Asset Allocation

[AV8]

As I said in my introduction, I now realize our asset allocation is all out of whack.* We are mostly in large-cap growth with some international and a rental house that I consider our real estate position.* Based on what I've gleaned here and by reading I'm thinking this asset allocation would be good for us:

50% Large Cap US (25% Value/25% Growth)
15% Mid-Cap
15% Small-Cap
20% International

Some extra thoughts:* Due to my future military retirement and our 10-15 year time horizon to retirement I do not think we need bonds in our allocation at this time.* We also have a rental house that works for our RE position and has appreciated well (its in AZ so I'm not too concerned about it crashing if the RE market tanks).

So I'm looking for validation...does this allocation make sense?

Now to the second part of my question.* Our investments are all in actively managed funds with 3 different fund families (but 70% or so Fidelity), and I'm now fairly convinced that I want to put them all in the same fund family (for ease of rebalancing) in index funds (to lower our expenses and get more consistent performance relative the market).* My thoughts are to sell all, bite the taxable event, and switch over to Vanguard index funds.* I'm guessing this will make life easier year to year when rebalancing the funds.* True?

Third and final question for now.* We both have IRA accounts and then a taxable account to consider (also the TSP 401k, but that's not germaine).* Do you allocate each of the three accounts the same as I describe above?* I know you wouldn't necessarily have to, but I'd think you'd want to be balanced between the taxable and tax-exempt accounts.*

Thoughts?

[grumpy]

AV8,

I think your proposed allocation seems reasonable for your circumstances. With a COLA'd pension in your future I agree that you don't need any significant bond or bond fund allocation.

I allocate my funds by looking at the total, not by trying to have my precise overall allocation mirrored within the tax deferred portion or the taxable portion. I do all rebalancing in the tax deferred accounts to avoid capital gains taxes.

I have a mix of index and actively managed funds with the bulk in index funds. I do try to keep the expense ratio low but am not a slave to low expenses ratios. I have all funds in two families (T.R. Price and Vanguard). I agree that having everything in one family makes things easier but working with two has not proved burdensome.

Welcome to the board. Good luck.

Grumpy

[AV8]

Grumpy,

Thanks. I hadn't considered rebalancing within the tax deferred accounts to avoid the capital gains taxes, although this now seems obvious.

AV8

[JPatrick]

I'm not sure you are going to find a great advantage in moving to vanguard, except they may have a greater variety of index funds.* I use Vanguard for my indexes only because when I started they were* the only index game in town.* I use Fido for everything else and for more recent portfolios I use Fido index funds over Vanguard.
I'm not completely clear when you are eligible for military retirement, but if it is over 10 years, I'd come up with a plan B in the event it doesn't happpen.* Life changes--the military changes.

[AV8]

JP,
You have a good point about Vanguard vs. other fund families re. index fund availablility. I need to re-look at Fidelity's index funds, as they would be the easiest for us. As I remember though, they had far less options and perhaps didn't cover all the allocations we wanted.

Regarding military retirement, I'm "vested" in 5 years (i.e. 20 years of service). I don't think there is enough political will to change my retirement, although that may not be true for people who just entered the service. My 10-15 year timeframe is more based on the young age of our children and letting our investments compound just a bit longer. I may or may not spend that extra time in the military. Bottom line on that decision is going to be if we are still having fun.

AV8

[Nords]

AV8,

* * *There are many roads to ER, and there are probably at least twice as many asset allocations as investors-- the AA you have and the AA you wish you have.* I think the most important part of an asset allocation is being able to sleep with it at night and not selling in a panic when the market drops 20%.

* * *With a military pension, you're right about zero bonds.* [warning-- soapbox rant follows]* However, are you certain that you're five years away from that pension?* It only takes one nasty tour to make you submit those resignation papers, and you shouldn't feel that you have to gut it out until retirement.* By far my last five years were the hardest, ironically at one of my best duty stations.* If I have one regret about my military career, it's that I stayed when I probably would have been happier going.* When my spouse pulled the plug on her active duty and joined the Reserves, just short of 18 years, her happiness factor shot through the overhead.* Keep that Reserves/National Guard option in your back pocket and don't hesitate to threaten it during assignment negotiations.* Navy assignment officers feel that they own you and that you'll do anything once you enter that 15-year zone.* I've done the math at the O-5 paygrade and it's not worth risking your life or your health for ~$750K over 18 years (the difference between a pension at age 42 vs age 60).* It'll make your family feel better, too, knowing that you're not making yourself crazy on active duty when you could be employed just about anywhere else.* [/rant]

