How Do You Make Your Asset Allocation Decisions?

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sureshoe
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How Do You Make Your Asset Allocation Decisions?

Post by sureshoe »

I get the sense most of the people on here eschew financial planners. So how do you make your AA decisions, and to what level of detail do you go?

I use Personal Capital. It falls in line, generally, with most investing theory I've read. The break it down to: US & Foreign Stocks. US & Foreign Bonds. Cash. Alternatives. I stray from Alternatives other than what is incidentally picked up by a few active funds I own.
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David Jay
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Re: How Do You Make Your Asset Allocation Decisions?

Post by David Jay »

AA is intensely personal, one should not rely on any formula or even the judgement of a financial planner.

It is imperative that one not overestimate their ability to handle risk, it is critically important that one not sell after a large downturn. I always use Bernstein’s quote: “mistiming the market is probably the most frequent and severe form of permanent capital loss”. This is why it is often said that you need to be prepared for a 50% market downturn - as sort of a “shock test”: Can you hold your AA through that sort of event?

Different individuals go to different levels of detail. The international (or not) debate has been ongoing for so long that I believe the question is essentially moot - just do what feels right to you.

Rick Ferri writes convincingly about the virtue of simplicity.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Sandtrap »

David Jay wrote: Tue Jun 22, 2021 7:54 am AA is intensely personal, it is imperative that one not overestimate their ability to handle risk, it is critically important that one not sell after a large downturn. I always use Bernstein’s quote: “mistiming the market is probably the most frequent and severe form of permanent capital loss”. This is why it is often said that you need to be prepared for a 50% market downturn - as sort of a “shock test”: Can you hold your AA through that sort of event?

Different individuals go to different levels of detail. The international (or not) debate has been ongoing for so long that I believe the question is essentially moot - just do what feels right to you.

Rick Ferri writes convincingly about the virtue of simplicity.
+1
Great points!
Well said.

The increased volume of posts about Allocation “adjustments” during the March 2020 drop support this.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by jebmke »

I pick a number (equity/fixed) and stick with it until I decide for some valid reason to pick another number. I've only changed twice. Once before retiring and again at an inflection point during retirement. I now have an asymmetrical allocation target. I will re-balance on the downside but not on the upside.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Sandtrap »

OP: suggest reading the forum wiki:
“Investing Behavior Pitfalls”.

“Life Cycle Investing” by W. Bernstein.

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Re: How Do You Make Your Asset Allocation Decisions?

Post by TomatoTomahto »

It also helps to have a grasp (or a child) with a good sense of how to counteract FOMO (Fear Of Missing Out). We have had “more” in fixed income and similar for years than could be considered necessary as part of our quasi-LMP (Liability Matching Portfolio). We have left a lot of money on the table as a result, but it’s in keeping with our overall plan.

I wanted to buy some ARKK. I mentioned it to my 25-year old, who is much smarter than I am, and he talked me off the ledge. As it happens, I picked the high of ARKK almost to the day, but more importantly than that, it’s just not “what we do.”
I get the FI part but not the RE part of FIRE.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by dbr »

I only invest in broad markets and made an arbitrary decision for bonds to be intermediate Treasuries and intermediate TIPS and an arbitrary decision for international stocks to be 15% of stocks. Looking at performance data* and modeling outcomes can be somewhat informative. The allocation between stocks and bonds is based on thinking through need, ability, and willingness to take risk including modeling outcomes in retirement models. Need, ability, and willingness includes understanding what you are trying to do and how you behave as an investor. This is for someone retired 14 years, but would apply starting some years before retiring. 30 years ago I had never heard of any of this stuff, but we have never had an enthusiasm for messing around with investments and don't do it.

*Performance data means the risk and return of portfolios. Performance of each asset in isolation should also be understood but is not the result needed. Note all modeling is subject to wide bands of uncertainty and one needs to be circumspect about predicting the future. Investing is not rocket science. Rocket science can land a rover on Mars. Investing is far more uncertain.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by David Jay »

Sandtrap wrote: Tue Jun 22, 2021 7:58 amThe increased volume of posts about Allocation “adjustments” during the March 2020 drop support this.
I remember a number of folks yelling: “THIS TIME IS DIFFERENT!”
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Toons »

70/30
Until I Leave
This World






:wink:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: How Do You Make Your Asset Allocation Decisions?

Post by sailaway »

Toons wrote: Tue Jun 22, 2021 8:51 am 70/30
Until I Leave
This World






:wink:
I started at 80/20 because Fidelity defined that as moderately aggressive, which suits me to a T. Many years later, as I learned things and finally got DH to admit that 100/0 was a bit aggressive for folks approaching FI, he chose 70/30. I see no reason to have that conversation again. We are currently focused on deciding if he quits a few weeks after our upcoming vacation or if he can make it a few more months to bonus time and the next RSU vest date.
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sureshoe
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Re: How Do You Make Your Asset Allocation Decisions?

