The 50-50 Portfolio - a no brainer or tweaks needed?

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Ready2RetireNow
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The 50-50 Portfolio - a no brainer or tweaks needed?

Post by Ready2RetireNow »

I recently went through a long exercise to come up with an asset allocation and asset selection for my retirement portfolio. After months of reading, researching, analyzing and going through a systematic process I discovered I had arrived at Bogle's classic 50% stocks 50% bonds! I plan to retire this year and want to implement this portfolio over the course of Q1 2021 (I am in 100% cash now).

Question: Is there a better, yet simple and efficient, way to implement a 50/50 portfolio than using 2 ETF's (VTI + BND) or 2 mutual funds (VTSMX + VBMFX)? I am interested in muting volatility and reducing the maximum drawdown, while not giving up too much performance. There is also the wrinkle of where my assets are located (60% in taxable account and 40% IRA). I live in a high income tax state plus my wife will keep working for the next 10-15 years at a high earning level. One thing I'm considering is using VIG instead of VTI (lower volatility) and using AGG instead of BND (due to higher credit quality and slightly lower effective duration). Full details below.

Portfolio Size: high six-figures
Emergency Funds: Yes, will hold 12 months of expenses in cash and/or ultrashort bond fund/ETF
Debt: None
Tax Filing Status: Married, filing jointly
Estimated Tax Rate: Effective Rates Fed 11% State 4.2% | Marginal Rates - Fed 22% State 9.3%
State: CA
Age: 59 (plan to claim social security at age 70)
Desired Asset allocation: 50% stocks / 50% bonds
Desired International allocation: 0% of stocks (following Bogle's philosophy on this)
Taxable Account: 60% of total assets, currently 100% cash
IRA Account: 40% of total assets, currently 100% cash
Glidepath: maintain 50/50 AA until age 80, then reduce to 40/60

My proposed assets and allocations to achieve the 50/50 portfolio (percentages are % of the total portfolio):
Taxable Account:
4.3% Vanguard Ultra-Short-Term Bond Investor (VUBFX) (0.20%)
9.4% Vanguard Short-Term Bond ETF (BSV) (0.05%)
10.8% Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares (VCADX) (0.09%)
18.7% iShares Core U.S. Aggregate Bond ETF (AGG) (0.04%)
16.8% Vanguard Dividend Appreciation ETF (VIG) (0.06%)

Traditional IRA Account:
33% Vanguard Dividend Appreciation ETF (VIG) (0.06%)
7% iShares Core U.S. Aggregate Bond ETF (AGG) (0.04%)

Additional Details:
I intend to first withdraw from my taxable account, until IRA RMD's kick in at age 72 (13 years from now). During those 13 years I want my IRA account balance to grow as much as possible but not suffer a catastrophic drawdown (i.e. 50%). As my taxable account is drawn down I will need to shift my allocation in the IRA account towards more bonds in order to maintain the 50/50 glidepath. At age 70 I plan to claim social security benefits which will significantly reduce the amount of withdrawals from the taxable account. After RMD's kick-in, my tax bill will shoot up as I will have portfolio income & realized gains + social security + RMDs. That part I have not solved yet lol.

Backtest results of my AA from PortfolioVisualizer:
Period: May 2007 - Dec 2020
CAGR: 6.88%
St Dev: 7.05%
Best Year: 17.72%
Worst Year: -10.94%
Max Drawdown: -19.31% (underwater 25 months)
Sharpe Ratio: 0.87
Sortino Ratio: 1.34

Backtest results of 50/50 implemented with VTI and BND:
CAGR: 7.44%
Stdev: 8.26%
Best Year: 19.75%
Worst Year: -15.06%
Max. Drawdown: -24.65% (underwater 29 months)
Sharpe Ratio: 0.81
Sortino Ratio: 1.24

Love this Bogle quote:
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
lakpr
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by lakpr »

VTMFX: Vanguard Tax Managed Balanced Fund, has 50:50 allocation.

It has a slightly higher expense ratio of 0.09%, but as a single fund, avoids many of the behavioral pitfalls that you mention. Provides you with a daily rebalancing of your assets, so you will NEVER be more than half wrong regardless of what the markets do.

