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Please critique my asset allocation - newbie investor

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  • Please critique my asset allocation - newbie investor

    Hello again

    Like the title says I am a newbie investor because I just started a full time job recently.

    I would appreciate if the experienced investors here want to offer any critiques/comments about my asset allocation, so that I can correct my mistakes early on.

    I am 28 years old, not looking to take money out for at least 30 years.

    My overall plan is

    - US stocks 55 %

    - International 35 %

    - Alternatives such as Reits - 10 %

    - Bonds - 0 % for now, and gradually introduce it as I go along and end up at 40 % when I am ready to retire.

    I realize that I am probably being overconfident because I haven't lost significant amount of money in a market crash yet, however whenever I see a market crash my first feeling is I wish i had more money to invest right now rather that I need to pull out my money right now.

    I have a 403 b and non governmental 457 b available to me, both have same investment choices, same expenses. 

    The only good investment choices (low cost) from these are 4 vanguard funds, with percentage of my tax deferred income going to each

    Vanguard Institutional index (VINIX) 45 %

    Vanguard Total International Stock Index (VTIAX) 35 %

    Vanguard extended market index admiral (VEXAX) 20 %

    The other one is a vanguard bond fund which I am currently not interested in.

    There is no option for small cap/value/emerging markets/reits etc - which I plan to own in mine and spousal roth ira

    My overall asset allocation goal is as follows

    - US large cap - 30 %

    - US midcap - 10 %

    - US large value - 5 %

    - US small - 5 %

    - US small value 10 %

    - International large cap - 15 %

    - international large value - 5 %

    - international mid-small - 5 %

    - international (emerging markets) - 5 %

    - Reit US - 7 %

    - reit international - 3 %

    Does this seem reasonable, or is it better to go with a more simple portfolio given the lack of availability of funds at my workplace plan.

  • #2
    Make your taxable investments (you ARE investing more than just in your 403b and 457 after maxing them, right?) the REIT type fund. Ask HR to expand their offering. Does anyone know if one can do occasional rollovers to a selfowned keo fund in REIT etc fund? Into an IRA loses backdoor Roth benefit, but worth it? No. Just put any non tax deferred investments, whenever you're able to do that, into the REIT type stuff.

    Comment


    • #3
      Hi Jenn,

      unfortunately with my small new hospitalist income (190 k), after maxing out 403b and 457 (36 k), roth ira (11k), 10 % tithe/charity and paying down student loans,  there is not much left to invest in a taxable.

      Comment


      • #4
        Couple things.

        I started just like you and with time continue to simplify to less asset classes and become more of a three fund investor. Your offerings from the work accounts would allow this quite easily. The extended market fund has small cap exposure and total international has extended markets in them. So you have that exposure through those funds. Trying to hold all those tilts will be a balancing nightmare for the first couple years as your contributions will be so large compared to the balances of the accounts.


        I'd put REITs in the ROTH.  I'd hold the vanguard funds from the work accounts in whatever proportion you decide upon. The percentage you choose is less important than sticking to the plan.


        As far as 0 percent bonds goes that's probably fine at a young age but the way I see it we've won the game with our income potential already why go mess that up with too much risk. I'm just as risk tolerant as you but keep about 25% bonds as I don't need to chase higher returns to have a comfy retirement.

        Comment


        • #5
          Hey joshua

           

          thanks for your input

          the risk is only if you withdraw from the market when there is  a crash right? If you stay and keep investing, in the long term you can reach your goals quicker without bonds to slow you down no?

          it makes sense what you are saying about the simplification. Id probably also hold a small value fund in my roth because from listening to paul merriman, there seems to be a premium for holding more small value.

          Comment


          • #6
            @Robin_George - You are my kind of investor. If you have a financial plan in place, there is absolutely no reason to include bonds unless you buy individual bonds to fund short-term (<5 year) goals, timed to mature at date of need. Your investment portfolio should be put into equity mutual/ETF funds and should be only be for money you will not need for at least 5 years. I see no need to dial back to bonds at retirement unless you are planning on liquidating and cashing out when you retire. Otherwise, recommend keeping 2 years of supplemental living expenses in a money market account to get you through a bear market, buy bonds to mature at date of needs in the short term (again, within 5 years) and rest in equities.

            Here is our allocation - 90% divided equally among:

            • Large Cap Value

            • Large Cap Growth

            • SC Value

            • SC Growth

            • International


            Remaining 10% into REIT fund.

