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Advice on asset allocation

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  • Avatar conniebird 
    Participant
    Status: Physician
    Posts: 258
    Joined: 01/08/2016

    I’m finally ready to graduate from Vanguard target funds and do some manual asset allocation. Wanted any advice, criticisms, etc:

    I’m 38 and planning on working for a long time – may eventually do part time though.

     

    Overall, this is what I was looking for:

    10% REIT

    10% Bonds

    20% International

    60% US Total stock market

     

    403b through work, generous company match:

    Total stock:

    56% – Vanguard Institutional Index Instl Pl VIIIX 0.02%

    14% – Vanguard Extended Market Index I VIEIX 0.12%

    (4:1 ratio) to mimic total stock market fund

    International:

    20% – Vanguard FTSE All‐World ex‐US Index Inst VFWSX 0.12%

    Bond:

    10% – Vanguard Total Bond Market Index InstlPls VBMPX 0.05%

     

    **I also have access to a non-govt 457b, same funds as my 403b, same expense ratios. Haven’t started contributing to this but will in the future, not to the max tho – maybe 6-10K a year, and then put any extra into a taxable.

    Roth IRA @ Vanguard (% approx, will need to rebalance yearly as the 403b will grow at a much faster rate)

    40% – Vanguard REIT Index Fund Investor Shares (VGSIX) 0.26%

    40% – Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) 0.17%

    10% – Vanguard Total International Stock Index Fund Investor Shares (VGTSX)  0.22%

    *will be using the admiral shares for these, so the expense ratios are actually lower

     

    Not quite ready to do a taxable, but once I am, was thinking these two:

    Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)

    Vanguard Total International Stock Index Fund Investor Shares (VGTSX)

    “Compound interest is the eighth wonder of the world. (S)he who understands it, earns it ... (s)he who doesn't ... pays it.”

    @ missbonniemd.com

    #12665 Reply
    Avatar chrisCD 
    Participant
    Status: Other Professional
    Posts: 92
    Joined: 01/14/2016

    Our ages are similar, but you are a little younger than I.   👿  My rule of thumb is what allocation can I use that basically allows me to ignore what is going on in the market.  My target has been 60% Stocks (mostly ETFs/ REITs); 40% Fixed Income.

    I make monthly contributions so I use that for re-balancing.  I personally like Dividend stocks.  My account is at Schwab so I use their ETFs.

    I have SCHB (US Broad), SCHD (Dividend Stocks), SCHH (REIT), SCHF (international equity) and then do hold some positions in a few stocks like AT&T, JNJ, Chevron, Exxon, Realty Income, Apple.  I have about 5% in REITs and 5% in international.

    My fixed income is mostly laddered CDs, but also hold some TIPS, Short-term bonds, US Aggregate Bond through Schwab’s ETF.

    cd :O) -- Chris Duncan -- "God grant me the strength of eagles' wings, the faith and courage to fly to new heights, and the wisdom to rely on His Spirit to carry me there."

    #12673 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7530
    Joined: 01/09/2016

    With all due respect, bonds are for people who don’t have a financial plan or for short-term (less than 5 years) liquidity needs, meaning the purchase of individual bonds timed to meet any capital needs within that time frame. Over 5 years, I recommend a well-balanced equity mutual fund/ETF portfolio, rebalanced annually in the same month for the long term (5+ years). At retirement, 2 months supplementary living expenses in a money market account. Knowing what we do about stock market returns over the long term, why would you ever sacrifice growth and income for the inferior return of bonds? Bond

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #12677 Reply
    Avatar AlexxT 
    Participant
    Status: Physician
    Posts: 897
    Joined: 01/13/2016

    I agree with Ms Turner.  I don’t understand why so many recommended portfolios include any bond allocation at all for investors who are not retired, at least in the current interest rate environment.  The rationale that I see cited most often is so that the investor won’t panic when the market drops.  That argument isn’t very compelling.   Just invest in equities, and hold on for the ride until you’re within 5 or 10 years of needing the money.  Then you can adjust your portfolio accordingly.

