How did you determine your asset allocation?

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bluexray
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How did you determine your asset allocation?

Post by bluexray »

How did you decide what your asset allocation should be? Hoping to hear some advice on mine.

I’m mid 30s with small family, stable employment, and a 25% pretax savings rate. Retirement 25+ years away. Have a mortgage at good rate.

I’m currently 70% stocks, 5% bonds, and 25% cash (in online savings account). Using the age in bonds/bonds -10 average (or in my case cash).
Fallible
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Re: How did you determine your asset allocation?

Post by Fallible »

bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.

I’m mid 30s with small family, stable employment, and a 25% pretax savings rate. Retirement 25+ years away. Have a mortgage at good rate.

I’m currently 70% stocks, 5% bonds, and 25% cash (in online savings account). Using the age in bonds/bonds -10 average (or in my case cash).
I've learned that it's very much about the risk you can and want to handle and that can depend largely on knowledge of risk and return and experience with market crashes.

Have you read the BH wiki on "Asset Allocation," which includes links to "Risk tolerance" and a four-part series by pro Larry Swedroe on "Ability, Willingness, and Need to Take Risk" (under Nos. 8-11 under "Reference"?

https://www.bogleheads.org/wiki/Asset_allocation

https://www.cbsnews.com/news/asset-allo ... -you-take/
https://www.cbsnews.com/news/asset-allo ... tolerance/
https://www.cbsnews.com/news/asset-allo ... -you-need/
https://www.cbsnews.com/news/asset-allo ... ing-goals/
Last edited by Fallible on Mon Nov 23, 2020 9:27 pm, edited 1 time in total.
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Topic Author
bluexray
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Re: How did you determine your asset allocation?

Post by bluexray »

Thanks for the link. Will take a look.
Fallible
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Re: How did you determine your asset allocation?

Post by Fallible »

bluexray wrote: Mon Nov 23, 2020 9:26 pm Thanks for the link. Will take a look.
I just edited my post to add the links for "Ability, Willingness, and Need to Take Risk."
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
KlangFool
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Re: How did you determine your asset allocation?

Post by KlangFool »

bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.

I’m mid 30s with small family, stable employment, and a 25% pretax savings rate. Retirement 25+ years away. Have a mortgage at good rate.

I’m currently 70% stocks, 5% bonds, and 25% cash (in online savings account). Using the age in bonds/bonds -10 average (or in my case cash).

bluexray,


1) 25% gross saving rate

and

2) 25+ years away from retirement.


usually do not go together. Have you actually calculated your targeted number and make sure that it is actually 25+ years away?


You can start with a targeted number of 25 X current annual expenses.

KlangFool
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Marseille07
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Re: How did you determine your asset allocation?

Post by Marseille07 »

I simply looked at the Trinity Study, updated Trinity Study and the ERN SWR series. I don't withdraw using their constant-dollar methods but the studies are useful to determine what works and what doesn't over medium-long term.
000
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Re: How did you determine your asset allocation?

Post by 000 »

My asset allocation is the point at which my fear and greed are equal in (perceived) magnitude.
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windaar
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Re: How did you determine your asset allocation?

Post by windaar »

Many dismiss it but I've just done "age in bonds/fixed." That has kept me within being able to tolerate a potential 50% loss in equity in a crash without losing sleep or selling low. It has also allowed me to not think about it or tinker based on events. It has served me very well.
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STVCT
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Re: How did you determine your asset allocation?

Post by STVCT »

KlangFool wrote: Mon Nov 23, 2020 9:36 pm
bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.

I’m mid 30s with small family, stable employment, and a 25% pretax savings rate. Retirement 25+ years away. Have a mortgage at good rate.

I’m currently 70% stocks, 5% bonds, and 25% cash (in online savings account). Using the age in bonds/bonds -10 average (or in my case cash).

bluexray,


1) 25% gross saving rate

and

2) 25+ years away from retirement.


usually do not go together. Have you actually calculated your targeted number and make sure that it is actually 25+ years away?


