Goal & Age Based Asset Allocation

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FIREyourself
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Goal & Age Based Asset Allocation

Post by FIREyourself »

What does the forum think about an AA model based on portfolio size and age where bond allocation increases as portfolio size and age increase? I didn't see a past thread with a model exactly like this.

The formula would simply be (portfolio size / goal) * age = bond allocation. So:

25 y/o investor with 5x expenses saved and goal of 25x would be 5% bonds
40 y/o investor with 12.5x saved and goal of 25x would be 20% bonds
60 y/o investor with 37.5x saved and goal of 25x would be 90% bonds

This seems like a better glide path for an investor seeking to minimize risk as age and nest egg increase. I wanted to see if there are any pitfalls I'm missing before implementing this strategy. Your insight is appreciated!
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Re: Goal & Age Based Asset Allocation

Post by livesoft »

[OT comment removed by admin LadyGeek] I don't see a reason to have more than 40% bonds no matter what one's age and goals are.
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Re: Goal & Age Based Asset Allocation

Post by Beensabu »

Or to put it another way... an older investor with a larger nest egg would arguably end up with too little risk. However, this would self-correct into a reverse glide path as the portfolio was drawn down.

The real issue is that an older investor with a smaller nest egg would arguably end up with too much risk, which could result in an even smaller nest egg later on. This would be self-defeating.
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Re: Goal & Age Based Asset Allocation

Post by ososnilknarf »

I've seen others here who have an AA based on the progress towards their goals, but I've never seen one that goes to such a low bond allocation.
I think there is some sense to this type of approach, if you are far from your goal, you need to take more risk to get there, but if you are closer, you can achieve it while taking less risk. But as others have suggested, I would probably also want to maintain a more reasonable bond allocation (as in don't allow it to grow to such a large percentage).
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Re: Goal & Age Based Asset Allocation

Post by absolute zero »

You are trying to create a formula which produces optimal asset allocations based on future age and portfolio size combination, for every possible future scenario. This is unrealistic, IMO. Just follow the asset allocation of a target date fund, and make tweaks to that based upon your personal need, willingness, and ability to take risk.

I can imagine a conversation with your spouse 20 years from now.

Spouse: "The market is crashing. All my friends are talking about it. Some are saying that they are pulling their money out of the stock market. What should we do? Do we have the right amount in stocks? I've never thought about this until now."
OP: "Don't worry, we will stick with the plan. It's based on the output of a formula that takes into account our age and portfolio size."
Spouse: "Okay, I guess that makes me feel better. Is this a well known formula? Can you tell me what it's called so I can read about it online? Did a financial advisor tell you about it?"
OP: "No I made it up 20 years ago."
Spouse: ......
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Re: Goal & Age Based Asset Allocation

Post by GoneOnTilt »

livesoft wrote: Wed Mar 24, 2021 11:21 am [OT comment removed by admin LadyGeek] I don't see a reason to have more than 40% bonds no matter what one's age and goals are.
Perhaps a modest investor might sell at the bottom if they see 30% of their savings wiped out in a 50% stock market crash. That's a reason. Not everyone has the stomach for that. I don't. I can't be alone.
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Re: Goal & Age Based Asset Allocation

Post by 1789 »

How did you come up with this formula?
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Re: Goal & Age Based Asset Allocation

Post by FIREyourself »

1789 wrote: Wed Mar 24, 2021 1:36 pm How did you come up with this formula?
I wanted to improve the age-based model in ways that seem logical to me: very risky portfolio when young (more so than age in bonds), very safe portfolio when old (or rich), and allows me to increase equity exposure somewhat during a downturn.

I also wanted an objective approach to AA that hopefully works for life so I don't have to re-evaluate risk tolerance.
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

FIREyourself wrote: Wed Mar 24, 2021 10:54 am What does the forum think about an AA model based on portfolio size and age where bond allocation increases as portfolio size and age increase? I didn't see a past thread with a model exactly like this.

The formula would simply be (portfolio size / goal) * age = bond allocation. So:

25 y/o investor with 5x expenses saved and goal of 25x would be 5% bonds
40 y/o investor with 12.5x saved and goal of 25x would be 20% bonds
60 y/o investor with 37.5x saved and goal of 25x would be 90% bonds

This seems like a better glide path for an investor seeking to minimize risk as age and nest egg increase. I wanted to see if there are any pitfalls I'm missing before implementing this strategy. Your insight is appreciated!
Well, I'm 51 with 40x saved and 40% bonds.

