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Struggling with AA ideas........
Old 08-12-2009, 12:25 PM   #1
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Struggling with AA ideas........

I'm the guy with the wierd AA consisting of mostly Berkshire Hathaway stock-- 48% of the total portfolio. When I was working I never had a real AA plan-- I just plowed what I made into whatever stocks that looked cheap at the time (mostly Berkshire obviously). I was using the scary/dangerous plan of putting most of my eggs in one basket, but I made sure I watched the basket. Over the years it worked pretty well as I never experienced any actual losses (never sold) and had pretty returns on an average cost basis during some difficult times, although I did make a few big dumb BRK buys early in my investing career before I knew you had to not just buy, but buy at the right price, lol. I did experience quite a bit of volaltility over the years obviously, but since I was a net buyer this actually helped me.

The thing I've been strugging with lately is I just don't think I have the same mental risk profile as I did when I was working. When the market dropped so much recently I sat on my hands (and my cash) and did nothing because I was freaking out. When I was working I would have gone in with both barrels blazing buying on the cheap. I'm wondering if this may be a temporary condition since I've lost a little confidence after shutting down my business and made a big change in my life (retired young), or has my risk profile really changed forever?

If it has changed, I realize I need to do something to put things more on auto pilot so I don't have to agonize daily. The only investments I'm interested in and comfortable with and feel like I have a little bit of an edge when to buy and sell is Berkshire and the two angel investments. The rest of the stuff I have I feel like liquditaing and putting into some sort of safe, fairly mindless mutual fund AA that I would just have to rebalance every year. I never liked or had much luck with funds in a taxable account (see two below), but liked the ability to take gains when I wanted to instead. But, maybe this time it is different.

One thing I do know is I need some kind of written plan. I'm floundering around now and don't like it. Think a combination of Berkshire and a group of funds would work? What would a good group of funds be?. Most of my investments are in taxable accounts. Here is my current allocation:

Tax Rate: Federal -- 25% State of Residence-- TX

Age: 44

Pulling 2.5% of portfolio out of cash for living expenses each year (including mortgage). Wife is working, rental units are all full and paying. If wife quits SWR goes to 2.7% If wife quit and all rentals were vacent we would be at a 3.4% SWR. I don't see all the rentals going to zero, but short term I guess it could happen.

Current portfolio size : mid 7 figure portfolio size

Taxable
16.5% cash--This is about 7.5 year of living expenses if wife keeps working, or about 6.5 years if she quits. Plus, as the "managed deep value POS" liquidates my cash pile will grow.

48.8% Berkshire Hathaway (brka, brkb)

18.3% managed "deep value" account that is being turned into cash as it slowly recovers-- mostly small caps. 1% mgmt fee. Lost confidence in them, style drift problems-- they just blew it basically.

5.4% angel-type investments, locked up for 5 years
2.4% Wellesley (VWINX) .23 exp ratio

1.6% Longleaf Internatonal (LLINX) 1.6 exp ratio, about at break even after 7 years. Geeeze..

1.6% Third Ave Value (TAVLX) 1.11 exp ratio, break even after 7 years as well.

.6% conoco phillips (cop)

.4% Wells Fargo (wfc)

His 401K (soon to be rolled to Vanguard)
2.5% cash

His Vanguard IRA brokerage
1.1% Berkshire, (stupid to be in a tax advantage account, but I was just buying all I could the time)

Her IRA at Vanguard
.8% various stocks (GE, Brkb)

Kids college funds are not included in this AA.


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Old 08-12-2009, 12:41 PM   #2
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When I designed my AA portfolio, I studied a lot of what Frank Armstrong published on the web. I thought his stuff was great in terms of the implementation details - you know "rubber hits the road" or "the mechanics of it".

The links to his work still on the web seems to be missing the graphs - aaaaargh!!!, but it looks like he published a book in 2003, and google books has a lot of it available on line - The Informed Investor: a Hype-Free Guide to Constructing a Sound Financial Portfolio

You have to decide what your goals are - how long does your portfolio need to survive, how much volatility are you willing to tolerate, etc. You should also decide which asset classes you want in your mix. Then you can figure out what allocation would be reasonable across the asset classes.