You can start with a targeted number of 25 X current annual expenses.

KlangFool
KlangFool is smart, and his forecasting logic is also how I arrived at my AA. I have a targeted number, and my asset allocation will evolve over time, the closer I get to 'winning the game'. I'm also mid-30s with a small family, stable job, and low mortgage rate, and I feel comfortable with my plan.

Right now, I'm at 100% equities, and using REITs to slightly lower portfolio correlation without lowering portfolio volatility/risk. Once I hit 20% of my target, I'll change to 10% bonds, and continue to add 10% bonds at the 40, 60, 80, and 100% to target milestones. At that point I'll stop working w/ a 50/50 portfolio, and probably use the 'glidepath' where I move back to 60-65% equities 5 years after the retirement date. A lot of things can change between now and then, but for now that seems like a good way to minimize sequence of returns risk while also allowing the nest egg to continue to grow for the kids.

In short - You can use how close you are to winning the game as an alternative to "age minus X" to think about your allocation.
sailaway
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Re: How did you determine your asset allocation?

Post by sailaway »

Initially, I chose what Fidelity recommended for moderately aggressive (80/20). Mostly just because I felt the wording described me.

When I finally got my husband to consider bonds, we went from joint 95/5 to 70/30 in one weekend (we had previously tracked joint net worth, but not allocation). He did some math and decided that was the sweet spot. It was closer to my 80/20 than his 100/0 and it fit the 100- his age rounded down guide, so I agreed. We also put all new monies into stocks, then rebalance twice a year, so we are generally a bit more aggressive than 70/30 sounds. We were already approaching FI when we made that decision, though. If we were planning on traditional retirement age, we might still be more aggressive.
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Re: How did you determine your asset allocation?

Post by flaccidsteele »

bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.

I’m mid 30s with small family, stable employment, and a 25% pretax savings rate. Retirement 25+ years away. Have a mortgage at good rate.

I’m currently 70% stocks, 5% bonds, and 25% cash (in online savings account). Using the age in bonds/bonds -10 average (or in my case cash).
I don’t have a pre-set asset allocation

Never did

Invest in the US index regularly
Buy more during bears
Rinse and repeat

The US market always recovers. Always. It’s never different this time

The asset allocation is what it is

No rebalancing either. Neither Bogle nor Buffett discussed rebalancing, and I haven’t seen any evidence that it offers a benefit for me

Retired in my 40s with almost $6m

NB: if you asked me what my AA is, I wouldn’t know off the top of my head. I would have to go figure it out
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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arcticpineapplecorp.
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Re: How did you determine your asset allocation?

Post by arcticpineapplecorp. »

i would say a good starting point is to look at the allocations of target date retirement funds over time. They're not exactly the same across fund families but they're close enough.

Now I say that's a starting point, because as was pointed out one's need, ability and willingness to take risk are more important. Why?

It's an individual thing. Start with the target date retirement funds for a young person. Allocated 90% to stocks, right?

You saw that in 2008 many millenials (who were in their mid to late 20s) who had only been investing for a few years supposedly bailed on stocks and swore them off for their lifetime. That may be true for some of them and not for others of them. Those who bailed had the need and possibly the ability (if they kept their jobs) but didn't have the willingness. Unfortunately, they found out after, not before the risk showed up.

Mark Zuckerberg is young. Should he have 90% in stocks? He could...because he can afford to take the risk (has the ability). He may be willing to take the risk. Does he "need" to take the risk? No. He's won the game. He could stop playing if he wants to. But he may have legacy needs, philanthropy needs, etc. He may desire to take risk to maximize the returns...for others, not himself.

in 2008 I watched in real time as my co-worker who was only a few years older than me sell out of stocks entirely. She had the need and the ability, but not the willingness. We worked the same job, similar economic circumstances (DINK), no debt, etc. But one of us stayed the course (me) and one didn't (my coworker).

