Author Topic: Allocation  (Read 2228 times)

felizcortez

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Allocation
« on: May 10, 2017, 03:27:04 PM »
I am 35 and currently have a net worth of $1.62M and need to work about 1.5 years more to fulfill a relocation contract.   If I left early, I would owe a substantial sum of money from a relocation and bonus (~$130k).

Current Asset Allocation:
$1.4M Invested - 63% US Stocks, 31% International Stocks, 3% Bonds and the remaining is alternatives/cash (From a target date fund in my 401k).
$220k Cash paying 1% at Ally. 

The cash position is large due to a number of bonuses recently and I wasn't sure what my tax bill would be from the relocation.  Now that that is all squared, I've upped my monthly Vanguard investment to $7k to try to ramp this down (all goes into Taxable 35% International, 65% US Stocks).

My IPS says I should be 90/10 stocks to bonds, so I'm thinking I need to change the Allocation a bit in my 401k to put some more bonds into a Tax efficient vehicle.  That being said, when I put the IPS 90/10 together I didn't take into account a Cash allocation which has grown over time.  I'm thinking about taking the cash position down to about $100k which would be about 1.5 years of living expenses.  We are planning to leave my job in 2019 to do some extended traveling.

Yearly Spending is $65k primarily due to rent in a HCOL area.


Questions:
1. Should I put the cash position even lower due to the expectation of some bonuses at the beginning of next year and a large equity payout at the end of next year?  I am expecting this to amount to about $60k.  I'm debating on just waiting until these Bonuses come in and then invest them.
2.  I feel like I am potentially being too conservative here by holding all this cash, even if I put it down to $100k.   Am I being to conservative here on the cash front?
3.  I feel like I've already won the game so I'm not sure I should have this aggressive of an allocation (90/10).  Note, I had no issues during the last down turn and when the last 10% correction happened, I piled more money into the market.  I'm pretty comfortable with risk, but that has always been with a large margin of safety with my salary and cash position.  We don't worry about money.

Retire-Canada

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Re: Allocation
« Reply #1 on: May 10, 2017, 04:42:59 PM »
2.  I feel like I am potentially being too conservative here by holding all this cash, even if I put it down to $100k.   Am I being to conservative here on the cash front?

I have less than half your invested portfolio and hold $0 in cash. I have a LOC for emergency cash flow needs. So if that was me I would invest all the cash unless you have some specific expenditures planned in the near future.

felizcortez

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Re: Allocation
« Reply #2 on: May 10, 2017, 05:28:20 PM »
A few expenditures are planned in the future.  The largest one will be a car purchase.  My job requires me to purchase a car at the end of the year to keep the stipend they pay me since I drive clients around.  I'll likely purchase a 2 year used vehicle to meet  the requirements that are put on the stipend.  I'm planning to pay cash for the car, but I expect this to be around $15k.

MustacheAndaHalf

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Re: Allocation
« Reply #3 on: May 10, 2017, 07:41:43 PM »
If you plan to keep working for the rest of the year, and are in the U.S., you might look at tax-exempt bonds.  Vanguard has several, and they invest in municipal bonds that are exempt from Federal tax (you can pick a state-specific fund to get both Federal and state tax-exempt income).  That will probably earn more than 1%, and tax exempt.

I'd trim the Ally position down to the spending you expect to do this year, which then includes an emergency fund.  A bond fund usually doesn't go up or down much, but you can't count on it as certainly as cash.

Look at Vanguard Retirement funds for people retiring in 5-10 years.  Those allocate a much higher bond percentage, and Vanguard funds contain much more expertise than anyone here.  You can imitate that allocation.

ysette9

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Re: Allocation
« Reply #4 on: May 10, 2017, 08:21:50 PM »
Wait though: the Vanguard target date fund for someone retiring in 5-10 years assumed a normal retirement. This presumes that the person is then 55-60 years old and is only finding a 30- year retirement. This is much different than someone in his or her 30s finding a 50-60 year retirement. At traditional retirement age their is concern from more people of preservation of capital. FIRE at a young age means your biggest risk is outliving your portfolio, so having too many bonds is actually too risky. I see nothing wrong with keeping the 90/10 split provided you can sleep at night, and have a year or two living expenses in cash as a buffer for short-term fluctuations. I believe people like GoCurryCracker do exactly this (though they are 100% equities plus some cash).

felizcortez

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Re: Allocation
« Reply #5 on: May 10, 2017, 10:39:57 PM »
All my current Bonds are in my 401k so they are in a tax sheltered account already.  When I deploy the cash into investments, I'll just change the allocation of the 401k and increase the bond level to keep the desired allocation while reducing cash.

I believe that I'll need a more aggressive allocation than a typical 60 year old retiring.  Lowest I think i would go would be 75/25 if I moved at all.

triangle

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Re: Allocation
« Reply #6 on: May 11, 2017, 11:57:34 PM »
I view your "$220k Cash paying 1% at Ally" as partially already in the bond bucket (comparable to a short term bond which is not something you need as a long term investor), so you are not that far off from the 90/10 target. I think it is better to me more conservative rather than aggressive at this point in time, that instead of moving a big portion of that cash into the stock market all at once to achieve the target allocation, do it more slowly over months/quarters so that it takes a few years to become fully balanced. Which gives you more time to get comfortable with your allocation and possibly allow you to take advantage of any dip in the market, ignoring that the market could continue to go straight up and you would have missed out on some gains.

MustacheAndaHalf

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Re: Allocation
« Reply #7 on: May 12, 2017, 08:13:23 AM »
Wait though: the Vanguard target date fund for someone retiring in 5-10 years assumed a normal retirement. This presumes that the person is then 55-60 years old and is only finding a 30- year retirement. This is much different than someone in his or her 30s finding a 50-60 year retirement.
You seem to be ignoring a lower percentage as a safe withdrawal rate, which is the conventional approach to a longer retirement.  All the longer retirement does is take the 4% withdrawal rule down closer to 3.3%.

OP can try various approaches here, with Vanguard's nest egg calculator:
https://www.vanguard.com/nesteggcalculator

That's the simplest calculator, which is why I like it.  You can vary stock/bond allocation, retirement length, and withdrawal rate.  Note historical data has no guarantee of repeating, so any projection decades into the future has a lot of uncertainty.  In my view, the investment books and target retirement funds all point towards more than 10% bonds.  Comparing all the books and target date funds to GoCurryCracker's blog and calling them equal doesn't sound reasonable to me.

BobTheBuilder

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Re: Allocation
« Reply #8 on: May 12, 2017, 11:50:04 AM »
I would invest a healthy part of your cash in european (EUROSTOXX 600) and asian markets. Please don't hate me for trying to market-time, but the U.S. are further ahead in the macro-economic cycle. That is a bit like rebalancing. Maybe keep half a year of your earnings cash if you like, but that depends on your comfort level.