Asset Allocation - Late Inning Accumulation Phase

[DawgMan]

Today I plan on doing my once a year rebalance of my accounts and as every year, I try and spend a little time doing some research, looking at what others are doing, and of course, second guessing my strategy which often results in analysis/paralysis. None the less, as always, hoping to pick up some nuggets of wisdom from some of you that might help me make some appropriate changes. Yes, I know multiple factors go into everyone's AA and it is very personal, but always interested to hear about the better mouse traps out there.

Quick & dirty... I'm still making good $$ and packing away as my first designed potential RE date is in about 3 - 4 yrs when I am 55. There is a reasonable chance I will chicken out and potentially work in some capacity a few yrs beyond, but that would be due to OMY syndrome or just not "feeling it". I'm a 1099 guy and don't hate my work so that is not a driver to hang it up, but like the idea of having the option.

I was pretty aggressive until about 2 yrs ago when I ratchetted down by AA to effectively 70/30. More specifically, my 70 is broken down 45 Large/15 Small/8 Intl Large/2 Emerging Mkt and my 30 is in Intermediate Bonds & cash. If I add my Other category (real estate/3rd party business investment), you could argue my AA is really 65/28/7 of which 65% is in tax differed accts, 28% taxable accts, and 7% other (would all go into taxable if sold). While my Other category is more speculative, I view the investments as effectively a blend of my stock/bond portion risk for internal reasons (Real Estate is my business, if I sold an investment I would plow it back into my AA). I will have no pension (other than SS I am conservatively not counting on), so my nut must generate my RE income. My thought is to maybe go to 60/40 when I do RE, but not sure.

Questions...

- Other than FIREcalc, I have used some of the historical AA model returns to help guide me on future performance and volatility and thus land me on an AA that "feels right". I know there is allot of talk about future returns being much less going forward than the past, but how did you reconcile your AA in the last 3 - 5 yrs of the accumulation phase and then what did you determine your AA strategy to be once retired?

- I'm not an individual stock buyer and try to subscribe to the KISS method, but think I have way too many ETFs/mutual funds... currently 15. Most are low cost investments and some are in my taxable accts and would create a tax event which is why I have not sold them yet. What do you think the optimal number of ETFs/Mutual Funds would be?

- I go round and round with my specific allocation of international (10%) as I have heard the arguments that by investing in larger US companies, you often have enough international exposure. Thoughts?

- While still in accumulation, my focus has been pure return based and trying to be tax efficient in my brokerage accts. I suspect I will determine my final AA/draw down strategy once I retire, but I suspect with no pension, I will keep the same strategy perhaps collecting dividends/interest vs reinvesting them, and then supplementing my income needs with selling (ideally LTCG) certain securities. I have lofty RE spending goals which will bump me into higher tax brackets, so employing certain tax strategies will play into my plans. I know some of you create dividend type portfolios, but how are those of you without any pensions/working spouses adjusting your AA or draw down approaches once retired?

Thanks in advance!

 

[DrRoy]

I think my approach is not too far from you, but I am further along and will RE in 3 months. My recent focus has been on reducing my equity AA from 85 a few years ago to 62 today. I am still musing my final target, somewhere 50-60. I agree that you have too many ETF's. I would say that you should work closer to a small number of index positions that cover the market, no more than 5. I personally have no international now, but that is a rare view. I expect to live off of a small pension, dividends and cap gains distributions, and RMD's.

 

[big-papa]

Same here. Will be 56 this year and thinking 2-3 years. It's mostly mental math, but my taxable accounts are fixed at 55% equity and the remainder in intermediate treasuries and TIPs. My tax deferred accounts went from around 70% to 65% in the rebalance I did last week and I will slowly take them down to 55% as well.

Regarding your AA, have you taken a trip over to bogleheads.org? Simba's spreadsheet offers a wealth of data for backtesting. It's not a retirement spreadsheet, but you can cut and paste out of it into your own for retirement backtesting.

Like you, I have many funds, but it's because I have:
A taxable account at Fidelity
A taxable account at Vanguard
My 401K at Fidelity
2 tax deferred accounts at Fidelity

They don't all have the same funds available, but I try to get close from an objective standpoint.

