Asset allocation with a ton of debt

[TravisRADMD]

Sorry for the spam. I did also post this as a thread under Dr. Dahle's latest blog post but I thought it would be more appropriate as a dedicated forum post.

I have a 1.6X student loan DTI ratio at 3.3% for 10 years(but will pay down early in 5-7). I maintain a 25% investment savings rate aside from my loan payments which is around ~25% of my annual income(overall 50% savings rate). So thats about 50:50 using use my debt as a fixed income equivalent. I understand that a 50:50 stock to bond ratio is too conservative for my age(33) but I ultimately think thats an appropriate ratio if my goal is aggressive loan pay-down.

Does this break down make sense? Since I have such a high "fixed income" ratio with my loans I wanted to add more risk to the portfolio. My investment horizon is 15-35 years but regardless of retiring early I do wish to be FI in 15 years. Should I add more risk?

50% Student loan payments
20% Total US index
5% Total International Index
20% Real estate ( 50% private syndication deals and funds, 25% Public REIT, 25% single family rentals)
5% Cryptocurrency/alternative

[Random1]

I must be missing something , but I would not account for debt as an asset class. I would think at the beginning of your career you could be more aggressive in regards to equities. At that stage I was close to 100% equities.

[TravisRADMD]

https://www.physicianonfire.com/stud...et-allocation/

Paying down debt technically increases your net wealth at a guaranteed rate. Same as any lower risk fixed income asset. I think it should be treated as so in your portfolio. Makes sense at least.

[CordMcNally]

I didn’t read the link but I’m not sure I buy the student debt as a bond debate. Say you have two situations, one with $200k in debt and $100k in cash and one with $100k in debt and $0 in cash. What’s the difference?

You’re probably overthinking it. Put however much towards your loans and investments that you’re comfortable with. You don’t have to justify anything to anyone.

[Random1]

I always thought of my med school debt of just a cost of doing business and getting to where I wanted to in life. I guess I really never considered part of the equation in my assets because it was debt. Either way it looks like a 50% stock allocation, 40% real estate and 10% crypto currencies. I personally would allocate more to stocks and less to real estate, unless that real estate was a business venture , ie rental out properties rather than just a REIT. I never had much interest in crypto. Though I am at the FI age of 53 where capital preservation is more important than hitting the home run.

[TravisRADMD]

I didn’t read the link but I’m not sure I buy the student debt as a bond debate. Say you have two situations, one with $200k in debt and $100k in cash and one with $100k in debt and $0 in cash. What’s the difference?

You’re probably overthinking it. Put however much towards your loans and investments that you’re comfortable with. You don’t have to justify anything to anyone.

Difference is the interest rate.

[TravisRADMD]

I always thought of my med school debt of just a cost of doing business and getting to where I wanted to in life. I guess I really never considered part of the equation in my assets because it was debt. Either way it looks like a 50% stock allocation, 40% real estate and 10% crypto currencies. I personally would allocate more to stocks and less to real estate, unless that real estate was a business venture , ie rental out properties rather than just a REIT. I never had much interest in crypto. Though I am at the FI age of 53 where capital preservation is more important than hitting the home run.

I appreciate the simplicity of seeing it as just another utility bill but its too big of an annual liability for me to simply see it as the cost of doing business in life. Debt is a fixed revenue generating asset just like any bond. It just happens to be negative revenue.

[Nysoz]

I think the better way to phrase this is that you have a high level of debt and you don't like it, so you're going to pay it off early in 5-7 years. With the money that you're saving towards retirement your expected portfolio will be x.

Once you're done with loans, what do you think your portfolio will look like? 70/5/20/5? 50/25/20/5?

If you want to increase risk, then pay less/minimums on your loans and invest the difference.

[TravisRADMD]

I think the better way to phrase this is that you have a high level of debt and you don't like it, so you're going to pay it off early in 5-7 years. With the money that you're saving towards retirement your expected portfolio will be x.

