I know many people here like the permanent portfolio, but I don't feel comfortable with that much in gold and bonds and I don't have many options within my 401k. I'm having trouble with creating an investment election within my 401k. I currently have about 6 mo salary invested and I continue to add about 15% of salary each year. I used to have 100% in the S&P 400 midcap index, but as my savings has grown, I realized the need to diversify. I've moved some money into TIPS and REITs. However, these separate funds are going away and being replaced by a single diversified fund which includes commodities. So I need to come up with a unified plan. I'm young (early 30s) and have a very high tolerance for risk. (I only start to get concerned if my portfolio loses more than 50%). I do not expect to retire until late 50s.
Here are my options:
Bond Funds:
Government STIF
Short term bond index
Bond Index (Intermediate term)
US Stocks:
S&P 500
S&P 400
Russell 2000
International Stocks:
International Developed Country (no US, mostly UK, JAP, CAN)
MSCI Emerging Market
Misc.
Diversified Choices fund (1/3 TIPS, 1/3 REITs, 1/3 Commodities)
The most expensive fund (emerging markets) has a cost of 15 BP, but most are 2-5BP, so I don't consider the expense ratio to be significant factor in choice. I looked into getting a self managed account, but the cost would be prohibitive. So I'm stuck with these choices for the foreseeable future. All are passively managed index type funds.
Here's what I'm thinking for a portfolio:
10% S&P 500
30% S&P 400
15% Developed Country Intl.
15% MSCI Emerging Markets
30% Diversified Choices (REIT/TIPS/CMDTY)
This puts me with 70% stocks (with slightly more than half US and the rest international) 10% REIT, 10% TIPS, 10% Commodities
Anyone see a problem with this allocation for investing long term? I do not plan to draw on this account for at least 25 years. I do not have any significant assets outside this account aside from a small emergency fund.
What does your asset allocation look like?
Portfolio creation / Asset allocation - help needed
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
I'm surprised you're uncomfortable with that much in gold and bonds considering the portfolio you're looking at. The 40% S&P is arguably the most stable part of your portfolio. Emerging markets are unreliable thanks to political instability, shaky rule of law, and unreliable accounting/accountability. Options are risky, and REIT stocks have been losing capital for a long time now. REITs are particularly uncertain in the long term, since they are easy prey to interest rate changes, although I think they're a good short-term play.
I'm not in PP but I'm seriously considering it--anything that has returned around 9% for several decades is worth a careful look.
I'm not in PP but I'm seriously considering it--anything that has returned around 9% for several decades is worth a careful look.
It doesn't matter that PP returns 9% if the fees for a self managed account are 5% (of my current balance). I can't do it. I have to work with what I have.
The name of the Diversified options fund is misleading - it has nothing to do with options, it means diversified choice. I'll rename it to prevent further confusion.
The name of the Diversified options fund is misleading - it has nothing to do with options, it means diversified choice. I'll rename it to prevent further confusion.
Anyone see a problem with this allocation for investing long term?
When there are lots of funds with arbitrary-seeming weights (10% here, 15% there), there's always a temptation to later fiddle with the weights or delete a fund or add one more. In hindsight those changes are usually a form of market timing that hurts the overall portfolio.
So, if you are committed to a stock-heavy index fund portfolio I would simplify it by reducing the number of funds and using round-number allocations. With your fund list I'd do
1/3 S&P 500
1/3 Int'l developed
1/3 intermediate bond index
It doesn't matter that PP returns 9% if the fees for a self managed account are 5% (of my current balance). I can't do it.
If instead your goal is to eventually have a PP, I would recommend investing the 401k conservatively, probably in the short term bond index, until it's large enough to use the brokerage option efficiently.
When there are lots of funds with arbitrary-seeming weights (10% here, 15% there), there's always a temptation to later fiddle with the weights or delete a fund or add one more. In hindsight those changes are usually a form of market timing that hurts the overall portfolio.
So, if you are committed to a stock-heavy index fund portfolio I would simplify it by reducing the number of funds and using round-number allocations. With your fund list I'd do
1/3 S&P 500
1/3 Int'l developed
1/3 intermediate bond index
It doesn't matter that PP returns 9% if the fees for a self managed account are 5% (of my current balance). I can't do it.
If instead your goal is to eventually have a PP, I would recommend investing the 401k conservatively, probably in the short term bond index, until it's large enough to use the brokerage option efficiently.
