AA for my Mom

[InvestingMom]

I would appreciate comments on an asset allocation plan I have created for my 72 year old mom.
Background:

• She has a trust fund with Northern in which she has no say in the invesments. All of the investments are in Northern funds and the allocation is approx 50/50 stock/equities. This represents approx 30% of her investments.
  She has an IRA and a taxable account which represent approximately 60% and 10% of her investments respectively.
  She also owns a Wells Capital non traded REIT in her IRA which represents approx 5% of her investments (included in the 60% figure above.)
  She owns her condo with some debt but payments are manageable.
  She is in the 15% tax bracket.
  She recieves Social Security and is taking distributions of 5% of her total investments out

My asset allocation plan on a combined basis (including the Northern Funds and her IRA, Taxable account and REIT):

• 60/40 Equities/bonds
  Of the Equities 70% in US and 30% in Foreign
  Both the US and Foreign will then be split 50/50 into Largo Co and Small Co (or emerging in the case of foreign)
  Each category will be weighted toward value.
  The REIT is included in the large co equities
  
  The invesments I plan to make at Vanguard to achieve the above are as follows:
  Taxable Account:
  VFINX(or should I put the NAESX in there?)
  NonTaxable IRA
  VIVAX
  NAESX
  VISVX
  VTRIX
  Dodge and Cox (she already owns this and I feel it is a good fund)
  VDMIX
  VEIEX
  Wells Capital Reit (once I figure this out I will try to sell it)
  
  I also want to add in one actively managed fund for a small cap fund and one actively managed account to try to capture some small cap value in foreign.
  
  Here are a couple of questions: Anyone have an opinion about VEIEX and the upfront .05% fee they charge? They also charge it upon sale?
  
  Anyone ever dealt with a non-publicly traded REIT?

[InvestingMom]

You can tell I am a newbie.
My message got away from me before I was done.

The bond fund will be the Vanguard total bond fund and the Vanguard intermediate bond index.

My lastest influence has been Paul Merriman's book Live it up without outlinving your money. I could not go with him entirely but he recommends 50% foreign. And 50% value. I have always weighted my own portfolio towards value and so his theory sits right with me.

I did not indicate the exact percentages for the vanguard funds because as I mention at the top of my message I am combining the northern trust with Vanguard and so the vanguard is filling in to meet my above plan. Hope that makes sense.

[xenial]

... 60/40 Equities/bonds

This breakdown may be appropriate, but on the surface it appears awfully aggressive for a 72 year old.

Both the US and Foreign will then be split 50/50 into Largo Co and Small Co (or emerging in the case of foreign)

Understand that you're severely overweighting small caps on the domestic side, and also emerging markets on the foreign side.

The REIT is included in the large co equities

Why large company?

Taxable Account:
VFINX(or should I put the NAESX in there?)

I would expect the large cap VFINX to be more tax efficient than the small cap NAESX.

I also want to add in one actively managed fund for a small cap fund and one actively managed account to try to capture some small cap value in foreign.

Why? You can capture the domestic small cap market cheaply with NAESX, among others. Foreign small cap value is trickier, but you can use DLS, an ETF.

Anyone have an opinion about VEIEX and the upfront .05% fee they charge? They also charge it upon sale?

The 0.5% purchase and redemption fees are paid into the fund's assets, so you benefit in the long run from the fees other shareholders pay. You can avoid the fees by buying VWO, the associated ETF.

Best wishes,
Ken

[Laura]

investingmom,

I agree with the other posters that the asset allocation you have outlined is very aggressive for someone you mother's age. You mention that she has a manageable mortgage and is in the 15% tax bracket so I am assuming she is not extremely wealthy. Here is a table offered by Larry Swedroe based on the 1970s bear market showing the amount of decline for various stock/bond allocations:

Max Equity - Exposure Max loss
20%...............5%
30%..............10%
40%..............15%
50%..............20%
60%..............25%
70%..............30%
80%..............35%
90%..............40%
100%.............50%

How would your mother feel if her portfolio lost 25% of its value? Try converting that 25% into the actual numbers that represent her portfolio.