Similarly, you could look at an older person, in retirement. My mother is retired. She's in her 70s. Her pension and SS cover her living expenses. Should she be conservative in her investments just because she's older? Not necessarily. She doesn't have the need to take risk if she has enough. She can stop playing too and be conservative. Or she can invest according to the allocation of who she's leaving money to. If that's her kids who are in their late 40s, early 50s then she could invest according to THEIR allocations (moderate or aggressive) rather than conservative.

So it's an individual decision and your circumstances should weigh in. I don't think you can/should just use any old formula like age minus bonds or follow target date, etc. These are starting points, not ending points.

I think you should run numbers. Look at how much you might need in retirement and why. Then determine how to get from here to there. That involves three variables: money, time, rate of return.

You have to make assumptions about rate of return, but you can be conservative with your estimates or wildly optimistic. If you're conservative and things don't go according to plan, you're probably ok. But if you're optimistic and things don't go as planned, you're toast.

Once you've determined what return you might need, you then know how much risk you're taking to achieve that return.

Know how much you stand to lose based on any percentage decline, then translate into dollars and see how you'd feel. Would you stay the course or not?

If you're 100% in stocks and stocks fall 50% you'll see your portfolio decline by 50%. You ok with that?
If you're 50% in stocks and stocks fall 50% you might see your portfolio decline by half as much, 25%. You feel better about that?
And so on.
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windaar
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Re: How did you determine your asset allocation?

Post by windaar »

arcticpineapplecorp. wrote: Mon Nov 23, 2020 10:20 pmIf you're 100% in stocks and stocks fall 50% you'll see your portfolio decline by 50%. You ok with that?If you're 50% in stocks and stocks fall 50% you might see your portfolio decline by half as much, 25%. You feel better about that?And so on.
Yes! Last March I saw poster after poster capitulating at the bottom. With a proper asset allocation you can stay the course.
Nobody knows nothing.
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bluexray
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Re: How did you determine your asset allocation?

Post by bluexray »

KlangFool wrote: Mon Nov 23, 2020 9:36 pm
bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.

I’m mid 30s with small family, stable employment, and a 25% pretax savings rate. Retirement 25+ years away. Have a mortgage at good rate.

I’m currently 70% stocks, 5% bonds, and 25% cash (in online savings account). Using the age in bonds/bonds -10 average (or in my case cash).

bluexray,


1) 25% gross saving rate

and

2) 25+ years away from retirement.


usually do not go together. Have you actually calculated your targeted number and make sure that it is actually 25+ years away?


You can start with a targeted number of 25 X current annual expenses.

KlangFool
Thanks for your comment/question (aside: I’ve perused the forums and found your comments always to be insightful and pay close attention to your comments).

The 25+ is more my planned working time based on my (current) high job satisfaction and the fact I have a pension that fully vests then.

For the 25x number, I’m probably around 15 years for that (and around same time mortgage will be finished).

If I’m at 70% stocks (nearly all index...can’t help myself a tad) and a 50% decline happens then I still have about 2/3 of my net worth (not including home). That thought helps me sleep at night.
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Re: How did you determine your asset allocation?

Post by KlangFool »

bluexray wrote: Mon Nov 23, 2020 10:30 pm
KlangFool wrote: Mon Nov 23, 2020 9:36 pm
bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.

I’m mid 30s with small family, stable employment, and a 25% pretax savings rate. Retirement 25+ years away. Have a mortgage at good rate.

I’m currently 70% stocks, 5% bonds, and 25% cash (in online savings account). Using the age in bonds/bonds -10 average (or in my case cash).

bluexray,


1) 25% gross saving rate

and

2) 25+ years away from retirement.


usually do not go together. Have you actually calculated your targeted number and make sure that it is actually 25+ years away?


You can start with a targeted number of 25 X current annual expenses.

KlangFool
Thanks for your comment/question (aside: I’ve perused the forums and found your comments always to be insightful and pay close attention to your comments).

The 25+ is more my planned working time based on my (current) high job satisfaction and the fact I have a pension that fully vests then.

