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Learning, Sharing, and Teaching => Investor Alley => Topic started by: forummm on February 04, 2015, 05:59:56 PM

Title: Thoughts on my long-term asset allocation target and spending strategy
Post by: forummm on February 04, 2015, 05:59:56 PM
I can't hit this target immediately due to limited 401k fund options, but I plan to leave my job soon and roll over into this asset allocation. When I retire, my plan is to hold this portfolio plus 1 year of living expenses in cash. I would probably spend about 4% of my portfolio in an average year, but about half of that would be optional things for fun (like international travel). I will have a trigger (such as a portfolio drop of more than 20%) where I will start spending only at the bare bones level (less than 2% of my portfolio at retirement) and spend that from the cash. I will probably consider trying to make some money at that point just to be able to buy some cheap stocks. When the market recovered (say, got back to a certain % of its value before the plunge) I would start to fill the cash pool again.

I realize that many on this forum will criticize having a 98% stock portfolio. But I think my strategy provides me the potential for an overall dramatically higher lifetime return with little risk. If I needed to live on 2% of my initial portfolio even for a few years, life would still be good. And I could always try to make some money if I wanted some luxury. The point of maximizing my long term portfolio return would be to fund charities since I don't need to spend the money on myself. If I get to the end of my life and there isn't much left, then it's a shame for the charitable causes, but I'll still be OK. I also have a steely and logical resolve. There is no chance that I would panic and sell stocks if the market crashed. I might be disappointed about not going to Europe for a few years if the downturn is long, but I'm just as happy reading a book and hiking in a national park anyway. I was 100% stocks (and not making much money) during the 2008 crisis and I never wanted to sell my stocks. The many scenarios I've run on cFIREsim and FIREcalc indicate that at the 4% withdrawal rate, a small amount of the time the portfolio lasts for 50 years but has dwindled to small amounts (sad charities). But most of the time the portfolio gets insanely large (happy charities).

15% VFIAX (500 Index Fund)
10% VIVAX (Large-cap value)
10% VSMAX (Small-cap)
15% VSIAX (Small-cap value)
5%   VGSLX (REIT)
5%   VEUSX (Europe large-cap)
5%   VPADX (Pacific large-cap)
5%   VTRIX (Intl large-cap value)
10% VFSVX (Intl small-cap)
5%   VINEX (Intl small-cap growth)
10% VEMAX (Emerging markets)

It's 55% US/45% Intl, roughly 45% large/55% small, and 60% blend/40% value or growth. It would probably be something like 6,000-10,000 stocks in total. There's a lot of diversity in there, but a lot of potential for high long-term returns. I back tested (https://www.portfoliovisualizer.com/backtest-asset-class-allocation) this for 1972-2014 (max available time frame) and there were portfolio declines of 20% or more about once per decade. Only once did the 5-year rolling return dip below 0 (-0.9% in 2011). The CAGR was 13.2% ($10k grew to $2M).

Thoughts?
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: innerscorecard on February 04, 2015, 06:43:57 PM
I think there is too much overlap.
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: Le Barbu on February 04, 2015, 06:55:22 PM
To much overlap for sure!

70% VTI and 30%VXUS would cover the same. The only step  I would add is going 40%VTI, 30%VBR AND 30% VXUS

100% stock is perfect, full diclosure, I am 120% stock!
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: forummm on February 04, 2015, 07:19:41 PM
I think there is too much overlap.

Can you please elaborate? No more than 25% is in any particular set of stocks.
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: forummm on February 04, 2015, 07:21:44 PM
100% stock is perfect, full diclosure, I am 120% stock!

How do you accomplish that?
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: kpd905 on February 04, 2015, 07:32:58 PM
Looks more complicated than it needs to be.

You could do something like this and achieve basically the same thing:

45% Total stock market
35% Total international market
10% REIT Index
10% Emerging Markets Index
Title: Re: Thoughts on my long-term asset allocation target and spending strategypp
Post by: Le Barbu on February 04, 2015, 07:36:14 PM
100% stock is perfect, full diclosure, I am 120% stock!

How do you accomplish that?

650k$ in stock and 100k$ LOC, 650/550*100=118%
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: Le Barbu on February 04, 2015, 07:39:22 PM
3-4 funds is enough, simple, cheap, easy to manage
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: forummm on February 05, 2015, 09:20:29 AM
Looks more complicated than it needs to be.

