Tweaking Asset Allocation

[Foodie]

Hello World,

My asset allocation right now is:

US Large Cap Stocks: 66%
International Stocks: 18%
US Small Cap Stocks: 4%
Bonds: 12%

The plan is to increase my Bond allocation 1% each year until 55. Expecting to get a pension of $80K/year. I am 49 now.

My question is: I am a little bit tempted to move some of the US Large Cap Stocks to International Stocks give the PE ratios of those markets. Deep down I feel it is a bad idea as it feels like market timing. Yet another part of me feels that US market is a bit frothy and Europe more ripe for a take off. What do you guys/gals think?

 

[atmsmshr]

I concur and already made this change last December as part of getting ready for retirement in 2-3 years.

Next change for me is to buy some bonds for risk management - but I surely have enjoyed the returns of 100% domestic stocks in the 401k until now.

 

[DrRoy]

I would move 2% per year.

I think that the US/Int'l market prospects are more about potential growth than PE's, and I prefer US.

 

[LOL!]

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 ...."

 

[Blue Collar Guy]

15 % of my equities are international. The have under performed terribly. Only recently they are kicking in. If i had to do my AA over again no more international for us. I hold on to them as somehow when we were agonizing over our AA we must have found some info that made us get them.

 

[2017ish]

I wouldn't move just because one looks more attractive than another today. Who actually knows whether US is Nikkei 1989, or if DrRoy is right? You currently have 20% of your equity in international. How does that compare to your desired/chosen allocation? Alternatively, why do you want to change your allocation moving forward--other than market timing?

(I have 50% international and sleep well with it; others have zero and sleep equally well. Choose your position in the eternal/interminable debate and keep it until you have good reason to change.)

 

[Foodie]

Guys (and gals)... thanks for reminding me that I just had a little case of "market timing" I cannot believe that after nearly a decade of not suffering such symptoms I was showing signs of it.

To: LOL!
Thanks for the sharing the data with the % appreciation of US and international markets. Puts things in perspective

To: 2017ish
I do have about 20% of equity in international. That is my desired asset allocation and it has been for about a decade. It was based on some risk/reward analysis that the Vanguard (Boggleheads maybe?) crowd made. So, it will stay that way... and not have it more weighted to the international side as I posted yesterday. The only re-balance that I am planning to do is to increase bonds/cash 1% per year so that when I am 55 years old, it stays at about 15%. This might be too aggressive for most, but given that I expect to have pension of $80K/year at that age, I keep it at that level. Other thoughts/comments welcome.

Bottom line: thanks for reminding me that one must have a better reason than "I feel" when changing asset allocation.

I guess that all of us are human. After seeing the market go up for 8 years, and getting a day like 2 days ago... I started to second guess myself for a second.

 

[pb4uski]

What happened 2 days ago?

 

[OldShooter]

... I am a little bit tempted to move some of the US Large Cap Stocks to International Stocks ...

Yup. Market timing.

15 % of my equities are international. The have under performed terribly. Only recently they are kicking in. ...

This is the way it is supposed to work. Asset allocation, ideally among assets with lower correlations, essentially guarantees that over any short period (years) some classes will be up and some classes will be down. Over maybe a decade, though, the diversification will have reduced portfolio volatility and the portfolio will probably have benefited from each class it turn having its day in the sun. An allocation that is constantly tuned to chase the currently-hot class is essentially a buy-high, sell-low strategy and will almost certainly underperform a portfolio held in patient hands.

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

Well, you need to be careful here. Internationals looked a little doggy in dollar terms 4Q16 because the dollar was strengthening, not because they were performing poorly. For example, the UK was up 8% but the strengthening of the dollar made it look like zero. I viewed that as money in the bank, since I am long-term bearish in the dollar. YTD17 is a different matter. While internationals have been stronger in local currency, the decline of the dollar has made them look stronger than they really are. That 6% differential is pretty much due to the decline of the dollar. My calculator says the dollar is down against the Euro, for example, by about 8% since the first of the year and down against the GB Pound by 5%. (This assumes that your 15% and 9% numbers are in dollars.)

