Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Looking for input on asset allocation
Old 08-04-2013, 12:02 AM   #1
Full time employment: Posting here.
ER Eddie's Avatar
 
Join Date: Mar 2013
Posts: 721
Looking for input on asset allocation

I'm fairly new to investment. Currently my money is in three Vanguard funds: Target Retirement 2015, Life Strategy Moderate Growth and Wellington funds. As I've been learning more, I have seen a number of shortcomings in my current setup.

To make a long story short, I'm thinking about shifting everything to the asset allocation below. But, since I'm still pretty new at this, I thought it would be a good idea to check it out with the forum first, before I went ahead.

For context, I am 51 years old, and I plan to shift from full-time to part-time work in about one year. I will continue working part-time as long as I enjoy it. As far as risk tolerance goes, I am probably in the moderate or perhaps low-moderate range.

Anyhow, here is the allocation I'm thinking about. Tell me if this seems reasonable:

All funds purchased through Vanguard.

60% stocks, 40% bonds.

Of the stocks, 70% would be in US funds, 30% in international.

Of the US stocks:
- 60% in Vanguard 500 Index fund
- 20% in Mid-cap Index fund
- 20% in Small-cap Value fund

Of the international stocks:
- 75% in Developed Markets Index fund
- 25% in Emerging Markets Index fund

Of the bonds:
- 50% Short-term Index Bond fund
- 50% Intermediate Term Index Bond fund


Does that seem about right? Is there anything significant that I am overlooking?

Thanks in advance for any input.
__________________

__________________
ER Eddie is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-04-2013, 12:51 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,619
You could simplify this and have a similar asset allocation.

First, did you know that Total Int'l Stock Market index is about 25% emerging markets already? So instead of those 2 int'l funds, you could simply have a Total Int'l Stock Market index fund.

By the same token, for US stocks, you picked 3 funds. You could have simply chosen the Total US Stock Market index fund. Is there some reason that you split US into 3 funds? If you wanted to tilt to small-cap, you could have 2 funds: Total US Stock Market Index and a Small-cap value index fund.

Your current Target Retirement and Life Strategy funds hold the Total Int'l Stock and the Total US Stock funds, don't they?
__________________

__________________
LOL! is offline   Reply With Quote
Old 08-04-2013, 07:24 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,433
Your target AA is exactly the same as mine. I have ER'd about 18 months.

On the bond side, I hold 6% (~ 18-24 months of spending) in cash and cash equivalents (3% in an online savings account and 3% in short term bonds) and the remaining 34% in bonds. Of the 34% in bonds, 80% are domestic bonds and 20% are international bonds and the domestic bonds are 80% investment grade and 20% high yield.

I would suggest that you consider adding some international bonds and possibly some high yield bonds to the bond side.

Another thing you could do is to have Vanguard's financial planners do a plan for you and see what suggestions they have. And I agree with LOL! that you can simplify your funds.

Another thing to consider is tax efficient placement of your portfolio. Luckily, my tax deferred accounts are large enough to hold my entire bond allocation plus some equities and my taxable and tax-free accounts are all equities.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 08-04-2013, 09:07 AM   #4
Full time employment: Posting here.
ER Eddie's Avatar
 
Join Date: Mar 2013
Posts: 721
Quote:
Originally Posted by LOL! View Post
You could simplify this and have a similar asset allocation.

First, did you know that Total Int'l Stock Market index is about 25% emerging markets already? So instead of those 2 int'l funds, you could simply have a Total Int'l Stock Market index fund.
Good suggestion, thank you. I was trying to reach the 25% percentage for emerging markets suggested by Steven Davis (Retire Early, Sleep Well), but perhaps 19% (what the Total fund allocates to emerging markets) is close enough.

Quote:
By the same token, for US stocks, you picked 3 funds. You could have simply chosen the Total US Stock Market index fund. Is there some reason that you split US into 3 funds? If you wanted to tilt to small-cap, you could have 2 funds: Total US Stock Market Index and a Small-cap value index fund.
Yeah, that was the result of my tweaking Mr. Davis' recommendation, which was for a 50/50 split between what he called the S & P 500 fund (now the Vanguard 500) and small cap. I wasn't comfortable with so much in small cap, so I tweaked his percentages so it was 50/25/25, large/medium/small. Perhaps I overcomplicated things.

If I can just use the Total US Stock index fund, plus a small cap index fund to "tilt" in that direction, that might do the trick. Seems like small cap is a good place to be, and I've only got 3% in it right now. I want that closer to about 25%.

Quote:
Your current Target Retirement and Life Strategy funds hold the Total Int'l Stock and the Total US Stock funds, don't they?
They do, and they have the advantage of also holding about 8% in the International Bond Index funds that Pb4uski mentions. On the other hand, they have about 15% in International Stock index funds, and I'd like it to be about twice that. The Retirement 2015 fund is too conservative for me, with only about 52% in stocks, and no longer fits my plans (I will continue to work part-time). They also have slightly higher expense ratios than the Admiral index funds.

