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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: Rip Van Winkle Portfolio Date: 3/23/2004 11:45 AM
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Author: yobria | Date: 3/22/04 10:14 AM | Number: 39933
Asset allocation depends drastically on one's age and years to retirement. With almost half its assets in bonds, this portfolio would be appropriate for a retiree, but not a 40 year old (assuming this is retirement money) who has 20 years of new money to contribute before retirement.

If I were the 40 year-old in your example, I would dollar cost average into only an S&P500 Index fund like VBINX until five years before retirement. Then, I would begin to add an intermediate bond fund and a Large Cap REIT fund.

Here is how I would adjust my portfolio as I approached retirement (R):

R-6: 100% S&P500
R-5: 90% S&P500 Index, 5% Bonds, 5% REITs
R-4: 80% S&P500 Index, 10% Bonds, 10% REITs
R-3: 75% S&P500 Index, 12.5% Bonds, 12.5% REITs
R-2: 70% S&P500 Index, 15% Bonds, 15% REITs
R-1: 65% S&P500 Index, 20% Bonds, 15% REITs
R-0: 60% S&P500 Index, 25% Bonds, 15% REITs

The changes as you approach retirement serve to reduce the volatility of the portfolio while retaining as much growth potential as possible, so you arrive at retirement with a portfolio that is capable of supporting the highest safe withdrawal rate. The thing you must guard against when approaching retirement is a portfolio that is highly correlated with the total stock market which, as we all know, can plunge 50% or more in a single year and stay there for decades. If this were to happen to your retirement portfolio right before retirement, it would greatly reduce the safe withdrawal rate. So, you must stabilize it prior to retirement.

The reason that I have added REITs to the picture is that they are only slightly correlated with the S&P500 and nearly totally uncorrelated with the Intermediate Bond market (see William Bernstein's book 'The Intelligent Asset Allocator'). In addition, they have an historical growth rate (too short to be statistically conclusive, however) of about the same as the S&P500. Thus (IMHO) they provide an excellent stabilizing characteristic, and increase the long term safe withdrawal rate. There is not enough historical data to provide statistically conclusive evidence for the 30 year max safe withdrawal rate for this portfolio. However, I believe it to be around 4.5%.

Russ
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