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Old 07-03-2012, 05:41 AM   #41
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Vanguard won't show me my cost basis until they run their batch jobs again, but from memory my unrealized short-term capital gains were ~$2500 and long-term gains were ~$6500. That should put me at ~$1500 in tax in order to shift those funds from an S&P 500 fund to a total market fund and from a balanced fund to a total bond fund.

Is it worth $1500 to make my asset allocation look a bit more like everyone else's?
Its not so much like everyone else's - it should be to your target AA that is consistent with the risk you are willing to assume. Since I hate paying taxes it would be a tough call for me.
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Old 07-03-2012, 01:44 PM   #42
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Well, they say AA is important but they also say it doesn't matter.

I've never cared, only looking at this balance once or twice a year and not doing much more than saying "hmm, that's interesting." I suppose I'm pretty tolerant of risk, at least until I have an ER plan worked out.

So I guess I'm going to leave it where it is and just do the cash transactions.
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Old 07-03-2012, 02:32 PM   #43
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Old 07-03-2012, 02:35 PM   #44
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Hey, all I'm saying is that nobody has ever convinced me that AA* really matters, other than in a fuzzy "am I comfortable with the risk" sort of way.

I don't really worry about fuzzy stuff like that, so unless I see some numbers or am captivated by some good reasoning, I'm just not gonna give a hoot. I strongly suspect that in the long haul it really doesn't matter much.

* except for the cash, that's deflating in my .5% interest checking account so it will be reallocated
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Old 07-03-2012, 02:45 PM   #45
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Hey, all I'm saying is that nobody has ever convinced me that AA* really matters, other than in a fuzzy "am I comfortable with the risk" sort of way.

I don't really worry about fuzzy stuff like that, so unless I see some numbers or am captivated by some good reasoning, I'm just not gonna give a hoot. I strongly suspect that in the long haul it really doesn't matter much.

* except for the cash, that's deflating in my .5% interest checking account so it will be reallocated
I think you are OK with that thinking. I don't have the exact numbers handy, but from what I recall, FIRECALC reports a pretty flat response to a long-term AA of anywhere from ~ 40% EQ up to 90% equities. Dropping Equities below ~ 35% was where there was a pretty steep drop-off in success rates, only a gentle drop at 100%.

This is why I question ERs that say they want a high % of fixed income to 'reduce risk'. They may reduce volatility, but they are almost certainly increasing their risk of depleting their portfolio. For me, that is the ultimate measure of financial 'risk'.

If someone is really the type that would freak out over a 30% market drop, sell at the low and then get back in when everything looks like sunshine and puppies, then maybe they should stick with fixed income. But they should be aware that the numbers say they are going to have to drop their 'SWR' considerably. Do some FIRECALC runs to check for your particulars.

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Old 07-03-2012, 11:35 PM   #46
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Well, they say AA is important but they also say it doesn't matter.
I've never cared, only looking at this balance once or twice a year and not doing much more than saying "hmm, that's interesting." I suppose I'm pretty tolerant of risk, at least until I have an ER plan worked out.
So I guess I'm going to leave it where it is and just do the cash transactions.
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Hey, all I'm saying is that nobody has ever convinced me that AA* really matters, other than in a fuzzy "am I comfortable with the risk" sort of way.
I don't really worry about fuzzy stuff like that, so unless I see some numbers or am captivated by some good reasoning, I'm just not gonna give a hoot. I strongly suspect that in the long haul it really doesn't matter much.
* except for the cash, that's deflating in my .5% interest checking account so it will be reallocated
Let's put a couple things into perspective.

AA matters when you're talking about the difference between a portfolio of 100% stocks and another portfolio of 100% cash. The first would beat inflation if its volatility didn't scare the bejeezus out of its owner, and the second is actually even nastier because the owner sleeps soundly at night without realizing they're being ravaged by inflation.

However AA does not matter when you're going from 51% stocks/49% cash to 50% stocks/50% cash. At that small a change, rebalancing doesn't matter either-- mathematically anyway.

What matters in that last situation is that the owner has made a plan ("I want a 50/50 portfolio...") and they're sticking to it ("... and I'm going to rebalance when it gets to 51/49"). Having a plan avoids lost sleep, obsession over the financial media, and "winging it".

An AA devoted to one stock is way too risky ("single stock risk") while an AA devoted to 30 stocks is probably a prudent risk (although at least one of those stocks is still likely to go to zero). Going from 30 stocks to 600 (or 1500) doesn't substantially change the volatility.

An AA heavy in company stock is way too risky if that company is also your employer. Exhibit "A" for this syndrome is Enron, where the employees lost both their income and their 401(k)s at the same time.

The significance of AA is that you should learn enough about it (from Bogleheads or from Otar) to choose an AA with which you're comfortable. Whether that AA is 25/75 or 75/25 probably doesn't matter-- the difference) won't make you obscenely rich or penniless. What will matter is having the confidence in your learning (and, much later, your experience) to stick to that AA no matter how gloomy CNBC or the stock markets seem to be. What will keep you poor is bailing at the bottom and jumping back in at the top. With the strength of your convictions, hopefully based on your knowledge instead of on the hand-holding of an advisor, you will not sell out at the bottom of the market and rush back in just before the next top. Instead you'll pick your AA and rebalance whenever it meets your criteria. If the market drops a thousand points, you won't think "OMG I have to cash out!!" Instead you'll think "Hunh-- wonder if I should rebalance." You'll check your AA and end up buying some of the assets at low prices while selling some of the other assets at high prices.