If my asset allocation seem arbitrary, how does one create a portfolio that is not arbitrary?
I guess I'm having a difficult time settling on an allocation because there seems to be no consensus or formula to follow. It all seems to be so subjective. Aside from having non-correlated assets, dollar cost averaging, and re-balancing, I can't find any solid info.
I don't see the point of bonds right now with the possible exception of TIPS, I bonds, or a high yield fund. The Fed controls the rate, which is currently at 0.25%. I could see them lowering it to 0%, but I don't see them implementing a tax on cash to establish a negative rate. I'd rather just keep cash than invest in bonds. I've included 10% TIPS, and I have my emergency fund and short term savings in cash equivalents.
Is portfolio creation just subjective feelings and preferences? Everything I've read seems to conflict everything else. I'm not very good with feeling things out. I need an equation.
I guess I'm having a difficult time settling on an allocation because there seems to be no consensus or formula to follow. It all seems to be so subjective. Aside from having non-correlated assets, dollar cost averaging, and re-balancing, I can't find any solid info.
I don't see the point of bonds right now with the possible exception of TIPS, I bonds, or a high yield fund. The Fed controls the rate, which is currently at 0.25%. I could see them lowering it to 0%, but I don't see them implementing a tax on cash to establish a negative rate. I'd rather just keep cash than invest in bonds. I've included 10% TIPS, and I have my emergency fund and short term savings in cash equivalents.
Is portfolio creation just subjective feelings and preferences? Everything I've read seems to conflict everything else. I'm not very good with feeling things out. I need an equation.
If you are interested in stability, the most important criteria is whether the investments are correlated or not. More stable investments are composed of uncorrelated investments -- i.e., when one is going up, another in going down.
If I had your choices, I would do 30% S&P 500, 40% intermediate bond and 30% d-choices, but only assuming the fees charged were similar.
It's very boring, but unlikely to lose money in any given year.
And all portfolios are essentially arbitrary. Best guess of the future based on the past. But only a guess.
If I had your choices, I would do 30% S&P 500, 40% intermediate bond and 30% d-choices, but only assuming the fees charged were similar.
It's very boring, but unlikely to lose money in any given year.
And all portfolios are essentially arbitrary. Best guess of the future based on the past. But only a guess.
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
Is portfolio creation just subjective feelings and preferences? Everything I've read seems to conflict everything else.
Well, a lot of people with varying degrees of expertise, conflict of interest, and perspective have sounded off on this subject. It's kind of an echo chamber, or peanut gallery, where most of the participants are ill informed and/or salesmen.
If you want to try to approach this mathematically you could look at the modern portfolio theory literature, e.g. "Asset Allocation" by Gibson. The premise is that the allocation minimizing risk for a given volatility tolerance can be found by solving a quadratic program based on historical correlation data. It's an interesting thought experiment but I'm skeptical of actually implementing it since the methodology, using past correlations to guide future decisions, is essentially superstition.
The Boglehead approach is to boil everything to two assets, the risky one and the safe one, and mix them according to your personal tolerance for risk. The problem there is that anticipating your reaction to unpredictable future events is, depending on how you look at it, either impossible by definition, or at least depends a level of self awareness that VERY few people have.
All of which is why I prefer the simplest possible approach, which is to concede that it's all arbitrary, pick N assets, and allocate 1/N to each.
Well, a lot of people with varying degrees of expertise, conflict of interest, and perspective have sounded off on this subject. It's kind of an echo chamber, or peanut gallery, where most of the participants are ill informed and/or salesmen.
If you want to try to approach this mathematically you could look at the modern portfolio theory literature, e.g. "Asset Allocation" by Gibson. The premise is that the allocation minimizing risk for a given volatility tolerance can be found by solving a quadratic program based on historical correlation data. It's an interesting thought experiment but I'm skeptical of actually implementing it since the methodology, using past correlations to guide future decisions, is essentially superstition.
The Boglehead approach is to boil everything to two assets, the risky one and the safe one, and mix them according to your personal tolerance for risk. The problem there is that anticipating your reaction to unpredictable future events is, depending on how you look at it, either impossible by definition, or at least depends a level of self awareness that VERY few people have.
All of which is why I prefer the simplest possible approach, which is to concede that it's all arbitrary, pick N assets, and allocate 1/N to each.