Ok, so we’ve gone over a lot. At this point, it’s time for you to draft your overall asset allocation. This will just be a draft too – you don’t have to stick with it forever.
The purpose of this exercise is to get you thinking about your specific situation. It’s different reading over sample portfolios versus when you have your actual money on the line.
So that’s your task in this lesson. Put what you’ve learned in this course so far into practice and create your own asset allocation!
Your Working Years
Once you have a copy, it’s time to decide what you want your ideal asset allocation to be. Start with what your asset allocation would be today.
If you’re already investing today, don’t worry about planning this around your existing investments. Anything in a 401(k), IRA or Roth IRA can be transferred to a new fund without you needing to worry about paying taxes for exchanging funds. If you already have some funds in a brokerage or taxable account, that’s another story, but we can deal with that later on when we start rebalancing.
The important parts to get an idea of now are the number of funds you want to include in your portfolio.
If you’re not sure, here’s my recommendation:
- First $10,000: All in a US Total Market Index Fund
- $10,000 – 3x your yearly spending: 3-fund portfolio with US equities, Intl equities & bonds
- 3x yearly spending and on: Decide how many funds you want!
Adding additional funds gives a feeling of control. It’s only an illusion of control. If your US Equities is all in one fund or if it’s in 2 funds, you’re still going to see a significant drop if the US market falls. You’ll just likely see more of a drop if you have tilted your portfolio with a small-cap fund.
The same holds true for international and emerging markets. Adding emerging markets makes your portfolio more diversified, but also riskier.
International bonds are different. They’re quite as safe as US Government-backed bonds (hence why Warren Buffett recommends those), but they are globally diversified in a way that’s hard to match.
Time to put it all together! Depending on where you are today age-wise, you may need to create more columns or remove some of the ones in the template. Feel free to add other columns if you’d like to be more specific in your timing, or more rows if you have additional funds to add.
At Retirement
The next step is to decide on your portfolio at the time you retire. This is what your asset allocation will look like during the first year that you start withdrawing funds from it.
Speaking from experience, this can be a scary year. 2020 is the first year my wife and I have both been fully not-working. At the time I’m writing this, the US stock market went down 9% yesterday, the 11th largest single-day loss in its history. Not exactly the best way to kick off our retirement.
I’d like to say I was completely calm about that, but internally I was panicking. Is our portfolio solid enough to withstand this? Do we have enough cash? Will we need to go back to work? Is there anything I can do?
It shouldn’t doesn’t take a 9% drop to make you realize that you’re exceeding your risk tolerance. When I logged into Personal Capital to check how my actual portfolio did, I noticed it “only” went down 5%. That was because our portfolio was about 60% equities and 40% bonds and cash.
We keep 2 full years of spending in cash at all times. The goal is to have this cash on hand, plus dividends from our investments to draw on. That combination helps us have cash on hand so we don’t need to take money out of the stock market – unless there’s a sustained downturn for about 3 years.
Try creating your own asset allocation for the year that you retire. Take a look at the stock/bond allocation chart and think about what would happen if the “worst” year here ends up being the year you retire (which might actually be the case for us (?).
| Asset Allocation %(Stock/Bond) | Worst Year | Best Year | Avg |
| 0/100 | -8.1% | 32.6% | 5.3% |
| 10/90 | ~-9.1% | ~31.3% | ~6% |
| 20/80 | -10.1% | 29.8% | 6.6% |
| 30/70 | -14.2% | 28.4% | 7.1% |
| 40/60 | -18.4% | 27.9% | 7.7% |
| 50/50 | -22.5% | 32.3% | 8.2% |
| 60/40 | -26.6% | 36.7% | 8.6% |
| 70/30 | -30.7% | 41.4% | 9.1% |
| 80/20 | -34.9% | 45.4% | 9.4% |
| 90/10 | ~-39% | ~49.8% | ~9.7% |
| 100/0 | -43.1% | 54.2% | 10.1% |
Try to put yourself in the shoes of being retired and not having income coming in. What asset allocation would you be comfortable with?
After Retirement
The last thing we need to draft a plan for is your asset allocation after you retire.
When looking at some popular asset allocations, we noticed some disagreements on what strategy to use here.
Some strategies, like Vanguard’s Target-Date funds, kept increasing the amount of bonds in the portfolio until they made up 70% of the portfolio.
In other strategies, like Kitces Bond-tend portfolio, bonds decreased after retirement.
Which you use could depend on your age of retirement and how much you plan to save up. Let’s look back at the withdrawal rate chart from Early Retirement Now.
Pick an asset allocation that you believe will outlast you. If you’re going to be in retirement for 40 years, a 3.5% withdrawal rate and a 75% stock portfolio might be a good idea. If you’re going the early retirement route and plan to be in retirement for 60 years, you could use the same portfolio, but you’ll need more money saved up before you retire.
Come up with a portfolio that you can use going forward and add that to the spreadsheet.
The last step is an optional one. Now that you have a draft of your asset allocation, it’s useful to get feedback on it. Luckily, your target asset allocation doesn’t share your personal savings numbers or other identifiable details. Instead, it’s 100% theory and planning – perfect for sharing and getting feedback from others.
If you want to share your asset allocation, you have 2 options:
First, is the Minafi Slack Community in the #asset-allocation channel. This entire channel is dedicated to discussion about asset allocations, and I’ll respond to any questions any there as soon as I can. You’ll be guaranteed to get some responses here, but fewer than in option 2.
For option #2, you’ll share your asset allocation in the Bogleheads Forum in the Personal Investments section. The “Bogleheads” are a group that follows the strategies of John Bogle, the founder of Vanguard that I’ve shared a few quotes by. Their style of investing mirrors the approach used in the Minafi Bootcamp (they were first, so technically the Minafi Bootcamp mirrors the approach they use). I’d encourage you to read the post about Asking Portfolio Questions then register on the forum and create a post there using that format.
If you want to skip this, just check it off
Consider this document as the draft of your asset allocation. There are sooo many things that could change later on. Maybe you retire with enough money to have a more conservative allocation like Warren Buffet’s portfolio. Maybe you realize you aren’t as risk-tolerant in your 50s as you are in your 20s. Maybe markets change and the United States becomes a smaller slice of the global pie.
A good asset allocation now will do well with all of these situations, but that doesn’t mean you’re stuck with it. The more you learn about how you react, the more refined your portfolio will be. The best portfolio more often than not one that you can set and forget.
There are no 3 main concepts in this lesson. Getting your asset allocation is enough!
I’ll leave you with one last quote about asset allocation from Ray Dalio.
The most important thing you can have is a good strategic asset allocation mix. So, what the investor needs to do is have a balanced, structured portfolio – a portfolio that does well in different environments…. we don’t know that we’re going to win. We have to have diversified bets.
Ray Dalio
Asset allocation is a plan for what bets you will place. It’s your route to retirement.
That’s not speculation! These bets aren’t on specific companies, but on the economy as a whole to innovate, create new products and generate new income. It’s a bet that the next 30 years will have as much chance as the last 30 years – or more.
If you believed that the good times are over and that innovation and technological advances are over, then that’d be a good reason to stay out of the stock market – or maybe to invest in guns or other companies that would profit from a dystopian future.
Even if things are perfect now, or you disagree with parts of society’s direction, there’s a big difference from today being the fall of Rome and a bump in the road. I choose to believe that the world as a whole will grow in ways we can’t even imagine. We might not get everything right, but progress will bring about new wealth – for those that are invested first, and hopefully everyone else in time.