what is a typical asset allocation?

[medved]

I am in my mid 50s. I have saved enough to retire but I plan to work for another couple of years. (I am earning a good income and the job, while it can be stressful, certainly gets easier once you internalize that you are doing it by choice).

I recently sold some stock to reduce my asset allocation to 48/52. (A significant chunk of the "fixed income" is in CDs -- and I know some people here would put that in a third category -- but I have always thought of it as just another part of the fixed income side of my portfolio).

I had been wanting to reduce my stock exposure for a while, but I was reluctant to take the capital gains. However, when the market fell steeply in 2018-Q4, I felt anxious. I guess nobody really knows what asset allocation is right for them until the market falls. So a week or so ago I bit the "capital gains tax bullet" and sold some stock.

My plan is to stay at 50/50, or thereabout, for the foreseeable future, re-allocating as needed. I have no pension, so that is it -- other than my income while I continue to work as SS.

I am comfortable at this level, but I am wondering whether my allocation is typical, or how atypical it is. Are there published data on typical asset allocations? I guess the data would have to been pretty customized to be useful, since it depends on age, how many years left to work, accumulated assets, etc.? But it seems like something someone might have collected data on.

Some would say "what difference does it make what other people are doing-- even similarly situated people -- you should just do what feels right to you." There is certainly merit to that view. But still, I think it is natural for someone to wonder what other similarly situated people are doing.

 

[W2R]

I thought Rick Ferri's book, "All About Asset Allocation" was tremendously helpful to me when I was in my 50's and preparing for retirement. It's interesting and easy to read.

I was 100:0 for most of the accumulation phase, because I was gambling to see if I could catch up to others after a financially rugged divorce in which we agreed that he would get the house and contents and all of our retirement accounts and other financial accounts. During 2002-2006 we had a bit of a bull market and I won the gamble. Then, during the three years before my 2009 retirement I transitioned to 45:55 (equities:fixed) and was there until recently.

Right now, I am 70, retired, very conservative about investing, and recently began the process of slowly moving towards 110-age for equities. So this year, I'm 42:58. But my situation is different from yours so probably not very useful for you.

 

[pacergal]

+1on the Rick Ferri book.
I was between 90/10 and 75/25 for many years prior to retirement. Moved closer to 70/30, then 60/40 the closer I got to leaving the workforce. Last year, I discovered I was still uncomfortable a bit, so moved closer to 50/50 with 5% band.
It is such an individual decision, only you will know what is reasonable to you.

 

[walkinwood]

Bengen's SWR paper said that the ~4% SWR worked for equity allocations from 40% to 70%, so you're right in there and that should work.



Being comfortable and sticking with your AA through all markets is essential.

 

[OldShooter]

... I guess nobody really knows what asset allocation is right for them until the market falls. ... I guess the data would have to been pretty customized to be useful, since it depends on age, how many years left to work, accumulated assets, etc.? ...

Yes. And yes again. My standard example is two identical widows, 75 YO, good health, long-lived family history. The one-size-fits all rule subtracts their age from 100 or maybe 120 to get an equity allocation. Same for both. But now observe that one has $100K to live on and the other has $10M. Should the allocations be the same? Of course not.

We'll be 72 this year. Our AA is about 70/30 because most of what we have will end up in our estate and most of that in trusts for our two adult sons. Their investing time horizon is long-term, so nearly 100% equities is the right thing for them. But DW and I have been through all the ups and downs starting in 1987, so we know that we will not panic and sell when the next downer comes.

 

[USGrant1962]

Another Rick Ferri fan here - get his book.

The other thing to keep in mind is inflation. It is a slow but unending erosion of your portfolio. That is why most historical studies suggest higher equity allocations than the old "100-Age" concept. Having said that 50/50 is in the middle of a broad sweet spot and IMO just fine. If you play with FIRECalc, you will find that historically anything between 30/70 and 70/30 generally works about the same.

 

[dtbach]

I don't think there is a "typical" AA. Each individual has his/her risk tolerance and time period to consider.

 

[VanWinkle]

I've read Rick's book twice and learned something new both times. It is an easy read and available used or at many libraries. You could buy new, but even Rick would say buy used and invest the difference!

VW

 

[LOL!]

In order to answer the thread title question, one does not have to look any further than the asset allocations institutionalized in Target Date funds. One can look at the Stocks/Bonds/Cash ratios in any number of these funds found at various vendors and that includes
the Federal Thrift Savings Plan
Vanguard
Fidelity
Schwab
TRowePrice
and many, many others.

 

[4legsgood]

Another Rick Ferri fan here - get his book.

...If you play with FIRECalc, you will find that historically anything between 30/70 and 70/30 generally works about the same.

+1, this keeps me sleeping well, and combined with stock allocation in total US stock market.

