I'm thinking of this Allocation (Any suggestions?)

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vpotus
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I'm thinking of this Allocation (Any suggestions?)

Post by vpotus »

Hi. I just turned 46 today! Going to eat cake soon...

I have a Vanguard 403b. In it I have Vanguard 500 Index fund with about 53k. I have a stable job and a state pension as well as a 2nd 403b. The state pension currently holds about 160k. The second 403b holds about 145K.

Before I make the changes, I thought I'd post here and see what you think. Since learning about allocations, I've think that this might be right for me:

3-Funds:
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) 45%
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) 35%
Vanguard Total International Stock Index Fund Investor Shares (VGTSX) 20%

Thanks for any advice you might have.

VP
Last edited by vpotus on Wed May 15, 2013 4:24 pm, edited 1 time in total.
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Clearly_Irrational
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by Clearly_Irrational »

Without knowing your age it's hard to know if your risk level is correct. Out of curiosity why are you weighting the US so heavily?
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Leif
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by Leif »

It may not provide as much return as an allocation that was more asset class diversified, given the same risk level, however it is simple.

For more information see Ultimate Buy and Hold - 8 slices vs 4 http://www.bogleheads.org/forum/viewtop ... 10&t=38374
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vpotus
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by vpotus »

Sorry. I'm 46 - today is my birthday and I didn't think to type it. LOL.

I've read in the Bogle book that international stocks should not be greater than 20%. I figured that since I have time and I'm not too worried about fluctuations, I could have age-10 for bonds. That leaves US stocks = 45%.
Thank you for looking.

VP
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TomatoTomahto
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by TomatoTomahto »

I think it's a fine allocation. Sometimes on this site, people discuss how many fund-angels can dance on the head of a pin. You do not want to have perfect be the enemy of good. The trick is having a plan, sticking to it, not acting from fear or greed, keeping investment costs low, and living below your means.

In my view, it's a better allocation than all S+P 500.

Good luck.
I get the FI part but not the RE part of FIRE.
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Clearly_Irrational
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by Clearly_Irrational »

You have an 80% allocation to stocks, remember that a 50% crash is a likely occurrence so you should be mentally ready to handle a 40% drop in your total portfolio value. A more conventional risk amount would be 54% in stocks. Since you have a state pension available, you have more capability to take risk than most if you need to.

I'm not sure that the 20% rule is really a good one going forward, it worked in the past because of American exceptionalism. While I don't think the US is down for the count, I think it's unlikely we'll see the same level of dominance in the 21st century that we saw in the 20th. The main reason I asked however was to be sure that you had a reason for it, and you do. As long as you're happy with your reasoning that's a step above most people.
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vpotus
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by vpotus »

Clearly_Irrational wrote:You have an 80% allocation to stocks, remember that a 50% crash is a likely occurrence so you should be mentally ready to handle a 40% drop in your total portfolio value. A more conventional risk amount would be 54% in stocks. Since you have a state pension available, you have more capability to take risk than most if you need to.
I believe I have a 65% allocation to stocks. I value all input and will eventually make the changes at Vanguard. Thank you.

VP
wesleymouch
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by wesleymouch »

I recommend the Wesley portfolio:
10% s&p/ 10% small cap value / 10% EFA / 15% gold / 50 % 5 yr treasuries and 5% cash.
It has a CAGR of 9.8% from 1971 to 2012 with worst year of -3.9%
During the 1966 to 1981 market it had positive real returns which a 50/50 stock bond split did not.
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TomatoTomahto
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by TomatoTomahto »

vpotus wrote:
Clearly_Irrational wrote:You have an 80% allocation to stocks, remember that a 50% crash is a likely occurrence so you should be mentally ready to handle a 40% drop in your total portfolio value. A more conventional risk amount would be 54% in stocks. Since you have a state pension available, you have more capability to take risk than most if you need to.
I believe I have a 65% allocation to stocks. I value all input and will eventually make the changes at Vanguard. Thank you.

VP
Yes, you do have a 65% allocation to stocks, roughly a third of that international. In addition, the larger companies have a substantial presence internationally. Apple, for example, is a large part of US stock market (TSM), but has a HUGE international presence.

Your allocation is fine; don't sweat the small stuff.
I get the FI part but not the RE part of FIRE.
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bottlecap
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by bottlecap »

I think it looks great if you have thought it out and are comfortable with it.

JT
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Clearly_Irrational
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by Clearly_Irrational »

vpotus wrote:I believe I have a 65% allocation to stocks. I value all input and will eventually make the changes at Vanguard. Thank you.
Sorry, stupid math error on my part due to the fact that the bonds are in the middle. 65% is correct.
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vpotus
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by vpotus »

Thank you for your help! No problem on the math error. (I'm sure someone here could prove how 65% stocks actually equals 85% with some kind of 4-fund/slice and dice portfolio!) :D
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Leif
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by Leif »

vpotus wrote: I've read in the Bogle book ...

