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Asset Allocation!!

Asset Allocation!!. Virtual Boglehead Chapter Manny. What is asset allocation?. -Wikipedia. - Boglehead Wiki. Methods of Asset Allocation. Strategic – “Buy and Hold” Tactical Asset Allocation – based of economic or valuations factors

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Asset Allocation!!

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  1. Asset Allocation!! Virtual Boglehead Chapter Manny

  2. What is asset allocation? -Wikipedia -Boglehead Wiki

  3. Methods of Asset Allocation • Strategic – “Buy and Hold” • Tactical Asset Allocation – based of economic or valuations factors • Market Timing – predicting market moves and investing based on predictions

  4. Equities: ownership in a public company = stocks Cash Equivalents : Savings, money market, Cash deposit (CDs)

  5. Fixed Income: Bonds – a loan issued to a holder with a return on interest Alternative Investments: Hedge funds, real estate, commodities

  6. Capitalization ( sum of a corporation's stock, long-term debt and retained earnings = outstanding shares multiplied by share price.) Style – type of fund being invested in VGTSX

  7. Style -Value -  stocks are selected that trade for less than their intrinsic values. Solid “fundamentals” - E.g. Fitbit example -Growth - company whose earnings are expected to grow at an above-average rate relative to the market. -E.g. Are overvalued by market but expected to grow – e.g. Amazon -Blend – combination of Value and Growth • Capitalization • -Large - > $10 billion • -Medium – $2 – 10 billion • -Small - < $2 billion

  8. Equities • Higher risk and Higher Rewards • Tolerate up to 50% drop in stocks • S&P500 Annual CAGR inflation adjusted • 6.66% (for the century) • 5.72% (for the decade) • 10.65% (for the past 5 years) • 5.02% (for the past year) • International • Recommended to have 20-40% per Vanguard White paper • Currency diversification • Domestic • “recommended” to have between 60-80% of equities in domestic stocks (for US citizens)

  9. More Details – Bonds and TIPS • Bonds – 2-4% return • Short and intermediate term bond funds • More stable against market crashes • Tax-exempt municipal bonds • Treasury Inflation Protected Securities (TIPS) • treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation • Acts as a bond fund though is a security

  10. The Efficient Market Hypothesis • Markowitz

  11. The Efficient Market Hypothesis • You don’t know anything that everyone else does not • All our collective knowledge is already in the price • Market timing is futile • Stop listening to the noise! • Jack Bogle: The “Low Cost” hypothesis: Costs matter, markets don’t have to be efficient

  12. -Wharton’s Executive Education Website

  13. Callan’s Periodic Table of Investments

  14. Risk • Risk – uncertainty of investment (often measured by standard deviation) = volatility • Risk tolerance – an individuals ability to tolerate risk • Swedroe Factor’s for Risk Tolerance • Ability – based on age/retirement age/stability of income, liquidity of assets • Willingness • Need

  15. What Does This Mean?

  16. How to Determine Your Asset Allocation? • Based on ability, need and willingness • Based on goals • Maximizing Reward for risk • Utilizing tax-efficiency • Allocating between Tax Advantaged (Roth IRA, IRA, 401k, 529) and non-tax advantaged (brokerage, cash) accounts • Finding index funds with lower Expense Ratios

  17. How is it done? For example: • Emergency Fund • Cash $5k • CD $5k • Brokerage Account • VGTSX (International Index) $20k (20%) • Roth IRA • TIPS $10 k (10%) • 401k • VTSMX (Domestic Index) $30k (30%) • VBIIX (Intermediate bond fund) $30k (30%)

  18. What to do in the future? Rebalancing • Likely only more helpful when in volatile market situations • Rebalancing more often does not lead to better results • Variation in frequency of rebalancing (month to year timeframe)

  19. Rebalancing Example VGTSX increases 100% in value to 40k You can either invest bond funds, domestic or TIPS and/or sell VGTSX • Portfolio Value (100k) • Desired AA = Intl Eq (20), Domestic Eq (50), Bonds (20), TIPS (10) • Emergency Fund • Cash $5k • CD $5k • Brokerage Account • VGTSX (International Index) $20k (20%) • Roth IRA • TIPS $10 k • 401k • VTSMX (Domestic Index) $50k • VBIIX (Intermediate bond fund) $20k • Portfolio Value (120k) • Desired AA = Intl Eq (20), Domestic Eq (50), Bonds (20), TIPS (10) • Emergency Fund • Cash $5k • CD $5k • Brokerage Account • VGTSX (International Index) $40k (30%) • Roth IRA • TIPS $10 k • 401k • VTSMX (Domestic Index) $50k • VBIIX (Intermediate bond fund) $20k • Portfolio Value (120k) • Desired AA = Intl Eq (20), Domestic Eq (50), Bonds (20), TIPS (10) • Emergency Fund • Cash $5k • CD $5k • Brokerage Account • VGTSX (International Index) $24k • Roth IRA • TIPS $12 k • 401k • VTSMX (Domestic Index) $60k • VBIIX (Intermediate bond fund) $24k

  20. Resources • Boglehead Forum and Wiki • Richard Ferri – Asset Allocation • Larry Swedroe • White Coat Investor

  21. Q& A • Should valuation changes determine AA changes?

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