Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Biggest decision - asset allocation
Old 08-10-2008, 03:54 PM   #1
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 162
Biggest decision - asset allocation

We will all ultimately retire, and most on the earlier side. While that is a big decision, I see a bigger one, and ultimately a lifelong one, of how to allocate one's nest egg. I have read here and elsewhere, that there are 2 major choices:

equities - higher returns with more risks
bonds/money market - lower returns with more safety

Up until now, I have always gone with equities (about 90%), and it has rewarded us well. Of course, it is always just paper gains/losses while you have a paycheck and do not rely on it for living expenses.

Even as I get closer to RE, it is not a major concern, but it is a leap of faith to live off a pile of money that will shrink/grow depending on the markets. We will have no pension other than SS which is a ways off. That makes it even more difficult.

Fortunately, we have saved a bit, and can live off an estimated 2.5% withdrawal, which is essentially the dividend yield currently. So even with a prolonged bear market, if dividends were not cut much, we would not have to sell into it to live.

The other option is to move more into fixed income, but that goes against my nature. Call it greed and habit. Although I am starting to come around to the thought of giving up some potential return for portfolio stability. Some market watchers see future returns in the 7-8% range, which is closer to bonds.

More than anything else I do, this can make or break our future. If the markets do give 8% over the next 30 years, we will wind up with millions and I will have happy kids (since we could never spend that much anyway). I see this as the more likely scenario, but the Japanese market is an indication that things can go wrong.

Long winded, but how are others handling their allocations?
__________________

__________________
firewhen is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-10-2008, 04:10 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,863
I'm pretty much all stocks. With the market looking overextended starting 1-2 years ago, I started moving a bit to cash. I had enough for about 3 years of full retirement when RE'd last November. DW decided not to retire yet, so we have a big cushion there as well. I plan to spend the cash down first rather than leaving it as a permanent allocation. I hope to do something similar in the future, selling equities for cash when the market exceeds expectations and hopefully using that cash in the dips, either spending it as needed or returning it to the market. With the market down 20%, I've already returned about 40% of the cash back to equities.

Only a year into a so far partial retirement, but that's the plan.
__________________

__________________
Animorph is offline   Reply With Quote
Old 08-10-2008, 04:32 PM   #3
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
I'm a reformed equity junkie myself. I used to be 90% equities but after reading various books and articles I decided to go to a more conservative 60% equities and 40% fixed income. It works out to about 5 to 15 years of living expenses in fixed income depending on what budget mode I am into. A small market decline wouldn't impact my spending but if 1929 returned I'd definitely go to the highly frugal spending plan.

I suggest you read Bernstein's Four Pillars. It will repeatedly put you to sleep but it's a great discussion of asset allocation. Scott Burns' articles on Couch Potato investing are easier reads. The forum has a recommended reading list that you can find in a search.

High equity exposures usually provide better long term returns. The operative word is "usually." A repeat of any one of our real market meltdowns (ala 1929, 1973 and others) will make the wisdom of owning bonds sink in but then it will be too late for you.

I personally am all in laddered CDs right now. I advocate holding individual issues of either CDs or bonds. I considering buying TIPS but I'll only get the actual bond. I do this rather than buying a mutual fund because I want to know that I really will get 100% of my principle back on a specific date. That isn't the case with bond mutual funds.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 08-10-2008, 04:48 PM   #4
Thinks s/he gets paid by the post
Bikerdude's Avatar
 
Join Date: Jul 2006
Posts: 1,901
I have a 50/50 bond/stock portfolio. Over time it should return 85% of a 100% equity portfolio at 50% of the risk. However, if you can live off of the dividend yield of a 100% equity portfolio I say go for it. But for me, I like to sleep at night.
__________________
“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” Alan Greenspan
Bikerdude is offline   Reply With Quote
Old 08-10-2008, 06:50 PM   #5
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,152
I have a 40/50/10 mix with a target withdrawal of 3%. But I have plenty of fat in the budget and could easily manage on 2% withdrawal rate.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 08-10-2008, 07:11 PM   #6
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,950
Like Alan, I could easily live on 2% which is more than my present budget while working. I might withdraw about 3-4% except in years when the market is down. I have some adjusting to do and do not know if I can spend money like that.

My planned asset allocation when retired is 45% equities, 55% fixed. I will get it in place and not mess with it, or at least I won't mess with it often.

My asset allocation up to 3 years before ER was 100% equities. That is risk-taking behavior, and my luck held as it paid off with good increases in the bull market environment of 2002-2006. I was diversified within equities, with much of it in small business and international.