Quote:
Originally Posted by pb4uski View Post
I would suggest that you consider adding some international bonds and possibly some high yield bonds to the bond side. [...]
Thanks, that's a good idea about adding international bonds. I hadn't considered that. I don't know what high yield bonds are, so I'll probably steer clear of those until I know more.

Quote:
Another thing to consider is tax efficient placement of your portfolio.
Yes, I wish I understood this piece better. Every time I try to read about it, my eyes glaze over, lol. I'll come to grips with it eventually.
__________________
ER Eddie is offline   Reply With Quote
Old 08-04-2013, 09:51 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,433
Quote:
Originally Posted by ER Eddie View Post
.....I don't know what high yield bonds are, so I'll probably steer clear of those until I know more.

Yes, I wish I understood this piece better. Every time I try to read about it, my eyes glaze over, lol. I'll come to grips with it eventually.
High yield bonds are just bonds issued by issuers whose credit rating (by Standard & Poors, Moody's or Fitch) are lower than investment grade so while there is more credit risk (that the issuer will have financial troubles and be unable to pay interest or principal) they also offer higher returns.

The basic premise of tax efficient placement is that you want to hold investments that generate higher levels of income that is taxable in tax deferred accounts and hold investments that generate lower levels of income that is taxable in taxable or tax free accounts. In my case, most of the dividends from my equity mutual funds are qualified dividends and are not taxed for someone in my tax bracket, so those investments go into my taxable account. On the other hand, dividends from bond mutual funds are subject to tax so those investments go into my IRA which is tax-deferred. See this link for details.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 08-04-2013, 09:55 AM   #6
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,460
One thing I notice when members post their YTD portfolio returns is how similar they are despite the different asset allocations. The same hold true at B*heads when they compare different portfolio structures. Here is a recent blog post by Mebane Faber comparing different portfolio returns. Asset Allocation Strategies Mebane Faber Research Stock Market and Investing Blog

The law of diminishing returns applies here. More tweaking will result in lower marginal benefit. In other words, the allocation looks fine, the major asset classes re covered, and you can put a lot more time and effort into it but aren't likely to get that much more as a result.

+1@pb4uski's suggestion to focus on tax. It has potential to deliver more future spendable $ now that your basic allocation scheme is set.
__________________
MichaelB is online now   Reply With Quote
Old 08-04-2013, 01:05 PM   #7
Full time employment: Posting here.
ER Eddie's Avatar
 
Join Date: Mar 2013
Posts: 721
Yeah, I've been playing around with Vanguard's Portfolio Tester, and I've noticed that most of the tweaks I introduce don't change the historical performance much at all (average return, gains in good years or losses in bad years, etc.) -- at most, it's by a few tenths of a percentage point. Still, it's fun to play around a little.

Here's what I've got now:

60/40, stocks/bonds.
Of stocks, 75% in US, 25% international.
Of bonds, 80% in US, 20% international.

So it would be 5 index funds:

- Total Stock Market Index (90% of US stocks)
- Small-cap Value Index (10% of US stocks)
- Total International Stock Index (25% of all stocks)
- Intermediate-Term Bond Index (80% of bonds)
- Total International Bond Index (20% of bonds)

Average expense ratio is 0.10%, which is a little less than before (0.16%). The large/med/small cap ratio is now 58/25/17, which suits me better than the previous 85/12/3). I get all "ok" messages on my analysis -- no more "caution" or "consider" notes -- which I take to be a good sign.

Even though it probably won't make a whole lot of difference in the outcome, I do think I have considerably more diversification now, a bit fewer expenses, less redundancy, and more emphasis on international and small-cap funds, which were lacking before. I also think it will be easier for me to understand how my portfolio is doing (vs. the lumpy funds I had before) and to rebalance it when necessary.
__________________
ER Eddie is offline   Reply With Quote
Old 08-04-2013, 02:02 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,619
That's a good asset allocation, but YOU have to believe in it or you will not follow it through good times and bad times. At least you have written it down, so now write down how you will rebalance and when you will rebalance.
__________________
LOL! is offline   Reply With Quote
Old 08-04-2013, 04:44 PM   #9
Full time employment: Posting here.
ER Eddie's Avatar
 
Join Date: Mar 2013
Posts: 721
I believe, baby, I believe! I've never been one to try to time the market. I'm not that smart, and from what I've seen, no one else is either. I understand that this is a "buy and hold" philosophy, designed for the long haul. I am only just now arriving at what I feel is minimal competence in this area. I don't think I'll be someone who thinks he knows how to tweak percentages in response to market trends. As long as I've got something reasonably solid, I'll just sit on it and wait.

