[Help with my three-fund portfolio]

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Basel Hodge
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[Help with my three-fund portfolio]

Post by Basel Hodge » Sat May 04, 2019 8:52 pm

[Moved into a new thread from: The Three-Fund Portfolio --admin LadyGeek]

Edit added 11/12/19 - About 9 posts down I added a more comprehensive view of my overall portfolio with broad questions related to it and changes I might consider as I move into retirement. Thanks ---Basel (I marked it with a blue *HERE)


Greetings to all! This is my first post.

My wife and I are about to retire and I find myself struggling with the shift from the collection phase of life to the withdrawal phase. I have generally followed the ‘Three Fund Portfolio’ model (although mine is really four fund with the addition of the International Bond Index).
My questions relate to fixed income investing:

1. Does the 3 fund model provide accessible dividends such that one can avoid adding a specific component to the portfolio to create dividends? I wonder if adding extra investment components goes counter to the simplicity and comprehensive nature of the 3 of 4 fund portfolio concept.

2. Considering emergency money or cash on the sidelines, are there common investment products that maintain some level of liquidity but have higher yield or greater interest rate than say a money market for example?

In general I think the questions above seek to elucidate how the Three Fund Portfolio serves to provide income and not just growth & stability (hopefully) in retirement?

I can add some specific detail if needed. I appreciate suggestions!
Last edited by Basel Hodge on Tue Nov 12, 2019 1:35 pm, edited 2 times in total.

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Dialectical Investor
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Re: The Three-Fund Portfolio

Post by Dialectical Investor » Sat May 04, 2019 9:15 pm

Basel Hodge wrote:
Sat May 04, 2019 8:52 pm
Greetings to all! This is my first post.

My wife and I are about to retire and I find myself struggling with the shift from the collection phase of life to the withdrawal phase. I have generally followed the ‘Three Fund Portfolio’ model (although mine is really four fund with the addition of the International Bond Index).
My questions relate to fixed income investing:

1. Does the 3 fund model provide accessible dividends such that one can avoid adding a specific component to the portfolio to create dividends? I wonder if adding extra investment components goes counter to the simplicity and comprehensive nature of the 3 of 4 fund portfolio concept.

2. Considering emergency money or cash on the sidelines, are there common investment products that maintain some level of liquidity but have higher yield or greater interest rate than say a money market for example?

In general I think the questions above seek to elucidate how the Three Fund Portfolio serves to provide income and not just growth & stability (hopefully) in retirement?

I can add some specific detail if needed. I appreciate suggestions!
Welcome.

Re: 1), the three-fund portfolio does not provide for this, nor should any portfolio, because it is not necessary. If you need cash, sell some shares. If this sounds wrong to you, you are not alone. You can use the search bar in the upper-right corner to search for "dividends" and find many threads about this. The focus should not be on income but rather on total return.

Re: 2), there are higher-yielding liquid options, but they entail risk of some other sort. So you can take on more term risk (interest-rate risk) by investing in securities with longer durations, or you can take on more credit risk--think chance of default. Assuming you don't want much of either risk, and depending on how you frame "liquidity" and on current market rates, you might find a money market mutual fund, bank money market, direct bank CD, high-yield savings account, short-term bond fund, etc. provides what you are loooking for.

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Taylor Larimore
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"Total Return Versus Income Approach"

Post by Taylor Larimore » Sat May 04, 2019 9:58 pm

Basel Hodge:

Welcome to the Bogleheads Forum!

As Dialectical Investor explained, it is usually a mistake to focus on dividend stocks for income. This Vanguard Study confirms:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

It is possible to add more funds to The Three-Fund Portfolio (which holds over 15,000 securities) but I believe the additional cost and complexity of adding overlapping funds is seldom worth it.

