I have updated the asset allocation calculator to take into account the new higher PE10 which is currently over 25. This implies an adjustment of -25% as described in the Market Level Allocation Strategy.
Unfortunately, this is a manual change so I may have to modify this again if the market level continues to move.
I’ve added a new Asset Rebalancer Spreadsheet menu option under Tools. This new option contains spreadsheets that help you periodically rebalance your asset allocation.
Try it out and let me know what you think!
My early retirement started over a year ago and I love it! In fact, I enthusiastically recommend retirement to anyone that asks.
Since retiring, I’ve supported my expenses with withdrawals from savings. A a result, I have a withdrawal strategy that you may find useful. But before I discuss my strategy, let’s look at some of the more popular retirement withdrawal strategies:
- The 4% Rule
- Fixed percentage of remaining portfolio
- Reduced spending as you age
For purposes of this discussion, I assume that you already know if you’ve enough money to retire.
The 4% Rule
The 4% Rule is popular and simple. When you retire, you take 4% of your savings and make that the maximum spending budget for the first year. At the end of each year, you adjust the previous year’s spending budget by the rate of inflation. That’s it. Easy! Continue reading
Based on user feedback, I have added more explanatory paragraphs to the Asset Allocation Results section of the asset allocation calculator. For instance, if you indicate that you own your own home, then I add the following paragraph:
You indicated that you own your home. As a result, the calculator did not add a Real Estate Investment Trust (REIT) to your portfolio because you already own a significant amount of real estate. If you don’t consider your home an investment and you would like to add a REIT, you can change your answer to the “Do you rent or own your own home?” question to “I Rent”.
Last week, I finished reading a scorching exposé about the personal finance industry called Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen. The book is a great read if you want to understand the history of the personal finance industry and how it leads your typical investor astray.
I was already aware that some conventional personal finance advice about spending, saving, investing, and retiring is useless or just plain wrong. But I didn’t understand how other things like psychological disposition and government have also had a big impact. Below are the most interesting things I learned from the book.
Popular Personal Finance Talking Heads Say Stupid Things
Many of the personal finance gurus you see on TV or hear on radio give really poor financial advice. Before the real estate bubble burst, Suze Orman said that real estate is the best investment. Recently, she admitted her mistake:
I’ve always said to you real estate would be the best investment you could ever make. Well, guess what? It didn’t turn out that way.
Dave Ramsey insists that small investors can safely make 12 percent annual returns on stock market mutual funds. The actual historical average has been in the 8 to 9 percent range. Dave Ramsey is also famous for recommending paying off the smallest credit card debt first instead of paying down the highest interest debt first. This isn’t rational. Continue reading
I recently received the following reader question:
I am thinking of retiring soon as well and was wondering what dollar figure (roughly) you think you need for retiring?
This is a common question for anyone approaching early or normal retirement. There are many books, articles, and calculators for deciding how big your retirement nest egg needs to be, but I’ll share the process I used to decide when I could retire. It’s the best way that I found.
Retirement Income Needs
The first thing you must do is figure out how much annual retirement income you need. I did this by creating a spreadsheet of my existing annual expenses and then adjusting up or down based on what I expected to happen during retirement. I also made sure to include my annual local, state, and federal taxes. You need to make the spreadsheet detailed enough so that it’s as realistic and accurate as possible.
You also need to account for any pensions, social security or other sources of funds. For example, if you have $50,000 in annual expenses and a $10,000 pension, then you only need your nest egg to support $40,000 of annual expenses. Alternatively, you can include your other sources of funds as part of your calculation in FIRECalc as described below. Continue reading
I’m interested in international bond funds because of the unprecedented and artificially low-interest rates created by the Fed. How many more government bonds can the Fed buy through Quantitative Easing before inflation starts growing as fast as the weeds in my lawn? Your guess is as good as mine, but I view my bond allocation as risky now.
Vanguard has come to the rescue again with its new international bond index funds. These low expense-ratio funds allow you to add new diversification to your bond allocation and come in two flavors: a total international bond index fund and an emerging markets government bond index fund. Let’s take a look at each.
Vanguard Total International Bond Index Fund
Vanguard describes the Total International Bond Index Fund as follows:
Vanguard Total International Bond Index Fund seeks to track the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). As with its index, the fund’s exposure to any single bond issuer, including government issuers, is capped at 20% to meet regulated investment company (RIC) tax diversification requirements. Approximately 7,000 high-quality corporate and government bonds from 52 countries are included in the index. The benchmark’s top country holdings as of April 30, 2013, were Japan (22%), France (11%), Germany (11%), Italy (8%), and the United Kingdom (8%).
A reader recently asked a question about taxes and asset allocation:
Love your site, especially how specific it is with naming the Vanguard funds! Do your asset allocation recommendations change depending on whether one is using taxable versus tax-sheltered accounts? I am finally getting around to creating a taxable investment account with Vanguard in addition the Roth I already have. Thanks!
The technical term for how you distribute your assets across taxable and tax-sheltered accounts is called Asset Location. The point of Asset Location is to minimize your taxes.
I’ve defined some general Asset Location guidelines depending on the type of account. The guidelines assume that you’ll be in a lower tax bracket after you retire and that the existing tax rates will remain close to what they are now. If you believe taxes are likely to increase significantly, you may want to change your Asset Location to maximize your contributions to tax-free (Roth) accounts first.
Tax-deferred Accounts (Traditional IRA, 401K, etc.)
Tax-deferred accounts are accounts where you can add pre-tax money, but you have to pay taxes when you withdraw the money. For example, a traditional IRA is a tax-deferred account. Continue reading
You’re probably familiar with Strategic Asset Allocation (SAA) because it’s the conventional way to divide your portfolio across various asset classes. It’s what I describe in asset allocation basics and there are many popular asset allocation strategies that use SAA.
However, Tactical Asset Allocation (TAA) is another story. You may never have heard of TAA even though you may ultimately find it useful. So what is TAA?
Tactical Asset Allocation Defined
Tactical Asset Allocation (TAA) involves adjusting your asset allocation to take advantage of inefficiencies or anomalies in the market. For instance, you may adjust your bond and stock allocations based on the current market level P/E ratio. This is what I do in my Market Level Allocation Strategy which is a TAA.
I think of TAA as a middle ground between passive index investing and active stock picking. It’s a way for you to more actively manage your index funds. Continue reading
Both my asset allocation and the built-in calculator have a value tilt. This article discusses why that is the case. But before I discuss why, I need to define exactly what is a value tilt.
What is a Value Tilt?
As I described in Slicing and Dicing Your Stock Allocation, you can divide your stock allocation based on multiple dimensions such as small-cap versus large-cap, value versus growth, and international versus domestic. You own a balance of all dimensions if you invest in a total world market fund that’s based on market capitalization.
If you over-weight your stock allocation towards one dimension, then you are “tilting” towards that dimension. For instance, if you own more value stocks than growth stocks, then you have a value tilt.
Does a Value Tilt Improve Returns?
The short answer is yes because it’s a type of value investing. George Athanassakos, a professor at the University of Western Ontario, summarized the academic research in his Value Investing Vs. Modern Portfolio Theory article as follows: Continue reading