Interim Asset Allocation: History, Decision, and Changes

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Over the last year or so, I’ve learned a lot of new things about investing and asset allocation. At the same time, I know that changing your asset allocation too frequently is often a response to recent market activity (aka performance chasing, or market timing). In addition, I’m a highly analytical person and I love for things to have a correct answer to 5 significant figures before committing… which is pretty much impossible here. But at some point I know I just need to take action if I truly believe it is an improvement.

Previous Asset Allocation
In April 2006, I moved from the all-in-one Vanguard Target Retirement 2045 Fund (VTIVX) to a portfolio with more asset classes in an attempt to better optimize risk/reward factors based on historical data. You can see the asset allocation breakdown here. This asset allocation is pretty much what I have right now, except that I added a Micro-Cap stock fund and we moved money into a 401k with limited investment options.

Interim Asset Allocation


I’m still continuing my series on building my portfolio, so I won’t explain all my actions here, but here are some quick summaries:

  1. Stocks/bonds allocation. I am shifting to a age-based formula for my stocks percentage. Using 115 minus my age, I am at 86% stocks and 14% bonds.
  2. Domestic/international allocation. I am increasing my international allocation to better match the world market. It’s essentially 50/50 if you think REITs are a separate asset class.
  3. Small/Value/Emerging Markets. These sub-classes are riskier than their overall market, but have been shown to have diversification benefits. Even if they don’t in the future, I am okay with them simply being more risky along with higher returns. Essentially, I am taking the total markets, and increasing the portion of one additional asset class which I think has the highest diversification benefits. For example, Small Value is a subset of Total US market, and Emerging Markets is a subset of the Total International market.
  4. Real Estate. I’m still holding REITs, as they are a way to invest in commercial real estate, and have also been shown to provide diversification benefits. Will give more references later.
  5. Micro-Cap, International Value, and Large Value. I think all of these potentially good asset classes to hold, but I think they are of lesser overall importance than the others. So in an effort to simplify, I am dropping them as separate funds. I still continue to have exposure the asset classes within other funds.
  6. New Bonds Allocation. I’ve been meaning to this for a while. I’ve been holding an intermediate-term corporate bond fund because it used to have a lower expense ratio after various fees. Inflation-protected bonds are still pretty new, but I’ve been convinced of their utility. I’ve also been convinced that bond ratings agencies just aren’t that good at their jobs, so I’m sticking with the highest quality bonds (Treasuries). The book Unconventional Success was a big influence here.

I call this my interim asset allocation because while I’m very confident this new setup fits my needs and preferences better than my previous asset allocation, I know that I will continue to learn and read. But just like with football coaches, this interim asset allocation might just become my permanent one.

In addition to all the books that I have read (and am still reading), I’d also like to say thanks to the many smart and helpful folks over at the forums for all the indirect and direct help. (I post anonymously at both forums.) Even though they sometimes feed my tendency towards complexity, I love the wealth of information that is available.

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  1. Great post! I’m a diehard memeber as well, and actually have my Roth IRA entirely in the Vanguard target 2405 retirement fund.. I also have a traditional IRA (vanguard as well) with a similar AA to yours, although you do have a few choices that are interesting.. Thanks for sharing your AA!

  2. Another dieharder here. Just wanted to say your whole series on asset allocation has been excellent!!

    Coincidentally, we’ve gravitated toward roughly the same. (I’m in my early thirties).

    16% Bonds (8 TIPS/ 8 Int. Govt)
    7% RE (4 Domestic/3 Intl)
    7% CCF (Pimco)
    70% Equity (60/30/10 dometic/intl/em; 60/40 lrg/small; 60/40 val/mkt)

    One thing you may want to consider, if you do not already:
    In reviewing your asset allocation, do you reduce the amount of your tax deferred holdings to reflect future tax liability? I.e., I multiply my 401k/tradl IRA holdings by 0.80 to reflect exp. 20% eff. tax rate in retirement. If you hold bonds in your tradl 401k and do not adjust, it results in your having a more aggressive allocation than probably intended.

  3. Could you please report the % change in your portfolio since Jan 1, 2008?

  4. Thanks for sharing. Is this for a taxable or tax-deferred account? Reason I ask is my understanding is bonds should not be in a taxable account due to the taxable income they produce.

  5. Good to get a United States handle on asset/ risk management- interesting discussion.

  6. Great work, very inspiring.

    Since you’re a highly-analytical person, have you ever looked back to compare the performance of your new allocation with the vanguard 2045 account?

    It would be interesting to see what the reward is for your effort.

    thanks again for a great site.

  7. I will probably look back to compare after 5-10 years, but I am afraid doing so early than that might not tell me very much.

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