What Is Your Asset Allocation/Fin Plan?

Investing Strategies Retirement Investing
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A few of you have been kind of laughing at myself and Intercst for having significant amount of assets in fixed income, which, I admit, yields barely above zero and has dismal prospects for price appreciation. The conversation was in the context of avoiding a 3% mortgage on residences because the alternative was more zero percent fixed income.

My question for you is this: What is your asset allocation/financial plan? Are you buying into the “it’s different this time” thinking, where you take on more equity risk, thinking that fixed income is “dead already”? Are you saying that an age 60something indexed, asset allocated investor, should no longer use the old balanced portfolio of, say, 60 percent equity/40 percent fixed income to maybe 40 percent equity/ 60 percent fixed income?

I’ve stayed the course because I still think that the return OF my safe money (the bonds portion) is better than taking extra risk to get a return ON my safe money. But it sounds like a few of you have different thinking and I’d like to tease that out a bit. I admit that prior to 2021, I wasn’t that concerned with earning zero on fixed income because inflation was close to zero. And equities did so well in 2021, that my 55/45 portfolio still returned 5% above the 7% inflation. But going forward it’s probably gonna be tougher. So I ask those laughing at money in nearly zero percent bonds, what are you actually doing as an alternative?

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I am 65 years old, and this has informed my thinking over the last few years:

https://www.kitces.com/blog/should-equity-exposure-decrease-…

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A few of you have been kind of laughing at myself and Intercst for having significant amount of assets in fixed income, which, I admit, yields barely above zero and has dismal prospects for price appreciation. The conversation was in the context of avoiding a 3% mortgage on residences because the alternative was more zero percent fixed income.

Have you been paying attention to intercst’s posts? He has about 95% of his investments in stocks. He avoids dividend paying stocks. He was limiting his income to qualify for the maximum Obamacare benefits.

PSU

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Have you been paying attention to intercst’s posts? He has about 95% of his investments in stocks. He avoids dividend paying stocks. He was limiting his income to qualify for the maximum Obamacare benefits.

I have not been paying such attention. But he agreed with my analysis that, during my entire adult lifetime (I’m 62), the cost of a mortgage was/is always more than interest received on fixed income. So he paid cash. This would imply that his 5% non-stock investments was more than what his house cost.
Even if it’s only 5% of one’s nest egg, most would agree that having more fixed income, at the time of purchase, than the value of your home, is “significant” even still a small part of a larger portfolio.

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My current thinking for myself is as follows:

  • 3-6 months of emergency fund cash (used for stuff like roof repairs, medical emergencies, or to cover the occasional bond that defaults instead of matures).

  • 5-7 year investment grade bond ladder where the maturing bonds get used as expected monthly spending cash, and the interest gets used to help maintain the bond ladder as old issues mature.

  • Darn near everything else in stocks. Dividends get used to help maintain the bond ladder as old issues mature. In a “normal” market year, any needed gains will also be tapped to maintain the bond ladder. In a “great” market year, excess gains will also be tapped to extend the bond ladder, so that in a “bad” market year, it can shrink without putting me in immediate danger.

The bond ladder will be the primary place where I’ll build in an inflation expectation. For instance, it might be set up so that I expect $9,000 a quarter of maturing bonds in the first year but $12,000 by year 5.

My overall expectation is that the maturing bonds plus Social Security will be designed around covering at least core, base living costs plus expected taxes, so that in a bad stock market, I can hunker down without expecting to have to sacrifice the basics.

If I reach retirement with more than I expect, I can make the bond ladder rungs broader to cover more than just the basics. If I reach retirement age with less than I expect, well, both my parents worked well into their 70s…

Regards,
-Chuck
Home Fool

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* 5-7 year investment grade bond ladder where the maturing bonds get used as expected monthly spending cash, and the interest gets used to help maintain the bond ladder as old issues mature.

That sounds like a fancy way of saying that your bond allocation is about 25% of your portfolio. So you’re 75/25ish. And while a bond ladder is a good mental device to help ignore bond price fluctuations, what you have is really the same as an intermediate term bond fund, with a whole lot more work.

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So you’re 75/25ish.
No idea. Could be a bit more, could be a bit less. Ideally, it ends up less in bonds because my stocks have gone up enough, but that’s wishful thinking rather than a solid plan. The goal is to have something more certain than stocks to cover near term expenses.

And while a bond ladder is a good mental device to help ignore bond price fluctuations, what you have is really the same as an intermediate term bond fund, with a whole lot more work.
Kind of, but there are a few differences. First, the intermediate bond fund as a whole never matures, so it is more subject to interest rate risk. Second, once the ladder is built, the expected effort works out to something along the lines of one or two transactions a month or quarter to replace a maturing bond. Not much more than ‘selling something to come up with cash to cover costs.’ Third, while my method is less exposed to interest rate risk than a bond fund, it is more exposed to default risk, so that’s the key trade off…

One thing that someone (AJ I believe) pointed out to me previously was that there are now specific-maturity-year bond ETFs out there. That might be an easier alternative to an individually managed bond ladder that could reduce the exposure to default risk while simplifying the management a bit.

