Portfolio Feedback for Long-Term Retirement Goals

[drmaman13]

Hi everyone,

I’m seeking input on my investment strategy and portfolio allocation. This forum has been a great resource, and I truly appreciate any insights or advice you’re willing to share

Here’s some background about my goals and situation:

Goals: Build a resilient portfolio that allows me to live off 3-4% of my holdings for the next 40-50 years (I'm 33). I'm currently at the 4% mark with my wife and have calculated this number to include 3 kids, which we plan on having starting next year (we currently have 0).

Risk Tolerance: I’m comfortable with moderate risk. My goal isn't to maximize upside but I want to have a more sustainable portfolio that protects against downside risk and gives me peace of mind in case of black swan events. I plan on working into the future (I currently have a business and have some other business ideas I hope to pursue in the next few years), but I want to be able to not work if I choose.

Hedging Against Uncertainty: I want to ensure stability in case of economic downturns, which is why I’ve included cash, bonds and gold as hedges. From what I've researched, gold tends to do well during inflation, and cash/bonds during deflation (I know this isn't always case just the way I generally view them)

Investment Preferences: I prefer broad diversification across asset classes, with a focus on U.S. equities, international stocks, and some alternative assets like REITs and others. I also consider my home a form of real estate investment.

Here’s my current portfolio:

A home I own outright
U.S. Large Cap Stocks (S&P 500): 25%
International Stocks (VXUS, including Emerging Markets): 20%
Mid and Small Cap Stocks (VIOV, IVOO): 10%
Bonds (VGIT): 15%
Cash or Short-Term Bonds: 10%
Gold (GLD): 5%
REITs (VNQ): 5%
Riskier Investments: 10%

I’ve structured this to balance growth potential with downside protection. I’d love to hear your thoughts on:
- The overall asset allocation—does it seem appropriate for my goals and time horizon?
- Should I just go simpler for US equities with VTI and do 35%? Is it worth having REITs if I have a home?
- The mix between U.S. and international stocks—does 35% US and 20% international seem like a good mix?
- Any feedback on the defensive holdings that I have? Anything that you would change?
- Any recommendations for improving stability while keeping growth opportunities intact?

If I'm off in my thinking, I'd love to know where that might be.

Thank you all in advance for your input! This topic has been taking over my headspace so genuinely looking forward to what you guys think!

[sycamore]

I’ve structured this to balance growth potential with downside protection. I’d love to hear your thoughts on:
- The overall asset allocation—does it seem appropriate for my goals and time horizon?

There's a model I like for determining asset allocation. It involves thinking about your ability, willingness, and need to take on stock investing risk. There are many nuances of course but I'll just give some general thoughts.

Regarding the need, that's often discussed in terms of future expenses versus future portfolio & income streams, which can get deep into the weeds. You appear to have done some calculations already. I'd say you do need to invest a significant amount in risky assets.

You have the ability in that you are young with a job that could provide income in the event your portfolio suffers for whatever reason.

You have willingness.

So I'd say your a good candidate for taking on a substantial amount of stock risk.

How much in stocks? In rough terms I see your proposed AA as 75% very risky stuff (all the stocks, REITS, even gold) and 25% not so risky stuff (bonds and cash).

This does not seem to jibe with:
- "I’m comfortable with moderate risk"
- "I want to have a more sustainable portfolio that protects against downside risk and gives me peace of mind in case of black swan events"
- "I want to ensure stability in case of economic downturns"

75% isn't obviously "wrong". My hunch is maybe 60% would be better.

One concern a large drawdown with 75% stocks could spook you into giving up on your plan -- selling at the bottom or on the way down, and never getting back into stocks.

I'm guessing you didn't really experience the Great Financial Crisis in 2007-2009 (you were a teenager) so it may be hard to judge your own risk tolerance not having lived through longer downturns (unlike 2020).

75% stocks would be okay. if you can sleep well even with day to day and year to year portfolio volatility, and, say, a 50% drawdown. Example: your portfolio gets to 1 million. Crash ensues. $750k stocks drops in half. Your portfolio is now $250k + $375k = $625k. Can you and your wife bear looking at your account statement and seeing what you "lost" ?

[Frenetic]

Congratulations on getting your financial house in order while you plan for children.

Should I just go simpler for US equities with VTI and do 35%? Is it worth having REITs if I have a home?

