Seeking Asset Allocation Advice

S

Surfs_Up

Recycles dryer sheets
Joined
Aug 21, 2004
Messages
91
All,
I've taken your advice and started to look at setting up a more diversified portfolio.  I have to come clean.  I, as TH has, have been timing the market. Actually, for the past decade :eek:   I rode the tech stock wave from the mid ninties to April 2000 and bailed on all stocks.  I just got back in the market March 2003 primairly in the QQQs.  I sold all my QQQs today.  The QQQs were up ~ 35% over that period and will have a 5% long term capital gain tax rate...not bad!  But now I want to diversify.

Heres what I'm thinking:

1)  Taxable account (33 % net worth)
    100% Wellesley

2)  IRAs (50% net worth)
    100 % Wellington

3)  Individual Stock from Options (17 % net worth)
Can't diversify until they go public or sell.

I want to keep everything as simple as possible for now as I will be a Perpetual Traveler for at least the next few years. I'm 39 and starting to travel next week. I'm thinking of letting the IRAs grow as long as possble and live off the taxable account. I plan on spending ~ 4% per year.

I'm thinking of having one years expenses in a money market account (or ?) and having the Wellesley dividends add to this spending account. Does this strategy seem reasonable? Any other suggestions?

Surf
 
Your plan looks reasonable. Here are some adjustments you may consider:

- If you pay significant federal taxes consider either:
- swapping wellington with wellesley.
Wellesley into the IRA, Wellington Taxable.
- OR -
IRA: total bond market index.
taxable: total stock market index

- Id consider some diversification into international stocks (maybe 5-10%), and REITS (5% or so in the IRA.)

If any individual stock amounts to more than 2% of your portfolio, diversify. Don't accumulate stock from vesting options from your employer, sell it. Watch out for ATM (alternative minimum tax) if you exercise stock options and don't sell the stock within the same year.
 
Upsides: probably low volatility, reasonable current income, relatively low costs for managed funds, mostly value stocks with reasonable PE's that shouldnt take too much of a beating if things go south, decent exposure to energy and utilities.

Downsides: all US exposure, limited upside potential (especially for longer term IRA assets), intermediate bonds could see some downside if rates REALLY go up quick.

I agree with the thought of adding some non-US exposure, and a few other asset classes besides US stocks and bonds. Some specialization is good; energy and health care have good short to intermediate term prospects. REITS are good, but boy are they run-up.

It may be a good strategy to do what I did. Start with these relatively conservative funds and muddle yourself down into other stuff as you get comfortable with it or you see buying opportunities. I really WILL reach a point where I dont do a lot of fiddling unless something REALLY big happens, like a 30-50% run up or drop.
 
JohnBlake,
Thanks for the advice. I plan on living on ~ $16K per year while overseas.... so federal and state taxes will be little to none. I like the idea of some additional international and REIT exposure. I like that Wellington has over 9 % of its equity holdings as international.

I totally agree that the stock option shares should be sold and diversified asap. Can AMT be a factor before you actually sell any shares?

Surf
 
TH,
Thanks for the review. Energy and Healthcare seem to make allot of sense right now. I like your suggestion to to start with these conservative funds first and drill down into other stuff later. I also like the limited downside of these conservative funds if things do head south.

I live in San Diego, and I feel the excesses of the 90s equity bubble have (not) been fully purged out of the system....just shifted from equities to housing here...... and that some severe pain could be in store. I feel we are now in the first cyclical bull within a 5-15 year secular bear that started in 2000. I don't buy that we are now in a new bull market. But, then again I could be wrong....guess we'll all know in 2015.

Surf
 
I would look toward healthcare and retail as sectors poised to outperform. Energy looks dicey right now. I read an article in the WSJ about oil companies just buying back massive amounts of stock because they can't find enough decent places to invest the cash. Share buybacks are good, but they're not really a long-term strategy when your business depends on selling a commodity in which you always must be finding new sources to maintain your revenue. There is big money to be made in cyclicals... it's about being on the right side of the swing ;)
 
A lot of tax implications can take effect if you exercise the shares and dont sell. I didnt exercise until I was ready to dump mne. Consult a tax pro for your specific situation, since everyone is likely to be a bit different.

Energy may have had its run, but I'm not entirely sold on selling ;)

Regarding the bulls and the bears...you know, at the depts of the trough in '02 I started feeling like valuations were ALMOST good, which means they were probably close to fairly priced since i'm a bargain shopper. Then this huge surge we had in 03 going into 04 just put us back into stupidland.

It'll all have to come out in the wash someday. Maybe soon. Hold onto your pennies and keep them close...
 
JohnBlake,
Thanks for the advice. I plan on living on ~ $16K per year while overseas.... so federal and state taxes will be little to none. I like the idea of some additional international and REIT exposure. I like that Wellington has over 9 % of its equity holdings as international.
Click to expand...

Hey surf, does living overseas shelter you from fed and state taxes? Keep in mind that even if you withdraw nothing, those funds will spin off dividends that are taxable (it just depends of how large the total dividend stream is.)

I didn't realize that Wellington and even Wellsley have international exposure. Given that, I think you're set.

I totally agree that the stock option shares should be sold and diversified asap. Can AMT be a factor before you actually sell any shares?
Click to expand...

Yes. If you exercise (and don't sell) a non-qualified stock option the gain counts towards your AMT income for that year. If you sell in the same year, it's a capital gain. If you wait until a latter year to sell, you pay the AMT, and run the risk that the stock price falls. I've known a people who owed the government more than their net-worth because of AMT. I don't think Qualified options (ISO) are subject to AMT. 4 years latter I'm still taking tax credits from a large AMT tax payment. This amounts to an interest-free loan to the government.

