Does this portfolio make sense?

[cyclone6]

I've struggled with this for a long time. Total information overload. But I think this is the plan I am going to implement...and would appreciate any comments or feedback. About me:

48 years old
Single
Total investable assets: $1550000
Partially retired (making about 25-30k/yr working **very** part-time as a consultant)

I would like to think that I could completely hang 'em up.

Here is the proposed portfolio:
View attachment allocationsummary.xls

I would like to take 4% out annually - probably using the 95% rule. I also believe in applying some sort of valuation measure to the percentage allocated to the equity portion of the portfolio. So I think when the annual rebalancing comes up I will adjust the stock percentage based on Robert Shillers PE10 ratio:

http://www.econ.yale.edu/~shiller/data/ie_data

And apply percentages somewhat along this line:

Stock % P/E10
25% >30
30% 27-29
35% 25-27
40% 23-25
45% 21-23
50% 19-21
55% 17-19
60% 15-17
65% 13-15
70% 11-13
75% 9-11
80% <9

As a side note, I included the Hussman Total Return (HSTRX) in my fixed income/bond portion of the portfolio. I realize that this is not a true bond fund - he has the ability to move durations and add exposure to precious metals, foreign currencies and REITS. But I like the idea that since my portfolio does not include explicit allocations to some of these assets that maybe when the valuations are correct I may have some exposure.

Does this all make sense? Or have I just completely over analyzed the whole thing?

Thanks for any comments you may have...

 

[rayvt]

I think you *have* overanalyzed it, and have totally missed the necessary "asset allocation" part. Also think that you have put way too much in fixed-income and nowhere near enough in equities for your age. Fixed-income returns are not enough to maintain your after-inflation purchasing power. $29,486 may seem a lot today-enough to buy a new car, but in 15 years a new car will cost $60,000 but the bonds will still be paying $29,000.

Where is the real-estate asset class? Where are the commodities?

IMHO, your table of stock vs. P/E is a prime example of over-tuning, and assumes an accuracy that simply isn't there.

And your spreadsheet implies to me that you are focussing too much on the wrong things-----just because they happen to be easy to measure.
E/R is important--but only if it is too high. And if the E/R on some particular fund is too high, what you should do is discard that fund flat out.
Ditto with the dividend column for the stock funds. Putting that info there will lead you to treat the dividedends as very important. But they are not. The thing that is most important about stocks is *not* dividends, it is capital gains. The dividends are merely an added bonus.

Your information overload is understandable, explainable, and not uncommon.
Philisophically, people tend to thing that important things are inherently complex & complicated. And since investing and money-for-the-rest-of-your-life is important, therefore the solution & method must be complex.

But really, it isn't. It's actually pretty simple. As simple as:
1) divide your money among 5-10 major asset classes
2) rebalance every few years. (Not even once a year. Once every 5-7 years. Maybe even never.)

For some more simple ideas on asset classes, methods, allocations, and withdrawals, download & read the papers by Melbane Faber, Guyton, Guyton/Klinger.

SSRN-A Quantitative Approach to Tactical Asset Allocation by Mebane T. Faber
MultiAssetCH.pdf (2 page synopsis) (My captured copy. The original link at http://www.jennisondryden.com/view/...607A/$File/JD2114MultiAssetCH.pdf&docType=pdf doesn't work anymore. )
MultipleClass.pdf (20 page paper)
FundAdvice.com - The Ultimate Buy-and-Hold Strategy - 2010 Update

 

[Spanky]

rayvt,
Is your portfolio consists of equal portion of each of the multiple asset classes in the articles?

 

[Nords]

Does this all make sense? Or have I just completely over analyzed the whole thing?
Thanks for any comments you may have...

Well, "Yes" and "Yes". You've complicated it more than the majority of DIY investors, although not as complicated as many. You've put a lot more thought into it than most, especially the ones who are chasing performance. You have a rebalancing plan and you seem committed to executing it.

