Figuring out your Asset Allocation

[JimmyJammy]

I was looking around for tips on setting one's asset allocation because I have recently started to think about retiring a little earlier than originally planned (plus I was laid off from my job). So, I think I'm going to reduce the risk in my portfolio.

But for anyone wrestling with this question, I came across this Financial Samurai website https://www.financialsamurai.com/the-pr ... ds-by-age/ which has broken down AA by different personality types. The site describes the following:

The Conventional AA (at age 40 that's 60/40)

The New Life AA (at age 40 that's 80/20)

The Survival AA (at age 50 that's 50/50)

The Nothing-to-Lose AA (at age 40 that's 100/0)'

The Financial Samurai AA (at age 40 that's 80/20)

How have you gone about determining your AA?

[reln]

I was looking around for tips on setting one's asset allocation because I have recently started to think about retiring a little earlier than originally planned (plus I was laid off from my job). So, I think I'm going to reduce the risk in my portfolio.

But for anyone wrestling with this question, I came across this Financial Samurai website https://www.financialsamurai.com/the-pr ... ds-by-age/ which has broken down AA by different personality types. The site describes the following:

The Conventional AA (at age 40 that's 60/40)

The New Life AA (at age 40 that's 80/20)

The Survival AA (at age 50 that's 50/50)

The Nothing-to-Lose AA (at age 40 that's 100/0)'

The Financial Samurai AA (at age 40 that's 80/20)

How have you gone about determining your AA?

When I learned a little accounting back in college class days, I learned what equity and bonds look like on the books. At that point I decided to hold 100\0 my entire life. Everything else was statistics (aka lies).

[sailaway]

I took comfort in being told that their wasn't much difference in outcomes between about 60/40 and 80/20 and threw a dart to come up with 70/30. I believe I told my husband at the time that it was the 110 minus the average of our ages rule. I had been 80/20 for some time, but jointly we were about 95/5. When we moved to 70/30, we figured we were 2-4 years out from living off that money.

You also need to decide on a reallocation strategy. Evidently, the different strategies don't have a huge difference in outcomes, as long as you rebalance. So we keep it simple and rebalance twice a year, when we do our financial snapshot.

[KlangFool]

OP,

It is very simple.

E = your annual retirement/FI expense. Pick your targeted number.

A) Example 1

Let's assume that it is 25xE = 25E. And, you want 10 years of expenses in FI. 10E/25E = 40%. Hence, your retirement AA = 60/40.

B) Example 2

Let's assume that you want to FI at 40E and you want 20 years of expense in FI. The FI portion = 20/40 = 50% Hence, your AA = 50/50.

KlangFool

[Blue456]

The Conventional AA (at age 40 that's 60/40)

The New Life AA (at age 40 that's 80/20)

The Survival AA (at age 50 that's 50/50)

The Nothing-to-Lose AA (at age 40 that's 100/0)'

The Financial Samurai AA (at age 40 that's 80/20)

How have you gone about determining your AA?

I read "Reducing the Risks of Black Swans" by Larry Swedroe and Unconventional Success by David Swensen. One of them has a portfolio with 70% treasuries and the other 70% equities. They both make good case for each. I think before you commit you really need to know why your going with specific AA.

[Steve Reading]

I was looking around for tips on setting one's asset allocation because I have recently started to think about retiring a little earlier than originally planned (plus I was laid off from my job). So, I think I'm going to reduce the risk in my portfolio.

But for anyone wrestling with this question, I came across this Financial Samurai website https://www.financialsamurai.com/the-pr ... ds-by-age/ which has broken down AA by different personality types. The site describes the following:

The Conventional AA (at age 40 that's 60/40)

The New Life AA (at age 40 that's 80/20)

The Survival AA (at age 50 that's 50/50)

The Nothing-to-Lose AA (at age 40 that's 100/0)'

The Financial Samurai AA (at age 40 that's 80/20)

How have you gone about determining your AA?

I allocate based on the equity risk premium, the risk of stocks and my tolerance for risk by using the Merton formula for optimal asset allocation. Uncorrelated explains it very well here:
viewtopic.php?t=305919

[abuss368]

I was looking around for tips on setting one's asset allocation because I have recently started to think about retiring a little earlier than originally planned (plus I was laid off from my job). So, I think I'm going to reduce the risk in my portfolio.

But for anyone wrestling with this question, I came across this Financial Samurai website https://www.financialsamurai.com/the-pr ... ds-by-age/ which has broken down AA by different personality types. The site describes the following:

The Conventional AA (at age 40 that's 60/40)

The New Life AA (at age 40 that's 80/20)

The Survival AA (at age 50 that's 50/50)

The Nothing-to-Lose AA (at age 40 that's 100/0)'

The Financial Samurai AA (at age 40 that's 80/20)

How have you gone about determining your AA?

