3020: [Part 2] Stocks - Part XXIII: Selecting Your Asset Allocation by JL Collins on Wealth Accumulation Phase

[00:00:00] This is Optimal Finance Daily. Stocks – Part XXIII – Selecting Your Asset Allocation – Part II by JL Collins of JLCollinsNH.com Factors to consider in assessing your risk tolerance 1. Temperament – This is your personal ability to handle risk. Only you can decide, but if there ever was a time to be brutally honest with yourself, this is it.

[00:00:30] 2. Flexibility – How willing and able are you to adjust to your spending? Can you tighten your belt if needed? Are you willing to move to a less expensive part of the country? Of the world? Are you able to return to work? Create additional sources of income? The more rigid your lifestyle requirements, the less risk you can handle.

[00:00:53] 3. How much do you have? As we've discussed, the basic 4% rule is a good guideline in deciding how much income your assets can reasonably be expected to provide over time. If you need every penny of that just to make ends meet, your ability to handle risk drops. 4. If, on the other hand, your ability to handle risk. If, on the other hand, your ability to handle risk. If, on the other hand, you're spending 4%, but a big chunk of it goes towards optional hobbies like travel, you can handle more risk.

[00:01:20] Taking all these considerations into account, here's what we do personally. Our daughter is just beginning her career and her wealth acquisition stage. She wants things to be as simple as possible. She is 100% in VTSAX and likely will be for decades to come.

[00:01:38] I'm retired and my wife will be shortly. Assessing the three risk factors above, our personal tolerance is very high. We hold an aggressive allocation of 75-25 stocks to bonds. The more common and conservative recommendation for our age would be 60-40 or even 50-50.

[00:01:58] Our allocations very well might not fit your needs, but this post should give you an idea of how to approach the question and reading the stock series will help you understand just what you're dealing with when investing in the market. After that, you have to know yourself. Frequently asked questions. When should I make this shift into bonds? This is very much a function of your tolerance for risk and your personal situation.

[00:02:23] For the smoothest transition, you might start slowly shifting into your bond allocation 5 or 10 years before you're fully retired, especially if you have a fixed date firmly in mind. But if you're flexible as to your retirement date and more risk tolerant, you might stay fully in stocks right up until you make the change. In doing so, the stronger potential of stocks could get you there sooner. But if the market moves against you, you'll have to be willing to push your retirement date back a bit.

[00:02:52] Of course, anytime you shift between the acquisition and preservation stages, you'll want to reassess and possibly adjust your allocation. Balance and choice, yin and yang. Does age matter? As you'll note from earlier, I've divided investment stages by life stages rather than using the more typical tool of age. This is an acknowledgement of the fact that people are living much more diverse lives these days, especially the readers of this blog.

[00:03:21] Some are retiring very early. Others are retiring from higher paid positions into lower paid work that more closely reflects their values and interests. Still others, like I did, are stepping in and out of working as it suits them, their stages fluidly shifting. So age seems not to matter, at least not as much as it once did. But that said, age does begin to limit your options as it advances. Age discrimination is a very real thing, especially in the corporate world.

[00:03:51] As you get older, you may not have all the same options readily available as in your youth. If your life journey involves stepping away from highly paid work occasionally, you'll do well to consider this. Further, as you age, you steadily have less time for compounding growth of your investments to work. Both of these considerations will influence your risk profile, and you might well want to consider adding bonds a bit earlier if that's the case. Is there an optimal time of year to rebalance?

[00:04:21] Not really. I've yet to see any credible research indicating a particular time of year works best. Even if someone were to figure it out, everybody would rush in negating the effect. I do suggest avoiding the very end or beginning of the year. It is a popular time for rebalancing, and many are engaged in tax selling and new buying. I prefer to avoid the possible short-term market distortions this might cause. Personally, we rebalance once a year on my wife's birthday.

[00:04:49] Random and easy to remember. I have some of my investments in tax-advantaged accounts and some in regular accounts. How can I rebalance across those? This can be cumbersome, and you'll have to work with what you have. While it's best to hold bonds in tax-advantaged accounts, it does complicate rebalancing. First, you should be considering all of your investments as a whole when figuring out your allocation.

[00:05:13] Next, as a rule, it's better to buy and sell in tax-advantaged accounts to avoid creating taxable events. Unless you happen to have capital losses in a given year, then it's best to take them in your taxable accounts when possible. For instance, you might own VTSAX in both an IRA and in a taxable account. Should you need to sell to rebalance that year, sell in the taxable account to capture the loss. You can deduct it against any other gain you happen to have, including any capital gain distributions.

[00:05:44] You can also deduct up to $3,000 against your earned income. Any loss left over, you can carry forward to use in future years. Does more frequent reallocation improve performance? Some contend that it can over time. Betterment makes this case. I'm not so sure I fully buy into the premise, but I do like the way they use your new contributions at any dividends to make it happen efficiently. It's a bit more work, but if you like, you can also do this yourself with your index funds.

[00:06:14] What might my taxes look like in the wealth preservation slash retirement stage? While everyone's situation will vary, here are two excellent posts from my pal Jeremy at Go Curry Cracker detailing his own tax strategy as he travels the world as an early retiree. The posts are called Never Pay Taxes Again and the Go Curry Cracker 2013 taxes. There you have it, the considerations you'll need to review and the tools you'll need to use

[00:06:42] to create the asset allocation that best fits your situation. You just listened to part two of the post titled, Stocks, part 23, Selecting Your Asset Allocation by JL Collins of JLCollinsNH.com. You sign up for something, forget about it after the trial period ends, then you're charged month after month after month. The subscriptions are there, but you're not using them.

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[00:08:06] If you enjoyed this post, I absolutely recommend reading JL's full 35-part stock series. Or better yet, pick up his book, The Simple Path to Wealth. When I started taking my finances seriously and digging myself out of 30 grand of debt, I oddly dreaded the day that I would have to look at investing more seriously. You see, reducing expenses, throwing money at debt, and saving up an emergency fund seemed pretty straightforward to me.

[00:08:35] But investing mystified me. Until I read JL's book, of course. I never imagined myself fully funding my retirement accounts and investing a large percentage of my take-home pay every month. And now, here I am. V-T-S-A-X for the win! It just goes to show that no matter where you're starting from, making the investment in educating yourself about these topics will definitely pay off in the long run. And that's a wrap for another Monday show.

[00:09:04] Have a great rest of your day and start to your week. And I'll be back tomorrow, as usual, where your optimal life awaits.