Can You Comment on My Asset Allocation

[nico08]

I use T. Rowe Price Advisory Planning Services for my retirement asset allocation. I am 41, I hope to retire anywhere within the next 4 to 9 years if possible. The recommended asset allocation plan is premised on me working until 65, but I was told that even if I want to retire early, the asset allocation would not change too much, because the early retirement would mean I would need my investments to last for a longer period of time, and I would need to take on more risk (stocks) to help make my retirement assets last as long as I do.

Here is the recommendation (I get close to the target with a combination of taxable, 401k/deferred compensation, and ROTH IRA investments):

Stock
Large Cap 48%
Mid/Small Cap 16%
International 16%
Specialty 0%

Bond
Investment Grade 15%
High Yield 0%
International Bond 5%

Cash
Short Term 0%

I abrogate a little from this recommendation. I have a REIT fund, since I do not own real estate, I thought it was a good idea to have some exposure to the real estate market. If I purchased real estate, I might get out of that. In the meantime, I consider it under the Mid/Small Cap allocation.

I do keep money in a Vanguard short-term bond fund for an emergency cash fund as well as a future real estate purchase fund.

I have a defined benefit pension coming to me at age 60 that might cover about 10% of my cost of living at the time I will start to receive it. Some say that a pension like this should cause me to change my stock/bond asset allocation. I am not sure about this.

I have a medium-level of risk tolerance, and I pretty high desire to become financially independent as soon as possible.

Is there a way for me to assess what the over-all or yearly rate of return and standard deviation on this type of asset allocation has been in past? Is there a calculator that will do this?

Do you think this is a good asset allocation considering my goals, risk tolerance and any other relevant factors? I appreciate your advice.

 

[W2R]

Whew, I realize I am a lot older than you (I'm 63), but I sure wouldn't want to retire on 80% equities. I could never sleep at night with that AA and no job, personally.

I guess the only other choice is to save more until you have enough that your portfolio is growing over time even with a more conservative AA, despite your (future) withdrawals. Bear in mind that my own risk tolerance is very low and my AA very conservative.

Just my opinion...

 

[ESRwannabe]

You might want to ask over at Bogleheads Investing Advice and Info about this as well. They love to critique people's portfolios.

 

[Texas Proud]

This is just my personal preferrence....

But I do not invest in international bonds... to me, that is an exchange rate risk that I don't want to take on...

I do invest in international stocks at a bit more % than you... and I also have less than 75% of my domestic in large caps (I think I am in the 60% range)...

As mentioned, an 80% allocation to stocks is a lot if you are retired... but that does not mean it is bad if you have enough to cover expenses etc. in bonds with a big cushion... I will probably be close to that.. but might go down to 70% when I actually do retire (I am about 85% now)...

 

[GregLee]

Whew, I realize I am a lot older than you (I'm 63), but I sure wouldn't want to retire on 80% equities.

TRP doesn't seem to be recommending that he retire on 80% equities, but that now, in the early years of the portfolio, he keep 80% equities. Presumably, they would have him reduce that percentage later.

 

[brewer12345]

I'd swap some of the large caps for some junk. Junk is pretty attractive at the moment (not to say it could not get "more attractive").

 

[slazenger]

This is just my personal preferrence....

But I do not invest in international bonds... to me, that is an exchange rate risk that I don't want to take on...

I do invest in international stocks at a bit more % than you...

Why are you ok with the exchange rate risk in international stocks, but not in bonds? You do realize where that risk is concerned, you're essentially telling him to eliminate it in his bonds, then add it right back with more foreign stocks.

 

[W2R]

TRP doesn't seem to be recommending that he retire on 80% equities, but that now, in the early years of the portfolio, he keep 80% equities. Presumably, they would have him reduce that percentage later.

If that is the case, then I'm perfectly OK with 80% equities until he gets close to retirement.

 

[Texas Proud]

Why are you ok with the exchange rate risk in international stocks, but not in bonds? You do realize where that risk is concerned, you're essentially telling him to eliminate it in his bonds, then add it right back with more foreign stocks.