Speaking of bogleheads, it's generally accepted over there that anything less than 5% of your total allocation really isn't going to move the needle much (looking at your 2% EM allocation).

Good luck!
big-papa

 

[Dawg52]

Speaking of bogleheads, it's generally accepted over there that anything less than 5% of your total allocation really isn't going to move the needle much (looking at your 2% EM allocation).


big-papa

That's probably true. Sometimes I feel like I need to have a little exposure in an area but don't have the gonads or desire to make an allocation significant enough to really matter. I own a little GLD just to satisfy my gold exposure hunger. The allocation doesn't really amount to a hill of beans, but I'm satisfied.

 

[DawgMan]

I am swallowing hard as I set my buy/sell orders in rebalancing. My natural analysis/paralysis/"market timing" is fighting me as I had been sitting on too much cash during the year. I don't know what is bothering me more... adding to my stock or bond position. I decided to let my heavy cash position ride thru most of the year as I was anticipating a pull back in stocks and my bonds getting hit. Well, bonds got hit and stocks went up. I know I know... follow the plan. Anyone else having feeling the resistance, particularly if your AA model says throw more in stocks right now?

 

[DawgMan]

That's probably true. Sometimes I feel like I need to have a little exposure in an area but don't have the gonads or desire to make an allocation significant enough to really matter. I own a little GLD just to satisfy my gold exposure hunger. The allocation doesn't really amount to a hill of beans, but I'm satisfied.

BTW... should I assume you are a fellow UGA Dawg??

 

[Whisper66]

My situation - Retired in 2015 at 55, wife not working, living off investments, no other planned income until SS kicks in.

--how did you reconcile your AA in the last 3 - 5 yrs of the accumulation phase and then what did you determine your AA strategy to be once retired?
-- We were fully invested in equities until about 1.5 yrs before retirement. Dropped to 85% equity / 15% fixed assets in preparation for retirement. The 15% fixed assets was set to give us enough to live for 3 yrs or more without having to sell off equities in a 3 yr down market. Would have made this move a couple years sooner if I knew I was going to retire at 55. Made sure that Firecalc gave us over 80% success rate under all reasonable scenarios before we pulled the trigger to retire. Should mention we have flexible asset allocation plan in retirement. With the market being highly priced (IMO), we've sold off some assets and are now at 75/25. May drop it one more time to 70/30...considering it at least. Will go back up in AA if there's a major correction in the market.

- What do you think the optimal number of ETFs/Mutual Funds would be?
- Not hung up on optimum number. My target is 10 or less. Currently have about 7 mutual funds with an additional smattering of about 6 dividend paying blue chip stocks for added income.

- I go round and round with my specific allocation of international (10%) as I have heard the arguments that by investing in larger US companies, you often have enough international exposure. Thoughts?
-- I have <10% international. Historical returns haven't excited me so haven't wanted more. Most of my investments are in larger companies so maybe that balances it a bit...haven't worried about it too much.

-- I have lofty RE spending goals which will bump me into higher tax brackets, so employing certain tax strategies will play into my plans. I know some of you create dividend type portfolios, but how are those of you without any pensions/working spouses adjusting your AA or draw down approaches once retired?
-- I've sold off all highly speculative investments, moved to just basic, more conservative investments, mostly broadly diversified mutual funds, moved to a moderate focus on dividend paying investments to lock in some return to help avoid need to sell off equities in a downturn. We are also making aggressive ROTH conversions to limit tax hit when we hit RMD's at 70.5 yrs old.

 

[Dawg52]

BTW... should I assume you are a fellow UGA Dawg??

I'm that other dawg. Mississippi State. But we're cousins....same conference.

 

[big-papa]

I'm that other dawg. Mississippi State. But we're cousins....same conference.

State, eh? My wife is a MS State Grad. Me, I'm LSU. But as said above, at least we're in the same conference!

 

[Lsbcal]

My comments in red:

...
- Other than FIREcalc, I have used some of the historical AA model returns to help guide me on future performance and volatility and thus land me on an AA that "feels right". I know there is allot of talk about future returns being much less going forward than the past, but how did you reconcile your AA in the last 3 - 5 yrs of the accumulation phase and then what did you determine your AA strategy to be once retired?

