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%
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):
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.
Short-term Corporate Debt: 15% (401k)
Short-term Treasuries/ TIPS: 10% (401k)
Current retirement assets:
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
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.