Some Adjustments to my Portfolio
I am in the process of making some adjustments to my portfolio, so I thought I would post a quick note about it.
The stock market has been on an upward trend for over 6 years now. In my opinion the bull market is getting a little long in the tooth. The current bull market started in March 2009 with the DOW Jones Industrial Average (DJIA) sitting at about 6,500 and, with the exception of a temporary 15% pullback in 2011, the DJIA has moved consistently upward to above 18,000 this spring. Thus the market has increased an average of just over 18% per year from March 2009 until this spring. That is far above the market’s long-tern average annual return of about 10%.
Frankly, this makes me a bit nervous that we could have a major market correction sometime in the near future. How near? Who knows, it could be another 2-3 years before the market sees any serious pullback. What to do? Well, I can not tell anyone else what they should do, however, I can only tell you what I am doing.
I reviewed my equity allocation in January of this year just as I always do. I made some small “re-balancing” adjustments as my equity assets had increased again in 2014. But this spring I am making a few more adjustments. Since my wife and I have been retired over 4 years now, we have only 5 years of our original 10 year fixed income ladder remaining. So I reviewed our remaining years of our fixed income ladder to make sure it was still on track. If you are not familiar with the importance of fixed income ladders, you can read my 2012 post, https://www.retirementplanningsimplified.com/withdrawing-funds-in-retirement/, to find out more.
Since the stock market has been providing mostly above average returns in recent years my fear is, at some point, we are going to experience a few years of below average market returns or possibly negative returns as the market always works its way back to its long-term average return. But it is anyone’s guess as to when this may happen. So I have decided, since the market has increased so much in recent years, to sell the equivalent of 2 years worth of living expenses from stock equity and add these funds onto the end of our fixed income ladder extending our safe money bucket from 5 to 7 years. This will give us a couple more years in the event the markets experience a huge fall and do not recover very quickly. Remember the purpose of your first bucket (i.e., the safe money bucket) is to provide income so you do not have to draw funds from your equity assets while they are down in value.
I also reviewed all our retirement accounts which hold mostly stocks as our retirement accounts represent most of our risk money buckets to be tapped several years down the road after our safe money assets have been depleted. If you are not familiar with the “Buckets” strategy for tapping your assets in retirement, read my 2012 blog post where I describe the strategy in some detail. Click on this link hppt://www.retirementplanningsimplified.com/the-buckets-strategy/. I decided that if there is a market correction in the future, I want to be in a position to be able to make “re-balancing” adjustments to my retirement accounts to take advantage of lower equity prices. What is my plan to do this? Let me explain.
My wife and I each have a traditional and Roth retirement accounts as well as a Health Savings Account (HSA); six tax deferred accounts in all. According to our particular bucket strategy almost 100% of these tax deferred accounts are invested in stock index funds to provide income for the latter part of our retirement years. But I have made one change to all these accounts. Even though, according to our plan, these accounts are supposed to be invested 100% in stock funds, I am keeping 20% of the assets in each account in cash. I am doing this so that in each individual retirement account, I have 20% cash available to buy more equity if they become much lower in value.
This is also another way to indirectly dial back your target equity allocation as I do occasionally when stock valuations are significantly higher than normal as they are today. As an example, in our particular case, our target equity allocation has been 50%. By putting 20% of our current equity allocation in a cash account in each of our retirement accounts to be used for re-balancing, we have effectively lowered our overall target equity allocation to 40%.
The reason I make the 80/20 stock/cash split in each individual retirement account is because cash in one account cannot be used to buy stocks in another type account.
For those of you interested in our current travels, we are in Lipari, Italy in the Aeolian Islands off the north coast of Sicily. We have been here a couple weeks and it is a lovely place as the pictures below will attest.
Dena at the Costello in Lipari
A typical street in Lipari
Back side of Lipari with Panarea & Stromboli Islands in the distance
Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
Comments
No comments yet.
Sorry, the comment form is closed at this time.