Read my "Simplicity" link below.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Topic Author
Basel Hodge
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Re: The Three-Fund Portfolio

Post by Basel Hodge » Mon May 06, 2019 9:37 am

Thank you Taylor & Dialectical Investor for your thoughtful responses to my post. I’ve read the linked material and I think I understand the underlying rationale. It does prompt some follow up questions. First I think some additional information might be in order…
======
I do have a pension which is about 2.5 % the amount of my total current portfolio per year. I’m 61 years old.
My portfolio is allocated generally 65% Stock 35% bond
My portfolio has the following percentages:
IRA 34%
Roth 15%
Joint acct (Non tax advantaged) 39%
Cash 12%
My age based priority plan for withdrawal in retirement:
Before age 70.5
1. Taxable accounts first (joint acct)
2. Traditional IRA second (Taxable)
3. Roth IRA third
After 70.5
1. Traditional IRA first (RMD taxable)
2. Taxable accounts second (joint acct)
3. Roth IRA third

General principles
1. Use Joint taxable account to establish a yearly spend account. This should be an account that pays the highest interest rate possible yet remains liquid. Assets used for expenditures for that year. (Money Market?)
2. Direct dividends from Joint account to Spending account (currently being re-invested).
3. Set aside cash in rebalancing portfolio by reducing stock portion of joint account to meet spending.
=======
The questions:
1. Given the responses regarding dividends in my last post, I want to be certain regarding my plan (general principals section #2) to direct dividends from the joint act. (non taxed advantaged) to my spend account makes sense. Up to this point in my life all dividends in all accounts have been reinvested. Or have I misunderstood the answer to my previous post?

2. Is there anything in the description of my portfolio that raises any red flags or provides any reason for concern?
Again thank you for your thoughtful response.

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Dialectical Investor
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Re: The Three-Fund Portfolio

Post by Dialectical Investor » Mon May 06, 2019 1:52 pm

Basel Hodge wrote:
Mon May 06, 2019 9:37 am
Thank you Taylor & Dialectical Investor for your thoughtful responses to my post. I’ve read the linked material and I think I understand the underlying rationale. It does prompt some follow up questions. First I think some additional information might be in order…
======
I do have a pension which is about 2.5 % the amount of my total current portfolio per year. I’m 61 years old.
My portfolio is allocated generally 65% Stock 35% bond
My portfolio has the following percentages:
IRA 34%
Roth 15%
Joint acct (Non tax advantaged) 39%
Cash 12%
My age based priority plan for withdrawal in retirement:
Before age 70.5
1. Taxable accounts first (joint acct)
2. Traditional IRA second (Taxable)
3. Roth IRA third
After 70.5
1. Traditional IRA first (RMD taxable)
2. Taxable accounts second (joint acct)
3. Roth IRA third

General principles
1. Use Joint taxable account to establish a yearly spend account. This should be an account that pays the highest interest rate possible yet remains liquid. Assets used for expenditures for that year. (Money Market?)
2. Direct dividends from Joint account to Spending account (currently being re-invested).
3. Set aside cash in rebalancing portfolio by reducing stock portion of joint account to meet spending.
=======
The questions:
1. Given the responses regarding dividends in my last post, I want to be certain regarding my plan (general principals section #2) to direct dividends from the joint act. (non taxed advantaged) to my spend account makes sense. Up to this point in my life all dividends in all accounts have been reinvested. Or have I misunderstood the answer to my previous post?

2. Is there anything in the description of my portfolio that raises any red flags or provides any reason for concern?
Again thank you for your thoughtful response.
Yes, I would not reinvest dividends in taxable if you need cash to spend. If you're not sure if you will need the cash, you could turn off auto-reinvest and then evaluate once or twice a year and reinvest manually or re-allocate if you determine you don't need the cash.

Withdrawal strategies can be complicated, as short-term and long-term tax implications need to be evaluated. For instance, you might consider doing Roth IRA conversions. You might also be interested in this Withdrawal Methods page in the Wiki.

You will likely get more (and better) responses if you start a new thread about withdrawal sequencing in retirement in the Personal Investments forum. You'll probably be asked for more info, such as marginal tax rate and spending needs.