So according to this formula, my AA is wrong?

Am I supposed to be 90% bonds because I'm >37.5x?

Or lower bonds because I'm younger?

So confused.
Last edited by watchnerd on Wed Mar 24, 2021 2:30 pm, edited 1 time in total.
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Re: Goal & Age Based Asset Allocation

Post by invest2bfree »

Better approach is -

Bonds = (Age -40)*2
20 year old 0% bonds
50 year old 20% bonds
65 year old 50% bonds.
60% VT, 40% BND.
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Re: Goal & Age Based Asset Allocation

Post by Robot Monster »

livesoft wrote: Wed Mar 24, 2021 11:21 am [OT comment removed by admin LadyGeek] I don't see a reason to have more than 40% bonds no matter what one's age and goals are.
In Jason Zweig's book Safe Money, he puts forth three commandments for "guidance on how to add stocks safely to your portfolio." The first commandment is: Thou shalt take no risk that thou needst not take. With this in mind, if you have a large enough portfolio, isn't there an argument to be made for 100% TIPS? (With nominal bonds you'd have to worry about hyperinflation, I guess.) Why take stock risk that thou needst not take, I darest ask? Well, the answer might be diversification, so you're not solely relying on the US government, but perhaps that still means a lot less than 60% stocks. Perhaps just 25%.

Personally speaking, not counting what I have in cash, my portfolio (88x expenses) is approximately:

27% equities
64% TIPS (both fund and individual at various durations)
9% intermediate treasury fund
Last edited by Robot Monster on Sun Jun 13, 2021 8:38 pm, edited 1 time in total.
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

Robot Monster wrote: Wed Mar 24, 2021 2:29 pm
livesoft wrote: Wed Mar 24, 2021 11:21 am [OT comment removed by admin LadyGeek] I don't see a reason to have more than 40% bonds no matter what one's age and goals are.
I'm Jason Zweig's book Safe Money, he puts forth three commandments for "guidance on how to add stocks safely to your portfolio." The first commandment is: Thou shalt take no risk that thou needst not take. With this in mind, if you have a large enough portfolio, isn't there an argument to be made for 100% TIPS? (With nominal bonds you'd have to worry about hyperinflation, I guess.) Why take stock risk that thou needst not take, I darest ask? Well, the answer might be diversification, so you're not solely relying on the US government, but perhaps that still means a lot less than 60% stocks. Perhaps just 25%.

Personally speaking, not counting what I have in cash, my portfolio (88x expenses) is approximately:

27% equities
64% TIPS (both fund and individual at various durations)
9% intermediate treasury fund
I have a fair amount of TIPS, both in my risk portfolio and in my LMP ladder.

But I'd never go 100% TIPS.

There is more to personal inflation than what CPI calculates.
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Re: Goal & Age Based Asset Allocation

Post by Robot Monster »

watchnerd wrote: Wed Mar 24, 2021 2:32 pm But I'd never go 100% TIPS.

There is more to personal inflation than what CPI calculates.
Yes, good point. How much would you expect personal inflation to deviate from CPI, would you guesstimate?
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

Robot Monster wrote: Wed Mar 24, 2021 2:41 pm
watchnerd wrote: Wed Mar 24, 2021 2:32 pm But I'd never go 100% TIPS.

There is more to personal inflation than what CPI calculates.
Yes, good point. How much would you expect personal inflation to deviate from CPI, would you guesstimate?
Not being retired yet, I have no idea.

If we end up retiring to Hawaii, as is one of the options under discussion, I could see it going up a fair bit.
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Re: Goal & Age Based Asset Allocation

Post by H-Town »

FIREyourself wrote: Wed Mar 24, 2021 10:54 am What does the forum think about an AA model based on portfolio size and age where bond allocation increases as portfolio size and age increase? I didn't see a past thread with a model exactly like this.

The formula would simply be (portfolio size / goal) * age = bond allocation. So:

25 y/o investor with 5x expenses saved and goal of 25x would be 5% bonds
40 y/o investor with 12.5x saved and goal of 25x would be 20% bonds
60 y/o investor with 37.5x saved and goal of 25x would be 90% bonds

This seems like a better glide path for an investor seeking to minimize risk as age and nest egg increase. I wanted to see if there are any pitfalls I'm missing before implementing this strategy. Your insight is appreciated!
I don't agree with this glide path model. There are several pitfalls:
1) If your goal is to minimize risk, you should not invest in stocks.
2) If one has huge portfolio (>30x expense), why should they need to minimize risk? What if they care more about maximizing wealth? If one is rich enough, investing in bonds is very inefficient.
3) If you're a 25 year old and an inexperienced investor, you should not invest heavily in stocks. You'd sell low and buy high.

