Less agressive Allocation?

[Bimmerbill]

I am currently:

12% bonds
33% S&P 500 Index
35% EAFE Index
20% Russel 4500 Index

I've been doing a lot of reading and wonder if I am being too agressive. My time line is about 20 years. I worry about a big correction, then worry I will miss a market run up if I reallocate...

I've been agressive because I will have two COLA'd pensions (reserve military and federal gov't FERS) to pad things a bit.

I've been thinking of going 30% (or 40%) bonds to guard against a big market correction. My bond allocation is the G fund in the TSP.

Anyone have any ideas, or similar concerns?

 

[brewer12345]

Hard to see why you would need more than 20 to 25% bonds. But I would diversify another way: add some international bonds, commodities, maybe a market neutral fund like MERFX.

 

[Gone4Good]

I am currently:

12% bonds
33% S&P 500 Index
35% EAFE Index
20% Russel 4500 Index

I've been doing a lot of reading and wonder if I am being too agressive. My time line is about 20 years. I worry about a big correction, then worry I will miss a market run up if I reallocate...

I've been agressive because I will have two COLA'd pensions (reserve military and federal gov't FERS) to pad things a bit.

I've been thinking of going 30% (or 40%) bonds to guard against a big market correction. My bond allocation is the G fund in the TSP.

Anyone have any ideas, or similar concerns?

Your allocation is fine for your time horizon, but is it right for you? If you're thinking of upping your bond allocation because you're fearful of a market correction, maybe your portfolio is a bit riskier than you're comfortable with. Better to make the switch now than after a correction.

 

[FinallyRetired]

With two COLAd pensions I think you can afford to be aggressive, especially if you can live mainly off the pensions, and let the rest of the money ride. I have one COLA pension, and keep telling myself I should be more aggressive (I'm 40% equity). It's easier to tell someone else than to do it oneself.

 

[Nords]

I've been agressive because I will have two COLA'd pensions (reserve military and federal gov't FERS) to pad things a bit.

You can calculate your monthly income that you'll be receiving from those pensions.

Take a look at the latest I bond or TIPS yields (whatever govt bond includes a CPI kick) and figure out how much of them you'd have to buy to throw off that same monthly income.

I bet you find out that you're a lot heavier in bonds (and their equivalent) than you'd expect.

 

[JustCurious]

I have seen studies that show that having less than 20% bonds results in a very small increase in long term returns, about 1/2 of one percent. Conversely, having an 80/20 allocation gives you almost the same return as 100% equity, with much less volatility. Therfore, given the very small loss of return and the greater loss of volatility, in my opinion, you should not have less than 20 percent bonds.

 

[runchman]

I recently went through similar soul-searching and changed from 100% to a 70/30 mix.

I played around with the risk/returns calculator at ifa.com with a 100% portfolio, starting with my current balance and looking at the 73/74 market.

I decided I just don't want to (potentially) stomach that magnitude of drop in my portfolio, even if it is temporary.

I figure 70/30 I'll be ok (in my head) with any portfolio swings for the next couple of decades.

My other thought that if/when the market does tank, it will feel good to be able to adjust more money into equities from the bond portion.

- John

 

[Bimmerbill]

Thanks for the insight. I know the COLA's pensions can be treated like bonds.

I've also read some articles about how bonds can cut down volitility without affecting returns much at all.

I've read some articles discussing the duration of stocks and am trying to figure out the best mix.

 

[Spanky]

Thanks for the insight. I know the COLA's pensions can be treated like bonds.

or treated as a "golden rice bowl." If it provides sufficient funding for expenses, the need for any other fix-income will be unnecessary.

 

[jIMOh]

I am currently:

12% bonds
33% S&P 500 Index
35% EAFE Index
20% Russel 4500 Index

I've been doing a lot of reading and wonder if I am being too agressive. My time line is about 20 years. I worry about a big correction, then worry I will miss a market run up if I reallocate...

I've been agressive because I will have two COLA'd pensions (reserve military and federal gov't FERS) to pad things a bit.

I've been thinking of going 30% (or 40%) bonds to guard against a big market correction. My bond allocation is the G fund in the TSP.

