Does anyone else not use a fixed asset allocation?

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BitTooAggressive
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Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

I am 58 years old, 6 years away from when I plan to retire. I do not have a fixed allocation between stocks and bonds.
I plan on having a two bucket approach, 1 bucket cash or what I call close enough to cash. For me that is VBIRX, short duration, high quality bond fund. Currently I have 15% in this. At retirement it will be my 5 year cash bucket and for now it provides cash and money to buy into stocks during a downturn.

My other bucket is for long term. Right now it is 100% stocks all index funds about 55% US and 45% international. I also hold about 30% small cap.

So I do not maintain a fixed bond stock allocation but will adjust as I see fit, especially in the long term bucket. Long term bonds yields are low and interest rates cannot go much lower so I see no role for bonds in my long term bucket.

However if interest rates ever went back up to late 70s early 80s level and I can get long term treasuries at 14% or whatever they were I would significantly adjust my long term bucket to probably 50% bonds.

Is anyone else taking a more flexible approach or is almost everyone in the static allocation of stocks bonds no matter market conditions?
L84SUPR
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Re: Does anyone else not use a fixed asset allocation?

Post by L84SUPR »

TLDR: I have buckets but overall my IPS says to retire with an AA of 30/70 (including fixed income) and increase equities by one percent a year.

I am 60 with 3 years until retirement. I have what might be best described as three buckets. Seven years in bonds to bridge from age 63 to 70 when the second of two social security payments kicks in, half of the remainder in Wellington, and the other half of the remainder in VTWAX. The overall portfolio AA is 60/40 which is consistent with 120 minus age. Including present worth of social security the AA is 30/70 which is a reasonable starting point for an increasing equities glide path.
Normchad
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Re: Does anyone else not use a fixed asset allocation?

Post by Normchad »

Some people just keep 10 years expenses in cash equivalents; so it’s a fixed amount but not a fixed percentage.

At my level, the difference between the two does really matter. My 40% bonds will be about 10 years expenses. But if I had, say 100 million, I wouldn’t do,it by percentages, I’d go with a fixed amount.
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JoMoney
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Re: Does anyone else not use a fixed asset allocation?

Post by JoMoney »

For the longest time I didn't, and to some extent I still don't. I simply kept an amount of cash that I felt comfortable with and everything else went into stocks averaged in each pay period. A couple years ago I started thinking about how I would manage withdrawals, and what sort of allocation I might want in a withdrawal stage. It became apparent that with a "bucket" style portfolio management there might be times that the safe-money bucket starts getting depleted in a stock downturn and needs to be refilled at some point. There are various methods people have suggested to do that, but the bottom line with it winds up being almost exactly the same as a constant-mix rebalanced allocation, it's just a mental accounting game with how one chooses to compartmentalize and think about the money. People poo-poo "mental accounting", but for some of us it's a preferable mental framework that might have psychological/behavioral benefits. Nobody I know was in the poorhouse from using the "envelope method" for budgeting, but I know plenty of people who would be better off if they had some framework to budget within.

FWIW, I hope I'm nowhere near a withdrawal stage, but my current plan is trying to get to a 90/10 portfolio where 10% in cash/bonds would represent 2.5years+ of "4% withdrawals", and do what is essentially one-way rebalancing (without actually rebalancing). I'll spend down stocks in good years, and move anything over 90% stocks over to cash/bonds. If bad year(s) for stocks come that cause the stock portfolio to drop below the 90/10 level I won't buy stocks with my safe money but I will spend down the cash/bonds to the 90/10 level and continue to maintain 90/10 level through withdrawals from each as necessary without actually moving money from the "safe" bucket to buy stocks, just managing it through withdrawals.
It's possible my risk tolerances will change and I'll up the cash/bond level as I age, but at this point it bothers me having so much in cash/bonds. I've also considered that when I get into a withdrawal phase I might begin purchasing a SPIA rather than holding bonds.
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

L84SUPR wrote: Sun Sep 12, 2021 10:14 am TLDR: I have buckets but overall my IPS says to retire with an AA of 30/70 (including fixed income) and increase equities by one percent a year.

I am 60 with 3 years until retirement. I have what might be best described as three buckets. Seven years in bonds to bridge from age 63 to 70 when the second of two social security payments kicks in, half of the remainder in Wellington, and the other half of the remainder in VTWAX. The overall portfolio AA is 60/40 which is consistent with 120 minus age. Including present worth of social security the AA is 30/70 which is a reasonable starting point for an increasing equities glide path.
Wellington is actively managed and will adjust the stock/bond allocation as the managers see fit within the funds range.

I don not plan on taking SS until 70 and two years after that my wife will be eligible to take hers, so at that point my cash bucket or need for bonds will be further reduced. That is why from age 64 to 70 I will be very careful and not cheat on my 5 year cash bucket.
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iceport
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Re: Does anyone else not use a fixed asset allocation?

Post by iceport »

BitTooAggressive wrote: Sun Sep 12, 2021 9:56 am Is anyone else taking a more flexible approach or is almost everyone in the static allocation of stocks bonds no matter market conditions?
I'm definitely using a fixed AA for life. It has served me well thus far, so I see no reason to change course. And I don't trust myself with any other approach.

