Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

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msterrr
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Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Mon Sep 25, 2017 3:37 am

I'm moving from an AA of 100% stock (all vanguard) to an AA of 35% stock / 65% bonds and alternatives. The primary goals of this move are (1) to improve downturn performance and (2) to reduce US market correlation. Shifting towards a higher weight of bonds in anticipation of retirement isn't an objective here - just looking for less volatility for peace of mind. Which of the portfolio allocations below would best serve my stated goals? I'm leaning towards #2. Any other insights or recommended tweaks to my approach :wink: ?

#1 Modified Swensen. Increased ITBs. Reduced US equities. -- Better downturn perf. Lower US mkt correlation
  • 35% Intermediate Bonds (VBIIX ~50/50 Int Term Treasury & Corporate)
    15% REIT (VGSIX)
    15% TIPS (VIPSX)
    15% US Stock Market (VTSMX)
    15% Intl Developed (VDVIX)
    05% Emerging Markets (VEIEX)
#2 Modified Swensen. Added LTBs. Reduced US equities. Reduced ITBs. Eliminated REITs. -- Best downturn perf. Lowest US mkt correlation.
  • 50% Long Term Treasury (VUSTX)
    15% TIPS (VIPSX)
    15% US Stock Market (VTSMX)
    15% Intl Developed (VDVIX)
    05% Emerging Markets (VEIEX)
Shifting towards a higher weight of bonds in anticipation of retirement isn't an objective in and of itself here. Just looking for less volatility.

EDIT:
Emergency funds: Six months of expenses in cash
Debt: None
Tax Filing Status: Married Filing Jointly
Tax Rate: 0% Federal, 0% State (maxing two i401k's mostly eliminates tax burden, still paying lots of FICA)
State of Residence: NC
Age: 34
Desired Asset allocation: 35% stocks / 65% bonds
Desired International allocation: >50% of stocks
Portfolio size: low six figures

Current retirement assets:
His i401k: 100% VTSMX (or similar US low cost index funds)
Her i401k: 100% VTSMX (or similar US low cost index funds)
Last edited by msterrr on Mon Sep 25, 2017 6:20 am, edited 1 time in total.

lazyday
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by lazyday » Mon Sep 25, 2017 5:46 am

Welcome.

I'm not sure you gave enough info for people to post on the big issues like moving from 0% to 50% or 65% fixed income, but others will probably ask about that. You could also give some of the info from the top thread "Asking Portfolio Questions".

A couple smaller things on Swensen: I believe his suggestion changed since the book, moving 5% REIT to EM. If you used that, you would have 10% in each. He also doesn't like corporate bonds, though maybe you do.
Just looking for less volatility
The second portfolio has a lot of exposure to inflation risk. TIPS dilute that risk but don't counter it, since they make up for inflation only in the TIPS allocation itself.

nativenewenglander
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by nativenewenglander » Mon Sep 25, 2017 5:59 am

Why not just go to Wellesley Income Fund? This has a proven track record of 50 years and actively managed, which is good for the bond portion of the mix.

sambb
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by sambb » Mon Sep 25, 2017 6:05 am

if this is in tax deferred (IRA, 401, etc.), i would just put it into lifestrategy conserv growth (50%) and wellesley (50%). done.

msterrr
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Mon Sep 25, 2017 7:07 am

lazyday wrote:
Mon Sep 25, 2017 5:46 am
I'm not sure you gave enough info for people to post on the big issues like moving from 0% to 50% or 65% fixed income, but others will probably ask about that. You could also give some of the info from the top thread "Asking Portfolio Questions".
I've added this info at the bottom of my original post.
lazyday wrote:
Mon Sep 25, 2017 5:46 am
A couple smaller things on Swensen: I believe his suggestion changed since the book, moving 5% REIT to EM. If you used that, you would have 10% in each. He also doesn't like corporate bonds, though maybe you do.
Yeah, the move was 5% REIT to EM, but the revised total was 15%/10% not 10%/10%. In #1 I went with the revised 15% REIT, but kept the original 5% EM.
lazyday wrote:
Mon Sep 25, 2017 5:46 am
Just looking for less volatility
The second portfolio has a lot of exposure to inflation risk. TIPS dilute that risk but don't counter it, since they make up for inflation only in the TIPS allocation itself.
True. I like the VUSTX credit quality, but the inflation risk is definitely too high. In light of those thoughts I'll revise #2 to:

#2 Modified Swensen. Added LTBs. Increased ITBs. Reduced US equities. Eliminated REITs. -- Best downturn perf. Lowest US mkt correlation.
25% Long Term Treasury (VUSTX)
25% Intermediate Bonds (VFITX ~100% Int Term Treasuries)
15% TIPS (VIPSX)
15% US Stock Market (VTSMX)
15% Intl Developed (VDVIX)
05% Emerging Markets (VEIEX)

msterrr
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Mon Sep 25, 2017 7:18 am

nativenewenglander wrote:
Mon Sep 25, 2017 5:59 am
Why not just go to Wellesley Income Fund? This has a proven track record of 50 years and actively managed, which is good for the bond portion of the mix.
VWINX only has ~6% non-US stock. Also, too many BBB / A bonds for my taste right now. Agreed that VWINX is a slam dunk for simplicity though 8-)

dbr
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by dbr » Mon Sep 25, 2017 7:54 am

msterrr wrote:
Mon Sep 25, 2017 3:37 am
I'm moving from an AA of 100% stock (all vanguard) to an AA of 35% stock / 65% bonds and alternatives. The primary goals of this move are (1) to improve downturn performance and (2) to reduce US market correlation. Shifting towards a higher weight of bonds in anticipation of retirement isn't an objective here - just looking for less volatility for peace of mind. Which of the portfolio allocations below would best serve my stated goals? I'm leaning towards #2. Any other insights or recommended tweaks to my approach :wink: ?

