Maximizing Long Term Gains at 22 Years Old

[FelipeA]

Hi,

I'm 22 years old with current living expenses at about 12k/yr including expensive university, health insurance, and car and working that down to 10k/yr. My network is nearing 6 figures and I think it's time for a legit, stable Asset Allocation.

My time frame to invest is decades as I don't plan to sell but live on 3% dividends that's the average for my portfolio.

I'm debating on how to split it up, here's my current ideal based on 80% Stock, 10% Income, 10% Safety. The high safety is because I have a focus on early retirement and don't want to withdraw during down years. It also makes putting money into IRAs and HSAs much easier as I can lump sum it.

50% S&P or Total Stock - Bread & butter of broad cross section of businesses bound to do well
15% Emerging Markets- see below
5% Developed Markets- see below
10% Renewables - low price, high dividend, by 2020 renewables will be cheaper than oil
10% Lending Club/Peer to Peer - in IRAs, high cashflow
5% Short Term Government Bonds- safety for rebalancing
5% Cash- safety for consuming in daily life

What I'm really debating on is 15% in Emerging vs 20% in Emerging and no Developed.

My reasoning is that the Developed countries have already utilized most of their resources, have access to internet, stable economic structures, and are already developed economically. Whereas with a longer time frame, Emerging countries will gain access to internet, higher standards of living, more stable political and economic structures, and have a much higher capacity for growth and innovation than developed countries. Most of the world's population is in emerging countries and I see a huge opportunity there, especially with the recent Chinese stocks scare.

Can anyone think of a reason to keep Developed when Emerging is spread across a larger portion of the population with more capacity to grow economically when I have a long time frame and plan on living off dividends?

Thank you very much.

 

[kaudrey]

I suggest you go over to the Bogleheads forum and read about the 3-fund portfolio.

Over decades, the small difference you are talking about won't matter.

 

[travelover]

I agree. Buy Vanguard Total World Fund, go out and have a life and come back in 30 years to a nice pot of dough.

 

[Animorph]

Could be overthinking it, but it won't kill you.

For a long term portfolio I think you need to avoid predicting trends like S&P 500, EM, and renewables. Even if you are right about their advantages, will they hold out for 50 years? I think you'd do better just getting everything (the entire market) now. My play was energy for 10% of my portfolio (still is). That was looking OK until oil prices crashed. Not what I expected 12 years ago or so. On the other hand it has at times worked nicely as a diversifier, which is the main reason it's there.

Diversification and rebalancing are why you probably want some international developed in your portfolio as well. If U.S. does well and exceeds your target allocation you have sort of a mish-mash of alternate allocations to buy into with the excess funds. That's one reason why my foreign exposure is about equal to my U.S. equities.

So I would recommend the additional diversification of S&P 500 plus and extended market fund (U.S. ex-S&P 500) and an increased developed international allocation. You can chose between simple single fund choices like TSM or multiple components if you want to be more active in rebalancing.

ETA: Sounds like you have included portfolio safety features you don't need until retirement (although they are not big enough that I'd worry about them much). I used an accumulation strategy until about a year before retirement and then switched to a transition portfolio (it was 2007 so it seemed necessary) and then my long term retirement portfolio. If you are not spending from your portfolio now and your retirement is still in the future I wouldn't worry about the safety allocations yet. On the other hand, if you are using it as an emergency fund by all means have a safety component in there.