BitTooAggressive wrote: Sun Sep 12, 2021 9:56 am So I do not maintain a fixed bond stock allocation but will adjust as I see fit...
Ah, and there's the rub! That's just an open invitation for introducing behavioral mistakes that could otherwise be avoided. Unless you are an extremely skilled contrarian investor, able to identify particularly undervalued assets and routinely profit from piling into them at the right time, the strategy is likely to lag a buy-hold-rebalance approach.

Just out of curiosity, have you been keeping track of your portfolio performance — accurately — over the long term? If so, have you compared it to an appropriate benchmark using a buy-hold-rebalance approach? Have your efforts to beat the market been successful?
"Discipline matters more than allocation.” ─William Bernstein
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Re: Does anyone else not use a fixed asset allocation?

Post by afan »

I keep enough in cash and short and intermediate term bonds to support us for the rest of our lives, assuming a slightly negative real return on those instruments. The rest in stocks. Because we are still working, we keep adding to the total. That means the proportion in stocks keeps increasing.
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Re: Does anyone else not use a fixed asset allocation?

Post by Candor »

Right now I'm at roughly 50/50 but it is not set in stone. I have a decent % in cash to get me to 59.5 and I will allow my AA to drift higher in equities as I access the cash. I would also increase equities by 10% or so if there is a significant drawdown in equities as I did last year. I like to have a little flexibility while not diverging too far (10% or so) from my desired AA.
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Svensk Anga
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Re: Does anyone else not use a fixed asset allocation?

Post by Svensk Anga »

My father’s plan was to maintain a 5-year Treasury ladder with the rest in stocks. Worked well enough for him, but he retired in the early 90s and so had a good run of equity gains before the tech melt down. I’d guess he also had better than current dividend yields with which to replenish the ladder.

For myself, I liked starting retirement with a big wad of cash/bonds, sized to get us to SS at 70 with some cushion. Five years in, we have been spending down the bonds and not rebalancing. As a consequence of spending down bonds and stock market gains, our equity allocation percentage is up quite a bit. This has been a very comfortable scheme when the market is throwing one of its periodic fits. We gave up a bit of potential early on compared to my prior inclination of holding a fixed 70/30. Lately we have been enjoying more gains than a 70/30. The early lost potential was effectively the insurance premium against an early retirement extended market downturn. Turns out that the insurance wasn’t needed, but that means our experience has been good.
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Re: Does anyone else not use a fixed asset allocation?

Post by secondopinion »

BitTooAggressive wrote: Sun Sep 12, 2021 9:56 am Is anyone else taking a more flexible approach or is almost everyone in the static allocation of stocks bonds no matter market conditions?
I am a concave investor (meaning that I systematically underweight stocks on increases and overweight on decreases), which should not to be confused with market timing where opinions of what is the top and bottom drives the decision. Those who have a safe bucket and then have all stocks otherwise are partially convex investors during accumulation. The withdrawal method, however, causes a concave movement (since more stock get placed into stocks as the portfolio decreases).

It is not wrong; just realize that this is against the grain a bit here for some (which is partially why my username is what it is).
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

iceport wrote: Sun Sep 12, 2021 10:26 am
BitTooAggressive wrote: Sun Sep 12, 2021 9:56 am Is anyone else taking a more flexible approach or is almost everyone in the static allocation of stocks bonds no matter market conditions?
I'm definitely using a fixed AA for life. It has served me well thus far, so I see no reason to change course. And I don't trust myself with any other approach.

BitTooAggressive wrote: Sun Sep 12, 2021 9:56 am So I do not maintain a fixed bond stock allocation but will adjust as I see fit...
Ah, and there's the rub! That's just an open invitation for introducing behavioral mistakes that could otherwise be avoided. Unless you are an extremely skilled contrarian investor, able to identify particularly undervalued assets and routinely profit from piling into them at the right time, the strategy is likely to lag a buy-hold-rebalance approach.

Just out of curiosity, have you been keeping track of your portfolio performance — accurately — over the long term? If so, have you compared it to an appropriate benchmark using a buy-hold-rebalance approach? Have your efforts to beat the market been successful?
Yeah, I have not kept track to come up with an exact number. Over the years I have rolled over several 401k programs into Vanguard over the years, and have not kept track of all of my contributions to have an actual number on returns. On top of that you can only invest in what your program allows you so you have to live with your 401K choices. Up until the last few years I have been pretty much 100% stocks and have done a good job. I do have one significant mistake in putting some of my money into Janus funds when they were in their heyday. So when anyone asks me or sometimes even when they don't I caution them about funds that are very concentrated and have a high valuation (however you want to measure valuation). I would say the Ark funds would be today the equivalent of the Janus funds.

But to offset Janus funds I made quite a bit using the Baron funds but have since moved all that to Vanguard. So right now I am all index except my 401k I have a international growth, actively managed fund, since that is my only international option... and a DFA small cap value fund, since that is my small cap value option.

In addition the fixed allocation is nice since it is easily repeatable. My wife is not very financially inclined (statistically she could easily outlive me by 15 years), so I do feel at some point just going to a life strategy fund would be a good option because I know that would provide a fantastic option that is very hard to mess up.
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iceport
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Re: Does anyone else not use a fixed asset allocation?

Post by iceport »

^^^ Thanks for the explanation! It actually seems to me that you aren't so much actively managing as employing what has been referred to as tactical asset allocation. To some extent, the difference is just a matter of degree. But TAA, if done carefully and within limited ranges, is probably not too risky.

As I noted, I just don't trust myself — even with only limited latitude to make adjustments.
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Re: Does anyone else not use a fixed asset allocation?

