Asset Allocation

[Spanky]

stock 53.79%
bond 32.31%
cash 13.90%

planning to increase equity to 60%.

 

[HFWR]

Investment/current/target

cash 11.51% 10.00%
bonds 29.03% 30.00%
stocks 49.34% 50.00%
reit 10.11% 10.00%

 

[OldShooter]

... I have a more complex mix than most (10 ETFs/MFs) with the following spread:

Morningstar Category; AA (%); Investment
Large Growth; 9; SCHG
Large Blend (S&P 500); 20; SWPPX
Large Value; 9; SCHD
Mid Cap Blend; 9; SCHM
Small Blend; 8; SCHA
Foreign Large Blend; 10; SCHF
Intermediate-Term Bond; 22; SCHZ
Realestate; 10; SCHH
Gold (Commodities Precious Metals); 1; SGOL
Inflation Protected Bond; 2; SCHP

In the long run, it probably doesn't make much difference between my AA and those with the simple 3 Vanguard fund spread, but I enjoy managing my portfolio and don't mind the extra work to re-balance.

One accusations made about many of the supposed stock-picking funds is that they are "closet indexers." IOW their complex portfolios are deliberately or inadvertently designed to mimic a total market fund while they collect a premium fee for doing so.

@JackJester you appear to have fallen into that trap. Just for grins I took your equity funds at the percentages you state and ran them against Vanguard's total US market fund VTSAX. Here is the result from Portfolio Visualizer. VTSAX is Portfolio #2.

​

Both portfolios have a 1.00 correlation to the US Market.

 

[Mdlerth]

Only time will tell

AA depends on lots of things, age being one of the least important. Among them are: Size of assets relative to retirement income needs, goal for the assets (spend all, leave a sizeable estate, etc.), and your battle-tested* risk tolerance.

I'm about 6 weeks from retirement at 61, with AA of 80/15/5. It occurs to me that I don't really know my "battle-tested risk tolerance", because for the past 40 years I've been drawing a steady paycheck. My high equity fraction could weather any market storms without much worry.

Market went up? The numbers on my 401k summary page went up and I basked in the glow. Market went down? Equity prices declined so my contribution + match bought more shares that month.

But after the paychecks stop, the next time markets get spooky will provide some insight into just how much volatility I can stomach. We still will have a buffer with pensions and DW's SS covering 80% of our living expenses, but it's too soon to know whether I'll shrug off a bear as easily as I had done while w*rking.

 

[OldShooter]

... it's too soon to know whether I'll shrug off a bear as easily as I had done while w*rking.

I think you'll do fine. DW and I have found that each "oops" is easier to ignore than the previous one. We were close to 100% equities before retiring but now have arranged our AA so we should be able ride the waves without SORR issues. I'm sure you will too.

 

[Doribe]

Age 63
71/20/9
I have a pension, so I feel comfortable with this amount of equities.

 

[GravitySucks]

I'm about 6 weeks from retirement at 61, with AA of 80/15/5. It occurs to me that I don't really know my "battle-tested risk tolerance", because for the past 40 years I've been drawing a steady paycheck. My high equity fraction could weather any market storms without much worry.

Market went up? The numbers on my 401k summary page went up and I basked in the glow. Market went down? Equity prices declined so my contribution + match bought more shares that month.

But after the paychecks stop, the next time markets get spooky will provide some insight into just how much volatility I can stomach. We still will have a buffer with pensions and DW's SS covering 80% of our living expenses, but it's too soon to know whether I'll shrug off a bear as easily as I had done while w*rking.

Yup!
I thought I had the fortitude to sleep well with 80/20, and then 70/30 but a couple of bumps in 2015 proved me wrong.
60/40 now and barely noticed December 2018. I've also gone to much higher quality and lower durations on bonds. Thinking I may let it slide up 65/35, but that really doesn't buy much more on the upside.

 

[wannabefire]

I've included a graphical representation (pie chart) of both Net Worth Allocation and Investment Allocation.

We are early 50s and looking to retire in about 5 years. We do not have pensions but will both have SS.

 

[SunBlueSky]

Age 54, first year of retirement, no pension, asset allocation as of today:

74.4% Cash/CD/MM/Savings/Checking
16.1% Stocks/Equity
8.40% REIT's
1.10% Bond Funds

I listed the REIT's separately from stocks, although some include it as part of their Equity bucket. These are mostly non-traded and were sold to me by a FA who I recently parted ways with .

