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Do I have Appropriate Stock/Bond and Domestic/International Allocations?
Old 11-27-2010, 02:40 PM   #1
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Do I have Appropriate Stock/Bond and Domestic/International Allocations?

I would like your opinion on the following two questions. I would like to be early retired yesterday (lol!) but realistically speaking, I probably won't be able to retire for another 8 to 15 years. I think it will take that long to acquire a net worth that would support my estimated annual living expenses using a 4 percent safe withdrawal rate. I am currently 40 years old.

1. My current stock allocation is 80 percent of my total investment portfolio and my current bond allocation is 20 percent of my total investment portfolio. Do you think that this is an appropriate allocation for my investment horizon?

2. My current international stock allocation is 17 percent of my total investment portfolio and my current international bond allocation is 4 percent of my total investment portfolio. Do you think that this is an appropriate international allocation for my investment horizon? I have read at least one article that suggested at least 50 percent of an investment portfolio should be allocated to international stocks and bonds. As you can see, my total international exposure amounts to about 21 percent, and that is what led my question here.

Thanks.
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Old 11-27-2010, 02:59 PM   #2
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FWIW my take on your questions:

1. Only you know what your risk tolerance is. If you have been invested the last 3 years and did not sell out your AA is tolerable for you. I'm close to that now and plan on a glide path of increasing my bond allocation as I approach retirement so I will be around 60:40 when I throw in the towel in 8-10 years.

2. As the US is about 50% and falling of total world equity markets anything less than 50% International is a bet on the US market. Having said that the two most important factors are a) your saving rate and b) your Equity:bond ratio, anything else is really nibbling around the edges and only time will tell what the "best" allocation in a slice and dice portfolio would be. Personally I have 50% Int:US but anything between 0 and 50% is a reasonable approach.

In terms of Foreign bonds I own none (directly). Too much currency risk for me. I follow the Swedrow approach of taking most of my risk in equities (hence the high allocation of stocks) and own mostly high quality US gov't bonds in short term/int term bond funds at Vanguard as well as a TIPS fund.

DD
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Old 11-27-2010, 03:03 PM   #3
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The proper allocation is part objective and part subjective (such as the expression, you should be allocated so you can sleep well at night).

That said, for me allocation of 80/20 would make me nervous. Wouldn't want to hit a rough patch just before you want to ER. A lot of folks who thought about ER'ing in 2008, only to have the market go on the skids.
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Old 11-27-2010, 09:43 PM   #4
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Easysurfer,

Considering the OP's timeframe, 80/20 does not appear risky. I would suggest 100/0 for the accumulation phase, but that is just me.

I haven't checked lately but my small bond exposure is supposed to be 50/50 US/foreign through mutual funds and ETFs. I hope there is a currency exposure, but I doubt it.
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Old 11-28-2010, 02:03 AM   #5
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Quote:
Originally Posted by DblDoc View Post
1. Only you know what your risk tolerance is.
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Old 11-28-2010, 04:04 AM   #6
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Personally, I won't sweat the international allocation. 50% of the revenue and more than 50% of the profits of the S&P 500 is derived from overseas operations. Twenty or so years ago the correlation between US stocks and International stock returns was only moderate,now days it is quite high as the recent financial crisis has demonstrated. This means the benefits of have "an international allocation" especially for large company (small cap maybe a different story) is decreasing.

If you looked at the Dow 30 I'd say that only a handful Travelers, AT&T, and Home Depot qualify as American companies the rest are really multinational companies. In the same way that BP is multinational company based in England, Nestles in Switzerland, Siemens in Germany. Then you get company like Honda which sells roughly 1/2 of its cars in North America and employees roughly 1/2 of its workers in North America, which makes it in some ways more American than McDonalds which has 19,000 out 32,000+ locations outside the US.

So a 20% international allocation certainly is well within a normal range.
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Old 11-28-2010, 06:13 AM   #7
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As others have said, the right answer is unique to each of us. Some of us were 100% equities at your age, others couldn't sleep at night with 100% equities at any age. Neither approach is "wrong" - comes down to your risk tolerance, goals, etc. Here's a place to start:

https://retirementplans.vanguard.com...rceDomain=true

There are lots of tools like this online, good luck.
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Old 11-28-2010, 08:56 AM   #8
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Quote:
Originally Posted by Ed_The_Gypsy View Post
Easysurfer,

Considering the OP's timeframe, 80/20 does not appear risky. I would suggest 100/0 for the accumulation phase, but that is just me.

I haven't checked lately but my small bond exposure is supposed to be 50/50 US/foreign through mutual funds and ETFs. I hope there is a currency exposure, but I doubt it.
Perhaps...but the OP's needs to keep an eye on his "retirement red zone", as that commercial says
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Old 11-28-2010, 02:54 PM   #9
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I think you are approaching the portfolio correctly in that first question is how much equity vs. how much fixed (bonds, etc.). Despite the fact that in all probability this will be better decade for equity than bonds, given reverse happened last decade and bond rates now so low, I still like the general rule of age in bonds. So perhaps with new monies can strive for that, imo, rather than any sudden or lump sum shifts. Among equities would favor about 14-20% international and within that can splice in emerging markets. For bonds some might simply split between a total bond fund and tips, but I like splice and dice-overall can get better yield and still keep intermediate term and investment grade. Anyhow you asked about foreign bond funds. Part of that question needs to address whether you prefer hedged or unhedged for currency risks. In any event, I think some exposure to foreign bond funds desirable and your percentage seems reasonable. Just my two cents.

Bob
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Old 11-28-2010, 07:59 PM   #10
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You have a fairly normal sounding allocation.

I'm nominally 100% equities, 50% foreign, and retired for about 3 years now, though DW isn't yet. Large market drops only make me feel bad if I can't buy anything.
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