add other asset classes?

[just_hatched]

I'm 34, married, no kids, and I don't have many bonds, no TIPS, and no REITs.

Taxable accounts:
35000 Vanguard Total Stock Market Index
13000 Vanguard Total Global Stock Index
12000 Company Stock purchase plan

Retirement accounts:
150000 401k, 15% Company stock, 75% various sized stocks, 10% bonds
45000 DW 401k, Vanguard, 50% US growth stocks, 50% international growth
12000 DW 401k, Fidelity, 85% US and global stocks, 15% bonds

12000 Roth, Vanguard Retirement 2045 fund
12000 Roth, Vanguard Retirement 2045 fund, DW

We also have 30000 in cash and CDs, plus 150000 home equity.

Good, I hope nobody here is scared of numbers. :

So my question is: am I too dependent on stocks?
I have enough cash (good or bad) and income at the moment that I don't plan to touch
the mutual funds for hopefully at least 10 years.

Therefore, that led me to invest mostly in stocks and just get the market return
without generating more income for me now that will be taxed. Instead, I'm DCAing
and buy and hold for the long term and hopefully LT gains won't be taxed heavily
when I sell shares in the future.

But most books suggest at most to risk 80% stocks and 20% bonds.
If I don't need the income from the bonds, I have plenty of time until I think I'll
need to sell, and I think interest rates are rising, then do I wait to add bonds?
Should I shift to more bonds in the retirement accounts?

Plus with the real estate bubble that may or may not exist, it doesn't seem like
a good time to add REITs, but maybe I'm just trying to time it which may be impossible.

So, I'm not sure if I should add bonds, REITs, and/or TIPS, and if so, do it in
the taxable accounts or retirement accounts?

Thanks!

 

[laurence]

My house is not paid for, but I follow similar thinking. My bond allocation is early payments. Plus, what the heck, I'm young!

 

[maddythebeagle]

My house is not paid for, but I follow similar thinking. My bond allocation is early payments. Plus, what the heck, I'm young!

Ditto on this. I am also in my early 30s and paying down my mortgage. No bonds in my investment accounts.

 

[wildcat]

95% stocks, little intl' bond exposure, no REITs (will add in the future but at these low yields why hurry?)

You seem to have a nice chunk in comp stock and is that 30K in cash/cds or did you mean 3k?  I wouldn't sit on 30k personally unless that is some sort of withdrawl for ER.   

Commodities fund is a good addition if you can get it via Pimco (for non-tax account).

Agree stocks are good for those that have the time and stomach for volatility.

 

[just_hatched]

You seem to have a nice chunk in comp stock and is that 30K in cash/cds or did you mean 3k? I wouldn't sit on 30k personally unless that is some sort of withdrawl for ER.

Company stock: Yes, I agree. In 401k, 15% is a bit high and future contribs I think I have set at 5 or 10%.
I keep thinking of rebalancing some of it into the lower balance portions such as international and mid-cap stock funds.
As for the stock purchase plan, I've been holding because I don't know where I'd put it if I sold it - maybe add more to the Vanguard Total Stock.

Cash: yes, 30k. For one thing, I have an older car, so I may want to spend 15-20k at any time. For lack of anywhere else to put it, I don't want to have all of my eggs in stocks. I still have home equity, but I haven't heard many people say they use that as their emergency fund.

I think your heavy equity allocation is fine. Your home equity is essentially a risk-free bond portfolio earning say 5-6% (depending on what type of mortgage), so that offsets your heavy stock allocation.

That's interesting. I would think from a diversification standpoint, the house would fall under the real estate class instead of the bond class. Hmm... a new perspective.
Also, just to add some more info, our only debt is the mortgage which is 30 year fixed at 6.0%
we have 100k remaining balance and the house is worth 250k. we're paying 500 extra per month.
The house has appreciated about 10%/year so far. I'm not expecting that to last much longer.

I max out my 401k at 14k/year, but my wife is at 8k/year. I've also considered whether better to pay down the mortgage at 6k/year or add 6k/year to her 401k, but it is nice to see the mortgage balance actually drop.

The part about the 401k is that it seems so long until we can get to it without penalty, yet it's also hard to pass up the tax break by maxing it out. Why "overkill" the 401k balances when I have to wait so long to get to it?

 

[wildcat]

Cash: yes, 30k. For one thing, I have an older car, so I may want to spend 15-20k at any time. For lack of anywhere else to put it, I don't want to have all of my eggs in stocks. I still have home equity, but I haven't heard many people say they use that as their emergency fund.

