Asset Allocation: new perspectives?

[ranchoparque]

Does anyone have any new thoughts on asset allocation since the recent market events have taken place?

What would you consider to be a conservative allocation for someone about 8 to 10 years from retirement?

Would this allocation include the 3-5 years of living expenses in CD's etc. that is often recommended?

 

[Dawg52]

Does anyone have any new thoughts on asset allocation since the recent market events have taken place?

What would you consider to be a conservative allocation for someone about 8 to 10 years from retirement?

Would this allocation include the 3-5 years of living expenses in CD's etc. that is often recommended?

For me, conservative means no more than 50% in the stock market. But even at that you can still take a pretty good haircut as we have just seen. I was 50/50 going into this market down turn and I am down roughly 20% overall for the year. Sucks. Oh yes, I would include an allocation to cd's as you have outlined.

 

[free4now]

Good question, and I'll be interested in hearing other responses. The one thing this financial crisis has hammered home is that historical results are not a bound on future results, and that things can get worse than history.

The conventional portfolios are designed generally to handle "no worse than historical" events, and obviously the way to handle worse than historical events is to have a more conservative portfolio. The one thing this financial crisis pointed out for many is that their sleep at night ability wasn't quite as strong as they thought.

The market movements we've seen are still within the range of historical data, even if the fundamental reasons for the crisis and outlook going forward may be unprecedented. It will only be years after this crisis that we will know how it affected things.

 

[ranchoparque]

just to clarify, I'm assuming that we are including everything into the "pie chart" of the allocation, including cash in emergency funds.

I was at 40% stocks and I thought I was pretty conservative and I'm down about 15%.

 

[DblDoc]

Yes. It is no longer an academic exercise for me. Still sleeping OK and shovelling the $ in as fast as it comes in.

Remember if you are retiring early you may need to tilt your portfolio more towards equity in order for it to last...

DD

 

[Bikerdude]

Bogle still uses the old rule of your age equals your bond allocation. I think that looks better and better to me after this down turn. I'm 60 and was 50/50 going in. I think I'll remain 40/60 for the next 5 years.

 

[Alan]

just to clarify, I'm assuming that we are including everything into the "pie chart" of the allocation, including cash in emergency funds.

I was at 40% stocks and I thought I was pretty conservative and I'm down about 15%.

I'm 16 months from ER at 55, and I too was at 40% stocks and am down 19%.

I also had 50% bonds and 10% cash which includes the emergency funds. I am fortunate to have a pension (I hope) when I retire so the cash portion is good for at least 5 years. The allocation is off a little at present but I'll be re-balancing to 40/50/10 next year.

 

[mark500]

I was ~ 50/50 and took about a 17% loss so far.
My fearful side tells me that my tolerance level is around 30% stocks.
But then I began thinking that allocating down at this time would be a mistake, since the market will highly likely be much higher in 10 years from these levels. Even Jack Bogle says the stock market should perform annually at about 10% from these levels. So, since I have the time, I plan to rebalance back to 45% stocks, and then in 10 years change my asset allocation to something like 30/40/30.

 

[ranchoparque]

I'm too chicken to rebalance at this point. I'm using the "Financial Engines" calculator to see if I can meet my retirement goals with the lowest exposure to risk. In my case I think I will do allright if I let the allocation in stocks drift down to about 30% .....I know this is kind of low but I think I would sleep better with less volatility.

I'm not planning on selling any stock funds (at least not for about 8-10 years) I just plan on putting new money into safer investments.

 

[ERD50]

...

The conventional portfolios are designed generally to handle "no worse than historical" events, and obviously the way to handle worse than historical events is to have a more conservative portfolio. ...

I'm not so sure that is obvious.

In most historical cases, you need some stocks to offset inflation. If you feel better with less volatility fine, but if it gets eaten by inflation, you may find yourself in the same situation - just a different path there.

I'd suggest the OP run FireCalc with varying AA and see what works for them. As a data point, nothing is a sure thing.

-ERD50

 

[W2R]

I don't want to sell either right now while we are in such a severe decline, Ranchoparque.

With a year and three weeks until ER, I had a 45:55 (equities:fixed) asset allocation according to my plan. This dropped to 38:62 in the past few weeks. I never expected to see a huge decline like this, but then it is what it is. Pretty bad. I am tentatively planning to rebalance to 45:55 this week if I can do it before the market increases again. Of course it always could decrease, too. I hope not.