Post by sureshoe »

Interesting mixes. I probably should addendum that I posted this as a bit of a curiosity more than seeking raw advice, and wondering how people came up with their numbers. I've mostly "stayed the course" for 15 years. I followed Motley Fool in the very early 2000s for stock picking, but grew weary very quick - less of the returns and more of the mental overhead. I had some big winners and big losers, and found I was netting around the S&P. So, I started using their mutual fund service - which probably overcomplicated things, but gets to a generic AA that almost fell in line with Personal Capital. Over time, I've moved more to indexes and a little more to international. But for the most part been 90ish/10ish stocks/bonds.

Right now I'm:
Cash - 2.4%
International Bonds - 1.9%
US Bonds - 9.5%
International Stocks - 24.2%
US Stocks - 59.6%
Alternatives - 2.4%

About 70% of my portfolio is in : FXAIX, VFIAX, FSIVX, VT, VBTIX, VFINX, VTI
That's spread out over 3 different 401k, 2 Roths, and a taxable. Slowly mopped up the stragglers, but not done a hard, clean sweep - just not been a big driving force as my portfolio has largely mirrored the market with some cushion due to the (small) bond position.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by dbr »

sureshoe wrote: Tue Jun 22, 2021 9:07 am Interesting mixes. I probably should addendum that I posted this as a bit of a curiosity more than seeking raw advice, and wondering how people came up with their numbers.
I would sure as heck hope my asset allocation is never construed as advice for someone else.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Sandtrap »

Toons wrote: Tue Jun 22, 2021 8:51 am 70/30
Until I Leave
This World






:wink:
Admire your tenacity!

j :D
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Re: How Do You Make Your Asset Allocation Decisions?

Post by David Jay »

sureshoe wrote: Tue Jun 22, 2021 9:07 amI probably should addendum that I posted this as a bit of a curiosity more than seeking raw advice, and wondering how people came up with their numbers.
In accumulation, I selected the highest stock percentage that I knew I would be able to hold in a large downturn. It worked in 2007, I did not sell.

In retirement, I selected the highest stock percentage that did not threaten my retirement (assuming the dreaded "50% downturn") and also allowed me to sleep well at night. Stock percentage now is 40% lower than during the accumulation years.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: How Do You Make Your Asset Allocation Decisions?

Post by asif408 »

I pretty much separate my money into safe (cash, CD's, I-bonds, short term Treasuries) and risky (stocks). I stay away from most alternatives. So once I decide how much safe money I need, I allocate among the risky.

Among the risky, I break it down by:

1) Markets: US, international developed, and emerging markets
2) Style: Growth/value, small/large
3) Sector/country


So starting with #1, my allocation is:
50% EM
40% international developed
10% US

Among those categories, I do some tilting (2), primarily to small in the US and international developed and to value in all 3 markets. Finally, I have a small sector tilt of my overall portfolio to a global energy fund (about 10%) and some small country tilts among my international stocks (about 5-10%). So most of my allocation efforts center around the decision on how much to allocate by (1) and (2). I use valuation metrics to guide my allocation decisions. The allocation I have now is one I've had for a few years but I did make heavier tilts to small and value in 2019 and 2020 after their relatively poor performance.

Earlier in the 2010s I have a significantly higher US allocation but decreased it over the years after its extended outperformance relative to international stocks, and got to my current allocation around 2016/2017. I've stuck with the heavy international allocation since then and continue to be patient with it, as I believe I will eventually be rewarded for the patience. I have 20-30 years or more until I retire, so I've got time on my side.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Taylor Larimore »

sureshoe wrote: Tue Jun 22, 2021 7:27 am I get the sense most of the people on here eschew financial planners. So how do you make your AA decisions, and to what level of detail do you go?

I use Personal Capital. It falls in line, generally, with most investing theory I've read. The break it down to: US & Foreign Stocks. US & Foreign Bonds. Cash. Alternatives. I stray from Alternatives other than what is incidentally picked up by a few active funds I own.
sureshoe:

What I cannot afford to lose is in the Vanguard Total Bond Market Index Fund and Cash. The rest is in the Vanguard 500 Index Fund.

Best wishes.
Taylor
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Re: How Do You Make Your Asset Allocation Decisions?

Post by HootingSloth »

I picked various guideposts and use smooth and automatic portfolio-size based glidepaths to steer gradually between them. Roughly speaking, the guideposts are:
  • Build a six month emergency fund (AA guidepost: 0x/0.5x)
  • Begin accumulating stocks (AA guidepost: 2x/0.5x)
  • Maintain 80/20 asset allocation while focusing on building enough for retirement (AA guidepost: 10x/2.5x)
  • Derisk while achieving financial independence (AA guidepost: 15x/10x)
  • Maintain sufficient fixed income (AA guidepost: 40x/10x)
  • Maintain 80/20 asset allocation (no guidepost, 80/20 AA as long as above 50x)
My emergency fund and the accumulated value of mortgage prepayments are considered part of the fixed income portion of my AA.

