Should asset allocation depend on size of portfolio?

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vchiu25
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Should asset allocation depend on size of portfolio?

Post by vchiu25 » Mon Mar 16, 2020 11:03 pm

One of the thing I noticed during this market turbulence is that I'm feeling ok with my current asset allocation so far (which is good). But I think this is because I know I still have enough. Right now I just look at percentage loss and ignore it. I think I would feel differently psychologically if total amount of my portfolio were to drop below 4% of my spending.

What do people think? Should one's asset allocation depend on size of portfolio? For example, if you have 5 million, 3 million or 1 million (or alternatively 100x, 50x, 20x spending etc), would you take on different asset allocation? Why or why not? How does this your affect your decision in this downturn when the portfolio size decline beyond some threshold.

Before the crisis. I had no need to take risk, but have plenty of ability. I had very low spending and figure I will be ~1.5% withdraw rate if I quit. So I feel comfortable holding 70-80% equity. :greedy Looking back, that may have been too aggressive. :oops: I did not expect market to drop so quickly. :o I estimated a maximum 30% total drop in portfolio size, we have reached that in less than a month. With potentially more to go. :!:

I'm still rebalancing now, but I think I may stop rebalancing when it drop below 4% rules.
Last edited by vchiu25 on Fri Mar 20, 2020 10:45 pm, edited 7 times in total.

raveon
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Re: Should asset allocation depend on size of portfolio?

Post by raveon » Mon Mar 16, 2020 11:12 pm

To me, AA is about risk tolerance. The larger my portfolio, the less inclination I have to take on more risk so my AA would adjust accordingly. Of course, I would have fewer years left to live/work also...

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LittleGreenSoldiers
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Re: Should asset allocation depend on size of portfolio?

Post by LittleGreenSoldiers » Mon Mar 16, 2020 11:17 pm

nope!

AA is based on your IPS. Ignore the noise.

vipertom1970
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Re: Should asset allocation depend on size of portfolio?

Post by vipertom1970 » Tue Mar 17, 2020 1:13 am

AA is very personal for how much risk you can take and I don’t think it based on the size of your portfolio.

My AA has been 100% equities since my mid 20s and at 50yo, my portfolio is about 52x(43x recently) my yearly expenses and still 100% equities but my flexible withdraw rate is less then 1.5%. Bad years I just use my EF bucket and replenish the bucket during bull run. I think they call it a bucket strategy.
Last edited by vipertom1970 on Tue Mar 17, 2020 1:27 am, edited 4 times in total.

Thesaints
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Re: Should asset allocation depend on size of portfolio?

Post by Thesaints » Tue Mar 17, 2020 1:17 am

Yes. Of course, I may add.
Does anybody think that Warren Buffett has his age in bonds ?

PilgrimHT
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Re: Should asset allocation depend on size of portfolio?

Post by PilgrimHT » Tue Mar 17, 2020 5:17 am

Certainly, in my view, portfolio size is one element, but not the only one, that influences asset allocation.

I retired in my mid-50s and maintain a 70/30 portfolio. I'm personally comfortable with what some might consider a more aggressive equity exposure given we spend less than 2% of our portfolio annually. Given this safety margin, I'm quite happy to let our portfolio grow and, if fate is kind to us, some day pass on our estate to our children and charities. Having stayed the course through a few major downturns, we are comfortable with volatility even in times like now.

I think without this safety margin, we would approach our asset allocation entirely differently despite a high risk tolerance.

longjohn
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Re: Should asset allocation depend on size of portfolio?

Post by longjohn » Tue Mar 17, 2020 6:54 am

Honestly, I think the AA should also depend on the portfolio as the size of it will influence your risk tolerance, i.e. the short answer is always based on risk tolerance and time-in-market. However, I think there is a difference between growing wealth and preserving wealth, e.g. young investor just starting out in life (first job, pension contribution, buying house etc.) are more risk tolerant 1) due to age, longer time to get long-term returns but also 2) has near zero wealth which drives up risk tolerance to 'get ahead'. But later in life where you are ahead, I think risk tolerance should go down once your net worth has grown to a substantial size.

I have seen many topics with people who has lost tremendous fortunes due to the recent stock market drop, and if you are in the long-term and want to grow infinitely to riches, then sure don't worry about the AA by having 75/25 or even more in equity. But personally, if I had a net worth of say USD 2 million, I would significantly reduce my risk tolerance as I would focus more on wealth preservation than growth. This would be whether I was in my 20s or 50s.

smitcat
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Re: Should asset allocation depend on size of portfolio?

Post by smitcat » Tue Mar 17, 2020 8:01 am

"Should one's asset allocation depend on size of portfolio?"
Yes - Of course.

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Sandtrap
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Re: Should asset allocation depend on size of portfolio?