Audrey
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Old 08-12-2009, 12:49 PM   #3
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Ouch. Looks a bit heavy on equities.

Have you checked out the Bogleheads web site yet? Your post is darn near exactly the right format for asking questions over there. I recommend them because you'll get good advice from some very experienced folks, including GOOD financial advisors (not annuity salesmen), in my humble opinion.

They also have a very good book list, and other reference materials.
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Old 08-12-2009, 01:07 PM   #4
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I guess you either buy into the asset allocation stuff of "The Four Pillars of Investing" and "All About Asset Allocation" or you don't. These books pretty much re-iterate the Fama & French stuff which is all espoused by Frank Armstrong and by the folks at FundAdvice.com - Home

To wit: You pick your risk tolerance by the amount of fixed income you are willing to have. So pick your stocks:bonds ratio and that's that. For you, you don't need to take much risk, so a 50:50 or less ratio of stocks:bonds would seem appropriate. There will probably not be much difference in outcomes in the range 30:70 to 50:50 anyways.

Next, your equity portion is always the same for a slice-and-dice small-and-value tiltered portfolio: 50% US, 50% foreign; 50% large cap, 50% small/mid cap; reduce growth stocks and tilt to value. Add some REITs if desired, but you have rental property, so it's probably not necessary to overweight REITs beyond what you would get in a small cap value fund.

I did see your post on Bogleheads, but it appeared that you set conditions that would preclude a response. Your conditions were essentially: "I am not going to buy into the Boglehead approach of index funds because I want to keep Berkshire Hathaway and my other investments." That's what you've told us here as well.

My recommendations:

1. Reduce amount of BRK. It's a large cap value play which is OK, but should probably not be more than 10% of your portfolio. It is very tax efficient in that it pays no dividends. But you've got to give it up. Come up with a plan to sell most of it over the next year or so.

2. Don't wait for your "deep value" account to recover. Loss aversion is a real behavioral finance trap. Get rid of it while it has a loss and use the loss to offset the cap gains on your BRK. You know: tax loss harvesting is good. Also read "Why Smart People Make Big Money Mistakes" for more help with avoiding behavioral finance traps which your post reeks of.

3. Get rid of those other actively manage large cap value funds (Third Avenue, Long Leaf). Once you realize they did better than the S&P500 because of the value tilt and maybe because of some foreign stocks, you can get value and foreign for lower expense ratios.

4. Your individual stocks seem like a distraction because they are a small amount of your portfolio. If they have a gain and you have held them a year, give them away to charity. Otherwise, sell them at a loss.

5. Now to your asset allocation. You really only need 4 equity funds there to start with. They are VTI (total stock market), VEU (total int'l stock market), VBR (small cap value index) and VSS (small cap foreign). You can have them in equal amounts. Consider BRK part of your large cap US allocation, so when you sell it, buy VTI.

You can pick other ETFs or funds, but just make sure they are low-cost index funds. For example, instead of VSS, you can pick GWX or SCZ or DLS. Instead of VBR, you can pick IJS. You may need to use these other etfs anyways when you do tax-loss-harvesting.

6. For your fixed income, look at your tax-bracket and decide if tax-exempt bonds are for you. It seems to me though that you should be in the 0% tax bracket since you can sell your losers to offset the dividend income. And return of capital is tax-free.

7. All IRAs should be in fixed income.

I don't know what else to tell you. I guess I could come over and hit you up-side the head with a two-by-four to make you do this, but it would only give you a headache. Good luck!
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Old 08-12-2009, 01:17 PM   #5
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So a $4MM portfolio all taxable might look like this:
$500K VTI
$500K VBR
$500K VEU
$500K VSS
$1000K Vanguard Total Bond Index or $1000K Vanguard Interm Term Tax Exempt, check your taxes
$1000K Vanguard Short Term Bond Index or $1000K Vanguard Short-Term Tax Exempt.