All that said, there is a Vanguard analysis (https://www.vanguard.com/pdf/ISGGEB.pdf) that says that 30-40% International is the sweet spot for minimum portfolio volatility. There is also a credible argument, IMO, that since US is about 50% of the world's investable market that, to cover everything equally, a portfolio should be 50% international. Personally, I think we are a little north of 35% right now. I'll be checking again between Xmas and New Year when we take our annual look at the portfolio.

Now back to our regularly scheduled program: To the OP: You may want to reconsider your relatively low 18% allocation not for market timing reasons but rather for portfolio design reasons. If I were you, which I'm not, I would run it up to at least 30%. Same-o for @Blue Collar Guy.

Edit/Currrency reference: http://www.x-rates.com/graph/?from=USD&to=EUR&amount=1

 

[Foodie]

What happened 2 days ago?

2 days ago the (tech/NASDAQ) market down about 2%
1 day ago market up about 2%
today market down about 2%

So the swings have been a bit rough.

 

[Koolau]

I guess i'd be less concerned about which stocks than how much stock. 88:12 seems over weighted even at 49 (with FIRE at 55). Imagine '08/'09. Totally up to you, but just my $0.02 worth as YMMV.

 

[Foodie]

I guess i'd be less concerned about which stocks than how much stock. 88:12 seems over weighted even at 49 (with FIRE at 55). Imagine '08/'09. Totally up to you, but just my $0.02 worth as YMMV.

Thank you Koolau. I am very open to suggestions from the forum. In fact, the whole purpose of me posting the information is to get feedback. Much appreciated.

Here are some thoughts to consider:

Right now I am 88% Stocks / 12% Bonds and Cash.
The plan is to increase it 1% each year.
At retirement it would be 82% Stocks / 18% Bonds and Cash.

At that time I have a pension of $80K/year.
Annual expenses are $60K / year.

Having said that, a questions to Koolau and other forum members is: Do you think that (given the pension) it is still too much in stocks for my given situation?

Again, I am most open to all suggestions. Share your thoughts!

 

[OldShooter]

... Do you think that (given the pension) it is still too much in stocks for my given situation? ...

IMO it's hard to say without knowing the size of the portfolio. If it is a few million, then you are completely bulletproof and you are really investing for your heirs and your estate. In that case, you really don't care about volatility because you probably won't be touching the stocks anyway. OTOH, if there is significant risk that you will need to spend say, half, of your portfolio inside a 10 year time horizon then 88% is probably too much in stocks.

Of course predictions, especially about the future, are always difficult. So it is more a peace of mind thing than anything else. From that point of view, some people might say "I've won the game, why would I keep playing?"

 

[Foodie]

IMO it's hard to say without knowing the size of the portfolio. If it is a few million, then you are completely bulletproof and you are really investing for your heirs and your estate. In that case, you really don't care about volatility because you probably won't be touching the stocks anyway. OTOH, if there is significant risk that you will need to spend say, half, of your portfolio inside a 10 year time horizon then 88% is probably too much in stocks.

Of course predictions, especially about the future, are always difficult. So it is more a peace of mind thing than anything else. From that point of view, some people might say "I've won the game, why would I keep playing?"

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.

 

[OldShooter]

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.

Well, if it was me I'd start giving some of it away and enjoying the process. I am biased towards gifts that directly affect lives, like "adopting" kids in overseas schools, providing college scholarships to kids who would otherwise be unable to attend at all or whose choices are limited by available funds. My wife and I have supported one young lady all the way from grade school through nursing school and a young man who is now doing very well in hospitality/hotel management. Neither would have ever left poverty or their birth village without this help. There is one foundation I have been thinking of getting involve with; one of their programs is providing small money to needy people for things like tools, boots, special clothing, etc. that enable the people to work. None of this type of stuff has to be really high buck. You might make a rule that you donate according to some rule, like 50% of the stock portfolio gains, 100% of dividends income, etc.