As long as you have a reason. If you have a big outlay coming up then I say yeah go for it. Still say commodities would be an excellent addition for a diversification idea. Low correl with stocks. It will help smooth out the bumps with stocks. I own the Pimco Commodity Real Return as part of my port.

 

[just_hatched]

Thanks to everyone for comments so far!

Hey Laurence, you win the cutest pic/caption award!
I laugh every time I see it.

 

[Gone4Good]

A little bit of bond exposure can help improve the risk adjusted returns of a diversified portfolio. I've seen research that suggests 20% fixed income exposure can substantially reduces volatility without meaningfully reducing expected returns.

At the end of the day it all comes down to risk tolerance. However, some investors overestimate their tolerance for volatility. Owning a heavily equity weighted portfolio when stocks are doing well is easy. But when stocks go down, and stay down, and then go down some more, its often hard to stay with the "stocks for the long-haul" philosophy. Many investors capitulate at the worst possible moment, locking in losses for the long haul.

If you were heavily invested in equities during the recent bear market, stuck with your strategy, and dollar cost averaged all the way, then your portfolio truly suits you. If that is not the case, then a little bit of bonds couldn't hurt.

With respect to other asset classes, I recently sold down my REIT position due to valuations. It pained me to do it because I think it helps diversification, but REITs have had an amazing run and seem a bit frothy. I don't own any commodities and think they may be a bit of a fad. Once every 20 years commodities do really well but then pretty much suck wind. They've done really well over the past two years, so I'm not too optimistic about the next 20.

 

[Nords]

If that is not the case, then a little bit of bonds couldn't hurt.

Sure it could. If an investor is carrying debt (mortgage, car payment, or credit card) with a higher interest rate than the bond's return, then a little bit of bonds is losing money. In that situation it'd make more sense to pay off the debt than to reduce volatility.

 

[Gone4Good]

Sure it could.  If an investor is carrying debt (mortgage, car payment, or credit card) with a higher interest rate than the bond's return, then a little bit of bonds is losing money.  In that situation it'd make more sense to pay off the debt than to reduce volatility.

Not sure I agree if we're talking about an investor who is going to bail out of stocks when they go down - which was the premise of the comment.

 

[just_hatched]

A little bit of bond exposure can help improve the risk adjusted returns of a diversified portfolio. I've seen research that suggests 20% fixed income exposure can substantially reduces volatility without meaningfully reducing expected returns.

when stocks go down, and stay down, and then go down some more, its often hard to stay with the "stocks for the long-haul" philosophy. Many investors capitulate at the worst possible moment, locking in losses for the long haul.

What I'm going for is long-term growth. If I use bonds to hedge against a prolonged bear market (like 20-30 years), I don't really want the income now, I want the growth. So I guess I'm hoping such a long bear market won't happen or else I suppose I placed the wrong bet. It sounds like others may be placing the same bet at my age as long as they have home equity, at least that's what I'm reading.

For my taxable funds, I started with the stock funds in early 2002 and "bought the dip" for the rest of the year. I don't know if that means I passed the test, but I realized that the upswing should happen before I needed to sell anything (even if it took 10 years). Hence, my "large" cash holdings at the moment just in case.

I guess it seems there isn't much difference right now between a 3.5% CD and/or ING account and a short term bond that returns about the same, or maybe 4%, so I stick with CDs.

I don't know much about commodities, and I'm already "in real estate" with my house although I suppose REITs return from rentals of commercial properties (don't know much about REITs either.)
And I'm not sure what TIPS can do for me.

 

[Spanky]

With respect to other asset classes, I recently sold down my REIT position due to valuations. It pained me to do it because I think it helps diversification, but REITs have had an amazing run and seem a bit frothy. I don't own any commodities and think they may be a bit of a fad. Once every 20 years commodities do really well but then pretty much suck wind. They've done really well over the past two years, so I'm not too optimistic about the next 20.

I also lowered my REIT holding recently. I thought about adding commodity since it supposed to increase diversification because of its low correlation to other asset classes. However, its return over the long-term (last 15 years) is feeble relative to that of the S&P500 despite its recent attractive performance.

 

[brewer12345]

I also lowered my REIT holding recently. I thought about adding commodity since it supposed to increase diversification because of its low correlation to other asset classes. However, its return over the long-term (last 15 years) is feeble relative to that of the S&P500 despite its recent attractive performance.

But remember, commodities are negatively correlated with equity returns. By definition, that means that they tend not to do well when stocks are surging.

