Investment amount instead of allocation percentage

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TheTimeLord
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Investment amount instead of allocation percentage

Post by TheTimeLord »

Instead of assigning a pecentage to an asset class such as equities does anyone ever say I want no more than say $500,000 in equities no matter what the size of my portfolio? Then adjust quarterly so you have $500,000 in equities.
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Re: Investment amount instead of allocation percentage

Post by cheese_breath »

Being retired I go the other way by saying I want at least X years of living expenses in fixed income regardless of market conditions, but I've never (yet)reached the point where X has affected my AA.
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Re: Investment amount instead of allocation percentage

Post by TheTimeLord »

cheese_breath wrote:Being retired I go the other way by saying I want at least X years of living expenses in fixed income regardless of market conditions, but I've never (yet)reached the point where X has affected my AA.
I definitely understand that perspective too. In retirement I am contemplating keeping 3 years expenses.
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sscritic
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Re: Investment amount instead of allocation percentage

Post by sscritic »

I have dollars, not percentages. When the market drops 50%, I will have fewer dollars, but my percentages will still be 100 in total. I spend dollars, not percentages. I think everyone actually understands this concept, even as they talk percentages. Note how people talk about emergency funds; it's always how many dollars you need, not the percentage you need. cheese_breath gets it:
I want at least X years of living expenses in fixed income
When I bought my house, I sold dollars from an asset class for the down payment, not a percentage (the escrow company wanted dollars, really!). I didn't change any other dollars because I liked the dollars I had. Now that had the effect of changing my percentages, but I didn't care. I wanted the reward, and was willing to risk the loss, of a given number of dollars in stock. Buying a house could have changed my attitude about the rewards and risks, but it didn't. And if it had, it would have been in dollars, not percentages.

Note that doesn't mean I am wedded to a specific dollar amount. If my $500k of stocks becomes $2 million of stocks, I might reduce the dollars in stocks, but not back to $500k.
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Re: Investment amount instead of allocation percentage

Post by YDNAL »

StarbuxInvestor wrote:Instead of assigning a pecentage to an asset class such as equities does anyone ever say I want no more than say $500,000 in equities no matter what the size of my portfolio? Then adjust quarterly so you have $500,000 in equities.
Of course... it is called establishing a floor of safe(r) assets.
  • 1. If you have $1.5M and establish a $1M floor in safer assets, then you "want no more than $500,000 in Equities."
    2. Over time, things change and so could the amount you want in Equities.
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Re: Investment amount instead of allocation percentage

Post by TheTimeLord »

YDNAL wrote:
StarbuxInvestor wrote:Instead of assigning a pecentage to an asset class such as equities does anyone ever say I want no more than say $500,000 in equities no matter what the size of my portfolio? Then adjust quarterly so you have $500,000 in equities.
Of course... it is called establishing a floor of safe(r) assets.
  • 1. If you have $1.5M and establish a $1M floor in safer assets, then you "want no more than $500,000 in Equities."
    2. Over time, things change and so could the amount you want in Equities.
Cool to know. I guess I am looking at it as more of a ceiling for risk assets because my portfolio is still growing but the same concept. Thanks.
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Re: Investment amount instead of allocation percentage

Post by Random Musings »

StarbuxInvestor wrote:Instead of assigning a pecentage to an asset class such as equities does anyone ever say I want no more than say $500,000 in equities no matter what the size of my portfolio? Then adjust quarterly so you have $500,000 in equities.
I believe Larry Swedroe, in past postings, has alluded to some form of this methodology.

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Re: Investment amount instead of allocation percentage

Post by TheTimeLord »

<Bump>

Am I the only one thinking along these lines?
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avalpert
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Re: Investment amount instead of allocation percentage

Post by avalpert »

StarbuxInvestor wrote:Instead of assigning a pecentage to an asset class such as equities does anyone ever say I want no more than say $500,000 in equities no matter what the size of my portfolio? Then adjust quarterly so you have $500,000 in equities.
Value averaging essentially takes that approach except the floor varies to help you reach a target end-value. There is no reason why you could say I never want more than $x of value at risk and adjust to that.
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Re: Investment amount instead of allocation percentage

Post by Dale_G »

I have a dollar number in mind for a lower limit for my bonds. Basically it means that I will sell bonds to rebalance into equities during an equity crunch until I reach my bond floor. And then I will stop selling bonds to buy equities. At the moment, rebalancing into equities stops after equities have taken a 65% hit - a bit more severe than the recent unpleasantness.