Right now, I am on the glidepath between 3 and 4. I don't know where along the ride I will stop accumulating. I suspect I have another 20 to 25 years to go but probably not at my current savings rate the entire time. The "x" is my current annual spending, excluding certain luxury spending like international travel and discretionary home renovation projects. I don't plan to change the guideposts if and when I start spending more in the future.

Edited to add: Here is a plot of the percentage of fixed income as a function of portfolio size:
Image
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
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Re: How Do You Make Your Asset Allocation Decisions?

Post by arcticpineapplecorp. »

it's really a personal decision and shouldn't be made just based on age (even though that's how the cookie cutter target date funds operate).

for instance, just because someone's in their 20s or 30s does that mean they "should" maximize risk in search of maximum returns?

the answer is, it depends.

if that 20-30 year old has no investible assets, they have a "need" to take risk.
but plenty of 20 somethings in 2008 found out they didn't have the "willingness" to take the risk of a 90/10 portfolio (target date).
also, a 30 year old college (tenured) professor has the "ability" to take risk, unlike a 30 year old gig worker.

So you should really assess your need, ability and willingness to take risk and not just follow what someone of a similar age is doing with their allocation. read more here:

https://www.cbsnews.com/news/asset-allo ... -you-take/

https://www.cbsnews.com/news/asset-allo ... tolerance/

https://www.cbsnews.com/news/asset-allo ... -you-need/

https://www.cbsnews.com/news/asset-allo ... ing-goals/

also you should look at prior bear markets, like in the example below from 1973-1974, how different allocations fared:

Image

you can also use this as a guide (note past returns are not indicative of future returns) from Vanguard:
https://investor.vanguard.com/investing ... allocation
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by dcabler »

asif408 wrote: Tue Jun 22, 2021 9:31 am I pretty much separate my money into safe (cash, CD's, I-bonds, short term Treasuries) and risky (stocks). I stay away from most alternatives. So once I decide how much safe money I need, I allocate among the risky.

Among the risky, I break it down by:

1) Markets: US, international developed, and emerging markets
2) Style: Growth/value, small/large
3) Sector/country


So starting with #1, my allocation is:
50% EM
40% international developed
10% US

Among those categories, I do some tilting (2), primarily to small in the US and international developed and to value in all 3 markets. Finally, I have a small sector tilt of my overall portfolio to a global energy fund (about 10%) and some small country tilts among my international stocks (about 5-10%). So most of my allocation efforts center around the decision on how much to allocate by (1) and (2). I use valuation metrics to guide my allocation decisions. The allocation I have now is one I've had for a few years but I did make heavier tilts to small and value in 2019 and 2020 after their relatively poor performance.

Earlier in the 2010s I have a significantly higher US allocation but decreased it over the years after its extended outperformance relative to international stocks, and got to my current allocation around 2016/2017. I've stuck with the heavy international allocation since then and continue to be patient with it, as I believe I will eventually be rewarded for the patience. I have 20-30 years or more until I retire, so I've got time on my side.
Similar idea here but closing in on retirement quickly...
Safe: This will be an income stream starting at age 70 consisting of SS, Ibonds, TIPs. Ibonds/TIPs set to last 15 years. Once Ibonds/TIPs are depleted, SS will of course continue on and we'll consider a SPIA purchased from the risk portion of the portfolio. I decided on this course a few years ago when spending a number of months wondering what might keep my 70+ year old self up at night after paying close attention to my parents and older siblings. This should cover bare minimum living expenses.

Risk: This is to both bridge the time between retirement and to make life worth living beyond the safe stream that starts at age 70. This is fixed at 60/40 with a mix of US, EM, and Int'l Small. Currently bonds are intermediate US treasuries but I plan on making a change in the next year or so to go with long treasuries to start retirement. Will step back down to intermediate then to short/cash as retirement progresses. Unless we enter a regime like the 70's where the yield curve was extremely flat between intermediate and long bonds, this should result in a little bit higher withdrawals at the beginning of retirement based on ABW withdrawal methods.

None of this would have occurred to me if I hadn't personally experienced 2008.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by abuss368 »

Sandtrap wrote: Tue Jun 22, 2021 8:01 am OP: suggest reading the forum wiki:
“Investing Behavior Pitfalls”.

“Life Cycle Investing” by W. Bernstein.

j🌺
Excellent idea Jim. The wiki is always evolving and being updated with information. I have spent some time there and have learned much. I recommend it to all investors.

Tony
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Re: How Do You Make Your Asset Allocation Decisions?

Post by abuss368 »

sureshoe wrote: Tue Jun 22, 2021 7:27 am I get the sense most of the people on here eschew financial planners. So how do you make your AA decisions, and to what level of detail do you go?

