What's your *real* asset allocation?

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jaj2276
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What's your *real* asset allocation?

Post by jaj2276 » Thu Jul 12, 2018 4:33 pm

I state that my asset allocation is Age - 10 in bonds (29.5% since I average both my wife and my ages together), 10% precious metals, rest in equity split 2/3 US and 1/2 Intl. And I keep pretty close to that in the accounts that I use to compute these values (29.67% bonds, 9.52% precious metals, 41.19% US stocks, 19.61% Intl).

However I also have three accounts that I include in my net worth that I don't track for asset allocation purposes. I have a smallish emergency fund sitting in cash. I have two houses that I simply count the principal payments that I've made (no increased house valuations, no "improvements", etc.), and I have what best can be described as an alternative investment that resembles a hedge fund (but isn't easily identified as a stock or credit hedge fund and isn't available to anyone except those who work there).

If I add those values in then I arrive at:

21.28% bonds
29.75% US equities
12.79% Intl equities
0.37% cash
6.21% precious metals
13.56% real estate
16.05% alternative

Not sure how I feel about those new numbers. Anyone else have asset allocations that differ significantly if they included accounts that they normally exclude? Or am I the only one that excludes accounts like that?

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Sandtrap
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Re: What's your *real* asset allocation?

Post by Sandtrap » Thu Jul 12, 2018 4:46 pm

To keep this "actionable".

What matters is that, on an individual level, the volatile part of one's total financial holdings (whether equities or otherwise) is at a percentage that one can sleep well with regardless of economic fluctuation.

Regardless of how you "slice and dice" it, there's just "fruits" and "vegetables". One is more perishable than the other.

Simple is better.
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delamer
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Re: What's your *real* asset allocation?

Post by delamer » Thu Jul 12, 2018 4:52 pm

If the three accounts/investments are intended for the same goal as your other assets, then they should be considered as part of the asset allocation

If the three accounts are intended for different goals, then they should to considered as part of the allocation for those goals.

22twain
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Re: What's your *real* asset allocation?

Post by 22twain » Thu Jul 12, 2018 5:19 pm

Sandtrap wrote:
Thu Jul 12, 2018 4:46 pm
Regardless of how you "slice and dice" it, there's just "fruits" and "vegetables". One is more perishable than the other.
And then there are Twinkies which are supposedly imperishable. :twisted:
My investing princiPLEs do not include absolutely preserving princiPAL.

jebmke
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Re: What's your *real* asset allocation?

Post by jebmke » Thu Jul 12, 2018 5:29 pm

I only include liquid assets. Assets that can be converted to cash within one business day. I can't eat my house. I need it to keep the rain out.

Even when I had NQ stock options I never counted them even when they were in the money. When we had investment property we never counted that.
When you discover that you are riding a dead horse, the best strategy is to dismount.

tbone555
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Re: What's your *real* asset allocation?

Post by tbone555 » Thu Jul 12, 2018 5:42 pm

It certainly is part of your asset allocation whether you choose to count it or not. It is also part of your net worth. If you want to break it down as liquid vs illiquid that is reasonable, but it doesn't take it out of the overall calculations.

Otherwise it seems like a mind game you are playing to make yourself feel like you have a different risk profile than you actually do.

Jack FFR1846
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Re: What's your *real* asset allocation?

Post by Jack FFR1846 » Thu Jul 12, 2018 6:16 pm

I include all invested assets including savings bonds. My allocation target and real are very close to the same. Within a percent or 2, moving with markets.

The house? No. That's where I live. It isn't a retirement investment.
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ruralavalon
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Re: What's your *real* asset allocation?

Post by ruralavalon » Thu Jul 12, 2018 6:17 pm

jaj2276 wrote:
Thu Jul 12, 2018 4:33 pm
I state that my asset allocation is Age - 10 in bonds (29.5% since I average both my wife and my ages together), 10% precious metals, rest in equity split 2/3 US and 1/2 Intl. And I keep pretty close to that in the accounts that I use to compute these values (29.67% bonds, 9.52% precious metals, 41.19% US stocks, 19.61% Intl).

However I also have three accounts that I include in my net worth that I don't track for asset allocation purposes. I have a smallish emergency fund sitting in cash. I have two houses that I simply count the principal payments that I've made (no increased house valuations, no "improvements", etc.), and I have what best can be described as an alternative investment that resembles a hedge fund (but isn't easily identified as a stock or credit hedge fund and isn't available to anyone except those who work there).

