Quiet iconoclast looking to ER in 2006

[Red-y]

I've learned a lot from this Board; thank you for sharing your varied experiences, opinions, and good-natured rants!

I'm 46, working in IT for 24 years, and trying to reach critical mass for ER in the spring of 2006.

I'm a big fan of Gillette Edmunds's book, "How to Retire Early and Live Well (on less than $1 million)." I'm following an asset allocation loosely based on his ideas...I can't get down to the maximum of 5 non-correlated asset classes that he recommends, but I'm a big fan of diversity anyway

You're welcome to take potshots at my allocations, if you'd like:

10% Emerging Markets
20% Foreign Stocks
10% US Small Cap Stocks
10% US Large Cap Stocks
30% US Real Estate
5% US Oil and Gas
15% Foreign Bonds and Cash

Yes, I do have a high tolerance for risk. Over the long haul, I expect this mix to return 9.75% a year.

My New Year's resolution has been to rigorously track my expenses in Quicken to be sure I'm being realistic about what amount of income I'll need when my fulltime corporate employment ends.

When the day comes, I want to be spending my money on ME, not my infrastructure, as Paul Terhorst advocates. Kayaking, camping, snowboarding in British Columbia powder are the essentials that I want to be sure are covered.

Best to all,
Red-y

Quote:

maximum of 5 non-correlated asset classes that he recommends,

Hi Red,

Welcome ! - I was in IT also! for 30 years 1971-2001.

What are the 5 asset classes that he recommends? -

Also, yes your portfolio looks to lean to the riskier side. I would make sure that you invest in index funds, that way you will beat all the money managers over the long haul and 90% of them year in and year out.

[Red-y]

Edmunds' strategy is to select 3 to 5 non-correlated asset classes from the list below. The "expected lifetime return" is listed in parenthesis after each asset class.

Emerging Markets (14%)
US Small Cap (12%)
US Large Cap (10%)
Foreign Stocks (10%)
US Real Estate (10%)
US Oil and Gas (8%)
Corporate Bonds (7%)
Foreign Bonds (7%)
Municipal Bonds (5%)
Money Markets and CDs (4%)
Treasure Bills (3%)
Gold (3%)

In his view, US stocks are highly correlated with US bonds, so if you want a stock/bond mix, one of the two classes should be foreign.

Yes, I'm almost entirely in Vanguard and Dimensional Fund Advisors (DFA) index funds. Set 'em and forget 'em, until rebalancing time comes around.

Hi Red,

I just finished Swedroe's book "What Wallstreet doesn't want you to know". He recommends a similar approach.

My Target Allocation for 2004 and beyond will be.

15% Large Cap Growth
10% Large Cap Value
10% Small Cap Growth
10% Small Cap Value
10% International
35% TIPS / Short Term Bond Funds
5% REITs
5% Cash in Money Market Fund

All of these will also be Vanguard Index Funds. I'll rebalance twice a year and re-visit my Stock Allocation every 5 years and Adjust based on age 110 - Age.
I'm 52 right now and will be about 60% Stocks/40% Fixed Income.

I only need about 6% Growth at 3% inflation, but 8% Growth would be nice.

[wzd]

Cutthroat - how did you like Swedroe's book? I've mentioned it a couple of times and really liked the balance of the usual theory and religion stuff (active vs. passive) along with some of the more applicable details in it.

I've selected a target allocation of 50% US, 15% Foreign, 20+% personally managed real estate, and the rest bonds/cash. I'm planning investment moves to Vanguard or other index funds but haven't selected them all yet. The real estate is higher risk and higher work, but only keeps me busy about 2-3 days a month.

Red-y - How are you invested in DFA? I thought you had to pay someone 1% to manage your money so you could invest in them. Swedroe really seemed to like them, but I have written them off as a candidate because of the difficulty investing.

Wayne

Wayne,

I really liked Swedroe's Book. I guess it must have been you that turned me on to it. The only thing that I think he fell a bit short on was in designing an Asset allocation. (Maybe on Purpose - especially since he was recommending the DFA funds). It would have been nice to see some sample allocations - risk vs. reward based on age etc.

But it was really good all in all, especially since reading all the other active managed crap for the last 20 years.

Thanks,

[wzd]

Cutthroat - Yeah, I noticed the same thing... and I just noticed that it was you that started an asset allocation tools thread a short while ago. Did you try the quicken web one, or find a better one? The quicken web one didn't segment value/growth and I think the foreign options were weak, but it is the best free one I've seen. Still watching that thread...hoping someone posts one.

