Author Topic: When to start diversifying?  (Read 1197 times)

LearningMustachian72

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When to start diversifying?
« on: February 25, 2020, 10:38:01 AM »
Hey!

My wife and I each contribute the max to our employer sponsored plans (457 and 403b for her, 401 for me).  We each have a balance of roughly 100k that is completely invested in VTSAX (her) and SP500 index (me).

We do not have any investments outside of this. 

My question is, at what point should we consider diversification beyond what we have now and why?

Thank you!

vand

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Re: When to start diversifying?
« Reply #1 on: February 25, 2020, 10:43:22 AM »
Like, yesterday, dude.
Or alternatively when everything is burning around you, because we all know those are the best time to be making clear and level headed investment decisions.

ixtap

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Re: When to start diversifying?
« Reply #2 on: February 25, 2020, 10:48:15 AM »
Now is the time to read articles about asset allocation and decide what is best for you and your situation. Check the boglehead wikis, for example.

nereo

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Re: When to start diversifying?
« Reply #3 on: February 25, 2020, 10:48:40 AM »
Understand right off the bat that the mantra of diversification began in an era where most people might own 10-15 individual stocks.
By owning those two index funds you are already very well diversified - within equities.  While those are all US companies the larger ones generate most of their revenue from international sales already, so indirectly you have a lot of exposure to world markets.  By owning those large indexes you own shares in companies in every industry there is, in approximately the same proportions which they operate in our actual economy.

If you wanted to diversify further (and there's no reason why you absolutely must) you might next consider a bond fund.  Bonds smooth out some of the volatility, adn as you approach retirement you may want some bonds to mitigate sequence of returns risk (SORR - when a market collapse very early on in your retirement tanks your portfolio). 

I wouldn't go overboard with bond funds though - a 90/10 or 80/20 is common for young people in the accumulation phase of their retirement.  Depending on how conservative you want to be as you approach retirement you may want to go as high as 60/40, but that is pretty conservative indeed.


LearningMustachian72

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Re: When to start diversifying?
« Reply #4 on: February 25, 2020, 11:22:06 AM »
Thanks everyone.

@nereo - yes, that was my reasoning for going all in on the broad index funds originally.  I should have mentioned that we are relatively young (30) and hope to ramp up our savings a bit more for a target retirement age between 50-55.

I think I will allocate 10% each to a bond fund.  I do not have much experience with bonds, if there are good articles or recommendations folks have, it would be greatly appreciated.

Lastly, probably an amateur question but if there is a downturn soon, I should wait until equities rebound to allocate that 10% over to bonds correct?  Or would you simply allocate 10% of future investments that way?

MDM

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Re: When to start diversifying?
« Reply #5 on: February 25, 2020, 11:52:17 AM »
Lastly, probably an amateur question but if there is a downturn soon, I should wait until equities rebound to allocate that 10% over to bonds correct?  Or would you simply allocate 10% of future investments that way?
Define downturn.

Define rebound.

Are you sure? ;)

In other words, don't try to time the market.

nereo

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Re: When to start diversifying?
« Reply #6 on: February 25, 2020, 12:06:39 PM »
In other words, don't try to time the market.

Wise words.  '
OP - the best strategy for you (and most people) is most likely to set up contributions every pay period to a pre-determined set of index funds and bond funds, and then put it on auto-pilot.  Contribute regardless of what the economy is doing, regardless of what the talking heads are saying.  When your income goes up - contribute more.  Don't skip contributions unless you have to.
Once a year rebalance so that your %equities and %bonds are in line with where you want them to be (e.g. 90/10 per your post).

It really can be that simple.

Also:  read the Investment Order sticky.

