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Subject:  Re: need help with asset allocation Date:  1/21/2005  12:13 AM
Author:  OldOne Number:  44130 of 88775

Income is $80,000 from pension, social security, and wife's part time job.

As I see it, you have 100% of your portfolio in income investments, and none in equities.

One of the "bibles" of asset allocation is The Four Pillars of Investing by William Bernstein.

On pages 277, 278 and 279 he points out that in allocating a portfolio we should consider a pension as the equivalent of a bond issued by our former employer and SS the equivalent of a bond issued by the government. The first thing we do is to capitalize this at a rate of 6% to possibly 12% for risky pensions. In other words, if you have $18,000 per year from SS, you have the equivalent of ($18,000/0.06) = $300,000 in a very safe bond.

I suspect that when you do this you will discover that you have enough fixed-income equivalents to account for much more than 60% of your total portfolio.

This argues strongly that most, if not all, of the rest of your money should be in equities. Bernstein likes the Vanguard index funds, I hold mostly Exchange-Traded Funds (ETF).

I am about 6 months from retirement, and DW and I will have just over $100k in pensions and SS. We have 94% of our liquid assets in equities. 80% of equities are in ETFs, about equally split between SPY, MDY, and QQQ, with 20% in individual stocks. We have 6% in i-bonds. These are not the funds Bernstein recommends, but I am comfortable with the risk levels right now. We have other investments about equal to our equity accounts in 3 single-family rental houses (now at 50% loan-to-value), which I consider a greatly under-utilized asset class. We do not consider the value of our residence as part of our portfolio, although possibly we should.

We are not going to make any changes in our asset allocation immediately after retirement, although I may start adding foreign equity funds and a small-cap ETF. I will probably rebalance about every 2 years.

My strong recommendation is that you:

1. Buy and read the Four Pillars, and

2. Move most of your investments to equities.

The greatest risk you face is not stock market losses, but loss of purchasing power through inflation.
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