One drawback, or advantage depending on your point of view, is that it has almost nil international equities.
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welloiledinvestor
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by welloiledinvestor »

My personal take on it is to go with a asset allocation that makes sense for you and that aligns with your risk tolerance. There could be far worst options. Pick one and stick to it no matter what. Also, I am not a fan of slice-and-dice. I prefer one-funds for simplicity. That's just me. Do what makes sense for you. I second other user's suggestion of the Tax-managed balanced fund (50/50) VTMFX . It sounds like you will be keeping it in a taxable account. Is that correct?
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by digit8 »

welloiledinvestor wrote: Tue Jan 05, 2021 7:24 am My personal take on it is to go with a asset allocation that makes sense for you and that aligns with your risk tolerance. There could be far worst options. Pick one and stick to it no matter what.
Plus 1. There is an argument to be made (including by me) that international stocks may (and probably even will) outperform the US in the long term, but IMHO that's a question of the optimal vs. the good enough. If you can stick with the plan, you might not get the best returns but you're unlikely to find yourself in a Ramen retirement, either.
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by pkcrafter »

Readyto..

What % of all retirement assets will you be withdrawing once retired?

You have tax-inefficient funds in taxable-not good. Use tax-manged balanced as suggested above.

https://personal.vanguard.com/us/funds/ ... IntExt=INT

Are you sure about 50/50? Depending on withdrawal rate, you might be able to use 40/60, but lower than that probably won't keep up with inflation.


Paul
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WoodSpinner
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by WoodSpinner »

OP,

Can you provide some info on your wife’s investments and income? Perhaps I am misreading your post but it seems like is very focused on your assets rather than a combination .

It’s hard to give an informed opinion if we don’t have all of the info.

WoodSpinner
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parrish
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by parrish »

The tax managed balance fund is good for taxable accounts. If you check past results it almost is the same as 60/40..The issue of international should not be an issue. International stocks have been a drag on the 3 fund portfolio for sometime.
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Ready2RetireNow
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by Ready2RetireNow »

lakpr wrote: Tue Jan 05, 2021 6:42 am VTMFX: Vanguard Tax Managed Balanced Fund, has 50:50 allocation.

It has a slightly higher expense ratio of 0.09%, but as a single fund, avoids many of the behavioral pitfalls that you mention. Provides you with a daily rebalancing of your assets, so you will NEVER be more than half wrong regardless of what the markets do.

One drawback, or advantage depending on your point of view, is that it has almost nil international equities.
Thank you for this! I was looking for a fund to serve as a benchmark to compare my portfolio against . Do you know if there is a non-tax managed version of this fund? The reason being, 40% of my assets are in a traditional IRA, so tax management is unnecessary for that portion of my portfolio.
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Ready2RetireNow
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by Ready2RetireNow »

WoodSpinner wrote: Tue Jan 05, 2021 9:25 am OP,

Can you provide some info on your wife’s investments and income? Perhaps I am misreading your post but it seems like is very focused on your assets rather than a combination .

It’s hard to give an informed opinion if we don’t have all of the info.

WoodSpinner
My wife and I manage our investments and retirement planning in a non-traditional manner. Since she is 15 years younger, a high income working professional who wants to continue working (great for me in terms of access to affordable health benefits), so we have very different time horizons and investing goals. She is in asset accumulation/growth mode, while I will be in a decumulation/investment stability mode. For simplicity I have opted to treat my retirement portfolio in isolation for now. Down the road (15 years we estimate), she will be 60 and ready to retire. At that point we will merge our retirement management efforts. Not sure if this is the best plan, but it sure is the simplest and my wife is on board with it.
RNJ
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by RNJ »

As our friend and mentor Taylor has said, "There are many roads to Dublin." There are fine suggestions above. For my taste, your proposal for taxable account is too complex.

The questions I have for you is this: At age 59 with a high six-figure portfolio, how did you come to be 100% cash?
Last edited by RNJ on Tue Jan 05, 2021 1:10 pm, edited 1 time in total.
lakpr
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by lakpr »

Ready2RetireNow wrote: Tue Jan 05, 2021 12:49 pm
lakpr wrote: Tue Jan 05, 2021 6:42 am VTMFX: Vanguard Tax Managed Balanced Fund, has 50:50 allocation.

It has a slightly higher expense ratio of 0.09%, but as a single fund, avoids many of the behavioral pitfalls that you mention. Provides you with a daily rebalancing of your assets, so you will NEVER be more than half wrong regardless of what the markets do.

One drawback, or advantage depending on your point of view, is that it has almost nil international equities.
Thank you for this! I was looking for a fund to serve as a benchmark to compare my portfolio against . Do you know if there is a non-tax managed version of this fund? The reason being, 40% of my assets are in a traditional IRA, so tax management is unnecessary for that portion of my portfolio.
I am not aware of any other fund, tax-managed or not, that has a 50:50 split between stocks and bonds. You can approximate that split by choosing to invest in equal proportions to both Vanguard LifeStrategy Conservative Growth fund (40:60) and Vanguard LifeStrategy Moderate Growth fund (60:40). It will require periodical re-balancing.

