Help with Long-term Allocation

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Help with Long-term Allocation

Post by indexaway » Wed Apr 13, 2016 3:12 pm

Fellow Bogleheads,

I wanted your take on the combined retirement portfolio for myself and my wife. At age 28, we are at the beginning of the accumulation phase with a time horizon of ~35 years. We can accept some volatility in hopes for greater returns. My basic strategy is as follows:


Step 1: Decide on a basic stock/bond allocation --> for me, close to 80-90% stock vs 10-20% bond

Step 2: Decide on the basic core funds: for us, Total US stock, Total Int stock, Total Bond, and REIT

Step 3: Tilt each core fund towards riskier (and over the long run, hopefully higher-return) assets:
-- Small value to complement Total US
-- Emerging markets to complement Total Int
-- High-yield Corporate to complement total bond

Step 4: For each segment, allocate about 25% to the Step 3 funds and 75% to the Step 2 funds.

I get something like this (rounded)

- 38%: Total US Stock
- 13% Small Value
- 16%: Total International
- 5%: Emerging Markets
- 15%: Total US Bond
- 5%: High Yield Corporate Bonds
- 8%: REIT

Step 5: Rebalance yearly based on an excel spreadsheet to help keep emotions out of it.


Thoughts? Of course there is no way to know what exact allocation in the future will give the best results. I just chose a basic 4 fund portfolio and then added 3 additional funds to tilt to a riskier allocation given my time horizon and risk tolerance.

Some additional information: the total balance in the retirement accounts now is ~$130,000. Current combined annual salary is ~$104,000 which is expected to increase to $400,000 to $600,000 after 5 years. If there is a 40% drop in the market next week, I don't think I will change the strategy once I've committed. The problem is first committing... :confused

Thanks for your thoughts!
Last edited by indexaway on Thu Apr 14, 2016 8:03 am, edited 2 times in total.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Wed Apr 13, 2016 5:51 pm

Would appreciate any comments.
Thanks.

GoFish
Posts: 143
Joined: Tue Mar 31, 2015 7:48 pm

Re: Help with Long-term Allocation

Post by GoFish » Wed Apr 13, 2016 6:01 pm

Looks good from here. Nothing to add.

I assume this will all be in tax advantaged space now? Down the road, after the salary bump, you'll no doubt have some taxable investments to add to this. Then you'll want to consider the most tax efficient locations for your investments.

Hector
Posts: 832
Joined: Fri Dec 24, 2010 2:21 pm
Contact:

Re: Help with Long-term Allocation

Post by Hector » Wed Apr 13, 2016 6:26 pm

indexaway wrote: Some additional information: the total balance in the retirement accounts now is ~$130,000. Current combined annual salary is ~$104,000 which is expected to increase to $400,000 to $600,000 after 5 years.
What occupation are you going to be in after 5 years?

User avatar
ruralavalon
Posts: 14271
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Help with Long-term Allocation

Post by ruralavalon » Wed Apr 13, 2016 6:39 pm

That looks more complex that is necessary in my opinion, but still fairly reasonable.

Make sure that you establish a good savings rate to start and increase it as your earnings grow.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Wed Apr 13, 2016 7:25 pm

Hector wrote:
indexaway wrote: Some additional information: the total balance in the retirement accounts now is ~$130,000. Current combined annual salary is ~$104,000 which is expected to increase to $400,000 to $600,000 after 5 years.
What occupation are you going to be in after 5 years?
We're in medicine. Currently in the middle of a long training track.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Wed Apr 13, 2016 7:26 pm

JGG wrote:Looks good from here. Nothing to add.

I assume this will all be in tax advantaged space now? Down the road, after the salary bump, you'll no doubt have some taxable investments to add to this. Then you'll want to consider the most tax efficient locations for your investments.


I have a very small amount in a taxable account now. I've spread these funds across all accounts that that only the Total US Stock is in the taxable account. This should be pretty tax efficient.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Wed Apr 13, 2016 7:30 pm

ruralavalon wrote:That looks more complex that is necessary in my opinion, but still fairly reasonable.

Make sure that you establish a good savings rate to start and increase it as your earnings grow.

My wife and I are using income-based repayments for her academic loans with the hopes of having whatever remaining balance forgiven after 10 years under the PSLF program. Therefore, in order to minimize our contributions we need to minimize our taxable income. We are therfore nearly maxing out our 403b contributions; that's a long winded way of saying that we are saving quite a bit right now. Thanks for your comments.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Wed Apr 13, 2016 7:31 pm

ruralavalon wrote:That looks more complex that is necessary in my opinion, but still fairly reasonable.

