Asset allocation calculator

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Asset allocation calculator

Post by VA_Investor » Sun Sep 16, 2018 9:07 pm

I am in the process transferring funds from advisor-managed portfolio to a 3 or 4 fund portfolio at Vanguard. I've been using MaxiFi to back out what level of return I need to achieve retirement goals. Once I have that number, I'd like to work out correct stock/bond allocation to achieve that return. Is there a calculator available that does that, based on historical returns? I have found some models like this one at Vanguard, but not a calculator.

Any problems or other advice using historical data? I'm trying to find best practice for setting asset allocation based on desired return.

Thanks!

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Asset allocation calculator

Post by Ron Scott » Sun Sep 16, 2018 9:33 pm

That’s not how it works. You don’t reverse engineer your asset allocation to shoot for a goal amount since you can’t predict returns. (This exemplifies how models like Firecalc are illusions.)

You set an allocation for equities between 25% and 75% based on you tolerance for risk, or, better yet, just allocate your-age-in-bonds, buy the whole US market, and you get what the market returns. Some people may tell you to expect a certain return rate over various periods of time based on your allocations and investments but they should not be trusted.

To build more wealth faster save and invest more and for a longer period of time, and check your progress annually.
Last edited by Ron Scott on Sun Sep 16, 2018 9:46 pm, edited 1 time in total.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.


User avatar
tennisplyr
Posts: 1893
Joined: Tue Jan 28, 2014 1:53 pm
Location: Sarasota, FL

Re: Asset allocation calculator

Post by tennisplyr » Mon Sep 17, 2018 6:58 am

Those who move forward with a happy spirit will find that things always work out.

retiredjg
Posts: 34373
Joined: Thu Jan 10, 2008 12:56 pm

Re: Asset allocation calculator

Post by retiredjg » Mon Sep 17, 2018 8:34 am

I agree with Ron Scott.

Figuring out "what return do I need?" only addresses one part of the asset allocation decision. It addresses "need" to take risk. And it is fine to know that, but it is NOT the most important factor in your decision.

What if you find you have a high need for risk (you need a very aggressive portfolio) but that does not suit your willingness to take risk (your emotional ability to watch your money come and go seemingly without reason)?

Or what if you find you have a high need but no ability to take risk? Ability refers to the ability of your portfolio to recover from a bad market crash before you need the money. If you are 62 years old and retiring at 65, your ability to take risk is significantly less than it was when you were 45.

Finding out how much return you need is fine as long as you don't exceed your ability or willingness to take risk. And you could find that you have a lower need to take risk than willingness or ability - that is a good situation to be in. The reverse is a recipe for a bad situation.

Admiral
Posts: 1442
Joined: Mon Oct 27, 2014 12:35 pm

Re: Asset allocation calculator

Post by Admiral » Mon Sep 17, 2018 11:46 am

I would also add that the Vanguard page you cite, while showing what different types of portfolio allocations have done historically, should be taken with a huge grain of salt.

For example, their 100% bond portfolio may have returned an average of 5.6% since 1929, but, well, needless to say, not lately.

I recommend you take a look at Flexible Retirement Planner, which allows you to control virtually all inputs (dates, portfolio amounts and account types, return rates, inflation, contributions, retirement income and spending, etc). It is a Monte Carlo simulation, so it is by no means perfect. But it will model for you what different kinds of portfolios are likely to return under different situations/scenarios. This is how you determine your AA, not by backing into a RoR that you "need" in order to reach FI.

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Mon Sep 17, 2018 7:42 pm

Ron Scott wrote:
Sun Sep 16, 2018 9:33 pm
You don’t reverse engineer your asset allocation to shoot for a goal amount since you can’t predict returns.
Ron, thanks for your response, but I respectfully disagree. The need to take risk absolutely depends on portfolio value and goals. If I've neared my retirement goals, I don't need to take additional risk. So understanding my goals, and what return my plan/model says I need to reach or maintain my goals, should be a consideration. This is discussed in BH Risk tolerance wiki, which states "Need to take risk is determined by the rate of return required to achieve financial objectives." There are other considerations, such as willingness or tolerance as you stated, and ability as retiredjg pointed out. So I think that figuring out what rate of return I need, and then building an allocation model to match that (consistent with my ability and willingness to take risk), is a sound approach.

Thesaints
Posts: 1664
Joined: Tue Jun 20, 2017 12:25 am

Re: Asset allocation calculator

Post by Thesaints » Mon Sep 17, 2018 7:45 pm

VA_Investor wrote:
Sun Sep 16, 2018 9:07 pm
Any problems...using historical data?
Yes. Historical return for bonds is 7%, but the 10-year note currently yields less than 3%.