Topic Author
Basel Hodge
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[Help with my three-fund portfolio]

Post by Basel Hodge » Tue Nov 05, 2019 2:26 pm

Prologue: This question could easily be in a different area, but since I am using a three fund approach (actually four with tot'l Int'l Bond Index) I feel more comfortable asking my question here.

I'm trying to evaluate and adjust my asset allocation. I use Portfolio Watch to assess this. I know the tool has some dedicated topics related to it and it's deficiencies. My question seems so simplistic...Let's say I determine my AA target to be 60/40.What part of my total investment portfolio do I include in that determination? Let me clarify a bit. In addition to my use of the following four funds (in various IRA, Roth IRA and taxed accounts) ...
60% stock
Vanguard Total Stock Index
Vanguard Total International Stock Index

40% bond
Vanguard Total Bond Market Index
Vanguard Total Int’l Bond Market Index

...I also have a fairly large amount of 'cash' in a money market account. I have been evaluating my allocation with all of the 'cash' excluded from Portfolio Watch and I have met that 60/40 AA target. That leaves the cash which represents about 13% of my total assets totally out of the AA picture.

I feel like I need some clarification on this? Should I be including that cash in my allocation determination?

Actually that cash account started as an "emergency fund" and what I also pay monthly bills from but over time it has just grown. I'm in a transition now as we enter retirement and so now I'm re-evaluating. Maybe we want to buy a trailer? Will we need a new car or perhaps a truck to pull that trailer? How much of that cash might we need if we sell our home and relocate? Questions like this resulted in my doing nothing with that cash in the money market. The asset allocation question about what should be included in that determination is the important part. Sorry for rambling!
Last edited by Basel Hodge on Tue Nov 05, 2019 8:35 pm, edited 2 times in total.

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Re: The Three-Fund Portfolio

Post by LadyGeek » Tue Nov 05, 2019 3:08 pm

^^^ Basel Hodge - I moved your post, replies and your prologue into a new thread. It's much easier help you this way. If you have any further questions, ask them here.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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Taylor Larimore
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Re: [Help with my three-fund portfolio]

Post by Taylor Larimore » Tue Nov 05, 2019 8:36 pm

Basel Hodge:

I will try to answer your question in red:
Basel Hodge wrote:
Tue Nov 05, 2019 2:26 pm
Prologue: This question could easily be in a different area, but since I am using a three fund approach (actually four with tot'l Int'l Bond Index) I feel more comfortable asking my question here.

I'm trying to evaluate and adjust my asset allocation. I use Portfolio Watch to assess this. I know the tool has some dedicated topics related to it and it's deficiencies. My question seems so simplistic...Let's say I determine my AA target to be 60/40.What part of my total investment portfolio do I include in that determination? All of it. Let me clarify a bit. In addition to my use of the following four funds (in various IRA, Roth IRA and taxed accounts) ...
60% stock
Vanguard Total Stock Index
Vanguard Total International Stock Index

40% bond
Vanguard Total Bond Market Index
Vanguard Total Int’l Bond Market Index

...I also have a fairly large amount of 'cash' in a money market account. I have been evaluating my allocation with all of the 'cash' excluded from Portfolio Watch and I have met that 60/40 AA target. That leaves the cash which represents about 13% of my total assets totally out of the AA picture. I think you should include your cash as part of your bond/fixed-income allocation. This allocation is your "safe" money.

I feel like I need some clarification on this? Should I be including that cash in my allocation determination? Yes.

Actually that cash account started as an "emergency fund and what I also pay monthly bills from but over time it has just grown. I'm in a transition now as we enter retirement and so now I'm re-evaluating. Maybe we want to buy a trailer? Will we need a new car or perhaps a truck to pull that trailer? How much of that cash might we need if we sell our home and relocate? Questions like this resulted in my doing nothing with that cash in the money market. The asset allocation question about what should be included in that determination is the important part. Sorry for rambling! You are not "rambling." I think I understand perfectly.
Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Asset allocation is critically important; but cost is critically important, too -- All other factors pale into insignificance."
"Simplicity is the master key to financial success." -- Jack Bogle

Topic Author
Basel Hodge
Posts: 7
Joined: Fri Apr 12, 2019 6:19 pm

Re: [Help with my three-fund portfolio]

Post by Basel Hodge » Mon Nov 11, 2019 6:46 pm

*HERE
Thank you to Taylor for his concise and direct responses to my question above. I did some digging around on the forums regarding the question of including cash in ones asset allocation. I’ve read this Do you include cash in your assets and this Asset Allocation-Cash Positions and it seems there are several ways of looking at the question.

