Over four years ago I did a post about my asset allocation, along with a couple of follow-up posts- one answering questions about the asset allocation and one demonstrating how I was implementing it at that time. The asset allocation only changed slightly (and was documented on the blog.) But the manner in which it is implemented has certainly changed. It was requested that I give an update, so here’s that update.

First, let’s review my asset allocation. I’m literally cutting and pasting this from my 2012 post.

75% Stock

50% US Stock
Total US Stock Market 17.5%
Extended Market 10%
Microcaps 5%
Large Value 5%
Small Value 5%
REITs 7.5%

25% International Stock
Developed Markets 15%
Small International 5%
Emerging Markets 5%

25% Bonds

Nominal Bonds (G Fund) 12.5%
TIPS 12.5%

While I’ve considered a lot of changes in that time period, the only one I’ve actually made is to put 5% of the portfolio into P2P Loans. That 5% came from the G fund and the TIPS allocation.

The Reasoning Behind the Asset Classes

Why do I have all of these asset classes? It’s important to remember the reason you have your investments, so this is a good chance for me to do just that.

  • Total US Stock Market- Capture market returns at low cost.
  • Total International Stock Market/Developed markets- Diversify into other markets with other currencies, essentially owning all the publicly traded stocks in the world between the two funds.
  • Small Value- Capture small and value tilt, boosting returns compared to a total market portfolio
  • Large Value- Capture value premium, boosting returns compared to a total market portfolio
  • Microcaps- Capture small premium, boosting returns compared to a total market portfolio. Attempt to capture CRSP 10 returns, the highest historical returns of any segment of the stock market.
  • Extended Market (Mid-caps)- Mid-caps have been the “sweet spot” for historical returns, at least for the last 20 years. Also adds on more small premium. The theory is that mid-caps avoid issues present in the large-caps (bubbles) and in the small caps (post-IPO cratering.)
  • REITs- Different type of company structure with relatively low correlation with the overall market, diversification into real estate.
  • Small International- Capture small premium with international stocks.
  • Emerging Markets- Diversify into markets not captured by US and Developed Markets Fund, overweight to capture potential premium.
  • TIPS- Protect against inflation and deflation, moderate stock market volatility.
  • G Fund- Protect against inflation, moderate market volatility, diversify and moderate TIPS.
  • P2PL- Diversify and boost returns.

Now, before we move on, let me emphasize this is my retirement portfolio. I have other portfolios as well. Each goal I have gets its own portfolio.

Taking a break on Day 5 of a canyoneering trip

Taking a break on Day 5 of a canyoneering trip

Emergency Fund/Short Term Savings Portfolio

100% Ally Bank High Yield Savings Account

College Portfolios (in the Utah 529s)

The ones for my kids are:

  • 50% Total International Stock Market
  • 25% Vanguard Small Value Index Fund
  • 25% DFA Small Value Fund

The ones for my nieces and nephew (much smaller) are:

  • 50% Total Stock Market Index Fund
  • 50% Total International Stock Market Index Fund

Childrens 20s Funds (in Vanguard UGMAs)

  • 50% Total Stock Market Index Fund
  • 50% Total International Stock Market Index Fund

Childrens Roth IRAs (Vanguard)

  • 100% Target Retirement 2060 Fund

Health Care Fund (in an HSA Bank/TD Ameritrade HSA)

  • 100% Vanguard Total Stock Market ETF

Mortgage Pay-off Fund

Michael-Relvas

Platinum Level Scholarship Sponsor

This is 100% stock, a bit of a play money account, mostly tilted to high-volatility and high expected return asset classes with the goal to tax loss harvest losers and donate winners to charity. There is no written investment plan for this account. As I write this post, it looks like this:

  • 23% Vanguard Precious Metals and Mining Fund
  • 7% Vanguard Energy ETF
  • 21% Vanguard Emerging Markets ETF
  • 7% Vanguard Health Care ETF
  • 15% Vanguard 500 Index ETF
  • 26% Vanguard Total International Stock Index ETF

Real Estate

I also have some real estate I’ve been dabbling into and may eventually fold into my retirement allocation. I’m really not sure what I’ll end up doing with this. It’s a very small chunk of our net worth and discussed in more detail here.

  • Equity 79%
  • Preferred Debt 15%
  • Debt 6%

The Retirement Accounts

So, now that we’ve been through all that, none of those accounts are particularly large in relation to our net worth which is primarily in our retirement accounts, our house, and the value of our business. Our retirement accounts look like this:

  • His Roth IRA (mostly at Vanguard with some at Lending Club) 19%
  • Her Roth IRA (Vanguard) 11%
  • His TSP 18%
  • His Partnership 401(k) (Schwab) 32%
  • His Partnership Defined Benefit/Cash Balance Plan (mostly ignored for AA purposes, but around 70/30 last I checked.)
  • His WCI 401(k) 15%
  • Her WCI 401(k) 5%

Here is how things are currently set out.

His Roth IRA 19%

  • Lending Club P2P Notes 4%
  • Vanguard REIT Index Fund 8%
  • Bridgeway Ultra Small Company Market Fund 5%
  • Vanguard Total International Stock Index Fund 2%

Her Roth IRA 11%

  • Value Index Fund 5%
  • Small Value Index Fund 5%
  • Total International Stock Index Fund 1%

His TSP 18%

  • G Fund 10%
  • S Fund 8%

His Partnership 401(k) 32%

  • Schwab TIPS ETF 8%
  • Vanguard Emerging Market ETF 5%
  • Vanguard Small International ETF 5%
  • Vanguard Total Stock Market ETF 14%

His WCI 401(k) 15%

  • Inflation Protected Securities Fund 2%
  • Extended Market Index Fund 1%
  • Total International Stock Index Fund 12%

Her WCI 401(k) 5%

  • Total Stock Market Index Fund 4%
  • Extended Market Index Fund 1%
commonbond

Platinum Level Scholarship Sponsor

There is a total of 7 accounts (His Roth IRA is in two places), 12 asset classes, and, ignoring admiral/investor share class differences, 15 different investments. Now let’s critique it a bit.

