Please explain asset allocation like I am 5

[brroku22]

I am 35 years old and extremely uneducated when it comes investing, but am finally at a point where I am making good money, and I want to make sure I am understanding asset allocation correctly. My ultimate goal is when my youngest graduates in 14 years I would like to have the option to start pulling $100-$150,000 from my investments if I chose to do so, I currently really enjoy what I do for a living but would like to have the option to just downsize to a very small house, buy an RV and just travel during the winter months. 

I currently have:
- $225,000 of VTI stock in a taxable eTrade account which I have just been buying more each time I have extra money.
- $100,000 cash above my emergency fund
- I also have roughly $10,000 left over after my monthly expense, however this extra is sales bonuses and side business income which comes as follows ($40,000 in March, $40,000 in July, $20,000 in August, $40,000 in November and I usually have a $20,000 out of pocket tax bill)
- This year I finally started fully funding my simple IRA I get from my employer and fully funded a Solo 401K I set up through my side business.

I am trying to figure out how to invest this cash and a plan for future investments. I read through some of the old articles and came across this,

Quoted from the article "Book Review: The Intelligent Asset Allocator"

If you only want four, the author suggests you might hold these ones, by simply plopping 25% of your investment portfolio into each:

US Large-capitalization stocks (as measured by the S&P 500 index)
US Small-cap stocks (the Russell 2000 index):
Foreign stocks (the Europe, Australasia, and Far East index, also known as EAFE)
US short-term bonds

If you wanted to do all your investing with Vanguard funds as I do, you might throw 25% each into VFINX, VB, VDMIX, and VBISX.

Am I understanding this correctly I should liquidate my VTI and with that and my cash on hand buy $81,250 of VFNI, VB, VDMIX and VBISX. Invest 25% of sales bonuses and side business income as they come into the above funds. Then once a year rebalance the account by selling the "winners" and buying the "losers" to where it is back to the same dollar amount invested into each fund.

Are these funds listed in the article still relevant or are their different ones to use now?

Is there a better way to do this?

Is it better to throw the $100,000 cash in now or do it in $20-$25,000 chunks?

Does it matter what time of the year I would rebalance the portfolio?

Should I be doing something different than piling this into my taxable?

Is my above goal realistic?

Thanks for any and all advice!

[MDM]

brroku22, welcome to the forum.

I am 35 years old and extremely uneducated when it comes investing but am finally at a point where I am making good money, and I want to make sure I am understanding asset allocation correctly.

One good place to start is Getting started - Bogleheads.  If you go through that, at some point you will find the Asset allocation article.  There is no one-size-fits-all-correctly asset allocation.

My ultimate goal is when my youngest graduates in 14 years I would like to have the option to start pulling $100-$150,000 from my investments if I chose to do so

As a very rough estimate, using a 4% safe withdrawal rate, that requires $2.5 million to $3.75 million invested.

Am I understanding this correctly I should liquidate my VTI and with that and my cash on hand buy $81,250 of VFNI, VB, VDMIX and VBISX.

You could, but why?  See Approximating total stock market and three-fund portfolio

Are these funds listed in the article still relevant or are their different ones to use now?

Is there a better way to do this?

There is no way to know best, and even knowing better is debatable, except in hindsight.  See Callan periodic table of investment returns.

Is it better to throw the $100,000 cash in now or do it in $20-$25,000 chunks?

See Dollar cost averaging versus lump sum

Does it matter what time of the year I would rebalance the portfolio?

Not statistically.

Should I be doing something different than piling this into my taxable?

How does the generic Investment Order look to you?

Is my above goal realistic?

Are you familiar with the Time value of money and how to estimate the future value of your current investments and contributions you might make?

In any case, considering all this at age 35 is better than waiting until age 45, 55, 65, etc., so good for you!

[Rob_bob]

I would not liquidate VTI, that is a total market index covering all market cap weights.  If you want to tilt to small cap stocks I personally use VB.  If you want some international I use VEU.

Just direct all new contributions to purchase the new funds until they are up to the percentage of the portfolio you want them to be.  You can even rebalance the same way, just and new money to what is below your target percentage.  Keep it simple.

[Tyler]

If you only want four, the author suggests you might hold these ones, by simply plopping 25% of your investment portfolio into each:

US Large-capitalization stocks (as measured by the S&P 500 index)
US Small-cap stocks (the Russell 2000 index):
Foreign stocks (the Europe, Australasia, and Far East index, also known as EAFE)
US short-term bonds

Welcome!

The asset allocation you're talking about is sometimes called the No-Brainer Portfolio. Follow that link, and it will give you more info on how it works, the relevant financial history, and even recommend a few fund options if you think it's for you. The funds listed in the book are just examples and there are lots of great alternatives including VTI. IMO, that's a keeper.

If you do decide to make major changes, keep in mind that you need to be extra careful selling funds in your taxable account to avoid a big tax bill. Be sure you understand the impact before doing anything.

[MustacheAndaHalf]

If you want to tilt to small cap stocks I personally use VB.

I held Vanguad "Small" cap ETF (VB) for many years, until I realized it has a high allocation to mid-cap stocks.  Many years ago, I even saw it exceed 50% mid caps, so I switched to other ETFs (which also cost $0/trade at Vanguard and other brokers)
https://www.morningstar.com/etfs/arcx/vb/portfolio

If you are willing to pay a higher expense ratio, SPDR S&P 600 Small Cap ETF (SLY) holds 99% small cap stocks, compared to VB holding 61%.  On this screen, you will see a grid called "Stock Style" with colored ovals - click "weight" to see exact percentages.
https://www.morningstar.com/etfs/arcx/sly/portfolio

If expense ratio is a sticking point, Schwab Small Cap ETF (SCHA) offers a 0.04% expense ratio compared to Vanguard Small Cap (VB) having 0.05%.
https://www.morningstar.com/etfs/arcx/scha/portfolio

[clarkfan1979]

I'm more of a big picture type of investor. Other people do a much better job with the details. I apologize is this is too simple, but you said to explain like you were 5 years old.

1) Your asset allocation during accumulation is going to be much different than when you start withdrawing. Do you want to make that transition slowly or do you want to do it all at once?

2) Once you get into withdrawing and you no longer have W-2 income, your tax liability will most likely be very small. Your first 80K of capital gains is taxed at 0%. You then have another $25,900 for the standard deduction for married couples.

Lets say someone pulled out $25,900 from their 401K. That should be taxed at 0%. Then you pull out another $124,100 from an after tax brokerage account. If $44,100 is principal and $80,000 is gains, that should also be at 0% federal tax.

In the above scenario, someone withdraws 150K and pays 0% federal tax. Did I do the math right?

 





 

[PDXTabs]

US Small-cap stocks (the Russell 2000 index)

FWIW the Russell 2000 had consistently under-performed the S&P 600.
https://www.spglobal.com/en/research-insights/articles/a-tale-of-two-small-cap-benchmarks-10-years-later

I personally own a little VIOV but am mostly global market-cap weighted with no bonds.

[talltexan]

For small cap, I prefer a value tilt (I really enjoyed the Paul Merriman Podcasts on the subject). Won't put call letters here because I think you should do the study to select the right etf's for this yourself.

[vand]

Most "things" are not really just one ingredient. When you make a cake you wouldn't just use flour. When you breath in air you don't just breathe in oxygen. When you put a soccer team together you don't put 11 forwards on the field. Things work better when blended. Same with an investment portfolio.

I reckon even a 4yo can understand that.