That's it. If you wish to add more things, it might add some fun, but they really won't change your results by much. Some things to consider: Large cap value: VTV, emerging markets VWO. I'm also wishy-washy on the bonds since you don't have much space in tax-sheltered.

Full disclosure: I own almost all the ETFs mentioned. For bonds, I use Fidelity US Bond Index, PIMCO Total Return, Vanguard GNMA and Vanguard Short Term Investment grade, so I don't use the bond funds mentioned.
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Old 08-12-2009, 01:41 PM   #6
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I did see your post on Bogleheads, but it appeared that you set conditions that would preclude a response. Your conditions were essentially: "I am not going to buy into the Boglehead approach of index funds because I want to keep Berkshire Hathaway and my other investments." That's what you've told us here as well.
I was wondering if that was what happened. It's either all in or out, huh? I can't be a mini-boglehead?

Quote:
Don't wait for your "deep value" account to recover. Loss aversion is a real behavioral finance trap. Get rid of it while it has a loss and use the loss to offset the cap gains on your BRK. You know: tax loss harvesting is good. Also read "Why Smart People Make Big Money Mistakes" for more help with avoiding behavioral finance traps which your post reeks of.
I read it years ago, but didn't realize I was falling into the trap. Good book. This account has generated 17K in ST losses and 193K in long term losses this year as they have been selling recently into the recovery. I've been taking the cash out as they sell and waiting until I have a plan. So, it is systematically being liquidated as we speak so I'm not really waiting, and I do have the big losses to offset some sales this year.

Quote:
Get rid of those other actively manage large cap value funds (Third Avenue, Long Leaf). Once you realize they did better than the S&P500 because of the value tilt and maybe because of some foreign stocks, you can get value and foreign for lower expense ratios.
Yep, I agree.

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Your individual stocks seem like a distraction because they are a small amount of your portfolio. If they have a gain and you have held them a year, give them away to charity. Otherwise, sell them at a loss.
Yes, they are a distraction.

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I guess I could come over and hit you up-side the head with a two-by-four to make you do this
Lol. Thanks, it may take just that. I'm agreeing with you on everything except for the large Berkshire liquidation. Every time I've lightened up and re-invested in something else (the stupid deep value fund was one of them) I've screwed up. Of course, I could have just made bad choices or had terrible timing I guess.

I'm working on it though, so don't give up on me. This is a big change for me.

Thanks for the recommendations.
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Old 08-12-2009, 01:46 PM   #7
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So a $4MM portfolio all taxable might look like this:
$500K VTI
$500K VBR
$500K VEU
$500K VSS
$1000K Vanguard Total Bond Index or $1000K Vanguard Interm Term Tax Exempt, check your taxes
$1000K Vanguard Short Term Bond Index or $1000K Vanguard Short-Term Tax Exempt.

That's it. If you wish to add more things, it might add some fun, but they really won't change your results by much. Some things to consider: Large cap value: VTV, emerging markets VWO. I'm also wishy-washy on the bonds since you don't have much space in tax-sheltered.
Wow, that simple huh? Where does the cash for living expenses go? Bond allocation I guess? How many years to keep?

Is it easier to dcf into something like this using ETFs? What are the other advantages of ETFs?

If my tax bracket is only 25% do the tax exempts make sense?
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Old 08-12-2009, 01:58 PM   #8
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Wow, that simple huh? Where does the cash for living expenses go? Bond allocation I guess? How many years to keep?
Yep, you can carve out cash for living expenses from the fixed income. The number of years is your choice: 1 year when cash is kept in low-yield accounts, 3 years when cash is kept in high yield accounts, or something else.

Quote:
Is it easier to dcf into something like this using ETFs? What are the other advantages of ETFs?
ETFs or funds, it just doesn't matter anymore. I use ETFs for equities and funds for fixed income. Since you are in TX, WellsFargo is all over Texas and their PMA account is the best. I'd recommend ETFs if you have the WF no-commission brokerage account going. The main advantage is no trading restrictions and easy tax-loss harvesting. The expense ratios are lower than the funds. The disadvantages are the bid/ask spread.

