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Old 01-09-2015, 11:32 AM   #21
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We have 67% in equities using a simple three way lazy portfolio.

The approximate equality of the pie slices is very pleasing to the eyes.
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Old 01-09-2015, 11:38 AM   #22
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Originally Posted by tuixiu View Post
We have 67% in equities using a simple three way lazy portfolio.

The approximate equality of the pie slices is very pleasing to the eyes.
I like the way you think. Esthetics are important.
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Old 01-09-2015, 11:57 AM   #23
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I think it's important to look at a variety of criteria when picking an AA. For example, some things I like to look at are

- FIRECALC style success rate (e.g. probability portfolio does not go to zero)
- final portfolio value at various quantiles (e.g. look at all of the runs in FIRECALC and see where the cutoffs are at the 25th, 50th, and 75th percentiles)
- expected return
- volatility
- maximum drawdown
- cost of investing in that AA (weighted average expense ratio)
- simplicity (total number of funds)

If you have well defined goals for investing, that will help you pick which criteria are most important to you. For example, if you want to maximize your legacy, then you should lean to portfolios with the highest expected return. If you are terrified by market crashes, then put more weight on volatility and max drawdown. If you want a portfolio that an uninterested spouse can manage then emphasize simplicity.
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Old 01-09-2015, 12:09 PM   #24
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Originally Posted by nuisance View Post
Here's the asset allocation I ended up deciding on:
30% us stocks
10% us small value
5% european stocks
5% pacific rim stocks
5% emerging markets stocks
5% international small
10% us reits
30% us bonds
70/30 seems very aggressive to me for somebody w/ a 50+ year horizon, especially at the start of retirement, when a bad sequence of returns could wreak havoc.
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Old 01-09-2015, 12:11 PM   #25
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Hopefully I am not raining on your parade, but here is my .02.

You are in your 30s. You need stable income for a long time, before you start drawing your assets. Your assets should be invested in something that provides that kind of income while you let your investment grow. The 4% rule is for people nearing retirement at 55+, not sub-40. You should be thinking 2-3% WR, or less. Even a $30K lifestyle would need at least $1M. A $30K lifestyle is not much after a mortgage or rent payment.

You will not have much in terms of Social Security, ever, as you will not have 35 years in. You likely do not have a pension. Your sole source of income, according to your posts, will be your investments. Therefore, you will need solid income producing investments. Stocks, rental income, CDs, bonds, etc.

Retiring in your 30s, with any kind of decent lifestyle, is extremely difficult without an inheritance, or large influx of cash. Some business owners can do it, and some employees of private firms that go public can do it. For the average Joe, in decent health, it is near impossible. The system is not geared for it, nor does it allow enough time for compounding growth of your assets. If you have another wage earner with you, it is more likely.

Having said that, your risks are inflation and out living your assets. Inflation is not an issue for now. Running out of your assets is your major concern. You may think that you can go back to your career if things do not work out. After a few years, you will be 50+, and have out of date skills. If you are over 50, it is difficult to get work; especially of you are already out of work.

Healthcare expenses will continue to increase as you get older, unless it becomes ‘free’.

Think hard about your decision, and do not adjust the calculators so that you have a ‘perfect path’. Go with general default parameters. Make sure you are 100%, and then some.

The market has been very good the past few years, and likely will be good for a few more. But just as it comes, it can go. Be sure to account for future market risk.
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Old 01-09-2015, 11:17 PM   #26
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Originally Posted by LOL! View Post
Anytime I see an asset allocation with international split up into those fine bits, I know someone has read an old edition of Bernstein or Ferri. Times have changed; new international index funds are now available; tax laws are different; these authors are recommending something different nowadays: simplification.

Here's another discussion on asset allocation that might be worthwhile reading:
Bogleheads • View topic - Ultimate Buy and Hold - 8 slices vs 4
Do you have some more specific pointers on how times have changed? I see eg. VFWAX (All-World ex-US Index Fund) but its expense and tax cost ratios are pretty similar to the international funds that are more localized.

The discussion you posted mentions that simpler is just as good, but doesn't make any real arguments why more funds is worse. The way I see it, if the various international funds I have turn out to be tightly correlated, then no rebalancing will happen and it will be similar to owning a larger index. If they are less correlated, then rebalancing does happen and it should lower overall risk.
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Old 01-09-2015, 11:38 PM   #27
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About the simple vs. complex discussion, my allocation is somewhat similar and I agree with nuisance. Aesthetically, there is something nice about having a small number of selections, but I do not find that there is any advantage to it, and possibly disadvantages (which are not so important to the vast majority):

If investing in no load funds with low expense ratios, investing in 4 different intl funds will be no more costly than owning 1 fund.
There is practically no additional maintenance if funds will be rebalanced once/year.
Tax considerations assume that more funds will engage in higher turnover than the single fund which may not be the case. I may be missing something on the tax implications? I'm guessing they still matter in a retirement account because the fund manager will have to pay taxes during turnover (including in passive indexes)

On the other hand, I don't think rebalancing/correlation is such an issue with a single fund because they are market capitalization weighted, so they should rebalance automatically. If one wants to have exposure to more noncorrelated markets (eg, Latin America, the far east, south asia, etc), then owning multiple funds provides a theoretical advantage in that there will be lower overall portfolio risk and a higher expected return, as long as the assets have similar expected returns (which they should based on the efficient market hypothesis), and appropriate allocations are made.
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Old 01-10-2015, 12:04 AM   #28
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As Animorph said, I don't think it's necessary to over-think this.

