Updated Asset Allocation
Recently I got a question from a reader who was nearing retirement about fixed income ladders. Our back and forth correspondence inevitably got into asset allocation. Since I had recently fine-tuned our own asset allocation, I thought I might present here how our financial assets are currently positioned.
The table below shows each of the asset classes we are invested in and what percent of our assets are invested in each category.
|
Asset Class |
% Allocation |
Investment Vehicle |
| Equities: |
43.5% |
|
| Large Cap Stocks |
20% |
Individual Stocks |
| Mid-Cap Value Stocks |
7.5% |
VOE |
| Small Cap Value Stocks |
7.5% |
VBR |
| Emerging Market Stocks |
8.5% |
VWO |
| Insurance: |
7% |
|
| Precious Metals |
6% |
Bullion, GLD, SLV |
| Short Position (20-Year Bonds) |
1% |
TBT |
| Covered Call Options |
6% |
Individual Stocks |
| Fixed Income: |
43.5% |
|
| Short-Term Bonds |
14.5% |
BSV |
| Cash/Cash Equivalents |
29% |
N/A |
Our target equity allocation is 43.5%. I use Vanguard ETFs for the mid-cap, small cap, and emerging market stock allocations due to their low costs. I use individual stocks for our large cap stock allocation. The reason I invest our large cap stock allocation in individual stocks is because these funds are outside our retirement accounts. This benefits us in two ways. First, it allows us to control our capital gains taxes, Secondly, in our particular tax situation, the dividends these stocks generate are taxed at 0% at the federal level.
Our insurance against currency devaluation and economic chaos (i.e., precious metals) is 6%. The 1% short position (a bond fund ETF that shorts 20-year bonds) is to help protect the value of our short-term bond funds from rising interest rates.
The 6% dedicated to the category named “Covered Call Options” is funds that I use to generate income from selling covered calls. Although these funds are for generating income, stocks are the underlying asset to perform these trades, so the risk for these assets is more than holding fixed income assets. However, I only sell options on very stable dividend paying stocks such as MSFT, PG, JNJ, XOM, etc. The option fees generated amount to an additional annual return of about 15% to 20% in addition to the dividend that each stock pays. Options trading is just something I like to do. It is not investing, so I do not recommend this strategy to anyone who is just an investor.
Some may wonder why we have such a large cash position. The cash is held in CDs and money market accounts which funds our 8-year bond ladder. This is what we will live on for the next 8 years of retirement. The 43.5% assets that are invested in equities will fund the following 24 years of retirement. Hopefully 32 years will be all we need to worry about.
How did I come up with the different percentages for each equity class? Through a detailed process which takes into account inflation, average returns for each equity type, and calculating the Net Present Value (NPV) of each equity class, I determined how much needs to be invested in each class today to generate the assets we will need to live on in the future. Perhaps I will discuss this in more detail in a future post.
If anyone is wondering whether I made any changes to our asset allocations because of the political antics going on in our nation’s capital, the answer is no. Well, actually, that is not 100% true. The nonsense in Washington did finally motivate me to sell some of my paper gold (i.e., GLD) and replace it with gold coins (i.e., real gold).
Everyone in Washington is all worried about raising the DEBT CEILING. The DEBT CEILING is not the problem. The problem is the DEBT!
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Nice article. I used to sell CC’s but I discovered naked puts and have found them to be much easier, more predictable. My method is to sell deep OTM puts on index ETFs looking for 1-2 percent per month, depending on the VIX. By using index ETFs I diversify, reduce risk and avoid the need to research companies. They lie anyway
Check near month put premiums on SSO, UWM, QLD. Feeling good about the market? Then try TNA, UPRO or TQQQ.
Most consider a naked put to be an artificial CC.
BTW, no leverage Is best and safest. Just maintain cash balance to cover. Recently saw two new books on this but I have been doing puts on Index ETFs for cash for 4 years.
See you in Hopetown this year?
Dave