For the 25x number, I’m probably around 15 years for that (and around same time mortgage will be finished).

If I’m at 70% stocks (nearly all index...can’t help myself a tad) and a 50% decline happens then I still have about 2/3 of my net worth (not including home). That thought helps me sleep at night.

bluexray,


When you reach your 25X number and your annual portfolio growth exceeds your gross income, would you be interested in working more years?


<<my (current) high job satisfaction >>

Do you like your job so much that you are willing to work for free? Aka, your portfolio growth swarms your annual income and you are essentially not gaining much net worth from your salary.


<<I have a pension that fully vests then. >>


Which may be irrelevant to you since you do not need the pension to retire.


<< If I’m at 70% stocks (nearly all index...can’t help myself a tad) and a 50% decline happens then I still have about 2/3 of my net worth (not including home). That thought helps me sleep at night.>>


This is because you think that you are 25 years from retirement. Do you "Sleep Well At Night" (SWAN) if the answer is 15 years?


In general, the standard advice is at least 10 years of expenses in Fixed Income. So, you should be 60/40 at 25X (15 years)


In summary, you should adjust your AA from 70/30 to 60/40 as your portfolio gets bigger.

A possible glide path could be


0 - 15X -> 70/30

15X to 20X -> 65/35

20X to 25X -> 60/40

KlangFool
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Re: How did you determine your asset allocation?

Post by beandeveloper »

There are so many articles about the need to determine what risk an investor is willing to have. But, especially based on some of the above stories about people selling off at a downturn as well as my own experience, it's very difficult, after you think you know the risk level you want, to predict how you'll actually behave when the market really takes a tumble. Numerous times I implemented an asset allocation I thought I was comfortable with, only to freak out when the market dropped 1,000 points. I never sold anything unnecessarily. But I sure had some white-knuckled hours at my computer refreshing market data. (BTW - I didn't need to be concerned.....but I was.)

Example: Over the summer my wife and I had long conversations about the state of the market and economy. We were both aligned on the fact that 1/ we wanted to sleep at night and 2/ we thought the market was in for a pretty significant correction. (I'm not making a political statement nor a prediction. I'm reporting what we discussed.) We decided we'd rather sacrifice the chance of big gains in exchange for stability. We're basically buying portfolio dampening. So we ended up increasing our cash position pretty substantially. I realized we made the right decision when, after making that change, I'd hardly notice when the market dropped 1,000 pnts.

So....to the best one can.....really try to look forward and think about what it might really feel like emotionally when the opening shows a big down day.
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Re: How did you determine your asset allocation?

Post by Doctor Rhythm »

Great question and probably something that gets answered less scientifically than we’d care to admit. I kind of started with what target date fund managers were doing in aggregate as a ballpark range. Then, as I became more risk tolerant, I increased my age-adjusted equity position. I’ve also periodically applied the “2008 test” which is to make sure that I’m okay with another 50% market decline.
Last edited by Doctor Rhythm on Mon Nov 23, 2020 10:58 pm, edited 1 time in total.
Marseille07
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Re: How did you determine your asset allocation?

Post by Marseille07 »

beandeveloper wrote: Mon Nov 23, 2020 10:45 pm There are so many articles about the need to determine what risk an investor is willing to have. But, especially based on some of the above stories about people selling off at a downturn as well as my own experience, it's very difficult, after you think you know the risk level you want, to predict how you'll actually behave when the market really takes a tumble. Numerous times I implemented an asset allocation I thought I was comfortable with, only to freak out when the market dropped 1,000 points. I never sold anything unnecessarily. But I sure had some white-knuckled hours at my computer refreshing market data. (BTW - I didn't need to be concerned.....but I was.)

Example: Over the summer my wife and I had long conversations about the state of the market and economy. We were both aligned on the fact that 1/ we wanted to sleep at night and 2/ we thought the market was in for a pretty significant correction. (I'm not making a political statement nor a prediction. I'm reporting what we discussed.) We decided we'd rather sacrifice the chance of big gains in exchange for stability. We're basically buying portfolio dampening. So we ended up increasing our cash position pretty substantially. I realized we made the right decision when, after making that change, I'd hardly notice when the market dropped 1,000 pnts.