But if you ARE going to be rebalancing, you might as well choose Total Stock Market fund (VTSAX) and Total Bond Market fund (VBTLX) for the traditional IRA; same number of funds.

OR, you can choose the Vanguard Balanced Index fund (VBIAX), it has a 60:40 allocation, yes it's slightly higher in equities than your target 50:50, but may be you can say "chuck it, I will keep just one fund in taxable and one fund in traditional IRA". Your asset allocation does not drift too far apart with this solution, as the resulting allocation is 40% * 60% (in t-IRA) + 60% * 50% (in taxable) = 54% in stocks, and the remainder in bonds. Is a 4% deviation from a preferred asset allocation worth tinkering and losing sleep over? Only you can answer that question.
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Ready2RetireNow
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by Ready2RetireNow »

pkcrafter wrote: Tue Jan 05, 2021 8:32 am Readyto..

What % of all retirement assets will you be withdrawing once retired?

You have tax-inefficient funds in taxable-not good. Use tax-manged balanced as suggested above.

https://personal.vanguard.com/us/funds/ ... IntExt=INT

Are you sure about 50/50? Depending on withdrawal rate, you might be able to use 40/60, but lower than that probably won't keep up with inflation.


Paul
Thanks Paul. Good question! My withdrawal rate in year 1 will be 4.3% of my total portfolio. I could go 60/40, but that would mean putting 100% of my IRA into stocks. Since I am withdrawing from my taxable account first, I am allocating 10 years worth of spending to bonds in that account. Is that too aggressive toward bonds in that account? Perhaps, but I think I will sleep better knowing that bond volatility should be much less than stocks and I have 10 years worth of expenses covered by relatively lower volatility investments.

I agree, tax efficiency in the taxable account is poor. I've debated back and forth on putting my entire bond allocation into VCADX (California Muni fund) to save on taxes, but it makes me nervous putting all my bond "eggs" in one basket, hence the bond diversification across BSV, VCAIX and AGG.

BTW - I modeled out the tax impact and it's not huge at least for the first 11 years, but when IRA RMDs and Social Security kicks in, and my wife is still working, taxes will go up dramatically for at least 5 years until my wife retires. Out of curiosity, I used a ROTH conversion calculator from Schwab to see if it was worth it to convert and the answer wasn't compelling either way. Tax rates would need to increase dramatically in the future, which they might, for a ROTH conversion to make sense. But betting on future tax policy is a tough call.
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by Ready2RetireNow »

RNJ wrote: Tue Jan 05, 2021 1:07 pm As our friend and mentor Taylor has said, "There are many roads to Dublin." There are fine suggestions above. For my taste, your proposal for taxable account is too complex.

The questions I have for you is this: At age 59 with a high six-figure portfolio, how did you come to be 100% cash?
My current cash position was arrived at purely from having a very high savings rate over past 17 years. I was extremely frugal over the course of my working career. Other than a few small stock buys here and there and a brief attempt to daytrade in my younger days, I never fully invested my money. The big question is, why was I never invested all these years? That is a tough question to answer. Namely it comes down to personal consequences and having a highly volatile income due to my career. Also, going through the dotcom crash (I worked in the technology industry at the time) taught me a tough lesson about risk. Once I got more comfortable with risk, the GFC hit in 2008-2009, which made me retreat. But I know that for my retirement to be sustainable I need to be invested going forward. Hence, where I am today and on this forum :)
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by WoodSpinner »

Ready2RetireNow wrote: Tue Jan 05, 2021 1:00 pm
WoodSpinner wrote: Tue Jan 05, 2021 9:25 am OP,

Can you provide some info on your wife’s investments and income? Perhaps I am misreading your post but it seems like is very focused on your assets rather than a combination .

It’s hard to give an informed opinion if we don’t have all of the info.

WoodSpinner
My wife and I manage our investments and retirement planning in a non-traditional manner. Since she is 15 years younger, a high income working professional who wants to continue working (great for me in terms of access to affordable health benefits), so we have very different time horizons and investing goals. She is in asset accumulation/growth mode, while I will be in a decumulation/investment stability mode. For simplicity I have opted to treat my retirement portfolio in isolation for now. Down the road (15 years we estimate), she will be 60 and ready to retire. At that point we will merge our retirement management efforts. Not sure if this is the best plan, but it sure is the simplest and my wife is on board with it.
Well, you are filling MFJ so advice and planning has to include her income, savings and investments as well.

For instance, your SS claiming strategy may not be optimal — it needs to factor in both incomes. A withdrawal strategy needs to consider her as well.

