Asset allocation considering this crazy bull market???

[White.Beard.Doc]

Happy Sunday! I did my 2020 asset allocation check up today. This is what I found:

20% short term bonds/cash equivalents
17% medium and long term bonds
37% total bond/cash allocation

44% US stocks
19% International stocks
63% total stocks

I feel like I am ok with my current asset allocation. In the past, I did not calculate cash or cash equivalents in my asset allocation, but this year I included those funds in my calculation because clearly the cash equivalents are part of my allocation. I am a couple of percentage points ahead of my written IPS in terms of lower risk, more stable bond and cash assets, but not enough for me to want to rebalance at the moment. My conclusion after this exercise is that I am going to sit tight. The frothiness of the stock market continues to make me feel like the big bear is coming soon. So that leads to my desire to maintain that 37% in low risk assets, and not get too greedy with my asset allocation. Of course, I am missing out on some stock market gains, but I am also holding a decent defensive position should the market tumble.

My life situation: although I could stop working for money as of today, at this moment my plan is to work for another 7 years. The plan could change tomorrow if I get hit by a bus, or perhaps I may end up wanting to continue working longer than 7 years. I have been around long enough to know that my perspectives on work and life evolve with time. The longevity calculator based on all of my health parameters says I have more than 3 decades yet to go, but only time will tell.

Is anyone else out there considering a change in their asset allocation? Or are you happy with where you are and staying the course?

[Lordosis]

I am 95/5 and do not plan to change things. I will almost certainly work 20 more years even though I hope to be FI before that. If I had a white beard in place of all my human capital I too would be more cautious.

[CordMcNally]

I'm currently:

80% US stock with a 5% small tilt
15% Total International
5% Bonds

I don't include cash in my asset allocation. I'm still pretty far away from when I want to retire (I'm early to mid 30s). I suspect I'll keep this AA for the next several years although I decide if I need to change yearly.

[CordMcNally]

Ha! I feel like 33 is right there on the edge between them. At least I got the decade right!

[StateOfMyHead]

Holy crap a baby! I'm even more impressed.

[Lordosis]

I am 33 as well. I am waiting for my next birthday before I call myself mid 30s.

[Lordosis]

The frothiness of the stock market continues to make me feel like the big bear is coming soon.

Also reading this reminded me of this scene.

[SLC OB]

Great question... I am 80/20 but I am 15 years or so behind you.
I feel comfortable with this right now, knowing that it will eventually bounce back.
We'll see how much heartburn I have when the bear comes a knocking...

[TheDangerZone]

80/20 here, early 30s. Targeting FI in 10 years. Plan to work at least 15 more years which should leave us with a decent cushion. Given that runway, the ever soaring bull does not worry me. I like to think I would be okay with a 50% equities drop corresponding to a 40% drop in our portfolio. As the numbers get bigger over time, that may become harder to stomach and we will have to adjust accordingly.

[spotty_dog]

If you feel better at 63/37 than at a riskier AA, then that's where you should be, and where you should stay regardless of what the market does. Write that into your IPS. Stay the course.

We opted to downshift to 65/35 at the beginning of this bull run, because our anxiety about a "correction" made it clear that we did not have the willingness to take more risk. Then if you run Monte Carlo simulations, we have a 97% chance to sustain a 30 year retirement if we didn't contribute another penny after today. Alternatively, we would have $10M in 10 years if we keep this AA and rate of contributions, which would sustain a 40-year retirement even if we go to 100% fixed income. That tells me we also don't have the need to take any more risk. So even if we have the ability to risk a lot, it's not worth the gray hairs.

[Hatton]

I think WBD and I are similar in age. I am recently retired. 65/30/5 stock/bond/cash. 20% international stock. I never kept so much cash until I knew I was near the end of work. Buckets I guess.

[jacoavlu]

relating asset allocation to market valuations is of course just market timing.

