Asset Allocation for 70 year old (Option 1 or Option 2?)

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Asset Allocation for 70 year old (Option 1 or Option 2?)

Postby Need N Advice » Mon Jun 28, 2010 4:10 pm

I have educated myself via financial advisors, books, periodicals, web, Bogleheads and last buy not least, common sense. However, I would appreciate your thoughts on my chosen two options for Asset Allocating myself at 70 years of age. Keep in mind that this will probably be the last time that I "fiddle" with my AA, at least for a decade.

FACTS

Emergency Funds: Years worth. No worries here.

Debt: Never and no.

Tax Filing Status: Married Filing Joint

Tax Rate: Thank God Florida has no State Income Tax, Federal: 15%

Desired AA: Stock/Bonds (30/70)

Taxable versus Non-Taxable: For simplicity, consider all the funds in Option 1 or Option 2 as 401k monies that have been rolled over into an IRA. However, there is monies in Roth IRAs.

OPTION 1

30%: Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) [ER: 0.07]

70%: Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) [ER: 0.12]

OPTION 2

70%: Vanguard Target Retirement Income Fund* (VTINX) [ER: 0.18]

20%: Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) [ER: 0.12]

10%: Vanguard Total International Stock Index Fund (VGTSX) [ER: 0.32]

-------------------------------------------------------------------------------------

*The Vanguard Target Retirement Income Fund is comprised of the following:

1 Vanguard Total Bond Market II Index Fund Investor Shares 44.8%
2 Vanguard Total Stock Market Index Fund Investor Shares 24.3%
3 Vanguard Inflation-Protected Securities Fund Investor Shares 19.9%
4 Vanguard Prime Money Market Fund Investor Shares 5.0%
5 Vanguard European Stock Index Fund Investor Shares 2.9%
6 Vanguard Pacific Stock Index Fund Investor Shares 1.6%
7 Vanguard Emerging Markets Stock Index Fund Investor Shares 1.5%

-------------------------------------------------------------------------------------

After analyzing these two options, I do have a preference but don't we all need some reassurances? Thus, I seek your thoughts and opinions.

Obviously Option 1 is the least expensive with low ER's. However, Option 2 offers more "diversification". But how much diversification does a 70 year old need and in this scenario diversification comes at a price.
Last edited by Need N Advice on Mon Jun 28, 2010 5:13 pm, edited 1 time in total.
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Postby chaz » Mon Jun 28, 2010 4:32 pm

I like OPTION 1 - sufficient diversification.
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Need more information

Postby Taylor Larimore » Mon Jun 28, 2010 4:57 pm

Hi Need Advice:

It is difficult to give you informed suggestions without more information. Please use this link for guidance:

Asking Portfolio Questions

Thank you.
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Postby Adrian Nenu » Mon Jun 28, 2010 5:10 pm

The main issue is how much risk can you afford to take - how much can you stand to lose without significantly affecting your lifestyle and peace of mind. My rule of thumb based on the 1973-1974, 2000-2003 and 2008-? bear markets might help:

Tolerable loss x 2 = Equity allocation < 50%

Let's say you have $1,000 and can afford to lose $100. Assuming a ~50% bear market loss (give or take a few percent), your equity allocation would be about $200 and $800 would be in safer investments such as TIPS, bond funds and FDIC insured CDs. The stock/bond mix is the most important decision all investors have to make and the main risk determinant. Diversify your equity allocation globally. Know the risk and don't take more risk than you can handle. Diversify, diversify, diversify.

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Postby Need N Advice » Mon Jun 28, 2010 5:15 pm

Diversification is a subjective term.

"Diversify your equity allocation globally". I agree 100%. Look at the "global" reach of the companies comprising the S&P 500 Index. IMO, that is global diversification.
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Postby dbr » Mon Jun 28, 2010 5:32 pm

If you are looking for reassurance, then one consideration where opinion might depart from your choice is the no/low allocation to TIPS in both portfolios.
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A third choice

Postby Taylor Larimore » Mon Jun 28, 2010 5:33 pm

Need Advice:

That was a quick edit with additional information!

Both options should work well. However, I think Vanguard's Target Retirement Income Fund by itself is preferable.

* Option 1 has no internatinal stocks or Inflation-Protected Securities.

* Option 2 has many overlapping bonds and stocks.

* The Vanguard Target Income fund is designed by Vanguard experts specifically for retirees. It is more diversified than options 1 & 2. It holds international stocks and TIPS for inflation-protection, automatically rebalances, and is simpler to understand and maintain by you and heirs.