I have talked with Sam at Financial Samurai. Many of the blog posts are nice and helpful. I would use an asset allocation that you are comfortable with and allows you to sleep at night. Expect stocks to decline by 50% (or more) in a downturn.

[Ferdinand2014]

I was looking around for tips on setting one's asset allocation because I have recently started to think about retiring a little earlier than originally planned (plus I was laid off from my job). So, I think I'm going to reduce the risk in my portfolio.

But for anyone wrestling with this question, I came across this Financial Samurai website https://www.financialsamurai.com/the-pr ... ds-by-age/ which has broken down AA by different personality types. The site describes the following:

The Conventional AA (at age 40 that's 60/40)

The New Life AA (at age 40 that's 80/20)

The Survival AA (at age 50 that's 50/50)

The Nothing-to-Lose AA (at age 40 that's 100/0)'

The Financial Samurai AA (at age 40 that's 80/20)

How have you gone about determining your AA?

I have talked with Sam at Financial Samurai. Many of the blog posts are nice and helpful. I would use an asset allocation that you are comfortable with and allows you to sleep at night. Expect stocks to decline by 50% (or more) in a downturn.

+1. Very personal decision. No one can answer for you. I personally keep 3 years expenses in short term treasury’s - the must not lose and sleep well at night money - and the rest in a low cost S&P 500 index. Historically, the worst downturns have turned the corner by 2.5 years and fully recovered by 5 years or less mostly. Great Depression excepted although deflation cushioned the blow somewhat. In any case, 5 years of safe investments at retirement seems a reasonable minimum number for me with the rest in equities. I am in the accumulation phase and greater than 10 years to retirement and my DW is significantly younger and will likely still be working when I retire. I keep 3 years of cash (t-bills) and continue to invest heavily every week into the S&P 500. I do not ever rebalance or keep an asset allocation. If at retirement, my 5 years represents 10% or 50% is irrelevant to me. The 5 years is key, as an example.

[TravelforFun]

I was looking around for tips on setting one's asset allocation because I have recently started to think about retiring a little earlier than originally planned (plus I was laid off from my job). So, I think I'm going to reduce the risk in my portfolio.

But for anyone wrestling with this question, I came across this Financial Samurai website https://www.financialsamurai.com/the-pr ... ds-by-age/ which has broken down AA by different personality types. The site describes the following:

The Conventional AA (at age 40 that's 60/40)

The New Life AA (at age 40 that's 80/20)

The Survival AA (at age 50 that's 50/50)

The Nothing-to-Lose AA (at age 40 that's 100/0)'

The Financial Samurai AA (at age 40 that's 80/20)

How have you gone about determining your AA?

I don't have an AA. I just keep 10 years worth of expenses in bonds, CDs, money market, and cash. This ensure I would not have to sell my stocks in a down market.

TravelforFun

[Dandy]

I was about 67 or 68 retired and not sure what my allocation should be. Was 60/40 too aggressive? Was 40/60 too conservative? I seemed to have enough assets so I looked at Wm Bernstein's idea of having X year's worth of draw down dollars in "safe" products. So, I reallocated enough fixed income into FDIC products, money markets and short term bond funds to fund our retirement to age 90. The result was about a 45/55 allocation. But it gave me peace of mind that I based our allocation mainly on having somewhat secure funding for retirement -- rather than a guess at what my (or my wife's) risk tolerance was and trying to translate that into a stock/bond allocation. Or following other people's suggestions that might fit their risk tolerance/views but not ours.

Sleep well have no regrets.

[David Althaus]

+1 Dandy. AT 73 we keep seven years expenses in fixed assets. Why? The Depression lasted 10 years, most bear markets last less than 5--so we kind of split the difference. Additionally, I read in an old book that you should prepare for seven lean years. Maybe I dreamt it. The rest is split 80% VTI and 20% VXUS.

All the best

[livesoft]

How have you gone about determining your AA?

Basically, I've just lived my life and checked my AA often as well as checking my portfolio often. After observing many ups, downs, recessions, pops, dumps, I have concluded the following:

1. I can always change my AA without cost to me because I have tax-advantaged accounts.

2. When I was younger and working, I didn't care about risk nor losing money, so I had lots of risk.

3. Now that I am retired, I know I can live with 60/40 for the rest of my life. I'm a little bit over that today (check often!), so I should rebalance.

One had better have a trivial way to check one's AA to make this work.

