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ObliviousInvestor
Joined: 17 Mar 2009
Posts: 255
Location: Chicago
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 Posted: Thu Jun 18, 2009 3:05 pm Post subject: Asset Allocation/Glide Path for non-retirement portfolios |
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As I read on a recent post here, the average asset allocation for Boglehead retirement portfolios appears to be something along the line of "age minus 13 in bonds."
My question is this: How would you translate your asset allocation guidelines so that they could be used for portfolios intended for purposes other than retirement?
For example, if you expected a cash outlay X years in the future, what would your glide path look like? For example:
Stock allocation = X + 10, or
Stock allocation = 1.5X
Just curious to hear people's thoughts. 
Cheers,
Mike
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Oblivious Investing: Diversify. Minimize Costs. Ignore the noise. |
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ziggy29
Joined: 10 Mar 2008
Posts: 915
Location: Texas Hill Country
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| Posted: Thu Jun 18, 2009 3:21 pm Post subject: |
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| Quote: | | For example, if you expected a cash outlay X years in the future, what would your glide path look like? |
I'm not sur ethere's a magic formula here, but if I had to try to build something close, my initial thoughts (based on my own risk tolerance):
* Less than 5 years, zero stocks at all times.
* Never more than 80% stocks.
Creating a first cut at such a formula might be:
80% * ((X - 5) / x)
Where negative results are considered zero. This yields the following allocations to stocks:
0 - 5 years: 0%
6 years: 13%
8 years: 30%
10 years: 40%
15 years: 53%
20 years: 60%
30 years: 67%
Approaching 80% as X goes to infinity. |
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saurabhec
Joined: 01 Oct 2008
Posts: 1266
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| Posted: Thu Jun 18, 2009 4:25 pm Post subject: Re: Asset Allocation/Glide Path for non-retirement portfolio |
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| ObliviousInvestor wrote: | As I read on a recent post here, the average asset allocation for Boglehead retirement portfolios appears to be something along the line of "age minus 13 in bonds."
My question is this: How would you translate your asset allocation guidelines so that they could be used for portfolios intended for purposes other than retirement?
For example, if you expected a cash outlay X years in the future, what would your glide path look like? For example:
Stock allocation = X + 10, or
Stock allocation = 1.5X
Just curious to hear people's thoughts.
Cheers,
Mike |
The standard financial theory answer to this is to consider the same AA as you would for a long-term portfolio, but dilute this "risky" portfolio with increasing investments in cash as you approach the time horizon. David Swensen in his book had a rule of thumb glidepath that was as follows:
> 8 years: 100% risky portfolio, 0% cash
6-8 years: 75% risky portfolio, 25% cash
4-6 years: 50% risk portfoliom 50% cash
2-4 years: 25% risky portfolio, 75% cash
0-2 years: 0% risky portfolio, 100% cash
So if you started with a portfolio that was 70% equity and 30% bonds (his recommended long-term portfolio), the equity percentage would go down in steps every couple of years starting 8 years from the investment horizon: from 70% to 52.5% to 35% to 17.5% to 0%. |
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ObliviousInvestor
Joined: 17 Mar 2009
Posts: 255
Location: Chicago
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| Posted: Fri Jun 19, 2009 2:21 pm Post subject: |
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Thanks to both of you for the suggestions.
Interesting (though not surprising, given how rarely we're all in perfect consensus around here) that at 8 years, one glide path would be 70% in stocks, and the other glide path would be 30% in stocks.
Just something I've been pondering lately, as it has seems to me to be discussed surprisingly infrequently given how common such scenarios are. (Home down payment in X years, College tuition in Y years, etc.)
Thanks again for sharing your thoughts.
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Oblivious Investing: Diversify. Minimize Costs. Ignore the noise. |
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dbr
Joined: 04 Mar 2007
Posts: 4995
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| Posted: Fri Jun 19, 2009 2:29 pm Post subject: |
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It is surely different to plan a glide path to meet an obligation that realizes at a fixed point in time compared to one that meets an obligation that extends over a period of time as long as a retirement.