All three portfolios should be good choices but in this case simpler is better.

* Edit: Use your Roth to add to the Target Income internal funds in any way you desire.

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Last edited by Taylor Larimore on Mon Jun 28, 2010 6:02 pm, edited 1 time in total.
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Re: Asset Allocation for 70 year old (Option 1 or Option 2?)

Postby YDNAL » Mon Jun 28, 2010 5:40 pm

Need N Advice wrote:I have educated myself via financial advisors, books, periodicals, web, Bogleheads and last buy not least, common sense. However, I would appreciate your thoughts on my chosen two options for Asset Allocating myself at 70 years of age. Keep in mind that this will probably be the last time that I "fiddle" with my AA, at least for a decade.
Need N Advice wrote:Diversification is a subjective term.

"Diversify your equity allocation globally". I agree 100%. Look at the "global" reach of the companies comprising the S&P 500 Index. IMO, that is global diversification.

Need N Advice,
  1. Diversified is not as subjective as you might think. The companies in the S&P 500 are indeed large global companies - but, you still should hold:
    • Bank of America and Barclays Plc
    • Toyota and Daimler AG
    • Nestle SA and Coca-Cola Co.
  2. The extent to which you want to include US vs. Foreign stocks in your allocation is subject to many criteria - but not because the S&P 500 is sufficient.

Option #1 excludes Foreign Stocks and would be out of the question, as far as I'm concerned.

Option #2 if full of overlap since TR Income holds everything (Bonds + Domestic + Foreign Stocks). Edit to add: in #1 you exclude Foreign stocks and here in #2 you overweight Foreign stocks. :?

Neither #1 or #2 provides inflation protection above whatever (if any) protection one may get from Stocks.

Target Retirement Income (alone) is a great match to your desired 30/70 Stock/Bond split all in one package. I would very careful with this one fund in a Taxable account for someone in a high(er) tax bracket.
Last edited by YDNAL on Tue Jun 29, 2010 8:02 am, edited 1 time in total.
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Postby Adrian Nenu » Mon Jun 28, 2010 5:44 pm

Look at the "global" reach of the companies comprising the S&P 500 Index. IMO, that is global diversification.


10 year avg. annual returns:

S&P 500 index - (0.90%)

Total International index - 1.97%

Emerging Markets index - 10.69%

Going forward, I have no idea which will outperform or have positive returns. I don't know if small caps will beat large caps or if REITs will beat small and large caps. Since I don't know, I diversify globally. Others who know don't have to because they can select the stock market which will have the highest returns. I accept the fact that I don't know.


Global diversification improved returns during the last 10 years. Nobody can predict which region/country/stock market will have the highest or lowest returns so the only logical strategy is global diversification using the global index as a starting point.

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Postby TJAJ9 » Tue Jun 29, 2010 3:50 am

Need N Advice,

How about 70% Total Bond Index/15% Total Stock/15% Total International. You can adjust the percentage of US/International equities to meet your desired allocation. For example, 70% Total Bond Index/20% Total Stock/10% Total International or 70% Total Bond Index/25% Total Stock/5% Total International, etc.
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Postby nisiprius » Tue Jun 29, 2010 7:32 am

I'm puzzled by your two choices.

Target Retirement Income (VTINF) is already 65% bonds and 5% short-term; it is already 30% stocks and as close to 70% bonds as makes no difference. And about 20% of its stocks are foreign, so you have your foreign exposure.

By adding Total International in option 2, you are saying that VTINF doesn't have enough foreign to suit you--yet option 1 contained no foreign at all!

This is not advice, just thoughts.

If you want the reassurance of a portfolio that is very reasonable, that embodies the "conventional wisdom," and in which you deliberately put the decision into someone else's hands, then why not 100% Target Retirement Income? Then it's done, and Vanguard rebalances for you.

Nobody can prove that anything else is all that likely to be all that much better.

Now, when you take an all-in-one fund and start adding outriggers to it to tilt it closer to your liking, that means you sort of know what your liking is. One outrigger might make sense, but by the time you are adding two or more it seems a little silly.

It seems to me that there's nothing wrong with adding outriggers to a blended fund, but it just seems less than straightforward. If you don't like the balance of a Betty Crocker mix, then why not mix from scratch instead of adding this and that to the mix? If nothing else, the rebalancing calculations are easier!

Target Retirement Income only has seven funds in it. Buy those same seven funds and adjust the percentages to your taste. Or, better yet, lump the three foreign funds and buy Total Bond, Total Stock, Inflation-Protected, International, and Prime Money Market in whatever proportions you like.
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