Since retiring sooner than I expected to, I have not yet decided on my asset allocation.

I know that I got very skittish about the stock market after the financial crises, and in 2015 I moved a majority of my 401k to treasury funds. Prior to that, I had been largely in stocks (through 1987, dot com, 2008/2009). Of course, I have missed out on the recent gains, but I think the pain of losing large amounts would affect me way more negatively. Especially now that I no longer have a steady paycheck and am not contributing to 401k, no more employer match, no bonuses, etc.

 

[SunBlueSky]

I forgot to include a single family rental house as part of my asset allocation. Should rental property be included?

 

[24601NoMore]

Retired this year at age 55..AA is roughly:

23% equities (16.47% US, 6.32% Intl)
16% Bond funds
61% CDs, MMs, etc

Dividends from the CDs, MMs and a couple of high yield equity positions we hold pay a good chunk of the bills, so we don't need to pull much (probably < 2% annually) from the stock or bond parts of the portfolio unless we need to fund a big and unplanned purchase. I prefer being able to SWAN and not worry about SOR risk by having a high allocation to CDs & (previously, before rates dropped through the floor, MMs) - especially after a 10+ year bull market that is very long in the tooth.

I expect a potentially significant drop in equities in 2020, particularly with it being an election year. Whether that materializes or not is anyone's guess, but I'd plan to increase equity positions with the 30+% drop I expect is fairly close to right around the corner - if not 2020, then 2021 or even 2022. I can forego some (likely small) incremental gains over the next year or two to have dry powder to "buy low", as I'm confident we'll see prices below the levels they're currently at within the next couple of years. I also feel a whole lot better not having big volatility in our net worth in the first years of ER..

My approach is somewhat in line with Kitces "bond tent" approach where you raise equity position once you get past the main SOR risk of ER. Except in my case, I'm using CDs at an average payout of 3%+ in lieu of individual bonds or a larger bond fund exposure..

 

[FREE866]

Age 54, first year of retirement, no pension, asset allocation as of today:

74.4% Cash/CD/MM/Savings/Checking
16.1% Stocks/Equity
8.40% REIT's
1.10% Bond Funds

Wow...you must have a lot of money....that AA will provide very little growth over time


I've always been very heavy in stock and it's the reason I was able to retire at 50.



53 now.

I'm at like 90%+ equity

 

[scrabbler1]

I have different investment objective for my taxable versus rollover IRA accounts. Therefore, I have different AAs for each. The taxable account is more income oriented, so I have more bonds in it than I do the rollover IRA, an account I won't be able to tap into for at least another 3 years (I am 56, but have had the rollover IRA for 11 years after it was my old 401k).


I have been gradually reducing the stock portion of the Rollover IRA as I age. It began at 55/45 and it is now 45/55.

 

[24601NoMore]

There are a lot of different schools of thought on what to do once you're out of the accumulation stage and into the ER/preservation stage, and the two phases can be very different.

Some pretty learned guys like Rick Ferri and Michael Kitces among others are not only comfortable with relatively low equity allocations in ER, but actually recommend it. Ferri, for example, says the "sweet spot" for those in early or normal retirement is ~35% equities. Kitces has recommended his "bond tent" approach where you have lower equities earlier in retirement, then raise the equity exposure once you're out of the ER years with reduced SOR risk and SS or other income streams come online.

If (like me), you expect the market to drop heavily in the next year or two, there's no sense exposing yourself to lots of market risk unless you "need" to. If you have a plan that pays the bills and helps bridge you to SS that doesn't require a high allocation to equities, it can in some situations make sense to lower your risk, get to SS, THEN re-assess how much you want to "let ride" on stocks to fund later years of spending.

Or course, I could be totally wrong, and the Dow could rocket to 30K+ and keep going without ever visiting the mid 20K levels again. But I do expect a big drop in the next year or two, and it's very likely that we'll see levels on the Dow below where we are now in that time. So, why watch your portfolio drop 30-50% AGAIN, like it did in 2008 unless you absolutely need to take that level of equity risk to meet your goals? Stock valuations are at nearly all-time highs (only 2 higher Schiller PE ratios previously - and currently at basically the same level as "Black Tuesday" in 1929), the bull is one of the longest in history, and we have an election year coming up with several candidates hammering Wall Street and wealth in general pretty hard. All that together doesn't bode well IMHO for equities in 2020, current run-up aside..

