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September 26, 2012


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new at this

So I agree with the basic jist of your post. Asset allocation is a good thing. But wonder if you have any more insights? For example, My weighting is 40% US Lg cap, 5% Int'l Lg cap, 5% US small cap, 40% Fixed income, 10% cash.

Is this good? No idea, but it tends to "feel" ok to me when when things get scary and also meets the minimum threshold of maintaining at least 50% in equities.

However, would be interesting to know if there is some compelling data that might suggest a different tweak to this would create a higher probability of achieving my goal, which is to not run out of money in the next 50 years.

Would also be intersted to know what allocation you use within your larger buckets of stocks, Bonds and Cash....

Retired Syd

New: I don't really have any insights to share with regard to your specific allocation. I use an investment advisor who's company provides me their asset allocation/risk tolerance profiles. I operate right off that.

Since I don't want to get in the business of recommending any particular brokerage or bank, I'm not going to get specific, but I've seen many allocation models floating around, and they all look pretty much the same to me. I suspect they are all using the same or similar asset allocation software.

In fact, if you do go meet with an investment advisor, they will plug the data from your portfolio into that software and show you how far off the "efficient frontier" you are (which just means is your portfolio taking on too much risk for the return you would expect to receive, or conversely, for the amount of risk you are assuming, could you be receiving higher returns.)

Here's something with asset allocation models that I just found poking around the internet:


It looks much like mine. The only thing I might suggest you consider in your allocation is a possible allocation to international stocks.

I know you are only a few months off from retirement. It might be the right time for you to get an hour or two with an investment advisor or fee-only financial planner to see how your situation and asset allocation looks to a second opinion. It sure helped my peace of mind.

new at this

Yes, About 2.5 months to go!! (Secretly writing this note while in a very boring meeting with corporate bureaucrats -- though they think I'm actually taking detailed notes on what they are telling me to do....).

I have accounts with 5 brokerages and have asked their sales people (eh em, I mean investment advisors) this same basic question....The common denominator seems to be that 90% of your results will be dictated by %stocks versus % bonds (with sweet spot between 50% to 70% stocks)...And none seem to be able to back up an argument that shows any great advantage to picking off the right "sub-category", like mid cap versus large cap versus Int'l....(Though I have met various people along the way with very strong "opinions") But your periodic chart suggests that their might be a pony in there somewhere.....

As for advisors, as a person who admittedly tends to stick to my own opinion until proven otherwise, haven't ever met an advisor that has been able to really provide much more than their biases when it comes to the "sub-category" question....Fine people perhpas, but I'd prefer to ask someone's advice who is actually living it (like yourself)...

There just seems to be something fundamentally out of whack with asking a person who still has to work for a living, how to not have to work for living....

As always, thanks for starting the conversation.

new at this

P.S. When I saw the same picture of the periodic table at the top of this second post, took me a second to realize it wasn't still Post#1.....Could explain why nobody else is joining in on the discussion....

Retired Syd

New: First to your second comment, I think you're right--I probably should have changed the image. I got kind of in a hurry to post and settled on that to quickly, I think.

I'm laughing that you are at a meeting and people probably think you are so engaged in it while you are really fantasizing about your retirement. So funny!

So first on the asset allocation thing. I read the chart a little differently than you do. I'm not really looking for the pony, I don't know which one is going to cross the finish line first in any given year. The benefit I'm looking for is the effect that including all the classes has on reducing my volatility (sleep at night factor).

Before I retired, I was, like you, more focused on return. Living through 2008 (the someone-who's-actually-living-it factor to which you refer) showed me I was paying too little attention to the risk side of the equation. So for me the chart represents a way to reduce risk, not to figure out the best return. If that makes any sense.

Now, you and I definitely have something in common. I read a bunch of blogs and articles about retirement, and as you know, I'm more interested in the lifestyle content than financial content. I always bristle at those giving retirement lifestyle advice when they aren't even retired. That's one where I feel like you have to live it to truly understand it. Otherwise you are just spouting advice based on what you think it's going to be like. I've got news--no matter how you've pictured it, there will be some surprises for you!


Ok, I'll admit it upfront: I hate bond funds because they never "mature" and they tend to fluctuate wildly with interest rates (depending on "duration").