So what model should one stick with? It depends on you. And if you don't know, then stick to Target Date fund or LifeCycle funds. You can't change your AA so it'll work out in the end. I promise.
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Re: Goal & Age Based Asset Allocation

Post by FIREyourself »

watchnerd wrote: Wed Mar 24, 2021 2:27 pm So according to this formula, my AA is wrong?
Your AA would be spot on if your portfolio goal is 50x expenses (40/50 * 51 = 41% bonds).

The point of this model is to factor in portfolio size relative to your goal as well as age. It would probably be most appropriate for people not interested in leaving a huge legacy.
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

FIREyourself wrote: Wed Mar 24, 2021 2:59 pm
watchnerd wrote: Wed Mar 24, 2021 2:27 pm So according to this formula, my AA is wrong?
Your AA would be spot on if your portfolio goal is 50x expenses (40/50 * 51 = 41% bonds).

The point of this model is to factor in portfolio size relative to your goal as well as age. It would probably be most appropriate for people not interested in leaving a huge legacy.
Where does that formula come from?
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Re: Goal & Age Based Asset Allocation

Post by HootingSloth »

For what it is worth, I have been using a goal based asset allocation, which works for my personal situation. Early on, I started at 80/20. Once I reached halfway to my comfortable-but-not-all-wants goals, I began slowly gliding towards 60/40. If I get to that goal and retirement does not seem to be in sight, I will probably glide back up in the direction of 80/20.

Just to have something precise/automated in my spreadsheet, I use the following formula:
percent in bonds = 0.4-0.2*ABS(LOG(portfolio/goal,2))
I do not try to take my age into account directly. I know that I will, in practice, be revisiting this glide path periodically--e.g., every year or so--to see if it still makes sense for my current circumstances. If I feel that a change is needed, I would pick a new glide path that starts at the same point but gradually steers in the direction that I want to go. I think it is important to try to follow an objective rule on short time scales to prevent behavioral mistakes. But I recognize that it can be very difficult to pick a rule that will never need to be changed given the vagaries of life. For that reason, I do not feel a need to take my age into account explicitly.
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Re: Goal & Age Based Asset Allocation

Post by Beensabu »

FIREyourself wrote: The point of this model is to factor in portfolio size relative to your goal as well as age. It would probably be most appropriate for people not interested in leaving a huge legacy.
I think you're onto something there (the bolded part).

How about looking at portfolio size relative to goal, disregarding age, and instituting caps both ways?

Say a 75/25 - 25/75 range, increase bond allocation by 5% every time you get another 1/5 of the way towards your goal.

So accumulators start off at 75/25. When one reaches their goal, they are at 50/50. Once one reaches double their goal, they are at 25/75.

We can come up with all sorts of formulas. I like this one ^ because it takes a much older "rule" into account + it is unlikely to upset anyone other than the 100% crowd.
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

Beensabu wrote: Wed Mar 24, 2021 4:47 pm
FIREyourself wrote: The point of this model is to factor in portfolio size relative to your goal as well as age. It would probably be most appropriate for people not interested in leaving a huge legacy.
I think you're onto something there (the bolded part).
Isn't that the whole point of a bond tent?

Large portfolio size + SOR = reduced need for risk / diminishing reward vs downside
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Re: Goal & Age Based Asset Allocation

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FIREyourself wrote: Wed Mar 24, 2021 10:54 am What does the forum think about an AA model based on portfolio size and age where bond allocation increases as portfolio size and age increase? I didn't see a past thread with a model exactly like this.

