Aggressive asset allocation

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milosz19
Posts: 11
Joined: Thu Aug 16, 2018 12:56 pm

Aggressive asset allocation

Post by milosz19 » Thu Aug 16, 2018 4:46 pm

Dear Bogleheads,

First, I would like to express gratitude to all contributors – over the years I have learned quite a bit from this forum – thank you.

This is the first time that I post here. I am looking for a critique of / advice on my asset allocation, which is surely different from what Jack Bogle recommends. In my mind, I justify the aggressive allocation by stable and generous pensions that my wife and I will receive as well as 3 rental properties that provide increased security. Both my wife and I are government employees with stable jobs, pensions starting at 62. We are in our mid-30s. Our portfolio is in Roth-IRA accounts and is distributed as follows:

10% - Foreign Large Blend (Developed)
40% - Large Cap (Mostly growth)
50% - Mid-Small Cap (Mostly Growth)
Everything is in low-cost funds and ETFs.

Of the US stocks, I do put an unusually large percentage of them in sectors such as healthcare and technology. For example, currently healthcare represents close to 40% of the US portfolio.

My question is: am I playing with fire putting so much money in sectors? In the past, tech constituted as much as 20% and health was another 20% or so. My logic was that given that I see my Roth as a cherry on top (not core of my retirement), I can take on more risk, and possibly reap greater rewards. Am I completely off here?

Lastly, does it make sense in an environment such as the one we have today to use sectors such as healthcare or utilities for a defensive play?
Any thoughts?

Thank you

delamer
Posts: 6089
Joined: Tue Feb 08, 2011 6:13 pm

Re: Aggressive asset allocation

Post by delamer » Thu Aug 16, 2018 6:14 pm

Doing any kind of defensive play does not make sense for someone who purports to be an aggressive investor.

A defensive play is something you do to reduce risk.

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vineviz
Posts: 1660
Joined: Tue May 15, 2018 1:55 pm

Re: Aggressive asset allocation

Post by vineviz » Thu Aug 16, 2018 6:52 pm

I have several thoughts, including the fact that I I think you might be looking at your Roth and pension backwards. If you’re 30 years from retirement, your Roth is the thing you can control and your potential pensions are the cherry on top.

Also, don’t mess around with sector funds. You’re more likely to guess wrong than guess right. Pick an international fund, a large cap US fund, and a small cap value fund. Put 1/3 in each and revisit in 10 years when it’s time to add a long term bond fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

wolf359
Posts: 1378
Joined: Sun Mar 15, 2015 8:47 am

Re: Aggressive asset allocation

Post by wolf359 » Thu Aug 16, 2018 7:59 pm

Some thoughts:

30 years (from mid 30's to mid 60's) is a long time. Although Plan A (2 government jobs with pensions) sounds solid, make sure you have a Plan B. What if you don't end up working for the government forever? What if one of you has health issues, or politics intervenes? By politics I mean both office politics and government politics, both of which are unpredictable.

A greater predictor of your return is how much you're actually investing, not just your asset allocation. A high savings rate will trump asset allocation.

Sector investing isn't diversified enough. I'd suggest broad stock market indices. If you want to increase risk, look into factor investing. For example, size (small vs large), value vs growth, momentum, etc. But make sure you have a solid core in a total stock market index just in case something goes wrong. I invest mostly in the Boglehead 3 stock, but I tilt to small cap value, with bets on large growth and momentum.

An example of what could go wrong with sector bet -- tech stocks after 2001. They recovered (tech stocks are hot right now) but if you look at a stock chart, the sector took 12-15 years to come back. Another example: Financial stocks were always considered solid bets prior to 2008 -- they haven't recovered yet.

letsgobobby
Posts: 11574
Joined: Fri Sep 18, 2009 1:10 am

Re: Aggressive asset allocation

Post by letsgobobby » Thu Aug 16, 2018 11:06 pm

With thirty years til you retire, and federal debt approaching 100% of GDP, you might reconsider your purported risk tolerance.

milosz19
Posts: 11
Joined: Thu Aug 16, 2018 12:56 pm

Re: Aggressive asset allocation

Post by milosz19 » Fri Aug 17, 2018 7:45 pm

Thank you all for your responses.
Let me give some additional information.
First, when I said government pension - to be more specific, both my wife and I are tenured professors at state schools. So, in the grand scheme of things, our jobs are secure. It is anticipated, that if we retire at 62, our pension will be about 75% of our income.