Make sure that you establish a good savings rate to start and increase it as your earnings grow.

My wife and I are using income-based repayments for her academic loans with the hopes of having whatever remaining balance forgiven after 10 years under the PSLF program. Therefore, in order to minimize our contributions we need to minimize our taxable income. We are therfore nearly maxing out our 403b contributions; that's a long winded way of saying that we are saving quite a bit right now. Thanks for your comments.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Thu Apr 14, 2016 8:05 am

Not generating too much controversy on this forum probably bodes well for the basic plan I've outlined.

Just one more question: for purposes of tilting the international segment of my portfolio, what are your feelings about:

Emerging Markets vs International Small Cap?

Much thanks!

User avatar
ruralavalon
Posts: 14271
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Help with Long-term Allocation

Post by ruralavalon » Thu Apr 14, 2016 10:25 am

indexaway wrote:Not generating too much controversy on this forum probably bodes well for the basic plan I've outlined.

Just one more question: for purposes of tilting the international segment of my portfolio, what are your feelings about:

Emerging Markets vs International Small Cap?

Much thanks!
I would not, do not, tilt to either. We use only Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

tyc
Posts: 109
Joined: Wed Mar 30, 2016 1:36 pm

Re: Help with Long-term Allocation

Post by tyc » Thu Apr 14, 2016 12:49 pm

For international funds, please make sure you check the fees. The fees can eat into your savings.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Thu Apr 14, 2016 1:35 pm

tyc wrote:For international funds, please make sure you check the fees. The fees can eat into your savings.
I was concerned about the fees also. Fortunately I was able to access institutional shares for the total international index with an ER of only 0.1%. I am paying a premium for Emerging Markets with an ER of 0.33% which I justified to myself because:
1) It's only 5% of my total portfolio.
2) It may be worth it if it bears greater returns in exchange for its volatility in the long-run (all conjecture, I realize, but so is any allocation in foresight).
3) I will very soon be able to switch to the admiral shares with an ER of 0.15%

Thanks!

tyc
Posts: 109
Joined: Wed Mar 30, 2016 1:36 pm

Re: Help with Long-term Allocation

Post by tyc » Mon Apr 18, 2016 1:11 pm

The power of compounding is very interest topic that many people don't write about. Most of the time, people write about compounding on interest. However, fees compound to itself and compound to your unrealized capital appreciations (fees + compounding fees + compounding pervious appreciations).

To see this example, take the differences between cumulative gross and net return of the same fund and divided by 2 (this will not work with annualized returns information). That's the total fees you'll be paying. Even though you might put a small allocation to that particular funds, over time the fees will add up.

Solo Prosperity
Posts: 367
Joined: Mon May 11, 2015 2:53 pm

Re: Help with Long-term Allocation

Post by Solo Prosperity » Mon Apr 18, 2016 5:55 pm

indexaway wrote:
tyc wrote:For international funds, please make sure you check the fees. The fees can eat into your savings.
I was concerned about the fees also. Fortunately I was able to access institutional shares for the total international index with an ER of only 0.1%. I am paying a premium for Emerging Markets with an ER of 0.33% which I justified to myself because:
1) It's only 5% of my total portfolio.
2) It may be worth it if it bears greater returns in exchange for its volatility in the long-run (all conjecture, I realize, but so is any allocation in foresight).
3) I will very soon be able to switch to the admiral shares with an ER of 0.15%

Thanks!
Do you not have access to the ETF (VWO)? Or just the Vanguard MFs?

VWO is 0.15% with no min. But if all you can get is the MF Investor class for now AND you want EM exposure, go for it. 0.33 bps for a couple years is not a bad price to pay for the extra diversification imo (FD: I hold EM and EM value)

And in regards to the allocation, looks good to me...not that it matter's though...has to look good to you. The not so secret secret of AA decisions is that as long as you include some portion of stocks and bonds and stick to it over long periods...you will be fine. I read a great book by Meb Faber that looked at numerous different AA's from around 25 different famous investors, and over a 40 year period, they all came very close to each other in performance (I think every single one excluding "The Permanent Portfolio" was within 1% CAGR). His conclusion was pretty obvious in that, what actually matter's are fee's and discipline, not whether you decide to have 5% in EM or 8% in EM. I think what you will find here is that some people invest in EM and some don't...But the most important thing is, as long as you find a low-cost option for each asset class, stick to your allocation for the next 35 years & re-balance periodically, you will do more than fine.

anjou
Posts: 161
Joined: Sat Dec 29, 2007 12:55 pm

Re: Help with Long-term Allocation

Post by anjou » Mon Apr 18, 2016 10:13 pm

I would recommend you start a lot simpler.