#1 Modified Swensen. Increased ITBs. Reduced US equities. -- Better downturn perf. Lower US mkt correlation
  • 35% Intermediate Bonds (VBIIX ~50/50 Int Term Treasury & Corporate)
    15% REIT (VGSIX)
    15% TIPS (VIPSX)
    15% US Stock Market (VTSMX)
    15% Intl Developed (VDVIX)
    05% Emerging Markets (VEIEX)
#2 Modified Swensen. Added LTBs. Reduced US equities. Reduced ITBs. Eliminated REITs. -- Best downturn perf. Lowest US mkt correlation.
  • 50% Long Term Treasury (VUSTX)
    15% TIPS (VIPSX)
    15% US Stock Market (VTSMX)
    15% Intl Developed (VDVIX)
    05% Emerging Markets (VEIEX)
Shifting towards a higher weight of bonds in anticipation of retirement isn't an objective in and of itself here. Just looking for less volatility.

Those two portfolios and dozens of other possibilities will all meet your requirements. You are either overthinking portfolio design or not thinking enough about what you really want to do with your money. Based on less downturn and lowest market correlation the obvious choice would be to put everything in total bond market or maybe even all in a TIPS fund, if those two things are really what you mean. Short term TIPS have little volatility in real dollars.

aristotelian
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by aristotelian » Mon Sep 25, 2017 7:58 am

You say this is not to shift for retirement purposes. Does that mean that this is a market timing move?

For "improve downturn performance" and "reduce market correlation," long term treasuries are no doubt the best bet. But you also say that you want to reduce volatility, and long term treasuries would be replacing market volatility with interest rate volatility. I like #2 for downturn performance and correlation purposes, but not for stability.

More details as to age, goals, and current investments would be helpful if you are seeking a specific recommendation.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by pkcrafter » Mon Sep 25, 2017 8:29 am

Hello msterrr,

What you are doing sounds like temporary risk evasion, a.k.a market timing. If you are worried about 100% stock, then that AA is just too high for your comfort zone.
35% Intermediate Bonds (VBIIX ~50/50 Int Term Treasury & Corporate)
15% REIT (VGSIX)
15% TIPS (VIPSX)
15% US Stock Market (VTSMX)
15% Intl Developed (VDVIX)
05% Emerging Markets (VEIEX)
This portfolio option is not 35% stock, it's 50% because REITS are stocks and have very high volatility too. In addition, the 50% stock would contain 30% REIT, which is twice what Swensen now recommends.

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.

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CWRadio
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by CWRadio » Mon Sep 25, 2017 8:39 am

What is current thinking about a CD ladder for the bond side of the portfolio?
Paul

lazyday
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by lazyday » Mon Sep 25, 2017 9:38 am

msterrr wrote:
Mon Sep 25, 2017 3:37 am
Tax Filing Status: Married Filing Jointly ....
Age: 34 ....
Portfolio size: low six figures
pkcrafter wrote:
Mon Sep 25, 2017 8:29 am
What you are doing sounds like temporary risk evasion, a.k.a market timing. If you are worried about 100% stock, then that AA is just too high for your comfort zone.
msterrr,

With equity so expensive today, it might make sense for some people to reduce risk by cutting the equity allocation. But dropping to 35% seems extreme in this case, and even 50% (including REIT) might be low. It's possible that during your lifetime, real stock prices will never again be as "low" as are now. So you might be stuck with your low allocation to equity, unless you are willing to buy back at a higher price.

Or are you ok holding this allocation forever?

If stocks were cheaper, what % equity would you be considering?

On the US vs Ex-US issue, I personally find nothing wrong with a moderate underweight to US equity. There is a significant tax cost though. For example, you can't take the foreign tax credit on shares in your tax advantaged accounts.

On Swensen, I think you're right, it was probably 20% in the book.

alex_686
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by alex_686 » Mon Sep 25, 2017 9:52 am

I like REITs. I overweight REITs in my portfolio. I believe that they are a excellent diversifier.

They are not bond alternatives. They have the same level of return and risk as equities. I could make a stronger argument for direct holding of real estate as a bond alternative. Still not a bond, but closer.

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welderwannabe
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by welderwannabe » Mon Sep 25, 2017 10:08 am

Everything is expensive today. Stocks and bonds.

