What would be your Asset Allocation ??

[rkser]

I think I have the necessary monies for our retirement, but am holding a 50/50 Stock to Bond Asset Allocation on the advice of a Financial Adviser. Our source of present income is from a disability policy and meager income from the part time business.

I am 56 & wife is 51, we own and manage a part time professional small business, for our need of health Insurance and some professional/work satisfaction purposes.

We have been and are conservative Investors with mostly Vanguard Index Fund portfolio. If I calculate the 4% withdrawal rate expenses method we are covered well and if I calculate the present yearly expenses X 30 we come out good. As a back up we also own a investment real estate(Office Building) which would serve for 5 yrs of expenses

-I was at 45% stock/55% bond portfolio, following the age in Bonds rule of thumb.
-I changed it to the present 50%/50% on the advice of Vanguard's complimentary financial plan.
He was making a point about DW being (only) 51 and have potentially 40 to 45 yrs to live and we need to stay ahead of inflation etc.

Although the difference is not much between the above 2 asset allocations, I feel borderline uneasy when I think about the 2 or 3 Market Drops we have survived.
During the recent market drop I worried about the declining personal wealth but did wait for the market turn around without any selling.

I am also reading articles about walking away from the investing table when one's game is done (Accumulated enough for retirement) and minimize any more risk to the present sum of monies.

I think mentally I would feel comfortable with 30% stocks portfolio, although I realize the 70% Bonds may not be as safe I think they are, as the interest rates may not stay this low for long.

Although I know one has to go with their own comfort level individually, I am curious to know any opinions and insights of others if they would face such a situation. What would be your asset allocation ??

Thanks in advance for any and all opinions.

 

[REWahoo]

I am also reading articles about walking away from the investing table when one's game is done (Accumulated enough for retirement) and minimize any more risk to the present sum of monies.

Of course the follow-up question is if you walk away from the investing table, where do you put your money for the next 40+ years? How do you stay ahead of inflation?

I think mentally I would feel comfortable with 30% stocks portfolio, although I realize the 70% Bonds may not be as safe I think they are, as the interest rates may not stay this low for long.

FIRECalc says you need to have ~40% as a minimum in equities to have a 95% or better chance of your money lasting 30 years (see graph below). For 40 years something like 50% would probably be better. You might want to run your numbers through FIRECalc using various stock allocations and see for yourself how history says you would have fared.

 

[eytonxav]

I'm 63 and this is my target allocation, although I'm currently holding more cash than I would like.

Target %
Domestic Equity 25.0%
International Equity 10.0%
Emerging Markets 5.0%
Fixed Income 40.0%
Commodity 3.0%
Preferreds/REITS 7.0%
Cash 10.0%


Also, I think now is not the time to have age in bonds.

 

[RonBoyd]

but am holding a 50/50 Stock to Bond Asset Allocation on the advice of a Financial Adviser.

My advice is to take the time to read as many threads in this Forum as it takes to fully understand that you need to be your own "Broker/Advisor" -- and how to do that. The kind of advice you are, currently, relying on (for instance, from "a Financial Advisor") is as valuable (and "feel good") as "Spend your Winters in the South and your Summers in the North."

Fortunately, you, apparently, have the resources that will allow some comfort zone in the "learning curve" but 40 years is a veeeery long time. Tomorrow (or the next day... or the next... or the next, etc.) could shorten that considerably... particularly if you have "a Financial Advisor" dipping in. (Not to mention the advice you may take from the Internet.)

 

[Midpack]

What someone else would do even if their circumstances are the same is irrelevant. You can search asset allocation here and see most members. Here are a few links on asset allocation that may be helpful.

http://www.early-retirement.org/forums/f28/assets-allocation-poll-21334.html

http://www.bogleheads.org/wiki/Asset_Allocation

 

[Spanky]

Also, I think now is not the time to have age in bonds.

Age in bonds have some variations: age - 10 , age - 20, etc.

 

[Bikerdude]

I'm currently at a retirement high in equities at 41%. I like the income from I get from dividends vs bonds.

 

[obgyn65]

To answer your question I would reduce my allocation to stocks. However, I tend to be conservative with my investments.

 

[REWahoo]

To answer your question I would reduce my allocation to stocks. However, I tend to be conservative with my investments.

Correct me if I'm wrong, but I'm under the impression you've never owned an individual stock or mutual fund and have no intention to do so. Correct?

 

[obgyn65]

Correct, but I would like to learn more on this topic when I FIRE. Right now all I do in my spare time is read here, learn, and participate. In 2012 I bought LTCI and deferred annuities. I also built a monthly cash flow analysis. One step at a time.

Correct me if I'm wrong, but I'm under the impression you've never owned an individual stock or mutual fund and have no intention to do so. Correct?

 

[ERD50]

....

