When to worry about asset allocation

[alm0stk00l]

How much should you have invested before you start worrying about your asset allocation? For instance, at this point I invest solely in VTSAX which is 100% equities, but I don't really have that much invested yet. Is it worth trying to fulfill a certain AA as soon as your start down the investing path or is it better to wait until you have at least enough for admiral shares in each fund you may be interested in?

Maybe some thresholds would help me. For instance:

Amount saved:

$10k -> pick any fund you like, 60/40, all stock, target retirement, etc.
$25k -> keep feeding your fund
$40k -> start a basic AA with stocks/bonds or something similar if it does not already exist in your fund
$80k -> start looking at expanding AA into other investment vehicles like real estate/reits, international, etc.
$100k -> have the AA that works for you and already rolling
$100k+ -> just keep chugging along

I just picked the numbers above randomly to illustrate a kind of road map that would be helpful to me. What is your road map?

[matchewed]

At either the beginning if you know why you should have an Asset Allocation, or after you've educated yourself as to what it is and why you should have it.

It isn't some benchmark that changes because of your portfolio level, it changes based on your comfort with and knowledge of risk. It changes based on your goals and objectives.

Use an investment policy statement - http://www.bogleheads.org/wiki/Investment_policy_statement

Understand what your risks are and what risks you're willing to take, all the while thinking about how you'll withdraw too, and invest accordingly.

[KingCoin]

I can't think of a compelling reason not to have a set AA right out of the gates (unless perhaps you're being charged a brokerage fee for every trade and the cost becomes onerous relative to the amount being invested).

Practically speaking, if you have less than $10k invested, it doesn't really matter whether you're 100 or 80/20 or 60/20/20. The absolute dollars involved aren't really big enough to move the needle one way or the other. The differences in expense ratio for admiral vs non admiral is going to be negligible for a small portfolio. Saving 5 basis points on a $10k portfolio is only $5.

[alm0stk00l]

I can't think of a compelling reason not to have a set AA right out of the gates (unless perhaps you're being charged a brokerage fee for every trade and the cost becomes onerous relative to the amount being invested).

Practically speaking, if you have less than $10k invested, it doesn't really matter whether you're 100 or 80/20 or 60/20/20. The absolute dollars involved aren't really big enough to move the needle one way or the other. The differences in expense ratio for admiral vs non admiral is going to be negligible for a small portfolio. Saving 5 basis points on a $10k portfolio is only $5.

I agree and I cannot think of a compelling reason to worry about it either. That is why I am wondering at what point you can actually start to realize benefits from an allocation. Do you have a generally invested amount that you would say it makes sense to focus on your AA?

[PeteD01]

How much should you have invested before you start worrying about your asset allocation? For instance, at this point I invest solely in VTSAX which is 100% equities, but I don't really have that much invested yet. Is it worth trying to fulfill a certain AA as soon as your start down the investing path or is it better to wait until you have at least enough for admiral shares in each fund you may be interested in?

Do you have a mortgage or other debt?
If yes, you need to account for that and you may find the answer right there.

Peter

[matchewed]

I can't think of a compelling reason not to have a set AA right out of the gates (unless perhaps you're being charged a brokerage fee for every trade and the cost becomes onerous relative to the amount being invested).

Practically speaking, if you have less than $10k invested, it doesn't really matter whether you're 100 or 80/20 or 60/20/20. The absolute dollars involved aren't really big enough to move the needle one way or the other. The differences in expense ratio for admiral vs non admiral is going to be negligible for a small portfolio. Saving 5 basis points on a $10k portfolio is only $5.

I agree and I cannot think of a compelling reason to worry about it either. That is why I am wondering at what point you can actually start to realize benefits from an allocation. Do you have a generally invested amount that you would say it makes sense to focus on your AA?

KingCoin isn't saying there is never a practical reason to worry about AA. Only at the theoretical idea of having only 10k invested. For an investor his first sentence is what matters. Have an AA determined prior to investing. Have a plan and adjust accordingly.

[KingCoin]

Do you have a generally invested amount that you would say it makes sense to focus on your AA?

Focus on it from $0 invested, as long as there's no structural barrier to such a portfolio (transaction costs, fund minimums, etc.). I mean, why not? It never hurts to establish good habits early, even if they don't make much of a difference on a small scale.

