Asset allocation for 5% return

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Jimsad
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Asset allocation for 5% return

Post by Jimsad » Sun Nov 12, 2017 2:42 pm

Hi everyone .
I am in a situation where I need to manage an investment account to get 5% annual yearly return .
I plan to do this with low cost index funds or ETFs at one of the major brokerages like Vanguard, Fidelity or Schwab.
What asset allocation of funds do you think would have best chance of achieving this return ?
I would appreciate your input.

jayk238
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Re: Asset allocation for 5% return

Post by jayk238 » Sun Nov 12, 2017 2:48 pm

I'm not remotely an expert on this but-

I think its going to be really hard for anyone to predict the exact breakdown for 5%. I mean- no one can really predict future markets. They can only tell you what prior years returned 5%. A lot of the vanguard funds I see have lifetime returns of 5 %. I would look at those.

However, I wouldnt go into it expecting that much- just have the hope for that return over time but dont expect it I guess.

delamer
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Re: Asset allocation for 5% return

Post by delamer » Sun Nov 12, 2017 2:55 pm

The likelihood of achieving 5% varies widely with the time period (5 years versus 30 years versus 50 years). It also depends on the risk you are willing to take -- how important is it to preserve principal?

And there is a big difference between an average annual return of 5% for a period versus a consistent 5% return year-in-and-year-out over the same period.

https://personal.vanguard.com/us/insigh ... llocations
Last edited by delamer on Sun Nov 12, 2017 2:59 pm, edited 1 time in total.

Newone88
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Re: Asset allocation for 5% return

Post by Newone88 » Sun Nov 12, 2017 2:58 pm

Agree with what has already been said. We need a little more information such as your age, risk tolerance, etc.
And I assume you mean 5% real return (% return minus inflation)?

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Sandtrap
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Re: Asset allocation for 5% return

Post by Sandtrap » Sun Nov 12, 2017 3:04 pm

Some helpful links:
Bogle Philosophy
https://www.bogleheads.org/wiki/Bogleh ... hilosophy
Here are links to the wiki's "Getting Started" and "Investing Startup Kit" pages:
https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Bogleh ... rt-up_kit
Define General Investment Goals and Objectives
https://www.bogleheads.org/wiki/Invest ... statement
Outline of Investing
https://www.bogleheads.org/wiki/Outline_of_investing
Suggested Reading List
https://www.bogleheads.org/RecommendedReading.php
What the experts say about investing
https://www.bogleheads.org/wiki/What_ ... investing

This: > > > > > >
Asking Portfolio Questions
https://www.bogleheads.org/forum/viewt ... =1&t=6212

Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Sun Nov 12, 2017 3:12 pm

This is a type of defined benefit plan account .
The account is to be credited with a guaranteed interest rate of 5% for each year in existence .
So I am trying to figure out how best to achieve this .
Would be ok if I can come close ,like 4% return .
Do not really desire a higher return than 5% as that would decrease the amount that can be contributed to the account the following year

Lindawilliams1960
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Re: Asset allocation for 5% return

Post by Lindawilliams1960 » Sun Nov 12, 2017 3:14 pm

Agree with the comments above that it will be difficult to predict 5% certain return year after year. You may end up averaging more than 5% in stock funds but you may have down years.
In fixed income you can not get 5% in investment grade funds.
You can get 5% return in some junk bond funds but you take higher risk.
One category that you may want to explore is floating rate bank loan funds that several fund families offer. There is no interest rate risk and you can get abut 5% yield.

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Kevin M
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Re: Asset allocation for 5% return

Post by Kevin M » Sun Nov 12, 2017 3:27 pm

There's no investment currently available that can guarantee a 5% annual return. To have a chance at the return, you must take some risk. This means that you might have an expected return in the ballpark of 5%, but this comes with a wide dispersion of possible returns, meaning that you could end up earning more or less than 5% over whatever time period is of interest.

Another issue is that not only is there uncertainty due to the dispersion of possible/probably returns, but there's uncertainty in the estimate of expected return itself. There is ongoing debate here about expected returns for various asset classes, so good luck with consensus on that.