Thesaints
Posts: 1664
Joined: Tue Jun 20, 2017 12:25 am

Re: Asset allocation calculator

Post by Thesaints » Mon Sep 17, 2018 7:47 pm

Ron Scott wrote:
Sun Sep 16, 2018 9:33 pm
You set an allocation for equities between 25% and 75% based on you tolerance for risk, or, better yet, just allocate your-age-in-bonds,
Why ? Why not 10% or 85% ? Are all people of a certain age the same ?

The "reverse engineering" is actually what financial planning consists of.

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Mon Sep 17, 2018 7:53 pm

retiredjg wrote:
Mon Sep 17, 2018 8:34 am
I agree with Ron Scott.

Figuring out "what return do I need?" only addresses one part of the asset allocation decision. It addresses "need" to take risk. And it is fine to know that, but it is NOT the most important factor in your decision.
...
Finding out how much return you need is fine as long as you don't exceed your ability or willingness to take risk. And you could find that you have a lower need to take risk than willingness or ability - that is a good situation to be in. The reverse is a recipe for a bad situation.
retiredjg, thanks for your response. I agree with most of your post, but I think that need to take risk can be the the most important consideration in some cases. If all things are equal between need, willingness, and ability, I'd say that need should drive the portfolio decisions. I probably should've given more background on my situation, but I'm at a point where I don't need to take a lot of risk. So for me, that outweighs my willingness and ability to take risk (which are both moderate and high, respectively).

User avatar
David Jay
Posts: 5771
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Asset allocation calculator

Post by David Jay » Mon Sep 17, 2018 7:58 pm

Here is Bill Bernstein’s AA recommendation from “The Investor’s Manifesto”:

Image
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Thesaints
Posts: 1664
Joined: Tue Jun 20, 2017 12:25 am

Re: Asset allocation calculator

Post by Thesaints » Mon Sep 17, 2018 8:03 pm

Case study: Warren E. Buffett
Age:88
Risk Tolerance: Very High (I guess)

Should he follow a 32/68 allocation, as per Bill Bernstein ?
(btw, second column should probably read "adjustment to the stock allocation")
Last edited by Thesaints on Mon Sep 17, 2018 8:08 pm, edited 1 time in total.

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Mon Sep 17, 2018 8:05 pm

Admiral wrote:
Mon Sep 17, 2018 11:46 am
I would also add that the Vanguard page you cite, while showing what different types of portfolio allocations have done historically, should be taken with a huge grain of salt.

For example, their 100% bond portfolio may have returned an average of 5.6% since 1929, but, well, needless to say, not lately.

I recommend you take a look at Flexible Retirement Planner, which allows you to control virtually all inputs (dates, portfolio amounts and account types, return rates, inflation, contributions, retirement income and spending, etc). It is a Monte Carlo simulation, so it is by no means perfect. But it will model for you what different kinds of portfolios are likely to return under different situations/scenarios. This is how you determine your AA, not by backing into a RoR that you "need" in order to reach FI.
Admiral, thanks for your response. I'll take a look at FRP. I took a look once but I didn't download it. I'm using MaxiFi which does the same things you mention for FRP, except MaxiFi doesn't have MC yet (supposed to be coming this year). I need to input return rates in MaxiFi, like you mentioned is an input for FRP. I guess I don't understand how setting an expected return rate for a model like FRP or MaxiFi is different than "backing into a RoR that I need to reach my goals," when both models are using the RoR as an input.

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Mon Sep 17, 2018 8:07 pm

Thanks Hedgefundie

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Mon Sep 17, 2018 8:08 pm

tennisplyr wrote:
Mon Sep 17, 2018 6:58 am
Here's a simple one: https://www.retirementsimulation.com/
Thanks tennisplyr

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Mon Sep 17, 2018 8:13 pm

Thesaints wrote:
Mon Sep 17, 2018 7:45 pm
VA_Investor wrote:
Sun Sep 16, 2018 9:07 pm
Any problems...using historical data?
Yes. Historical return for bonds is 7%, but the 10-year note currently yields less than 3%.
Thanks Thesaints. How do you recommend establishing an asset allocation mix to achieve a certain level of risk/return, if historical models are no good?

