For the first time in many years, we made some significant changes to our asset allocation this year. This is not something we do lightly nor frequently and we try not to do it in response to changes in the markets. These changes are changes we have been thinking and talking about for literally years and put down in writing for months before implementing to make sure we really wanted to make them.
Reasons for Changing Portfolio
Our goals with this restructuring were the following:
- Reduce overall number of asset classes
- Reduce number of accounts
- Maintain similar overall risk (both market risk and currency risk)
- Maintain a small value tilt with domestic equities
- Increase allocation to real estate
- Decrease platform risk and active management risk
- Decrease costs
As you will recall, our old retirement allocation looked like this:
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%
-
Thoughtful meditation before changes to my portfolio.
25% International Stock
- Developed Markets Large 15%
- Developed Markets Small 5%
- Emerging Markets 5%
25% Bonds
- Nominal Bonds (G Fund) 10%
- TIPS 10%
- P2PLs 5%
There were 12 total asset classes, which seems okay until you realize that might mean closer to 20 different investments spread across almost ten different accounts. The portfolio complexity was overkill.
The new allocation looks like this:
60% Stock
- 40% US Stock
- Total US Stock Market 25%
- Small Value Stocks 15%
- 20% International Stock
- Total International 15%
- International Small 5%
20% Bonds
- G Fund 10%
- TIPS 10%
20% Real Estate
- REITs 5%
- Real Estate Debt/Hard Money Loans 5%
- Real Estate Equity, Small Businesses, Websites, and Other Opportunities 10%
That cuts us back to 9 asset classes and allows several accounts to be closed (eventually.)
Let's go through each of the significant changes and discuss the reasoning behind them.
# 1 Dropping Peer to Peer Loans
This was such a significant change it got its own blog post-Why I Decided to Liquidate My Lending Club Account. The bottom line is that the asset class, and particularly the way in which I was investing in it, was becoming less and less attractive as the years went by, especially when compared to the hard money lending opportunities out there. In addition, dropping this asset class will eventually allow us to close three accounts- the Roth IRA at Lending Club and taxable accounts at both Lending Club and Prosper.
# 2 Giving up on BRSIX
I have been a faithful holder of the Bridgeway Ultra-Small Market Fund for over a decade at 5% of the portfolio. My records show that my first purchase was shortly after walking out of residency. Over that time period, we have enjoyed an annualized return of 10.8%. I certainly would not call it a bad investment. However, there have been several things that have bothered me about it over the years.
First is the expense ratio. At 0.75%, it is approximately 15 times higher than many of my investment holdings.
Second, it has relatively high turnover and frequently sends out massive capital gains distributions. This doesn't matter much to me since I have always held it in a Roth IRA, but for a fund that is supposedly tax-managed, this has driven a lot of investors away.
Perhaps most importantly, the fund has shown that it really cannot meet its stated goal. I don't blame John Montgomery. He and his team sure tried hard. But I think they have chosen an impossible task. It is basically impossible to capture the return of the CRSP 10 (i.e. the 10% smallest stocks on the market.) The tracking error of this fund against its stated benchmark has been both positive and negative, but it was always much more than you would hope from an index-like fund.
In many ways, this fund is actively managed, and I'm not a big fan of active management. I think it's great that Bridgeway gives away half of its profits to charity and pays it's most poorly paid employee no less than 1/7 of the CEO's salary, but I would rather they passed that savings on to me as the investor and owner of the fund to decide which charity I wish to support. The bottom line is that I have been using this fund to help me get my small value tilt. I think I can maintain that tilt about as effectively by just moving this 5% of my portfolio into the small value allocation. A year ago when Bridgeway raised IRA fees I moved this holding to my Vanguard account. That makes the exchange for small value that much easier and eliminates one account to track.
# 3 Dropping Large Value
In a similar manner to the microcap fund, this was an easy target when it came time to reduce the number of asset classes in the portfolio. This 5% basically went into the small value allocation.
