50% S&P500 /25% Bonds /25% Cash

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invest8104
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50% S&P500 /25% Bonds /25% Cash

Post by invest8104 » Wed Mar 25, 2020 1:10 pm

Hi Bogleheads,

Thoughts on a 50% S&P500, 25% Bonds & 25% Cash portfolio in a taxable account? For the sake of this conversation, say you are 30 y/o and do not have access to bonds in your tax advantage account. Which bond fund would you use in this case? I see that there has been a lot of conversation regarding the benefit of having the Total Bond Market fund vs a tax exempt bond fund.

whereskyle
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by whereskyle » Wed Mar 25, 2020 1:19 pm

invest8104 wrote:
Wed Mar 25, 2020 1:10 pm
Hi Bogleheads,

Thoughts on a 50% S&P500, 25% Bonds & 25% Cash portfolio in a taxable account? For the sake of this conversation, say you are 30 y/o and do not have access to bonds in your tax advantage account. Which bond fund would you use in this case? I see that there has been a lot of conversation regarding the benefit of having the Total Bond Market fund vs a tax exempt bond fund.
As a 30 year old, I don't hold bonds, and if I did, they would be a smaller portion of my portfolio. I personally would put some of the 25% in emerging markets and maybe some in U.S. stocks that are not perfectly correlated with the S&P 500, such as small/mid caps, consumer durables (I use VDC), or the FAANG stocks. I agree 100% with your S&P 500 allotment. I am skeptical of almost any portfolio that does not have at least 50% in the S&P 500. If you wanted to keep it super simple, I would just put your 25% in that.
Last edited by whereskyle on Wed Mar 25, 2020 1:22 pm, edited 2 times in total.
"I am better off than he is – for he knows nothing, and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle

mega317
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by mega317 » Wed Mar 25, 2020 1:20 pm

We need way more information. Edit your post according to the template in the post linked in my signature.

As a very general principle I would not hold a taxable bond fund or cash in a taxable account. That said I have money in a checking account and also some in savings/CDs since I'm currently paying weekly for a large home project. So I suppose I also have cash. But I don't feel putting my whole paycheck in stocks every month and then selling multiple times through the month to pay bills.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

magicrat
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by magicrat » Wed Mar 25, 2020 1:21 pm

Can't answer. You should set an asset allocation for your total portfolio, and then make asset location decisions.

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tvubpwcisla
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by tvubpwcisla » Wed Mar 25, 2020 1:23 pm

The more I learn about investing the more I realize that the allocation is just one piece of the puzzle. Investors play with these percentages all the time to best suit their goals and needs. The best allocation is the one that allows you to be healthy, happy, and sleep well at night without a care in the world. Don't forget to keep your expenses as low as possible. :beer
The secret to building wealth is to have a plan, keep expenses low, become an expert in your craft, consistently buy the market, diversify, establish multiple income streams, and always smile.

Alex GR
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by Alex GR » Wed Mar 25, 2020 1:25 pm

invest8104 wrote:
Wed Mar 25, 2020 1:10 pm
Hi Bogleheads,

Thoughts on a 50% S&P500, 25% Bonds & 25% Cash portfolio in a taxable account? For the sake of this conversation, say you are 30 y/o and do not have access to bonds in your tax advantage account. Which bond fund would you use in this case? I see that there has been a lot of conversation regarding the benefit of having the Total Bond Market fund vs a tax exempt bond fund.
In all fairness, OP specifically asked about all of that (50% S&P500, 25% Bonds & 25% Cash) being in a taxable account. In that case, doesn't it mainly depend on your income? For low income TBM generally works out better, for high income-tax exempt works better. I am sure there's a study somewhere on where that cutoff is exactly (i.e. which income level)

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ruralavalon
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by ruralavalon » Wed Mar 25, 2020 1:26 pm

It is impossible to answer without more facts.

invest8104 wrote:
Wed Mar 25, 2020 1:10 pm
Hi Bogleheads,

Thoughts on a 50% S&P500, 25% Bonds & 25% Cash portfolio in a taxable account? For the sake of this conversation, say you are 30 y/o and do not have access to bonds in your tax advantage account. Which bond fund would you use in this case? I see that there has been a lot of conversation regarding the benefit of having the Total Bond Market fund vs a tax exempt bond fund.
At age 30 50% in fixed income seems high absent some unusual circumstances. Is that 25% cash really your emergency fund?

