Tag Archives: Asset Allocation

Meeting the Bogleheads

In February, I attended my first Bogleheads chapter meeting.  It was a long drive.  I drove over 100 miles to the Philadelphia meeting in King of Prussia, Pa.  I have been a follower of the Bogleheads.org forum for many years and have spent countless hours reading the Bogleheads.org forum.

The Bogleheads take their name from John C. Bogle who founded Vanguard in 1975.  He created the Vanguard 500 Index Fund (VFINX).  The Vanguard 500 Index fund (VFINX) was the first index fund available to individual investors that tracks the S&P 500.  John C Bogle has also made a career of being a champion for small investors.  His approach to investing is to build a portfolio of low-cost index funds that are tax efficient and to stay the course during all market conditions.

The Bogleheads are a group of people who follow the investment teachings of John C. Bogle.  They have a forum Bogleheads.org.  They also have written The Bogleheads Guide to Investing and the Bogleheads guide to Retirement Planning.  The Bogleheads are an altruistic group.  They help others learn about investing at no cost and have donated the proceeds from their books to charity.  A person can post a question about investing, education, careers, consumer goods, as well as other topics related to personal finance on the forum.  Most questions receive many answers by highly knowledgeable and experienced investors.

The Bogleheads’ Guide to Investing

The Bogleheads’ Guide To Retirement Planning

I did not know what to expect since it was my first meeting.  Everyone was friendly and welcoming.  They were happy to see everyone who was in attendance.  Even though I did not know anyone, it was like a meeting with old friends.

There were about 30 people who attended the meeting.  They said that it was one of the larger chapter meetings.  Some people were long time members.  Others were first timers, such as myself.  There were people in attendance from Philadelphia, Maryland, New Jersey, Washington D.C., and the Poconos.

It was nice to put a face to some of the avatars that are regular contributors on the forum.  It was a pleasure to meet “Lady Geek”.  If you follow the forum, you know her as the moderator who regularly monitors the posts.  She makes sure that the rules are followed.  If someone strays from following the rules, the post will be removed or the thread will be locked.  The Bogleheads forum is as close as it comes to being a perfect online community.  That is due to the hard work that the moderators put in to keeping it positive and educational.  No politics, religion, trolling, or solicitation is allowed.

The topics that were discussed over the course of two hours were:

  • Retiree Portfolio Model, a highly informative lecture on Roth conversions (think MBA level).
  • Social Security tax impact calculator, how a Roth Conversion can impact your Social Security taxes (think Ph.D. Level).
  • Asset allocation, Lady Geek gave a great lecture on asset allocation based on risk tolerance (think undergrad level for newcomers).

It was truly an intense 2-hour lecture.  It was almost information overload.  I left the meeting feeling stimulated and exhausted.  I cannot wait to attend the next meeting in May to listen to the lectures on tax loss harvesting.

The Bogleheads have chapter meetings in most major U.S. cities.  They are free to attend.  I highly recommend attending if you are into reaching FI and FIRE.  If you are interested, there is a local chapter section on the forum to find a meeting near you.  Also, if you are interested in the calculator and more detailed notes from the February 2017 meeting, they can be found under the Philadelphia chapter meeting section on the Forum.

Early Retirement Portfolio & Plan

Thank you for reading part-4 in my series on asset allocation.  In my last post, I wrote about our current balanced-growth asset allocation.  That is the asset allocation that we plan on maintaining until we retire in 2028.

In this post, I will be considering the future.  This post is about how I foresee our assets being allocated at the time of retirement.  I use the word foresee because it is what I am anticipating.  As I stated in my previous post, I don’t have a crystal ball.  Nobody can predict the future, but this is what I am optimistically forecasting.

At the time of retirement, I will be age 52 and my wife will be age 60.  At age 60, my wife will draw a Pension equal to 70% of her last annual salary.  The Pension technically has a cost of living adjustment (COLA), but there has not been an adjustment in over 15 years.  Moving forward, we are not going to count on any COLA adjustments.

By 2028, we plan on having about 50 years of annual living expenses in investable assets.  To come up with that amount, I have run our figures on many different financial calculators including AARP, Charles Schwab, and Fidelity that take future projected growth of different asset allocations into account.  The 50 years of living expenses is based on what we currently have saved, the amount we plan on adding to our savings, as well as projected market performance.

The asset allocation that we plan on using at retirement will be 50% invested in stocks and 50% invested in bonds/cash:

S&P 500 Index Fund – 32%

Extended Market Index Fund – 8%

Total International Stock Market Index Fund – 10%

Intermediate Term Bond Fund – 32%

TIPS Fund – 10

Cash – 8%

At retirement, we are planning on withdrawing only 1.8% per year from our portfolio.  Based on the Vanguard Monte Carlo Nest Egg Calculator, our success rate is projected to be 100%.  We also have a greater than 100% projected success rate on Firecalc.com and the Trinity study.

