I've recently given more thought to my asset allocation, and have been a bit more analytical about it than the past. I figured I'd share it here for anyone that finds it interesting. While feedback is welcome, I don't have specific questions for the group.
A couple points up-front:
1. For my taxable accounts, I personally prefer Schwab to Vanguard. Their fees are low, and they have a great selection of ETF's that cover a very broad range. This isn't a knock against Vanguard, just my personal preference.
2. My personal risk tolerance is conservative in terms of overall asset allocation (stocks, bonds, etc.), however, I am generally more aggressive than most within those allocations. For example, my international allocation is weighted towards small-caps and emerging markets.
3. While this wasn't my original intent, I ended up with an allocation that I think I could be comfortable with both pre-FIRE and post-FIRE. I played around with both more conservative and more aggressive allocations, and I wasn't comfortable moving much in either direction.
4. I believe in maximizing diversification and minimizing fees. In that order. My core funds are broad, low expense funds. However, I didn't shy away from a few funds with higher expenses that captured corners of the market under-represented by the core funds.
5. I apply the high level allocation to my individual accounts as best I can. I don't worry about the alternatives in 401k's that don't have good options there. I am not currently trying to tax optimize these portfolio by weighting tax-efficient options in tax-deffered accounts. I would like to, but my contribution rates to each portfolio vary enough that it gets complicated fast.
So here are my high level allocations:
Domestic | 45% |
International | 20% |
Fixed Income | 25% |
Alternatives | 10% |
My allocations to specific securities (taxable account only): are as follows:
Domestic:SCHB | Schwab US Broad Market ETF | 50% |
SCHA | Schwab US Small-Cap ETF | 50% |
Rationale: These are both broad based funds with low fees. I don't particularly care for the large-cap weighting of SCHB, but it's an efficient fund, so I balanced it out with SCHA.
InternationalSCHF | Schwab International Equity ETF | 25% |
SCHC | Schwab International Small-Cap Eq ETF | 25% |
SCHE | Schwab Emerging Markets Equity ETF | 25% |
EWEM | Emerging Markets- Equal Country Weight ETF | 10% |
FRN | Frontier Markets ETF | 15% |
Rationale: SCHF, SCHC, and SCHE provide good, broad, and cheap exposure to the core international markets. However, they do underweight / leave out the smaller end of the Emerging Market and Frontier Market segments. I rounded it out with FRN an EWEM (although they are costlier funds) for the added future growth opportunities here.
Fixed IncomeSCHZ | US Aggregate Bond ETF | 50% |
PGX | Preferred Shares ETF | 12.5% |
CXA | CA Muni Bnd ETF | 12.5% |
TLO | Long Term Treasury ETF | 12.5% |
PHB | High Yield Corporate Bond ETF | 12.5% |
Rationale: While SCHZ is a typical good, broad, and cheap bond ETF, the typical bond ETF sticks to shorter term and lower risk bonds. I added TLO for exposure to long dated bonds (more interest rate risk, higher yield, and negatively correlated to stocks). PHB was added, as the bond index excludes high yield issues. CXA and PGX make sense from a tax efficiency standpoint, as they both yield higher than SCHZ, and have significant tax benefits over regular bonds. However, it doesn't make sense to overweight either of these on those grounds alone.
AlternativesSCHH | Schwab US REIT ETF | 50% |
DRW | Global ex-US Real Estate ETF | 50% |
Rationale: It's good to have some alternative exposure, but not too much. I split it between US and International for diversification, and International currently yields almost twice what domestic does. I might add an MLP or other alternative at a later date.