Investing Newbie seeking Initial Asset Allocation advice

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Investing Newbie seeking Initial Asset Allocation advice

Postby benjam.brooks » Mon Jul 01, 2013 8:19 pm

Hey Bogleheads!

I came across the forum after recently finishing William Bernsteins book 'The Four Pillars of Investing'. I'm writing this post because 1) I'm starting a new job that is matching my 401(k) contributions up to 6% of gross income 2) I'd like to open a Roth IRA to invest additional funds outside of my 401k contributions 3) I have no current investments/retirement assets and 4) I'm trying to come up with an initial optimal asset allocation. I thought this would be a great venue to look for some suggestions/ideas/critiques/food for thought! Here is my requisite info (keep in mind I'm a post-masters student reentering the work force):

Emergency Funds: None (Estimated $3,700 monthly expenses)
Debt: Credit Card $2,250 (17% APR), Student Loan $100,000 (5% interest)
Tax Filing Status: Single
Tax Rate: Federal ~25%, State 5%, City 3%
State: NY
Age: 27
Desired Asset Allocation: 75% equity / 25% fixed-income
Desired International Allocation: 22% of equity, 16.5% of total portfolio

Initial Asset Allocation idea (based off of Bernstein's tax-sheltered 75% equity / 25% bond recommended allocation):
Equity
Large Cap Blend: 15% (401k)
Large Cap Value: 18.75% (Roth)
Small Cap Blend: 3.75% (401k)
Small Cap Value: 11.25% (Roth)
EAFE Blend: 5.63% (Roth)
Emerging Markets Blend: 5.63% (Roth)
International Value: 5.25% (Roth)
REIT: 7.5% (Roth)
Satellite: 2.25% (Roth)

Fixed-Income:
Short-term Corporate Debt: 15% (401k)
Short-term Treasuries/ TIPS: 10% (401k)

Current retirement assets:
None.

Annual Contributions:
401k: $4,200 (pre-tax)
Roth: $5,400 (post-tax)

Questions:
1) Please give me ideas on my asset allocation (i.e. rip it to shreads). I'm most interested in critiques of my fixed income allocation. Bernstein believes in investing in short-duration fixed income instruments that aren't greatly exposed to the effects of 1) rising interest rates and 2) inflation (forces my bond portfolio most likely will have to deal with over the next 20-40 years). I also have allocated 2.25% of my overall allocation to 'Satellite' equity. For example, if I think strongly about US financials, or Japanese equity, or Frontier Markets over the next year I would buy a specific ETF to consummate this strategy. Is this advisable or should I just lump that 2.25% into one of my other allocations?

2) Is it advisable to split my international equity allocation in the same fashion Bernstein recommends for US equity? By this I mean should I split by Large/Small and Blend/Value for EAFE and Emergins as I do with US equity? Does this strategy even make sense for international equity?

Thanks in advance for your time and consideration. Look forward to your ideas!
benjam.brooks
 
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Re: Investing Newbie seeking Initial Asset Allocation advice

Postby benjam.brooks » Mon Jul 01, 2013 11:25 pm

benjam.brooks
 
Posts: 3
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Re: Investing Newbie seeking Initial Asset Allocation advice

Postby pkcrafter » Tue Jul 02, 2013 8:15 pm

Benjam...... Benjam....... Benjam..... Ok, hint taken. :happy


benjam.brooks wrote:Hey Bogleheads!

I came across the forum after recently finishing William Bernsteins book 'The Four Pillars of Investing'. I'm writing this post because 1) I'm starting a new job that is matching my 401(k) contributions up to 6% of gross income 2) I'd like to open a Roth IRA to invest additional funds outside of my 401k contributions 3) I have no current investments/retirement assets and 4) I'm trying to come up with an initial optimal asset allocation. I thought this would be a great venue to look for some suggestions/ideas/critiques/food for thought! Here is my requisite info (keep in mind I'm a post-masters student reentering the work force):

Emergency Funds: None (Estimated $3,700 monthly expenses)<--Essential. You definitely need to create an EF. Could save the day if you are out of work again. Six to nine months of living expenses if you are in an unstable job. The EF is there to prevent tapping retirement accounts in stressful times.
Debt: Credit Card $2,250 (17% APR)<--Get rid of this and pay off immediately from now on. , Student Loan $100,000 (5% interest)<--5% interest rate is not looking to good now. It's difficult to beat that, so you might raise the priority in paying it down.
Tax Filing Status: Single
Tax Rate: Federal ~25%, State 5%, City 3%
State: NY
Age: 27
Desired Asset Allocation: 75% equity / 25% fixed-income<--This is reasonable as long as you can handle a loss of 35%.
Desired International Allocation: 22% of equity, 16.5% of total portfolio<--OK, but on the minimum end of recommended--20-40%.

Initial Asset Allocation idea (based off of Bernstein's tax-sheltered 75% equity / 25% bond recommended allocation):
Equity
Large Cap Blend: 15% (401k)
Large Cap Value: 18.75% (Roth)
Small Cap Blend: 3.75% (401k)<--This is such a low allocation it probably isn't worth holding. Just hold small value.
Small Cap Value: 11.25% (Roth)
EAFE Blend: 5.63% (Roth)
Emerging Markets Blend: 5.63% (Roth)
International Value: 5.25% (Roth)
REIT: 7.5% (Roth)
Satellite: 2.25% (Roth)<--Too little to have any impact and not worth playing with.