Post by Garco »

I am retired, and taking RMD's from my 403b. I do use a fixed asset allocation but it's not guided by a specific formula or model trend-line. Nor by the classic "age in bonds" idea. At this time, in my main retirement account, I have 61% equities, 39% fixed income (including bond funds and TIAA Traditional). This is far from an "age in bonds" portfolio. But it's helpful for me to think about the equities share, which I try to keep at 60% or below.
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Re: Does anyone else not use a fixed asset allocation?

Post by afan »

secondopinion wrote: Sun Sep 12, 2021 11:54 am

I am a concave investor (meaning that I systematically underweight stocks on increases and overweight on decreases), which should not to be confused with market timing where opinions of what is the top and bottom drives the decision. Those who have a safe bucket and then have all stocks otherwise are partially convex investors during accumulation.
How many transactions does this generate? How large an increase or decrease is required to trigger action? By how much do you change allocation after a change in stock prices?
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Re: Does anyone else not use a fixed asset allocation?

Post by pascalwager »

I'd advise against calling a short-term bond fund "cash". It's not cash. Cash is only appropriate for an investment horizon up to one year. So right now, you're 85/15 stocks/bonds.

Your bonds have a duration of about 2.8 years. Is that your investment horizon? Probably not. Just calculate your investment horizon and build a bond portfolio with an overall duration to match--readjusting duration annually.
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

pascalwager wrote: Sun Sep 12, 2021 2:17 pm I'd advise against calling a short-term bond fund "cash". It's not cash. Cash is only appropriate for an investment horizon up to one year. So right now, you're 85/15 stocks/bonds.

Your bonds have a duration of about 2.8 years. Is that your investment horizon? Probably not. Just calculate your investment horizon and build a bond portfolio with an overall duration to match--readjusting duration annually.
That is why I called it close enough to cash. I understand I could take a 5% loss in a bad year but am willing to accept that for a higher yield.
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Re: Does anyone else not use a fixed asset allocation?

Post by dbr »

Of course lots of people do. Sometimes this is based on some kind of "buckets" idea or sometimes just because the idea of having an asset allocation for a portfolio doesn't seem important. I doubt in the end it makes a lot of difference as very often the actual allocation the person has is not very different either way they may have arrived at it.

Asset allocation is important because it can vary over such a wide range, but that does not imply that small changes in asset allocation have large effects.
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Re: Does anyone else not use a fixed asset allocation?

Post by willyd123 »

Like you, I use the bucket approach and when you utilize this approach the AA is just the result of the bucket approach. Most people would say my resulting AA is too aggressive given my age but I have 10 years worth of expenses in very low risk investments so I can live through a pretty big down turn without a problem.
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Re: Does anyone else not use a fixed asset allocation?

Post by dbr »

willyd123 wrote: Sun Sep 12, 2021 4:18 pm Like you, I use the bucket approach and when you utilize this approach the AA is just the result of the bucket approach. Most people would say my resulting AA is too aggressive given my age but I have 10 years worth of expenses in very low risk investments so I can live through a pretty big down turn without a problem.
I don't know what your asset allocation is, but if you had 20x in stocks and 10x in fixed income, for an AA of 67/33, that would surely be within the realm of perfectly ok. At that rate you have 30x saved up altogether, which is very safe. If you have 30x in stocks and your AA is 75/25, that is what people usually call risky, but now you have so much money relative to what you spend it really doesn't matter what your asset allocation is as long as you can live with the risk. If you had 25x in fixed income and 0x in stocks, that would be taking chances even though you could survive all downturns except the downturn of taking withdrawals.

The problem with "enough to live through a downturn" is that this is not a sufficient consideration of what happens to a portfolio through the whole life cycle of all probable outcomes. That doesn't mean, as explained above, that it is a bad idea.
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Re: Does anyone else not use a fixed asset allocation?

Post by djm2001 »

OP, I recommend McClung's book, Living Off Your Money. It compares several variations of harvesting strategies (e.g, spend-bonds-first, glide paths) and withdrawal strategies. Some of the variations are subtle and the distinctions are useful to know about.
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Re: Does anyone else not use a fixed asset allocation?

Post by Ferdinand2014 »

JoMoney wrote: Sun Sep 12, 2021 10:19 am For the longest time I didn't, and to some extent I still don't. I simply kept an amount of cash that I felt comfortable with and everything else went into stocks averaged in each pay period. A couple years ago I started thinking about how I would manage withdrawals, and what sort of allocation I might want in a withdrawal stage. It became apparent that with a "bucket" style portfolio management there might be times that the safe-money bucket starts getting depleted in a stock downturn and needs to be refilled at some point. There are various methods people have suggested to do that, but the bottom line with it winds up being almost exactly the same as a constant-mix rebalanced allocation, it's just a mental accounting game with how one chooses to compartmentalize and think about the money. People poo-poo "mental accounting", but for some of us it's a preferable mental framework that might have psychological/behavioral benefits. Nobody I know was in the poorhouse from using the "envelope method" for budgeting, but I know plenty of people who would be better off if they had some framework to budget within.