    #14903 Reply
    Avatar jwgreene 
    Participant
    Status: Physician
    Posts: 7
    Joined: 02/08/2016

    I believe the reason to have a well balanced portfolio, with bonds even when you are younger, is so that you are constantly able to “buy high and sell low.” For instance, if you are early in your career and have an 80/20 stock/bond ratio, you can constantly adjust your future withholdings from your job to funnel into the underperforming asset class.

     

    If the stock market is down, funnel more future contribution into it. You are then buying low and when the market rebounds you earn more money.

     

    If the stock market is soaring, funnel more contributions into bonds to keep the 80/20 mix you are shooting for. That avoids buying high, and you have more money in bonds to funnel into stocks the next time there is a bear market.

     

    If you are all in stocks, your just always buying high or low depending on the market and you have no way to smooth the ride or capitalize on the buy high/sell low strategy.

    #14910 Reply
    Liked by Aj
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5758
    Joined: 01/12/2016

    Bonds smooth volatility, and volatility can eat at overall returns and your sentiment. Bonds have outperformed stocks over the last 5 years, most people dont even know that.  Being still young I dont have any besides munis in my taxable, but that may change soon depending on what happens this year.

    #14919 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7530
    Joined: 01/09/2016

    I believe the reason to have a well balanced portfolio, with bonds even when you are younger, is so that you are constantly able to “buy high and sell low.” For instance, if you are early in your career and have an 80/20 stock/bond ratio, you can constantly adjust your future withholdings from your job to funnel into the underperforming asset class.

     

    If the stock market is down, funnel more future contribution into it. You are then buying low and when the market rebounds you earn more money.

     

    If the stock market is soaring, funnel more contributions into bonds to keep the 80/20 mix you are shooting for. That avoids buying high, and you have more money in bonds to funnel into stocks the next time there is a bear market.

     

    If you are all in stocks, your just always buying high or low depending on the market and you have no way to smooth the ride or capitalize on the buy high/sell low strategy.

    Click to expand…

    The problem almost any investor will have is defining how “down” is “down” to buy and how “high” is “soaring”. Not having a defined policy is very iffy. For those of you lurkers who don’t know about rebalancing (and I know you’re out there!), my blog post this month is easy to follow.

    Of course, I’ll never understand the bond idealogy for a committed long-term investor who rebalances annually and has a plan in place.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #14926 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7530
    Joined: 01/09/2016

    Bonds smooth volatility, and volatility can eat at overall returns and your sentiment. Bonds have outperformed stocks over the last 5 years, most people dont even know that.  Being still young I dont have any besides munis in my taxable, but that may change soon depending on what happens this year.

    Click to expand…

    Why do long-term investors need to smooth volatility? Knowing, of course, that volatility does not = risk and that volatility is the driver of long-term growth…why would you want to smooth volatility if you are not going to need access to your money?

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #14932 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 886
    Joined: 01/09/2016

    There is absolutely a case for bonds, and not only that, there is plenty of evidence that ‘permanent’ or ‘all weather’ type of portfolio is a better tool to manage long-term risk, which does not decrease with time (actually increases with time, and significantly so):

    http://www.norstad.org/finance/risk-and-time.html

    Two examples are Larry Swedroe and Ray Dalio, and there are others as well:

    http://portfoliocharts.com/portfolios/

    I like to use the approach suggested by Nassim Taleb, which is basically a barbell type portfolio where 1/2 is invested in equal-weighted high risk asset classes, and 1/2 is invested in relatively safe bonds (such as Treasuries or municipal bonds in after-tax accounts).  A barbell is a known tool to manage long term risk, providing redundancy in case of any potential adverse future event (or a bad sequence of returns that might otherwise decimate a 100% stock portfolio).

    If anybody doubts the need for bonds, I present the following charts as evidence.  Having all stocks is always a bad idea because nobody knows when the next recession hits and whether you can simply wait it out (or not).  The simplistic assumption that many people have that higher volatility means higher returns is actually quite false if we consider the mathematics of the stock market and the fact that timing matters greatly (and we have no abilities to guess correctly).  There goes the argument that ‘just switch from 100% in stocks to 50% when you retire – what if you happen to land in the middle of a bad recessions?  Timing is everything, and your portfolio has to be at least ROBUST to bad timing on your part (and to bad markets).