DCA or not is not much difference unless the market is pushing an all-time time and you think it is going to drop. Just thinking it is going to drop is not sufficient. In the current climate, I don't think it matters, but I could be wrong.

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If my tax bracket is only 25% do the tax exempts make sense?
Maybe not, you gotta do the math yourself.
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Old 08-12-2009, 01:59 PM   #9
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When I designed my AA portfolio, I studied a lot of what Frank Armstrong published on the web. I thought his stuff was great in terms of the implementation details - you know "rubber hits the road" or "the mechanics of it".

The links to his work still on the web seems to be missing the graphs - aaaaargh!!!, but it looks like he published a book in 2003, and google books has a lot of it available on line - The Informed Investor: a Hype-Free Guide to Constructing a Sound Financial Portfolio

You have to decide what your goals are - how long does your portfolio need to survive, how much volatility are you willing to tolerate, etc. You should also decide which asset classes you want in your mix. Then you can figure out what allocation would be reasonable across the asset classes.

Audrey
Thanks for the link-- I'll read it. My hangup is I'm so damn skeptical when reading about the efficient frontier due to following Berkshire so long. However, I'm sadly coming to the conclusion that I don't have Warren or Charlie's skills, so even though market is not totally efficient I might not be able to take advantage of its inefficiencies.
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Old 08-12-2009, 02:07 PM   #10
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Cash for living expenses? If you are using AA, then you are skimming off the total return of the portfolio for your annual withdrawal. Just pull the money from whichever funds did the best over the past year.

If you have a high enough bond percentage, then that will cover several years of living expenses. You have to make the call here. Some people like 7 years, some 10. You have to decide what is right for you.

Personally I keep cash for 1 to 3 years living expenses in a separate cash account from my retirement portfolio and replenish that from the portfolio. This just helps me sleep at night as the markets rollercoaster. The cash+bonds in my retirement portfolio cover an additional 10 years of expenses if needed. Mostly the cash+bonds are there to rebalance against the equities. A lot of people just keep 1 year's cash and some leave it in the portfolio. Lots of different flavors!

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Old 08-12-2009, 02:15 PM   #11
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Thanks for the link-- I'll read it. My hangup is I'm so damn skeptical when reading about the efficient frontier due to following Berkshire so long. However, I'm sadly coming to the conclusion that I don't have Warren or Charlie's skills, so even though market is not totally efficient I might not be able to take advantage of its inefficiencies.
Personally, I don't believe the markets are efficient - at least not over short periods of time (1 year or less), and sometimes for much longer. I've seen too much otherwise with my own eyes! IMO if markets were efficient, we wouldn't have bubbles - at least there would be no sudden bursting! Rebalancing my AA is actually how I personal live with what I perceive as usually inefficient and often irrational markets!

Actually, I don't think the "Efficient Frontier" has anything to do with markets being efficient. It just means that diversification across poorly correlated asset classes can help improve risk-adjusted returns (i.e. returns with lower volatility) over holding just one stock or asset class. I think that's what it means! Someone can correct me but I don't ever remember reading some gospel about "efficient markets" when I was doing my AA design. I didn't believe that then either.

Otherwise - why come up with an asset allocation? What are you trying to accomplish though diversification? Reduce volatility? Improve portfolio survival? Beat inflation? You gotta figure out what your goals are.

Audrey
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Old 08-12-2009, 02:35 PM   #12
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Otherwise - why come up with an asset allocation? What are you trying to accomplish though diversification? Reduce volatility? Improve portfolio survival? Beat inflation? You gotta figure out what your goals are.
OK, I must be confusing the efficient frontier with the EMH. I think they are linked somehow, but I don't care and don't need to get that academic anymore.

Yes, my goals through diversification are to reduce volatility, improve portfolio survival chances for a long (50 year?) retirement, and to provide a decent return above inflation. Inflation plus 4-5% would be nice.
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Old 08-12-2009, 03:02 PM   #13
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$1000K Vanguard Total Bond Index or $1000K Vanguard Interm Term Tax Exempt, check your taxes
$1000K Vanguard Short Term Bond Index or $1000K Vanguard Short-Term Tax Exempt.
Can you expain comparing the total bond index to the interm term tax exempt since they seem to be, um, different?

