Author Topic: The IDEAL Portfolio  (Read 9141 times)

chris316

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The IDEAL Portfolio
« on: March 28, 2017, 09:06:59 PM »
So I know everyone's exact situation is different but I hear so many different things on this site and forum. So my questions are...

What would the average Joe's investment portfolio look like (during their working years)?.. some one with average income trying to become financially independent and retire early? obviously indexed vanguard funds are the favorite but how much and of what exact fund?

what exact accounts?
401
Roth IRA?
Traditional IRA?
other?

and what exact allocation?
u.s. bonds ?
international bond?
international stocks?
U.s. stocks?
alternatives?
cash?

and most importantly why?


chris316

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Re: The IDEAL Portfolio
« Reply #1 on: March 28, 2017, 10:17:44 PM »
https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/

Stickies at top of this sub forum.

that thread I feel is confusing and not specific to just Portfolio investments. maybe I missed it? I'm talking just American. and what specific vanguard stocks and/or bonds and what accounts... for example....

401k- fidelity- what funds? what percent allocation to each?
roth ira- vanguard- what funds? what percent allocation to each?
traditional ira- who? what funds? what percent allocation to each?

what account? what investment firms? what funds? what percent allocation to each?


Eucalyptus

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Re: The IDEAL Portfolio
« Reply #2 on: March 29, 2017, 01:01:10 AM »
The idea with that thread, is that you work down that list of things first. Dollars should go in the first one, once that is finished, then the second one, etc, etc. You shouldn't invest in an index fund portfolio if things higher on the list are still needing your dollars.

Frankies Girl

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Re: The IDEAL Portfolio
« Reply #3 on: March 29, 2017, 02:26:38 AM »
https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/

Stickies at top of this sub forum.

that thread I feel is confusing and not specific to just Portfolio investments. maybe I missed it? I'm talking just American. and what specific vanguard stocks and/or bonds and what accounts... for example....

401k- fidelity- what funds? what percent allocation to each?
roth ira- vanguard- what funds? what percent allocation to each?
traditional ira- who? what funds? what percent allocation to each?

what account? what investment firms? what funds? what percent allocation to each?


For more on how the market works and basic investing start here: http://jlcollinsnh.com/stock-series/ with either Mr. Collins' book or read through the series on his website. Then head over to Bogleheads site, and read about how to write an investment policy statement, and figure out your asset allocation. Do some research on lazy portfolios there as well.

Vanguard's lazy portfolios are probably the best example of asset allocation for the "average joe" investor that does index investing.

As far as what accounts? Oh goodness. I'd figure that the average person doing this sort of thing has all of them: a work-sponsored account of some kind (401k/403b/etc) and possible several of each, BOTH a Roth IRA and a traditional IRA, an HSA if they're lucky, AND a taxable account.

The Bogleheads site should explain which funds are recommended in the lazy portfolio section (but it's easy to get recommendations on this forum for index funds or do a bit more reading on Vanguard's site to find ones that work well for you) or if you use Fidelity, they have a good page here that explains the Fido funds that work best.

As far as companies to go with: Vanguard is the gold standard if you're an index investor, but you can also do well using Fidelity, T Rowe Price and a few others (I don't keep track after Vanguard/Fido honestly). It comes down to personal choice after you've done your homework. You can use one or you can use Vanguard for that, Fido for this, and whomever if you have a preference. You don't have to use more than one tho; the chances of Vanguard or Fidelity wiping out and erasing your entire portfolio are along the lines of a worldwide catastrophe event, and if that actually happened, then your money would be the least of your worries. ;)

And as far as the why part? Because index investing works, but it's not glamorous or exciting (at least not like the gambling sort of rush most day traders and stock market gurus chase after). But as long as you invest wisely and control your spending, you can retire early and go do stuff that matters to you without fear of losing a paycheck or being stuck in a job you hate for the rest of your useful life. That part is pretty exciting.

MustacheAndaHalf

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Re: The IDEAL Portfolio
« Reply #4 on: March 29, 2017, 03:17:13 AM »
The simplest, slightly wrong (in my opinion) answer would be what John Bogle and Warren Buffet advocate: pour it all into an S&P 500 index fund.  The reason I suggest it first is that starting is actually more important than getting everything right.  If you're wrestling with too many ideas, just pour it into an S&P 500 index fund.

Years until retirement should impact your bond allocation.  So there's no "average Joe" allocation that works for both the 60 year old worker and 25 year old worker who both plan to retire at age 67.  The older worker should be nearing their target bond allocation, while the younger worker should imitate the target date funds that allocate about 10% bonds.

2Birds1Stone

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Re: The IDEAL Portfolio
« Reply #5 on: March 29, 2017, 05:09:05 AM »
Sounds like you want to overcomplicate things.

The IDEAL portfolio is one which will keep you invested in the bull and the bear, without giving you the itch to tinker. Remove human error/intervention and you will have a winner.

For tax deferred/exempt (401k, Roth, HSA) a simple target date fund will do the trick.

Then you can go either 100% VTI/(XVUS) in taxable. Or use short/intermediate tax exempt bonds to mimic allocation of tax deferred.

Mr Mark

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Re: The IDEAL Portfolio
« Reply #6 on: March 29, 2017, 06:31:51 AM »
...starting is actually more important than getting everything right.  ...

^this

If you are young and growing a stach, the important and more 'painful' bits are getting badass frugal and increasing your savings rate and lowering your expenditure. This is much, much harder than portfolio choices.

The sticky grabs the key elements of tax optimisation and grabbing employer's free money.