If I add those values in then I arrive at:

21.28% bonds
29.75% US equities
12.79% Intl equities
0.37% cash
6.21% precious metals
13.56% real estate
16.05% alternative

Not sure how I feel about those new numbers. Anyone else have asset allocations that differ significantly if they included accounts that they normally exclude? Or am I the only one that excludes accounts like that?
Age 72, retired.

I don't believe that every component of net worth should be a part of the asset allocation, just investable assets.

We have no emergency fund (just a few months basic living expenses in a checking account), have no "alternative" investments, and don't count our home as an investment.

Our investments include only my rollover IRA, 2 Roth IRAs and a joint taxable account. Our asset current allocation is:
48%, intermediate-term bonds;
28%, total U.S. stock market;
12%, U.S. small cap value; and
12%, total international stock market
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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TheTimeLord
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Re: What's your *real* asset allocation?

Post by TheTimeLord » Thu Jul 12, 2018 6:32 pm

Jack FFR1846 wrote:
Thu Jul 12, 2018 6:16 pm
I include all invested assets including savings bonds. My allocation target and real are very close to the same. Within a percent or 2, moving with markets.

The house? No. That's where I live. It isn't a retirement investment.
Since I assume I will end up in Assisted Living at some point, I plan to sell my house and use the proceeds.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

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ruralavalon
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Re: What's your *real* asset allocation?

Post by ruralavalon » Thu Jul 12, 2018 7:37 pm

TheTimeLord wrote:
Thu Jul 12, 2018 6:32 pm
Jack FFR1846 wrote:
Thu Jul 12, 2018 6:16 pm
I include all invested assets including savings bonds. My allocation target and real are very close to the same. Within a percent or 2, moving with markets.

The house? No. That's where I live. It isn't a retirement investment.
Since I assume I will end up in Assisted Living at some point, I plan to sell my house and use the proceeds.
The house is where we live, it's not an investment.

The house is our backup plan for long-term care if needed.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

AlohaJoe
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Re: What's your *real* asset allocation?

Post by AlohaJoe » Thu Jul 12, 2018 7:56 pm

jebmke wrote:
Thu Jul 12, 2018 5:29 pm
I only include liquid assets. Assets that can be converted to cash within one business day. I can't eat my house. I need it to keep the rain out.
You can't convert any Vanguard mutual fund to cash within one business day. You can't convert any stock or ETF to cash within one business day.

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TheTimeLord
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Re: What's your *real* asset allocation?

Post by TheTimeLord » Thu Jul 12, 2018 8:00 pm

ruralavalon wrote:
Thu Jul 12, 2018 7:37 pm
TheTimeLord wrote:
Thu Jul 12, 2018 6:32 pm
Jack FFR1846 wrote:
Thu Jul 12, 2018 6:16 pm
I include all invested assets including savings bonds. My allocation target and real are very close to the same. Within a percent or 2, moving with markets.

The house? No. That's where I live. It isn't a retirement investment.
Since I assume I will end up in Assisted Living at some point, I plan to sell my house and use the proceeds.
The house is where we live, it's not an investment.

The house is our backup plan for long-term care if needed.
Don't consider it a investment, consider it an asset and assets have value. And as far as our plan goes it is an asset we plan to liquidate when we move into either Independent or Assisted Living.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

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aj76er
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Re: What's your *real* asset allocation?

Post by aj76er » Thu Jul 12, 2018 9:47 pm

As part of my rebalancing portfolio spreadsheet, the last sheet tracks overall net worth which is a rough estimate of all of my assets. In this sheet I lump everything into broad asset categories (equities, fixed income, real estate). I do this as more of a curiosity, but I do assign very rough ranges to these numbers in which I'd like to stay. And I absolutely view my existing residence as both an investment and as a consumption item. this is because it has real value that I can sell if needed or desired.

I think it's a good idea to have a bird's eye view of the risk of one's entire pool of assets. For example if the equity in my primary residence ever became greater than 50% of net worth, it would be a cause for concern. Others may have different feelings about other asset classes.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

SimplicityNow
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Re: What's your *real* asset allocation?

Post by SimplicityNow » Thu Jul 12, 2018 11:32 pm

I use to have a separate emergency fund in high yield savings and short term CD that I didn't count in my asset allocation.

Since retiring I changed my opinion and no longer consider it an emergency fund. It is part of my fixed income side of my AA.