Yes go simpler, sell Mid and Small Cap Stocks (VIOV, IVOO): 10% and just do U.S. Large Cap Stocks (S&P 500): 25%. You are probably in an S&P 500 index fund since not many 401k/457/403b offer a Total Stock Market index fund, but if you do have access to one go with that including your S&P 500 index fund. Since you have your own home, get out of REITs and put it in your U.S. Large Cap Stocks (S&P 500) fund.

- The mix between U.S. and international stocks—does 35% US and 20% international seem like a good mix?

Looks good to me, 20% international seems to be the sweet spot

- Any feedback on the defensive holdings that I have? Anything that you would change?

Sell off Gold (GLD): 5% REITs (VNQ): 5% and put in Bonds (VGIT): 15% as your defensive holdings. Keep your Cash as cash in an HYSA, probably earmark some of it for your child to be born (529, emergency fund for medical/daycare, etc.) don't mess with Short-Term Bonds. Convert your cash into the max I-Bond purchase (10k individual/20k married couple) every year.

Riskier Investments: 10%

Halve this to only 5% of your portfolio and put the other 5% in your U.S. Large Cap Stocks (S&P 500).

I highly recommend the book The Bogleheads' Guide to the Three-Fund Portfolio which will really give clarity why simplying/distilling your portfolio to 3 funds is good.

Cheers,
the F-man

[sycamore]

And I have a separate post for these questions:

- Should I just go simpler for US equities with VTI and do 35%? Is it worth having REITs if I have a home?
- The mix between U.S. and international stocks—does 35% US and 20% international seem like a good mix?
- Any feedback on the defensive holdings that I have? Anything that you would change?
- Any recommendations for improving stability while keeping growth opportunities intact?

- The 10% in small+mid and 25% in large is not very different from a total market. If you're not going to significantly tilt toward one, I wouldn't bother -- stick with VTI.

- How much US versus international is an on-going argument. I won't make any arguments one way or the other Your 35/20 US/International means 36% of stocks are in international. That's about the same as what most "target date" funds use.

Because you place value on having diversification in your asset classes, I'd use a minimum of 15% of stocks, up to market weight about 45% currently.

- I wouldn't bother with REITs myself. Some people bother with an extra allocation to REITs because they think publicly traded REIT stocks do not adequately reflect the value of real estate in the general economy. (Likewise, some people like to invest in private equity for the same reason. And other reasons.)

- VGIT - intermediate term US government Treasuries. Good choices.

- cash/short-term bonds - also good.

- regarding being "defensive", a common investment for that is TIPS or I Bonds. VTIP or STIP are good short-term bond choices that you could use for your cash/short-term bonds bucket.

[drmaman13]

I’ve structured this to balance growth potential with downside protection. I’d love to hear your thoughts on:
- The overall asset allocation—does it seem appropriate for my goals and time horizon?

There's a model I like for determining asset allocation. It involves thinking about your ability, willingness, and need to take on stock investing risk. There are many nuances of course but I'll just give some general thoughts.

Regarding the need, that's often discussed in terms of future expenses versus future portfolio & income streams, which can get deep into the weeds. You appear to have done some calculations already. I'd say you do need to invest a significant amount in risky assets.

You have the ability in that you are young with a job that could provide income in the event your portfolio suffers for whatever reason.

You have willingness.

So I'd say your a good candidate for taking on a substantial amount of stock risk.

How much in stocks? In rough terms I see your proposed AA as 75% very risky stuff (all the stocks, REITS, even gold) and 25% not so risky stuff (bonds and cash).

This does not seem to jibe with:
- "I’m comfortable with moderate risk"
- "I want to have a more sustainable portfolio that protects against downside risk and gives me peace of mind in case of black swan events"
- "I want to ensure stability in case of economic downturns"

75% isn't obviously "wrong". My hunch is maybe 60% would be better.

One concern a large drawdown with 75% stocks could spook you into giving up on your plan -- selling at the bottom or on the way down, and never getting back into stocks.

I'm guessing you didn't really experience the Great Financial Crisis in 2007-2009 (you were a teenager) so it may be hard to judge your own risk tolerance not having lived through longer downturns (unlike 2020).

75% stocks would be okay. if you can sleep well even with day to day and year to year portfolio volatility, and, say, a 50% drawdown. Example: your portfolio gets to 1 million. Crash ensues. $750k stocks drops in half. Your portfolio is now $250k + $375k = $625k. Can you and your wife bear looking at your account statement and seeing what you "lost" ?