Because a bond pays interest... the change in price for an international bond fund is the change in interest rates and the exchange rate... I don't see the benefit of looking for a bit more yield when it can be overcome many times over by the exchange rate..

International stocks can increase in price because they become more valuable... the business is growing etc. etc.... and the exchange rate risk is not as large...

Let me give an example... say your international bond is paying 7%... and the rates do not change.... but the exchange rate change 30% against you... you just lost 23% and do not have much hope of getting this back unless the exchange rate changes back to your favor... and any interest rate changes would probably happen to your US bonds at about the same amount as your international bonds... so in reality you are actually betting against the dollar for a bit of yield...



But, you invest in the next big company in China or India or even Europe... and it goes up 50%... but your exchange rate goes against you by 30%... you are still up 20%...



Now, if you want to play the game of 'is the dollar going to tank' or 'is the dollar going through the roof', then international bond funds are the way to go...

 

[brewer12345]

Foreign currency bonds appear to add some diversification to a portfolio, which is why I think they are a nice addition. Its not about chasing yield.

 

[GregLee]

... so in reality you are actually betting against the dollar for a bit of yield...

For a bit of yield or for the sake of betting against the dollar. But most international bond funds hedge against currency risk, so you don't actually get a bet against the dollar. A couple of weeks ago, I put a small amount into T. Rowe Price Emerging Markets Local Currency Bond Fund, without currency hedging, with the idea of betting against the dollar and diversifying, but I haven't really decided whether that's a good idea.

 

[Texas Proud]

For a bit of yield or for the sake of betting against the dollar. But most international bond funds hedge against currency risk, so you don't actually get a bet against the dollar. A couple of weeks ago, I put a small amount into T. Rowe Price Emerging Markets Local Currency Bond Fund, without currency hedging, with the idea of betting against the dollar and diversifying, but I haven't really decided whether that's a good idea.

Don't get me wrong, if you know what you are doing I don't have a problem with it... heck, I think betting against the dollar right now might be a good thing... except when I think about the Euro...

My boss and I argue over this all the time... he thinks the dollar is going to tank and wants to invest in 'something'... I always ask... 'what is better?'... it usually comes down to Australia and NZ....

 

[Animorph]

There is a wide range of reasonable allocations. This looks like an older domestic-dominated version that is within the norm. I would go with 50/50 domestic/foreign at least, with emerging markets, and closer to 50/50 large/small and 50/50 growth/value. I do have RE exposure and natural resource exposure as added allocations. But that's just me.

I agree 20% bonds is aggressive near retirement, but just about within a mainstream enough 120-age in equities. I'm normally 100% equities, well out of the mainstream. You can leave the bond allocation as it is until you retire, given some flexibility. If you can time your retirement to begin when your portfolio has accumulated to the appropriate level, you can then reallocate to more bonds if you want before you retire. You'll need to be a bit conservative at that point to avoid any problems with a bad market just after you retire. If you have to retire at a specific time in the future then you may need to be more conservative with your allocation before that time.

 

[Texas Proud]

Foreign currency bonds appear to add some diversification to a portfolio, which is why I think they are a nice addition. Its not about chasing yield.

Does the diversification pay off As expected?

IOW, I would agree that you are adding diversification... but does it give you any benefits you get from other diversification? Is it that much different than US bonds?

(note: not an argument, I don't know the answers)

 

[brewer12345]

Does the diversification pay off As expected?

IOW, I would agree that you are adding diversification... but does it give you any benefits you get from other diversification? Is it that much different than US bonds?

(note: not an argument, I don't know the answers)

The research I have read (in the past) suggests that a 10% or so unhedged foreign bond allocation does indeed move you closer to the efficient frontier.

 

[eytonxav]

I use T. Rowe Price Advisory Planning Services for my retirement asset allocation. I am 41, I hope to retire anywhere within the next 4 to 9 years if possible. The recommended asset allocation plan is premised on me working until 65, but I was told that even if I want to retire early, the asset allocation would not change too much, because the early retirement would mean I would need my investments to last for a longer period of time, and I would need to take on more risk (stocks) to help make my retirement assets last as long as I do.

