Rebalancing the portfolio for 2014 and looking for advice

[Snydley]

HI-
I'm 39, DH is 45; we are playing catch-up with retirement. We have 120K total in our accounts right now. I'd like to go risky for the next few years, since I won't be retiring for at least 25 years. DH would like to retire in 20 years, which seems doable as our house will be paid off in 15 and my decent earning potential (I'm currently only working 1/2 time). We are adding ~$3,300 per month to our accounts (this includes employer matches).

My original thought was to go 100% stocks next year (we were a little under 60% stocks for most of 2013). I scaled that back a bit to this:

16% Bonds
72% US stocks (mostly large cap, some med and small as well)
12% International stocks (mainly developed).

Thoughts?

thanks
Jen

[humandraydel]

16% bonds is a little low for your age - I'd suggest something closer to 25%. But the real question is - why now? Stocks had a great year and I doubt they will repeat that - they might even go down. It sounds to me like you are performance chasing which usually leads to poor results - buying stocks when they are high and selling when they are low. How did you handle the stock market decline in 2008/2009?

[kork13]

Just a bit of clarification before we get too far into this... When you say 16% bonds, 72% US stock, 12% Int'l stock, do you intend to allocate NEW money contributions according to that allocation for the next year, or do you want to rebalance your ENTIRE portfolio to reflect that allocation?

My main concern here is not that you want to be so relatively aggressive (for your ages) with your investments, but rather, quite simply, you don't seem to have a plan at all. To swing from holding 60% stock to wanting 100% stock & now 84% (total) stock, that tells me that you don't have a good long-term plan in place. I think you need to take a hard look at what your comfort levels are, what your plans & goals are, and how you can achieve them. Develop an asset allocation that will meet those goals with an appropriate level of accepted risks, and build a plan for how you will adjust that allocation in future years in accordance with changing timelines & levels of risk.

We're all happy to help you in guiding that planning process. But before you start moving money around, you need to have a plan for how & why you're doing it.

[feh]

In addition to what kork said, you need to determine your risk tolerance. If you go 85-100% equities, what will you do if the market drops 50%?

[jIM_Ohio]

HI-
I'm 39, DH is 45; we are playing catch-up with retirement. We have 120K total in our accounts right now. I'd like to go risky for the next few years, since I won't be retiring for at least 25 years. DH would like to retire in 20 years, which seems doable as our house will be paid off in 15 and my decent earning potential (I'm currently only working 1/2 time). We are adding ~$3,300 per month to our accounts (this includes employer matches).

My original thought was to go 100% stocks next year (we were a little under 60% stocks for most of 2013). I scaled that back a bit to this:

16% Bonds
72% US stocks (mostly large cap, some med and small as well)
12% International stocks (mainly developed).

Thoughts?

thanks
Jen

Because you are investing $3300/mo, I would advise you stick with 60% stocks and 40% bonds. No reason to take excessive risk when you have such a high contribution amount. I don't think you are behind.

I would make sure the 40% bonds is well diversified (at least 4 different types of bonds- corporate, government, foreign, inflation protected, cash, high yield etc)
I would make sure the 60% stocks is biased towards mid and small caps more than large caps (if you want to take risk, take it with aggressive selections, not a high stock allocation).

[Snydley]

It sounds to me like you are performance chasing which usually leads to poor results - buying stocks when they are high and selling when they are low. How did you handle the stock market decline in 2008/2009?

Ok so a bit of history, DH and I are both scientists and were in school/training for a long time. We bought our first home in 2011 and had spent the previous 7 years saving our extra money for the downpayment. We had a few random retirement accounts in 2008 they were all at 100% bonds (from what I can tell) so we didn't lose much of the very little money we had.

Just a bit of clarification before we get too far into this... When you say 16% bonds, 72% US stock, 12% Int'l stock, do you intend to allocate NEW money contributions according to that allocation for the next year, or do you want to rebalance your ENTIRE portfolio to reflect that allocation?.

I was thinking of moving existing money into this allocation, and having future additions fall into it as well.

My main concern here is not that you want to be so relatively aggressive (for your ages) with your investments, but rather, quite simply, you don't seem to have a plan at all.

You're right. I have no plan. We were never infested at all until last spring. I was thinking of assuming more risk the next few years, because I did a 25 year calculation of our predicted contributions with compound interest (assuming an average of 5% growth per year from investments) and that got us to $2,000,000. I know the more growth I can accumulate these next 5 years dramatically impacts the final returns. I should consider that losses will hurt more as well. Since I've only been in the market with our money since last spring, I'm seeing good returns. However, when I look at the history of the mutual/index funds I am choosing, it's hard to imagine that going a higher % of stocks now is a bad idea.

Maybe I should be 20% bonds?

[jIM_Ohio]

You're right. I have no plan. We were never infested at all until last spring. I was thinking of assuming more risk the next few years, because I did a 25 year calculation of our predicted contributions with compound interest (assuming an average of 5% growth per year from investments) and that got us to $2,000,000. I know the more growth I can accumulate these next 5 years dramatically impacts the final returns. I should consider that losses will hurt more as well. Since I've only been in the market with our money since last spring, I'm seeing good returns. However, when I look at the history of the mutual/index funds I am choosing, it's hard to imagine that going a higher % of stocks now is a bad idea.

Maybe I should be 20% bonds?

History aside, is it more important to make a good decision now, or live with ineffective decisions you made in the past?

