Tweaking Asset Allocation

[Foodie]

Winemaker: Very cool handle. A little side comment of a different type of asset allocation. Here is the allocation of my liquid assets (wine collection)
France - 66% (Bordeaux 52%, Burgundy 8%, Rhone 4%, Other 2%)
USA - 13%
Italy - 8%
Germany - 6%
Spain - 5%
Other - 2%

I always wanted to make wine, but too expensive to get started. I just work on brewing my own beer and baking bread (with home grown levain, of course)

Spanky: Thanks for you succinct way of putting things. I appreciate the bottom line.

OldShooter: I really like your way with words. Your examples, quotes, perspective and sentences are awesome. In addition to finance knowledge, you have a gift with language and I love that.

Chuckanut: Your reminder to keep long term perspective is always appreciated. All of us, certainly me, benefit from hearing those words again from time to time.

 

[Kishinev]

Thanks. Here are some of the numbers that you requested:

Net worth: $2,760,000
Investments: $2,050,000
House: $450,000 (all paid)
Fine Wine: $260,000 (planning to drink it)

No kids and not too stressed out if there is nothing left for nephews and nieces after taking care for my SO.

Thanks again for your thoughts. Let me know if there are other numbers that you would like to see.

Hi Foodie neighbor,

This is what works for me. I am 59, single, adult kid. I have a paid off my house worth about $750K, hold $10K in cash, no wine (fine or otherwise), no other debt. If I retire next year I'll have a company pension that pays $95K/year for 2 years, then $85K/year with no COLA. The pension fund is close to 100% funded. According to Immediate Annuities calculator it will take about an $1.5M investment to generate the same cash flow with annuities. I will also have SS of $25K at 62 or $44K at 70.

I've been spending less than $25K/year for the last 5 years pre-tax, a little more before then to support my kid through college/law school. Also donated $50K last year. At this time I cannot imagine inflating my lifestyle beyond pension/SS. So I view my investments as building generational wealth and my age doesn't drive my AA as if I had to rely on the income my investments produce. I also survived the last two market crushes without selling any stocks, so hopefully I can survive a couple more without panicking. The down side for me is less money for legacy/charity.

So my $3.7M investment is 100% in stock index funds: 55% US, 45% international. My additional contributions are going into international to ultimately achieve 50/50 US/international split. I have no idea if US or international will do better over my lifetime, and I am fairly tolerant of volatility. I do believe that stocks will outperform bonds in my lifetime, besides I dislike owning bonds in a period of rising interest rates.

Another way I see it is if I view the pension as fixed income, then my AA is 71/29, aggressive, but not uncommon for my age.

My family emigrated from behind the iron curtain in the '70s with less than $600 and carry-on luggage between the 6 of us, thus having an opportunity to create substantial generational wealth is motivational for me.

Since creating generational wealth does not seem to be a priority to you, as others have stated in this thread, figure out what your goals are and select your AA accordingly.

 

[Foodie]

Kishinev. Hey there

Thanks for sharing what works for you. Super impressed with your $3.7 M portfolio and even more so with your less than $25K/year spending. Like your parents, I am also a first generation American. I have been here for 30 years. Dad paid my undergraduate education. I am eternally grateful to him for that. The rest (grad school included) has been on my own.

I see that you are of the school "Since income > expense, I could take more risks and continue to build my portfolio." I think that I am heading on that direction too. Tough question.

If you don't mind me asking, given where you are why haven't you retired? Enjoy the job? If so, more power to you. I used to absolutely love my job. Now, it is not too bad... but the love that I once felt is gone. That is why I am considering 55 as a time to retire.

 

[Kishinev]

Scholarships and a small student loan paid for my USC engineering degree and a research assistant job paid for MIT graduate school, the megacorp paid for USC MBA a few years later.

I believe that I need to retire to something, rather than from something, and on my 50th birthday I made a resolution to figure our what I want to be when I grow up and retire to that by age 55. Unfortunately, I failed miserably in this task and got afflicted with OMY (One More Year) syndrome. I was also fairly happy with what I was doing at work: interesting projects, good pay and recognition from my bosses, and great colleagues. So I am now on my 5th OMY.

But the work environment is changing and not in a good way, the project I worked the last several years is winding down, many of my close work friends retired or left, management changed, the 25 mile each way commute on the "405" is starting to get old, thus I hope to retire early next year on my 60th birthday when pension is fully vested. Desperately trying to find the cure for OMY since I am still not confident of what retirement will look like.