    If you’d like to easily convince yourself that 100% stocks DOES NOT guarantee higher return than a 50:50 portfolio, I present the Vanguard’s historical returns calculator (fourth document in the list below):

    https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf

    You’ll easily see that 100% portfolio’s survivability is worse than that of a 50:50 one, and the LONGER the period the worse it is (because risk increases with time).

    All of this makes sense once we consider the markets to be Fat Tailed (which is a fact) vs. Modern Portfolio Theory’s model, which is Normal distribution.  The difference can’t be more stark, and the resulting approach to managing investments can’t be more different (fifth document below).

    And finally ask yourself this.  What is the most damaging situation: assuming 10% return and getting 5% (thereby having 2/3 less money) or assuming 5% return and getting 5% return while saving MORE?  If you can’t save more, then you’ll have less money, that’s rather predictable.  If you want a high return but get a much lower return (which is what the 2nd and the 3rd charts show), that’s going to be a lot more damaging to your retirement (and this might happen suddenly due to a recession or a sequence of low returns).  The problem is that future returns are nowhere near predictable, so you might get a 20% return or might get a 0% return if you have a very high risk portfolio.  Having a lower risk portfolio will probably not produce high returns, it also won’t produce very low ones, and THAT is the key requirement for having a portfolio to be stable enough (and robust enough regardless of what the markets do) to provide for retirement.

    Moreover, to avoid any bad timing decisions, all you have to do is de-risk after-tax by buying more bonds such as municipal bonds and you do not have to make any timing decisions at all, no need to sell anything.  In any case, the more money you accumulate, the less risk you have to take going forward.  So bonds are the key and stocks are the gravy.  Better have your principal than leave everything up to the stock market.

     

     

    Attachments:
    You must be logged in to view attached files.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #14948 Reply
    Avatar jz 
    Participant
    Status: Physician
    Posts: 649
    Joined: 01/09/2016

    thank you, Mr. Litovsky, for bringing sanity to the question, “why bother with bonds”

     

    #14958 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 886
    Joined: 01/09/2016

    There is absolutely a case for bonds, and not only that, there is plenty of evidence that ‘permanent’ or ‘all weather’ type of portfolio is a better tool to manage long-term risk, which does not decrease with time (actually increases with time, and significantly so):

    http://www.norstad.org/finance/risk-and-time.html

    Two examples are Larry Swedroe and Ray Dalio, and there are others as well:

    http://portfoliocharts.com/portfolios/

    I like to use the approach suggested by Nassim Taleb, which is basically a barbell type portfolio where 1/2 is invested in equal-weighted high risk asset classes, and 1/2 is invested in relatively safe bonds (such as Treasuries or municipal bonds in after-tax accounts).  A barbell is a known tool to manage long term risk, providing redundancy in case of any potential adverse future event (or a bad sequence of returns that might otherwise decimate a 100% stock portfolio).

    If anybody doubts the need for bonds, I present the following charts as evidence.  Having all stocks is always a bad idea because nobody knows when the next recession hits and whether you can simply wait it out (or not).  The simplistic assumption that many people have that higher volatility means higher returns is actually quite false if we consider the mathematics of the stock market and the fact that timing matters greatly (and we have no abilities to guess correctly).  There goes the argument that ‘just switch from 100% in stocks to 50% when you retire – what if you happen to land in the middle of a bad recessions?  Timing is everything, and your portfolio has to be at least ROBUST to bad timing on your part (and to bad markets).

    If you’d like to easily convince yourself that 100% stocks DOES NOT guarantee higher return than a 50:50 portfolio, I present the Vanguard’s historical returns calculator (fourth document in the list below):

    https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf

    You’ll easily see that 100% portfolio’s survivability is worse than that of a 50:50 one, and the LONGER the period the worse it is (because risk increases with time).

    All of this makes sense once we consider the markets to be Fat Tailed (which is a fact) vs. Modern Portfolio Theory’s model, which is Normal distribution.  The difference can’t be more stark, and the resulting approach to managing investments can’t be more different (fifth document below).