Do those same calculations

I like the 5% return you used
try it with 4% and 6%
try it with $4300/mo and $2300/mo (plus or minus $1000 you are contributing now).

It is my opinion... that your contributions are the single biggest factor to your success. You don't need to be 80-20 (don't worry about what calculators or other people tell you), because you may or may not need to be more aggressive... based on what I see, I believe you will achieve your goals with moderate risk (60-40 or 40-60). Why take more risk than you need to?

Saving $3300/month is huge. If you are serious about that amount and have confidence in it, I believe the contributions will matter more to your return.

In addition, the returns you get the last 5 years of working will be much more important than the returns you get the next 15 years (its called sequence of returns). I would focus more on having a good long term 20 year allocation, than taking excessive risk the next 5 years based on some calculator.

[feh]

One more thought - the title of this thread is misleading. The OP is not rebalancing, but drastically changing their asset allocation.

OP - since you admit you do not have a plan, I suggest to go to the boglehead wiki and spend some time thinking about asset allocation and what your risk tolerance is.

[Snydley]

jIM-Ohio, I can't thank you enough. You stated exactly what I needed to hear.

I'm quite confident we will be able to continue the $3,300/month for the long haul. I'm currently working 1/2 time and hope to move to closer to full time within the next few years. When this happens my DH will hopefully be able to ramp-down his workload a bit and may take a cut in pay to do so (we have a 6yo), but our plan is to keep the same relative level of income.

I would make sure the 40% bonds is well diversified (at least 4 different types of bonds- corporate, government, foreign, inflation protected, cash, high yield etc)
I would make sure the 60% stocks is biased towards mid and small caps more than large caps (if you want to take risk, take it with aggressive selections, not a high stock allocation)

Why avoid large cap? I thought it was generally recommended to be a high % of large cap (relative to mid and small)

Do those same calculations

I like the 5% return you used
try it with 4% and 6%
try it with $4300/mo and $2300/mo (plus or minus $1000 you are contributing now).

With 120K, 3,300 per month, and 5% interest rate over 25 years = 2,390,855
change the interest rate to 6% = 2,818,017
change the interest rate to 4% = 2,035,045

With a 5% interest rate and $2,300/month contribution = $1,789,494
5% interest rate and $4,300/month = 2,992, 217

Ok so I'm convinced to be more conservative, maybe sticking with a similar allocation to last year.

One more thought - the title of this thread is misleading. The OP is not rebalancing, but drastically changing their asset allocation.

OP - since you admit you do not have a plan, I suggest to go to the boglehead wiki and spend some time thinking about asset allocation and what your risk tolerance is.

If I can figure out how to change the title thread I will- thanks. I will check out boglehead as well.

[jIM_Ohio]

jIM-Ohio, I can't thank you enough. You stated exactly what I needed to hear.

Why avoid large cap? I thought it was generally recommended to be a high % of large cap (relative to mid and small)



With 120K, 3,300 per month, and 5% interest rate over 25 years = 2,390,855
change the interest rate to 6% = 2,818,017
change the interest rate to 4% = 2,035,045

With a 5% interest rate and $2,300/month contribution = $1,789,494
5% interest rate and $4,300/month = 2,992, 217

Ok so I'm convinced to be more conservative, maybe sticking with a similar allocation to last year.

I did not say avoid large cap. I hope what I said was overweight small and mid cap. The best risk adjusted return is with mid and small cap stocks. This will add volatility, but if you considered taking the risk of 80-20, consider that a 60-40 portfolio which has a higher percentage of small and mid caps might generate similar returns without all the risk.

If you compared an 80-20 portfolio which was 40% S&P, 20% domestic small cap, 20% foreign large, 10% government bonds, and 10% foreign bonds, with a 60-40 portfolio which was 15% large cap, 15% mid/small cap, 15% foreign large and 15% emerging markets, plus 10% TIPS, 10% high yield, 10% real estate and 10% foreign bonds, which one has more risk?

On the surface the 80-20 should appear to have more, yet the 60-40 portfolio clearly holds more volatile assets in slightly higher percentages (for the most part).

As you see the need to taper risk, you remove the volatile assets (small/mid caps and emerging markets) for less volatile assets (like large caps and government bonds). Still keeping the 60-40 allocation.


In addition, hopefully it is clear the difference of 1% returns is "only" about $800,000- the question to ask is "is the risk worth it".
Clearly the additional deposits (extra $12,000 per year) make a bigger difference than generating 1% returns.

Granted going from 80-20 to 60-40 is probably a 3% difference in long term "expected" returns.

[GrimJack]

In addition to what kork said, you need to determine your risk tolerance. If you go 85-100% equities, what will you do if the market drops 50%?

Personally, I would buy more stock at that time. If the stock was in dividend-producing stocks and they were counting on the income not the sales makes buying more when the stocks fall even better. They would only lose the 50% if they sell at that time. Granted, they have to have some way to make it past the downturn, but she is talking about investments now not selling when they retire.

[feh]

Personally, I would buy more stock at that time. If the stock was in dividend-producing stocks and they were counting on the income not the sales makes buying more when the stocks fall even better. They would only lose the 50% if they sell at that time. Granted, they have to have some way to make it past the downturn, but she is talking about investments now not selling when they retire.

The point of the question was to get the OP thinking about their risk tolerance. Lots of people panic sold during the 2008-9 drop. If the thought of the value of their investments being cut in half makes the OP sick to their stomach, then they shouldn't have so much in equities.