My suggestion for the "bond" (fixed income) portion of an asset allocation: consider individual bonds (or CDs, savings bonds, savings accounts, etc) instead of bond funds. Yes, this is more work than a bond index fund. But, unlike bond funds, individual bonds can be kept until maturity regardless of how much their value fluctuates with interest rates.

Yes, this means that one needs to have enough money in the "fixed income" portion of the asset allocation to be able to buy enough different bonds to be diversified. If one doesn't have enough to do that it might be best to stick to CDs and savings accounts for the fixed income allocation until enough capital is accumulated.

One reason I mention this is because I bought bonds back when interest rates were much higher. Since those bonds have a long way to go before they mature they continue to pay very nice rates of interest and I don't care one whit how much they fluctuate in value. Had I purchased a bond fund the yield and value would be all over the place. We are talking about "sleeping at night" after all.

Once one is retired consider putting some of the equity (stock) portion of the portfolio into dividend stock indexes (such as DVY or SDY) or mutual funds that focus on dividend stocks. They tend to be a bit less volatile than the market (VTI, total market index fund) but have a higher yield, which helps boost income a bit.

My 2¢.

New at this

And they are off...Which ones do want to have a bet on? Option 1, you split your money even between all; Or option 2, since your winnings are based on the average speed of only the horses you bet on, you cleverly just spread your bets across the two or three with the best returns over the long term.

The issue with option 1 is that if you include horses that don't have a sufficient track record, you will hurt your average by including them.

So my own research says the only horses that have proven to be strong runners over the long term, are US large caps and US small caps. All the rest of the alternatives require that the future is different than the past (e.g. Mid caps knave underperformed consistently)....or your making a leap of faith that "emerging markets" are going to align to the mean.

So while I understand the pitch about reducing volatility by including all the options, we need to be really careful to only include choices that have a basis for pulling the aggregate up.

So I seem to be limited to just US lg and small caps. Everything else Ishtar a leap of faith.

P.S. If I'm wrong about something in this theory, I'd rather learn it this way than in the real world.

New at this

P.S. My above comment only applies to alternatives within the "equity" bucket of your portfolio.

Retired Syd

New: That seems like a well-reasoned approach to me. I have never done the work that you have done to analyze what the effect of international markets has on the basket. Like I said, I just follow the allocation that my investment advisor publishes. I may, indeed be getting lower returns at higher risk than you are, who knows. But so far, I'm on track to be getting the return that I need I need to last for 50 years (the last cell in my spreadsheet turns red at age 101) and am able to sleep at night. Like I said, some may say that I've decided to be lazy. They wouldn't be wrong.

Admittedly, I haven't studied this, and it sounds like you have, but from the chart above doesn't it look like the green emerging market box pulls the basket up more in the up years than the down does in the down years?

New at this

Near term, yes. The issue is, by definition, with an emerging market, it's hard to establish a long term track record. We really are betting on the come here....Another observation that concerns me with this discussion is that all of the research that supports the ability to pull 3% for 50 years is based on a basket of US stocks. With the exception of Australia, the US provides the only regression base that supports a 3% WR.

I sincerely hope your advisor has a better crysal ball than mine, but depsite the theoretical attractiveness of the " reduce volatility" argument, when it come time to stand strong during the next crash, I'm only going to feel secure in a strategy that is based on proven history.


Warren Buffett: "I will take the market return and be happy with it, because I know the odds of beating the market over my investing lifetime are slim."

As a finance major I made my first equity investment at age 19 and have managed our account since that time (save a four year stint with an international equity advisor). My experience includes individual equities, options, alternatives,and some market timing, and like many owned some Berkshire Hathaway over the years. Some were home runs, others crashed and burned. Based on my research and validated by personal experience, I am a believer in index/broad based low cost investing with allocations that match risk tolerance (but, if you want to allocate 5% or 10% to your personal hedge fund and shoot for the stars, feel free and enjoy, you may be fortunate and beat the market, and attribute it to your wisdom and insights :-).

IMHO the low cost broad based or index funds (equity and fixed) serve retirees particularly well as I believe the focus should be on capital preservation with reasonable growth opportunities with commensurate risk as part of a solid allocation plan (think 2000-2002 and 2008, for equities ... ouch! ... and don't forget the value of fixed investments in a portfolio).