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Mon Sep 17, 2018 8:15 pm

David Jay wrote:
Mon Sep 17, 2018 7:58 pm
Here is Bill Bernstein’s AA recommendation from “The Investor’s Manifesto”:
Thanks David

Thesaints
Posts: 1664
Joined: Tue Jun 20, 2017 12:25 am

Re: Asset allocation calculator

Post by Thesaints » Mon Sep 17, 2018 8:23 pm

VA_Investor wrote:
Mon Sep 17, 2018 8:13 pm
Thanks Thesaints. How do you recommend establishing an asset allocation mix to achieve a certain level of risk/return, if historical models are no good?
Be a pessimist. Also, try to understand where historical returns come from and re-evaluate expectations based on present situation, not on an historically average one.
We certainly know that bond returns going forward are going to be well below historical average for a while.
Stocks also look on the less generous side.

However, I think you are doing things the right way:
- Set target (this much money, in so many years).
- Calculate required average return.
- Guess which AA has an expected return around that value.
- See if the volatility linked to that AA can deplete your portfolio so much that you care (i.e. check range of possible outcomes, not just the expected ones, with an eye to the especially negative).
- Revise target (money, or number of years) if it turns out you can't stomach possible negative outcomes.

Admiral
Posts: 1442
Joined: Mon Oct 27, 2014 12:35 pm

Re: Asset allocation calculator

Post by Admiral » Mon Sep 17, 2018 8:33 pm

VA_Investor wrote:
Mon Sep 17, 2018 8:05 pm
Admiral wrote:
Mon Sep 17, 2018 11:46 am
I would also add that the Vanguard page you cite, while showing what different types of portfolio allocations have done historically, should be taken with a huge grain of salt.

For example, their 100% bond portfolio may have returned an average of 5.6% since 1929, but, well, needless to say, not lately.

I recommend you take a look at Flexible Retirement Planner, which allows you to control virtually all inputs (dates, portfolio amounts and account types, return rates, inflation, contributions, retirement income and spending, etc). It is a Monte Carlo simulation, so it is by no means perfect. But it will model for you what different kinds of portfolios are likely to return under different situations/scenarios. This is how you determine your AA, not by backing into a RoR that you "need" in order to reach FI.
Admiral, thanks for your response. I'll take a look at FRP. I took a look once but I didn't download it. I'm using MaxiFi which does the same things you mention for FRP, except MaxiFi doesn't have MC yet (supposed to be coming this year). I need to input return rates in MaxiFi, like you mentioned is an input for FRP. I guess I don't understand how setting an expected return rate for a model like FRP or MaxiFi is different than "backing into a RoR that I need to reach my goals," when both models are using the RoR as an input.
Your AA is based on risk tolerance and is only tangentially related to your final FI #. There are many roads to Dublin. Your goal (FI, retirement, etc) will be achieved when your portfolio reaches a point where it can support X years of expenses with whatever you consider to be a safe withdrawal rate, plus any other income (SS, pension, etc). With a tool like FRP, you can pick any allocation you want, and then vary the presumed return (or the contribution amount, or the retirement expense need, or the retirement income, or the expected date of retirement) to see that there is no "magic" AA that will get you to your goal. There are many factors to consider. AA is only one of many. That was my point.

User avatar
Taylor Larimore
Advisory Board
Posts: 27612
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Asset allocation calculator

Post by Taylor Larimore » Mon Sep 17, 2018 8:39 pm

VA_Investor wrote:
Sun Sep 16, 2018 9:07 pm
I am in the process transferring funds from advisor-managed portfolio to a 3 or 4 fund portfolio at Vanguard. I've been using MaxiFi to back out what level of return I need to achieve retirement goals. Once I have that number, I'd like to work out correct stock/bond allocation to achieve that return. Is there a calculator available that does that, based on historical returns? I have found some models like this one at Vanguard, but not a calculator.

Any problems or other advice using historical data? I'm trying to find best practice for setting asset allocation based on desired return.

Thanks!
VA_Investor:

Consider this Vanguard Questionnaire

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Mon Sep 17, 2018 8:39 pm

Thesaints wrote:
Mon Sep 17, 2018 8:23 pm
VA_Investor wrote:
Mon Sep 17, 2018 8:13 pm
Thanks Thesaints. How do you recommend establishing an asset allocation mix to achieve a certain level of risk/return, if historical models are no good?
Be a pessimist. Also, try to understand where historical returns come from and re-evaluate expectations based on present situation, not on an historically average one. We certainly know that bond returns going forward are going to be well below historical average for a while. Stocks also look on the less generous side.
Thanks Thesaints. The Portfolio Visualizer tool that Hedgefundie listed above lets me adjust historical returns on asset classes, so I can play around with some more conservative/pessimistic assumptions. Appreciate your feedback on this!