[oldtoyota]

Do you have a generally invested amount that you would say it makes sense to focus on your AA?

Focus on it from $0 invested, as long as there's no structural barrier to such a portfolio (transaction costs, fund minimums, etc.). I mean, why not? It never hurts to establish good habits early, even if they don't make much of a difference on a small scale.

I think doing it the above way would be the easiest. I am heavily invested in stocks (almost wrote 'socks,' which would be weird). This year, I'm adding more money into bonds. At the end of the year, I still won't be completed balanced, and I'm okay with that for now.

What's tricky about balancing out later (as I am doing now) is that I want to be both balanced and taking advantage of the stock market. To get to where I want to be in regards to AA, I'd have to decrease my stock investments by A LOT. I'm not willing to do that now. However, I am willing to put *more* into bonds. So, I won't be balanced, but I'll have more money saved overall while making a slow path to my AA goal.

[soccerluvof4]

Do you have a generally invested amount that you would say it makes sense to focus on your AA?

Focus on it from $0 invested, as long as there's no structural barrier to such a portfolio (transaction costs, fund minimums, etc.). I mean, why not? It never hurts to establish good habits early, even if they don't make much of a difference on a small scale.

I think doing it the above way would be the easiest. I am heavily invested in stocks (almost wrote 'socks,' which would be weird). This year, I'm adding more money into bonds. At the end of the year, I still won't be completed balanced, and I'm okay with that for now.

What's tricky about balancing out later (as I am doing now) is that I want to be both balanced and taking advantage of the stock market. To get to where I want to be in regards to AA, I'd have to decrease my stock investments by A LOT. I'm not willing to do that now. However, I am willing to put *more* into bonds. So, I won't be balanced, but I'll have more money saved overall while making a slow path to my AA goal.

I am sure there is a market out there for pricey sock! so don't be hard on yourself!

To kingcoins point from 0$ invested start with your plan. You will have a better chance of preventing losses first like most investors if educated. Which in fairness its seems your trying to accomplish by reaching out and asking questions.

[Zaga]

For simplicity we stuck with only balanced funds (Wellington, Fidelity 4 in 1, etc) until we had over $100K.  It just didn't seem worth it to deal with 5 accounts asset allocation at that low level.

[AlexK]

I have almost all of my liquid assets in S&P 500 index funds. The reason why is I played with cFIREsim and it looks like the more equities, the higher success rate. It goes against common wisdom but it's what the numbers are saying.

http://www.cfiresim.com/input.php

See the graph below.

[foobar]

Conventional wisdom is fine with all stocks. It works great with 30 year time horizons. When you lower it to 10 or so, the mixed portfolios tend to have better average (the good ones are not as good but the bad ones are not as bad) performance. And why do the s&p 500? Small caps have historically given an extra 1.5% return over that index.:)

 

I have almost all of my liquid assets in S&P 500 index funds. The reason why is I played with cFIREsim and it looks like the more equities, the higher success rate. It goes against common wisdom but it's what the numbers are saying.

http://www.cfiresim.com/input.php

See the graph below.

[AlexK]

I have S&P 500 because my 401k has a low cost index fund for that. But you are right, I could be putting taxable funds into small caps.

[ThermionicScott]

It's pretty hard to go wrong with the old "age in bonds" rule of thumb* -- it has you invest aggressively when you're young and saving with more earning years ahead, and has your AA automatically become more conservative as your 'stash grows and you get nearer to retirement.  Committing to a rule such as this also helps remove the temptation to tinker with your AA when the market is high and everyone is optimistic, or when the market is down and everyone wants to sell.

* Percentage of portfolio in bonds is your age, rest is stocks.

[foobar]

Just picking 60/40 (or 40/60) also works out well. 

It's pretty hard to go wrong with the old "age in bonds" rule of thumb* -- it has you invest aggressively when you're young and saving with more earning years ahead, and has your AA automatically become more conservative as your 'stash grows and you get nearer to retirement.  Committing to a rule such as this also helps remove the temptation to tinker with your AA when the market is high and everyone is optimistic, or when the market is down and everyone wants to sell.

* Percentage of portfolio in bonds is your age, rest is stocks.