What Is Your Asset Allocation/Fin Plan?

Investing Strategies Retirement Investing
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At my age allocation has become more a matter of psychology than reason. And I think that is true of many old people who worked and saved for decades.

If we had to, we could live on our combined pension and SS income without touching our investments. Because of our fearful conservative nature, we have put nearly 1/3 of our money into cash earning about .5 percent. We moved our money from bonds to cash because bonds presently face interest rate risk, are presently paying next to nothing, and cannot be deployed quickly and easily.

If the stocks never correct that much in price, we will continue to have more equities than we need.

If equities suffer a once in a century deep and sustained crash, the cash will be our insurance policy.

The only thing ā€˜novelā€™ about our allocation is that I spent the last two years phasing out of bonds and into real cash - as I said, bonds have interest rate risk, earn practically zero, and cannot easily be deployed like cash.

Cash be nimble, cash be quickā€¦

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There are simulators out there that allow you to model the ā€œwhat ifā€.

I particularly like firecalc.net. You input your numbers, and it runs ā€œwhat ifā€ for the past 100 years. That included the crash of '29.

IMHO, the key isnā€™t worrying about stuff like that. Bubbles burst. Crashes happen. The more important thing is to have the bulk of your money in companies that are performing day in, day out. Then a crash/burst becomes more of a buying opportunity than a problem.

Several of my stocks are down compared to a few months ago. I have no idea when the decline will stop. But Iā€™m not worried, because COST and V, and most of my other companies, arenā€™t going anywhere. The few that I have that are speculative, I know are speculative, and I donā€™t have a sizeable portion of my portfolio in them. Probably about 80% of my portfolio is in 4 rock-solid companies. The other 20% is a bit more adventurous (e.g. Saul stocks, and a solid state battery company).

1poorguy

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I am currently at an allocation of 85% stock/15% cash. Retired with a pair for home and zero debt. I also sell cash secured puts and covered calls on some positions to earn a bit on the cash reserve.35% is allocated to my top three positions,Brk,BAM,and ENPH.

JK

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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.

Absolutely not laughing at you and am so sorry if you took it that way. On the other hand, I have been reading Intercstā€™s posts for over 20 years and his bias against real estate is so strong I canā€™t help but laugh when I see it surface over and over and over again. He likes to compare investing in real estate against what could be gotten in the stock market, while the bond market is the much better benchmark to compare that against, yet money that could be invested in the stock market rather than paying for a home in cash he compares against the bond market. Cherry picking! That said, Intercst has very little if anything in fixed income assets. You have misunderstood that. IIRC, heā€™s a market index ETF guy with individual stocks carrying over from his early years.

Please be careful about staying in bonds, unless you are looking to hold them until term. If you are in bond funds, make sure they are very short term bonds. The Fed is talking about raising interest rates, at which point the value of existing bonds will decrease because higher returns can be gotten by buyers of new release bonds. There is real risk to your capital in bonds for no real potential reward. The minimal return is not worth the risk, IMO.

Also please understand how the 60/40 allocation was developed, the government bonds it was based on, and why the same does not necessarily apply to corporate or junk bonds which tend to also go down when stocks go down. So many articles out there on what is a valid portfolio allocation, but in the end it is based on your assets, needs, and tolerance for risk.

It also has to do with how well you can ride out the market and not cash stocks in. If we needed to we could start taking SS, rent out the lower apartment of our house, rent out our vacation home. We have a certain amount of dividend payers coming in every year. These things allow us to be more aggressive in our allocation if we chose to do so. Once again, there are a lot of moving parts. YMMV.

Good luck and donā€™t delay!

IP

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25

"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."

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

Well, thereā€™s fixed-income and thereā€™s fixed-income.
What people generally think of for fixed-income allocation is total U.S. investment-grade bond market (AGG & BND).
The duration of AGG is 6.7 years. The risk/reward is unfavorable. Interest rate risk is high.

I choose cash and near-cash, because there is no interest rate risk. Whether the yield is 0.7% or 1.95%, the dollar amount of the yield is small. Small enough that the risk is not worth it.
If you have a $1million portfolio, 40% ($400,000) in AGG/BND, you get $7000 a year. BFD.

AGG has lost -4.17% in the last year. Loss of $16,680.
FLRN is flat, yield 0.5% and price lost -0.5%.

ā€œYou can choose only among the options that are actually available.ā€
In the fixed-income arena, there are no available options that offer decent return and low risk. So thatā€™s out.
Percentagewise, I donā€™t have much in the cash allocation. Enough dollars to make the wife comfortable.

My main ā€œallocation strategyā€ is active risk management. A well-developed plan on what to do when the market tops out and starts to downturn. This has been discussed more throughly on the Mechanical Investing board.

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Well, thereā€™s fixed-income and thereā€™s fixed-income.
What people generally think of for fixed-income allocation is total U.S. investment-grade bond market (AGG & BND). The duration of AGG is 6.7 years. The risk/reward is unfavorable. Interest rate risk is high.

