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Help with asset allocation
Old 04-20-2013, 11:25 AM   #1
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Help with asset allocation

I understand that asset allocation is key. The problem is, I have a very rudimentary understanding of "asset allocation." I am 51, planning to retire at 53, and I currently have about 53% in stocks, 43% in bonds, and about 6% in cash/CD. Beyond just the stock/bond/cash split, which I'm not sure I've got right, there is also another layer of "asset allocation" that I need to understand as well -- the one dealing with large cap, medium/small cap, foreign, etc. That part I do not understand well.

Can someone give me advice about asset allocation and suggest some trustworthy resources that are good for beginners and not too detailed or in-depth? I'm not stupid, but my eyes glaze over when I read detailed financial analysis (I find it pretty boring, to tell the truth). I have a couple of pieces of advice in this area, but I'm not sure I trust them. Someone help a noob out?
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Old 04-20-2013, 03:07 PM   #2
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Quote:
Originally Posted by ER Eddie View Post
I understand that asset allocation is key. The problem is, I have a very rudimentary understanding of "asset allocation." I am 51, planning to retire at 53, and I currently have about 53% in stocks, 43% in bonds, and about 6% in cash/CD. Beyond just the stock/bond/cash split, which I'm not sure I've got right, there is also another layer of "asset allocation" that I need to understand as well -- the one dealing with large cap, medium/small cap, foreign, etc. That part I do not understand well.

Can someone give me advice about asset allocation and suggest some trustworthy resources that are good for beginners and not too detailed or in-depth? I'm not stupid, but my eyes glaze over when I read detailed financial analysis (I find it pretty boring, to tell the truth). I have a couple of pieces of advice in this area, but I'm not sure I trust them. Someone help a noob out?
Eddie, Go to the library and borrow "All About Asset Allocation" by Rick Ferri. This book explains asset allocation for each stage of life and risk tolerance. He explains the differences in the asset classes you describe and provides you with sample portfolios to consider for yourself.
The book is very readable.

-- Rita
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Old 04-20-2013, 06:38 PM   #3
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Thanks, Rita, I'll do that.
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Old 04-20-2013, 08:35 PM   #4
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Eddie,
Since you find this stuff "boring", you might want to keep things simple with a 3-fund portfolio (as opposed to a 'slice & dice' one). Check out the Boglehead's site for info on both.
Three-fund portfolio - Bogleheads
Slice and Dice - Bogleheads

Here's an overview, too:
http://www.bogleheads.org/wiki/Main_Page
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Old 04-20-2013, 10:28 PM   #5
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Sounds good, racy. I like "keep it simple" approaches.

p.s. I caught my weiner in my zipper earlier today. I'm not that bright.
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Old 04-20-2013, 10:48 PM   #6
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Eddie,
Since you find this stuff "boring", you might want to keep things simple with a 3-fund portfolio (as opposed to a 'slice & dice' one). Check out the Boglehead's site for info on both.
Three-fund portfolio - Bogleheads
In fact if you go to the above link there is a link to a Vanguard tool that will do all the work for you in about 2 minutes:

https://personal.vanguard.com/us/fun...ion?reset=true

fd
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Old 04-20-2013, 11:35 PM   #7
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Thanks, Dave. That was easy.
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Old 04-21-2013, 08:51 AM   #8
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Eddie, Go to the library and borrow "All About Asset Allocation" by Rick Ferri.
Great book, but I wouldn't categorize it as "good for beginners and not too detailed or in-depth? I'm not stupid, but my eyes glaze over when I read detailed financial analysis (I find it pretty boring, to tell the truth). Someone help a noob out?"

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Originally Posted by racy View Post
Eddie,
Since you find this stuff "boring", you might want to keep things simple with a 3-fund portfolio (as opposed to a 'slice & dice' one). Check out the Boglehead's site for info on both.
Three-fund portfolio - Bogleheads
Slice and Dice - Bogleheads

Here's an overview, too:
Bogleheads
+1. Good places to start, and it really doesn't have to be any more complicated. You might Google/Bing "lazy portfolio" too for some good overview sources.

http://www.marketwatch.com/lazyportfolio/howto

http://assetbuilder.com/couch_potato...otato_cookbook
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Old 04-21-2013, 09:08 AM   #9
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I'd also suggest a simple 3 or 4 fund VG portfolio. Don't get bamboozled with all the hype around small cap, large cap, growth stocks, etc. Perfection is the enemy of good.
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Old 04-21-2013, 09:13 AM   #10
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Thanks, folks. I've got my money mostly in Vanguard right now, but it's a bit of a mess. I have about 8 different types -- "funds of funds" like Star Fund and Wellington, Retirement 2015 (and 2020), a Bond fund, a Life Strategy fund. It was a haphazard approach, but the best I knew how to do at the time.

Fortunately, these all seem like pretty good funds, and I believe the asset mix is close to where I need it, although I'm going to have to do some tweaking. I will probably stick generally with the funds I have (maybe consolidating some), rather than transferring everything into the 3 index funds recommended in the article.