* * *I think the TSP is absolutely germaine.* Presuming that you're going to make it to a 20-year retirement, your biggest advantage over other investments is the TSP.* The contribution limits were just raised to the IRS limit ($15K/year) and if you can max out the TSP first then you should do so.* In fact it's a sneaky way to shift even more of your assets away from taxation-- contribute all of your pay & bonus to the TSP (minus the FICA and the allotments, of course) up to the limits.* If necessary, cash in some taxable investments at long-term cap-gains rates for living expenses.* You can deal with the TSP tax-deferral issue after retirement (see below).* TSP's expense ratios are competitive with (if not lower than) Vanguard and we've been very happy with the small-cap "S" fund.

* * *Your AA is as good as anyone else's.* The rise of the large-cap sector (and the demise of small-cap stocks) has been predicted for several years now, so you're poised to benefit from either.* Most of the large caps have an international presence today so you're covered on that as well.* We favor value, and growth has lagged historically, but that's history-- again you may catch the growth wave just as it jumps ahead.* We don't know.* No one should claim to, either.* When we were working we kept all our investments in equities with no bonds and no cash stash, either.* In retirement we've kept the equity allocation with two years' expenses in cash.

* * *Others will thump the drum about REITs, commodities (including precious metals), hedge funds, and other niche investments.* I'm not sure they're necessary, especially when (as you point out) you're already invested in real estate.* Again there are many suitable AAs and yours will probably do the trick without a little of everything.* But if you're absolutely thrilled about the idea of holding a niche investment, then bring in 5-10%.

* * *Vanguard has the edge on index management, as long as Gus Sauter is in the business, but Fidelity has recently decided to mark their own index territory.* Some of Fidelity's expenses are as low as (or even lower) than Vanguard's and there's talk of making those loss-leader fees permanent.* You may decide that Fidelity's index funds are as good as Vanguard's, and Fidelity may cut you a better deal.* Personally I think Fidelity's customer service is much better than Vanguard, but perhaps Vanguard has recovered from their earlier problems.* At the right level of assets you may not have to choose between expense vs customer service, so you should definitely consolidate your funds with one company to reach their breakpoints.* You don't necessarily have to cash out a fund if you transfer it "in kind"-- Fidelity holds our Tweedy, Browne shares for free even though TBGVX is not one of their NTF funds.* We haven't had a complaint in 20 years with Fidelity.* TH, I mean (Cute Fuzzy Bunny), can tell you more about how he's treated by Vanguard.* He's one of the world's worst customers so if they can please him then they can please us, too.

* * *Grumpy makes the best point about rebalancing in your tax-deferred accounts.* But if you're buying tax-efficient index funds (and not bonds, either) then it shouldn't matter too much which account your asset allocation goes into.* If you want to nit-pick on taxes, you could argue that it's better to hold the international investments in a taxable account so that you can take the foreign-tax credit... but that's probably less than $1000/year.* In the accumulation phase, you have the additional advantage of being able to rebalance by directing your new DCA money into the accounts & allocations where you want to.* Instead of moving things around, you put your new savings into the investments that need new money the most.* It's probably more important to max your TSP & IRA contributions than it is to worry about which allocation they go into.

* * *When you retire from the military, your income will drop low enough that you'll be able to contemplate Roth IRA conversions within the 15% tax bracket over a period of several years.* So although you might accumulate a pile of money in the TSP & conventional IRAs, you'll have at least a decade to convert to Roths before starting Social Security.* Of course it may make more sense to stay in the TSP instead of rolling to a conventional IRA and converting, but you'll have to do the math on that when you retire.

* * *A thought about kid's college funds-- the board is pretty evenly divided on how much a parent should contribute to a kid's college costs.* If you decide to put money in their college funds, as they leave elementary school that might be a good time to start buying bonds.* You can buy EE & I bonds and redeem them tax-free for education, although the program has quite a few caveats.* (Like holding I bonds for five years to redeem without a penalty.* And EE bonds can suck when their interest rate floats.)* You might not be very happy about the costs of 529 plans, and I think that the lower expense ratio of a taxable index fund will beat out even the cheapest 529 plans.* Then there's the issue of the change in 529 tax status in 2010, the question of whether you want to restrict your college savings for education (or have it available to help your kids buy a home & start a business), and what to do if your kids don't need the college fund (scholarships, military academies).* With three kids and probably over a decade in college investing, though, you'll have to read all the fine print and crunch the numbers.