FWIW, I hope I'm nowhere near a withdrawal stage, but my current plan is trying to get to a 90/10 portfolio where 10% in cash/bonds would represent 2.5years+ of "4% withdrawals", and do what is essentially one-way rebalancing (without actually rebalancing). I'll spend down stocks in good years, and move anything over 90% stocks over to cash/bonds. If bad year(s) for stocks come that cause the stock portfolio to drop below the 90/10 level I won't buy stocks with my safe money but I will spend down the cash/bonds to the 90/10 level and continue to maintain 90/10 level through withdrawals from each as necessary without actually moving money from the "safe" bucket to buy stocks, just managing it through withdrawals.
It's possible my risk tolerances will change and I'll up the cash/bond level as I age, but at this point it bothers me having so much in cash/bonds. I've also considered that when I get into a withdrawal phase I might begin purchasing a SPIA rather than holding bonds.

My guess you are aware of this study:


https://papers.ssrn.com/sol3/Papers.cfm ... id=2680084

And this:

https://papers.ssrn.com/sol3/Papers.cfm ... id=3274499

Essentially by a static allocation you are doing 2 way rebalancing- selling stocks when they are expensive and buying them when cheap. With bucket strategy depending on the rules you apply, would not buy stocks when they are cheap. What confuses me, is the other concept that any rebalancing bonus will only occur if you are rebalancing between assets with similar expected returns - US and International stocks for example, but not stocks and bonds. Stock and bond rebalancing is expected to lower returns with no rebalancing bonus, but increase risk adjusted return. All of which I’m fairly certain you are aware of. I have been debating what’s next for my allocation as well. I also basically have cash - mostly short term treasury and stocks S&P 500. My cash is an amount, not a percentage. The percentage is the after effect of the amount. I am maybe 10 years from retirement and have been considering a LMP of safe assets based on anticipated expenses (25 x) - (social security+ 50% of current dividends) and the rest in stocks - as William Bernstein suggested in one of his books. The goal based approach fits this concept with an allocation based on goal expenses rather then age.

viewtopic.php?p=5240649#p5240649
Last edited by Ferdinand2014 on Sun Sep 12, 2021 11:55 pm, edited 3 times in total.
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Marseille07
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Re: Does anyone else not use a fixed asset allocation?

Post by Marseille07 »

The OP's approach might be "flexible" but flexibility isn't necessarily a good thing in investing because the flipside of "flexibility" is often market-timing.
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Re: Does anyone else not use a fixed asset allocation?

Post by drumboy256 »

Paging KlangFool….
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

Marseille07 wrote: Sun Sep 12, 2021 11:45 pm The OP's approach might be "flexible" but flexibility isn't necessarily a good thing in investing because the flipside of "flexibility" is often market-timing.
So it’s market timing whenever you make changes to your portfolio based on conditions? What about when the life strategy funds make changes like allocating more to international stocks based on their judgment? What about when Wellington adjusts its stock/bond allocation based on market conditions?
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Re: Does anyone else not use a fixed asset allocation?

Post by palaheel »

djm2001 wrote: Sun Sep 12, 2021 5:10 pm OP, I recommend McClung's book, Living Off Your Money. It compares several variations of harvesting strategies (e.g, spend-bonds-first, glide paths) and withdrawal strategies. Some of the variations are subtle and the distinctions are useful to know about.
I also like that book, though OP is several years from retirement, and being in retirement is McClung's primary topic.
Nothing to say, really.
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Re: Does anyone else not use a fixed asset allocation?

Post by Marseille07 »

BitTooAggressive wrote: Mon Sep 13, 2021 2:48 am So it’s market timing whenever you make changes to your portfolio based on conditions? What about when the life strategy funds make changes like allocating more to international stocks based on their judgment? What about when Wellington adjusts its stock/bond allocation based on market conditions?
Anything with "their judgment" would be timing. If you craft rules today and follow through, it's not timing. "Age in bonds" would be an example where it is not market timing.
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

djm2001 wrote: Sun Sep 12, 2021 5:10 pm OP, I recommend McClung's book, Living Off Your Money. It compares several variations of harvesting strategies (e.g, spend-bonds-first, glide paths) and withdrawal strategies. Some of the variations are subtle and the distinctions are useful to know about.
Thanks for the suggestion. I will take a look.
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

Marseille07 wrote: Mon Sep 13, 2021 7:05 am
BitTooAggressive wrote: Mon Sep 13, 2021 2:48 am So it’s market timing whenever you make changes to your portfolio based on conditions? What about when the life strategy funds make changes like allocating more to international stocks based on their judgment? What about when Wellington adjusts its stock/bond allocation based on market conditions?
Anything with "their judgment" would be timing. If you craft rules today and follow through, it's not timing. "Age in bonds" would be an example where it is not market timing.
Ok. That is really splicing hairs IMO. If you forgot a rule or learned something knew can you adjust your rules?

I am just going to have to think all market timing is not bad.
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Re: Does anyone else not use a fixed asset allocation?

Post by diabelli »

I do not have a fixed allocation. I was heavily tilting SCV funds a few years ago until they recently ran up, and then switched to total market. I've also increasingly changed my automated investments to gradually favor international funds, based on happenings and policy changes within the US as I personally view them.

Also (like many) my bond allocation is nearly 0%, based on all of the typical recent yield + inflation concerns and -- also -- as I'm a bit perplexed about how to hold these in a high tax bracket after maxing out a 401k. I've done national munis briefly but still have to pay taxes to NJ, and I just don't trust NJ's economy (and debt rating) enough to invest in NJ munis. So I've basically replaced bonds with cash as the "safety" component of my portfolio.