Total US Stock
Total International
Total Bond

Small Value has a tracking error with US Stock. Check out this recent posting by Larry Swedroe. I do overweight in small value but feel it takes a lot more discipline to stay in it for the long run. A simpler approach is usually easy to sustain for most people. So you could start simple for a few years, before adding it.

Emerging markets is covered in Total International. Overweighting it taking on more risk. International is a diversifier on US Stock. Overweight of emerging is like amping up that diversifier with more risk. Do you really need it? Can you achieve the same end goal with 25% international?

Corporate bond is not advisable. You want to take the risk with stocks and have bonds as the ballast when stocks are turbulent.

Anjou.

User avatar
Peter Foley
Posts: 4619
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Help with Long-term Allocation

Post by Peter Foley » Mon Apr 18, 2016 10:44 pm

I'm okay with your proposed AA at your age. In part because of your age I would also agree with a small value tilt. I'm not a fan of emerging markets - in part because I really don't trust the accounting standards that may be used. But that does not mean my hesitation is valid.

I do strongly believe that bonds are for safety. If I were going to diversify in bonds I would add TIPS to a total bond allocation. I would not add high yield corporate. You are already taking plenty of risk with your equity allocation.

You might want to read the Wiki with regards to Fama-French. That is the justification for the small value tilt. Note that a small value tilt also adds more risk so you may want to increase your bond AA to compensate.

Edit: I agree you should start with a simpler portfolio and work to more complex over a few years.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Tue Apr 19, 2016 1:05 pm

anjou wrote:I would recommend you start a lot simpler.

Total US Stock
Total International
Total Bond
Thank you Anjou. I actually spend almost one year in a single target date fund and only later switched to the 3-fund portfolio, which I've had for almost a year now. Having spent some time in the simpler realms of investing, I am now interested in tilting and don't mind a little short-term tracking error.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Tue Apr 19, 2016 1:06 pm

Peter Foley wrote:I'm okay with your proposed AA at your age. In part because of your age I would also agree with a small value tilt. I'm not a fan of emerging markets - in part because I really don't trust the accounting standards that may be used. But that does not mean my hesitation is valid.

I do strongly believe that bonds are for safety. If I were going to diversify in bonds I would add TIPS to a total bond allocation. I would not add high yield corporate. You are already taking plenty of risk with your equity allocation.

You might want to read the Wiki with regards to Fama-French. That is the justification for the small value tilt. Note that a small value tilt also adds more risk so you may want to increase your bond AA to compensate.

Edit: I agree you should start with a simpler portfolio and work to more complex over a few years.
Thanks PF. I will read up on Fama-French and re-think the HY-bonds.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Tue Apr 19, 2016 1:09 pm

QuietWealth wrote:
Do you not have access to the ETF (VWO)? Or just the Vanguard MFs?

VWO is 0.15% with no min. But if all you can get is the MF Investor class for now AND you want EM exposure, go for it. 0.33 bps for a couple years is not a bad price to pay for the extra diversification imo (FD: I hold EM and EM value)

And in regards to the allocation, looks good to me...not that it matter's though...has to look good to you. The not so secret secret of AA decisions is that as long as you include some portion of stocks and bonds and stick to it over long periods...you will be fine. I read a great book by Meb Faber that looked at numerous different AA's from around 25 different famous investors, and over a 40 year period, they all came very close to each other in performance (I think every single one excluding "The Permanent Portfolio" was within 1% CAGR). His conclusion was pretty obvious in that, what actually matter's are fee's and discipline, not whether you decide to have 5% in EM or 8% in EM. I think what you will find here is that some people invest in EM and some don't...But the most important thing is, as long as you find a low-cost option for each asset class, stick to your allocation for the next 35 years & re-balance periodically, you will do more than fine.
I suppose I can just change my mutual fund account to a broker account so that I can swap VEIEX into VWO. I have only owned MFs but don't see any reason not to switch over to ETFs for the lower fees. Thanks.

azanon
Posts: 1992
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

Re: Help with Long-term Allocation

Post by azanon » Tue Apr 19, 2016 1:54 pm

indexaway wrote:Fellow Bogleheads,

I wanted your take on the combined retirement portfolio for myself and my wife. At age 28, we are at the beginning of the accumulation phase with a time horizon of ~35 years. We can accept some volatility in hopes for greater returns. My basic strategy is as follows:

....