While it is true that a person's financial situation changes upon retirement, namely the investor forgoes a periodic influx of earned money on that date, it is hardly true that the date of retirement sets any kind of time frame for investing. |
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Russell
Joined: 23 Feb 2007
Posts: 275
Location: on the Chesapeake Bay
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| Posted: Fri Jun 19, 2009 3:03 pm Post subject: Re: Asset Allocation/Glide Path for non-retirement portfolio |
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| ObliviousInvestor wrote: | My question is this: How would you translate your asset allocation guidelines so that they could be used for portfolios intended for purposes other than retirement?
For example, if you expected a cash outlay X years in the future, what would your glide path look like? For example:
Stock allocation = X + 10, or
Stock allocation = 1.5X
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I kind of like Stock allocation = [current dividend yield] * X
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The best material model for a cat is another, or preferably the same, cat. - A. Rosenblueth and N. Wiener (1945). |
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avalpert
Joined: 22 Mar 2008
Posts: 1767
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| Posted: Fri Jun 19, 2009 3:08 pm Post subject: |
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There is no right formula - and sticking strictly to even a well designed (but none the less arbitrary based on some underlying assumption) one is probably a disservice.
Some things you would want to consider: how certain is it I will need the money (i.e., something I need, want, might need etc.), how much of a stretch is it for me to reach the goal (if I have the cash already I can put it in a CD, if I need a lot of investment returns to get there I will need to take on some risk - but should revisit the first question) etc. |
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livesoft
Joined: 01 Mar 2007
Posts: 12030
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| Posted: Fri Jun 19, 2009 3:10 pm Post subject: |
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Here's something else to throw into the mix:
If your cash outlay in a future year is less than 5% of your portfolio value, then it probably falls within your rebalancing "bands" and can be simply ignored. So when it comes time to spend it, you spend it and then rebalance.
Last edited by livesoft on Fri Jun 19, 2009 3:13 pm; edited 1 time in total |
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dbr
Joined: 04 Mar 2007
Posts: 4995
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| Posted: Fri Jun 19, 2009 3:12 pm Post subject: |
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| livesoft wrote: | Here's something else to throw into the mix:
If your cash outlaw in a future year is less than 5% of your portfolio value, then it probably falls within your rebalancing "bands" and can be simply ignored. So when it comes time to spend it, you spend it and then rebalance. |
That is an excellent illustration of how retirement "time frame" might work showing that "time frame" is not a very helpful concept in such cases. |
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ObliviousInvestor
Joined: 17 Mar 2009
Posts: 255
Location: Chicago
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| Posted: Fri Jun 19, 2009 3:17 pm Post subject: |
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| avalpert wrote: | | There is no right formula - and sticking strictly to even a well designed (but none the less arbitrary based on some underlying assumption) one is probably a disservice. |
Agreed completely. Same thing with any asset allocation rule of thumb. Regardless, I still think they're helpful at least as a starting point for analysis.
| livesoft wrote: | | If your cash outlay in a future year is less than 5% of your portfolio value, then it probably falls within your rebalancing "bands" and can be simply ignored. So when it comes time to spend it, you spend it and then rebalance. |
Good point.
Though sometimes, the funds for the particular expenditure might have their own account (529, for instance), which leaves us in the position of still needing to determine an allocation for that account.
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Oblivious Investing: Diversify. Minimize Costs. Ignore the noise. |
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bobbyrx
Joined: 09 Dec 2007
Posts: 343
Location: New York
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| Posted: Fri Jun 19, 2009 4:14 pm Post subject: |
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I have just retired at age 66 and never bought into a specific % in stocks or bonds. My own formula is simply to determine what I wish to spend each month plus taxes. Subtract SS check(s) and pension. Multiply the difference X 25. That amount goes into TIPS, MM, Short Treasuries.
The remainder- for extreme longevity, emergencies (e.g. LT Care), Estate goes into Index funds.
For me, that's about 20% in equities. My needs determined the percentage, not a predetermined formula.
Bob |
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