Wayne

[Red-y]

wzd -- yes, I have access to the DFA funds through my current investment advisor, who charges 0.8% of assets annual fee.

I was a diehard Do-It-Youself investor when I heard a free pitch by the guy, a local money manager here in Seattle. He convinced me that the more finely targeted market sectors of the DFA funds would outweigh his annual fee so I invested with him in 2000.

For instance, if you look at the Vanguard Small Cap index funds, they are really in the 6th-8th deciles in terms of market cap. The DFA 9-10 or Micro cap fund is just that...the 9th and 10th deciles. So if you want a true small/micro cap fund, that is what you are getting with DFA.

For reasons I won't go into here, I have moved up my target retirement date by 2 years and I'm looking to shave expenses wherever I can. Therefore, the investment advisor and his fees are going.

I have called Vanguard and I can transfer the DFA holdings over into a brokerage IRA account. I will never be able to add to these holdings or reinvest the dividends/capital gains, but I can keep these positions.

In my mind, that's having my cake and eating it too. The DFA holdings are about 45% of my total retirement funds. I'll keep them intact and rebalance around them with Vanguard's own funds.

According to Morningstar, retail investors can access DFA funds with a $2 million minimum investment.

Although I didn't plan to get set up in DFA through the investment advisor and then transfer the assets over to Vanguard, there is no reason why someone else couldn't do this on purpose. That is, pay the advisor's fee for a short period of time, get access to the funds, and then do a transfer to a low-cost financial house like Vanguard.

Wayne,

I have Quicken 2004 and have played with the same Asset Allocation Stuff for years. But, since they did not break the classes down to Value and Growth, I was looking for a better tool.

Funny - The Quicken Asset Allocation stuff used to project a 12% return for my same asset alloc model that in 2004 says I should expect a 7% return. I did not change the tool did!!

[cute fuzzy bunny]

Quote:

Welcome ! - I was in IT also! for 30 years 1971-2001.

I sense a pattern here. Before my time in marketing I spent 7 years in a fortune 500 IT shop. Converted the whole place from Banyan and Novell to Windows NT server, then migrated six different email systems over to microsoft exchange.

One thankless job. Except for all that stock that leads to ER.

[unclemick]

Not quite - 29 yrs goo and stick - aerospace - heat shields, adhesives, insulation, paints, composites - lab rat and desk jockey - the Dilbert cubicles didn't show up until the last 5 yrs of employment - ER'd 1993.

Also left handed and INTJ.

Hi unclemick! Pretty interesting as in addition to us
being the same age and retiring the same year, I also
spent the last 10 years of my career in aerospace,
working with some of the same kind of stuff
(composites, etc.), first in Michigan and later on in Texas.
However, I am very non-technical. Started out as an
accountant and always basically been the "money guy".

John Galt

[Red-y]

Update on my "have my cake and eat it too" strategy of moving my DFA funds in kind from a Schwab Advisor IRA account to a Vanguard self-directed IRA account:

It didnt' work. Although two reps at Vanguard had assured me that others at Vanguard held those same DFA funds (and therefore I could, too), turns out you must hold them through an investment advisor account like I had at Schwab. When the IRA transfer was made, all my DFA funds were liquidated and only cash was transferred to Vanguard.

So I have involuntarily turned 45% of my retirement assets into cash. To add insult to injury, my old investment advisor told me I could have just left the DFA funds where they were at Schwab! But I had already initiated the transfer to Vanguard and unknowingly started the chain of events that ended up in the total liquidation of my DFA holdings.

Water under the bridge now...gives me a chance to pick out some new funds from Vanguard or their stable of FundAccess funds to redeploy the cash into.

[haha]

Quote:

When the IRA transfer was made, all my DFA funds were liquidated and only cash was transferred to Vanguard.So I have involuntarily turned 45% of my retirement assets into cash.

Red-Y-
Does this mean you accidentally gave yourself a big capital gains tax to pay?

Mikey

[wabmester]

I assume no cap gains since it was an IRA, but that still sucks that Vanguard misled you. I haven't been very impressed with Vanguard's customer service types, or even their CFP's for that matter. I just hope they have smarter people at the top of the food chain.

[fire5soon]

Wabmester,
I've heard the same thing about Vanguard's service and advice. Although all of my assets (minus the 401k) are with Vanguard I haven't really had to deal with their customer service as I've literally done everything online... including rollovers. So far, so good.

-Jay