Between the pension and withdrawing 1.8% from our portfolio, we will have $112K per year to live on.  Just based on simple math, if we are taxed at 25%, we would have $7K per month to live on.  That would be more than double of what we live on now with less expenses.

For the first 10 years of retirement, we plan on withdrawing from our taxable account.  When my wife is age 70, we will be forced to withdraw from her Traditional IRA because of Required Minimum Distributions (RMD).  At that point, we will still be 8 years away from having to withdraw from my Traditional IRA.  We might never have to touch our Roth IRA accounts.  If we do use our Roth IRA accounts, it might just be to withdraw extra money without causing us to go into a higher tax bracket.

We are currently planning on being flexible when it comes to Social Security.  Our goal is to take it when my wife is 70 and I am 62.  We are, however, keeping the option open of taking it early based on retiring during a prolonged market correction. Otherwise, the amount that we will collect will compound 7% annually for every year my wife waits between age 62 and 70.

For some people, this plan might seem too conservative.  For me, being a little on the conservative side is important.  That is because I am retiring at a young age.  I have to plan on being able to fund a retirement of at least 35 years for both my wife and myself.

For me, I don’t see it as being overly conservative.  I see it more as being flexible.  By only planning on a 1.8% withdrawal rate, we have a great amount of flexibility.  If we had to increase it to 2.8%, our success rate only falls to 98% on the Vanguard Monte Carlo Nest Egg Calculator.  If my wife had to work two more additional years, her pension would jump to 80% of her last annual salary.  Also, I will most likely still work part-time because I want continue to take advantage of my catch-up contributions in my retirement accounts.

That is how our future plan looks.  It is over 11 years from now.  I don’t want to get too excited.  Between now and then, we will work hard, save, invest, take care of our health, and enjoy every day.

Also, please check out the following links from some of the top personal finance blogs to learn about the #DrawdownStrategy Chain:

Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement

Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy

Link 2: OthalaFehu: Retirement Master Plan

Link 3: Plan.Invest.Escape: Drawdown vs. Wealth Preservation in Early Retirement

Link 4: Freedom is Groovy: The Groovy Drawdown Strategy

Link 5: The Green Swan: The Nastiest, Hardest Problem in Finance

Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan

Link 7: Cracking Retirement: Our Drawdown Strategy

Link 8: The Financial Journeyman: Early Retirement Portfolio & Plan

Link 9: Retire by 40: Our Unusual Early Retirement Withdrawal Strategy

Link 10: Early Retirement Now: The ERN Family Early Retirement Captial Preservation Plan

Link 11: 39 Months: Mr. 39 Months Drawdown Plan

Link 12: 7 Circles: Drawdown Strategy – Joining The Chain Gang

Link 13: Retirement Starts Today: What’s Your Retirement Withdrawal Strategy?

Link 14: Ms. Liz Money Matters: How I’ll Fund My Retirement

Link 15a: Dads Dollars Debts: DDD Drawdown part 1: Living With a Pension

Link 15b: Dads Dollars Debts: DDD Drawdown part 2: Retire at 48?

Link 16: Penny & Rich: Rich’s Retirement Plan

Link 17: Atypical Life: Our Retirement Drawdown Strategy

Link 18: New Retirement: 5 Steps for Defining your Retirement Drawdown Strategy

Link 19: Maximize Your Money: Practical Retirement Withdrawal Strategies Are Important

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

Balanced-Growth Portfolio

Welcome to Part-3 of my series on asset allocation.  In my last post, I wrote about Adding Bonds To Reduce Volatility in the portfolio that my wife and I held for the past ten years.  In this post, I am going to write about our new asset allocation.  This is the allocation that we will hold until we reach early retirement (FIRE).

As a Financial Independence (FI) blogger, I have always been a portfolio nerd.  The Lazy Portfolios made popular by Paul B. Farrell on marketwatch.com and his book The Lazy Person’s Guide to Investing have always been something that I have enjoyed following.  It is interesting to analyze the performance of famous portfolios like the Coffeehouse Portfolio, Yale’s Unconventional Portfolio, the Second Graders Starter Portfolio, as well as others.

The portfolio that I would like to introduce to you is what I call The Sweet Dreams Portfolio.  The portfolio is named after what it provides for us.  It is a portfolio that allows us to sleep well at night in spite of all the scary headlines that can easily cause nightmares from the sensationalized financial and political media.