I use Personal Capital. It falls in line, generally, with most investing theory I've read. The break it down to: US & Foreign Stocks. US & Foreign Bonds. Cash. Alternatives. I stray from Alternatives other than what is incidentally picked up by a few active funds I own.
Hi sureshoe -

I am uncertain if most Bogleheads “eschew” financial planners and advisors, but I would speculate there are many do it yourself folks. Financial advisors can provide an important service for investors who need guidance or perhaps support when markets inevitably become volatile or pull back.

I used to use a personal financial software many years ago: Quicken. In fact I used it for a decade but stopped cold about 12 years back. I ended up focusing on simplicity that I no longer had a need or realized the value that I initially did.

I think it may be best to focus on total market index funds. Many advisors and experts recommend the same. vanguard Total Stock, Total International Stock, Total Bond, and Total International Bond (if you so desire) are excellent investments. These four funds hold the entire investment universe.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: How Do You Make Your Asset Allocation Decisions?

Post by abuss368 »

David Jay wrote: Tue Jun 22, 2021 8:19 am I remember a number of folks yelling: “THIS TIME IS DIFFERENT!”
Hi David Jay -

I am hearing and reading that a lot lately in reference to real estate.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: How Do You Make Your Asset Allocation Decisions?

Post by abuss368 »

Taylor Larimore wrote: Tue Jun 22, 2021 9:44 am What I cannot afford to lose is in the Vanguard Total Bond Market Index Fund and Cash. The rest is in the Vanguard 500 Index Fund.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources."
Hi Taylor -

This is key and excellent advice. I learned this concept many years ago when the Great Recession and then the COVID Pandemic hit the world’s investment markets.

While our present allocation to bonds in under our age, we are increasing that allocation a percentage point or each and every year. The goal is to arrive at the desired allocation to bonds by retirement.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Sandtrap »

abuss368 wrote: Tue Jun 22, 2021 6:54 pm
Taylor Larimore wrote: Tue Jun 22, 2021 9:44 am What I cannot afford to lose is in the Vanguard Total Bond Market Index Fund and Cash. The rest is in the Vanguard 500 Index Fund.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources."
Hi Taylor -

This is key and excellent advice. I learned this concept many years ago when the Great Recession and then the COVID Pandemic hit the world’s investment markets.

While our present allocation to bonds in under our age, we are increasing that allocation a percentage point or each and every year. The goal is to arrive at the desired allocation to bonds by retirement.

Best.
Tony
The allocation glide slopes for “Age in Bonds” vs “Target Date Fund of Funds” vs Bernstein’s “LMP” are different.

Which one do you adhere to?

Aloha
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Re: How Do You Make Your Asset Allocation Decisions?

Post by abuss368 »

Sandtrap wrote: Tue Jun 22, 2021 8:10 pm
abuss368 wrote: Tue Jun 22, 2021 6:54 pm
Taylor Larimore wrote: Tue Jun 22, 2021 9:44 am What I cannot afford to lose is in the Vanguard Total Bond Market Index Fund and Cash. The rest is in the Vanguard 500 Index Fund.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources."
Hi Taylor -

This is key and excellent advice. I learned this concept many years ago when the Great Recession and then the COVID Pandemic hit the world’s investment markets.

While our present allocation to bonds in under our age, we are increasing that allocation a percentage point or each and every year. The goal is to arrive at the desired allocation to bonds by retirement.

Best.
Tony
The allocation glide slopes for “Age in Bonds” vs “Target Date Fund of Funds” vs Bernstein’s “LMP” are different.

Which one do you adhere to?

Aloha
J🌺
Jim -

I focus on the allocation that protects what money I can not afford to lose (or be as impacted from market pullbacks), rather than what an investment expert may recommend. While these investment experts recommendations and strategies are indeed important and educational, all investors are different.

Different needs. Different goals. Different tolerances for risk.

Hopefully that answers your question.
Tony
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Re: How Do You Make Your Asset Allocation Decisions?

Post by PKD »

The most important thing for me was to pick an allocation that I could stick with no matter what. For me, that’s 80/20 stocks/bonds and 60/40 US/international. I’m not shooting for perfection. I’ve never once run “what if?” scenarios to see how much better or worse I would have done with a different allocation. That would just cause me to constantly question myself.

I think my plan is good and I can stick with it. That’s what matters.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by bluexray »

Does it seem like risk tolerances are higher these days?

The age in bonds is often considered to be too conservative?

Probably due to combination of long bull market and low interest rates.

I think I’m going to stick close to age in bonds than most.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Taylor Larimore »

Aloha Joe wrote: Taylor:

The allocation glide slopes for “Age in Bonds” vs “Target Date Fund of Funds” vs Bernstein’s “LMP” are different.

Which one do you adhere to?
Aloha Joe

I do not "adhere" to any pre-set "glide slopes." My stock/bond allocation is based on my time frame, risk tolerance, and my personal financial situation.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources.
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Johnathon Livingston »

I borrow heavily from Vanguard’s target date funds and the supporting research.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by rockstar »

This question made perfect sense even 5 years ago. It doesn't anymore.