For certainty in nominal terms, or as close as you can come to it, you're looking at nominal Treasuries or CDs. You can see Treasury rates here: Daily Treasury Yield Curve Rates. As you can see, even if you go with the maximum term of 30 years, you're looking at less than 3%.

You can earn somewhat more in CDs. For example, the 5-year Treasury yield is 2.06% as of 11/10/2017, while you can earn about 2.5% in a good CD purchased directly from a bank or credit union, and about 2.40% in a new-issue brokered CD from Vanguard.

For certainty in real (inflation-adjusted) terms, TIPS (or I Bonds) are an option. The current TIPS rates are shown here: Daily Treasury Real Yield Curve Rates.

Real return probably is of more interest than nominal return. So with 5% nominal at an estimated inflation rate of 2%, you're looking at 3% real. Even the 30-year TIPS currently yields less than 1% real. Some will give you an expected 10-year return for US stocks of say 3-3.5%, while others might say it's more like 5% or even higher. So you're probably looking at 60-100% in stocks to get an expected nominal return of 5%.

Kevin
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Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Sun Nov 12, 2017 4:42 pm

Thank you for your reply.
I am thinking 35% in US total stock market , 15% in International stock index funds and 50% in a combination of TIPs, total bond market and CDs to try to get to close to 5% return .
Appreciate any further thoughts .

Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Sun Nov 12, 2017 4:51 pm

Thanks for the link you sent Delamer .
But since future returns are expected to be lower, I was thinking more in terms of 50:50 stocks and bond funds

dbr
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Re: Asset allocation for 5% return

Post by dbr » Sun Nov 12, 2017 4:56 pm

Jimsad wrote:
Sun Nov 12, 2017 3:12 pm
This is a type of defined benefit plan account .
The account is to be credited with a guaranteed interest rate of 5% for each year in existence .
So I am trying to figure out how best to achieve this .
Would be ok if I can come close ,like 4% return .
Do not really desire a higher return than 5% as that would decrease the amount that can be contributed to the account the following year
I think we should understand better what this account is. Who is crediting the account with a guaranteed interest rate of 5% and why do you need to design the asset allocation?

Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Sun Nov 12, 2017 5:00 pm

dbr,
This is cash balance retirement account .
I am managing the investments . The plan design is to credit 5%
Interest yearly to the plan . I am trying to figure out the best asset allocation to Acheive this

Lindawilliams1960
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Re: Asset allocation for 5% return

Post by Lindawilliams1960 » Sun Nov 12, 2017 5:18 pm

It looks like the plan was designed long time ago when interest rates were higher. You best course may be to amend the plan with a different criteria. Then you can invest in a low cost balanced fund.

dbr
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Re: Asset allocation for 5% return

Post by dbr » Sun Nov 12, 2017 5:23 pm

Jimsad wrote:
Sun Nov 12, 2017 5:00 pm
dbr,
This is cash balance retirement account .
I am managing the investments . The plan design is to credit 5%
Interest yearly to the plan . I am trying to figure out the best asset allocation to Acheive this
Are you therefore responsible for taking people's money and making sure you can meet an obligation to provide them with a guarantee of 5% interest on their contribution every year?

As far as getting return on money, the US stock market should have an expected return of greater than 5%, but that return is highly variable from year to year. There are no investments at this time that provide a safe fixed return of 5% every year along with being able to return the money at point of retirement.

I admit I am not intimately familiar with how defined contribution cash balance plans are managed, but if you are also not sure how to do this it seems odd you would have responsibility for such a plan.

Does this describe what you are doing: https://www.dol.gov/agencies/ebsa/about ... sion-plans If so are you the employer or the investment manager responsible for the plan? Pages such as these are on the topic of how to manage such plans, but it might be this example page is more of a sales pitch for an investment manager than a do it yourself guide: https://www.plansponsor.com/managing-in ... nce-plans/

Have you done any research on this other than asking here?

