Asset Allocation change help

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Posts: 72
Joined: Fri Feb 03, 2023 8:36 pm

Asset Allocation change help

Post by JayRod »

I posted a question earlier about how to invest cash at a higher rate than my mortgage. viewtopic.php?t=396826

It was enlightening to say the least, but also showed me I may need to think about this differently so I'm going to lay out the whole asset allocation situation here and see what you guys think. (I will NOT be paying off the mortgage so let's just ignore any suggestions of talking me into that)

The context is that I have been permanently disabled for 13 years. We had a baby a year ago and my wife has not gone back to work. She planned to by the time he was three but is leaning more and more to waiting much longer. I totally support this but it changes our monthly cash flow dramatically as her whole pay check was basically savings. Now we're down to saving just about $200 per month instead of $2500 per month. With such lower income I feel I need to lower my risk tolerance in my asset allocation.

Here's what we have...

Emergency funds: 6 Months

Debt: 30 year fixed rate mortgage at 3.125%. 28 years left, 192k principle left. (FWIW 200k equity in home currently)

Tax Filing Status: Married Filing Jointly

Tax Rate:12%

State of Residence: FL

Age: 40

Current Asset allocation: 80/20

Portfolio Size: 500k

30% 150k VTSAX Vanguard Total Stock Market
20% 100k VFRIX Vanguard Short-Term Treasury

My Roth IRA:
25% 125k VTSAX Vanguard Total Stock Market

Her Roth IRA:
25% 125k VTSAX Vanguard Total Stock Market

With income so low now contributions will not be available, just rebalancing.

Questions: In my previous post I said I wanted to put about 200k in a 5% one year CD, then hope rates are still high in a year and do it again. This would essentially give me 833 dollars more per month income (realized at maturity) and make my mortgage payments for me. The spread between a 3% mortgage and a 5% CD is appealing. I still may do this.

However, when looking at it from a total asset allocation perspective, this may be too conservative. The CD, or equivalent, will not keep pace with inflation in terms of real rates, so others have suggested just putting 100k in the CD and keeping the other 100k in equities. The 100k cd would give me nearly 10 years of mortgage payments if rates stay around these levels. The 100k kept in equities should hopefully have done better than 5% over that time. Having the freedom for my wife to not work for another 10 years would be ideal.

I wouldn't want to consider the 100k CD as part of my investment portfolio anymore though because if rates went back down to 0%, I'd probably "recast" the mortgage by 100k to cut the payment in half. So, this allocation would be more of a "special situation" due to the current low income and no longer something to be rebalanced with the retirement portfolio.

This would change the total portfolio size to 400k allocated as follows.

Portfolio Size: 400k

17.5% 70k VTSAX Vanguard Total Stock Market
20% 80k VFRIX Vanguard Short-Term Treasury

My Roth IRA:
31.25% 125k VTSAX Vanguard Total Stock Market

Her Roth IRA:
31.25% 125k VTSAX Vanguard Total Stock Market

Sales from my taxable account to fund the CD would be tax free due to my low income making my Long Term taxable rate 0%. This is where I'm leaning for now. Any insight would be appreciated.
Rocky Mtn Man
Posts: 139
Joined: Mon Apr 25, 2022 1:58 pm

Re: Asset Allocation change help

Post by Rocky Mtn Man »

A recent bear market example that happened in our lifetime:

Between Oct 9th, 2007 and March 9th 2009 the market fell 56.8%.

Can you stomach your $100,000 equity position turning into $44,000 between market open today and July 2024? How many mortgage payments evaporated versus a CD?

"Everyone has a plan until they get punched in the mouth" -- Mike Tyson
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