I think that much of the focus on fixed allocation around here is for psychological benefit rather than some good indicator that it will really help the theoretically sound-minded investor achieve better returns in comparison with somebody responding thoughtfully to clear trends and events.
Ferdinand2014
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Re: Does anyone else not use a fixed asset allocation?

Post by Ferdinand2014 »

I do not use a fixed allocation.

We invest in an S&P 500 fund and cash in the form of short term treasury's. The cash is an amount that my DW and I decide based on a combination of near term large expenses (new car, bathroom remodel) over the next few years and emergency fund leading to a number, not a percentage. This keeps us from ever selling stocks during accumulation. The percentage is currently about 9% and will fluctuate based on the market and what expenses we determine. As our expenses keep going down (Empty nest, paid off mortgage and student loans), We have had to add very little to it as we can cash flow more and more of our expenses and our emergency number goes down with expenses as well. The percent is the after effect of the amount determined. Essentially a bucket approach while accumulating.

Near retirement, I am debating a couple of possible approaches:

First, going to a LMP. To determine this, I would calculate my 25X number and subtract social security and 50% of expected dividends. This I may put in a combination of nominal treasury's and TIP's. The rest would go into stocks for fun stuff and gifting. Basically again a bucket approach instead of an allocation with no rebalancing ever. This would be somewhat as suggested by William Bernstein: https://www.amazon.com/Rational-Expecta ... 0988780321

Another approach that I have debated is a goals instead of age based allocation to stock/safe assets glide path instead of a bucket approach, with the allocation percent determined by my estimate of accumulated assets at retirement and my LMP as described above. For example, say I need about 4 million for my 25X number minus social security and Fidelity says in a retirement analysis that I may accumulate 6 million in market conditions "significantly below market average".This would suggest about 66% of my retirement portfolio should be in safe assets. One way to glide to this would be:

(current portfolio / 6 million) *.66 = allocation to safe assets. If I reach my number before retirement, It causes you to rebalance risk off the table. If the market tanks, It causes you to buy stocks on the cheap.

viewtopic.php?p=5240649#p5240649

Or just go 50/50 and rebalance once a year..... :sharebeer
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RJC
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Re: Does anyone else not use a fixed asset allocation?

Post by RJC »

This will be our approach as we get closer to retirement. Put in about 10 years of fixed income and let the rest ride on equities.

The less tweaking, the better IMO.
dbr
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Re: Does anyone else not use a fixed asset allocation?

Post by dbr »

So when people say they start retirement with x years in fixed income, how many years stay in fixed income as time goes on?
palaheel
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Re: Does anyone else not use a fixed asset allocation?

Post by palaheel »

I plan to follow McClung's approach. Withdraw from fixed. Harvest equities when they cross a certain threshold (20% real growth in McClung's model). His idea of separating harvesting equities and withdrawing from the portfolio was an eye opener for me.

Yes, it is possible that in a really, really bad scenario the fixed income will be gone, and I'll have to sell equities to withdraw funds. That's likely to be in a really bad market, too. But McClung went through enough data that I think it's an acceptable risk.
Nothing to say, really.
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

RJC wrote: Mon Sep 13, 2021 8:29 am This will be our approach as we get closer to retirement. Put in about 10 years of fixed income and let the rest ride on equities.

The less tweaking, the better IMO.
That is not far from mine but I will probably do 5 years. Would you consider moving a sizable amount from equities to bonds if the bond market became much more favorable similar to the early 1980s?
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Re: Does anyone else not use a fixed asset allocation?

Post by RJC »

BitTooAggressive wrote: Mon Sep 13, 2021 8:53 am
RJC wrote: Mon Sep 13, 2021 8:29 am This will be our approach as we get closer to retirement. Put in about 10 years of fixed income and let the rest ride on equities.

The less tweaking, the better IMO.
That is not far from mine but I will probably do 5 years. Would you consider moving a sizable amount from equities to bonds if the bond market became much more favorable similar to the early 1980s?
That is a good question. I haven't thought of what I would do if it made substantial gains.
Marseille07
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Re: Does anyone else not use a fixed asset allocation?

Post by Marseille07 »

BitTooAggressive wrote: Mon Sep 13, 2021 7:52 am Ok. That is really splicing hairs IMO. If you forgot a rule or learned something knew can you adjust your rules?

I am just going to have to think all market timing is not bad.
I didn't say all market timing is bad. Some people do well with it.

The problem I see with your OP is that the approach seems rather arbitrary. You seem to be dividing up your investments into "long term" vs "short term," however those are defined. And while the "short term" seems fixed income only, the "long term" bucket would hold anything based on your discretion.

So...I don't really see the end game here. What are you trying to optimize, if at all?
L84SUPR
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Re: Does anyone else not use a fixed asset allocation?

Post by L84SUPR »

dbr wrote: Mon Sep 13, 2021 8:35 am So when people say they start retirement with x years in fixed income, how many years stay in fixed income as time goes on?

My IPS says to increase equities 1 percent per year but variation of 5 to 10 percent is allowed. I will spend from different buckets depending on market conditions but I don't plan on doing precise rebalancing. If the market tanks and I spend my entire 7 years of bonds my AA would go to 80/20 (excluding guaranteed income) if I didn't rebalance, which is the highest stock percentage allowed by my IPS. I don't know if I will rebalance into bonds if the market is down, I have used up the bond bucket, and I don't need my bonds anymore. My social security kicks in after 7 years so I am not overly concerned.