Ok, now that you clarified, Iā€™m realizing that we are talking semantics. I include cash and nearly cash (very short term bonds and CDs) as ā€œfixed incomeā€. I agree with you that anything longer is the fixed income that has a bad risk/reward profile.

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I am currently at an allocation of 85% stock/15% cash. Retired with a pair for home and zero debt. I also sell cash secured puts and covered calls on some positions to earn a bit on the cash reserve.35% is allocated to my top three positions,Brk,BAM,and ENPH.

JK

Retired with a ā€œpairā€ of what?

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Retired with a ā€œpairā€ of what?

Itā€™s a typo. He meant a ā€œpaid for homeā€.

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Retired with a ā€œpairā€ of what?

Itā€™s a typo. He meant a ā€œpaid for homeā€.

Ah! Thanks! I thought maybe he lived in a pair, like the old lady in the shoe.

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30

In this current environment, anyone needing or wanting bonds in their portfolio might be best served by taking a look at ULST, Ultra Short Bond ETF, or other short duration bond fund offerings.

In the case of ULST, it has a positive return YTD, 1 mth, 3mth, and 1yr, etc. Certainly has performed better than cash.

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I am the original poster of this thread. I guess I need to clarify. I consider ā€œcashā€ as a subset of ā€œfixed incomeā€. Most of my 45% fixed income is cash or short term bond funds (muni bonds in the taxable account, regular taxable bonds in my tax-sheltered accounts).

I agree that anything longer than cash or short term bonds does not have a good risk/reward profile.

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32

This is my first post on this board. Since I have spent a lot of time contemplating my portfolio allocation, this is what I have done. I have approximately a 70/30 allocation. As to the 70% equites, 20% is in ā€œSaulā€ stocks, mostly thru Bull/Call spreads. This way, when these stocks tank, I buy back the short calls for a little money and then I have only long calls. I did this on March 20, 2020. I posted this on the mechanical investing board in real time.

As to the other approximately 50%, it is allocated approx. 29% in U.S. and 21% Foreign. The U.S. is mostly Berkshire and some Vanguard total market (VTI). The Foreign is a mix of Vanguard funds (VINEX, VXUS and VWO).

Now to the hard part. About 25% of the 30% fixed income is in I-Bonds which I purchased many years ago. As to the other 25% of the 30% is in Ally Bank or sitting in brokerage accounts making nothing. To compensate me for the ā€œnothingā€, I have been shorting the bond market by shorting the Ultra 10 Year Bond. Symbol TN at TD Ameritrade. This makes me feel better because I get my return thru rising interest rates. Be aware that this is a highly leveraged investment. There may be some smaller contracts that you can trade, but I just go with the big one. Also, I may get a smallish mortgage in a little over a year (if I decide to upgrade my overpriced Condo in Honolulu), so this is also a hedge to rising interest rates.

I enjoy this board and thank everyone for participating.

Sandywater

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33

Should have been paid for home, not paid for home. Fat fingers!

34

Fat fingers twice apparently.

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35

My question for you is this: What is your asset allocation/financial plan?

Currently, my annual income from Social Security, VA Disability Compensation, and two small pensions that I had to take as an annuity, is enough to cover my living expenses and pay the Federal and state taxes on my income. And, to be able to maintain a $300K cash balance in my bank and credit union accounts.

RMD from my two traditional IRA accounts is, roughly, 77% of my annual taxable income. This is likely the last year that my current annual income will be able to pay all of my Federal and state income taxes. Since 2015, all of my RMD has been transferred from my IRA accounts to my taxable investment account with the exception of a Qualified Charitable Distribution that I started last year to support the PBS NewsHour.

Like others in this thread, I consider cash held in taxable investment and traditional IRA accounts as fixed-income investments albeit with a terrible yield along with bonds. My fixed-income assets represent almost 10% of my asset holdings. Equities represent a little over 90% of my assets.

Iā€™m not terribly concerned about a market downturn as some have mentioned. It will reduce my taxable income along with my Federal and state income taxes. It might even move me into a lower marginal tax bracket.

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36

MCCrockett writes,

Currently, my annual income from Social Security, VA Disability Compensation, and two small pensions that I had to take as an annuity, is enough to cover my living expenses and pay the Federal and state taxes on my income. And, to be able to maintain a $300K cash balance in my bank and credit union accounts.

RMD from my two traditional IRA accounts is, roughly, 77% of my annual taxable income. This is likely the last year that my current annual income will be able to pay all of my Federal and state income taxes. Since 2015, all of my RMD has been transferred from my IRA accounts to my taxable investment account with the exception of a Qualified Charitable Distribution that I started last year to support the PBS NewsHour.

Like others in this thread, I consider cash held in taxable investment and traditional IRA accounts as fixed-income investments albeit with a terrible yield along with bonds. My fixed-income assets represent almost 10% of my asset holdings. Equities represent a little over 90% of my assets.

Iā€™m not terribly concerned about a market downturn as some have mentioned

Exactly!

If youā€™ve been successful in managing your skim rates over several decades and let the savings compound at stock market returns, youā€™ll likely retire with more money than you can spend.