Joe Schmo

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Re: When to start diversifying?
« Reply #7 on: February 25, 2020, 12:12:40 PM »
If you want to diversify do it with future investments with and eye towards the looooooooooong term. Like buy the shit out of it for the next 10-30 years. Or at least that's my plan :/

ol1970

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Re: When to start diversifying?
« Reply #8 on: February 25, 2020, 12:42:27 PM »
What I tell people is you start to diversify from 100% stocks/indexing at either $3M account value (not overall net worth), or 55 years of age.  At $3M you are beyond set if you are even remotely normal.  At that point start throwing in stuff like bond ladders o(own the actual bond itself not a fund of bonds), CD's (if they ever start having a return again), real estate, private placement investments/alternatives, tiny bit of gold if you are so inclined, debt service instruments, etc.  Of course it goes without saying that you should have zero debt...ever.

Or the alternative is if you are approaching retirement/inability to work anymore, I'd diversify the $3M then as well to say 75% Stocks 25% Bonds as the extra you make on being 100% stocks doesn't change your lifestyle one bit but does help you sleep better.

Once you get to $3M let it ride forever...or until you start taking distributions because you've pulled the retirement trigger.  All new dollars start the diversification with.  Worked well for me...but I'd be wealthier if I remained 100% equities, but I've never stressed out about market undulations and live a life of abundance.

nereo

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Re: When to start diversifying?
« Reply #9 on: February 25, 2020, 12:48:19 PM »
What I tell people is you start to diversify from 100% stocks/indexing at either $3M account value (not overall net worth), or 55 years of age.  At $3M you are beyond set if you are even remotely normal.  At that point start throwing in stuff like bond ladders o(own the actual bond itself not a fund of bonds), CD's (if they ever start having a return again), real estate, private placement investments/alternatives, tiny bit of gold if you are so inclined, debt service instruments, etc.  Of course it goes without saying that you should have zero debt...ever.

Or the alternative is if you are approaching retirement/inability to work anymore, I'd diversify the $3M then as well to say 75% Stocks 25% Bonds as the extra you make on being 100% stocks doesn't change your lifestyle one bit but does help you sleep better.

Once you get to $3M let it ride forever...or until you start taking distributions because you've pulled the retirement trigger.  All new dollars start the diversification with.  Worked well for me...but I'd be wealthier if I remained 100% equities, but I've never stressed out about market undulations and live a life of abundance.

Is this satire?

frugalnacho

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Re: When to start diversifying?
« Reply #10 on: February 25, 2020, 01:03:43 PM »
I agree with nereo, you are already diversified pretty well, even though you are heavy on domestic equities.   My real answer to the question though is ASAP.  Decide what type of asset allocation you want to hold, and then start investing in those ratios.  At the very beginning when you don't have enough to meet fund minimums you won't be able to split between multiple funds, but then again your stache is so tiny it doesn't matter.  Once you get above the fund minimums you should be investing according to your asset allocation.  I would advise creating an investment policy statement with your desired asset allocation, and then just do it moving forward.

I hold 60% domestic equities (VTSAX or equivalent), 40% international equities (VTIAX or equivalent), 0% bonds, and several months expenses in a saving account.

vand

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Re: When to start diversifying?
« Reply #11 on: February 25, 2020, 04:18:12 PM »
Some terrible "advice" been thrown around on this thread as is the usual around here.

If you have difficulty sleeping easy at night with a 100% stock portfolio then a 90/10 or 80/20 portfolio is going to do... absolutely sod all for your beauty naps. Long story short: look up the risk parity portfolio. Stocks are more volatile than bonds; so a 90/10 portfolio has about 98% of the same risk profile as a 100/0 portfolio and a 80/20 portfolio about 95%.

My advice: start at 60/40. Better to be too conservative and find out you are happy to dial up your risk appetite after a bear market than the other way around.

BicycleB

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Re: When to start diversifying?
« Reply #12 on: February 25, 2020, 06:30:45 PM »
Hey!

My wife and I each contribute the max to our employer sponsored plans (457 and 403b for her, 401 for me).  We each have a balance of roughly 100k that is completely invested in VTSAX (her) and SP500 index (me).

