My asset allocation for an agressive 29 yo - any thoughts?

[KageC]

Hi all,

I'm in my late-20s with no debt, filling taxes single and about $120k in annual income. I've got a 6-month emergency fund set up, as well as about 30% of my net worth in cash or cash equivalent for potential future opportunities (down payment, ...) - working on a "safe" investment portfolio for 30% of this cash.

For the rest of my investment (long term - no goal except growing it as much as possible and maybe semi-retire early), here is my current asset allocation (all Vanguard ETFs):

- 40% Total Stock Market (VTI)
- 25% REITs (VNQ) - I might add some International Real Estate with VNQI - 20% of this maybe.
- 10% Developed Market Equities (VEA)
- 10% Emerging Market Equities (VWO)
- 10% Small Cap Growth (VBK)
- 3% US Treasuries (VGIT)
- 2% TIPS (VTIP)

I put my REITs & Bonds in my Roth 401(k) + Roth IRA, most of the equities is in a taxable account.

Do you have any thoughts? Anything I might have missed?

Thanks for your comments!

[mcraepat9]

Small cap growth? Google “the black hole of investing”. Ditch this ASAP.

REITs are fine if you want them.

Re bonds - either go to 10% or 0%. 5% isn’t enough to do anything.

I would stick with nominal Treasurys. TIPS don’t make sense for a person in your position - large unexpected inflation will be reflected in your salary.

Are you sure Roth 401k is right for you?

[Flyer24]

You don’t need TIPS and 25% REIT is too much.

[Thegame14]

You don’t need TIPS and 25% REIT is too much.

+1 Agree with this plus you dont need small cap growth as well, you are getting too cute with it.

[k3vb0t]

KageC, it might be beneficial for you to explain your own reasoning on why your selected those funds/ETFs/Asset Allocation before requesting advice.

Is there a reason you've avoided a 3 fund portfolio?

Also agree with others that when you've got less than 10% in anything it is highly unlikely to add anything of significant to the portfolio besides complexity.

[atdharris]

I definitely would not include 25% in REITs unless you have some sort of reasoning for that.

[Dr. Long]

Some great responses here. Agree on ditching the REITS and TIPS then just simplify the rest down to a 3 (or less) fund.

IMO from what you said I'd just go 100% VTI, but others here will tell you to add international exposure, and possibly 10% bonds. That is really your personal choice.

https://personal.vanguard.com/us/FundsInvQuestionnaire will probably tell you 100% equities based on your age and what you said. Take it and see!

[nix4me]

I agree with last poster, ditch it all and go 100% VTI. Simple is better.

[ruralavalon]

Hi all,

I'm in my late-20s with no debt, filling taxes single and about $120k in annual income. I've got a 6-month emergency fund set up, as well as about 30% of my net worth in cash or cash equivalent for potential future opportunities (down payment, ...) - working on a "safe" investment portfolio for 30% of this cash.

For the rest of my investment (long term - no goal except growing it as much as possible and maybe semi-retire early), here is my current asset allocation (all Vanguard ETFs):

- 40% Total Stock Market (VTI)
- 25% REITs (VNQ) - I might add some International Real Estate with VNQI - 20% of this maybe.
- 10% Developed Market Equities (VEA)
- 10% Emerging Market Equities (VWO)
- 10% Small Cap Growth (VBK)
- 3% US Treasuries (VGIT)
- 2% TIPS (VTIP)

I put my REITs & Bonds in my Roth 401(k) + Roth IRA, most of the equities is in a taxable account.

Do you have any thoughts? Anything I might have missed?

Thanks for your comments!

An asset allocation of 95/5 stocks/bonds is not a "safe" investment portfolio. In the late 20s I suggest around 20% in bonds.

In the 20s I suggest not using a TIPS fund. in my opinion a TIPS fund is useful only in or near retirement. Your inflation protection is your earning capacity and a relatively high stock allocation.

Long-term small-cap growth has been a bad choice. Larry Swedroe, etf.com (10/11/2013), "The ‘Black Hole Of Investing’ " .

40% of domestic stocks in REIT is extreme.

Unless you will be eligible for a significant pension in addition to Social Security, or you will soon move into a very high tax bracket for the rest of your working life (e.g. a physician, dentist, CPA, attorney just starting practice), it's likely that traditional contributions will be better for you than Roth contributions.

[MotoTrojan]

All good advice here. I would recommend you hold a core US and core International position, then tilt with one holding total, or one for each category.

My core portfolio is 55% Total US, 25% Total Int, 20% US Small Value for example. Something like that would be easier to manage and more well rounded IMHO.

If you want to be a bit more aggressive maybe only hold small-cap international or tilt small.

Small-growth... no way.

[Bacchus01]

I agree with last poster, ditch it all and go 100% VTI. Simple is better.

This. That's what I would do. You don't need the complexity.

Your absolute biggest ROI right now, and for the next 20 years, is going to be a combination of your career growth and your spending habits/savings rate. Focus way more on those two than your investment returns. Set it and forget it.

[willthrill81]

I see no value in a 5% allocation to bonds. Frankly, I think that if you're not willing and able to be 100/0, you probably need to dial down to at least 70/30 to see a significant reduction in historic maximum drawdowns.

[3funder]

I suggest the following portfolio:

40% VTI
40% VXUS
20% BND

Invest as much as you can; you'll be fine.

[rascott]

29 means you are 30+ years from being able to (penalty free) touch your retirement accounts.

Holding any bonds makes zero sense to me personally...I know that goes against the grain here. I'm ten years older than you and have been 100% equities for my 19 years of investing and have no intention of adding bonds until I get to age 50. 5% makes even less sense. You are already 70/30 at 100% equity....considering your cash position.