And ... I too would drink the wine! Good reds, hopefully.

 

[Foodie]

OldShooter: Thanks for your comments on the giving away. And yes, they are GREAT reds. I have been putting that collection for decades. I guess that you have a collection of pistols and rifles? Cool stuff.

Great to hear about the support that you have provided to those kids. I am a really strong believer in supporting education. First generation student here. Made it all the way to an nice institute of technology, and now serving as dean at a research institution.

Ah... back to topic.... given the new info, what do you think about the asset allocation idea that Koolau mentioned (get a lot more bonds)?

 

[gcgang]

Would you care if you "lost"a million bucks? If no, and you'll never " need" this money, put it all in equities.

Expanding Shooters comment - if half of all equities are non US, and you want to overweight lower valued markets, you might want to have as much as 70% non US.

 

[pb4uski]

2 days ago the (tech/NASDAQ) market down about 2%
1 day ago market up about 2%
today market down about 2%

So the swings have been a bit rough.

No disrespect, but it is totally foolish to pay any attention to market changes for a period of less than a year... and 3 or 5 years is a more appropriate time horizon.

 

[pb4uski]

On your original question, I presume that your portfolio/assets are sufficeint to support your lifestyle and you are FI but it is hard to tell without knowing your spending.

Assuming that you have plenty and have "won the game", there are two schools of thought. One is that there is no need to take any risk so invest in totally safe investments and at the other extreme is that you can "afford" to lose some money and it will not effect your lifestyle so you can easily accept the risk and hold more equities. Of course, lots of in betweens.

I suggest that you think about what AA you want to have when you retire and divert new money contributions and perhaps income to that asset class so you reach your goal at the time that you retire. That said, IMO there is nothing wrong with 88/12 AA at 49 with a 6 year time horizon to retirement. I was 100/0 until my mid/late 40s and then started putting new money into fixed income.

 

[jimnjana]

T
At that time I have a pension of $80K/year.
Annual expenses are $60K / year.

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

 

[OldShooter]

... what do you think about the asset allocation idea that Koolau mentioned (get a lot more bonds)?

@Foodie, I think there is a good reason why you're not getting more definitive opinions:

Almost everything we have all read about asset management in retirement is implicitly or explicitly directed towards making sure the portfolio doesn't run out before the owner's death. So we see discussions of asset allocation to balance needed growth with safety and we have discussions of withdrawal rates. While there are no guarantees, there is a quite a body of statistical evidence that leads to popular conclusions, like the 4% withdrawal rate and holding some equities.

This is not the problem you're trying to solve. From what you've said, your portfolio will outlive you and it may well increase in size as you age. So comes the question: "What problem are you trying to solve?"

IOW, what is the purpose of your portfolio? Until you can answer that question, the old corruption of what Lewis Carroll's Cheshire cat said applies: "If you don't know where you're going, any road will get you there."

 

[Spanky]

At that time I have a pension of $80K/year.
Annual expenses are $60K / year.

Two schools of thought:
1. Since income > expense, I could take more risks and continue to build my portfolio.
2. Since income > expense, I do not have to take on more risks to preserve what I already have.

 

[Foodie]

pb4uski: Thanks for putting the two different schools of thought so succinctly and to point out all the in between. I think that that is the essence of this discussion.

jimnjana: Refreshing perspective and good reminder.

At the end of the day, this was a good discussion for me. A helpful reminder, hopefully to others as well, to keep on with the plan and not change it in the middle of the journey for no solid reason. I will keep the 88/12 and each year reduce the stock allocation by 1%

 

[Winemaker]

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).

+100

Steady as she goes. Same portfolio, only real estate portfolio larger, and I'm almost 60.

 

[Chuckanut]

2 days ago the (tech/NASDAQ) market down about 2%
1 day ago market up about 2%
today market down about 2%

So the swings have been a bit rough.

Following short term swings like those above is not what I would recommend for long term peace of mind and getting a good night's sleep.