Seeking Advice on Portfolio Mix (11 yrs to FI)

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Topic Author
olliema
Posts: 34
Joined: Sun Mar 11, 2018 10:34 pm

Seeking Advice on Portfolio Mix (11 yrs to FI)

Post by olliema » Sun Dec 01, 2019 10:36 am

I'm seeking honest feedback on planned portfolio allocations given my objective of FI in roughly 11 years.

Details / IPS highlights are below.

Main question: does this portfolio mix seem sensible for someone aiming to retire / semi-retire roughly 11 years from now, if investor has good risk tolerance, and is willing to trade some investment return potential for consistency of the returns they do get.

Let me know what else I can provide and I thank you for your suggestions.

Investor Profile
  • Age 46 / Working Full-time / Expect to be highly employable for 10+ years
  • Spouse 34 (No income / Stay at home mom) / One child 2 years old
  • By 2030 (age 57), I’d like to have enough money for me + wife to subsist without work-based income for 40 years
  • I have good risk tolerance, e.g. I would not try to cash out on a 30-50% market drop, and would likely buy more equities
  • Dates are flexible - I can work longer or stop sooner depending on markets and / or desire to increase retirement income.
  • ~$1.18M in retirement accounts (92% stock, 1% bond, 7% cash equiv.) today
  • I contribute $30K per year to investments & plan to continue this contribution rate for 11 years minimum
  • I believe with above contribution and 5.5% average gross return I could possibly grow portfolio to $2.25M by Dec 2030
  • I believe in 2030 $2.25M could support (in 2019 dollars assuming 1.5% inflation), $68K income annually for 40 years, putting FI in my grasp.
What I think needs to change:
  • Reduce volatility by increasing bond exposure
  • Reduce expenses by using cheapest funds available
Target portfolio:
  • 70% Equity Index (SP500)
  • 30% Bond Index (US Corp & Investment-grade)
Target Portfolio Details:

Code: Select all

_________________________________________________________________________________
|	Investment		|      ER / Fees	|     Allocation %	|
---------------------------------------------------------------------------------
|	VIIIX			|			|			|
|	Vanguard SP500 Index	|0.02 ER / No Fees	|	61%		|
---------------------------------------------------------------------------------
|	FXAIX			|			|			|
|	Fidelity 500 Index Fund	|0.02 ER / 0.15 Mgt Fee	|	9%		|
|	*will fold into VIIIX*	|			|			|
---------------------------------------------------------------------------------
|	VBTLX / VBVMPX		|0.03 ER (Inv. Shares)	|			|
|	Vanguard Total Bond	|0.05 ER (Adm. Shares)	|	30%		|
|	Market Index Fund	|			|			|
|	30% corp. + 70% U.S. 	|			|			|
|	gov. bonds all		|			|			|
|	maturities		|			|			|
---------------------------------------------------------------------------------
How I got to the above conclusion:
  • Reviewed my current portfolio mix and investment costs to see what needs to change
  • Reviewed available funds & expenses/fees in my 401(k) & IRA accounts
  • Back-tested a variety of scenarios using portfoliovisualizer with equity-to-bond mixes of 90:10, 80:20, 70:30, 60:40
  • Concluded 70:30 seems to had the right mix of performance to stability from the historical data
  • Forecast a 5.5% average gross return on a $1.1M portfolio with $2.5K monthly contributions could yield roughly $2.25M in 11 years
  • Forecast future value of $80,100, or 1/28th of a $2.25M portfolio, in 2030 dollars at 1.5% annual inflation - $68K is result
  • Monte Carlo simulated (Vanguard + Firecalc) consuming $80K for 40 years from a $2.25M portfolio. > 90% probability of success
Principles:

SIMPLICITY, COSTS & AUTOMATION
  • Hold fewest number funds possible to keep portfolio easy to manage.
  • Use lowest cost funds possible maximize returns.
    • FXAIX will be migrated to VIIIX via 401(k) rollover to cut costs & streamline.
  • Exposure to international markets implied through global exposure of firms in SP500 index.
  • Bonds are held in bond funds, to simplify management and mitigate interest rate exposure.
  • Contributions are automated through payroll deduction.
  • Contributions made equally thru year, regardless of market conditions (dollar cost averaging).
REVIEW & RE-BALANCE
  • Portfolio will be reviewed quarterly to review fees, expenses and allocations / performance.
  • Re-balancing will occur when / if asset class allocations exceed 5% of Portfolio Value OR 25% of target allocation, whichever is less (Swedroe 5/25 Rule).

lakpr
Posts: 5375
Joined: Fri Mar 18, 2011 9:59 am

Re: Seeking Advice on Portfolio Mix (11 yrs to FI)

Post by lakpr » Sun Dec 01, 2019 10:49 am

Just a few minor cautions:

1. You are assuming a 5% return rate between now and 2030, and coming up with 2.25 million figure. In other words, you are assuming that the return is real return. It's possible, historically that's been the long term real return rate (over and above inflation). But with a time horizon of just 1 decade, that may not hold true.

If you would achieve 2.25 million in today's dollars by 2030 or sooner, and your expenses in 2030 would be around 68k in today's dollars again, that's approximately a 3% withdrawal rate, and yes it will definitely sustain you forever with a 70:30 allocation.

2. It appears that you are not including international equities in your portfolio. It may or may not be right choice, but one which will only be clear when it's already in the rear view mirror. I, personally, tend to underweight the international equities, limiting it to no more than 15% of my own portfolio. But even to me, complete non-allocation to international equities sounds a bit extreme.

There is a paper published by Vanguard that, if you allocate 20% of your stock allocation to international stocks, you accrue 85% of the diversification benefit (you will invest essentially in nearly 7000 stocks instead of just 3000+ stocks), and with a 30% allocation to international stocks, 99% of the diversification benefit. [ You will find the link for this paper in one of @ruralavalon's many posts in this forum ]. Based on this paper's findings, I have moved my international allocation to 20% of my 70:30 portfolio, or 55:15:30. I would urge you to consider this modest allocation to international as well.

Topic Author
olliema
Posts: 34
Joined: Sun Mar 11, 2018 10:34 pm

Re: Seeking Advice on Portfolio Mix (11 yrs to FI)

Post by olliema » Sun Dec 01, 2019 1:27 pm

Thank you lakpr. Your feedback is helpful and I agree that my assumptions on future returns & inflation is nothing more than an semi-educated guess.

I will look up the international paper and give it consideration. Even a 10% international allocation could be a good thing for me.

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