The formula would simply be (portfolio size / goal) * age = bond allocation. So:

25 y/o investor with 5x expenses saved and goal of 25x would be 5% bonds
40 y/o investor with 12.5x saved and goal of 25x would be 20% bonds
60 y/o investor with 37.5x saved and goal of 25x would be 90% bonds

This seems like a better glide path for an investor seeking to minimize risk as age and nest egg increase. I wanted to see if there are any pitfalls I'm missing before implementing this strategy. Your insight is appreciated!
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Re: Goal & Age Based Asset Allocation

Post by dboeger1 »

My biggest criticism of the strategy is that life goals are rarely static in practice, so trying to incorporate goals into an AA formula is a bit like trying to pre-allocate story points in JIRA to customer cases prior to a brand new product launch with barely any track record to draw from (I'm going through this at work now and it's as silly as it sounds). Let's say your goal is to have 1 kid, but then you unexpectedly end up having twins. So then you decide to save enough in 529 plans for in-state tuition, but then they both get into Harvard med. So then you increase your savings and investments, only for 1 of them to change majors and graduate earlier with no debt. I'm not saying there's absolutely no value in trying to predict these things, but I would challenge the notion that it's easier or more accurate to base something like asset allocation on goals than it is just purely based on risk tolerance. Another obvious example is that one might aspire to retire 25x expenses, but then they get a huge promotion at work and decide to stick it out longer to afford a more luxurious life.

I think hard lines in the sand have become popular as a result of the FIRE crowd trying to measure everything and plan for early retirement, but remember, the norm throughout history has been for most people to work into their old age, and whatever they ended up with was what they had. There was no day on which most people crossed a wealth threshold and decided they were done. That is a very modern/contemporary concept for all but the richest of socioeconomic classes. Quite frankly, even today, FIRE is still just a niche within the niche that is aggressive savers in developed nations with higher incomes. It's quite common for Bogleheads to post that they're continuing to work well beyond 25x expenses just in case, or because they decided to shoot for higher goals once they seemed plausible.

Thus, modifying asset allocation based on a formula aimed at reaching goals one sets at a relatively young age with much uncertainty about their precise future is not very useful or practical. I suppose one could modify it as their goals change, but if that happens quite frequently, then it again begs the question how useful it is. Most people just generally want more with a vaguely defined tolerance for risk, and that's all they know in advance. They figure out their exact spending and goals once they get much closer and have a better understanding of where they stand financially.
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Re: Goal & Age Based Asset Allocation

Post by FIREyourself »

invest2bfree wrote: Wed Mar 24, 2021 2:28 pm Better approach is -

Bonds = (Age -40)*2
20 year old 0% bonds
50 year old 20% bonds
65 year old 50% bonds.
Not bad but what if I accumulate a lot by age 35 or 40? I might not be comfortable with 0% bonds at that point. That's why I think portfolio size should be factored in along with age.
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Re: Goal & Age Based Asset Allocation

Post by FIREyourself »

Beensabu wrote: Wed Mar 24, 2021 4:47 pm How about looking at portfolio size relative to goal, disregarding age, and instituting caps both ways?
I like the idea of an upper limit on bonds (maybe 75-90%), especially if having a little in stocks is truly less risky than all bonds.
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

FIREyourself wrote: Wed Mar 24, 2021 6:56 pm
Beensabu wrote: Wed Mar 24, 2021 4:47 pm How about looking at portfolio size relative to goal, disregarding age, and instituting caps both ways?
I like the idea of an upper limit on bonds (maybe 75-90%), especially if having a little in stocks is truly less risky than all bonds.
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Re: Goal & Age Based Asset Allocation

Post by Beensabu »

watchnerd wrote: Wed Mar 24, 2021 4:58 pm
Beensabu wrote: Wed Mar 24, 2021 4:47 pm
FIREyourself wrote: The point of this model is to factor in portfolio size relative to your goal as well as age. It would probably be most appropriate for people not interested in leaving a huge legacy.
I think you're onto something there (the bolded part).
Isn't that the whole point of a bond tent?

Large portfolio size + SOR = reduced need for risk / diminishing reward vs downside
Isn't the bond tent geared towards the first few years prior to (you build it up) and after (you spend it down) beginning the withdrawal stage, with the main intent being to address sequence of returns risk?

If OP is looking for a glide path to use, and they don't like the ones already out there for whatever reason, it's not a terrible idea to build their own rule based on portfolio size relative to goal. I wanted to point out that they're onto something there, because that's the part of what they wrote that makes sense to me.

The rest of it read like they might be building a rule in order to validate their currently desired AA -- maxing out risk to get past the finish line to a place where they can finally be safe. I'm not saying that's necessarily what's happening here, but it was one of my first thoughts.

I still think that going overboard with either too much or too little risk is the flaw with their proposed rule.
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Re: Goal & Age Based Asset Allocation

Post by KlangFool »

OP,

A) Are you aiming for Financially Independence (FI) or Retirement?

B) If you are aiming for FI, then, the age does not matter. Only portfolio size matters. You can be FI at any age as long as your portfolio is big enough. For example, if you win 10 million lottery tomorrow, you portfolio would be big enough. How does your age matters to your AA? It does not.

