Asset Allocation

Image courtesy of iosphere/ FreeDigitalPhotos.net

Image courtesy of iosphere/ FreeDigitalPhotos.net

As I turn 35, I just spent a good chunk of time updating all of our investment accounts.  I recently read All About Asset Allocation by Richard Ferri and decided that my haphazard investment selections needed to change, and I needed to really focus on what we wanted.  We want to retire when I turn 50 (exactly 15 years from now), with approximately $2.4 million in assets.  Now, that’s a lot of money, and I’m basing it off the 85% rule – we’ll want 85% of our current salary in retirement, then multiply by 25 for a safe withdrawal rate of 4%.  I’m hoping that we can work to reduce that number closer to $1.5 to $1.6 million (and also the retirement age!) as we work through our debts and lowering our expenses.

We’ve been very aggressive investors up until now – only about 5% in bonds, the rest in equities of varying types – but with a 15 year horizon, we want to start being a little more conservative.  I learned a lot about assets and their correlations and statistics in the book, and I took a look at what we were doing – we had a halfway decent allocation for our very aggressive model, but it could be improved.

We had investments all over the place – my previous criteria was lowish fee (anything above 1% was too high), and good lifetime performance (> 5%, the higher the better).  I had no clue about the Morningstar style boxes, or anything else, they were “stocks” to me.  I also hadn’t changed anything since we set up the contributions, so the balances were out of whack.  At one point earlier this year, I realized how much we were paying in fees, and moved some things around so that we had lower fees.  I pretty much stayed with the same “styles” we had previously.

Proposed Asset Allocation

We’re going with an overall 15/80/5 bond/equity/other allocation.  Some investors use a rule of thumb: your age in bonds, which means we’d be in 35-37% bonds, which is way too conservative for my tastes, and I know 15% bonds is still considered fairly aggressive, but bonds aren’t really my cup of tea.  For the “other” category, we’re using Dad’s 403b account to invest in a real estate (REIT) mutual fund to get some exposure to real estate, without being landlords.  Within the equities category, we’re further breaking it down into total US market (50% of entire allocation), US small/micro-caps (10%), total non-emerging market (15%), and total emerging market (5%).

Specific Funds

Most of our assets are in Fidelity, so I’m using Fidelity/Spartan index funds for the majority of our allocation, with the exception of our official retirement plans.  My 401(k) has a commingled fund that follows the Blackrock Russell 3000 index (no symbol), and it’s the cheapest available in my plan at 0.28% gross expense ratio – all the other funds have .5% or higher expense ratios – 100% of my 401(k) is in this fund, because we can diversify outside of this account for a *lot* less.  Dad’s 403b has access to a lot of Vanguard funds at very inexpensive expense ratios, and one real estate fund at a lowish expense ratio.  All of our “other” allocation is in this real estate fund (CSRIX).  Other funds Dad has in his 403b: Vanguard total stock market signal shares (VTSSX), Vanguard total international stock index fund signal shares (VTSGX), Vanguard total bond market index fund institutional shares (VBTIX), and Vanguard inflation-protected securities fund admiral shares (VAIPX).  We’re splitting everything evenly within his account because the fees are so low.

With our IRAs in Fidelity, I’m using Fidelity funds (because I can trade them for free!): Fidelity Spartan US bond index fund advantage class (FSITX), Fidelity Spartan Total market index fund Fidelity advantage class (FSTVX), Fidelity Spartan small cap index fund Fidelity advantage class (FSSVX), Fidelity Spartan international index fund Fidelity advantage class (FSIVX), and Fidelity Spartan emerging markets index fund Fidelity advantage class (FPMAX).  Those are weighted so that across all of our accounts, the asset allocation is what we want.  We qualify for their “advantage” class funds because we can invest a minimum of 10k in each, that gets us a .02% reduction in fees, so I made sure that we’d meet that minimum by having some funds in one account, and others in our other accounts.

I wanted to reduce the number of overall funds we had, which is made difficult by the selections in our retirement plans (seriously – mostly Vanguard funds in a Fidelity run account?).  I could likely reduce our fees even lower by switching to Vanguard, but that would mean having even more accounts to keep track of – and I’ve been very happy with Fidelity over the last 15 years.

Do we have the “right” allocation?  I have no idea – but I don’t think anyone else really knows either.  In order to prevent “perfect” from being the enemy of done, I just picked something that seemed reasonable to me based on Modern Portfolio Theory.

Any comments on our asset allocation choices?  I’m open to tweaking it, but no major changes until I hit 40 in 5 years.

6 thoughts on “Asset Allocation

  1. Josh @ CNA

    Asset allocation is the most important factor when it comes to investing. I think the 15/80/5 allocation is pretty good and I can’t wait to see how it works out for you. I’m sure you will be sharing your results…right? Anyway, great post, I’d love to see you join the conversation over at CNA!

    Reply
    1. Mom Post author

      Thanks for stopping by – I definitely will indirectly be posting progress through my Net Worth updates, and maybe more directly by breaking out the different classes. We’re continually adding to our 401k and 403b accounts, so I have to figure out how to calculate performance (I think it has something to do with the XIRR function in Excel though 🙂 )

      Reply
  2. donebyforty

    I like the asset allocation, though I admit that this is an area where I’m never particularly critical because they all seem good to me. I think I should read the book you recommend…I’m never sure exactly how to pick the “right” allocation.

    Reply
    1. Mom Post author

      I found the book through the bogleheads.org forum, and it was highly recommended as a place to start. The book can be a bit dry though, especially if you’re not interested in statistics (Ferri talks a lot about standard deviation – it’s his measurement of risk). One thing I really liked about it is that it explains *why* a mix of different assets is better in a way that my mathematical brain understands – with lots of pretty graphs too.

      Reply
  3. cashrebel

    It must be tough to even figure out your current asset allocation with so many different funds. I have a similar allocation as you. 70% equities, 10% bonds, 10% REIT, 10% P2P. From all the asset allocation books I’ve read, it sounds like the most important thing is to re balance your whole portfolio every year or so.

    Reply
    1. Mom Post author

      Thanks for stopping by. I set up a rather complicated spreadsheet which did the math for me, and I just tweaked numbers until the overall numbers were what I wanted. But Goal Seek only works on one field at a time 🙁

      Reply

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