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Post by chang on Feb 2, 2021 7:50:29 GMT
When you calculate your "percentage in equity" (i.e., 60/40, 50/50, etc.) there are a number of issues that can have significant future influence, but how to include them isn't clear. For example: - Suppose you expect an inheritance (assume for the sake of argument that you are 99% sure you will inherit at least $X at some point). Do you prepare for that in your AA / investing strategy now?
- Suppose you expect to receive $2500/mo in Social Security after age 65. That is the equivalent of a $1.5 million bond paying 2%. Do you pretend that you have that bond in your AA now? If not, then the day you start to collect SS, it will be as if a $1.5 million bond suddenly appeared in your portfolio. Why not prepare for that in your pre-retirement investing strategy?
- Do you include the value on non-primary real estate, coin/stamp/art collections, etc. in your AA?
- Suppose you plan to make a sizable RE purchase down the road. Do you mentally subtract that from your FI holdings (assuming that's how you plan to pay for it)? [This applies directly to me.]
I could go on, but you get the idea. Your "effective equity" may be higher or lower than it appears by just running X-Ray on your stocks and funds.
Interested in how flexibly or rigidly people reckon their "percentage in equity" taking into account other factors like these.
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Post by Chahta on Feb 2, 2021 13:09:53 GMT
When you calculate your "percentage in equity" (i.e., 60/40, 50/50, etc.) there are a number of issues that can have significant future influence, but how to include them isn't clear. For example: - Suppose you expect an inheritance (assume for the sake of argument that you are 99% sure you will inherit at least $X at some point). Do you prepare for that in your AA / investing strategy now? I will but am not preparing. I am on my own so I need to think in those terms until it happens.
- Suppose you expect to receive $2500/mo in Social Security after age 65. That is the equivalent of a $1.5 million bond paying 2%. Do you pretend that you have that bond in your AA now? If not, then the day you start to collect SS, it will be as if a $1.5 million bond suddenly appeared in your portfolio. Why not prepare for that in your pre-retirement investing strategy? I choose to manage my portfolio separately. Current SS benefits give me the freedom to grow it or protect it. Some like to think in terms of SS being a bond fund producing X% yield. Might make me feel better to have a bigger portfolio to add it in. But honestly we have no idea where SS is headed.
- Do you include the value on non-primary real estate, coin/stamp/art collections, etc. in your AA? Not an issue for me. But I help a cousin who has a RE heavy portfolio and it is important to consider.
Suppose you plan to make a sizable RE purchase down the road. Do you mentally subtract that from your FI holdings (assuming that's how you plan to pay for it)? [This applies directly to me.] I sold a classic car and will buy again. I include in my portfolio so I know where it is. If I was saving for a house I would do the same. For me it adds to the bond AA.
I could go on, but you get the idea. Your "effective equity" may be higher or lower than it appears by just running X-Ray on your stocks and funds.
Interested in how flexibly or rigidly people reckon their "percentage in equity" taking into account other factors like these.
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Post by yogibearbull on Feb 2, 2021 14:30:25 GMT
Several important points.
But the asset-allocation decision is ultimately investor's, based on financial situation and risk tolerance [sleep comfort level]. The behavioral issues cannot be overlooked.
There have been long debates over whether to use present-value of income streams [Social Security, pension/annuity, etc]. A better approach, IMO, is to use the income-gap approach. In this approach, one considers expenses and sources of steady income, finds the difference, and manages the portfolio for income-gap.
Calculating effective-equity to account for different types of stocks, bonds, alternatives is addressable and I have mentioned that elsewhere. Important point there is not to rely on nominal-equity % [e.g. from M* X-ray] as that can mislead.
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Post by Deleted on Feb 2, 2021 14:33:58 GMT
We don't know what others use as the basis of their portfolio composition, whether it's a trading portfolio, includes cash or CDs. pension income, social security, etc. I use the total amount held in brokerage accounts. Personal investment returns based on an investor's 'portfolio' is a murky point, as well.
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Post by FD1000 on Feb 2, 2021 19:12:09 GMT
It should be based on your goals, risk tolerance, style.
1) How many years it should last
2) What is your max loss? What is your sleep level?
3) What do you want to cover? LTC, maybe annuity
4) Social security gap. How much money you need monthly.
The more specific the above, the easier it gets to figure out your AA. It's a lot easier for someone with a portfolio size of over 25 times their yearly expense need and not including SS+pension+others for 30-35 years coverage.
