Stocks — Part XXIII: Selecting your asset allocation

Overall Morningstar rating for solid risk-adjusted results among Allocation% to 85% Equity funds as of 11/30/ A globally diversified fund pursuing growth.

But that is only part of the equation. What asset allocation do you suggest for the next 5 years?

Date as of: 01/06/2019

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Rebalancing is simply the process of bringing your selected allocation back in line as it drifts with the rise and fall of the stock and bond markets. My question is, I am still back and forth with how to handle our existing accounts and if an additional IRA is needed.

Does this sound right? I am afraid I am giving myself paralysis by analysis and would love your opinion. Sounds like you are on target: Max out your tax-advantaged opportunities and then build up your taxable accounts. Google and read before you act. Been reading yours and a few others and trying to formulate my steps to early retirement. Any help would be greatly appreciated. My wife is a stay-at-home mom. My wife rolled over her k from her former employer and now has an IRA spousal, as contributions come from my income.

The limits to contributions however are slowing our growth. Our question is what best to do next…do we open a regular taxable account at this point and put remaining cash in VTSAX in that account? I am 41 and my wife is in her 30s. We want to stay aggressive and are not looking at anything but stocks at this stage.

If we never touch it, do we still pay tax on any capital gains? Any feedback would be greatly appreciated. Yes, absolutely fund a taxable account once your tax-advantaged options are fully funded. You will owe tax on any dividends and capital gains distributions CGDs are very rare with VTSAX , but capital gains on your shares are only taxed when you sell.

At your income level you might also consider making future IRA contributions to a traditional rather than the Roth for the immediate tax deduction. I started contributing to this rollover account in I contribute after-tax money into this account from my bank account.

Does this mean I should deduct these contributions on my tax return? Since the money is out of pocket taxes withheld prior receipt , I am not sure how to treat it. Thank you for all of your wonderful advice. This is my first year earning an income. My question to you is this: The equal blend you describe would overweight small and mid-caps, thus increasing volatility over VTSAX — and there is no guarantee that over-performance will continue.

Your thoughts much appreciated , love your site. Youve echoed my thoughts on holding cash instead of bonds. Also, whats been concerning me….

When theres a big drop in equitites its advised to have a 2- 3 year cash buffer to draw from while equities recover. Does this mean 25 x my annual income plus 3 yrs in cash required for FI? Traditionally, the 25x covers both. Im slowly working my way through your site and reading all your responses to questions. Would you say the Fidelity equivalent of the VTSAX would be comparable or would it be worth it to get a Vanguard account to invest in what it offers… I am extremely new to all this.

Jim, Thank you for the information and discussion on asset allocation. I am age 63 and retired. I do not currently own any bonds. I currently have no other income.

However, my wife will be taking SS at her full retirement age in 4 years and I will take SS at age Since retiring at age 50, I have always determined my AA by first allocating 7 years of living expense to liquid non-stock, then the remainder into stock. This has allowed me to feel comfortable with a more aggressive AA. Is my thinking flawed? So lowering that risk does provide the potential opportunity to have a greater allocation to, and the ability to accept more volatility on, the stock side.

That, too, allows the opportunity to be more aggressive in your allocation choices. Jim, One other data point may be necessary for you to evaluate my situation. Thank you in advance for your thoughts. I am completely new to investing. I am not sure how I should be allocating my investments. I am young and married and have a VA pension that brings in non-taxable cash. There are also a few bond funds. I am not sure how I should allocate my funds.

Am I being too conservative and setting myself up for underperformance? Over the decades, stocks have a high probability of outperforming bonds. So, the more bonds you have the lower your expected performance will be. But that is only part of the equation. If, when the market plunges, the pain causes you to panic and sell, you will be left bleeding by the side of the road.

If a greater percentage of bonds gives you greater piece of mind and prevents that panic sale, you will be far better off. Please help, I am totally lost on bonds. Does this mean even with the interest they pay, you would have lost money? I have years cash sitting in a saving account so immediate withdrawals are not a real concern in the near future. The fed is planning to raise interest rates higher so from what I understood from your bond article, this will drive bond returns even lower?

I feel I must be missing a piece of the puzzle when it comes to bond investing. Hi Rick Im with you on this. Interest rates slowly rising. I feel safer with cash than bonds. VBTLX certainly has the potential to have a capital loss and that loss could be larger than the interest it pays. You are correct that this happens when interest rates rise.

