Joypog's regularly changing AA (originally "The Desert Looking Glass Portfolio")

[joypog]

This post was originally titled "The Desert Looking Glass portfolio?" but since I keep changing my prospective Asset Allocation every couple weeks, I thought I'd retitle to more about me .

I've been on a slow trend towards becoming more and more aggressive with my potential portfolio as I think about our final AA (going from our current 70% cash position to PP to GB to 50% stock).

This afternoon I got curious about intermediate term bonds (which seem to have half the safety of STT's and half the upside volatility of LTT's which could either be considered the best or worst of both worlds). Searching ITTs on this site lead me to Desert's Portfolio (60% ITT, 10%US, 10%SV, 10%Emerge, 10%Gold) - which looked like the mirror image of what I'm currently toying with as our final portfolio AA (we plan on averaging into the final position around the end of the year):

10% Gold
10% Cash
10% LTT's
---
10% flex (currently cash, for a potential house purchase...after pulling the trigger, we would push this last chunk towards US Stocks, REITs, ITT's, or emerging markets).
---
10% SV
10% Intl
40% US Stock
---

Because I have about 20 years left in my career with a government pension, I'm slowly getting more comfortable with the idea of going hard into the stock market - potentially through and past retirement.

On the other hand, if my career path veers outside of public work, then I may well transition over to the Desert portfolio near retirement.

The fun thing about this forum is that we have a mix of people who appreciate/disbelieve the PP. So it's fun to hash these half baked ideas here...thanks in advance for any thoughts. Cheers!

[Hal]

Here's something to think about seeing you will have a government pension.
https://socialize.morningstar.com/NewSo ... eplySeq=41

If you took John Bogles advice, you would have a much higher share (& gold?) allocation than what you would normally have.

[joypog]

unfortunately the link just takes me to Morningstar's front page? Could you repost it?

As for the pension...I won't vest for a couple more years, so I wonder how my psychology will shift once I know that I've got it in the bag. Even though the percentage is small at first just knowing its coming will be a relief, and then the extra accrual just starts ramping up from there.

Thanks!

[joypog]

Another idea - Snow White and the Seven Dwarfs:
30% US Stock and then 10% each Intl, SV, Reit, Gold, LTT, Cash and Emgerging Markets

[Hal]

unfortunately the link just takes me to Morningstar's front page? Could you repost it?

As for the pension...I won't vest for a couple more years, so I wonder how my psychology will shift once I know that I've got it in the bag. Even though the percentage is small at first just knowing its coming will be a relief, and then the extra accrual just starts ramping up from there.

Thanks!

Hmm... Dead link on the Morningstar page and the WayBack machine failed me...

Here we go
https://www.bogleheads.org/wiki/Asset_a ... te_note-11

[joypog]

hmm interesting.

Playing with round numbers...let's say I have 10,000/yr from a pension ...assuming that income is part of a 4% SWR would that count for $250k as a bond portion?

So if someone was shooting for a 60/40 split in a $1M portfolio one could go 850k stocks / 150k bonds?

edit: Alternately I could think of my 10k pension as reducing my living expenses from 40k to 30k.
Assuming a conservative 3% SWR, that would lead to a $1M portfolio that would be invested with whatever AA I finally settle upon.

[joypog]

btw I followed up with the same question on Bogleheads and was given good advice to not try and account for the pension as part of the AA. Just redeuce my assumed needed monthly income...and then invest according to my preexisting risk preference.

Which pushed me back to my AA.

Well after much more thought and conversation with my wife, we are:

25% Cash (if we ever get around to buying a house, this will cover the down payment)
10% LTT
10% Gold
10% SV Tilt
10% Intl
35% US Stock

If we ever buy the damn house we'll be
10x5 Cash, Gold, SV, Intl, LTT
50% Stock

Its basically a compromose portfolio with elements of HBPP, GB, Bernstein...but ultimately following the bogleheads directive of going heavy on US Stocks. There is definitely a sheeple element to this - if we screw up the results, at least it won't be from being too far out from standard recommendations (including the intl and sv tilts). But I'm keeping the LTT and Gold as "insurance" for the black swan financial moments if they ever show up. That plus the cash makes for a 70/30 portfolio - perfectly in line with current recommendations for people my age.

So yeah, its very much a go with the flow portfolio.