How is it that your tax-advantaged accounts offer no bond funds? That seems impossible.

What is your tax bracket, both federal and state? What state do you pay any state income taxes to?

Alex GR is right, "For low income TBM generally works out better, for high income-tax exempt works better."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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invest8104
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by invest8104 » Wed Mar 25, 2020 1:47 pm

I reside in Florida so there is no state income tax.

I need a high cash position for other investments - Businesses & RE.

I have limited funds in an IRA - $20k compared to $300k in the taxable account. It is not even worth sticking the Bonds in this, given the overall balance of the accounts. I rather just stick the IRA in a Target Retirement Account and forget about it (I realize this goes against the 1 portfolio across all accounts mentality)

My emergency fund is a Discover high yield savings account.

My tax bracket is 24%

I would prefer to be 75% S&P500 & 25% Cash, but I am not sure I can ride the large swings in the market.
Last edited by invest8104 on Wed Mar 25, 2020 1:50 pm, edited 2 times in total.

Northern Flicker
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by Northern Flicker » Wed Mar 25, 2020 1:48 pm

invest8104 wrote:
Wed Mar 25, 2020 1:10 pm
Hi Bogleheads,

Thoughts on a 50% S&P500, 25% Bonds & 25% Cash portfolio in a taxable account? For the sake of this conversation, say you are 30 y/o and do not have access to bonds in your tax advantage account. Which bond fund would you use in this case? I see that there has been a lot of conversation regarding the benefit of having the Total Bond Market fund vs a tax exempt bond fund.
If that is the level of risk you are comfortable with then the fact that some 30-year-olds are 100% stock should not change it. Be sure you are considering the long-term risk of underperforming inflation as one of your risks.

Bonds issued by the US treasury are exempt from state income taxes. Municipal bonds are exempt from federal taxes and many are exempt from state taxes in the state where issued. I-bonds (US Savings bonds) are both state tax exempt and tax-deferred (only pay tax when cashing in). It is hard for readers to make recommendations without knowing your tax bracket, I would probably not consider bond funds unless and until you have hit the annual $10K max for i-bonds, which you buy at treasurydirect.gov.

Treasury bonds do not incorporate the little stock-like risk that bonds with credit risk will. If you stick to treasuries, I-bonds, and maybe some TIPS you maybe can increase your stock allocation a little bit without and have the same risk profile as the lower stock allocation with a bond fund that incorporates some credit risk, maybe:

50-60% S&P500
40-50% short-term treasuries and I-bonds
(up to all I-bonds for the bond allocation, limited only by the $10K/yr purchase limit).

Holding Short-term treasuries is largely equivalent to holding intermediate treasuries and cash. Funds would be FUMBX, VSBSX, VGSH.

With 40-50% bonds, you would be taking done inflation risk (inflation may be low right now, but who knows in the future?). I-bonds mitigate that risk in addition to being tax-efficient.
Risk provides no guarantee of return.

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emlowe
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by emlowe » Wed Mar 25, 2020 2:00 pm

invest8104 wrote:
Wed Mar 25, 2020 1:47 pm

I need a high cash position for other investments - Businesses & RE.
Is this cash really a part of your investment portfolio? It seems it is part of your operating expenses. It's on your balance sheet, but it's not part of your investment AA
Ferri Core 4: 40% Bonds | 6% Reit | 18% Total i18n | 36% Total US

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UpsetRaptor
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by UpsetRaptor » Wed Mar 25, 2020 2:10 pm

That's a perfectly fine portfolio/strategy.

Some may say they'd take on more risk as a 30-yr-old, but that's a personal risk question, up to you.

Some may say they'd add international, but that's up to you.

Some may prefer other bond products than a total bond market index fund, such as a tax exempt muni bond fund for high income tax bracket folks, but total bond is fine.

Some may be vehement about a number of those points, but your strategy is nice, simple, and satisfies the Pareto principle.

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ruralavalon
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by ruralavalon » Wed Mar 25, 2020 4:36 pm

invest8104 wrote:
Wed Mar 25, 2020 1:10 pm
Hi Bogleheads,

Thoughts on a 50% S&P500, 25% Bonds & 25% Cash portfolio in a taxable account? For the sake of this conversation, say you are 30 y/o and do not have access to bonds in your tax advantage account. Which bond fund would you use in this case? I see that there has been a lot of conversation regarding the benefit of having the Total Bond Market fund vs a tax exempt bond fund.
invest8104 wrote:
Wed Mar 25, 2020 1:47 pm
I reside in Florida so there is no state income tax.

