Asset allocation suggestions for retirement accounts

[lhamo]

I am finally ready to tackle the task of possibly reallocating our retirement account assets -- I have had my head in the sand about this for eight years, more or less just coasting along and not really thinking strategically about it.

Basic scenario is this:

1. DH is 49, I will soon be 39. We have a low seven figure NW, with over 60% of it in liquid assets. The large liquid asset stockpile is there because we would like to buy housing in a fairly expensive city within the next 6-12 months. We also want large cash reserves to cover living expenses and possible business start-up expenses in the event that I do not go back to mainstream employment.

2. I took an extended leave from my job earlier this year, and will most likely not go back. Still trying to figure out if I will look for another regular position, try to get into consulting, or do something else to earn basic living expenses. DH is continuing to work and I think will probably do so for at least a few more years -- he is very uncomfortable taking the leap into ER for social/psychological as well as financial reasons. But I would guess he would be ready to step back from work a bit in 5 years or so. I will probably take more of a ESR approach, as there are things I still want to accomplish professionally and personally. We are open to doing 72t distributions, but most likely will try to avoid it. We are not counting on social security, but wouldn't object to a check if the gvt. is still sending them out by the time we get to that age.

3. We currently have about 322k in retirement assets. These are mostly in Vanguard and American Funds (the only option offered by our employer-sponsored plan), along with a small IRA at our credit union. The funds are currently allocated as follows (percentage of holdings in brackets):

VFINX $15,098.26 (4.68%)
VTSMX $47,206.27 (14.62%)
VGTSX $5,262.90 (1.63%)

CU IRA $5,326.04 (1.65%)

AWSHX $87,373.19 (27.06%)
AEPGX $28,342.64 (8.78%)
ANWPX $62,490.65 (19.35%)
AIVSX $30,634.58 (9.49%)
AGTHX $41,157.22 (12.75%)

The American Funds are all in 403b accounts. VFINX and VTSMX are in Roth IRAs. VGTSX is in a traditional Rollover IRA I opened this year (cashed out of Domini, which I was unhappy with).

Of the 403b funds, AEPGX has given us the best returns, followed by ANWPX, AGTHX, AIVSX and with AWSHX at the bottom.

I don't want to invest retirement monies in bonds/bond funds for the time being as we have so much in liquid assets already.

The credit union IRA needs to be moved -- been too lazy to do anything about it so far.


4. Reallocation questions

a. I find it really hard to know how to split up the American Funds money, as their funds do not fit nicely into standard categories. I know I have too much overlap now (between Growth and Investment Co. of A, for example), and perhaps too heavily weighted toward more volatile sectors (international, growth) though Wash Mut does balance things out a bit). Any suggestions for how to reallocate within the AF family so that we have a better balance?

b. I have considered rolling my AF accounts over to Vanguard, but seems that the standard thinking seems to be that once you have AF it is ok to stick with them, as the fees have already been paid (ours were purchased at a reduced charge, FWIW, as our employer has her substantial trust fund invested with them along with the organization's retirement accounts). But I much prefer Vanguard to American (had an argument with the investment plan advisor on our first meeting about the superiority of index funds to managed funds...). Any advice? Stay with AF or move to Vanguard?

c. What about the allocation of the Vanguard funds -- should I tweak with that somewhat?

Would greatly appreciate any advice and suggestions. Please be gentle...

lhamo

 

[LOL!]

First figure out what asset allocation you want to achieve, then figure out which funds to use to get that allocation from the funds available to you. I read your post and it seemed like you had these funds and wanted to know what asset allocation you could get with those funds. That's backwards.

For free, personal and exquisite advice on AA, the best place to go ask is the vanguard diehards forum: Bogleheads :: View Forum - Investing and Personal Finance

 

[lhamo]

Hi LOL,

I guess I am asking for advice on several things:

1. What is a good basic allocation to have for someone in our situation, in terms of stock-based, retirement investments that will most like not be touched for at least 12-15 years?

2. How can I best achieve that allocation by rebalancing the investments we currently have in our portfolio? What do I need to sell and what would it be best for me to buy?

3. What are the merits of keeping money in American Funds versus moving more of it over to Vanguard?

Sorry if the original post wasn't clear. Maybe I am using the terms wrong -- I should have said rebalancing rather than asset allocation?

lhamo

 

[travelover]

Ihamo have you considered a Target Retirement Fund? That would answer #1 and #2. Expense ratio for same would answer #3.

 

[LOL!]

What's a good basic asset allocation? That's a simple question with a complicated answer. For help, I would suggest that the you read some books like Rick Ferri's All About Asset Allocation or William Bernstein's The Four Pillars of Investing. You can also read the articles at FundAdvice.com - Home. All these places give consistent and similar advice on the subject.

In a nutshell: Figure out how the percentage fixed income you wish to have based on your risk tolerance. The rest goes into equities. For equities you have a couple of main methods of asset allocation: total stock market or slice-and-dice.

Even with total stock market, you have to figure out the percentage of domestic and international that you wish to have. World markets are around 50% US and 50% international, but some folks do not wish to go more than 20% international (I am not one of them). One can purchase just 2 funds with this type of asset allocation: a total US stock market fund like VTSMX and a total international stock index fund like VFWIX.

Slice-and-dice is more complicated. Some studies show a small cap and value tilt can increase returns and reduce risk over a total stock market portfolio. Throw in some REITs, a little overweight in emerging markets and maybe some other asset classes and you've got a portfolio with nuances that can be discussed for weeks on end and rebalanced occassionally for fun and profit. Read the books and fundadvice for more info.

For the fixed income, you can even divide that percentage up among TIPS, intermediate term, short term, etc.

It was not clear to me if the 403b is a legacy 403b and can be moved or if you are still working and must keep the 403b active. If you can move the 403b away from American funds, then I would suggest that you do so. First, the expense ratios will be lower at Vanguard. Second, you can select passively managed index funds at Vanguard that fit exactly the asset class you want. There will be no guess work about how the American fund divides up among the asset classes you are going for.

So what you need/want to do will take more work than a simple message board post. I hope though that this response causes you to explore further your asset allocation instead of just stopping here and not doing anything at all. Good luck!