HEDGEFUNDIE
Posts: 1206
Joined: Sun Oct 22, 2017 2:06 pm

Re: Asset allocation calculator

Post by HEDGEFUNDIE » Mon Sep 17, 2018 8:43 pm

VA_Investor wrote:
Mon Sep 17, 2018 8:39 pm
Thesaints wrote:
Mon Sep 17, 2018 8:23 pm
VA_Investor wrote:
Mon Sep 17, 2018 8:13 pm
Thanks Thesaints. How do you recommend establishing an asset allocation mix to achieve a certain level of risk/return, if historical models are no good?
Be a pessimist. Also, try to understand where historical returns come from and re-evaluate expectations based on present situation, not on an historically average one. We certainly know that bond returns going forward are going to be well below historical average for a while. Stocks also look on the less generous side.
Thanks Thesaints. The Portfolio Visualizer tool that Hedgefundie listed above lets me adjust historical returns on asset classes, so I can play around with some more conservative/pessimistic assumptions. Appreciate your feedback on this!
I use 3% for bonds and 7% for stocks.

Thesaints
Posts: 1664
Joined: Tue Jun 20, 2017 12:25 am

Re: Asset allocation calculator

Post by Thesaints » Mon Sep 17, 2018 8:52 pm

Admiral wrote:
Mon Sep 17, 2018 8:33 pm
Your AA is based on risk tolerance
If it were only based on that, then one would always choose the riskiest AA he can bear.
That would not serve well all those who don't need to take so much risk because their target is closer.
I agree that one may reevaluate targets not only to stay within tolerable risk, but also revising them on the upside because extra risk involved looks very bearable.

One may plan for a BMW, but as that target get closer they may think that a Porsche has become an actual possibility and take on the extra risk, if failing means to be stuck with an Audi.
Of course, if going for the Porsche opens up the possibility of being only able to afford mass transit, conclusions may be different.

Thesaints
Posts: 1664
Joined: Tue Jun 20, 2017 12:25 am

Re: Asset allocation calculator

Post by Thesaints » Mon Sep 17, 2018 8:54 pm

HEDGEFUNDIE wrote:
Mon Sep 17, 2018 8:43 pm
I use 3% for bonds and 7% for stocks.
If those are nominal figures, they seem alright to me.

HEDGEFUNDIE
Posts: 1206
Joined: Sun Oct 22, 2017 2:06 pm

Re: Asset allocation calculator

Post by HEDGEFUNDIE » Mon Sep 17, 2018 8:58 pm

Thesaints wrote:
Mon Sep 17, 2018 8:54 pm
HEDGEFUNDIE wrote:
Mon Sep 17, 2018 8:43 pm
I use 3% for bonds and 7% for stocks.
If those are nominal figures, they seem alright to me.
Yes nominal

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Tue Sep 18, 2018 8:51 pm

Taylor Larimore wrote:
Mon Sep 17, 2018 8:39 pm
Consider this Vanguard Questionnaire
Thanks Taylor, appreciate your suggestion. I actually went through this questionnaire a while back. It considers willingness and ability to take risk, but it doesn't account for need to take risk. This is a shortfall of a lot of financial planning, IMO. For me, the recommendations where too aggressive on stock allocation since I don't need to take as much risk (nearing age 60 and nearing retirement savings goals).

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Tue Sep 18, 2018 8:55 pm

HEDGEFUNDIE wrote:
Mon Sep 17, 2018 8:43 pm
I use 3% for bonds and 7% for stocks.
Thanks Hedgefundie. BTW, the Portfolio Visualizer tools are really helpful, thanks again for that suggestion!

HEDGEFUNDIE
Posts: 1206
Joined: Sun Oct 22, 2017 2:06 pm

Re: Asset allocation calculator

Post by HEDGEFUNDIE » Tue Sep 18, 2018 9:13 pm

VA_Investor wrote:
Tue Sep 18, 2018 8:55 pm
HEDGEFUNDIE wrote:
Mon Sep 17, 2018 8:43 pm
I use 3% for bonds and 7% for stocks.
Thanks Hedgefundie. BTW, the Portfolio Visualizer tools are really helpful, thanks again for that suggestion!
You’re welcome!

Fallible
Posts: 6562
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: Asset allocation calculator

Post by Fallible » Tue Sep 18, 2018 10:03 pm

VA_Investor wrote:
Sun Sep 16, 2018 9:07 pm
I am in the process transferring funds from advisor-managed portfolio to a 3 or 4 fund portfolio at Vanguard. I've been using MaxiFi to back out what level of return I need to achieve retirement goals. Once I have that number, I'd like to work out correct stock/bond allocation to achieve that return. Is there a calculator available that does that, based on historical returns? I have found some models like this one at Vanguard, but not a calculator.