 

[FREE866]

There are a lot of different schools of thought on what to do once you're out of the accumulation stage and into the ER/preservation stage, and the two phases can be very different.

Some pretty learned guys like Rick Ferri and Michael Kitces among others are not only comfortable with relatively low equity allocations in ER, but actually recommend it. Ferri, for example, says the "sweet spot" for those in early or normal retirement is ~35% equities. Kitces has recommended his "bond tent" approach where you have lower equities earlier in retirement, then raise the equity exposure once you're out of the ER years with reduced SOR risk and SS or other income streams come online.

If (like me), you expect the market to drop heavily in the next year or two, there's no sense exposing yourself to lots of market risk unless you "need" to. If you have a plan that pays the bills and helps bridge you to SS that doesn't require a high allocation to equities, it can in some situations make sense to lower your risk, get to SS, THEN re-assess how much you want to "let ride" on stocks to fund later years of spending.

Or course, I could be totally wrong, and the Dow could rocket to 30K+ and keep going without ever visiting the mid 20K levels again. But I do expect a big drop in the next year or two, and it's very likely that we'll see levels on the Dow below where we are now in that time. So, why watch your portfolio drop 30-50% AGAIN, like it did in 2008 unless you absolutely need to take that level of equity risk to meet your goals? Stock valuations are at all-time highs, the bull is one of the longest in history, and we have an election year coming up. All that together doesn't bode well IMHO for equities in 2020, current run-up aside..

You make some interesting points. Thanks.

 

[Corporateburnout]

We are both 66. Our AA is 52/40/8 since we retired 6 years ago.

No plans to reduce our allocations to equities below 50% for the foreseeable future.

 

[24601NoMore]

Oops - I was mistaken. Ferri actually says the "center of gravity for retirees and early retirees" is 30% equities, 70% Fixed Income. Original article is at:

https://www.forbes.com/sites/rickferri/2015/02/06/the-center-of-gravity-for-retirees/#ef4f4a45dae9

Of course, YMMV and realize there are a lot of different opinions and preferences on what people are comfortable with. But I do think Rick's logic is sound and the following from the article made a lot of sense (to me)..

Retirees and those almost retired shouldn’t care what their highest level of risk tolerance is because they shouldn’t be investing anywhere near it. There is no economic reason for a person to take more investment risk than necessary once they’ve accumulated enough money for retirement. The focus should be on the minimum amount of risk needed to achieve an income required in retirement.

FWIW..

 

[Ronstar]

^ Thanks for the link. I generally agree with Ferri’s position.

Stocks are claims on future earnings and deserve a higher risk premium than bonds that pay a known interest rate and return principal at maturity. Uncertainties surrounding future earnings make stock prices much more volatile than bonds and can result in bear markets that last several years. Investors who are working and accumulating assets can weather these periods of uncertainty and benefit from a higher allocation to stocks. That’s not the case with someone living off their investments.

He brings up a good point in that stocks are claims on unknown future earnings whereas bonds are based on known interest and return principal. Somewhat explains the differences in volatility between the 2.

 

[FREE866]

^ Thanks for the link. I generally agree with Ferri’s position.



But like we have discussed, there are a lot of factors at play here. Not just age and position in the retirement term. All personal circumstances define risk in the allocation.

I think there is a bit of hyperbole in the quote you referenced. Over time stocks are not "much more volatile than bonds"and obviously stocks carry more uncertainty. That's why over time they dwarf the returns bonds have provided.



Also, his comment that bear markets can "last several years" is not true. Possible? sure, but bear markets on average last about 18 months.

 

[Ronstar]

I think there is a bit of hyperbole in the quote you referenced. Over time stocks are not "much more volatile than bonds"and obviously stocks carry more uncertainty. That's why over time they dwarf the returns bonds have provided.

As part of my allocation research, I checked returns since inception between Vg Total Stock and Total Bond funds. Total Stock is 6.87. total Bond is 4.26. These are average returns, so the numbers don’t really address volatility. But I was surprised that the bond fund return was that close to the stock fund return.

Also, his comment that bear markets can "last several years" is not true. Possible? sure, but bear markets on average last about 18 months.

