Asset allocation with $8 million

[Spanky]

My DH will be retiring this year. He is 54 and I am 55 and we are trying to figure out the proper asset allocation. He is very conservative with investing and I am moderate but willing to take more risk.

$8 million - amazing with this kind of risk profile!

 

[foxfirev5]

I would put a good bit of the CD $ into an investment grade bond ladder. The returns are better.

Even with the recent drop in CD yields I'm not seeing enough of a spread to jump into corporates. CD's still have an advantage over treasuries (over 1 year maturity) with a similar lack of credit risk.

The only IG that offer a significant yield advantage are the BBB issues. There are plenty of opinions out there that this area could get a little dicey. I know the past few years have had few defaults but I'm a little concerned about the future.

A few months ago I put all I could into 7&10 year CD's yielding 3.5-3.65% bringing my ladders avg maturity and yield up to 3 years and 3%. Pretty darn close to a comparable Short Term Investment grade fund or even BND with a much shorter duration. IMHO credit risk free CD's are the best bargain out there. However I will continue to evaluate and when a significant spread develops I may shift maturing CD's in that direction. Or not.

 

[kgtest]

The key is to let the portfolio do its thing and mainly leave it alone.

I used to think investing was for the sophisticated, educated, super complex problem solving and ambitious...


Then I joined ER forum and realized it was the opposite...KIDDING! But in reality, managing an investment portfolio is about one of the laziest activities ever, next to maybe paying the property taxes 2x a year.



Sure if you are day trading it can be more work, but the typical DCA balanced AA Indexer it's really like the most uneventful thing of the year. Sort of like when you just saw a cheetah pounce on it's prey for the first time...I thought that was investing...no it's more like a snail or sloth at the DMV.

 

[Foxtails]

$8 million - amazing with this kind of risk profile!

Spanky - Don’t be so impressed. A lot of this was not market gains but salary, stock options, brute force saving, etc. I will be honest and say I kick myself frequently for getting out of the market in 2008 and only within the last 2 - 3 years getting our equity position to 50%. I’m sure we’ve missed out on millions in gains but I can’t change the past. At least we’ve corrected course and have a better asset allocation to take advantage of market gains. I put this out there so others can learn from our mistakes and hold tight during downturns. Do not sell and sit on the sidelines because it is difficult to know when to get back in and before you know it years may have gone by and you miss a lot of upswings!

 

[audreyh1]

Spanky - Don’t be so impressed. A lot of this was not market gains but salary, stock options, brute force saving, etc. I will be honest and say I kick myself frequently for getting out of the market in 2008 and only within the last 2 - 3 years getting our equity position to 50%. I’m sure we’ve missed out on millions in gains but I can’t change the past. At least we’ve corrected course and have a better asset allocation to take advantage of market gains. I put this out there so others can learn from our mistakes and hold tight during downturns. Do not sell and sit on the sidelines because it is difficult to know when to get back in and before you know it years may have gone by and you miss a lot of upswings!

Well, it is indeed impressive that you have been able to amass that size of a portfolio in spite of having gotten out of the market in 2008 and missing out on a large chunk of the subsequent recovery and run up. You learned a harsh lesson, but you are still financially in great shape and can move forward the wiser. Sitting on your hands is often the best investment strategy once you’ve built your portfolio.

I like 50/50 because I’ve hedged my bets either way. And I like occasional rebalancing because I don’t know what is going to happen in the future, but at least I can trim some winners and buy more of some losers and get back to my planned risk profile (AA).

I also like have a year or two expenses in short-term funds because that seems to help me ignore wild market swings because I know I won’t need that money for a while. With a good chunk of your portfolio in bonds/CDs you can cover many years if you need to wait for stocks to recover.

 

[gcgang]

Thanks to all who have responded. Just to clarify we already own the rental and the muni bonds that’s why they are in the asset allocation. As far as panic selling he agreed that if we stayed at 50% or less in equities we would hold tight no matter what happens. During the correction last year at one point we were down over $400k but we just ignored it so I think we have learned our lesson about not selling in a downturn.

The fact you were looking at -$400k shows you weren't ignoring it, rather you chose not to sell/make any changes. Good so far.

The Big Mistake happens when that number you're watching hits your point of maximum discomfort. That's when people "capitulate" and usually the market starts rising. Is there a dollar number that would make your H do this? As you have a very low WD and seem somewhat risk averse, set your % in Equities so that dollar amount won't likely be attained. Maybe plan for 50-75% correction.

And have at least 25% of your Equity as Foreign Equity.

 

[audreyh1]

It helps me to think of my portfolio spread out over time. There are some investments (fairly stable cash and short term bonds/CDs) that can be accessed within 1 to 3 years with minimal loss and maybe a gain. There are more that even if they take a hit are likely to recover within 5 years (intermediate bonds). And finally equities where it could take more than 5 years to recover, maybe even 10.

The point is that when we see a big hit to the portfolio it helps to realize that we don’t need to access it all tomorrow. We can wait for recovery. Structure your portfolio so that you have assets to draw on during down market times, and you will be OK.

 

[audreyh1]

And have at least 25% of your Equity as Foreign Equity.

