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Author: Lurker1999 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75389  
Subject: How to approach asset allocation? Date: 8/13/2005 1:22 PM
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I would like some input on how other people approach asset allocation.

After some early adventures I have decided I don't like "adventure" in my investments. I don't want to spend the time to analyze stocks because I believe I can't time the market in the long run and betting on a few stocks is too "risky" for me.

I started investing a few years before the spectacular stock market correction in 2000. I took losses to shuffle money to vehicles more suited to my new Foolish strategy after that. Before I stumble blindly into the next disaster I figured it was time to take stock.

I had a rough idea of what I wanted my asset allocation to be and picked my holdings accordingly. But I never broke it down to exact percentages before today. I set up a spreadsheet with all of my investments and labelled them according to Yahoo classifications. I have the following investments:

Taxable:
Dodge & Cox Stock (Mod All) DODGX 24.18%
Mairs & Power Growth (Large Blend) MPGFX 2.89%
Vanguard Total Stock Market (Large Blend) VTSMX 21.72%
Cisco CSCO 0.90%

Roth:
Dodge & Cox Balanced (Mod All) DODBX 10.74%
Essentially a 60/40 split between DODGX and DODIX.
Dodge & Cox Income (Int Bond) DODIX 1.64%

Rollover IRA:
Vanguard Target Retirement 2025 (Mod All) VTTVX 31.47%
Holds 47.1% Total Stock, 47.1% Total Bond, 8.3% European Index, 3.5% Pacific Index

403b:
TIAA-CREF Equity Index (no symbol, it's technically an annuity) 6.47%

Stock = 77.27%
Bond = 19.01%
International = 3.71%

I forget what website I was looking at but it allowed you to play with anything from a 100% stock/0% bond allocation to 50/50, etc. and track your returns historically from the early 1900s to present. With an 80/20 allocation I could offset some of the dramatic swings from an all equity portfolio yet only "lose" 1-3% of returns vs. an all equity portfolio. That seemed quite satisfactory to me.

I'm 30+ years away from retirement and have not reached my full earnings potential yet. My salary should at least double after 2-3 years. I'm maximizing all of my tax-deferred retirement accounts annually. I'm at last in a position to save for a down payment as well as other expenses (car is 13 years old). I'm otherwise very financially content and have sufficient cash which I did not count in this calculation for emergencies. All of these investments are therefore for retirement since I plan on dealing with my immediate/intermediate needs out of my salary and savings.

I lumped all US stocks together. I know some people subdivide the market further since Vanguard Total Stock concentrates more on large caps. I don't think I want to keep track of more taxable dividends/capital gains unless someone has a convincing argument it's worthwhile doing and I should add Vanguard Mid-Cap/Small-Cap Index.

My bond holdings are buried. Total Bond Index is held via Target Retirement 2025. Dodge & Cox Balanced is essentially a 60/40 split between their Stock and Income funds. My Dodge & Cox Income stake is only a place holder currently in the event they close the fund to new investors.

I never settled on what I should do with Cisco. It's down 75% from when I purchased it at the height of the frenzy and my stupidity. Since I grew Foolish I have net actual losses of $6,000 in my taxable holdings (excluding the tax-deferred accounts) which is far better than when I first established all of my current positions. I know money has no memory but if I sell CSCO I'll add another $3800 of losses to that total.. Maybe it will come back? Does it really matter since it's less than 1% of my portfolio?

I continue to add to my 403b and the Roth gets an infusion each year as long as I continue to meet AGI criteria. I also recently started DCA $50/week into VTSMX via payroll deduction. I think an 80/20 split is appropriate for me although I would love to hear other people's opinion about this.

Where do I rebalance when the time comes? My bond holdings are all in tax-deferred accounts with various limitations. I could put my Roth allocation for that year into Dodge & Cox Income rather than Balanced. Is that too narrow of an investment focus?

I don't know if I want more international holdings. I'm fairly certain I want to stay away from REITs since my personal belief is that real estate as a whole has gotten a bit too popular since 2000.

Again, any opinions or suggestions are appreciated.
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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47209 of 75389
Subject: Re: How to approach asset allocation? Date: 8/13/2005 1:51 PM
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Lurker, you seem very conservative in your investment choices. That is fine if that is what matches your risk profile. However, for someone 30 years from retirement, your very high bond allocation is surprising. Most would stay close to minimal bond holdings until you get within about 10 years of retirement.

If spending time on stocks seems out of the question, mutual funds is the right way to go. You seem to have some good ones. Your decision to avoid Reits is fine. Many think there is a real estate bubble which will burst one of these days--at least in residential.

Many people add small cap and mid cap coverage (or total market) over an S&P Index fund, because the small caps and mid caps have been generating better returns recently. Similarly international funds have been doing very well recently.

On Cisco, most people would suggest you sell, take the loss and find something more promising to invest in. Those tech stocks have been quite flat for quite a while. They are probably still over valued--at least in the eyes of investors. In a taxable account, you can write off the loss vs capital gains or deduct up to $3K per year from current income. If the loss exceed $3K and capital gains for the year, the excess can be carried over until its used up.

You don't mention an emergency fund. Do you have one? Are you covered by credit cards?

On rebalancing, do it the way that is most advantageous for you. If you owned high growth investments likely to grow by hundreds of percents, you would like to have them in your Roth since they would never be taxed there. Second choice for equities is taxable account since they get taxed at capital gains rates. So bonds would ideally be in the Roth or as second choice the IRA. But bond funds do make a nice emergency fund. Tax free bond funds can be especially useful for that purpose. Emergency fund needs to be in a taxable account for easy access.

Good luck.

