Asset Allocation summary

An asset allocation plan is an important part of every financial plan. I have changed my asset allocation several times in recent years, but seem to have settled on the following for now:

  • 70% stocks, 30% fixed income
  • The 70% in stocks breaks down to 30% in US Large Cap stocks, 10% in US Small and Mid Cap stocks, 25% in Non-US stocks, and 5% in REITs
  • The 30% in fixed income breaks down to 10% in Bond funds, 10% in Inflation-indexed bonds, and 10% in Stable value funds.

I include only our investment accounts (retirement and brokerage accounts) in the allocation above.

I am not exactly sure how we ended up with these target allocations. The 70-30 split between equities and fixed income is based on my risk tolerance and in line with Ben Graham's recommendation in The Intelligent Investor that no individual investor should have more than 75% in equities. I learned almost everything about asset allocation from the book The Intelligent Asset Allocator by William Bernstein. I have also listed some of the links that I like about portfolio allocation at the end of this post.

In our case, since much of our investments are currently in our 401(k) accounts, I am restricted by the investment choices available there. We are also limited in my choices by the relatively smaller contribution limits for IRAs.

Some specific notes on our asset allocation:
  • Currently most of our holdings are in tax-deferred accounts. My plan is to "front-load" these so as to make the most of the tax deferral. At some point in the future, I plan to reduce the contributions to tax-deferred accounts, and direct them to taxable accounts instead.
  • Our college saving accounts are not included in the allocations given above. I will separately track the allocation in them since the money in these accounts will be needed sooner than the rest.
  • For tax-efficiency, the entire bond portion and the REITs are in tax-advantaged accounts. The rest is split between taxable and tax-advantaged accounts.
  • The bond funds are split equally between short-term and intermediate-term treasury and investment grade funds. We do not hold long-term or high-yield bonds. Since bonds are primarily for safety, I see no need to hold these riskier assets.
  • For Inflation indexed bonds, we hold both a Treasury Inflation-protected Securities fund, and Series I savings bonds.
  • There are several asset classes that we don't own that we probably should, most notably Emerging market stocks. I have exposure to emerging markets through the international funds we own, but I have been hesitant to allocate a fixed percentage to them. As Bernstein has explained, higher growth rates do not necessarily translate to higher returns in the long term.
Since we are planning to retire abroad, we are more concerned about a decline in the value of the US dollar than the average US retiree. The general principle is that you should hold most of your money in the currency that you plan to spend it in. We are currently doing the following to hedge the currency risk:
  • 25% of our entire portfolio is in Non-US stocks.
  • We own some property and a bank account in India. These are not included in the allocation above. We plan to increase the assets in India as we get closer to retirement.
There are two common ways to re-balance an investment portfolio: either do it annually, or do it whenever the allocation of an asset type is off by more than a certain percentage. In my case, since I am very much in the accumulation phase of my investments, I don't strictly do either of the above. Instead, I have been using new contributions to try to meet the target allocations, and it has worked out reasonably well so far.

I'd love to hear your comments or thoughts on our portfolio.

Related posts:

Related links: