Our 2016 Asset Allocation

It’s time for portfolio talk! Don’t you all love it when bloggers talk about their portfolio? Is the market up? Is it down? What’s your portfolio doing? “How’s your plutonium?” What, you don’t love the jibber-jabber about the current state of “the markets” or, god forbid, individual companies?

Me neither. We’re not supposed to be paying attention to this stuff, the ups and downs and whims of the market. When it comes to your investing, what is important is your asset allocation. That’s why Vanguard’s webcasts and podcasts so boring. The point of every discussion ends up being, “We recommend a long-term view based on your goals, and to not pay attention to short-term market movements.”

So what has our asset allocation looked like?

First, let’s take a look at what it used to look like, many years ago. I was looking through my old files for things to throw out and I found my original 457 Plan paperwork. Just for laughs (gags) here’s what my contributions looked like when I started my first real job:

Yes, that’s 25% in Emerging Markets! What was I thinking? I’ll tell you what I was thinking. One, that Emerging Markets had been on this insane hot streak for a few years, and two, that emerging markets by definition have nowhere to go but up, right?

Well, incredibly, Emerging Markets did go gangbusters for my first year of investing, with something like a 40% gain, and then spent the year after that losing the entire gain. Lesson learned! Emerging Markets are a nice thing to have as part of a diversified portfolio, but it shouldn’t be a main focus, because their charts look like a Richter scale during an earthquake.

What’s the other fund that stands out? Oh, the Stable Income Fund, which is not much different from a money market mutual fund. I thought the “steady income” of that would temper the mood swings of the emerging markets fund. Nevermind that there is absolutely no use in having a fund like that in a retirement account in your early 20s!

Well, the important thing at that age is to sign up for the retirement plan at all. So at least I did that. I have the HR person who explained all of my new job’s benefits to thank for that. She told me that I really should sign up for the retirement plan and contribute something, because she regretted not doing it when she first started.

That stuck with me, even though I didn’t know exactly what I was signing up for. After all, my job has a pension attached, and the 457 Plan was another, voluntary retirement plan you could join. It seemed a little redundant to me (it’s not, but that’s an explanation for another day) but hearing my HR person tell me she regretted not starting early is what convinced me.

Obviously, looking at the funds I was picking, there wasn’t much theory put into it. I contributed 2% of my income because 1% was the minimum, and I didn’t want to do just the minimum! No, I put in double the minimum amount! Beside that, it seemed like play money that I could just experiment with.

Learning more about asset allocation

As our stash has grown more and more over the years, it’s become more important to have an asset allocation strategy. Despite my background as an accountant and taking some investing courses years ago, I didn’t have a specific approach to this until last year. My Investment Analysis class in college covered individual stock-picking, business cycles, stocks vs. bonds, but definitely not the different approaches to personal asset allocation.

So I have understood using diversification to mitigate risk and the emergency fund and all that. But until recently, I had no big picture plan. We had been moving from one savings goal to the next (car, house, renovations) while continuing to put money into our retirement accounts. We still save for big short-term expenses using a money market mutual fund, but as for the long term stash, it’s all about retirement now.

I have to say, I did learn a lot at the Bogleheads wiki and Bogleheads message boards. They are extremely level-headed investors. The Bogleheads site is extremely text-heavy, but don’t worry. If you’re new to the idea of asset allocation and there’s only a couple articles that you need to read, and even then, you can skip chunks of them, and you’ll be all set. To get serious about retirement investing, you should know some basic concepts and understand some of the theory behind them so you feel confident in your decision-making.

Bogleheads’ Asset Allocation – This explains how you reduce risk to your investments by diversifying.  A portfolio of only stocks will perform well in some years and terribly in others.  Same goes for a portfolio made entirely of bonds. But with a mix of the two, you will have a resilient portfolio that weathers the storms. Add other asset classes, other countries, industries, and you’ll have something really safe. To me, this is important so that when QT (Quittin’ Time) comes, I know my portfolio won’t be on a huge up or down streak. Also, by owning a mix, you can naturally buy low and sell high every time you re-balance your portfolio (ie. keep your fund balances percentages where you want them).

Tax Efficient Fund Placement – There’s really only one chart you need to know here. It’s the one ranking a bunch of types of financial assets by how tax efficient they are. Some types of funds will generate more taxable events than others, and those are the ones (REITs, high-yield bonds, active managed stock funds) you want to be sure to put in a tax-deferred retirement account. This was a good lesson to learn.

Lazy Portfolios – These are some good examples of portfolios you can have that will keep expenses low and be easy to maintain over time. It wouldn’t be a bad idea to just pick one of these that looks good to you and go with it.

Bogleheads Videos – I haven’t watched many of these charmingly low-budget videos hosted by a guy named Rick, but theses are all good lessons. And how can you not love a guy who uses an analogy of bread-making  to demonstrate asset allocation. Flour, water and yeast = Stocks, bonds, and cash. YES.

What does our asset allocation look like now?

Ten years later and ten years wiser (maybe?) our overall  portfolio looks like this:

As you can see, we are heavily in stocks, with bonds just over 10%. And almost 8% is in Lending Club notes. Incredibly, I’m over a year into this blog and I’ve barely mentioned my affinity for Lending Club, the peer-to-peer lending service. Our Lending Club portfolio (over 1,000 notes at this point) provides a pretty reliable 10% return, even without goosing it with new money for most of 2015. I consider Lending Club notes like bonds because of the income stream they provide.

So if Lending Club returns stick around a very respectable 10%, why don’t I put more money into it? For one, Lending Club tends to charge-off huge batches of notes at once, so you will suddenly see your return drop a full percentage point without notice, which is freaky. Secondly, when you open a Lending Club account, they make you promise that you won’t put more than 10% of your financial assets into Lending Club. At least they did in 2011, when I opened it. Weird, but I obeyed it, and my idea Lending Club allocation was 10% until I got sheepish after seeing the return drops, then I scaled back to 8%.

Here’s a little more granular look, with international vs. domestic break down:

My ideal split for stocks is 75% US and 25% International, and this is pretty close. I just recently added Vanguard’s Total International Bond so we have a little exposure to that as well. The REIT is in Marge’s IRA for the tax deferral benefits.

In addition to all this, we keep an emergency fund consisting of 8 months of expenses, a $5,000 replacement fund for the rental apartment, and our tenants’ security deposits.

And my 457 Plan contributions, where we do most of our retirement savings, because it’s cheap and has penalty-free withdrawls, look like this:

Mostly it’s in the Vanguard Institutional Index, basically an insanely cheap (0.02% fee) version of VTSAX. You’ll notice I still have Emerging Markets, but it’s just a quarter of my international investments here. And all of our domestic bonds are invested here for the tax-deferral benefits.

Do you have an ideal asset allocation?

Leave a Comment