Altering asset allocation to suit joint views...advice?

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AustenNut
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Altering asset allocation to suit joint views...advice?

Post by AustenNut » Wed Apr 12, 2017 11:13 pm

Back when I first discovered Bogleheads years ago, I came up with an Investment Policy Statement (IPS) that my DH agreed to. However, he's an agreeable guy and didn't have as much interest in personal finance, so there was no discussion about it, just assent. Over the years, he has become much more interested in our finances and is not as comfortable with the IPS, more particularly the asset allocation. I'm okay with changing our IPS at this time, because really, this is the first time that it will truly be a joint IPS, and I think that both of us should be fully behind our plan.

That being said, however, I want to make sure that there's no recency bias or other issues coming into play in deciding our plan. Also, are there general questions that you more experienced Bogleheads have to help tease out a partner's thoughts and wishes? Issues we should both think about and discuss?


More detailed info:

My asset allocation was: 50% equities in international, 50% in domestic, and fixed assets were to remain at a set percentage for a decade, and then increase by 10% as each new decade range was hit.

Issues that have arisen are:

1) When it was time to do a shift in the fixed assets, he was not as comfortable with it as it seemed like a big jump. In conversations, we decided that it would probably be easier for his mindset to do an age - x type of allocation, where the percentage only changes 1% each year rather than no change for 9 years and then a 10% jump. So this issue seems solved.

2) He wants a larger percentage of our equities purchases to go toward domestic stocks, admittedly, because during this time the domestic market has far outperformed the international one. I want to make sure that whatever percentage we choose sticks, as I realize that maintaining an asset allocation is important rather than just changing it based on whatever is currently doing well. (At the moment it looks like we might compromise at 35% international, though he'd prefer even less.)

3) We had discussed doing our average age - 10 as our percentage of fixed assets, yet again, I think he feels this number is high and would rather pursue a more aggressive strategy, as he is seeking to maximize gains, and doesn't see fixed assets as an important component of the portfolio, as they don't ever do much in the way of big gains.


Any advice that can be provided on how we can best accomplish a joint IPS/asset allocation we're both happy with would be greatly appreciated.

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Re: Altering asset allocation to suit joint views...advice?

Post by AlohaJoe » Wed Apr 12, 2017 11:51 pm

AustenNut wrote:2) He wants a larger percentage of our equities purchases to go toward domestic stocks, admittedly, because during this time the domestic market has far outperformed the international one.
Other than walking someone through the year-by-year returns in the 2000s when foreign outperformed and trying to make them really understand what it would feel like to have an entire decade of domestic underperforming foreign, I'm not sure what can really be done to avoid any recency-bias performance chasing when deciding the domestic/international split.
he is seeking to maximize gains, and doesn't see fixed assets as an important component of the portfolio, as they don't ever do much in the way of big gains.
Bonds have outperformed stocks over the past 30 years so he clearly has no idea what he's talking about.

It is hard to tell from your post how recent his interest in the subject is and how deep his knowledge. Since your plan has been in place for years, I'd be hesitant to make any big changes until he's been thinking about it for a few years.

One other thing I'd throw in: there's a fair amount of research showing that women are basically better at financial planning than men because men (on average, obviously there is a lot of variation) take too many risks, trade too much, don't stay the course, and so on. Your description of his desire to "maximise gain" makes him sound like a stereotypical man, which is another reason to be very gradual and considered with any changes you make.

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randomizer
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Re: Altering asset allocation to suit joint views...advice?

Post by randomizer » Thu Apr 13, 2017 12:16 am

It is very hard to change other people's views. You can lead a horse to water but you can't make it drink...

I would suggest getting your DH to read some books on the subject, but I don't know if that would help.
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nisiprius
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Re: Altering asset allocation to suit joint views...advice?

Post by nisiprius » Thu Apr 13, 2017 6:34 am

AlohaJoe wrote:...Bonds have outperformed stocks over the past 30 years...
I like bonds and I'm a very conservative investor, but I would have to say that's not so. In order to go back 30 years with real-world funds, I used Vanguard 500 Index instead of Total Stock, and Vanguard GNMA Fund instead of Total Bond, but the results would be about the same for anything similar--the green line is a reasonably representative for "stocks," orange for "bonds," and, you know what, it's just like every book says. Yep, stocks have been riskier. Yep, stocks have been risky in absolute terms, quite scary when gauged by my personal standards. Yep, stocks fluctuate so much that even over long periods of time there have been bad moments when stocks were below bonds. And yep, overall, stocks have had higher long-term returns than bonds.