I can think of a couple situations where AA mattered to a few posters:
1. Dex, perpetually gloomy & doomy, jumped out of the markets last August (or was it Aug 2010?). The stock market quickly shot up. In retrospect, Dex nailed it-- he got out exactly at the bottom and missed the subsequent runup. If he'd just rebalanced to his AA he would have saved himself a lot of hyperbolic hypothecating. I believe Dex no longer posts here.
2. Dixonge, who admitted up front that his ER strategy was "insane". His AA was very heavily skewed to options, and IIRC the volatility eventually nailed him with margin calls. BTW you need to PM Dixonge about ERing to Mexico.
3. VaCollector, who kept buying BofA stock a few years ago because it just kept getting cheaper and cheaper. When they cut their dividend to a token penny/share, it also came close to ruining him. If he'd had an AA limited to a max percentage for a single stock then he probably would've still sunk a lot of money into BofA, but he would have avoided risking the rest of his portfolio for it.

As for paying taxes enroute your new AA, it's up to you. You can do it overnight (and pay some taxes) or you can do it gradually from income (and pay less taxes).

The point is that you have a plan, that you be confident in it, and that you stick to it.

----------

Low-yielding cash accounts: You are falling prey to the phenomenon known as "chasing yield". Asset allocation means using cash to dampen your portfolio volatility and to have an emergency fund. You should not give a crap what yield that cash is earning-- that's not its purpose. Instead you should be looking forward to being able to use some of that cash when stocks are on sale, or to having it available when you need it for an emergency. The one-time gains you get from those situations (stocks on sale or a discount for cash) will more than make up for years of minimal yield. Would you rather earn 2%/year with a near certainty of one sharp 20% loss somewhere during that 10 years, or would you rather earn 0.5%/year with the possibility of one 10% gain?

----------

I suspect that once you get through the Bogleheads or Otar reading, you'll feel more comfortable about the dispute over whether or not AA matters.
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Old 07-04-2012, 12:15 AM   #47
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I think you are OK with that thinking. I don't have the exact numbers handy, but from what I recall, FIRECALC reports a pretty flat response to a long-term AA of anywhere from ~ 40% EQ up to 90% equities. Dropping Equities below ~ 35% was where there was a pretty steep drop-off in success rates, only a gentle drop at 100%.

This is why I question ERs that say they want a high % of fixed income to 'reduce risk'. They may reduce volatility, but they are almost certainly increasing their risk of depleting their portfolio. For me, that is the ultimate measure of financial 'risk'.


-ERD50
While I do think AA matters I think there are many ways to skin the retirement cat. As ERD say anything between 35%-100% equities is doable in retirement and less if you are Groucho . Personally my AA has varied dramatically in my 13 years of being retired from a low of a bit over 50% equities in 2000 to high of near 90% in the last few years. There are plenty of professional portfolio managers and most brokerage who put out suggestion for over or under weighting a particular asset class.

I don't put much stock in their recommendations, but it is worth noting that a lot of big funds to change their AAs.

In my case I really focus on simple question. Will this particular asset class provide a reasonably high probability of achieving a 3-3.5% real return over the next decade to support my retirement? Back in 2000 with TIPs having real yields of almost 4% and AA Munibonds over 5.5% bonds were very attractive. Stocks at historic highs were less attractive especially tech and growth stocks.

Currently bonds I think have near zero chance of doing this, my existing CD portfolio (4.2%) is close but still will lose to taxes and inflation. Stocks I think are fairly value , but the dividend yield of 2% I think will keep up with inflation and there is decent chance of some capital appreciation.
I have started to shift assets to real estate since I think they have best chance of exceeding the 3.5% real return over the next decade.
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Old 07-04-2012, 02:42 AM   #48
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And nobody thinks the OP's international is a bit high? (it's just a question.)
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Old 07-04-2012, 07:20 AM   #49
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And nobody thinks the OP's international is a bit high? (it's just a question.)
It is higher than I would prefer. My target is for international equities is 25% of total equities. OP is almost half.
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Old 07-04-2012, 01:18 PM   #50
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And nobody thinks the OP's international is a bit high? (it's just a question.)
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It is higher than I would prefer. My target is for international equities is 25% of total equities. OP is almost half.
Another perpetual debate.

I guess the answer depends on how the question is framed. If one of the assets in a portfolio went up or down by 25% in a month, how much would it affect the total portfolio? And would you care?
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Old 07-04-2012, 01:57 PM   #51
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I am in the close is good enough camp. My equity allocation is currently 33% but it will be growing as I load up during the bottom. When will that be?
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Old 07-04-2012, 02:16 PM   #52
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I am in the close is good enough camp. My equity allocation is currently 33% but it will be growing as I load up during the bottom. When will that be?
LOL will tell us in a special edition of his market-timing newsletter...

