Best Asset Allocation for an ER


Full time employment: Posting here.
Jan 19, 2008
I am interested in opinions on the best method to invest for an early retiree. I am 53 and not quite 100% retired. Where should I be looking? What asset classes should I be using?

I am willing to do whatever it takes, even if it is complex. Any help is appreciated.

Are there any old threads that I should be reading?

I should add that the "minimum" overall return I am looking for is 6% (includes inflation). The "minimum" real return I am looking for is around 3%.
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Thanks for the reply, I thought stating the return I was looking for provided enough info to answer the "it depends". Maybe I am naive.

In any case I have a considerable nest egg and am looking to withdraw in the 4% range and am willing to adjust that depending on how things go. I do consider myself fairly conservative.

I'll check out that thread, thanks.
IMy wife's primary fund (IRA) is VG WEllesley and my primary retirement fund is a target retirement type fund. Lots of other ways to do it but I think this will work for me.
to get a real return of 3% you need about a 50/50 mix of equities to everything else. how you do it is kind of up to you. you can achieve the overall average or better with funds that will give you wide swings up and down like most index funds which are stuck in a down market in the areas they track and stand no chance of cushioning the fall or getting out of sectors that are being pounded or even making money in a down market. of course you are fully invested and you will never lag an index by a fund managers poor choice of investments.

you can do it with some actively managed funds that trade in a tighter range , they arent up as much in a bull market but dont fall as much either. you may not stand as great a chance of going over your goal.

as an example i use a particular newsletter geared to fidelity funds as well as an etf portfolio to. the goal of the fidelity portfolio is to get the same returns as the s&p 500 but with less risk and slightly less money committed to stock. so far we have beaten the market on average for over 20 years while only having 75-80% in equities vs the 100% you would need in the index fund.

i adjust the allocations to my 2 portfolios into ray lucias bucket system so i usually have somewhere between 50-60% in equities except when playing a dirty llil market timer like now where im about 38% and looking to add on the drops
Asset allocation is a pretty important decision. As others have said, a lot depends on what allows you to sleep at night, so it is pretty personal. What might work for one person might not be at all correct for another person. I would recommend reading about it in books such as:

The Four Pillars of Investing by W. Bernstein
All about Asset Allocation by Richard Ferri
The Bogleheads' Guide to Investing by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf
The Only Guide to a Winning Investment Strategy You'll Ever Need: The Way Smart Money Invests Today by Larry Swedroe

all of which are available at amazon. Or, you could read some of the many other books available on the topic.

Personally I really got a sense of where my "sleep at night" level was while reading these and fine tuning my asset allocation during various bumps of the economy in the past couple of years. I am not yet retired (another year to go) but I am planning on 45% equities, 55% fixed. This would be way too conservative for some people, though.
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RockOn if anyone knew the perfect AA we would all be in it. Only the future knows. Having said that there are several predictors of returns for various AA and volatility is usually a function of FI percentages (along with suppressing returns). You can check many basic AA on sites such as Vanguard or Fidelity - check out Lazy Portfolios.

I, for one, am an older ER and conservative so I have opted for an AA of 50/50 with the equity portion having a small and value tilt with about 20% international exposure. Is that the best? Ask me in 20 years.
There is no optimal portfolio that works well in all market conditions. Forget about market timing, momentum, technical analysis, economic forecast, newsletter, etc. Identify your risk tolerance and pick an allocation between equity and fix-income. Include all asset classes, if possible, in equal proportion for the equity portion and cash, short-term and intermediate bonds for the fixed income portion. It's very, very simple.

P.S. We are currently at 55/45 (equity/FI) since we are very close to ER.
your mix should be to meet your income needs, not to grow richer at this point. if you can do it with 20% equities than that is all you need. you dont have to keep playing and taking risks if you aleady won the game
My understanding is the trinity study (which tested withdraw rates) suggest that a 60-40 portfolio can sustain a 4% starting withdraw rate (and not run out of money).

So part of consideration is also whether you want to draw down principal or live off of interest only. It varies from person to person.

There are people on this board which live off of dividends and dividends only (allowing principal to actually grow in retirement). There are people which use dividends and other investments. There are people which only use other investments.

The more information posted about situation will give you more ideas as to what is best.
Thanks for all the information. This isn't easy is it? I do not want to draw down my funds, I want to be able to withdraw around 4% (I'm flexible on this) for 30 to 40 years and have my account grow to roughly match inflation. I want to be nice to my kids! As I figure it, I need around 6% gross, 3% real as minimums to reach my goal.

I've been seriously thinking about around 30% to 40% in diversified fairly high yielding dividend stocks (including some international, some small cap.... all value) , 10% in Reits, 10% in Preferred stocks, maybe 5% in commodities, and the rest in a variety of bonds including some in junk, with a few % in MLP's or oil and gas trusts. Does this sound like a consistent 6%/3% real portfolio?