So....to the best one can.....really try to look forward and think about what it might really feel like emotionally when the opening shows a big down day.
I think you guys did the right thing by increasing your cash position. I've never understood why people freak out so much on portfolio volatility; those are signs that they don't have enough EF.
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retired@50
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Re: How did you determine your asset allocation?

Post by retired@50 »

bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.
Have you taken the quiz at Vanguard?

See link: https://personal.vanguard.com/us/FundsI ... unds/tools

It might help to get you in the proper frame of mind for this important decision...

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: How did you determine your asset allocation?

Post by flaccidsteele »

windaar wrote: Mon Nov 23, 2020 10:25 pm
arcticpineapplecorp. wrote: Mon Nov 23, 2020 10:20 pmIf you're 100% in stocks and stocks fall 50% you'll see your portfolio decline by 50%. You ok with that?If you're 50% in stocks and stocks fall 50% you might see your portfolio decline by half as much, 25%. You feel better about that?And so on.
Yes! Last March I saw poster after poster capitulating at the bottom. With a proper asset allocation you can stay the course.
I don’t think many capitulated. I think one article cited 8%? Most didn’t even notice
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: How did you determine your asset allocation?

Post by flaccidsteele »

retired@50 wrote: Mon Nov 23, 2020 10:59 pm
bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.
Have you taken the quiz at Vanguard?

See link: https://personal.vanguard.com/us/FundsI ... unds/tools

It might help to get you in the proper frame of mind for this important decision...

Regards,
Interesting quiz. Never seen that before

I’ve never invested in bonds so I had to extrapolate what I would do. The quiz didn’t include real estate so I treated my allocation to rentals as closer to “stocks” as opposed to “bonds” as per their risk/return profile

The Vanguard quiz returned “Suggested Allocation ("100% Stocks")” for me
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: How did you determine your asset allocation?

Post by ivgrivchuck »

bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.
I researched what retirement target funds do. And what would be mathematically optimal. Then I tried to factor in that I'm not only saving for retirement, but also have some shorter term goals (like children's college expenses). My risk tolerance is also reasonably high (I started investing in 2009 after the big dip, so I haven't yet gone through a huge crash, but I'm quite confident I can stay the course). I'm in late 30s.

Result: (x is my spouses age who is a bit younger than me)
Stocks (VTI/VXUS): 120 - x
Cash (I-bonds/EE-bonds/CDs/MYGAs): x - 20
Traditional Bonds: 0 (until yields are back to something reasonable. I want at least 1% spread compared to the best cash investments)

For retirement which is still ~25 years away, I'm considering 60/40 and variable withdrawal method. But we'll see, there is still a plenty of time to think about that...
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
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dogagility
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Re: How did you determine your asset allocation?

Post by dogagility »

As a young investor with little knowledge but investing for the long term, I looked at the historical returns of stocks vs bonds. Since I wanted the most growth, I decided to invest it 100% in stock. Pretty easy decision.

Now that I'm nearing spending some of this mountain, the question is more difficult. Based upon what my peepers have been seeing on this site for the last 3 years, I'm thinking of sliding from my current of 80:20 to 60:40 at retirement. Then, perhaps, increase to 70:30... depending upon how well the first five years of retirement have gone and what the VPW worksheet is showing me. (Bond tent, of sorts)
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bluexray
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Re: How did you determine your asset allocation?

Post by bluexray »

Appreciate the comments.

I think I’ll stick with 70/30 for about 5 years then reassess. Will probably stick to cash instead of bonds given the low yields for time being, and wanting to use that as ballast/risk less (except for nastily ole inflation, but hopefully stock gains will help with the inflation).

I got 70/30 in the vanguard calculator.
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Re: How did you determine your asset allocation?

