A Warm Slice Of Humble Pie

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slice of pie, image credit: http://www.mcpies.comI’ve been trying recently to try and make some minor adjustments to the target asset allocations of my portfolio. I want to create something that I won’t be tempted to change again for many years. While attempting this, I keep noticing how hard it is for a beginning investor to try and figure out where to put their hard-earned money. So many websites, books, magazines, television shows… and the amount of information being thrown at you just seems to multiply daily. Everybody has an opinion, including me. Am I right?

Who knows? I don’t. I’m simply doing the best anyone can do – read a steady stream of books, academic studies, participate in discussions, and then making a decision based on that information. I try look at the bigger picture and draw conclusions based on historical studies going back from the 1920s and not five-year historical returns. But none of us can predict the future.

What is accepted as common knowledge often changes with time. My own views shift as I read more. I also see a lot information out there that I disagree with. Therefore, I encourage everyone to do their own due diligence, keep their minds open, question things, and try to separate the wheat from the chaff for themselves. All I can do is to promise that I will try to keep doing the same.

(This will be added to my compilation of posts about managing money called My Rough Guide To Investing.)

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Comments

  1. I went through the whole self-doubt and research process (a few books by Ric Edelman, that book about the couch potato portfolio, etc.) about investing too. There’s all sorts of white noise out there, but the things I picked out were to buy Vanguard, don’t buy any funds with loads, and buy an index fund.

    Personally I did the research and exchanged my shares of Vanguard Star into Vanguard Target 2045 (you posted this as a strategy earlier, but I had been thinking about it before then). An index fund it ain’t, but it has low expenses and will get more conservative over time by investing in bonds. I’m sure most here will say I’ll be missing exposure to some things (I’ve heard that Vanguard doesn’t give adequate exposure to small caps, don’t know if it’s true) but overall I think this is a decent all-in-one investment…and I like the simplicity of having a single fund.

  2. i would say that between “the coffeehouse investor” “the four pillars of investing” and the “future for investors” i figured out my long term strategy. i took into account what i agreed with, and where i thought the world would be before i died. i came up with this, if it helps.

    40% VGTSX (intl)
    40% VFINX (S&P)
    10% VBR (sm cap val)
    5% VNQ (REIT ETF)
    5% MO (Philip Morris)

  3. As the “efficient frontier” is only known in retrospect, I think any reasonable asset allocation in keeping with your personal risk tolerance will perform close to your personal optimum. The trick is to not pay unnecessary expenses, and that includes costs of trading or shifting asset allocations around.

    I sometimes think that it would be best if, once your asset allocation was set, to just leave it on “autopilot” and stop reading any more PF literature – unfortunately I find PF interesting as a “hobby”, so I’m sure to come across some new ideas and be tempted to fiddle with my asset allocation in the future to some degree. Luckily I now have the retirement accounts for my two sons to play around with if I get bored 😉

  4. I’m going to say something that is counterintuitive and will quite possibly bring a lot of fire my way but I’ll say it anyway.
    I think asset allocation isn’t all that important. I think four other elements of investing are far more important. Time horizon, fees, tax treatment, and what you do with dividends/gains.
    Compounding tells you that the earlier you start investing/saving the better. I believe the magic of compounding is a much greater force in how your portfolio grows. How much you pay in fees is also critical. If you’re paying 1.5% in fees, your investments have to make up the difference. How your investment is taxed also has a large effect. Finally, whether or not you reinvest dividends and capital gains will have an effect.

  5. Every individual investor goes through this. I have seen your current allocation and I think it looks fine. Actually there is no correct way to allocate your investments. Your allocation should be based on your goals and risk tolerance. Having said this, there are obviously wrong ways to do your allocation.

    All in all I think you are fine. I understand that you are trying to get to an allocation that you don’t have to change for a few years. While this might seem like a good idea, I don’t think it is. Now I am not advocating day trading, but rebalancing and prudent exposure to bonds based on the investing environment should be done regularly.

    Example: Take your current portolio with 90% equities and 10% bonds. Find your allocation that you want your equities broken down by and keep that allocation whether or not your bond exposure is 10% or 40%.

    By the way, keep up the good work. Most people don’t put this much effort into their finances. You will be a success simply because you are paying attention to it.