    And finally ask yourself this.  What is the most damaging situation: assuming 10% return and getting 5% (thereby having 2/3 less money) or assuming 5% return and getting 5% return while saving MORE?  If you can’t save more, then you’ll have less money, that’s rather predictable.  If you want a high return but get a much lower return (which is what the 2nd and the 3rd charts show), that’s going to be a lot more damaging to your retirement (and this might happen suddenly due to a recession or a sequence of low returns).  The problem is that future returns are nowhere near predictable, so you might get a 20% return or might get a 0% return if you have a very high risk portfolio.  Having a lower risk portfolio will probably not produce high returns, it also won’t produce very low ones, and THAT is the key requirement for having a portfolio to be stable enough (and robust enough regardless of what the markets do) to provide for retirement.

    Moreover, to avoid any bad timing decisions, all you have to do is de-risk after-tax by buying more bonds such as municipal bonds and you do not have to make any timing decisions at all, no need to sell anything.  In any case, the more money you accumulate, the less risk you have to take going forward.  So bonds are the key and stocks are the gravy.  Better have your principal than leave everything up to the stock market.

     

    Attachments:
    You must be logged in to view attached files.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #14959 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 886
    Joined: 01/09/2016

    My post was deleted, and I’m not sure why.  Let me try to post again.

    There is absolutely a case for bonds, and not only that, there is plenty of evidence that ‘permanent’ or ‘all weather’ type of portfolio is a better tool to manage long-term risk, which does not decrease with time (actually increases with time, and significantly so):

    http://www.norstad.org/finance/risk-and-time.html

    Two examples are Larry Swedroe and Ray Dalio, and there are others as well:

    http://portfoliocharts.com/portfolios/

    I like to use the approach suggested by Nassim Taleb, which is basically a barbell type portfolio where 1/2 is invested in equal-weighted high risk asset classes, and 1/2 is invested in relatively safe bonds (such as Treasuries or municipal bonds in after-tax accounts).  A barbell is a known tool to manage long term risk, providing redundancy in case of any potential adverse future event (or a bad sequence of returns that might otherwise decimate a 100% stock portfolio).

    If anybody doubts the need for bonds, I present the following charts as evidence.  Having all stocks is always a bad idea because nobody knows when the next recession hits and whether you can simply wait it out (or not).  The simplistic assumption that many people have that higher volatility means higher returns is actually quite false if we consider the mathematics of the stock market and the fact that timing matters greatly (and we have no abilities to guess correctly).  There goes the argument that ‘just switch from 100% in stocks to 50% when you retire – what if you happen to land in the middle of a bad recessions?  Timing is everything, and your portfolio has to be at least ROBUST to bad timing on your part (and to bad markets).

    If you’d like to easily convince yourself that 100% stocks DOES NOT guarantee higher return than a 50:50 portfolio, I present the Vanguard’s historical returns calculator (fourth document in the list below):

    https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf

    You’ll easily see that 100% portfolio’s survivability is worse than that of a 50:50 one, and the LONGER the period the worse it is (because risk increases with time).

    All of this makes sense once we consider the markets to be Fat Tailed (which is a fact) vs. Modern Portfolio Theory’s model, which is Normal distribution.  The difference can’t be more stark, and the resulting approach to managing investments can’t be more different (fifth document below).

    And finally ask yourself this.  What is the most damaging situation: assuming 10% return and getting 5% (thereby having 2/3 less money) or assuming 5% return and getting 5% return while saving MORE?  If you can’t save more, then you’ll have less money, that’s rather predictable.  If you want a high return but get a much lower return (which is what the 2nd and the 3rd charts show), that’s going to be a lot more damaging to your retirement (and this might happen suddenly due to a recession or a sequence of low returns).  The problem is that future returns are nowhere near predictable, so you might get a 20% return or might get a 0% return if you have a very high risk portfolio.  Having a lower risk portfolio will probably not produce high returns, it also won’t produce very low ones, and THAT is the key requirement for having a portfolio to be stable enough (and robust enough regardless of what the markets do) to provide for retirement.