At the end of the day it is just mental accounting.

CarpeDiem22
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Re: What's your *real* asset allocation?

Post by CarpeDiem22 » Fri Jul 13, 2018 6:14 am

I include everything except vehicles. I don't own a house, but I would include if I did.

jaj2276
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Re: What's your *real* asset allocation?

Post by jaj2276 » Fri Jul 13, 2018 7:28 am

My point in doing this exercise was to see if I felt I was taking more or less risk with my portfolio. On one hand my bond allocation went from ~29% to ~21% which seems like a big increase in risk. However my largest single position (US equities) went down from ~40% to ~30% so it seems like I've become more diversified.

If my starting point for bonds is 29% and I'm only at 21% then maybe I need to be more conservative with future contributions. Except I don't want to be too conservative and find I've left money on the table.

I guess maybe both sets of numbers give me peace of mind. The first set shows where I'm at with the money I have in the public capital markets. I feel my risk there is appropriate. And the second set of numbers shows that I'm not too concentrated in any one asset class.

petulant
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Re: What's your *real* asset allocation?

Post by petulant » Fri Jul 13, 2018 7:54 am

Some people on this forum go to great lengths to ensure complete analytical purity regarding asset allocation, going so far as to put a principal value on social security, make adjustments based on tax location, etc.

Some of these moves may be meritorious in some circumstances, but overall trying to translate these factors into percentage changes to asset allocation is, I think, a waste of time.

What matters about asset allocation is the risk involved for a portfolio balance that will be needed to live on; most people don’t want to ever see a -50% draw down in the value of their 401(k), so they have a bond allocation. Bond allocations reduce the volatility of the portfolio balance, typically to a greater mathematical degree than they reduce returns (due to rebalancing), meaning it’s a good deal.

Other aspects of one’s financial life should go into setting that asset allocation inside the portfolio, but it’s not particularly helpful to turn them into percentages. For example, a social security benefit that covers most living expenses may reduce the impact of taking risk with stocks, meaning a retired person feels more comfortable with a higher stock allocation. Owning one’s home outright may increase risk tolerance. Deriving most income from a small business that could go under may reduce risk tolerance. Having a mix of Roth and tax deferred accounts raises interesting asset location issues.

Setting an asset allocation and then determining your “true” allocation to see if you’re taking on too much risk is circular. For example, if one has a 70/30 allocation, one should have set a 70/30 allocation based on the volatility, drawdown, and return they preferred in a portfolio, based on their otherwise existing situation. To throw that information about homeownership and employment back in the mix would alter the preferred allocation. Thus, if a house is a bond earning imputed rent, then the desired target allocation should have never been 70/30; it should have been about 60/40 (if the house would be about 10% of portfolio). If social security is a bond, the target allocation would be different. Does that make sense?

It’s also unhelpful because of the lack of precision in valuing illiquid assets and rights. Do you compute a comparable annuity cost for social security? What about changes over time? How do you value the home—market value, equivalent face value of a bond with yield at imputed rent, original cost minus loan? If you’re young, how much do you have to guesstimate effective tax rates for drawing these benefits?

Set your asset allocation just based on your investment portfolio. But do think deeply about the rest of your life situation before doing so—that should be relevant to your need and ability to take risk.

SQRT
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Re: What's your *real* asset allocation?

Post by SQRT » Fri Jul 13, 2018 8:11 am

I certainly don’t include my personal use real estate in my AA. I do include the capitalized value of my pension though. I think it comes down to comparability. If we use recognized “rules of thumb” for AA we should try to be comparable. Person A has a AA of 60/40 no pension and person B has a 60/40 allocation with a big pension not included. Same risk? Don’t think so? Is it worth trying to adjust your AA? I guess it depends on how big your pension is compared to your actual portfolio. For many(most) people it might not be material. For me it is since my pension has a capitalized value of about 40% of my total portfolio plus capitalized pension. The easiest way (for me ) to take this pension into account for risk assessment purposes is to include it in my adjusted AA. I don’t continuously recalculate this. A few %age points one way or the other wouldn’t matter.

As for personal use real estate earning notional rent and including the value in your AA? In theory might make sense but you would have to consider maintenance, utilities, property taxes, mortgage interest, etc. Seems like a “bridge too far” for me especially if owning your own home doesn’t really impact your risk much? In addition, in my case we own multiple homes for personal use so would I include all of them? Just one? Which one? Maybe they are really just cost streams? Maybe Capitalize as an negative outflow? What about any mortgage?
Last edited by SQRT on Fri Jul 13, 2018 12:35 pm, edited 2 times in total.

bg5
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Re: What's your *real* asset allocation?