 

[Midpack]

Like others have said, there is no one size fits all AA. But most of what we’ve all read here seem to fall between 30:70 to 80:20 equity:bonds. The difference in average total returns in that range haven’t been that wide. If you can live with that range, maybe the best way to decide what’s best for you is to focus on the one year downside - what can you live with? E.g. how much downside will allow you to resist panic selling and still sleep well at night? Can you live with a 34.9% portfolio loss in one year to average 9.4% or is a 14.1% loss and an average 7.3% return sound more palatable? Something in between?

The numbers aren’t guaranteed of course, but they provide a decent relative glimpse.

 

[ckelly78z]

Right now my AA is 100/0 into LCG, and has done better than most for the last few years (everybody took a hit 4Q 2018). I'm 53, and will be re-evaluating this often depending on what the market is doing, what the FED is going to be doing, and what our trade war is doing.

 

[Markola]

As others above noted, it is remarkable how little difference it can make over a 20 year + time frame whether one is 40%, 50%, 60% or 70% equities, if left alone, according to Portfolio Visualizer’s fairly limited timespan of a few decades. We are ages 53 and 55 and are comfortable with our 50/50 allocation, which is arrayed much like a Vanguard target date or Life Strategy fund. At a globally-diversified 50/50, it feels like we’re as ready as we can be for anything that happens.

Portfolio 1 Blue = our 50/50 allocation
Portfolio 2 Red = a similar 40/60 allocation
Portfolio 3 Gold = a similar 70/30 allocation. It is ahead the last few years but I would bet on the other two outpacing it very slightly during and for many years after the next recession.

 

[VanWinkle]

In order to answer the thread title question, one does not have to look any further than the asset allocations institutionalized in Target Date funds. One can look at the Stocks/Bonds/Cash ratios in any number of these funds found at various vendors and that includes
the Federal Thrift Savings Plan
Vanguard
Fidelity
Schwab
TRowePrice
and many, many others.

Many target date funds have 40% of the stocks in International. That
may fit some well, but most retirees likely would like a little less that 40%.
If I see those allocations, how do I pick the right one? Just by age can be
deceptive as many have circumstances that would trump the age only allocation formula.

 

[medved]

Many target date funds have 40% of the stocks in International. That
may fit some well, but most retirees likely would like a little less that 40%.

That is interesting. I did not know that. Of our 50% equities, about 30% of that (so, about 15% of our total portfolio) is in international equities. Left to my own devices, I might dial that back, in favor of US equities. But people who are a lot smarter than I am have told me 30% is very reasonable.

 

[ckelly78z]

Many target date funds have 40% of the stocks in International. That
may fit some well, but most retirees likely would like a little less that 40%.
If I see those allocations, how do I pick the right one? Just by age can be
deceptive as many have circumstances that would trump the age only allocation formula.

Look at the Prospectus for each fund before investing. It will tell you who the manager is, what their experience is, how it has performed over different time periods, and what each individual stock that is owned.

I have never taken the "age" for target date funds as a rule, but a guideline. I tend to be more aggressive, and get better returns looking elsewhere, but taking a proactive approach to picking my own.

 

[OldShooter]

That is interesting. I did not know that. Of our 50% equities, about 30% of that (so, about 15% of our total portfolio) is in international equities. Left to my own devices, I might dial that back, in favor of US equities. But people who are a lot smarter than I am have told me 30% is very reasonable.

It's very reasonable. US market cap is 50-55% of the world market cap. Guru Kenneth French talks here (8 minute video) about home country bias: https://famafrench.dimensional.com/videos/home-bias.aspx There is quite a good Vanguard paper (https://personal.vanguard.com/pdf/icriecr.pdf) too, which shows research that 30-40% of equities in international funds has minimized portfolio volatility in backtests. DW and I try to stick to around zero bias; we hold a lot of VTWSX and VT. Very comfortable with it.

(A bit beyond the scope of this thread, but I believe that both regression to the mean and a future decline in the value of the US dollar are reasons to be optimistic about international investments.)

Re blended and target date funds I do not like them because they are impossible to benchmark. The concept is not bad, but I would suggest instead making your own blend of separate equity and fixed income so you can monitor performance.

 

[OldShooter]

Look at the Prospectus for each fund before investing. It will tell you who the manager is, what their experience is, how it has performed over different time periods ...

A completely accurate statement, but mountains of data say that none of that stuff matters. See post #25 here: http://www.early-retirement.org/for...y-and-expense-ratios-95684-2.html#post2183096

 

[VanWinkle]

It's very reasonable. US market cap is 50-55% of the world market cap. Guru Kenneth French talks here (8 minute video) about home country bias: https://famafrench.dimensional.com/videos/home-bias.aspx There is quite a good Vanguard paper (https://personal.vanguard.com/pdf/icriecr.pdf) too, which shows research that 30-40% of equities in international funds has minimized portfolio volatility in backtests. DW and I try to stick to around zero bias; we hold a lot of VTWSX and VT. Very comfortable with it.