Once you're done with loans, what do you think your portfolio will look like? 70/5/20/5? 50/25/20/5?

If you want to increase risk, then pay less/minimums on your loans and invest the difference.

I do consider debt a "fixed income equivalent" when held at a low rate with current yields nearly negative. If so I need more risk. I don't want to increase risk at the expense of holding debt for a longer time period which leaves the option of increasing risk with asset selection in my investment portfolio. And yes, once I'm done with the loan or refinance down to a smaller liability then I will start de-risking my investment portfolio as needed with more fixed income.

[CordMcNally]

Difference is the interest rate.

What about net worth difference? I don’t think I can get behind ‘debt is a fixed income equivalent’. Just to play devil’s advocate, why don’t you rack up some credit card debt to ‘de-risk’ your portfolio?

[TravisRADMD]

What about net worth difference? I don’t think I can get behind ‘debt is a fixed income equivalent’. Just to play devil’s advocate, why don’t you rack up some credit card debt to ‘de-risk’ your portfolio?

By net worth if you mean my overall asset portfolio allocation then yes I agree it makes a difference. If I already had 1 million dollars in some US index then even though my income and debt obligations are exactly same my ratio of debt to wealth or if viewing it as "fixed income equivalent", overall asset allocation has substantially changed. By definition it now has a higher risk profile. But the premise is based off my personal situation of starting as a new attending with little to no real savings and a lot of student debt.

As far as playing devils advocate. I think we're talking past each other. The debt is being considered a "fixed income equivalent" in a personal portfolio not because it's debt but because of the two things: interest rate on the loan and the current market interest rates which are nearly negative. Why allocate to bonds yielding under <1% if you have debt obligations yielding -3.3%. If I had credit card debt I'm assuming you mean high interest debt which would add risk to my portfolio, of course not decrease it. It's the interest/return rate the dictates that risk profile of the asset and vice versa.

[xraygoggles]

You didn't list your debt amount, but @3.3% fixed, I wouldn't be in a rush to pay it off. Also, your investment asset allocation is different than debt paydown; doesn't make sense combining them in terms of portfolio.

Also, you are young and early in your career, so it's probably a good idea to build your assets vs paying down debt IMO. Compound interest, etc..

[Nysoz]

I guess I'm confused about your strategy. You don't want to hold onto debt so you're paying 50% of your savings rate towards your low interest debt/loans. Then you're wanting more risk in your portfolio. You're already at relatively max risk with all equities/real estate/alternative investments and no bonds. Are you considering leveraged etfs or options or other riskier options?

Say your loans are 3% and you're going to make 8% in the rest of your investments. Half your money is essentially getting you 3% and the rest 8%.

If you want more risk, pay less towards loans so 1/4 is getting 3% and 3/4 is getting you the 8%.

Are you wanting to try to make 16% with a riskier/aggressive investment strategy instead of the 8%? If you think you can make 16% why pay down the 3% loan?

The purpose of bonds in a typical portfolio is for rebalancing. I think I remember seeing something where a 95/5 or 90/10 allocation beats 100/0. That's due to a small portion in bonds that you're able to rebalance into equity dips historically. Most young people here are just 100% equities just because it's easier and hard to know when to rebalance.

Paying off your low interest loans early is the low risk/guaranteed return which doesn't match with trying to increase risk elsewhere.

[CordMcNally]

I’m confused, too.

[wa2106]

Overall your plan seems reasonable - you're putting half toward loans, half toward retirement.

But you're describing it as one would asset allocation which is throwing me and everyone else off when what you're actually describing is your contribution percentage. What happens when one asset class appreciates versus the other? Choose your amount you're putting toward loans, the amount you're putting toward retirement and within the amount putting toward retirement choose asset allocation (right now you'd be 40% US, 10% international, 40% RE, 10% BTC/other). Not having bonds is fine at your age. Real estate and other are higher than I'd have.