Pimp My Portfolio

[bbuzzard]

I started my annual re-balancing, and I thought I would run this past the experts here for feedback. Keep in mind my investing style is moderately aggressive. Currently, I plan to FIRE in 5 years (95% probability). The main change is that I am increasing my international and bond exposure, and reducing my US large cap exposure.

Current
Large Cap - 40.5% (Vngd 500 Index and Vngd Tax-Managed Capital Appreciation)
Mid Cap – 14.4% (Vngd Mid-Cap Index)
Small Cap – 18.0% (Vngd Small-Cap Index and Vngd Tax-Managed Small-Cap)
REIT – 9.8% (Vngd REIT Index)
International Developed – 7.1% (Vngd Developed Mks Index and Vngd Tax-Man Intl)
International Developing – 1.0% (Vngd Emerging Markets Stock Index)
Bonds – 3.8% Vngd Short-Term Treasury and Vngd Intermediate-Term Treasury)
Cash – 5.2% (Bank and Vngd Treasury Money Market)

Proposed
Large Cap – 30% (Vngd 500 Index and Vngd Tax-Managed Capital Appreciation)
Mid Cap – 15% (Vngd Mid-Cap Index)
Small Cap – 15% (Vngd Small-Cap Index and Vngd Tax-Managed Small-Cap)
REIT – 10% (Vngd REIT Index)
International Developed – 10% (Vngd Developed Mks Index and Vngd Tax-Man Intl)
International Developing – 5% (Vngd Emerging Markets Stock Index)
Bonds – 10% Vngd Short-Term Treasury and Vngd Intermediate-Term Treasury)
Cash – 5% (Bank and Vngd Treasury Money Market)

In additional to this portfolio, I hold stock in a professional partnership worth 8% of my total equity+bond+cash portfolio. This stock is not liquid, as it is cashed out over 5 years (20%/year) when I sell/quit. Thanks for you feedback, I get a lot of good ideas from this forum. Fire Away!

 

[mickeyd]

Pretty nice mix. From the AA I assume that you have a fairly good percentage in taxable accounts not tax-deferred (tax managed accounts noted). What % is tax deferred?

Since you are only 5 years from retirement, I would consider increasing your FI from 15% (10+5) to 30-40. Of course, if you have pension(s) that will generate an income stream of some significance, maybe 20-30% would do it.

 

[bbuzzard]

From the AA I assume that you have a fairly good percentage in taxable accounts not tax-deferred (tax managed accounts noted). What % is tax deferred?

Good question, I should have provided this information. Taxable/Tax Deferred is 53%/47% not counting stock in the professional partnership; 57%/43% counting this stock.

 

[bbuzzard]

Of course, if you have pension(s) that will generate an income stream of some significance, maybe 20-30% would do it.

Second good point/question. No pension. Zero. Nada. I intend to FIRE at 48, so I am also a long time from SS (if ever ).

 

[brewer12345]

I'd be lower on REITs and Domestic Large Caps, and add allocations to foreign bonds and commodities. I would also think about swapping out some mid and small cap exposure for more international equity exposure.

 

[bbuzzard]

Since you are only 5 years from retirement, I would consider increasing your FI from 15% (10+5) to 30-40?

With current low interest rate, I am having a really hard time convincing myself to purchase FI instruments. I know the experts indicate otherwise, and that I am not thinking completely rationally here. However, I am even having trouble moving from 8.1% to 15%. Maybe next year I will convince myself to go to 20 or 25%.

 

[bbuzzard]

I'd be lower on REITs and Domestic Large Caps, and add allocations to foreign bonds and commodities.

I have considered lowering the REIT given that there is a lot of REIT exposure included in the index funds. Had not given any though to international bonds.

How would you accomplish the commodities exposure? Perhaps sector funds? This is an area I have thought about but am relatively ignorant of.

 

[REWahoo]

... I am even having trouble moving from 8.1% to 15%. Maybe next year I will convince myself to go to 20 or 25%.

Hey, if the market takes a dum.....uh, goes south, you may get there without having to do anything!

 

[mickeyd]

With current low interest rate, I am having a really hard time convincing myself to purchase FI instruments.

Sounds like you are trying to time that market. IMHO, this is not good for any long term investment strategy. In other words, if you believe that your asset allocation should contain more FI, then you should take action to get it where it needs to be ASAP.

You do not know what interest rates will be tomorrow, but you do know what your AA should be tomorrow. Waiting can prove to be a losing proposition.

 

[brewer12345]

I have considered lowering the REIT given that there is a lot of REIT exposure included in the index funds. Had not given any though to international bonds.

How would you accomplish the commodities exposure? Perhaps sector funds? This is an area I have thought about but am relatively ignorant of.

PCRIX or DJP. The latter is suitable for taxable accounts and trades like a ETF.

