Asset allocation

[DazedandConfused]

Here I go again doing my yearly remix. Here is my current allocation.

Foreign 14.177%
Small Cap 3.792
Mid-Cap 3.805
Large Cap 39.332
Bond 22.382
Cash 16.512
Total 100%

[ucanit]

You're probably a lot better diversified than I am, Dazed. I'll try to do a recap on mine tomorrow. One thing we (all of us) seem to always forget...well, two things.

(1) We should always include the present value of our expected returns from CSRS as "government securities" and (2) include the equity in our homes as "real estate."

Not that it's a big damn deal but if we don't do this, we may "under allocate to the stock side" and some folks may "over allocate to additional real estate investments."

[DazedandConfused]

I always just included that in income and never considered it as part of investing because I have no discretion over my income. You have my ear!

[DazedandConfused]

After posting on Bogleheads I am in the process of reworking and simplifying my allocation. I have made some fundamental mistakes in which allocations belong in taxable and tax advantaged. Back to the books until I get this right.

[ucanit]

Simplifying, I understand...because I've thought all along that you were using a lot more funds than necessary; but what's your motive on these taxable and tax-advantaged changes?

Sorry I didn't get back to you sooner on this...but here is what I meant. Folks sometimes want to include some real estate investments in their portfolio but unless you're really wanting to be overweight in real estate, most of us have plenty of real estate included when we consider what we've got invested in our homes. Secondly, when you’re trying to determine how to diversify between more risky (stock) or less risky (bond) investments; most of us will err on the side of being too conservative because we don't include the NPV (Net Present Value) of the (pretty much) guaranteed income from our CSRS retirement. You see, that CSRS pension is pretty much the same as having a few hundred thousand dollars invested in government bonds. See?

I always suggest that you put a percentage equal to your age (about 63%) into safe stuff and venture the remaining percentage into something a little more risky to help keep your return high enough to offset inflation.

One more thing (while I've got your attention and I don't know what else to do with it), you've got to get a return that exceeds economic growth, including inflation or the money you are trying to accumulate looses purchasing power. To do that you have to remember (1) World-wide GDP must increase at about 1-1.25% to grow as fast as the population increases, (2) U.S. GDP must increase at about 2.5-3.5% to keep up with our national population growth and (3) inflation is any increase in either or both GDPs above population growth. The reason I say this is that GDP is basically a measure of money supply...it must increase at the same basic rate as population to ensure that old supply/demand curve doesn't drive inflation or deflation based on the amount of money available per person. Bottom-line...after-tax return should exceed 4.75% just to break even and keep the same purchasing power. Otherwise, you'll get more bang for your buck if you just spend your damned money now!!!

[DDEATH]

ucanit......... good advice.

I've never used the NPV of my CSR in that way, but I can see the logic. At today's low interest rates.......... my CSR is worth more than a million!

I gotta buy more equities tomorrow..........

[WestTx]

My military pension is probably right much like your CSRS pension. There's something to be said for the guaranteed income stream over future years, plus cost of living adjustments.

The majority of my investments are diversified in AIM funds (Invesco Aim). I attribute any success I've had to a knowledgable financial advisor and my son, although I pay attention to the financial trends. I ain't completely stupid!

As a side note, I've done right well over the many (many) years with rare coin investments and sales. I hold on to a big handful of cash reserves for the rainy days ahead.

I don't post much here, butt I do read what you boys are talk'en bout'. You seem to be doin' right well, and that's good!

WestTx

[DazedandConfused]

I believe I have finally settled on asset allocation. The bonds and inflation-protected are all in tax advantaged accounts, and I also have about 1 year in emergency cash reserves between checking, the bank and Vanguard Money Market VMMXX, which I don't calculate with the funds below. I am still contributing $1500/mo to my 457b account, and I will reretire in 3 years or later if my health holds up.

Vanguard Total Stock Market index VTSMX 32.5%
Icon Energy ICENX 4%

Vanguard Mid-Cap Index VIMSX 18.8%

Vanguard Small-Cap Index NAESX 7%

Vanguard Total Bond II Index VBMFX 18%
Vanguard Inflation-protected Securities VIPSX 3%

Vanguard European Stock Index VEURX 5.2%
Dodge & Cox International DODFX 4%
Vanguard Pacific Stock Index VPACX 3.5%
Vanguard Emerging Markets VEIEX 3.4%

[ucanit]

DAMN, D'nC!!! That's one of the best diversified portfolios I've ever reviewed. Like I said before, you did more investments than I'd do or suggest...but (whew!!) what a job!!!

The only duplication I found was that VEURX and DODFX both invest in GlaxoSmithKline.

Here's my prediction for your portfolio: Over the next 3 years you should realize a 9.18% annual return and a .3% annual expense ratio. If you invested $100K, on March 15, 2010; by March 15, 2013 you should have earned about $30,554.51 and paid about $871.35 in expenses...giving your portfolio a value on that date of $129,683.16. Will you buy me a drink if I'm within a million dollars? <LOL>

[DazedandConfused]

UCanIt, thanks for the analysis! The two non-Vanguard funds are in IRAs that for one reason or another I am not converting to Vanguard. Everything will merge into vanguard when I retire to make distribution simpler. MRD does not kick in until 2019 for me.