Question specifically for the older/wiser (50+)

[azanon]

I'm 33, and currently have my monies spread amonst several mutual funds, both domestic and international, with an emphasis on "growth" type strategy. Except for a short term MM fund which i have about 6K in, and my checkbook which tends to have ~ 2K in it, i'm 100% stock.

If you were my age, and striving for an ER in your 50s, where would your allocations be just speaking generally, such as stocks, bonds, real estate, etc.

I know that a lot of you older (wiser) guys tend to be quite conservative, but i'm not sure to what extent I should assume that's simply because of your age, because you're no longer working and thus are risk adjusting based on that.

Am i insane to be 100% stock now? I guess i "think" i'm diversified because since i have mutual funds, i probably actually own several 100 companies, and with a 40% international weighting, those companies are spread all over the globe. I'm pretty sure i have the gut to stick out the volitality because that's exactly what i did from late 1999-2002 when i took a major beatdown.

 

[brewer12345]

Re: Question specifically for the older/wiser (50+

I think it is perfectly rational for you to be 100% stock or nearly so at your stage in the game. You will be dumping in a lot of cash over the next few decades, so volatility shouldn't be a big deal. You aren't depending on the portfolio for living expenses, so who cares if it jumps up and down in the short term? I would, however, point out that it is quite likely that you would get the same returns (or nearly so) with less portfolio volatility with 10% bonds and smidgens of commodities, real estate, and timber.

 

[malakito]

Re: Question specifically for the older/wiser (50+

I'm 35 and like you am nearly 100% in stocks as well, so I don't think you're insane at all. Like you, I also suffered through 2000-2002 without selling but enjoyed 2003.

malakito.

 

[azanon]

Re: Question specifically for the older/wiser (50+

Yeah i had a nice 03' too.  Glancing at quicken, i had a net worth rise from 60K to 125K in jan 03-dec 04.  Net worth for me includes house, cars valued by KBB, any/all loans, and liquid cash investments.

 

[JOhn Galt]

Re: Question specifically for the older/wiser (50+

I agree. At 33, you are not "insane". In fact, I would never say that about anyone's diversification
decisions, even if they were older. I might so opine
regarding their politics, but I digress At your age
with the info you supplied, I think you are just fine.
If it was me, I would have a significant chunk in real estate, but's that's just a personal preference of mine
and not for everyone, obviously.

JG

 

[unclemick]

Re: Question specifically for the older/wiser (50+

DCA and time in the market - nothing's changed. The old numbers said north of 15 years kept you safe. Also, if you can slice and dice, value average or use some other technique to buy more when your stocks are down - faith in De Gaul will pay off.

 

[azanon]

Re: Question specifically for the older/wiser (50+

I might so opine
regarding their politics, but I digress

Haha!  I really like you JG.  BTW, have you by chance been watching Boston Legal?  Its a liberal show but Shackner makes some hilarious comments in support of republicans. My favorite actor in it, and on all of TV, is without a doubt, James Spader.

Re Real estate and back on topic, you without a doubt know a lot more abour Real Estate than me JG, but, generally speaking, isnt Real Estate a really bloated, overpriced market right now?  I thought the RE market has sort of been resembling stocks in the 90s, meaning it could burst at any time.

 

[John Galt]

Re: Question specifically for the older/wiser (50+

Hello! I watch very little TV, and so have not seen Boston Legal. I am kind of a Shatner fan though so maybe I should check it out.

Real estate is only "bloated" in certain areas. Bargains
abound in many many others. But, it can involve a lot of work and like most things, you are more likely to
win if you start with a lot of knowledge and
experience.

Totally off topic and to unclemick, I just finished a book
on 'Jack the Ripper' and was musing about whether he
may have been the originator of "slice and dice"?
Not sure, but according to the book he did not diversify
at all.