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47210 of 75389
Subject: Re: How to approach asset allocation? Date: 8/13/2005 5:49 PM
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If you're 20 to 30 years away from retirment, I would strongly suggest that you get dump all the bond and fixed asset funds. This is a real drag on the total portfolio. There's no reason at all to have fixed assets when you this far from retirement, at least in my opinion. Good luck. As for diversification, I have my IRA and taxable account with Vanguard. I divide it between Primecap, CapOp, Healthcare, Windsor II, Index500.

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Author: zipper103 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47216 of 75389
Subject: Re: How to approach asset allocation? Date: 8/14/2005 1:57 AM
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I recommend the following book:

'The Intelligent Asset Allocator' by Bernstein

zip

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47220 of 75389
Subject: Re: How to approach asset allocation? Date: 8/14/2005 11:02 AM
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I also think you have way too many bonds. The 80/20 split is even too conservative from a strictly factual point of view.

Now, if you can't sleep at night with too much of the ups and downs of the market, then it's not a good investment strategy, but if you can manage to convince yourself to think long term, and not worry what happens today, tomorrow, next year, or even in the next 5 years, then you should be in substantially all stocks.

You say the 20% mix only drag you down 1-3%, but do you realize how substantial that is?

$1000, invested for 30 years, at a stock market average-ish 10% return
=> $17,450

drag it down to 8%, "only" 2% loss
=> $10,060

You've lost more than 40% of your money due to the lost compounding!

With the time you have until retirement, unless you personally just consider yourself very risk adverse, you should really consider all or substantially all stocks, with maybe a touch of high yield bonds just for diversification effects while keeping higher returns.

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47221 of 75389
Subject: Re: How to approach asset allocation? Date: 8/14/2005 11:08 AM
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>> Now, if you can't sleep at night with too much of the ups and downs of the market, then it's not a good investment strategy, but if you can manage to convince yourself to think long term, and not worry what happens today, tomorrow, next year, or even in the next 5 years, then you should be in substantially all stocks. <<

This part, for those keeping score at home, is critical. If one truly is 30+ years from retirement, then one doesn't need any bonds yet. But that assumes that one can "sleep at night with...the ups and downs of the market." If you can't do that, you're better off with a strategy that won't cause you to make emotional mistakes out of the twin portfolio-killers, fear and greed. Fear and greed cause people to buy high and sell low, and almost guarantee terrible results. If investors have the attitude that they can't stomach huge losses in the short term, they are certainly better off with some bonds (perhaps 20-50%, depending on their time horizon and just how much they can stomach in terms of volatility).

Having said all that, I completely agree that from a detached, unemotional perspective, someone with a 30+ year time horizon should be 100% in equities. If, of course, their ability to not sweat the small stuff allows it. The optimal asset mix assumes no emotion or panic on the part of the investor, and if that's not the case, the optimal mix needs to be adjusted into the comfort zone of the investor.

#29

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47222 of 75389
Subject: Re: How to approach asset allocation? Date: 8/14/2005 11:40 AM
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Here's a good site that shows you the effect of investing in bonds vs. stocks for allocations from 0% stock to 100% stock with a broadly diversified index fund portfolio.

http://www.ifa.com/portfolios/

They also show you a 50 or 75 year backtest of how the portfolio would have performed. It may allow you see how much volatility various choices entail.

intercst



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Author: Lurker1999 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47224 of 75389
Subject: Re: How to approach asset allocation? Date: 8/14/2005 1:08 PM
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Thank you for the input. I think the prevailing wind that my allocation is too conservative has merit. All of my bond holdings are in tax deferred accounts so I can move my holdings without incurring tax consequences. I am considering a shift from the Vanguard Target Retirement 2025 fund to the 2045 fund. That would decrease my total bond market index holding and increase my international exposure. It would also produce an immediate shift to 90% equity (domestic & international) in the portfolio.

Further, instead of adding to Dodge & Cox Balanced for my Roth I could increase my international exposure by buying the Dodge & Cox International fund (my Roth is held directly with D&C) for 2006. It would increase my international exposure to about 8% of my portfolio.

Since I am contributing to equity index funds on a weekly basis via payroll deduction I'll continue to further decrease the bond percentage of my portfolio. Eventually the Target Retirement fund will begin increasing its percentage of bonds, automatic rebalancing.

Selling Cisco would not produce any tax benefits as I have over $30,000 in realized losses that I'm slowly applying towards earned income and capital gains. With the size of my current portfolio I anticipate this taking close to 10 years. I do wonder if selling it now isn't the prototypical bad call of buy high, sell low..

I have an emergency fund covering 6 months of full living expenses that is completely separate from these accounts.

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47228 of 75389
Subject: Re: How to approach asset allocation? Date: 8/15/2005 9:20 AM
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I do wonder if selling it now isn't the prototypical bad call of buy high, sell low..

Here's a commentary from MarketWatch on Cisco:

Commentary: Company's high-growth days are over

http://www.marketwatch.com/news/story.asp?dist=nwhwk&param=archive&siteid=mktw&guid=%7B339E553E%2D36E6%2D4928%2DAC43%2D12A9F335FBFD%7D&garden=&minisite=

Selling Cisco would not produce any tax benefits as I have over $30,000 in realized losses that I'm slowly applying towards earned income and capital gains.

It would produce a tax benefit, but you won't realize that tax benefit until further down the road (greater than 10 years, by what you say). The tax benefit might actually be more beneficial 10 years down the road if ordinary income tax rates are higher in general, or your marginal ordinary income tax rate is higher then.

IMHO, the question you should be asking yourself is, will the dollars I currently have tied up in Cisco perform better invested in something else over the next 10 years? That is a question only you can answer.

2old




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