During the crummy market just prior to those years, I was 33% equities and 66% bonds. In retrospect, probably I should have allocated a greater percentage to equities.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is offline   Reply With Quote
Old 08-10-2008, 07:48 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
Hmmm - I have this vague idea that 60/40 is the benchmark pension or Bogle's 'policy portfolio'.

First ten years of ER was handgrenade 60/40ish with 3% as my 'floor' portfolio yield and VG Lifestrategy moderate as my lead sled dog(nod to Fleckenstein). In jan 2006 sort of consolidated my outliers and went Target 2015 a lifecyle fund. Note that a small pension kicked in at +5 yrs and early SS at +10 yrs into ER - up to 40% of income if I throttle back SWR which I varied between 2.5 to 7% over the last 15 years.

7% the year after Katrina for house plus remodeling plus travel. 5% variable 2007 and maybe 4% this year cause I am not getting any younger.

Probably 65/35 now not adjusting for pension or SS.

heh heh heh - Sort of match your wiggles and waggles over the years and use your handgenades to stay within the kill radius of 25 times expenses - portfolio wise - or until RMD makes you an offer you can't refuse.
__________________
unclemick is offline   Reply With Quote
Old 08-10-2008, 09:50 PM   #8
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,152
Quote:
Originally Posted by unclemick View Post
Hmmm - I have this vague idea that 60/40 is the benchmark pension or Bogle's 'policy portfolio'.
I'm sure you are right, but according to VG's portfolio analyzer there is only a 1% difference between 60/40 (8.9% long term avg) and 40/60 (7.9% long term avg) so I confess that I am taking the chicken approach and going for the lower return and volatility. For me that means more zzzz's, less stress, better health, ....... I hope
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 08-10-2008, 10:12 PM   #9
Thinks s/he gets paid by the post
walkinwood's Avatar
 
Join Date: Jul 2006
Location: Denver
Posts: 2,677
The magic of a portfolio composed of uncorrelated asset classes is that you can have a higher overall return than the average of the separate asset classes. That is, adding an uncorrelated asset that has a lower return, could raise your portfolio return.

I recommend reading the William Bernstein books - Four Pillars and also Intelligent Asset Allocator.

My allocation is currently 65% equities (domestic, international and REITs) and 35% bond (mainly short-term high-quality short term). During my accumulation phase it was 80/20.
__________________
walkinwood is offline   Reply With Quote
Old 08-11-2008, 11:54 AM   #10
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
I would like to bring up a point that is not discussed very often. That is, you need to be careful to consider the long term when you are young because over time your taxable investments will accumulate capital
gains that will cost you a bundle if you switch horses in mid-stream.

If I were a long way from retirement, I would seriously consider using Vanguard's new FTSE All World fund as my primary vehicle in the taxable account. This fund seems to cover all bases ..... low cost index and market weighted diversification among domestic, international and emerging market stocks. You could augment this one fund approach with other "ideas" as the urge strikes..... and believe me, they will.

At 74, needing supplemental income from my taxable account, I am using Vanguard's Wellington with a dash of Tax Managed Small Cap and FTSE All World Ex US.

The point is, plan ahead as far as you can, choose wisely and "stay the course". If you have to play around, do it on the edges.

Cheers,

charlie
__________________
charlie is offline   Reply With Quote
Old 08-11-2008, 01:51 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
Quote:
Originally Posted by charlie View Post
I would like to bring up a point that is not discussed very often. That is, you need to be careful to consider the long term when you are young because over time your taxable investments will accumulate capital
gains that will cost you a bundle if you switch horses in mid-stream.

If I were a long way from retirement, I would seriously consider using Vanguard's new FTSE All World fund as my primary vehicle in the taxable account. This fund seems to cover all bases ..... low cost index and market weighted diversification among domestic, international and emerging market stocks. You could augment this one fund approach with other "ideas" as the urge strikes..... and believe me, they will.

At 74, needing supplemental income from my taxable account, I am using Vanguard's Wellington with a dash of Tax Managed Small Cap and FTSE All World Ex US.

The point is, plan ahead as far as you can, choose wisely and "stay the course". If you have to play around, do it on the edges.

Cheers,

charlie
Amen!

heh heh heh - I wish Vanguard would quit coming out with new stuff that I like! aka All World Fund.
__________________
unclemick is offline   Reply With Quote
Old 08-11-2008, 02:54 PM   #12
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
I am 97% equity now and 3% bonds. Age 35, about 15-35 years from retiring.

My plan is to sell 1% of portfolio to bonds every 6 months until I am at 80-20. This June I did not need to sell, the market corrected this for me. Part of the plan is to sell 1% off top of everything I hold 2X per year as well, but the market of 2008 had other ideas thus far.