JG

 

[Hyperborea]

Re: Question specifically for the older/wiser (50+

I would, however, point out that it is quite likely that you would get the same returns (or nearly so) with less portfolio volatility with 10% bonds and smidgens of commodities, real estate, and timber.

Ok, so if one has a world market capitalization weighted equity portfolio (or something close to it in equity diversification) what would you consider as a reasonable "smidgen" to have of commodities, real estate, and timber?  How would you practically hold these investments to minimize costs and taxes?  These types of investments are often expensive and tax unfriendly.

 

[Hyperborea]

Re: Question specifically for the older/wiser (50+

Except for a short term MM fund which i have about 6K in, and my checkbook which tends to have ~ 2K in it, i'm 100% stock.

For me anyways that's too light on "readily accessible" money. I've got a good bit more than that spread amongst CDs, SBs, and bank account float. If I lost my job and the market tanks (not neccessarily uncorrelated events either) then I want to be able to afford to support everything for at least 6 months with enough margin of safety.

 

[azanon]

Re: Question specifically for the older/wiser (50+

For me anyways that's too light on "readily accessible" money.  I've got a good bit more than that spread amongst CDs, SBs, and bank account float.  If I lost my job and the market tanks (not neccessarily uncorrelated events either) then I want to be able to afford to support everything for at least 6 months with enough margin of safety.

Not all of my stock investments are in retirement vehicles.  I have about 15K in a taxable utility fund atm that could be liquidated and transferred to my checking account via ACH transfer within a week or two, and if i was really in a bind, i could pay a small fee to have the money wired to my bank account.

Further, i have about 7K worth of leave surplus from my job, and i think the fed government gives you a severance pay on the order of about 10K or so if you get laid off/fired/RIF'ed.

As a last resort, i can put my pride on the shelf and call my dad for help who's worth about 2mil liquid atm + assets .

Oh yeah, also we're a double income family, so it'd be highly unlikely we'd both lose our jobs at the same time. If one of us lost one, we'd just buckle down and go into high frugile mode.

I essentially agree with you though; ideally i'd like to see that MM fund get up to 10-15K eventually..... i'm gettin there .

 

[brewer12345]

Re: Question specifically for the older/wiser (50+

Ok, so if one has a world market capitalization weighted equity portfolio (or something close to it in equity diversification) what would you consider as a reasonable "smidgen" to have of commodities, real estate, and timber?  How would you practically hold these investments to minimize costs and taxes?  These types of investments are often expensive and tax unfriendly.

I'd be surprised if most of us don't have a decent chunk of our assets in tax sheltered accounts, which are naturally the perfect place to stuff any tax-unfriendly asset classes. As far as what to buy, I personally hold PCRDX for commodities (buy PCRIX instead if you can). For real estate, one's own home is not a bad start. REITs are also readily available via ETFs. The only way I know of that youcan easily and cheaply buy timber exposure is a publicly traded company, PCL.

My MIL has a portfolio I helped her set up as a model long term retirement portfolio. It is more return focussed than income-oriented because she has a big, fat pension, so its probably not suitable for the more risk averse ERs out there. It includes 5% REITs, 5% commodities, 5% TIPS, and another 15% exposure to short term bonds (duration ~2). The rest of the portfolio is a mix of US and global stocks, with allocations to domestic and international indexes, some small cap exposure, and a chunk in DODGX (LC Value).

I'm still working my way there, but it is where my portfolio is headed over the next couple of years.

 

[azanon]

Re: Question specifically for the older/wiser (50+

It is more return focussed than income-oriented because she has a big, fat pension, so its probably not suitable for the more risk averse ERs out there.

I should have pointed out this rationale is a large reason why i'm going 100% stock.  My pension wont be fat if i retired at normal age (58 ), but it'd be 30% of what i made full time + my wife and i would both get SS.  (i dont follow the doomsday belief that SS wont be there when i get old(er)).

Basically, my investments would only have to cover the difference.