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Post by retiredat48 on Feb 2, 2021 19:40:23 GMT
Portfolio Allocation considerations, included or not?:
--Potential Inheritances--NO...not included. Glad I did not, as my Mother-In-Law just turned 101! But one should be aware of the allocation of the inheritance, like, is it all Treasuries...or Stocks? I assisted in closing an estate where the grandparents, age in nineties, owned 100% stocks...millions worth...and to see their purchase over a lifetime was very interesting. They rarely sold anything.
--Social Security...as a bond. NO for income...and NO for bond equivalent value. Briefly, recommend just subtract income from annual spending needs, to get the annual income need from ones portfolio. Adding as a bond just distorts things. Especially as you cannot control it...you can't sell SS. BTW if you include, what is the term/maturity?? Hope you don't call it a short term bond fund.
--Real Estate...NO (own three homes); I am conscious that it is a form of an allocation to real things...an investment...but I keep it out of my portfolio. A REIT fund, however, I do add to portfolio.
--Coins...NO
--Real Estate envisioned buying down the road--NO
Note: I do keep a list of what I own, that is available to executor, etc. For decades, I kept the estimated value of these items, including portfolio value, and had charted an end of year total asset value. Stopped at about age 62, when "enough" wealth was no longer a question mark. It is an interesting bar chart, kept since age 23 (before computers), on original paper. Fact: In only three of those years, age 23 to age 62, was there a decline in total asset value at year's end (even with bear markets). Of course, I was also adding savings each year.
R48
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Post by chang on Feb 2, 2021 21:51:03 GMT
--Real Estate envisioned buying down the road- -NO : Let's explore this one with an example. Suppose you're a newly-retired 55-year old, with a $6m stock/bond portfolio. Your AA is 50/50, which is right where you want it for the long-term. But you've been renting for years, and have plans to buy a retirement house for $1m from your cash/bond holdings sometime in the next couple of years. The moment you write that $1m check, your portfolio becomes $5m and your AA becomes 60/40 -- more aggressive than you had planned. Doesn't it make sense to earmark a future RE purchase as "protected" and arrange your desired AA for the remainder of your portfolio? |
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Post by steadyeddy on Feb 2, 2021 21:52:36 GMT
I do not include any *future* things in my AA calculation. I look at how much I have in the market and based on that calculate AA - I have a googlesheets for it.
All the best!
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Post by chang on Feb 2, 2021 22:04:48 GMT
There have been long debates over whether to use present-value of income streams [Social Security, pension/annuity, etc]. A better approach, IMO, is to use the income-gap approach. In this approach, one considers expenses and sources of steady income, finds the difference, and manages the portfolio for income-gap. Calculating effective-equity to account for different types of stocks, bonds, alternatives is addressable and I have mentioned that elsewhere. Important point there is not to rely on nominal-equity % [e.g. from M* X-ray] as that can mislead. : The income gap approach is easier with a dividend/income oriented investment portfolio. Not so clear if you are TR-focused and don't have specific income-generation goals. I would be interested in a summary or links to your effective equity calculations / assumptions. TIA. |
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Post by yogibearbull on Feb 2, 2021 22:22:13 GMT
There have been long debates over whether to use present-value of income streams [Social Security, pension/annuity, etc]. A better approach, IMO, is to use the income-gap approach. In this approach, one considers expenses and sources of steady income, finds the difference, and manages the portfolio for income-gap. Calculating effective-equity to account for different types of stocks, bonds, alternatives is addressable and I have mentioned that elsewhere. Important point there is not to rely on nominal-equity % [e.g. from M* X-ray] as that can mislead. : The income gap approach is easier with a dividend/income oriented investment portfolio. Not so clear if you are TR-focused and don't have specific income-generation goals. I would be interested in a summary or links to your effective equity calculations / assumptions. TIA. Income-gap approach only estimates potential draws for living from the portfolio. How the portfolio is managed doesn't matter. See effective-equity details in this LINK. |
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Post by Chahta on Feb 2, 2021 22:52:24 GMT
--Real Estate envisioned buying down the road- -NO : Let's explore this one with an example. Suppose you're a newly-retired 55-year old, with a $6m stock/bond portfolio. Your AA is 50/50, which is right where you want it for the long-term. But you've been renting for years, and have plans to buy a retirement house for $1m from your cash/bond holdings sometime in the next couple of years. The moment you write that $1m check, your portfolio becomes $5m and your AA becomes 60/40 -- more aggressive than you had planned. Doesn't it make sense to earmark a future RE purchase as "protected" and arrange your desired AA for the remainder of your portfolio? Why? Take $500k ea from stocks and bonds and maintain 50/50. Or hold it "separately" in a safer muni or ST bond fund. |
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Post by retiredat48 on Feb 2, 2021 23:33:33 GMT
