Comments on: Asset Allocation and Risk Tolerance

By: Monevator

Monevator — Fri, 30 Mar 2012 21:54:47 +0000

Regarding the rule of thumb test for stomaching volatility, I was contemplating what I’d do with a large lump of cash that may be coming my way.

For the past four years it’d have gone straight into equities of some sort or another. But I think I can no longer face another 50% net worth loss in two years straight. Perhaps it’s partly I’m older, and partly as you say the sums at risk have grown larger.

I still can’t face government bonds at barely 2% (heresy I know — and my pure passive co-blogger agrees — although actually I remember your post “Why not 100% stocks?” now I think of it).

But I can get 4% on a cash savings account here in the UK (with some constraints on withdrawal) and I think it might have this money’s name on it!

By: Mike

Mike — Tue, 27 Mar 2012 14:40:29 +0000

Yes, exactly. When it comes to Vanguard’s target funds, I think many investors would be better served by picking a fund that is intended (by Vanguard) to be for investors who are significantly older.

By: Larry

Larry — Tue, 27 Mar 2012 14:33:42 +0000

I think I see what I was missing. So where VG as a rule starts its glide paths towards being more conservative some 25 years before “retirement,” you could (as a person I believe 25-29 years of age) choose for example the 2035 fund where the glide path has already started, rather than the 2050 fund where you would have much longer before the fund started to become more conservative. (I’m sure you mention that in the book, but I didn’t connect all the dots.)

By: Mike

Mike — Tue, 27 Mar 2012 12:43:11 +0000

Larry,

I don’t think I understand what you’re asking. When I point out that Vanguard’s target retirement funds are more aggressive than many investors would like, the whole point is to reduce the likelihood that somebody will accidentally end up with an allocation that’s too aggressive as a result of picking solely based on the date in the name.

By: Larry

Larry — Tue, 27 Mar 2012 12:05:18 +0000

Mike, just to stir the pot a little: You write, “Generally speaking, it’s better to have an asset allocation that’s too conservative than an asset allocation that’s too aggressive.” I agree, and will be rebalancing soon to meet that goal. But that being the case, why would you have invested in a VG target fund that you later acknowledge is more aggressively allocated than most investors would prefer?

By: Clif Bridegum

Clif Bridegum — Mon, 26 Mar 2012 18:09:08 +0000

Mike,
This article provides a fantastic summary of things that new investors should consider when planning for retirement.

Great Job!

By: Cowboy Mike

Cowboy Mike — Mon, 26 Mar 2012 17:17:32 +0000

Very nice article Mike. My compliments to you!
Happy trails, Mike

By: Forrest

Forrest — Mon, 26 Mar 2012 16:53:14 +0000

Thanks!!!!! I got it now

By: Mike

Mike — Mon, 26 Mar 2012 16:24:53 +0000

To use your example, I had meant that stocks would have to climb to 70% (or fall to 50%) to trigger a rebalance.

But I think the other method would be reasonable as well.

By: Forrest

Forrest — Mon, 26 Mar 2012 16:18:38 +0000

I understand your primary point: Better to have a method.

But, if one chooses the 10% of portfolio method, is the below example a correct interpretation?

Beginning Equity /Bond split (60%/40%)
====================
Assume that after a bull market, the ratio has changed to (66%/34%). Now, if one uses a “10% rule,” would this trigger a rebalance? (eg, 60% x 1.10 = 66%). Or do you mean that stocks would have to climb to 70% to trigger a rebalance (eg, 60% + 10% = 70%)?

(I’m assuming no taxes – don’t want to muddy the waters!)

Thanks Mike!