The time to swing for the fences was in the early to mid earning years, IMHO. To each their own, of course, and Jacq I believe takes a different perspective and I wish her well; I just respectfully see it differently and thought I'd add to the discussion.

Best to all.

Retired Syd

New: You sound like a person that has their asset allocation perfectly suited to their risk tolerance. Pass Go and collect $200!

Retired Syd

DGP: I have read many compelling arguments for investing in bonds over bond funds. I haven't really studied that one either though, as to how much difference it would make to the portfolio.

Rick: Hmmm, you were with an international equity advisor, do you have an opinion on whether to allocate some portion of one's assets to international equities? You might be able to speak to that one better than I.


Some suggest that the equity portion of the portfolio be 2/3 US (VTI) and 1/3 international (VGTSX), which seems reasonable to me. Of course, we all desire some negative correlations in our asset mix to reduce overall volatility, and sometimes we achieve it and other times not so much (recall that there was really no place to hide in 2008, other than cash, and even that was a bit dicey at times).

Retired Syd

Rick: Yep, I'm sure hoping we never see another 2008!


Syd, as a fellow retiree about the same as me (I am 49 now), I have a two-tiered approach to risk tolerance and asset allocation (AA).

The first tier is part of my portfolio which generates the income needed to cover my current expenses. It is mostly in bond funds, the biggest part in a bond fund which contains corporate bonds at or slightly below investment grade. The overall AA of this part of my portfolio (about 2/3 of my total portfolio) is about 68/32 in favor of bonds with the stock portion invested in growth and dividends (which are taxed today at 0% federal), the latter of which are reinvested.

The other tier in my portfolio is a Rollover IRA from my old job. It maintains a 55/45 ratio in favor of stocks because I won't need to access this money until at least age 60. The stock part is in an S&P500 index fund while the bond part is in an intermediate-term, investment-grade corporate bond fund. At some point in the next few years I will adjust the AA so more of it is in bonds (I look forward to your piece about rebalancing).

I need to have two different AAs and risk tolerances because I have vastly different investment goals for each part of my portfolio. Combined, however, I am at about 60/40 in favor of bonds which is more than my age in bonds but then again I an "living" like someone older than I really am because......I am RETIRED! :)

New at this

Rick - I've heard the 2/3rd VTI, 1/3 VEA (Int'l) AA recomended before and have seen populus books like "ETFs for dummies" that makes a big push for allocating a big slug to Int'l. Intuitively it sounds so clean; and in some periods have seen charts that reflect less volatiliy because of low correlation. But I also read a report that said the only "proven" market to support a reasonable SWR is the US and Australia.

Including others, like Int'l, actually wouldn't have worked very well over the last 80 years. So while it "feels" right to include Int'l, I can't find anyone who can support the idea with actual data. Any insights?


Hi New,

Good question and good observations for which I don't have any great insights. I am mindful that the historical models are quite helpful, but of course not infallible since there are no guarantees that history will repeat itself (at least not necessarily in my remaining horizon). I also note our world is much smaller than it was even 15 years ago, and international adds some additional diversification (although some fairly argue that US equities now inherently have international exposure due to the nature of the global economy).

I suppose the backstop is regardless of the portfolio mix we are adaptable and faithful so we'll make it forward one way or another.

Have a great weekend.

Retired Syd

Rick: That's a good observation. The world is flatter, and that is probably an indication that the international markets will become more and more correlated, providing less of a buffer to that basket.

Retired Syd

deegee: I do the same thing. First I come up with an overall allocation, though, and then I put most of the equities in retirement accounts and most of the more liquid assets in non-taxable accounts. This can be a bad tax answer as interest is taxed at ordinary rates, and you are giving up capital gains treatment for those assets in retirement. But I do it so I can access the liquid assets now (as I'm spending them down until I can get to the retirement assets. For me it's about more than just getting the income off of them!)

New at this

One last observation on this point is that if you pull up a quick chart comparing, say, sp500 and EFA (Int'l), if you believe they will always eventually converge, it appears to be a good moment to place your bet on Int'l. However, as an employee of a US multinational, we just seem to have such an advantage structurally that it's tough to bet on what has historically always been a slower horse. Europe specifically has a very punitive tax situation that just tends to dampen enthusiasm and place like Japan and China have their own unique obstacles. So when its all said and done, although the past cannot predict the future, it's all we got.

Thanks for providing the forum.

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