Some additional information: the total balance in the retirement accounts now is ~$130,000. Current combined annual salary is ~$104,000 which is expected to increase to $400,000 to $600,000 after 5 years. If there is a 40% drop in the market next week, I don't think I will change the strategy once I've committed. The problem is first committing... :confused

Thanks for your thoughts!
You sound like me back when i was 28.

I would say the portfolio is probably too aggressive. If i had a "do-over", I probably would have picked a portfolio that would be suitable for all ages, instead of one that I'd have to scale back as I got older and the portfolio size grows.

With that level of expected income, do you really need to have such an amp-ed up portfolio? An alternative is to saved 25% of gross or more (let the savings do most of the work), and have a portfolio that's much more conservative with a higher sharpe ratio, as opposed to one that will only excel when the economic climate is in prosperity.

By like me, i meant i had an amped up portfolio, it grew to a few hundred thousand, then I got my a** handed to me. I waited it out and let it grow back in mostly all equities too, but in hindsight, I would have preferred the smoother ride.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Tue Apr 19, 2016 2:01 pm

azanon wrote:
indexaway wrote:Fellow Bogleheads,

I wanted your take on the combined retirement portfolio for myself and my wife. At age 28, we are at the beginning of the accumulation phase with a time horizon of ~35 years. We can accept some volatility in hopes for greater returns. My basic strategy is as follows:

....

Some additional information: the total balance in the retirement accounts now is ~$130,000. Current combined annual salary is ~$104,000 which is expected to increase to $400,000 to $600,000 after 5 years. If there is a 40% drop in the market next week, I don't think I will change the strategy once I've committed. The problem is first committing... :confused

Thanks for your thoughts!
You sound like me back when i was 28.

I would say the portfolio is probably too aggressive. If i had a "do-over", I probably would have picked a portfolio that would be suitable for all ages, instead of one that I'd have to scale back as I got older and the portfolio size grows.

With that level of expected income, do you really need to have such an amp-ed up portfolio? An alternative is to saved 25% of gross or more (let the savings do most of the work), and have a portfolio that's much more conservative with a higher sharpe ratio, as opposed to one that will only excel when the economic climate is in prosperity.

By like me, i meant i had an amped up portfolio, it grew to a few hundred thousand, then I got my a** handed to me. I waited it out and let it grow back in mostly all equities too, but in hindsight, I would have preferred the smoother ride.
That is a good perspective to consider. My thinking had been that since I expect stable and fruitful future income, I could afford to have a more aggressive portfolio with a bumpier ride. But yes, this is more theoretical since I haven't yet had to ride a bear market. I will consider this. Thanks!

azanon
Posts: 1992
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

Re: Help with Long-term Allocation

Post by azanon » Tue Apr 19, 2016 2:12 pm

indexaway wrote:That is a good perspective to consider. My thinking had been that since I expect stable and fruitful future income, I could afford to have a more aggressive portfolio with a bumpier ride. But yes, this is more theoretical since I haven't yet had to ride a bear market. I will consider this. Thanks!
Ive brought this up in a few threads lately, but you might want to at least fool around a bit with the calculators either here https://portfoliocharts.com/ or at portfoliovisualizer.com. What I think you'll find at either of them is that there are ways to get comparable return without as much risk by backing off the equities some and inserting more.... alternatives, to just generalize, and then rebalancing. So if you were to plug in the one you propose, it'll no doubt have a high return, but you might find that "standard deviation" undesirable, considering that there are alternative portfolio structures that can really drop that standard deviation without affecting the return that much.

I want to go back in time ala "Back to the Future" and send my 28 year old self that link :D

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Tue Apr 19, 2016 2:37 pm

azanon wrote:
indexaway wrote:That is a good perspective to consider. My thinking had been that since I expect stable and fruitful future income, I could afford to have a more aggressive portfolio with a bumpier ride. But yes, this is more theoretical since I haven't yet had to ride a bear market. I will consider this. Thanks!
Ive brought this up in a few threads lately, but you might want to at least fool around a bit with the calculators either here https://portfoliocharts.com/ or at portfoliovisualizer.com. What I think you'll find at either of them is that there are ways to get comparable return without as much risk by backing off the equities some and inserting more.... alternatives, to just generalize, and then rebalancing. So if you were to plug in the one you propose, it'll no doubt have a high return, but you might find that "standard deviation" undesirable, considering that there are alternative portfolio structures that can really drop that standard deviation without affecting the return that much.