# 4 Dropping Extended Market
When I designed this asset allocation, a major chunk of my investments were in the TSP. However, as the years go by, the TSP becomes less and less of my portfolio since I am not making any ongoing contributions to it. The only small cap fund in the TSP is really an extended market fund, which is mostly midcaps. While that helped me some to get my small value tilt and perhaps also helped me capture a unique mid-cap factor, this asset class has somewhat reluctantly made its way to the chopping block. If I want to own more real estate, something has to give. Since it will take me a while to ramp up the real estate since I'll be doing a big chunk of it in taxable (a relatively small portion of my portfolio still), I'll use these mid-caps (specifically the TSP S Fund) to make up the difference until I get there.
# 5 Dumping Emerging Markets
We actually never had the intention to overweight emerging markets. We simply wanted to market weight the European, Pacific, and Emerging Market components of the international stock asset class. However, since the TSP was our main investing account, we were kind of stuck with the I Fund, a developed market only fund. So we added the Vanguard EM fund in the Roth IRAs to get the EM stocks. Over the years, as more and more of the international holding has moved out of the TSP and into various other accounts and I prefer the Total International fund to the relatively highly correlated Developed Markets Fund, EM has gradually been overweighted. Seems like a good place to shave an asset class to me. It's not like we don't still own all of the emerging markets stocks. We're just no longer unintentionally overweighting them. We plan to continue our 5% allocation to international small stocks as we have been pleased with this Vanguard fund since we first invested in it when it opened.
# 6 Figuring Out Real Estate
Although some people think I'm anti-real estate for some bizarre reason, I really view stocks, bonds, and real estate as the three major investment asset classes. In some ways, this formal real estate allocation is really just an acknowledgment of what we have been doing already. I have been running a separate (separate from our retirement allocation) allocation for our real estate empire. It currently includes some syndicated equity and debt investments and the administrative building for our partnership. In addition, I am going to fold the REIT allocation into this 20%, using Vanguard's excellent index fund of publicly traded REITs to assist with rebalancing between the other major asset classes. I plan to use 5% of this 20% for hard money lending, basically real estate-related debt investments. Many of these are available via the crowdfunded syndicated sites and through personal relationships I have. Holding periods are usually less than a year, often as little as six months, yet returns of 8-12% are routine and the debt is backed by the value of the asset. It seemed a great replacement for peer to peer loans in the portfolio. The remainder of the allocation will be dedicated to equity investments, both real estate and other business opportunities such as syndicated shares of my hospital or websites. Even with our 7.5% REITs we're not at 20% yet, but we should be able to get there gradually over the next year. While many of these investments are even less liquid than our P2PLs were, it is still only a small portion of the portfolio, they generally produce good cash flow, and they reward us appropriately for the illiquidity. I'll have an ongoing series of posts about what I'm doing with this section of the portfolio (since it is far more interesting to talk about than the 80% of the portfolio invested in boring old stock and bond index funds.)
Have you ever made changes to your asset allocation? What was your process and reasoning? What asset classes do you think belong in a portfolio? Do you invest in real estate? Why or why not and how? Comment below!
Interesting. I suppose “20% Alternatives” might be better nomenclature, since you are including “small businesses, websites” etc.
Yes, that would be reasonable nomenclature. There’s a whole post on what I’m doing with that 20% coming out in a couple of weeks.
My asset allocation currently contains no real estate, but I eventually intend to add REITs to my Roth IRA and invest in a duplex or other hard real estate investment.
Looks solid, WCI.
I see you’re willing to break Benjamin Graham’s mantra to always own between 25% and 75% bonds. I don’t blame you, of course. I have 10%.
Cheers!
-PoF
Yes, interesting to go from 25% fixed income to 20%. Admittedly, I know very little about the alternatives you mention so I’m looking forward to posts on those, but I wonder if you think them less risky then typical equities thus allowing you to decrease your fixed income allocation? Alternatively, perhaps in (reverse?) Swedroe fashion, by dropping microcaps you feel you can drop the fixed income component too?
I don’t see it as a change. It was 10% G, 10% TIPS, and 5% P2P. It will be 10% G, 10% TIPS, 5% hard money loans.
