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Old 05-16-2010, 12:39 PM   #21
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I don't follow the asset allocation strategy because it relies on total return, which I find too erratic. If I happen to have capital appreciation that is great, but I don't count on it. My focus is on the income. People usually make the argument that dividends and selling shares are no different, which I just agree to disagree on. I think they are different.

If I were building a portfolio of stock funds, I would not buy anything that doesn't have at least a 2% dividend yield. The reason for that limit is that you can receive a 2% real return from bonds. I have no expectations in regards to share price, but I do expect for the dividend yield to, on average, grow every year, keeping up with or exceeding inflation.

I don't buy anything unless the income makes sense. For bonds, I track my own inflation rate. So, if I want to see what my current real return is going to be if I hold to maturity, I subtract my inflation rate from the bond yield.

If I want to determine if a bond fund or a stock fund is better to buy then I compare the dividend yield of the stock fund to the yield minus my inflation rate for the bond fund. Then I also take into account the characteristics of each asset.

Generally the way I judge stocks and bonds is by the characteristics of their income stream.

The benefit of bonds is that the yield is stable and predictable. The benefit of stocks is that the yield can grow and typically will outpace inflation. The downside of bonds is that the yield is stable, and will not adjust to inflation. The downside of stocks is that the yield can fluctuate, and go down.

One more important consideration is taxes. Stocks are more tax efficient in a taxable account, but it is much more than just because of qualified dividends. The reason is that with a stock fund the dividends are taxed on a "real yield" and bonds are taxed on the entire yield, i.e. the "nominal yield".

With a stock I feel comfortable spending the entire dividend. With a bond fund I need to reinvest my inflation rate. If I don't do this then over time my bond yield will decrease in real terms. A down side to this is of course that the government is going tax the full nominal yield.
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Old 05-16-2010, 12:46 PM   #22
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The question is: Where are we in the cycle? I think we have been in a cyclical bear market since 2000. It hasn't fully played out.

Looking at history is good, but picking the correct reference point to begin is key.

The next 10 years may be like none we have experienced in our lifetimes. The debt issue has not fully played out. Although, the recent focus has been on Europe, the USA is in worse shape when you factor in the state's debt issues.
USA National Debt + USA National Budget Deficit + States' Debt + States' Budget Deficits = Crisis with limited or no solution

Cash Flow needs over the next 10 years should guide your investments - allow for inflation, and increase in taxes.


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Old 05-16-2010, 05:51 PM   #23
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Or you can be realistic and assume it will merely be different.

Kidding aside, you are correct that we simply do not know. That said, I wonder if you are trying to overthink your AA. My philosophy is the simpler the better - ever considered something along the lines of 50% Wellesley & 50% Wellington?
Your comment on just simply investing in Wellesley/Wellington made me go back to my trusty Quicken investment return calculator. My annual average return from early 1987 (when I started investing) to this past Friday is 7.21 % per year. This involved an enormous level of slicing and dicing, as many as 35 funds at one time and many many hours of research and fretting and going over prospecti sp? till eyes crossed. The same period return on Wellsi/Welltn? 7.63% !
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Old 05-16-2010, 06:06 PM   #24
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Your comment on just simply investing in Wellesley/Wellington made me go back to my trusty Quicken investment return calculator. My annual average return from early 1987 (when I started investing) to this past Friday is 7.21 % per year. This involved an enormous level of slicing and dicing, as many as 35 funds at one time and many many hours of research and fretting and going over prospecti sp? till eyes crossed. The same period return on Wellsi/Welltn? 7.63% !
Yep. I'm also a graduate of the School of Overcomplicated Asset Allocation.

Watch this space - we're planning a class reunion in a couple of years. I'm hoping to have my port down to only three funds by then.
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Old 05-16-2010, 06:17 PM   #25
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Your comment on just simply investing in Wellesley/Wellington made me go back to my trusty Quicken investment return calculator. My annual average return from early 1987 (when I started investing) to this past Friday is 7.21 % per year. This involved an enormous level of slicing and dicing, as many as 35 funds at one time and many many hours of research and fretting and going over prospecti sp? till eyes crossed. The same period return on Wellsi/Welltn? 7.63% !
Another vote for lessons learned from the "School of Overcomplicated Asset Allocation".