            Again, the above allocation is for investable assets, not the whole portfolio, which may include bonds timed to meet short-term goals. You may want to keep a small part in cash for "just in case". Crucial that you rebalance in the same month annually and keep an eye on funds for style drift.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment


            • #7
              Kidilandoc, The overall asset location looks like a good plan for someone your age, just starting a career.

              I don't know that you need the detail spelled out with 5 divisions of US stock, 4 divisions of international, 2 in REIT.  A simpler portfolio using the big index funds you have available will have lower costs and returns will likely be similar.  There's nothing wrong with slicing and dicing, and I do some, but it requires more attention, and could lead to some return chasing if you don't stick with one plan.

              My portfolio is pretty similar to yours, with the addition of 10% bonds / cash at age 40.

              • 60% US Stocks (with a tilt to small and value)

              • 20% International Stocks (50 / 50 developed and emerging markets)

              • 10% REIT (Real Estate Investment Trust)

              • 10% Bond & Cash (mostly bond plus cash emergency fund)


              For details and the not-very-sophisticated reasoning behind it, please have a look at my latest post, The PoF portfolio.

               

               

              Comment


              • #8
                What about tax free bonds in taxable accounts, a NO BRAINER don't you think?

                Comment


                • #9




                  Hey joshua

                   

                  thanks for your input

                  the risk is only if you withdraw from the market when there is  a crash right? If you stay and keep investing, in the long term you can reach your goals quicker without bonds to slow you down no?

                  it makes sense what you are saying about the simplification. Id probably also hold a small value fund in my roth because from listening to paul merriman, there seems to be a premium for holding more small value.
                  Click to expand...


                  yes and no.

                  In theory that is true, but in reality your investing and living(ie life just happens, retirement doesnt always happen at market peaks) time frames may vary significantly in non beneficial ways. Being young I also have 0% bonds, but will gradually ramp that up as the risk is unjustifiable when we've done the work with income already. People confuse longer term safety from stocks for the long run, but the volatility is actually more dangerous as your account grows larger. So you either diversify or have some kind of loss avoidance plan in place. A 50% loss in a 2 million dollar portfolio could represent more than a decade of contributions and growth, and there are no guarantees about when things come back of course.

                  The truth is as usual more nuanced. Taking on more risk has not in the last couple of decades led to higher returns, and even the last 5 years if you were in 100% bond fund like TLT you outperformed someone in an SP fund. According to the efficient market hypothesis/efficient frontier this should not be possible, but over and over again it is. I bought a bit of a low volatility fund last week while the market was killing itself and will probably buy some more this year for just such reasons.

                  Your scale of risk should go from:

                  Future purchasing power<--------->capital preservation

                  100% stocks is all about future purchasing power with significant risk to capital loss

                  100% capital preservation will preserve capital at the expense of a likely loss of future purchasing power

                  Probably best to be somewhere along the scale and not at either extreme.

                  Its difficult since most financial books and definitions define risk as volatility, which is because its nicely defined by mathematics and can be used as a comparison, and while thats useful...its not as pertinent to what we're all looking for, preservation with increased future purchasing power.

                  Comment


                  • #10




                    Hey joshua

                     

                    thanks for your input

                    the risk is only if you withdraw from the market when there is  a crash right? If you stay and keep investing, in the long term you can reach your goals quicker without bonds to slow you down no?

                    it makes sense what you are saying about the simplification. Id probably also hold a small value fund in my roth because from listening to paul merriman, there seems to be a premium for holding more small value.
                    Click to expand...


                    The risk is in not having a financial plan in place. The plan should drive the investment portfolio. With a plan that takes into account periodic down cycles, you can ride through without having to touch your investments. Those who have no plan have to deal with bear markets as best they can, which usually means cashing out at inopportune times. i.e. - if the market is down at your chosen retirement date, you will have planned ahead  for just such an event so that there will be no effect to your lifestyle of your portfolio.

                    Risk and volatility are two entirely different concepts.

                    • Risk is the chance of permanent loss. It is managed with a long- and short-term plan in place that is updated as "life happens".

                    • Volatility is the driver of long-term growth. It is ephemeral and should be both embraced and exploited.


                    There is no loss in a portfolio - even when the market is down 50% - if you don't make it permanent. That is achieved by having a plan in place.
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #11




                      What about tax free bonds in taxable accounts, a NO BRAINER don’t you think?
                      Click to expand...


                      Yes, if the return on the tax-exempt bond fund is equal to the equivalent taxable bond fund.  If the return on the tax-exempt fund is lower, you've got to do the math.

                      If you're going to hold tax-exempt bonds, a taxable account is the place to hold them.

                      Comment

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