Some things to consider when thinking about risk:
https://www.thestreet.com/story/13861401/1/real-estate-best-performing-asset-class-during-the-past-20-years.html
http://www.multifamilyexecutive.com/business-finance/business-trends/mba-mortgage-delinquency-rates-stay-low-in-q3_o
http://nesteggrx.com/crowdfunding-the-good-the-bad-and-the-ugly/
I disagree. I view the hard money loans on real estate as fixed income. Riskier than treasuries? Absolutely. Riskier than the P2P Loans they replace in the AA? Probably not.
I don’t own any real estate beyond my primary residence. As you know, I’m not interested in the extra work needed to properly invest in this asset class.
I’m especially looking forward to reading about your investments in websites 😉
How do you find “real estate related debt investments”? What sort of “due diligence” ado we look for / research? What if we don’t have the minimum for the investment? What other sort of similar investment would you recommend? REIT?
We introduce them to you if you sign-up for our free real estate newsletter here:
https://www.whitecoatinvestor.com/free-monthly-newsletter/
That is a book length question, but I have a post coming up about them soon.
You can’t invest if you don’t have the minimum, but you can just go the publicly traded route if low minimums are your primary consideration. Something like REM perhaps.
What about INTERNATIONAL???
Us large cap companies offer some international exposure since they do business all over the world. E
He still has 20% to Int’l…
Looks like a relatively heavy tilt to international, which I’m thinking is good at this moment in time. I was actually going to ask JIm to comment on his reasoning for the international asset percentage he chose.
15% TISM, 5% small international
What makes for a good international index fund (beyond the basics of no fee no load low ER)? Are we looking more for diversification, or exposure to particular factors? For instance, the international index available through Schwab (https://www.morningstar.com/funds/xnas/swisx/quote.html) seems very heavily weighted to Europe and Japan
From Morningstar instant xray
Total Exposure
(% of Stocks)
North America 1.25
Latin America 0.02
United Kingdom 17.40
Europe Developed 44.65
Europe Emerging 0.00
Africa/Middle East 0.47
Japan 23.90
Australasia 7.07
Asia Developed 4.72
Asia Emerging 0.52
Not Classified 0.00
It is also very heavily weighted towards large cap.
I am trying to look into this more, but intuitively it seems this might not be the ideal composition in terms of diversification, or is this a pretty standard composition for an international index and what I should be looking for?
For comparison Vanguard Total International Stock has this composition, which has quite a bit of north american interestingly, but also includes more asia. Its composition while still very large cap weighted has a slight bit more mid cap.
Total Exposure
(% of Stocks)
North America 7.69
Latin America 2.81
United Kingdom 12.04
Europe Developed 29.81
Europe Emerging 1.27
Africa/Middle East 2.34
Japan 17.56
Australasia 4.86
Asia Developed 9.86
Asia Emerging 11.77
Not Classified 0.00
The expense ratio is 0.17 compared to 0.06 for the SWISX.
Anyways, what is the goal with international stock, and which index seems to track that most ideally?
Thanks!
Vanguard include Canada and emerging markets. Schwab doesn’t. I prefer Vanguard’s version. Compare Schwab’s version to Vanguard’s Developed Market Index.
I have 12% RE including my primary residence. I have invested in 2 hospital syndications and one surgery center. These investments are cashed out now.
How do you find these investment opportunities? What sort of “due diligence” do we look for / research? What if we don’t have the minimum for the investment? What other sort of similar investment would you recommend? REIT?
Great to make a move from complexity in the direction of simplicity! Couple of thoughts. As you have a small value tilt in the US, why not do a small small value tilt in international (eg. DLS) instead of just small cap? Why, at this point, increase you risk assets (admittedly not much, only 5%)?
I’ve never been 100% completely sold on tilting. Thus the moderate size of the US tilt and only a small tilt internationally. If Vanguard had an international small value, I’d probably use that instead.
Now that REITs are an S&P sector anyway, how do you account for that? Is that on top of your 5% REIT allocation or just the acknowledgement of its part of the S&P in your 20% RE allocation?
I’ve always considered them a sector and a separate asset class. But that 5% is on top of what’s in TSM and VG SV.
