Goal Update: Investment Portfolio Asset Allocation & Holdings – Nov 2011

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Time for another update of my investment portfolio, including employer 401(k) plans, self-employed plans, IRAs, and taxable brokerage holdings.

Asset Allocation & Holdings

You can view my target asset allocation here, along with link to other model portfolios. Despite the headlines, I still like to buy, hold, and rebalance. Here is my current actual asset allocation:

Everything is within acceptable ranges, other than I need to buy more TIPS. This is just an overshoot since I have my 401k buying shares in a stable value fund automatically, and my TIPS are mostly stuck in IRAs. Actually, my TIPS holdings have been doing great, due to how low real yields are right now. Last I checked, even 10-year TIPS had negative real yields.

My current ratio is about 75% stocks and 25% bonds. I’ve been thinking about this balance. On one hand, I’m contributing a lot of money into the portfolio, and I hope that I can get my “early” retirement on within the next 10 years. At that point, I’m going to want something closer to a 60% stocks and 40% bonds setup, the classic balanced fund ratio. So I want to shift towards bonds, but bond yields don’t look very appetizing right now. For now, I’m just going to keep up the gradual shift.

Stock Holdings
Vanguard Total Stock Market ETF (VTI)
Diversified S&P 500 Index Fund (DISFX)*
Fidelity Extended Market Index Fund (FSEMX)*
Vanguard Small-Cap Value Index Fund (VISVX)
Vanguard FTSE All-World ex-US ETF (VEU)
Vanguard MSCI Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VGSIX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX)
Stable Value Fund* (3% yield on past purchases, 1.8% on new)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities

The overall expense ratio for this portfolio is in the neighborhood of .20% annually, or 20 basis points, which is much lower hurdle to overcome than the average mutual fund expense ratio of over 1% annually. This is all DIY, so I don’t pay portfolio management or financial advisor fees.

3% Safe Withdrawal Rate

I’ve also decided to use a 3% theoretical safe withdrawal rate instead of a 4% withdrawal rate. So instead of reaching 25 times our annual expected expenses, we will need to save 33 times. This is due to the fact that we will probably reach early retirement with 10 years, and thus our portfolio will have to last a lot longer than a conventional age 65 retirement. 3% is a more conservative number, and in reality I doubt that we will even go by the 3% number in strict terms. From reading other early retiree stories, we’ll stay flexible and adjust our withdrawals somewhat with market returns.

With portfolio increases and additional contributions, at a 3% withdrawal rate our current portfolio would now cover 43% of our expected expenses. If you recall, I plan to have the house paid off at retirement as well. It might be nice to have a portfolio that yields 3% where we could spend the dividends and interest payments, and I have been tossing around ideas for that as well. I still like the idea of 50% Target Retirement Income (or similar) and 50% Wellesley Income.

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  1. If you are interested in yielding 3% why not invest some (and grow it over time) of your holdings in something like SDY?

  2. I own plenty of stocks, the majority of my portfolio, including every company in SDY. But high-yield stocks are still a very different asset class than bonds. I like having the diversification benefit of having both.

  3. SDY might not have been a good example, but maybe an etf (I don’t have a vanguard account but I am sure they have one) that follows the dividend aristocrats. Yes, they aren’t “bonds” but have paid increasing dividends for 25+ years.

  4. Have you established a 75% stocks/25% bonds benchmark and, if so, how do your returns over the past few years compare to it?

  5. What tool/software you use to manage your investment profile, mainly mutual funds / ETFs from multiple accounts? Thanks.

  6. Jonathan….My entire portfolio is in the Vanguard Target 2050. I like the idea of having more of a 50/50 split between international stocks and US stocks and am intersted in acheiving this by investing 50% in the VTIAX and the other 50% in the VTSAX. (These also have a lower average fee than the Target 2050.) If you were doing a large rebalance/reallocation, would you move all the money at once, or do it slowly, by setting up an automatic exchange every week, for example. Obvioulsy, to get into the Admiral share class, at some point I will have to do two $10,000 exchanges, one for VTIAX and the other for VTSAX, but how would you do the rest? Total portfolio is about $120K. I’ve always wondered how rebalancing worked…do you rebalance by changing future contributions or by transferring existing assets, or both? Thanks!

  7. I am currently investing in Vanguard Emerging Markets Stock Index Fund Admiral Shares. They have a purchase fee of 0.5%. I would prefer to use the ETF since they do not have the purchase fee. Any ideas how to accomplish this with periodic investing?

  8. @Evan – I like dividend stocks.

    @Bitzer – There’s no reason at this time to set a benchmark because my investments are passive are basically what I’d use to make the benchmark in the first place. 😉

    @SPS – I just use an Google Docs spreadsheet right now.

    @Jordan – I would simply do it all at once, if possible on the same day, and then everything would work out without worrying about day-to-day changes. I rebalance with both contributions throughout the year and also buy/sell if needed once a year.

    @John – There’s Sharebuilder or FolioFN or other brokers that auto-invest for you with window trades. I just buy using a limit order in the middle of a trading day. The volume on VWO is pretty good, and the limit order is just to prevent some sort of awful fill. But really, if you are investing in the long term the 0.5% upfront fee isn’t a huge deal especially if you really like automatic investments. ETFs have the additional worry of deviations from NAV as well which mutual fund don’t have.

  9. so you’ve mentioned having kids before. does your early retiremenet account for saving for your kids’ college at all? what about any additional expenses for raising children?

  10. Just curious – what makes you pick mutual funds over ETFs, if there is an ETF alternative available? Is it just that you’re already comfortable with a predictable fund?

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