What do you include in your asset allocation calculations?

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Swampy
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What do you include in your asset allocation calculations?

Post by Swampy » Fri Jan 27, 2017 12:13 pm

Trying to get a clearer picture of 'real' investment asset allocation, I'm wondering what you decide to include in your total investment portfolio for the sake of completeness. Do you include investment real estate, collectibles, cash value of life insurance, CD's, cash holdings, precious metals, etc?

The reason I ask is that an asset allocation based strictly on equity vs bond holdings will often be substantially different from one where an individual is holding CD's, rental property, a large 'emergency fund,' etc.

How many of you further sub-categorize your holdings into US vs foreign equities, sectors, bonds by duration and quality, etc?
How many further sub-categorize into taxable vs tax deferred vs tax free (including Roth) for the asset classes?

Thanks.
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livesoft
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Re: What do you include in your asset allocation calculations?

Post by livesoft » Fri Jan 27, 2017 12:17 pm

Swampy wrote:Trying to get a clearer picture of 'real' investment asset allocation, I'm wondering what you decide to include in your total investment portfolio for the sake of completeness. Do you include investment real estate, collectibles, cash value of life insurance, CD's, cash holdings, precious metals, etc?
I could say Yes, I include all of those that I own, but the reality is that I do not own collectibles, life insurance, CDs, cash, nor precious metals. I do not include the value of my home.

I do break down AA into US, foreign, fixed income, and "other." I go by the M* 9-box style grid for large/mid/small and value/blend/growth. I described this in detail in this thread: viewtopic.php?t=150267

I do not tax-adjust the various kinds of accounts because I have found taxes to be close enough to zero for a mid-7-figure portfolio. Indeed, the tax cost of the taxable accounts is less than zero.
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MortgageOnBlack
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Re: What do you include in your asset allocation calculations?

Post by MortgageOnBlack » Fri Jan 27, 2017 12:20 pm

How about the mortgage? Can this be looked at like a bond to encourage extra principal payments which could be used in conjunction with taxable investing (Total US Stocks or Total International), assuming all tax-advantaged accounts are being maximized? I like the idea of a guaranteed return even if it's at a low-interest rate.
Last edited by MortgageOnBlack on Fri Jan 27, 2017 12:24 pm, edited 1 time in total.

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Re: What do you include in your asset allocation calculations?

Post by PhysicianOnFIRE » Fri Jan 27, 2017 12:21 pm

Screenshots of my breakdown below.

I have some "play money" invested in a couple microbreweries, a couple 529 plans, but I don't include them in my "asset allocation" calculation. I do include them, along with two homes in my net worth calculation. If I had rental properties, I would include those as Real Estate when calculating asset allocation.

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Re: What do you include in your asset allocation calculations?

Post by Jack FFR1846 » Fri Jan 27, 2017 12:27 pm

I classify following traditional Boglehead 3 fund categories.

US Stock index
International stock index
Bonds

Included in bonds for me are iBonds.

I own no REITs and do not count my house or small collection of silver coins or even the cash value of a Universal Life policy. Those are included in my net worth number, but not for AA.
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Re: What do you include in your asset allocation calculations?

Post by bottlecap » Fri Jan 27, 2017 1:04 pm

I use the 9 box fund style divisions for US, plus international, plus bonds.

Cash and real estate is not included, but I'm obviously aware of it and, if appropriate, might slightly affect the risk I take with my stock/bond investments.

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retired61
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Re: What do you include in your asset allocation calculations?

Post by retired61 » Fri Jan 27, 2017 4:32 pm

I include the following:
US Stock
Non US Stock
IT Bonds
ST Bonds
Munis
Assets "not in the market" i.e. Not affected by the market or interest rate changes
-CDs
-Fixed annuity (not annuitized)
-IBonds
-Cash

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fourwedge
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Re: What do you include in your asset allocation calculations?

Post by fourwedge » Fri Jan 27, 2017 4:35 pm

Only investments that I hold. I don't count SS, 529, or HSA.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.

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Re: What do you include in your asset allocation calculations?

Post by zuma » Fri Jan 27, 2017 4:46 pm

We own a rental property, but don't include that in our AA calculation.