Back in 2008/2009 variations on this technique were called "Plan B", and sometimes derided as failure to stay the course. But having a floor makes sense to me. Have fun in Vegas (or wherever), but when you get down to gas money to return home, it is time to stop. Walking through Death Valley might not be much fun.

I don't have any ceilings however. The dollars at risk don't mean much as long as there is an assumed safe floor.

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Re: Investment amount instead of allocation percentage

Post by pkcrafter »

Starbux, I'm curious to know if you are in accumulation phase. If you are, then in effect, you are reducing equity allocation as you go along, but it isn't well controlled. This may not be a bad idea as you approach retirement. But my curiosity asks if 500k is now 80% of your portfolio or 40%. the other thing you are doing is looking at risk in terms investors can really relate to. Percentages are vague, but $$ are real. Most people are risk averse and using $$-speak creates a much clearer picture in a person's mind.

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Re: Investment amount instead of allocation percentage

Post by TheTimeLord »

pkcrafter wrote:Starbux, I'm curious to know if you are in accumulation phase. If you are, then in effect, you are reducing equity allocation as you go along, but it isn't well controlled. This may not be a bad idea as you approach retirement. But my curiosity asks if 500k is now 80% of your portfolio or 40%. the other thing you are doing is looking at risk in terms investors can really relate to. Percentages are vague, but $$ are real. Most people are risk averse and using $$-speak creates a much clearer picture in a person's mind.

Paul
I am towards the end of the accumulation phase and starting to deal with the question how much is enough. That lead me to the thought that if a 50/50 $1,000,000 portfolio where you have $500K equities and $500K bonds is enough then a 33/66 $1,500,000 portfolio with $500K equities and $1,000K bonds would also be enough and so on and so on. That is where the thought a of fixed $ amount for equities comes from. The $500K is just a round number to use as an example.
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columbia
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Re: Investment amount instead of allocation percentage

Post by columbia »

I could see someone taking this approach:

Keep things simple and invest in an 80/20 fund and every time it reaches, say $500,000, take $100,000 off the table and move it into TBM.
Lather. Rinse. Repeat.

I'm not sure *I* would ever do that, but - psychologically - it sets up an area of protected/safe/whatever term you want to use assets in one's mind.
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Re: Investment amount instead of allocation percentage

Post by midareff »

columbia wrote:I could see someone taking this approach:

Keep things simple and invest in an 80/20 fund and every time it reaches, say $500,000, take $100,000 off the table and move it into TBM.
Lather. Rinse. Repeat.

I'm not sure *I* would ever do that, but - psychologically - it sets up an area of protected/safe/whatever term you want to use assets in one's mind.

Let's say you have retired a year or two ago. Then it gets interesting and equities drop 50%. Do you rebalance out of TBM if you are retired and figure TBM has your needs covered with a small safety margin?
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Re: Investment amount instead of allocation percentage

Post by avalpert »

midareff wrote:
columbia wrote:I could see someone taking this approach:

Keep things simple and invest in an 80/20 fund and every time it reaches, say $500,000, take $100,000 off the table and move it into TBM.
Lather. Rinse. Repeat.

I'm not sure *I* would ever do that, but - psychologically - it sets up an area of protected/safe/whatever term you want to use assets in one's mind.

Let's say you have retired a year or two ago. Then it gets interesting and equities drop 50%. Do you rebalance out of TBM if you are retired and figure TBM has your needs covered with a small safety margin?
Unless you are a late retiree or have a terminal disease - yes. If your retirement money has to be able to last another 20-30 years you really should have equities to do so. If this happens when you are only a year or two into retirement and you are really concerned about having enough you may be able to return to the workforce, even if only part time.
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Re: Investment amount instead of allocation percentage

Post by TheTimeLord »

midareff wrote:
columbia wrote:I could see someone taking this approach:

Keep things simple and invest in an 80/20 fund and every time it reaches, say $500,000, take $100,000 off the table and move it into TBM.
Lather. Rinse. Repeat.

I'm not sure *I* would ever do that, but - psychologically - it sets up an area of protected/safe/whatever term you want to use assets in one's mind.