Where did the value of your house come into play? Did you ignore it completely or did it influence the 20% choice of RE?
Ignored completely. If I sold it and started renting I might add it to my retirement allocation.
Personally, when I eventually purchase a home, I will consider it part of my net worth, but I won’t consider it an investment or part of my portfolio. If the home is paid off, then it will reduce my yearly expenses, and that is the main benefit. On the other hand, if I purchase a duplex, live in one unit and rent out the other, then I WOULD consider that an investment.
Solid changes. Simpler is better. I found complexity to add cost and work and not as much diversification benefit as I had hoped (especially when they all went down together), so I think you are on the right track.
Nice changes. I have ten asset classes and would love to simplify, but I still have over 60% of my portfolio in taxable accounts, most of which is sitting on big capital gains.
Via email:
My Portfolio. I’m 72, single, and retired ERMD. Everything’s in Vanguard. 70% Stock, 30% Bonds. No reale state except for paid-off residence. Total net worth: $4.8M
STOCK
Total Stock Index, VTSAX 40%
Growth index VIGAX 13%
Diff. Appre. Index VDADX 5%
FTSE All World ex-US VFWAX 8%
Sm. Cap Val VSIAX 3%
BONDS
Sh. Inv Gr VFSUX 15%
Cal TxFr Int. VCADX 8%
Hy Yd VWEAX 7%
Nice nest egg. I wonder if they always invested that way? I wonder if they would post a comment or advice?
Aggressive but obviously it worked out well.
I like the simplicity WCI! Any thoughts on the lazy 3 (or 4) asset portfolio? That’s what I have been modeling my accounts after…
I think it’s a reasonable way to invest.
Me too! I can’t talk myself into getting excited enough to learn more about all the different options to feel comfortable enough to do more than a 3 fund portfolio. But I think it’s OK. I’m putting away about 25-30 percent of income into retirement each year so should be fine.
You combine any reasonable plan with that sort of a savings rate and any kind of a reasonably long career and you’re going to be just fine.
If that portfolio gets you 4% real, and your income is $200K, that means you’re putting away $50-60K a year.
That means $1.5M in today’s dollars at 20 years with $50K a year contributions and $3.5M at 30 years with a $60K contribution
=FV(4%,30,-60000,0,1) = $3.5M
Even with these modifications do you think it will provide a net increase in asset growth or just a smoothing of returns? I would think you can be even less diversified across asset classes and achieve the same rate of return and similar or less volatility. Maybe just own the World index?
Depends on whether a small value tilt pays off over my investment horizon or not. Certainly investing can be made more simple than this.
World index is hard to own, and mostly bonds which would be a pretty poor performer. Unless you mean some kind of all world index that exists rather than the global asset allocation?
I love your entrepreneurship, it’s a shining example of what can be done.
I realize things get complicated over time. We are spread out over 9 banking systems. Just opening accounts as they came. Mind you many kind of accounts were not even available up until a few years ago.
Some old IRA’s need conversion to Roth. Is there a good time to do that or it doesn’t matter?
Yea. The good time is a year you’re in a relatively low tax bracket. Sabbaticals, part-time, early retirement etc.
What about just cashing them out first when the withdrawal time comes vs. 401 k- any advantage to converting them to Roth there?
Not sure exactly what you’re asking. Yes. Roth conversions make a lot of sense at various times in life. Whether you convert traditional IRA to Roth IRA Or 401(k) to Roth IRA or to Roth 401(k), not big difference.
I got it. Thank you.
It almost feels like you are trying to be a venture capitalist with that 10% Real Estate Equity, Small Businesses, Websites, and Other Opportunities.
A mentality like its play money, but if I hit a home run, maybe I will put more towards it, if I loose it, doesnt matter much.
It definitely leans toward play money I suppose, but there is a goal with it. It’s a higher risk, higher return portion of the portfolio with hopefully low correlation with both stocks and bonds.
