What would be a good addition to my portfolio of investments?
I currently have the following assets:
* $74,000 in 4 individual corporate bonds (Sara Lee, Goldman Sachs, Selective Insurance Group, Tenneco Packaging).
* About $5,000 in my employee 457b and Roth 401K.
I will be contributing $34,000 a year to these plans, the maximum allowable.
This money is allocated as follows:
20% Bond Index Fund
20% Stable Value Fund
25% Large-Cap Index Fund
10% Mid-Cap Index Fund
10% Small-Cap Index Fund
15% International Index Fund (All-World ex-US)
* About $25,000 idly sitting in my local bank earning virtually no interest.
I will need about 5k of this money in my savings and checking accounts at all times. Where should I invest the rest?
I was considering buying another corporate bond with a minimum yield of 6%.
Or maybe I could get a REIT index fund?
What about purchasing one or more individual stocks, like Berkshire Hathaway, to round off my portfolio?
Should I do a little of all these?
What do you think would provide diversification and make my portfolio more dynamic?
FYI- I am 42 years-old, and I want to retire in 8-10 years, possibly by 50, but no later than 52.
My risk tolerance is moderate.
How do I create a well-rounded investment portfolio?
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aussierogue
- Posts: 379
- Joined: Thu Nov 10, 2011 1:02 pm
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
No, its not diversified (yet). He has $$74K in corporate bonds and $25K in cash and 5K in the diversified fund items. Q today is 20K of the 25.
I can't see putting that into more corporate bonds. I think I would look into dividend paying stock funds with low expenses. Query how the corp. bonds perform during times of crises and whether you plan on holding them to maturity.
I have personally been looking into high-yielding foreign funds like DWX, SDIV or DOL that have been beaten up recently, but I have not pulled the trigger on any of them, and don't know if I will.
George the Original One could identify some individual issues and REITS if you are so inclined.
Ultimately, the bigger question on when you can retire is comparing your likely expenses with your total savings, which will exceed current assets within 3 years. Have you done those calculations?
I can't see putting that into more corporate bonds. I think I would look into dividend paying stock funds with low expenses. Query how the corp. bonds perform during times of crises and whether you plan on holding them to maturity.
I have personally been looking into high-yielding foreign funds like DWX, SDIV or DOL that have been beaten up recently, but I have not pulled the trigger on any of them, and don't know if I will.
George the Original One could identify some individual issues and REITS if you are so inclined.
Ultimately, the bigger question on when you can retire is comparing your likely expenses with your total savings, which will exceed current assets within 3 years. Have you done those calculations?
Since you asked for constructive criticism:
You don't have much of an inflation hedge. Consider adding gold, real estate, inflation-linked bonds, commodities, or increasing the international stock allocation.
Your domestic stock allocation is so close to the total market that I'd just lump it all together into one index fund.
The modern portfolio theory and permanent portfolio analyses agree that sovereign bonds have better risk-adjusted returns than corporate bonds. Consider replacing all the corporates with treasuries.
Counting everything together, you have a relatively conservative allocation with more bonds and cash than anything else. If you're comfortable with that consider merging it into one simple all-encompassing portfolio such as the permanent portfolio, Swedroe Fat Tail Minimization, or 50/50 world stock / intermediate treasury index.
You don't have much of an inflation hedge. Consider adding gold, real estate, inflation-linked bonds, commodities, or increasing the international stock allocation.
Your domestic stock allocation is so close to the total market that I'd just lump it all together into one index fund.
The modern portfolio theory and permanent portfolio analyses agree that sovereign bonds have better risk-adjusted returns than corporate bonds. Consider replacing all the corporates with treasuries.
Counting everything together, you have a relatively conservative allocation with more bonds and cash than anything else. If you're comfortable with that consider merging it into one simple all-encompassing portfolio such as the permanent portfolio, Swedroe Fat Tail Minimization, or 50/50 world stock / intermediate treasury index.
The problem is that my employer (MTA) does not offer one comprehensive index fund that covers the total U.S. market. In fact, they don't even offer an index fund that covers just the U.S. stock market, let alone anything else.
So, I have to purchase several index funds separately. Luckily, the six funds in my 457b and Roth 401k plans are cheap. My total fees for this portfolio are only 0.47%.
I was thinking of taking your advice before you even gave it. I was going to change my asset allocation as follows:
Stable fund 20%
Bond index fund 20%
Large-cap index fund 20%
Mid-cap index fund 10%
Small-cap index fund 10%
International index fund 20%
Keep in mind that the international index fund (msci all country world ex us index) is not all emerging markets. A lot of this fund is in the developed world, so I don't know if the returns on this portion of my portfolio would outperform the U.S. portion.
I think that if U.S. stocks sink, so will the rest of the world. The only real diversification I see in this portfolio is the fixed income portion.