Post by Sandtrap » Tue Mar 17, 2020 8:16 am

vchiu25 wrote:
Mon Mar 16, 2020 11:03 pm
One of the thing I noticed during this market turbulence is that I'm feeling ok with my current asset allocation so far (which is good). But I think this is because I know I still have enough for my need with 4% rules. Right now I just look at percentage loss and ignore it. I think I would feel differently psychologically if total amount of my portfolio were to drop below a certain dollar number.

What do people think? Should one's asset allocation depend on size of portfolio? For example, if you have 5 million, 3 million or 1 million (or alternatively 100x, 50x, 20x spending etc), would you take on different asset allocation? Why or why not? How does this your affect your decision in this downturn when the portfolio size decline beyond some threshold.
The "rules of thumb" are willingness, need, and ability to take risk.

However, there's a bigger or more comprehensive picture to take:

One's entire short and long term personal financial, and investment finance, strategy is based on:
1 Where you are in the investing "life cycle".
2 Personal and financial goals, short and long term.
3 Small Fish, Medium Fish, Large Fish, Jumbo Fish, Predator Fish, Reef Fish (what type of fish you are at your core)
4 (Absolutely Yes) Size of Portfolio:

Wealthy: 1-5 million
Substantial Wealth: 5-10 million
Filthy Rich: 10+ million
Mega Rich: Billionaire
Etc.

5. Estate dynamics and planning.

*Perhaps the greatest damages sustained by an investment strategy (IPS) and portfolio $$ are behavioral.
Avoiding this demands "self knowledge" (#3 above).

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

alex_686
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Re: Should asset allocation depend on size of portfolio?

Post by alex_686 » Tue Mar 17, 2020 8:19 am

The larger the portfolio the greater ability one has to take risk.

However, your willingness to take risk may increase or decrease. No hard answers here.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

smitcat
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Re: Should asset allocation depend on size of portfolio?

Post by smitcat » Tue Mar 17, 2020 8:20 am

alex_686 wrote:
Tue Mar 17, 2020 8:19 am
The larger the portfolio the greater ability one has to take risk.

However, your willingness to take risk may increase or decrease. No hard answers here.
Perfect answer really.

Nowizard
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Re: Should asset allocation depend on size of portfolio?

Post by Nowizard » Tue Mar 17, 2020 8:21 am

Though not likely to be an issue for most here, there are approximately 50% of the population with no concern or knowledge about asset allocation since they have no stocks/funds, etc., just check-to-check living. This is not meant to be a guilt trip for those of us more fortunate, just another comment that different circumstances result in different behavioral responses even among those here who are much more financially literate and stable than most others. As with many financial decisions, there is nuance.

Tim

Dandy
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Re: Should asset allocation depend on size of portfolio?

Post by Dandy » Tue Mar 17, 2020 8:26 am

Asset size for the most part has to do with the need to take risk. If you have enough your need is usually less. That doesn't mean you can't take risk -- you have the ability and don't have the need -- so it depends on the willingness to take risk.

I have enough (hopefully) and at my age and pension and SS income have little need to take risk. So, I decided to have a moderate allocation (was 45/55 - haven't looked lately) and a decent amount of assets in FDIC products, money markets and short term bond funds. Others might want to grow their portfolio for heirs . I think my heirs will do fine.

Northster
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Re: Should asset allocation depend on size of portfolio?

Post by Northster » Tue Mar 17, 2020 8:28 am

I would say the larger the portfolio the less need to take risk. So without a need or willingness I am staying with 40/60, even though I have the ability to take more risk.

Topic Author
vchiu25
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Re: Should asset allocation depend on size of portfolio?

Post by vchiu25 » Fri Mar 20, 2020 8:13 pm

For those who think asset allocation should depend on size of portfolio. How would this affect re-balancing?

For example, I'm still rebalancing according to my plan (70/30). But if my portoflio were to drop below some threshold (4% rules), does that mean I should become more conservative or still stay the course?

bltn
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Re: Should asset allocation depend on size of portfolio?

Post by bltn » Fri Mar 20, 2020 8:29 pm

PilgrimHT wrote:
Tue Mar 17, 2020 5:17 am
Certainly, in my view, portfolio size is one element, but not the only one, that influences asset allocation.

I retired in my mid-50s and maintain a 70/30 portfolio. I'm personally comfortable with what some might consider a more aggressive equity exposure given we spend less than 2% of our portfolio annually. Given this safety margin, I'm quite happy to let our portfolio grow and, if fate is kind to us, some day pass on our estate to our children and charities. Having stayed the course through a few major downturns, we are comfortable with volatility even in times like now.

I think without this safety margin, we would approach our asset allocation entirely differently despite a high risk tolerance.
I agree . The less buffer a retired couple have relative to their spending, the more conservative their asset allocation will be.

MathIsMyWayr
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Re: Should asset allocation depend on size of portfolio?

