Asset Allocation

How To Respond to Market Drops

August 25th, 2008  |  Published in Asset Allocation  |  Comments Off on How To Respond to Market Drops

Walter Updegrave recently received a question from a reader that lost over 10% of their retirement assets in the last few months (since June). The reader was wondering what they were supposed to do as they are 58 years old. Can he “wait it out?” Should he pull out and cut his losses? Walter outlines a “Retirement Home Stretch Investing Plan” that is better than his initial suggestion – pull it out and put it into a money market fund.

The Retirement Home Stretch Investing Plan is his recommendation for a stock-bond allocation that closely mirrors the 120 minus age rule. He recommended for the 58 year old near-retiree to:

Generally, though, someone your age should have roughly 60% to 65% of his retirement portfolio in stocks and the remainder in bonds. The stocks are there for long-term growth, the bonds for steady income and short-term protection. As you age, you would then gradually move more of your savings toward bonds, although even in your 80s and 90s, you likely want to keep 20% to 30% of your portfolio in stocks.

Fifty-eight minus 120 is 62… which is within the 60-65% range that Walter recommends. The bottom line is that there is no right answer since we can’t see the future so what can you do? Just make prudent choices, even if it is following a simple rule, and let the chips fall where they may.

The Home Stretch to Retirement [Money on CNN Money]

Asset Allocation Mix: Not Just Stocks, Bonds & Cash

July 28th, 2008  |  Published in Asset Allocation  |  Comments Off on Asset Allocation Mix: Not Just Stocks, Bonds & Cash

When it comes to asset allocation, it’s important to get the right mix of equities (stocks) and bonds but those aren’t the only two asset classes you should be aware of. The general rule of thumb, that your percentage of retirement held in stocks should be 120 minus your age and the rest in bonds, is a good start but falls short in giving you a good allocation mix because it ignores so many asset classes.

When you look at target retirement funds, you’ll see that some offer exposure to international equities and bonds, some offer a little mix of cash, and others don’t necessarily follow the 120 minus age rule in the first place.

What are some other asset classes? Consider putting a small percentage in investing in areas like real estate, or commodities, or precious metals, or even even artwork (OK, maybe not artwork). A small percentage in those areas could give you some much needed diversity given your risk profile.

Don’t just think stocks, bonds, and cash.

Introducing: Life-Cycle ETFs!

July 10th, 2008  |  Published in Asset Allocation  |  1 Comment

It was only a matter of time before ETFs, or exchange traded funds, came in life-cycle flavors. Brokerages started offering life-cycle mutual funds, or target date and target retirement, a few years ago and they’ve become very popular options for folks who want a simple investment product that does all the work for them. No asset allocation, no rebalancing, the brokerage, in its infinite wisdom, handles all that for you based on the target date of the fund you choose.

Life-Cycle ETFs differ from life-cycle mutual funds in the same way as ETFs in general differ from mutual funds. The cost trade-off is usually in the expense ratio and commission charges. With a mutual fund, you pay a higher expense ratio but have little commissions (for example at Vanguard, you can buy most Vanguard funds without paying a fee). With ETFs, you pay a commission per trade but less in expense ratios.

Otherwise, they’re pretty much the same.

Vanguard LifeStrategy Funds

June 9th, 2008  |  Published in Asset Allocation, Retirement  |  1 Comment

Lifecycle, Lifestyle, Target Retirement… and now LifeStrategy. Are these all the same things? Are they different? Is it just branding at work?

LifeStrategy is Vanguard’s trademarked name for a Lifestyle fund. If you recall the differences between a Lifestyle and a Lifecycle fund, a lifecycle fund is one that changes its asset allocation as time passes. A lifestyle fund, on the other hand, remains static and is like a snapshot in time of a lifecycle fund.

Vanguard added four LifeStrategy funds – Conservative Growth, Growth, Income, and Moderate Growth. The Conservative Growth Fund is 20% short term reserves, 30% bonds, and 50% stocks. The Growth Fund is 0% short term reserves, 10% bonds, and 90% stocks. So you can see, the Growth Fund is significantly more aggressive than the Conservative Growth Fund.

It’s essentially the same thing as a Lifestyle fund, simply wrapped in a different name.


The 156th Carnival of Personal Finance is available at PT Money and my post on Naming Beneficiaries on Retirement Plans was included.

Target Retirement Funds May Not Be Better

May 23rd, 2008  |  Published in Asset Allocation, Retirement  |  Comments Off on Target Retirement Funds May Not Be Better

Conventional wisdom states that you should take risks when you’re younger, become more conservative when you’re older, and your finances will be better off for it. This is embodied in the typical advice for asset allocation – take 120, subtract your age, and you should have that value, as a percent, allocated towards equities in your portfolio. If you’re 20, you should be 100% in stocks. 40? 80% stocks, 20% bonds. Brokerage firms offer funds with this concept in mind, though their implementations vary slightly, by designing target retirement or lifecycle funds to this way. As the years progress, the allocation adjusts itself to meet the “rule of thumb” needs of the age group.

A recent study published in the Financial Services Review, an academic journal, shows that this isn’t necessary any advantage to his approach when looking at real-world portfolio returns. Professors Harold Schleef and Robert Eisinger of Lewis & Clark College ran simulations and discovered that such an allocation offered no advantage because of how random the stock market could be. They picked randomly a 30 year period across 80 years between 1926 and 2006 and created fictitious people with target retirement-like allocations (risky to conservative), seeing which stood the best chance of reading $1M. They found that there was only a 29% chance of making it.