WoodSpinner
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by lakpr »

Ready2RetireNow wrote: Tue Jan 05, 2021 1:47 pm Thanks Paul. Good question! My withdrawal rate in year 1 will be 4.3% of my total portfolio. I could go 60/40, but that would mean putting 100% of my IRA into stocks. Since I am withdrawing from my taxable account first, I am allocating 10 years worth of spending to bonds in that account. Is that too aggressive toward bonds in that account? Perhaps, but I think I will sleep better knowing that bond volatility should be much less than stocks and I have 10 years worth of expenses covered by relatively lower volatility investments.
I think you should put almost all stocks in taxable and the 10-years worth of bonds in the IRA instead. Then, when you need to withdraw money for living expenses, sell the stocks in taxable. Simultaneously, exchange the bonds in the IRA to stocks for exactly the equivalent amount. In the end money would have come from selling the bonds, but you will have done that in a much more tax-friendly way.
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by ruralavalon »

Welcome to the forum :) .

In my opinion your desired 50/50 asset allocation is within the range of what is reasonable for a retiree at age 59 and in early retirement.

Withdrawals from the taxable brokerage account between age 59 until Required Minimum Distributions (RMDs) start at age 72 is a good idea.

But in planning tax strategy and Social Security claiming strategy you need to consider your wife's income because your "wife will keep working for the next 10-15 years at a high earning level".

In your taxable brokerage account you could use Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX) which has a 50/50 asset allocation.

Then in your traditional IRA split 50/50 in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX). In your traditional IRA I suggest regular mutual funds rather than ETFs, so you can set up automatic reinvestment of dividends.

This portfolio is almost entirely maintenance-free, requiring little to no management or rebalancing on your part.
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RNJ
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by RNJ »

Ready2RetireNow wrote: Tue Jan 05, 2021 2:12 pm
RNJ wrote: Tue Jan 05, 2021 1:07 pm As our friend and mentor Taylor has said, "There are many roads to Dublin." There are fine suggestions above. For my taste, your proposal for taxable account is too complex.

The questions I have for you is this: At age 59 with a high six-figure portfolio, how did you come to be 100% cash?
My current cash position was arrived at purely from having a very high savings rate over past 17 years. I was extremely frugal over the course of my working career. Other than a few small stock buys here and there and a brief attempt to daytrade in my younger days, I never fully invested my money. The big question is, why was I never invested all these years? That is a tough question to answer. Namely it comes down to personal consequences and having a highly volatile income due to my career. Also, going through the dotcom crash (I worked in the technology industry at the time) taught me a tough lesson about risk. Once I got more comfortable with risk, the GFC hit in 2008-2009, which made me retreat. But I know that for my retirement to be sustainable I need to be invested going forward. Hence, where I am today and on this forum :)
Got it. Given your history and experience, it might be worth thinking about your risk tolerance. With respect to the taxable account, this stage of the game (I'm not far behind you), try to keep it simple. Good luck!
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by NearlyRetired »

lakpr wrote: Tue Jan 05, 2021 1:10 pm
Ready2RetireNow wrote: Tue Jan 05, 2021 12:49 pm
lakpr wrote: Tue Jan 05, 2021 6:42 am VTMFX: Vanguard Tax Managed Balanced Fund, has 50:50 allocation.

It has a slightly higher expense ratio of 0.09%, but as a single fund, avoids many of the behavioral pitfalls that you mention. Provides you with a daily rebalancing of your assets, so you will NEVER be more than half wrong regardless of what the markets do.

One drawback, or advantage depending on your point of view, is that it has almost nil international equities.
Thank you for this! I was looking for a fund to serve as a benchmark to compare my portfolio against . Do you know if there is a non-tax managed version of this fund? The reason being, 40% of my assets are in a traditional IRA, so tax management is unnecessary for that portion of my portfolio.
[snip]
I am not aware of any other fund, tax-managed or not, that has a 50:50 split between stocks and bonds. You can approximate that split by choosing to invest in equal proportions to both Vanguard LifeStrategy Conservative Growth fund (40:60) and Vanguard LifeStrategy Moderate Growth fund (60:40). It will require periodical re-balancing.
......
This is what I am doing (with funds available in UK) - but why the need for rebalancing if the two funds are always rebalanced themselves. Won't the portfolio be automatically rebalanced to 50/50? What am I missing?
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by clip651 »

NearlyRetired wrote: Mon May 29, 2023 3:54 am
lakpr wrote: Tue Jan 05, 2021 1:10 pm
Ready2RetireNow wrote: Tue Jan 05, 2021 12:49 pm
lakpr wrote: Tue Jan 05, 2021 6:42 am VTMFX: Vanguard Tax Managed Balanced Fund, has 50:50 allocation.