The Good

  1. Low-Cost – The average expense ratio of the entire portfolio is 14 basis points. Could it be lower? Sure, but when you’re down below 20 basis points, there isn’t a lot of benefit to trying to lower that, especially when there are NO advisory fees on top of it. I mean, I’m stuck with higher investor share class ER in the individual 401(k)s, the Lending Club fee is 1%, and the Bridgeway fund is 0.78%. Maybe if I dropped those two asset classes and moved the individual 401(k)s somewhere else I could get down to 10 basis points. No biggie.
  2. Easy to Rebalance – For such a complex portfolio, the rebalancing is really easy. You’ll notice the presence of the Total International Fund in four of the six accounts and the S Fund/extended market index funds in 3 of the accounts. That’s where the magic happens. When I need to add to something else in the account, it comes from those funds and more is added to those funds in another account. The only painful one is the P2PLs which require an IRA transfer to rebalance and make contributions. I actually do that two or three times a year.
  3. Takes Advantage of The Good Things In Each Account – The only place you can invest in the G Fund is in the TSP, so that’s where I put that. At Schwab, there are no commissions for Schwab ETFs, and I see little difference between the Schwab and the Vanguard TIPS ETFs, so I just used the Schwab one. The Vanguard ETFs there are available for a low commission. Everything else is at Vanguard where the only dilemma is which funds to choose to get the Investor class ERs in the individual 401(k)s and which ones to put in the IRAs.
  4. Higher expected return assets in the Roth IRAs – This is a very minor point, but I actually increase the risk of my portfolio slightly (thus hopefully boosting returns) by keeping higher returning assets in the Roth IRA as opposed to the 401(k)s. Since I don’t adjust my AA for tax considerations due to hassle (tax adjusting them is probably the academically correct thing to do), that’s how it works out.

The Bad

  1. Complexity – Nobody can argue in good faith that anyone needs 12 asset classes. You can see how complex it can get trying to move around twelve asset classes in seven different accounts. I think the minimum is three asset classes, and I think there is pretty good bang for your buck going from three to seven. There may even be some advantage in going from seven to ten. But over 10? Who are we trying to kid? At this point we’re just playing with our money. What are the likely candidates for being dropped at some point in the future? In no particularly order, Large Value, Extended Market (mostly mid-caps), Micro-caps, P2P Loans, REITs. Dropping all of those would get us down to seven.
  2. Overloaded on Emerging Markets – The original plan called for 15% Developed Markets. That was back when I was using the TSP I Fund, which does not include Emerging Markets. However, over the years I gradually moved I Fund money into the G and S Funds because I wasn’t adding new money to the TSP. Meanwhile, I was substituting TISM instead of Vanguard Developed Markets fund for the I fund because I think it is a better fund. But I was still holding a separate emerging markets fund. By the time I realized how overloaded I was in EM, it had already tanked and I didn’t want to sell low, so I’m just riding it out. I’ll probably fix it at some point.
  3. Bond ETFs Not Great – There are some issues with bond funds, but even more issues with bond ETFs. They may not apply much to an ETF that is all treasuries, but I’d eventually like to get out of the Bond ETF game. So I’m gradually adding money to the TIPs Funds in the individual 401(k)s and not adding more money to the Schwab TIPS ETF. To be honest, those individual 401(k)s have made rebalancing much easier than it used to be! I may eventually just own individual TIPS instead of a fund at all, but so far it hasn’t been worth the extra hassle to me.
  4. Ignoring the HSA – Since I’m investing my HSA for the long haul, I probably ought to include it in the retirement asset allocation. The same argument could probably be made for the real estate stuff in taxable and maybe even the mortgage pay-off fund.

Comparing to 2012

Well, let’s compare to what was going on back in 2012. In 2012, we had six accounts, eleven asset classes, and thirteen funds. So we’re a little more complex due to the additional asset class and additional accounts, but not terribly worse. Back in 2012, I had seven asset classes in my Roth and now I’m down to four. I have more asset classes in my partnership 401(k) as it has grown, and fewer in the TSP which has not had any additional contributions (actually I did transfer my DBP in there when it was closed.) And of course we have since started individual 401(k)s. The retirement portfolio is about four times the size it was at the beginning of 2012. This is due primarily to additional contributions, but also due to decent returns. Our returns have been:

  • 2012 13.9%
  • 2013 19.7%
  • 2014 6.3%
  • 2015 -0.3%

Contributions for those years include (counts money added to the portfolio during that calendar year, not contributions assigned to that tax year):

  • 2012 $60,500
  • 2013 $87,923
  • 2014 $117,021
  • 2015 $164,952

Conclusions

Our trek toward financial independence continues. Our income is higher, our retirement nest egg nearly quadrupled in the last four years, we have started a significant taxable account, and we have made lots of progress toward our other goals.

What do you think? Is that portfolio insane or what? Do you have a written investing plan? How are you invested these days? Has it changed much in the last 5 or 10 years? What is your asset allocation? Are you making progress toward your goals? Comment below!