This portfolio has a balanced-growth asset allocation.  Based on the Vanguard portfolio allocation model, a portfolio made up of 60% stocks and 40% bonds is classified as a balanced portfolio.  Vanguard classifies a portfolio of 70% stocks and 30% bonds as a growth portfolio.  The Sweet Dream’s portfolio is 65% stocks and 35% bonds.  The Sweet Dreams portfolio is made up of the same funds that we used in our previous asset allocation.

The Sweet Dreams Portfolio:

S&P 500 – 38%

Extended Market Index Fund – 11%

Total International Stock Market Fund – 16%

Total Bond Market – 35%

You might be asking, why not just use the total stock market instead of using a S&P 500 and an extended market fund?  The answer to that question is that these are the options that my wife and I have available in our 403B accounts.  A total stock market fund has the same market weighted allocation of a 4:1 ratio and can be used in place of those two funds.

You might also be asking, why don’t I have the names and ticker symbols listed for these funds?  Again, the answer is based on what we have available for investment options.  Our Roth IRA’s and taxable funds are invested with Vanguard.  My 403B has index funds from Fidelity.  My wife’s 403B plan has index funds from Charles Schwab.  This asset allocation can be created with index funds from any of those companies.

In my first two posts in this series, I wrote from a position of experience.  In those two posts, I was able to look back at how my asset allocation performed over long periods of time.  Those posts were also about how I responded during different market conditions.

The Sweet Dreams Portfolio is a brand new asset allocation model for us.  There is no such thing as a crystal ball that I can use to see into the future.  We can only look backwards at how an asset allocation performed during different market conditions.

Over the past 10 years, The Sweet Dreams Portfolio returned an average of 6.34% per year.  The largest one year loss was in 2008 with a -24% loss.  An initial investment of $10K would have grown to nearly $20K if re-balanced annually.

Over the past 20 years, The Sweet Dreams Portfolio returned an average of 6.91%. The worst one year loss over the period of 20 years was still in 2008.  An initial investment of $10K would have grown to more than $38K if re-balanced annually.

At the age of 40, I still have a long investing horizon.  It is not as long as others because of our goal to retire in less than 12 years.  We are comfortable with the 65% invested in equities for growth.  We are also comfortable with the 35% invested in bonds to use as a re-balancing tool during market corrections.  Ultimately, we are comfortable with the thought of having restful nights and sweet dreams as we work toward our next goal on this financial journey.

Please keep an eye out for the 4th and final part of this series.  The final post in this series will be about how we plan on structuring the asset allocation of our retirement portfolio when we reach early retirement (FIRE).  The final post will also include how we plan on funding our retirement based on investment withdrawal rates, pensions, and Social Security.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

Bonds to Reduce Volatility

During the first ten years of my investing career, my asset allocation was solely invested in stocks.  From 1997 until 2007, my portfolio returned 8.5%.  I wrote about that period in my first post of this series 100 Percent Invested in Stocks.  In this post, I will write about how adding bonds to my portfolio reduced volatility during the decade that followed.

By the year 2007, my portfolio had five years of positive returns.  At that time, I was reading a good amount of Jack Bogle’s writings on asset allocation.  He suggested holding (100 – your age) in stocks.

After investing for 10 years, it made sense for me to reduce the volatility of my portfolio.  However, I still was focused on aggressive growth because I had the goal of retiring early.  I felt an asset allocation equal to my age in bonds was too conservative.

Another factor that I had to consider was that I was newly married.  Prior to getting married, my wife and I decided to manage all our finances together.  We sat down and evaluated how we wanted to invest our money after we were married.

At that point, I was 30 years old and my wife was 37.  We decided on adding 25% of our portfolio to bonds.  It was close to equaling (110 – our average age) in stocks.

This is how our new asset allocation looked:

S&P 500 Fund – 43%

Extended Market Index Fund – 13%

Total International Stock Market Index Fund – 19%

Total Bond Market Index Fund – 25%

My second decade as an investor was equally as volatile as my first decade. In 2007, our portfolio was off to a solid start by returning over 10%.  Then 2008 came.  That was the beginning of the great recession that resulted from the subprime mortgage bubble bursting.  In 2008, our portfolio had a loss of more than -30%.  If I had my original asset allocation of 100% invested in stocks, we would have lost more than -40%.

Just as during the dot.com bubble and the three years of negative returns that followed, we just kept investing and moving forward.  We stuck to our normal schedule of dollar cost averaging.  We also stuck to our plan of semi-annual re-balancing.

Fortunately, the market bottomed out in March of 2009 and one of the greatest bull markets began.  By the middle of 2010, we had recovered all of our losses. From 2009 to 2016, our portfolio averaged over 10.5% annually.

That 10.5% return did not occur without volatility.  During this period, there were peaks and valleys along the way.  There were budget crises, polarizing politics, debt-ceiling debacles, federal government shutdowns, and threats of austerity.