Anyone have any ideas, or similar concerns?

YES. You are quite aggressive. More international, than domestic. You might be able to allocate more to domestic US stocks and actually be more conservative than you are now.

Is all this in just 4 mutual funds? Maybe you want to add a 5th or 6th fund... maybe a value fund, an international bond position, or something like PRPFX which is quite diverse and defensive.

 

[Dry Socks]

Do you include your emergency cash fund in the asset allocation numbers ?

 

[Bimmerbill]

No, these numbers are just my 401K, the TSP. The TSP has limited funds available to invest in.

My national guard pension will kick in at age 60 (19 years from now) for about $600 a month, in todays dollars. Not a lot of money, but I will get medical care too.

I am still working on my FERS pension, projected to be 26% of my high 3 salary years.

 

[martyb]

Here's my TSP info:

G Fund: 17.92%
F Fund: 8.83%
C Fund: 37.30%
S Fund: 15.30%
I Fund: 20.65%

I am 100% in the L-2030 Lifecycle Fund, and this is the current allocation of the funds within that L-Fund. If you add those together, you'll see that I'm currently holding 73.25% in index funds right now, and the remaining 26.75% is in the F & G funds. The F fund is the actual bond fund, the G fund is a long-term treasury rate/government securities deal. If I leave my money in the L-2030 for the rest of my working career, which will come to an abrupt end in 5 years, 8 months, then at that time my index/stock allocation will be 67.50% which seems about right to me. Of course, there are those days when I think about getting a bit more aggressive with the international fund....If I make any changes to my portfolio at all, it will to make it MORE aggressive, not less. My situation is comparable to yours, except my retirement timeline is a bit closer than yours. I retire Jan 2013 under CSRS with almost 36 years service, and will start to collect my military pension 5 yrs later, at age 60. My initial pension in 2013 will be around 40K & the military pension will be about 14K. I figure I can afford to be a bit aggressive with the TSP, but I still don't wanna get too crazy with it!

 

[clifp]

20 years is a long-time so I think your allocation is fine, because I think over the long-term stocks will outperform even if the gap between bond returns and stock returns is reasonably likely to decrease. But if you are concerned about market volitality doubling or even tripling your bond probably won't make a huge difference in your retirement income. Try plugging the different allocations into FIRECalc
and seeing the impact. I think one reasonably easy way to this is change your future contributions to TSP, so if you are currently contributing 15% to a bond fund, double that to 30% and your bond allocation will gradually increase.


On the other stuff can happened and your Federal pension may not work out quite the way you think, new job, may retire early etc.

Somewhat OT, my first question on the board was how to I treat international funds with FIRECalc.
I never got a satisfactory answer, and see BimmerBill has 33% in EAFE, is there any plans to update FIRECalc to include international funds?

 

[Olav23]

I am not sure there is a Russell 4500. Do you mean the Wilshire 4500 or the Russell 2000?

 

[kaudrey]

Hi Bill,

As others have said, you have to go with what you are comfortable with.

Having said that, I am 15 years out and also will have a FERS pension. I have about 10% of my holdings in bonds and 5% in money markets - the rest is all stocks/funds. I have a pretty high risk tolerance, so I am comfortable with fewer bonds, but that's me.

I don't think your allocation is bad. You have more international than I do (I have about 25%), but I have both EAFE and emerging markets.

Karen

 

[ChrisC]

I figure I can afford to be a bit aggressive with the TSP, but I still don't wanna get too crazy with it!

Well, I think I've gone crazy after seeing your post. I plan to retire under CSRS in 2010, with 31 plus years of service. I have a TSP and 401K account, with this allocation:

TSP

49% - C Fund
30%- S Fund
21%- I Fund

401K

23.5% - Balance Fund
8.5 %- Growth/Income Fund
27.5%- Mid/Small Cap Value
24.7%- Large Cap Value
5.5%- Bond Fund
10.2%- Technology Fund

I view my CSRS pension as the equivalent of a Treasury Bond Fund. And my allocation with that in mind, isn't really that bad at all. It's around 75% equities and 25%bonds.