As I’ve commented elsewhere, I’m OLDer than WCI and several others here. So our funds are a hodgepodge of overlapping and underlapping funds, 21 or so with 2-3 of some of the same ones across his IRA her IRA etc, and even last year our adult daughter (not us anymore) still owned the last of a Hershey DRP we bought before she was born and gave to her. The many funds evolved as new types of funds were offered- luckily we skipped the loaded mutual funds (thanks Andrew Tobias’s The Only Investment Guide You’ll Ever Need). They all total to our intended 70/30 stocks/bonds and 70/30 US/intl stocks.
I started consolidating recently out of higher fee to lower fee Vanguard index funds, actually selling and buying as we are out of the sock money away phase and in a lowest likely tax rate might be good time to have capital gains on Roth conversions or transfers from one fund to another phase. Accelerated that a bit this year for the buy a boat, we can afford it, phase.
It just occurred to me with this article that we ought to count the army pension as a bond type asset. But at what value? It goes to 1/3 or so if husband dies, and doesn’t survive us, so not quite $1-4 m. Any suggestions, WCI or others? Does it kind of mean we should have hardly any bonds other than CDs for weddings, boat repairs, and other out of the ordinary expected expenses in the future? And just sell stocks to keep that cushion of available cash?
I don’t count pensions as part of an asset allocation. It just reduces the amount of income you need from your portfolio. Having a pension would be a reason to have a slightly more aggressive asset allocation. As far as losing it upon the death of your husband, you just need a plan for that. It might be annuitizing a chunk of the portfolio in your name, buying some life insurance in his name or something else entirely. You just need a plan if he dies 10 years before you.
Thanks WCI; I will do the math and perhaps finally agree with husband and brother (informal financial advisor) that we CAN afford the boat.
I think it depends a little on the pension. As you already know the military pension is a little unique- no underlying assets aside from the government, and it is funded by a special Treasury issue – so in some ways it should be as safe as TIPS (it is indexed annually to inflation, etc.)
It also depends on how much of your fixed annual costs it would cover. We could live pretty easily on just the Army pension if the market tanks, so I use it as an excuse not to hold bonds and not to annuitize.
But everyone is different..
I think it’s a great reason not to annuitize. Buying a SPIA is just buying a pension. If you already have a decent pension, another one isn’t nearly as attractive as it is to someone without one.
Any thoughts on how to count a “self-owned” pension i.e. Cash Balance Plan? Right now I’m planning on treating it as the bond portion of the portfolio vs. tracking the underlying holdings since it’s obviously not as simple to go in and reblance that as self-directed retirement accounts. Obviously the fact that its funding comes out of our own annual cash flow isn’t ignored, but I feel like its less complex to treat it as a fixed income allocation and leave it at that.
I’d ignore it if it’s small. If it’s a big chunk of your retirement money then find out its asset allocation and adjust elsewhere. Most DBPs are somewhat bond heavy, so just hold less bonds in your 401k to make up for it.
It’s small now relative to overall portfolio since it’s fairly new but will grow obviously over the next few years. Part of the way we justify the cost of managing the DBP, in addition to the fact it gets us a small 199a deduction, is it operates like the bond portion, and the asset protection that goes with the program.
I appreciate you answering the comments even on posts that are years old.
Ok, I give up. What does “TSP” stand for?
Thrift Savings Plan- the 401(k) for military and federal workers.
Or Tri Sodium Phosphate used to clean brewing equipment. I don’t think Dr. Dahle would have any of that on hand, though.
Could be another business investment, right? Though that might be tough in Utah.
Not if it can’t be used to make meth.
Controversial statement here, but I think any bonds in a portfolio that is within 10 years of retirement is a waste. Everyone always talks about the average rate of return of bonds over the past 30 years. However, if you look at the historical fed funds rate in conjunction with the Bond return rate, we’re going to likely see bond returns more similar to the mid- half of the 20th century rather than the last 30 years. The average rate of return of bonds from 1930 until 1979 was 3%, while over this period of time the fed funds rate went from 3.5% to 15.5%. The average bond rate of return from 1980 to 2016 was 8.15%, however the Fed funds rate dropped from 15.5% to 0.5%. I think that the best anyone could hope for from their bond return is low single digits for the next 2 to 3 decades, potentially paired with a higher inflation rate. I’m no expert by any means, but mathematically it just does not make sense to be in bonds unless you need a very secure portfolio in the near future.
