Help, the wolves are upon me!

[packrat44]

I have 2 financial advisors that have been breathing down my neck since May 07. Just as they were ready to sink their fangs into me and suck out my blood (money), I temporarily gave them the slip and found Early Retirement Forum. I have been keeping them at bay the last 2 months while reading the posts on this site along with Bogle, Berstein, Swedroe, and Armstrong.

I have developed an asset allocation that I believe with work for me and I would appreciate your constructive critique. Will it work? What are the flaws? What should be done differently?

Background: DW and I retired 1 year ago; military and federal civilian pensions cover our basic expenses; inexpensive health insurance through Tricare Prime; I will draw SS in 4 to 7 years; DW will draw in 8 years; no mortgage; no debt; do all our own maintenance - residential and automotive; $2M portfolio. Presently in 6 American and 1 Fidelity equity funds; 11 individual stocks; 1 bond fund; and a MM fund. Looking at 4% annual withdrawal from portfolio (from equities in good times; from bonds/CDs in bad times). "Wants" are relatively small so we can radically reduce withdrawals during bad times.

Proposed Asset Allocation

Equities -----70%
Bonds/CDs--20%
MM ----------10%

Equities
---US
------Large Cap -----40%
------Small Cap----- 13%
---International
------EAFE ----------15%
------Emerging Mkt-- 2%

Bonds/CDs ----------20% (laddered at 4%/yr for 5 years)

MM ------------------10%

[twaddle]

The first question an FA would probably ask is: what's your risk tolerance?

I ran your port through a backtest spreadsheet, and your portfolio would have lost about 25% of its value a couple of times in the last 35 years. Are you comfortable with that level of volatility?

Also, it's not clear how this port flows from Bogle, Bernstein, et al. Bogle would suggest capturing the total market. Bernstein and Swedroe would focus more on the "value premium" and MPT.

[packrat44]

Quote:

Originally Posted by twaddle The first question an FA would probably ask is: what's your risk tolerance? I ran your port through a backtest spreadsheet, and your portfolio would have lost about 25% of its value a couple of times in the last 35 years. Are you comfortable with that level of volatility? Also, it's not clear how this port flows from Bogle, Bernstein, et al. Bogle would suggest capturing the total market. Bernstein and Swedroe would focus more on the "value premium" and MPT.

Risk Tolerance:
In 1987 on the day of the crash, the stock broker I was using at the time called me and said I needed to sell all my Intel. I asked him if the fundamentials had changed. He said no but the price had dropped substantially. I said good and told him to double by position.

Through 2000 - 2002 I continued to buy the maximum allowed in my TSP account that followed the S&P 500.

Never did I sell any equities during those times. I do not like corrections or crashes (unless I have excess cash on hand, then I have fun buying); but they are a fact of life.

Buy the whole market:
I have been giving serious thought to begin shifting to index funds for simlicity and lower costs.
The split I propose for the US equities is approximately 75% Large Cap and approximately 25% Small Cap. This would buy the US market.
The total equity split would be approximately 75% US and appproximately 25% International. Hopefully to moderate some of the wild swings.

[Ed_The_Gypsy]

Quote:

Risk Tolerance: In 1987 on the day of the crash, the stock broker I was using at the time called me and said I needed to sell all my Intel. I asked him if the fundamentials had changed. He said no but the price had dropped substantially. I said good and told him to double by position.

That is the kind of cojones that make a successful investor.

[BigBob]

I am not an expert in asset allocation, but from the looks of it, your allocation looks good to me. If I were in your shoes, I would be very comfortable with it.
I just have one comment on Risk Tolerance that you might consider (that I will need to wrap my arms around someday too). I think that how I might react to major market swings when retired(later) will be different from when I am in the accumulation phase(now). Now I look it as a buying opportunity, as you did, and that I have time to make up the difference. When I am retired, a major market dip might cause me to sweat a bit more. Will it cause me to sell and tighten up my belt buckle? - I hope not.

[LOL!]

If you have not already: a good forum for answering your questions would be the Vanguard Diehards forum: Bogleheads :: View Forum - Investing and Personal Finance

With your pensions, your 70% equities for your portfolio seems reasonable. You can reduce your investment expenses quite a bit by not using American funds. For the informed investor, American funds are nothing special. With such a large portfolio, you could get your overall expense ratio down to 0.2% or about $4000 a year on a $2million portfolio.

[Leonidas]

Quote:

Originally Posted by Ed_The_Gypsy That is the kind of cojones that make a successful investor.

I wish I had some extra money back in 1987 (and a crystal ball). I didn't sell anything - mostly because the loss was already massive by the time I even knew something was going on - but I had the deer in the headlights look going on for a while.

Had a great broker though. She never even thought of selling anything. She chilled me out when I called her early the next morning by saying "my clients with real money in the market are not fazed at all".

[unclemick]

Hmmm - memory says it took a month but I switched from 50/50 Ben Graham to 100% 500index in my 401k and held 1987 to 1993 when I was layed off. Never sat down and penciled out how well I did versus my old asset allocation.

Doctor Strangelove is one of my favorite movies - so I have my 'real' retirement in a lifecycle fund(Target Retirement 2015) and like the Doc's errant hand in the movie - a few individual stocks - for the hormones, the uncontrolible urge to putz - don't you know.

heh heh heh - expense ratio 0.21% on Target and 0 on individual stocks(those I don't putz). . Current yield in 'hard times' (aka 2.94% or so) and 5% varible the rest. Age 64 - party on!

