Starting out with Asset Allocation and desperately need help

[blessyouall]

Dear Bogleheads

AA newbie here -- please help me!

We have been saving up for the last few 3-5 years and are now at a juncture where ignoring potential returns from assets is unwise. Portfolio is over 6 figures and under 7 figures.

Some background -- up until May this year we were almost 90% in cash. However, over the last few months as I started to learn more about AA, I realize what we have been forgoing. I also learnt that allocating as per the Swenson portfolio is a great first start (and I agree).

The difficulty I now have is the following - how do you convert a portfolio that is 90% or more in cash to five or six key funds when you’re reading (depending on where you look) that stocks, bonds, REITs all are ‘over-valued’ or peaking or over crowded.

So my fear is that I rebalance over night and then things tank all of a sudden and I lose capital.

Two key questions --

1) Should I DCA for the next two or so years and reduce my risk?
2) Specifically about bonds, I actually ended up buying VUSUX (long term treasury) at 8% of total portfolio and VIPSX (Inflation protected) at another 8% of total portfolio in one shot last month (Sept 2012). Should I have DCAd that instead if we know a bond decline is coming as interest rates are at historic lows?

Please help me. We are in our late 30s, have some risk tolerance but I would like to avoid an over 20% dip in my overall portfolio if I can. Having lived through 2008 and taken out money at the wrong time, I have become very cautious.

Thanks so much!!

[Grt2bOutdoors]

Dear Bogleheads

AA newbie here -- please help me!

We have been saving up for the last few 3-5 years and are now at a juncture where ignoring potential returns from assets is unwise.

Some background -- up until May this year we were almost 90% in cash. However, over the last few months as I started to learn about AA, I realized what we have been forgoing.

I also learnt that allocating as per the Swenson portfolio is a great first start (and I agree).

The difficulty I now have is the following - how do you convert a portfolio that is 90% or more in cash to five or six key funds when you’re reading (depending on where you look) that stocks, bonds, REITs all are ‘over-valued’ or peaking or over crowded.

So my fear is that I rebalance over night and then things tank all of a sudden and I lose capital.

Two key questions --

1) Should I DCA for the next two or so years and reduce my risk?
2) Specifically about bonds, I actually ended up buying VUSUX (long term treasury) at 8% of portfolio and VIPSX (Inflation protected) at another 8% of portfolio in one shot last month (Sept 2012). Should I have DCAd that instead if we know a bond decline is coming as interest rates are at historic lows?

Please help me. We are in our late 30s, have some risk tolerance but I would like to avoid an over 20% dip in my overall portfolio if I can. Having lived through 2008 and taken out money at the wrong time, I have become very cautious. Portfolio being discussed is over 6 figures and under 7 figures.

Thanks so much!!

Hello and welcome to the forum!

First, do not feel compelled to make any rash moves. Take some time to read some of the fine books on the recommended reading list. http://www.bogleheads.org/wiki - Have you seen the wiki (link to the left)?
May I recommend The Bogleheads Guide to Investing? A quick read, very understandable and written by the founders of this forum. You can even "rent" a copy from your local library.

Can you list your current portfolio in the format as shown in the wiki?
You can either do it by percentage or actual dollar value - your choice, the total should add up to 100%.
Indicate if the monies are in taxable and/or tax-deferred vehicles (401k, IRA, etc.)
Including your federal and state/local tax rates will be extremely helpful as well.

DCA'ing may or may not reduce the risk of principal loss, it will assure you that you are buying more when prices are low and less when prices are high, thus averaging your total cost. My crystal ball is cloudy, but if you look to the Japanese experience, rates there have been super low for over a decade with no end in sight to when rates may actually rise. My advice is to ignore the noise of the market, develop an Investment Policy Statement, run it by us as a sounding board, then begin implement it. Since you are late 30's, you likely will have an investing time frame of more than 40 years - that means you will likely be purchasing more fixed income over time, you shouldn't worry if the price of the bond fund declines 10% today, you will not be making withdrawals until 20 or 25 years into the future.

I am in a similar age bracket, I actually hope prices decline so I can pick up more shares at even cheaper prices in the hopes of realizing significant overall portfolio growth by age of retirement. Read up on bonds - as prices decline, yields rise - if you hold the fund for the length of the average portfolio duration you will earn back any short-term capital decline in the form of higher interest payments. The key in any investment plan is to in the words of John Bogle - Stay the course!