I am just commenting on the bond portions. If you are gonna go heavy on bonds I would suggest a good measure of corporates, along the line of portfolio #1. I like the 50/50 mix of corporates/treasuries there. I am not a fan of portfolio #2 as it is 65% US Govt debt. When you reduce your stock holdings as much as you may be considering, yield on the fixed income side becomes important to keep your portfolio moving ahead in regards to inflation. I am not suggesting high yield here.

When someone is 70% + Equities I can see going with all treasuries for your bonds if one desires (not my cup of tea, but it is absolutely a valid strategy). However, when you are considering 35% equities I think a little more risk out of your bond holdings is in order.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

msterrr
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Mon Sep 25, 2017 10:42 pm

pkcrafter wrote:
Mon Sep 25, 2017 8:29 am
Hello msterrr,

What you are doing sounds like temporary risk evasion, a.k.a market timing. If you are worried about 100% stock, then that AA is just too high for your comfort zone.
Yes. My perceived risk from a 100% equity portfolio at this time is too high for my comfort zone so I'd like to hold more debt this year. I may shift back towards an unmodified Swensen with more equities later. I'm not trying to time the market as much as bring my perceived risk back to tolerable levels.
pkcrafter wrote:
Mon Sep 25, 2017 8:29 am
35% Intermediate Bonds (VBIIX ~50/50 Int Term Treasury & Corporate)
15% REIT (VGSIX)
15% TIPS (VIPSX)
15% US Stock Market (VTSMX)
15% Intl Developed (VDVIX)
05% Emerging Markets (VEIEX)
This portfolio option is not 35% stock, it's 50% because REITS are stocks and have very high volatility too. In addition, the 50% stock would contain 30% REIT, which is twice what Swensen now recommends.
I understand REITs are stock. I don't understand how you jumped from 15% to 30% REITs though.

msterrr
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Mon Sep 25, 2017 10:55 pm

lazyday wrote:
Mon Sep 25, 2017 9:38 am
With equity so expensive today, it might make sense for some people to reduce risk by cutting the equity allocation. But dropping to 35% seems extreme in this case, and even 50% (including REIT) might be low. It's possible that during your lifetime, real stock prices will never again be as "low" as are now. So you might be stuck with your low allocation to equity, unless you are willing to buy back at a higher price.

Or are you ok holding this allocation forever?
I am okay holding this allocation. If I want to increase my equity allocation at some point I am okay buying equities back at a higher price.
lazyday wrote:
Mon Sep 25, 2017 9:38 am
If stocks were cheaper, what % equity would you be considering?

On the US vs Ex-US issue, I personally find nothing wrong with a moderate underweight to US equity. There is a significant tax cost though. For example, you can't take the foreign tax credit on shares in your tax advantaged accounts.
If US equities were cheaper I'd be considering the current Swensen. 30% VTSMX, 15% VDVIX, 10% VEIEX, 15% VGSIX, 15% VFITX, 15% VIPSX.

rgs92
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by rgs92 » Mon Sep 25, 2017 11:01 pm

The thing that jumps out at me is that, at 34 with a low-six-figure portfolio, you are considering a 15% allocation to US Stocks.
That's next to nothing.

If you want this to be a permanent allocation, that is questionable.
If you plan to change to more US Stocks later, that is market-timing, which is also questionable.

It sounds as if you want to be more conservative, in which case a long-term position of your entire portfolio in Wellesley as suggested above is sensible, or perhaps a permanent allocation of, say, 45/55 stocks/bonds rebalanced each half-year or so as a rough equivalent using Total Stock and Bond Market funds for simplicity.

All those complexities of REITs/TIPS/Emerging Markets just don't seem to be likely IMHO to add to long term returns or to reduce volatility or make it easy to rebalance and keep track of things. It's just not worth it I believe.

I know you said you are OK holding a very low allocation of US stocks forever, or even buying them back at a *higher* price, but I just cannot see this as fruitful for the long term under any circumstances other than real economic calamity, and the real calamity could occur in 20-30 years when your retirement portfolio falls far short of what you need.

But good luck and I hope my advice helps you.

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steve roy
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by steve roy » Tue Sep 26, 2017 12:13 am

My suggestion? 60% Lifestrategy Consetvative Growth and 40% Wellesley. You could also build a Three Fund Portfolio plus Wellesley to lower costs a bit.

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steve roy
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by steve roy » Tue Sep 26, 2017 12:14 am

Yikes! A Dupe! (But not anymore).
Last edited by steve roy on Wed Sep 27, 2017 5:27 pm, edited 1 time in total.

msterrr
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Tue Sep 26, 2017 1:32 am

Thanks for all the insights. I'm going to go sit this year out with the below portfolio.