I'd suggest looking at the VPW tool to set your AA in retirement. Then move towards that as you approach actual retirement.

- I'm not an individual stock buyer and try to subscribe to the KISS method, but think I have way too many ETFs/mutual funds... currently 15. Most are low cost investments and some are in my taxable accts and would create a tax event which is why I have not sold them yet. What do you think the optimal number of ETFs/Mutual Funds would be?

No optimal number here. FWIW, we have only 5 basic stock funds: large cap, midcap, small cap US plus large cap and small cap international.

- I go round and round with my specific allocation of international (10%) as I have heard the arguments that by investing in larger US companies, you often have enough international exposure. Thoughts?

I use my own trend following method to move the International between a general international fund and the US counterpart. For international small cap (which I overweight relative to LCI) I move between VINEX and VMVAX (midcap value). For most of 2016 this was in VMVAX.

I've mentioned this market timing on other threads but I don't think I've influenced anyone. That's fine, I have no faith in moving with the herd when it comes to stocks. Most people are better off with buy-hold as it's easier to implement.

- While still in accumulation, my focus has been pure return based and trying to be tax efficient in my brokerage accts. I suspect I will determine my final AA/draw down strategy once I retire, but I suspect with no pension, I will keep the same strategy perhaps collecting dividends/interest vs reinvesting them, and then supplementing my income needs with selling (ideally LTCG) certain securities. I have lofty RE spending goals which will bump me into higher tax brackets, so employing certain tax strategies will play into my plans. I know some of you create dividend type portfolios, but how are those of you without any pensions/working spouses adjusting your AA or draw down approaches once retired?

Perhaps you've done this already but I'd look into a multi-year tax strategy that takes into account Roth IRA conversions and when to take SS.

 

[DawgMan]

Excuse my ignorance... VPN tool is what exactly?

 

[Lsbcal]

Excuse my ignorance... VPN tool is what exactly?

The VPW tool was developed by Longinvest. Check out the threads on this. Bogleheads has a very long thread where you can read how it developed and how people have used it. It is a spreadsheet tool and one can download it for Excel (as I do from the Bogleheads site) or for other free spreadsheet programs.

There is also a thread on this site that detailed it. One virtue is that even if you don't use it's recommended withdrawal percentages, you can see how a portfolio would have performed historically during the bad start years (particularly 1930 and 1968).

 

[FreeBear]

DawgMan, Sounds like you are getting close! Here are several thoughts.

Asset allocation:
It's hard to suggest AA for someone else given unknown SWR and perspective on risk. We're running 50% equities, 42% bonds, and 8% cash now that we're 2 years into retirement. During the accumulation phase I loved 100% equities until about 5 years from pulling the plug; never held more than 1-2 month's of cash. Now DW and I sleep better with only 50% equities to deal with sequence of return risk over the next 10 or so years. Plan to gradually rise to 60% over the next decade to fight long term inflation risk and LTC/medical costs later in life.

2 general suggestions:

If you haven't already done so, I suggest running a Fircalc analysis plotting % success rate verses asset allocation. The optimal AA and overall curve shape depends essentially on the withdrawal rate. In our case, anything between 50% to 70% stocks seems to work well, but again this depends on specific WR.

Determine how long of a bear market you would like to endure without having sell stocks. We decided to hold at least 7 years of retirement expenses but probably no more than 10 years in bonds and cash. Fortunately for us, our WR is low enough to bring us back to 50-70% equities range suggested by the Firecalc model.

Optimal number of funds:
We have 6 different accounts (IRA, ROTH, and taxable for each of us). One account has 6 index funds. Our long term goal is to consolidate down to 2 funds for each of the larger accounts, one stock and one fund. The smaller accounts will have only one fund, something like a target date index or Vanguard 60/40 index.

I used to like to slice and dice, but now want to keep things simple to minimize expenses and analysis paralysis on my part. Also DW hates finances so I want to keep it easy for her to understand, especially if she ever has to run the show.

Oh, we're now using only low cost, broad market index funds from Vanguard or Fidelity. I gave up trying to beat the market...