[cableguy]

Great comments. I am always so focused on the percentages but its interesting to hear people talk about X many years of very safe money to ride out any craziness and the rest in stocks. So if I want to live off $200k a year and know I can do that for 7 years no matter what and I have $5M in "cash" I would deploy that cash such that 28% would be in very safe investments (CD's, MM, etc.) and the rest S+P 500?

[3funder]

I settled on 120 minus my age.

[JimmyJammy]

OP,

It is very simple.

E = your annual retirement/FI expense. Pick your targeted number.

A) Example 1

Let's assume that it is 25xE = 25E. And, you want 10 years of expenses in FI. 10E/25E = 40%. Hence, your retirement AA = 60/40.

B) Example 2

Let's assume that you want to FI at 40E and you want 20 years of expense in FI. The FI portion = 20/40 = 50% Hence, your AA = 50/50.

KlangFool

Sorry, I'm not quite understanding. What does FI stand for?

[KlangFool]

OP,

It is very simple.

E = your annual retirement/FI expense. Pick your targeted number.

A) Example 1

Let's assume that it is 25xE = 25E. And, you want 10 years of expenses in FI. 10E/25E = 40%. Hence, your retirement AA = 60/40.

B) Example 2

Let's assume that you want to FI at 40E and you want 20 years of expense in FI. The FI portion = 20/40 = 50% Hence, your AA = 50/50.

KlangFool

Sorry, I'm not quite understanding. What does FI stand for?

Financially Independence. You may or may not stop working but your portfolio can sustain your current annual expense forever.

KlangFool

[asif408]

How have you gone about determining your AA?

I started with my emotional makeup and erred on the conservative side. So I started 70/30 stocks bonds, with about a 70/30 split US/Int'l. Once I experienced a few years of corrections in the US and bear markets internationally, I adjusted up to 100/0 stocks bonds, with a heavy international allocation now. I found that during the corrections and bear markets I was ok buying more of the losers and selling the winners, so determined my emotional makeup was conducive to high equity allocations.

I think you should start with your emotional makeup and not worry about age based allocations, and experience a few 30-50% drops and see how you react before settling on something. Because the worst thing you can too is be too aggressive at the start and then capitulate and sell out when things get rough, locking in losses.

[Tyler9000]

How have you gone about determining your AA?

Personally I'm big on using data to make informed decisions, so I made a bunch of spreadsheets to evaluate different asset allocation options. I share them here if you're interested: https://portfoliocharts.com/

Additionally, I read in an old book that you should prepare for seven lean years. Maybe I dreamt it.

I just wanted to say I got your reference. Well done.

[JimmyJammy]

How have you gone about determining your AA?

Personally I'm big on using data to make informed decisions, so I made a bunch of spreadsheets to evaluate different asset allocation options. I share them here if you're interested: https://portfoliocharts.com/

I'm curious!

[tennisplyr]

I started about 30 years ago pre-BH and it seemed to me that given my risk tolerance that 50/50 was a reasonable place to be. I've actually varied very little from that AA, now retired 9 years...probably will move a bit towards 40/60.

[retiredjg]

I was looking around for tips on setting one's asset allocation because I have recently started to think about retiring a little earlier than originally planned (plus I was laid off from my job). So, I think I'm going to reduce the risk in my portfolio.

But for anyone wrestling with this question, I came across this Financial Samurai website https://www.financialsamurai.com/the-pr ... ds-by-age/ which has broken down AA by different personality types. The site describes the following:

The Conventional AA (at age 40 that's 60/40)

The New Life AA (at age 40 that's 80/20)

The Survival AA (at age 50 that's 50/50)

The Nothing-to-Lose AA (at age 40 that's 100/0)'

The Financial Samurai AA (at age 40 that's 80/20)

How have you gone about determining your AA?

It does not need to be this hard.

What is your current stock to bond ratio? What do you think would be more comfortable?

[JimmyJammy]

How have you gone about determining your AA?

It does not need to be this hard.

What is your current stock to bond ratio? What do you think would be more comfortable?

Currently, I'm 80% Stock, 13% Bond, and 7% Cash (money market). So, 80/20.

I think I'm going to be more comfortable with 70/30. Otherwise, I'm looking at the market all the time and that stresses me out.

[retiredjg]

How have you gone about determining your AA?

It does not need to be this hard.

What is your current stock to bond ratio? What do you think would be more comfortable?

Currently, I'm 80% Stock, 13% Bond, and 7% Cash (money market). So, 80/20.

I think I'm going to be more comfortable with 70/30. Otherwise, I'm looking at the market all the time and that stresses me out.

That sounds like an answer to me.