You could do something like this and achieve basically the same thing:

45% Total stock market
35% Total international market
10% REIT Index
10% Emerging Markets Index

Is "complicated" bad? If the funds are just sitting in accounts for years, with occasional rebalancing, is there a reason to only be in 3-4 funds instead of 11?

With this less complicated example, I lose the value and small tilts that I was looking for.
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: capitalninja on February 05, 2015, 09:35:44 AM
I wouldn't say investing in more than 3 - 4 is necessarily a bad thing.  My index fund investment portfolio consists of the following 10 Vanguard ETFs: VEA, VWO, VNQ, VNQI, VTV, VOE, VBR, VB, VSS, and VTI.

I prefer this strategy because it gives me more control over the various weightings (heavier International). I'm 85% equities with 15% or so in RIETs as an alternative. No bonds.

Testing my portfolio against one of the Future Advisor's Robo advisor *guestimates* the following:

(http://www.ciphermonk.net/photos/returns.png)

The 3 - 4 fund strategy certainly requires less work to keep in balance, but I have the time and I also enjoy doing it.
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: rmendpara on February 05, 2015, 09:52:35 AM
I can't hit this target immediately due to limited 401k fund options, but I plan to leave my job soon and roll over into this asset allocation. When I retire, my plan is to hold this portfolio plus 1 year of living expenses in cash. I would probably spend about 4% of my portfolio in an average year, but about half of that would be optional things for fun (like international travel). I will have a trigger (such as a portfolio drop of more than 20%) where I will start spending only at the bare bones level (less than 2% of my portfolio at retirement) and spend that from the cash. I will probably consider trying to make some money at that point just to be able to buy some cheap stocks. When the market recovered (say, got back to a certain % of its value before the plunge) I would start to fill the cash pool again.

I realize that many on this forum will criticize having a 98% stock portfolio. But I think my strategy provides me the potential for an overall dramatically higher lifetime return with little risk. If I needed to live on 2% of my initial portfolio even for a few years, life would still be good. And I could always try to make some money if I wanted some luxury. The point of maximizing my long term portfolio return would be to fund charities since I don't need to spend the money on myself. If I get to the end of my life and there isn't much left, then it's a shame for the charitable causes, but I'll still be OK. I also have a steely and logical resolve. There is no chance that I would panic and sell stocks if the market crashed. I might be disappointed about not going to Europe for a few years if the downturn is long, but I'm just as happy reading a book and hiking in a national park anyway. I was 100% stocks (and not making much money) during the 2008 crisis and I never wanted to sell my stocks. The many scenarios I've run on cFIREsim and FIREcalc indicate that at the 4% withdrawal rate, a small amount of the time the portfolio lasts for 50 years but has dwindled to small amounts (sad charities). But most of the time the portfolio gets insanely large (happy charities).

15% VFIAX (500 Index Fund)
10% VIVAX (Large-cap value)
10% VSMAX (Small-cap)
15% VSIAX (Small-cap value)
5%   VGSLX (REIT)
5%   VEUSX (Europe large-cap)
5%   VPADX (Pacific large-cap)
5%   VTRIX (Intl large-cap value)
10% VFSVX (Intl small-cap)
5%   VINEX (Intl small-cap growth)
10% VEMAX (Emerging markets)

It's 55% US/45% Intl, roughly 45% large/55% small, and 60% blend/40% value or growth. It would probably be something like 6,000-10,000 stocks in total. There's a lot of diversity in there, but a lot of potential for high long-term returns. I back tested (https://www.portfoliovisualizer.com/backtest-asset-class-allocation) this for 1972-2014 (max available time frame) and there were portfolio declines of 20% or more about once per decade. Only once did the 5-year rolling return dip below 0 (-0.9% in 2011). The CAGR was 13.2% ($10k grew to $2M).

Thoughts?

If you can't afford to retire based on a somewhat diversified portfolio, then you are taking on incrementally more risk than normal. Of course, you can do this. Nothing "wrong" with it, but I can't say it's a wise decision.

If I was sitting on a 10mm portfolio and wanted to be lazy and earn the 200k in dividends and be on my way, maybe that's more acceptable, but it seems you are risking a lot of your spending on market fluctuations. Not what I would do, but that's really up to you.

Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: Le Barbu on February 05, 2015, 09:58:12 AM
Complicated is not "bad" and if you enjoy this strategy and stick to it, it's perfectly fine

On the other end, all-in one products are now cheaper than ever and can protect you to second guess yourself someday

Backtesting is fine also but doesn't predict futur returns in any way...

I personaly own 10 "positions" over 4 accounts and think it's way enough! In other words, you can own only 1 to 3 holding per account and get all the diversification you want over your different account (registered, taxable etc). This way you get best of both world, simplicity AND diversification. I decided of my A.A. for best tax efficiency and low MER.

I also think: What if someone else got to manage all this if I become disable or....dead?


"It seems that perfection is attained not when there is nothing more to add, but when there is nothing more to remove". - Antoine de Saint Exupéry
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: skyrefuge on February 05, 2015, 10:05:58 AM
I'm usually the first to pipe up and say "what the hell are you doing?!" when I see a long list of funds like this. But since I actually read the rest of your text, it's pretty clear that, unlike most such long-lists, you actually know and understand what you're doing and have a logic behind it, so I'd say it seems fine to me.
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: Scandium on February 05, 2015, 10:29:25 AM
Why small cap value in the US, but small cap growth internationally? Usually it's a SC-value tilt that will (supposedly) outperform. And 55% small cap, no bonds should make for a seriously volatile ride! As long as you're ready for that..
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: index on February 05, 2015, 10:32:24 AM
I can't hit this target immediately due to limited 401k fund options, but I plan to leave my job soon and roll over into this asset allocation. When I retire, my plan is to hold this portfolio plus 1 year of living expenses in cash. I would probably spend about 4% of my portfolio in an average year, but about half of that would be optional things for fun (like international travel). I will have a trigger (such as a portfolio drop of more than 20%) where I will start spending only at the bare bones level (less than 2% of my portfolio at retirement) and spend that from the cash. I will probably consider trying to make some money at that point just to be able to buy some cheap stocks. When the market recovered (say, got back to a certain % of its value before the plunge) I would start to fill the cash pool again.

I realize that many on this forum will criticize having a 98% stock portfolio. But I think my strategy provides me the potential for an overall dramatically higher lifetime return with little risk. If I needed to live on 2% of my initial portfolio even for a few years, life would still be good. And I could always try to make some money if I wanted some luxury. The point of maximizing my long term portfolio return would be to fund charities since I don't need to spend the money on myself. If I get to the end of my life and there isn't much left, then it's a shame for the charitable causes, but I'll still be OK. I also have a steely and logical resolve. There is no chance that I would panic and sell stocks if the market crashed. I might be disappointed about not going to Europe for a few years if the downturn is long, but I'm just as happy reading a book and hiking in a national park anyway. I was 100% stocks (and not making much money) during the 2008 crisis and I never wanted to sell my stocks. The many scenarios I've run on cFIREsim and FIREcalc indicate that at the 4% withdrawal rate, a small amount of the time the portfolio lasts for 50 years but has dwindled to small amounts (sad charities). But most of the time the portfolio gets insanely large (happy charities).

15% VFIAX (500 Index Fund)
10% VIVAX (Large-cap value)
10% VSMAX (Small-cap)
15% VSIAX (Small-cap value)
5%   VGSLX (REIT)
5%   VEUSX (Europe large-cap)
5%   VPADX (Pacific large-cap)
5%   VTRIX (Intl large-cap value)
10% VFSVX (Intl small-cap)
5%   VINEX (Intl small-cap growth)
10% VEMAX (Emerging markets)

It's 55% US/45% Intl, roughly 45% large/55% small, and 60% blend/40% value or growth. It would probably be something like 6,000-10,000 stocks in total. There's a lot of diversity in there, but a lot of potential for high long-term returns. I back tested (https://www.portfoliovisualizer.com/backtest-asset-class-allocation) this for 1972-2014 (max available time frame) and there were portfolio declines of 20% or more about once per decade. Only once did the 5-year rolling return dip below 0 (-0.9% in 2011). The CAGR was 13.2% ($10k grew to $2M).

Thoughts?