Thatā€™s makes for a worry-free retirement, at least from the spending & financial planning perspective.

intercst

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37

When I was 52, I was mostly in stocks. Had a five year CD ladder of basic living expenses in CDs paying 6% or 6.5%. Nice. I was hoping to live to mid/upper 80s so it was 30+ years of retirement.

When I was 62, I started moving some of my ā€˜incomeā€™ from dividends /interest into REITs. CDs still a good value.

Well, I hit 72ā€¦so 20 years of ā€˜retirementā€™ had gone by. Now, if I lived to 90 , that was only a 20 year retirement left. NO need for 30 year SWR. Heck, if 4% was safe for 30 years, probably 5% was fine for 20 years or less.

I moved some of my income to corporate bond funds and high yield bond funds along the way getting to 75, so I am about 70% equities/30% REITS/Corporate Bonds/TIPs. The IRA is 20% of the portfolio but ratchets up percentage wise and portfolio vale year after year. Take out X and the next year it is up by X+%. As you get older, the percentage you must take also goes up.

Income wise, Iā€™m happily retiredā€¦ still a bit LBYM, but I donā€™t run around saving 20c on a dozen eggs, eat out whenever I want, but still not anxious to get back to travel with all the stuff going around. Yeah, Iā€™ve got my shots and boosters, but that is no guarantee.

I guess one ā€˜rule of thumb (dumb)ā€™ is that your allocation at a given age should be something like 120-age percent in equities and the rest in bonds. Still have some ready cash for a year or two.

Keep six months cash in IRA to fund monthly withdrawals and fund it twice a year. Half the funding comes from the dividends - not reinvested but moved to cash account. So once or twice a year I sell 2% a year and move to cash. The cash is only a few percent of the portfolio value so I donā€™t sweat it. (4-5% average). Iā€™ā€™ likely never spend the money Iā€™ve got.

Sort of a different perspective now that Iā€™m 75 and life expectancy is ā€˜averageā€™ not even 15 years. Women live a few years longer.

t.

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38

Further to Rayā€™s point: from a tactical asset allocation (read: relative momentum) perspective -
Of the fixed income classes Corporate Bond, 10Y treasuries, Global Hi Yield, IG preferred stocks -
IG preferred stocks is the strongest of the four, at basically a flat-to-barely-negative trend (relative to its 10M SMA).

Cash, at the moment, and likely for the next several weeks, is stronger than any of them.

FC

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This is a great thread. I really enjoy your voices, opinions, and advice. This is why I subscribe to the Fool. (Some would note this is a free board, no subscription required). Thank you, each. For guiding me for 20+ years now. (I started with SA in the late 90s, when our Foolish chat board technology was, well, about the same).

Iā€™m 55, with ā€˜earlyā€™ retirement a choice. IMHO all financial choices are about nest egg, risk, income and lifestyle. My favorite question of all time was from the first financial advisor my wife I and ever hired, back in our mid 20s. He asked, ā€œWhen would you like work to be optional?ā€

I think itā€™s important in discussions of portfolio mix and strategy to share both age and goals. I have more wealth today than I ever imagined as a child or young man working my first jobs. What I used to think was well beyond my reach, in terms of cash flow and spending, is common to me today. Iā€™m blessed.

To the OPā€¦

What is your asset allocation/financial plan? Are you buying into the ā€œitā€™s different this timeā€ thinking, where you take on more equity risk, thinking that fixed income is ā€œdead alreadyā€? 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 run hot, very hot. I keep a touch of cash, 8-12% with the rest in mostly equities. Mostly high-growth equities. Not ā€˜Saulā€™ stocks but ā€˜Tinkerā€™ stocks, and the chats on his (and others, now) Slack board. My next bond purchase will be my first.

At the same time, Iā€™m comfortable with options to hedge, to hedge my equities or risk against the market. Buy puts, thatā€™s an insurance expense.

I donā€™t have a pension ā€“ long ago sold from my employer to an insurance company then pushed to me. I also donā€™t plan on social security in any of my financial models or future. The worldā€™s on fire ā€“ the politicians will come for the money, with enough of the votes, and the money that is mine (ours) so far will be gone.

My cash holding, cash not anything else, is enough for 2-3 years. Iā€™m extending that in this downturn to last 3-5 years by trimming some less-convicted or higher-risk stock holdings.

I own commodities and real estate in small amounts through ETFs. I own physical gold and silver. Thatā€™s for barter at best. I own my home, four acres on high ground with a stream at the bottom. I plant a garden the deer and rabbits eat every year. I own guns and will defend my garden and water if the whole shithouse goes up in flames.

Meanwhile, a bit of cash, some ā€˜be preparedā€™ (the Boy Scout motto, Iā€™m an Eagle Scout), fully invested, and some chatter on the boards.

Ditched that ā€˜fixed incomeā€™ myth. Keep cash and supplies on hand for a few years, invest the rest with a clear view to our shared horizon.

Kip

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40

I am the original poster, Kip (just above). Thanks for that reply. I donā€™t think that your plan could work for me, but I appreciate your perspective.