I'm pretty sure we all have different (and often rightly so) asset allocations and ways to organise our passive portfolios. The common threads are almost certainly:
- kill high cost debt asap (credit cards, student loans, stupid car loans, PMI)
- leverage tax code loopholes complexity and free money
- invest in low cost diversified index funds, with a strong tilt to US equity if you can/are US domiciled, & usually using Vanguard
- don't try to time the market, just get it in and get it in often, and don't sell
- try to understand what you're doing and why it works for you
- there isn't a real short cut, nor does there need to be. (in fact the danger of trying to find a short cut is you get off the surest path to FIRE success)

So there's a continum of portfolios from your pure uncut just 100% US Stocks via VTSAX,  to soft and gentle 60% US (& International?) stocks + 40% bonds + some CDs/cash emergency, all the way to deliciously complex mixes of Real Estate, leverage, multiple stock indexes that deliberately overweight small cap (or mid cap) with a % international but excluding Europe, some dividend stocks, REITs and a few gold ETFs in there as a paperweight.

All I'd bet could use historical back-testing justification or logical-like arguments of some kind for why their portfolio is 'best'. The only truth is nobody knows exactly what the absolute 'IDEAL' portolio of investments is going to be for you in the future, and there is no investment reward without risk.

Cut spending. Save in low cost index. Reinvest dividends. Read Jack Bogle. Ignore the markets. And FIRE awaits sooner than you think.



NoStacheOhio

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Re: The IDEAL Portfolio
« Reply #7 on: March 29, 2017, 07:11:08 AM »
The IDEAL portfolio is one which will keep you invested in the bull and the bear, without giving you the itch to tinker. Remove human error/intervention and you will have a winner.

This will make a bigger difference than the specific funds you choose. Investing (especially retirement investing) works best when it's automated. Money comes out of your paycheck and goes straight to the portfolio. The more complication, the more risk for something to go wrong.

2Birds1Stone

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Re: The IDEAL Portfolio
« Reply #8 on: March 29, 2017, 07:19:11 AM »
The IDEAL portfolio is one which will keep you invested in the bull and the bear, without giving you the itch to tinker. Remove human error/intervention and you will have a winner.

This will make a bigger difference than the specific funds you choose. Investing (especially retirement investing) works best when it's automated. Money comes out of your paycheck and goes straight to the portfolio. The more complication, the more risk for something to go wrong.

Damn it, if I could only take my own advice lol!

moof

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Re: The IDEAL Portfolio
« Reply #9 on: March 29, 2017, 12:28:28 PM »
If you are far from retirement (like 15+ years), stick it all in stocks.  100%, no if and's or but's.  Stocks over the long term win in all but the most corner of cases, and you are ususally screwed no matter what in those cases.  Choose a broad fund with very low fees (VTSAX).  Add in some percentage of international stocks in a broad index fund if you want to hedge against a US only crash that happens not to take the global economy with it (I am in US stocks only, if you could not tell).  Fund tax deferred accounts first, pay off debt like a madman, and don't spend like a fool.

Choose your long term asset allocation, 60/40 stocks and bonds is a well known piece of target advice to start with.  The actual value is subject to holy wars, but anything in the 20-40% kind of does not matter in terms of likelihood of success.  In the end it is up to your personality.  If you are prone to panic and don't want to scale spending with the gyrations of the market stick to higher ratio of bonds.  If you are more flexible and want to increase the odds of extra pocket change 20-30 years into retirement choose more stocks.

As you approach your retirement date start shifting your portfolio to match your target asset allocation.  Timing of this is up to you, the more gradual you ease into it the longer on average it will take to get to your "number", but the more predictable that date will be (longer mean time, smaller standard deviation).  Waiting until the day you hit your number to transition from 100% stocks to 60/40 would be an extreme example, subject to losing years if things crash when you are almost fully funded.

In retirement I would not want less than the next year's expenses in cash.  I would not want anything needed in the next 5 in anything more aggressive than a bond index fund (i.e. 20% bonds minimum).  Replenish your living cash with whatever is doing best at the moment (counter intuitive, but sell high, not low).  Re-allocate to your target asset allocation whenever it is out of whack enough to bug you.

Classical_Liberal

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Re: The IDEAL Portfolio
« Reply #10 on: March 29, 2017, 03:29:27 PM »
Identify your REAL risk tolerance, not what people on MMM tell you it should be, not what you think it is.

Play on Tyler's site and imagine what your gut would feel like a year into your chosen portfolios max drawdown.  Then read and learn for awhile before you make an investment policy statement. During the interim if you have a bunch of cash burning a hole in your pocket, there is nothing wrong with 100% VTI to start.  Any portfolio you choose will likely have some US stock component.

Eric

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Re: The IDEAL Portfolio
« Reply #11 on: March 29, 2017, 04:50:28 PM »
My ideal porfolio is $2,000,000 in a Roth IRA.  And since I have so much money, I'll just park it all in a Target Date Fund, say 2050, and call it a day.  Why?  Because it's tax free and easy.

farfromfire

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Re: The IDEAL Portfolio
« Reply #12 on: March 30, 2017, 05:50:05 AM »
Identify your REAL risk tolerance, not what people on MMM tell you it should be, not what you think it is.

Play on Tyler's site and imagine what your gut would feel like a year into your chosen portfolios max drawdown.  Then read and learn for awhile before you make an investment policy statement. During the interim if you have a bunch of cash burning a hole in your pocket, there is nothing wrong with 100% VTI to start.  Any portfolio you choose will likely have some US stock component.
+1

Yes, 100% stocks will most probably perform better than anything else. But looking at the monetary value of your investment account (which doesn't mean much), and seeing that it dropped by 10, 20, 40%... It's tough. Even if you stay the course and continue investing, there might be psychological effects that are only alleviated when the drawdown ends, years later.

Personally, I wish my brokerage account just showed the number of stocks instead of the current market value to avoid such effects.