C) I aim for FI. I do not use age as part of my asset allocation decision.

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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

Beensabu wrote: Wed Mar 24, 2021 4:47 pm
FIREyourself wrote: The point of this model is to factor in portfolio size relative to your goal as well as age. It would probably be most appropriate for people not interested in leaving a huge legacy.
I think you're onto something there (the bolded part).

How about looking at portfolio size relative to goal, disregarding age, and instituting caps both ways?

Say a 75/25 - 25/75 range, increase bond allocation by 5% every time you get another 1/5 of the way towards your goal.

So accumulators start off at 75/25. When one reaches their goal, they are at 50/50. Once one reaches double their goal, they are at 25/75.

We can come up with all sorts of formulas. I like this one ^ because it takes a much older "rule" into account + it is unlikely to upset anyone other than the 100% crowd.
Looks the same to me.

A 60 year old with 90% bonds, ends up spending down mostly the bonds (because that's what she / he mostly has), ends up with a rising equity glide path.

Especially since the equity part will grow more.

Unless they're going to keep rebalancing back to 10/90.

But 10/90 doesn't test well for SWR.
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

KlangFool wrote: Wed Mar 24, 2021 7:09 pm OP,

A) Are you aiming for Financially Independence (FI) or Retirement?

B) If you are aiming for FI, then, the age does not matter. Only portfolio size matters. You can be FI at any age as long as your portfolio is big enough. For example, if you win 10 million lottery tomorrow, you portfolio would be big enough. How does your age matters to your AA? It does not.

C) I aim for FI. I do not use age as part of my asset allocation decision.

KlangFool
Well, I'm FI (we're currently at 40x) and we consider age in our planning.

Because:

a) FI is not the same as not working. FI doesn't mean you're currently living off your port, just that you could be.

b) Social Security has an age-based impact on COL, depending on when you take it

c) Age relates to how long you have to fund COL before SS, and whether those funds come from taxable accounts prior to 59.5, and from IRA after 59.5
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Re: Goal & Age Based Asset Allocation

Post by Cash is King »

KlangFool wrote: Wed Mar 24, 2021 7:09 pm OP,


C) I aim for FI. I do not use age as part of my asset allocation decision.

KlangFool
^This. You should always construct your portfolio/AA on risk tolerance not on your age. Keep it simple.
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Re: Goal & Age Based Asset Allocation

Post by Ferdinand2014 »

FIREyourself wrote: Wed Mar 24, 2021 10:54 am What does the forum think about an AA model based on portfolio size and age where bond allocation increases as portfolio size and age increase? I didn't see a past thread with a model exactly like this.

The formula would simply be (portfolio size / goal) * %bonds at goal = bond allocation. So:

25 y/o investor with 5x expenses saved and goal of 25x would be 5% bonds
40 y/o investor with 12.5x saved and goal of 25x would be 20% bonds
60 y/o investor with 37.5x saved and goal of 25x would be 90% bonds

This seems like a better glide path for an investor seeking to minimize risk as age and nest egg increase. I wanted to see if there are any pitfalls I'm missing before implementing this strategy. Your insight is appreciated!
I would not use age.
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

Cash is King wrote: Wed Mar 24, 2021 7:21 pm
KlangFool wrote: Wed Mar 24, 2021 7:09 pm OP,


C) I aim for FI. I do not use age as part of my asset allocation decision.

KlangFool
^This. You should always construct your portfolio/AA on risk tolerance not on your age. Keep it simple.
But my risk tolerance varies with age.

Because my human capital declines with age.
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Re: Goal & Age Based Asset Allocation

Post by Cash is King »

watchnerd wrote: Wed Mar 24, 2021 7:32 pm
Cash is King wrote: Wed Mar 24, 2021 7:21 pm
KlangFool wrote: Wed Mar 24, 2021 7:09 pm OP,


C) I aim for FI. I do not use age as part of my asset allocation decision.

KlangFool
^This. You should always construct your portfolio/AA on risk tolerance not on your age. Keep it simple.
But my risk tolerance varies with age.

Because my human capital declines with age.
In my opinion, if build your portfolio to achieve your goals and within your risk parameters you should not have to make big moves to your AA. YMMV.
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

Cash is King wrote: Wed Mar 24, 2021 7:44 pm

In my opinion, if build your portfolio to achieve your goals and within your risk parameters you should not have to make big moves to your AA. YMMV.
Define 'big moves'.