Let's say you have retired a year or two ago. Then it gets interesting and equities drop 50%. Do you rebalance out of TBM if you are retired and figure TBM has your needs covered with a small safety margin?
Yes, because you have properly assessed risk and while equities have dropped 50% you only had a 10%-20% equity allocation so you would only be transferring a small amount from your TBM. The key being your statement about small safety margin leading to a conservative asset allocation.
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OutInThirteen
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Re: Investment amount instead of allocation percentage

Post by OutInThirteen »

My wife and I follow this approach. A couple of years ago we decided to cap our equity exposure at $200K. When our equity holdings exceeded that target by 5%/$10K we would sell back down to $200K and reallocate money into cash/bonds/equivalents, either my Thrift Savings Plan G Fund, my 403(b) stable value fund, or my Traditional IRA core fund. On the other hand, when our equity holdings dropped to below $190K we would buy back up to $200K. That only happened once since we started this approach. This approach has only worked because of the volatility over the past several years. The result has been that we've been "earning" $10K to $30K from our $200K equity investments annually, which has been good as I transitioned into retirement.

We are fortunate in that, other than bridging a few years until my second pension and SS kick in, we won't have to rely on any investment income to maintain our desired retirement lifestyle.
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Re: Investment amount instead of allocation percentage

Post by JoMoney »

I keep a fixed dollar amount of cash/short-term bonds, consider potential other sources of income/insurance, and the rest is put into investments... which at this point is entirely equities.
Similar approach, opposite allocation I guess... I say to myself "I only want/need $xxx in cash or fixed income payments" and the rest can be invested.
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Re: Investment amount instead of allocation percentage

Post by Dandy »

Not exactly. I do think people tend to look at risk in percentage terms rather than dollars. In the accumulation stage I had a certain dollar target for my stable value fund and put excess mostly into equities. In retirement I tend to have a base dollar amount "safe" and then put excess more at risk - mostly intermediate bond funds or equity funds.

As the portfolio grows keeping the equity percentage allocation the same increases the dollars at risk. In the accumulation stage you may offset this growing dollar risk by time and contributions - in or close to retirement both recovery options are more limited. While focusing on dollars at risk don't forget the real risk for most retirees - risk of not having enough dollars to fund a long retirement.

I think that is why Wm. Bernstein advises those who feel they have ample retirement resources to have 20 - 25 years worth of retirement drawdown relatively safe. I think of two "portfolios" one that is "safe" to fund our retirement and the other for (growth, inheritance, charity, fun etc). I really only have one portfolio but periodically make sure I have allocated enough "safe" dollars to cover my projected retirement needs.
That approach limits my risk to funding a long retirement and my worry about equity volatility.

You are looking at the issue from the opposite standpoint i.e. limiting your equity dollars at risk and I guess keeping the excess safe or safer.
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Re: Investment amount instead of allocation percentage

Post by TheTimeLord »

Dandy wrote:You are looking at the issue from the opposite standpoint i.e. limiting your equity dollars at risk and I guess keeping the excess safe or safer.
Basically. Looking at it like X dollars in equities is all the market risk I need take to achieve my goals.
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Re: Investment amount instead of allocation percentage

Post by YDNAL »

StarbuxInvestor wrote:I am towards the end of the accumulation phase and starting to deal with the question how much is enough. That lead me to the thought that if a 50/50 $1,000,000 portfolio where you have $500K equities and $500K bonds is enough then a 33/66 $1,500,000 portfolio with $500K equities and $1,000K bonds would also be enough and so on and so on. That is where the thought a of fixed $ amount for equities comes from. The $500K is just a round number to use as an example.
I take exception.
  • 1. "Enough" is being able to meet basic consumption* without unnecessary risk.
    2. If $500K in safe(r) assets is enough, then that's all you really need.
    3. Anything above that can help meet ALL other goals/objectives (that is, besides basic consumption).
* your basics can be different than mine, which can be different from the next guy/gal.
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Re: Investment amount instead of allocation percentage

Post by markcoop »

I remember when I was younger, a percentage change was not a big deal. If I had $30K in saving, 10% was $3K and just didn't seem like that amount would make or break me. Yes I was able to buy what seemed like alot with $3K, but I had pay checks coming in and could quickly recover that amount. Now, a little later in life (I'm 48), I do have a different perspective. A 10% loss of my portfolio now cannot be made up with a paycheck or two. I still deal in percentages, but I am cognizant of the dollar amount represented by the percentage. To some degree, it has certainly made me more conservative with my money.
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Re: Investment amount instead of allocation percentage

Post by Diligent Hands »

This is a 5 year old thread I found using the Bouglehead search engine.

I am curious if any of the original participants have changed their views or asset allocation approach in the last 5 years? This would especially be true of TimeLord as I am considering using a target dollar value for equities.

A target value for equities allows me to get the benefit of a traditional percentage approach (buy when market is down and sell when market is up). I am thinking about a 5% band, but I wouldn't rule out buying on RBDs even if didn't reach the trigger.
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Re: Investment amount instead of allocation percentage

Post by PhysicianOnFIRE »

I have a similar plan, but the fixed amount would be in bonds.