 

[bbuzzard]

Sounds like you are trying to time that market.

You are correct, sir! Emotions can rule even when you know they should not.

[edit typo: your -> you]

 

[Spanky]

PCRIX or DJP. The latter is suitable for taxable accounts and trades like a ETF.

I am still waiting for the recovery of PCRIX -- still in the red.

 

[BUM]

I am still waiting for the recovery of PCRIX -- still in the red.

Me too Spanky. But with the dividends added in, I'm just a bit green.

When rebalancing, I'll maintain the position..."strong-hold."

 

[JustCurious]

Since you plan to retire in 5 years, you have WAY WAY too much in equities. 85 percent equity is VERY risky. Do you remember what happened in 2000? What about October 1987? Were you around during 1972-74? The equity markets have suffered dramatic drops before, and it WILL happen again.

If the equity markets drop by 20 percent next year and take 85 percent of your portfolio down with it, (which means you will lose about 16 percent of the value of your portfolio) will that change your plans?? If the answer is yes, you have too much equity, plain and simple, and you have been lulled into a false sense of security by the tremendously bullish equity markets over the last 4 years since 2003. IMHO, if you plan on living off your investments in 5 years, you should not have more than 50 percent of your assets in equities, and all of it should be in broadly diversified market indexes, and should include international exposure. The other 50 percent should be in fixed income (bonds, bond funds, cash).

 

[bbuzzard]

If the equity markets drop by 20 percent next year and take 85 percent of your portfolio down with it, (which means you will lose about 16 percent of the value of your portfolio) will that change your plans?? If the answer is yes, you have too much equity, plain and simple, and you have been lulled into a false sense of security by the tremendously bullish equity markets over the last 4 years since 2003. IMHO, if you plan on living off your investments in 5 years, you should not have more than 50 percent of your assets in equities, and all of it should be in broadly diversified market indexes, and should include international exposure. The other 50 percent should be in fixed income (bonds, bond funds, cash).

Actually, part of the reason that I am so equity heavy is the fact I do not feel that I have to retire in five years (my job is not that bad), and when I do retire I will have a 3.5% SWR that is about 150% of what I currently spend. Therefore, I feel comfortable accepting more risk. I do agree that I do not have enough in bonds, and I am considering upping bonds to more than 10%. OTOH, I lived through the late 70s and saw bonds crater. That haunts me to this day. Holding 6% bonds when the interest rate is 14% would kill me.

 

[Nords]

I do agree that I do not have enough in bonds, and I am considering upping bonds to more than 10%. OTOH, I lived through the late 70s and saw bonds crater. That haunts me to this day. Holding 6% bonds when the interest rate is 14% would kill me.

What do you want the bonds for? I'm not "for" or "against" bonds, but it pains me to see someone buying an asset class that they know is going to make them sorry.

If you want income you could try short-term CDs or dividend-paying stocks. Or you could try reducing volatility by holding other asset classes.

 

[poyet]

Bonds are certainly as dangerous an asset class as are stocks, perhaps even worse as they ruin with certainty their holders over the long term. They can also ruin them over the short term when rates rise and go against them as everybody know.

I see two possibilities:

1) your portfolio is large enough and you count on it to make a living when ER in 5 years. Then you need to protect it more and TIPS, CDs (as Nords suggested), RE funds, div paying ETFs, whatever is appropriate should be included. In that case holding bonds (especially bond funds) is not a protection of any kind as you noticed from your experience or memories ;

2) your portfolio needs to grow for whatever reason (you don't need it to make a living in 5 years, you think that capital is made to grow, etc.) and therefore you need to remain exposed to stocks to the risk of missing your ER target in 5 years ? In that case large caps are cheaper than mid and small caps at the moment (why sell them ?), and EM stocks are cheaper than developed countries stocks, with an emphasis on Russia, Poland, China (Shangai), Brazil for example. You could keep some cash to put it at work if a good opportunity arise next year when indices hit their MM200 average as it happened in June this year as long as markets remain bull (take a simple criterion as Roc(MM200)>0 on more than 2/3 indices of the markets you're exposed to).

Then the decision is yours. I am ERed and 100% in stocks on a large portfolio as I do not need it to make a living and suppose that capital is made to grow. I keep 10% of this portfolio for my trading activities.

 

[brewer12345]

I am still waiting for the recovery of PCRIX -- still in the red.

Then you are missing the point of the investment.

 

[Spanky]

Then you are missing the point of the investment.

I am still holding it.

 

[FinanceDude]

Bonds are certainly as dangerous an asset class as are stocks, perhaps even worse as they ruin with certainty their holders over the long term. They can also ruin them over the short term when rates rise and go against them as everybody know.

That is an irresponsible statement supported by air.

