Our 2016 Asset Allocation: Baking the Perfect Pie

Mr. Enchumbao

I work for a large investment management company helping people save for traditional retirement. During my spare time, I help others save for financial independence and early retirement by writing for Enchumbao. My journey to FI began in 2012. I was in a lot of debt back then, but I turned things around and became debt free a few years later. My wife and I reached financial independence in 2017 and are preparing to retire by 2020.

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3 Responses

  1. Very nice post and good asset allocation. I think for folks like us in the FIRE crowd we need a high equity allocation. Otherwise, the portfolio is not going to last for the 40 or even 50 years of projected retirement (given today’s low bond yields). Very different from the traditional retiree at age 65!
    One thought on your home purchase fund: If I were to plan a home purchase in 3 years, I’d have more equity, less bond exposure. A home is a capital purchase (real estate is capital, included for example in REITs). So to hedge the future home price fluctuation, REITs wouldn’t be a bad choice. They might go down in value, but at the same time, you could buy your future home at a cheaper price. All the while getting higher yields than bonds. Nominal bonds would be the opposite of a hedge: an inflation shock would make the house more expensive but sink your bond portfolio. Or a bad recession would make the home cheaper but bonds will rally. Nominal bonds are an anti-hedge, they add unnecessary risk for this spending goal. Just a thought! 🙂

    • Thanks ERN for your thoughtful post! It certainly got us thinking. I agree on the high equity allocation for forks like us with a long retirement ahead of us. Equities make up around 68% of our net worth asset allocation and our long term goal will be to bring it down to about 35% of it by reinvesting in real estate. But in relations to the stock and bond allocation I don’t see us going beyond having 12-15% in bonds.
      Adding REITs to our home purchase sounds like a good idea and we are definitely exploring it. Maybe we set aside 25% of the funds in REITs. That would bring the home fund asset allocation to 25% REITs, 15% stocks, 60% bonds. It definitely brings the risk level higher. I see this as if we were going with the VG Lifestrategy Conservative Growth Fund which has a 40% stocks/60% bonds asset allocation. https://investor.vanguard.com/mutual-funds/lifestrategy/#/ We just started investing in this “home fund” so we can make adjustments. That’s just an example of what we might do. One thing to keep in mind is that we might be buying abroad and the real estate market abroad doesn’t move in correlation with the U.S. market. We’ll let you and our readers know what we decide. This is the most thought-provoking comment I’ve seen on our site. I guess we should talk about asset allocation more often! 🙂 Thanks for stopping by.

  2. LM says:

    Love those LifeStrategy funds. The simplicity of not having to rebalance is excellent.

    I see the point made by earlyretirementnow and I’d caveat it with being positive you are ok with the potential downside. Even in a tough bond market a bond-heavy portfolio may still protect you from big drops as long as exposure to long term bonds is minimal. Just my 2 cents. Still agree with the logic just be mindful of the potential swings.

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