Equities I do 70/30 US/intl. Half of my domestic holdings are in small cap... mainly SCV.

Savings rate trumps it all.

[Quirkz]

Holding any bonds makes zero sense to me personally...I know that goes against the grain here. I'm ten years older than you and have been 100% equities for my 19 years of investing and have no intention of adding bonds until I get to age 50.

You're not the only one. I finally shifted into some bonds only recently, and I'm in my mid-40's. Since the OP has proclaimed themselves "aggressive" in the subject, I'd say "age-20" is closer to what they might be looking for. Being able to weather a big dip--something they may not have experienced yet, and also depending on whether they were paying attention last December--is key, though.

[esteen]

Agree, a lot of good advice here, though as you can see each poster has a slightly different flavor. I think most would agree with this however:

Your absolute biggest ROI right now, and for the next 20 years, is going to be a combination of your career growth and your spending habits/savings rate. Focus way more on those two than your investment returns. Set it and forget it.

So true! That said, there's nothing wrong with thinking about your asset allocation now.

Small cap growth? Google “the black hole of investing”. Ditch this ASAP.

Not to derail on this portion, but...
If you want to do "tilts" into certain sectors of the market, small cap is a popular one but growth is not, due to some hefty academic research (esp. Fama/French) on the higher returns of value tilt (opposite of growth tilt). However that research is not definitive by any means, and many (including Bogle himself) thought value vs growth should not be bet on either way for outperformance reasons. For example the ETF you are in beat the Vanguard SC Value ETF by over 1.7% since fund inceptions (~14ish years). Does that mean it will continue to outperform? No! But it also does not mean that SC value will definitely outperform in the future either. In short, what most posters have said rings true - if you have a specific "tilt" like small cap, growth, REITs, etc., you should have a real good reason for it. A strong, data-backed reason that is not a flavor-of-the-year but you truly believe will last your investing lifetime. Without that reason, there isn't a good argument to make your investing situation more complex, and you should just hold the market at whatever equity % is right for you.

25% REIT is too much.

Probably is for most people. There are some prominent portfolio methods that espouse REITs (normally 10-20% is more common, see Ivy Portfolio), and given a US Stock-heavy portfolio there is some decent backtesting evidence that shows carving some of that out for REITS lowers volatility without marring returns (use Tyler's great Portfolio Charts site to play with percentages yourself). However, just like the growth/value tilting, backtesting does not equal future returns and tilting toward REITs is betting on that continued low correlation. I agree with Flyer24 that your 25% allocation to REITs is probably too much unless you have a real good reason that we're all unaware of. You may want to think in terms of your real property (own a primary home, or other property?) as a part of your allocation too, which automatically increases your RE exposure. I never recommend counting the full value of your primary home in your allocation, but the portion which you could reasonably "downsize away" and your secondary properties could be looked at in that context.

29 means you are 30+ years from being able to (penalty free) touch your retirement accounts.

Holding any bonds makes zero sense to me personally...I know that goes against the grain here.

On the contrary I think many would agree with rascott. Asset allocation is a personal decision but 100% equities isn't unreasonable with your time horizon if you are of an aggressive investing mindset and will not panic/sell during protracted (years-long) downturns. The key is, will you sit tight?

Savings rate trumps it all.

Repeating this for emphasis


-ES

[grabiner]

Mathematically, 100% equities is fine for a 29-year-old.

But in practice, I don't recommend it until you actually know how you react to a bear market. If you were paying attention to the market last December when it dropped 19%, and you rebalanced by buying more stock at the bottom, you may know something about your risk tolerance. If not, the last real bear market was in 2007-2009, and you probably had no money invested to think about.

[sometimesinvestor]

unlike some i think 5% in bonds at least gives youa fund source if the market drops about 8%


While 25% may be too much in Reits its impossible to forecast the future so it could work out. Bottom line: its not what I would do but its rational.

[willthrill81]

Mathematically, 100% equities is fine for a 29-year-old.

But in practice, I don't recommend it until you actually know how you react to a bear market. If you were paying attention to the market last December when it dropped 19%, and you rebalanced by buying more stock at the bottom, you may know something about your risk tolerance. If not, the last real bear market was in 2007-2009, and you probably had no money invested to think about.

Of course, most 29 year olds don't have much invested in the first place. Seeing your $20k get cut in half when you have 30 years or more before you retire is a lot easier than when you see $1 million drop to $500k.

[ruralavalon]

Mathematically, 100% equities is fine for a 29-year-old.

But in practice, I don't recommend it until you actually know how you react to a bear market. If you were paying attention to the market last December when it dropped 19%, and you rebalanced by buying more stock at the bottom, you may know something about your risk tolerance. If not, the last real bear market was in 2007-2009, and you probably had no money invested to think about.

Mathematically, 100% equities is fine for a 29-year-old.

But in practice, I don't recommend it until you actually know how you react to a bear market. If you were paying attention to the market last December when it dropped 19%, and you rebalanced by buying more stock at the bottom, you may know something about your risk tolerance. If not, the last real bear market was in 2007-2009, and you probably had no money invested to think about.

Of course, most 29 year olds don't have much invested in the first place. Seeing your $20k get cut in half when you have 30 years or more before you retire is a lot easier than when you see $1 million drop to $500k.

The danger of a 100% stock allocation is real.

In a stock market crash you could panic and sell, then agonize for years over when it is a good time to get back in the market, and so miss out on the recovery.

Many people did exactly that during the dotcom crash of 2000 - 02, and during the real estate crash of 2007 - 09.

It is wrong to simply declare that you won't feel a sense of panic during a stock market crash, you will. Will you resist the urge to sell? Who knows, unless you have actually been through a stock market crash with a significant amount of money on the line.