* * *I think that covers the big picture.* Ask more questions if there are other details.

* * *I have a question-- do you literally fly AV-8s?

Ah, the sleepy teenager stirs. Surf's up! See you tomorrow...

[AV8]

Wow Nords, what happened to the beach?! Good to see that your teen finally woke up so you could go enjoy the sunshine. Thanks for the detailed response.

TSP - I didn't mean to lead you astray with my comment. We max the TSP (and both Roth IRAs) every year. It's just very easy to rebalance the TSP compared with what I envision for the other funds at least in the beginning here. Seems you and JP are on a similar tack and that I should look at/consider Fidelity's index funds. The one type I see they lack is a small cap index fund, but I suppose I could capture that in the TSP fairly easily.

You've given me a lot to consider (children's education, TSP conversion post-retirement, etc.). I'm going to have to reread your reply a couple of times to let it all soak in.

No, I don't fly A/V-8B's. I am an AV8-tor (aviator) -- both professionally and as a hobby. I can see how that's misleading considering there is an RF-4 around here too. Perhaps I need to go by a different byline (or whatever you call it). I wouldn't mind giving a Harrier a spin some day, but since I'm not in the "Corps" I think they won't be all that willing to let me try.

AV8

[JPatrick]

Ok, if you are within 5 years, then you are pretty close to coming under the "hey I can stand on my head that long" rule.
Here's another way to look at the no cash/bonds because of my cola'd pension.* By the way, you were aware that your friends in DC have tried to limit your cola in the recent past and almost certainly will in the future?

Anyway, say you ER in 10 years and you are making 40K from your pension and your want your investments to provide another 15K for the next 40 years.* If this 15K is money you MUST have to live, then I'd say you need to protect it with some sort of bond/cash position.* Lots of ways to approach this without resorting to the completely mundane.* For example, I get my bond fix through Vanguard Hi yield,* FSICX, and FAGIX.* I have owned floating rate funds before as well.* Not pure bonds by most definitions, but a hedge nonetheless.

[AV8]

JP,
Yes, I know all about the US governments desires to dilute military pensions.* They are also working on tripling health care costs for military retirees by 2009, but that is another discussion.

I agree that you need to protect your income stream leading into retirement, but in our situation, with 10 years to go and a large portion of retirement income already "assured" with the pension, that we'll be okay to accept the risk of an all equity allocation.* Good inputs though, thanks.

AV8

[Nords]

Quote:

Originally Posted by JPatrick Ok, if you are within 5 years, then you are pretty close to coming under the "hey I can stand on my head that long" rule.

Man, I hear ya, but I've seen too many instances of the other side:
-- The PACOM officer who was an absolute Santini, yelling at everyone and verbally threatening them, right up to his myocardial infarct.* There was actually a debate about whether they should call the ambulance.
-- The bitter O-5 at NAVREG Hawaii who'd been told that she had to take a "must fill" billet in Guam... then been sent to a "must fill" billet in Hawaii, only to find that it had been filled and she had to take a staff job... her detailer had just told her she had a "hot fill" in Korea.* When asked why she was putting up with that, her response was "I have 16 years of service, no savings, and no options."
-- The senior leaders who left their families in one port while they went to "hardship duty" in another port.* They were a constant thorn in the sides of their subordinates during the week because they had no home to go to.* They were a constant pain on weekends because they were trying to catch the Friday 1600 flight to the Mainland and come back very late Sunday night-- right after they dumped their IN boxes on their people.* Then they started spending their "free time" down in the hostess bars on Ke'eamoku, and suddenly that family wasn't such a priority anymore.

In our case, when we found ourselves having a discussion about the quality of the family-counseling staff at the proposed new homeport, we knew there had to be a better way to put family ahead of career.

Quote:

Originally Posted by JPatrick By the way, you were aware that your friends in DC have tried to limit your cola in the recent past and almost certainly will in the future?

You saw how well that worked out the last time, right?* That's probably the only time in the entire 20th century that the JCS went to Congress singing "This sucks and we can't recruit anybody" in four-part harmony.*

The latest trick has been to offer "career" military a $30K REDUX bonus at mid-career if they'll take a reduced pension and a reduced COLA.* The promise is that their full COLA will be restored when they're 62.

I'd say another version of a sub-COLA pension has about the same snowball's chance as a new draft.* People who are already in the military are protected under the current legislation.