 

[LOL!]

This is an interesting discussion to me. When one has a couple of COLA pensions, one could argue that they are like bonds and allow one to take on more risk in they normally would.

But one could make the counter argument that with COLA pensions, you are gonna be all set for retirement and you do not need to take on as much risk and try to get a higher rate of return because you got those pensions to back you up.

So figure out how much return on average you need to get to reach retirement nirvana. Adjust your equity:fixed ratio to get that rate of return. See also some of stuff that Rick Ferri has written: http://www.portfoliosolutions.com/v2/main.aspx?id=books/seriousmoney

 

[ChrisC]

The goal of reaching retirement nirvana is obviously based on the lifestyle you wish to attain in retirement. Once you're in retirement there's no sense in delaying gratification for things that we want. The kids are generally in good shape (assuming they don't boomerang on us and that contingency is partially taken into account in an emergency fund) and our parents probably have enough funds for LTC. We've done too many dress rehearsals already. We'll just leave a little spare change for the kids when we finish our partying!

I'm aggressive because I'm shooting for the stars in retirement, but if my investment decisions result in bad returns, I'll settle for the moon. At some point, the stars might be within our reach -- then I'll go conservative and invest everything in the "G" fund and its equivalent. LOL

 

[Nords]

This is an interesting discussion to me. When one has a couple of COLA pensions, one could argue that they are like bonds and allow one to take on more risk in they normally would.

Sounds logical, and it's an asset-allocation issue.

But one could make the counter argument that with COLA pensions, you are gonna be all set for retirement and you do not need to take on as much risk and try to get a higher rate of return because you got those pensions to back you up.

This sounds more like an emotional debate. It's certainly illogical to be concerned about taking risks with money that you don't need. That's pretty much my definition of "riskless".

If I don't need the money, then why would I care what could happen to it? Perhaps the most Vulcan-logical thing to do would be to give the money away to charity or to hire a professional money manager. I'd have put the money in the hands of someone who needed it or someone who'd be willing to figure out what to do with it. Then I could stop worrying and sleep better at night.

If I cared about the money then that could imply that I thought I might need it. In that case I'd try to quantify the need and perhaps hedge my bets-- half into I bonds for my long-term care fund and half into small-cap international emerging-market b33ver-cheeze futures. On margin. After all, I have what I need and I couldn't care less what happens to the rest. In fact maybe I should put it all on black at the Bellagio.

If I was just worried that I'd screw up my stewardship of the money then I'd try to figure out what would provide the best long-term return-- after all, I don't need the money so I might as well go for historical performance with minimal expenses. In that case I'd put it all in equities-- perhaps a world equity fund or a split between international equities and the Wilshire 5000. I might buy a couple hundred individual stocks (thus reducing my annual expenses to zero) or buy low-ER ETFs or index funds. And I'd reinvest the dividends.

Or I could decide that, since I didn't need the money, I'd spend it on things I didn't need-- college scholarships for my local high school, a Ferrari Testarossa, a month-long sabbatical at the Chicken Ranch, a world tour aboard the QEII, or annual gifts to all my family & relatives. Take your choice, or take your vitamins and try for all of the above.

I certainly wouldn't bury it in the back yard-- or in Treasuries.

BTW Tweedy, Browne's literature brought up this question for a retired woman with "more than enough" who had no idea how to invest the rest. She spent some of it, gave some away, set some aside for her family (grandkid college funds, house down payments), and invested the rest in Berkshire Hathaway.

See also some of stuff that Rick Ferri has written: http://www.portfoliosolutions.com/v2/main.aspx?id=books/seriousmoney

Rick's a good writer and I've read most of his stuff but I can't tell which of the 16 chapters you're specifically referring to here. Are we still talking about investing money that's not needed?

 

[Bimmerbill]

Sorry, meant Wilshire 4500.

CSRS.... drool... I missed this by quite a few years unfortunately, starting with the feds in 1993.

I've considered my pensions as bonds too. Hard to estimate them tho since they begin in 19 years and 16 years. I guess they are deferred?