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Can You Comment on My Asset Allocation
Old 10-14-2011, 10:13 AM   #1
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Can You Comment on My Asset Allocation

I use T. Rowe Price Advisory Planning Services for my retirement asset allocation. I am 41, I hope to retire anywhere within the next 4 to 9 years if possible. The recommended asset allocation plan is premised on me working until 65, but I was told that even if I want to retire early, the asset allocation would not change too much, because the early retirement would mean I would need my investments to last for a longer period of time, and I would need to take on more risk (stocks) to help make my retirement assets last as long as I do.

Here is the recommendation (I get close to the target with a combination of taxable, 401k/deferred compensation, and ROTH IRA investments):

Stock
Large Cap 48%
Mid/Small Cap 16%
International 16%
Specialty 0%

Bond
Investment Grade 15%
High Yield 0%
International Bond 5%

Cash
Short Term 0%

I abrogate a little from this recommendation. I have a REIT fund, since I do not own real estate, I thought it was a good idea to have some exposure to the real estate market. If I purchased real estate, I might get out of that. In the meantime, I consider it under the Mid/Small Cap allocation.

I do keep money in a Vanguard short-term bond fund for an emergency cash fund as well as a future real estate purchase fund.

I have a defined benefit pension coming to me at age 60 that might cover about 10% of my cost of living at the time I will start to receive it. Some say that a pension like this should cause me to change my stock/bond asset allocation. I am not sure about this.

I have a medium-level of risk tolerance, and I pretty high desire to become financially independent as soon as possible.

Is there a way for me to assess what the over-all or yearly rate of return and standard deviation on this type of asset allocation has been in past? Is there a calculator that will do this?

Do you think this is a good asset allocation considering my goals, risk tolerance and any other relevant factors? I appreciate your advice.
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Old 10-14-2011, 10:26 AM   #2
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Whew, I realize I am a lot older than you (I'm 63), but I sure wouldn't want to retire on 80% equities. I could never sleep at night with that AA and no job, personally.

I guess the only other choice is to save more until you have enough that your portfolio is growing over time even with a more conservative AA, despite your (future) withdrawals. Bear in mind that my own risk tolerance is very low and my AA very conservative.

Just my opinion...
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Old 10-14-2011, 10:28 AM   #3
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You might want to ask over at Bogleheads Investing Advice and Info about this as well. They love to critique people's portfolios.
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Old 10-14-2011, 10:41 AM   #4
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This is just my personal preferrence....

But I do not invest in international bonds... to me, that is an exchange rate risk that I don't want to take on...

I do invest in international stocks at a bit more % than you... and I also have less than 75% of my domestic in large caps (I think I am in the 60% range)...

As mentioned, an 80% allocation to stocks is a lot if you are retired... but that does not mean it is bad if you have enough to cover expenses etc. in bonds with a big cushion... I will probably be close to that.. but might go down to 70% when I actually do retire (I am about 85% now)...
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Old 10-14-2011, 11:05 AM   #5
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Whew, I realize I am a lot older than you (I'm 63), but I sure wouldn't want to retire on 80% equities.
TRP doesn't seem to be recommending that he retire on 80% equities, but that now, in the early years of the portfolio, he keep 80% equities. Presumably, they would have him reduce that percentage later.
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Old 10-14-2011, 11:10 AM   #6
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I'd swap some of the large caps for some junk. Junk is pretty attractive at the moment (not to say it could not get "more attractive").
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Old 10-14-2011, 11:13 AM   #7
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This is just my personal preferrence....

But I do not invest in international bonds... to me, that is an exchange rate risk that I don't want to take on...

I do invest in international stocks at a bit more % than you...
Why are you ok with the exchange rate risk in international stocks, but not in bonds? You do realize where that risk is concerned, you're essentially telling him to eliminate it in his bonds, then add it right back with more foreign stocks.
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Old 10-14-2011, 11:31 AM   #8
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TRP doesn't seem to be recommending that he retire on 80% equities, but that now, in the early years of the portfolio, he keep 80% equities. Presumably, they would have him reduce that percentage later.
If that is the case, then I'm perfectly OK with 80% equities until he gets close to retirement.
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Old 10-14-2011, 11:58 AM   #9
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Why are you ok with the exchange rate risk in international stocks, but not in bonds? You do realize where that risk is concerned, you're essentially telling him to eliminate it in his bonds, then add it right back with more foreign stocks.
Because a bond pays interest... the change in price for an international bond fund is the change in interest rates and the exchange rate... I don't see the benefit of looking for a bit more yield when it can be overcome many times over by the exchange rate..

International stocks can increase in price because they become more valuable... the business is growing etc. etc.... and the exchange rate risk is not as large...

Let me give an example... say your international bond is paying 7%... and the rates do not change.... but the exchange rate change 30% against you... you just lost 23% and do not have much hope of getting this back unless the exchange rate changes back to your favor... and any interest rate changes would probably happen to your US bonds at about the same amount as your international bonds... so in reality you are actually betting against the dollar for a bit of yield...



But, you invest in the next big company in China or India or even Europe... and it goes up 50%... but your exchange rate goes against you by 30%... you are still up 20%...



Now, if you want to play the game of 'is the dollar going to tank' or 'is the dollar going through the roof', then international bond funds are the way to go...
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Old 10-14-2011, 12:08 PM   #10
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Foreign currency bonds appear to add some diversification to a portfolio, which is why I think they are a nice addition. Its not about chasing yield.
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Old 10-14-2011, 12:17 PM   #11
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... so in reality you are actually betting against the dollar for a bit of yield...
For a bit of yield or for the sake of betting against the dollar. But most international bond funds hedge against currency risk, so you don't actually get a bet against the dollar. A couple of weeks ago, I put a small amount into T. Rowe Price Emerging Markets Local Currency Bond Fund, without currency hedging, with the idea of betting against the dollar and diversifying, but I haven't really decided whether that's a good idea.
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Old 10-14-2011, 12:31 PM   #12
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For a bit of yield or for the sake of betting against the dollar. But most international bond funds hedge against currency risk, so you don't actually get a bet against the dollar. A couple of weeks ago, I put a small amount into T. Rowe Price Emerging Markets Local Currency Bond Fund, without currency hedging, with the idea of betting against the dollar and diversifying, but I haven't really decided whether that's a good idea.