Clearly my adopting the three (or four) fund approach speaks to my appreciation for keeping things simple when possible. However, since I am at a true point of transition in my life as my wife and I prepare to move into full retirement in the next 5 or 6 months I now feel compelled to provide a more comprehensive view of my financial situation. I am including portfolio information, additional important financial information and several questions related to the withdrawal phase of our financial life. I’ve tried to use the recommended “template for investment help” but do have some brief interjections for clarity. I wish to point out that with my pension and my Social Security, I will likely require no more than 2% yearly from my portfolio to meet our somewhat Spartan lifestyle needs. I will phase that in and adjust as I get some retirement experience.

Pension I do have a pension that represents about 2.2% of my assets (yearly total before taxes)

Emergency funds: Yes 2.6%

Debt: No

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 4.25% State

State of Residence: Michigan

Age: Self 61 Spouse 55

Desired Asset allocation: 60% stocks / 40% bonds
Desired international allocation 40% of stocks / 30% of bonds

Note- I have more to say about Allocation. Many of my questions below relate in one way or another to determining allocation and /or evaluating allocation for sake of rebalancing

Please provide a hint as to the size of your current total portfolio:
Hint- Lower 7 figures.
Investment details follow•See spreadsheet link below current retirement assets
Show us your current portfolio including all investment and retirement accounts (yourself and spouse). Also include the available funds in your employer provided retirement plans.
Show each fund or holding as a percentage of the entire portfolio

Current retirement assets
Link to spreadsheet

Taxable
xx% cash (for investing – do not include emergency funds)
Note – A portion of the 9.9% in Fidelity Money Market (SPAXX) can be used as required to to modify the portfolio allocation. I’m also comfortable leaving it in the Money Market for the time being as our transition to retirement has many unanswered questions as I allude to in my opening comments.

Contributions

New annual Contributions
I am currently retired – one more year of max Roth IRA contribution for 2019.

Funds available in her Simple IRA Spouse will retire end of April 2020. Simple IRA contributions (American Funds American Balanced Fund) will cease at that point and all assets in that fund will be available for rollover to Vanguard. Between now and the end of April the American Funds American Balanced Account in the above spreadsheet will increase to 2.14% of assets (65% stock, 35% bond)

Questions:

Generally I welcome any thoughts or recommendations relative to my portfolio that seems appropriate to my transition from work life to retirement. I appreciate the “KISS” (keep it simple stupid) approach for all of the obvious reasons.

1. Given the importance of asset allocation, I need to seek confirmation that my general 60/40 approach seems appropriate.
Note – my father taught me to be a good saver but he always instructed me to avoid bonds in this economy because as interest rates inevitably will rise the value of bonds will be inversely proportional. Hence, his portfolio was always in Equities. I trusted my father in most aspects of life and his advice in all other areas of life was always good! However my readings in this one area of financial life goes against that advice and the conventional wisdom of the financial experts convinced me to include bonds in my portfolio. Furthermore, I had a recent meeting with a financial consultant from Personal Capital who suggested I was too heavily weighted in bonds (especially international bonds) as well as too heavily weighted in international verses domestic stock. He also recommended a portion of my portfolio should be in Alternatives. Now, to be clear I am not paying anyone to do the investing for me (especially factoring the cost). Though a free consultation gives me some additional ‘food for thought’ and as such I am including that information here to flush out my overall struggle with nailing down my desired asset allocation. Again I welcome thoughts and recommendations but favor the simple approach.