You don't hold any real estate, but then you don't hold any inverse-triple leverage beever cheese futures either. You can probably live the rest of your life without those two asset classes, especially if you don't like real estate or its expenses.

The overall expense ratios are great, although TRP seems to be typically taking more than their fair share. The income seems good. Have you looked at the volatility and how it's done over the life of the assets? Do you need to run it through FIRECalc?

However, it doesn't matter what we think. You took the time to do the learning to research & develop this portfolio, and you have a lot of "ownership" invested in it as well as your money.

What matters is that you sleep well at night, and that if the market sags 30% this summer then you won't immediately sell out at the bottom and curl up in a fetal ball in the corner sucking your thumb while spouting doom & gloom. Not that any of us have ever done so.

 

[Luckygem]

Diversification =)

 

[cyclone6]

Thanks for the comments. I agree completely that the table to use PE10 ratios to adjust stock percentages is far too detailed...think maybe I will tone that down and make it much more broad so that I am not jumping around every year. Seems like too much work.

As for the commodities and REITS - I was (am) still torn on these. I was going to add a slice of REITS (both domestic and foreign) - but then I had that consultation with Vanguard. They recommended just the same 3 funds we keep hearing about - Total stock, total international, and total bond. Their reasoning is that these things are included in the big, broad indices. And that adding them explicitly overweights those asset classes. Still, I like the idea of adding a slice of small/mid-cap...and may still add that REIT slice.

I will say this for Vanguard - they put their money where their mouth is. Looking at their target retirement funds they basically do stick with just those three funds. (With some TIPS added as you enter retirement) So they certainly appear to believe in what they recommend for their clients.

 

[Ed_The_Gypsy]

I think you are too light on equities. IMHO, you should have more like 60% equities at your age. You are getting 3% yield and you want to w/d 4%. Granted, yields may improve, but I think they are in line with your AA.

 

[rayvt]

I would expect Vanguard to eschew REITs & commodities in their "target" funds, and in their initial consulations. In general, people who are attracted to these target funds are people who are skittish about investing and are uncomfortable about anything other than buy&hold. This category of people is VERY unlikely to be comfortable with real-estate or commodity investments. And are VERY unlikely to be comfortable with a large allocation to equities.

During the consultation, more knowlegable investors are probably going to be more insistant about REIT & commodities. I bet that when somebody passes this hurdle, they'll then bring VNQ/VGSIZ and VAW/VMIAX into the conversation.


If you want to get a little more hands-on, be sure you look at the two JennisonDryden papers I linked to. In the longer paper, they mention the standard 5 asset classes. (And to Spanky, yes, my base portfolio starts out with all 5 classes.)
To me, the short article was a real eye-opener. If you are missing one of the categories, then there are years when you've missed out the class that had the top performance.

 

[Ed_The_Gypsy]

It is very nice of Paul Merriman to update his work and make it available as pdf files. I used to have to do screen copies of his stuff. His work helped me very much.

Good links, rayvt. Thank you.

 

[Spanky]

If you want to get a little more hands-on, be sure you look at the two JennisonDryden papers I linked to. In the longer paper, they mention the standard 5 asset classes. (And to Spanky, yes, my base portfolio starts out with all 5 classes.)
To me, the short article was a real eye-opener. If you are missing one of the categories, then there are years when you've missed out the class that had the top performance.

Have you consider adding precious metals as well? This class provides a decent return over time at a dissimilar price movement to other asset classes.

 

[ItDontMeanAThing]

I was going to add a slice of REITS (both domestic and foreign) - but then I had that consultation with Vanguard. They recommended just the same 3 funds we keep hearing about - Total stock, total international, and total bond. Their reasoning is that these things are included in the big, broad indices.

Vanguard told me the same thing. Most of my US equity allocation at the time was equally divided between Large Cap Idx, Value Idx, Small Cap Idx and Small Value Idx. I asked why I should consolidate these into the Total Stock. I thought that if a market segment heated up or tanked that the Total Stock fund would mean I couldn't sell my winners and buy losers at a lower price. His answer, filtered through my 30 years of investment knowledge, was doublespeak and hand waving. I think Vanguard wants people in a single stock fund because it lowers their costs, but I've been accused of being a cynic.

