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Old 01-29-2008, 01:10 PM   #1
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Retired need to do this?

Is this the formula most use--after 55 and retired--to divide your finances:

45% Large cap
30% cash and bonds
10% international
10% midcap
5% small cap

Money magazine suggests this formula, and I just want to see if the consensus agrees. Do you?
And thanks for any help you can give, too!

P.S. I am sure there are posts on this somewhere, but my gosh! how long would it take to wade thru? And I know this board has some pretty knowledgeable folks on it.
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Old 01-29-2008, 01:16 PM   #2
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Quote:
Originally Posted by Orchidflower View Post
Is this the formula most use--after 55 and retired--to divide your finances:

45% Large cap
30% cash and bonds
10% international
10% midcap
5% small cap

Money magazine suggests this formula, and I just want to see if the consensus agrees. Do you?
And thanks for any help you can give, too!

P.S. I am sure there are posts on this somewhere, but my gosh! how long would it take to wade thru? And I know this board has some pretty knowledgeable folks on it.
It won't be mine. I prefer a more conservative asset allocation, with 55% cash and bonds, 45% equities. This allocation is 70:30 and mine is 45:55. I'd suggest reading some of the books available about asset allocation, because this is a REALLY personal decision! Everyone needs to figure out what works for them, not for someone else (IMO).

Here's some that I like:
All About Asset Allocation by Richard A. Ferri
The Only Guide to a Winning Investment Strategy You'll Ever Need: The Way Smart Money Preserves Wealth Today, by Larry E. Swedroe
The Boglehead's Guide to Investing by Taylor Larimore, Mel Lindauer, Michael LeBoeuf, and John C. Bogle

Happy reading, if these appeal to you!

W2R
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Old 01-29-2008, 01:23 PM   #3
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I agree it is a personal choice. For example Bill Gates could be 100 percent fixed income and never run out of money. However I will not be able to go 100 % fixed income simply because I would probably run out of money before I die.
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Old 01-29-2008, 01:34 PM   #4
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Quote:
Originally Posted by Orchidflower View Post
Is this the formula most use--after 55 and retired--to divide your finances:

45% Large cap
30% cash and bonds
10% international
10% midcap
5% small cap

Money magazine suggests this formula, and I just want to see if the consensus agrees. Do you?

No! (I hate that rag more and more every day; why did I renew it?)

Where do they get the idea to lump cash and bonds together? Frankly, I consider bonds a part of my investment plan. I once believed that bonds are useful for parking money and for balancing the portfolio. But down (equity) markets show me otherwise. I lumped a payout into a zero coupon bond fund in 1990 to balance my mostly equity holdings; my fund company tells me that that zero account has had an average annual return of 10.29% over those 17 years; it's the only account I never added to or withdrew from, so I can see what it really did.
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Old 01-29-2008, 02:27 PM   #5
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Consumer Reports analyized the market since 1940 and recommended that people stay 100% stock through retirement and if they didn't it could cost them millions in lost opportunity. They did point out that if someone thought this was too risky then they might want to consider an 80/20 allocation.

edit: The last issue of consumer reports, that this was in, has finally caused me to decide that I won't be renewing that subscription.
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Old 01-29-2008, 02:48 PM   #6
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I second W2R recommendation. There is no "consensus" on AA as that requires too many person specific variables. If you are looking for a simple solution you could go the Wellesley/Wellington or target retirement fund approach.

DD
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Old 01-29-2008, 03:08 PM   #7
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I always lump "cash and bonds" together as fixed income. If you buy a bond fund, it may have a healthy slug of cash in it anyways.

You may wish to read up on asset allocation so that you can understand where the Money article is coming from. It's possible that the stock allocation that Money gave is simply the standard total market weight for the various "caps".