Post by 7eight9 »

bluexray wrote: Tue Nov 24, 2020 9:30 am Appreciate the comments.

I think I’ll stick with 70/30 for about 5 years then reassess. Will probably stick to cash instead of bonds given the low yields for time being, and wanting to use that as ballast/risk less (except for nastily ole inflation, but hopefully stock gains will help with the inflation).

I got 70/30 in the vanguard calculator.
You might want to look into multi-year guaranteed annuities (MYGAs) for some of your fixed income (currently cash) portion.

Multi-Year Guarantee Annuities (MYGAs) are the annuity industry’s version of a CD (Certificate of Deposit). Both MYGAs and CDs allow you to contractually lock in a specific annual interest rate for a duration of time you choose at the time of application. MYGAs can be as short term as 2 years and you can lock them in for as long as 20 years. MYGAs have no annual fees, no moving parts, and provide full principal protection while guaranteeing an annual interest rate. If you are a current CD buyer, then you should also be a MYGA buyer.
Read more at --- https://www.stantheannuityman.com/myga-rates
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aristotelian
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Re: How did you determine your asset allocation?

Post by aristotelian »

Two ways of looking at it:

How many years expenses would you like in safe assets?

Assuming stocks have higher risk/return, what % of portfolio are you willing to put at risk of losing 50% or more in a poor sequence of events?
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bertilak
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Re: How did you determine your asset allocation?

Post by bertilak »

bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.
My starting point...
Harry Markowitz wrote:I visualized my grief if the stock market went way up and I wasn’t in it , or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities.
I was at 50/50 before reading that Markowitz quote. My reasoning was as follows. I figured 50/50 meant one half of my portfolio was right on the money and the other half was at least decent. A few years later (not long ago) I started feeling I was being too conservative and moved to 60/40 -- more aggressive but still safely middle-of-the-road.

60/40 is where I am now and I expect to remain there for a while.
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Re: How did you determine your asset allocation?

Post by 3funder »

120 minus age in stocks.
Global stocks, US bonds, and time.
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Re: How did you determine your asset allocation?

Post by pkcrafter »

bluexray wrote: Mon Nov 23, 2020 9:05 pm How did you decide what your asset allocation should be? Hoping to hear some advice on mine.

I’m mid 30s with small family, stable employment, and a 25% pretax savings rate. Retirement 25+ years away. Have a mortgage at good rate.

I’m currently 70% stocks, 5% bonds, and 25% cash (in online savings account). Using the age in bonds/bonds -10 average (or in my case cash).
First, I would say that 70% stock at your age is reasonable, but I also believe many investors do not really know their risk tolerance until they experience the stress of a falling crashing market. The news and noise of a crashing market can scare inexperienced investors to a point of actual panic. When that happens the reaction is sell.

Because of the urgency that panic creates, taking risk tests in a rising market when new investors are excited to get in can produce erroneous optimistic results.

Having said that, I will note that there are some investors who actually have a risk-taking gene and high risk does not panic them. I'll also say that many of those with the gene do not understand the guarded approach of those that don't have the gene.



Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
ivgrivchuck
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Re: How did you determine your asset allocation?

Post by ivgrivchuck »

bluexray wrote: Tue Nov 24, 2020 9:30 am Appreciate the comments.

I think I’ll stick with 70/30 for about 5 years then reassess. Will probably stick to cash instead of bonds given the low yields for time being, and wanting to use that as ballast/risk less (except for nastily ole inflation, but hopefully stock gains will help with the inflation).

I got 70/30 in the vanguard calculator.
70/30 is a perfectly reasonable allocation at your age.

You mentioned that you have a mortgage though. Have you considered "investing" your cash (except emergency fund) into paying some of the mortgage? You'd likely get ~2.5% return. Sounds pretty attractive compared to all the alternatives...
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bluexray
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Re: How did you determine your asset allocation?

Post by bluexray »

I suspect I have a low to moderate risk tolerance.