 

[Hyperborea]

Re: Question specifically for the older/wiser (50+

I'd be surprised if most of us don't have a decent chunk of our assets in tax sheltered accounts, which are naturally the perfect place to stuff any tax-unfriendly asset classes.

I've got some limits there as a %age of my assets.  I've got a rollover IRA with old 401ks in it but I'm reasonably hopeful that it will never get any new money before I retire (I'm reasonably happy with my current employer and they with me - so I want to hang out here until retirement in 6 or so years).  By the time I retire it will have shrunk to be approximately 5-10% of my total portfolio depending on what kind of returns happen to those funds.  That is my only freely investable tax-sheltered account.  The 401k at work has good funds but nothing "exotic" - we do get good US index, international index, and DFA micro-cap value funds so I can't complain too much.

Given an account that will "shrink" as a percentage of one's portfolio to say 5% which of the diversifiers would you consider the most important?  Commodities?  Real estate (I already own a home in a "hot" market)?  Timber?  Foreign bonds?  And most important, why?

The only way I know of that youcan easily and cheaply buy timber exposure is a publicly traded company, PCL.

There are direct timber investments available and I've looked at some of them but they have generally one of two problems.  They involve you directly in another country's taxation system and figuring out how it interacts with the US one OR it's in some country with little or no taxation and they look to be barely above the level of a scam.

Some of the more "honest" appearing are:
http://www.kauaitimbers.com/projections.html

http://www.greenplan.co.nz/default.asp

http://www.forestenterprises.co.nz/

I'm still working my way there, but it is where my portfolio is headed over the next couple of years.

In about 6-7 years I'll likely be able to move my investments around a lot more with little to no concern for tax implications so I will readjust quite a bit at that time.

 

[brewer12345]

Re: Question specifically for the older/wiser (50+

Hyper, given that you already have RE exposure, I would probably say to put the commodities in the limited tax deferred space. They have the least correlation with other asset classes, especially in times of trouble. For other asset classes, especially real estate via REITs and possibly even foreign bonds, I bet you could pretty easily get access to those asset classes in a tax deferred manner via a low cost variable annuity from TIAA-CREF, Vanguard, or Fidelity. TIAA-CREF, for example, has a real estate fund with a good track record and very low expenses which can be bought in an annuity wrapper for cheap.

 

[Nords]

Re: Question specifically for the older/wiser (50+

Am i insane to be 100% stock now?  I guess i "think" i'm diversified because since i have mutual funds, i probably actually own several 100 companies, and with a 40% international weighting, those companies are spread all over the globe.   I'm pretty sure i have the gut to stick out the volitality because that's exactly what i did from late 1999-2002 when i took a major beatdown.

You sound perfectly sane to me, although spouse & I are only in our mid-40s.

Volatility is only relevant if you (a) need the money, or (b) have trouble sleeping at night. Otherwise it's generally correlated with higher returns for patient investors.

Since at least one of you guys is likely to remain employed, your $6K might be all the cash stash you need. Aside from dear old dad, you can handle emergencies from salaries or even credit cards. Another option might be a no-cost HELOC from a local credit union.

 

[Hyperborea]

Re: Question specifically for the older/wiser (50+

Hyper, given that you already have RE exposure, I would probably say to put the commodities in the limited tax deferred space.  They have the least correlation with other asset classes, especially in times of trouble.

Yeah, I've been bouncing mentally back and forth between the commodities and the foreign bonds. I'm still not happy about the fees on PCRDX though.

For other asset classes, especially real estate via REITs and possibly even foreign bonds, I bet you could pretty easily get access to those asset classes in a tax deferred manner via a low cost variable annuity from TIAA-CREF, Vanguard, or Fidelity.  TIAA-CREF, for example, has a real estate fund with a good track record and very low expenses which can be bought in an annuity wrapper for cheap.

Not really worth it for me to open an annuity in the US. I'll be gone in about 6-7 years and then I won't be worrying about US taxes. At that point it will be far better to have capital gains in taxable accounts as they will be untaxed by the US and low/no taxed by another country.