Post by bg5 » Fri Jul 13, 2018 8:13 am

I am 100% VTSMX.

I feel confident about my position and whatever makes anybody sleep better at night is the right decision. I sleep very well at night :)

petulant
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Re: What's your *real* asset allocation?

Post by petulant » Fri Jul 13, 2018 2:26 pm

SQRT wrote:
Fri Jul 13, 2018 8:11 am
I certainly don’t include my personal use real estate in my AA. I do include the capitalized value of my pension though. I think it comes down to comparability. If we use recognized “rules of thumb” for AA we should try to be comparable. Person A has a AA of 60/40 no pension and person B has a 60/40 allocation with a big pension not included. Same risk? Don’t think so? Is it worth trying to adjust your AA? I guess it depends on how big your pension is compared to your actual portfolio. For many(most) people it might not be material. For me it is since my pension has a capitalized value of about 40% of my total portfolio plus capitalized pension. The easiest way (for me ) to take this pension into account for risk assessment purposes is to include it in my adjusted AA. I don’t continuously recalculate this. A few %age points one way or the other wouldn’t matter.

As for personal use real estate earning notional rent and including the value in your AA? In theory might make sense but you would have to consider maintenance, utilities, property taxes, mortgage interest, etc. Seems like a “bridge too far” for me especially if owning your own home doesn’t really impact your risk much? In addition, in my case we own multiple homes for personal use so would I include all of them? Just one? Which one? Maybe they are really just cost streams? Maybe Capitalize as an negative outflow? What about any mortgage?
While your approach isn’t unreasonable, the other way to value the pension quantitatively is to subtract the annual or monthly income from your portfolio withdrawal need, which should affect your willingness/need to take risk.

jebmke
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Re: What's your *real* asset allocation?

Post by jebmke » Fri Jul 13, 2018 2:35 pm

AlohaJoe wrote:
Thu Jul 12, 2018 7:56 pm
jebmke wrote:
Thu Jul 12, 2018 5:29 pm
I only include liquid assets. Assets that can be converted to cash within one business day. I can't eat my house. I need it to keep the rain out.
You can't convert any Vanguard mutual fund to cash within one business day. You can't convert any stock or ETF to cash within one business day.
Sure I can; If I transfer funds from my stock fund to my settlement fund it is then in cash. Happens to be in Vanguard but it is in cash.

I can move the cash to my bank in one business day.
When you discover that you are riding a dead horse, the best strategy is to dismount.

SQRT
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Re: What's your *real* asset allocation?

Post by SQRT » Fri Jul 13, 2018 3:44 pm

petulant wrote:
Fri Jul 13, 2018 2:26 pm
SQRT wrote:
Fri Jul 13, 2018 8:11 am
I certainly don’t include my personal use real estate in my AA. I do include the capitalized value of my pension though. I think it comes down to comparability. If we use recognized “rules of thumb” for AA we should try to be comparable. Person A has a AA of 60/40 no pension and person B has a 60/40 allocation with a big pension not included. Same risk? Don’t think so? Is it worth trying to adjust your AA? I guess it depends on how big your pension is compared to your actual portfolio. For many(most) people it might not be material. For me it is since my pension has a capitalized value of about 40% of my total portfolio plus capitalized pension. The easiest way (for me ) to take this pension into account for risk assessment purposes is to include it in my adjusted AA. I don’t continuously recalculate this. A few %age points one way or the other wouldn’t matter.

As for personal use real estate earning notional rent and including the value in your AA? In theory might make sense but you would have to consider maintenance, utilities, property taxes, mortgage interest, etc. Seems like a “bridge too far” for me especially if owning your own home doesn’t really impact your risk much? In addition, in my case we own multiple homes for personal use so would I include all of them? Just one? Which one? Maybe they are really just cost streams? Maybe Capitalize as an negative outflow? What about any mortgage?
While your approach isn’t unreasonable, the other way to value the pension quantitatively is to subtract the annual or monthly income from your portfolio withdrawal need, which should affect your willingness/need to take risk.
That’s certainly the way you would determine your WR but this method would make the AA not comparable for the normal “risk rules of thumb” re AA. Like 100 minus your age,etc. Also,not clear to me how you would quantitatively adjust your AA to reflect your pension other than by notionally capitalizing it? I guess you could just add 10 or 20 % to the equity proportion but this would hardly be rigorous.