At the very bottom of 2008-2009 it was true that bonds had outperformed stocks for thirty years, which stunned people who'd been led to believe that couldn't happen. But it's not true as of today.

The general phenomenon--the stock line looks like a ball bouncing on top of the bond line, and hitting the bond line from time to time--has been pretty much true, and it sets a kind of bounds on the risk. On the one hand, for randomly chosen periods in the US past, it's been true that the chances of stocks underperforming bonds has been small. There hasn't been much risk that you'd end up worse with stocks. On the other hand, it's been true that you couldn't count on or plan on stocks to outperform by much. For planning purposes, you can't do things like save at a lower rate and make up for it by saving more aggressively; that idea wouldn't have worked.

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nisiprius
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Re: Altering asset allocation to suit joint views...advice?

Post by nisiprius » Thu Apr 13, 2017 7:00 am

As for the joint views... I'm afraid I can't testify from personal experience, as "my wife lets me do all that stuff" and I keep forcing her to read the Vanguard statements, and insist that she log into her Vanguard account (which has view-and-transact authority on my account) at least once a year and take $100 out of it to make sure she knows how to do it and that software rot, version skew, and cookie expiration have not created any stumbling blocks.

One thing to be said is that it honestly does not sound as if your differences are large. One stupidly obvious idea, I can't imagine if this would work in practice, would be, in some manner, to split your assets in two and have each of you manage half.

Another thing to be said is that maybe you could each tolerate using a target-date fund, and, either by choosing different fund families, or by choosing different retirement year fund names, one of you could lean more conservative than the other.

A final thing to be said is that if you play with the numbers--and I suggest PortfolioVisualizer.com, it's a neat tool--a difference of 10%-of-portfolio in stock allocation, or the difference between 50/50 US/international and, say, even 80/20 US/international--has not really made much difference. Seriously. Take an actual look.

Portfolio 1: 30% VTSMX, 30% VGTSX, 40% VBMFX (60/40 stocks/bonds with 50/50 US/international in the stocks).
Portfolio 2: 25% VTMSX, 25% VGTSX, 50% VBMFX (50/50 stocks/bonds keeping US/international unchanged)
Portfolio 3: 48% VTSMX, 12% VGTSX, 40% VBMFX (keeping 60/40 stocks/bonds, cutting international to 80/20 within the stocks)

Click here

Image

There's a lot to look at there and of course there is a difference which may or may not continue in the future, but I'd call your attention to a couple of things.

First, all three portfolios returned "six or seven percent." Not three percent; not ten percent; six or seven. Over ten years, all of them more than tripled your money, but none of them quadrupled it. In the big scheme of things: about the same.

Second, before getting too excited over the difference of $5,000 in the final numbers of, keep in mind that all of these portfolios saw about 30% "drawdowns" during 2008-2009. In other words--figure out how you want to measure this--but it's clear that the ups and downs during that ten years period, for any of those portfolios, was several times bigger than the final difference.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Altering asset allocation to suit joint views...advice?

Post by randomizer » Thu Apr 13, 2017 7:41 am

Thank you nisiprius for your ever-illumunating posts. I always feel enriched by your patient teaching, even when I'm not the original poster who asked the question.
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Re: Altering asset allocation to suit joint views...advice?

Post by harvestbook » Thu Apr 13, 2017 7:50 am

Sounds like a nice case of recency bias--paying attention to the last few years only will of course make you think the US stock market is the only sensible game in town. It's quite possible international stocks are set for a decade of outperforming the US (a number of analysts suggest such a scenario, but in truth no one knows.) It's important to note that the period you use for back-testing will always give you a different picture of reality, and of course no tables or charts can predict the future. (I'd also suggest Your Money and Your Brain by Jason Zweig, since behavior is at least as important, if not more, than asset allocation).

But I'd rather be happy than right, so I'd attempt to split the difference. While money causes problems in many marriages, it can also be a great way to strengthen a relationship through growth, learning, and compromise. It did in mine. Good luck!
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Re: Altering asset allocation to suit joint views...advice?

Post by BL » Thu Apr 13, 2017 8:12 am

A couple things I thought of as we compromise as well:

Have him solely responsible for one account (his IRA?), maybe just with contributions to start with. The idea is to make changes slowly. Waiting 6 months to make a change is a good practice.

Or perhaps a <5% "play account" where he can do whatever he chooses and see the results.
Some of us have to learn by doing. Don't add to it if you lose money!

I wouldn't sell off international but perhaps only buy US and bonds for a while. That would slowly dilute the international, but no sudden moves while International takes off. International has been going great for a little while, and before that as well except for a few bad recent years. Perhaps change AA slowly like you decided to do with bonds? 1% a year, or whatever.