The earlier I retire, the more I would like my withdraws to be dividend and interest payments (as opposed to selling shares). I think a 30 year retirement allows for selling shares, where as early retirement suggests to just live off the dividends and interest to allow for close to 50 years of withdraw.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 08-11-2008, 08:16 PM   #13
Dryer sheet wannabe
 
Join Date: Apr 2007
Posts: 15
Ours is approximately 50/50 .. mainly because we don't need to take the risk with a lot of equity (expenses are .8% of the total + we get a DB pension that starts in about 10 years).
__________________
I always wanted to be a procrastinator.
sidney is offline   Reply With Quote
Old 08-11-2008, 09:12 PM   #14
Thinks s/he gets paid by the post
Spanky's Avatar
 
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,046
Our allocation is 52/48 (equity/fixed income) -- 5 years from retirement.
__________________
May we live in peace and harmony and be free from all human sufferings.
Spanky is offline   Reply With Quote
Old 08-12-2008, 11:13 AM   #15
Full time employment: Posting here.
 
Join Date: Jul 2007
Location: ST LOUIS
Posts: 995
Any more than a 60/40 and I have trouble sleeping at night.
__________________
rec7 is offline   Reply With Quote
Old 08-12-2008, 12:27 PM   #16
Recycles dryer sheets
bamsphd's Avatar
 
Join Date: Nov 2005
Posts: 337
I think of it in terms of one year's "safe" withdrawals, which I currently approximate as 4% of my investments.
  • I keep between $10,000 and one year in MM funds.
  • I keep about one year in a short-term bond fund for sudden unplanned needs, and for float when manipulating my bond ladder.
  • I am building a five year TIPs ladder with new issues. Each year I invest 4% of my then current total investment portfolio in a new rung.
  • The remaining roughly 70% is in equities. If taxes were not an issue, and Admiral shares were available, I would probably put almost all my equity money into Vanguard's new all world fund. As it is, I have a mix of index funds and individual stocks that I am reluctant to move because I prefer to defer taxes. I also keep my international outside of IRA/401k/etc accounts so that i can capture the foreign tax credit.
I still have a salary, but will not have a pension, and expect to wait at least 15 years before SS starts. I might decrease the equities to around 60% as I get even closer to retirement. Perhaps by purchasing some 30 year TIPs for a rainy day. I currently find it hard to imagine intentionally going below 60% equities, though a bear market could easily take me there. If it did, based on past experience, I would probably not make any significant portfolio changes. Though if it reached depression or Japan levels I would start eating my ladder.
__________________
bamsphd is offline   Reply With Quote
Old 08-13-2008, 08:15 PM   #17
Dryer sheet aficionado
 
Join Date: Jul 2008
Location: Vientiane by way of California
Posts: 44
Quote:
I also keep my international outside of IRA/401k/etc accounts so that i can capture the foreign tax credit.
VERY curious, as I recently was off playing nice with forms 2555 and 1116...

How do you get the foreign tax credit by keeping your international equity investments in a straight-up taxes paid account?
__________________
thaidyed is offline   Reply With Quote
Old 08-14-2008, 08:04 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Moemg's Avatar
 
Join Date: Jan 2007
Location: Sarasota,fl.
Posts: 10,040
Whatever allows you to sleep at night is the correct allocation . For me it is 75% stocks 25% bonds and a nice pension.
__________________
Moemg is offline   Reply With Quote
Old 08-14-2008, 08:19 AM   #19
Full time employment: Posting here.
hankster's Avatar
 
Join Date: Jan 2008
Posts: 645
I'm sleeping well at 65/35 with about 9 years to ER. Planning to slowly transition to 50/50 by then.
__________________
"There is no dignity quite so impressive, and no independence quite so important, as living within your means." Calvin Coolidge
hankster is offline   Reply With Quote
Old 08-14-2008, 11:40 AM   #20
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
Quote:
Originally Posted by thaidyed View Post
VERY curious, as I recently was off playing nice with forms 2555 and 1116...

How do you get the foreign tax credit by keeping your international equity investments in a straight-up taxes paid account?
It comes to you documented on a 1099 form. You don't get the credit if your holdings are in a tax deferred acount, nor if your international holdings are a "fund of funds".

DD
__________________

__________________
DblDoc is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Best Asset Allocation for an ER RockOn FIRE and Money 21 02-11-2008 01:18 PM
Need help with asset location decision joesxm3 FIRE and Money 9 07-08-2007 10:59 PM
A little help with Asset Allocation. geoloco FIRE and Money 4 08-22-2006 12:50 PM
Asset Allocation AV8 FIRE and Money 17 02-25-2006 08:13 PM

 

 
All times are GMT -6. The time now is 01:04 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.