You are also correct that interest rates have risen of late and there is talk of them rising more. The Fed would love to see rates higher, if only to have the ability to lower them again when times get tough.

But that said, predicting interest rates is even more challenging than predicting the stock market. So, it is important to remember that when you hear people saying interest rates are going up, they are only guessing.

People have been predicting interest rates climbing for at least two decades and they have mostly fallen. I have no idea what they will do from here. Neither does anyone else, including maybe especially those who claim they do.

VBTLX is a total bond market fund. This means it holds bonds of all different maturities and that means that it really averages out to be a mid-term bond fund with about year average maturities. This means, when rates are rising, there is always the opportunity for VBTLX to buy new bonds at the higher rates. The fund may be down in a given year or two, but it is still paying interest and I am reinvesting that interest in lower priced shares.

It serves my desire for ballast just fine. I appreciate your patience explaining this. You have cleared it up, I think. I apologize for my lack of knowledge on this but I am grateful for your site where I can ask such questions. But I would own a few more shares from that 3. Your series has been great help! I am currently maxing out my k annual contributions and planning on putting whatever excess investment money I have left over in my VTSAX account.

Would you instead invest a large portion into the VTSAX and just contribute enough to get the company matching k instead? Obviously, the k has higher expense ratios but is tax advantaged so I am at a loss at which direction to take this. What do you recommend for my situation? But, most importantly, whatever percent you hold in stocks: Finally, in deciding on your allocation, you should look at your assets and your husbands as a whole.

My wife and I are in our early 30s, and are looking to pull the trigger on exiting corporate life and entering FI in years. Thank you for your comment, but it appears you missed this post: Most questions I am asked these days have been asked and answered many times before. Perhaps yours has as well. A warm hello from London U. My understanding so far: Now My Question is: Are you withdrawing funds for consumption?

Rebalancing every year might give me same growth in my portfolio over ten years or slight less or slightly better!

Let me start by saying I agree with Dawn. Were I anywhere other than the US, I would look at a fund like https: In fact, as the world continue to grow and prosper and the US share of the ever larger pie drops, at some point I too will go that route.

Especially as Vanguard continues to lower the ER. It is now down from. We rebalance to bring our portfolio back to our target allocations. As the market rises or falls, these tend to drift. If you live in UK why is all your equities in the US stock market? My mind is telling me invest all in US. They will keep buying business all over the world including U. And you will be the part of the it. In my view US is a great bet and largest diversification. Your new to investing.

You need to understand diversification. No one knows how the future will pan out. Which counties will do well and which will lag. Some believe all the big future gains will come from emerging markets?

And not concentrate your risk. If you had some UK exposure you would be shielded from this. IMHO you need to read up on diversification. Read monevator site or the escape artist blog. These are UK based sites full of information. Dawn, I have thought about buying into other markets. Lot of corruption, government influence on the companies, poor accounting etc etc. The answer is most likely Yes!

Now my view on currency risk. Even if I invest in U. The ftse index had gone up due pound depreciation. However if I invest in local FTSE stock then yes i am more less covered against the currency risk as earnings are locally in pounds. Again by investing in US there is nothing to be worried about as you are buying half of the world available equity also most importantly you know what you are buying because lot of those products are in life.

Lastly expenses ratio is the cheapest too compare to other assets class. I feel sure you can buy a China ETF. A world index is the way to go. Then you got all bases covered. Anyway you need to do what you are happy with. It just makes me pull back ABIT. And the rest in the UK. That feels right for my temperament. Your email address will not be published. Notify me of follow-up comments by email.

Notify me of new posts by email. Selecting your asset allocation. You also know that, with simplicity as our guide, we look at our investing lives in two broad stages using just two funds: Betterment Target Retirement Funds Both allow you to choose your allocation and then they will automatically rebalance for you. Risk Basically, bonds smooth the ride and stocks power the returns. Factors to consider in assessing your risk tolerance.

Stepping away from REITs. Comments Thanks to your wisdom I have slowly but surely moved most of my money to VTI and the available index fund in my k plan. Welcome Jags… and thanks! Good move funding it. If one of those factors above changes and creates the opportunity to exit, you can do it then. Hi Jim, First off let me apologize for my not well edited first post!