Over the course of those ten years, our portfolio had an average return of 5.24%.  If we were invested in 100% stocks the average return would have only been 5.58%.  By adding 25% in bonds, there was almost zero impact on growth.  The bonds did help to reduce volatility.

If you are not comfortable with having 100% of your portfolio invested in stocks, consider adding some bonds to your allocation.  Bonds are susceptible to interest rate increases, currently have low yields, and do not hold up as well as stocks during periods of inflation. Bonds do, however, reduce volatility when the stock market is in decline.  That is the main reason why they have an important role in our asset allocation.

Please keep an eye out for Part-3 in my series on asset allocation.  In Part-3, I will write about the balanced-growth asset allocation that we will hold until we reach early retirement (FIRE).

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

100 Percent Invested in Stocks

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Do you think you have the risk tolerance to invest 100% of your portfolio in equities?  I had an asset allocation of 100% invested in equities for over 10 years.  At this stage in my life, However, I no longer have the need or desire to have that asset allocation.  That was how my portfolio was invested when I reached my first milestone of Saving $100,000 by age 30.

This is the first of a 4-post series about my asset allocation.  This series on asset allocation is about my asset allocation at different points in my investing career.  The series is based on where I started, what happened, where I am at now, and were I will be heading based on age and risk tolerance.

My investing career began in 1997.  This was a time Alan Greenspan referred to as a period of irrational exuberance.  The stock market was soaring.  The S&P 500 had an average return of over 15% per year from 1989 to 1999.  If a person invested $100 in the Vanguard 500 Index Fund (VFINX) in 1989, it would have grown to $692 by 1999.

In 1997, I purchased my first mutual fund.  My first fund was the Vanguard 500 index fund (VFINX).  This was the only investment that I owned from 1997 until 2000.  I would purchase at least $500 worth of this funds shares per month.  Over that 3-year period, the Vanguard 500 averaged a return of nearly 20% per year.

In 2000, as the result of my savings and market returns, my portfolio was large enough to add more funds.  To improve my diversification, I wanted to add small caps and international stocks to my asset allocation.  I added the Vanguard Extended Market Index Fund (VEXMX).  By adding the Vanguard Extended Market Index fund to my portfolio, I could replicate the total stock market because I already owned the Vanguard 500 Index Fund.  The third fund that was added was the Vanguard Total International Stock Market Index Fund (VGTSX) for international exposure.

My asset allocation was:

Vanguard 500 Index Fund – 60%

Vanguard Extended Market Index Fund – 15%

Vanguard Total International Index Fund – 25%

As far as equities are concerned, my new portfolio was diversified.  It contained every major publicly traded U.S. and international stock.  In my mind, I was ready for the new century and another decade of 20% annual returns.

It did not take long for things to change for the worse.  In March of 2000, the dot.com bubble burst.  On September 11, 2001, New York City and Washington D.C. were attacked by terrorists.  By 2003, the U.S. was fighting two wars in Afghanistan and Iraq.  Those unfortunate events drove the U.S. economy into an extended recession.

As the result of those events, the stock market posted losses for three consecutive years.  The average annual  return on my portfolio was a loss of -16%.  In other words, if I invested $100 in January or 2000, it was worth $61 by January of 2003.

How did I handle the prolonged recession and market contraction of the early 2000s?  Honestly, I stayed the course.  I dollar cost averaged the same amount of money into my investments every month.  My goal was to reach financial independence, so I rode out those volatile markets and took advantage of buying equities at a reduced price.  I would, however, feel unnerved when I paid attention to the media.  Fortunately, I was too busy working and going to college to become obsessed with the media.  I honestly do not remember ever feeling overly panicked during this period.

My patience did ultimately pay off.  By sticking with my allocation, I was rewarded handsomely between 2003 and 2007.  Over the course of those next five years, my portfolio had an average return of more than 16% per year.

During my first 10 years as an investor, my portfolio returned slightly more than 8.5% per year.  This asset allocation, however, was extremely volatile.  The best year returned 34% and the worst year had a loss of -20%.

An asset allocation of 100% invested in stocks is not suited for every investor.  It worked for me because I was young and able to dollar cost average when the market was both up and down.  This type of volatility does cause many investors to sell low and buy high.  That is a losing game if you want to reach financial independence.  If you cannot honestly handle a -40% drop in the value your portfolio, then a portfolio made up of 100% stocks might be too aggressive for you.

There is a simple solution if the volatility of a portfolio invested in 100% stocks causes you to feel insecure.  Add a percentage of bonds to your portfolio that matches your risk tolerance.  In my next post, I will write about how adding bonds to my asset allocation reduced the market volatility of the next decade.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.