The only bear market I have experienced was the short lived one earlier this year. Looking back at my investments on vanguard, I invested only about 1/3 or my normal DCA amount from March through May. At least I didn’t sell anything. The “fear” at the time caused me to put more of my saved income to cash rather than investing it at the time. Not the worst, but certainly not the best.

I’ve also been paying some more on my mortgage and already figure that “against” my savings rate. I’m paying a 20 year fixed like a 15 year for now.
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bluexray
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Re: How did you determine your asset allocation?

Post by bluexray »

ivgrivchuck wrote: Tue Nov 24, 2020 11:56 am
bluexray wrote: Tue Nov 24, 2020 9:30 am Appreciate the comments.

I think I’ll stick with 70/30 for about 5 years then reassess. Will probably stick to cash instead of bonds given the low yields for time being, and wanting to use that as ballast/risk less (except for nastily ole inflation, but hopefully stock gains will help with the inflation).

I got 70/30 in the vanguard calculator.
70/30 is a perfectly reasonable allocation at your age.

You mentioned that you have a mortgage though. Have you considered "investing" your cash (except emergency fund) into paying some of the mortgage? You'd likely get ~2.5% return. Sounds pretty attractive compared to all the alternatives...
I noticed you are in savings bonds in your signature. Mind explaining how you came around the that decision? Thanks.
ivgrivchuck
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Re: How did you determine your asset allocation?

Post by ivgrivchuck »

bluexray wrote: Tue Nov 24, 2020 12:39 pm I noticed you are in savings bonds in your signature. Mind explaining how you came around the that decision? Thanks.
* I-bonds are paying 1.7% at the moment. Plus they are excluded from state taxes. Plus taxation is deferred. That's clearly better than almost anything else available.
* EE-bonds are paying slightly less (0.1%) than the best savings account (0.6%). However in return for accepting a slightly lower return, I get option to hold them for 20 years to double their value (3.5% annual interest). Plus they are excluded from state taxes. Plus taxation is deferred.

Another way to look into the issue is that I-bonds are an inflation hedge and EE-bonds are a deflation hedge.
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Chrono Triggered
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Re: How did you determine your asset allocation?

Post by Chrono Triggered »

I'm in my early 30's, and think equities purchased now while be worth more than bonds when I plan on withdrawing, so I am 100% stocks. I would consider adding bonds when I have a realization that my portfolio being halved would cause me distress; this has not happened yet.

I have considered going 10% in long term bonds for the rebalancing opportunity in bear markets but I haven't been swayed just yet.
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Re: How did you determine your asset allocation?

Post by sschullo »

My AA reflects my investing story: success, losses, mistakes, correct choices, my age, my risk tolerance, and my willingness to take a risk, and a ton of luck. Your AA reflects more of your attitude than investment knowledge and the data (read my signature quote).
You could have a great plan but abandon it when the market does its negative thing once in a while. Sorry to be so vague but that's what I came up with after decades of success, losses, massive mistakes, correct choices, my age, risk tolerance, and willingness to take a risk with a ton of luck.
Never in the history of market day-traders’ has the obsession with so much massive, sophisticated, & powerful statistical machinery used by the brightest people on earth with such useless results.
Fallible
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Re: How did you determine your asset allocation?

Post by Fallible »

bluexray wrote: Tue Nov 24, 2020 9:30 am Appreciate the comments.

I think I’ll stick with 70/30 for about 5 years then reassess. Will probably stick to cash instead of bonds given the low yields for time being, and wanting to use that as ballast/risk less (except for nastily ole inflation, but hopefully stock gains will help with the inflation).

I got 70/30 in the vanguard calculator.
And now, put the above in an investment policy statement (or, if you have one, update it). A great value in an IPS is to remind you, especially during a market crash, of your reasons for investing a certain way at a certain time. As you continue to learn about investing and experience the market madness, you may find that your rationale was right, or wrong, or needs correcting or updating to meet changing times.

https://www.bogleheads.org/wiki/Investm ... _statement
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Re: How did you determine your asset allocation?