But since you are reading Money, maybe you can take a step up and read about asset allocation. Here's a thread with lots of reference links:

Asset allocation tutorial?
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Old 01-29-2008, 04:26 PM   #8
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My personal investing professor gave me a printout on how much money you make in stock--using historical data--and you actually DID come out better with stock than, say, real estate and other forms. When I find it, I will post it for your information. Someone might find it interesting I figure.

Wow! Thanks LOL!....I gots me some readin' to do!!! I'll be reading that thread carefully for sure!
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Old 01-29-2008, 04:33 PM   #9
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Originally Posted by LOL! View Post
I always lump "cash and bonds" together as fixed income. If you buy a bond fund, it may have a healthy slug of cash in it anyways.

You may wish to read up on asset allocation so that you can understand where the Money article is coming from. It's possible that the stock allocation that Money gave is simply the standard total market weight for the various "caps".

But since you are reading Money, maybe you can take a step up and read about asset allocation. Here's a thread with lots of reference links:

Asset allocation tutorial?

Thanks, LOL! Most investment advice I look at doesn't bother to give an idea about how to slice up the bond section (regardless of what percentage you choose). I plan to set up a new allocation starting in the spring and I hope to have it in place by the time I rebalance in mid-July.

Am I the only one who thinks that the news reported is about stocks only: Dow, Nasdaq and S&P went up today; Nasdaq went down today; Dow and S&P, down up down up. Never: Bonds shot thru the roof this morning, 'twas a bad day for bonds.... P.S. I love the volatility of the zero fund, it feels almost like a stock fund.
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Old 01-29-2008, 04:37 PM   #10
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Orchidflower - In general the bond/cash (fixed income) portion of your portfolio lessens the volatility but also lessens the return. The AA you listed is a bit hot (too low an allocation of bonds) for some retired. On the other hand there are some in here that are 100% equities. You can check sites like Fidelity for sample AA to get an idea of historical upsides and downsides - the final selection usually has more to do with what your stomach can take than with the expected return.

You may also want to goggle "lazy portfolios" to see some sample portfolios and how they have done. Good luck.
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Old 01-29-2008, 04:37 PM   #11
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Originally Posted by Marquette View Post
Consumer Reports analyized the market since 1940 and recommended that people stay 100% stock through retirement and if they didn't it could cost them millions in lost opportunity. They did point out that if someone thought this was too risky then they might want to consider an 80/20 allocation.

edit: The last issue of consumer reports, that this was in, has finally caused me to decide that I won't be renewing that subscription.
There was a thread on that Consumer Reports article a while back. I think they should stick to reviewing minivans and microwaves.
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Old 01-29-2008, 04:44 PM   #12
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The vanguard Star is as "risky" as I get and it is about 63% stocks.
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Old 01-29-2008, 04:49 PM   #13
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My personal investing professor gave me a printout on how much money you make in stock--using historical data--and you actually DID come out better with stock than, say, real estate and other forms.
AFAIK that is true historically over a long period of time 100% stocks is the highest return. In the long run it works, in the long run we're all dead. Can you afford to have your portfolio cut 50% just into retirement? I can't. I have a target retirement fund as my main retirement fund and my wife has Wellesley. Then we have a few stocks, funds, ibonds; not much though, most is in those two main funds and they have worked very well for us recently.
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Old 01-29-2008, 05:43 PM   #14
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Someone posted this Dinkytown asset allocator recently - I think it might be useful for you.

Asset Allocator - Financial Calculators from Dinkytown.net
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Old 01-29-2008, 11:37 PM   #15
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Somewhere on this board, I can't remember where, it was cited that a 60/40 AA was the optimal for growth/risk protection (my words, not theirs).
I am retired. Was a raging gambling manic for most of my adult life (100% equities for the 1st 25 years). A few years ago (6 or so), I started to transition to a more conservative AA, anticipating the need to perserve my capital from dramatic (like 2000, and recent) downturns.
My AA is as follows:
Cash - 10%
Bonds - 10%
Preferreds - 9%
Muni's - 13%
US Stocks - 28%
Intl Stocks - 25% * I am heavier in this due to new global economy
REITs - 5%
Even with this, I am down a ton from the last few weeks (still -9% from my portfolio high (not counting div. and int,for simplicity). I would hate to see what it would be with my old portfolio.
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Old 01-30-2008, 09:50 AM   #16
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(Since I am new here and am quite interested in the same issue.) How does Quantext and Geoff Considine fit into this conversation?