We also don't include our savings account, which has enough cash for one year of expenses.

What we include:

60% equities – stock funds, REIT fund
40% fixed income – bond funds, TIPS fund, CDs

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Re: What do you include in your asset allocation calculations?

Post by bertilak » Fri Jan 27, 2017 8:36 pm

I only count liquid assets. If I owned illiquid assets that paid me income (e.g. rental property) I MIGHT count that as part of my AA but would probably look at is as a business that was managed separately from my investible assets. Since I don't own anything like that I haven't thought it through.
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J295
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Re: What do you include in your asset allocation calculations?

Post by J295 » Fri Jan 27, 2017 9:52 pm

Exclude home/cars/personal property, and exclude social security.
Include the rest (which included, for example, multi year payments from sale of closely held business).

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Toons
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Re: What do you include in your asset allocation calculations?

Post by Toons » Fri Jan 27, 2017 10:13 pm

Investments only.
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rob
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Re: What do you include in your asset allocation calculations?

Post by rob » Fri Jan 27, 2017 10:16 pm

Another vote for liquid investments only..... I never do a net worth thing as I don't see much point. No direct real-estate or their mortgages, no emergency money (I think in draw-down I would but not in accumulation). I also do not include pensions - although in my case so small not to matter or estimated social security.
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Re: What do you include in your asset allocation calculations?

Post by mindboggling » Fri Jan 27, 2017 10:54 pm

I include:
1. all stock mutual funds
2. fixed income: all bond mutual funds plus money market fund, I-bonds & high-yield savings account
3. variable annuity (not yet annuitized)

Not included:
1. fixed (no COLA) pension
2. 2 checking accounts with low balances
3. 2 low-paying savings accounts
4. social security (not applied for yet)

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Re: What do you include in your asset allocation calculations?

Post by Swampy » Sat Jan 28, 2017 7:27 am

I see a divergence of opinions regarding annuities and also between the separation of laddered CD's vs bond holdings.

As regards to the cash value of life, I have an old policy that pays minimum 4% a year and cash value keeps growing every year.
What about including that with the bond allocation?

The real estate held isn't a cash cow, more like a goat to be milked - but has been a consistent income generator.
Any thoughts about possibly moving this holding into the REITS column?

I just want to make sure I'm measuring equities and bonds with a similar yardstick as others. Depending on what I include,
the equity side has a large swing in the allocation percentage.
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Re: What do you include in your asset allocation calculations?

Post by rkhusky » Sat Jan 28, 2017 7:37 am

I think that you first need to decide what to include in your asset allocation, then decide what the allocation will be, then how it will change over time, and then stick with it, unless you need to change it because your life circumstances have changed.

Whether or not you include your home, pension, life insurance, emergency fund, etc in your AA is not as important.

I include CD's, cash at my brokerage, and stock and bond mutual funds in my AA. I don't include cash in savings/checking accounts. My emergency fund is in bond mutual funds and so is counted. My AA only includes those things with which I can easily rebalance, because I only compute my AA in order to see if I need to rebalance.

In terms of categorization, I have large,mid and small US, large and mid/small for both emerging and developed int'l, AAA and other for both short and other bonds (AA munis are currently considered AAA and short is 3 years or less).

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Re: What do you include in your asset allocation calculations?

Post by Quark » Sat Jan 28, 2017 8:07 am

Swampy wrote:...I just want to make sure I'm measuring equities and bonds with a similar yardstick as others....
Why is this important?

Stocks, bonds, cash, CDs and the like are what most people include when reporting allocations, typically as equity/bond. However, other financial related assets should be taken into account when setting this allocation. As a random example, take two people in similar overall financial circumstances who want to take similar levels of risk. One owns rental real estate, the other doesn't. Would you expect them both to have the same stock/bond split?

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Re: What do you include in your asset allocation calculations?

Post by Dandy » Sat Jan 28, 2017 8:40 am

mutual funds, bank savings products, EE and HH bonds -- I don't include home (that is fully paid off), cash value of insurance and don't turn income streams like pension and social security into pseudo bonds. So pretty much products that I can move from mutual funds to bank/government savings products or vice versa.