Here is the recommendation (I get close to the target with a combination of taxable, 401k/deferred compensation, and ROTH IRA investments):

Stock
Large Cap 48%
Mid/Small Cap 16%
International 16%
Specialty 0%

Bond
Investment Grade 15%
High Yield 0%
International Bond 5%

Cash
Short Term 0%

I abrogate a little from this recommendation. I have a REIT fund, since I do not own real estate, I thought it was a good idea to have some exposure to the real estate market. If I purchased real estate, I might get out of that. In the meantime, I consider it under the Mid/Small Cap allocation.

I do keep money in a Vanguard short-term bond fund for an emergency cash fund as well as a future real estate purchase fund.

I have a defined benefit pension coming to me at age 60 that might cover about 10% of my cost of living at the time I will start to receive it. Some say that a pension like this should cause me to change my stock/bond asset allocation. I am not sure about this.

I have a medium-level of risk tolerance, and I pretty high desire to become financially independent as soon as possible.

Is there a way for me to assess what the over-all or yearly rate of return and standard deviation on this type of asset allocation has been in past? Is there a calculator that will do this?

Do you think this is a good asset allocation considering my goals, risk tolerance and any other relevant factors? I appreciate your advice.

Looks reasonable to me, but on your international, I would want some % of that to be emerging market.

 

[Ed_The_Gypsy]

The research I have read (in the past) suggests that a 10% or so unhedged foreign bond allocation does indeed move you closer to the efficient frontier.

The problem is finding unhedged funds.

 

[brewer12345]

The problem is finding unhedged funds.

GIM, BEGBX, Pimco unhedged, etc. They are out there.

 

[Ed_The_Gypsy]

In the accumulation phase, I favor 100% equities. The long-term returns are better than for bonds/debt instruments. Why would you care if they are volatile?

A conservative retirement would have equities and debt instruments. The ratio of 60/40 is popular. This represents about 10 years of spending at 4% of the total in less volatile assets ('bonds').

With 100% equities, you could wait until retirement, then convert 40% to a 10-year ladder of CDs or bonds.

Or, create the 'bond' ladder before you get to retirement, converting so much a year (if 5 years away, convert 8% every year, for example).

I am almost 100% equities (50/50 US/non-US). I am 64, but I do not know when I will quit. Today looks like a buying opportunity for equities for me. I am paying a lot more attention to dividend-paying equities than I used to. If I can get 4.5% dividend with the potential for growth, I will be happy. I look at SS as my bond fund anyway. midnighter777 wants to retire at 50, so he cannot look at things that way.

 

[Ed_The_Gypsy]

GIM, BEGBX, Pimco unhedged, etc. They are out there.

Neat! Thanks.

 

[slazenger]

Because a bond pays interest... the change in price for an international bond fund is the change in interest rates and the exchange rate... I don't see the benefit of looking for a bit more yield when it can be overcome many times over by the exchange rate..

International stocks can increase in price because they become more valuable... the business is growing etc. etc.... and the exchange rate risk is not as large...
.........

Now, if you want to play the game of 'is the dollar going to tank' or 'is the dollar going through the roof', then international bond funds are the way to go...

If I'm interpreting your reasoning correctly, you're essentially viewing the "exchange rate risk" as a negative thing, all other "risks" being equal since this is essentially the only difference between a domestic bond which you advocate over a collection of foreign bonds.

If you ask me, "exchange rate risk" is mostly a misnomer, especially where long-term investing is concerned. Over a long period of time, the see-saw of various currencies (including our own) would be expected to balance out. But I think it's actually more of a misnomer because you're implying, or actually suggesting, its safer to have as much of your money as possible in the current of one country - (the U.S, in your case) - than it would be to have it in the currencies of many countries, such as in an International Bond fund.

In short, i see that "risk" as a null at worst, and as an advantage, at best.

Now foreign taxes - there's a real loss that sometimes isn't recouped/reinbursed, if similar taxes are levied again here after the exchange.

 

[Texas Proud]

The research I have read (in the past) suggests that a 10% or so unhedged foreign bond allocation does indeed move you closer to the efficient frontier.

I have been doing a bit of quick reading and have graphed the two funds you posted compared to VFICX.... and compared it with the change in the US$...