Again, if the pension isn’t too big (say SS size) and your portfolio is a fairly good size, it probably doesn’t matter much.

The rules of thumb are probably very coarse measures in any event. For some people with large pensions (my case) it seems like a reasonable way to go.

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Re: What's your *real* asset allocation?

Post by Gnirk » Fri Jul 13, 2018 4:13 pm

My "real" asset allocation includes equity funds, cash, CDs, bond funds, and savings bonds. Nearly all is in a taxable account. My allocation = 110-age in fixed income, the remainder in equities. I do not include our primary home or our snowbird home, because even though they are owned free and clear, in my mind they are as much a liability as an asset because of taxes, maintenance, utility costs and HOA dues.

WanderingDoc
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Re: What's your *real* asset allocation?

Post by WanderingDoc » Fri Jul 13, 2018 4:24 pm

82% real estate equity (active and passive investments)
8% paper
~12% cash/CDs
~0.02% crypto :D

Don't own my personal residence.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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knpstr
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Re: What's your *real* asset allocation?

Post by knpstr » Fri Jul 13, 2018 4:35 pm

Real Asset Allocation

33.5% Real estate (all direct ownership, no reits)
13.0% Index funds
51.5% Small business ownership
2.0% Cash

Index funds portion is 100% equities. Which is what I quote for this site.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

petulant
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Re: What's your *real* asset allocation?

Post by petulant » Fri Jul 13, 2018 6:38 pm

SQRT wrote:
Fri Jul 13, 2018 3:44 pm
petulant wrote:
Fri Jul 13, 2018 2:26 pm
SQRT wrote:
Fri Jul 13, 2018 8:11 am
I certainly don’t include my personal use real estate in my AA. I do include the capitalized value of my pension though. I think it comes down to comparability. If we use recognized “rules of thumb” for AA we should try to be comparable. Person A has a AA of 60/40 no pension and person B has a 60/40 allocation with a big pension not included. Same risk? Don’t think so? Is it worth trying to adjust your AA? I guess it depends on how big your pension is compared to your actual portfolio. For many(most) people it might not be material. For me it is since my pension has a capitalized value of about 40% of my total portfolio plus capitalized pension. The easiest way (for me ) to take this pension into account for risk assessment purposes is to include it in my adjusted AA. I don’t continuously recalculate this. A few %age points one way or the other wouldn’t matter.

As for personal use real estate earning notional rent and including the value in your AA? In theory might make sense but you would have to consider maintenance, utilities, property taxes, mortgage interest, etc. Seems like a “bridge too far” for me especially if owning your own home doesn’t really impact your risk much? In addition, in my case we own multiple homes for personal use so would I include all of them? Just one? Which one? Maybe they are really just cost streams? Maybe Capitalize as an negative outflow? What about any mortgage?
While your approach isn’t unreasonable, the other way to value the pension quantitatively is to subtract the annual or monthly income from your portfolio withdrawal need, which should affect your willingness/need to take risk.
That’s certainly the way you would determine your WR but this method would make the AA not comparable for the normal “risk rules of thumb” re AA. Like 100 minus your age,etc. Also,not clear to me how you would quantitatively adjust your AA to reflect your pension other than by notionally capitalizing it? I guess you could just add 10 or 20 % to the equity proportion but this would hardly be rigorous.

Again, if the pension isn’t too big (say SS size) and your portfolio is a fairly good size, it probably doesn’t matter much.

The rules of thumb are probably very coarse measures in any event. For some people with large pensions (my case) it seems like a reasonable way to go.
Thing is, like I said before, the appropriate asset allocation can be circular. If you determined a 60/40 asset allocation based on considerations that did not include pensions as bonds, then once you do include them, the 60/40 asset allocation wasn't appropriate to start with.

That applies to the rules of thumb. The rules were developed at a time when many employers still offered modest pensions. They were certainly developed, and still apply, to people with social security. So it's analytically problematic to apply a rule of thumb to a portfolio where you capitalize the pension value, if the rule of thumb was developed assuming you would not.

There is no real quantifiable way to set your asset allocation; what I'm saying is that if you include more of these financial rights and values as assets, then the original allocation you set should be revised.