International:
We're running about 10% international, primarily developed world. Bogle hasn't been a big fan of international for reasons you cite and due to currency risk. Still, I'll probably keep my 10% in the IRA's for the sake of diversity and, well, I don't want to lock in my losses at this point...

Tax efficiency:
We're managing income for a significant ACA subsidy. So this trumps ROTH conversions of existing IRA's or concerns about RMD's. If/when subsidies disappear and the tax brackets and standard deduction deductions are eased, we'll revisit ROTH conversion.

Sounds like you're planning for a fairly heavy burn rate, so you'll probably be much more sophisticated about this stuff.

Oh, what are you going to do all day when you FIRE??

FB

 

[DawgMan]

DawgMan, Sounds like you are getting close! Here are several thoughts.

Asset allocation:
It's hard to suggest AA for someone else given unknown SWR and perspective on risk. We're running 50% equities, 42% bonds, and 8% cash now that we're 2 years into retirement. During the accumulation phase I loved 100% equities until about 5 years from pulling the plug; never held more than 1-2 month's of cash. Now DW and I sleep better with only 50% equities to deal with sequence of return risk over the next 10 or so years. Plan to gradually rise to 60% over the next decade to fight long term inflation risk and LTC/medical costs later in life.

2 general suggestions:

If you haven't already done so, I suggest running a Fircalc analysis plotting % success rate verses asset allocation. The optimal AA and overall curve shape depends essentially on the withdrawal rate. In our case, anything between 50% to 70% stocks seems to work well, but again this depends on specific WR.

Determine how long of a bear market you would like to endure without having sell stocks. We decided to hold at least 7 years of retirement expenses but probably no more than 10 years in bonds and cash. Fortunately for us, our WR is low enough to bring us back to 50-70% equities range suggested by the Firecalc model.

Optimal number of funds:
We have 6 different accounts (IRA, ROTH, and taxable for each of us). One account has 6 index funds. Our long term goal is to consolidate down to 2 funds for each of the larger accounts, one stock and one fund. The smaller accounts will have only one fund, something like a target date index or Vanguard 60/40 index.

I used to like to slice and dice, but now want to keep things simple to minimize expenses and analysis paralysis on my part. Also DW hates finances so I want to keep it easy for her to understand, especially if she ever has to run the show.

Oh, we're now using only low cost, broad market index funds from Vanguard or Fidelity. I gave up trying to beat the market...

International:
We're running about 10% international, primarily developed world. Bogle hasn't been a big fan of international for reasons you cite and due to currency risk. Still, I'll probably keep my 10% in the IRA's for the sake of diversity and, well, I don't want to lock in my losses at this point...

Tax efficiency:
We're managing income for a significant ACA subsidy. So this trumps ROTH conversions of existing IRA's or concerns about RMD's. If/when subsidies disappear and the tax brackets and standard deduction deductions are eased, we'll revisit ROTH conversion.

Sounds like you're planning for a fairly heavy burn rate, so you'll probably be much more sophisticated about this stuff.

Oh, what are you going to do all day when you FIRE??

FB

Thanks!

For now, planning on a 4% SWR which per FireCalc should get me there, between a 60/40 - 70/30 split. I will have to get into some of the minutia of tax efficiency as I get closer to launching. My current income and projected RE income will keep me in the upper tax brackets so ACA savings are non existent and Roth conversions make no sense at this point. As someone who is self employeed, my best tax reduction strategy is frankly to keep some sort reminisce of my business running... something I will think about in a few yrs. Like you, I was more aggressive with my AA a few years ago as I always felt I had 2 things working for me... 1) time before I retire, and 2) a good income to always pay the bills. Your last question is probably what I am struggling with the most. A combination of the fear in giving up a lucrative income, switching from an accumulation mentality to a withdrawal mentality, determining what I am "retiring too", and frankly, not having any buddies who are currently or even really close to retiring is all keeping me in the Matrix despite what my numbers tell me I can do. Honestly, while I still am focused on making sure my numbers work out, I am putting most of my energy in trying get comfortable with leaving the Matrix.

 

[photoguy]

What do you think the optimal number of ETFs/Mutual Funds would be?