Don't count on me for the details. Do a little research yourself, and consider consulting with an accountant. (I've done my own taxes my entire life. The one year I hired an accountant, I was very disappointed. It was a waste of money and time. Probably just a bad accountant.
 
Yeah, Wellington has about a 9.5% foreign stock component (9.5% of the equity piece anyhow, not total..which would make it about 6% of the total fund), and wellesley has about 2% of its ~35% equity holdings. Wellesly also has a few percentage points of foreign bond holdings...or it did the last time I read the prospectus a few quarters ago.

I like a little more of both foreign equity and foreign bondage...
 
Hey TH,

Do you do "foreign bondage" with a whip and chains? :)

Cheers,

Charlie
 
I was hoping someone would pick up on that.

Its "fun with words" day!

Not as good as "international talk like a pirate" day, but being able to throw around terms like "topless runup" and "foreign bondage" sure make for a good time.

Otherwise I have to go out and finish cleaning up the garage. I'd rather be beaten with wet foreign noodles to be frank.

But its inevitable...
 
It all sounds good in theory.

But have you every poured chocolate syrup and whipped cream all over someone and tried to lick it all off?

You start going into a diabetic coma before getting to anything interesting... :p

Yes, the evil is in me today, and I'm avoiding work at all costs.
 
Heres what I'm thinking:

1) Taxable account (33 % net worth)
100% Wellesley

2) IRAs (50% net worth)
100 % Wellington

3) Individual Stock from Options (17 % net worth)
Can't diversify until they go public or sell.

I want to keep everything as simple as possible for now as I will be a Perpetual Traveler for at least the next few years. I'm 39 and starting to travel next week. I'm thinking of letting the IRAs grow as long as possble and live off the taxable account. I plan on spending ~ 4% per year.

Surf
Click to expand...

I have been reading a lot on this site lately about investing and the market. And a lot of the people (TH comes to mind) keep saying that there is a 30% downside potential in the market, and that in their opinions it is quite overvalued. With this in mind, is it good advice to ask someone to invest a chunk of new money (:confused:?? we do not know how much) into the market, in one go?

Just a thought.

SWR
 
Highly debatable. Some say DCA in, others say get in there and get it over with. You'd have to be a fortune teller to know for sure.

I feel the downside is more limited with the hand picked value stocks in the wellesley and wellington funds. At least the floor is a little closer to them. And in the meanwhile, if they do go down, the dividends are pretty good.

As long as you have no short term plans to touch the principal, the dividend payout should stay good, even if they bounce around like a rubber ball.

Another option if you're really not excited about managed funds, or if you have a high tax profile, is to build your own 'tax managed' fund. Buy the us large cap value index in whatever equity proportion you like (30-70%), and buy the intermediate state muni fund, the broader muni index, the tips fund, or whatever combination floats your boat.
 
Bernstein and Bogle both recommend DCA or "value
average" NEW money into the stock market over a
2-3 year period.

The whole idea of DCA is to avoid investing your total
wad at a market peak. It is true that about 60-70%
of the time you will "win" by plunging but the incremental advantage is not large and the risk is
too high for me, at least.

If you think like TH that the market is set to plunge,
then wait. If you think it is going to the moon, then
plunge. If you don't know, then DCA or value average
for crying out loud.

The prudent thing to do is DCA or value average unless
YOU CAN AFFORD THE RISK.

Cheers,

Charlie
 
JohnBlake,
No, living overseas doesn't shelter you from federal or state taxes, but living off your taxable account does shelter you from income tax (no income). I'll only pay long term capital gains of 5%.

Thanks for the AMT info. Yes, in the tech froth of the late 90s and the cliff drop in the early 2000s, many people went bankrupt due to poor timing of stock option excersizing...and the AMT hit. This is the dark side of stock options that few people know about.

Surf
 
SWR,
I'm making a horizontal move.....I'm already in the market. So, I'm going in all at once....really never left. If a had a large (new) chunk to go into the market at this point in time I would DCA in....as suggested above.

Surf
 
Surf:

My problem is I have a chunk of money that just came out of a CD. So I am troubled with the prospect of putting it into a fund just to see it depleat. Having no Income like yourself, I cannot afford to loose what little I have accumulated so far. And I will be travelling for 6 months where it will be difficult keep tabs on it.

SWR
 
SWR,
I'm putting the assetts I'm going live off for the next several years into Wellesley. This fund pays a fairly high dividend and has limited stock market exposure....around 35 % as I recall. If you want simplicity, some growth, and asset preservation....you may want to just lump sum it all into Wellesley now......forget about it and go travel. That's what I would likely do if I was in your situation.

Surf
 
Surf:

Well I looked as the Wellesley fund data and it shows a 1 - 5 year return before tax of between about 4 - 6.75 %. As my $200k I want to invest is in an IRA, would I not be only slightly compromized putting it in a 5 year CD at 5% with my credit union?

Unless I am reading the data wrong?

SWR
 
Hi SWR,

Would you mind sharing the name of your CU and URL if they have one?
5% is pretty good now a days.
This past March, I got in on the 5 year 5.25% CD from PFCU.

MJ
 
MJ:

I am with OrangeCountysCU.org. But I get over their published rates. I have negociated them with my manager, as I have over $1m invested with them. I do not even live their now. All managers of institutions have a discrestionary amount they can give to good customers.

If you want to go to Canada you can get good rates at GICDirect.com

Also check bankrate.com

SWR
 
SWR,
I like Wellesley because I'm looking very long term. I 39 so I need to take more stock market risk than some others. I look at the Wellesley 10 year return of 10.16% and the 34 year return of 10.9% and I like these returns much better than 5% CDs......and I've been comfortable with Nasdaq stock volalitility for a long time, so with the conservative Wellesley fund I should sleep like a baby.

Surf
 
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