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Re: Asset allocation for 5% return

Post by abuss368 » Sun Nov 12, 2017 5:47 pm

Hi jimsad -

An investors asset allocation between stocks and bonds will determine an investment portfolios return over time. Higher risk stocks should result in higher returns. An investors asset allocation should be based on goals, time frame, and tolerance for risk.

I am not aware of any investment that will provide a guaranteed 5% return year in and year out. I would consider the a few total market index funds and stay the course.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

Lindawilliams1960
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Re: Asset allocation for 5% return

Post by Lindawilliams1960 » Sun Nov 12, 2017 6:08 pm

It looks like the plan was designed long time ago when interest rates were higher. You best course may be to amend the plan with a different criteria. Then you can invest in a low cost balanced fund.

dbr
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Re: Asset allocation for 5% return

Post by dbr » Sun Nov 12, 2017 6:10 pm

I should add that the risk of not making the 5% interest credit is absorbed by the employer and/or by whomever they contract to manage the plan. Thus risk management is of the essence as much as targeting a return.

Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Sun Nov 12, 2017 6:37 pm

Dbr and others , Thanks for your replies.
Yes , I am the employer and plan administrator and have a small company with few employees .
This is a new plan I am setting up with help of a retirement actuary or third party administrator .
Now I have to decide whether to hire a financial advisor and pay them 0.8- 1% of AUM fees hoping they will reach the desired 5% return or try to do it myself . Even if I hire a financial advisor , I will still have the final responsibility for the plan assets .

An example to clarify things -
If assets are 100,000, then at 5% , 105000 should be credited to account at end of year.
Any shortfall to above should be made up by extra company contribution for that year .
Hope this clarifies my situation .

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arcticpineapplecorp.
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Re: Asset allocation for 5% return

Post by arcticpineapplecorp. » Sun Nov 12, 2017 6:42 pm

those of you who have answerd, might want to reference this earlier post of the OP. Here talks about whether or not to set up a cash balance plan in this post:

viewtopic.php?f=1&t=231441&p=3603300#p3603300
by Jimsad » Fri Nov 03, 2017 6:52 pm
Hi Bogleheads ,
I would appreciate your input regarding our situation .
We are trying to decide whether it is worthwhile to create additional tax deferred space for retirement savings which will also decrease our present tax burden by decreasing our taxable
Income versus just continuing to put additional savings in mutual funds in taxable account

Present situation -
Contribute 77k per year toward 401k for both of us
Trying to decide whether to open cash balance plan what will let us put 100k into tax deferred space and also will decrease our taxable income by 100k .
The expenses are about 12k per year employee Contribution and about 2k set up fees and about 1800 annual administration fee for cash balance plan
Even if new tax plan comes , we think our tax
Bracket will remain at 39.6%

Our situation
DH- 49 DW-46
401k yearly contribution - 77k
458k in taxable accounts
909k in tax deferred
330k - 529s
Rental real estate - 530k
Commercial real estate - 1.4 Mil
Residence - 1 mil
debt- 500k mortgage on commercial real estate

We hope to retire between 55-60 years .
But one of will work till 60yrs.

Thank you very much.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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arcticpineapplecorp.
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Re: Asset allocation for 5% return

Post by arcticpineapplecorp. » Sun Nov 12, 2017 6:44 pm

and this:
viewtopic.php?f=1&t=231441&p=3603300#p3602809
by Jimsad » Fri Nov 03, 2017 9:56 pm
Thanks for your reply.
Since this is a type of company retirement plan,
I will have to contribute to employees too.
For my company , if I Want to contribute for myself - 53k in 401k with profit sharing and another 100k in cash balance plan , then ,
I will have to contribute upto probably 20k to employees.
So total cost to company is 173k out of which , 153k goes pretax for my retirement account and upto 20k goes into employee retirement accounts pretax .
This is in Additon to other expenses for plan administration mentioned above .
Hope this clarifies things .
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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whodidntante
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Re: Asset allocation for 5% return

Post by whodidntante » Sun Nov 12, 2017 6:53 pm

If you need 5% real then I would suggest EM equities and a short term bond fund. About 60/40.

dbr
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Re: Asset allocation for 5% return

Post by dbr » Sun Nov 12, 2017 7:04 pm

Now the whole proposal makes more sense.

