For the past few years, I’ve found myself in the fortunate position of having some discretionary funds left over at the end of each pay cycle to invest after all of my expenses, retirement savings, and college savings have been socked away. I will have much more to say about the specifics behind my budget and savings goals in future posts, but for now I want to discuss how I came up with an investment allocation for, and how I track, the taxable portion of my portfolio.
Your age in bonds, the rest in stocks?
If you’ve found yourself here at Dollar Barrister, you’re probably familiar with the old adage that you should invest your age in bonds and the rest in stocks. I generally subscribe to that theory, but believe we are going to be in a low interest rate environment for a long time. Rates just simply can’t go up too much or Western governments are going to be in deep trouble after all of these years of NIRP, ZIRP, and central bank machinations. And, because of that, there is just a lot of money swirling around the global financial system that has no choice but to chase yields in historically riskier asset classes like stocks, real estate, fine art, professional sports teams, and others.
So how does that affect my asset allocation strategy?
Well, for one thing, it makes bonds less attractive (rates have nowhere to go but up, which will bring down bond prices as yields rise), though the relative stability of bonds are still important to an overall asset allocation. I consider myself – like most lawyers do, I think – to be somewhat risk averse. So in a normal market or financial cycle I think I would stick to the conventional wisdom and hold my age in bonds. But right now my target asset allocation is ten percent lower in bonds and ten percent higher in stocks (against my age, which is 38). However, this is simply how I choose to allocate the funds that I invest each month (with the idea that at the end of each calendar year I will rebalance the funds that I invest each month in order to hit my desired asset allocation).
How I calculate the allocation, and my current portfolio
I do not consider retirement funds or 529 contributions when calculating either my overall asset allocation or in terms of my monthly savings budget. This is because my 401k, IRA, and 529 funds are all target date funds held at Vanguard and T Rowe Price. I just don’t think it makes sense to consider them against the taxable portion of my portfolio that I am actively tracking in order to keep my saving momentum going. Instead, I just pretend like those accounts don’t exist, and invest in them every month as if they were regular expenses.
So, as it stands right now, my taxable account allocation on a percentage basis looks like this:
T Rowe Price PRWCX (capital appreciation): 25%
T Rowe Price PRINX (municipal bonds): 40%
CapitalOne (assorted stocks and ETFs): 24%
Vested employer stock: 5%
US savings bonds (gift from parents): 5%
Emergency cash: 1%
I will have more to say about my individual taxable investments in a future post (including how I selected them and my plan to simplify them, Bogleheads-style!) But as of now, the percentages tally up as follows:
Total Stock: 54%
Total Bonds: 45%
Total Cash: 1%
According to my asset allocation strategy, I am overweight in bonds by around 15% (my target is roughly 30%). I would also like to increase my stash of emergency cash to around 5%. I plan on doing this by continuing to invest in those asset classes, but by boosting my savings rate once we no longer have to pay for full-time childcare and increasing the amount that I invest in equities, particularly in PRWCX and VTI (which sits within my CapitalOne account).
In general, I am a long-term investor and I do not plan on selling off any of my taxable investments and rebalancing that way (with a couple of exceptions. For example, at some point this year I will likely sell some of my employer’s stock, which is trading at an all-time high, pay off the rest of my law school loans, and then move the rest into one of my stock funds.) Instead, I will adjust my monthly contributions so that, over time, the total account balances reflect my desired percentages.
What is your current asset allocation? Have current market conditions influenced it? What do you think of mine?