Post by livesoft »

Back in the early 1980s when we started saving aggressively for the future (retirement, home down payment, vehicle purchases), I don't recall if there was even concept of Asset Allocation as we know it today. There were certainly CDs and GNMA funds, paying a rate over 10% and mutual funds (especially no-load funds) were starting to come on the radar screens of magazines. In those days, Fidelity Magellan had a pretty hefty front-end load and so did all the American Group funds.

So what happened to me is that the head of HR at my new employer said to to put half my 403(b) in the one equity fund (CREF stock) and the other have in the fixed income (TIAA traditional annuity) because it was good to have some of both at the outset and would make things simpler in the future. We saved outside of our employer plans in the latest hot no-load funds from Vanguard, Twentieth Century, Fidelity, Dodge & Cox, and Oakmark. Since those hot funds were equity funds, we had more than 50% of asset allocation in stocks.

As time went on, our AA evolved to about 90:10 and would have kept getting higher, but we sold equity fund shares to buy a house. We had lived through a few bull markets and some bear markets and were always watching our investments, but just didn't care if they lost money or not.

Then I stopped working full-time and learned about AA. We shifted to about 70/30. Then when I stopped working altogether, we shifted to about 60/40 where we are today in our mid-60s. I don't think we will ever change our AA going forward.

So we determined our AA from our many years of experience investing and looking at our portfolio (or not looking at our portfolio). This need, ability, and willingness to take on risk only permeated our thinking in the past 10 years when our income dropped because one of us was not working full-time.

So for the OP, I think you cannot go by a formula, but need to consider that you might have to try out some different ratios of stocks to bonds and see what you can live with.
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FelixTheCat
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Re: How did you determine your asset allocation?

Post by FelixTheCat »

I determined my AA based on fear. In the stock market crash of 2009 I saw stocks drop by 37% and I sold at the bottom. Not a good Boglehead move.

I made some changes. A short-term bond fund to use in case the market tanks again so I don't have to sell stocks. The balance of my portfolio is 50/50.

My plan was tested this year. When the market dropped because of COVID, I didn't panic and I didn't sell anything. This is a good plan for me.
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abc132
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Re: How did you determine your asset allocation?

Post by abc132 »

The first thing I did was separate my emotion from my plan. Day to day, week to week, month to month, or even year to year volatility are simply not risks to my long term investing plan.

1. Nearly 100% stocks has the best performance and the best margin of safety over long periods of time (30+ years). The gains made by taking short term risk result in a portfolio large enough to handle the dips and still provide more net worth during the dips.

100% stocks until 40's


2. As I approach retirement, protecting that portfolio starts to become important - not emotionally, but financially. This has resulted in a movement to bonds. Currently 80/20 with more than 5 years in bonds/CD, and buying all bonds. I might get to 70/30 by retirement, and if so I will spend down the bonds/CD/cash back to 80/20. Stock outperformance makes my portfolio safer, even if I end up with a higher percentage of stocks. My 80/20 portfolio may end up with more years of bonds than many people's 60/40 portfolio - due to those years of stock gains.

10 years before expected retirement, or 15-20x expenses, start to move into bonds.


3. I keep enough freely available money that I don't even think of bailing on the market. This typically results in about 5% cash, which is a drag on my portfolio performance. I personally would like it to be smaller, but this is a decision based on making my significant other happy. Some of the bonds/CD's are also laddered, so that I could go many years without selling any stocks.

Keep an emergency fund that allows you to stick to your plan.


Monte Carlo simulations formed the basis of my plan. Everyone has reasons why not to do things, but by examining historical performance, worse than historical performance, higher than expected expenses, etc, I could see how my current plan will play out under the scenarios tested, and how altering things helped or hurt in these scenarios.

I enjoy re-evaluating my plan continuously (weekly), but I rarely ever steer the ship. The moves I make are well thought out, and based on something developed over a few years of analysis rather than short term feelings or emotions.
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