[quoye]Then the decision is yours. I am ERed and 100% in stocks on a large portfolio as I do not need it to make a living and suppose that capital is made to grow. I keep 10% of this portfolio for my trading activities.
[/quote]

I hope you're well diversified, being 100% in stocks. Just because YOU hate bonds, doesn't mean that we should all sell our bonds and go 100% stock like you.........

 

[poyet]

That is an irresponsible statement supported by air.

I hope you're well diversified, being 100% in stocks. Just because YOU hate bonds, doesn't mean that we should all sell our bonds and go 100% stock like you.........

This statement is first sound and second well demonstrated by many studies. Would you like to get references I'll have pleasure pointing to some, noting that all might not be written in English, though I believe you might find equivalent material in any language as this is not rocket science anyway. Over decades, bonds have seldom even hedged inflation (especially on longer maturities), therefore not even preserving the capital in real terms (which is BTW not that easy). I'm sure that other posters would have references in English in that respect anyway.

I do not hate bonds. I have no affect linked to asset classes. I just consider them for what they are. I could even purchase bonds when the stock market hints to its next dive and when the Fed would in response be expected to lower rates. But that does not make them safe. They are for example of one usage, just a portfolio component when facing a bear market in stocks (with shorts and other), as long as inflation would remain tame and rates would go down.

Finally, I certainly do not suggest to anyone to sell his/her bonds and go 100% stocks. In the end asset allocation is very personal and that's what I expressed. What I hinted to is that bonds can go up or down in stomach-testing (if not wrentching) ways and that if an investor has to wait until the maturity to get back its principal, divs + principal @ maturity seldom make it for inflation. Therefore I hardly consider them as a SAFE way to park money. BTW, anything which is not inflation protected is not safe (that's why I pointed to TIPS, for example).

We tend to forget how destructive inflation can be (for both bonds and stocks) as we've been through a long period of "mastered" inflation. Some terrible bear markets (e.g. 73-74) keep the memory of the destructive power of high inflation. In Europe people tend to complain of the "strong Euro" at the moment and though it does not help my positions in USD (as not only am I 100% stocks but too ? heavily weighted in USD) the European Central Bank has a sound policy to keep inflation under check (same for the FED) which is KEY to any monetary policy. Over decades, exchange rates have little impact on well diversified portfolios of stocks and stocks tend to preserve capital (and even deliver real positive returns) as inflation is pushed downwards onto the customers by raising product prices.

You all know that. Just to say that I do not hate bonds but that I hardly see them as safe

My two cents.

 

[brewer12345]

The issue isn't whether an asset class is "safe". There is no uch thing. The question is whether the addition of a judicious amount of that asset class to a portfolio improves the portfolio's overall return and or risk profile. Generally speaking, bonds do both nicely.

 

[poyet]

The issue isn't whether an asset class is "safe". There is no uch thing. The question is whether the addition of a judicious amount of that asset class to a portfolio improves the portfolio's overall return and or risk profile. Generally speaking, bonds do both nicely.

I 100% concur with you Brewer. The difficulty I see, is that too often people load bonds because they consider them "safe" or safer (as opposed to stocks) and not because adding them to a portfolio would / could enable them to match a specific risk / return profile they would have designed. Generally speaking, by increasing diversification (and hopefully decreasing correlation which can be debated) bonds (as other assets classes) should contribute to lower risk (but also probably returns). BTW decreasing risk and preserving returns is a bit of a graal isn't it

 

[brewer12345]

(but also probably returns). BTW decreasing risk and preserving returns is a bit of a graal isn't it

Bzzt! Wrong!

Go look at just about any efficient frontier study. Adding a small amount of bonds (10% or so) to a stock portfolio incresases (or maintains) return while decreasing risk.

 

[Nords]

That is an irresponsible statement supported by air.

Guys, guys, safe your weapons for a minute.

I interpret Poyet's words to mean that bonds can instill a false sense of security just as easily as stocks can. He makes an excellent point about bonds & inflation. Many investors, especially those growing up around the Depression, think that today's bonds & inflation are just like they were in the 1920s. Not so.

FD, I doubt that you'd put your clients in a 100% bond portfolio without knowing their specific situation and making sure they understand the risks & issues.

Brewer, you say "risk" to mean "volatility". I bet most of us high-equity investors are more concerned about "risk" in its senses of inflation erosion & diworseification.

Unlike a few other posters who aren't in this thread (yet), none of us is claiming to "hate" or "despise" or to otherwise eschew an asset class. There are situations where it's incredibly stupid to be 100% stocks and others where it's just as ill-advised to be 100% anything else. Poyet is a trained professional who's well-equipped to try this at home, and some of us are well-supported with pensions or low-expense lifestyles that enable us to invest like this.

No one is trying to preach to the converted or to go on jihad. Even Warren Buffett advises that most investors should go with index funds, and even Bogle deviates from his own gospel.

Okay, thanks for listening. Ready on the left, ready on the right, all ready on the firing line...