Recent market events have not changed my thoughts on asset allocation so far. I am pretty distressed about the market lately, but not losing sleep over it, or tempted to sell low. That's probably the best I can hope for since this is such an extreme event.

As for what a conservative AA might be for someone 8-10 years out, it all depends on the person and how conservative they want their conservative AA to be. I think 50:50 or even 60:40 could be considered conservative with that many years left before ER. Only you know what is comfortable for you.

Yes, I would include the 3-5 years of living expenses in CD's in this asset allocation.

 

[samclem]

I'm too chicken to rebalance at this point. I'm using the "Financial Engines" calculator to see if I can meet my retirement goals with the lowest exposure to risk. In my case I think I will do allright if I let the allocation in stocks drift down to about 30% .....I know this is kind of low but I think I would sleep better with less volatility.

I'm not planning on selling any stock funds (at least not for about 8-10 years) I just plan on putting new money into safer investments.

Well, you are smart to only take on the degree of risk you need to take, but ask yourself one other question: If inflation is at 7% and stocks are making 10% gains (price plus dividends), will you still sleep well at night with a majority of your portfolio in fixed income investments that are losing earning power every year--maybe for a very long stretch? Stock volatility is just one danger--inflation is another one that is very real. Stocks often keep up with inflation, unless it gets to levels that result in market distortions.

 

[ranchoparque]

good point about inflation.
I suppose I had been using 3% inflation as a benchmark for some time.

Usually when inflation goes up the rates on money market and CD's, etc. go up too. The real return after taxes and inflation means that my investment in the safer portion of my portolio is barely keeping up, but with 30% in stocks to "goose the yield" I would hope to preserve capital and get some growth.

I will have an inflation adjusted pension at retirement. If needed, I could work a few years longer.

I am not too familiar with using Firecalc. I tried it...but it seemed that the success rates were too generous. I'll try again. Is there a thread about how to use firecalc for Newbies?

 

[Alan]

... In my case I think I will do allright if I let the allocation in stocks drift down to about 30% .....I know this is kind of low but I think I would sleep better with less volatility.

I'm not planning on selling any stock funds (at least not for about 8-10 years) I just plan on putting new money into safer investments.

If the volatility has you stressed then may be you should let it drift down to 30%. But I would not recommend selling off equities now as you are sure to be losing money over the next 5 - 10 years IMO. If you are at a risk level too high for your comfort level then that tends to lead to your emotions driving your financial decisions.

 

[youbet]

I'm not so sure that is obvious.

In most historical cases, you need some stocks to offset inflation. If you feel better with less volatility fine, but if it gets eaten by inflation, you may find yourself in the same situation - just a different path there.

-ERD50

Yep, and unless the extremely rare case of deflation sets in, there is no recovery from inflation. Once you go through a high inflation period, your purchasing power is permanently eroded. It won't "recover."

 

[ranchoparque]

Ok, well to give a concrete example using a mutual fund let's take Vanguard Retirement Income fund, VTINX.
It has roughly 30% stocks 64%bonds and 6%cash. Do you think an allocation like that would keep up with inflation?

 

[clifp]

IMO, this is a reasonable allocation for somebody in their 60s with a modest pension.
For somebody who is 8 to 10 years from retirement and intends to withdraw something near 4% a year, I think is too conservative keep up with inflation. Now if you can survive with a 3% withdrawal rate it probably fine.

Ranch I'd encourage you to run it through FireCalc and other calculators and get a feel for how the portfolio performed during a period like the 70s.

 

[chinaco]

We intended to maintain about a 60/40 alloc when we ER. We were at 70/30... but after the recent equity market drop... we are closer to 50/50.

I will not rebalance any fixed to equity at this stage... it might jeopardize ER.

The fixed we have now will still cover our target income needs for 10 years... but it is less than I was planning. Fortunately, our target income level was quite a bit more than we spend today (we were being conservative). I can trim the target income back to 80% (which is still more than we spend today) and use the other 20% (not spent) are an emergency reserve. Thank goodness I was being conservative... otherwise I might have to delay ER.