25% Long Term Treasury (VUSTX)
25% Intermediate Bonds (VFITX ~100% Int Term Treasuries)
15% TIPS (VIPSX)
15% US Stock Market (VTSMX)
15% Intl Developed (VDVIX)
05% Emerging Markets (VEIEX)

Also, I am 34, but I'm aiming to retire "early" in the next 5-7 years. Poor equity performance or overly conservative AA both have the potential to extend my timeline out a few years (which is acceptable), but I think the above AA best accomplishes my current goals - (1) to improve downturn performance and (2) to reduce US market correlation.

msterrr
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Tue Sep 26, 2017 2:06 am

alex_686 wrote:
Mon Sep 25, 2017 9:52 am
I like REITs. I overweight REITs in my portfolio. I believe that they are a excellent diversifier. They are not bond alternatives. They have the same level of return and risk as equities. I could make a stronger argument for direct holding of real estate as a bond alternative. Still not a bond, but closer.
Could you expand on your belief in REITs as an excellent diversifier? Are you holding VGSIX or something else?

inbox788
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by inbox788 » Tue Sep 26, 2017 3:04 am

msterrr wrote:
Tue Sep 26, 2017 1:32 am
Thanks for all the insights. I'm going to go sit this year out with the below portfolio.

25% Long Term Treasury (VUSTX)
25% Intermediate Bonds (VFITX ~100% Int Term Treasuries)
15% TIPS (VIPSX)
15% US Stock Market (VTSMX)
15% Intl Developed (VDVIX)
05% Emerging Markets (VEIEX)

Also, I am 34, but I'm aiming to retire "early" in the next 5-7 years. Poor equity performance or overly conservative AA both have the potential to extend my timeline out a few years (which is acceptable), but I think the above AA best accomplishes my current goals - (1) to improve downturn performance and (2) to reduce US market correlation.
Are you planning on making drastic shifts in AA every year? What is the size of your portfolio and will you continue this plan as it grows?

Strategy runs counter to the pick an AA and gradually change on your own time schedule, not the market.

https://www.bogleheads.org/wiki/Asset_allocation

Ron Scott
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by Ron Scott » Tue Sep 26, 2017 4:54 am

msterrr wrote:
Tue Sep 26, 2017 1:32 am
I'm going to go sit this year out with the below portfolio.

25% Long Term Treasury (VUSTX)
25% Intermediate Bonds (VFITX ~100% Int Term Treasuries)
15% TIPS (VIPSX)
15% US Stock Market (VTSMX)
15% Intl Developed (VDVIX)
05% Emerging Markets (VEIEX)

I think the above AA best accomplishes my current goals - (1) to improve downturn performance and (2) to reduce US market correlation.
I think your goals are a well-stated position on your current thinking and risk tolerance. The allocations you suggest hit the goals. Good to go...

lazyday
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by lazyday » Tue Sep 26, 2017 5:36 am

msterrr wrote:
Tue Sep 26, 2017 1:32 am
Also, I am 34, but I'm aiming to retire "early" in the next 5-7 years. Poor equity performance or overly conservative AA both have the potential to extend my timeline out a few years (which is acceptable)
Tax Filing Status: Married Filing Jointly ....
Portfolio size: low six figures
Maybe you're saving a huge amount each year, otherwise it would be surprising that you could retire so soon.

If equities forever stay as expensive as they are today, then we might expect a 3.7% real return globally (ignore Valuation Change). If bonds return 0% real forever, then a $1,000,000 portfolio might return 1000000 * .35 * .037 = 13000 a year, with no portfolio growth if that 13000 is spent. So you can spend $13,000 per year for two people, and adjust for inflation. You could spend down the portfolio over the next 60 years, so maybe you could spend $25,000 a year.

If valuations are stable for 7 years and then the market crashes just after you retire, then your portfolio will not support a $25000 withdrawal each year. Not even close. If you're not familiar with "sequence of returns risk" then you might google that or "safe withdrawal rate".

fundseeker
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by fundseeker » Tue Sep 26, 2017 5:44 am

That is quite a swing. I'm sure you're not the only one pulling out of the market, but I hope you are able to get back in at the right time. Just wondering how and when you decided 100% was a good idea, and why didn't you make this change a year or six months ago? I am with you on being nervous though, but my tweak has been to go from 60/40 down to 58/42. I may regret not following your lead though :). Good luck!

msterrr
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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Tue Sep 26, 2017 6:59 am

lazyday wrote:
Tue Sep 26, 2017 5:36 am
Maybe you're saving a huge amount each year, otherwise it would be surprising that you could retire so soon.
I've been investing 2/3 of income (after SE taxes).
lazyday wrote:
Tue Sep 26, 2017 5:36 am
If equities forever stay as expensive as they are today, then we might expect a 3.7% real return globally (ignore Valuation Change). If bonds return 0% real forever, then a $1,000,000 portfolio might return 1000000 * .35 * .037 = 13000 a year, with no portfolio growth if that 13000 is spent. So you can spend $13,000 per year for two people, and adjust for inflation. You could spend down the portfolio over the next 60 years, so maybe you could spend $25,000 a year.
Goal is 25,000 withdrawal yearly / 60 years :D - I'm expecting to end the savings stage with ~1/2 that portfolio aiming for a 4% SWR though.
lazyday wrote:
Tue Sep 26, 2017 5:36 am
If valuations are stable for 7 years and then the market crashes just after you retire, then your portfolio will not support a $25000 withdrawal each year. Not even close. If you're not familiar with "sequence of returns risk" then you might google that or "safe withdrawal rate".
The potential need to extend my timeline out a few years due to fluctuations in market performance is understood and acceptable.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by aristotelian » Tue Sep 26, 2017 8:11 am

msterrr wrote:
Mon Sep 25, 2017 10:42 pm

Yes. My perceived risk from a 100% equity portfolio at this time is too high for my comfort zone so I'd like to hold more debt this year. I may shift back towards an unmodified Swensen with more equities later. I'm not trying to time the market as much as bring my perceived risk back to tolerable levels.
It seems like you are trying to have it both ways. You are not doing a permanent allocation shift, but you aren't timing the market either. Well, which is it? If it's not permanent, what criteria would you use to rebalance back into stock?