The smallest number that satisfies your need to tinker.

For me, this is probably about 5-10 different funds. But due to spread out accounts I have somewhere in the range of 30-50 (not sure exactly without counting). Some of this is different variations of the same vanguard fund. Eg VBR, vsiax, visvx (all small cap value) or very similar funds like vti and vfiax (total us stock and sp500)

 

[pb4uski]

Ideally I could get down to 8 tickers... one index fund for each major asset class in my AA.... domestic equities, international developed equities, international emerging market equities, domestic investment-grade bonds, domestic high-yield bonds, international developed bonds, international emerging market bonds, and cash. And even with that I concede that I slice and dice more than I really need to and I would simplify it for DW's sake if my demise was imminent.

However, tax efficiency (not wanting to sell one tickers that has significant unrealized gains), interest rate risk mitigation (in CDs and target maturity bond funds that mature in different years), etc. result in our currently having 14... but I'm ok with that many.

 

[W2R]

Questions...

- Other than FIREcalc, I have used some of the historical AA model returns to help guide me on future performance and volatility and thus land me on an AA that "feels right". I know there is allot of talk about future returns being much less going forward than the past, but how did you reconcile your AA in the last 3 - 5 yrs of the accumulation phase and then what did you determine your AA strategy to be once retired?

I determined what I wanted my AA to be in retirement, after reading a bunch of investing books and online stuff. To me, it seemed like people were saying a nice conservative AA was 50:50. When I told my multi-bazillionaire financial wizard of a big brother that this was my plan, he urged 45:55 so I decided on that. I figured he knew what he was doing.

So, during my last 3-5 years of the accumulation phase, I steadily moved from my accumulation phase AA of 100% equity funds, to my planned retirement AA of 45% equities, 55% fixed. I had everything in place maybe 2-3 years before I retired in November, 2009. I had a few months to see what sort of yield my AA would give me, before the crash.

- I'm not an individual stock buyer and try to subscribe to the KISS method, but think I have way too many ETFs/mutual funds... currently 15. Most are low cost investments and some are in my taxable accts and would create a tax event which is why I have not sold them yet. What do you think the optimal number of ETFs/Mutual Funds would be?

I have six:
VTSAX (Total Stock Market)
VTWAX (FTSE All World Ex US)
TSP G Fund (government bond fund)
VBTLX (Total Bond Market)
VWIAX (Wellesley)
VWELX (Wellington)

I hardly have any Wellington (just $13K in a Roth IRA), so really the first five would suffice, for me. I really like to keep it simple. My smart brother has lots more funds and even individual stocks and bonds, but that would drive me bonkers.

Actually, just having one of Vanguard's retirement funds sounds appealing because I wouldn't have to rebalance. I can foresee that rebalancing might become hard to do if I ever started losing my mental capabilities due to age.

- I go round and round with my specific allocation of international (10%) as I have heard the arguments that by investing in larger US companies, you often have enough international exposure. Thoughts?

Of the above funds, I have 12.5% in VTWAX. Since I have VTSAX, my overall international exposure is a bit higher.

International hasn't been doing well lately so people are advising against it. Back when international was doing really well, people were urging 50% or more international. To me this smacks of market timing and buy high, sell low practices.

- While still in accumulation, my focus has been pure return based and trying to be tax efficient in my brokerage accts. I suspect I will determine my final AA/draw down strategy once I retire, but I suspect with no pension, I will keep the same strategy perhaps collecting dividends/interest vs reinvesting them, and then supplementing my income needs with selling (ideally LTCG) certain securities.

I definitely agree with collecting dividends in cash for spending, as you plan to do, and I would urge you to do that. Personally I don't spend my LTCG, but then I suppose I really could spend more. I take my LTCG in cash and then use that cash in rebalancing.

I have lofty RE spending goals which will bump me into higher tax brackets, so employing certain tax strategies will play into my plans. I know some of you create dividend type portfolios, but how are those of you without any pensions/working spouses adjusting your AA or draw down approaches once retired?