The one nagging question I have is the Intermediate Treasuries....I just don't see the value of it. I'd rather be in STT if I wanted the protection or in LTT if I wanted the potential deflation protection. ITT seems to be caught in a no-man's land.

[Vil]

Start to smell pinwheel-ish here... you just miss some REIT ..
For me its too much of slice & dice. Only piece of international stocks I found that is not that much corelated to US stock market is EU small caps (and in EU we are good in having the small caps really small ;-)). For REITs I have read a lot, though their correlation to stocks increased in time, have thought of having APAC REITs, but was lazy enough to continue digging..

[joypog]

Start to smell pinwheel-ish here... you just miss some REIT ..
For me its too much of slice & dice. Only piece of international stocks I found that is not that much corelated to US stock market is EU small caps (and in EU we are good in having the small caps really small ;-)). For REITs I have read a lot, though their correlation to stocks increased in time, have thought of having APAC REITs, but was lazy enough to continue digging..

Hahah yes! I looked at the Pinwheel quite a bit as well.

Decided the political risk of emerging markets made it not worth the additional effort of keping another asset of the portfolio.

Strongly debated keeping or tossing the small caps. Ultimately, too many people like the tilt, so decided to follow the herd and throw a little money towards it.

And I purposely left out the REITs because I'm an architect. I currently work for the government, so I'm shielded from sudden shocks, but I thought its best to avoid personal investments in my own industry. If anything, I'd hedge against the construction industry...but I can't think of how!

[dualstow]

FYI, Hal’s initial link worked for me. Maybe it was a temporary glitch.

Bogle Says Count SS/Pension in Allocation
Splitter 01-01-2007, 11:25 AM | Post #190913 |
0


The "Is my Social Security/Pension a bond equivalent" question has gotten much debate on this board. But until now I hadn't seen Jack Bogle's opinion on the subject.

In this interview with Scott burns entitled Heeding Advice of an Elder, Bogle says you should count Social Security and Pension income in your allocation. (Annuitized/Discounted for age). He also says not to count your house in your allocation if you are living in it.

I find this very interesting. Not only in and of itself, but because Bogle also mentions the "Your age in bond" rule of thumb. Many people think that too conservative and think it should be reduced by 10 or 20. What I found intriguing, however, is that if you did indeed count your Social Security/Pension as a bond equivalent, then the 'Your age in bonds' rule of thumb makes much more sense because it reduces the bonds in your actual portfolio.

Of course, counting your Social Security/Pension in your allocation brings up an obvious question: At what rate should you annuitize it?
But, that's a whole other can of worms. The main question being should you count it in the first place.

Any opinions? Is Bogle on the mark or ready for the rocking chair?

Originally posted in thread: 55894

[Vil]

Start to smell pinwheel-ish here... you just miss some REIT ..
For me its too much of slice & dice. Only piece of international stocks I found that is not that much corelated to US stock market is EU small caps (and in EU we are good in having the small caps really small ;-)). For REITs I have read a lot, though their correlation to stocks increased in time, have thought of having APAC REITs, but was lazy enough to continue digging..

Hahah yes! I looked at the Pinwheel quite a bit as well.

Decided the political risk of emerging markets made it not worth the additional effort of keping another asset of the portfolio.

Strongly debated keeping or tossing the small caps. Ultimately, too many people like the tilt, so decided to follow the herd and throw a little money towards it.

And I purposely left out the REITs because I'm an architect. I currently work for the government, so I'm shielded from sudden shocks, but I thought its best to avoid personal investments in my own industry. If anything, I'd hedge against the construction industry...but I can't think of how!

Stupid question - as the only bonds you (plan to) keep is LTT and is just 10% - is that worth at all ? I mean (conceptually) for the time being - its just a burden (even though with minor effect on your overall portfolio), but when the sun start to shine over LTTs (god knows when) - will it be worth holding it again in such small amounts - or you plan to buy in later on, when you decide the time has come ?

[joypog]

Stupid question - as the only bonds you (plan to) keep is LTT and is just 10% - is that worth at all ? I mean (conceptually) for the time being - its just a burden (even though with minor effect on your overall portfolio), but when the sun start to shine over LTTs (god knows when) - will it be worth holding it again in such small amounts - or you plan to buy in later on, when you decide the time has come ?