I think, the idea of AAs depend on the bond market continuing its bull run. This doesn't make sense to me. Rates are currently negative real right now. And it doesn't seem likely that they will go negative nominal. Negative rates have really hurt European banks.

The appropriate question to ask now is: where can I put my money other than equities that will reduce the overall risk of my portfolio to a level that I can deal with? And I'm trying to figure this one out for myself.
Last edited by rockstar on Wed Jun 23, 2021 10:10 pm, edited 1 time in total.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by RadAudit »

Haphazardly.

In my 30s, I started with age in bonds. As time wore on, I increased my bond allocation after every major stock pull back by 10% points. when I retired in my 60s, I was at 50 / 50. Right now, in my 70s, I'm thinking of increasing the allocation to 60 / 40, all in one fund, to increase the chances of DW having enough and simplifying portfolio management.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by nedsaid »

For me, I look at Target Date Retirement 2025 funds and Moderate Target Risk funds issued by Vanguard, Fidelity, T. Rowe Price, and American Century to give me an idea and to reassure me that I am in the ballpark on my asset allocation. Gives me ideas on such things as Stocks vs. Bonds, U.S. vs. International Allocation. I see if such funds have a TIPS allocation and how much. I look at commitment to International Bonds. So if I see the big boys doing something new, I take notice. I make my own decisions but I use these funds as a rough guide and as a source for new ideas.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by spdoublebass »

nedsaid wrote: Wed Jun 23, 2021 8:09 pm For me, I look at Target Date Retirement 2025 funds and Moderate Target Risk funds issued by Vanguard, Fidelity, T. Rowe Price, and American Century to give me an idea and to reassure me that I am in the ballpark on my asset allocation. Gives me ideas on such things as Stocks vs. Bonds, U.S. vs. International Allocation. I see if such funds have a TIPS allocation and how much. I look at commitment to International Bonds. So if I see the big boys doing something new, I take notice. I make my own decisions but I use these funds as a rough guide and as a source for new ideas.
I'm sure there is nothing I know about TD funds that you aren't already aware of, so I'll dive right in.

Did you pick 2025 because that is the start date of your retirement?

I ask because I also use them as a guide (or maybe even a benchmark) but I have a hard time knowing which one to follow. They end at 30/70, but seem to hit retirement around 47/53.
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FIREyourself
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Re: How Do You Make Your Asset Allocation Decisions?

Post by FIREyourself »

I use a function of age and wealth - basically age in bonds scaled for wealth relative to my FI goal.
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Garco
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Garco »

Basic question: "In the short run or the long run?"

I started investing in 1975 -- shortly after I began the job that I stayed with until I retired in 2014. During the early years, I had a simple ~75-25 portfolio within a 403b plan. I wasn't worried about losses. I focused on my career. I chose an allocation that would start my accumulation with a strong commitment to "growth" over my working lifespan. My investment options were highly constrained. I hardly looked at my holdings.

Over the years I stayed with a stock-heavy portfolio. After 30 years or so, I began to taper the ratio of stocks to fixed income. Now that I'm retired, that original portfolio is about 60% stocks. This is in my main tax deferred account. In addition, however, I have a second portfolio outside of my 403b plan. In that portfolio, in a brokerage account, I have 45% in stocks and 55% in fixed income.
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Sandtrap
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Sandtrap »

rockstar wrote: Wed Jun 23, 2021 3:21 pm This question made perfect sense even 5 years ago. It doesn't anymore.

I think, the idea of AAs depend on the bond market continuing its bull run. This doesn't make sense to me. Rates are currently negative real right now. And it doesn't seem likely that they will go negative nominal. Negative rates have really hurt European banks.

The appropriate question to ask now is: where can I put my money other than equities that will reduce the overall risk of my portfolio to a level that I can deal with? And I'm trying to figure this one out for myself.
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nedsaid
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Re: How Do You Make Your Asset Allocation Decisions?

Post by nedsaid »

spdoublebass wrote: Wed Jun 23, 2021 8:18 pm
nedsaid wrote: Wed Jun 23, 2021 8:09 pm For me, I look at Target Date Retirement 2025 funds and Moderate Target Risk funds issued by Vanguard, Fidelity, T. Rowe Price, and American Century to give me an idea and to reassure me that I am in the ballpark on my asset allocation. Gives me ideas on such things as Stocks vs. Bonds, U.S. vs. International Allocation. I see if such funds have a TIPS allocation and how much. I look at commitment to International Bonds. So if I see the big boys doing something new, I take notice. I make my own decisions but I use these funds as a rough guide and as a source for new ideas.
I'm sure there is nothing I know about TD funds that you aren't already aware of, so I'll dive right in.

Did you pick 2025 because that is the start date of your retirement?