Risk parameters are not static, either.

Portfolio size and SOR relative to retirement age are relevant factors, which is why various glide paths take those into account.
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Cash is King
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Re: Goal & Age Based Asset Allocation

Post by Cash is King »

watchnerd wrote: Wed Mar 24, 2021 7:49 pm
Cash is King wrote: Wed Mar 24, 2021 7:44 pm

In my opinion, if build your portfolio to achieve your goals and within your risk parameters you should not have to make big moves to your AA. YMMV.
Define 'big moves'.

Risk parameters are not static, either.

Portfolio size and SOR relative to retirement age are relevant factors, which is why pretty much all glide paths take those into account.

I would define big moves as going from 80/20 to 30/70 or 40/60. If you are referring to portfolio weightings then I agree. You should take that into consideration when you construct your portfolio.
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Re: Goal & Age Based Asset Allocation

Post by watchnerd »

Cash is King wrote: Wed Mar 24, 2021 7:55 pm

I would define big moves as going from 80/20 to 30/70 or 40/60. If you are referring to portfolio weightings then I agree. You should take that into consideration when you construct your portfolio.
Gotcha.

I would also add:

I don't know how people estimate COL, and thus compute their 'number', without considering age, inflation for XX years, and future SS/pension.

At least I can't in any reasonably empirical way.
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FIREyourself
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Re: Goal & Age Based Asset Allocation

Post by FIREyourself »

KlangFool wrote: Wed Mar 24, 2021 7:09 pm A) Are you aiming for Financially Independence (FI) or Retirement?

B) If you are aiming for FI, then, the age does not matter.
I'm shooting for FI too. I would think age should still be a consideration when FI because of the usual reasons to increase bonds with age (less time to recover, greater need for income).
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Re: Goal & Age Based Asset Allocation

Post by Johm221122 »

I use a goal based AA (until withdrawal stage)
33% or less of goal or less 80% stocks
33% to 66% of goal 70% stocks
66%+ and retirement 60% stocks
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Beensabu
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Re: Goal & Age Based Asset Allocation

Post by Beensabu »

watchnerd wrote: Wed Mar 24, 2021 7:13 pm
Beensabu wrote: Wed Mar 24, 2021 4:47 pm How about looking at portfolio size relative to goal, disregarding age, and instituting caps both ways?

Say a 75/25 - 25/75 range, increase bond allocation by 5% every time you get another 1/5 of the way towards your goal.

So accumulators start off at 75/25. When one reaches their goal, they are at 50/50. Once one reaches double their goal, they are at 25/75.
Looks the same to me.
It's similar, yes - that's on purpose. To show there's a way to implement the basic idea of goal-based AA shifts (which has merit, and which others obviously are doing) without taking it too far.

How do caps of 75% maximum and 25% minimum for a fixed income allocation look the same as 90-100% or 0-10% ? The point of upper and lower caps is to avoid going too extreme in either direction.
watchnerd wrote:A 60 year old with 90% bonds, ends up spending down mostly the bonds (because that's what she / he mostly has), ends up with a rising equity glide path.
Yup. See:
Beensabu wrote:... an older investor with a larger nest egg would arguably end up with too little risk. However, this would self-correct into a reverse glide path as the portfolio was drawn down.
watchnerd wrote:Unless they're going to keep rebalancing back to 10/90.
According to OP's rule, they'd actually end up going to 5/95 or 0/100 eventually, then back into some equities once drawn down enough, then back to 90 or 95 or 100, assuming nothing too crazy happens with inflation anyway ¯\_(ツ)_/¯. It's almost like the strategy gets more complicated and needs more oversight and rebalancing activity right when you want it to be as simple as possible...
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Re: Goal & Age Based Asset Allocation

Post by KlangFool »

FIREyourself wrote: Wed Mar 24, 2021 8:29 pm
KlangFool wrote: Wed Mar 24, 2021 7:09 pm A) Are you aiming for Financially Independence (FI) or Retirement?

B) If you are aiming for FI, then, the age does not matter.
I'm shooting for FI too. I would think age should still be a consideration when FI because of the usual reasons to increase bonds with age (less time to recover, greater need for income).
FIREyourself ,

If you are FI, you do not need to work anymore. So, what has age got to do with anything? You can FI at your current age. You do not need to work anymore.