 

[nwsteve]

Re: Question specifically for the older/wiser (50+

 I'll be gone in about 6-7 years and then I won't be worrying about US taxes.  At that point it will be far better to have capital gains in taxable accounts as they will be untaxed by the US and low/no taxed by another country.

Brewer,
Are you not US citizen? Others here can confirm but it is my understanding that unless you are not US or give up your citizenship, you owe the IRS no matter where you live. There are exemptions for living and working overseas but there are limits and it must be earned income I believe.
Others?
nwsteve

 

[MSDOGS1976]

Re: Question specifically for the older/wiser (50+

I was basically 90-100% stocks under the age of 40. Now that I am close to retirement, I have pulled in my horns. I use the 100 rule now, 100 - age = amount to maintain in equities. I own PRWCX and plan to put 5% in a REIT fund in the future. The balance is in I-Bonds, t-bills and cd's. Good luck with your plan!

 

[Hyperborea]

Re: Question specifically for the older/wiser (50+

Brewer,
Are you not US citizen?  Others here can confirm but it is my understanding that unless you are not US or give up your citizenship, you owe the IRS no matter where you live.  There are exemptions for living and working overseas but there are limits and it must be earned income I believe.
Others?
nwsteve

Actually, you were quoting me, Hyperborea, and not Brewer. Yes, I am not a US citizen and I will be out of the US long before I need to worry about the expatriation taxes (these will hit a US citizen even if they give it up or a green card holder if they have been in the US too long).

 

[azanon]

Re: Question specifically for the older/wiser (50+

Aside from dear old dad, you can handle emergencies from salaries or even credit cards.

Yeah its sort of a nice-to-know thing mainly because I'd exhaust every option before going to him. Its not because he wouldnt freely help me, if not even feel good about helping me in a time of need, its just that I spent 20+ years finally earning his respect as a man and protector of my family, and I wouldn't want to take any action that might lessen his perception of me.

 

[brewer12345]

Re: Question specifically for the older/wiser (50+

Yeah, I've been bouncing mentally back and forth between the commodities and the foreign bonds.  I'm still not happy about the fees on PCRDX though.


.

I'm not thrilled with the fees on PCRDX and I might eventually open an account with Vanguard or someone like that just so that I can get access to PCRIX, but for now it isn't worth the trouble. I am OK with ponying up in the meantime because the data was so compelling, and commodities have a relatively high negative correlation with small caps, which I am heavily over-weighted in.

 

[soupcxan]

Re: Question specifically for the older/wiser (50+

Personally, I would never go 100% equities. One look at the 20-year graph of the Nikkei tells me that long term bear markets are possible even in developed economies. I don't believe that this scenario will play out in the US but anything is possible. So, I go for a 50/50 split of US/Intl equities with plenty of other asset classes to balance things out (including various types of bonds).

 

[Jane]

Re: Question specifically for the older/wiser (50+

Like soupcxcan, I am not comfortable with 100% stock either. I am 31 (planning to retire in early 50's) and I have 75% equities, 25% bonds + GIC as my overall portfolio (plus 3K in chequing and 15K in savings account). My dh though (who is investing for the first time) is 100% stock (we'll see which portfolio comes up ahead in 20 years).

My thinking is that the longer investment period you have, the less risk you need to take.

Jane

 

[soupcxan]

Re: Question specifically for the older/wiser (50+

Personally, I do not put much stock in time diversification because I think it rests on the assumption that there will not be any structural changes in the marketplace during your investment horizon. For example, if the equity risk premium declines for some reason (more investors, more intelligent investors, some unforseen external factor) then all the time diversification in the world isn't going to help you. On the other hand, if the risk premium remains constant, then time diversification can help smooth out the noise (volatility) from period to period.

Both sides make convincing arguments and cite interesting data to support their claims.

My thinking is that the longer investment period you have, the less risk you need to take.