If you believe in historical data, the safest portfolio is 60% stock and 40% bonds. Since 1928, a person with that allocation could have withdrawn 4.5% of their initial savings every year for 30 years and not run out of money. For a portfolio of 40% stocks and 60% bonds, that number drops to 3.9%. Even though there is not much of a difference in the average yearly return of a 60/40 and 40/60 portfolio, investment returns follow a power law. Over a 30 year retirement, seemingly small differences in yearly returns add up to a large difference in outcomes.
Appropriate Asset Allocation for new Retiree?
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SunBlueSky
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Going by your comment, if you do have concerns then it may make sense for you to change to a lower stock position. I found that as I got closer to retirement, I was less comfortable with the thought of losing a big chunk to market drops. What gave me comfort was having more in safer accounts (Money Markets and CD's) and less in the stock market. Inflation is a risk though, and I am also looking into TIPS. Have you run your scenarios in FireCalc?
You have $24K a yr in pension and SS. Your goal is $70K a yr so your $1.8M must generate $46K per year which is 2.55%. This is close to CD rates online or long term US treasury bonds. Just a thought.
Vanguard has a site to determine your ideal portfolio after answering some questions based on your risk tolerance, time horizon, type of investor you are, etc. Click the following link:
https://personal.vanguard.com/us/FundsInvQuestionnaire
Vanguard will respond with a general advice on your current portfolio.
My specific advice: Get to know bonds. Most investors invest in equity during their career so they know equities. However, bonds are different and they behave differently during a bear market. This is illustrated at:
https://obliviousinvestor.com/what-happens-to-bonds-in-a-stock-market-crash/
Morningstar assign specific risk of a specific bond funds versus other bonds and assign specific reward of a specific bond versus other bonds. You should select bonds that has relatively higher reward but relatively low risk.
I guess what I am saying: equities are more important prior to retirement. Bonds are more important after retirement. Your AA are 50/50 which is OK but my question is what type of bonds do you have?
Do you understand the risk and rewards on your bond portion of your portfolio? For example there is a huge difference between junk bonds and treasury bonds so 50/50 portfolios will have different risks depending on the specific type bonds.
Finally, you will be concerned about liquidity. I recommend some treasury bonds for liquidity...based on the second link above.
mickeyd
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
My AA for the last few years has been 45/45/10. That seems to have given me enough growth exposure without assuming too much risk. Is this the right AA for me? Heck, I don't know, but if you ask me how it worked out 30 years from now (when I am 105) I will be glad to present you with a full report.
OldShooter
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Answer has to be "It depends."
What is your objective for the portfolio? Do you want your last check on the day you die to bounce? Or do you want to leave an estate with bequests to people and/or charities. Or ??
How big is the portfolio relative to your spending needs? At 72YO we are 75/25 and the 25% portion, without rebalancing, would meet our spending needs for years.
Remember, too, that over long periods of time (10 years) the volatility of equities is fairly irrelevant. It is not really risk. Risk due to volatility starts to bite only if you have to sell equities/sequence of returns risk.
One side note on your $1.8M portfolio...I suggest that you attempt to lower your fees. For example....If your average fee is 0.25%, then you are paying about $4,500 every year.
After you have retired, it may be worth your time to research every mutual fund, broker, etc to reduce your current fees and yet have the same portfolio that you are comfortable with. Do some comparison shopping since it is a competitive business. i.e. Vanguard versus Fidelity
I do know some of my investor friends know how to buy stock and bonds directly which may also reduce your annual fees. They also inform me buying stocks and bonds directly are not a problem. However, selling bonds before the maturity date can be problematic. Google : How to buy stock (or bonds) directly. It makes interesting reading for a retiree.
Another interesting link is:
https://www.investopedia.com/articl...w-optimize-your-portfolio-and-reduce-fees.asp
After you have retired, it may be worth your time to research every mutual fund, broker, etc to reduce your current fees and yet have the same portfolio that you are comfortable with. Do some comparison shopping since it is a competitive business. i.e. Vanguard versus Fidelity
I do know some of my investor friends know how to buy stock and bonds directly which may also reduce your annual fees. They also inform me buying stocks and bonds directly are not a problem. However, selling bonds before the maturity date can be problematic. Google : How to buy stock (or bonds) directly. It makes interesting reading for a retiree.
Another interesting link is:
https://www.investopedia.com/articl...w-optimize-your-portfolio-and-reduce-fees.asp
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Be a little careful with this. The issue is diversification.