If you get there and it is still too aggressive, that is easy to fix. But stay at 70/30 long enough to get a good feel for it - you don't want to go down and come back up again. That's a poor idea.

[Ferdinand2014]

Great comments. I am always so focused on the percentages but its interesting to hear people talk about X many years of very safe money to ride out any craziness and the rest in stocks. So if I want to live off $200k a year and know I can do that for 7 years no matter what and I have $5M in "cash" I would deploy that cash such that 28% would be in very safe investments (CD's, MM, etc.) and the rest S+P 500?

Yes. Rebalancing might (time dependent) reduce your volatility (some call risk) for a given level of return. I counter that with the idea that I always want a certain amount of safe assets defined in terms of expenses and known needs never to be sold or rebalanced for a certain allocation percent. As long as I have a minimum amount of expenses, the volatility of my risk assets (stocks) is irrelevant nor what percent it represents of my portfolio especially during accumulation. It conceptually works for me and helps to avoid the constant analysis paralysis that I used to go through regarding an asset allocation and rebalancing. Its most important to stick with a plan that you can work with many years. That’s the personal part. No one can tell you what’s best for you.

[qwertyjazz]

How have you gone about determining your AA?

Personally I'm big on using data to make informed decisions, so I made a bunch of spreadsheets to evaluate different asset allocation options. I share them here if you're interested: https://portfoliocharts.com/

Additionally, I read in an old book that you should prepare for seven lean years. Maybe I dreamt it.

I just wanted to say I got your reference. Well done.

Some sort of dream?

[BAM55]

I think you also need to look at your current asset balances and determine if asset preservation is important at the current stage of our life. For example, my wife and I are in our mid 50's and we have over $3.5MM under management at Vanguard. When our advisor was developing our plan, he suggested 50/50 stocks/bonds as we have technically already achieved our savings goal, thus eliminating the need for any undue risk. However, we still want this balance to grow, hence the 50% in stocks - but could also live many years on the bonds if/when the market tanks (that is when we stop working, which both of us still are). We also looked at 60/40, but the historical differences in returns vs. 50/50 are minor.

Now if we were both 35 and had $1.2MM and wanted at least $3.5MM by the time we hit 55, we would probably be 80/20, as we have more time and need more money!

[sycamore]

How have you gone about determining your AA?

Personally I'm big on using data to make informed decisions, so I made a bunch of spreadsheets to evaluate different asset allocation options. I share them here if you're interested: https://portfoliocharts.com/

Additionally, I read in an old book that you should prepare for seven lean years. Maybe I dreamt it.

I just wanted to say I got your reference. Well done.

Some sort of dream?

Well if there's a reference to something I don't recognize, there's a good chance it involves either the Bible, Shakespeare or a Bob Dylan song.
In this case it's the story of Joseph interpreting Pharaoh's dreams of seven fat cows and seven lean cows.
To prepare for the coming lean years you may need to moove some assets around.

[cashboy]

for retirement (which i am in courtesy of megacorp job eliminations):

i figured out what i have in assets (bonds, equities)
ex: $1,000,000

i figured out what i need each year in income (expenses, fun, taxes, etc.)
ex: $100,000

i figured out how much i need to generate in gains/returns from my assets 'on top of' my other income streams (ex: pension of $60,000)
ex: $40,000

i figured out what % of gains/returns i needed to produce each year
ex: 4%
so 4% of $1,000,000 = $40,000, on top of the $60,000 pension equals $100,000, which is the yearly income required.

i looked at this for average annual return to determine an AA that will produce the % of gains/returns i needed to produce each year:

https://personal.vanguard.com/us/insigh ... locations

then picked an AA.

this is a very simplistic example using easy to follow numbers, but gives one an idea of a 'starting place'.


long story short, i am currently at 50/50 and will stay that way for a while.

[Garco]

For the first 25 years of my managing a retirement account, i.e., from ages 30 to 55, I maintained approximately a 75-25 AA. Or more specifically my annual contributions to my tax deferred retirement funds were in that ratio. The market did what it did with those funds. I switched my allocation from time to time, and major market crashes changed the ratios in my account mainly by subtracting from the equities side of my port.

As I approached retirement at age 70, i.e., during the preceding 10 years, in addition to absorbing the effects of market realignments (crashes), I began to taper my holdings to about 65-35, and, at the moment I retired, to 60-40. Now, as I begin my 7th year in retirement, my AA is about 50-50. More specifically, it's 50% equities while the remaining funds are divided into various types of non-equities investments and cash reserves. I don't plan to change that 50-50 allocation as the target steady state, but the economy and market will perturb that ratio in different ways.