Aside from yearly tweaks to get things back in line, I may change the percentages when I enter bona-fide retirement (i.e., stop working part-time) or when I get to around 60.
__________________
ER Eddie is offline   Reply With Quote
Old 08-04-2013, 05:39 PM   #10
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
To the OP : very rarely you will find consensus about AA on this website. Some posters are more risk takers than others. So let me ask you : what level of AA are YOU comfortable with ?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 08-04-2013, 05:58 PM   #11
Thinks s/he gets paid by the post
Major Tom's Avatar
 
Join Date: Nov 2009
Location: SF East Bay
Posts: 3,129
Quote:
Originally Posted by obgyn65 View Post
To the OP : very rarely you will find consensus about AA on this website. Some posters are more risk takers than others. So let me ask you : what level of AA are YOU comfortable with ?
I don't see a great deal of disagreement over different AA's between members here. I think you have experienced a lot of questioning in the past due to the fact that your portfolio consists almost entirely of fixed income investments and thus represents an extreme (in this group, at least).

For the majority here who rely, to different degrees, on equities, I don't see much dissent.

I'm trying to remember the last argument I saw between someone who was 50/50 and someone who was 70/30...........
__________________
ER, for all intents and purposes. Part-time income <5% of annual expenditure.
Major Tom is offline   Reply With Quote
Old 08-04-2013, 06:09 PM   #12
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
You may have missed some interesting threads :-)

However, it seems that the posters at Bogleheads may be more conservative than here on average (more like me) and have a higher fixed income portion of their AA. I may be wrong, though.

Quote:
Originally Posted by Major Tom View Post
I don't see a great deal of disagreement over different AA's between members here. I think you have experienced a lot of questioning in the past due to the fact that your portfolio consists almost entirely of fixed income investments and thus represents an extreme (in this group, at least).

For the majority here who rely, to different degrees, on equities, I don't see much dissent.

I'm trying to remember the last argument I saw between someone who was 50/50 and someone who was 70/30...........
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 08-04-2013, 06:30 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,976
Quote:
Originally Posted by obgyn65 View Post
However, it seems that the posters at Bogleheads may be more conservative than here on average (more like me) and have a higher fixed income portion of their AA. I may be wrong, though.
Do you have any basis for stating Diehards tend to be more conservative? I'd guess Bogleheads typically have the same or higher equity exposure AA's than members here, mostly because the average age there is lower as it's not a retirement forum. No in depth research/evidence but this shows 87% of them fall between 20-70% equity, often considered the most popular AA ranges. Bogleheads &bull; View topic - Poll for 65+ Seniors
Attached Images
File Type: jpg image.jpg (153.0 KB, 17 views)
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 08-04-2013, 06:32 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
Quote:
Originally Posted by Major Tom View Post
I don't see a great deal of disagreement over different AA's between members here. I think you have experienced a lot of questioning in the past due to the fact that your portfolio consists almost entirely of fixed income investments and thus represents an extreme (in this group, at least).

For the majority here who rely, to different degrees, on equities, I don't see much dissent.

I'm trying to remember the last argument I saw between someone who was 50/50 and someone who was 70/30...........
Me neither, anything from 40/60 to 80/20 is considered fine and FireCALC and most other retirement calculators will show only modest difference in survival rates, max SWR what have you within that range. Most long forum members understand that and don't argue much with in the range.

Since this is an Early retirement board, I think this is primarily for those retired or planning on retiring between 45 and 62, if somebody below 45 wants a 100% equities that also seems fine, and somebody over 62 wants only 20% equities that is cool also.
__________________
clifp is offline   Reply With Quote
Old 08-04-2013, 06:39 PM   #15
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Point taken. As I said, I may be wrong but it's the impression I got.
Quote:
Originally Posted by Midpack View Post
Do you have any basis for stating Diehards tend to be more conservative? I'd guess Bogleheads typically have the same or higher equity exposure AA's than members here, mostly because the average age there is lower as it's not a retirement forum. [/URL]
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 08-04-2013, 08:41 PM   #16
Full time employment: Posting here.
ER Eddie's Avatar
 
Join Date: Mar 2013
Posts: 721
Quote:
Originally Posted by obgyn65 View Post
To the OP : very rarely you will find consensus about AA on this website. Some posters are more risk takers than others. So let me ask you : what level of AA are YOU comfortable with ?
I'm pretty comfortable with the AA I laid out, based on what I know, such as it is. Some of the advice I was getting made me a little edgy. For instance, Steven Davis, whose book Retire Early, Sleep Well was very educational (and an easy read for a newbie like me) advised a higher percentage in small caps and international funds than I was comfortable with, so I dialed those percentages back a little.