The major impact of age on FI is the size of the portfolio needed at each age range. It has less to do with AA. You could FI at 30+ years old if your portfolio is 50X your current annual expense. The AA could be 70/30 and 30/70 and it will be fine.

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Re: Goal & Age Based Asset Allocation

Post by KlangFool »

watchnerd wrote: Wed Mar 24, 2021 7:18 pm
KlangFool wrote: Wed Mar 24, 2021 7:09 pm OP,

A) Are you aiming for Financially Independence (FI) or Retirement?

B) If you are aiming for FI, then, the age does not matter. Only portfolio size matters. You can be FI at any age as long as your portfolio is big enough. For example, if you win 10 million lottery tomorrow, you portfolio would be big enough. How does your age matters to your AA? It does not.

C) I aim for FI. I do not use age as part of my asset allocation decision.

KlangFool
Well, I'm FI (we're currently at 40x) and we consider age in our planning.

Because:

a) FI is not the same as not working. FI doesn't mean you're currently living off your port, just that you could be.

b) Social Security has an age-based impact on COL, depending on when you take it

c) Age relates to how long you have to fund COL before SS, and whether those funds come from taxable accounts prior to 59.5, and from IRA after 59.5
watchnerd,

If (a) is true, then (b) and (c) do not really matters. You have the money to fund the gap between now and social security arrived. If that is not true, you do not have (a). Aka, you cannot live off your current portfolio.

If you have 40X your current annual expense, why do you need to care about (b) and (c).

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Re: Goal & Age Based Asset Allocation

Post by KlangFool »

FIREyourself wrote: Wed Mar 24, 2021 8:29 pm
KlangFool wrote: Wed Mar 24, 2021 7:09 pm A) Are you aiming for Financially Independence (FI) or Retirement?

B) If you are aiming for FI, then, the age does not matter.
I'm shooting for FI too. I would think age should still be a consideration when FI because of the usual reasons to increase bonds with age (less time to recover, greater need for income).
FI means that you can live off your current portfolio forever. Aka, you do not need to work anymore. So, how does your current age matters? If you still need to worry about needing to work and time to recover, your portfolio is not big enough for you to be FI.

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Re: Goal & Age Based Asset Allocation

Post by livesoft »

Robot Monster wrote: Wed Mar 24, 2021 2:29 pm
livesoft wrote: Wed Mar 24, 2021 11:21 am [OT comment removed by admin LadyGeek] I don't see a reason to have more than 40% bonds no matter what one's age and goals are.
In Jason Zweig's book Safe Money, he puts forth three commandments for "guidance on how to add stocks safely to your portfolio." The first commandment is: Thou shalt take no risk that thou needst not take. With this in mind, if you have a large enough portfolio, isn't there an argument to be made for 100% TIPS? (With nominal bonds you'd have to worry about hyperinflation, I guess.) Why take stock risk that thou needst not take, I darest ask? Well, the answer might be diversification, so you're not solely relying on the US government, but perhaps that still means a lot less than 60% stocks. Perhaps just 25%.

Personally speaking, not counting what I have in cash, my portfolio (88x expenses) is approximately:

27% equities
64% TIPS (both fund and individual at various durations)
9% intermediate treasury fund
First, I disagree with "[t]he first commandment" because I ("thou") do not invest only for myself and my generation.

Second, I guess I have a different perception of risk than many other folks. I just do not consider the probability of equities dropping 50% quickly in a short-term time frame to be realistic and thus something to lower my asset allocation to equities for.

Third, suppose I was a billionaire and had expenses of $200,000 a year. Then I could have those TIPS to cover that, but what would I do with the rest of my portfolio? Yes, I would give it away at some point, but I could give even more away if it was in equities and not in TIPS.
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Re: Goal & Age Based Asset Allocation

Post by Thesaints »

FIREyourself wrote: Wed Mar 24, 2021 10:54 am What does the forum think about an AA model based on portfolio size and age where bond allocation increases as portfolio size and age increase?
I think that it assumes age is the only factor in determining an investor's needs.
Furthermore, I understand it says that when one has "lots of money", they have to be 100% in bonds. Is it that correct ?
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Re: Goal & Age Based Asset Allocation

Post by nzahir »

FIREyourself wrote: Wed Mar 24, 2021 10:54 am What does the forum think about an AA model based on portfolio size and age where bond allocation increases as portfolio size and age increase? I didn't see a past thread with a model exactly like this.