Asset allocation allowed me to retire early. I saw I was totally overweighted in growth funds before the internet bubble burst and sold a bunch to buy up seriously underpriced value funds. Couldn't have done that if I'd been in the Total Stock fund.

 

[Ed_The_Gypsy]

Have you consider adding precious metals as well? This class provides a decent return over time at a dissimilar price movement to other asset classes.

Ye gods! Not metal as an asset. It is pure speculation. It pays no dividends, you have to store it and you lose when you buy and you lose when you sell. If you MUST be a gold bug, look into mining stocks. Looking at it that way should scare some sense into you.

 

[NW-Bound]

Asset allocation allowed me to retire early. I saw I was totally overweighted in growth funds before the internet bubble burst and sold a bunch to buy up seriously underpriced value funds. Couldn't have done that if I'd been in the Total Stock fund.

+1

This has always been my premise, that "slicing and dicing" gives an investor visibility into different market sectors and different industries.

It is still very difficult to time the sector rotation, however.

 

[cyclone6]

Agreed - great links rayvt!

ItDontMeanAThing and NW-Bound...one of my earlier attempts at putting something together included the slicing and dicing of market capitalizations of both the Domestic and International markets. Much along the lines Merriman proposes. I may still go that way...

My question is doesn't it seem as though the small caps have gotten way out ahead of themselves at this time? The Vanguard small-cap index recently hit an all-time high? Sure seems the large caps are trailing significantly...

 

[ItDontMeanAThing]

My question is doesn't it seem as though the small caps have gotten way out ahead of themselves at this time? The Vanguard small-cap index recently hit an all-time high? Sure seems the large caps are trailing significantly...

One of the things I proved to myself in my first 10 years of investing is that I was horrible at predicting the future. The two times in my life I've moved big chunks of money into an asset allocation scheme I couldn't help but notice that some parts of the market looked expensive and some looked cheap. Told my self I'm in it for the long haul and that I can't time the market. Took 3 months to move the money, moving a third at a time. Did that in hopes of not buying in at a market top but never analyzed it to see if it made any difference.

 

[pb4uski]

+1

This has always been my premise, that "slicing and dicing" gives an investor visibility into different market sectors and different industries.

It is still very difficult to time the sector rotation, however.

While I can see the potential value of slicing and dicing if one wants to time the market (or sectors within the market) the question in my mind becomes whether one can do that successfully in the long run AND whether one is willing to invest the time and effort needed. As for me, I'm skeptical that I could be consistently successful doing it and I definitely don't care to take the time and effort to do so - I have better things to do.

So a portfolio of total stock, total international and total bond works fine for me. KISS.

 

[Ed_The_Gypsy]

If you keep looking at dividends, size and style do not matter any more. Capital gains, especially with 'growth' stocks (i.e., pay no dividends) are chimeras, IMHO. No one can find the next Microsoft, but they CAN find a Dividend Achiever.

 

[ItDontMeanAThing]

While I can see the potential value of slicing and dicing if one wants to time the market (or sectors within the market) the question in my mind becomes whether one can do that successfully in the long run AND whether one is willing to invest the time and effort needed. As for me, I'm skeptical that I could be consistently successful doing it and I definitely don't care to take the time and effort to do so - I have better things to do.

So a portfolio of total stock, total international and total bond works fine for me. KISS.

Asset allocation, or 'slicing and dicing' usually is done without any attempt at market timing, at least to my understanding. Consider one asset allocation strategy shown below:

In this portfolio, one buys Vanguard index funds corresponding to each segment. Every three months or so compare current percentage of assets to initial. Rebalance as needed by selling winners and buying losers. Takes me about an hour a year, couldn't be more KISS.

 

[Spanky]

Every three months or so compare current percentage of assets to initial. Rebalance as needed by selling winners and buying losers. Takes me about an hour a year, couldn't be more KISS.