IMO, you can choose three funds wisely one balanced or broad equity index, one international, and one broadly diversified bond fund rebalance once every 2 years, and I bet you come out ahead of anything more complicated. Especially if you ignore any market event in between rebalances.

Simplicity really seems to pay off in investing. Or perhaps it's that complexity tends to be a drag on a portfolio performance because it encourages more fiddling, probably increases taxes slightly, and generally requires quite a bit more attention and thus causes more anxiety and more chances for self second guessing.

I still maintain my slices of REITs, international small caps, mid caps, etc., but I almost always wonder if it's worth all the rebalancing trouble.

Audrey
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Old 05-16-2010, 10:24 PM   #26
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I vote for the simplicity approach too. I know for myself, if the systems gets overcomplicated I run the chance of just giving up and losing interest. Similar to if my exercise routine or budget tracking gets too cumbersome..then there's a tendancy to say.."forget it, I've got better things to do with my time..."

The beauty of keeping allocations simple, such as only a few index funds is then one mostly needs to focus on percentage allocations instead of all the other details.
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Old 05-17-2010, 12:24 AM   #27
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Originally Posted by dex View Post
The question is: Where are we in the cycle? I think we have been in a cyclical bear market since 2000. It hasn't fully played out.

Looking at history is good, but picking the correct reference point to begin is key.

The next 10 years may be like none we have experienced in our lifetimes. The debt issue has not fully played out. Although, the recent focus has been on Europe, the USA is in worse shape when you factor in the state's debt issues.
USA National Debt + USA National Budget Deficit + States' Debt + States' Budget Deficits = Crisis with limited or no solution

Cash Flow needs over the next 10 years should guide your investments - allow for inflation, and increase in taxes.
I think one of the problems problems for us younger boomers is that we entered adult hood in the 1980s and the period of 1980-2000 was one of the least turbulent in the last 100 years. This relative tranquility may very well have resulted in a very good period for stocks and bonds. The 1980s had low inflation, big increases in productivity due to computers, no major wars, generally improving social situation (e.g. lower crime, teenage pregnancy, drug use, better race relations etc.) . Really only the 1920 and the 1950 were similar and the good times really only lasted for 10 years.

I think it is very hard to pick the right reference point, I do think the financial crisis of the last few years had some long term ramifications which aren't close to being resolved. Still I am cautiously optimistic that it won't be as bad as 2000-2010 or 1929-39
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Old 05-17-2010, 08:09 PM   #28
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The more comments on this thread, the cloudier things become, and the less certain I am on what to do.
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Old 05-17-2010, 08:58 PM   #29
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The more comments on this thread, the cloudier things become, and the less certain I am on what to do.
That is actually a very good thing. The forum is much more useful in telling people what NOT to do than what to do. Simply put there is a general consensus on money management mistakes e.g have all of your 75% assets in your companies stock, don't buy an variable annuity for your IRA, and don't pay a commission based financial adviser. When you get to trying to predict the future among reasonable investment, all of our crystal balls are cloudy.

When you get to the point on the forum where you ask a question a get a wide range of opinion and almost no one is saying NO DON"T DO THAT, you can be reasonably confident that all of choices are a pretty similar.

If you asked me if I was willing to risk a large sum of money to wager that my suggestion of 3 index funds plus a couple of the funds, is better over the next 30 years, than your 16 funds, or simply sticking all of your money in Wellesley I won't take that bet.

I'd probably take bet that is is better off than sticking 100% of your money in Munis or Gold, and certainly take the bet that it is better than spending 1%/year for a financial adviser.

Pick whatever makes you the most comfortable and you feel is the easiest. Then sleep well knowing that you didn't do anything stupid with your hard earned money.