2. Allocation - what is appropriate for me and how do I include cash? Taylor suggested above to include it as part of my bond portion of the 60/40 portfolio. I’m placing the question here again because I may not have asked the question with enough detail. So Asset allocation is very important and rebalancing at regular intervals to adjust back to your desired allocation is also very important. That means I need to understand how the various tools consider cash when they provide a view of your allocation. I notice they often provide a “cash reserves” component and that totally upsets my 60/40 stock to bond view. If I understand Taylor's suggestion & I have a money market account holding 10% of portfolio in cash (separate from emergency funds) I could view that as 60 stock/30 bonds/and 10 cash reserves or for sake of simplicity just refer to that generally as a 60/40 spilt. Have I got that right?

3. What is the best tool to determine allocation? Different tools show different percentages. I have been using the following tools…Portfolio watch (Vanguard), X-ray (Morningstar), Personal Capital tools. I was originally going to provide screen shots of the various results I get from each of these tools depending on how they view cash or money market parts of your portfolio. It makes it difficult to adjust the portfolio when the depiction of the allocation is inconsistent.

4. Using Morningstar X-ray, I noticed I have a lot of what they refer to as “stock intersection” which as I understand it is common stock that I own also exists as part of the indexed funds. Apparently, it has the effect of over weighting certain investment sectors (example-technology). My plan was to sell of the common stock in my rollover IRA and contribute those assets as appropriate into the four Vanguard Indexed pillar accounts I already own to meet the needs of my asset allocation. Have I got that correct? Am I also correct that there is no immediate tax consequence of doing this? Is there a long-term consequence I need to consider?

I know I’ve thrown a lot out there. I really appreciate those folks who keep this site a viable source of information for folks like me who are not financial professionals yet enjoy learning and taking control of their personal financial decisions. Thank you.
Last edited by Basel Hodge on Tue Nov 12, 2019 3:47 pm, edited 3 times in total.

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Wiggums
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Re: The Three-Fund Portfolio

Post by Wiggums » Mon Nov 11, 2019 7:26 pm

Dialectical Investor wrote:
Sat May 04, 2019 9:15 pm
Basel Hodge wrote:
Sat May 04, 2019 8:52 pm
Greetings to all! This is my first post.

My wife and I are about to retire and I find myself struggling with the shift from the collection phase of life to the withdrawal phase. I have generally followed the ‘Three Fund Portfolio’ model (although mine is really four fund with the addition of the International Bond Index).
My questions relate to fixed income investing:

1. Does the 3 fund model provide accessible dividends such that one can avoid adding a specific component to the portfolio to create dividends? I wonder if adding extra investment components goes counter to the simplicity and comprehensive nature of the 3 of 4 fund portfolio concept.

2. Considering emergency money or cash on the sidelines, are there common investment products that maintain some level of liquidity but have higher yield or greater interest rate than say a money market for example?

In general I think the questions above seek to elucidate how the Three Fund Portfolio serves to provide income and not just growth & stability (hopefully) in retirement?

I can add some specific detail if needed. I appreciate suggestions!
Welcome.

Re: 1), the three-fund portfolio does not provide for this, nor should any portfolio, because it is not necessary. If you need cash, sell some shares. If this sounds wrong to you, you are not alone. You can use the search bar in the upper-right corner to search for "dividends" and find many threads about this. The focus should not be on income but rather on total return.

Re: 2), there are higher-yielding liquid options, but they entail risk of some other sort. So you can take on more term risk (interest-rate risk) by investing in securities with longer durations, or you can take on more credit risk--think chance of default. Assuming you don't want much of either risk, and depending on how you frame "liquidity" and on current market rates, you might find a money market mutual fund, bank money market, direct bank CD, high-yield savings account, short-term bond fund, etc. provides what you are loooking for.
+1

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Wiggums
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Re: [Help with my three-fund portfolio]

Post by Wiggums » Mon Nov 11, 2019 7:34 pm

I include cash in my allocation.

An AA of 60/40 is reasonable. I am following the three fund portfolio and I do not have individual stocks. You selected good stocks, but they are also in the index as well.

Congratulations on your retirement.