This is great feedback. I've always been 80% stocks, 20% risky asset allocation that cannot be named, so going 30% bonds/cash/gold actually feels a lot more risk averse than what I've been doing. Your logic makes sense, though and I was honestly hoping to get some perspective like this so I appreciate it. I've done a lot of simulations and obviously you lose out on a lot of gains long term as you add more bonds. In the 2007-2009, TLT did really well. Do you think there's a place in a portfolio for long term bonds (which have higher returns long term) or do you think the allocation of intermediate bonds is better since it's less volatile. What are your thoughts on holding gold, since it seems bonds/cash don't seem to help much during inflationary recessions, but gold seems to hold value? But gold also doesn't generate income and isn't great to hold long term.

[drmaman13]

Congratulations on getting your financial house in order while you plan for children.

Should I just go simpler for US equities with VTI and do 35%? Is it worth having REITs if I have a home?

Yes go simpler, sell Mid and Small Cap Stocks (VIOV, IVOO): 10% and just do U.S. Large Cap Stocks (S&P 500): 25%. You are probably in an S&P 500 index fund since not many 401k/457/403b offer a Total Stock Market index fund, but if you do have access to one go with that including your S&P 500 index fund. Since you have your own home, get out of REITs and put it in your U.S. Large Cap Stocks (S&P 500) fund.

- The mix between U.S. and international stocks—does 35% US and 20% international seem like a good mix?

Looks good to me, 20% international seems to be the sweet spot

- Any feedback on the defensive holdings that I have? Anything that you would change?

Sell off Gold (GLD): 5% REITs (VNQ): 5% and put in Bonds (VGIT): 15% as your defensive holdings. Keep your Cash as cash in an HYSA, probably earmark some of it for your child to be born (529, emergency fund for medical/daycare, etc.) don't mess with Short-Term Bonds. Convert your cash into the max I-Bond purchase (10k individual/20k married couple) every year.

Riskier Investments: 10%

Halve this to only 5% of your portfolio and put the other 5% in your U.S. Large Cap Stocks (S&P 500).

I highly recommend the book The Bogleheads' Guide to the Three-Fund Portfolio which will really give clarity why simplying/distilling your portfolio to 3 funds is good.

Cheers,
the F-man

Love the feedback, and thanks for the kind words.

The reason I was thinking of holding small/mid is that it seems small cap actually out performs the sandp500 in the long term so I felt it would help with some diversification. Prob not a big needle mover either way though so I like the idea of simplifying. So you're thinking a portfolio that looks like this makes more sense for my goals would be: 20% international, intermediate bonds 25%, 5% risky, 45% sandp, 5% cash in a HYSA. This is actually pretty similar to the boglehead 3 fund portfolio. I've read here and there about the philosophy but would love to read that book so appreciate the suggestion.

Do you have any strategy for protecting against inflationary recessions?

[drmaman13]

And I have a separate post for these questions:

- Should I just go simpler for US equities with VTI and do 35%? Is it worth having REITs if I have a home?
- The mix between U.S. and international stocks—does 35% US and 20% international seem like a good mix?
- Any feedback on the defensive holdings that I have? Anything that you would change?
- Any recommendations for improving stability while keeping growth opportunities intact?

- The 10% in small+mid and 25% in large is not very different from a total market. If you're not going to significantly tilt toward one, I wouldn't bother -- stick with VTI.

- How much US versus international is an on-going argument. I won't make any arguments one way or the other Your 35/20 US/International means 36% of stocks are in international. That's about the same as what most "target date" funds use.

Because you place value on having diversification in your asset classes, I'd use a minimum of 15% of stocks, up to market weight about 45% currently.

- I wouldn't bother with REITs myself. Some people bother with an extra allocation to REITs because they think publicly traded REIT stocks do not adequately reflect the value of real estate in the general economy. (Likewise, some people like to invest in private equity for the same reason. And other reasons.)

- VGIT - intermediate term US government Treasuries. Good choices.

- cash/short-term bonds - also good.

- regarding being "defensive", a common investment for that is TIPS or I Bonds. VTIP or STIP are good short-term bond choices that you could use for your cash/short-term bonds bucket.

I agree with the feedback. I am biased towards US companies over INTL and a lot of US companies are global, so the 35/20 seems okay, probably not a huge difference to weight it slightly more or less.

Regarding, REITs, is the reason you wouldn't bother with REITs is because it adds unnecessary complication or because it doesn't add much diversification/value since equities/real estate are correlated?