I would not consider myself qualified to make good suggestions for how to manage the investments in such a plan. I would suggest that the issue is not just how to obtain 5% return but also how to manage the risk involved in making up shortfalls. This is a complex technical topic that interacts with your business that would probably justify paying for professional advice. It also seems to me that the previous comment regarding the possibility that 5% is too high a crediting rate might be valid. That would also be a subject for advice.

tibbitts
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Re: Asset allocation for 5% return

Post by tibbitts » Sun Nov 12, 2017 7:38 pm

I don't think most of the posts are addressing the somewhat unique issues here. I know I'm definitely not qualified to comment. Maybe post the entire plan document, and let the experts here chew on it a for a while.

Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Sun Nov 12, 2017 8:26 pm

Thanks for your replies .

I am having difficulty accepting that I have to pay 0.8-1% AUM fees to a financial adviser for managing assets of this plan .

Even if I use them, as per the plan documents , the final responsibility is still with me In terms of any risk to assets.

I interviewed a few advisors for this . From what I understood , they will open a Vanguard or TD Ameritrade account and invest in low cost index funds or ETFS with a generous tilt towards bonds. But they were secretive about exact funds they use .

Just the way I manage my own personal investments , I am wondering why I cannot try this for a year or two and I can always hire an advisor in future .
I just am looking to be close to 5% return per year(total return).
I think even 3-4% would be reasonable for my purposes .

suemarkp
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Re: Asset allocation for 5% return

Post by suemarkp » Sun Nov 12, 2017 8:29 pm

I think this gets you most of what you want: VPGDX (Vanguard Managed Payout Fund). It is a stock heavy find of funds, and I'm not sure how it performed during the 2008 crash but it was around back then, but current yield is over 5%. I would not want to be in your position of having to guarantee a 5% return...

dbr
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Re: Asset allocation for 5% return

Post by dbr » Sun Nov 12, 2017 9:18 pm

Jimsad wrote:
Sun Nov 12, 2017 8:26 pm


I just am looking to be close to 5% return per year(total return).
I think even 3-4% would be reasonable for my purposes .
Can I ask the one question whether or not you understand the difference between getting 5% in each and every year and investing in something that has an expected return of 5% but offers highly variable results from year to year and a 50% chance (or more) of falling short of 5% long term average return even over very long times. To find an investment that has almost no chance of falling short of 5% long term average requires an expected return of much more than 5% when the investments have risk. Generally to invest without long term risk requires some sort of liability matching and ability to hedge. This is what is technical about doing this and needs someone more expert than most of us here are. That does not mean there is not one poster or another that might read this that has experience in this field. That is also why finding such an investment when long bonds do not yield 5% might be difficult. Most likely hitting that number right now would mean the company subsidizing the benefit. There is nothing wrong with that, but it would be a business cost you would have to understand.

On the other hand the current Treasury yield curve is almost 3% for 30 year Treasuries and a perpetual safe withdrawal rate for a stock and bond portfolio might be 3% as well.

Maybe this fellow at Vanguard could be consulted: https://institutional.vanguard.com/VGAp ... lanceplans

Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Mon Nov 13, 2017 6:56 am

SuemarkP,
Vanguard managed payout fund you suggested seems suited for what I am looking for in terms of return .
I will have to find out if they will let dividend reinvestment instead of paying it out .

dbr
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Re: Asset allocation for 5% return