Any problems or other advice using historical data? I'm trying to find best practice for setting asset allocation based on desired return. ...
It appears from your later replies to posters Ron Scott and retiredjg that you have indeed taken need, ability, and willingness to take risk into consideration in setting an allocation. However, I can't tell if you have done so before reading their replies and good advice or after. Which is it?
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

Agggm
Posts: 240
Joined: Mon Dec 25, 2017 6:18 pm

Re: Asset allocation calculator

Post by Agggm » Tue Sep 18, 2018 10:31 pm

VA_Investor wrote:
Sun Sep 16, 2018 9:07 pm
I am in the process transferring funds from advisor-managed portfolio to a 3 or 4 fund portfolio at Vanguard. I've been using MaxiFi to back out what level of return I need to achieve retirement goals. Once I have that number, I'd like to work out correct stock/bond allocation to achieve that return. Is there a calculator available that does that, based on historical returns? I have found some models like this one at Vanguard, but not a calculator.

Any problems or other advice using historical data? I'm trying to find best practice for setting asset allocation based on desired return.

Thanks!
If you want to take it easy on your self, consider vanguards personal advisors service. Or, use Vanguard or Schwab target date funds.
Otherwise, you could be second guessing your allocation for years with size and value tilts and sectors and EM and factors lol and and and and...

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Tue Sep 18, 2018 10:53 pm

Fallible wrote:
Tue Sep 18, 2018 10:03 pm
It appears from your later replies to posters Ron Scott and retiredjg that you have indeed taken need, ability, and willingness to take risk into consideration in setting an allocation. However, I can't tell if you have done so before reading their replies or after. Which is it?
Fallible, this was my investment strategy before discovering bogleheads forum fairly recently, i.e., develop a plan (Admiral suggested using FRP, I'm using MaxiFi) and then select portfolio allocation that minimizes risk consistent with making the plan work. There have been some good points made here along the lines that you can change other parts of the plan besides asset allocation (work longer, save more, etc. etc.). I agree with this. But at some point, I have to fix certain assumptions to actually have a plan. For example, say I want to retire at age x, my wife retire at age y, we have z current savings, we are saving xx per year, we expect yy social security starting at age zz, etc. etc. I understand that all these variables can be altered, and MaxiFi lets me look at different scenarios (similar to FRP). But right now I know what assumptions I want to make for my plan (i.e., I know when I want to retire, how much I have saved, how much more I plan to save before retirement, when I expect to start taking social security, etc.). Once all those variables are set in my plan, the one knob I have left to turn is portfolio return to get to desired retirement income. I'm sure there are other ways to develop a plan, this is just what I'm doing and is consistent with approach I've seen used by some financial planners.

For my situation, I'm about ten years from retiring, have made good progress towards retirement savings goals, and don't need to take as much risk as when I was starting out. My portfolio growth goal will probably be in the 5% range (still fine-tuning this). So my original question was simply looking for tools to help me figure out portfolio allocation that achieved my target return.

I'm not sure if this answered your question, but thanks for your response.

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Tue Sep 18, 2018 11:04 pm

Agggm wrote:
Tue Sep 18, 2018 10:31 pm
If you want to take it easy on your self, consider vanguards personal advisors service. Or, use Vanguard or Schwab target date funds.
Otherwise, you could be second guessing your allocation for years with size and value tilts and sectors and EM and factors lol and and and and...
Thanks Agggm, appreciate your suggestion. I've used target date funds in the past, and also used the underlying target date fund allocations as a guide to set asset allocations for my own portfolios. You have to keep an eye on the allocation for target date funds to make sure it lines up with what you want (i.e., can't just use date since allocation might be more or less conservative than you want). But I agree it's a good option to keep in mind and an alternative to building a 4-fund portfolio myself. Thanks for your response.

Admiral
Posts: 1442
Joined: Mon Oct 27, 2014 12:35 pm

Re: Asset allocation calculator

Post by Admiral » Wed Sep 19, 2018 6:27 am

Thesaints wrote:
Mon Sep 17, 2018 8:52 pm
Admiral wrote:
Mon Sep 17, 2018 8:33 pm
Your AA is based on risk tolerance
If it were only based on that, then one would always choose the riskiest AA he can bear.
That would not serve well all those who don't need to take so much risk because their target is closer.
I agree that one may reevaluate targets not only to stay within tolerable risk, but also revising them on the upside because extra risk involved looks very bearable.

