Pimp My Portfolio

[bbuzzard]

I started my annual re-balancing, and I thought I would run this past the experts here for feedback. Keep in mind my investing style is moderately aggressive. Currently, I plan to FIRE in 5 years (95% probability). The main change is that I am increasing my international and bond exposure, and reducing my US large cap exposure.

Current
Large Cap - 40.5% (Vngd 500 Index and Vngd Tax-Managed Capital Appreciation)
Mid Cap – 14.4% (Vngd Mid-Cap Index)
Small Cap – 18.0% (Vngd Small-Cap Index and Vngd Tax-Managed Small-Cap)
REIT – 9.8% (Vngd REIT Index)
International Developed – 7.1% (Vngd Developed Mks Index and Vngd Tax-Man Intl)
International Developing – 1.0% (Vngd Emerging Markets Stock Index)
Bonds – 3.8% Vngd Short-Term Treasury and Vngd Intermediate-Term Treasury)
Cash – 5.2% (Bank and Vngd Treasury Money Market)

Proposed
Large Cap – 30% (Vngd 500 Index and Vngd Tax-Managed Capital Appreciation)
Mid Cap – 15% (Vngd Mid-Cap Index)
Small Cap – 15% (Vngd Small-Cap Index and Vngd Tax-Managed Small-Cap)
REIT – 10% (Vngd REIT Index)
International Developed – 10% (Vngd Developed Mks Index and Vngd Tax-Man Intl)
International Developing – 5% (Vngd Emerging Markets Stock Index)
Bonds – 10% Vngd Short-Term Treasury and Vngd Intermediate-Term Treasury)
Cash – 5% (Bank and Vngd Treasury Money Market)

In additional to this portfolio, I hold stock in a professional partnership worth 8% of my total equity+bond+cash portfolio. This stock is not liquid, as it is cashed out over 5 years (20%/year) when I sell/quit. Thanks for you feedback, I get a lot of good ideas from this forum. Fire Away!

[mickeyd]

Pretty nice mix. From the AA I assume that you have a fairly good percentage in taxable accounts not tax-deferred (tax managed accounts noted). What % is tax deferred?

Since you are only 5 years from retirement, I would consider increasing your FI from 15% (10+5) to 30-40. Of course, if you have pension(s) that will generate an income stream of some significance, maybe 20-30% would do it.

[bbuzzard]

Quote:

Originally Posted by mickeyd From the AA I assume that you have a fairly good percentage in taxable accounts not tax-deferred (tax managed accounts noted). What % is tax deferred?

Good question, I should have provided this information. Taxable/Tax Deferred is 53%/47% not counting stock in the professional partnership; 57%/43% counting this stock.

[bbuzzard]

Quote:

Originally Posted by mickeyd Of course, if you have pension(s) that will generate an income stream of some significance, maybe 20-30% would do it.

Second good point/question. No pension. Zero. Nada. I intend to FIRE at 48, so I am also a long time from SS (if ever ).

[brewer12345]

I'd be lower on REITs and Domestic Large Caps, and add allocations to foreign bonds and commodities. I would also think about swapping out some mid and small cap exposure for more international equity exposure.

[bbuzzard]

Quote:

Originally Posted by mickeyd Since you are only 5 years from retirement, I would consider increasing your FI from 15% (10+5) to 30-40?

With current low interest rate, I am having a really hard time convincing myself to purchase FI instruments. I know the experts indicate otherwise, and that I am not thinking completely rationally here. However, I am even having trouble moving from 8.1% to 15%. Maybe next year I will convince myself to go to 20 or 25%.

[bbuzzard]

Quote:

Originally Posted by brewer12345 I'd be lower on REITs and Domestic Large Caps, and add allocations to foreign bonds and commodities.

I have considered lowering the REIT given that there is a lot of REIT exposure included in the index funds. Had not given any though to international bonds.

How would you accomplish the commodities exposure? Perhaps sector funds? This is an area I have thought about but am relatively ignorant of.

[REWahoo]

Quote:

Originally Posted by bbuzzard ... I am even having trouble moving from 8.1% to 15%. Maybe next year I will convince myself to go to 20 or 25%.

Hey, if the market takes a dum.....uh, goes south, you may get there without having to do anything!

[mickeyd]

Quote:

With current low interest rate, I am having a really hard time convincing myself to purchase FI instruments.

Sounds like you are trying to time that market. IMHO, this is not good for any long term investment strategy. In other words, if you believe that your asset allocation should contain more FI, then you should take action to get it where it needs to be ASAP.

You do not know what interest rates will be tomorrow, but you do know what your AA should be tomorrow. Waiting can prove to be a losing proposition.

[brewer12345]

Quote:

Originally Posted by bbuzzard I have considered lowering the REIT given that there is a lot of REIT exposure included in the index funds. Had not given any though to international bonds. How would you accomplish the commodities exposure? Perhaps sector funds? This is an area I have thought about but am relatively ignorant of.

PCRIX or DJP. The latter is suitable for taxable accounts and trades like a ETF.

[bbuzzard]

Quote:

Originally Posted by mickeyd Sounds like you are trying to time that market.

You are correct, sir! Emotions can rule even when you know they should not.