Post by dbr » Mon Nov 13, 2017 9:17 am

Jimsad wrote:
Mon Nov 13, 2017 6:56 am
SuemarkP,
Vanguard managed payout fund you suggested seems suited for what I am looking for in terms of return .
I will have to find out if they will let dividend reinvestment instead of paying it out .
The payout from that fund is not return. The fund can pay back a return of capital as well. Also the payout is variable depending on investment results. Like all funds dividend reinvestment is allowed. That fund has had higher than 5% returns since inception in 2008 as a natural result of the stock market being in a huge bull phase. If the stock market should enter a bear phase or experience a significant crash your plan would crash with it. Managed payout does not seem to have an asset plan that is superior to any other investment in stocks and bonds including the fact that a reliable annual return of 5% each year does not materialize. If your plan can be made to work with highly variable investment returns that have an expected return of 5%, then you can just invest in a three fund portfolio with maybe 30% in bonds and be prepared to manage the risk that the return you need does not materialize over a period of some time.

ryman554
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Re: Asset allocation for 5% return

Post by ryman554 » Mon Nov 13, 2017 9:23 am

Like dbr, I am not qualified to make any recommendations, so let me say this:

There are no existing set of funds that guarantee 5% each and every year. Quit looking for them.

I don't pretend to understand what the difficulty is in earning *more* than 5%, I don't pretend to understand what your withdrawal rules are (can they be done at any time or only upon separation of employment?), I don't pretend to understand *why* you are taking on this likely extremely legally complex set of operations are, but please re-read the above and reply to dbr's query on if you understand and can tolerate the concept of variability in your returns.

The *only* way you are going to *guarantee* 5% is if you contribute it from the business, for benefit of this plan. What you would then need to do is to find the cash-like vehicle which gives you the largest guaranteed interest rate, which would be something like a CD -- but then these may fun afoul of the withdrawal needs of the account.

Make it an expense on the business and be done with it. If you can't, then your business likely can't afford this kind of plan.

smitcat
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Re: Asset allocation for 5% return

Post by smitcat » Mon Nov 13, 2017 9:57 am

arcticpineapplecorp. wrote:
Sun Nov 12, 2017 6:42 pm
those of you who have answerd, might want to reference this earlier post of the OP. Here talks about whether or not to set up a cash balance plan in this post:

viewtopic.php?f=1&t=231441&p=3603300#p3603300
by Jimsad » Fri Nov 03, 2017 6:52 pm
Hi Bogleheads ,
I would appreciate your input regarding our situation .
We are trying to decide whether it is worthwhile to create additional tax deferred space for retirement savings which will also decrease our present tax burden by decreasing our taxable
Income versus just continuing to put additional savings in mutual funds in taxable account

Present situation -
Contribute 77k per year toward 401k for both of us
Trying to decide whether to open cash balance plan what will let us put 100k into tax deferred space and also will decrease our taxable income by 100k .
The expenses are about 12k per year employee Contribution and about 2k set up fees and about 1800 annual administration fee for cash balance plan
Even if new tax plan comes , we think our tax
Bracket will remain at 39.6%

Our situation
DH- 49 DW-46
401k yearly contribution - 77k
458k in taxable accounts
909k in tax deferred
330k - 529s
Rental real estate - 530k
Commercial real estate - 1.4 Mil
Residence - 1 mil
debt- 500k mortgage on commercial real estate

We hope to retire between 55-60 years .
But one of will work till 60yrs.

Thank you very much.
I understand clearly the desire to offset income now when taxes are high to hopefully pull in that income later on when taxes will be lower.
Based upon the non recoverable fees that are required to increase the tax deferred amounts as well as the income levels described here (which will affect RMD's/taxes down the road) the math likely does not make sense. After checking the exact math again I would suspect that it makes much more sense to leave the tax deferred amounts available as is and save the extra target amounts in after tax accounts.

WhiteMaxima
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Re: Asset allocation for 5% return

Post by WhiteMaxima » Mon Nov 13, 2017 12:23 pm

5% long term in average is possible. Short term, it is unheard of. None can guarantee that. if you have a mortgage at interest of 4% after tax rate. You technically will get 5% return pre-pay you mortgage.
Last edited by WhiteMaxima on Mon Nov 13, 2017 12:32 pm, edited 1 time in total.

rkhusky
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Re: Asset allocation for 5% return

Post by rkhusky » Mon Nov 13, 2017 12:24 pm

Would it be a hardship on the company to contribute the full 5% every year? If not, then you could consider Vanguard LifeStrategy Income (20/80) or Target Retirement Income (30/70) on the aggressive side or CD's and/or bonds on the conservative side. If you invest in something riskier, like a 50/50 portfolio, then you risk having to contribute 25% some year.

Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Mon Nov 13, 2017 12:56 pm

Ryman554 and dbr,
Thanks for your input .
I am comfortable taking the risk .

Example -
If assets are 100000 , I have to credit 5000(5%) at end of Year .
So 105000
If I get 0% return for a year , I have to contribute total 10000 for the following year from my business ( to make up for 5000 from previous year) . This will mean more tax deductible contribution for company.
If I make 10% return , then following year , I contribute 5000 less to account from Company.
I want to try for a year or two and if I am not doing well , then hire a financial advisor and hope he does better and pay him fees .
Either way , we the final legal responsibility is mine as I am owner of company .

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Kevin M
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Re: Asset allocation for 5% return

Post by Kevin M » Mon Nov 13, 2017 1:00 pm

Jimsad wrote:
Sun Nov 12, 2017 8:26 pm
I just am looking to be close to 5% return per year(total return).
I think even 3-4% would be reasonable for my purposes .
You might find it useful to look at something like this: Find CDs and bonds (Vanguard). Just sticking with fixed-income, you can see what kind of credit risk and term risk you must take to get a desired yield. For example, you can exceed your 3% threshold with a 10-year Agency (3.2%), or your 4% threshold with a 30-year high-grade corporate (4.11%). You have to take significantly more credit risk to get to 5% with an investment-grade 5-year corporate (5.65%). You probably don't want to take too much credit risk without diversifying among many bonds, or using a fund.

Keep in mind that the credit risk could result in return being less than the yield, and term risk could too if you must sell before maturity (for individual securities).

You could look at the Vanguard list of bond funds to see how much term risk and credit risk you must take to get to a desired SEC yield, which you can think of roughly as the expected return for the fund. Vanguard funds list - index and active mutual funds (once on the page, filter to just view intermediate-term and long-term bond funds).

You might want to view a fund's performance in late 2008 to get a sense of potential losses when credit risk and term risk show up big time in non-Treasury funds.

Kevin
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Kevin M
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Re: Asset allocation for 5% return

Post by Kevin M » Mon Nov 13, 2017 1:05 pm

Jimsad wrote:
Mon Nov 13, 2017 12:56 pm
If I get 0% return for a year , I have to contribute total 10000 for the following year from my business ( to make up for 5000 from previous year) . This will mean more tax deductible contribution for company.
If I make 10% return , then following year , I contribute 5000 less to account from Company.
I want to try for a year or two and if I am not doing well , then hire a financial advisor and hope he does better and pay him fees.
You should also consider that with a 50/50 stock/bond portfolio you could experience a loss of 25% or more in a year, and it could take years to recover from that loss. You may not encounter a big stock loss in a year or two, so that's not necessarily going to tell you much about whether or not to use a financial advisor. As long as you stick with broad-market index funds, your returns will depend on the market, not on your abilities, and the same goes for a financial advisor.

Kevin
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Re: Asset allocation for 5% return

Post by Jimsad » Mon Nov 13, 2017 1:15 pm

Kevin,

Thanks for your reply .

One strategy is to go with broad index funds .

If I want to go with bond funds only or treasuries or cds (no stock funds ) , does anybody have Any input what combination of these conservative investments might come close to 3-4% return ( I know 5% would be difficult ).

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Tyler Aspect
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Re: Asset allocation for 5% return

Post by Tyler Aspect » Mon Nov 13, 2017 1:17 pm

I would suggest you do away with any guaranteed investment return with your defined benefit plan, if not possible then pick the lowest percentage possible. Guaranteed return saps the fund of potential return, or it could put significant liability on the company.

https://www.aarp.org/content/dam/aarp/p ... -Plans.pdf
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

wrongfunds
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Re: Asset allocation for 5% return

Post by wrongfunds » Mon Nov 13, 2017 1:21 pm

I believe you have not heard about this forum before. People do not even get 3% withdrawal of their investment for 30 year retirement period where the entire investment is allowed to go to zero! How would you be able to get 5% return on your investment?