I ask because I also use them as a guide (or maybe even a benchmark) but I have a hard time knowing which one to follow. They end at 30/70, but seem to hit retirement around 47/53.
Yes, 2025 is my approximate retirement date. I look at these funds to see what the experts at the mutual funds believe to be an age appropriate asset allocation. Except for American Century, the others are at about 58% stocks. I am at about 63%-64% stocks now, a bit stock heavy because of the very low interest rates. As I said, I look also at the Moderate Target Risk funds.

John Bogle has an interviews out there where he says such things as retirees invest too conservatively, the actuarial value of Social Security is about $350,000 and you can consider that as a bond, and that a 65% stock/35% bond portfolio is good for most investors. So I am thinking about stopping the de-risking process. Even Bobcat2 aka BobK thinks that in the light of very low interest rates that near retirees and retirees should consider modestly increasing their allocation to stocks in response.

There are other fund companies that you could look at for a model: Blackrock and American Funds come to mind. A 50/50 portfolio seems to be appropriate for somebody just starting retirement.
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warner25
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Re: How Do You Make Your Asset Allocation Decisions?

Post by warner25 »

bluexray wrote: Wed Jun 23, 2021 12:10 am Does it seem like risk tolerances are higher these days?
Yes, as someone who has been visiting this forum almost daily since 2009, I have seen people increasingly mock 60/40 or age-in-bonds as foolishly conservative. I think part of that is just selection bias, in terms of who is attracted to an investing forum. I think another part of that is the incredible performance of US stocks since 2009. I think the last part is people feeling like they need to take on more risk because they are not satisfied with expected returns, for example:
rockstar wrote: Wed Jun 23, 2021 3:21 pm ...the idea of AAs depend on the bond market continuing its bull run. This doesn't make sense to me. Rates are currently negative real right now...
I just keep thinking about what nisiprius has expressed many times, in different ways: "Hard times happen." Sometimes bonds yield 3% real, and sometimes they yield -1%, and that's frustrating but there's no way to opt-out of that.

My wife and I chose our shared asset allocation, which has bounced around between 50/50 and 60/40, mostly as a compromise. My wife said that, on her own, she would probably just have a savings account and EE or I bonds. On my own, I might be closer to something like $100k in cash and bonds with everything else going into stocks at the global market cap. I am convinced that most people on this forum don't consider their spouse's risk tolerance at all, and that will ruin some people in the next long bear market.

My own ideas are also influenced by:
1. All the studies showing that some mix of stocks and bonds has historically outperformed 100% stocks for many things, like SWR and even maximum return - so real diversification isn't just owning the whole stock market
2. My experience as a beginning investor in 2008-2009, and my understanding of the Shiller PE being well above the historical norm for my entire life as an investor so far
3. The fact that we are on-track to easily reach our financial goals even if the real return on our portfolio is quite low
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Re: How Do You Make Your Asset Allocation Decisions?

Post by rockstar »

Sandtrap wrote: Wed Jun 23, 2021 11:28 pm
rockstar wrote: Wed Jun 23, 2021 3:21 pm This question made perfect sense even 5 years ago. It doesn't anymore.

I think, the idea of AAs depend on the bond market continuing its bull run. This doesn't make sense to me. Rates are currently negative real right now. And it doesn't seem likely that they will go negative nominal. Negative rates have really hurt European banks.

The appropriate question to ask now is: where can I put my money other than equities that will reduce the overall risk of my portfolio to a level that I can deal with? And I'm trying to figure this one out for myself.
+1
Yes
Where is “Safe Haven” going forward?

j🌺
I can only buy $10k of I Bonds a year. I don't know of anything safer with a real yield right now. Both REITs and preferred stock should return a positive real yield, but both don't provide downside protection like investment grade treasury bonds typically do. They don't reduce risk.

Fixed income replacement is a tough egg to crack. What I should do is look to see what investors in Japan bought. They've experienced a decade of persistent low yields. What did they buy?
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Re: How Do You Make Your Asset Allocation Decisions?

Post by rockstar »

warner25 wrote: Thu Jun 24, 2021 12:18 pm
bluexray wrote: Wed Jun 23, 2021 12:10 am Does it seem like risk tolerances are higher these days?
Yes, as someone who has been visiting this forum almost daily since 2009, I have seen people increasingly mock 60/40 or age-in-bonds as foolishly conservative. I think part of that is just selection bias, in terms of who is attracted to an investing forum. I think another part of that is the incredible performance of US stocks since 2009. I think the last part is people feeling like they need to take on more risk because they are not satisfied with expected returns, for example:
rockstar wrote: Wed Jun 23, 2021 3:21 pm ...the idea of AAs depend on the bond market continuing its bull run. This doesn't make sense to me. Rates are currently negative real right now...
I just keep thinking about what nisiprius has expressed many times, in different ways: "Hard times happen." Sometimes bonds yield 3% real, and sometimes they yield -1%, and that's frustrating but there's no way to opt-out of that.