Also, studies have shown that 4% is a sustainable withdrawal rate for a portfolio. You mention that she is withdrawing 5%. Make sure and keep an eye on her balances so that she does not withdraw her money too rapidly and run out when she is older.

Finally, most of us here do not have ticker symbols memorized and won't take the time to look them up. Please edit your post and include the names of the funds you are proposing. I am sure you will receive more replies.

Laura

[InvestingMom]

Thanks for your input. I am so grateful that there are people like you out there who are willing to help.

I will review the 60/40 allocation with my mom again. She is actually at 80/20 right now (thanks to her wonderful broker). She is very risk tolerant but I will go over the potential losses with her again. Incidentally the table I was looking at had a potential 20% loss for 60/40. Also I excluded from my facts that I will maintain 10% in cash.

I will repost my plan in a bit so that it is more readable and see if I get any other bits of advice. Laura thanks for the advice on not using tickers.

As for the asset allocation, can I ask whether either of you have read the Merriman book? As I understand his theory, by adding the small cap, the value funds and 50% foreign, he shows how risk is reduced.

Ken
You mention that I am seriously overweighting small cap and emerging. I presume you mean in relation to the entire market. I will look closer at the emerging piece but the reason I am suggesting the higher small cap is because of Merriman's advice....ie it actually reduces risk? Any comment?

Regarding the Vanguard 500 versus the small cap fund in the taxable account, can you clarify why you recommend the vanguard 500? I was thinking the dividends would be less in the small cap fund, but I suppose there is less chance of trading the 500 fund when doing rebalancing

Lastly, thanks for your other tips!

[Laura]

InvestingMom,

You do reduce risk by diversifying (remember what happens when you have all the eggs in one basket) but you can go too far. I haven't looked up your funds but I have seen people overdiversify or tilt too far in one direction after reading some books. The concept of diversification is correct and since none of us can predict which sector will do well it is important to cover them all. The Callan Table graphically shows what I mean. This doesn't mean that you need a separate fund to cover each box on the table.

Laura

[xenial]

Incidentally the table I was looking at had a potential 20% loss for 60/40.

It is impossible to say precisely the potential loss associated with a given equity allocation. One popular rule of thumb is that it's half your equity percentage, which would be 30% in this case. If you base your expectations on the Great Depression, it would be worse. In any case, historical information is of limited use. Just because something bad hasn't happened in the past doesn't mean it couldn't happen in the future.

As for the asset allocation, can I ask whether either of you have read the Merriman book? As I understand his theory, by adding the small cap, the value funds and 50% foreign, he shows how risk is reduced.

Ken
You mention that I am seriously overweighting small cap and emerging. I presume you mean in relation to the entire market. I will look closer at the emerging piece but the reason I am suggesting the higher small cap is because of Merriman's advice....ie it actually reduces risk? Any comment?

I have not read Merriman's book. Different people have widely divergent opinions on how to reduce risk within one's equity allocation. I personally lean toward market weighting, which represents the combined result of all market participants' actions. As I commented above, beware of relying too much on historical data. Certain asset subclasses might have done well in the past, but this fact tells us little about the future.

Regarding the Vanguard 500 versus the small cap fund in the taxable account, can you clarify why you recommend the vanguard 500? I was thinking the dividends would be less in the small cap fund, but I suppose there is less chance of trading the 500 fund when doing rebalancing

You're right that the yield on large caps is slightly higher, but the overriding consideration is potential capital gains. If a S&P 500 company grows strongly, it will remain in the S&P 500 Index. If a small cap company grows strongly, it will become a large cap company. It may leave the relevant small cap index, forcing the small cap index fund to sell it for a big gain.

Best wishes,
Ken

[DaleMaley]

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