It has a slightly higher expense ratio of 0.09%, but as a single fund, avoids many of the behavioral pitfalls that you mention. Provides you with a daily rebalancing of your assets, so you will NEVER be more than half wrong regardless of what the markets do.

One drawback, or advantage depending on your point of view, is that it has almost nil international equities.
Thank you for this! I was looking for a fund to serve as a benchmark to compare my portfolio against . Do you know if there is a non-tax managed version of this fund? The reason being, 40% of my assets are in a traditional IRA, so tax management is unnecessary for that portion of my portfolio.
[snip]
I am not aware of any other fund, tax-managed or not, that has a 50:50 split between stocks and bonds. You can approximate that split by choosing to invest in equal proportions to both Vanguard LifeStrategy Conservative Growth fund (40:60) and Vanguard LifeStrategy Moderate Growth fund (60:40). It will require periodical re-balancing.
......
This is what I am doing (with funds available in UK) - but why the need for rebalancing if the two funds are always rebalanced themselves. Won't the portfolio be automatically rebalanced to 50/50? What am I missing?
The two lifestrategy funds will grow or shrink at somewhat different rates with market movements. So the allocation will drift eventually as one fund becomes the larger holding in the portfolio. It might take quite a while to drift significantly.
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by Outer Marker »

Ready2RetireNow wrote: Tue Jan 05, 2021 2:12 pm My current cash position was arrived at purely from having a very high savings rate over past 17 years. I was extremely frugal over the course of my working career. Other than a few small stock buys here and there and a brief attempt to daytrade in my younger days, I never fully invested my money. The big question is, why was I never invested all these years? That is a tough question to answer. Namely it comes down to personal consequences and having a highly volatile income due to my career. Also, going through the dotcom crash (I worked in the technology industry at the time) taught me a tough lesson about risk. Once I got more comfortable with risk, the GFC hit in 2008-2009, which made me retreat. But I know that for my retirement to be sustainable I need to be invested going forward. Hence, where I am today and on this forum :)
Good you are rethinking this going into retirement - but having been on the sidelines for 17 years in all-cash during your working years, I would seriously question whether you are ready to go 50/50 as you enter retirement. I would go slowly into this. Vanguard Federal Money Market is currently paying 5%. I would consider putting all of taxable into that. (Exempt from CA tax). Or CDs. The Vanguard balanced fund (60/40) could be used in your IRA, which would give you an overall AA of about 25/75, which is at the point of "minimum risk" on the "efficient frontier." If you can handle that over the next few years, you could consider moving more of your taxable cash into either the Vanguard Balanced fund, or Tax Managed Balanced Fund, depending on your tax bracket. To help you stay the course, I'd recommend you use blended funds, rather than holding equities separately.
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by Godot »

Outer Marker wrote: Mon May 29, 2023 9:45 am
Ready2RetireNow wrote: Tue Jan 05, 2021 2:12 pm My current cash position was arrived at purely from having a very high savings rate over past 17 years. I was extremely frugal over the course of my working career. Other than a few small stock buys here and there and a brief attempt to daytrade in my younger days, I never fully invested my money. The big question is, why was I never invested all these years? That is a tough question to answer. Namely it comes down to personal consequences and having a highly volatile income due to my career. Also, going through the dotcom crash (I worked in the technology industry at the time) taught me a tough lesson about risk. Once I got more comfortable with risk, the GFC hit in 2008-2009, which made me retreat. But I know that for my retirement to be sustainable I need to be invested going forward. Hence, where I am today and on this forum :)
Good you are rethinking this going into retirement - but having been on the sidelines for 17 years in all-cash during your working years, I would seriously question whether you are ready to go 50/50 as you enter retirement. I would go slowly into this. Vanguard Federal Money Market is currently paying 5%. I would consider putting all of taxable into that. (Exempt from CA tax). Or CDs. The Vanguard balanced fund (60/40) could be used in your IRA, which would give you an overall AA of about 25/75, which is at the point of "minimum risk" on the "efficient frontier." If you can handle that over the next few years, you could consider moving more of your taxable cash into either the Vanguard Balanced fund, or Tax Managed Balanced Fund, depending on your tax bracket. To help you stay the course, I'd recommend you use blended funds, rather than holding equities separately.
This post is 2.5 years old. I would think the OP has already made a decision.
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Re: The 50-50 Portfolio - a no brainer or tweaks needed?

Post by Outer Marker »

Godot wrote: Mon May 29, 2023 10:09 am This post is 2.5 years old. I would think the OP has already made a decision.
Ha! I hate when these old zombies come back to life.
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