I agree - his comment on bear market longevity was a little extreme - just to support his position I suppose.

 

[FREE866]

I think there is a bit of hyperbole in the quote you referenced. Over time stocks are not "much more volatile than bonds"and obviously stocks carry more uncertainty. That's why over time they dwarf the returns bonds have provided.[ /QUOTE]

As part of my allocation research, I checked returns since inception between Vg Total Stock and Total Bond funds. Total Stock is 6.87. total Bond is 4.26. These are average returns, so the numbers don’t really address volatility. But I was surprised that the bond fund return was that close to the stock fund return.

That seems about right. Over a 10 year time frame a million dollars in stocks at 6.87% gives you almost 2 million . At 4.26 you have about 1.5 million. 2X the return.

 

[RobbieB]

Age 64 - 78/19/3

 

[Pete10k]

This is more detail than you asked for but since I have one of the higher equity allocations in this thread I thought I’d explain my strategy. Left megacorp in February and I’m turning 55 in December. 95% equity, 5% Muni bonds (yielding 4.5%).

I’m a Dividend Growth Investor holding 55 growth, value, and defensive stocks, mostly large caps. I will consolidate my holdings to approx 40 companies this coming year pending our tax situation.

These companies are mostly dividend champions or contenders and they raise their dividends each year. For example, MSFT (17 years of dividend increases) and in the case of JNJ or KO (56 yrs), PG and GPC (62 yrs). I really like this strategy in good years like this year (up around 25% including dividends) and pull backs like last December where I was flat for the year but still received the dividends because I always have cash from dividends to pay the bills and care less about the account value since these companies will be around long after I’m gone.

Our annual dividend yield is 3.2% and the dividend income is growing at 8% per year. I never got annual raises like that from megacorp! We have an expensive standard of living and the dividend income mostly covers our costs without having to liquidate much. I try to avoid eating the seed corn and I’m extremely motivated not to so I don’t have to go back to w*rk.

The best news is when the recession hits we can easily scale back about 30% of our current spend (country club, eating out all the time, major trips, etc) and reinvest the additional dividend income into whatever is beaten down at the moment. I’m using FASTGraphs to manage this portfolio and would be flying blind without it as it helps me identify under/over valued stocks. GLTA!

 

[Austin704]

53 years old

Currently 65/30/5 but building up cash position. Will hold at 60/30/10 in my 60s, then probably drift toward 50/30/20 in my 70s. I don’t think I’ll ever hold less than 45% equities—but that could change.

I have a decent sized pension that allows me to stay more aggressively invested than I might otherwise for my age. But I’ve never used my age to set AA—just more about my risk tolerance than anything.

I’ve noticed a considerable reduction in volatility since going 65/30/5 from 75/20/5 and I am more comfortable now than ever in terms of market risk—

 

[24601NoMore]

I think there is a bit of hyperbole in the quote you referenced. Over time stocks are not "much more volatile than bonds"and obviously stocks carry more uncertainty. That's why over time they dwarf the returns bonds have provided.

Also, his comment that bear markets can "last several years" is not true. Possible? sure, but bear markets on average last about 18 months.

If anyone hasn't already seen this chart, it nets out the risk any of us are taking with equities.

There have been periods where equities have been down from peak for as many as 29 YEARS. So, it might be good to not only think about how long a bear market lasts, but more importantly - how long will it take for the equity part of your portfolio to recover from a market drop?

Not sure about any of you, but as someone in very early (year one) ER, I don't want to go through a period of time when my net worth is significantly less than it is now because we're in a 29, 26, 23 or even 16 year "recovery from peak" period. No thanks. I'll play it conservative for now, wait for the next (inevitable as we are overvalued at this point, IMHO) big drop, buy low and ride the next leg up. In the meantime, those of us with lower equity positions are relatively protected from the next potential 20+ year trough in equity prices and more importantly - 20+ year periods where the equity value of our portfolio is potentially much less than it was at the peak.

The thing I liked most about the article from Rick Ferri that I posted is his recommendation that those of us in retirement not invest according to our perceived ability to take risk, but only to the minimum level needed to generate the income needed. That's IMHO a very good recommendation and sure helps with SWAN..unless, of course, you're personally comfortable with potentially being "underwater" after the next market drop for 20 years or more.