[Sarah in SC]

Quote:

Originally Posted by Leonidas Had a great broker though. She never even thought of selling anything. She chilled me out when I called her early the next morning by saying "my clients with real money in the market are not fazed at all".

That is great! We had one panic call when the market went down, and he said "well I bet you are getting a ton of worried phone calls today!" and I said, no, actually, his was the first call we'd had. That helped put it in perspective for him. But I love that line--I'll use it on my parents!

Sarah

[packrat44]

Quote:

Originally Posted by BigBob I think that how I might react to major market swings when retired(later) will be different from when I am in the accumulation phase(now). Now I look it as a buying opportunity, as you did, and that I have time to make up the difference. When I am retired, a major market dip might cause me to sweat a bit more. Will it cause me to sell and tighten up my belt buckle? - I hope not.

BigBob,
Then I was in the accumulation phase and a long way from RE. Presently I am 88% equity, 5%bonds, 7% MM. Now that I am in the distribution phase I need to become more conservative.



Sarah in SC,
I acquired the majority of my American Funds in late Dec 06. At that time I declared I would have contributed $1M prior to the end of 13 months so as not to accrue the load fee. This requirement has been met about Apr 07. What are the requirements for holding the funds so as not to accrue the load charges, or any other fees?

I have been seriously thinking of moving the majority of my portfolio, if not all, into various Vanguard index funds. I would probably start with the individual stocks whose value reduction during this correction is similar to indexes to be acquired.

What are your suggestions?

[Bikerdude]

Looks like a pretty generic portfolio. The only thing left to do is reduce costs (I would seriously look at Vanguard) as others have mentioned. With that much money Vanguard will do a plan for you free.

How much do you have in individual equities? I would keep them at 10 to 20% of my total equity and each not more than 4%. Other than that it looks OK. Enjoy!

[packrat44]

Quote:

Originally Posted by Bikerdude Looks like a pretty generic portfolio. The only thing left to do is reduce costs (I would seriously look at Vanguard) as others have mentioned. With that much money Vanguard will do a plan for you free. How much do you have in individual equities? I would keep them at 10 to 20% of my total equity and each not more than 4%. Other than that it looks OK. Enjoy!

Bikerdude,

Presently I am looking at moving the majority to Vanguards index funds because of costs. There is 26% in individual equities. This will be the first to be liquidated and transferred into index funds.

I was interested in their free plan under a Flagship account. However, after reading other posts on this site, it appears their plan is worth no more than that.

[FinanceDude]

Quote:

Originally Posted by packrat44 I was interested in their free plan under a Flagship account. However, after reading other posts on this site, it appears their plan is worth no more than that.

Well, how good would a "free" plan be? Particularly from a proprietary fund company..........

[Lsbcal]

Quote:

Originally Posted by packrat44 Presently I am looking at moving the majority to Vanguards index funds because of costs. There is 26% in individual equities. This will be the first to be liquidated and transferred into index funds.

Sounds like a sensible plan to me. You might consider putting some TIPS in that 20% bond allocation: protects against inflation spikes and they should have negative correlation to equities (as we've seen lately). See Swedroe's bond book, especially Appendix B, for a TIPS strategy which he will be undating in a followon investment book.

Les

[Bikerdude]

Quote:

Originally Posted by FinanceDude Well, how good would a "free" plan be? Particularly from a proprietary fund company..........

I don't know if you would call a plan that required you to put up $1,000,000
to get it, free.

That said, I think any plan is good for comparison to what you currently have or plan to have. All information is useful provided it comes from a good source. I think Vanguard is a good source. Ultimately you must make up your own mind.

[Spanky]

Quote:

Equities -----70% Bonds/CDs--20% MM ----------10%

Your proposed allocation is perfectly fine since your pensions will cover all your expenses. You have plenty of cushions (if not excessive) from cash + CD/Bonds -- $600K (30% of $2MM).

[2B]

Reading your original post, you and your wife are in your mid to late 50s and have $2MM you don't need to live on. I think a big part of your plan needs to be how you're going to enjoy spending a large part of the money over the next 20 years.

Your 70/30 allocation would be considered overly aggressive for most retirees except for your large pensions. You could calculate the NPV of your retirement (multiply by 20 if COLA'd and by 15 if not). Add the pension value to your portfolio as "bonds" and see if you are about 50/50. If you are 50% bonds or higher, I agree with your 30%. If not, I'd consider raising your bond allocation.

My current personal allocation is

• 35% cash/CD
• 30% large cap (mostly Vanguard Total Stock Market)
• 10% small cap (Vanguard Small Cap Index)
• 25% foreign (10%Vanguard Emerging Markets and 15% D&C Foreign)

I was planning to go to 40% cash/CDs but the current down draft interrupted to sales. I'm planning to ride through this and complete the conversion. As you can see, I'm also heavily into index funds.

Stay away from the FAs.

[riskadverse]

Tell the 2 financial advisors you lost your job a year ago and you can no longer afford them.

[FinanceGeek]

Here's a good article from Paul Merriman that provides an overview of one approach to asset allocation. Personally I'd implement his portfolio with either VG funds or ETFs although he provides other choices...

http://www.fundadvice.com/articles/b...-strategy.html

[sweetana3]

I think my husband is the original poster. Except for the military pension. Mine has a Fortune 100 pension. You know you are trained when the portfolio can go down $200,000 in one day and it looks like a buying opp. Since then it is about 75% returned to prior value.

Take emotion out of the equation and it really helps.