I help my MIL with her retirement portfolio, which is basically all index funds. At the end of last year, we dropped the REIT allocation to 5% (from 10%) and added a 5% commodities position. She has a small (a few percent) TIPS position which we will probably jettison in favor of commodities at the end of this year.

 

[Gone4Good]

just_hatched, you actually have more fixed income exposure than you may realize. Based on my quick calc from the information you provided, bonds and cash account for about 15% of your portfolio (excluding home equity). You seem to want an aggressive portfolio, so what you have seems fine.

Congrats on accumulating an impressive net worth by 34.

 

[just_hatched]

just_hatched, you actually have more fixed income exposure than you may realize. Based on my quick calc from the information you provided, bonds and cash account for about 15% of your portfolio (excluding home equity). You seem to want an aggressive portfolio, so what you have seems fine.

Congrats on accumulating an impressive net worth by 34.

Hey, that sounds easy to me - just keep doin' what I'm doin' !

If it ain't broke, don't fix it.
(I'll remember that when the 20-year bear market hits...)

eh - what are the odds of that?

Thanks!

 

[cute fuzzy bunny]

Sure it could. If an investor is carrying debt (mortgage, car payment, or credit card) with a higher interest rate than the bond's return, then a little bit of bonds is losing money. In that situation it'd make more sense to pay off the debt than to reduce volatility.

Ding Ding Ding...we have a winnah!

Remember kids, that bonds have been good portfolio ballast during times of erratic equity market movements AND while interest rates have been declining. Here at the end of a long 20 year slide in interest rates they've looked just delightful during that time period. Now with rates sliding upwards, bonds still havent had the slap on the fanny that I think they're due.

Plus with 5% CD's kicking around, taking 4% for an intermediate bond or 6.5% for lower risk junk bonds is a bad, bad idea.

Someone want to hazard a guess at what I dont have in my portfolio anymore?

 

[ats5g]

Insert Quote
Quote from: Nords on September 14, 2005, 08:00:48 PM
Sure it could. If an investor is carrying debt (mortgage, car payment, or credit card) with a higher interest rate than the bond's return, then a little bit of bonds is losing money. In that situation it'd make more sense to pay off the debt than to reduce volatility.

Ding Ding Ding...we have a winnah!

Totally agree. And the same could be said of investing in anything with lower expected returns than debt. Imagine not paying off a 18% credit card to invest in stocks or real estate!

Remember kids, that bonds have been good portfolio ballast during times of erratic equity market movements AND while interest rates have been declining. Here at the end of a long 20 year slide in interest rates they've looked just delightful during that time period. Now with rates sliding upwards, bonds still havent had the slap on the fanny that I think they're due.

I'm gonna have to take issue with this. IMO, the bull market in bonds is not due to the falling interest rates. If this was true the return on bonds would have been higher than their yields from the early 80's. Bond investors were actually hurt by the falling interest rates b/c they had to reinvest all those coupons at lower interest rates. What did help bond investors was that inflation was much lower than expected, and high inflation expectrations had been priced into the yields on bonds in the 80's.

One could also make the argument that equities and real estate are also "due for a slap in the face".

just_hatched, here is some info on TIPS to help you understand them:

What You Should Know About U.S. Inflation Protected Securities from the Bond Market Association.

Understanding and Using Inflation Bonds from TIAA-CREF

TIPS as an Asset Class from Ibbotson Associates.

I think that conservative investors should be almost all in LT TIPS, since they are the real safe long term investments, not cd's, short term bonds, Tbills, stocks, or real estate. See:

Who should buy long term bonds, or

the more detailed long version of Who should buy long term bonds - To get past all the complicated math, after reading the introduction, skip to page 118 and start at "C. Bond Demand in the Presence of Equities".

- Alec

 

[just_hatched]

just_hatched, you actually have more fixed income exposure than you may realize. Based on my quick calc from the information you provided, bonds and cash account for about 15% of your portfolio (excluding home equity).

One thing I left out, I also have $38k worth of pension plan at the moment.

When I break down my % net worth in assets, I have no clue how a pension fits into the mix.
Should it count as cash?

IMO, it's ok to put the pension in my NW total because I should be able to roll it into an IRA if I left
the company. As long as the pension stays solvent at the company or they don't erase it with
an email update "Our new policy is, well, NO PENSION FOR YOU!"

Maybe I can leave it in my total (can you tell I really want to leave it in my total??)
but not include it in my asset allocation analysis.

It's there, I just don't know how to treat it, or just ignore it because it could always vanish.