That’s the fun thing about a portfolio- it’s yours and only has to be right for you. I agree that a reasonable expected return for a high-quality bond fund is the yield on the fund. For the Total Bond Market fund, that’s 2.57%. In 2016, inflation was 1.26%. This year so far it is running about twice that. While it’s hard to get excited about that, I assure you that 2.57% beats -40% every time. And your return on riskier asset classes could easily be that in any given year.
Agreed on multiple fronts. However, in looking back over the past 90 years, there were only four specific, one-year periods where the SP500 would have been a negative return over a 10 year period. The biggest loss averaged -1.5%. With dollar cost averaging, it is highly unlikely that you need to fear any significant market downturn when your investment horizon is 10+ years. Unfortunately, no one knows whether the future will mimic the past. I am just surprised that with your current nest egg along with multiple income streams and a lengthy portfolio timeline (much longer than actual retirement date) that you have any interest in bonds dragging your portfolio for the relatively mild, short term stabilizing affect that they offer. I don’t mean this to be negative against your thought process, I am just surprised based on what I know of your thought process/financial situation. Your portfolio size, income streams, and time horizon already have market downturn risk insurance already built in.
Although my capacity to take risk is high, my need to take risk is low.
Amazing how personal asset allocation can be isn’t it?
Indeed, yes! It’s the old “do I take de-risk when I have enough, or go for broke aiming to be the richest guy in the graveyard” argument.
Not Bad, WCI. Not Bad.
Which int’l small cap did you choose, VFSVX, or perhaps its ETF cousin VSS? Just wondering, not splitting hairs or criticizing. I had a difficult time choosing a fund for my int’l small cap allocation (I hold the TSP I-Fund for most of it) and could use some insight. I actually chose an active one (Fidelity’s FISMX) for the time being and, like most readers, I would prefer a passive one that could fit the niche well.
I think SCHC is the best choice. It is more tax-efficient than VSS. If you are investing in a Roth IRA it may not make too much of a difference, but the downside of VSS is that it contains EM. I think EM is fine, but it is much better to hold separately in taxable due to its volatility and the tax-loss harvesting opportunities it affords.
I hold it using VSS in my 401(k). I’ve owned the fund before as well. Not sure why you would pick an active fidelity fund over Vanguard’s excellent offering for the asset class.
I really like the new simplicity. I have been sticking to 5 funds thus far and have little interest in increasing it. I like keeping it simple while I can concentrate on making money at work or having fun on my days off. I may add alternative investments when I semi retire.
I am curious why only 20% in international?
I am also curious why the willingness or need to take on more risk at 20 or 25% bonds. I believe you are in your 40s correct?
20% of portfolio = 33% of stocks. I think a reasonable percentage ranges from 20% to 50% of stocks. 33% is pretty darn close to the middle of that range. It’s a percentage I can stick with that I think will give me the benefits of investing in international stocks. But I’m not going to argue that 33% is right and 40% is wrong. Both are probably fine if you stick with them for the long term. Now, 95%? I think that’s wrong. 2%? I think that’s wrong.
My apologies, I thought it was 20% of your stock allocation and just misread. Who knows what the right allocation is. When I started my international exposure recommendations were 20-40%. Since I had no idea what the right answer was, I chose 30%. In 40 years I will tell you if it was a good choice.
I’m still curious about your thinking regarding your bond allocation. Being in my 40s I keep 30% in bonds with the plan to increase to 40% when I semi retire since I am less willing to take on risk. How did you make your decision regarding 20 or 25% in bonds?
BTW, I realize you take P2P lending to be part of your bond allocation just as you are allocating hard money lending to be a bond allocation. I can not disagree with you that you are selling debt and that fits well into the bond category, but at the same time that debt is more risky than TIPS or Nominal bond which in my eyes add to the overall risk of the portfolio. My understanding is that bonds are meant to decrease risk. For example, I can loan $50K to my alcoholic cousin but I probably should not consider that investment as part of my bond holding as the risk is extremely high. Somewhat similarly, I consider P2P or hard money loans are strongly tied to the economy and therefor start to resemble equitiy risk as compared to Treasury Risk. Can you please provide your thoughts on this decision as well?