If the bull market continues for 7 years it won't much matter but I will spend from stocks and leave the G Fund alone and attempt to rebalance. I envision making cash flow adjustments annually since adjusting TSP distributions requires paperwork and there are tax withholding rules.

By age 70 the Roth conversion account should be big enough I can do some rebalancing with it.

TLDR: In theory my IPS lays out an increasing equities glide path. How that plays out in practice is a work in progress.
secondopinion
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Re: Does anyone else not use a fixed asset allocation?

Post by secondopinion »

afan wrote: Sun Sep 12, 2021 1:47 pm
secondopinion wrote: Sun Sep 12, 2021 11:54 am

I am a concave investor (meaning that I systematically underweight stocks on increases and overweight on decreases), which should not to be confused with market timing where opinions of what is the top and bottom drives the decision. Those who have a safe bucket and then have all stocks otherwise are partially convex investors during accumulation.
How many transactions does this generate? How large an increase or decrease is required to trigger action? By how much do you change allocation after a change in stock prices?
Generally, it takes a 10% change of stocks to cause a shift. I then over-rebalance by 2 times the amount required. For example, if the stock allocation is at 70%, then a 10% drop causes this to become 67.74194% of the portfolio before rebalancing. By correcting this by 3 times, this allocation becomes 70% + (70% - 67.74194%)*2 = 74.51613%. The COVID dip would have caused three triggers and changed the allocation to about 84-85% in stocks. I cap the maximum to 90% stocks and the minimum to 50% stocks.
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

Marseille07 wrote: Mon Sep 13, 2021 9:52 am
BitTooAggressive wrote: Mon Sep 13, 2021 7:52 am Ok. That is really splicing hairs IMO. If you forgot a rule or learned something knew can you adjust your rules?

I am just going to have to think all market timing is not bad.
I didn't say all market timing is bad. Some people do well with it.

The problem I see with your OP is that the approach seems rather arbitrary. You seem to be dividing up your investments into "long term" vs "short term," however those are defined. And while the "short term" seems fixed income only, the "long term" bucket would hold anything based on your discretion.

So...I don't really see the end game here. What are you trying to optimize, if at all?
Sure it’s rather arbitrary. Same with most people and their asset allocation. Most people that say are using a 70/30 could probably use an 80/20 or 60/40. I am trying to make sure my retirement savings last long enough for my wife and would like to leave something for children and grandchildren without taking too much risk….whatever too much is. So that means enough fixed income to survive a downturn but still having most of my money on stocks.

I don’t want to get overly conservative in retirement. Also in this current environment I see no reason why anyone would want long term bonds. Maybe 5 years from now bonds will be more reasonably priced.
Marseille07
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Re: Does anyone else not use a fixed asset allocation?

Post by Marseille07 »

BitTooAggressive wrote: Mon Sep 13, 2021 2:29 pm Sure it’s rather arbitrary. Same with most people and their asset allocation. Most people that say are using a 70/30 could probably use an 80/20 or 60/40. I am trying to make sure my retirement savings last long enough for my wife and would like to leave something for children and grandchildren without taking too much risk….whatever too much is. So that means enough fixed income to survive a downturn but still having most of my money on stocks.

I don’t want to get overly conservative in retirement. Also in this current environment I see no reason why anyone would want long term bonds. Maybe 5 years from now bonds will be more reasonably priced.
Right. So...why not have a fixed AA of equities / fixed income, but tweak the fixed income side as you see fit while leaving equities alone?
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

Marseille07 wrote: Mon Sep 13, 2021 2:40 pm
BitTooAggressive wrote: Mon Sep 13, 2021 2:29 pm Sure it’s rather arbitrary. Same with most people and their asset allocation. Most people that say are using a 70/30 could probably use an 80/20 or 60/40. I am trying to make sure my retirement savings last long enough for my wife and would like to leave something for children and grandchildren without taking too much risk….whatever too much is. So that means enough fixed income to survive a downturn but still having most of my money on stocks.

I don’t want to get overly conservative in retirement. Also in this current environment I see no reason why anyone would want long term bonds. Maybe 5 years from now bonds will be more reasonably priced.
Right. So...why not have a fixed AA of equities / fixed income, but tweak the fixed income side as you see fit while leaving equities alone?
Because over the long run fixed income is a drag on your portfolio. So I pick a number of years of fixed income I need to outlast a downturn and put better options in my long term bucket.
dboeger1
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Re: Does anyone else not use a fixed asset allocation?

Post by dboeger1 »

I would argue that virtually everyone is, not just for the sake of being pedantic, but because I think it highlights an important point. Pretty much everyone has at least a cash checking account that they pay everyday expenses out of, even if they're using credit cards (which ultimately get paid off from the cash account) and don't keep an explicit "emergency fund". I've rarely heard of people keeping a fixed percentage of their asset allocation in cash, although I have seen it here on Bogleheads before. For the majority of us who keep a fixed amount in cash, the debate on whether or not emergency funds are necessary is kind of missing the point. Whether you call it an emergency fund or not, everyone has at least some fixed cash buffer. Some people just have a bigger cash buffer and give it a fancy name. But if you keep $1k or less in your checking account daily in order to pay for spending, you have something functionally equivalent to albeit smaller than a typical emergency fund.

Why would anybody do this if their ultimate goal was to stick to a specific asset allocation? Shouldn't cash be a fixed percentage of the total portfolio? Well, because the reality is that there are competing priorities, and the emergency or credit card bill that comes due tomorrow and needs to be paid in cash is higher priority than retirement decades from now. In a sense, the portfolio is actually split into 2 conceptual buckets, 1 for retirement that is calibrated for the long time horizon, and 1 for short-term expenses. The latter is 100% cash because it absolutely must be available soon and not suffer any loss of principle.

