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  • Creating a Single Asset Allocation for Multiple Goals

    How can one create a single asset allocation that captures different levels of risk for different investing time horizons?

    It seems like the general advice on WCI and Bogleheads is that everyone should have a single asset allocation that is laid out in their investment policy document. I have created one for my retirement goal, however that is a fairly aggressive allocation and is mostly diversified stock index funds.

    The problem is that I have other goals (in the 5-10 year time horizon) for which I want to invest the money and not leave it sitting in a savings account, but don't want it to take the aggressive asset allocation that my retirement investing has.

    How can I fulfill both goals (long-term retirement that is many years out and 5-10 medium-term goals) with a single asset allocation? It seems like this would necessitate having two different "portfolios" having asset allocations with different levels of risk.

  • #2
    This is two different pots of money. One is your retirement money and the other is presumably not. It's similar to comparing retirement accounts and emergency funds.

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    • #3
      Originally posted by CordMcNally View Post
      This is two different pots of money. One is your retirement money and the other is presumably not. It's similar to comparing retirement accounts and emergency funds.
      bingo.

      No free lunch.

      No return without risk.

      If you need it soonish it needs to be safe.

      If for retirement, put it in you AA and ignore.

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      • #4
        Got it thanks. The comparison to an emergency fund is particularly illustrative.

        It seems then that the only way to go about this is to create another brokerage account and manage that shorter term (5-10 year) investment at its own AA at the desired (lower) risk level?

        Is it a fair characterization then, that whenever I read about AAs on WCI or Bogleheads, people are almost always referring to their long-term (retirement/financial independence) allocations?

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        • #5
          When someone talks about asset allocations, they are almost always talking about their retirement portfolio. Emergency funds and funds you'll need in 5-10 years (building a house, car fund, etc,) aren't included in your retirement accounts but they should be in something of appropriate risk given whatever time frame you need that money.

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          • #6
            I think about it like this:
            AA is the overall deal but I generally omit my EF when discussing retirement AA. Likewise I don't include my house & cars although they are valuable.

            Example: someone with a 70:30 retirement AA might be including wife's IRA, His 403b IRA, His solo 401k for his side hustle, both back door Roth IRAs and the taxable brokerage account. The overall retirement mix is 70:30 stocks bonds with 35% of the stocks being international.

            In addition to that 70:30 retirement AA they have some other buckets = accounts for other goals:

            Kids college bucket (has investments in 529 plans)

            Emergency fund (EF) bucket = 3 months cash in a "high yield" savings account (some people have a complicated elaborate plan, but lets keep it simple)

            House down payment bucket (in a mix of short term bonds, CDs and cash or just all in cash)

            You need a different bucket for your whatever thing that is not retirement. The money can still be in vanguard or fidelity and it can even still be in the same brokerage account under the same login in, but it needs to be in something other than stocks, unless you want to gamble or unless the time horizon is long.

            Less than 5 years = cash

            5-10 years? I would also say cash, but this is more debatable

            >10 years, I would have at least some stocks

            > 20 years, I would do all stocks.

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            • #7
              I use one Vanguard MM fund. I keep enough cash in as my EF and larger purchase fund, otherwise everything else gets invested for according to my long term plan. Your money is all the same, if you need to put it in separate accounts for mental clarity that's ok, but you can leave it all in the one account for making it easy.

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              • #8
                Agree with Tangler. You could certainly aggregate all the funds and figure out the overall asset allocation. But as a practical matter you have to pick a risk profile for the funds allocated to goals over different timeframes.

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                • #9
                  I am a proponent of keep a separate taxable account for funds to segregate non-retirement funds. The difficult part is not the original allocation. It is segregation of the additions and gains/losses whatever they maybe. One year, 5 yr and 10yr pots of money are completely different than retirement. Goal changes, you can reallocate or add. This is not a short term problem. Lumpy additions and lumpy spending.

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                  • #10
                    Appreciate all the replies.

                    Since this is currently top of mind for me, Tangler you mentioned:
                    5-10 years? I would also say cash, but this is more debatable
                    Are there any resources that you all may be able to point me to that discuss investing for this time horizon?

                    Holding cash seems rough given inflation rates. Could probably do something like treasuries, but hoping for some more formal exploration of the commonly-recommended options.

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                    • #11
                      Originally posted by galatte View Post
                      Appreciate all the replies.

                      Since this is currently top of mind for me, Tangler you mentioned:


                      Are there any resources that you all may be able to point me to that discuss investing for this time horizon?

                      Holding cash seems rough given inflation rates. Could probably do something like treasuries, but hoping for some more formal exploration of the commonly-recommended options.
                      It's kind of a crap shoot with that time frame. I think a lot depends on your risk tolerance as well as what your alternate plan would be if the amount you needed was less than what you had saved/invested.

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                      • #12
                        Uniformly great responses above.

                        Personally, one taxable account is for retirement, and the other I have no qualms making withdrawals from for whatever reason. Those dollars are assigned a job before they’re even deposited.

                        But that’s just psychological. Money is fungible.

                        Regarding the 5-10y timeframe, I know what I would do but I also know that taking a loss wouldn’t be an issue financially or emotionally.

                        In general, my advice would be to keep it simple as follows. If it were less than five years you’d probably go bonds (or maybe cash, but not now), and if it were more than 10 you’d go stocks—so I’d go 50/50 between S&P fund and intermediate treasuries (or munis, depending on your tax bracket).

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                        • #13
                          Originally posted by galatte View Post
                          Are there any resources that you all may be able to point me to that discuss investing for this time horizon?
                          Christine Benz is usually on point.

                          https://www.morningstar.com/articles...ate-term-goals

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                          • #14
                            Originally posted by bovie View Post

                            Christine Benz is usually on point.

                            https://www.morningstar.com/articles...ate-term-goals
                            This is great.

                            5-10 years is difficult.

                            Really depends.

                            Risk tolerance? Plan B? Overfunding?

                            There is no free lunch.

                            There is no return without risk.

                            Cash = inflation risk.

                            Stocks = market risk

                            Bonds have interest rate risk & low yields (inflation risk).

                            I-bonds? maybe but you must keep for 3 years (i think) and only 10k per person per year.

                            Risk & Return are best friends.

                            I am getting a little older (48) and I have basically 2 types of buckets:

                            1. cash for anything less 10 years

                            2. Stock index funds for anything over 10 years.

                            This is not what you asked, but this is my simple plan for life:

                            2 buckets: cash & stock index funds

                            (negligible amounts of I-bonds but insignificant)

                            I keep the cash bucket filled mostly from new income.

                            When I retire completely I will keep 3-5 years of expenses in cash and refill it from selling stocks during bulls and drain it down during bears.

                            If I run out of cash due to a > 5 year bear, I will spend less and/or try to find some income (worst case).

                            My IRAs are 100% stock index funds as they are not needed for >20 years and my guess is it will be higher than now at that point.

                            I could live off 3% of my egg as of today, so I am ok with my “risky” allocation of 90:10 stocks : cash.

                            Hatton is my role model (for the cash bucket model).

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