[dbr]

Easing in over a period of time is a psychological device that will immunize you to regret whether assets climb, fall, or stay flat. Mathematically, of course, the effect is to keep you in poor returning cash for longer than you needed to be and therefore on statistical average is not an optimum strategy. Now the only question is whether you will have psychological regret over taking a strategy you knew was not optimum in order to ease psychological regret. Note, in the long run taking a year or two to resolve the issue won't make much difference at all.

But here are some questions: If you were invested and you were reading that x, y, and z are overvalued, would you bail out and wait to get back in? If you were fully invested, would you periodically sell out to cash so you could ease back in, if it is such a good idea?

One question to ask, if investing appears fearful, is your proposed asset allocation within your psychological tolerance?

If you fear the outcome in all asset classes, you might settle your mind by waiting a bit and doing more reading on the subject of investing basics in such books as the Boglehead books, Swedroe, Ferri, Bernstein, Armstrong, etc. referenced in the library section of the Wiki.

[Aptenodytes]

You are probably overthinking this. One of your goals is to avoid a 20% drop in portfolio value. That means your aa will be light in stocks .. maybe 35-40%. So the things you worry about actually don't matter that much.

I suggest you first sort out the aa and then go in at any pace you feel like.

It is the aa you want to concentrate your attention on, not the timing.

[ruralavalon]

Start with some reading on asset allocation, to better address your own risk tolerance, such as --
Wiki article link: Asset Allocation ; and
viewtopic.php?p=538014 .

Then consider this Vanguard paper, which more directly addresses your question --
https://pressroom.vanguard.com/nonindex ... raging.pdf
"In this paper, we compare the historical performance of dollar-cost averaging (DCA) with lump-sum investing (LSI) across three markets: the United States, the United Kingdom, and Australia. On average, we
find that an LSI approach has outperformed a DCA approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments. This finding
is consistent with the fact that the returns of stocks and bonds exceeded that of cash over our study period in each of these markets."

In the end do what leaves you feeling most comfortable. Some people compromise, and : (1) put 50% into their asset allocation all at once; and (2) then put 10% slices in at pre-determined times such as every month or every 3 months.

[retiredjg]

Welcome to the forum!

We are in our late 30s, have some risk tolerance but I would like to avoid an over 20% dip in my overall portfolio if I can.

This would mean you should probably have no more than 40% to 45% stocks. This is conservative and will likely not grow as fast or as much as a higher percentage of stocks. However, it seems you've already found out that a higher percentage of stocks does not suit you well, so you should avoid that option. Selling during a crash again could be something of a disaster.

This thread may help you decide how to get your money into the market. viewtopic.php?f=10&t=86433&newpost=1239761

[livesoft]

If one isn't ready to lose capital, then one isn't ready to invest. They go hand-in-hand: Losses and investing. One cannot avoid losses if they invest.

[pingo]

Livesoft's point grows more profound for me every day, but I relate to the OP's quandry. So far, our investing decisions have been swayed by which undesirable outcome we can live with versus the undesirable outcome that we think we can't live with. When we've had to decide whether to Lump Sum or DCA, we've asked ourselves the following, with the assumption that Lump Sum returns will generally beat DCA in the long run:

Can I live with things if I lump sum and if those investments take a dive right after?
(No, has traditionally been the answer.)

Can I live with the regret of DCA and ultimately having lower returns?
(Yes, has traditionally been the answer.)

DCA won the decision in each case. Be advised that since those decisions, I have personally observed in each case that Lump Summing would have resulted in higher returns and less tediousness/frustration (regardless of returns). (sigh)

I am now to a point where I see the madness of drawing things out for too long and have become more and more comfortable with the concept Lump Summing. But perhaps it is a madness that one must experience first before Lump Summing one's investments becomes a good idea.

It's just my experience, but maybe it helps.

All the best!

[blessyouall]

Dear Bogleheads

Thanks so much for your clear and important responses. Thanks to each of you ruralavalon, dbr, aptenodytes, grt2boutdoors, retiredjg, livesoft and pingo, and to everyone who’s posted in various forum topics.

Here are some of the gems I have gleaned (and am working on).

1) My skepticism and need to DCA point to needing a different more conservative AA instead. So I am reading up on AA.
2) Psychological regret can come from either DCA (through a smaller return) OR LS (if I go in at a peak)
3) If one isn't ready to lose capital, then one isn't ready to invest.
4) LS is statistically more likely to produce higher return given my horizon is over 20 years.
5) Short term bond fund declines will not affect me (again, given the investing horizon) so I am less afraid to get into bonds at this time.

Overall I am going with the Swenson model (investing our life savings of few 100K). I could go slightly higher on the bond portion and will like be DCA’ing in over say 8-10 months.

I will post back if that was a good call .