The tax exempt yield is better on this pairing using a 25% bracket, but the ST bond index on the next pairing seems to win out.
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Old 08-12-2009, 03:28 PM   #14
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Can you expain comparing the total bond index to the interm term tax exempt since they seem to be, um, different?
I was not comparing them. If you must hold fixed income in a taxable account and you are in a high marginal income tax bracket, then tax-exempt makes sense. If you are in a low marginal income tax bracket, then don't bother with tax-exempt. 25% is not a particular high marginal income tax bracket. Are you reading into this more than that? If so, I'm not saying more than that.

Generally, books make a big deal about not going to long duration with bonds. So an intermediate term fund is the longest you should go. The actual durations of bond funds will depend on what the manager puts in the fund. If you mix funds of intermediate-term and short-term you can dial in a pseudo-duration that is what you want.

The reality is that over the long term, all bond funds with low expense ratios perform about the same, so that it doesn't matter which one you buy. In the short term though it does matter.
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Old 08-12-2009, 03:59 PM   #15
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I wonder if we (me included) don't overestimate the importance of an AA?

I just plugged a 3.5% WR (35,000 spend, 1,000,000 portfolio) and a 40 year period into FIRECALC. In the "INVESTIGATE" tab, I checked:
Quote:
Investigate changing my allocation

[x] How will changing the allocation -- putting more or less into stocks -- affect the results?
and the resulting chart of "Success %" is really flat - all the way from 40% stock allocation to 100% stock allocation. I didn't expect that. 50%-65% was a pixel or two higher, that was all.

I think most of us would be very uncomfortable with a 100% stock allocation, but FIRECALC says that a more conservative 40% AA has the same success rate (96%) as 100% AA. And an AA of 35% stocks and below drops down fast (and pretty linearly) down to 33% success at 5% stocks.

It is tough to compare the volatility because FIRECALC changes the scales. But with success defined as "not running out of money", there does not seem to be a big difference. Max/min ending values - 100% max was ~ 5x (better); Min was about 4x (worse), Average was about 4.5X (better).

I could understand someone taking the greater chance that if they run out (4% chance), it might go deeper in exchange for the pretty high odds that they would come out far ahead with the 100% AA. The 40% AA had maybe 5 years above a $4M end value maxing at ~ $5.3M. The 100% AA had more years than I could count above $4M - maxing out at ~ $25M.

I can also understand someone wanting what appears to be the lower volatility of the 40% AA and giving up the chance for a big win. But (at least with these numbers/time), since success drops so quickly below 40%, I would at least want to move up the scale a bit more towards center, in case future events shift the curve a bit one way or the other.

I don't see any right/wrong in any of this - merely an observation. I'd just suggest people run their numbers - SS, pensions etc might change the curve for you. But I was surprised how flat that curve was. Makes we wonder about fussing over 5% allocations here and there in our portfolios?

-ERD50
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Old 08-12-2009, 04:15 PM   #16
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I wonder if we (me included) don't overestimate the importance of an AA?
...

Makes we wonder about fussing over 5% allocations here and there in our portfolios?

-ERD50
Exactly, which is one reason I wrote in this thread about the stocks:bonds ratio:

Quote:
There will probably not be much difference in outcomes in the range 30:70 to 50:50 anyways.
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Old 08-12-2009, 04:41 PM   #17
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Exactly, which is one reason I wrote in this thread about the stocks:bonds ratio:
There will probably not be much difference in outcomes in the range 30:70 to 50:50 anyways.

Yes, but I was surprised that it went all the way from 40/60 to 100/0 and that the "not much" was 2 percentage points in success rates from those extremes to the middle of the curve.

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Old 08-12-2009, 05:04 PM   #18
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Once again, long-term outcomes are about the same. It's the short term that kills you.
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Old 08-12-2009, 07:55 PM   #19
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Yeah - don't ignore the short-term effects. It's the volatility you have to live with in the short term.