I'm 51 years old, and decided to go with 60/37/3 equities/bonds/cash. My equity component is now sitting at about 65%, but I'm not in a hurry to re-balance - may do so sometime this year, or if it goes even higher. As I get older, I will probably reduce the equity component a little, but doubt whether I will go much below 50%, as SS will be a stabilizing factor as that comes into play.

My equity component is divided approximately 80/20 between VTSAX and VTIAX. The bond component is VBTLX. I don't wish to complicate my portfolio more than I think it needs to be, so I keep it to just these 3 funds. That way, I can spend the majority of my time madly pottering around the house
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Old 01-10-2015, 12:14 AM   #29
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I love the honest feedback you guys are giving me. Especially Senator who even took time to dig through my posting history to see what my story is.

Several people have made comments about how 70/30 is aggressive, and it is. My understanding is that 70/30 outperforms eg. 60/40 over the long run, as long as you can stomach the ups and downs. Firecalc at 3.7% withdrawal shows them succeeding at the same rate, with the 70/30 ending portfolio being on average 19% more than the 60/40 ending portfolio. I like that because after 30 years I have another 30 to go.

The part that is as important as the AA that I haven't posted about is the withdrawal strategy. I'm still playing around with that, but the core of the plan is to cut back expenses if the market doesn't play nice (especially in the first 5-10 years). Our current budget is about 90k, which leaves plenty of room for cutting back. That's a 3.4% withdrawal rate assuming 11% overall tax rate. If the market goes down a lot in the first 5-10 years, we could hunker down and live on half that, knowing that it will recover some day and we can start eating again. If things get really bad, we would probably sell our house and relocate out of the expensive city. This reduces costs and adds some money to the portfolio.

But most of the time, the market will perform wonderfully. At least half the time the portfolio will grow, and grow, and grow so we can take out even more.

Obviously this plan is not as bullet proof as what some people are doing here. Perhaps being younger makes me more optimistic/tolerant of risk. I'm also impatient. I'm ready to start enjoying my time!
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Old 01-10-2015, 05:28 AM   #30
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Originally Posted by nuisance View Post
Do you have some more specific pointers on how times have changed? I see eg. VFWAX (All-World ex-US Index Fund) but its expense and tax cost ratios are pretty similar to the international funds that are more localized.

The discussion you posted mentions that simpler is just as good, but doesn't make any real arguments why more funds is worse. The way I see it, if the various international funds I have turn out to be tightly correlated, then no rebalancing will happen and it will be similar to owning a larger index. If they are less correlated, then rebalancing does happen and it should lower overall risk.
In the old days when some books by Bernstein, Ferri, Swedroe were written and when the likes of Merriman, Armstrong, etc, started their web sites, …

VTIAX/VGTSX(total int'l) was a fund of funds which did not allow the foreign tax credit to be taken, so folks needed to hold the individual funds in order to get that important tax break. No small caps were included in the holdings as well, so it was a large-cap fund.

There was VTMGX which was tax-managed international which had a 5-year early redemption fee of 1%, so that made it less desirable for tax-loss harvesting, so some folks avoided it. This fund was large-cap developed and did not have emerging markets.

So one had to own the Europe, Pacific, and Emerging markets funds separately to get the tax breaks, avoid the redemption fees, etc.

Then VFWIX/VFWAX/VEU was started which was not a fund of funds. It made a good tax-loss harvesting partner for VGTSX and VTMGX. The ETF share class of VTMGX was added and the 5-year early redemption fee was removed.

It was hard to get small-caps in a foreign fund, too.This was when small cap foreign was doing great. DFA had such funds, Fidelity added new ones, other companies had expensive ones (MIDAX for instance). Vanguard did not have a small-cap foreign fund until the actively-managed VINEX was started in 1996, but I think it was closed to new investors for a time, too. Then in 2009 Vanguard opened VFSVX/VSS which is the small-cap version of VFWAX/VEU. This may have been the first index fund to hold small-cap emerging markets although DFA had had a passively-managed small-cap EM fund for a while.

A little later, the fund-of-funds nature of VTIAX/VGTSX was changed and the tax laws were changed so fund of funds could make use of the foreign tax credit. Also the fund changed the index that it followed and added small-caps, too.