You have too much overlap and it is unnecessarily complicated. 13.2% CAGR is meaningless without the Sharpe ratio for the period as well.

These holdings make your portfolio essentially 50% US based 50/50 split between mid and large caps:

15% VFIAX (500 Index Fund)
10% VIVAX (Large-cap value)
10% VSMAX (Small-cap)
15% VSIAX (Small-cap value)

Can be replaced by:

25% - VTI
25% - VXF

I would drop the REIT as VTI + VXF is about 4% weighted toward REITS; There is a 4-5% weighting in what I suggest below:

This is 45% foreign foreign companies, 50/50-large/medium with 10% EM:

5%   VEUSX (Europe large-cap)
5%   VPADX (Pacific large-cap)
5%   VTRIX (Intl large-cap value)
10% VFSVX (Intl small-cap) <----Overlap with US
5%   VINEX (Intl small-cap growth) <-----Overlap with the US
10% VEMAX (Emerging markets)

Bump each of your US funds up 5% to make up for the Overlap and get rid of the two INT funds

Replace this whole list with:

15% - VEU - Ex US large Cap
15% - VSS - Ex US Small Cap
5% - VWO - Emerging Markets

Your final portfoliio would be:

30% VTI
30% VXF
15% VEU
15% VSS
10% VWO


I would advise against a 100% stock portfolio, but I'm outspoken on here going into year 5 of this bull market.

Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: forummm on February 05, 2015, 04:48:40 PM
Why small cap value in the US, but small cap growth internationally? Usually it's a SC-value tilt that will (supposedly) outperform. And 55% small cap, no bonds should make for a seriously volatile ride! As long as you're ready for that..

I couldn't find a Vanguard international small-cap value fund. The growth fund looked pretty interesting. And has had positive returns versus an international index for 10 years. A 5% stake felt about right for something like this.
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: forummm on February 05, 2015, 05:02:58 PM
You have too much overlap and it is unnecessarily complicated. 13.2% CAGR is meaningless without the Sharpe ratio for the period as well.

These holdings make your portfolio essentially 50% US based 50/50 split between mid and large caps:

15% VFIAX (500 Index Fund)
10% VIVAX (Large-cap value)
10% VSMAX (Small-cap)
15% VSIAX (Small-cap value)

Can be replaced by:

25% - VTI
25% - VXF

I would drop the REIT as VTI + VXF is about 4% weighted toward REITS; There is a 4-5% weighting in what I suggest below:

This is 45% foreign foreign companies, 50/50-large/medium with 10% EM:

5%   VEUSX (Europe large-cap)
5%   VPADX (Pacific large-cap)
5%   VTRIX (Intl large-cap value)
10% VFSVX (Intl small-cap) <----Overlap with US
5%   VINEX (Intl small-cap growth) <-----Overlap with the US
10% VEMAX (Emerging markets)

Bump each of your US funds up 5% to make up for the Overlap and get rid of the two INT funds

Replace this whole list with:

15% - VEU - Ex US large Cap
15% - VSS - Ex US Small Cap
5% - VWO - Emerging Markets

Your final portfoliio would be:

30% VTI
30% VXF
15% VEU
15% VSS
10% VWO


I would advise against a 100% stock portfolio, but I'm outspoken on here going into year 5 of this bull market.

Thanks for the thought you put into this. You say that VINEX and VFSVX overlap with the US. They appear to have 0% US stocks. Is there some other way that they overlap?

The Sharpe Ratio was 0.51 (vs 0.38 for US Market or Intl Market). The Sortino Ratio was 0.97 (vs 0.64 for US Market or Intl Market).
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: Le Barbu on February 05, 2015, 05:14:42 PM
Some consider US get you exposed to international and European expose you to emergent markets

Every markets move more and more together and some purist of indexing just drop everything in VT!
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: Scandium on February 05, 2015, 06:05:38 PM
Why not just replace the three international with total international? It has large, small and emerging.

You say you don't mind the complexity, but why do it when you don't have to? Then again I'm not sold on the idea that loading up on small cap is the way to go. It may have outperformed in the past, but there were also decades of underperformance.
Title: Re: Thoughts on my long-term asset allocation target and spending strategy
Post by: Le Barbu on February 05, 2015, 06:29:41 PM
There is many reasons why US Small Cap Value can continue to outperform on the long run.