Such a drastic shift seems to be more than just reducing your exposure, it is turning your strategy on its head.

I would suggest you do a risk tolerance questionnaire and really ask yourself the big questions about your approach to investing. Ask yourself about your need, willingness, and ability to take risk. Then write an Investment Policy Statement for yourself. Then develop a portfolio that is consistent with your IPS.

You are leading with the portfolio without thinking through the big picture, and that is a recipe for all kinds of behavioral mistakes, in my opinion.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by pkcrafter » Tue Sep 26, 2017 8:26 am

aristotelian wrote:
Tue Sep 26, 2017 8:11 am
msterrr wrote:
Mon Sep 25, 2017 10:42 pm

Yes. My perceived risk from a 100% equity portfolio at this time is too high for my comfort zone so I'd like to hold more debt this year. I may shift back towards an unmodified Swensen with more equities later. I'm not trying to time the market as much as bring my perceived risk back to tolerable levels.
It seems like you are trying to have it both ways. You are not doing a permanent allocation shift, but you aren't timing the market either. Well, which is it? If it's not permanent, what criteria would you use to rebalance back into stock?

Such a drastic shift seems to be more than just reducing your exposure, it is turning your strategy on its head.

I would suggest you do a risk tolerance questionnaire and really ask yourself the big questions about your approach to investing. Ask yourself about your need, willingness, and ability to take risk. Then write an Investment Policy Statement for yourself. Then develop a portfolio that is consistent with your IPS.

You are leading with the portfolio without thinking through the big picture, and that is a recipe for all kinds of behavioral mistakes, in my opinion.
msterrr, aristotelian's analysis is "on the money." You are approaching investing in a way that will significantly reduce returns over time.

If you have not yet explored our Wiki, here is a link.

https://www.bogleheads.org/wiki/Getting_started

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.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by Bfwolf » Tue Sep 26, 2017 8:33 am

aristotelian wrote:
Tue Sep 26, 2017 8:11 am
msterrr wrote:
Mon Sep 25, 2017 10:42 pm

Yes. My perceived risk from a 100% equity portfolio at this time is too high for my comfort zone so I'd like to hold more debt this year. I may shift back towards an unmodified Swensen with more equities later. I'm not trying to time the market as much as bring my perceived risk back to tolerable levels.
It seems like you are trying to have it both ways. You are not doing a permanent allocation shift, but you aren't timing the market either. Well, which is it? If it's not permanent, what criteria would you use to rebalance back into stock?

Such a drastic shift seems to be more than just reducing your exposure, it is turning your strategy on its head.

I would suggest you do a risk tolerance questionnaire and really ask yourself the big questions about your approach to investing. Ask yourself about your need, willingness, and ability to take risk. Then write an Investment Policy Statement for yourself. Then develop a portfolio that is consistent with your IPS.

You are leading with the portfolio without thinking through the big picture, and that is a recipe for all kinds of behavioral mistakes, in my opinion.
+1

OP, please consider rethinking your approach.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by bloom2708 » Tue Sep 26, 2017 8:34 am

This question/plan is a perfect example of too much thinking.

The plan doesn't reduce risk, it moves it around and attempts to hide it. It likely reduces the return and it will be very hard to stay with. Long treasuries. TIPS. REIT. Very little US stocks.Tilts. Gaps. I guess it has it "all".

A 50/50 3 fund portfolio would be a much better plan. Take your risk on the stock side of the portfolio.

I think Bogleheads exists to help people not do odd things. But, we can only give ideas. Don't just do something. Stand there.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by lazyday » Tue Sep 26, 2017 9:17 am

msterrr wrote:
Tue Sep 26, 2017 6:59 am
Goal is 25,000 withdrawal yearly / 60 years :D - I'm expecting to end the savings stage with ~1/2 that portfolio aiming for a 4% SWR though.
So $625,000 for two people, retiring around age 40? Are there other sources of income? Is it easy to go back to work after several years of retirement if the portfolio fails? Does the 4% withdrawal include luxuries that can be cut back, or is it a simplicity lifestyle already?

Most (or all?) SWR studies that found 4% to have worked historically were assuming a 30 year retirement. The historical SWR would be significantly lower for a longer withdrawal period, especially with a bond heavy portfolio.

4% barely succeeded (or in some studies, failed, depending on the assumptions) for retirements beginning some years in the mid to late 1960s. Today stocks are much more expensive than in the 60s, and nominal bond yields are lower.