Not exactly ER, I hope retirement police does not boot me from this forum.

 

[OldShooter]

... I believe that I need to retire to something, rather than from something ...

Lots of volunteer opportunities, including overseas. I've been volunteering with SCORE the past few years and it's been great fun. (https://www.score.org/volunteer) I only put in a few hours a week but there is plenty of opportunity for more time if one wants to do it.

 

[Scuba]

I wouldn't change anything, unless it makes things less stressful for you. Pension is gonna carry you, have fun spending your money.

+1, and I wouldn't be rushing to put equities into bonds now.

 

[bmcgonig]

I think the fact that you got very nervous about 2% down days means that your asset allocation is out of whack. In my very humble opinion you are very likely to panic on a regular bear market which is way overdue.

Get your allocation down to where you don't really care too much about a 20% correction. I bet that's way below 88% stocks.

 

[Foodie]

bmcgoing Interesting suggestion. There is no doubt a lot of truth in you statement. However, history has shown that during the 2000 bust and the 2008 crisis I did not panic at all... but I was worried and depressed. So I passed the test, but it was not fun. At that time I was 100% in stocks.

 

[bmcgonig]

bmcgoing Interesting suggestion. There is no doubt a lot of truth in you statement. However, history has shown that during the 2000 bust and the 2008 crisis I did not panic at all... but I was worried and depressed. So I passed the test, but it was not fun. At that time I was 100% in stocks.

Good point but you're closer to retirement now. Less time to recover before you're done. I know in my case it changed my psyche.

 

[UnrealizedPotential]

I only invest in things I can understand somewhat. If it makes sense to me I do it. If not I don't. IOW I know nothing about companies overseas and I know very little about overseas markets, so I don't invest there. Others may have the knowledge and the interest to invest overseas and that's fine. I feel comfortable staying invested in the U.S. It's what I know and where I feel comfortable. I do have about 10% overseas bond exposure but it's not something I really think about and it's part of one of my bond funds. This requires no action on my part as the overseas exposure is a small part of my portfolio and it's a pretty stable bond fund.

 

[OldShooter]

... I know nothing about companies overseas and I know very little about overseas markets ...

Same with me, but over the years we have allocated around 30% or more to international investments, most commonly with Vanguard Total International Index (VGTSX), simply as part of a diversification strategy. Using VGTSX means I actually don't have to know anything!

If you are interested in the topic at all, here is a good monograph from Vanguard: https://www.vanguard.com/pdf/ISGGEB.pdf My takeaway from this one is that 30-40% International is the sweet spot for minimizing total portfolio volatility.

Also, here is a short video by Kenneth French of Fama/French fame and a certified market guru: https://famafrench.dimensional.com/videos/home-bias.aspx It is from a dynamite page of videos: https://famafrench.dimensional.com/videos.aspx containing Fama and French's views on many aspects of investing. Some are short, like the one I referenced, but even the longer ones are usually very worthwhile.

 

[Fedup]

International has been taken off since Janet Yellen's testimony.

 

[RobLJ]

I have steadily increased the % of intl versus US the last 10 years; some years like last year and the year before, this makes me look like an idiot. Other years like this one make me look a lot better (China fund is up 40% over the last 3 years, but I'm still in the red on Latin America.)
You can make the case that US stocks as a whole are priced to perfection versus most international markets, although I don't think that's the case for small value. What I have seen is that the pendulum swings chaotically between US and international in terms of valuations and large vs small and growth vs value, so I want to own at least a piece of all/most.

The 1998-2001 tech/S&P bubble taught me that, yes, large growth can get mispriced at times (I shifted gains to small/mid value after I compared fund PE, and was lucky that small/mid value took off like a rocket while the S&P was punched in the nads--due to over-valuation).

International funds are 1/3 of my overall stock allocation, which is about where I'll keep it.

YMMV. S&P/US well could come out ahead in a 10-20 year period, but there is overall volatility to consider. To critique the above, all markets seem increasingly correlated.

International stocks have had a great 6 months. They are up 15%+ while US stocks are only up 9%.

For the past 12 months, international stocks are up 27% and US stocks are up 24%.

So you can move some US to international, but you need a better reason than "I feel ...."