With BEGBX, it looks like it is most the dollar change that makes it different than the US fund... but, it is not quite keeping up with the US fund (probably because of cost, but I did not check out the difference in cost)....

Now, GIM varies wildly from VFIXC.... not sure why... but it does not look good the last 200 days... but over 10 years it is great...

 

[brewer12345]

I have been doing a bit of quick reading and have graphed the two funds you posted compared to VFICX.... and compared it with the change in the US$...

With BEGBX, it looks like it is most the dollar change that makes it different than the US fund... but, it is not quite keeping up with the US fund (probably because of cost, but I did not check out the difference in cost)....

Now, GIM varies wildly from VFIXC.... not sure why... but it does not look good the last 200 days... but over 10 years it is great...

BEGBX is pretty plain vanilla and they mostly stick to higher credit ratings and play duration games vs. their index. GIM trafficks mostly in currency and credit games vs. the index. But evaluating these things vs. a single fund is disingenuous. You really need to look at it as part of a diversified portfolio. Since human beings aren't good at eyeballing that stuff, most researchers who study this stuff resort to mathematical models and historical performance quantitative evaluations.

 

[Texas Proud]

If I'm interpreting your reasoning correctly, you're essentially viewing the "exchange rate risk" as a negative thing, all other "risks" being equal since this is essentially the only difference between a domestic bond which you advocate over a collection of foreign bonds.

If you ask me, "exchange rate risk" is mostly a misnomer, especially where long-term investing is concerned. Over a long period of time, the see-saw of various currencies (including our own) would be expected to balance out. But I think it's actually more of a misnomer because you're implying, or actually suggesting, its safer to have as much of your money as possible in the current of one country - (the U.S, in your case) - than it would be to have it in the currencies of many countries, such as in an International Bond fund.

In short, i see that "risk" as a null at worst, and as an advantage, at best.

Now foreign taxes - there's a real loss that sometimes isn't recouped/reinbursed, if similar taxes are levied again here after the exchange.

As Brewer noted, it is not that great using the 'eyeball method'.... but from the little eyeballing I did, it looks like the US dollar is down 20% over the last 10 years...

But I will disagree with you on the exchange rate balancing out... I remember when I was young the British Pound vs US dollar was 5 to 1... when I lived in the UK, it was 1.4 to 1 and I think went down to 1.3ish to 1... a few years later it was 1.8 to 2.0 to 1 and is not going back down..


My main point is that I want to invest in an asset that I hope will grow and that I can use in the future.... since I have my expenses in US dollars, then it is US dollars that I will spend and it is US dollars that I want to grow...

Investing in foreign bonds can make me more money in US dollars... but not much more, and probably less, if we assume that there is no exchange rate risk... the premiss is that a higher interest rate in a foreign land is compensation for the risk of that currency being devalued over time...

So if we are talking country debt, then you have to price in the difference between the safety of the US debt vs the other countries debt... the yield on Greek debt looks very good right now.... but I would not want to touch it...

And I would say the same thing for corporate debt... if it is a strong European company, then the yield on their Euro debt is probably the same as if they had US$ debt... so the only benefit of buying their Euro debt is the potential for an exchange rate change...

If you want an exchange rate investment (ie, betting that the dollar will go one way or the other), then I agree that it is the way to go...


Now, I will try and find a few articles on this and see if there is something that gives some real numbers behind it... I will be looking to see if you invest in foreign bonds and take out the difference in default risk that you are better off than just plain US debt... from the few quick articles that I read today, they seem to say 'no, there is not a benefit' after taking into account the risk and expense cost of the fund... but these are just people like me spouting off.... not backed by math that I could see...

 

[MichaelB]

80% equities is high, even at a young age, and half that in US large cap is a pretty high concentration in one asset class.

1/5 of equities allocated to international is low. I would say at least 1/3, and at least half that to emerging markets.

Agree with Brewer about the int'l fund diversification value and the funds he named. GIM is a closed end fund and a bit more volatile. Part of the int'l bond could be in emerging market - for example, Fidelity (FNMIX0 and PIMCO (PELBX).