Even without sequence of returns risk (assuming valuations just stay as they are) I don't think the proposed portfolio can support a 4% withdrawal rate for 60 years.
The potential need to extend my timeline out a few years due to fluctuations in market performance is understood and acceptable.
Maybe you could hold the 65% bond portfolio and delay retirement until stocks become cheap enough to move back to equities. You take a real risk that stocks do not become cheap again for much longer than "a few years".

I feel that there is very high risk today in holding a lot of equity. If US stocks become as cheap as they were in the early 1980s, we could see a 75% drop from today's price. Ex-US doesn't look as extremely expensive, but still pricey.

But moving away from equities can increase shortfall risk. I see this as a tradeoff. I don't know enough about your situation and personalities to judge, but it seems your tradeoff may be extreme.
aristotelian wrote:
Tue Sep 26, 2017 8:11 am
It seems like you are trying to have it both ways. You are not doing a permanent allocation shift, but you aren't timing the market either.
It's market timing:
If US equities were cheaper I'd be considering the current Swensen. 30% VTSMX, 15% VDVIX, 10% VEIEX, 15% VGSIX, 15% VFITX, 15% VIPSX.
I'm one of the minority here that thinks market timing can be ok in moderation, for some people, when markets reach extremes. Provided you are humble enough to accept that you could be completely wrong, and can accept the consequences of being wrong. For me, US vs Ex-US valuations might be at enough of an extreme to make a bet against US and underweight it. I'm not convinced that global equities are so expensive that market timing equity overall is worth the risk. And of course moving from 100% to 35% equity is anything but moderate!

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by alex_686 » Tue Sep 26, 2017 9:37 am

msterrr wrote:
Tue Sep 26, 2017 2:06 am
Could you expand on your belief in REITs as an excellent diversifier? Are you holding VGSIX or something else?
This point has been debated back and forth here on Bogleheads. The nub of the question is if REITs sector has a prescient low correlation to the rest of the equity market? If you believe that is true then you should overweight REITs. I believe this in part by theory, part by history. I am not going to delve into this issue unless you ask.

I assume you know that if you add a risky asset with a low correlation to the rest of your portfolio your total risk falls.

Some more random thoughts. I use VNQ, the Vanguard REIT ETF. Direct holdings of real estate tend to have bond like level or returns and risk. They are even a better diversifer than REITs, having an even lower correlation. The problem here is that you have to become a landlord, invest in illiquid instruments, and take on a high level of specific risk.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by lazyday » Wed Sep 27, 2017 5:50 am

msterrr,

Perhaps it might help to imagine that you had to set your AA today, and couldn’t ever change it again. Given today’s expensive markets, what AA would you choose for an unknown future?

Then you might use that AA as a starting point to choose an AA where you hope to increase equities someday if they are cheap enough.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Tue Oct 03, 2017 11:43 am

Thanks again for all the feedback in this thread. Learned quite a lot here and elsewhere in the past week :mrgreen:

I went with a 50/50 AA and stuck with Swensen's fixed income portfolio allocation (50/50 ITB/TIPS) and updated equity portfolio allocation.

My current AA is:
25% Intermediate Bonds (VFITX)
25% TIPS (VIPSX)
21% US Stock Market (VTSMX)
11% REIT (VGSIX)
11% Intl Developed (VDVIX)
07% Emerging Markets (VEIEX)

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by David Jay » Tue Oct 03, 2017 9:49 pm

Getting in and out of the market based on your instincts virtually guarantees underperformance. As Bernstein says: "...mistiming the market is probably the most frequent and severe form of permanent capital loss"

All the best, but I fear for your portfolio...
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by Valuethinker » Wed Oct 04, 2017 2:50 am

msterrr wrote:
Mon Sep 25, 2017 3:37 am
I'm moving from an AA of 100% stock (all vanguard) to an AA of 35% stock / 65% bonds and alternatives. The primary goals of this move are (1) to improve downturn performance and (2) to reduce US market correlation. Shifting towards a higher weight of bonds in anticipation of retirement isn't an objective here - just looking for less volatility for peace of mind. Which of the portfolio allocations below would best serve my stated goals? I'm leaning towards #2. Any other insights or recommended tweaks to my approach :wink: ?
REITs are more volatile than stocks as a whole. Look at that chart for 2008-09. The argument is that the income from REITs offsets the higher volatility of the share prices (vs the S&P500). However the yield on the VNQ/ US REIT index is at an all time low, so the total return picture going forward does not look that great. See threads by William Bernstein (also as wbern here, his earlier posting name).
#1 Modified Swensen. Increased ITBs. Reduced US equities. -- Better downturn perf. Lower US mkt correlation
  • 35% Intermediate Bonds (VBIIX ~50/50 Int Term Treasury & Corporate)
    15% REIT (VGSIX)
    15% TIPS (VIPSX)
    15% US Stock Market (VTSMX)
    15% Intl Developed (VDVIX)
    05% Emerging Markets (VEIEX)
#2 Modified Swensen. Added LTBs. Reduced US equities. Reduced ITBs. Eliminated REITs. -- Best downturn perf. Lowest US mkt correlation.
  • 50% Long Term Treasury (VUSTX)
    15% TIPS (VIPSX)
    15% US Stock Market (VTSMX)
    15% Intl Developed (VDVIX)
    05% Emerging Markets (VEIEX)
Shifting towards a higher weight of bonds in anticipation of retirement isn't an objective in and of itself here. Just looking for less volatility.
Contradictory statement? Higher weight of bonds generally means lower volatility (regardless of retirement status)-- unless we repeat the monetary conditions of the late 1970s/ early 80s (high inflation then superhigh interest rates to crush inflation).
EDIT:
Emergency funds: Six months of expenses in cash
Debt: None
Tax Filing Status: Married Filing Jointly
Tax Rate: 0% Federal, 0% State (maxing two i401k's mostly eliminates tax burden, still paying lots of FICA)
State of Residence: NC
Age: 34
Desired Asset allocation: 35% stocks / 65% bonds
Desired International allocation: >50% of stocks
Portfolio size: low six figures