My wife and I chose our shared asset allocation, which has bounced around between 50/50 and 60/40, mostly as a compromise. My wife said that, on her own, she would probably just have a savings account and EE or I bonds. On my own, I might be closer to something like $100k in cash and bonds with everything else going into stocks at the global market cap. I am convinced that most people on this forum don't consider their spouse's risk tolerance at all, and that will ruin some people in the next long bear market.

My own ideas are also influenced by:
1. All the studies showing that some mix of stocks and bonds has historically outperformed 100% stocks for many things, like SWR and even maximum return - so real diversification isn't just owning the whole stock market
2. My experience as a beginning investor in 2008-2009, and my understanding of the Shiller PE being well above the historical norm for my entire life as an investor so far
3. The fact that we are on-track to easily reach our financial goals even if the real return on our portfolio is quite low
Most back dated studies use periods of time, where bonds appreciated as yields went down. What would those studies look like if bonds didn't appreciate, where you only earned your negative real yield? That's what I think is going to happen for the foreseeable future. I'm convinced their nominal zero bound. What would happen if you swap out those bonds for Japanese bonds over the same period of time?

My approach now is to gradually build up I Bonds. First as a emergency fund replacement. Second as a potential AA thing. I don't want to tie up money for 20 years in EE bonds.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by soccerbogle »

I am in the accumulation period. I have my emergency / safe / car fund money that I am comfortable with. The rest goes into stocks for retirement.

This means as I put more in my retirement accounts and the stocks in the accounts grow, my allocation becomes more aggressive on paper. This is fine for me, b/c the important part of my allocation is the dollar amounts (not a percentage) in the emergency / safe / short term needs portion of my portfolio.

At ~45 y/o, I will re-evaluate and set a plan to build up X years of expenses in fixed income going toward retirement (which will effectively glide my asset allocation to become more conservative).
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Re: How Do You Make Your Asset Allocation Decisions?

Post by Marseille07 »

rockstar wrote: Thu Jun 24, 2021 1:10 pm I can only buy $10k of I Bonds a year. I don't know of anything safer with a real yield right now. Both REITs and preferred stock should return a positive real yield, but both don't provide downside protection like investment grade treasury bonds typically do. They don't reduce risk.

Fixed income replacement is a tough egg to crack. What I should do is look to see what investors in Japan bought. They've experienced a decade of persistent low yields. What did they buy?
They just hold onto cash is my understanding. You can imagine they don't have much confidence in Nikkei, and understandably so.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by arthurdawg »

Good question...

My AA goes back to my first interest in investing in the late 90s which led to me reading most of the books that are recommended here and deciding on a 75/25 allocation. I've increased foreign stocks to about 35% and reallocated my bonds to tax-exempt funds. So I've changed the mixture a bit over time, but have maintained my portfolio at about 70/30. I'll probably look to add something more stable in about 5-10 years when I am contemplating that I'll begin to slow my medical practice down in preparation for either part-time work or earlier retirement.


I think you find what works... it depends on risk tolerance, how much you have coming in, and how late in life you start making money, in addition to many other variables.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by sureshoe »

bluexray wrote: Wed Jun 23, 2021 12:10 am Does it seem like risk tolerances are higher these days?

The age in bonds is often considered to be too conservative?

Probably due to combination of long bull market and low interest rates.

I think I’m going to stick close to age in bonds than most.
If by "age in bonds", you mean a 40 year old should have 40% bonds, I think that's way too conservative. I might say (Age-20) in bonds. I'm 90-10... and probably a little too aggressive.

I think you're dead on about people being overly aggressive right now. I've just always been like this. I was hot and heavy back in 2000, but didn't have a lot in the market. By 2009, everyone had been punched in the mouth and was scared to death. I think everyone has been tiptoeing back in and now, I have this sense there is a feeling the market can't do anything but go up.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by sureshoe »

soccerbogle wrote: Thu Jun 24, 2021 11:23 pm I am in the accumulation period. I have my emergency / safe / car fund money that I am comfortable with. The rest goes into stocks for retirement.

This means as I put more in my retirement accounts and the stocks in the accounts grow, my allocation becomes more aggressive on paper. This is fine for me, b/c the important part of my allocation is the dollar amounts (not a percentage) in the emergency / safe / short term needs portion of my portfolio.

At ~45 y/o, I will re-evaluate and set a plan to build up X years of expenses in fixed income going toward retirement (which will effectively glide my asset allocation to become more conservative).
So you're really 100-0 with some cash, which I technically don't count. I think of it as "Investment" and "Operational", and I count "Operational" as my net worth, but not as part of my investing strategy.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by monodactyl »

I find my risk tolerance and find the maximum return I can get for that level of risk.

I use a combination of historical returns, volatility, correlations, as well as some of the stuff places like Vanguard and Blackrock put out for long-term capital market assumptions. More art than science.

