Updating My Target Asset Allocation/Investing Strategy

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asset allocation, passive investing, passively managed mutual funds, mutual funds, investing strategy

For the past three years (since this site was created in fact), I have operated my passive investment strategy around a target overall asset allocation of 25% fixed income and 75% equity investing instruments. Thus far, I have and continue to be very comfortable with this asset allocation, given my age, risk comfort profile, and the number of years I have left working before retirement. 

Using this 25/75% split in overall asset allocation, it boils down to having 5% of my overall assets held in cash. However, during the past year, due to vacation savings, dream and life values savings, and the receipt of a lump-sum inheritance amount (1/4 of which I am keeping in cash for the time being), I have tended to carry around 10% of my overall assets in cash-equivalent accounts. Since I like having this amount of cash on hand being saved for specific purposes, I figure it is time for me to accept the fact that I need to change my target asset allocation percentages to account for this preference.    

In thinking about how to account for this change, I saw two possible options:

  1. Maintain my 75/25% overall asset allocation split between equity and fixed income instruments by increasing my cash target allocation to 10% and decreasing my target bond allocation. 
  2. Maintain my current asset allocation target for bonds, increase my cash target to 10%, and then decrease the amount of equity holdings I have by 5%.
After comparing these two options, I opted to go with #2 because it would introduce a little more stability/safety in to my portfolio compared to #1. In addition, since a lot of my cash savings are earmarked for shorter-term items, such as vacations and property taxes, I felt better about keeping my current bond asset allocation.
Having decided which route I would take, I could then work through the details of updating my precise asset allocation targets. Shown below are the results!   

Overall Asset Allocation

% Equity = 70%
% Cash/fixed income securities = 30%
Total Portfolio = 100%

Equity Asset Allocation

For the equity portion of my portfolio, my target split is shown below:

% US Domestic Equity = 70% (70% x 0.70 equity = 49% of total portfolio)
% International Equity = 30% (30% x 0.70 equity = 21% of total portfolio)
Total Equity Portion of Portfolio = 100%

I then break down these broader allocation levels in to subcategories so I can select INDEX mutual funds to give me exposure to these areas, as shown below:

Detailed Allocation Calculations

1. % Cash (money market target 10%)
2. % Non-Inflation Protected Short Term Bond Funds (avoid long term bond funds) (target 12%)
3. % TIPS Bonds (inflation protected bonds -target 8%)
4. % International Equity (Target 10%)
5. % International Emerging Markets (Target 11%)
6. % Domestic Large Cap (Target 7%)
7. % Domestic Small Cap (Target 7%)
8. % Domestic Small Cap Value (Target 13%)
9. % Domestic Large Cap Value (Target 12%)
10.% REIT (Real Estate Investment Trust – target 10%)
Total Net Worth = 100%

Online Savings Account and Vanguard Index Funds That I Use for My Asset Allocation 

All of these have very low fees, and since they are index mutual funds, you will have higher returns than 70% of investing professionals with active management. You can open an account with Vanguard very easily at http://www.vanguard.com/. There are generally no commissions/fees for buying Vanguard funds through your Vanguard account. All funds require $1000-$3000 of initial principal to buy a particular fund.

1. Cash – Place in DollarSavingsDirect.com high yield savings account.
2. Vanguard Short Term Bond Index (MUTF:VBISX)
3. Vanguard Inflation-Protected Secs (MUTF:VIPSX) – Note: This is an actively managed fund.
4. Vanguard Total Intl Stock Index (MUTF:VGTSX) 
5. Vanguard Emerging Mkts Stock Idx (MUTF:VEIEX)
6. Vanguard Total Stock Mkt Idx (MUTF:VTSMX) 
7. Vanguard Small Cap Index (MUTF:NAESX)
8. Vanguard Small Cap Value Index (MUTF:VISVX)
9. Vanguard Value Index (MUTF:VIVAX)
10.Vanguard REIT Index (MUTF:VGSIX)

Investing New Money when it Comes In –

So, having bought the funds listed above, now what do I when I get my paycheck each month and have new money to invest? This is where dollar-cost averaging and/or rebalancing comes in to play!

Portfolio Rebalancing

Portfolio rebalancing is the process of maintaining the recommended allocation target %’s listed previous in order to maximize return and minimize risk. The rule I follow for when to rebalance is called the 5% rule. For example, the target allocation % for the REIT part of your portfolio is 10%. Following the 5% rule, you would rebalance the portfolio either by selling shares or contributing more money depending on whether the current % of the total portfolio was 15% or 5%, respectively.

As a general rule, I try to avoid selling shares of mutual funds (except in tax-sheltered accounts) frequently in order to perform rebalancing. Instead, when new money comes in, I buy additional shares in other funds if as needed to maintain my targets.

However, a full rebalancing of your portfolio should be 1X to 2X per year, unless your allocations targets are already aligned from keeping it up throughout the year with monthly investments.

Dollar Cost Averaging

Another method of maintaining your portfolio/deciding how much money to invest and when is called dollar cost averaging. 

In Dollar Cost Averaging, the idea is that a constant amount of money is invested each month in to your account, and therefore, will buy MORE shares when the market is down and LESS shares when the market is up.

How about you all? What is your overall target asset allocation that you use in your investing strategy? Do you ever think about revising it?

Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/english-in-vancouver/7359571334/sizes/s/in/photostream/


    1. I'm just finding your site now and found my way to this post. First of all, I love this. It's awesome to see something so well-thought out and actually written. Second, I'm interested in your inclusion of short-term savings as part of your investment portfolio. Everyone has different approaches, and I actually consider my money to be saved in several different portfolios. So, as an example, my retirement portfolio is completely separate from my emergency fund, and neither one counts toward the asset allocation of the other. I like this approach because it lets me clearly segregate the different purposes of my money and manage them appropriately.

      Not trying to suggest you change anything, I'd just like to hear your thoughts on why you chose a different approach. Always fun to learn something new.
      My recent post The Basics of a Living Trust

      • Thanks so much for stopping by and sharing your insight momanddadmoney! 🙂

        You make a VERY good point. I actually didn't even think about that, but it makes a lot of sense to count emergency funds and short term savings accounts as a separate part of my long term asset allocation. I'll have to put this on my list of things to investigate more in depth.
        My recent post The Dangers of Lifestyle Inflation

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