If you can't live with the short-term volatility that you have set up, you might make some poor decisions under extreme market - decisions that will totally undermine your investment plan and mess up those long term results/goals.

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Old 08-12-2009, 09:09 PM   #20
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I'm the guy with the wierd AA consisting of mostly Berkshire Hathaway stock-- 48% of the total portfolio.
Doesn't seem that weird to me, and it's been the subject of some discussion in our family. Asking devil's advocate questions on your post may help me clarify my thinking too.

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The thing I've been strugging with lately is I just don't think I have the same mental risk profile as I did when I was working. When the market dropped so much recently I sat on my hands (and my cash) and did nothing because I was freaking out.
If it has changed, I realize I need to do something to put things more on auto pilot so I don't have to agonize daily.
I don't know if it's confidence or just the absence of paychecks. You've dealt with this volatility before, so otherwise what's changed? Which reaction did you have?: "Oh no, I'll be eating cat food!!" or was it more along the lines of "Geez, what a waste of charitable donations and a NetJet share."

Is it a change in risk profile, or is it more of a desire not to have to work so hard to take care of the portfolio?

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The only investments I'm interested in and comfortable with and feel like I have a little bit of an edge when to buy and sell is Berkshire and the two angel investments.
One thing I do know is I need some kind of written plan. I'm floundering around now and don't like it.
Looks like you just wrote yourself an asset allocation plan…

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The rest of the stuff I have I feel like liquditaing and putting into some sort of safe, fairly mindless mutual fund AA that I would just have to rebalance every year. I never liked or had much luck with funds in a taxable account (see two below), but liked the ability to take gains when I wanted to instead. But, maybe this time it is different.
Think a combination of Berkshire and a group of funds would work? What would a good group of funds be?.
… and you could maybe add Vanguard's Wellesley to it.

Did I mention that Tilson thinks Berkshire is still 30% undervalued? Admittedly he's a Berkshire cheerleader, but unlike Cramer or TMF he has a lot of shareholders to answer to. So would you buy more, sit on what you have, or sell?

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Pulling 2.5% of portfolio out of cash for living expenses each year (including mortgage). Wife is working, rental units are all full and paying. If wife quits SWR goes to 2.7% If wife quit and all rentals were vacent we would be at a 3.4% SWR. I don't see all the rentals going to zero, but short term I guess it could happen.
At your age and with kids, it sounds like an extremely practical, sensible, and conservative SWR. Plenty of room before you have to sweat liquidating losing stocks in a bear market.

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mid 7 figure portfolio size
16.5% cash--This is about 7.5 year of living expenses if wife keeps working, or about 6.5 years if she quits. Plus, as the "managed deep value POS" liquidates my cash pile will grow.
48.8% Berkshire Hathaway (brka, brkb)
18.3% managed "deep value" account that is being turned into cash as it slowly recovers-- mostly small caps. 1% mgmt fee. Lost confidence in them, style drift problems-- they just blew it basically.
5.4% angel-type investments, locked up for 5 years
2.4% Wellesley (VWINX) .23 exp ratio
Kids college funds are not included in this AA.
Your portfolio resembles our (much smaller) version. While we have cash flow (and future cash flow) from my pension and our rental, yours is also coming from liquidating your "deep value" assets. You could have survived the entire Great Depression, let alone the 1999-2008 tumult, without selling a single stock. No need to rush into anything.

Better still, are you/spouse going to someday collect Social Security or other pensions? Are they factored into your asset allocation?

Quote:
Originally Posted by cardude View Post
1.6% Longleaf Internatonal (LLINX) 1.6 exp ratio, about at break even after 7 years. Geeeze..
1.6% Third Ave Value (TAVLX) 1.11 exp ratio, break even after 7 years as well.
.6% conoco phillips (cop)
.4% Wells Fargo (wfc)
His 401K (soon to be rolled to Vanguard)
2.5% cash
His Vanguard IRA brokerage
1.1% Berkshire, (stupid to be in a tax advantage account, but I was just buying all I could the time)
Her IRA at Vanguard
.8% various stocks (GE, Brkb)
Am I adding these numbers correctly to come up with 8.6% of your total portfolio value? If these assets are annoying you too then they could be the next to be liquidated for spending cash. Or put it into Wellesley. Or, since they're less than 10% of the total, you could just ignore them. But it sounds like it's more hassle to do the tax paperwork than anything else. Speaking of taxes, as has been mentioned already, selling specific shares of losers would be a great way to offset cap gains, although a bit more of a tax hassle.