I think this idea of multiple buckets (not time horizon buckets as are often labeled a bucket strategy, which is really just mental accounting, but rather spending obligation buckets) extends to more competing priorities. A common example is paying for children's college tuition. How would one assess overall portfolio asset allocation with the competing priorities of long term retirement and paying for college in the shorter term? It doesn't really make sense to consider them together. They're really 2 separate obligations. It makes more sense to split the portfolio up into 2 separate buckets, 1 for retirement, 1 for tuition, and asses risk tolerance and time horizon individually. Then it's just a matter of funding them according to relative priority. If you find that you can't afford to stay on top of both obligations, you may have to sacrifice part of one of the goals for another. The resulting total asset allocation will fall where it may, but isn't particularly of importance.

I don't think many Bogleheads think of separate spending obligations that way. An earlier commenter up above said that they didn't see any reason to deviate from an overall portfolio asset allocation. I disagree though. If that commenter were to pay for college for kids, I assume they'd be spending out of the general total portfolio bucket, and they probably wouldn't be reducing the amount of support in the event of a market downturn. But isn't that effectively allocating a "safe" portion of the portfolio to tuition, and then letting the remainder dedicated to retirement float in asset allocation with the market? In other words, if college costs $100k, and the parents have $100k in bonds and $400k in stocks, but the stocks lose 50% while the kids are in school and they still spend the $100k on tuition, aren't they basically allocating the $100k in stocks to tuition, letting the stocks drop 50%, and then instead of having bonds to rebalance back into stocks following the downturn, they'd actually be selling stocks during the downturn to rebuild their bond allocation that they spent on tuition? That's essentially sacrificing a significant chunk of their retirement portfolio and stability to the tuition payments. I would argue that actually maintaining separate spending buckets not only offers more tailored asset allocations on a per-obligation basis, but it also offers better control over competing priorities. In this case, having separate buckets would allow the parents to see that maybe their asset allocation is actually way too risky for their liking because they have a significant amount of short-term spending planned, and also, they might be able to consciously underfund the college savings by $20k in a down market and ask the kids to make up the difference. It's really not all that different conceptually from having a cash buffer that we feel comfortable with to manage our daily spending.

To be fair, I don't think we all need to go out and start creating buckets with carefully selected asset allocations for every cup of Starbucks in our future. We generally don't rebalance with that kind of granularity anyway. There are really only a few major buckets of spending in life that really warrant having a dedicated bucket. However, I think the important point is that asset allocation is a means to an end, not a religion. You don't pick 70/30 because it's inherently awesome. You pick it because it suits your needs. Well, if you have multiple competing needs with very different time horizons, it only makes sense to start thinking about it from that end, rather than trying to force a specific total asset allocation to work. That's why I think it's better to think in buckets for the major life spending categories, set their individual asset allocations, and then fund those buckets according to their relative priorities, keeping in mind that one may not have the funds to successfully fill every bucket to the very top. The total asset allocation can and should fluctuate with how the investor decides to prioritize those various buckets. Indeed, I don't see how anyone could say with a straight face that their risk tolerance follows a perfectly straight line from youth to old age. I think it's perfectly natural for risk tolerance to fluctuate as people buy houses, send kids to school, pay for medical bills, get promotions, etc.

The only reason setting a ballpark total asset allocation is okay is that we can't really get that granular with rebalancing anyway, and the market is quite volatile, so whether you use buckets or not, your portfolio is always going to be a rough approximation of the ideal anyway. In practice, whether you're 70/30 or 80/20, or whether you have a $5k spending account or a $20k emergency fund in cash, the differences aren't all the significant, especially early on in the accumulation phase when it mostly comes down to savings rate and earning potential.
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Re: Does anyone else not use a fixed asset allocation?

Post by sailaway »

dboeger1 wrote: Mon Sep 13, 2021 6:28 pm I would argue that virtually everyone is, not just for the sake of being pedantic, but because I think it highlights an important point.
This may be true early in accumulation, but if you are FI, your monthly cash needs probably aren't enough to push you out of your rebalancing bands. So while our cash fluctuates as you describe, it is dwarfed by the bonds we lump it with when making calculations for rebalancing. Stock price fluctuations have a much bigger effect.
dboeger1
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Re: Does anyone else not use a fixed asset allocation?

Post by dboeger1 »

sailaway wrote: Mon Sep 13, 2021 7:49 pm
dboeger1 wrote: Mon Sep 13, 2021 6:28 pm I would argue that virtually everyone is, not just for the sake of being pedantic, but because I think it highlights an important point.
This may be true early in accumulation, but if you are FI, your monthly cash needs probably aren't enough to push you out of your rebalancing bands. So while our cash fluctuates as you describe, it is dwarfed by the bonds we lump it with when making calculations for rebalancing. Stock price fluctuations have a much bigger effect.
That's exactly my point. You didn't expand your cash buffer to stick to a percentage of the total portfolio. That's because a cash buffer is generally sized to meet a specific category of obligations which shouldn't change much because it's based on spending patterns. A college fund is in some sense a different kind of buffer for a different kind of spending. Retirement is a different buffer. A home down payment fund is another. The point I was making is that even people who mostly stick to a single asset allocation still have these separate buffers in practice, unless they really make it a point to sell stocks and bonds according to their asset allocation every time they pay for parking or go out to eat. That's why I would caution people not to overestimate the importance of a firm total portfolio asset allocation.
Marseille07
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Re: Does anyone else not use a fixed asset allocation?