Last question on bonds - for treasuries of 15% (Swenson recommended) should I just split 5% short, intermediate and long term each?

Thanks again all!

[Aptenodytes]

Last question on bonds - for treasuries of 15% (Swenson recommended) should I just split 5% short, intermediate and long term each?

Glad you are finding the discussion helpful.

On this particular question, I don't think there's any single approach that has majority support here. The specifics of each person's plan and circumstances matter, making it difficult to compare portfolios directly.

If you want to "set it and forget it" I think the core choice is something like what you propose above, or any of the other simple, logical combinations. You'll probably find many people here suggesting eliminating the long-term funds (but we shall see). The Wiki summarizes a few perspectives that tilt away from the long-term. http://www.bogleheads.org/wiki/Bond_Bas ... short-term. On balance, you may want to modify this option to 50-50 short/intermediate. Such a shift makes your bond holdings much safer because you lower interest rate risk considerably.

Many people don't think that for bonds it makes sense to "set it and forget it," however, and instead shift time horizons based on fluctuations in the yield curve. I'm one of those people. The Swedroe book on bond investing lays out this approach in very clear, simple terms. Essentially you check in a few times a year or so and look at how big an increase in yield you get for each year's increase in maturity. You choose a threshold (Swedroe suggests 20 basis points / year). You compare each bucket to the one adjacent and favor the longer-term if the gains exceed the threshold, otherwise you favor the shorter. A few months ago treasuries transitioned from a condition that favored short-term funds to favoring intermediate-term funds, using this threshold. Long-term funds remain highly unfavorable.

[pingo]

I have not read David Swensen's works (I'm only referencing what's in the Boglehead's Wiki, so take this for what it's worth), but I might consider using Vanguard Total International Stock Market Index Fund (VGTSX or VTIAX) instead of the 3:1 proportion of Foreign Developed equities to Emerging Markets. VG Total Int'l holds Developed and Emerging in roughly that proportion, so holding it could simplify the portfolio/rebalancing.

[blessyouall]

Thank you again, aptenodytes and pingo

Aptenodytes, before discovering bogleheads, and posting here, I had already gone in last month with VUSUX (long term treasury) with about 7.6% of portfolio. I now know you said long term treasuries are not in favor, and I agree as I already have unrealized losses of $1.3K in a month.

So should I hold on to VUSUX and try to recover my 1.3K given my long term view, or cut losses and switch to intermediate if more problems are obviously coming.

Not sure why I did the long term treasuries to begin with. Just shows what a newbie I am to this I guess. AA is hard work!!

Thanks very much all.

===========================
My current allocations as percentage of portfolio ( I have a long way to go!! )



Cash 52.835%
TIPS 8.617%
Short Tem Bonds 0.000%
Long Bonds (VUSUX) 7.577%
PIMCO Total Bond Fund 2.923%

REIT (TAREX) 8.444%
Real Estate Equity in home 7.605%

US Index 1.602%
DEveloped Markets Index 0.000%
Emerging MKTS Index 0.000%
Individual Stocks 2.861%
Commodities (SLV) 3.673%
Energy Fund 1.174%
Balanced Fund 2.689%

SUM 100.000%

[Jerilynn]

Two key questions --

1) Should I DCA for the next two or so years and reduce my risk?
2) Specifically about bonds, I actually ended up buying VUSUX (long term treasury) at 8% of total portfolio and VIPSX (Inflation protected) at another 8% of total portfolio in one shot last month (Sept 2012). Should I have DCAd that instead if we know a bond decline is coming as interest rates are at historic lows?

Please help me. We are in our late 30s, have some risk tolerance but I would like to avoid an over 20% dip in my overall portfolio if I can. Having lived through 2008 and taken out money at the wrong time, I have become very cautious.

Thanks so much!!

Here's what I wrote before regarding this....



Here's how it always works:

If you put in a lump sum, the market immediately tanks and you want to kick yourself for not investing in pieces by DCAing.

If you DCA, the market will continue to go up and you will want to kick yourself for not dumping it all in at once.

So, just kick yourself to begin with, then flip a coin. It's as accurate as any other method of trying to predict the market.

[blessyouall]

Thanks Jeri. I DCA'd and as you predicted I now wish I would have gotten in earlier (given the current rally). Not a big deal though. All's good, take care and thanks again!

[c00kie]

Just shows what a newbie I am to this I guess. AA is hard work!!
===========================

Determining the AA that is right for you is hard work. I researched the topic for over a year before I decided what AA worked for me. But once you decide on an AA, investing is a piece of cake. I love not having to debate where to put new money.

Bogleheads rock!

Cookie