Just to clarify a few things: I own the following stocks—mostly with values mostly between 1k and 2k: Hello Jags, I am by means an expert, but I would look for opportunities to sell the individual stocks when one or more incurs a temporary loss.

Always nice to see you here! Thanks for the referrals. Thanks Richard… I had forgotten Vanguard did those. Thanks for the reading suggestions, EA.

Just for that, your little gold secret is safe with us. Helped me realise I was ready to quit my job! Hi John… I can understand the confusion. Thanks for giving me the chance to clarify! Thanks Alec… Glad it has been useful! Hopefully this in on the mark in addressing your questions and comments? Glad it helped, David. But, of course, all this goes out the window if you sell during the panics.

Hi Jim, Great post as always. Thanks Sai… glad you liked it! Sorry, I got that sideways. Not to me, especially in this market. Welcome, m, and thanks for sharing. Two excellent posts, Jeremy. Thanks Paul and Neil for sharing your approach. Thanks Matt… interesting stuff. Jim, Thanks for the post. VFIAX please see my reply to his question below. Between you and Joy above I might have to print as many as a dozen.

Using the Admiral Shares versions: I look forward to hanging out with you! Hi Jonathan… Sounds good to me. Hi Jags… You raise a good point. Money in traditional IRAs has a tax obligation hanging over it. Thanks Kenneth… Very interesting review. Also — your site is fantastic.. More importantly, these seem to be beyond asset mix of the Simple Path discussed here.

Glad you like the site and the Series! Thanks for the kinds words! I chose this because of: Hi BGM… Nice to see you over here!

VASGX is a fine choice and it matches your goals perfectly and a good one to mimic in your k. We all have a right to some ignorance and stupidity in our 20s. Sorry, meant to put Jim, but John came out. No worries, Steve… Yep. You always have to pay FICA tax and being self employed you get to cover both sides. IRAs only provide a deduction against your income tax. Hi Jim, Really enjoy reading your blog, especially the Asset Allocation topic as it has been my concern for my super fund i am in Australia- it is a retirement fund for the last 6 months.

Would appreciate your comment. And that, since you asked, is my comment. Hi jlcollinsnh, Thank you for providing and sharing your knowledge. Index and Save the 25 basis points. Hi Sean… Glad you found your way here. Thanks for all the help! Hi Dave… Your question is a little like asking: Hi Jim, Thanks a lot for the great blog and knowledge that you share with your readers! Here the quick breakdown on what I have: Does this sound like a good strategy? Also, see my reply to Rob below.

I hope this is not too confusing. Yes, I prefer to hold bonds in a tax-advantaged account. Whether that should be your Roth depends on how you plan to use your Roth. Hi Rob… My guess is the better results come from periodic rebalancing that results in selling high and buying low as you make the shifts. So, yes, I think your thinking is correct. Investing will always be a bit scary and the drops, when the come, terrifying. Dear Jim, Thank you for all of the great articles you write.

Hi Andrew… Your thinking is spot on and while you are in the wealth accumulation phase the new money you are adding both helps to smooth the ride by taking advantage of dips and allows you new investment money to use to bring your allocations back into line.

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Asset allocation and tax management in one fund. Fact Sheet Sep 30, The Approach In allocating its assets, the Fund seeks to maintain broad diversification across equity market sectors and styles, and to emphasize market segments believed to offer attractive risk-adjusted return prospects. The Features The Fund's combination of different portfolios and preferred stocks and similar securities, provides access to a wide range of securities, from U.

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Remember Me Click here to remain recognized on this device for future visits to eatonvance. In other words, I believe bonds are expensive and have a higher risk of staying flat or losing money for investors who do not hold to maturity. By providing five different asset allocation models, I hope you are able to identify one that fits your needs and risk tolerance.

Ideally, your asset allocation should let you sleep well at night and wake up every morning with vigor. I encourage everyone to take a proactive approach to their retirement portfolios.

Ask yourself the following questions to determine which asset allocation model is right for you:. Before Personal Capital, I had to log into eight different systems to track 28 different accounts brokerage, multiple banks, K, etc to track my finances.

Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button.

Aggregate all your financial accounts in order to get a good over view of your net worth and start building those passive income streams! It only takes a minute to sign up.