My cash is also held in a short term 52-week bond ladder...but the question is a good one.

First, I'm only dong US treasuries because I'm taking all my corporate risk in the equity market. Second I looked at ITT's and the loss from even the smallest interest rate rise is brutal relative to any gains one might get from the coupons, so I'm passing on those.

As for the LTT's...I treat it as purely speculative insurance (like gold) to slightly blunt the pain of deflation in the rare occurance it. As insurance, I don't want to make money off it, just hopefully make things less bad if/when it hits.

However, I don't plan on timing the market so I only expect to buy up based on the AA, but given HBPP's 40% relabancing bands, it might not even happen that often.

Ultimately the money needs to be stashed somewhere and I don't want all of it in stocks. The value of STT's as almost-ready cash is evident, and LTT's at least provide a speculative value. ITT's feel like a no-man's land with the worst of both worlds. So without any better options, it seems like a good enough option. But will it be a good bet? I don't know...maybe as a security blanket that pays 3% a year?

When I get closer to retirement, I might transition out of these LTTs to buy some TIPS to cover necessary expenses above my pension and SSN...(like I'm currently doing with our kid's college funds).

[boglerdude]

Cool story. Did you buy that portfolio yet =)

[joypog]

Cool story. Did you buy that portfolio yet =)

Hahah good question! Last weekend we started moving money into position, but we're going in over 10 months. We got to our crazy cash position due to our hyper-conservativeness and see no compelling reason to suddenly change....

And yeah, it was fun trying to convince my wife it was time to buy into small value stocks with the current market turmoil. She agreed to go in halfway and revisit the question in two weeks.

[D1984]

Cool story. Did you buy that portfolio yet =)

Hahah good question! Last weekend we started moving money into position, but we're going in over 10 months. We got to our crazy cash position due to our hyper-conservativeness and see no compelling reason to suddenly change....

And yeah, it was fun trying to convince my wife it was time to buy into small value stocks with the current market turmoil. She agreed to go in halfway and revisit the question in two weeks.

Just curious, which small value stock fund are you going with? AVUV? Royce? Aegis Value? Towle Deep Value? One of the DFA SCV funds? Something from Bridgeway? RZV? Wasatch? S&P 600 Value? Russell 2000 Value? Something else entirely? Some choices are smaller and more value-loaded than others (and consequently have higher expected returns).

[joypog]

Cool story. Did you buy that portfolio yet =)

Hahah good question! Last weekend we started moving money into position, but we're going in over 10 months. We got to our crazy cash position due to our hyper-conservativeness and see no compelling reason to suddenly change....

And yeah, it was fun trying to convince my wife it was time to buy into small value stocks with the current market turmoil. She agreed to go in halfway and revisit the question in two weeks.

Just curious, which small value stock fund are you going with? AVUV? Royce? Aegis Value? Towle Deep Value? One of the DFA SCV funds? Something from Bridgeway? RZV? Wasatch? S&P 600 Value? Russell 2000 Value? Something else entirely? Some choices are smaller and more value-loaded than others (and consequently have higher expected returns).

We're not thinking too hard about it...so just the Vanguard VSIAX since our IRA's are both with the big V. Maybe at some point I'll jump into the details and see if there is an ETF that might squeeze a little more performance out for us. The percentages are such that the only holding in a taxable account will be the US market fund and I suspect that will just be Fido since that's our taxable brokerage.

(30-World, 10-SV, 10-EM; 10-LTT, 10-Gold, 30-Cash/ITT)

[joypog]

Two weeks later and a few more changes.

I read Meb Faber's Global Asset Allocation book and decided to add another chunk to "real" assets. At first I thought it would be commodities, but holy god they've had some bad performance over the past 20 years. So with trepidation I'll throw some money at REITs after we fill up the 10% gold allocation. The trepidation comes from being an architect so REITS create a portfolio correlation with my profession. On the other hand, we have a pretty conservative portfolio so a little jazz feels like the right move. At some point if our stash gets so large at some point, we might split the 10% REITs into 5% REITs and 5% commodities.

We also decided to ditch factor tilts. After reading Tyler's latest great piece on inflation, we realized that if we were going to under perform, we'd much rather do that by following market (aka conventional wisdom).

