AA question

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WhiteRabbit
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AA question

Post by WhiteRabbit » Fri Nov 09, 2018 12:03 am

I've read about Asset Allocation and the answer is normally based on the investor's age. Most investing advice assumes the assets are being earned and invested by the same individual or couple. I have recently inherited a rather large estate and am trying to determine how best to manage it. Determining an AA seems to be the first step, but my age doesn't seem to be a relevant factor. We won't need nearly the common 4% withdrawal rate (we've been getting by fine on less than a 1% withdrawal rate), but I still want our investments to grow at respectable rates.

I plan to go with a 3 Fund Portfolio. I'm struggling with the allocation for the bond portion. I am leaning towards a lower percentage since it seems that I can afford more risk. My thinking is that I'm mainly investing for future generations, which is a "long timeframe", right?

I also plan to slowly add some real estate. Probably larger parcels of timber or farmland which will be a good pass through investment for future generations. About 1/3 of my inheritance was in the form of real estate that after subdividing will be sold for about 3 times appraisal value. I don't expect real estate will amount to more than about 10% of our assets.

I'd appreciate any thoughts or advice about the bond portion of our portfolio.

Thanks

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vineviz
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Re: AA question

Post by vineviz » Fri Nov 09, 2018 7:14 am

At a 1% withdrawal rate, to be honest the asset allocation won’t make a whole lot of difference: any allocation above 30% equities would be adequate to support that withdrawal rate in perpetuity.

I’d choose the highest equity allocation you can handle emotionally.

Personally I’d aim for maybe 60% equity, 30% long term bonds, and maybe 10% in alternatives or illiquid investments like real estate.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

rkhusky
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Re: AA question

Post by rkhusky » Fri Nov 09, 2018 7:21 am

What would be your reaction if it seemed like the entire economy was collapsing, the country was going to war, and the stock portion of your portfolio just dropped by 50%?

a) Sell stocks/bonds and move to CD's until things settle down.

b) Consider it a buying opportunity and sell bonds to buy more stocks to maintain or perhaps increase you stock allocation.

If (a), then you might want 20/80 or 30/70. If (b) 60/40 or 70/30 might work.

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bertilak
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Re: AA question

Post by bertilak » Fri Nov 09, 2018 7:31 am

rkhusky wrote:
Fri Nov 09, 2018 7:21 am
... you might want 20/80 or 30/70. If (b) 60/40 or 70/30 might work.
To avoid the hard questions and temptations to change with the wind I averaged them all out and came up with 50/50. So far that is working for me.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

WhiteRabbit
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Re: AA question

Post by WhiteRabbit » Fri Nov 09, 2018 10:58 am

Thanks for the replies. It helps to hear other perspectives.

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prudent
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Re: AA question

Post by prudent » Fri Nov 09, 2018 12:11 pm

Topic moved to Investing - Help with Personal Investments.

WhiteRabbit
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Re: AA question

Post by WhiteRabbit » Fri Nov 09, 2018 12:46 pm

Sorry, I chose the incorrect place to ask. I'm new here.


I just went over to JL Collins site and realized he recently posted his new AA since retiring. 76% VTSAX, 23% VBTLX, and 1% cash. That seems like a comfortable bond ratio to me. I think I will start with that and keep reading.

icetrap
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Re: AA question

Post by icetrap » Fri Nov 09, 2018 12:49 pm

Sorry for your loss,

The right approach is to consider: Need / Ability / Desire. Age is a proxy for these, but is only helpful as a quick rule of thumb.

Do you need an aggressive portfolio? Your answer is no. There's no need to have an aggressive portfolio to meet more money than a very conservative fund.

Do you have the ability to withstand an aggressive portfolio? Yes, based on fund worth. You can manage by leaving up on 1/4 of the inheritance. A short term down swing of 50% would not affect your financial livelyhood one bit; so you can have a 100% equity portfolio. Any down swing is going to be eventually get back up if you don't touch it. Based on your age, you may not have the time to built back the portolio prior to retirement, but the portfolio do not need to get built up again.

Do you desire more risk? If the fund were to drop 50% would you be sleeping well, or would you panic and saleoff? If you would saleoff, than a more conservative plan is required. You can basically divide your equity allocation by half to see what the worst drop you could expect during a single year. (ie: 80% stock AA -> 40% drop in fund after 1 year is pretty much the maximum loss you can expect) In the end, if you don't need more reward, why get more risk for extra return which you don't need. :confused

The cool thing is that it doesn't matter much at the margin. Regardless if you go for 50%/50% or 60%/40% you would only get a worst drop of 25% vs 30% or a rate of return of about 5.5% vs 5.8% (ie on 4 million fund -> Loss of 1 million vs 1.2 million :( AND return of 200k vs 232k :D ) [Assuming Bonds = 4% return; Equity = 7%]. Sure it is some difference, but better make a decision now and return to it later. In any case, don't make rush move after market improvement/decline and spread any subsequent change over a few years to avoid bad behavior.

WhiteRabbit
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Re: AA question

Post by WhiteRabbit » Wed Nov 14, 2018 11:50 am

Icetrap,

Thanks for the detailed reply. You gave me a lot to think about and put things into perspective. :thumbsup

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