Current retirement assets:
His i401k: 100% VTSMX (or similar US low cost index funds)
Her i401k: 100% VTSMX (or similar US low cost index funds)
There's nothing wrong with 35/ 65. International for an American investor is not as critical as for the rest of us, somewhere around 40% (of equity exposure) is probably the right tradeoff (assuming we are including Emerging Markets in that).

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by indexonlyplease » Wed Oct 04, 2017 5:56 am

alex_686 wrote:
Mon Sep 25, 2017 9:52 am
I like REITs. I overweight REITs in my portfolio. I believe that they are a excellent diversifier.

They are not bond alternatives. They have the same level of return and risk as equities. I could make a stronger argument for direct holding of real estate as a bond alternative. Still not a bond, but closer.
Hey alex

Why do you own REITs. Is it the income? Or long term return? Just asking. Also, what % do you like. Also, considering the REITs in total stock market.

Thanks,

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by indexonlyplease » Wed Oct 04, 2017 6:03 am

CWRadio wrote:
Mon Sep 25, 2017 8:39 am
What is current thinking about a CD ladder for the bond side of the portfolio?
Paul
I was thinking about a cd ladder with some extra cash I did not want to put in the market. But the rate only good rate is Ally 5 yr 2.25%. 150 day penalty. The 1,3 yr rates seem to low to build ladder. What do you think?

I did purchase a 5 yr cd at Ally.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by pptiger » Wed Oct 04, 2017 7:09 am

What if the market keeps going up for another one or two years and the bottom of the next correction is still higher than the current price?

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by midareff » Wed Oct 04, 2017 7:14 am

pptiger wrote:
Wed Oct 04, 2017 7:09 am
What if the market keeps going up for another one or two years and the bottom of the next correction is still higher than the current price?
How does that old saying go........ What if a frog had wings?

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by pptiger » Wed Oct 04, 2017 7:17 am

midareff wrote:
Wed Oct 04, 2017 7:14 am
pptiger wrote:
Wed Oct 04, 2017 7:09 am
What if the market keeps going up for another one or two years and the bottom of the next correction is still higher than the current price?
How does that old saying go........ What if a frog had wings?
My point exactly.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by midareff » Wed Oct 04, 2017 7:20 am

pptiger wrote:
Wed Oct 04, 2017 7:17 am
midareff wrote:
Wed Oct 04, 2017 7:14 am
pptiger wrote:
Wed Oct 04, 2017 7:09 am
What if the market keeps going up for another one or two years and the bottom of the next correction is still higher than the current price?
How does that old saying go........ What if a frog had wings?
My point exactly.
LOL, and nobody knows nothing. My crystal ball has been murky so long I stopped looking at it. Pick an AA that lets you SWAN and forgetaboutit.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Wed Oct 04, 2017 9:17 am

David Jay wrote:
Tue Oct 03, 2017 9:49 pm
Getting in and out of the market based on your instincts virtually guarantees underperformance. As Bernstein says: "...mistiming the market is probably the most frequent and severe form of permanent capital loss"
That's exactly why I landed at my final AA. I'm reducing my overall equity exposure for the long term so I don't feel the urge to act based on instincts. I'm also no longer trying to tweak the Swensen portfolio allocations for what I perceive current conditions to be.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by alex_686 » Wed Oct 04, 2017 10:01 am

indexonlyplease wrote:
Wed Oct 04, 2017 5:56 am
Why do you own REITs. Is it the income? Or long term return? Just asking. Also, what % do you like. Also, considering the REITs in total stock market.
Income nor long term is the correct metric because, after all, dividends are irrelevant. At this stage of my life I don't need to do any liability matching, so not short term investing. The correct question is the risk adjusted return you need your portfolio to generate. That is, does adding REITs increase my returns and lower my risk? Yes it does. See my first post on why I think REITs are a unique diversifier.

I have about 10% of domestic equity, or 5% of total equity, in REITs. That is above and beyond the standard weight in the index funds. I

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by dbr » Wed Oct 04, 2017 10:20 am

alex_686 wrote:
Wed Oct 04, 2017 10:01 am
indexonlyplease wrote:
Wed Oct 04, 2017 5:56 am
Why do you own REITs. Is it the income? Or long term return? Just asking. Also, what % do you like. Also, considering the REITs in total stock market.
Income nor long term is the correct metric because, after all, dividends are irrelevant. At this stage of my life I don't need to do any liability matching, so not short term investing. The correct question is the risk adjusted return you need your portfolio to generate. That is, does adding REITs increase my returns and lower my risk? Yes it does. See my first post on why I think REITs are a unique diversifier.