We do not have any investments outside of this. 

My question is, at what point should we consider diversification beyond what we have now and why?

Thank you!

When your progress toward your financial goals makes it rational to do so, taking into account your risk tolerance.

For example, let's suppose your risk tolerance is high, by which I mean, even if both indexes you're invested drop another 30% in the next month, it won't bother you too much. Which is a very rational attitude for a gainfully employed couple making substantial retirement contributions already. In this example, let's further suppose that your goal is Financial Independence, that the amount of money you need to reach FI is $1 million ignoring any possible pension, and the current $200k balance (or $185k, based on the last couple of days' drops) represents the fact that most of your accumulation phase is still ahead of you.

Based on a high risk tolerance and the fact you're not close to FI, 100% stock is a reasonable allocation. There will presumably be big swings up and down between now and FI, but the odds of them changing the outcome dramatically are low enough that many people (including me, who has a much more diversified portfolio) feel it's reasonable in your case.

Later, for example when you reach 700k out of your $1 million example, it becomes more important to diversify. Opinions differ as to whether and why you should, but a common scenario would be to focus on a 70% stock 30% bond portfolio during FI, to provide more stability during downturns (thanks to the bond component) while retaining most of the growth potential (thanks to the stock portion plus the chance to rebalance on a steady, perhaps annual basis, which historically has proven effective). After reaching the 700k mark, you could choose to invest primarily in bonds, unless stock drops during the final years cause you to need some stock investing to reach the desired 70/30 ratio.

Another pattern for tapering from 100% stock to a stock/bond diversification would be to start your taper 5 years before your estimated FI date. Each year, you could target a fifth of the transition. So if you were investing $100k/year and at $400k portfolio you anticipate you're 5 years from FI after accounting for estimated gains, in that year you might establish a year end target of being 6% in bonds (one fifth of 30%). The following year, you'd increase to 12% bonds. To save on taxes, you could adjust your contributions each year to  seek the desired year-end allocation; that way, you wouldn't need to sell anything unless stock valuations rise faster than your contribution rate.

Those are examples of your investment context determining the proper allocation. That, not market timing, should drive your allocation decisions. When stocks are dropping rapidly like the past couple days, I would not sell stock or change from a 100% stock allocation.
« Last Edit: February 25, 2020, 06:53:30 PM by BicycleB »

ChpBstrd

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Re: When to start diversifying?
« Reply #13 on: February 26, 2020, 04:23:02 PM »
If the $200k represents the vast majority of your liquid net worth AND if you have the guts not to sell in a correction, the answer is not yet.

I'm assuming you plan to retire on $1M minimum, and you probably spent 3-4 years saving the $200k. That means you are at least 5-10 years from retirement. Would you be willing to wager that stocks will be more expensive 5-10y from now? I certainly would. That bet has a high historical payout. Meanwhile, you have plenty of time as a buy and hold investor to ride out any 2-5 year downturn and still come out ahead in the end!

If you were 2 or 3 years from retirement, or if you had another brokerage account with $500k in stocks, or if you are a CNBC enthusiast who breathlessly follows the daily ups and downs, I'd have a different answer for you. If any of the above were true, I'd recommend going to a bond fund or cash with 40-50% of your allocation.

celerystalks

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Re: When to start diversifying?
« Reply #14 on: February 26, 2020, 08:40:05 PM »
How is job security and what is the defined benefit pension situation?  If job security is high and you are accruing credits towards a pension, to me that factors against owning bonds at this point. 

LearningMustachian72

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Re: When to start diversifying?
« Reply #15 on: February 27, 2020, 02:22:26 PM »
Damnit you guys, I’m losing all my $...jk

I appreciate everyone’s advice.  I am not too concerned with large swings at this point as I am relatively young and at least 20 years from full retirement. (I say that having not lived through anything major).

I think I will either move 10% to bonds or wait until I have a little more of a balance to get into bonds.