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Re: Altering asset allocation to suit joint views...advice?

Post by dbr » Thu Apr 13, 2017 8:27 am

AustenNut wrote:
1) When it was time to do a shift in the fixed assets, he was not as comfortable with it as it seemed like a big jump. In conversations, we decided that it would probably be easier for his mindset to do an age - x type of allocation, where the percentage only changes 1% each year rather than no change for 9 years and then a 10% jump. So this issue seems solved.

Right. It matters not at all anyway.

2) He wants a larger percentage of our equities purchases to go toward domestic stocks, admittedly, because during this time the domestic market has far outperformed the international one. I want to make sure that whatever percentage we choose sticks, as I realize that maintaining an asset allocation is important rather than just changing it based on whatever is currently doing well. (At the moment it looks like we might compromise at 35% international, though he'd prefer even less.)

If this is really because of recent results there should be encouragement to take a longer and more objective view. However, whether one is 50% international, 35% international, or 25% international is a minor issue.

3) We had discussed doing our average age - 10 as our percentage of fixed assets, yet again, I think he feels this number is high and would rather pursue a more aggressive strategy, as he is seeking to maximize gains, and doesn't see fixed assets as an important component of the portfolio, as they don't ever do much in the way of big gains.

He is absolutely correct that this is about how much return you need and how much uncertainty in getting that return you are willing to tolerate. Age formulas are not how to do that problem, so he is "right" and you are "wrong." But, he is also wrong by being simple minded about "more return" without considering risk. A better thought process would be the need/ability/willingness framework. Larry Swedroe discusses that in some of his books. The crux of the issue is to look at investment models that show the range of outcomes likely to materialize at different asset allocations, amount of saving, and length of time. The other factor, willingness, is how able you would be to stay with the plan if things don't go well for awhile. Ability assesses how able you would be to cope if things don't go well for longer than awhile.


Any advice that can be provided on how we can best accomplish a joint IPS/asset allocation we're both happy with would be greatly appreciated.

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Re: Altering asset allocation to suit joint views...advice?

Post by aristotelian » Thu Apr 13, 2017 8:31 am

I think you need a meta-IPS, that is, a statement of how the two of you decide the IPS itself. You could consider your portfolio separately and each manage your own portfolios. If you think your husband is too aggressive, you could choose to overcompensate and be doubly conservative. You could view your assets as one big portfolio and agree to split the difference whenever there is a difference. You will probably never agree but you can agree to disagree and compromise.

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Re: Altering asset allocation to suit joint views...advice?

Post by AlohaJoe » Thu Apr 13, 2017 10:24 am

nisiprius wrote:
AlohaJoe wrote:...Bonds have outperformed stocks over the past 30 years...
I like bonds and I'm a very conservative investor, but I would have to say that's not so.
Challenge accepted!

(Actually my main point was really that the OP's husband almost certainly has no idea how bonds & equities really behave in the historical record, since the description in the OP makes it sound like he's parroting stereotypical investing newbie stuff and I was a bit hyperbolic & imprecise with my data. All of the below should really be considered an academic digression....)

Though I agree claims like this are very start/end date sensitive, it wasn't just "at the bottom of 2008". Between 1981 and 2011, 20-year bonds outperformed the S&P 500. Between 1969 and 2008, 20-year bonds outperformed the total stock market, which was an even longer period -- basically someone's entire investing life. What's more, we only have to look beyond the US to frequently see bonds outperforming stocks. And not just in the usual suspect case of Japan: EM bonds consistently outperform EM stocks.

Over shorter periods of time, 20-year bonds also beat the S&P 500 from 2006 to 2016. None of which is a surprise to most of us -- but the OP's husband comes across as the kind of naive investor that WOULD be surprised by a 10-year losing streak.

Shorter-term bonds don't have quite the impressive resume but they often don't lose to stocks by very much in many periods.

Corporate bonds don't get talked about much on Bogleheads -- and they certainly haven't done much in the past 20 or 30 years that is particularly impressive -- but corporate bonds also outperformed US stocks over various significant periods of time.

And finally, the OP said her husband...
doesn't see fixed assets as an important component of the portfolio, as they don't ever do much in the way of big gains.
When US bonds just delivered over 10% a year for 3 decades, most people would argue the OP's husband's claim is a bit suspect.

All of OP's husband's beliefs aren't the end of the world -- none of us know everything and we all knew less before we started coming to Bogleheads. But it just another reason to be cautious about making changes quickly when you realise there is so much out there to learn & understand.....