Then they did the reverse (conservative to risky) and saw that there was a 45% chance of getting to a million. Going from conservative to risky was better historically! Of course they warn that you shouldn’t take this information and go all gangbusters but it’s certainly something that is noteworthy.

The Odds for a Retirement Nest Egg, Recalculated [New York Times]

Diversification Across 401(k) Portfolios

April 8th, 2008  |  Published in 401K, Asset Allocation  |  Comments Off on Diversification Across 401(k) Portfolios

The latest Yahoo Finance article on retirement, courtesy of TheStreet, is one in which they discuss managing two 401(k)s when both members of a marriage are working. The article itself is merely an extension on the discussion of one’s own diversification in a single 401(k) but I think there are some points that it could’ve made but didn’t.

Here are some points it did make that are worth noting:

  • Some 401(k)s have better funds for different things. For example, a small cap fund in one 401(k) may have a better expense ratio than the small cap fund in the other 401(k).
  • One 401(k) may offer options not available in another fund, such as emerging market funds. This would allow you to have some diversification by way of emerging markets through one 401(k) and then balancing that out in the other 401(k).
  • If your total retirement contributions won’t max out both 401(k), max out the one that’s more beneficial to your family. Go for the ones with better employer contributions, better funds, etc.

Some points that it missed:

  • Having two funds makes management much easier, you can have one account focus on one asset type (preferably the one with better fees) and then re-balance with the other. For example, put all of the funds in one 401(k) into large cap equities and then use the other 401(k) to go international and emerging markets.
  • Two accounts means greater discussion, talking about retirement and money is always a good thing.


MoneyNing did a fine job on the Carnival of Personal Finance this week and My Retirement Blog was included with our post Retirement fund or emergency fund?

Why The Fed Rate Cut Should Concern You

November 5th, 2007  |  Published in Asset Allocation, Investing  |  Comments Off on Why The Fed Rate Cut Should Concern You

Money magazine has an interesting article about how the recent Fed rate cut language indicated that the Fed was more interested in fighting off a Recession than keeping inflation at bay, which was something it had always had its eye on. When the Fed lowers rates, it does so because it wants to spur growth and it thinks that the growth can be controlled enough that it won’t result in inflation. The Fed started to raise rates the last couple of years because it felt growth was strong and that inflation was a concern, so it increased the borrowing costs and reigned in business growth. It’s a complicated way of saying that when the Fed lowers rates, the risk of inflation goes up and business growth goes up as well. When it lowers rates, risk of inflation goes down and business growth stagnates (in general, specific industries have industry forces at play).

So, the recent rate hike is a concern for retirees because that means the price of goods is likely to go up with inflation. Inflation is the number one concern for anyone on a fixed income, most notably retirees. A recession is also bad but Money magazine makes a great point: “the typical recession has lasted 18 months on average (not including the Great Depression), inflation can dog your finances for a long, long time.”

What can you do?

Position your portfolio so that you can handle inflation as well as capital preservation. By this, they mean that you should be conservative but not too conservative. Treasury bonds don’t yield enough to be worth it, so you’ll want to get into a mix of stocks and bonds to give you a chance against inflation. “Real estate investments, such as REITS or real estate funds, typically perform the best of all types of investments during times of high inflation. But like stocks, they also carry a significant risk of short-term loss.”

It’s tough to know exactly what to do but I think that understanding that the specter of inflation is out there is better than not knowing.

Dow Index Drops 362.14, 2.6% – Now What!?

November 1st, 2007  |  Published in Asset Allocation  |  1 Comment

The day after Halloween, the Down drops nearly a four spot on us, over two and a half percent, and we’re left wondering what the heck we should do. I mean, is the credit crunch starting to take effect? Just yesterday the Fed dropped the target interest rate, things were looking pretty good, and today oil spikes and the Dow takes its biggest dip in a while (not a long while, but it’s a big dip and it’s kinda scary). So, what do you do?

If you were well prepared, you should do nothing. If you are five years away from retirement and had 100% exposure to the stock market, this is a wake up call. You have too much in the stock market. If you’re five years out from tapping into your nest egg, you should be at a point where a 2.6% fall isn’t going to bother you too much. Take this as a little warning shot across the bow and balance your portfolio to something that is more fitting someone that close to retirement.

If you’re forty years out, this 2.6% is, if nothing else, an opportunity to put more money in. The Dow just had a 2.6% haircut in one day. It’ll go back, it always will, so you want to be putting a little more money into the market so when it does recover over the course of the next 40 years, you’ll get 2.6% more. If the Dow never recovers, well the last thing you need to worry about is whether your stock portfolio is strong because the economy will be in the tubes.

Check Diversification Across All Retirement Accounts

October 22nd, 2007  |  Published in Asset Allocation  |  1 Comment

After years of working, changing jobs, and rolling around 401(k)’s and all the other accounts, it starts to get a little complicated and choatic in terms of getting all the accounts in order. One of the easiest things to do is lose track of your asset diversification because of all the different accounts and it’s one of the dangerous things to do. When all of your retirement money is in one account, it’s easy to calculate the percentage you have in stocks and bonds; when it’s across multiple accounts, it’s much harder. You have to login, record all the funds you might have, check the fund diversification, then calculate the dollar amount in each type, then aggregate all the numbers so you have a total picture. However, just because it’s easy to lose track of it doesn’t excuse it. You really need to keep track of all of your funds because it’s your future at stake.

So, take fifteen minutes today and login to all of your accounts, check that your asset diversification is what it should be. You’ll thank me in however many years later (when you retire!).