Topic Author
Basel Hodge
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Joined: Fri Apr 12, 2019 6:19 pm

Re: [Help with my three-fund portfolio]

Post by Basel Hodge » Tue Nov 12, 2019 11:44 am

Wiggums wrote:
Mon Nov 11, 2019 7:34 pm
I include cash in my allocation.

An AA of 60/40 is reasonable. I am following the three fund portfolio and I do not have individual stocks. You selected good stocks, but they are also in the index as well.

Congratulations on your retirement.
Thank you Wiggums. The thought feels a bit scary really. You say you include cash in allocation. As part of the bond %?

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Taylor Larimore
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Mixing cash and bonds for fixed-income?

Post by Taylor Larimore » Tue Nov 12, 2019 12:35 pm

Basel Hodge wrote:
Tue Nov 12, 2019 11:44 am
Wiggums wrote:
Mon Nov 11, 2019 7:34 pm
I include cash in my allocation.

An AA of 60/40 is reasonable. I am following the three fund portfolio and I do not have individual stocks. You selected good stocks, but they are also in the index as well.

Congratulations on your retirement.
Thank you Wiggums. The thought feels a bit scary really. You say you include cash in allocation. As part of the bond %?
Basel Hodge:

Cash AND bonds are primarily for safety in a portfolio. Stocks are for higher return. For simplicity, I feel it is reasonable to include both cash and bonds in the fixed-income part of your asset-allocation.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objectives, your time horizon, your level of comfort with risk, and your financial resources."
"Simplicity is the master key to financial success." -- Jack Bogle

Topic Author
Basel Hodge
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Joined: Fri Apr 12, 2019 6:19 pm

Re: [Help with my three-fund portfolio]

Post by Basel Hodge » Fri Nov 15, 2019 12:18 pm

I really appreciate the input I've received thus far. I wonder if I can get some thoughts relative to questions 3 and 4, especially as it relates to possible "stock intersection".
• When does intersection become a concern such that selling the common stock and reallocating it to one of the three Index funds is advisable?
• Any thoughts on the accuracy of tools for analyzing the portfolio?

BTW... Taylor Larimore, I have the newest copy of your book, "The Bogleheads Guide to the Three Fund Portfolio" and find it terrific. It has really helped me to take control of my investments.

Best Regards,
~Basel

Topic Author
Basel Hodge
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Joined: Fri Apr 12, 2019 6:19 pm

Re: [Help with my three-fund portfolio]

Post by Basel Hodge » Sun Nov 17, 2019 8:45 pm

Bump.
To clarify. I understand what stock intersection is, basically overlap between segments of your portfolio. What I need some help with is how to evaluate the results of stock intersection as exposed using Morningstar X-ray tool. How does one determine 'over exposure' in a particular sector or with a specific stock? Thank you.

dbr
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Re: [Help with my three-fund portfolio]

Post by dbr » Sun Nov 17, 2019 10:13 pm

Regarding asset allocation, unless your plan involves an explicit attempt to tilt to some asset class or to practice factor investing, all you really need to define is the ratio between stocks and bonds. And you can do that by just holding a total market stock fund and whatever bonds you want. You don't need an analyzer to figure that out and you won't own any stock funds that have short term reserves as complicating factors. No one agrees on an appropriate portion of stocks to invest in international. This forum is adamant that the right number is any choice between 0% and 50% and might not be intolerant of someone who wanted more. A simple solution to that is 25% of stocks in international.

As to cash there is no fundamental allocation reason to have a cash asset class. It is just part of fixed income (which is neither fixed nor income). An individual may have a reason to hold some money or other as what is effectively cash. But if you are that person you know who you are.

For stock intersection a simple fix is to not own any individual stocks and forget about it. I gather that is your plan anyway.

If you want to get more "sophisticated" you can try figuring out the estimated return and standard deviation of return of your whole portfolio and see if your allocation to stocks and bonds suits your ideas of what that means. Portfolio Visualizer does a lot of that stuff. It will also compute factor loadings if you want that.

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