You could hire Warren Buffet to manage your portfolio and pay him 1% AUM but you still will NOT get the mythical 5% guaranteed returns.

You need to amend the stable value fund for your employees. What are you are asking could have been in the pas when interest rates and mortgage rates were in double digits.

The answer is NO. I don't quite understand why other replies are trying to sugar coat it for you.

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Kevin M
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Re: Asset allocation for 5% return

Post by Kevin M » Mon Nov 13, 2017 1:40 pm

Jimsad wrote:
Mon Nov 13, 2017 1:15 pm
Kevin,

Thanks for your reply .

One strategy is to go with broad index funds .

If I want to go with bond funds only or treasuries or cds (no stock funds ) , does anybody have Any input what combination of these conservative investments might come close to 3-4% return ( I know 5% would be difficult ).
I think I already answered that, or at least pointed you to the sources you can use to answer it. Look at the individual fixed-income securities and the Vanguard bond funds to see the yields for various degrees of credit risk and term risk.

With an individual security with essentially no credit risk (Treasuries or CDs), you will earn about the yield if held to maturity, with the only variable being your reinvestment rate. Your return will be less certain the more credit risk you take.

With a bond fund, you can use SEC yield as an approximation of expected return, but your actual return over a period equal to fund duration can vary by as much as a percentage point (or even more) for an intermediate-term fund. For example, total bond market index fund admiral shares has an SEC yield of about 2.4% and a duration of about 6 years, so over a 6-year period you might expect a return of about 2.4%, but could end up with anywhere from 1.4% to 3.4%. You get higher yield with an intermediate-term corporate fund, 3.15%, with a slightly longer duration of 6.5 years, but I would expect the dispersion of probable returns to be wider with the higher credit risk.

No one can give you any certainty here. With more risk comes higher expected return but also less certainty of return (higher dispersion of probable returns). That goes for fixed income as well as stocks, but the dispersion of probable returns is much greater for stocks than for high-quality fixed income.

Kevin
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Constant Chaos
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Re: Asset allocation for 5% return

Post by Constant Chaos » Mon Nov 13, 2017 1:45 pm

Where did the 5% come from? Spouse has a cash balance plan and the crediting interest rate is very low, something close to 1% I think.

thangngo
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Re: Asset allocation for 5% return

Post by thangngo » Mon Nov 13, 2017 1:47 pm

Jimsad wrote:
Sun Nov 12, 2017 2:42 pm
Hi everyone .
I am in a situation where I need to manage an investment account to get 5% annual yearly return .
I plan to do this with low cost index funds or ETFs at one of the major brokerages like Vanguard, Fidelity or Schwab.
What asset allocation of funds do you think would have best chance of achieving this return ?
I would appreciate your input.
It's a fool's errand to find a combination of funds to get 5% annual yearly return. You should use a different approach than starting with a 5% return. Start with asset allocation. Study Vanguard's target retirement funds, life strategy funds, etc. to get an idea of how to build portfolio. Better yet, you can buy their target date fund and/or life strategy funds and just forget about portfolio structure.

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Re: Asset allocation for 5% return

Post by mptfan » Mon Nov 13, 2017 1:49 pm

Jimsad wrote:
Sun Nov 12, 2017 3:12 pm
This is a type of defined benefit plan account .
The account is to be credited with a guaranteed interest rate of 5% for each year in existence .
So I am trying to figure out how best to achieve this .
What you are trying to achieve is not possible. I do think it's possible to achieve 5% interest or dividend payments, but it would certainly not be guaranteed.
I eat risk for breakfast. :)

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Re: Asset allocation for 5% return

Post by ryman554 » Mon Nov 13, 2017 3:59 pm

Jimsad wrote:
Mon Nov 13, 2017 1:15 pm
Kevin,

Thanks for your reply .

