My Revised Asset Allocation

When our investments reached certain milestones ahead of schedule, we discussed over several months whether we ought to take some risk off the table. In the end, we revised to a more conservative target asset allocation of 60/40 equity to fixed income. Then we mulled it over some more, and modified it to 45/40/15 equity/fixed income/real estate.

This was in accordance with Bernstein's dictum, "If you've won the game, stop playing." We opted to reduce our stake in equities primarily because we no longer need to take the same level of risk to achieve our financial goals.

My crystal ball remains permanently cloudy, so our plan does not require market timing. It is intended to withstand austere scenarios.

Let's see what Personal Capital's tools reveal about this snapshot in my actual portfolio. I rebalance with new contributions on a monthly basis, then at a macro level once a year, so percentages will not be perfectly in line with our ideal asset allocation.

Investing Fees

I run my DIY, low cost, passive index fund portfolio primarily out of Vanguard. I have additional smaller investments through other brokerages including Fidelity (which holds the Roth-converted portion of our 401k), Schwab (small account opened for international travel where I can use their card without fees at foreign ATM machines) and TD Ameritrade (which is the platform used to invest our HSA funds).

My annual fees across all accounts, including both taxable and tax-deferred investments, is currently a whopping .06%. This reflects the weighted average of no load index fund expense ratios. I can live with that.

Cash

We currently hold 10% of our portfolio in cash equivalents, primarily money market funds. This is from liquidation of stocks in February 2020 with the goal of purchasing a multifamily investment property. More about that below.

Fixed Income

30% of our portfolio is invested in bonds, split about evenly between a total US bond fund and a TIPS fund, both located in our tax-deferrred investments. We also have a relatively small quantity of municipal bond funds in our taxable account. This is our "dry powder," and while currently rates are near historic lows, we're playing the long game. This is primarily a capital preservation move. The TIPS component is an added hedge against inflation.

Equity

53% of our investments are in equities, with 38% in a total US market index fund and 15% in a total international market fund.

Real Estate

7% of our investments are in the Vanguard REIT fund. Back in 2008, this fund's performance correlated strongly with the S&P 500, so critics teasingly call it a real estate flavored stock. As a means of obtaining exposure to an alternative asset class, it's low maintenance and passive enough to suit my needs.

As referenced in the cash section above, I am on the market for a multifamily investment property. Recent COVID-related legislation prohibiting evictions has pushed back my planned timeline for investment to 2021. I'm in no rush, and I haven't quit my day job...yet. More to come on this front. I'd probably be better served by investing these funds in a short-term CD.

The impact on our asset allocation is that we intend to increase our real estate allocation up to 15%. Although we have discussed it at length, our investor policy statement needs to be revised in writing to reflect this reality.

Efficient Frontier

Another convenient service from Personal Capital that is usually only available from private financial advisors is the ability to calculate whether one's portfolio is on the efficient frontier. The underlying idea, based on Harry Markowitz's Modern Portfolio Theory, is that a portfolio combining different asset classes with distinct volatility profiles can be tweaked to increase return while reducing risk if the proportions of each asset are correct.

Our investment portfolio lies very close to the efficient frontier, with a 7.6% expected return and a 9.7% historical risk as measured by standard deviation.

Our Revised Target Portfolio At A Glance

Reviewing the changes we've implemented, and including the corresponding Vanguard Admiral Share funds we use to invest accordingly, we get the following portfolio:

• Real Estate: 15%
  • Direct Ownership of Multifamily Investment Property
  • Balance in REIT (VGSLX)
• Domestic Equity: 35% (VTSAX)
• International Equity 10% (VTIAX)
• Bonds: 20% (VBTLX)
• TIPS: 20% (VAIPX)

Financial goals for the coming decade include:

• Roth converting our investment portfolio, which is currently 75% in tax-deferred accounts, and 25% in either taxable or Roth accounts. We have some work ahead to defuse this tax bomb.
• Availing ourselves of the tax benefits of real estate ownership in order to facilitate those Roth conversions and reduce our taxable income.
• As we gain greater comfort and experience with real estate, we might increase that allocation of our portfolio up to 25% over time.

I clearly did a lousy job of predicting what our current asset allocation would be when I devised our game plan 4+ years ago. In large part that was because I did not predict the speed with which we would reach our goals - something I attribute largely to serendipity.

It's Seneca revisited: Luck is what happens when preparation meets opportunity.

I wish you good luck in these volatile times.