Asset Allocation

texlaker

New member
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Hello Everyone,

Its great to come across a website dedicated to TSP particpants! I have been a particpant in the plan since mid 2002. I am 30 years old and plan to retire at age 57 (keeping my fingers crossed). My current asset allocation is 40% C, 40% S and 20% I.

I consider myself to be a buy-and-hold investor. Read Bogle, Siegel and Bernstein before I started to invest my money, they kind of sold me on the long term investor mantra. Currently, my TSP portfolio is my only investment holdings. (I do havea 529 set up for my son's college fund.)

I would like to know what you guys think about my current asset allocation. Specifically, what do you think about the 20% I fund allocation. To much or to less? I know that Bogle does not like international whereas Bernstein believes it is an essential component to a diversified portfolio.

Also, how often should I rebalance my portfolio...annually, semi-annually, quarterly or even monthly. As i understand it, the rationale for doing so is to buy low and sell high.

Thanks for the input and I look forward to some interesting conversations on the board.

Texlaker.
 
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texlaker wrote:
Hello Everyone,

Its great to come across a website dedicated to TSP particpants! I have been a particpant in the plan since mid 2002. I am 30 years old and plan to retire at age 57 (keeping my fingers crossed). My current asset allocation is 40% C, 40% S and 20% I.

I consider myself to be a buy-and-hold investor.

Welcome texlaker! Thanks for joining us.

I don't know if you looked at our longer term comments and allocation suggestions, but you are almost exactly where I have set the aggressive investor. You can read those commentsby clicking here.My suggestion for someone who wants to be aggressive and is along term investor is currently 35% C, 35% S and 30% I, so I won't argue with your choice.

Tom
 
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I'd say you have the right idea. Regarding the number of times you should change the allocation depends on how aggressive you're willing to be. I'm very aggressive and change mine about once per month - I see no need in doing it more often than that, as it would probably do more harm than good in the long term (I'm not a believer in day-to-day "market timing").

The two major allocation changes I have made / am making are as follows:

1. I moved money out of the I fund - I was carrying a 35-35-30 mix in the three stock funds until recently. My reason for doing this is that interest rates are now going up, which is good news for the dollar and generally not so good news for the I fund (which to this point has done very well against the weak dollar). So now I'm in a 55 C / 45 S distribution.

2. I am going to start trending down my investment in the S fund. As I stated elsewhere on this forum, small cap stocks tend to do the best in the early part of a recovery (i.e. last year). As the recovery matures, the large cap stocks (C fund) overtake the small caps in returns and pass them for the remainder of the expansion cycle. Both will make money in a positive economic environment, but the S&P will do a little better. So essentially, my S fund money will be pushed gradually into the C. Depending on how the I fund performs against a stronger dollar, I *may* move some back into that one in the future.

In any case, I'm steering clear of the F and G - those are your best bets in a bear market with falling interest rates, and I don't believe we will be in that situation for quite some time (years).
 
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Welcome, texlaker!

I started as buy-and-hold as I think everyone should. Soon, I will be looking for Day-Trader's Anonymous meetings, heh heh.

re: you allocation. You are not in F Fund...good job! I think your allocation is just dandy. I would say more S, but one of the thing I learned on TSPTalk is that small caps wane further into a bull market. (I had read that a long time ago, but long since forgotten and never really thought about it.) I think we are seeing large caps begin totake the lead. I would also suggest more I Fund, but that depends upon your take on the dollar. Some of us have paid for disagreeing with the Oracle from Omaha. :D

Consider opening an IRA in addition to your TSP and 529. Roth or Traditional depends on your tax planning.
 
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Thanks for the wonderful replies.

TSPTalk: I did notice that i was very close to your targeted recommendations...maybe great minds think alike. Thanks for taking the time to put this forum up for those of us interested in discussing the markets and the TSP.

Mike: I did not know about the relationship between the dollar and the rising interest rates. Thanks for the heads up. I was actually thinking about increasing my I fund allocation. I will have to consider that option in a little more detail now. It does appear that we are headed to upward climb in interest rates.

Rolo: I suspect that my particpation in this forum will erode my commitment to the buy-and-hold mantra. Maybe too much informaiton is bad information. Pllease tell me more what the Oracle from Omaha (Mr. Buffett) has to say about the dollar. I would like to open a Roth next year to get some small cap value or even small foreign value exposure.
 
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texlaker wrote:
Rolo: I suspect that my particpation in this forum will erode my commitment to the buy-and-hold mantra. Maybe too much informaiton is bad information. Pllease tell me more what the Oracle from Omaha (Mr. Buffett) has to say about the dollar. I would like to open a Roth next year to get some small cap value or even small foreign value exposure.
Tom (TSPtalk) pointed out Buffett's take on the buck. Search for "Buffett", upper right.

Another reason that I am my own worst enemy is that I would waffle between buy-and-hold/long-term and actively trading. My waffling led to indecision and that had cost me. It also goes against my "seemed like a good idea at the time" policy. Basically, have clear exit strategies that take multiple outcomes into account. One axiom is, "The money is made when the equity is purchased."

re: "Too much information". I love saturating myself with information and I think that is a large part of our instincts--the subconscious knows something and tries to tell us in an abstract way. Some of my best moves, I could not articulate the why's and wheretofore's, only that it "seemed right". Analysis paralysis kills me, in stocks and in video games.

Investing has taught me as much about myself and human nature than it has about money and economics. This is ironic since I wanted to sublimate, to bury myself in finance in order to avoid dealing with my personal issues! baha!
 
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Rolo - I read the very same info that you did regarding small caps - although I saw it in a business column a few months ago. We will see large caps take the lead very soon - certainly within the next year, and probably a lot sooner. I'm keeping a sharp eye on the C and S fund prices, and I'll continue the process of bumping money out of the S and into the C as we head into the fall. If the dollar continues this mind-boggling weakness, I will probably start splitting my S money into the C and I funds. However, I don't expect the dollar to remain weak for long. The big question is when will the feds bump interest rates upward again - that will have a major impact.
 
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Rising interest rates generally are associated with a strengthening dollar. The reason for that is that rising interest rates serve to tighten the money supply - and anytime you see a diminishing supply of something, *generally* the price of that something will increase (at least long-term - there may be short-term "hiccups").

With the global economy, nothing is all that simple anymore, though(there's a currency market for one thing - and that is subject to psychology, much like the stock market is, and there is speculative trading there as well). How well other economies are performing relative to the US will also influence the dollar.
 
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That makes sense...higher interest rates means the buck is worth more so it costs more.
 
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That is why it surprised me that Warren Buffett was saying the dollar should continue to fall. Here we are in an economic recovery, interest rates are rising, jobs increasing, earnings jumping, so I figured the dollar would rise. That is also why I was out of the I fund for the past few months. Maybe Warren (and fuzzduzz) are right and the economy is not growing as fast as we may think.....

Nahhh. :) Warren is working for John Kerry so it makes sense that he'd downplay the strong economy. But I still have to wonderwhythe dollar is not rebounding.
 
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Part of it might be psychological.

If currency traders don't believe the US economy is strengthening much, they won't be all that interested in the dollar. I'm convinced the economy has been and is continuing to strengthen, but we will have the occasional hiccup with lower-than-expected job growth.

Perhaps they are waiting for the 2nd fed rate hike. Even after the first one, our interest rates are lower than they've been for a very long time, so the money supply is still larger than it should be (if you don't believe this, take a look at the abysmal rates of return on money market funds and CD's).
 
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Mike wrote:
Part of it might be psychological.
...
Perhaps they are waiting for the 2nd fed rate hike. Even after the first one, our interest rates are lower than they've been for a very long time, so the money supply is still larger than it should be (if you don't believe this, take a look at the abysmal rates of return on money market funds and CD's).
I'll go with that...even with rate hikes and a moderately-paced recovery, the dollar is still cheap, and relative to expectations (psychology), it is really cheap. Perhaps the economy is viewed as strengthening and since rates are not wholly reflecting that proportionally, the dollar still falls due to that perception.

I am, of course, speaking out my butt on this. :D
 
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For the long-term, 40-40-20 is okay butTom's 35-35-30 or perhaps even 40-30-30 would work just fine. Siegal recommends 42-33-25, Bernstein would recommend 25-25-25-25 (g fund). Carlson recommends 50-25-25. Bogel 40-20-20-20 (maybe even 0% I fund). Okay, you get the point. There really is not a right answer since we do not know the future. Most of the above experts will agree that you should stick to your allocation year in and year out, rebalance annuallyor within a specified range, eg:

C fund 35-45%

S fund 35-45%

I fund 15-25%

If for instance,I fund grows to27% of the allocation and S fund drops to 33%, withC fund remaining constant, you would rebalance back to 40-40-20 sinceS and I are out of balance in conjunction with your allocation range. Some folks advocate never rebalancing and letting theallocation ride (Bogle calls this "benign neglect"). Others (including Bogle) highly recommend that you lock in the return of the highest performing fund annually, in essence buying high and selling low. Once again, you aregoinghear strong arguments for both.

Regarding Bogle oninternational investing, I think hefalls prey torecency, ie, heused the 10 year period ending in 1998 to argue for a smaller international allocation.Bernstein does a much better jobby using longer timeperiods.Bernstein's analysis is more in line with the number of years that you will be accumulating, ie, 27.
 
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Just wanted to add that you have already made the most important decision for the long-term buy and hold investor, ie, the stock/bond ratio.This decision will account for as much as90% of your long-term return with market timing, stock picking, and manager expertise addingnominal if any benefit. I suggest that you visit indexfunds.com, coffeehouseinvestor.com, diehards.org and efficientfrontier.com for further reading and comment regarding the advantages of passive investing.
 
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I have a problem with absolute rules, particularly arbitrary ones. Rigidity is contrary to flexibility. No flexibility means no ability to adapt to economic changes,leaving you subjugated to the "downs" and unable to capitalise on the "ups".

A little bit of intelligence and dilligence will likely boost your returns greatly.
 
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And changing your allocation in response toeconomic forecastsis not arbitrary? To change your allocation plan in response to ephemeral economic forecasts, seasonality patterns, etc., is basically akin to pissing in the wind.The forecasts change daily and are completely arbitrary.
 
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Pete1 wrote:
The forecasts change daily and are completely arbitrary.
Yes and no. Like anything in the Media, you have to filter out the hype and noise to pay attention to the real 4-1-1; ignore the "experts" flailing about.

The equities about to plummet forecast in 2000 was sound and rational.

The stay away from bonds right now warningis prudent and reasonable.

I do not speak of market timing scuttlebutt, but of major, obviouschanges in economic direction.
 
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Yes, the noise can be deafening - just go take a look today.

Interestingly, both Bogle and Bernstein reference the unsustainability of P/E ratios of large growth and tech stocks in books written prior to the 2000-2002 bear market - "Commonsense On Mutual Funds" (Bogle) and "The Intelligent Asset Allocator" (Bernstein). There advice - diversify.Their advice worked well for those who chose to follow it.
 
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Better advice during that time (January 2000) was Bill O'Neil's "get into cash and stay there, she's gonna blow!" It was clearly, beforehand and in hindsight, a time for total capital preservation.
 
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