I think mentally I would feel comfortable with 30% stocks portfolio, although I realize the 70% Bonds may not be as safe I think they are, as the interest rates may not stay this low for long.

...

Thanks in advance for any and all opinions.

Opinions are fine, but IMO, facts trump random opinions. REWahoo beat me to the facts:

FIRECalc says you need to have ~40% as a minimum in equities to have a 95% or better chance of your money lasting 30 years (see graph below). For 40 years something like 50% would probably be better. You might want to run your numbers through FIRECalc using various stock allocations and see for yourself how history says you would have fared.

That graph shows that a 35% allocation to equities is more dangerous than a 100% allocation to equities. Where is the 'comfort' in 30% equities, in light of these facts?



And then:

To answer your question I would reduce my allocation to stocks. However, I tend to be conservative with my investments.

Correct me if I'm wrong, but I'm under the impression you've never owned an individual stock or mutual fund and have no intention to do so. Correct?

Correct, but I would like to learn more on this topic when I FIRE. Right now all I do in my spare time is read here, learn, and participate. In 2012 I bought LTCI and deferred annuities. I also built a monthly cash flow analysis. One step at a time.

With all due respect (and I mean that seriously, no satire) to obgyn65, why offer your opinion on something where you have admitted that you have no knowledge? FIRECALC is quite clear on what happens with a low Equity allocation (historically). It really doesn't take any more 'learning' than just looking at and understanding the graph that REWahoo posted. If there is something about that graph that you, or anyone, do/does not understand, post the question and I'm sure that the many helpful people on this forum will attempt to explain it.

-ERD50

 

[pb4uski]

Just my personal view, but I think 50/50 is pretty conservative. DW and I are 57 and we target 60/40 and still sleep very well at night.

The walking away from the investing table argument only works if you have a boatload of money so even with paltry returns your nestegg will still provide for you. The paradox is that you are so overfunded you can actually take more risk.

At young ages like ours you should probably forget about a 4% WR and think more of 3.0-3.5% or so.

 

[Katsmeow]

DH - 65
Me - 58

Allocation 55% stock/45% bonds (a very small amount of that is in cash). I actually just rebalanced as we had gotten to 60/40.

 

[obgyn65]

The OP's question is : what would be your AA ? I answered the question honestly from my viewpoint, knowing that my investment decisions have always been very conservative. The question is not asking us to explain what equities are, AA history, or superiority of any AA approach, to which I admit I have little knowledge.

The fact that I may know less about AA than you should not prevent me, as a forum participant - same as you - from answering the OP's simple question about "what would I do". My NW at age 47 is greater than 5 m, even if I have used very conservative investing patterns all my life. No lottery won, worked about 10 years in lower paying countries than the US, and no inheritance. Therefore, I got something right somewhere, didn't I ? Non financial experts should be able give their opinion in these open ER forums the same way as everyone else without the fear of being criticized in public or ridiculed.

Do I criticize you for posting your opinion in healthcare-related forums on this website, even when you openly question well-established and generally accepted medical protocols? I read posts when time permits, and respect everyone's views on these topics, even when I disagree with them. Can you please do the same with mine, or put me on your 'ignore list' and be done with this. Thank you.

With all due respect (and I mean that seriously, no satire) to obgyn65, why offer your opinion on something where you have admitted that you have no knowledge? FIRECALC is quite clear on what happens with a low Equity allocation (historically). It really doesn't take any more 'learning' than just looking at and understanding the graph that REWahoo posted. If there is something about that graph that you, or anyone, do/does not understand, post the question and I'm sure that the many helpful people on this forum will attempt to explain it.

-ERD50

 

[mathjak107]

there is something very important missing from this discussion i think ,unless i missed it..

the biggest question is what rate is obgyn looking to draw ?

that is the determining factor.


i see lots of recommenedations for higher equity positions but nothing about the wiithdrawal rate the op is looking for.

in our case we have enough outside income to draw 2% or less from investments. i could do that with zero stocks just following bill bernsteins short term bonds/tips/annuity mentality.

in fact up to a 3% withdrawal rate that can be just as almost bullet-proof as 100% equities tested out at a 4% withdrawal rate.

unless i missed it at some point i do not think we know that answer and that will be key for someone going so conservative.

so ,now gives that info obgyn so we can offer better advice.

 

[Ed_The_Gypsy]

OP, I am still working and not in withdrawal mode yet. I am comfortable with my ~100% equities position, 50% US/50% non-US target. I rode out the Crash of '87 and 2000 and 2008 and recovered every time. I am focusing on dividend-paying equities right now. Capital gains will be incidental but welcome. My 'bond' allocation will be my Social Security checks.

It is not clear what you are anxious about.