One may plan for a BMW, but as that target get closer they may think that a Porsche has become an actual possibility and take on the extra risk, if failing means to be stuck with an Audi.
Of course, if going for the Porsche opens up the possibility of being only able to afford mass transit, conclusions may be different.
Read "risk tolerance" as "need and ability to take risk." Thanks.

User avatar
ruralavalon
Posts: 14250
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Asset allocation calculator

Post by ruralavalon » Wed Sep 19, 2018 9:04 am

Ron Scott wrote:
Sun Sep 16, 2018 9:33 pm
That’s not how it works. You don’t reverse engineer your asset allocation to shoot for a goal amount since you can’t predict returns. (This exemplifies how models like Firecalc are illusions.)

You set an allocation for equities between 25% and 75% based on you tolerance for risk, or, better yet, just allocate your-age-in-bonds, buy the whole US market, and you get what the market returns. Some people may tell you to expect a certain return rate over various periods of time based on your allocations and investments but they should not be trusted.

To build more wealth faster save and invest more and for a longer period of time, and check your progress annually.
I agree. Don't start by selecting a rate of return, that's going at the problem backwards.

Determine an asset allocation which is comfortable for you based on a realistic assessment your own ability, willingness, and need to take risk. At least 20% bonds even if young and daring. A significant stock allocation even if old and conservative. It's a very personal decision.

Then contribute to investing as much as is practical for you every year.

Take the return that the market gives.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
Posts: 34373
Joined: Thu Jan 10, 2008 12:56 pm

Re: Asset allocation calculator

Post by retiredjg » Wed Sep 19, 2018 9:32 am

I think this poster is saying s/he is older and within 10 years of retirement with a willingness and at least some ability to take risk. In a case like that, the need to take risk may actually be less than willingness and ability.

It is possible that need should be the limiting factor for this poster.

Thesaints
Posts: 1664
Joined: Tue Jun 20, 2017 12:25 am

Re: Asset allocation calculator

Post by Thesaints » Wed Sep 19, 2018 11:09 am

ruralavalon wrote:
Wed Sep 19, 2018 9:04 am
I agree. Don't start by selecting a rate of return, that's going at the problem backwards.

Determine an asset allocation which is comfortable for you based on a realistic assessment your own ability, willingness, and need to take risk..
How do you estimate your need to take risk, if you donn’t have a target amount at some point in the future ? And once you have that, isn’t just simple algebra to calculate necessary rate of return ?

User avatar
ruralavalon
Posts: 14250
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Asset allocation calculator

Post by ruralavalon » Wed Sep 19, 2018 11:24 am

Thesaints wrote:
Wed Sep 19, 2018 11:09 am
ruralavalon wrote:
Wed Sep 19, 2018 9:04 am
I agree. Don't start by selecting a rate of return, that's going at the problem backwards.

Determine an asset allocation which is comfortable for you based on a realistic assessment your own ability, willingness, and need to take risk..
How do you estimate your need to take risk, if you donn’t have a target amount at some point in the future ? And once you have that, isn’t just simple algebra to calculate necessary rate of return ?
No, it's not really a math problem.

It's a matter of controlling what the investor can, not pretending to have control that the investor doesn't have.

An investor can choose an asset allocation to use. An investor can choose, within limits, how much to contribute to investing. An investor can choose, within limits, how long to work. An investor cannot choose a rate of return to recieve, you get whatever return the market gives.

I think it's likely a mistake to pick a high rate of return which you want, and then pick a riskier asset allocation trying to achieve the high rate of return. I think that can backfire,and leave you worse off.
Last edited by ruralavalon on Wed Sep 19, 2018 11:29 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Thesaints
Posts: 1664
Joined: Tue Jun 20, 2017 12:25 am

Re: Asset allocation calculator

Post by Thesaints » Wed Sep 19, 2018 11:28 am

So, how do I choose my AA ?

Also, it is not really “choosing market return”, but “assuming market return” and if you don’t assume anything at all, why do you invest ? Maybe return for bonds is going to be -99% going forward...