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Re: What do you include in your asset allocation calculations?

Post by CyclingDuo » Sat Jan 28, 2017 9:08 am

Swampy wrote:Trying to get a clearer picture of 'real' investment asset allocation, I'm wondering what you decide to include in your total investment portfolio for the sake of completeness. Do you include investment real estate, collectibles, cash value of life insurance, CD's, cash holdings, precious metals, etc?

The reason I ask is that an asset allocation based strictly on equity vs bond holdings will often be substantially different from one where an individual is holding CD's, rental property, a large 'emergency fund,' etc.

How many of you further sub-categorize your holdings into US vs foreign equities, sectors, bonds by duration and quality, etc?
How many further sub-categorize into taxable vs tax deferred vs tax free (including Roth) for the asset classes?
The WSJ had an article a few years ago (HERE it is http://www.wsj.com/articles/new-take-on ... 1403470472 ) that talked about including SS and your home equity into your asset allocation calculations.

Morningstar has also had various articles and interviews as well about the asset allocation calculation of using SS. Here's one such example that makes good sense (at least to us)...

http://www.morningstar.com/cover/videoc ... ?id=702029

Jack Bogle thinks this way as well in terms of including Social Security into your asset allocation mix - at least in terms of the stock to bond percentages.

The subject continually raises disagreement - not only what I've read on these boards - but also in many articles and thoughts from advisors, such as Paul Merriman's thoughts about not including it as an asset here...http://paulmerriman.com/social-security-asset/

In the end, we all have to come up with our own view of our individual asset allocation that we are comfortable with in running the calculation. We are certainly open to the thought of considering the asset allocation model that includes social security for our own calculations.
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Re: What do you include in your asset allocation calculations?

Post by dbr » Sat Jan 28, 2017 9:29 am

Asset allocation is about the risk and return of a collection of assets based on the properties of those assets. In a forum that is intended to be about investing in stocks and bonds (in a broad sense of bonds) more of less in the model of Vanguard mutual funds, a portfolio is a collection of stock and bond mutual funds. That can include ETFs as funds and can be stretched to include CDs, cash under the mattress, and individual stocks and bonds.

To include more things than that in an asset allocation you need to have a measure of the risk and return properties of that asset commensurate with the same for stocks and bonds. Any discussion that includes real estate, annuities, etc. has to to figure out how to get that done. Bogle in using SS as a bond would have a formula to capitalize the bond via net present value, but as far as I know does not distinguish the risk in this "bond" nor its "return" relative to the same for any other bonds in particular. The idea does break down at that point. I suppose it is kind of like holding TIPS is that the principal and the return are inflation indexed and it sort of has the Federal Government of the US behind it but not with the kind of security that a Treasury bond has. How one would make a holding in a couple of rental houses report a risk and a return that could be compared to that of the stock market is not simple, but means exist to make some estimates. I assume articles that include such considerations offer methods of doing so.

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Re: What do you include in your asset allocation calculations?

Post by jimishooch » Sat Jan 28, 2017 12:53 pm

fixed income=
bonds: in any shape or form
CDs: in any shape or form
money market/high yield savings
fixed annuities

with that said my emergency fund (budget expense account) is not counted toward's AA. either is any income producing vehicle; SS/pension etc.

good luck
jim

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Re: What do you include in your asset allocation calculations?

Post by Swampy » Sun Jan 29, 2017 1:38 pm

jimishooch wrote:fixed income=
bonds: in any shape or form
CDs: in any shape or form
money market/high yield savings
fixed annuities

with that said my emergency fund (budget expense account) is not counted toward's AA. either is any income producing vehicle; SS/pension etc.

good luck
jim
How do you reconcile the fact that bonds and CD's historically have a higher yield than MMF or savings? Do you lump them all together as fixed income or do you separate them out?

By and large, some very good responses.
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Re: What do you include in your asset allocation calculations?

Post by Sheepdog » Sun Jan 29, 2017 1:50 pm

I have included in my AA in addition to stocks, conventional bonds and mutual funds: CDs, EE and I bonds as part of fixed income. Nothing else
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Re: What do you include in your asset allocation calculations?