It's not entirely clear to me somebody should adjust their asset allocation in some analytically clear way because they have a pension. They should have set the asset allocation, in the emotional preference sense, knowing they had the pension in the first place. There is no pure starting point of knowing "I am a 60/40 guy" or something like that.

AlohaJoe
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Re: What's your *real* asset allocation?

Post by AlohaJoe » Fri Jul 13, 2018 9:10 pm

jebmke wrote:
Fri Jul 13, 2018 2:35 pm
AlohaJoe wrote:
Thu Jul 12, 2018 7:56 pm
jebmke wrote:
Thu Jul 12, 2018 5:29 pm
I only include liquid assets. Assets that can be converted to cash within one business day. I can't eat my house. I need it to keep the rain out.
You can't convert any Vanguard mutual fund to cash within one business day. You can't convert any stock or ETF to cash within one business day.
Sure I can; If I transfer funds from my stock fund to my settlement fund it is then in cash. Happens to be in Vanguard but it is in cash.

I can move the cash to my bank in one business day.
I guess I don't understand this definition of "liquid" then. You can't pay anyone with your settlement account. You can't buy any goods or services. I mean, you can but that takes more than 24 hours, since you have to transfer it somewhere else. So I don't see the value of a definition of liquid that means "a number in an account is higher in 24 hours but it takes 48-72 hours before I can use it to pay for any goods or services; meanwhile I will discount everything else that also can pay for goods and services within 48-72 hours".

But the good part about personal finance is that it is personal and each of us gets to make our own decisions on lots of things and do what makes the most sense for us.

SQRT
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Re: What's your *real* asset allocation?

Post by SQRT » Sat Jul 14, 2018 7:31 am

petulant wrote:
Fri Jul 13, 2018 6:38 pm
SQRT wrote:
Fri Jul 13, 2018 3:44 pm
petulant wrote:
Fri Jul 13, 2018 2:26 pm
SQRT wrote:
Fri Jul 13, 2018 8:11 am
I certainly don’t include my personal use real estate in my AA. I do include the capitalized value of my pension though. I think it comes down to comparability. If we use recognized “rules of thumb” for AA we should try to be comparable. Person A has a AA of 60/40 no pension and person B has a 60/40 allocation with a big pension not included. Same risk? Don’t think so? Is it worth trying to adjust your AA? I guess it depends on how big your pension is compared to your actual portfolio. For many(most) people it might not be material. For me it is since my pension has a capitalized value of about 40% of my total portfolio plus capitalized pension. The easiest way (for me ) to take this pension into account for risk assessment purposes is to include it in my adjusted AA. I don’t continuously recalculate this. A few %age points one way or the other wouldn’t matter.

As for personal use real estate earning notional rent and including the value in your AA? In theory might make sense but you would have to consider maintenance, utilities, property taxes, mortgage interest, etc. Seems like a “bridge too far” for me especially if owning your own home doesn’t really impact your risk much? In addition, in my case we own multiple homes for personal use so would I include all of them? Just one? Which one? Maybe they are really just cost streams? Maybe Capitalize as an negative outflow? What about any mortgage?
While your approach isn’t unreasonable, the other way to value the pension quantitatively is to subtract the annual or monthly income from your portfolio withdrawal need, which should affect your willingness/need to take risk.
That’s certainly the way you would determine your WR but this method would make the AA not comparable for the normal “risk rules of thumb” re AA. Like 100 minus your age,etc. Also,not clear to me how you would quantitatively adjust your AA to reflect your pension other than by notionally capitalizing it? I guess you could just add 10 or 20 % to the equity proportion but this would hardly be rigorous.

Again, if the pension isn’t too big (say SS size) and your portfolio is a fairly good size, it probably doesn’t matter much.

The rules of thumb are probably very coarse measures in any event. For some people with large pensions (my case) it seems like a reasonable way to go.
Thing is, like I said before, the appropriate asset allocation can be circular. If you determined a 60/40 asset allocation based on considerations that did not include pensions as bonds, then once you do include them, the 60/40 asset allocation wasn't appropriate to start with.

That applies to the rules of thumb. The rules were developed at a time when many employers still offered modest pensions. They were certainly developed, and still apply, to people with social security. So it's analytically problematic to apply a rule of thumb to a portfolio where you capitalize the pension value, if the rule of thumb was developed assuming you would not.

There is no real quantifiable way to set your asset allocation; what I'm saying is that if you include more of these financial rights and values as assets, then the original allocation you set should be revised.