(A bit beyond the scope of this thread, but I believe that both regression to the mean and a future decline in the value of the US dollar are reasons to be optimistic about international investments.)

Re blended and target date funds I do not like them because they are impossible to benchmark. The concept is not bad, but I would suggest instead making your own blend of separate equity and fixed income so you can monitor performance.

I agree with OldShooter on this, except many suggest 20-40% in international. I also agree that international equities have a good chance of returning more than US equities in the next 10 years. I don't feel compelled to buy the market at the world allocation of 55/45 US/International. Mr. Market can throw a tantrum longer than I can stay solvent. Taylor Larimore over on the Bogleheads likes the 20-40% international range so I will stick with his experience. I think someone that goes US only properly allocated will do fine if it meets their goals.

 

[Markola]

It was good to reread that impressive Vanguard white paper VanWinkle referenced. It was written in 2012 and, since then, U.S. equities have outperformed international. The concluding sentences are a good summary of the paper:

“... For many investors, an allocation between 20% and 40% should be considered reasonable, given the historical benefits of diversification. Allocations closer to 40% may be suitable for
those investors seeking to be closer to a market- proportional weighting or for those who are hoping to obtain potentially greater diversification benefits and are less concerned with the potential risks and higher costs. On the other hand, allocations closer to 20% may be viewed as offering a greater balance among the benefits of diversification, the risks of currency volatility and higher U.S. to non-U.S. stock correlations, investor preferences, and costs.”

DW and I are 20%.

 

[FREE866]

I base my AA allocation on a 17 year time horizon as that is when I will turn 70 and SS will dramatically change the amount I need to withdraw from the portfolio.

When I run the numbers through Firecalc whether I'm at 60/40 or 70/30 or 90/10 is very little difference --all are at 100% success , but the higher equity portfolio leaves me a 20-25% higher value.

Other than presumably less volatility is there a reason I should go less equity?
thx

 

[OldShooter]

I base my AA allocation on a 17 year time horizon as that is when I will turn 70 and SS will dramatically change the amount I need to withdraw from the portfolio.

When I run the numbers through Firecalc whether I'm at 60/40 or 70/30 or 90/10 is very little difference --all are at 100% success , but the higher equity portfolio leaves me a 20-25% higher value.

Other than presumably less volatility is there a reason I should go less equity?
thx

I would say no. We were at close to 100% equity when I retired at 56 and DW retired two years later. Now, 15 years later, we are at about 70/30.

Your "other than" is important though. Have you been through a real market pullback? 2008, tech bubble, etc.? If you successfully held your course and didn't panic sell, then you are probably pretty fireproof. (It gets easier every time, too.) Otherwise, you'll test your fire resistance in the next one and decide whether 100% equity is for you.

IMO one of the disservices Harry Markowitz did when he developed modern portfolio theory is to equate volatility with risk. Volatility is definitely risk over short periods of time (<5 years, maybe) and in cases where one might be forced to sell a volatile asset. For an investor, though, it is almost a don't care because, based on historical data, the benefits of holding volatile equity over a long period of time easily outweigh the risk that at the end the assets might be sold during a dip. Of course, Markowitiz got the Nobel and I didn't, but that's my take on it.

 

[FREE866]

I would say no. We were at close to 100% equity when I retired at 56 and DW retired two years later. Now, 15 years later, we are at about 70/30.

Your "other than" is important though. Have you been through a real market pullback? 2008, tech bubble, etc.? If you successfully held your course and didn't panic sell, then you are probably pretty fireproof. (It gets easier every time, too.) Otherwise, you'll test your fire resistance in the next one and decide whether 100% equity is for you.

IMO one of the disservices Harry Markowitz did when he developed modern portfolio theory is to equate volatility with risk. Volatility is definitely risk over short periods of time (<5 years, maybe) and in cases where one might be forced to sell a volatile asset. For an investor, though, it is almost a don't care because the benefits of holding volatile equity over a long period of time easily outweigh the risk that at the end the assets might be sold during a dip. Of course, Markowitiz got the Nobel and I didn't, but that's my take on it.

Thx...in 2000 I had very little money so wasn't affected....in 2008 I was still in accumulation phase so was just always adding....same in 2011 was scary at one point and August 2015 was very rocky but I ER'd in January 2017 so I guess December 2018 was my first "test" and yeah I didn't like it , but wasn't even thinking of selling....

 

[Dtail]

I have had money invested since 1981, but never truly paid attention to the large changes either way just out of naivety or indifference of some sort despite being in the industry.

Weird I know.

So my true first mini test was last Dec and I did not freak out or change anything, but was watching it a little more closely. For better or for worse, I trust the calculators.

 

[target2019]

50/50 asset allocation is typical, for OP and me.