Thanks,
Bonds arent supposed to be less risk, they are supposed to be uncorrelated. We happen to prefer less risky bonds as an investing populace because those offer the best non correlated returns. Risky bonds, and they do exist basically perform like an equity.
Even with 10-25% your portfolio is almost as risky as a 100% equity portfolio given almost all the risk comes from the equities and its still a large majority of the makeup.
I think he’s referring to the Vanguard World Index Fund. It’s 100% stock.
However risky bonds (eg. junk bonds) are correlated with equity risk so don’t serve the function of being uncorrelated with risky assets. Hence the common practice of keeping all your bonds safe and taking all your risk on the equity side. It’s fine to own risky bonds, but it seems to me to be unnecessarily complicating one’s portfolio.
Exactly, hard loans and P2P is correlated with the economy and therefor should act like equities. That is why I do not believe they belong in the bond portion of the portfolio. This brings the uncorrelated to equities or poorly correlated to equities portion of the portfolio down to 20%. More risky than I would like, but WCI is not me and WCI has his own risk profile he needs to deal with.
I think that applies to corporate bonds. I don’t think it necessarily applies to other types of fixed income such as P2P Loans or hard money lending on real estate.
I would think that as any debt does up the risk/return continuum it would become more and more correlated with equity risk, no?
Eh he is willing to take that risk to make 9-10% on his note.
It is correlated though not certain the exact co-efficient.
That being said, I am making 18% on HML. Risk is there, but I am comfortable with it. So is WCI.
What equity are you referring to? You mean the US stock market? I would argue the correlation between P2P Loan performance and the US stock market is very low, whereas the correlation with junk corporate bonds and the US stock market isn’t all that low at all.
Interesting question though, what if correlation is actually negative? When economy was barely recovering (09 etc), companies like LC came up because credit was frozen and thus alot of need for non-bank credit = profit for investors.
Hmm…study would be nice.
Conversely in our current “good” economy and highly priced stock market, P2P returns have suffered…
It is always good to go back and revisit allocations.
Interesting that business investments are only < 10% of your allocation. Considering this site is likely a large portion of your net worth I would have expected this to get it's own category.
Peer to peer loans always made me a bit hesitant.
Thanks for sharing your in sight.
While it’s difficult to value, this business might be 2/3 of my net worth. I don’t include it in my retirement portfolio nor do I include the potential buyout of my practice partnership.
AGE IN BONDS “John Bogle”
AGE IN BONDS “John Bogle” Follow modern portfolio
Swedroe’s books has model portfolios
WCI: What does nominal bonds G fund mean? Why don’t you just use Vanguard Total Bond Fund and Vanguard Total Int’l Bond Fund?
Secondly are you a believer that bonds should be placed in tax deferred vehicles and equities in taxable accounts?
1. I prefer having treasury bond yields with MMF risk. That’s what I get with the TSP G Fund. It’s a free lunch of sorts. https://www.whitecoatinvestor.com/the-g-fund-a-free-lunch-military-physician-series/
Not necessarily. It’s actually really complicated. It isn’t just about tax-efficiency, but also about expected return. So there are times when bonds should go in taxable and times when bonds should go in tax-protected. These days it doesn’t matter all that much due to low yields on bonds. More details here: https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/
Thanks WCI. I wish the TSP G Fund was available to me it looks like a good cash alternative fund.
I agree with you with respect to bond and equity placement. I asked because Vanguard adviser told me their is little to refute because their advice is backed by academic studies. The idea of allocating my entire 401K to bonds because of the tax rate arbitrage between capital gains and ordinary income rate seems ridiculous given how much more the account would grow with equities vs bonds.
Unfortunately, it’s complicated. Bonds in tax-protected is often the right answer, especially when rates are high. So the Vanguard advisor is partially right.