I Monte-Carlo it out, see if the result is in line with my risk capacity, if not. I do some soul searching to find out what can give between my tolerance and capacity, then iterate with the best return for the newly set risk level.

If I really can't find a portfolio with acceptable risk where the return helps me meet my needs, then I guess I just look at my lifestyle.

Right now I'm about 60/40 equity / IG bonds, levered 1.4x. I get cheap leverage at LIBOR + 0.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by soccerbogle »

sureshoe wrote: Fri Jun 25, 2021 7:47 am
soccerbogle wrote: Thu Jun 24, 2021 11:23 pm I am in the accumulation period. I have my emergency / safe / car fund money that I am comfortable with. The rest goes into stocks for retirement.

This means as I put more in my retirement accounts and the stocks in the accounts grow, my allocation becomes more aggressive on paper. This is fine for me, b/c the important part of my allocation is the dollar amounts (not a percentage) in the emergency / safe / short term needs portion of my portfolio.

At ~45 y/o, I will re-evaluate and set a plan to build up X years of expenses in fixed income going toward retirement (which will effectively glide my asset allocation to become more conservative).
So you're really 100-0 with some cash, which I technically don't count. I think of it as "Investment" and "Operational", and I count "Operational" as my net worth, but not as part of my investing strategy.
You could look at it that way, yes.

I read lots of threads after I found BH about AA and most of the advice is good but was difficult for me to make actionable. How do I decide my need, ability, and willingness to take risk percentage-wise? There is really no way except guess and check... which can be very painful if you find out you're wrong by selling during the crash. However, once I figured I can keep X dollars in safe places then whatever happens to the other money doesn't matter b/c it is there for the long haul. That was the lightbulb for me to get to an AA. Whether you include my safe money in my "official AA" or not I guess is a matter of perspective and have seen people on BH argue both ways. Whether you have 400k in stocks and 100k in cash to be 80/20 or 400k in stocks for 100/0 with a separate 100k fund for emergencies and the new roof you are planning to get... is six of one and a half dozen of the other.

I do think it can be somewhat misleading if people claim they are 100/0 while simultaneously holding other decent sized pots of money in fixed income or pensions. It is very different to have $1M invested at 100/0 as your only source of retirement income vs $1M invested at 100/0 while you also hold a pension that covers some / all of your expected expenses. These two situations might read the same "100/0" in a message board post but without further explanation it wouldn't be clear that they are extremely different situations.

This is why HOW you get to your AA is so important.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by DetroitRick »

At the very beginning of my investment experience, I used general inputs from Schwab and Vanguard - and then tweaked these to my own individual circumstances and other factors. From day 1, I favored diversification over prediction in making the choices. My allocation decisions were further influenced by various elements of financial theory and even (horrors) common sense. Specific human influencers came along later and included (and still include) Rick Ferri and Burton Malkiel. As I approached and entered retirement, I gave my decisions a lot more thought and made some additional changes. I really have never been willing to turn my allocation decisions over to anyone.

I've also now done some long-term benchmarking to assess my allocation and increase my comfort level. Plus those severe financial downturns helped me validate my personal risk tolerance.

All these minor additional changes (between original choices and now) included:
A slight increase in fixed income in retirement (was 10-20% in accumulation years, is around 30% now)
Added TIPs starting around age 50
Tweaked international upward from an original position of 25% equity to just under 40%. May yet go higher.
Added some alternative investments in small quantity

At this point, while I'm open to future allocation changes, as with the past - I don't expect to make many. But we'll see what future investment opportunities arise.
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Re: How Do You Make Your Asset Allocation Decisions?

Post by trueblueky »

The universe is about 60/40. That's in the sweet spot of the 4% withdrawal studies, fits the maxim of "no more than 75%, no less than 25%), and lets me sleep well at night.

I don't worry if the world is 61/39 this month or if my AA is 59/41 temporarily. I don't look at it every day. I have better things to do.

I have 1/3 of stocks in international. So 40/20/40 for US stocks, International stocks, fixed income.

Fixed income includes G Fund, SCHZ (Schwab bond index ETF), other.
unbiased
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Re: How Do You Make Your Asset Allocation Decisions?

Post by unbiased »

Appreciate the conversation here. I used to have an "overall" AA where I kept a 60/40 spread among my Roth, Taxable, & 401K. I kept most of the "40" fixed income in the tax advantaged accounts, and the stocks in the taxable. Well, now that I'll hit FI before I can draw on the tax advantaged, I've been busy adding stocks to those accounts and making the taxable more conservative, building up a few years of expenses, etc. LT needs, more stocks, ST needs, more cash/bonds.

Still going through this reconfiguring now and will unfortunately realize some LT capital gains this year from selling. Small price to pay for FI. The plan is not just what I need "now" but what my older, less cognitively fit self will appreciate. Simplicity is key.
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