I need a high cash position for other investments - Businesses & RE.

I have limited funds in an IRA - $20k compared to $300k in the taxable account. It is not even worth sticking the Bonds in this, given the overall balance of the accounts. I rather just stick the IRA in a Target Retirement Account and forget about it (I realize this goes against the 1 portfolio across all accounts mentality)

My emergency fund is a Discover high yield savings account.

My tax bracket is 24%

I would prefer to be 75% S&P500 & 25% Cash, but I am not sure I can ride the large swings in the market.
Your cash reserves for business operations should not be counted in your retirement/long-term investment portfolio.

About how much cash do you want to hold aside for business reserves? Leaving those business reserves aside, what asset allocation do you want for your retirement/long-term investment portfolio?

Are you self-employed? If so how many other employees do you have in your business? What form is your business (sole proprietorship, partnership, S Corp, etc.)?

If you are self-employed you can use other types of tax-advantaged accounts with higher contribution limits than a regular IRA.

If you are self-employed you could consider using a SEP IRA, SIMPLE IRA, or individual (solo) 401k. Vanguard, small-business plans,"Compare plans". That link has a nice table comparing the features (like contribution limits, amount of paperwork required, etc.) of the three types of plans.

Both Fidelity and Schwab also offer the same types of plans. Fidelity "Retirement plans for small businesses ". Schwab, "Small business retirement plans".

Do you have any employees in your business? if so, how many? About how much (in dollars) do you believe that you might be able to contribute annually to your retirement/long-term investing?

The College Investor (12/11/2017), "Comparing The Most Popular Solo 401k Options".

The Bogleheads' wiki has articles on each type of plan. Boglehead's wiki, "SEP IRA". Boglehead's wiki, "SIMPLE IRA". Boglehead's wiki, "Solo 401k Plan".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

zubinh
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by zubinh » Thu Mar 26, 2020 8:30 am

I employ a similar strategy in my taxable account but I just use VTMFX and keep the cash allocation separate.

MikeG62
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by MikeG62 » Thu Mar 26, 2020 9:07 am

invest8104 wrote:
Wed Mar 25, 2020 1:10 pm
Hi Bogleheads,

Thoughts on a 50% S&P500, 25% Bonds & 25% Cash portfolio in a taxable account? For the sake of this conversation, say you are 30 y/o and do not have access to bonds in your tax advantage account. Which bond fund would you use in this case? I see that there has been a lot of conversation regarding the benefit of having the Total Bond Market fund vs a tax exempt bond fund.
When you say cash, what specifically are you taking about? I hope it’s not funds sitting in a low yielding bank account.

With regard to tax exempt vs taxable, generally speaking it depends on your marginal tax rate. Having said that, be careful with tax exempt in this environment.
Real Knowledge Comes Only From Experience

Starfox
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Re: 50% S&P500 /25% Bonds /25% Cash

Post by Starfox » Thu Mar 26, 2020 9:25 am

I think you may be happier with 75% SP500 and 25% Cash - it has provided similar returns/risk to 60% SP500 and 40% Bonds

https://awealthofcommonsense.com/2015/0 ... portfolio/

https://www.reuters.com/article/us-mark ... SKBN18R33D

Image

The 60/40 portfolio is comprised of 60% in the S&P 500 and 40% in bonds utilizing 10 year treasuries through 1975 and the Barclays Aggregate Bond Index thereafter. The 75/25 portfolio is made up of 75% in the S&P 500 and 25% in short-term t-bills.
The 75/25 strategy slightly outperformed the 60/40 portfolio with higher volatility, but that’s to be expected given the higher allocation to stocks. When both allocations were negative on an annual basis, the 75/25 portfolio lost an average of 12.1% while the 60/40 portfolio was down an average of 8.5%. The worst annual loss for 75/25 was -32.3% while the biggest annual drawdown for the 60/40 portfolio was -27.3%.
Larger gains and larger losses, basically what you should expect when you get rid of bonds and increase equity exposure. While the overall performance is interesting, what most investors are concerned about right now is a rising interest rate environment. You can see that the 75/25 outperformed in the 1950s and 1960s when rates rose (although the enormous bull market in stocks did much of the heavy lifting in the 50s).

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