How are your results? Sam began investing his own money ever since he opened an online brokerage account in Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world.

He also became Series 7 and Series 63 registered. Updated for and beyond. Tax reform is allowing us to keep more of our money than ever before. Time to take full advantage before the downturn hits and taxes inevitably increases. The people who have gotten ahead and will get ahead are those who invest. But because my employer has a vested interest in us maintaining coverage on this company, I will publish this report that shoes nothing earth shattering. You can be the King Of Neutral ratings e.

Coming out with a Strong Neutral call today! Interesting, why do you think bonds will have a negative return over the long run? Wouldnt debt still retain value as someone will always want to lend money? Further, I think that sitting on the other side of this debt bubble, lending standards have increased and may stay strict for quite some time.

Because of an asset shift away from bonds into riskier assets like stocks. If you look at the year bond movement in recent levels, anybody who bought a month ago is losing money.

The charts will give you some idea. I understand you have to outpace inflation and keep skin in the game, but I think there is nothing wrong with hitting singles and being the tortoise that finishes the race with the least risk possible with an acceptable rate of return. Is your allocation a percentage of total net worth, and do you consider the equity of business ventures and real estate in this percentage?

My asset allocation charts are for investment portfolios in stocks and bonds only. That is going to get a little more complicated since there are so many other types of investments. Personally my allocation looks a bit like this:. Passive income streams from good tenants, if you can find them that is. This plan depends upon the solidity of real estate as a backbone for passive income and later retirement, and the bonds to provide funds for rebalancing.

Bonds are in a bear market and getting eaten by inflation but stocks have been in a bull market for quite a while. It stands to reason that at some point this will change. Allocations are strategic and diversified. It is nearly impossible to beat the Warren Buffett portfolio for stocks and other market investments……..

A tangible asset in an isolated market can provide massive levels of insulation from market fluctuations.

I have a pretty low risk tolerance. I loved all the analysis and data points that you included in this post. Volatility in stocks is nuts. I am thinking about getting more structured notes though as my CDs expire since your recent post got wheels turning. I like the Financial Samurai asset allocation plan.

However, once I hit 65, I probably would increase my bond allocation quite a bit. When you get older, your risk tolerance usually reduce quite a bit. My bond allocation went down a lot after I rolled over my k. I really need bump up my bond allocation, but the rate is so low right now. My 1 tenet in investing is not to lose money! I just refuse to lose. I consider more than risk tolerance with my asset allocation.

In retirement this time I will have all my basics covered by Social Security and a pension. That represents the fixed portion of my retirement. My stock market portfolio asset allocation is intended to shield me against a very volatile market and still be a growth portfolio. I expect to live 30 years in retirement and want sufficient funds to support my wants in life. This plan could change, but that is what it is today.

Ive always felt avoiding the latest meltdown in stocks is really the best investment strategy. Bear markets typically last. So simplistically the closer you are to the last bear market time-wise the more bullish you should be on stocks. If you can tell us when the next bear market will start within the month is fine , shoot me an e-mail and give me a heads up would ya? Haha well I cant tell you when its going to start but the idea is the farther you get from the more cautious you have to be when the market enters a downtrend just follow moving averages for simplicity.

There will be another crash someday in the future though and even if you only manged to save half your portfolio from the effects of it thats a huge deal especially if you can buy back in a year later anywhere close to the bottom.

The one key thing I want everybody to know is that we will all lose money eventually. Nobody can consistently beat the market, no matter how smart we think we are. Everything is easier said than done. I think you are doing great! With your time horizon, skills as a developer, and your initiative to work on multiple income streams, you should be fine. The FS model seems appropriate, but only you can decide. The one thing to note is that things change all the time.

My article on Yakezie. Gathering feedback now and need a developer. The return on government bonds currently are so low that you are actually losing money investing there.

Certain corporate bonds do better, but again, its pretty limited. You also have an automatic inflation hedge built in with dividends that you dont get with bonds unless they happen to be TIPS- treasury inflation protected. Moving some of your income to bonds when you hit 65 does make some sense though, the time to take risk has probably passed you by at that point.

We allocate our assets, our stocks, bonds, and cash, because we want to get the return that we are aiming for while minimizing the risk that we are exposed to. You need to decide how to divide your assets and choose an investment that will go with how you divide your money.