Aggressive asset allocation as a temporary measure [Spain]

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hopper8
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Joined: Sat Aug 09, 2014 9:48 am

Aggressive asset allocation as a temporary measure [Spain]

Post by hopper8 »

I’m new at investing, but I’ve been reading quite a lot about it. Two key lessons I learn from these readings: 1) The need diversify your portfolio across different types of securities, sectors, size of companies and various markets in order to reduce my portfolio’s volatility; 2) Adopt a buy and hold strategy, without being tempted to time the market; 3) The need to invest primarily on core holdings that could be reliable year in and year out.

Still, given my circumstances, I’m thinking of having – as a temporary measure - a more aggressive asset allocation and would like your feedback about it.
First, my circumstances: From the sell of an apartment I owned, I have 500k dollars and I expect to inherit another 200k from my parents, probably in not a long-distance future (they’re both 90 years old) . I work as an independent free-lance consultant, so don’t have a steady monthly income, but because of particular circumstances, in the last couple of years I had a yearly shortfall of around 40k USD. So a major goal of my investment would be complementing my income, At the same time, my income might change because I’m exploring the possibility of changing my professional work and start a business, which of course I don’t know how it will go. At the same time, I’m 50 years old and would like to retire in around 13-15 years, so a second financial goal would be capital growth.

I realize that whatever type of investment I make, my financial situation is not sustainable in the long term unless I start earning more money. But my question is, given these special circumstances – quite a lot of cash but not sufficient to live from it in the long term future, and little current income, with uncertainty on this regard due to my change of job – what would you recommend in terms of asset allocation.

This is what I'm thinking of doing. Out of the 500k I currently have, I invest 350k (leaving 150 for emergency and income and – if my new business starts giving me income, some for future investment), in dollar cost averaging over 6 months (to reduce market risk) making the following portfolio:

1. conservative bond fund - 15%
2. 2 multisector bond funds - 15%
3. US large blend fund - 15%
4. European large blend fund 15%
5. Asia fund - 14%
6. Worldwide emerging market - 13%
7. US Small caps – 13%

Since I understand that products 5-7 have generally more volatility, if after a year one of them goes significantly up, I could sell all or part of and use it as additional income. If all of them go down (even considerably) I could keep them and use my cash money (and the little I get from the bonds) until one of those volatile funds go up. Meanwhile, if I’m able to start generating income from my business, I could rebalance my portfolio to be less risky.
What do you think about this strategy? If you think is too risky, what would you instead, taking into account my financial situation?

Thank you,

Hopper
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LadyGeek
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Re: Aggressive asset allocation as a temporary measure

Post by LadyGeek »

Welcome! With your statement of "40k USD", are you located inside the US or from another country?

Asset allocation is determined by your Ability, willingness, and need to accept risk.

The Bogleheads' approach is to invest in the entire market using low cost funds. A portfolio would consist of a total stock (US), total international (ex-US), and bond funds. You adjust your level of risk by varying those percentages. There's nothing wrong with going aggressive and then reducing your risk later.

We can recommend specific funds, but it depends on your country. Taxation can have a large impact. For example: EU investing (I don't know if this applies to you)
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hopper8
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Re: Aggressive asset allocation as a temporary measure

Post by hopper8 »

Thank you for the quick response. Yes, I'm based outside of the US, specifically in Spain. So I'd appreciate any input you may have about tax-efficiency products for Spain.
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LadyGeek
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Re: Aggressive asset allocation as a temporary measure [Spai

Post by LadyGeek »

You're welcome. The wiki article I referenced does apply: EU investing

In addition to taxation, currency differences (currency risk), and the distribution of dividends can impact your decisions. Details are in the wiki article.

I am sorry, but I don't have the experience to recommend funds to you. I have retitled your thread to indicate Spain, which will attract the attention of our EU experts.

To your point of inheritance, we often recommend to not include inheritance as a planned investment. There are many things that can go wrong, meaning that the money may be needed by your parents - nothing is left to you.
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.
Valuethinker
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Re: Aggressive asset allocation as a temporary measure

Post by Valuethinker »

hopper8 wrote:Thank you for the quick response. Yes, I'm based outside of the US, specifically in Spain. So I'd appreciate any input you may have about tax-efficiency products for Spain.
You are probably looking at funds listed in Dublin or Luxembourg. However I don't know Spanish tax laws. There are a number of ETFs. Does Spain have tax protected retirement accounts?

Your biggest problem is your proposed portfolio could halve in value virtually overnight. See 2008-09 (about -35%). Or any other bear market.

In your shoes I would aim for conservatism, not aggressiveness. You have to cut your personal costs to match your income and/or raise your income. Trying to do that latter via your stock portfolio is a recipe for disaster.

Until you've got that back in balance I don't think you can afford to take large risks with your portfolio.
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nedsaid
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Re: Aggressive asset allocation as a temporary measure [Spai

Post by nedsaid »

First, get over the thoughts that you "need" a certain rate of return on your investments. The markets will return what they will return and don't care at all about your needs and your own personal financial situation. What you have to do is to invest in the most rational way that you can. If you have a shortfall in your income, ramping up the risk in your portfolio is not going to solve the problem. Markets have a way of doing the wrong thing at precisely the wrong time, Murphy's law and all of that. Invest your portfolio in the manner you normally would and find another solution to your shortfalls in income. In my opinion, you are inviting disaster.
A fool and his money are good for business.
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hopper8
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Re: Aggressive asset allocation as a temporary measure [Spai

Post by hopper8 »

Thanks so much for all your comments. I’ll seriously consider what you said about the risks of being too aggressive in my investments, given my circumstances.

Thanks also LadyGeek for sending me the reference about the EU Wiki. I’ve read it and actually have a few follow-up questions, but since they are related to tax-efficiency products for a Spanish resident rather than type of asset allocation, I’ll open another thread for those questions.

Hopper
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LadyGeek
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Re: Aggressive asset allocation as a temporary measure [Spai

Post by LadyGeek »

If your questions relate to your personal situation (as stated in your first post), I recommend you ask the question here - or link back to this thread. It is easier to supply an answer when we can view all of your information in one location.

As an alternative, you can change the title of the thread by editing the "Subject:" line in Post #1. For example, "Portfolio help for Spanish Resident" will address all of your questions.

(I wanted to offer you this choice.)
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