Am I missing anything? Is there a good resource out there for people like me?
You place your bets and you take your chances.

I don't think you need any MLPs, nor any preferred stocks, nor any junk bonds, nor any oil and gas trusts. But you must give up the word "consistent".

This paper: and this paper:

show you can achieve what you want without all those fancy investments.

I imagine you have read these already though since they showed up in the other links.
You might want to read the book "Work Less, Live More" by Bob Clyatt (he's on this forum as ESRBob, by the way). In it he details what he calls a Rational Investing Portfolio which based on historical results returned 10.2% over 1988-2006 period with low volatility (6.86%). It is somewhat complicated in that it includes 16 asset classes. We are working towards following a more simplified portfolio (fewer funds) that he also recommends. It has returned 8.6% since 1988 with volatility of 6.7%. Of course no one knows what future returns will be but at least these model porfolios have some history and research behind them.
Thanks LOL and simple girl for the suggestions. I'll check out the Clyatt book.

LOL, you don't think adding some historically higher yielding asset classes such as I suggested with about 25% or so of my money would help with consistency? Also,thanks for the direction, I haven't read all of the links yet but what I have read is very helpful.
Thanks LOL and simple girl for the suggestions. I'll check out the Clyatt book.

LOL, you don't think adding some historically higher yielding asset classes such as I suggested with about 25% or so of my money would help with consistency? Also,thanks for the direction, I haven't read all of the links yet but what I have read is very helpful.

It sounds like you're looking to invest your money in a variety of assets with low correlation, or possibly negative correlation, to each other.

The problem is there is no 'consistency', really. You pick things with a low correlation and aim for a standard deviation you can live with and go from there.

The books W2R posted were extremely helpful to me (and I was able to get them all at my local library! LBYM!).

If you're interested, there's a great discussion over at about Swedroe's posit for a sound portfolio built around low correlation and a low standard deviation. Basically, it's a mix of 70% stable (long and short term securities and bonds) and 30% 'juice' (commodity futures, emerging markets, etc). Interestingly, the historic return was only a percentage or so below TSM but the standard deviation was (if I recall) over 8 points lower.

Swedroe pointed out that tracking error would kill you, but if someone is only concerned with consistent results, then tracking error isn't really an issue.

edit: above is based on sketchy understanding of what my poor brain has been able to absorb so far.. I'm only a few months into the learning curve.
Thanks LOL and simple girl for the suggestions. I'll check out the Clyatt book.

LOL, you don't think adding some historically higher yielding asset classes such as I suggested with about 25% or so of my money would help with consistency? Also,thanks for the direction, I haven't read all of the links yet but what I have read is very helpful.
Consistency and Guarentee are 2 words that you should strike from your retirement vocabulary. If anyone promises you either, run like they are after your family jewels, ... cause they are.
As you can see there are many ways to skin this cat ... they will all work under certain conditions. You have to pick the one that matches your goals, portfolio, and risk tolerence.
I would suggest you
1) read all you can ... until it starts to sound repetitive.
2) do your financial inventory
3) put together your plan
4) implement plan and adjust as your goals or risk tolerence change
IMO simplier is better... but that's me.

Come back to this forum and ask questions. Good luck to you.
Stable value funds may provide the return and stability that you seek. Unfortunately, they are only available via 401K plans.


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I just looked at the stable value fund in my 401(k). It's roughly 6.5% cash and the remainder is synthetic GIC. If anyone is interested in what a GIC is, this was a useful link:

Stable Value and GICs Q&A
Here's a repost of an article by Larry Swedroe: Asset Class Investing: No Pain, No Gain - Seeking Alpha

Basically, if you want a 'consistent' return, then you are talking about no risk. No risk means CDs and money market funds or perhaps TIPS. The reason one is able to get a long-term average return-above-inflation or long-term-real-return is because of the risk that you take. If you want that type of return, you have to give up on consistency.

But once you accept that risk and volatility go with your increased return, you can prepare for that.
Wouldn't something like a 5 year CD work for now. High Yield Rates for 1 yr CD
Ladder them, so that you're looking at one getting out every 2 months or so?
Other than that, I'd have to think almost any MMA (money market account) would suffice.
That's basic though. It won't increase the value drastically over the long term (i.e. hedge against inflation).
I'm not all that hung up on "consistent", I should have not included that in my goals. I know there will be volatility reaching for a 6%/3% real return at current market valuations and interest rates.

However, I am interested in the best AA for as low of a SD as possible.

Thanks LOL and everyone else for providing the links, I haven't made it through all of them yet, they are great information.

Myself: your response came in while I was responding to LOL. I am looking for 3% after inflation, CD's and MM do not take me there.
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