Buffett's Rule 1 is Don't Lose Money. Now why I can't tell you that any of these AA won't lose money over the next few years, I feel very confident they won't over the next 10 or 20 years.
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Old 05-17-2010, 09:01 PM   #30
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Take your money, go to one of a handful of places, and say "Here's my money. Tell me what to do."

Places:

Vanguard
Portfolio Solutions
Evanson Asset Management
Asset Builder

Full disclosure: I have not used any of their advisory nor planning services.
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Old 05-17-2010, 09:07 PM   #31
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That is actually a very good thing. The forum is much more useful in telling people what NOT to do than what to do. Simply put there is a general consensus on money management mistakes e.g have all of your 75% assets in your companies stock, don't buy an variable annuity for your IRA, and don't pay a commission based financial adviser. When you get to trying to predict the future among reasonable investment, all of our crystal balls are cloudy.

When you get to the point on the forum where you ask a question a get a wide range of opinion and almost no one is saying NO DON"T DO THAT, you can be reasonably confident that all of choices are a pretty similar.

If you asked me if I was willing to risk a large sum of money to wager that my suggestion of 3 index funds plus a couple of the funds, is better over the next 30 years, than your 16 funds, or simply sticking all of your money in Wellesley I won't take that bet.

I'd probably take bet that is is better off than sticking 100% of your money in Munis or Gold, and certainly take the bet that is better than spending 1%/year for a financial adviser.

Pick whatever makes you the most comfortable and you feel is the easiest. The sleep well knowing that you didn't do anything stupid with your hard earned money.

Buffett's Rule 1 is Don't Lose Money. Now why I can't tell you that any of these AA won't lose money over the next few years, I feel very confident they won't over the next 10 or 20 years.
Well said.

I'm going to bookmark this post to use as a future reference for posters seeking "the" asset allocation.
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Old 05-17-2010, 09:13 PM   #32
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I can see your point, REWahoo. That is what makes this investment stuff so difficult. If I assume the past decade is not representative of what the future will hold then I could be pessimistic and assume it will be worse or I can be optimistic and assume it will be better. Obviously, no one really knows.
It's a big relief when you give up trying to beat the market, and are just as happy simply matching it.

Regarding Wellesley, it is a fine fund and I was in it in my accumulation stage. Now that I am approaching the decumulation stage, I prefer funds that are more clearly stocks, bonds, or cash. That way I can withdraw from the desired asset class without having to figure out how much of each dollar withdrawn was stocks v cash, etc. (as you do with balanced funds).

Another great place for Wellesley is for those who live off dividends. I just don't plan to draw down that way, though many do so successfully.

Just some food for thought. The only "right" approach is what's right for you. Just keep your stocks:bonds in the proper allocations with a rebalancing every few years.
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Old 05-17-2010, 09:34 PM   #33
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The more comments on this thread, the cloudier things become, and the less certain I am on what to do.
Well, I think you're getting some good consensus, like:

Try to set up your asset allocation with just 3 well-diversified funds.

Audrey
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thanks
Old 05-17-2010, 09:41 PM   #34
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thanks

Thanks again, everyone. I feel much more educated ... less confident ... but more educated.

It will be interesting to look back at this thread many years from now.
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Old 05-17-2010, 11:27 PM   #35
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I think it is very hard to pick the right reference point, I do think the financial crisis of the last few years had some long term ramifications which aren't close to being resolved.
Agree with that - something will collapse..


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Still I am cautiously optimistic that it won't be as bad as 2000-2010 or 1929-39
I think it will be worse than 2000 - 10.
It will fell like and we will hear it is as bad as '29-39 - the social environment is radically different. I think there will be a Republican President (and possibly a republican controlled congress) when it does happen.
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Old 05-18-2010, 07:57 AM   #36
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Thanks again, everyone. I feel much more educated ... less confident ... but more educated.

.
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Agree with that - something will collapse..




I think it will be worse than 2000 - 10.
It will fell like and we will hear it is as bad as '29-39 - the social environment is radically different. I think there will be a Republican President (and possibly a republican controlled congress) when it does happen.
The only thing I'm confident of is I plan to have plenty of med's on hand.
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