I want to go back in time ala "Back to the Future" and send my 28 year old self that link :D
I've used portfoliovisualizer before and really like it! Let's say portfolio A is what I've suggested above. Portfolio B is the same without the riskier funds (small value absorbed into total us, emerging absorbed into total international, and high yield absorbed into total bond. Portfolio C is B without REIT.

2005 to Present
A: CAGR 6.62%, Std.Dev. 15.86%. Worst year 31.21%. Sharpe Ratio 0.41
B: CAGR 6.51%, Std.Dev. 14.92%. Worst year 30.11% Sharpe Ratio 0.42
C: CAGR 6.28%, Std.Dev. 15.14%. Worst year 30.39% Sharpe Ratio 0.40

So the volatility is similar and CAGR differences pretty small. But even these small CAGR differences compound to mean real differences in end value over the long run. I suppose one way to reduce volatility would be just to decrease my equity exposure. But at least for the moment I feel like I can pay the price of volatility for great 30-40 yr returns.

Having said this: I may also be repenting this strategy later azanon! I'm not sure I have the stomach to withstand a 30% drop, but can only hope that I will stick to the plan in a real world market crash.

azanon
Posts: 1992
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

Re: Help with Long-term Allocation

Post by azanon » Tue Apr 19, 2016 2:45 pm

indexaway wrote:I've used portfoliovisualizer before and really like it! Let's say portfolio A is what I've suggested above. Portfolio B is the same without the riskier funds (small value absorbed into total us, emerging absorbed into total international, and high yield absorbed into total bond. Portfolio C is B without REIT.

2005 to Present
A: CAGR 6.62%, Std.Dev. 15.86%. Worst year 31.21%. Sharpe Ratio 0.41
B: CAGR 6.51%, Std.Dev. 14.92%. Worst year 30.11% Sharpe Ratio 0.42
C: CAGR 6.28%, Std.Dev. 15.14%. Worst year 30.39% Sharpe Ratio 0.40

So the volatility is similar and CAGR differences pretty small. But even these small CAGR differences compound to mean real differences in end value over the long run. I suppose one way to reduce volatility would be just to decrease my equity exposure. But at least for the moment I feel like I can pay the price of volatility for great 30-40 yr returns.
Well, i didn't want to outright say it cause some of the other bogleheads will jump in, but that's not what i meant. Try substituting not only bonds, but very uncorrelated bonds... like LT treasuries. Or try a nice dose of commodities or gold for some of those equities. Or best yet, try both LT treasure and gold/commodities in place of some of the equities. THEN you'll see that SD take a nosedive, but I bet the CAGR remains pretty stable.

Here's my portfolio: 15% midcap blend, 10% EM, 10% Int Developed, 30% ShortT Treasuries, 20% LT treasuries, 7.5% gold, 7.5% com

"my" results? CAGR 9.90%, SD 8.43%, Worst year -12.05, sharpe 0.62 My percent equities? per above, only 35%.

And that's by no means a best case, you can get well over 10% CAGR, and even better SD. But i had to work with my investment options in my retirement plans.

But i'm not saying necessarily pick a portfolio that resembles mine. But I do think the point is clear that there's no reason to accept an anticipated 15% Standard deviation. I'd reject that immediately, if it were me.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Tue Apr 19, 2016 3:06 pm

azanon wrote:
indexaway wrote:I've used portfoliovisualizer before and really like it! Let's say portfolio A is what I've suggested above. Portfolio B is the same without the riskier funds (small value absorbed into total us, emerging absorbed into total international, and high yield absorbed into total bond. Portfolio C is B without REIT.