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Re: Altering asset allocation to suit joint views...advice?

Post by NiceUnparticularMan » Thu Apr 13, 2017 10:41 am

I'd negotiate the best "deal" you can get, then just do it.

Maybe some recency bias will influence exactly where that deal lands, but as another poster pointed out, within a pretty broad range, outcomes can end up broadly similar, and no one really knows the optimal mix for the future. So I view a conversation like "35% Intl versus 50% Intl" as ultimately having pretty low stakes. More important I think is to make sure this is a one-time thing, you and don't keep re-negotiating down the road.

I do agree this would be more of a problem if one of you was, say, 50% Intl and the other 0% Intl, or 50% bonds and the other 0% bonds at a certain time, and no one wanted to budge. But if you are both willing to compromise, and in fact you really aren't ending up that far off from your original preference, I think that is a reasonable result.

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Re: Altering asset allocation to suit joint views...advice?

Post by cadreamer2015 » Thu Apr 13, 2017 11:37 am

My DW is more conservative than I am, so we have invested her IRA in 50% Wellington and 50% Wellesley. When I look at our retirement assets holistically, I manage my IRA to give the total retirement assets the asset allocation I think is appropriate, which has somewhat more exposure to equities and international equities at 30% of total equities. Of course this means that my own retirement assets are more risky and more international than DW's, but this has worked for us.
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Re: Altering asset allocation to suit joint views...advice?

Post by KATNYC » Thu Apr 13, 2017 12:26 pm

Following along since I predict we will end up having this same conversation in a few years.

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Re: Altering asset allocation to suit joint views...advice?

Post by KATNYC » Thu Apr 13, 2017 12:32 pm

nisiprius wrote:As for the joint views... I'm afraid I can't testify from personal experience, as "my wife lets me do all that stuff" and I keep forcing her to read the Vanguard statements, and insist that she log into her Vanguard account (which has view-and-transact authority on my account) at least once a year and take $100 out of it to make sure she knows how to do it and that software rot, version skew, and cookie expiration have not created any stumbling blocks.

One thing to be said is that it honestly does not sound as if your differences are large. One stupidly obvious idea, I can't imagine if this would work in practice, would be, in some manner, to split your assets in two and have each of you manage half.

Another thing to be said is that maybe you could each tolerate using a target-date fund, and, either by choosing different fund families, or by choosing different retirement year fund names, one of you could lean more conservative than the other.

A final thing to be said is that if you play with the numbers--and I suggest PortfolioVisualizer.com, it's a neat tool--a difference of 10%-of-portfolio in stock allocation, or the difference between 50/50 US/international and, say, even 80/20 US/international--has not really made much difference. Seriously. Take an actual look.

Portfolio 1: 30% VTSMX, 30% VGTSX, 40% VBMFX (60/40 stocks/bonds with 50/50 US/international in the stocks).
Portfolio 2: 25% VTMSX, 25% VGTSX, 50% VBMFX (50/50 stocks/bonds keeping US/international unchanged)
Portfolio 3: 48% VTSMX, 12% VGTSX, 40% VBMFX (keeping 60/40 stocks/bonds, cutting international to 80/20 within the stocks)

Click here

Image

There's a lot to look at there and of course there is a difference which may or may not continue in the future, but I'd call your attention to a couple of things.

First, all three portfolios returned "six or seven percent." Not three percent; not ten percent; six or seven. Over ten years, all of them more than tripled your money, but none of them quadrupled it. In the big scheme of things: about the same.

Second, before getting too excited over the difference of $5,000 in the final numbers of, keep in mind that all of these portfolios saw about 30% "drawdowns" during 2008-2009. In other words--figure out how you want to measure this--but it's clear that the ups and downs during that ten years period, for any of those portfolios, was several times bigger than the final difference.
This is incredibly helpful. Thanks for sharing.

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Re: Altering asset allocation to suit joint views...advice?

Post by AustenNut » Thu Apr 13, 2017 9:05 pm

Thank you all for your thoughtful replies. In relation to some of the speculation about DH's interest and knowledge of personal finance, I would say he has been interested for approximately two years. He has a taxable account for "play" money and we each have a SEP IRA from part-time jobs (with relatively small amounts of $) that is invested how we each wish, kind of like more "play" money. I certainly think that compromise is possible, but based on the advice here, will plan to have us reallocate slowly. Today we discussed the possibility of doing a target fund, simply in order to take out some of the rebalancing issues and danger of wanting to tinker with the allocations later on. No decisions yet, but lots of food for thought. Thank you!

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