Post by MathIsMyWayr » Fri Mar 20, 2020 9:16 pm

Asset allocation depends on the size of the portfolio and the life milestone. For those near or in retirement, if you have enough fixed income to cover the expenses for the entire expected remaining years, asset allocation is entirely a personal choice.

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WoodSpinner
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Re: Should asset allocation depend on size of portfolio?

Post by WoodSpinner » Fri Mar 20, 2020 9:59 pm

vchiu25 wrote:
Mon Mar 16, 2020 11:03 pm
One of the thing I noticed during this market turbulence is that I'm feeling ok with my current asset allocation so far (which is good). But I think this is because I know I still have enough for my need with 4% rules. Right now I just look at percentage loss and ignore it. I think I would feel differently psychologically if total amount of my portfolio were to drop below a certain dollar number.

What do people think? Should one's asset allocation depend on size of portfolio? For example, if you have 5 million, 3 million or 1 million (or alternatively 100x, 50x, 20x spending etc), would you take on different asset allocation? Why or why not? How does this your affect your decision in this downturn when the portfolio size decline beyond some threshold.
Note, the 4% Rule of Thumb makes some assumptions about your AA, 60/40 I believe.

At some level I think your suggestion makes sense but it’s such a personal decision around emotional risk and retirement goals that I would hesitate to make a firm rule or guideline.

I will be ok but certainly am not as confident as I was in mid February when I had a much larger cushion.

WoodSpinner

doldrum
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Re: Should asset allocation depend on size of portfolio?

Post by doldrum » Fri Mar 20, 2020 10:06 pm

vchiu25 wrote:
Mon Mar 16, 2020 11:03 pm
One of the thing I noticed during this market turbulence is that I'm feeling ok with my current asset allocation so far (which is good). But I think this is because I know I still have enough for my need with 4% rules. Right now I just look at percentage loss and ignore it. Should one's asset allocation depend on size of portfolio?
Ask Ray Dalio this question right now. Asset allocation doesn't really depend on size it depends on what percentage loss you willing to tolerate and what you are willing to do in order to prevent a loss. For instance, Dalio has been promoting his book, getting interviewed nonstop, and likely became too dogmatic with his All Weather portfolio mindset that he didn't see the writing on the wall. In a true crisis bonds/stocks/gold/bitcoin all sell off because people need cash. They are not inversely correlated. Asset allocation, "The Efficient Frontier", 60/40, 40/60, Age-, Target date funds etc are all an attempt to break the paralysis analysis and get you in the game. They are not the golden ticket of investing. The key to investing with this kind of market volatility is living in the present. So what do we know right now? Cash is king and we are not at the bottom. I thought there was going to be a bump in the market next week (because of rebalancing by pension funds,etc) but New York is getting hammered by COVID-19. The reality of this situation is just starting to get priced into the market so I wouldn't make any major moves out of cash (probably until May/June). Then we have to weigh the following: Are stocks and bonds going to be correlated moving forward (like the 70's)? Or do you believe they are inversely correlated which makes up for their underperformance?

More importantly we need to weigh how we will achieve that 2-4% perpetual withdrawal rate. Is that based on drawdown, dividends, sales, rental income, etc? Is index investing dead or should we just buy Clorox, Amazon, and Zoom? This event is definitely thought provoking. My plan: I unloaded every position that I didn't want to hold (what we are all calling tax loss harvesting to make ourselves feel better about our investments when the economy is crashing around us). I have been purchasing long puts on SPY/AAPL/TSLA, long calls on VIX/VXX, "day trading" long SPY shares with trailing stops, selling covered calls against my VTI portfolio, purchasing some individual equities, and really just trying to avoid any falling knives/dead cats bouncing. But most of my portfolio is in cash right now until this insanity settles out.

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bertilak
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Re: Should asset allocation depend on size of portfolio?

Post by bertilak » Sat Mar 21, 2020 6:24 am

smitcat wrote:
Tue Mar 17, 2020 8:01 am
"Should one's asset allocation depend on size of portfolio?"
Yes - Of course.
The simple answers are often the best. This is a good example.

To elaborate (for those who might disagree): Your investment plan should depend heavily on your life situation and the size of your portfolio is a major part of your life situation.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

smitcat
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Re: Should asset allocation depend on size of portfolio?

Post by smitcat » Sat Mar 21, 2020 6:59 am

bertilak wrote:
Sat Mar 21, 2020 6:24 am
smitcat wrote:
Tue Mar 17, 2020 8:01 am
"Should one's asset allocation depend on size of portfolio?"
Yes - Of course.
The simple answers are often the best. This is a good example.

To elaborate (for those who might disagree): Your investment plan should depend heavily on your life situation and the size of your portfolio is a major part of your life situation.
Thank you - as our portfolio size has changed (and our life situation) so has our asset allocation.

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