I have high hopes for a low Aug-Sep.
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Old 07-04-2012, 02:40 PM   #53
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I am in the close is good enough camp. My equity allocation is currently 33% but it will be growing as I load up during the bottom. When will that be?
You may have missed it.

Portfolio has already recovered back to the March-April highs. I even bought some Higgs Bosons recently which I expect to sell for huge profit once folks figure out how important they really are.
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Old 07-04-2012, 02:50 PM   #54
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I even bought some Higgs Bosons recently which I expect to sell for huge profit once folks figure out how important they really are.
I sure hope you can prove that it was a legit purchase.

I've heard that CERN's LHC staff has been looking high & low for them ever since they turned up missing during inventory, and if you happen to have the drones they seek then they're gonna be seriously pissed off...
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Old 07-04-2012, 03:40 PM   #55
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AA matters when you're talking about the difference between a portfolio of 100% stocks and another portfolio of 100% cash.
That's a good point. I suppose I came off a bit brash / hyperbolic. What I really meant was "AA doesn't really matter as long as the allocation isn't extreme. Whether it's 20/80 or 80/20, I'm not going to get excited."

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Low-yielding cash accounts: You are falling prey to the phenomenon known as "chasing yield". Asset allocation means using cash to dampen your portfolio volatility and to have an emergency fund. You should not give a crap what yield that cash is earning-- that's not its purpose.
I hear what you're saying but in this case my real issue isn't chasing yield it is not using the cash for the right purpose. It was sitting there out of pure negligence.

A year ago that cash was sitting there, neglected, because I didn't know what I was going to do with it. Down payment? Education? Travel?

Now I want to whittle it down to two years of living expenses ($40k) and put the rest to work getting me closer to ER. That's reasonable yes?

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Instead you should be looking forward to being able to use some of that cash when stocks are on sale
I touched on this in an earlier post. I have no idea when stocks are on sale or not and I certainly can't predict when it will happen. Rather than letting it sit in the hopes that I notice a downturn and then act on it, I'd like to buy & forget. In the past I spread my purchases out ($500 a week went into an index fund) to deal with price volatility.

Considering I have $60k to invest today, do I buy now or wait for a sale (risky) or set up some auto investments to run over the next 6 months or so?

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And nobody thinks the OP's international is a bit high? (it's just a question.)
I personally have no opinion on this but I can say that I modeled it after the bogleheads wiki: Lazy Portfolios - Bogleheads
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Old 07-04-2012, 10:52 PM   #56
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What I really meant was "AA doesn't really matter as long as the allocation isn't extreme. Whether it's 20/80 or 80/20, I'm not going to get excited."
Yep.

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Now I want to whittle it down to two years of living expenses ($40k) and put the rest to work getting me closer to ER. That's reasonable yes?
Yep.

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I touched on this in an earlier post. I have no idea when stocks are on sale or not and I certainly can't predict when it will happen. Rather than letting it sit in the hopes that I notice a downturn and then act on it, I'd like to buy & forget. In the past I spread my purchases out ($500 a week went into an index fund) to deal with price volatility.
Considering I have $60k to invest today, do I buy now or wait for a sale (risky) or set up some auto investments to run over the next 6 months or so?
You have two main choices with a third option, and you should choose the one where you're more likely to follow through.

You seem to favor the buy/hold/set/forget model, so you'd probably be happiest with dollar-cost-averaging over the next six months. Set up six monthly purchases and don't worry about the markets.

If you wanted to seek value then you'd wait until your chosen ETFs/funds dropped below their long-term averages during a nasty recession. You'd invest your stash through one or two buys when you guess the prices are near a bottom. The problem with that is spending several years waiting while second-guessing yourself, especially if the economy happens to be starting into a multi-year bull market.

A third choice is to make six monthly purchases. But rather than buying the same amount every month, instead use value averaging: buy enough each month to bring that asset's allocation back in line with the rest of the portfolio. The theory is that you'll buy more the month after that asset goes down, and less the month after that asset goes up. But it's more monitoring and effort.

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I personally have no opinion on this but I can say that I modeled it after the bogleheads wiki: Lazy Portfolios - Bogleheads
Well, again, the key to choosing your portfolio is finding one that lets you sleep at night. If you don't particularly care which one seems "best" then just choose one that makes you happy. It doesn't particularly matter whether it's too high in international equities or triple-leveraged inverse-indexed beever-cheeze futures other assets. If it seems "good enough" then you can stop the analysis paralysis (which frequently happens during asset allocation discussions), put your plan in motion, and go live your life.

Personally I think any asset allocation smaller than 15% is a waste of time & effort. (Decimal points are a waste of time & effort too.) If you can't build a portfolio with just six blocks then you need to redesign the portfolio. I also think that rebalancing for anything less than five percentage points of change is also a waste of time & effort, although some investors find value in the discipline of annual rebalancing.

There are many roads to ER, but they all get there.

One last time: the two most important aspects of the investment plan are setting it in motion and sticking to it.
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