--Real Estate envisioned buying down the road- -NO : Let's explore this one with an example. Suppose you're a newly-retired 55-year old, with a $6m stock/bond portfolio. Your AA is 50/50, which is right where you want it for the long-term. But you've been renting for years, and have plans to buy a retirement house for $1m from your cash/bond holdings sometime in the next couple of years. The moment you write that $1m check, your portfolio becomes $5m and your AA becomes 60/40 -- more aggressive than you had planned. Doesn't it make sense to earmark a future RE purchase as "protected" and arrange your desired AA for the remainder of your portfolio? Hi Chang. Well. some comments: --This is no different than anyone buying a first home throughout their life. No need to reflect it in your portfolio allocation. --Will you pay cash, or finance? If finance, the transaction stands on its own. Perhaps some portfolio selling to come up with down payment. If paying in cash ($1MIL) sure, this will adjust ones portfolio size. But the house results in a huge savings from monthly rent. So one simply takes their portfoflio and sees what their annual spending/draw needs are, then adjusts the allocation. You can maintain your Asset Allocation by simply selecting the mix of stocks/bonds to liquidate to buy the house. BTW note the example shows a $6M portfolio, buying a $1 mil house. If the portfolio was one MIL, you wouldn't even consider a $1mil house. People instinctively know approx what they can afford. When I retired at age 48, I bought(built) a second FL home (bigger than the first) because I was confident I could do it. The portfolio had to be able to cover this monthly cost, or else I would not have done it! Showing this home in my asset allocation would have been misleading, as it generates no income. A rental property could be different, but still, it simply results in a monthly income. Just subtract it from annual income needs, then invest portfolio accordingly. Disclosure...my third home is a rental property in FL. I don't consider it part of my investing portfolio...it is part of my wealth rackup. It reduces my annual income needs from the portfolio. So for example, if the retiree spending needs are fully covered by Social Security, a Pension, and Rental property income, you invest the portfolio knowing you need no income from it. This allows more stock allocation/growth bias, as you are really investing for your heirs. Likewise, typically, a $6 mil portfolio, or a $5 mil portfolio plus a house, is also in this category! R48 |
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Post by chang on Feb 3, 2021 0:54:01 GMT
Why? Take $500k ea from stocks and bonds and maintain 50/50. That is, of course, a very good point. Why earmark only FI for the purchase? Honestly, I don't have a good answer. Logically it makes more sense to manage my portfolio as it is, when it is; and when a major withdrawal needs to be made, to make it evenly across the portfolio. I suppose that it's my nature not to sell equity if I can help it. (Also, a simpler answer is that all my equity is sitting on CGs.) Will you pay cash, or finance? If finance, the transaction stands on its own. Perhaps some portfolio selling to come up with down payment. If paying in cash ($1MIL) sure, this will adjust ones portfolio size. But the house results in a huge savings from monthly rent.I will pay cash for it. Good point about the rent savings! That needs to be accounted for in yogibearbull 's "income gap" analysis. Excellent, useful input; thanks. |
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Post by Mustang on Feb 21, 2021 20:11:15 GMT
I suppose I look at things through the income gap approach. I create a budget. I subtract fixed income such as my pension and our social security from the budget. Shortfalls need to be covered from investments. (extra cash is invested.) I do not consider my house an investment. We have to have someplace to live. We have no mortgage so that reduces the expenses in our budget and it reduces the withdrawal needed from other investments. I am a total return type investor. All dividends and capital gains are reinvested. Yes, I pay taxes on them every year but they increase the basis of the investment so when shares are sold there are fewer taxes to be paid. People often forecast that they will pay lower taxes in the future because of lower income in retirement. That is not our case. If my estimates are anywhere close our income will not go down at all so we are completely indifferent as to when the taxes are paid. Now or in the future will not change or tax bracket. Things like rental property, reverse mortgages and annuities are considered other investments, neither stocks nor bonds. But, because of their income stream, they work well as a replacement for bonds in an asset allocation. Why? The purpose of bonds in a portfolio is to provide income (either dividends or sales of shares) when stocks are out of favor. Bonds keep you from selling shares of stock at a loss and preserves the shares so that the investment can take advantage of the recovery. The cash flow from reverse mortgages and annuities do the same thing.
I do not have a specific hard fast target asset allocation. I have a range. I have set it based on research by Bengen, the Trinity studies, and others. For our current point in life it is 75% to 50% stock. I am not sure how to include our variable annuity. All of the investments are 100% stock funds but the annuity has a guaranteed 6% per year increase in its income and death benefit. So I don't include it on either side. Should we someday exercise the income benefit it will simply become another pension and will be treated exactly the same way as my current pension. If the death benefit is taken first then the money will be reinvested and the asset allocation of the new investments will be included. Until either event happens it is classified as "other investment."
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