Author Topic: What are the questions you ask yourself to determine Asset Allocation for stash?  (Read 1216 times)

Hall11235

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Fellow MMMers,
I am starting to get a little older with a little more money at my disposal. Looking to actually sit down and comtemplate what an asset allocation might look like (right now, we are 20k/year in I-Bonds and 100% equities past that).

So, my questions are these:
1. What do you consider important for Asset allocations?
2. Is there a comprehensive guide or blog for this?
3. I know this is extremely variable based on the person's situation, but any good rules of thumb? (Bond % = x type heuristics)

Any information here would be amazing, even (or especially) just pointing me in the right direction to start. :)

shureShote

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I don't think you can go wrong reading and rereading the BH Wiki entry.

https://www.bogleheads.org/wiki/Asset_allocation

For us, we are fortunate to have pretty high salaries, a decent 401k match (and wonderfully low cost options), and an OK pension (though not COLAd). Therefore, ours is pretty darn high in equities. So what is important for us is simply potential for growth, while having the ability to roll with the market punches. We made it through every up and down in the market since the late 90s and have never wavered. So I am confident our risk tolerance is high enough to handle the high level of equities we have.

Now, in a few years retirement will be getting close enough that I expect to start a glidepath towards our retirement AA of about 40% bonds. I think we will make a couple big steps, so not so much gliding as a controlled hard landing.

Sandi_k

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Fidelity has used 120 minus age for your stock percentage, e.g., 120-40 years old = 80% stocks.

AKA: your age - 20 = bonds.

BicycleB

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Fellow MMMers,
I am starting to get a little older with a little more money at my disposal. Looking to actually sit down and comtemplate what an asset allocation might look like (right now, we are 20k/year in I-Bonds and 100% equities past that).

So, my questions are these:
1. What do you consider important for Asset allocations?
2. Is there a comprehensive guide or blog for this?
3. I know this is extremely variable based on the person's situation, but any good rules of thumb? (Bond % = x type heuristics)

Any information here would be amazing, even (or especially) just pointing me in the right direction to start. :)

One blog that gives considerable information and analysis on the topic is Early Retirement Now (ERN), hosted by the eponymous Big ERN.

From past reading and modest personal analysis:
1. Historically, allocations with 40% to 80% stock have performed well in the long term.
2. Using bonds as the main counterweight to stock has been great for most of the last 40 years, but with rising inflation, it's possible that is changing. Alternatives to bonds are numerous and various sources disagree widely on whether and how to use such alternatives (real estate / REITs, gold, other stuff). There's an interesting thread called "Idiots and Gurus" that gave some interesting analysis implying, in my view, some advantages for a more diversified portfolio.
3. Whether you are comfortable during market dips makes a big difference. If yes, high stock % may be ok; otherwise maybe err low.
4. Annual rebalancing helps a little, and has the advantage of a clear procedure to follow.

PS. My questions are "What are my goals?" and "What asset allocation will meet them?" I used 70/30 stock/bonds for a long time, including 7 years of FIRE, while owning a real estate property that represented a large portion of equity and income. In January this year, I sold the property for personal reasons and went with a more diversified financial portfolio, still majority stock but more diverse in the non-stock portion. The diversification helped significantly so far this year.
« Last Edit: May 13, 2022, 11:50:09 AM by BicycleB »

FLBiker

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You got a couple good blog referrals up above.  You'll often read that it has to do with risk tolerance, but I don't really see it that way.  It's more about your behavior.

Personally, I think it would be "riskier" to be 100% bonds, because you will almost certainly have less money in the long run than 80/20 stocks / bonds (even though that is typically described as the "riskier" portfolio).  The issue is your behavior.  If you are prone to panic and pull your money out when things go down, lower stock exposure is probably better.  If you can stay the course no matter what is happening, higher stock exposure is better.

And I just follow the global market cap weighting on stocks (e.g. something like 55% US, 45% ROW) rather than having a home country bias.

Finally, as I've gotten closer to FI, I'm accumulating more cash.  I want to either have a decent cushion (2-3 years) of cash OR dramatically lower expenses (by paying off my house) when I stop working.  I'm not sure which direction I'm leaning.  Part of the reason why I want such a big cushion is I want to be able to avoid both selling stocks at a big loss AND having to exchange currency at a bad time -- my portfolio is almost all in USD but we moved to Canada a couple of years ago so I spend in CAD.  So my target AA right now is like 80% stocks / 10% bonds / 10% cash.