For stocks, holding a total US market fund means you are diversified across over 3,000 issues. For an individual to achieve diversification buying individual stocks, statisticians will tell you you need 60-100 or more stocks, carefully selected across sectors and geographic locations. IMO this is essentially impossible for an individual investor.
For US government bonds and bank CDs diversification is not a concern because these are considered to be zero risk instruments. Still, there are planning issues with selecting maturities.
For corporate bonds, you are back to diversification as an issue. I am on the investment committee of a nonprofit where we always buy bonds directly and never through a bond fund. We have about $2.5M invested in bonds, mostly $10K positions per issue. So we are north of 200 issuers and pretty well diversified. But, again, this number of issues is tough for an individual to manage.
So, for most of us little investors to achieve diversification we have to be buying mutual funds.
Finance Dave
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I would take a "risk tolerance" quiz...I bet you can find a free one online. Now that I have minimal income, I've become very conservative and won't allow my equity position to go over 40%, and typically I keep it closer to 25-30% unless the market drops 5% or more.
Also you say the remainder will be in "funds"....what type of funds do you mean? Hopefully not stock mutual funds....if so you'd be 100% in the market lol.
I have a large portion of my money in laddered CDs right now. Very low return, but safe and steady. I get a small upside with my equities. I am afraid to own any long-term bonds right now, as a spike in interest rates would cause their value to go down...but if rates get up higher I would consider some. Short-term bonds are ok...look at the "duration" if you're buying a bond fund and this will give you an idea of whether the fund is short-term or long-term. Anything over 6-7 years I won't do right now.
Good job saving and getting to this point!
Also you say the remainder will be in "funds"....what type of funds do you mean? Hopefully not stock mutual funds....if so you'd be 100% in the market lol.
I have a large portion of my money in laddered CDs right now. Very low return, but safe and steady. I get a small upside with my equities. I am afraid to own any long-term bonds right now, as a spike in interest rates would cause their value to go down...but if rates get up higher I would consider some. Short-term bonds are ok...look at the "duration" if you're buying a bond fund and this will give you an idea of whether the fund is short-term or long-term. Anything over 6-7 years I won't do right now.
Good job saving and getting to this point!
For a typical S&P500 mutual fund such as VFINX, the top ten holdings comprise of 21.49% of the fund:
Microsoft CorpMSFT4.29%
Apple IncAAPL3.84%
Amazon.com IncAMZN2.91%
Facebook Inc AFB1.73%
Berkshire Hathaway Inc BBRK.B1.60%
JPMorgan Chase & CoJPM1.52%
Alphabet Inc Class CGOOG1.49%
Alphabet Inc AGOOGL1.47%
Johnson & JohnsonJNJ1.38%
May not be necessary to diversify to 500 issues to match VFINX.
Just enough to match perhaps top 100 holdings should be sufficient in order to avoid the fees. Slightly more risk is involved..but the risk is minimal. For example, if a company comprising about 1% of the fund crashes 50%, then the effect is only 1/2% of the fund.
It all depends on your main objective: Diversification to 500 or more holdings to reduce the risk in a mutual fund...or Slightly less diversification to 100 holdings to avoid the fees.
My investor friend consider fee payments to a mutual fund as "dead" money. For a large portfolio of $2M plus, this dead money can be substantial over the years and the compounding effect is lost.
He claims that the money that he saves is sufficient to lease a brand new sports car every 24 or 36 months. As far as the slightly increased risk of owning about 100 holdings versus 500 holdings in a S&P500 mutual fund, that doesn't appear to bother him a bit. Just another way of investing and it is up to the individual to balance the risk versus reward.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Vanguard 500 and Vanguard Total Stock have a 0.04% ER... on $2 million... that is $800/year.... probably enough to make one month's lease payment on a brand new sports car each year. Yup... "dead" money for sure.
An initial investment of $2 million would grow in 20 years to be $13.455 million at a 10% return with no expenses.... with 0.04% expenses it would grow to $13.357 million....I guess you could get a nice sports car with the $98k difference but you'll have to wait 20 years to do so.
Let's hope that your investor friend is better at investing than at math.
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capjak
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Vanguard 500 and Vanguard Total Stock have a 0.04% ER... on $2 million... that is $800/year.... probably enough to make one month's lease payment on a brand new sports car each year. Yup... "dead" money for sure.
An initial investment of $2 million would grow in 20 years to be $13.455 million at a 10% return with no expenses.... with 0.04% expenses it would grow to $13.357 million....I guess you could get a nice sports car with the $98k difference but you'll have to wait 20 years to do so.