Post by Marseille07 »

dboeger1 wrote: Mon Sep 13, 2021 9:17 pm The point I was making is that even people who mostly stick to a single asset allocation still have these separate buffers in practice, unless they really make it a point to sell stocks and bonds according to their asset allocation every time they pay for parking or go out to eat. That's why I would caution people not to overestimate the importance of a firm total portfolio asset allocation.
If you see JoMoney's post upthread, this is exactly how some folks (including myself) plan to operate. Those who are equities-heavy kind of have to refill fixed income quickly as there isn't much safety margin to goof around.
placeholder
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Re: Does anyone else not use a fixed asset allocation?

Post by placeholder »

In my case I'm in retirement but made no change to my asset allocation however I'm drawing a pension (non cola) that currently covers expenses and I could start taking social security at any time so I'm letting me 60/40 allocation ride.
hudson
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Why would anyone want long term bonds?

Post by hudson »

BitTooAggressive wrote: Mon Sep 13, 2021 2:29 pm
Marseille07 wrote: Mon Sep 13, 2021 9:52 am
BitTooAggressive wrote: Mon Sep 13, 2021 7:52 am Ok. That is really splicing hairs IMO. If you forgot a rule or learned something knew can you adjust your rules?

I am just going to have to think all market timing is not bad.
I didn't say all market timing is bad. Some people do well with it.

The problem I see with your OP is that the approach seems rather arbitrary. You seem to be dividing up your investments into "long term" vs "short term," however those are defined. And while the "short term" seems fixed income only, the "long term" bucket would hold anything based on your discretion.

So...I don't really see the end game here. What are you trying to optimize, if at all?
Sure it’s rather arbitrary. Same with most people and their asset allocation. Most people that say are using a 70/30 could probably use an 80/20 or 60/40. I am trying to make sure my retirement savings last long enough for my wife and would like to leave something for children and grandchildren without taking too much risk….whatever too much is. So that means enough fixed income to survive a downturn but still having most of my money on stocks.

I don’t want to get overly conservative in retirement. Also in this current environment I see no reason why anyone would want long term bonds. Maybe 5 years from now bonds will be more reasonably priced.
I've started warming up to long term bond funds for duration matching purposes...two examples:

I'm 73; I could buy a 20 year long term inflation protected treasury bond to fund my needs for age 93 in 2041.

I also hold a fund that's average duration is 5.3 years. I don't plan on spending that money for ten years or longer. I would like to swap that fund for a fund with a 10-15 year duration. Since I'm duration matched, the risky part of long bonds is tempered.

Bottom Line: maybe look at duration matching... viewtopic.php?t=318412
hudson
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Re: Does anyone else not use a fixed asset allocation?

Post by hudson »

Ferdinand2014 wrote: Mon Sep 13, 2021 8:27 am I do not use a fixed allocation.

We invest in an S&P 500 fund and cash in the form of short term treasury's. The cash is an amount that my DW and I decide based on a combination of near term large expenses (new car, bathroom remodel) over the next few years and emergency fund leading to a number, not a percentage. This keeps us from ever selling stocks during accumulation. The percentage is currently about 9% and will fluctuate based on the market and what expenses we determine. As our expenses keep going down (Empty nest, paid off mortgage and student loans), We have had to add very little to it as we can cash flow more and more of our expenses and our emergency number goes down with expenses as well. The percent is the after effect of the amount determined. Essentially a bucket approach while accumulating.

Near retirement, I am debating a couple of possible approaches:

First, going to a LMP. To determine this, I would calculate my 25X number and subtract social security and 50% of expected dividends. This I may put in a combination of nominal treasury's and TIP's. The rest would go into stocks for fun stuff and gifting. Basically again a bucket approach instead of an allocation with no rebalancing ever. This would be somewhat as suggested by William Bernstein: https://www.amazon.com/Rational-Expecta ... ads.org-20

Another approach that I have debated is a goals instead of age based allocation to stock/safe assets glide path instead of a bucket approach, with the allocation percent determined by my estimate of accumulated assets at retirement and my LMP as described above. For example, say I need about 4 million for my 25X number minus social security and Fidelity says in a retirement analysis that I may accumulate 6 million in market conditions "significantly below market average".This would suggest about 66% of my retirement portfolio should be in safe assets. One way to glide to this would be:

(current portfolio / 6 million) *.66 = allocation to safe assets. If I reach my number before retirement, It causes you to rebalance risk off the table. If the market tanks, It causes you to buy stocks on the cheap.

viewtopic.php?p=5240649#p5240649

Or just go 50/50 and rebalance once a year..... :sharebeer
I really like the bolded part above!
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BitTooAggressive
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Re: Does anyone else not use a fixed asset allocation?

Post by BitTooAggressive »

Is there any place on this website that defines all the acronyms commonly used here?
sailaway
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Re: Does anyone else not use a fixed asset allocation?

Post by sailaway »

BitTooAggressive wrote: Tue Sep 14, 2021 10:05 am Is there any place on this website that defines all the acronyms commonly used here?

Yep!

https://www.bogleheads.org/wiki/Abbrevi ... d_Acronyms
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