WBD I think you are perfectly appropriate where you’re at, as long as changes in the market aren’t going to cause you to change course

in other words if we experience a 50% equities drop in the next year, your plan would be to rebalance back to about 65/35

[Tim]

WBD,
As you know your AA is or should be independent of the market performance. I would suggest you calculate what your AA was at 12/31/18. If it was good enough then, then why is a new AA as of 12/31/19 acceptable? Now and in the future, significant gains/losses are leading to behavioral finance adjustments base on the market. Do the calculation for 12/31/17 too. You are close to 60/40, is that where you want to be? You probably can afford to take more risk, but you may want to take some chips off the table. The game is won, so why continue playing? Those choices are yours alone and should not depend on results of 2018 and 2019 markets. What if's are ok, but if you want to lower your risk, do it according to a plan. The market performance should not impact your AA unless their are points you wish to take chips off the table based upon your total picture. You still have a 30 year runway, if not more.

I actually went back 10 years to rethink my AA. What did I find, riding the "winners". My bad. Worked out well. I did this when WCI suggested holding up on any AA changes in plan for 30 days. What I found is a ridiculous predicament.
Do you need the gains? 30 yrs
Can you afford the risk? 30 yrs
I am a little more aggressive, but so what. You can afford 60/40 even though you don't need it. Pick you poison and then stay with it. The reality is 30% +/- is a behavioral reaction, not risk management using AA.

You do know the market could consolidate for two years, build a base and resume climbing for 8 more years. And it could drop like a rock! No right answer, but the motive of fear of a drop is the wrong reason, completely emotional reaction to the market. Thanks for sharing your AA.

[White.Beard.Doc]

This is hardly a representative example, but among posters on this forum, it seems like the docs starting out are around 90% stocks, and mid career docs more like 80% stocks, and then there is me at a later stage of my career, more like 60-70% stocks.

In the old days, it was... "Your age in bonds!"

Given the very low yields on bonds in the last decade, along with greater longevity, the tilt away from bonds seems most likely appropriate. Maybe the new mantra should be.... "one half your age in bonds/cash". Time will tell.

[Hatton]

Good observation on age bands. I sometimes feel 65% equity is too aggressive at 62. One of my peers who recently retired is 50%

[StateOfMyHead]

White.Beard.Doc where do you count your real estate holdings? I'm 10 years out from retirement and have 30% VTSAX, 30% retirement year target type plans from employers, ~40% of my net worth in real estate. I'm probably pushing the envelope a bit but hate to be too conservative. I feel as if the real estate market which returns cash flow or could be sold for profit even in a bad market provides a bond-like cushion. Your or anyone's insight would be most appreciated especially because I just increased my automatic deposits into VTSAX.

[Lithium]

I might be the only one who does this but I factor in present value of future SS and pension in my AA. When I do this My AA is 40% US stocks, 30% fixed income, 20% international, and 10% REITs. That feels about right. I agree that adjusting AA to market valuations is market timing. I am considering what to do with proceeds from a house sale in a few months and think I will try either RE crowdfunding or a real estate fund.

[hightower]

37 here. I've been directing all of our investments to a 60/30/10 Stocks/Bonds/Cash allocation for about the last year. Yes, I missed out on some gains over the last year, but I'm ok with that because I'm not worried about feeling the need to sell in the event of a downturn. When the next bear market hits, I'll switch back to a more aggressive allocation. I know that's sort of market timing, but I can't stomach being 80/20 or 90/10 or whatever these days. I want cash on hand to buy stocks when they go on sale. I don't really worry about my portfolio right now. I don't particularly like buying stocks right now, but that's about the only thing I think about. I'm not losing sleep worrying about the next downturn.

[hightower]

relating asset allocation to market valuations is of course just market timing.

WBD I think you are perfectly appropriate where you’re at, as long as changes in the market aren’t going to cause you to change course

in other words if we experience a 50% equities drop in the next year, your plan would be to rebalance back to about 65/35

A 50% equity drop would motivate me to move all my cash back to equities and adjust my remaining positions to something like 90/10. A 50% drop is a clear signal that it's time to buy again. 1/2 off sale!