[edit typo: your -> you]

[Spanky]

Quote:

Originally Posted by brewer12345 PCRIX or DJP. The latter is suitable for taxable accounts and trades like a ETF.

I am still waiting for the recovery of PCRIX -- still in the red.

[BUM]

Quote:

Originally Posted by Spanky I am still waiting for the recovery of PCRIX -- still in the red.

Me too Spanky. But with the dividends added in, I'm just a bit green.

When rebalancing, I'll maintain the position..."strong-hold."

[JustCurious]

Since you plan to retire in 5 years, you have WAY WAY too much in equities. 85 percent equity is VERY risky. Do you remember what happened in 2000? What about October 1987? Were you around during 1972-74? The equity markets have suffered dramatic drops before, and it WILL happen again.

If the equity markets drop by 20 percent next year and take 85 percent of your portfolio down with it, (which means you will lose about 16 percent of the value of your portfolio) will that change your plans?? If the answer is yes, you have too much equity, plain and simple, and you have been lulled into a false sense of security by the tremendously bullish equity markets over the last 4 years since 2003. IMHO, if you plan on living off your investments in 5 years, you should not have more than 50 percent of your assets in equities, and all of it should be in broadly diversified market indexes, and should include international exposure. The other 50 percent should be in fixed income (bonds, bond funds, cash).

[bbuzzard]

Quote:

Originally Posted by JustCurious If the equity markets drop by 20 percent next year and take 85 percent of your portfolio down with it, (which means you will lose about 16 percent of the value of your portfolio) will that change your plans?? If the answer is yes, you have too much equity, plain and simple, and you have been lulled into a false sense of security by the tremendously bullish equity markets over the last 4 years since 2003. IMHO, if you plan on living off your investments in 5 years, you should not have more than 50 percent of your assets in equities, and all of it should be in broadly diversified market indexes, and should include international exposure. The other 50 percent should be in fixed income (bonds, bond funds, cash).

Actually, part of the reason that I am so equity heavy is the fact I do not feel that I have to retire in five years (my job is not that bad), and when I do retire I will have a 3.5% SWR that is about 150% of what I currently spend. Therefore, I feel comfortable accepting more risk. I do agree that I do not have enough in bonds, and I am considering upping bonds to more than 10%. OTOH, I lived through the late 70s and saw bonds crater. That haunts me to this day. Holding 6% bonds when the interest rate is 14% would kill me.

[Nords]

Quote:

Originally Posted by bbuzzard I do agree that I do not have enough in bonds, and I am considering upping bonds to more than 10%. OTOH, I lived through the late 70s and saw bonds crater. That haunts me to this day. Holding 6% bonds when the interest rate is 14% would kill me.

What do you want the bonds for? I'm not "for" or "against" bonds, but it pains me to see someone buying an asset class that they know is going to make them sorry.

If you want income you could try short-term CDs or dividend-paying stocks. Or you could try reducing volatility by holding other asset classes.

[poyet]

Bonds are certainly as dangerous an asset class as are stocks, perhaps even worse as they ruin with certainty their holders over the long term. They can also ruin them over the short term when rates rise and go against them as everybody know.

I see two possibilities:

1) your portfolio is large enough and you count on it to make a living when ER in 5 years. Then you need to protect it more and TIPS, CDs (as Nords suggested), RE funds, div paying ETFs, whatever is appropriate should be included. In that case holding bonds (especially bond funds) is not a protection of any kind as you noticed from your experience or memories ;

2) your portfolio needs to grow for whatever reason (you don't need it to make a living in 5 years, you think that capital is made to grow, etc.) and therefore you need to remain exposed to stocks to the risk of missing your ER target in 5 years ? In that case large caps are cheaper than mid and small caps at the moment (why sell them ?), and EM stocks are cheaper than developed countries stocks, with an emphasis on Russia, Poland, China (Shangai), Brazil for example. You could keep some cash to put it at work if a good opportunity arise next year when indices hit their MM200 average as it happened in June this year as long as markets remain bull (take a simple criterion as Roc(MM200)>0 on more than 2/3 indices of the markets you're exposed to).

Then the decision is yours. I am ERed and 100% in stocks on a large portfolio as I do not need it to make a living and suppose that capital is made to grow. I keep 10% of this portfolio for my trading activities.

[brewer12345]

Quote:

Originally Posted by Spanky I am still waiting for the recovery of PCRIX -- still in the red.

Then you are missing the point of the investment.

[Spanky]

Quote:

Originally Posted by brewer12345 Then you are missing the point of the investment.

I am still holding it.

[FinanceDude]

Quote:

Originally Posted by poyet Bonds are certainly as dangerous an asset class as are stocks, perhaps even worse as they ruin with certainty their holders over the long term. They can also ruin them over the short term when rates rise and go against them as everybody know.

That is an irresponsible statement supported by air.

[quoye]Then the decision is yours. I am ERed and 100% in stocks on a large portfolio as I do not need it to make a living and suppose that capital is made to grow. I keep 10% of this portfolio for my trading activities.
[/quote]

I hope you're well diversified, being 100% in stocks. Just because YOU hate bonds, doesn't mean that we should all sell our bonds and go 100% stock like you......... :P :P