As you near retirement, I do think reducing your equity exposure temporarily (aka a bond tent) makes sense to reduce SORR, but I'm not an expert on that.  I'm more comfortable with just overshooting my FI target / working part-time.

VanillaGorilla

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The nice thing about a high savings rate is that asset allocation doesn't really matter. Whether you're 60/40 or 100/0 equities/bonds, whether you include gold or REITs or Ibonds, your time to FI is short. At 65% savings rate a 100% total stock market portfolio gets you to FI between 6 and 15 years.

60/40 -> 8-13 years.

60/25/15 equities/bonds/gold -> 7-11 years.

So really, it doesn't much matter. Save a lot, invest it, and that's what matters far more than your asset allocation. Arguably tax minimization matters more too.

If your cashflow is lumpy, decrease volatility by holding more cash.

Personally, I have tinkered a bit and realized that I value simplicity. A lot. So I navigated some sort of reasonable-seeming balance between paying off a modest (300k) mortgage and investing 100% in large cap equities, which is some mix of total market and s&p 500 indices depending on availability.

Now I've got a pittance left on the mortgage, which I'm appreciating during the current downturn, and a ton of money in equities. I hold enough cash to cover roughly two months worth of expenses, and I cashflow even big expenses since I save so much.

If/when I quit my job I'll probably move to one off Big ERN's drawdown strategies, either a glidepath or a 60/25/15 stock/bond/gold portfolio.

Cliff notes: holding 100% equities as you work toward FI seems very reasonable to me. Which ends up being exactly what's recommended by a variety of reasonable authors (see JL Collins, ERN, etc).
« Last Edit: May 13, 2022, 11:35:12 AM by VanillaGorilla »

harvestbook

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Your age and/or retirement date plans are a factor, too, as well as life expectancy. I've been happy around the 98/2 range for most of my investing life (bonds basically serving as a second-tier emergency fund) but now semi-retired I want a little more cushion. iBonds should fit that role nicely for the next five years to bridge me to Medicare.

Wife is a bit younger and still working, so our plans are actually for 40-50 years for her, but my thinking changed a bit with 60 coming up next month--I realized death is 100 percent certain one day and the money was probably enough, even in a tanking market, so I shouldn't worry about the wrong things. Not really changing much except slowly building up some cash with the iBonds, nothing drastic. All my 401k and IRA still goes 100 percent stocks.

My response to inflation is to just plant a couple more rows of taters and cabbage this year. We even talked about me finding a job for a while, but I realized time was my most valuable asset, not more money. So I guess the question that stared me in the face was, "Wow, you're getting old. How do you want to spend the rest of your life?" Good enough is good enough.
« Last Edit: May 14, 2022, 07:11:12 AM by harvestbook »

Hall11235

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All,
Thank you! These were some great and detailed responses!

There is much to chew on here over some Saturday morning coffee.

My current plan (subject to change) is to have something approximating an 80/20 split, with 1-2 years cash on hand (iBonds for now). In addition to this, reducing outgoing expenses (eventually paying off mortgage, etc.), and being comfortable with part time work, sets me up for FIRE in about 10-12 years, pending nothing horrible. :)

cool7hand

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We wanted lower volatility in the five years leading up to FIRE and since FIREing. We picked All Seasons as a result.

joe189man

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I think its deeper than just X% in bonds vs stocks.

i think 100% VTSAX and forget it is also not great. you could probably get a phd in this subject. figure out how far down the rabbit hole you want to go.

you can consider not just SP500 vs bonds but also alternatives, international stocks and bonds, then sectors with in the market, SP500 is overweight in technology and financials, do you want to balance the sector allocation also? it really never ends and past performance does not equal future returns

Whats your rebalancing strategy? once a year or actively as needed during a drop or bull run?

whats your risk tolerance and time horizon to FIRE? also consider your age and mortality https://engaging-data.com/will-money-last-retire-early/

At my age of 40 with two young kids and a big stash to build still, i am considering the ideas in Die with Zero by Bill Perkins as well

This is a good read with good resources

https://forum.mrmoneymustache.com/investor-alley/psa-read-tyler-of-portfolio-charts'-recent-blog-post-on-portfolio-construction/

lots to consider, good luck