VP
Nice start. Be sure to also check out books by Bernstein and Swedroe, if you've not already done so, on asset allocation. Good luck.
jnsickler
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by jnsickler »

Good portfolio, plain and simple. My personal preference would be for higher allocation in international, but that's splitting hairs.

DON"T FORGET TO REBALANCE! ... when allocations get out of whack.
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Peter Foley
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by Peter Foley »

Excellent choices. This is fine. I like the comment about dancing on the head of the pin. While I think this is perfect in terms of balance and simplicity, others might recommend changes that represent slightly different philosophies in terms of bond allocation and international. What you are proposing is very mainstream.

One thing to think about is the balance between your ability to take risk and your need to take risk. Your pension reduces your need to take risk because you don't need to seek higher returns to make ends meet in retirement. It also allows you to take more risk if you care to do so because your basic needs will be covered. It is entirely your call. I have a pension and at your age was about 75% equities - I paid the price for that in the 2000 recession. As time went on and I had more at risk I became more conservative.
mullery
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by mullery »

wesleymouch wrote:I recommend the Wesley portfolio:
10% s&p/ 10% small cap value / 10% EFA / 15% gold / 50 % 5 yr treasuries and 5% cash.
It has a CAGR of 9.8% from 1971 to 2012 with worst year of -3.9%
During the 1966 to 1981 market it had positive real returns which a 50/50 stock bond split did not.
I would be concerned with the amount of bonds and cash in this portfolio. Bonds aren't going to have the same downside protection they have had for the past 30 years, nor are they going to produce such a high return. You would have to accept a lower expected rate of return and higher amount of risk with this portfolio than it produced over the past 40 years.

I also suggest you read one of the recommended books on asset allocation. I have read many of them and found Rick Ferri's "All About Asset Allocation" to be particularly easy to digest. If optimizing your risk/return is a higher priority than simplicity, adding more asset classes to your portfolio may be a good idea.
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vpotus
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by vpotus »

mullery wrote: I would be concerned with the amount of bonds and cash in this portfolio. Bonds aren't going to have the same downside protection they have had for the past 30 years, nor are they going to produce such a high return. You would have to accept a lower expected rate of return and higher amount of risk with this portfolio than it produced over the past 40 years.

I also suggest you read one of the recommended books on asset allocation. I have read many of them and found Rick Ferri's "All About Asset Allocation" to be particularly easy to digest. If optimizing your risk/return is a higher priority than simplicity, adding more asset classes to your portfolio may be a good idea.
Mullery: you are referring to wesleymouch's portfolio. Yes?

I also wonder about bonds. Some say one should have bonds match one's age. But lately it seems that people are worried about them. Then again... if you don't have bonds and the stocks crash, you lose value. What is the answer?
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TomatoTomahto
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by TomatoTomahto »

vpotus wrote:
mullery wrote:I also wonder about bonds. Some say one should have bonds match one's age. But lately it seems that people are worried about them. Then again... if you don't have bonds and the stocks crash, you lose value. What is the answer?
People are always worrying about one thing or another. There were people worried about bonds years ago. You needn't have bonds matching your age; even devout Bogleheads will agree with age-10 for bonds. Find something that seems right for you, have a plan to change over time if a slope works for you, and then stick to it without listening to the noise.

EDITED TO ADD: I think any bond allocation between 20% and 80% can be justified on the basis of age, need and ability to take risk, size of portfolio, etc. That's what makes horse races.
I get the FI part but not the RE part of FIRE.
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by ruralavalon »

vpotus wrote:Hi. I just turned 46 today! Going to eat cake soon...
. . . . .
Before I make the changes, I thought I'd post here and see what you think. Since learning about allocations, I've think that this might be right for me:

3-Funds:
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) 45%
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) 35%
Vanguard Total International Stock Index Fund Investor Shares (VGTSX) 20%
Simple, low cost, broadly diversified, and covers nearly everything thats investible. Looks reasonable to me, also seems that you have given this some thought.

Go for it.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Valuethinker
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Re: I'm thinking of this Allocation (Any suggestions?)

Post by Valuethinker »

vpotus wrote:Hi. I just turned 46 today! Going to eat cake soon...

I have a Vanguard 403b. In it I have Vanguard 500 Index fund with about 53k. I have a stable job and a state pension as well as a 2nd 403b. The state pension currently holds about 160k. The second 403b holds about 145K.

Before I make the changes, I thought I'd post here and see what you think. Since learning about allocations, I've think that this might be right for me:

3-Funds:
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) 45%
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) 35%
Vanguard Total International Stock Index Fund Investor Shares (VGTSX) 20%

Thanks for any advice you might have.

VP
As long as you can live with the volatility of being 65% in equities (given you have a final salary/ defined benefit pension scheme, that shouldn't be a huge worry) then this looks eminently simple and sensible. Everything else is just 'tweaking'.
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