Our approach is a little more complicated than just a 60/40 mix. The fixed is intended to get us through the first 10 years of Retirement (55-65). The equity protion (as it stands today about 50% of the portfolio) will be divided between several target retirement funds that mature at 10 year intervals... with more of a portfolio % allocated to the decade from (65- 75), less for the decade (75-85)... etc.

 

[samclem]

We intended to maintain about a 60/40 alloc when we ER. We were at 70/30... but after the recent equity market drop... we are closer to 50/50. . . .


Our approach is a little more complicated than just a 60/40 mix. The fixed is intended to get us through the first 10 years of Retirement (55-65). The equity protion (as it stands today about 50% of the portfolio) will be divided between several target retirement funds that mature at 10 year intervals... with more of a portfolio % allocated to the decade from (65- 75), less for the decade (75-85)... etc.

So, you'd be about 40% equities when you start retirement, possibly at the start of a bear market of unknown duration?
-- 50% in cash/fixed (to be used for the first 10 years)
-- Approx 20% of portfolio in a 2020 target retirement retirement fund x 30% fixed component of that fund = 6% of total portfolio in cash/fixed
-- Approx 15% of portfolio in a 2030 target retirement fund x 15% fixed component of this fund = 2% of total portfolio in cash/fixed
-- Approx 10% of portfolio in a 2040 target retirement fund x 10% fixed component of this fund = 1% of your total portfolio in cash/fixed
-- Approx 5% of portfolio in a 2050 retirement fund x 10% fixed component of this fund = 0.5% of your total portfolio in cash/fixed

I wouldn't be comfortable being 60% fixed at the start of a 50+ year retirement, but different people have different perceptions of risk. If the future is anything like the past, having such a high bond/cash component significantly reduces a portfolio's ability to keep up with the ravages of inflation and other untoward events. If my pension covered only a small portion of my expected expenses, think I'd be comfortable with your plan except for the high initial chunk set aside in cash/bonds. 10 years worth of spending is a lot to have sitting on the sidelines if/when the stock market bounces back.

 

[wcv56]

You might want to look into some total return funds which are designed to be in
the right assets at the right times. This one is a high frontend load (wasax) but will give you some idea of how they try to work asset allocation in different markets.
Still does not look like they done that great in bad times but this is just one of many
out there to include a few CEF's that are managed in the same manner that pay above average dividends.
WASAX: Holdings for IVY ASSET STRATEGY FD CLASS A - Yahoo! Finance

 

[ranchoparque]

other online calculators

I've run my numbers in Firecalc and Financial engines and the plan seems to work. I had to tweak things a little. I'm prepared to work a little longer if the numbers don't seem to add up as I get closer to retirement.
Are there any other online retirement calculators which forum users find helpful?

 

[chinaco]

So, you'd be about 40% equities when you start retirement, possibly at the start of a bear market of unknown duration?
-- 50% in cash/fixed (to be used for the first 10 years)
-- Approx 20% of portfolio in a 2020 target retirement retirement fund x 30% fixed component of that fund = 6% of total portfolio in cash/fixed
-- Approx 15% of portfolio in a 2030 target retirement fund x 15% fixed component of this fund = 2% of total portfolio in cash/fixed
-- Approx 10% of portfolio in a 2040 target retirement fund x 10% fixed component of this fund = 1% of your total portfolio in cash/fixed
-- Approx 5% of portfolio in a 2050 retirement fund x 10% fixed component of this fund = 0.5% of your total portfolio in cash/fixed

I was thinking of using 2025, 2035, etc.

Our networth is worse now than a couple of months ago.

But I have a pension, retirement health care coverage, and of course SS for DW anf I. Our home is almost paid off.

Plus my projected spending is high compared to what we actually spend (today)... is almost double. We have plenty of cushion.

 

[Delawaredave5]

I was 60/40 (but some of the "equities" portion is actually balanced funds with bonds in them) - downturn took me towards 50/50 - I'm gradually buying back up.

Commodities have been "sexy" last couple years and I think over-recommended in allocations - I don't like more than 5%.

 

[Alan]

I've run my numbers in Firecalc and Financial engines and the plan seems to work. I had to tweak things a little. I'm prepared to work a little longer if the numbers don't seem to add up as I get closer to retirement.
Are there any other online retirement calculators which forum users find helpful?

I also like Retirement Income Planner on Fidelity's site

 

[Gotadimple]

And then there's ORP! www.i-orp.com

Rita