I have about 10% of domestic equity, or 5% of total equity, in REITs. That is above and beyond the standard weight in the index funds. I
Exactly. Assets are not held in isolation but as part of a portfolio and the properties of the whole portfolio define the outcome of investing.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by pkcrafter » Wed Oct 04, 2017 11:40 am

msterrr wrote:
Tue Oct 03, 2017 11:43 am
Thanks again for all the feedback in this thread. Learned quite a lot here and elsewhere in the past week :mrgreen:

I went with a 50/50 AA and stuck with Swensen's fixed income portfolio allocation (50/50 ITB/TIPS) and updated equity portfolio allocation.

My current AA is:
25% Intermediate Bonds (VFITX)
25% TIPS (VIPSX)
21% US Stock Market (VTSMX)
11% REIT (VGSIX)
11% Intl Developed (VDVIX)
07% Emerging Markets (VEIEX)
This looks like a good final portfolio while keeping in mind that there is no perfect portfolio. Congratulations on your decision. Now, all you have to do is stay with it through all market gyrations and all the noise created by nervous investors and sly insiders who want to shake things up and make investors nervous.


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.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by indexonlyplease » Wed Oct 04, 2017 3:03 pm

alex_686 wrote:
Wed Oct 04, 2017 10:01 am
indexonlyplease wrote:
Wed Oct 04, 2017 5:56 am
Why do you own REITs. Is it the income? Or long term return? Just asking. Also, what % do you like. Also, considering the REITs in total stock market.
Income nor long term is the correct metric because, after all, dividends are irrelevant. At this stage of my life I don't need to do any liability matching, so not short term investing. The correct question is the risk adjusted return you need your portfolio to generate. That is, does adding REITs increase my returns and lower my risk? Yes it does. See my first post on why I think REITs are a unique diversifier.

I have about 10% of domestic equity, or 5% of total equity, in REITs. That is above and beyond the standard weight in the index funds. I
I get it. I have read what you are talking about. Makes sense. Also, 5% of total equity is conservative I believe if I am thinking correctly. I have seen 10 and 15 of total.

Thanks,

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by alex_686 » Wed Oct 04, 2017 5:10 pm

indexonlyplease wrote:
Wed Oct 04, 2017 3:03 pm
I get it. I have read what you are talking about. Makes sense. Also, 5% of total equity is conservative I believe if I am thinking correctly. I have seen 10 and 15 of total.
It is not conservative, it is optimal. Mean-variant efficient. Depending upon the numbers you plug in on correlations one gets 10% to 20% of domestic equity. I have other exposure to direct real estate - home and rental property.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by msterrr » Thu Oct 05, 2017 5:16 am

alex_686 wrote:
Wed Oct 04, 2017 5:10 pm
indexonlyplease wrote:
Wed Oct 04, 2017 3:03 pm
I get it. I have read what you are talking about. Makes sense. Also, 5% of total equity is conservative I believe if I am thinking correctly. I have seen 10 and 15 of total.
It is not conservative, it is optimal. Mean-variant efficient. Depending upon the numbers you plug in on correlations one gets 10% to 20% of domestic equity. I have other exposure to direct real estate - home and rental property.
Swensen originally recommended REITs as 40% of domestic equity (30% DOM / 20% REITs). His updated recommendations are for REITs as 33% of domestic equity (30% DOM / 15% REITs).

If I'm understanding you correctly you're saying that you believe that REITs are useful for diversification, *but* you also believe that the full benefit can be achieved by holding REITs at a much lower 10-20% of domestic equity? So for a total 45% domestic equity allocation you'd personally choose a 40% DOM / 5% REIT to 35% DOM / 10% REIT split?

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by alex_686 » Thu Oct 05, 2017 8:12 am

msterrr wrote:
Thu Oct 05, 2017 5:16 am
If I'm understanding you correctly you're saying that you believe that REITs are useful for diversification, *but* you also believe that the full benefit can be achieved by holding REITs at a much lower 10-20% of domestic equity? So for a total 45% domestic equity allocation you'd personally choose a 40% DOM / 5% REIT to 35% DOM / 10% REIT split?
I don't know Swensen reasoning so I can't comment on that.

I am working off of memory here. If REITs offer a slightly lower return and slightly lower volatility than the S&P 500 and if the correlation is about .7 then the optional holdings is somewhere between 10% to 20%. A note on mean variance portfolio optimization - it is very sensitive to inputs. Change them slightly and you get wildly different results. I will say that a 20% REIT allocation gets you to 9% under your scenario, so 10% would be at my upper limit for my reallocation bands.

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Re: Shifting 100% Stock → 35% Stock & 65% Bonds / REITs

Post by Slothmeister » Thu Oct 05, 2017 9:11 am

I hope msterr invested in Admiral shares as it sounded like he/she had enough for them.

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