    Moreover, to avoid any bad timing decisions, all you have to do is de-risk after-tax by buying more bonds such as municipal bonds and you do not have to make any timing decisions at all, no need to sell anything.  In any case, the more money you accumulate, the less risk you have to take going forward.  So bonds are the key and stocks are the gravy.  Better have your principal than leave everything up to the stock market.

     

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #14964 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 886
    Joined: 01/09/2016

    Here are the five documents I refer to in the post above.

    Attachments:
    You must be logged in to view attached files.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #14966 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 886
    Joined: 01/09/2016

    Last one:

    Attachments:
    You must be logged in to view attached files.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #14972 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7530
    Joined: 01/09/2016

    My post was deleted, and I’m not sure why.  Let me try to post again.

    There is absolutely a case for bonds, and not only that, there is plenty of evidence that ‘permanent’ or ‘all weather’ type of portfolio is a better tool to manage long-term risk, which does not decrease with time (actually increases with time, and significantly so):

    http://www.norstad.org/finance/risk-and-time.html

    Two examples are Larry Swedroe and Ray Dalio, and there are others as well:

    http://portfoliocharts.com/portfolios/

    I like to use the approach suggested by Nassim Taleb, which is basically a barbell type portfolio where 1/2 is invested in equal-weighted high risk asset classes, and 1/2 is invested in relatively safe bonds (such as Treasuries or municipal bonds in after-tax accounts).  A barbell is a known tool to manage long term risk, providing redundancy in case of any potential adverse future event (or a bad sequence of returns that might otherwise decimate a 100% stock portfolio).

    If anybody doubts the need for bonds, I present the following charts as evidence.  Having all stocks is always a bad idea because nobody knows when the next recession hits and whether you can simply wait it out (or not).  The simplistic assumption that many people have that higher volatility means higher returns is actually quite false if we consider the mathematics of the stock market and the fact that timing matters greatly (and we have no abilities to guess correctly).  There goes the argument that ‘just switch from 100% in stocks to 50% when you retire – what if you happen to land in the middle of a bad recessions?  Timing is everything, and your portfolio has to be at least ROBUST to bad timing on your part (and to bad markets).

    If you’d like to easily convince yourself that 100% stocks DOES NOT guarantee higher return than a 50:50 portfolio, I present the Vanguard’s historical returns calculator (fourth document in the list below):

    https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf

    You’ll easily see that 100% portfolio’s survivability is worse than that of a 50:50 one, and the LONGER the period the worse it is (because risk increases with time).

    All of this makes sense once we consider the markets to be Fat Tailed (which is a fact) vs. Modern Portfolio Theory’s model, which is Normal distribution.  The difference can’t be more stark, and the resulting approach to managing investments can’t be more different (fifth document below).

    And finally ask yourself this.  What is the most damaging situation: assuming 10% return and getting 5% (thereby having 2/3 less money) or assuming 5% return and getting 5% return while saving MORE?  If you can’t save more, then you’ll have less money, that’s rather predictable.  If you want a high return but get a much lower return (which is what the 2nd and the 3rd charts show), that’s going to be a lot more damaging to your retirement (and this might happen suddenly due to a recession or a sequence of low returns).  The problem is that future returns are nowhere near predictable, so you might get a 20% return or might get a 0% return if you have a very high risk portfolio.  Having a lower risk portfolio will probably not produce high returns, it also won’t produce very low ones, and THAT is the key requirement for having a portfolio to be stable enough (and robust enough regardless of what the markets do) to provide for retirement.

    Moreover, to avoid any bad timing decisions, all you have to do is de-risk after-tax by buying more bonds such as municipal bonds and you do not have to make any timing decisions at all, no need to sell anything.  In any case, the more money you accumulate, the less risk you have to take going forward.  So bonds are the key and stocks are the gravy.  Better have your principal than leave everything up to the stock market.

     

    Click to expand…

    With a real financial plan in place, you will know if you can weather a recession, along with the answers to the other uncertainties postulated. Financial planning is not a quick mathematical exercise. Unfortunately, most people see the portfolio as the plan instead of relegating it to its proper place, which is merely a tool to be used in the plan.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #14974 Reply

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