This keeps us at a 50% stocks portfolio which is within spitting distance of a standard (albeit conservative) recommendation from the BH world. And I suspect this stocks percentage will go up in the next few years as I vest in my pension and if we ever buy the damn house and no longer need to keep a large cash reserve for the down-payment.

Now I'm shooting for:
50-World (actually 60/40 US-Intl split between multiple accounts)
20-Cash/ITT (also house down-payment money)
10-LTT (PP nod)
10-Gold (PP nod)
10-Reits (feels like half-stocks/half-"real" asset)

And yes, we're still planning to average into the market over the next 10 months...I argued for a quicker entry, my wife would happily procrastinate for the next decade...so a year seems like a reasonable compromise.

[Hal]

Hi Joypog,

You may find this interview interesting. Unfortunately can't remember where they discussed REITS and Chris Coles(?) opinion.
https://www.youtube.com/watch?v=JwS824WRflI

Have you thought about having a 40% core portfolio of the PP as you have the individual components already, and the other 60% as a REIT/Share/ITT portfolio? As you get more information you can fine tune the REIT/Share/ITT allocation.

Seeing you're reading Meb Faber, add some commodities and you have his IVY portfolio
https://portfoliocharts.com/portfolio/i ... allocation

[joypog]

Hi Joypog,

You may find this interview interesting. Unfortunately can't remember where they discussed REITS and Chris Coles(?) opinion.
https://www.youtube.com/watch?v=JwS824WRflI

Have you thought about having a 40% core portfolio of the PP as you have the individual components already, and the other 60% as a REIT/Share/ITT portfolio? As you get more information you can fine tune the REIT/Share/ITT allocation.

Seeing you're reading Meb Faber, add some commodities and you have his IVY portfolio
https://portfoliocharts.com/portfolio/i ... allocation

Thanks! I'll check it out the video. I'm not 100% sold on REITS as a great asset class so I'm deifnitely interested. But yes, I definitely looked at the Ivy...I've spent sooo much time on portfolio charts over the past couple of months! I suspect the heavy duty lifting has been completed on this project but who knows...this investing thing has been much more of a rabbit hole than I expected!

And yes, I've definitely thought of my portfolio as a PP + Fairly aggressive Stock portfolio. If you subtract the PP from my AA above, and scale the remaining VP up to 100% it would be 35US- 33xUS-16ITT-16REIT...basically a 70/30 portfolio with a high average rate of return and yes, the volatility of a TSM only portfolio...but that's kind of what the whole PP+VP concept is supposed to support.

[Vil]

Yeah, definitely 20% commodities held in the Ivy portfolio needs some strong conviction, given that in the short term you will buy at high price (the war in Ukraine is already taken into account, and what happens if it ends some time soon..? For markets I do not think that it will make any sort of difference anymore if it ends or not, but that's just my opinion..). I do not know if you have read already the other Meb's book (The Ivy Portfolio) and 'oddly' enough what he describes as crucial areas where endowments constantly beat the retail investors are the private equities and hedge funds (if you do not have some hefty 7 figure account you simply cannot touch these...) Having said that, the rest of the Ivy is nothing close to a secret - just yet another AA from the tons of AAs out there that nobody has any idea how will behave in the years to come. In this book, another aspect that he talks about is the tactical asset management - any asset (from the AA) that goes below the 10 month MA (if I am not mistaken) is sold and kept in cash.. But that's already semi-trading / semi-investing

[Dieter]

I’ve always seen REITs treated as stocks

I think safer to think of then that way

[joypog]

Interesting. I was reading Swedroe's book and spoke more with my wife about our AA. She's really loss averse and she feels only comfortable with a 25% to 30% max drawdown. Which pushes us back towards a 40% or 50% stock portfolio (which would still double our equity holdings).

I'm a bit more aggressive so it seems that our next compromise may well be a +/-55/45 split (age in bonds) with some factors to juice the results (an about face from our decision at last week). Something like:
---
20 US TSM
10 SV
10 Intl TSM
5 SV exUS
5 EM
---
5 REITS
10 Gold
10 LTT
---
25 Cash/ITT (mainly T-bills for our our downpayment stash, amount the rest being Treasuries purchased with duration at the Swedroe .20 BP rule, currently in the 2 to 3 year range)
---

This looks pretty close with Tyler's Pinwheel with 50% stocks (30% TSM and 20% tilts), 25% Tbills with short Tnotes, and 25% in quirky assets like LTT's, Gold, and REITS.