Welcome to Quantext.com
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Old 01-30-2008, 10:16 AM   #17
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Orchidflower:

The first question to ask yourself, is how much volatility you are willing to live with on a short term (say year to year) basis. This will help determine the stock/bond ratio you can live with.

On the conservative side, you also have to look at the effects of inflation over long periods of time. This puts a floor on how small your equity % should be. The longer your retirement, the higher equity % you need to keep up with inflation.

THEN - consider first going with only one or two funds. A good balanced or target retirement fund can take care of your diversification needs. You can supplement this with one other fund to fine tune the allocation ratio if you want.

KEEP IT SIMPLE is really a good idea in investing.

If you really want to do your own detailed asset allocation, then do the research. This easy to digest online book Investment Strategies for the 21st Century will be very helpful. It will also help you determine the basic equity/bond mix.

I have found financial magazines like Money virtually useless for retirement investment planning. Website like the above and Morningstar, books like "Four pillars of investing" and the Bogle book on mutual funds, are far more useful. But still, the more you research, the more you might be tempted to implement a complex investment plan. Simple ones usually do just as well with a lot less bother.

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Old 01-30-2008, 10:31 AM   #18
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if someone thought this was too risky then they might want to consider an 80/20 allocation.
I wouldn't ditch CR just because of this.. IIRC it's pretty much along the lines of Bernstein, a favorite figure here. It's more or less what I have, just 'cause I've always had it; I didn't want to sell off big chunks and pay cap gains.

I guess I could think about rebalancing now that the cap gains hit will be reduced by ohh.. 15% or so since last year's high . But I will prob. stay put; my personal rate of inflation is just too great to "risk" bonds right now, and I have (I hope) 30-40 years of road ahead, soo.. fingers crossed. I could always move back in with Mom.
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Old 01-30-2008, 10:39 AM   #19
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I wouldn't ditch CR just because of this.. IIRC it's pretty much along the lines of Bernstein, a favorite figure here. It's more or less what I have, just 'cause I've always had it; I didn't want to sell off big chunks and pay cap gains.
I've felt that, in general, their analysis of products and services has been sub-par; This just happens to be the proverbial straw.

I see no issue with choosing to be 100% equities if it fits someones risk profile. However, to recommend that everyone own 100% equities without even providing coverage for potential market failures is asinine. Maybe I'm being too harsh, but I'd liken it to running an article in 1999 that said retirees needed to be 100% tech stocks if they didn't want to lose out on extra money.

edit: And, to be honest, I'm much more of a chicken than you. I'm 75/25 but it's where my wife and I ended up after taking a long, hard look at what would let us sleep at night
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Old 01-30-2008, 10:40 AM   #20
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Ladelfina:

Obviously, over the years, you have developed the "stomach" to handle the volatility of the high equity portfolio you have. That's really what it comes down to.

Most people cannot. But one certainly can become inured to it over time. It's those first few years that are a killer for many people, and they find themselves selling equities at the worst possible time because the short term swings in the portfolio frighten them. It's far better to maintain a lower equity allocation than it is to panic sell equities during bear markets.

But, for those who can stomach it, high percentage equities wins in the long run......

Audrey

P.S. Personally, I am finding over time that I also become more concerned about the tax efficiency of my portfolio and less about volatility, and as such I have been allowing my equity % to very gradually creep up over time. As my portfolio grows, I find that I am more tolerant of the higher volatility because even with severe market drops, I can see how my portfolio is still X% higher than 2 or 3 years ago, so it just doesn't seem like a big deal anymore.
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