My plan has been to own at least five years worth of bonds in retirement. That would represent 20% of a portfolio with 25x expenses. As the portfolio gets larger, the bond portion becomes proportionately smaller.

At 50x, 5 years worth of bonds is now 10% of the portfolio. Of course, the greater your multiple, the more likely your portfolio is to grow as you’ll be spending a smaller percentage of it, and the lower your bond percentage can safely be.

This is the reverse glidepath that has become popular in recent years. Once you’re safely past the first five to ten years of retirement where poor returns can inflict the most damage, you can afford to safely increase your stock allocation.

The venerable Dr. Bill Bernstein is known for the quotable “If you’ve won the game, why keep playing?”

I think that’s a great way for a retiree with 20x to 25x to think.

However, the more you have, the more you can afford to remain aggressive with your portfolio. Why play that game? If not for yourself, for your heirs or favorite charitable organizations. I’m sure there’s someone out there who would love for you to run up the score.

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Re: Investment amount instead of allocation percentage

Post by Uncorrelated »

I think percentages are the sensible approach.

There are two main approaches to investing. The first is to define an utility function for your expected wealth, most simple utility functions call for a constant percentage of assets. Other utility functions call for a time varying percentage of assets. But since each asset you own grows at at different rate, it is highly unlikely that a constant dollar amount is a good approximation.

The other approach to investing is to determine the risk that you want to take, and then pick the portfolio that maximizes the return for that risk. That approach also calls for a constant percentage of assets.


A 6 month emergency fund. is that 100% of your portfolio, 1% of your portfolio or 70% of your portfolio? Without that information, it is impossible to determine whether your portfolio is efficient. If the percentage of equity in your portfolio keeps changing from 40% to 60% due to market movements, then a constant allocation of around 50% results in lower risk with the same expected returns. This also highlights the important of percentage allocations.

If you want to create your own annuity, a decreasing amount in extremely safe assets (TIPS, cash) can make sense, but that is a pretty limited case.
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Re: Investment amount instead of allocation percentage

Post by firebirdparts »

This (value averaging) makes sense to me as a way to take advantage of volatility without having a crystal ball. That is what the original post was about, value averaging. The strategy is a means of equity amount "control" and so the name is no good. But that is the name that somebody gave it.

I see some similarities between this and certain decumulation strategies in "living off your own money".

I also see that you don't want to rebalance too soon, as always. Gut wrenching moves in equities take at least 3 months, maybe a year.

In my hapless imagination this is an asset allocation strategy. Good comments in this thread comparing it to other asset allocation strategies. Not so good comments if you just google it. Somehow, in the wider world it got labeled as an alternative to dollar cost averaging, which doesn't make any sense at all. You need to think of it as an asset allocation strategy instead.
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Re: Investment amount instead of allocation percentage

Post by Steadfast »

We do this. A couple of high earning 40-something Californians.

Aim for bout 90K in cash equivalents
300K in intermediate-term California municipal bonds (tax-friendly emergency fund, dry powder, whatever you want to call it)
Rest goes in global equities.

Once the first two fixed layers are satisfied, everything else goes into equities, because there is sufficient security in place to deal with most bad news scenarios, so the overall %s aren't important, although we do track them. It's a 75/25 equity-bond split today, which is maybe a little aggressive but fine with us.

Over time, cash and muni bond targets will grow a bit, and duration of bonds may adjust downward a bit, diversification of bonds to outside California, etc., to increase security and diversification, as we age toward retirement.
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Re: Investment amount instead of allocation percentage

Post by Ferdinand2014 »

I have never understood either allocation percent nor rebalancing. I could care less about volatility. The optimal allocation or rebalancing is known only in retrospect. If we decide to invest, we generally must have the belief that there is an equity premium and that over long periods of time this rewards investors. With that in mind, I keep X dollars invested in T-Bills that will cover my expenses for a minimum of 2 years if both wife and I unable to work, 3 years if only she can work, projected large expenses over our budget the next 3 years and enough extra to sleep well at night. Everything else goes into equities every 2 weeks without fail. What percent allocation is irrelevant as volatility is irrelevant when you have enough cash. Put another way, if you have a portion of investments put aside for liability matching a need such as cash reserves (Tbills) in accumulation or minimum guaranteed cash flow in drawdown (TIPS ladder for example), why would you sell those assets to rebalance into the poorer returning investment (equity in market downturn) to maintain a percent allocation and thereby reduce your minimum guaranteed cash flow.
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