2005 to Present
A: CAGR 6.62%, Std.Dev. 15.86%. Worst year 31.21%. Sharpe Ratio 0.41
B: CAGR 6.51%, Std.Dev. 14.92%. Worst year 30.11% Sharpe Ratio 0.42
C: CAGR 6.28%, Std.Dev. 15.14%. Worst year 30.39% Sharpe Ratio 0.40

So the volatility is similar and CAGR differences pretty small. But even these small CAGR differences compound to mean real differences in end value over the long run. I suppose one way to reduce volatility would be just to decrease my equity exposure. But at least for the moment I feel like I can pay the price of volatility for great 30-40 yr returns.
Well, i didn't want to outright say it cause some of the other bogleheads will jump in, but that's not what i meant. Try substituting not only bonds, but very uncorrelated bonds... like LT treasuries. Or try a nice dose of commodities or gold for some of those equities. Or best yet, try both LT treasure and gold/commodities in place of some of the equities. THEN you'll see that SD take a nosedive, but I bet the CAGR remains pretty stable.

Here's my portfolio: 15% midcap blend, 10% EM, 10% Int Developed, 30% ShortT Treasuries, 20% LT treasuries, 7.5% gold, 7.5% com

"my" results? CAGR 9.90%, SD 8.43%, Worst year -12.05, sharpe 0.62 My percent equities? per above, only 35%.

And that's by no means a best case, you can get well over 10% CAGR, and even better SD. But i had to work with my investment options in my retirement plans.

But i'm not saying necessarily pick a portfolio that resembles mine. But I do think the point is clear that there's no reason to accept an anticipated 15% Standard deviation. I'd reject that immediately, if it were me.
Those are pretty impressive numbers. Thanks for sharing your allocation.

azanon
Posts: 1992
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR

Re: Help with Long-term Allocation

Post by azanon » Tue Apr 19, 2016 3:15 pm

indexaway wrote:
azanon wrote:
indexaway wrote:I've used portfoliovisualizer before and really like it! Let's say portfolio A is what I've suggested above. Portfolio B is the same without the riskier funds (small value absorbed into total us, emerging absorbed into total international, and high yield absorbed into total bond. Portfolio C is B without REIT.

2005 to Present
A: CAGR 6.62%, Std.Dev. 15.86%. Worst year 31.21%. Sharpe Ratio 0.41
B: CAGR 6.51%, Std.Dev. 14.92%. Worst year 30.11% Sharpe Ratio 0.42
C: CAGR 6.28%, Std.Dev. 15.14%. Worst year 30.39% Sharpe Ratio 0.40

So the volatility is similar and CAGR differences pretty small. But even these small CAGR differences compound to mean real differences in end value over the long run. I suppose one way to reduce volatility would be just to decrease my equity exposure. But at least for the moment I feel like I can pay the price of volatility for great 30-40 yr returns.
Well, i didn't want to outright say it cause some of the other bogleheads will jump in, but that's not what i meant. Try substituting not only bonds, but very uncorrelated bonds... like LT treasuries. Or try a nice dose of commodities or gold for some of those equities. Or best yet, try both LT treasure and gold/commodities in place of some of the equities. THEN you'll see that SD take a nosedive, but I bet the CAGR remains pretty stable.

Here's my portfolio: 15% midcap blend, 10% EM, 10% Int Developed, 30% ShortT Treasuries, 20% LT treasuries, 7.5% gold, 7.5% com

"my" results? CAGR 9.90%, SD 8.43%, Worst year -12.05, sharpe 0.62 My percent equities? per above, only 35%.

And that's by no means a best case, you can get well over 10% CAGR, and even better SD. But i had to work with my investment options in my retirement plans.

But i'm not saying necessarily pick a portfolio that resembles mine. But I do think the point is clear that there's no reason to accept an anticipated 15% Standard deviation. I'd reject that immediately, if it were me.
Those are pretty impressive numbers. Thanks for sharing your allocation.
You're welcome. If you wanted to read a good book that gets into the strategy of using volatile, but uncorrelated asset classes, Larry Swedroe's Black Swans is a good one. Also, "Tyler" at portfoliocharts.com has a number of articles at his site, which explains the "why" this seems to work. To me, it's almost like magic really - I would intuitively think the 30% position in short term treasuries alone would destroy the return power of any portfolio. Or that the 0% inflation adjusted return of gold and commodities would destroy a portfolio. But mix all of that together and rebalance annually? Magic.

EricBackus
Posts: 19
Joined: Wed Jul 15, 2015 10:30 am

Re: Help with Long-term Allocation

Post by EricBackus » Thu Apr 28, 2016 6:56 pm

indexaway wrote: I'm not sure I have the stomach to withstand a 30% drop, but can only hope that I will stick to the plan in a real world market crash.
I'm a little late to this discussion, but this really stood out to me.