Regards,
-Chuck
Home Fool

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For much of my life, having a mortgage helped greatly with reducing your taxes. Often reducing the cost of your mortgage by 30%, especially in the early years of mostly interest payments. That changed and I’m not sure what, if any, help you get nowadays. Of course the lower interest rates help greatly (well, until the skyrocketing house prices).

Once in a while I’ve dabbled with some long term treasuries (VGLT) or some ETF/fund that had some bonds but I’ve never allocated a set bond position to my portfolio. Instead I just use a collection of individual stocks (~20) and some index ETFs with gold. I usually have at least 10% in cash and use drops in quality stocks to spend the cash.

Personally I feel like I have too much cash but with the market’s current levels, I’m ok with it.

I really see no point in CD/bond ladders at current rates. I’ve used a couple of 3 yr MYGA to eek out some interest (2.4-3%) to help cover retirement expenses starting in about a year.

Under more normal economic/world situation I would have more of a bond position. For now I’d rather bounce back and forth from stocks and cash.

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the cost of a mortgage was/is always more than interest received on fixed income.

But fixed income is not the only alternative.

See, the thing is, if you have a lot lot, lot of money then is doesn’t much matter if you have a mortgage or not.

If you don’t have a lot of money, then you don’t have the option of paying cash, so you have to have a mortgage.

It’s only in the middle ground where you both have the choice and it makes a difference.

If you read between the lines of what intercst says, he has a lot, lot, lot of money. So much that having a house worth of his money in a low yielding money market fund has no significant effect on his overall return.

Bu he then projects his situation onto everybody else. Not everybody has so much money that burying a ton of it in a no earning MMF is a big “Meh!”

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But fixed income is not the only alternative.</>

Again, I’m asking: What is your alternative? More stock risk? What’s your asset allocation?

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I’ll tell you what I’ve done but I surely don’t suggest anyone use me as an example to follow.

I’m 69 and a widower. I’ve never paid much attention to the rules about how to allocate my retirement funds. My investments are, as they have been since I took personal control of them in 2009, 100% stocks. About 80% of my money is in an IRA, 20% in a ROTH. The mix is heavily weighted toward growth companies. However as I watched them grow at an unreasonable rate I sold enough to give me a generous 5 year cash cushion in my IRA. The idea I that I can withstand a market downturn of at least 5 years without having to sell anything. That cash is making me effectively nothing; I can live with that. I know nothing about bonds, and own none.

Most years I draw down my IRA for whatever I need beyond my limited fixed income. Right now that is not necessary as I have the remaining proceeds from the sale of my old house. Some of the house proceeds went to my Tesla Y (an indulgence, but one I can afford). Some went into paying the taxes on a ROTH conversion from my IRA, and that will happen again this year. Once it is gone I will be living off the IRA again. Staying within 4% or so should be no problem.

When I eventually have to take RMD withdrawals from the IRA that will exceed my needs, I will invest the rest. That will be the first time I have invested outside an IRA or ROTH. For the first time I’ll have to concern myself with taxes on dividends, capital gains, long term vs short term, and all the rest. Pick up a few new skills.

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But going forward it’s probably gonna be tougher. So I ask those laughing at money in nearly zero percent bonds, what are you actually doing as an alternative? - Daryll44

My home and land are paid for and I haven’t had a mortgage for twenty plus years. And I am not laughing at anybody. But here is my perspective. I have about 40% of my portfolio in MM right now and like you I had enjoyed a nice overall return due to the performance of the equity side of my portfolio.

But the only reason I have that much in non performing MM setting around is because I am leery of putting it into equities right, now with valuations and PE’s in the stratosphere. I would prefer to be 95% equities. But prudence tells me to wait, even if it takes years, for this bubble to burst, and then that would be time to back up the truck as they say. I will say I am investing for the benefit of my heirs as I don’t depend on my portfolio for retirement income, so that makes a big difference.

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As IP says, bonds right now make no sense. With inflation and the loss of principle from interest rate risk, bonds are a guaranteed loss. You are better putting that money into a non-interest bearing bank account. At least there you have only inflation loss and not interest rate risk.

With a 30 yr FRM at 2% (wow!) or 3.5%, inflation and interest rate risk work in your favor.

What is your asset allocation/financial plan? Are you buying into the “it’s different this time” thinking, where you take on more equity risk, thinking that fixed income is “dead already”? Are you saying that an age 60something indexed, asset allocated investor, should no longer use the old balanced portfolio of, say, 60 percent equity/40 percent fixed income to maybe 40 percent equity/ 60 percent fixed income?