If you are concerned with 'the market' taking a dive, it seems as if you are looking only at stock prices and by implication, capital gains, ignoring earnings and dividends. You are then only looking at the resale value, not a stream of income. This is looking at stocks like a stack of gold coins where you can only monetize them by selling them one by one until they are all gone, instead of a goose that lays a gold egg from time to time. People who panic when there is a crash and sell are only killing the goose.

If you are deep into bonds, it would appear that you fear loss of principle (on paper) more than you fear loss of dividends. With interest rates so low these days, dividends from bonds are tiny.

When interest rates do go up again, what do you think is going to happen to your bonds? Their market value will drop and you will still only be getting tiny dividends. What you thought was a safe haven for your capital was no safer than stocks and you got almost nothing for holding them. Even when stock prices go down, you do not lose until you sell. Dividend-payers will still pay a dividend no matter what happens to the market price.

If you play with FireCalc, you will see how low withdrawal rates make any portfolio survivable. If you only take 3.5% to 4% out of your pot every year, almost any stock portfolio will survive forever. Interestingly enough, my stock portfolio pays out 3.5% to 4% per year in dividends without selling anything. I never have to worry about what 'the market' value of my shares is today, because I am not going to sell them. As Warren Buffett says, his favorite holding period is forever.

 

[obgyn65]

I am not the OP. Not sure how my SWR rate would help answer the OP's point. I only offered my view on AA honestly, for which I have been criticized in public and basically told to shut up. I have a pretty thick skin, but I wished my views, as a very conservative investor, would be respected the same way as everyone else's.

there is something very important missing from this discussion i think ,unless i missed it..

the biggest question is what rate is obgyn looking to draw ?

 

[mathjak107]

ooops you are not the op. but thats alright i don't see that info for them either.

 

[mathjak107]

I am not the OP. Not sure how my SWR rate would help answer the OP's point. I only offered my view on AA honestly, for which I have been criticized in public and basically told to shut up. I have a pretty thick skin, but I wished my views, as a very conservative investor, would be respected the same way as everyone else's.

well the same thing applys to you. it all depends on what you need to draw out. 4% is a tough nut without equities . you really need at leat 40-50% to make the rule hold true for a high percentage of the time.

3% or less is another story. don't forget though a 1% drop in withdrawal rate represents a 25% drop in income. it is no small amount.

right now as i mentioned we are at about 97% different fixed income funds.

although we will need less then 2% it looks like i am not happy getting low returns either.

so with bonds seemingly winding down we have started to make preparation to move about 1/3 as we have some drops into a growth and income model of the newsletter we follow.

if nav on bonds starts to take a hit we will shift some more.

the idea is risk is a relative thing.

equities were alot less risky when they fell 6,000 points in 2008-2009..

cash has been very risky with negative real returns.

bonds were low risk but now they are high risk. it is not a question of if they will fall in value, the only question is when.

we can have a mass exodus from bonds to equities when that happens.

for 3% and under withdrawals i like bill bernsteins risk free concept of short term bonds,tips and annuities.

 

[obgyn65]

So do I. My planning horizon is 48 years, with a WR low enough to generate $100k-120k on average every year until 95 years old when I include some annuities in the plan ($80-100k a year without annuities). Although I worry about inflation, I am comfortable with my plan and my WR overall.

It's ok to disagree.

3% and under withdrawals i like bill bernsteins risk free concept of short term bonds,tips and annuities.

 

[mathjak107]

you mean 48 years in retirement? phew that is a long time. at what withdrawal rate.? if it is 4% or higher then you will need equities or risk pushing a cart under the bridge.

 

[obgyn65]

Less than 4%, although I guess it varies between 2 and 3.5% with or without the use of annuities. I will continue to do some hours part time or locum tenens positions, therefore an exact SWR over 48 years in my case does not really apply.

To come back to the OP's question, what is your AA and what do you plan for your SWR and for how long ?

you mean 48 years in retirement? phew that is a long time. at what withdrawal rate.? if it is 4% or higher then you will need equities or risk pushing a cart under the bridge.

 

[mathjak107]

well 3.5% without equities is alot for that long with no equities.

you really have to weight your success of doing that against the risk level you can stand.

you may find your success rate is so low without a decent equity position that the real risk is in not owning a decent amount of equities.

 

[MichaelB]

We are all free to post our opinions. It is also ok to challenge some of the assumptions implied in the recommendations. Lets try to keep the thread on topic and friendly. Whenever we post an opinion we should be prepared to support it.

Rkser, FIREcalc has been mentioned by REW, ERD50 and Gypsy Ed for good reason. It will let you enter your data and see how different allocations to equities and fixed income survive over time. I agree with their suggestions that you spend some time doing that, so you can have a better understanding of how that increase of 5% to equities affects your portfolio over the next 30 years. It may help the sleep test.

 

[gerntz]

Age 64. Bds(Short-Med)/Eq(US & global)/Alt(GLD + REstate): 40/45/15. About 75% is in funds.