Opinons on changing asset allocation based on time Horizon

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gavinsiu
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Opinons on changing asset allocation based on time Horizon

Post by gavinsiu »

I have been dutifully saving for retirement since my 20's and using what is essentially a portfolio of index fund consisting of 75% Total Stock market and 30% total international. I also get matching employer stock for while and have converted them occassionally to the portfolio. The plan seems to be doing ok and I seemed to be on track. I was pretty comfortable with a 100% stock portfolio.

Now I am in my mid 50's and retirement is actually within visible site. I figure I would retire in 10-15 years. The goal is to transform a 100% stock to 60/40 Stock/bond. I have already converted some stocks into bond positions. What is your opinion of an optimal glide path. For people further ahead, when did you start shifting your asset allocation?
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bertilak
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Re: Opinons on changing asset allocation based on time Horizon

Post by bertilak »

Pick a date where you want to be at some AA (say 60/40) and simply do a linear interpolation.

If this is a tax-advantaged account (e.g., IRA), no sweat -- just sell and buy to your heart's content.

If in a taxable account, try to take advantages of market moves to sell in a way to minimize taxes. This could be an
irregular, transition.

Always think long term. Don't worry if you drift off of your plan at times, just keep your eye on the target. No need to be rigidly precise.
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vineviz
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Re: Opinons on changing asset allocation based on time Horizon

Post by vineviz »

gavinsiu wrote: Thu Sep 22, 2022 1:36 pm I have been dutifully saving for retirement since my 20's and using what is essentially a portfolio of index fund consisting of 75% Total Stock market and 30% total international. I also get matching employer stock for while and have converted them occassionally to the portfolio. The plan seems to be doing ok and I seemed to be on track. I was pretty comfortable with a 100% stock portfolio.

Now I am in my mid 50's and retirement is actually within visible site. I figure I would retire in 10-15 years. The goal is to transform a 100% stock to 60/40 Stock/bond. I have already converted some stocks into bond positions. What is your opinion of an optimal glide path. For people further ahead, when did you start shifting your asset allocation?
The "optimal glide path" depends on a number of factors, some of which you've outlined.

If you estimate the net present value of your future retirement savings contributions, your total equity allocation should be about 60% of that number plus the current value of your portfolio.

So, if you're expecting 10 years of $15k contributions the NPV of that is about $130k. If your current portfolio is $600k, then you should have [.6 x (130+600)] = $438k in stocks and $162k in bonds. I'm rounding these numbers.

Depending on where you are with accumulated savings and your savings rates, my guess is that if you're close to age 55 then your glide path should be currently near 75% stocks and 25% bonds and moving towards 60/40 pretty much in a linear fashion.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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galawdawg
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Re: Opinons on changing asset allocation based on time Horizon

Post by galawdawg »

bertilak wrote: Thu Sep 22, 2022 1:46 pm Pick a date where you want to be at some AA (say 60/40) and simply do a linear interpolation.

If this is a tax-advantaged account (e.g., IRA), no sweat -- just sell and buy to your heart's content.

If in a taxable account, try to take advantages of market moves to sell in a way to minimize taxes. This could be an
irregular, transition.

Always think long term. Don't worry if you drift off of your plan at times, just keep your eye on the target. No need to be rigidly precise.
Agree. You can also avoid tax issues in your taxable account by adjusting future contributions to direct to a bond index fund instead of a stock fund as well as stopping any automatic reinvestment of dividends from your stock funds and instead manually reinvest those into a bond fund.
Topic Author
gavinsiu
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Re: Opinons on changing asset allocation based on time Horizon

Post by gavinsiu »

bertilak wrote: Thu Sep 22, 2022 1:46 pm Pick a date where you want to be at some AA (say 60/40) and simply do a linear interpolation.

If this is a tax-advantaged account (e.g., IRA), no sweat -- just sell and buy to your heart's content.

If in a taxable account, try to take advantages of market moves to sell in a way to minimize taxes. This could be an
irregular, transition.

Always think long term. Don't worry if you drift off of your plan at times, just keep your eye on the target. No need to be rigidly precise.
Thanks, all of my retirement are in tax deferred accounts. The linear interpolation is a good idea.

I have always thought of things long term. Whenever my portfolio dropped, I have shrugged because the time horizon was decades away. Back in 2008, when the portfolio dropped by like 36% or so, I was less concern that my portfolio was down but more that Vanguard was going to kick me out of Admiral share class If it dropped further. However, I have to recognize that my portfolio has grown to a point where my contribution has a lesser effect and that I might have the time to recover. This is a new feeling and concern for me, who did not have this concern previously.
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gavinsiu
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Re: Opinons on changing asset allocation based on time Horizon

Post by gavinsiu »

vineviz wrote: Thu Sep 22, 2022 1:57 pm
The "optimal glide path" depends on a number of factors, some of which you've outlined.

If you estimate the net present value of your future retirement savings contributions, your total equity allocation should be about 60% of that number plus the current value of your portfolio.

So, if you're expecting 10 years of $15k contributions the NPV of that is about $130k. If your current portfolio is $600k, then you should have [.6 x (130+600)] = $438k in stocks and $162k in bonds. I'm rounding these numbers.

Depending on where you are with accumulated savings and your savings rates, my guess is that if you're close to age 55 then your glide path should be currently near 75% stocks and 25% bonds and moving towards 60/40 pretty much in a linear fashion.
Thanks, 75% stock is pretty close to what I have right now, so perhaps i am on the right track. I have to re-evaulate how far I am in my goals. The last check was like 5 years ago, but is due for another review.
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