Post by Aptenodytes » Sun Jan 29, 2017 2:30 pm

This doesn't have to be complicated or contentious.

1) when you determine the target AA of the portfolio of investment accounts, you take into account everything that matters with respect to your need and ability to take risk, your liquidity needs, and your non-tangible behavioral psychology needs. How you take it all into account will be idiosyncratic - - there are no universal guidelines. People who tell you there's one formula that works for everyone are wrong, and people who tell you they ignore all these things are almost definitely not being fully honest.

2) once you have a target AA for your investment accounts, you can ignore everything else because the only decisions you are making concern only these accounts. That is, when you do your periodic rebalancing, there's no need to see how much you could get if you auctioned all your valuables or what the blue book values of you cars are. People who tell you they are taking all that into account when they rebalance are probably not being fully rational.

3) point (2) notwithstanding, if there's any major change in the things that went into (1) you logically should re-evaluate the AA of your investment accounts.

4) whether or not you ever convert all your assets and obligations into a consistent dollar value and portray an overall comprehensive allocation has no material effect on anything. So don't worry if people do it and don't bother yourself if you don't feel like it.

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Re: What do you include in your asset allocation calculations?

Post by Sandtrap » Sun Jan 29, 2017 2:42 pm

As a retired businessman, I better understand an investment portfolio if I approach it as a business unto itself. Long term. Stable, maybe. And income producing.
Thus, I do not include anything personal, home, R/E, rental property, rental income, etc.

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Re: What do you include in your asset allocation calculations?

Post by 8hygro » Sun Jan 29, 2017 10:20 pm

PhysicianOnFIRE wrote:

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PhysicianOnFire...I find this text very easy on the eye's, is it Calibri?

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Re: What do you include in your asset allocation calculations?

Post by randomizer » Sun Jan 29, 2017 11:07 pm

I include anything which is a mutual fund (that means taxable account, 401k, 529s). Within that, I split into domestic equity, international equity, bonds (ie. I'm basically following the three-fund portfolio model). With respect to bonds, I have a funds-of-funds that holds both domestic and international bonds (eg. target retirement fund): I note the domestic/international split, but don't make any attempt to allocate it or rebalance it explicitly (any time I need bonds outside the target retirement fund, I go domestic).

I ignore the emergency fund and everything else.
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Re: What do you include in your asset allocation calculations?

Post by honduranhurricane » Sun Jan 29, 2017 11:13 pm

I only include liquid assets for my AA. I include my 401K, both our back door Roths and wifes 457. I exclude house, SocSec, taxable brokerage and both our pensions. Also I do not include 529 and HSA, though I do have an individual allocation plan for each.

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Re: What do you include in your asset allocation calculations?

Post by ff4930 » Sun Jan 29, 2017 11:32 pm

PhysicianOnFIRE wrote:Screenshots of my breakdown below.

I have some "play money" invested in a couple microbreweries, a couple 529 plans, but I don't include them in my "asset allocation" calculation. I do include them, along with two homes in my net worth calculation. If I had rental properties, I would include those as Real Estate when calculating asset allocation.

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PoF,

Any reason why you are overlapping Total US Stock with S&P 500?

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Re: What do you include in your asset allocation calculations?

Post by Ari » Mon Jan 30, 2017 5:44 am

I pretty much only include my investment account. I don't include my emergency fund and I don't even include my retirement account, as that money cannot be accessed until I'm 65 (unless they raise the retirement age, which seems likely). My goal is set a long time before that, so I don't think it's relevant.
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Re: What do you include in your asset allocation calculations?

Post by dcabler » Mon Jan 30, 2017 6:50 am

For Asset Allocation, only investments:
Taxable account at Fidelity
Taxable account at Vanguard
My rollover IRA at Fidelity
Wife's rollover IRA at Fidelity
Current 401K (which I'll roll over into my rollover IRA at Fidelity when I'm no longer at my present employer)

For Asset Allocation, I don't include
SS
529
Cash in checking and savings accounts
Texas Tomorrow Fund for daughter's allocation
Any material possessions, including house, cars, jewelry, etc.