I guess your first question should be what assets you feel comfortable with. While AA is responsible for 90% of your returns, if you're not comfortable with it then it doesn't matter what the research shows because you'll freak sell out at the first growl of the bear. If you're comfortable with Berkshire then keep some of it. If you can find other asset classes (Dividend-paying stocks? Value stocks? Bonds?) then you could buy Vanguard mutual funds or index ETFs in those classes too.

[Bob Clyatt's WLLM has a great interactive spreadsheet of choosing asset classes through Vanguard's funds. Our ER portfolio's ETFs are listed in my profile.]

If you moved the 18.3% "deep value" account and the other 8.6% into Wellesley, then how much of the Berkshire and the angel assets would you need to maintain a 4% SWR or less? In the highly unlikely case that Berkshire went to zero, what would your SWR be?

One approach would be to assume that your spouse stopped working and half of your rentals were vacant. Figure out your spending and how much you'd need to support a 4% SWR, then put that amount into Wellesley/cash and put the rest into whatever asset classes you want-- like Berkshire & angel investments. The portfolio is sort of a "dumbbell" distribution with "low-volatility" assets at one end of the bar and "high-volatility" assets at the other end.

Another approach would be to split your money among the classes you like the best-- one-quarter Wellesley, one-quarter Berkshire, one-quarter angels, one-quarter cash. (Your overall expense ratio would be the envy of many investors.) Berkshire and the angel investments wouldn't affect the portfolio's overall return as much, so you could cheer when they rise and not feel so bad when they drop. Your cash stash, perhaps laddered among CDs of 3-7 years, would give you years of recovery time for any bear market. When the other three assets exceed their asset allocations by going over 28%-30% (whatever tripwire you prefer) then sell them back down to 25%-28% and boost the cash stash.

Here's another devil's-advocate question: why are you investing in angel assets? Is it "family/friends" money, or are you mentoring an entrepreneur, or are you utterly fascinated with analyzing startup businesses and their financials? It's an important question to answer before you put more money into it. Angel liquidity exits seem to be stretching to 7-10 years and while there are still values to be found, it's hard work. Diversification among 10-12 different startups over the next few years is essential if you're not just throwing darts and hoping to win the lottery. If you're not absolutely riveted by the due-diligence research or motivated by the mentoring then it's probably better to delegate the research to Buffett. I'm a couple years into the process myself, it's definitely not family/friends or mentoring, I've satisfied a lot of my curiosity, and I'm not sure if I want to be working this hard.

If you're uncomfortable shedding Berkshire now, what about converting to "B" shares and selling out-of-the-money call options? Pick a price at which you think Berkshire is more than fairly valued, write a contract, and collect the premium. If the price goes up above your strike price then you lose the shares and "solve" your asset allocation problem while making a little extra money on the side. If they stay flat you make a little extra money. If they go down, you weren't going to sell the shares anyway. But call options offer a way to set a sell-stop while keeping your emotions out of the process. They're new and they don't have a lot of volume yet so pricing is probably inefficient, but the Gates Foundation is doing a wonderful job of raising the "B" share daily volume. As volume rises it's not unthinkable that Berkshire could end up in the S&P500 in the next 5-10 years, and their options pricing will become more efficient.

Quote:
Originally Posted by cardude View Post
Yes, my goals through diversification are to reduce volatility, improve portfolio survival chances for a long (50 year?) retirement, and to provide a decent return above inflation.
Inflation plus 4-5% would be nice.
Yeah, we all want "inflation+ 4-5%" until we see how much volatility that necessitates. If your SWR is only 2-3.5% then could you be "content" with earning that amount over inflation?

Let us know how your thought process goes so that I can have a spouse discussion about it in our house!
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