User avatar
galeno
Posts: 1413
Joined: Fri Dec 21, 2007 12:06 pm

Re: Asset allocation calculator

Post by galeno » Wed Sep 19, 2018 1:12 pm

My risk tolerance is very high (+20%). My wife's risk tolerance is moderate (age in FI). Our NEED to take risk is moderate. We use (age in FI) for our retirement portfolio.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

Fallible
Posts: 6562
Joined: Fri Nov 27, 2009 4:44 pm
Contact:

Re: Asset allocation calculator

Post by Fallible » Wed Sep 19, 2018 2:46 pm

VA_Investor wrote:
Tue Sep 18, 2018 10:53 pm
Fallible wrote:
Tue Sep 18, 2018 10:03 pm
It appears from your later replies to posters Ron Scott and retiredjg that you have indeed taken need, ability, and willingness to take risk into consideration in setting an allocation. However, I can't tell if you have done so before reading their replies or after. Which is it?
Fallible, this was my investment strategy before discovering bogleheads forum fairly recently, i.e., develop a plan (Admiral suggested using FRP, I'm using MaxiFi) and then select portfolio allocation that minimizes risk consistent with making the plan work. There have been some good points made here along the lines that you can change other parts of the plan besides asset allocation (work longer, save more, etc. etc.). I agree with this. But at some point, I have to fix certain assumptions to actually have a plan. For example, say I want to retire at age x, my wife retire at age y, we have z current savings, we are saving xx per year, we expect yy social security starting at age zz, etc. etc. I understand that all these variables can be altered, and MaxiFi lets me look at different scenarios (similar to FRP). But right now I know what assumptions I want to make for my plan (i.e., I know when I want to retire, how much I have saved, how much more I plan to save before retirement, when I expect to start taking social security, etc.). Once all those variables are set in my plan, the one knob I have left to turn is portfolio return to get to desired retirement income. I'm sure there are other ways to develop a plan, this is just what I'm doing and is consistent with approach I've seen used by some financial planners.

For my situation, I'm about ten years from retiring, have made good progress towards retirement savings goals, and don't need to take as much risk as when I was starting out. My portfolio growth goal will probably be in the 5% range (still fine-tuning this). So my original question was simply looking for tools to help me figure out portfolio allocation that achieved my target return. ...
Thanks for your response; you've put some good thought into this.

I think what was confusing for me is that you originally mentioned calculating rate of return first and then deciding an allocation that would achieve that return. But later, after some posters brought up first determining need, ability, and willingness to take risk in setting an allocation, you then also referred to these and to need in particular. After need, you apparently have the ability for the last ten years to retirement, although ability does include investment horizon. Willingness could be the final determination since it is possible to have both need and ability but increasingly less desire/ability to stomach worries about the next crash/financial crisis. And risk tolerance does change often.

I don’t know if you’ve read Larry Swedroe’s blogs on ability, willingness, and need, but in case not, here they are:

https://www.cbsnews.com/news/asset-allo ... -you-take/

https://www.cbsnews.com/news/asset-allo ... tolerance/

https://www.cbsnews.com/news/asset-allo ... -you-need/
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

User avatar
Taylor Larimore
Advisory Board
Posts: 27612
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Need to take risk

Post by Taylor Larimore » Wed Sep 19, 2018 2:54 pm

VA_Investor wrote:
Tue Sep 18, 2018 8:51 pm
Taylor Larimore wrote:
Mon Sep 17, 2018 8:39 pm
Consider this Vanguard Questionnaire
Thanks Taylor, appreciate your suggestion. I actually went through this questionnaire a while back. It considers willingness and ability to take risk, but it doesn't account for need to take risk.
VA_Investor:

Look again at Questions #1 & #10:
#1. I plan to begin taking money from my investments in ...
1 year or less
1 – 2 years
3 – 5 years
6 – 10 years
11 – 15 years
More than 15 years
#10. My current and future income sources (for example, salary, Social Security, pension) are …
Very unstable
Unstable
Somewhat stable
Stable
Very stable
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Need to take risk

Post by VA_Investor » Wed Sep 19, 2018 9:09 pm

Taylor Larimore wrote:
Wed Sep 19, 2018 2:54 pm

VA_Investor:

Look again at Questions #1 & #10:
#1. I plan to begin taking money from my investments in ...
1 year or less
1 – 2 years
3 – 5 years
6 – 10 years
11 – 15 years
More than 15 years
#10. My current and future income sources (for example, salary, Social Security, pension) are …
Very unstable
Unstable
Somewhat stable
Stable
Very stable
Best wishes.
Taylor
Thanks Taylor. Consider this hypothetical example where I'm financially independent at age 50, but still working for 15 years (OK, this is hypothetical). I don't need to take any investment risk and can keep my funds in laddered bonds/CDs or Gov't treasuries or whatever. However the questionnaire (including the two questions above) may lead me to a portfolio allocation heavily weighted in stocks, because answering the questions truthfully indicates that I am willing and able to take risk. IMO, the questionnaire just doesn't drive out the "need" question at all.