Overlayed on all the above was the introduction of Vanguard ETFs. Most recently the ETF share class of VTIAX/VGTSX became available: VXUS.

More ETFs from other vendors have appeared, too. In particular, the small-cap foreign developed and emerging markets have several to choose from that didn't exist 10 years ago, such as SCZ, DLS, GWX, DGS, EWX, EEMS, etc.

So when Merriman was telling everyone about following Fama & French and DFA was ascendent, all those Vanguard funds didn't even exist in their current form, but the separate Europe, Pacific, Emerging funds did, so that's what got recommended.

Sure, one can keep them separate if one wants, but every once in a while an index changes and the more narrow fund has to sell the country leaving the index. For instance, I think South Korea and maybe Taiwan have switched from Emerging to Developed. Morningstar and Vanguard have a different list of countries for Emerging and Developed. I am not sure how index providers (FTSE, MSCI, Russell, etc.) divides up developed versus developing nowadays.

Folks also debate if the small-cap and value premiums exist anymore. Also debated are whether emerging markets has decent risk-adjusted rewards as it appeared to have in the past. Certainly the 3-year return of VEMAX/VWO is pretty bad at about 4% a year.

OK, that's some history and why I wrote Times Have Changed.
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Old 01-10-2015, 11:04 PM   #31
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Thanks, LOL. That was an interesting read. I also had a good time cutting and pasting ticker symbols into Google to follow along. (Doesn't seem to be a Chrome plugin to do that for me. Something to put together once I have the time. :-))

I do want to point out that Bernstein (c) 2010 still breaks down foreign investments in several of the example portfolios. That isn't very long after your story starts, though.
Likewise Ferri (c) 2010 writes: "While buying an EAFE Index fund is a convenient way to invest in developed markets, the shifting allocation between Europe and the Pacific Rim is not the most desirable approach to asset allocation. Dividing developed markets into an equal portfolio of Europe and Pacific Rim and rebalancing annually is a better alternative than allowing your portfolio allocation to swing between the two regions." He's not just advising this because there were no appropriate funds available.

It's an interesting point that over time countries will move to a different index. But surely this would be reflected in the tax cost ratios of the various funds, and on that metric VFWAX isn't any better than VSS, VEMAX, VPADX, VEUSX.
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Old 01-11-2015, 06:23 AM   #32
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I wanted to note that VFWAX has no overlap with VSS. Together they make up VTIAX. There is nothing wrong with owning VTIAX (total international stock market index) just as there is nothing wrong with splitting it up.

Indeed, for tax efficiency reasons and depending on how much "room" one has in various types of accounts, one may wish to put split things so that the least tax-efficient ones are in tax-advantaged accounts and the most tax efficient international bits are in a taxable account.

Also one can own VTIAX and decide to overweight small caps (VSS) or emerging markets VEMAX (large) or EEMS (small) or Europe or Pacific. That is, one can do anything from simple to complex.

The idea is to figure out what you want and why you want it, then buy the tickers that get you there as opposed to just following some model portfolio.

Oh, books copyrighted in 2010 were written earlier. Much of the history I wrote about happened in 2009 and later, especially for the reconstitution of VTIAX.
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Old 01-11-2015, 06:51 AM   #33
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When people talk about Risk Tolerence I can't relate it to how I view and manage.

I more think about designing my life to be very flexible - so despite market events I can maximize my chance of relative comfort and budget stability even in a 50% 5 year market downturn etc....manage your critical expenses so that they don't get out of control and choke you in he event of money cash decrease etc....

I'm in my 30s and 4 years retired and 2 years fired
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Old 01-14-2015, 05:47 PM   #34
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Shasta, that's an interesting notion and is a bit the direction I'm thinking of going. I've been playing with cfiresim, and withdrawing 3% of the portfolio every year looks pretty good. The initial withdrawal isn't quite what I'd like, but in most cases it picks up slowly over time. If it turns out I'm retiring into a recession I'll be glad that I didn't start taking more than 3%. And you don't die with nearly as big a pile doing that than if you pick some percentage and just inflation adjust every year.
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Old 01-14-2015, 06:40 PM   #35
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nuisance (and Shasta),

The SWR methodology is useful for planning, but from what I've read, it seems like nearly everyone adjusts in bad/good years once embarked upon the journey.

Although we are quite a bit older than you, our plan is very similar--save enough to be able to live decently well on 1% of initial portfolio, then let things ride variably with each year once we pull the trigger. (Actually, we are tentatively planning 1% to 1.25% withdrawal of balance at end of each quarter, with no upper or lower bounds....) In reasonable worst case scenario, we forego the huge discretionary spending for travel/wine/restaurants and end up living "only" decently well for stretches of time.

It's all about margins of safety...
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