Archives for June 2007

I haven’t posted my investment portfolio since April, mainly because it hasn’t really changed much. But here’s another snapshot:

Thoughts
Another couple of months have gone by, and my desire to re-define my asset allocation remains unfulfilled. All I did was buy some more of a Total US Market fund (FSTMX) through my self-employed 401(k). You’d think someone who writes about money on a daily basis would be on top of such things!

But really, I think I might actually be spending too much time on this. As Jack Bogle has stated, “The greatest enemy of a good plan is the dream of a perfect plan.” There is no perfect asset allocation, and I know that. I keep telling myself, I’m not looking for the perfect plan, just a better one which has been well-reasoned out, and one which I should have little reason to tinker with for a long time.

To achieve such a better plan, I have been re-reading each of my favorite investing books on top of many new ones (including All About Index Funds by Ferri, Unconventional Success by Swensen, Only Guide to a Winning Bond Strategy You’ll Ever Need by Swedroe), looking at their research, comparing their model portfolios, and trying to balance all the advice given. But after all these months, my slow deliberation has really just turned into what academics call “paralysis by analysis” and have been just been putting off making a decision for weeks. I do have some overall changes planned, including:

• Increasing my allocation to international assets,
• Decreasing my value tilt, and
• Increasing my bond allocation.

I want to avoid trying to time the market, or chasing recent performance. But I also don’t want to base my decisions on simply trying to avoid the impression of trying to time the market. Although I’m always open to suggestions, I feel I need to some fresh input. Got an asset allocation suggestion? Ideas on a better value/size/country tilt? Another book to read? Throw it at me.

Recent articles by Bernstein Wealth Management [pdf] and Kiplinger’s Personal Finance suggest that as we continue to live longer lives, this should increase the percentage of our portfolios that we devote to stocks.

Living Longer…
A 2000 study by the Society of Actuaries states that a male who reaches age 65 has a 50% chance of living beyond age 85 and a 25% chance of living beyond 92. Women can expect to live two to three years longer than men. More importantly for couples, you are now looking at a 50% chance of one of you living beyond 92!

Means Some Potential Changes
Bernstein then ran some Monte-Carlo simulations using historical data (for what years, I couldn’t tell) to “help quantify the impact of alternative allocation and spending decisions over varying time periods and markets.” The basic scenario was a couple who retired at 65. The variables were how aggressive the portfolio was (20%-100% in stocks), and how much you withdraw from the portfolio each year (2-7%). Here are two summarizing charts and some of their findings:

1. If you’re going to spend a relatively high percentage like 5% of your portfolio, it is important to keep your stock percentage at least at 60%. But, increasing it to all the way 100% doesn’t help much, and increases the downside in a bear market.
2. At a low spending rate, like 3%, then your stock percentage doesn’t matter that much either way.
3. Although spending and allocation are both critical factors, the former tends to exert a more powerful influence. Simply working a bit longer in order to delay spending can increase your success rate significantly.

Conclusions
Taking into account these findings, the Bernstein paper concludes that although bonds are a traditional safe-haven for retirees, their increased longevity make the growth from stocks important throughout one’s lifetime. They suggest that a proper compromise between these factors is a portfolio of 60% stocks and 40% bonds, along with a 4% spending rate. This gives the couple an 85% chance of having their money last till death.

Glassman of Kiplinger also makes his own suggestions:

Bernstein emphasizes that individual clients’ needs differ. Certainly, but based on this report and other research, I have decided to raise my suggested quick-and-dirty stock allocations for retirement accounts this way: If you’re under 40, there’s no reason not to own a 100%-stock portfolio. Between ages 40 and 60, you can move to an 80-20 stock-bond ratio. Between age 60 and retirement, shift to keep at least 60%, and in most cases closer to 70%, in stocks.

This is much more aggressive than almost all the Lifecycle or Target-dated Funds (see here for a comparison between Vanguard and T. Rowe Price Target Retirement funds.)

My concern would be that with so much in stocks, when people “fail”, they fail by a lot, whereas with bonds it might be easier to compensate for a slow stock market by working part-time. I’m undecided as to if this study will cause me to make any changes.