Given my wife's conservativism, we may well land closer to a Desert portfolio by lowering the US TSM holding and upping the Tnotes.

Tyler's comment in 2015 is good description of how we're thinking about things

For the record, I like the Desert portfolio especially for those who have a real psychological hangup with gold and long term treasuries.  The 70's were worse than the PP and the 80's and 90's were better, all as you'd expect based on the allocations.  But in the grand scheme of things it could be a pretty reasonable option for a lot of people. 

BTW how the hell did y'all end up finally settling on your final AA? When you finally ran out of cash to aveage into the market? Or is the fact you're on this forum is a sign you're an inveterate tweaker?

[Hal]

Given my wife's conservativism, we may well land closer to a Desert portfolio by lowering the US TSM holding and upping the Tnotes.

<snip>
BTW how the hell did y'all end up finally settling on your final AA? When you finally ran out of cash to aveage into the market? Or is the fact you're on this forum is a sign you're an inveterate tweaker?

Just to get things started...

75% https://investor.vanguard.com/mutual-fu ... file/VSMGX

& 25% Gold https://www.merkinvestments.com/downloa ... cation.pdf

Gives a minimum variance portfolio.

How did I settle on the final AA? When I read Otto von Bismarcks quote
https://quotefancy.com/quote/1094939/Ot ... lts-than-a

Edit:
"Over the time period studied, the optimal allocation in a balanced portfolio has actually been 20% to gold and 80% to a balanced portfolio, representing a result of roughly 50% stocks, 30% bonds, and 20% gold."
https://proactiveadvisormagazine.com/ho ... llocation/

[joypog]

I dig it, a 40/60 portfolio with gold. Works out quite nicely to hit a PP! That's a brilliant 2 fund idea.

How did I settle on the final AA? When I read Otto von Bismarcks quote
https://quotefancy.com/quote/1094939/Ot ... lts-than-a

“A bad plan that is well executed will yield much better results than a good plan that is poorly executed.”

Yeah...that's why I am forcing ourselves to move 5% into the market every month. At the end of ~10 months we'll be basically 75% in stocks/bonds/gold and holding the remainder in cash. If we moved at my wife's pace we'd still be 70% cash in a decade. Which might not be the worst thing, but I want that to be a conscious decision not a continual default. Fortunately she's been playing along with this latest obsession of mine.

And to be fair to my wife, we had a 4 year house remodel (while we lived with her parents). It took forever, but we ultimately came up with the right design solutions for the work....so I have faith we'll land at the correct spot for us, but it will take a bit of back and forth to get there.

[joypog]

Joypog, I can't remember if you mentioned this already, but is most of your portfolio in taxable or tax-deferred accounts?

The first decision is percent equity. I like the 50% equity allocation at your age. You could perhaps go as low as 40%, but below 40% seems too conservative for the number of years before you'll need the money. I think the house down payment should be kept primarily in cash/STT (and/or i Bonds if you have at least a year before buying). In other words, I'd separate this savings allocation from the ITT allocation that will remain a part of your portfolio after the house purchase.

If you really wanted a happy wife, you'd save cash for the down payment and invest your entire long-term portfolio in Vanguard's Wellesley fund.

At the moment it's about two-thirds in tax-deferred accounts and I would suspect that would continue for the foreseeable future. That said, we've built up enough of a cushion we won't completely drain our taxable account if we go for a 20% downpayment....though given our conservativeness, we'll most likely push hard to pay down any mortgage since that's just a guaranteed interest loss.

I agree about shooting for a minimum 50% allocation (up to 55% if I count REITS). My wife and I need to try life on the "wild" side (HA, its nothing compared to to the Bogleheads on Reddit!) and then if it's too exciting, we can always drop it down to a 40% AA. Conversely, if we're comfortable with stocks at that level we might let it slide up the AA by natural growth (and as my pension accrues years of service time).

I keep seeing people talk about Wellesley, I need to look into that. I'm certain there are a plethora of lazy / simple portfolios that would be great for us...but I'm a bit too curious to just settle on someone else's AA, even if it were to be better than anything I might home brew.