  6. samerwriter says

    I got fed up reading books, articles, and blogs about:

    * NOW is the best time to buy dividend stocks!
    * Make sure you INCREASE your allocation in international stocks!
    * Are you DIVERSIFIED enough???
    * Don’t OVERWEIGHT you bonds!!
    * Should you be in MUNIs?

    blah blah blah blah. What a bunch of hooey. Here’s the problem. Particularly in a taxable account, every time you change your funds to suit the strategy du jour, you risk incurring a substantial taxable event. Sure, there are strategies for minimizing that, but it’s a lot of effort.

    A couple years ago we put nearly all of our taxable savings in a Vanguard Target Retirement fund. I’ve been tempted, occasionally, to move some out into sector specific funds, but then I think better of it. It’s an invest-and-forget strategy. Our 401k plan recently started offering similar funds that we’re planning to take advantage of.

  7. Maybe rather than (or in addition to) calculating your net worth, you might calculate your “net savings rate.” My net worth has been plummeting because we have so much company stock (not my call). So it’s dispiriting to look at that total number. But I created an excel spreadsheet to determine our net savings rate (including 401k contributions, etc.) and that’s a number to be really proud of.

  8. I love this website! You seem to be someone that highly resembles myself in age and desire to invest wisely. I have found everything here very useful and enjoy watching the decisions you are making. It has affected the way I am also investing.

    But, I also have felt the same confusion about the entire subject. Who is right? Thanks for keeping it interesting while simple enough to actually digest.

  9. I know, I just realized that our tax bracket will be higher this year, which increases the difference between taxes on short-term and long-term gains in a taxable account. Hmm.

  10. I would have to agree with BeN. It’s not what I’m doing, but I do find the majority of investors would be better off with a target retirement fund like the one you have selected.

    I also don’t think it’s the best asset allocation, too low small, where’s REIT…etc…etc, but they have created a portfolio they think is good in their opinion, you may have another opinion. I do think I can create a better portfolio, but how many people are willing to keep up with it? How many people do you know that rebalance say annually or slowly shift from equity into fixed-income.

    Yes, I do believe you can create a better portfolio, but for most people the life cycle funds are one of your best bets, especially if you don’t want to look at the portfolio often or as originally indicated years. Then rebalancing is not going to happen if you don’t look at it for years. If you are not going to rebalance then you need a managed fund, either a basket of index funds or a true managed fund. The target 2045 as indicated by BeN is an excellent choice.

    The odds are that the majority of portfolio’s I’ve seen by DIY investors are horrible, and the coffee house investor that was posted earlier isn’t a bad portfolio. It’s one of my favorite portfolios, but it’s a 60% stock portfolio and only 10% of your entire portoflio is international. So again you could agree that this isn’t the best porfolio.

    If anybody asks me to recommend a single fund or to create a portfolio for them, it’s a waste of time for my breath for me to tell them what I’m doing with my portfolio, when I know they aren’t going to rebalance and I know they won’t understand anything I’m doing.

    I don’t want to go on and on about the target funds at vangaurd, but they do know a little bit more than the average person and the average investor. Take a look how TIPS (inflation protected securities) are added when the funds get closer to retirement, when do you plan on adding Tips, when do you plan on rebalancing? It’s easy to see why most people are really kind of lost when it comes to investing and the target retirement funds are in my opinion their best bed. All they have to do is keep contributing

  11. My 401K is split evenly into the available stock funds (25-30 year horizon), but I’d like to roll it over to Vanguard, etc. for lower fees.

    For my Roth IRA, with the dinky $4,000 limit, I’ve decided that Vanguard multicap ETFs are the best way to go. They have the lowest fees and you can get wide exposure with minimal transaction costs. My wife and I are using our Roths as income funds so there’s a pretty conservative bias. My plan is roughly:

    Stock Portion (30% of total)
    VTI (Total US) 40%, 0.07% expense
    VXF (Total US, excluding large caps) 20%, 0.08% expense
    VEU (Total world, excluding US – brand new) 40%, 0.25% expense

    http://www.vanguard.com/jumppage/vipers/

    Conservative Portion (70% of total)
    Loomis-Sayles Bond (LSBRX) 25%
    Vanguard Money Market: 75%
    (We may move some to AGG or the new Vanguard bond ETFs)

    I have no faith in REITs at this time…too much uncertainty over housing spillover, etc.

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