However, because nothing is certain (health, job, government debt) as several of you have pointed out, we would like to boost our security.
Not putting all of our eggs in one basket, we have also bought 3 rental homes, all of which should be paid off before we turn 50, and whose rents will make up about 60% of an income. We bought these to be a buffer against inflation.

In agreement with another poster, savings rate is important, and since we graduated we have been maxing the Roths (we are thinking about starting contributing to a 403B (similar to a 401K).

All of that said, we really are willing to accept quite a bit of risk- from what I see, however, everyone seems to be suggesting that the risk is investing in the market period. That we should still stick with the suggested allocation of 1/3 international, 1/3 large cap, 1/3 small cap?
Correct?

Of international, how much would you put into emerging markets? (We have been burned every time we did that before).

On a psychological level, it is difficult to abandon sectors when they have done significantly better than the market (especially health).
Since we might be at the end of the bull market, health seems particularly attractive as it did significantly better than the market in the last recession.

delamer
Posts: 6089
Joined: Tue Feb 08, 2011 6:13 pm

Re: Aggressive asset allocation

Post by delamer » Fri Aug 17, 2018 8:32 pm

milosz19 wrote:
Fri Aug 17, 2018 7:45 pm
Thank you all for your responses.
Let me give some additional information.
First, when I said government pension - to be more specific, both my wife and I are tenured professors at state schools. So, in the grand scheme of things, our jobs are secure. It is anticipated, that if we retire at 62, our pension will be about 75% of our income.

However, because nothing is certain (health, job, government debt) as several of you have pointed out, we would like to boost our security.
Not putting all of our eggs in one basket, we have also bought 3 rental homes, all of which should be paid off before we turn 50, and whose rents will make up about 60% of an income. We bought these to be a buffer against inflation.

In agreement with another poster, savings rate is important, and since we graduated we have been maxing the Roths (we are thinking about starting contributing to a 403B (similar to a 401K).

All of that said, we really are willing to accept quite a bit of risk- from what I see, however, everyone seems to be suggesting that the risk is investing in the market period. That we should still stick with the suggested allocation of 1/3 international, 1/3 large cap, 1/3 small cap?
Correct?

Of international, how much would you put into emerging markets? (We have been burned every time we did that before).

On a psychological level, it is difficult to abandon sectors when they have done significantly better than the market (especially health).
Since we might be at the end of the bull market, health seems particularly attractive as it did significantly better than the market in the last recession.
Over the long run, a diversified portfolio of stocks will reward you for taking risk by yielding higher returns.

But when you start talking about havng a big bet on one sector (like health) or eliminating sectors (like emerging markets), then you are reducing diversification and increasing risk.

So if you get lucky, you get bigger returns than average. And if you are unlucky, you do worse than average.

UpperNwGuy
Posts: 980
Joined: Sun Oct 08, 2017 7:16 pm
Location: Washington DC

Re: Aggressive asset allocation

Post by UpperNwGuy » Fri Aug 17, 2018 9:20 pm

I recommend you forget about sectors and factors and invest in three funds: Total Stock, Total Bond, and Total International. You can adjust the percentages based on how much risk you want to take.
Retiree with a pension and a 60/40 taxable portfolio: Total Stock + Total Int'l + Total Bond + Interm Term Tax Exempt.

milosz19
Posts: 11
Joined: Thu Aug 16, 2018 12:56 pm

Re: Aggressive asset allocation

Post by milosz19 » Sun Aug 19, 2018 5:06 pm

Thank you all for your advice.

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