Remember that the market overall has dropped ~50%, twice in the last 20 years. It appears your analysis has looked only at the 2008 crash, and looked only at the worst year (not the worst point within that year which was probably worse), and still your allocation would have dropped more than 30%. You're planning on being invested for 30-40 years, but really longer than that as you live off of those investments. In that kind of time frame, you almost certainly will see several more crashes like this, perhaps even worse than this, and the worst thing for you is if you bail out at the bottom.

Don't just hope that you will stick to the plan. Convince yourself that you WILL stick to the plan, without any doubt. And if you really can't do that, dial back the equity portion of your portfolio. (You have the luxury of time and a high-paying job, so you will come out just fine even if you're only, say, 50/50 instead of 85/15.) I like almost everything about your existing plan, but you must stay the course.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Thu Apr 28, 2016 7:44 pm

EricBackus wrote:
indexaway wrote: I'm not sure I have the stomach to withstand a 30% drop, but can only hope that I will stick to the plan in a real world market crash.
I'm a little late to this discussion, but this really stood out to me.

Remember that the market overall has dropped ~50%, twice in the last 20 years. It appears your analysis has looked only at the 2008 crash, and looked only at the worst year (not the worst point within that year which was probably worse), and still your allocation would have dropped more than 30%. You're planning on being invested for 30-40 years, but really longer than that as you live off of those investments. In that kind of time frame, you almost certainly will see several more crashes like this, perhaps even worse than this, and the worst thing for you is if you bail out at the bottom.

Don't just hope that you will stick to the plan. Convince yourself that you WILL stick to the plan, without any doubt. And if you really can't do that, dial back the equity portion of your portfolio. (You have the luxury of time and a high-paying job, so you will come out just fine even if you're only, say, 50/50 instead of 85/15.) I like almost everything about your existing plan, but you must stay the course.
Thanks EricBackus! I wrote out my allocation plan and designed an excel spreadsheet to help me rebalance so that I can stay the course. I wrote the above using the word "hope" just because I haven't yet gone through a real crash, but I intend to not let the year-to-year noise dissuade me from the course I've chosen for the decades to come. I appreciate your input!
.indexaway.

pkcrafter
Posts: 13134
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Help with Long-term Allocation

Post by pkcrafter » Fri Apr 29, 2016 9:44 am

Indexaway, just to add a bit of perspective, you have an aggressive portfolio of 80% stock, plus the high-yield will also act like a stock fund in a downturn. You also have a strong tilt to small cap and you've included REITs. What this means is you will get lots of tracking error plus a potential drawdown of maybe 40-45%. Your gains over the market return will be inconsistent and come in bursts often followed by several years of underperformance. Holding through a major loss is very difficult to do for most investors, but if you want to stay with the plan you've created, make your investment policy statement a contract That creates a stronger statement, then add something to the contract that says you won't sell without discussing first with somebody who understands your portfolio or you could also post on the forum for support.

Your portfolio is a well-designed long-term one, if it does not exceed your tolerance, and you won't know that until you're tested.

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.

indexaway
Posts: 123
Joined: Sat Mar 05, 2016 3:29 pm

Re: Help with Long-term Allocation

Post by indexaway » Fri Apr 29, 2016 1:36 pm

pkcrafter wrote:Indexaway, just to add a bit of perspective, you have an aggressive portfolio of 80% stock, plus the high-yield will also act like a stock fund in a downturn. You also have a strong tilt to small cap and you've included REITs. What this means is you will get lots of tracking error plus a potential drawdown of maybe 40-45%. Your gains over the market return will be inconsistent and come in bursts often followed by several years of underperformance. Holding through a major loss is very difficult to do for most investors, but if you want to stay with the plan you've created, make your investment policy statement a contract That creates a stronger statement, then add something to the contract that says you won't sell without discussing first with somebody who understands your portfolio or you could also post on the forum for support.

Your portfolio is a well-designed long-term one, if it does not exceed your tolerance, and you won't know that until you're tested.

Paul

Thanks Paul. I like your idea of discussing any deviation from the plan with someone. Unfortunately, I am the most "informed" on investment principles within my friend/family/colleague circles. I plan to change this by joining my local Boglehead chapter (very excited for my first meeting next month!).

I will make sure that I re-post on this forum to seek advice BEFORE making any allocation changes. That said, I'm in it for the long-haul, and plan to stick to it!

Thanks!

Post Reply