Not necessary. An investor will do just fine not holding foreign equity funds at all.

Personally I hold 20% of my equity in international stocks and don’t feel any need to go higher.

 

[pb4uski]

... Do not sell and sit on the sidelines because it is difficult to know when to get back in and before you know it years may have gone by and you miss a lot of upswings!

Yup... in order to profit you need to make two good decisions... when to get out and when to get back in. The when to get out decision is usually easy... the getting back in decision is very difficult.

 

[NW-Bound]

Once I get out, anytime I get back in at a lower point I consider it a success.

No need or illusion that I can time the exact bottom. Or the exact top for that matter.

 

[njhowie]

Even with the recent drop in CD yields I'm not seeing enough of a spread to jump into corporates. CD's still have an advantage over treasuries (over 1 year maturity) with a similar lack of credit risk.

The only IG that offer a significant yield advantage are the BBB issues. There are plenty of opinions out there that this area could get a little dicey. I know the past few years have had few defaults but I'm a little concerned about the future.

A few months ago I put all I could into 7&10 year CD's yielding 3.5-3.65% bringing my ladders avg maturity and yield up to 3 years and 3%. Pretty darn close to a comparable Short Term Investment grade fund or even BND with a much shorter duration. IMHO credit risk free CD's are the best bargain out there. However I will continue to evaluate and when a significant spread develops I may shift maturing CD's in that direction. Or not.

Completely agree on all points.

When I read the leading post, my first thought was $8 million, $160k expenses - this is a no brainer - what are the longest term non-callable CDs out there? I was still able to get 3.3% for 7 years yesterday and see Fidelity currently has new issue 10-years for 3.25%.

As long as you can get the $160k or more without having any market exposure, then why open yourself to the risk? 30-year treasuries are available today for 3.12%.

If it were me, I would take $5 million and put in to those 3.12% 30-year treasuries (with tax-free income at state level) - there's the guaranteed $160k/year to cover expenses. That leaves $3 million - ladder those in shorter-term treasuries and CDs and be done with it.

I'm not seeing the necessity or justification for putting anything in to equities or bonds in this situation.

 

[Dtail]

Once I get out, anytime I get back in at a lower point I consider it a success.

No need or illusion that I can time the exact bottom. Or the exact top for that matter.

Yes as you actively trade to some extent. For us buy and hold folks, we need to stay the course. (Convincing myself too) lol.

 

[OldShooter]

... An investor will do just fine not holding foreign equity funds at all. ...

I'm not sure what "just fine" means.

Lots of less-sophisticated investors think they are doing "just fine" with their managed accounts if the account increases in value, regardless of whether the increase is much less than the overall market increase.

An investor who avoids international funds will probably do "just fine" on this basis as well, but he/she will not be keeping up with the market when the international sectors are leading. Regression to the mean tells us that will happen in the future, possibly in the near future.

FWIW, last year we moved from a 30% International position to a "Total World" portfolio, so we are now about 45% International. I figure that in five or ten years we'll know whether that was wise or not.

 

[audreyh1]

I'm not sure what "just fine" means.

Lots of less-sophisticated investors think they are doing "just fine" with their managed accounts if the account increases in value, regardless of whether the increase is much less than the overall market increase.

An investor who avoids international funds will probably do "just fine" on this basis as well, but he/she will not be keeping up with the market when the international sectors are leading. Regression to the mean tells us that will happen in the future, possibly in the near future.

FWIW, last year we moved from a 30% International position to a "Total World" portfolio, so we are now about 45% International. I figure that in five or ten years we'll know whether that was wise or not.

The only “harm” someone would come to from avoiding international investing is perhaps a slight reduction in their long term return. It’s not like portfolio metrics as measured by Firecalc include international equities by default. Bogle’s long held opinion also is that international equities are not necessary.

It depends on the investor’s goals. They can choose.

As for “keeping up with the market”. Which market?

If someone is designing their AA and looking at portfolio survival and keeping up with inflation, they may not care about “keeping up with the market”.

 

[OldShooter]

The only “harm” someone would come to from avoiding international investing is perhaps a slight reduction in their long term return. ...

Yes, my point exactly. The same statement can be made for any sector(s) that an investor excludes from a portfolio.

It depends on the investor’s goals. They can choose...

Yup.

As for “keeping up with the market”. Which market?

I use the Russell 3000 for US and the ACWI for total world. Most other "market" benchmarks, like the S&P 500, tend to be sector benchmarks. YMMV

If someone is designing their AA and looking at portfolio survival and keeping up with inflation, they may not care about “keeping up with the market”.

True enough. Then there's no need for much angst in any portfolio design.

Overall, International is a sector like any other sector. Or you can consider it to be several sectors like Emerging Markets, EAFE, etc. Not much different than US sectors like consumer durables, energy, etc. An investor can choose to avoid any sector or sectors, but as you point out, the risk "is perhaps a slight reduction in their long term return." If the investor understands that and it's "just fine" then I'm OK with that.

Really, the same discussion applies to "socially responsible" aka "ethical" investing. I have a nephew-n-law who is very hot on this. No non-renewable energy companies, probably no weapon manufacturers, etc. He's quite comfortable with the fact that his performance may well be reduced as a result of his decisions. It's "just fine" with him.