It's not entirely clear to me somebody should adjust their asset allocation in some analytically clear way because they have a pension. They should have set the asset allocation, in the emotional preference sense, knowing they had the pension in the first place. There is no pure starting point of knowing "I am a 60/40 guy" or something like that.
You could be right.

In my case I have a very large pension and most people would be able to live very well on this alone. My portfolio is 100% equities. Why? Is it because I inherently considered the pension and took a higher equity risk or did I have a high risk tolerance and ignored the conventional wisdom of risk management? I must be honest. I’m not sure. But I do know that at least after the fact I have convinced myself that capitalizing my pension is appropriate and doing so makes me “feel better” about my AA. There is a fair amount of support for doing this in the financial literature but agree it’s certainly not universally accepted.

jebmke
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Re: What's your *real* asset allocation?

Post by jebmke » Sat Jul 14, 2018 8:30 am

AlohaJoe wrote:
Fri Jul 13, 2018 9:10 pm
I guess I don't understand this definition of "liquid" then.
Liquidity is the ability to quickly buy or sell an asset without impacting the asset value. All of my assets are liquid now. In the past, this was not true. But I never included non-liquid assets in my allocation plans.

I never counted real estate because it could not be sold quickly (single digit business days) and there was risk that anything close to a quick sale would adversely affect the value realized.

My NQ stock options could not be liquidated quickly because I was an insider and not allowed to trade without significant restrictions as to time and amount.
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Re: What's your *real* asset allocation?

Post by mbasherp » Mon Jul 16, 2018 3:46 pm

This thread got me thinking about how much my home equity and emergency fund change my actual "allocation of assets" away from my "asset allocation."

My current asset allocation plan is 90% stock/5% bond/5% precious metals.
The actual allocation of my assets as of today:
Stock 49.2%
Bond 5.6%
Precious Metals 2%
Cash 6.2%
Real Estate (home equity) 37%

Of course this is largely a time wasting exercise, but it is interesting.

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Meg77
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Re: What's your *real* asset allocation?

Post by Meg77 » Mon Jul 16, 2018 4:11 pm

jebmke wrote:
Sat Jul 14, 2018 8:30 am
AlohaJoe wrote:
Fri Jul 13, 2018 9:10 pm
I guess I don't understand this definition of "liquid" then.
Liquidity is the ability to quickly buy or sell an asset without impacting the asset value. All of my assets are liquid now. In the past, this was not true. But I never included non-liquid assets in my allocation plans.

I never counted real estate because it could not be sold quickly (single digit business days) and there was risk that anything close to a quick sale would adversely affect the value realized.

My NQ stock options could not be liquidated quickly because I was an insider and not allowed to trade without significant restrictions as to time and amount.
I don't really understand what liquidity has to do with calculating asset allocation. Lots of investible assets are not particularly liquid, but they exist all the same and should be accounted for I would think. Direct oil and gas holdings, investment real estate, hedge funds, angel investments or private equity, various other sorts of partnerships, hard currency, crops or livestock, large holdings of public or privately owned stock, small business interests, private loans, RSUs, stock options.

I hold several of the above mentioned assets, and I do struggle with how to incorporate them into my asset allocation. Not because it's "hard to rebalance" though, which is what many people assume the problem to be. My problem is that I struggle to identify and stick to an asset allocation target when a lot of my investments (particularly larger dollar ones) have been made based on an opportunity that happened to arise at a certain time (a multi-family real estate syndication, a tech start-up accelerator, a rental property in foreclosure).

I analyze my asset allocation frequently, and currently I'm at 55% investment real estate, 34% stock, 5% bonds, 3% alternatives and 2% cash. Only 7% in cash/bonds seems overly aggressive, but several of my rentals have a loan to value under 60% and cash flow reliably. So they "feel" more like fixed income and are unlikely to experience much volatility in value.

If you take out the real estate and other non-liquid holdings, I'm at 82% stock, 13% bonds and 5% cash. I'm fine with that AA too, but it's vastly different from the "real" one.

For me, tracking asset allocation is all about where to put new money, as I'm in the accumulation stage. I don't really rebalance actively, but my idea is to direct new money (which equates to about 10% of our total assets each year) into lagging asset classes based on my target AA. In reality I don't really have a strict target AA; I tend to direct new money into stocks in retirement accounts and into cash outside them, until/unless the market dips (when I buy stock index funds) or an investor I've worked with pitches me a new real estate partnership that is appealing. I like not having any one class over 50% of the total though.
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