Freaky AA

[cardude]

Well, I’m almost ready to hang it up, and after reading some of the asset allocation threads on this site I’m realizing my accumulation phase portfolio may look a little freaky to most of you. My method was very focused on one stock in the beginning, and still 45% of the total portfolio is made up of just one stock (Berkshire Hathaway). The bulk of the rest of the stocks are split about 50/50 between small cap value type stocks and large caps.

I’m comfortable holding the Berkshire during retirement since I have a decent handle on what’s going on and I’m able to stomach the short-term risk when Buffett dies, but I’m interested in a more normal AA for the rest of the 55%. Any ideas/suggestions?

My estimated W/D rate is 2.7%.

Stocks
Taxable account—68%
Retirement accounts—3%

Mutual Funds (taxable)
TAVVFX—1%
LLINX—1%

Cash 27%

[W2R]

Quote:

Originally Posted by cardude Well, I’m almost ready to hang it up, and after reading some of the asset allocation threads on this site I’m realizing my accumulation phase portfolio may look a little freaky to most of you. My method was very focused on one stock in the beginning, and still 45% of the total portfolio is made up of just one stock (Berkshire Hathaway). The bulk of the rest of the stocks are split about 50/50 between small cap value type stocks and large caps. I’m comfortable holding the Berkshire during retirement since I have a decent handle on what’s going on and I’m able to stomach the short-term risk when Buffett dies, but I’m interested in a more normal AA for the rest of the 55%. Any ideas/suggestions?

You're right - - having 45% of your assets invested in any one stock is not something I personally could work around in devising an AA. Even though it is a holding company with diverse interests, to my understanding it is still a single stock and not a diversified mutual fund. No matter what else you do with the other 55%, it just goes against any possibility of adequate diversification for a retired person, in my opinion.

[LOL!]

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Originally Posted by cardude ... I’m interested in a more normal AA for the rest of the 55%. Any ideas/suggestions?

A pretty typical asset allocation is 60% equities, 40% fixed income. Put your fixed income in your tax-advantaged accounts.

A total bond market index fund or split it up 35% short term, 35%-50% TIPS, and the rest intermediate term bond is pretty typical.

For equities, typical is dometic stocks from 80% to 50% of all equities and 20% to 50% foreign equities. It probably doesn't really matter, but 25% to 35% of foreign is where many people are comfortable. Choose a total market index fund for both domestic (VTI) and foreign (VEU).

If you wish to tilt to small cap, then buy some small cap index fund like VB or GWX, say maybe 10% to 50% of your equity holdings. If you want a REIT fund, go for it, but take a percentage of your equities to buy the REIT fund.

That's asset allocation at its simplest. You can consider your BRK to be large cap US.

[cardude]

I forgot to mention that I'm 43...........and expect to live 'till 103.

Does that make my current allocation any better?

[Nords]

Quote:

Originally Posted by cardude I forgot to mention that I'm 43...........and expect to live 'till 103. Does that make my current allocation any better?

Holy cow, Cardude, our ER portfolio was up to 36% Berkshire and our kid's college portfolio was approaching 60%. I've been spending the last couple weeks divesting ourselves down to 23% & 0% in the respective portfolios... how much are you willing to give me for my remaining shares?

Here's the problem with your question: we anonymous Internet posters have no idea how well you (or anyone else asking this question) will handle volatility, single-stock risk tolerance, or other unforeseen events. We have no idea about your pension income (actual or forecast), expenses, family, healthcare costs, or about any other details that would affect your "sleep at night" comfort as well as the financial aspects of a portfolio.

What we do have is a great reference library. If you haven't already educated yourself from it then I'd recommend reading Clyatt's "Work Less, Live More" (especially with the spreadsheets on the CD), Bernstein's "Four Pillars" or even Dimson & Marsh's "Triumph of the Optimists". Teach yourself what you want to know about asset allocation and then pick a Bernstein portfolio that you can live with.

BTW, take a look at Berkshire's share price in the 1980s (during the bad ol' USAir days), the end of the 1990s (when Buffett was a tech idiot), and 2001-2003 (World Trade Center reinsurance). Screw the volatility of Buffett stepping down-- how would you handle Berkshire if its share price dropped from 45% of your portfolio to 22% and stayed there for three years? We decided that we didn't need the upside any longer.

[Spanky]

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Originally Posted by cardude I forgot to mention that I'm 43...........and expect to live 'till 103. Does that make my current allocation any better?

No, your portfolio is concentrated. A call for diversification is in order unless you are happy with the downside risk of a heavily concentrated portfolio.

[cardude]

Thanks all. I agree I need to educate myself on how to convert my weird AA over to a more normal and hopefully more sustainable portfolio. In my defense, when I was working and accumulating, the idea of risk equaling volatility didn't seem right since I was a net buyer of stocks and could wait out volatile periods. Actually, volatile periods were usually good for me since I could pick up more shares at lower prices. However, I'm realizing the whole picture changes when you become a net seller of stocks, because too much volatility really can kill the portfolio. Basic stuff for all of you I realize, but I'm getting there..........

[clifp]

Well considering you concentrated position is in Berkshire, I think your AA sins are forgivable. I believe a quick skimming of modern portfolio theory should suffice for penance. Actually given Berkshire low or possibly negative correlations with market over the last year or two, I think you certainly want to have some BRK, but it has been surprisingly volatile.

On the other hand Warren may end up playing a practically joke and appoint an idiot to take over from him...

[megacorp-firee]

Quote:

Originally Posted by clifp Well considering you concentrated position is in Berkshire, I think your AA sins are forgivable. I believe a quick skimming of modern portfolio theory should suffice for penance. Actually given Berkshire low or possibly negative correlations with market over the last year or two, I think you certainly want to have some BRK, but it has been surprisingly volatile. On the other hand Warren may end up playing a practically joke and appoint an idiot to take over from him...

Agreed. If you have to err, then BRK is probably the best to 'mess up' with. On the other hand, IMO, when Mr. B goes to the big trading pit in the sky, BRK holders will be in for a ride.

[jIMOh]

Quote:

Originally Posted by cardude Well, I’m almost ready to hang it up, and after reading some of the asset allocation threads on this site I’m realizing my accumulation phase portfolio may look a little freaky to most of you. My method was very focused on one stock in the beginning, and still 45% of the total portfolio is made up of just one stock (Berkshire Hathaway). The bulk of the rest of the stocks are split about 50/50 between small cap value type stocks and large caps. I’m comfortable holding the Berkshire during retirement since I have a decent handle on what’s going on and I’m able to stomach the short-term risk when Buffett dies, but I’m interested in a more normal AA for the rest of the 55%. Any ideas/suggestions? My estimated W/D rate is 2.7%. Stocks Taxable account—68% Retirement accounts—3% Mutual Funds (taxable) TAVVFX—1% LLINX—1% Cash 27%

What is the dividend yield of taxable account?
What is this amount relative to needed income?

[cardude]

Quote:

What is the dividend yield of taxable account? What is this amount relative to needed income?

Sorry, I just saw this. Dividend yield is only 1% due to most of it being in Berkshire, which pays no dividend.

Dividends only make up 30% of needed income.

[jIMOh]

With a W/D rate of 2.7%, a suggestion to consider would be upping the dividend income stream (meaning invest more in securities which pay a dividend). A 2.7% yield should not be difficult to generate, and you will get principal appreciation in the mean time as well.