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Wed Sep 19, 2018 9:14 pm

Fallible wrote:
Wed Sep 19, 2018 2:46 pm

I don’t know if you’ve read Larry Swedroe’s blogs on ability, willingness, and need, but in case not, here they are:

https://www.cbsnews.com/news/asset-allo ... -you-take/

https://www.cbsnews.com/news/asset-allo ... tolerance/

https://www.cbsnews.com/news/asset-allo ... -you-need/
Thanks Fallible, I did come across those in the BH Risk Tolerance wiki, which is a good resource. Thanks for your feedback.

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Wed Sep 19, 2018 9:16 pm

ruralavalon wrote:
Wed Sep 19, 2018 11:24 am
No, it's not really a math problem.
I'm an engineer---everything is a math problem! :D

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Wed Sep 19, 2018 9:17 pm

Seriously though, thanks to everyone that responded here. I appreciate all the thoughtful feedback and insights.

User avatar
David Jay
Posts: 5771
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Asset allocation calculator

Post by David Jay » Thu Sep 20, 2018 9:03 am

VA_Investor wrote:
Wed Sep 19, 2018 9:16 pm
ruralavalon wrote:
Wed Sep 19, 2018 11:24 am
No, it's not really a math problem.
I'm an engineer---everything is a math problem! :D
I understand, I have the same ailment :wink:

But the emotional world does not operate in accord with Newtonian Physics. And the biggest threat to your portfolio is the person in the mirror. May I recommend some reading like "Your Money and your Brain" by Jason Zweig.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

User avatar
ruralavalon
Posts: 14250
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Asset allocation calculator

Post by ruralavalon » Thu Sep 20, 2018 10:20 am

David Jay wrote:
Thu Sep 20, 2018 9:03 am
VA_Investor wrote:
Wed Sep 19, 2018 9:16 pm
ruralavalon wrote:
Wed Sep 19, 2018 11:24 am
No, it's not really a math problem.
I'm an engineer---everything is a math problem! :D
I understand, I have the same ailment :wink:

But the emotional world does not operate in accord with Newtonian Physics. And the biggest threat to your portfolio is the person in the mirror. May I recommend some reading like "Your Money and your Brain" by Jason Zweig.
I agree. Asset allocation involves neuroscience as well as math.

That is an excellent book on the subject of emotions in investing.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Asset allocation calculator

Post by Ron Scott » Thu Sep 20, 2018 6:18 pm

Thesaints wrote:
Mon Sep 17, 2018 7:45 pm
VA_Investor wrote:
Sun Sep 16, 2018 9:07 pm
Any problems...using historical data?
Yes. Historical return for bonds is 7%, but the 10-year note currently yields less than 3%.
In addition to Thesaints technical assessment, which should certainly be considered, I will offer some logic for not using historical data for equities:

Using 80 or so years of US market data to predict the next 30 or more years' market performance is statistically and logically flawed. There is not enough data for modern statistical tools to function properly and believing those 80 years either cause or will predict future returns completely ignores the possibility that some other event(s) will upset any short-term pattern and result in meaningfully lower or higher returns. WE DO NOT KNOW what will happen and using those old data does not educate us about the future.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Sun Sep 23, 2018 9:14 pm

Ron Scott wrote:
Thu Sep 20, 2018 6:18 pm
Using 80 or so years of US market data to predict the next 30 or more years' market performance is statistically and logically flawed. There is not enough data for modern statistical tools to function properly and believing those 80 years either cause or will predict future returns completely ignores the possibility that some other event(s) will upset any short-term pattern and result in meaningfully lower or higher returns. WE DO NOT KNOW what will happen and using those old data does not educate us about the future.
Thanks Ron, appreciate the additional feedback. What do you recommend using in planning models to predict portfolio returns based on a certain asset allocation?

VA_Investor
Posts: 35
Joined: Mon Aug 27, 2018 7:12 pm

Re: Asset allocation calculator

Post by VA_Investor » Sun Sep 23, 2018 9:19 pm

David Jay wrote:
Thu Sep 20, 2018 9:03 am
But the emotional world does not operate in accord with Newtonian Physics. And the biggest threat to your portfolio is the person in the mirror. May I recommend some reading like "Your Money and your Brain" by Jason Zweig.
ruralavalon wrote:
Thu Sep 20, 2018 10:20 am
I agree. Asset allocation involves neuroscience as well as math. That is an excellent book on the subject of emotions in investing.
Thanks David and ruralavalon, I'll put "Your Money and your Brain" on my reading list.

Post Reply