Help with asset allocation

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Topic Author
mentos
Posts: 31
Joined: Mon Feb 15, 2016 9:44 am

Help with asset allocation

Post by mentos » Thu Feb 13, 2020 2:17 pm

Hi, my wife and I are 36 and I'd like help rebalancing. Our 401ks are currently 100% in target date funds but the expense ratios are quite high at 0.65%.

We'd like to be 100% stocks.

Current allocation:
401ks: 400k target date funds
Roth IRAs: 70k total stock market fund, 11k international fund

I was thinking something like:
50% S&P
30% small cap
20% international

Or should I split it 34/33/33?

lakpr
Posts: 3864
Joined: Fri Mar 18, 2011 9:59 am

Re: Help with asset allocation

Post by lakpr » Thu Feb 13, 2020 2:44 pm

I think it's best if you provide your complete financial picture ... any Roth IRAs? Taxable investments? etc. ..

IN GENERAL, and without all those details this advice may not be fully applicable to you ... for a couple with average age of 36, I would suggest a 60:20:20 portfolio between stocks / international stocks / bonds. That's based upon a "Age-15" allocation to bonds, then a 25% allocation within the stocks to international stocks.

That 60% allocation to domestic stocks, if possible should be invested in a Total Stock Market Index (or its closest cousin, Russell 3000 index fund).
In the absence of such a stock fund being available, I'd split it in a 4:1 ratio between S&P 500 and small cap index funds. This combination is suggested to approximate the total stock market index fund.

So
- 48% to S&P 500 index fund
- 12% to Small Cap index fund
- 20% to a low cost International Stocks fund (make sure the expense ratio is no more than 0.2%)
- 20% to a US Bond Index fund

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BolderBoy
Posts: 4632
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Help with asset allocation

Post by BolderBoy » Thu Feb 13, 2020 3:05 pm

mentos wrote:
Thu Feb 13, 2020 2:17 pm
Hi, my wife and I are 36 and I'd like help rebalancing. Our 401ks are currently 100% in target date funds but the expense ratios are quite high at 0.65%.

We'd like to be 100% stocks.
An AA of 100/0 requires nerves of steel when you are in your mid-30s.

How did you react to the market crash of 2007-2009? If your answer isn't, "I was buying as much stock as I could.", then you may want to rethink your desired AA.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

Topic Author
mentos
Posts: 31
Joined: Mon Feb 15, 2016 9:44 am

Re: Help with asset allocation

Post by mentos » Thu Feb 13, 2020 3:18 pm

lakpr wrote:
Thu Feb 13, 2020 2:44 pm
I think it's best if you provide your complete financial picture ... any Roth IRAs? Taxable investments? etc. ..

IN GENERAL, and without all those details this advice may not be fully applicable to you ... for a couple with average age of 36, I would suggest a 60:20:20 portfolio between stocks / international stocks / bonds. That's based upon a "Age-15" allocation to bonds, then a 25% allocation within the stocks to international stocks.

That 60% allocation to domestic stocks, if possible should be invested in a Total Stock Market Index (or its closest cousin, Russell 3000 index fund).
In the absence of such a stock fund being available, I'd split it in a 4:1 ratio between S&P 500 and small cap index funds. This combination is suggested to approximate the total stock market index fund.

So
- 48% to S&P 500 index fund
- 12% to Small Cap index fund
- 20% to a low cost International Stocks fund (make sure the expense ratio is no more than 0.2%)
- 20% to a US Bond Index fund
Thanks for the reply. I stated earlier we had Roth IRAs with about 81k in there.

20% for bonds seems high. The target date funds have about 10% bonds. Do you think the target date funds are too aggressive?

Would it be best to rebalance all at once or do it gradually?

Topic Author
mentos
Posts: 31
Joined: Mon Feb 15, 2016 9:44 am

Re: Help with asset allocation

Post by mentos » Thu Feb 13, 2020 3:19 pm

BolderBoy wrote:
Thu Feb 13, 2020 3:05 pm
mentos wrote:
Thu Feb 13, 2020 2:17 pm
Hi, my wife and I are 36 and I'd like help rebalancing. Our 401ks are currently 100% in target date funds but the expense ratios are quite high at 0.65%.