For purposes of retirement calculations, all investments + SS are included.

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Re: What do you include in your asset allocation calculations?

Post by rkhusky » Mon Jan 30, 2017 2:58 pm

Ari wrote:I pretty much only include my investment account. I don't include my emergency fund and I don't even include my retirement account, as that money cannot be accessed until I'm 65 (unless they raise the retirement age, which seems likely). My goal is set a long time before that, so I don't think it's relevant.
You should include your retirement account unless it is in a target retirement fund or a balanced fund, such that you never need to worry about rebalancing. IMO, you only need to compute your AA is if you plan to rebalance at some point.

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Re: What do you include in your asset allocation calculations?

Post by jimishooch » Mon Jan 30, 2017 3:02 pm

Swampy wrote:
jimishooch wrote:fixed income=
bonds: in any shape or form
CDs: in any shape or form
money market/high yield savings
fixed annuities

with that said my emergency fund (budget expense account) is not counted toward's AA. either is any income producing vehicle; SS/pension etc.

good luck
jim
How do you reconcile the fact that bonds and CD's historically have a higher yield than MMF or savings? Do you lump them all together as fixed income or do you separate them out?

By and large, some very good responses.
all together as fixed income is the asset class but most call it "bonds".
Last edited by jimishooch on Mon Jan 30, 2017 3:17 pm, edited 1 time in total.

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Re: What do you include in your asset allocation calculations?

Post by stemikger » Mon Jan 30, 2017 3:06 pm

Toons wrote:Investments only.
:happy
+1

Me too. I just went back to 60/40 from 65/35. I only count investments. With a paid off mortgage, I don't need to shoot for the moon and take on more risks.
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Re: What do you include in your asset allocation calculations?

Post by Shazb0t » Mon Jan 30, 2017 3:19 pm

I include all my investments, cash, cds, savings, checkings. I do not include my 6 month Emergency Fund. I do not include possessions like cars, collections, etc.

I think that is the best way to be fair with what your real asset allocations is as opposed to say having 50% of your cash in a savings account and investing in the stock market 90/10 stocks/bond ratio and considering yourself aggressive.

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Re: What do you include in your asset allocation calculations?

Post by Dandy » Mon Jan 30, 2017 3:27 pm

It is interesting that many don't include their emergency fund. When you think about it all your assets are really part of your emergency fund. If you have a 6 month E fund and are out of work for 10 months - guess you are going to use other assets. It is a form of mental accounting which I understand and have used to some extent. You certainly don't want to spend it when that is not its intent. I guess my allocations were always equities/bonds/cash so I never had a separate E fund - just made sure I had a decent cash allocation.

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Re: What do you include in your asset allocation calculations?

Post by nisiprius » Mon Jan 30, 2017 3:32 pm

If it isn't liquid and doesn't have an easily-looked-up market value I don't include it. I don't include my house, because
  • I need it to live in,
  • I only need maybe 95% of it to live in but I have no way to click a link, sell 5% of it, and keep the rest,
  • The idiosyncratic risk of this particular house in this particular town is so high I can't model it or calculate correlation coefficients between it and anything else, and
  • There's no real way to know what it's worth, anyway--Zillow says one thing, my tax bill says another.
For the same reason I don't include Social Security because I don't know how I can sell a chunk of it to somebody else. I don't think it makes sense to consider Social Security as part of my bond allocation. It makes more sense to say it's low-risk income, I can deduct it from my expenses, and measure my investment portfolio for it's ability to meet the expenses that aren't met by Social Security.

Another reason is that absolutely everything I've ever read in retirement books about asset allocation is talking about securities and other liquid assets held in banks or brokerages.

I consider the point of asset allocation calculations is to judge the risk/volatility of those assets which are liquid, have a reliable value that can be realized on demand, that are available to use to meet living expenses.
Last edited by nisiprius on Mon Jan 30, 2017 3:38 pm, edited 3 times in total.
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Re: What do you include in your asset allocation calculations?

