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Portfolio Allocation – Part 1 March 11, 2007

Posted by pf in Portfolio Allocation.

Now I need to take a look at my portfolio to figure out if I’m on the right track to achieving my long term goals and that I’m comfortable with the level of risk. 

There an almost unlimited amount of calculators available to help you determine your asset allocations. Similarly, these calculators run the gambit in terms of their complexity – both in terms of the inputs you need to provide and the results you get in return.  For myself, I am looking for a tool that will tell me:

  • Whether or not the mix I choose will put me on the path to meeting my goals ($100k / year for 30 years beginning at age 62)
  • Not just the allocation between stocks, bonds, and cash (ex: 70/20/10), but also the mix within (ex: small, large, international, etc)

To accomplish this, I looked at a lot of asset allocations tools there were readily available online.  I fully expect that there will be a range of results.  My hope is that by using multiple tools, I will find a tendency or a clustering that occurs and seems to make sense.  As I mentioned above, it ran across the entire spectrum, from the simplistic (2 questions) to the more complex (10+ questions with various assumptions, etc).  Although sometimes each tool did not have all of the information I was seeking, in the aggregate, I think I got a good sense for some potential allocations.  Below are some of the tools I found useful and their results:

Oppenheimer Funds Asset Allocation Worksheet

This tool satisfied my second requirement (mix of investments), but did not really lend itself to helping to answer the first.  I won’t go into all the inputs (there were 11 questions), but the suggested allocation was a Long-Term Aggressive Portfolio Model with the following suggested allocations:

Domestic Equity 70%  
   Large-cap Growth   25%
   Large-cap Value   20%
   Mid-cap Equity   10%
   Small-cap Equity   15%
   Commodity Strategy Total Return  
International 30%  
   International Equity   25%
   Emerging Markets Equity   5%
Fixed Income  
   International Bonds  
   High Yield Bonds  
   Short-/Intmdt-term Bonds  

Vanguard Investor Questionnaire

This tool had similar questions and approach to the one from Oppenheimer, although it did get a bit more detailed with questions about my experiences with various investment mixes (ex: international, bonds, etc.) It also asked me about my currently portfolio mix.  Unfortunately, however, the suggested allocation was at a high level with 80% stocks and 20% bonds.  A nice extra was the model portfolio allocations where you could view historical performance under various allocations.  My impression is that Vanguard has a more detailed tool available…but only for clients.

Morningstar Asset Allocator

Although it did not require a lot of inputs, this tool was able to provide information to help me answer my two main questions.  It basically asked me:

  •  What my financial goal was (lump sum ($2M) or annual $ ($100k for 30 years)). 
  •  Current portfolio value (~$215,000)
  • Amount of monthly investments ($1700) 
  • How long I would make these investments (28 years).  

 As I have an account / portfolio setup at morningstar, it was also able to plug in my current portfolio allocations for use in its calculations.   I must say, the initial results using my current allocation were not overly impressive.   Using my assumptions above, I have a 39% chance of meeting my annual $ goal, but interestingly, a 58% chance of meeting my lump sum goal ($2M). 

What I find interesting about this is that I would have thought the % of success for either would be relatively similar given how I had calculated my long term goals earlier.  I’ll have to give this some thought. 

It now allows me to tinker with various allocations and change some of my other variables (ex: monthly investments and time until retirement) and see how it changes the output.  For example, by increasing my investments to $2000 / month, delaying retirement until 65, and having an asset mix of 10% bonds, 40% lg-cap, 25% sm/mid-cap and 25% international, the chances of achieving my annual goal increase to 62%. 

Alright, while I don’t think I have my answer yet, I am getting some information to think about:

  • My current portfolio has about 10% allocated to small/mid-caps.  Wondering if I need to increase my stake there?
  • Although I’m currently focused on asset allocation, the initial results are telling me that at my current pace, I may not achieve my financial goals…regardless of my allocation. 

Fortunately, there is a lot of information and tools out there about this.  I’ll do some more research and hopefully have some conclusions and action plans in part 2 of this exercise.  Any thoughts / input always welcome!



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