I was just checking with the forum to see if I'd made any huge boners. Apparently only small ones.
__________________
ER Eddie is offline   Reply With Quote
Old 08-05-2013, 02:50 PM   #17
Recycles dryer sheets
In-control's Avatar
 
Join Date: Mar 2007
Posts: 319
Quote:
Originally Posted by MichaelB View Post
One thing I notice when members post their YTD portfolio returns is how similar they are despite the different asset allocations. The same hold true at B*heads when they compare different portfolio structures. Here is a recent blog post by Mebane Faber comparing different portfolio returns. Asset Allocation Strategies Mebane Faber Research Stock Market and Investing Blog

The law of diminishing returns applies here. More tweaking will result in lower marginal benefit. In other words, the allocation looks fine, the major asset classes re covered, and you can put a lot more time and effort into it but aren't likely to get that much more as a result.

+1@pb4uski's suggestion to focus on tax. It has potential to deliver more future spendable $ now that your basic allocation scheme is set.
I agree. If you have a well deviersified balanced fund allocation is built into a well balance fund - that'swhat the management fee is supposed to be for. Last year my Vanguard FP told me that I did not have enough international exposure. I explained to him that the Wellesley Income fund that I am in has a 6% exposure and as long as I can get between 7-8% yield per year while l having the lowest possible risk I was good.

I originally had multiple funds but have simplified to just a few. My main fund is VG Wellesley. I have two funds that are higher risk, VG Health and High yield Corp. Both are @ 5% allocation. I keep my allocation of 40% Stocks/50% bonds/10% cash by moving $ between Fidelitys Stock and Bond index funds in a IRA account. This keeps my Cap Gains low.

John Bogle suggests using your age for your bond allocation. This assumes that your retiring in your mid 60's I believe. He also suggest having a Total Stock and Bond Market index fund and that's it. Suggesting that the companies that make up those index funds are global and capture that market.

Simplisity may be boring - but you have less stress and you get, from my experience, the same or better results. I also try to stay away from lifestyle funds as they charge a fee for the fund then a fee for each individual fund within that fund. All this just for an allocation % which you can acieve using the portfolio tracker asset allocation tool and a handful of index funds.

__________________
Just Trekking thru!
In-control is offline   Reply With Quote
Old 08-05-2013, 09:19 PM   #18
Recycles dryer sheets
 
Join Date: Dec 2011
Posts: 77
Suggest checking out David Swensen's Yale Endowment permanent portfolio. it's an AA one keeps the same in all market conditions, hence the "permanent" part.
__________________
web_diva is offline   Reply With Quote
Old 08-05-2013, 09:33 PM   #19
Thinks s/he gets paid by the post
photoguy's Avatar
 
Join Date: Jun 2010
Posts: 2,301
Quote:
Originally Posted by ER Eddie View Post
Anyhow, here is the allocation I'm thinking about. Tell me if this seems reasonable:
How different is your proposed allocation from your existing one? It's hard to say because your existing funds are mixes.

It might help compare the two, if you put your data into a tool like morningstar's x-ray and see how much change there really is.
__________________
photoguy is offline   Reply With Quote
Old 08-05-2013, 09:45 PM   #20
Full time employment: Posting here.
ER Eddie's Avatar
 
Join Date: Mar 2013
Posts: 721
Quote:
Originally Posted by photoguy View Post
How different is your proposed allocation from your existing one? It's hard to say because your existing funds are mixes.


It might help compare the two, if you put your data into a tool like morningstar's x-ray and see how much change there really is.

I did -- I used Vanguard's tool, called the Portfolio Tester, where you can run before & after analyses to your heart's content.

The most significant changes were:

1. The ratio of large to med to small cap stock investments changed from 84 large/13 med/3 small (before) to 58 large/25 med/17 small (after). Before, Vanguard was giving me a "caution" signal that my ratios were overemphasizing large caps, but not anymore. The new ratios are more in line with the actual market, with a little extra emphasis on small cap value funds (my preference).

2. Investment in international stocks rose from from 16% to 25% (of total stocks). Percentage of US stocks dropped a similar amount. Before, Vanguard was suggesting I consider investing more in international funds.

3. Investment in international bonds went from about 7% to 20% (of the bond funds). Percentage of US bonds dropped accordingly.

I think that gives me a little more diversification, and it shores up areas where I was under-invested.

There were a couple of non-quantifiable changes, too:

4. It's now simpler for me to understand, since each fund is a single type, whereas before, each fund was a mixture of many types, so it was hard to know what an increase or decrease meant. Now I can understand what is going on more easily.

5. Before, my portfolio seemed rather hodge-podge and redundant (e.g., TR 2015 and the Life Strategy funds are very similar). Now it seems more clear cut and in line with the "all-index, all the time" approaches suggested here and elsewhere.


Overall, I feel good about it. I think I came away with a more clear-cut, understandable, and diversified mix.

I appreciate the input.
__________________

__________________
ER Eddie is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 10:23 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.