Thank you for helping me understand that I didn't need to "slice and dice" things. That was making me anxious. The lazy portfolio is too lazy/simple for me, but I get the three layer cake approach.
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Old 04-21-2013, 09:25 AM   #11
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The lazy portfolio is too lazy/simple for me, but I get the three layer cake approach.
Lazy portfolios may begin at 3-funds, but many are up to 11 holdings Invest Simple with Lazy Portfolios - MarketWatch.com. 11 funds is more than enough diversification IMO. I think the main common denominator among them is usually low expense, indexed funds as core holdings.
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Gone Fishing Portfolio Calculator
Old 04-21-2013, 10:04 AM   #12
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Gone Fishing Portfolio Calculator

Here's a calculator you could use, if you like the "hands-on" approach:
Marotta's 2012 Gone Fishing Portfolio

Or if you want to keep it slightly simpler, you can go with "Pacific Ex Japan (EPP)" instead of Hong Kong, Singapore and Australia.

--Dale--
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Old 04-21-2013, 10:08 AM   #13
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Here's a calculator you could use, if you like the "hands-on" approach:
Marotta's 2012 Gone Fishing Portfolio
That's a little different...
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Old 04-21-2013, 10:49 AM   #14
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Lazy portfolios may begin at 3-funds, but many are up to 11 holdings Invest Simple with Lazy Portfolios - MarketWatch.com. 11 funds is more than enough diversification IMO. I think the main common denominator among them is usually low expense, indexed funds as core holdings.
Oh, ok, I didn't examine the concept of "lazy portfolio" closely enough to understand it then. The first example I came across was just 1/3 into each of the three categories. Seemed a little too simple.

I'm going to see if I can consolidate my current hodge-podge into about 4 funds -- Star and Wellington, a Target Retirement Fund (which is the 3 index funds), plus a separate Total Bond Market Index fund (to get the overall asset balance right). Still a bit of a hodge-podge, but a bit more organized one.

Thanks for the assistance.
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Old 04-21-2013, 10:55 AM   #15
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While all these tools do the work for a person, the OP expressed an interest in "another layer of "asset allocation" that I need to understand as well -- the one dealing with large cap, medium/small cap, foreign, etc. That part I do not understand well."

The tools don't explain that, Rick Ferri's book will. The only way to gain an understanding is to spend the time understanding the basics. There is no 'beginner' book on asset allocation, but Ferri's book is not an advanced book either.

Rita
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Old 04-21-2013, 11:02 AM   #16
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Unless you have a strong preference for something different, the total stock market funds/ETFs (U.S., international, or global) from Vanguard are a good place to start. Unlike something like an S&P500 fund, you get all the small/mid/value/growth stocks if you buy the entire market. Everything after that is just tweaks and additional rebalancing work.

There's nothing particularly bad with what you're already in, they just all kind of duplicate each other. You could just pick a stock fund and a bond fund and be done with it. But I don't think there's a compelling reason to rush into something different, especially if there are any costs to it.
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Old 04-21-2013, 11:19 AM   #17
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Here's my favorite AA article:

http://www.merriman.com/PDFs/UltimateBuyAndHold.pdf

It covers the basics and provides recommended portfolios in just a few pages. My portfolio essentially follows this approach. There are more articles at the same website. I do not use this company in any way, and it looks like their self-promotion has increased since my last visit there, but the articles were a nice resource when I was getting started.
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Old 04-21-2013, 02:48 PM   #18
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Oh, ok, I didn't examine the concept of "lazy portfolio" closely enough to understand it then. The first example I came across was just 1/3 into each of the three categories. Seemed a little too simple.

I'm going to see if I can consolidate my current hodge-podge into about 4 funds -- Star and Wellington, a Target Retirement Fund (which is the 3 index funds), plus a separate Total Bond Market Index fund (to get the overall asset balance right). Still a bit of a hodge-podge, but a bit more organized one.

Thanks for the assistance.

I think the phrase is from either Scott Burns (financial writer for Dallas) or Paul Ferrell (at Marketwatch). But they range from a 3 ETF portfolio to an 11-12 ETF position portfolio; the ones with more numerous funds add the ability to weight small/mid and international/emerging and alternative (REITs, commodities, junk bonds, etc.) They are predicated on minimizing cost through the ETFs and easy balancing--either once a year or you could do so when one gets 3-5% beyond its target weight in the portfolio. You pick your sectors and associated ETF and the percentage allocation to each, buy and you're done, until time to rebalance.

I took this approach from 98 to 2006 and it served us very well. My fear of a housing crash in '06 (and nearing 50) caused me to increase cash/bonds and radically change allocations and add diversity/complexity. That worked splendidly during the '08-'09 crash, but also reduced beta (compared to S&P 500) from '10 on, of course. I've kept cash at 20% (although it was once at 30% until the stock gains started pouring in).
The idea is that you take 30 minutes once a year (or twice a year) to rebalance and you're done, hence lazy. I would rebalance once a fund goes 3-5% beyond its target, but then it wouldn't be lazy, just dilettantish.
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Old 04-21-2013, 02:54 PM   #19
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If you go to Morningstar.com, open a free account, start the instant x-ray, enter your fund names as a percentage of total, and click, you will receive a good summary that shows you the next layer of asset allocation. Morningstar calls it a style box, and you'll see how the combination of your funds in their various percentages play out as far as Small Cap Value (SCV), for instance.

It does take effort, whether researching or reading. You can do it.
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Old 04-21-2013, 03:00 PM   #20
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Here's Ferrell's lazy portfolios (Scott Burns's are either similar or the same):
Invest Simple with Lazy Portfolios - MarketWatch.com

I would pick the Aronson and add a 3-5% in Biotech and a 5-10% shortbond or floating by decreasing the Pacific, small, and Treasury, but that's just me. I like to cheat on what I think are appealing 3-5 year sectors.
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