The formula would simply be (portfolio size / goal) * age = bond allocation. So:

25 y/o investor with 5x expenses saved and goal of 25x would be 5% bonds
40 y/o investor with 12.5x saved and goal of 25x would be 20% bonds
60 y/o investor with 37.5x saved and goal of 25x would be 90% bonds

This seems like a better glide path for an investor seeking to minimize risk as age and nest egg increase. I wanted to see if there are any pitfalls I'm missing before implementing this strategy. Your insight is appreciated!
What is the purpose of 5% bonds?

I feel like 5% to a different asset class is too little, 10% should be the minimum if you want to have it

No model portfolio is a 95/5. There are 90/10s, but more common is the 80/20 or 100/0
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Re: Goal & Age Based Asset Allocation

Post by Robot Monster »

livesoft wrote: Sun Jun 13, 2021 8:49 pm
Robot Monster wrote: Wed Mar 24, 2021 2:29 pm In Jason Zweig's book Safe Money, he puts forth three commandments for "guidance on how to add stocks safely to your portfolio." The first commandment is: Thou shalt take no risk that thou needst not take.
First, I disagree with "[t]he first commandment" because I ("thou") do not invest only for myself and my generation.

Second, I guess I have a different perception of risk than many other folks. I just do not consider the probability of equities dropping 50% quickly in a short-term time frame to be realistic and thus something to lower my asset allocation to equities for.

Third, suppose I was a billionaire and had expenses of $200,000 a year. Then I could have those TIPS to cover that, but what would I do with the rest of my portfolio? Yes, I would give it away at some point, but I could give even more away if it was in equities and not in TIPS.
Point #1: If you're investing for your kids, or cancer research, then I think you can increase your risk and say that risk is something you need to take. "Need" is, of course, open to interpretation. "I need a Lamborghini!," is probably stretching it.

Numero dos: Prove it to me with science! Just kidding. But not really. Everyone has their predictions about the future, but consider me skeptical.

Three: Billionaires can invest in ways most cannot.
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Re: Goal & Age Based Asset Allocation

Post by aristotelian »

Interesting way to think about it but might be a solution in need of a problem. For what it's worth, according to this formula I am about 10 points overweight in stocks. I'm not planning to change.

Statistically, SWR studies suggest we are generally safer (less in danger of running out of money) with more equity, not less. It is only when you get under say 15 years timeframe when you start running out of time to make up for a market crash. I still hold some bonds. From a risk adjusted return standpoint, I am willing to accept slightly lower expected return for lower volatility and "sleep at night" factor.

Another way to think about it is to focus on the maximum market loss you are willing to accept at any given time. Assuming the market would go down 50% in a bad market crash, you would want (0.5*stocks) + bonds > portfolio floor. Whether you have a portfolio floor or how you determine it is an individual question and very complicated.
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Re: Goal & Age Based Asset Allocation

Post by revhappy »

GoneOnTilt wrote: Wed Mar 24, 2021 1:34 pm
livesoft wrote: Wed Mar 24, 2021 11:21 am [OT comment removed by admin LadyGeek] I don't see a reason to have more than 40% bonds no matter what one's age and goals are.
Perhaps a modest investor might sell at the bottom if they see 30% of their savings wiped out in a 50% stock market crash. That's a reason. Not everyone has the stomach for that. I don't. I can't be alone.
I am implementing rising equity glide path(suggested by Michael Kitces) currently I am at 30% equities(age 41) and I am increasing my equity ratio by 1% each month and I plan to continue until I hit 70% in equities. I am planning to continue working for another 3-6 years and retire early. My corpus is currently at 50X annual expenses. I plan to add another 20X in annual expenses to my corpus, before I hang up my boots. The logic is that by the time I hit 70% equities, my nest egg will be large enough to tolerate a 50% crash. So you need to do a mental haircut for your equity portion of 50% at any point in time.
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Re: Goal & Age Based Asset Allocation

Post by revhappy »

Cash is King wrote: Wed Mar 24, 2021 7:21 pm
^This. You should always construct your portfolio/AA on risk tolerance not on your age. Keep it simple.
I believe risk tolerance is something that can be acquired and it more of education, having access to smart financial advisors, if you cannot do it yourself. Also, I believe risk tolerance is easier to build, if you "earned" your asset allocation based on systematic investing. For example, you just decided to go from 30:70 to 70:30 in one move then the market crashes, you will start getting panic attacks. However, if you build it based on systematic investment, go from 30:70 to 70:30, 1% a month, there is no way you will panic, because you have a process in place and you have planned for it.
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