But I sure hope I'm not whistling in the dark. These discussions remind me of GDER, whose handle stands for "Government-dependent early retiree"...

[AV8]

Quote:

Most of the large caps have an international presence today so you're covered on that as well.

Can you explain that further? Is that because of globalization of the large funds or direct investment in companies based outside the US?

Nords - I'm still happy doing what I'm doing. They are sending me back to fly again after a brief time away on the staff, which is exactly what I was hoping to do. I have A LOT of friends and aquaintances that have left though, and in each case they had great reasons to go. If I we were unhappy we would leave.

AV8

[Nords]

Quote:

Originally Posted by AV8 Can you explain that further?* Is that because of globalization of the large funds or direct investment in companies based outside the US?

I've read that the S&P500 makes up over 70% of the total stock market.* Of the top companies in the S&P500, many of them are worldwide companies-- like big oil or Coke or Johnson & Johnson-- companies that derive a substantial portion, perhaps even a majority, of their revenues from outside the U.S.

When you do a typical portfolio x-ray the software doesn't always credit U.S.-registered firms for their foreign revenue.* 20% international may actually be more like 25-30% international when you look at the sources of the large-cap's revenues, so you're probably striking a good balance.* The alarm bells start ringing when you see someone at 50% (can't call that "diversified") or 5% (why make the effort).

Quote:

Originally Posted by AV8 Nords - I'm still happy doing what I'm doing.* They are sending me back to fly again after a brief time away on the staff, which is exactly what I was hoping to do.* I have A LOT of friends and aquaintances that have left though, and in each case they had great reasons to go.* If I we were unhappy we would leave.

Sounds like you're getting treated pretty good.* "Do what's fun & makes you happy" is the best career advice!

I'm probably overcompensating.* I worked way too hard to balance career/family on the back stretch and it's an extremely stark contrast to the fun my spouse (& others) are enjoying in the Reserves.* I'd hate to see someone get told to "suck it up" when their gut instincts were correct all along.* #@$%, maybe I wasn't in the wrong service, maybe I was just in the wrong platform...

[ats5g]

AV8,

Though it sound logical, that US multinationals provide international diversification, there is little proof of that. See:

U.S. Multinationals as Vehicles for International Diversification

* if you've got a local library card, you can probably access it. If not, I can email it to you.

The International Diversification Fallacy of Exchange-Listed Securities

Of course this doesn't mean that Multinational Corporation won't provide international diversification in the future, just that they haven't really done so to date.

- Alec

[cute fuzzy bunny]

Looks like the articles you pointed to are from the late 90's? Anything maybe changed in the last 8 years?

No local libraries for me on that accessmylibrary thing, but it came through with a zip code already filled in thats not too far from where I live...might we be neighbors?

[ats5g]

Quote:

Looks like the articles you pointed to are from the late 90's? Anything maybe changed in the last 8 years?

The first article uses data from the ten year period 86-95, and the second uses 91-95. The first article also references a 1978 article from the Journal of Portfolio Management "Multinationals are Poor Tools for International Diversification," which looked at returns from the 60's and 70's, and found that multinationals were ineffective for obtaining international diversification [as summarized in the first link].

Unfortunately, I have found anything more recent. But I think data over four decades is enough to cast doubt on the theory that multinationals are enough for international diversification.

Quote:

might we be neighbors?

nope. the website somehow knows what zip code you're accessing the site from. For me at home it's 21054 [maryland].

- Alec

[cute fuzzy bunny]

I guess what i'm saying is that todays multinationals werent very multinational in the 60's and 70's. And not as multinational even in the 80's and early 90's as they are today, maybe?

Huh...it didnt plug in my zip code, but one from about an hour south of here...maybe thats their default...

[ats5g]

Quote:

Originally Posted by Completely Fulla BS I guess what i'm saying is that todays multinationals werent very multinational in the 60's and 70's. And not as multinational even in the 80's and early 90's as they are today, maybe?

That could certainly be true, and seems pretty logical. Unfortunately, there's nothing to show that this will lead the MNC's stock to provide international diversification. Kind of like the "active management works better in small caps and international stocks" theory that doesn't hold up when the data is analyzed. Good theory, but lacking evidence.

Quote:

Huh...it didnt plug in my zip code, but one from about an hour south of here...maybe thats their default...

Maybe it's your ISP's zip code

[cute fuzzy bunny]

Could be...I think they're located near downtown sacramento.

I love theories with no evidence! You cant be proven wrong!