 

[Another Reader]

I don't mind investing a little in the developed economies that function more or less as ours does. I'm not investing in the third world, where GAAP are thought of as optional, dependent on the direction of the political winds. While the world economy is doing well, these countries look good, because they are growing. Other than some hiccups in places like Greece, we have had a pretty good run with them. However, when the SHTF, you often learn you did not really own what you thought you did.

I get a share of the GDP of these countries, but through investments in businesses based in the developed world that do business there. My guess, and of course it's just a guess, the next time the economies of these countries turn, I will lose a lot less than those directly invested in them.

 

[Spanky]

Spanky - Don’t be so impressed. A lot of this was not market gains but salary, stock options, brute force saving, etc. I will be honest and say I kick myself frequently for getting out of the market in 2008 and only within the last 2 - 3 years getting our equity position to 50%. I’m sure we’ve missed out on millions in gains but I can’t change the past. At least we’ve corrected course and have a better asset allocation to take advantage of market gains. I put this out there so others can learn from our mistakes and hold tight during downturns. Do not sell and sit on the sidelines because it is difficult to know when to get back in and before you know it years may have gone by and you miss a lot of upswings!

Thanks for the info. Nearly any asset allocation, i.e., 30/70, would work for a 2% safe withdrawal rate ($160K/8 mil). It depends on your risk tolerance and how much money that you want to leave behind. 30/70 AA, I think, is considered super conservative. Our AA, 55/45 designed for a 1 - 2% SWR, is considered moderate.

 

[Luck_Club]

The dilemma is simple $8Mil times 5% = $400K. Getting less than that for an ounce of risk and you feel cheated.

So talk of $180K blah blah blah, from t-bills, balanced funds, etc is noise interfering with solving the problem.

Dig deep take some risk and effort to get some safe 10% balanced against the 2.5%, and all should be well.

There are safe 5-7% yields out there, the issue is anyone could go pop, and there aren't enough to balance all the risks. So to go passive you need some long high yield balanced against some long low yield to make it work.

 

[Another Reader]

The dilemma is simple $8Mil times 5% = $400K. Getting less than that for an ounce of risk and you feel cheated.

So talk of $180K blah blah blah, from t-bills, balanced funds, etc is noise interfering with solving the problem.

Dig deep take some risk and effort to get some safe 10% balanced against the 2.5%, and all should be well.

There are safe 5-7% yields out there, the issue is anyone could go pop, and there aren't enough to balance all the risks. So to go passive you need some long high yield balanced against some long low yield to make it work.

Or just buy a lot of real estate when it's on sale at 50 percent off. Worked for me, and I never have to worry about the above.

 

[Spanky]

Or just buy a lot of real estate when it's on sale at 50 percent off. Worked for me, and I never have to worry about the above.

50% off? It may take a while if not years.

 

[Another Reader]

Well, I was in the right place at the right time...as were a lot of other people.

Asset sales do occur reasonably frequently, and buying greedily when they do can catapult you forward in your acquisition phase.

 

[Luck_Club]

Or just buy a lot of real estate when it's on sale at 50 percent off. Worked for me, and I never have to worry about the above.

I was going to mention investment real estate as well. Easy to evaluate, and more control over the risks. In my humble opinion safer than marketable securities. Finally all cash should yield between $600,000 to 1.6 Mil per year if bought correctly.

 

[53anddone]

We are in a very similar spot. I am 56 and my wife is 50. Similar investable assets.

Agree with other comments that you have won the game.

We are 55% in equities (split among 30 blue chip dividend payers), 40% CD and Munis, 5% cash. I am comfortable managing the stocks and none make up more than 2-3% of our assets. I rarely sell stocks unless its tax time and then I may take a loss here and there.

I am getting around $240K gross in dividends and interest and our COL is below this.

I dont panic when the market drops as I figure we have a 30 year window and its the income I pay more attention to.

 

[GajPD]

Not many comments cover inflation here, they should. Over 30-40 years even 2% inflation takes a huge toll. Historically of that time frame, stocks is the only way to insure you beat inflation with limited downside if you can resist any bad sell decisions in market declines. SPX index’s with low/no fees help also. Maybe try and Russell 1000 index to get a little smaller cap exposure helps also. Just a thought, similar situation here.

 

[RothReady2Retire]

Completely agree on all points.

When I read the leading post, my first thought was $8 million, $160k expenses - this is a no brainer - what are the longest term non-callable CDs out there? I was still able to get 3.3% for 7 years yesterday and see Fidelity currently has new issue 10-years for 3.25%.

As long as you can get the $160k or more without having any market exposure, then why open yourself to the risk? 30-year treasuries are available today for 3.12%.

If it were me, I would take $5 million and put in to those 3.12% 30-year treasuries (with tax-free income at state level) - there's the guaranteed $160k/year to cover expenses. That leaves $3 million - ladder those in shorter-term treasuries and CDs and be done with it.

I'm not seeing the necessity or justification for putting anything in to equities or bonds in this situation.

If it were me , I would do exactly this also.