Let's hope that your investor friend is better at investing than at math.
If fees is a focus than Fidelity Zero (FZROX) Fee funds fit. 0.0% fees.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
True, and we own FZROX.... but the whole point was that fees today are quite modest for a lot of good index funds and nowhere near enough to "lease a brand new sports car every 24 or 36 months" on $2 million... pure hyperbole.... that thinking is stuck in the past on fees... and perhaps also on lease rates for sports cars!
Let's see: $4000/mo Social Security + $3200/mo rental property income + $1.2 million in various Vanguard & Wells Fargo funds...hell, we're making as much as when we were working full-time! Plus (or minus), mortgages are all paid off, & only one minor HELOC to pay off. Guess I don't need to worry.
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
True enough and I don't disagree except to point out that the task of managing a truly diversified portfolio of individual stocks is pretty overwhelming for a retail investor. So I don't see how the "balance" could ever favor that strategy over the pittance than passive mutual funds cost. YMMV, of course.
Vanguard 500 and Vanguard Total Stock have a 0.04% ER... on $2 million... that is $800/year.... probably enough to make one month's lease payment on a brand new sports car each year. Yup... "dead" money for sure.
An initial investment of $2 million would grow in 20 years to be $13.455 million at a 10% return with no expenses.... with 0.04% expenses it would grow to $13.357 million....I guess you could get a nice sports car with the $98k difference but you'll have to wait 20 years to do so.
Let's hope that your investor friend is better at investing than at math.
Your math calcs are correct. I need to discuss this issue with my friend on our next fishing trip on my cabin cruiser. The 0.04% is today's but 20 years ago it was higher. He did mentioned his logic: He is a "buy and hold" investor so it did not make sense to him to pay an annual fee every single year in a buy and hold portfolio. Also it could be that he already made the $98,000 difference (or more if the earlier fees were higher) and he is now using that difference for his lease payments.
It is also possible his investment assets are more than $2M since he is also divorced (like me) but he lives in a nicer house with a live-in maid in a granny house. He claims I was foolish to re-marry a young woman 20 years younger when his live-in maid is also 20 years younger. His maid fixes breakfast, dinner, cleans the house, washes his clothes and does his shopping for him. His maid does 80% of what my young wife does but with less risk.
My point: There is an alternative to everything. Fees are a consideration in any portfolio and Vanguard has the lowest fees available unless someone out there can match or better Vanguard's 0.04%. I also decided to throw out my friend's strategy of buying individual stock instead paying the annual fee as an alternative. I do admit his live-in maid alternative is less risky. My next house will probably have not have a built-in heated swimming pool and spa (which has maintenance) but have a granny house which has the potential having maintenance done by someone else.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Even at 0.2% on $2m it would only be $4k a year... perhaps he was thinking of high cost managed funds of yesteryear that were 1% or more... in which case you are starting to talk about serious sports car money.
That's a great point if you just look at it from a transactional standpoint where he is trying to get the "best deal" on the work. I would question whether he gets the same emotional connection from his maid that you (hopefully) get from your wife. It's a personal decision but from knowing nothing of your friend the attitude seems to be "get the most you can for the least money and don't worry about relationships". He might end up rich but miserable with that attitude. I know I'm reading into what he said and hopefully I'm wrong about him. My point is that if you truly find love it's not a "transactional" relationship where you look for the "best deal". If that's all you look for then he is absolutely right that the best deal is a maid and hookers.
VanWinkle
Thinks s/he gets paid by the post
Amazing how a thread evolves........
Well, I guess evolution is one way to describe that.
The original thread topic is interesting and there’s more to add, so hopefully it’ll get back on track.According to google: Vanguard S&P 500 VFINX first opened in 1976 with an expense ration of 0.14% which was 85% lower than a typical actively managed mutual fund. This low fee passive index fund revolutionize the industry. Admiral funds came later and this lowered the fees even more.
My friend is in his 70's and he started investing in his 30's so he has been doing this for 40 years which is the same time I got started. I did invest in VFINX and I am sure he did not. His mindset may be the 85% higher expense ratio.
He is a funny guy because we had different investing style and different life style (He's into cars and I am into boats). He always criticize my decisions and my political beliefs in such a friendly way that he makes me laugh.
The point in this discussion is that investment fees are decreasing over the years and therefore I recommend investors should take the time to do some comparison shopping.
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Worse yet, he could have been being sold load funds. 2% annual fees (and worse) were also common back then.