I just read a bit about TIPS bonds, thanks for the recommendation. The concept is very interesting, I am skeptical though since it's based on the CPI which I don't believe accurately reflects real inflation. It's something I want to look deeper into though since that does seem to be an interesting way to hedge inflation.

[drmaman13]

And I have a separate post for these questions:


- The 10% in small+mid and 25% in large is not very different from a total market. If you're not going to significantly tilt toward one, I wouldn't bother -- stick with VTI.

- How much US versus international is an on-going argument. I won't make any arguments one way or the other Your 35/20 US/International means 36% of stocks are in international. That's about the same as what most "target date" funds use.

Because you place value on having diversification in your asset classes, I'd use a minimum of 15% of stocks, up to market weight about 45% currently.

- I wouldn't bother with REITs myself. Some people bother with an extra allocation to REITs because they think publicly traded REIT stocks do not adequately reflect the value of real estate in the general economy. (Likewise, some people like to invest in private equity for the same reason. And other reasons.)

- VGIT - intermediate term US government Treasuries. Good choices.

- cash/short-term bonds - also good.

- regarding being "defensive", a common investment for that is TIPS or I Bonds. VTIP or STIP are good short-term bond choices that you could use for your cash/short-term bonds bucket.

I agree with the feedback. I am biased towards US companies over INTL and a lot of US companies are global, so the 35/20 seems okay, probably not a huge difference to weight it slightly more or less.

Regarding, REITs, is the reason you wouldn't bother with REITs is because it adds unnecessary complication or because it doesn't add much diversification/value since equities/real estate are correlated?

I just read a bit about TIPS bonds, thanks for the recommendation. The concept is very interesting, I am skeptical though since it's based on the CPI which I don't believe accurately reflects real inflation. It's something I want to look deeper into though since that does seem to be an interesting way to hedge inflation.

I do have one more question that doesn't make sense to me. When I do all these simulations of different portfolios it seems like a 100% stock portfolio or something close to it almost always wins, and that a 50/50 bond split doesn't add much protection to survival rates. So the 100% stock portfolio adds a ton of potential growth but doesn't have much worse survival rates to portfolios with higher bond allocations. If you take emotions out of it, does it make sense to invest in bonds, if you have a 20+ year time horizon? Even in 2007-2009 with 100% stock portfolio it would have bounced back if you didn't panic sell. Guess I'm wondering if the reason for the high bond allocation is because it helps people not panic sell or if there's another reason (I understand bond allocations later in life when time horizons are shorter).

[snowday2022]

Your number should be revised to account for the 3 kids. They are expensive any way you slice it.

[sycamore]

Regarding, REITs, is the reason you wouldn't bother with REITs is because it adds unnecessary complication or because it doesn't add much diversification/value since equities/real estate are correlated?

Yeah, various reasons.

It's not clear to me how I'd determine how much more REITs to add. Correlation to stocks, unique risks and returns, etc. And there's the various kinds of REITs and REIT funds -- office/industrial, retail, medical/technical, etc. Active or passive management? And which manager or which index?

Years ago when I pondered whether to buy REIT funds, I mostly went in circles coming up with something I could settle on. It was easier to just accept the market's view of REIT exposure through total market stock funds.

[sycamore]

...

... I've done a lot of simulations and obviously you lose out on a lot of gains long term as you add more bonds. In the 2007-2009, TLT did really well. Do you think there's a place in a portfolio for long term bonds (which have higher returns long term) or do you think the allocation of intermediate bonds is better since it's less volatile. What are your thoughts on holding gold, since it seems bonds/cash don't seem to help much during inflationary recessions, but gold seems to hold value? But gold also doesn't generate income and isn't great to hold long term.

If we're talking about using bond funds in a portfolio where the goal is "retirement spending of a unknown duration", yes, I think there's a good argument for using a bond fund with an appropriate duration. Ideally the duration will correspond roughly to your need for the money, is in order to avoid interest rate risk. But that's not the only risk with bonds -- an investor also needs to be sleep well with the price volatility of long term bonds, to remember to adjust their bond fund(s) over time to match one's declining life expectancy. All in all I'd say intermediate term bond fund is a better default choice for most people who a have a long spending horizon. (I use a TIPS non-rolling ladder myself, but I'd use a intermediate term TIPS fund if I couldn't own individual TIPS - like if I only had a 401k account with no brokerage option.)

Gold I'm not inclined to think will add much if any benefit over TIPS.