Spending only one hour in a year for rebalancing and tax-loss harvesting? You must be very efficient.

 

[pb4uski]

Asset allocation, or 'slicing and dicing' usually is done without any attempt at market timing, at least to my understanding. Consider one asset allocation strategy shown below:

In this portfolio, one buys Vanguard index funds corresponding to each segment. Every three months or so compare current percentage of assets to initial. Rebalance as needed by selling winners and buying losers. Takes me about an hour a year, couldn't be more KISS.

Guess I misinterpreted what was meant by slicing and dicing. I thought it related to making sector bets within the equity allocation.

Sounds like it is just AA at a lower level. For example my Vanguard Total Stock includes large cap, large cap value, small cap and small cap value, but based on market weightings, not necessarily 10% each.

Where the graph above indicates large and small cap do you really mean large cap growth and small cap growth? BTW, to have large cap and small cap equal at 20% each seems to me to extremely overweight small cap, but I assume the graph is hypothetical.

 

[ItDontMeanAThing]

Spending only one hour in a year for rebalancing and tax-loss harvesting? You must be very efficient.

All my retirement investments (except gold mining) are in index funds at a single firm. At the end of each quarter I input the values into an existing spreadsheet then check a column to see if difference between target and actual % warrants a rebalance. If it does, then another column shows the dollar amounts to exchange. The time consuming part is going online to make the exchanges. One hour (more or less) covers it for two rebalances a year, the most I've done.

Taxable account is another matter. I'm living off that so I have to think about what I'm going to do before I do it.

 

[ItDontMeanAThing]

Guess I misinterpreted what was meant by slicing and dicing. I thought it related to making sector bets within the equity allocation.

Or maybe I misinterpreted what the other author meant when he mentioned slicing and dicing.

Sounds like it is just AA at a lower level. For example my Vanguard Total Stock includes large cap, large cap value, small cap and small cap value, but based on market weightings, not necessarily 10% each.

Yes.

Where the graph above indicates large and small cap do you really mean large cap growth and small cap growth? BTW, to have large cap and small cap equal at 20% each seems to me to extremely overweight small cap, but I assume the graph is hypothetical.

I think it means growth. It's not my graph. It came from a site that turned their AA ideas into a book so the details of their current AA strategy are not explained online. My guess is it's hypothetical.

 

[OrcasIslandBound]

Welcome to the Forum Cyclone6!

Not everyone subscribes to the "we need more than half in equities" opinion. My DW and I currently have $1.3 million and are invested very similarly to your spreadsheet proposal of 40% stock and 60% bonds. We're a tiny bit older at 53 each. We believe that Bogle sums it up with one word "enough" in one of his recent books. 40% stocks, 60% bonds can earn a fine living while greatly reducing the volatility of your investments. Yes, firecalc appears to push more in equities, actually a mild shortcoming in this tool IMHO. We also use Fidelity's retirement planning tools and find them to be a good complement. I hope to retire in 3 years with 1.5 million + 100K for our son's college. We realize, of course, that if he gets accepted into a $200K/4 year school, we might have to cough up more, and I might have to work longer. We'll see how this goes...

In any case, I think you've done a terrific job planning your ER!

- Stephen

 

[Spanky]

.. 100K for our son's college. We realize, of course, that if he gets accepted into a $200K/4 year school, we might have to cough up more, and I might have to work longer. We'll see how this goes...

$50K per year for a college degree? Has he considered going to a public university?

 

[LOL!]

Or maybe I misinterpreted what the other author meant when he mentioned slicing and dicing.


Yes.


I think it means growth. It's not my graph. It came from a site that turned their AA ideas into a book so the details of their current AA strategy are not explained online. My guess is it's hypothetical.

The pie chart appears to be the Coffeehouse Portfolio of Bill Schultheis
The Coffeehouse Investor » Coffeehouse Returns

That's not "large growth"; it's "large blend". Ditto for small.