I don't have a working spouse, and my monthly pension deposit is in the mid three figures so it's pretty tiny. But, I have two other reliable income streams:

1.) SS, and

2.) equal monthly withdrawals from the TSP "G Fund" which is guaranteed to never decrease in share price (so it's essentially like cash with around 2.6%-2.9% interest at present IIRC). I am withdrawing an amount from the G Fund that should last and meet my RMD requirements until I am 94, but without inflation protection. So, as time goes by and inflation kicks in, I will depend less on this income stream and more on my taxable portfolio.

Also I spend my dividends although I don't have a "dividend type portfolio". If I needed more money, I'd spend up to 3.5% of my 12/31 portfolio value, which would be more than my dividends.

 

[RobLJ]

How did you reconcile your AA in the last 3 - 5 yrs of the accumulation phase and then what did you determine your AA strategy to be once retired?

I was close to hitting 50 in 2005 and getting increasingly nervous about the housing market, so I slowly dialed back my 90% stock allocation to 65%, which took me almost two years, mostly to intermediate treasury funds, corporate bonds, and cash. I was lucky in that timing--and the cash/treasuries turned out to be very useful in rebalancing back to stocks in the last quarter of 2008 and through 2009. Before semi-retiring (a year and a half ago), I further stepped the stock allocation back to 57-63 % range, rebalancing when I go beyond those bounds.


- I'm not an individual stock buyer and try to subscribe to the KISS method, but think I have way too many ETFs/mutual funds... currently 15.

My DW has a series of IRA and 401k accounts and mine (about 65% of our retirement funds) cover the small, mid, large/value, mixed, growth scale, with international stocks and bonds as well. I'm waiting 6 months for the market to settle pre-summer, but I'll solve part of the problem by moving her last and largest 401k into her new employer's plan, which is pretty good.
If you find a good answer to simplify across multiple accounts, let me know. I think we own about 35 funds spread across 10 accounts.

- I go round and round with my specific allocation of international (10%) as I have heard the arguments that by investing in larger US companies, you often have enough international exposure. Thoughts?

Styles slowly (sometimes quickly) go in and out of favor--a good example is the movement to small/mid growth since the election, replacing large-cap. International, partly as a function of dollar strength, has been in a long-term funk, but every dog gets its day, finally. Most of my little rebalancing over the last three years have been increasing international stock and bonds. On EM, when the dollar starts weakening (whenever that occurs), EM tends to move and when EM moves, it can move very quickly. I did take gains in China in 2007 after it had done a moonshot and my worst loser over the last 6 years has been Latin America, but rebalancing early last year helped dull the pain there since it shot up before slumping again after the election.
I don't have an answer to international, other than rebalancing yearly and being patient. The comparative US winning streak can continue for a while--but at some point it will change. I'm rebalancing some cash into Europe and Asian stock in a week or two.

I know some of you create dividend type portfolios, but how are those of you without any pensions/working spouses adjusting your AA or draw down approaches once retired?

A missing piece since I started investing in the early 90's is real estate and real estate bonds, so I started a position in the Fidelity funds in these and have been slowly building them up, eventually to a 10% allocation.

Normally, I would shift my allocations more towards yield, particularly treasury, TIPS, high-rated corporate bond, and dividend funds.
Instead, I've been waiting for four years for the Fed to move from zero interest to raise interest rates, so I've held quite a bit more cash rather than bonds/rebalance into longer-term Treasuries and corporates. Also, I've put part of that bond allocation in high-yield and floating funds, on the assumption the US will avoid a recession and continue very slow growth out of the Great Crash. This has been a risky strategy, which I don't recomend, although it seems to have worked. Over the next two years, I plan to slowly move back into a more "normal" TIPS and short/intermediate Treasures in the bond allocations, the latter after the Fed continues to raise. This has been a risky strategy since 2013 (assuming no recession short-term), so take with a huge grain of salt. I do like the Vanguard Dividend and Dividend growth funds for yield and probably will move some of my large-cap growth into dividend/value fund, which isn't a strength in my larger Fidelity account. I do think dividend stocks are "fully valued" right now, so I'm not in a hurry. I will increase international value/dividend allocation in a few weeks as the main piece of the international rebalancing--I think they're comparatively cheap, to US value stocks.

/QUOTE]