Sovereign bonds simply do not yield enough to even keep up with inflation, let alone provide enough income for retirement.
Commodities and gold? What index fund can I invest in to track these? My employer doesn't offer it, or I would have made it at least 10% of my portfolio.
If all else fails I might just eat the risk and purchase another BBB-rated corporate bond that yields over 6%.
So, I have to purchase several index funds separately. Luckily, the six funds in my 457b and Roth 401k plans are cheap. My total fees for this portfolio are only 0.47%.
I was thinking of taking your advice before you even gave it. I was going to change my asset allocation as follows:
Stable fund 20%
Bond index fund 20%
Large-cap index fund 20%
Mid-cap index fund 10%
Small-cap index fund 10%
International index fund 20%
Keep in mind that the international index fund (msci all country world ex us index) is not all emerging markets. A lot of this fund is in the developed world, so I don't know if the returns on this portion of my portfolio would outperform the U.S. portion.
I think that if U.S. stocks sink, so will the rest of the world. The only real diversification I see in this portfolio is the fixed income portion.
Sovereign bonds simply do not yield enough to even keep up with inflation, let alone provide enough income for retirement.
Commodities and gold? What index fund can I invest in to track these? My employer doesn't offer it, or I would have made it at least 10% of my portfolio.
If all else fails I might just eat the risk and purchase another BBB-rated corporate bond that yields over 6%.
my employer (MTA) does not offer one comprehensive index fund that covers the total U.S. market
If it were me I'd just use the large cap index and leave it at that. By definition large caps are practically all of the cap-weighted market so the S&P is very highly correlated with the total market.
The only real diversification I see in this portfolio is the fixed income portion.
The international stocks are denominated in foreign currencies, so they give you currency diversification.
Sovereign bonds simply do not yield enough to even keep up with inflation
The TIPS real rate tends to disagree...
Anyway you want to look at the whole portfolio rather than individual assets. Buying corporate bonds instead of Treasuries has the effect of increasing volatility and expected returns. This can also be accomplished by increasing the stock allocation. The literature indicates that, between the two, the higher-stock/safer-bond approach has better risk-adjusted returns.
If it were me I'd just use the large cap index and leave it at that. By definition large caps are practically all of the cap-weighted market so the S&P is very highly correlated with the total market.
The only real diversification I see in this portfolio is the fixed income portion.
The international stocks are denominated in foreign currencies, so they give you currency diversification.
Sovereign bonds simply do not yield enough to even keep up with inflation
The TIPS real rate tends to disagree...
Anyway you want to look at the whole portfolio rather than individual assets. Buying corporate bonds instead of Treasuries has the effect of increasing volatility and expected returns. This can also be accomplished by increasing the stock allocation. The literature indicates that, between the two, the higher-stock/safer-bond approach has better risk-adjusted returns.
"If it were me I'd just use the large cap index and leave it at that. By definition large caps are practically all of the cap-weighted market so the S&P is very highly correlated with the total market."
So, are you saying that including mid-caps and small-caps is redundant?
What about all those articles I read that recommend a certain percentage of your portfolio to be in small and mid-cap stocks? They even show graphs that suggest small and mid-caps outperform large-caps over time, but are more volatile.
"The TIPS real rate tends to disagree..."
My employer does not offer TIPS. I might have included this in the fixed income portion of my portfolio.
As far as individual corporate bonds go, I keep these until maturity. The only concern I have is if the company issuing the bond goes bankrupt and defaults on its payment.
So, are you saying that including mid-caps and small-caps is redundant?
What about all those articles I read that recommend a certain percentage of your portfolio to be in small and mid-cap stocks? They even show graphs that suggest small and mid-caps outperform large-caps over time, but are more volatile.
"The TIPS real rate tends to disagree..."
My employer does not offer TIPS. I might have included this in the fixed income portion of my portfolio.
As far as individual corporate bonds go, I keep these until maturity. The only concern I have is if the company issuing the bond goes bankrupt and defaults on its payment.
They even show graphs that suggest small and mid-caps outperform large-caps over time, but are more volatile.
This is the age-old slice-and-dice vs. total-market debate:
http://www.bogleheads.org/wiki/Slice_and_Dice
After MUCH consideration I think total-market works better in the real world. But if you're set on slice-and-dice I probably won't be able to change your mind.
The point of the TIPS thing is that it shows that treasury bonds do in fact yield a real return above inflation.
This is the age-old slice-and-dice vs. total-market debate:
http://www.bogleheads.org/wiki/Slice_and_Dice
After MUCH consideration I think total-market works better in the real world. But if you're set on slice-and-dice I probably won't be able to change your mind.
The point of the TIPS thing is that it shows that treasury bonds do in fact yield a real return above inflation.