We'd like to be 100% stocks.
An AA of 100/0 requires nerves of steel when you are in your mid-30s.

How did you react to the market crash of 2007-2009? If your answer isn't, "I was buying as much stock as I could.", then you may want to rethink your desired AA.
I will consider bonds, thank you. All of my peers seem to be 100% stocks right now.

lakpr
Posts: 3864
Joined: Fri Mar 18, 2011 9:59 am

Re: Help with asset allocation

Post by lakpr » Thu Feb 13, 2020 3:23 pm

mentos wrote:
Thu Feb 13, 2020 3:18 pm
Thanks for the reply. I stated earlier we had Roth IRAs with about 81k in there.
Sorry, missed that. Now that I see it, I do think it is well invested, wouldn't change anything.
mentos wrote:
Thu Feb 13, 2020 3:18 pm
20% for bonds seems high. The target date funds have about 10% bonds. Do you think the target date funds are too aggressive?
Yes in fact, I do think target date funds start high and increase their bond allocation also too rapidly. My preference -- and you don't have to follow me, you can follow the target date funds as well -- is to start with and keep an "Age-15" to "Age-20" in bonds always. Thus, at age 70, I would still be advocating a 50:50 or may be a 45:55 allocation, but the Target funds would slide down to 30:70 allocation.
mentos wrote:
Thu Feb 13, 2020 3:18 pm
Would it be best to rebalance all at once or do it gradually?
Once you pick a rebalancing strategy, I would do it all at once. Next rebalance would be either due to a trigger point (one of the asset classes moved 5% too much from its target), or because it's an anniversary date.

lakpr
Posts: 3864
Joined: Fri Mar 18, 2011 9:59 am

Re: Help with asset allocation

Post by lakpr » Thu Feb 13, 2020 3:27 pm

mentos wrote:
Thu Feb 13, 2020 3:19 pm
I will consider bonds, thank you. All of my peers seem to be 100% stocks right now.
In the words of someone (I don't remember the name of the poster) on this forum ... this is a "contra-indicator".
If too many people are advocating buying something ... may be it is time to SELL that something :)
Reminds me of the story of Joseph Kennedy and the shoe-shine boy -- shoe-shine boy offering tips on which stocks to buy ... and Joe Kennedy went ahead and sold everything in stocks ... right before the Great Depression ...

mega317
Posts: 3133
Joined: Tue Apr 19, 2016 10:55 am

Re: Help with asset allocation

Post by mega317 » Thu Feb 13, 2020 3:53 pm

mentos wrote:
Thu Feb 13, 2020 3:18 pm
Do you think the target date funds are too aggressive?
It doesn't really matter what anyone else thinks. And you will find all kinds of opinions. You need to come to this yourself.
BolderBoy wrote:
Thu Feb 13, 2020 3:05 pm
How did you react to the market crash of 2007-2009?
OP was 25 and likely didn't have as much money. So even if s/he was going all stocks it might not have anything to do with the current situation which is half a million. Which is a way of saying I agree with you.

Topic Author
mentos
Posts: 31
Joined: Mon Feb 15, 2016 9:44 am

Re: Help with asset allocation

Post by mentos » Thu Feb 13, 2020 5:19 pm

mega317 wrote:
Thu Feb 13, 2020 3:53 pm
mentos wrote:
Thu Feb 13, 2020 3:18 pm
Do you think the target date funds are too aggressive?
It doesn't really matter what anyone else thinks. And you will find all kinds of opinions. You need to come to this yourself.
BolderBoy wrote:
Thu Feb 13, 2020 3:05 pm
How did you react to the market crash of 2007-2009?
OP was 25 and likely didn't have as much money. So even if s/he was going all stocks it might not have anything to do with the current situation which is half a million. Which is a way of saying I agree with you.
That's correct I only had maybe 15-20k invested at the time. I did lose 2k or so from panick selling but I believe I'm wiser and more disciplined now.

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