Post by Toons » Mon Jan 30, 2017 3:34 pm

stemikger wrote:
Toons wrote:Investments only.
:happy
+1

Me too. I just went back to 60/40 from 65/35. I only count investments. With a paid off mortgage, I don't need to shoot for the moon and take on more risks.


+1
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Re: What do you include in your asset allocation calculations?

Post by PhysicianOnFIRE » Mon Jan 30, 2017 4:22 pm

ff4930 wrote:
PhysicianOnFIRE wrote:Screenshots of my breakdown below.

I have some "play money" invested in a couple microbreweries, a couple 529 plans, but I don't include them in my "asset allocation" calculation. I do include them, along with two homes in my net worth calculation. If I had rental properties, I would include those as Real Estate when calculating asset allocation.

Image

Image

:beer
-PoF
PoF,

Any reason why you are overlapping Total US Stock with S&P 500?
Yes!

The same reason I have two international funds. Tax loss harvesting. I'm OK holding either or indefinitely, so I chose not to switch back to original positions after 31 days.

And yes, 8hgyro, beautiful Calibri.

:beer
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Re: What do you include in your asset allocation calculations?

Post by kelway » Mon Jan 30, 2017 4:50 pm

PhysicianOnFIRE wrote:
ff4930 wrote:
PhysicianOnFIRE wrote:Screenshots of my breakdown below.
Any reason why no small-blend and small-value? I think you're leaving money on the table for a higher risk allocation.

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Re: What do you include in your asset allocation calculations?

Post by kelway » Mon Jan 30, 2017 5:03 pm

Deleted
Last edited by kelway on Mon May 15, 2017 8:02 pm, edited 1 time in total.

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Re: What do you include in your asset allocation calculations?

Post by PhysicianOnFIRE » Mon Jan 30, 2017 10:21 pm

kelway wrote:
PhysicianOnFIRE wrote:
ff4930 wrote:
PhysicianOnFIRE wrote:Screenshots of my breakdown below.
Any reason why no small-blend and small-value? I think you're leaving money on the table for a higher risk allocation.
In the international? I do have a tilt to small-blend and small-value within my US stock portion. The portfolio might actually a bit more sliced and diced than I feel it needs to be. I have avoided duplicating the same asset classes that I have in taxable to reduce the likelihood of an accidental wash sale.

:beer
-PoF

Ari
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Re: What do you include in your asset allocation calculations?

Post by Ari » Wed Feb 01, 2017 2:54 am

rkhusky wrote:
Ari wrote:I pretty much only include my investment account. I don't include my emergency fund and I don't even include my retirement account, as that money cannot be accessed until I'm 65 (unless they raise the retirement age, which seems likely). My goal is set a long time before that, so I don't think it's relevant.
You should include your retirement account unless it is in a target retirement fund or a balanced fund, such that you never need to worry about rebalancing. IMO, you only need to compute your AA is if you plan to rebalance at some point.
It's the default government retirement fund, which is a leveraged stock fund (which decreases leverage and adds bonds as age 65 approaches), and in my investment account I'm 100% stocks, and just rebalance between stock markets with incoming funds.
All in, all the time.

Swampy
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Re: What do you include in your asset allocation calculations?

Post by Swampy » Sat Feb 04, 2017 2:46 pm

So, to be clear, there is some disagreement as to what is or is not included.

1. As I see it, a sum total of the estate includes stocks and bonds including ETF's and funds, REITS, CD's, Life cash value, CD's and other cash products, personal residence, investment real estate and exclude vehicles, collectibles and all the other 'stuff' that could essentially be valueless.

2. As far as investable net worth assets go, all the above can be included minus personal residence and life cash value.

3. As far as the investment portfolio goes, all the above as per #2 minus investment real estate.

4. Purists also wish to exclude CD's and all cash products (AKA emergency fund and 'dry powder') as well.

That said, going with any of the above choices can result in quite different asset allocations.

By going with #4, my allocation is essentially 40% equities and 60% bonds.
I figure that I've won the game and do not need to take additional risk to squeeze a little extra return but with a jump in volatility.
If you fail to plan, you plan to fail. | Failure is not an option. | If I have seen further, it is because I was carried on the shoulders of giants.

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