The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Done by Forty on February 25, 2013, 10:11:24 AM
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Hi MMMers,
I am hoping you can give some advice on what you would do with two different asset allocations. I know these are personal decisions but I'm interested in polling the community to see how you would handle:
1) Saving for our next home with a 5 year horizon. We currently have about $73k in VBISX, which is about 60% total bond index, and the remainder is between the total stock and total international stock indexes. Learning more about the bond bubble and the input from the thread below, I am thinking we may need to have more cash (maybe much more cash) in this mix, even with a 5 year horizon. So, how would you set your asset allocation to save for your next home in a 5 year timeframe? And would you adjust the allocation as you move through the timeframe?
https://forum.mrmoneymustache.com/investor-alley/vbisx-vanguard-short-term-bond-index-fund-investor-shares/
2) Early retirement. We are currently using the simpleton's portfolio (25% US large cap, 25% US small cap, 25% international, 25% US short term bonds) but we are planning for FIRE in 8 years. I'm wondering if this may be too aggressive for people who are 8 years from retirement (that is, would we be advising a typical 57 year old to build this kind of allocation)? As this is a community of ER's, I thought you might have insight into what's advisable.
Thank you!!!
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1) Personally, I kept most of my down payment money in an online savings account (Ally), with some in CDs. None in stocks, none in bonds. But I'm not very good with risk.
2) I would say that if you're 40, 25% in bonds might be a bit low, but some people here would say that if you're ER'ing, you need to have a higher portion in equities than if you're going to keep working for longer in order to get enough in growth.
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1. I don't know much about that fund but just because it's in bonds doesn't mean you'll be able to get your money back in 5 years. Check the duration (weighted average maturity) of the bond portfolio in the fund. If it's >5 years, then a rise in long term interest rates is a big risk for you. I'm on the same sort of schedule (well, maybe a bit sooner than 5 years), and I'm basically holding cash in "high interest" savings accounts for the mortgage down payment. Not the whole down payment, but most of it. I'm of the opinion that if you NEED the money short term, you better make sure you don't lose it. It's quite possible I'm more risk averse than I should be, but that's my nature.
2. I don't think being 8 years from retirement is relevant. What is relevant is how you plan to retire, i.e. will you have part-time income, will you be alright with variable withdrawals from your 'stache to protect against bad years, or is it possible to only live off the inflation-beating portion of your 'stache plus part-time income? If the latter, then no worries as your wealth will last forever.
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@ icefr - thanks for the feedback. I'm currently 32, if that changes the advice re: bonds.
@aclaridge. I plan on having a stache that can cover my annual expenses without having to work part time, but of course I'll be flexible enough to work and to adjust my withdrawals if I have to.
But mostly I'm wondering what other ER planners do: what asset allocations do you have currently, and do you plan on making them more conservative as you approach your date?
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I'm about 30% cash, 10% short term bonds, 40% equity (mix of CDN, US, emerging markets), 20% REITs and a small amount in gold. The cash is for a house I'll buy in the next couple years most likely or whenever real estate here becomes more reasonably priced.
As for asset allocation in the future - I plan on rebalancing and over/under weighting at the asset class level (bond/equity/REIT/commodity) and at the geographical level as I see fit, but that's the only "speculation" I'll allow myself. I'll never invest more than ~3% of my portfolio in any one ticker. Obviously right now I'm leaning away from bonds quite a bit. I'm sure I'll change that in the future at some point.