Fixed-Income:
Short-term Corporate Debt: 15% (401k)
Short-term Treasuries/ TIPS: 10% (401k)

Current retirement assets:
None.

Annual Contributions:
401k: $4,200 (pre-tax)
Roth: $5,400 (post-tax)<--Roth does not seem like a very good choice in the 25% bracket. Use your tax-deferred 401k for better efficiency with this money. Also, post available funds and expense ratio for the 401k

Questions:
1) Please give me ideas on my asset allocation (i.e. rip it to shreads). I'm most interested in critiques of my fixed income allocation. Bernstein believes in investing in short-duration fixed income instruments that aren't greatly exposed to the effects of 1) rising interest rates and 2) inflation (forces my bond portfolio most likely will have to deal with over the next 20-40 years). I also have allocated 2.25% of my overall allocation to 'Satellite' equity. For example, if I think strongly about US financials, or Japanese equity, or Frontier Markets over the next year I would buy a specific ETF to consummate this strategy. Is this advisable or should I just lump that 2.25% into one of my other allocations?

I think your bond allocation is fine. Some may think your satellite idea is fine too if it keeps you from messing up the rest of the portfolio or satisfies some urge to prove your investing talent, but I'd vote to not play.

2) Is it advisable to split my international equity allocation in the same fashion Bernstein recommends for US equity? By this I mean should I split by Large/Small and Blend/Value for EAFE and Emergins as I do with US equity? Does this strategy even make sense for international equity?<--Mostly a matter of individual taste is what it comes down to. Again, I'm on the side of efficiency and simplicity, so I would recommend total international and small cap international, but I think you will find posters who will agree with your more-complex approach.

Paul

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
pkcrafter
 
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Location: CA

Re: Investing Newbie seeking Initial Asset Allocation advice

Postby Twins Fan » Tue Jul 02, 2013 9:08 pm

It's not bad... shows you have done some studying, so that's good. It would be a lot better if you had $1,000,000 in your accounts. :D

It seems overly complicated for someone just starting out, as in you have absolutley zero in retirement accounts now. It will take a while to have any meaningful amount in all those little bits and pieces AA... to get to admiral shares, lower ER, or whatever. Most of them are probably $3000 to open anyway, if you're looking at Vanguard for your Roth. Unless you're thinking ETFs, but.... I like the 75/25 split. No problem there. But, I'd say stick to a simple three fund portfolio or even an all-in-one fund until you actually have some $$ to make splitting it up worthwhile. JMHO

Also, I'd say contribute to get the match (free money) in the 401k and that's it for investing for now. Pay off that CC ASAP at 17%. Build up an emergency fund of whatever you're comfortable with (6 months). Then it comes down to paying down the student loan debt at 5%, investing more, or a combo of the two.

You did say post-masters, so I'm guessing you have a high income earning potential? Contributing to a Roth might be a good idea now, when you're at a lower tax bracket than you will be later on.

Prioritize and simplify for now would be my advice. And, don't worry about "optimum" right now... you will likely change your mind about AA, which sectors, and other things more often than you change undies. :D You're just starting out.
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Re: Investing Newbie seeking Initial Asset Allocation advice

Postby benjam.brooks » Thu Jul 04, 2013 10:16 pm

pkcrafter and Twins Fan thanks so much for the feedback! You both make really compelling points. Here is some more color about my situation that may help you further understand my original plan. My company uses Principal Financial Group as a 401k provider and does not let me use Vanguard for personal brokerage accounts (only Fidelity/Schwab). Principal's 401k investment options are very limited for Boglehead strategies (mostly active funds with high expenses). The only available passive equity index funds with relatively low fees (>0.31%) through 401k are S&P 500, S&P 400 and S&P 600 index funds (no international options). Also, there are no passive fixed-income index funds available. Therefore, my decision to split retirement investments between 401(k) and Roth were two-fold. 1) It's impossible to simulate Bernstein's AA with my 401k and 2) I will (hopefully) exceed Roth IRA income limit as soon as 2014, making Roth IRA accounts unavailable to me. Given this information and taking your advice into account here is an updated course of action:

1) Limit my retirement contributions to maxing out my 401k matching (no Roth) with the following AA: 75% equity (2/3 S&P 500 / 1/3 S&P 600), 25% fixed-income (PIMCO Total Return Fund).
2) Pay off credit card debt.
3) Fully fortify Emergency Funds.
4) Once, 2+3 accomplished, decide whether to pay off student loan debt or open Roth.

This seems like the most sensible plan to me. My initial plan may have been putting the cart before the horse. The limitations of this new investment strategy is that I have no access to international equity and the bond fund I am investing in is active. What are your thoughts on the updated plan?
benjam.brooks
 
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Re: Investing Newbie seeking Initial Asset Allocation advice

Postby Twins Fan » Fri Jul 05, 2013 10:47 am

Just my personal opinion for your situation, but I think you would be fine holding just the S&P 500/600 in the 401k for a bit. Since you're just starting out. I mean if you lose 10% of $10K or $20K, how much does that really hurt? Right now it's just about stashing something in the 401k and getting the match, while other things are taken care of.

There's plenty of reading to do on the PIMCO fund... and, plenty of mixed feelings. Some love it some don't. Again my personal opinion, I think it was a good fund that had a good run, but it's run may have reached the end. It's gotten VERY big, the low interest rate environment, the yield chasing.... check out the turnover rate of that fund. But, I'm no expert, I could be wrong there, and that's really only a feeling. Do you have a stable value fund option in your 401k? That can be a good place to hold some part of the 401k in a "safe" asset.
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