It’s not “it’s different this time” thinking. That’s just you trying to put words in our mouth. Don’t project.

… thinking that fixed income is “dead already”

It is dead right now. Not “dead already”-----dead at this point in time. Fixed income currently is a net losing investment. Fixed income is equivalent to investing in timeshares. (Although, granted, fixed income has historically been good at times, whereas timeshares have never been good.)

…where you take on more equity risk, thinking that fixed income is…

You are implicitly assuming that equity allocation has risk but fixed income allocation doesn’t. This is not the case.
Every type of allocation has it’s own associated risk. Just now, fixed income has enormously greater risk than historically. Indeed, equity risk is greater than normal, but fixed income risk is vastly greater than normal.

So I ask those laughing at money in nearly zero percent bonds,

Not laughing. Purposely avoiding that stinking pile of garbage. In fact, the people whose bonds have total return of zero percent over the next decade will be doing ecstatically well.

what are you actually doing as an alternative?

  • Investment grade preferred stocks
  • Cash
  • Cash in savings accounts earning 0.5%
  • Cash in short-term FI funds. FLRN, VUBFX, etc.
  • Have plan in place for when the market enters bear territory. (Yeah, market timing, I know. And as everybody knows, market timing is the devil’s brew and never works.)
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BigHairyMike writes: My home and land are paid for and I haven’t had a mortgage for twenty plus years. And I am not laughing at anybody. But here is my perspective. I have about 40% of my portfolio in MM right now and like you I had enjoyed a nice overall return due to the performance of the equity side of my portfolio.

But the only reason I have that much in non performing MM setting around is because I am leery of putting it into equities right, now with valuations and PE’s in the stratosphere. I would prefer to be 95% equities. But prudence tells me to wait, even if it takes years, for this bubble to burst, and then that would be time to back up the truck as they say. I will say I am investing for the benefit of my heirs as I don’t depend on my portfolio for retirement income, so that makes a big difference.

We are almost exactly situated the same. How old are you? At 62, I’m happy with how my investing situation turned out. I do regret not better understanding things at a younger age and being more aggressive earlier. My kids are benefitting from what I’ve learned. As to waiting for the bubble to burst, that could end up like those waiting, from 1957, for dividends to become 4%. Might not happen in our lifetimes.

This might end up being like 1974-5, where there’s really no place to hide and investors have to accept both stocks and fixed income (even cash) lose value. Yikes. Ouch.

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what are you actually doing as an alternative?
* Investment grade preferred stocks
* Cash
* Cash in savings accounts earning 0.5%
* Cash in short-term FI funds. FLRN, VUBFX, etc.

I’m confused. You trash fixed income, but your alternative is short term fixed income (including cash, which is short term fixed income)?

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So I ask those laughing at money in nearly zero percent bonds, what are you actually doing as an alternative?

Not laughing, but I do have a different allocation.

I’m 60, just retired, and my wife is 50, also not working. I’m at about 10% cash and 90% equities. The equities are about 30% S&P500 index fund and the balance in individual stocks, primarily tech, and almost all Motley Fool Stock Advisor picks.

I assume I’ll live to be 90, and my wife may well live beyond that, given our family histories. That’s a very long investment horizon, and our 10% cash balance is roughly 3 years living expenses, so I’m not concerned with the volatility that the equity portion experiences.

Tim

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I assume I’ll live to be 90, and my wife may well live beyond that, given our family histories. That’s a very long investment horizon, and our 10% cash balance is roughly 3 years living expenses, so I’m not concerned with the volatility that the equity portion experiences.

What if we experience a 1929 type thing where stocks didn’t recover fully until 1954? What if it’s a Japan1989 type thing and it’s (tech) all been a big bubble?

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What if we experience a 1929 type thing where stocks didn’t recover fully until 1954? What if it’s a Japan1989 type thing and it’s (tech) all been a big bubble?

Then I’ll still be better off than 90% of the population.

And if in 3 years, the market is still declining, I’ll rethink my strategy based on that new information. But reasonable odds say that stock market recessions don’t last more than 3 years.

If the Yellowstone caldera collapses and explodes, I won’t have to worry about longevity either. I try to plan for likely events, not all events.

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I think I’ve said before, I don’t plan to change hardly anything. I’ve read several articles, including TMF articles, that say “if it ain’t broke, don’t fix it”.

As I start to draw-down accounts, I will put the cash in my checking account because that is where all the auto-pays occur.

We’re not extravagant, so I’m not too worried about market fluctuations. It will fluctuate. Just have to ride it out. I try to own good companies, and let them do their thing.

1poorguy

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Yep. Like that one. Let equities do their thing. If it’s working, let it work.

Other than mutual funds in my retirement accounts, I have zero bond exposure. I don’t know the bond exposure in the mutual funds, but I know there is some.

1poorguy