Don't get me wrong, if you know what you are doing I don't have a problem with it... heck, I think betting against the dollar right now might be a good thing... except when I think about the Euro...

My boss and I argue over this all the time... he thinks the dollar is going to tank and wants to invest in 'something'... I always ask... 'what is better?'... it usually comes down to Australia and NZ....
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Old 10-14-2011, 12:32 PM   #13
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There is a wide range of reasonable allocations. This looks like an older domestic-dominated version that is within the norm. I would go with 50/50 domestic/foreign at least, with emerging markets, and closer to 50/50 large/small and 50/50 growth/value. I do have RE exposure and natural resource exposure as added allocations. But that's just me.

I agree 20% bonds is aggressive near retirement, but just about within a mainstream enough 120-age in equities. I'm normally 100% equities, well out of the mainstream. You can leave the bond allocation as it is until you retire, given some flexibility. If you can time your retirement to begin when your portfolio has accumulated to the appropriate level, you can then reallocate to more bonds if you want before you retire. You'll need to be a bit conservative at that point to avoid any problems with a bad market just after you retire. If you have to retire at a specific time in the future then you may need to be more conservative with your allocation before that time.
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Old 10-14-2011, 12:34 PM   #14
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Foreign currency bonds appear to add some diversification to a portfolio, which is why I think they are a nice addition. Its not about chasing yield.
Does the diversification pay off As expected?

IOW, I would agree that you are adding diversification... but does it give you any benefits you get from other diversification? Is it that much different than US bonds?

(note: not an argument, I don't know the answers)
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Old 10-14-2011, 12:40 PM   #15
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Does the diversification pay off As expected?

IOW, I would agree that you are adding diversification... but does it give you any benefits you get from other diversification? Is it that much different than US bonds?

(note: not an argument, I don't know the answers)
The research I have read (in the past) suggests that a 10% or so unhedged foreign bond allocation does indeed move you closer to the efficient frontier.
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Old 10-14-2011, 12:56 PM   #16
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Originally Posted by midnighter777 View Post
I use T. Rowe Price Advisory Planning Services for my retirement asset allocation. I am 41, I hope to retire anywhere within the next 4 to 9 years if possible. The recommended asset allocation plan is premised on me working until 65, but I was told that even if I want to retire early, the asset allocation would not change too much, because the early retirement would mean I would need my investments to last for a longer period of time, and I would need to take on more risk (stocks) to help make my retirement assets last as long as I do.

Here is the recommendation (I get close to the target with a combination of taxable, 401k/deferred compensation, and ROTH IRA investments):

Stock
Large Cap 48%
Mid/Small Cap 16%
International 16%
Specialty 0%

Bond
Investment Grade 15%
High Yield 0%
International Bond 5%

Cash
Short Term 0%

I abrogate a little from this recommendation. I have a REIT fund, since I do not own real estate, I thought it was a good idea to have some exposure to the real estate market. If I purchased real estate, I might get out of that. In the meantime, I consider it under the Mid/Small Cap allocation.

I do keep money in a Vanguard short-term bond fund for an emergency cash fund as well as a future real estate purchase fund.

I have a defined benefit pension coming to me at age 60 that might cover about 10% of my cost of living at the time I will start to receive it. Some say that a pension like this should cause me to change my stock/bond asset allocation. I am not sure about this.

I have a medium-level of risk tolerance, and I pretty high desire to become financially independent as soon as possible.

Is there a way for me to assess what the over-all or yearly rate of return and standard deviation on this type of asset allocation has been in past? Is there a calculator that will do this?

Do you think this is a good asset allocation considering my goals, risk tolerance and any other relevant factors? I appreciate your advice.
Looks reasonable to me, but on your international, I would want some % of that to be emerging market.
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Old 10-14-2011, 12:57 PM   #17
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The research I have read (in the past) suggests that a 10% or so unhedged foreign bond allocation does indeed move you closer to the efficient frontier.
The problem is finding unhedged funds.
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Old 10-14-2011, 01:08 PM   #18
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The problem is finding unhedged funds.
GIM, BEGBX, Pimco unhedged, etc. They are out there.
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Old 10-14-2011, 01:20 PM   #19
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In the accumulation phase, I favor 100% equities. The long-term returns are better than for bonds/debt instruments. Why would you care if they are volatile?

A conservative retirement would have equities and debt instruments. The ratio of 60/40 is popular. This represents about 10 years of spending at 4% of the total in less volatile assets ('bonds').

With 100% equities, you could wait until retirement, then convert 40% to a 10-year ladder of CDs or bonds.

Or, create the 'bond' ladder before you get to retirement, converting so much a year (if 5 years away, convert 8% every year, for example).

I am almost 100% equities (50/50 US/non-US). I am 64, but I do not know when I will quit. Today looks like a buying opportunity for equities for me. I am paying a lot more attention to dividend-paying equities than I used to. If I can get 4.5% dividend with the potential for growth, I will be happy. I look at SS as my bond fund anyway. midnighter777 wants to retire at 50, so he cannot look at things that way.
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Old 10-14-2011, 01:21 PM   #20
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GIM, BEGBX, Pimco unhedged, etc. They are out there.
Neat! Thanks.
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