One strategy is to go with broad index funds .

If I want to go with bond funds only or treasuries or cds (no stock funds ) , does anybody have Any input what combination of these conservative investments might come close to 3-4% return ( I know 5% would be difficult ).
You are not listening to us.

Let us say that you go with 100% S&P 500. Let's also say that a repeat of 1929 happens and it loses 90%(!). Your 100k becomes 10k. Your business now has to put in $90500. Can the business support such a contribution?

Let us say that get get a 2017. Your $100k becomes $120k. Do you have to withdraw $15k?

IF the business cannot support $90500 contribution, then doesn't your plan fail?

Yes, we could go around doing various percentages of stocks/bonds, but it is entirely likely that you will have to plan on contributing more than 5% in a down year. Can the business support this? What is the upper limit the business is guaranteed to support? Please answer this so we can help you further.

As for your question, 30 year treasuries aren't going to work, unless you can guarantee that money stays in there for 30 years! The best you can do is 1 year CDs or equivalents and that is going to be not much better than a high-yield checking account. That gets you 1%. Maybe 1.5%. And answers your question, above. There is nothing out there that is liquid over the time frame you are looking for that comes close to 3%, let alone 4%.

wrongfunds
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Re: Asset allocation for 5% return

Post by wrongfunds » Mon Nov 13, 2017 4:13 pm

The only reason OP wants to do this is to give himself a tax break by deferring his income. It is pesky government regulations which are forcing him to offer a retirement plan to his employee. If he really wants to offer stable value fund with guaranteed 5% return to his employees, just commit himself to making up the difference between what treasury is paying vs the desired 5% from his business.

By the way, if you are willing to open up your fund to us, we will all jump in to get the "guaranteed 5% return" instead putting our money in to Vanguard.

Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Mon Nov 13, 2017 4:50 pm

Thanks for the replies .
It is true that I get a tax break from setting this up .
But I feel the employees benefit too as the company (which is me as owner ) is taking the risk of guaranteeing a 5 % return to employees and They get contributions in their accounts with
a 5 % yearly return

Jimsad
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Re: Asset allocation for 5% return

Post by Jimsad » Mon Nov 13, 2017 4:51 pm

And I as the owner of the company take the risk

smitcat
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Re: Asset allocation for 5% return

Post by smitcat » Mon Nov 13, 2017 4:57 pm

Jimsad wrote:
Mon Nov 13, 2017 4:50 pm
Thanks for the replies .
It is true that I get a tax break from setting this up .
But I feel the employees benefit too as the company (which is me as owner ) is taking the risk of guaranteeing a 5 % return to employees and They get contributions in their accounts with
a 5 % yearly return
If the costs to you are 20% or more to get the money tax deferred is there really a reasonable opportunity to get that % back when you have to deal with higher RMD's?
IMHO -you can have a decent plan for your employees and yourself with a safe harbor plan without having guarantees.

aristotelian
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Re: Asset allocation for 5% return

Post by aristotelian » Mon Nov 13, 2017 5:00 pm

It's threads like these that make you wonder if the bubble is about to pop.

wrongfunds
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Re: Asset allocation for 5% return

Post by wrongfunds » Mon Nov 13, 2017 5:09 pm

OP has not yet answered the question of how he decided to come up with the number "5%". I mean if he has handful of lower paid employees who would put few thousands in this fund, then he can afford to "guarantee" the 5% return all by himself for first few years. Once he gets them "hooked" on 401K plan, then he can cut down on the promised return and still satisfy the HCE discriminatory rule (assuming that even applies to his small business)

Bottomline:- Find your worse case liability for the guarantee and if the business can pay it for next few years, you don't need permission from BH. You might even already have an exit plan in your mind!

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grayfox
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Re: Asset allocation for 5% return

Post by grayfox » Mon Nov 13, 2017 5:18 pm

Never mind!
Last edited by grayfox on Tue Nov 14, 2017 1:39 am, edited 2 times in total.
Gott mit uns.

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