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Our Asset Allocation: Equities Breakdown

Ideal Net Worth Breakdown:

  • 70% Stock Funds (Retirement and taxable brokerage accounts). This post will focus on this class of investments.
  • 30% Real Estate/Alternate Assets (REITS, crowdfunding real estate, and oil and gas investing).
  • As we move toward 40 we may or may not add bond funds depending on the interest rate environment.

As a young investor my ideal asset allocation is to be invested 100% in equities (100% in stocks) inside and outside of our retirement and taxable accounts. This  post does not include our equity in businesses, a limited liability company (LLC) I manage, primary residence equity, or real estate syndication/private equity assets. This asset allocation breakdown is simply the percentage breakdown in the accounts listed below, also know as paper assets.

Our investment portfolio is comprised:

2 Roth IRA Accounts (Both at Vanguard)

1  401k Roth Option (Transamerica)

1 SIMPLE IRA (State Farm)

1 Brokerage Account (Vanguard)

What is Asset Allocation? According to Investopia, “Asset Allocation is an investment strategy that aims to balance risk and reward by appointing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.”

FFRocks Asset Allocation Breakdown

We own zero bonds and are invested in 100% equities (stocks & stock funds). The portfolio allocation uses mostly Vanguard mutual funds and exchange traded funds (ETFs). This is a very aggressive/high risk approach to investing and one that favors the investor still in their twenties. It is recommended that as you age you reduce your stock allocation and increase your bond percentage to have a less volatile ride and preserve your financial stash. Below is the asset allocation model I plan on following in such a low interest rate environment.

I am a strong believer that a young professional should generally be in at 100% stocks. Bonds are used in a portfolio to de-risk and play a defensive role when the market is not preforming well. To me the main risk of owning a large percentage of bonds is that over the long term your  IRR (internal rate of return) will suffer. Young people should embrace drops in the stock market, buying at a discount is always better than paying retail price!

This asset allocation I have laid out below basically covers the entire world with a tilt to value, small-cap US and International, emerging markets, and real estate. I expect large cap US funds to return 5-7% into the future and consistently pay quarterly dividends. The large tilt to small cap stocks will make the portfolio much more volatile,  while cranking up the return on investment by a percent or two. Value funds target companies that are on sale, these companies tend to have lower price to earnings ratios. The VTI fund holds about 20% of its assets in mid-cap companies, which is why you do not see any in my portfolio. The international markets have under preformed except for the International small-cap (VSS), which has been as solid as anything since its inception in 2008. I am more bullish on the US than international companies but at 30% of my overall portfolio I want to participate in the upside during the good years. During down years in certain counties and industries dividends will usually go up, which is good for quarterly/monthly cash flow.

Studies have also shown that having 10-20% in the real estate asset class can enhance your returns (Yale Endowment Fund). Many institutional investors and private equity funds love investing in physical properties. I very easily could use a one or two fund portfolio, but by adding in different asset classes that I have, I should be able to increase returns by 1%-2% over the portfolios lifetime. That increase does not seem like it would be worth the time, but over 50 years it can add hundred of thousand of dollars to your returns.

We own shares of thousands of different companies all around the world. Each one of the companies comprises a small portion of our portfolio and year after year we are deploying money into economies on every continent in every industry. I am a huge fan of index in this way, it keeps me from obsessing about which individual companies to invest and focused on my duties within our consulting firm. If an individual company goes bankrupt within one of the indexes then I then have thousands of other companies in all industries working harder to make up the difference. The company that goes bankrupt will then drop out of that index and be replaced by a company that is running more efficiently! When one of the indexes below goes to a larger percentage I sell some shares to get back to my ideal asset allocation and purchase other shares that have under preformed. This is known as dollar cost averaging and I do this once a year, which basically allows you to buy low and sell high.

The ticker symbols that make up a good portion of each of the asset classes we invest in are shown on the right. We own more funds than the ones listed below, but these are the majority.

Domestic Funds= 60% 

Large Cap US Stocks: 25% (VTI)

Large Cap Value US Stocks: 10% (VTV)

Small Cap US Stocks: 15% (VB)

Small Cap Value US Stocks: 10% (VBR)

International Funds= 30%

Developed International: 15% (VEA)

Small Cap International: 7% (VSS)

Emerging Markets: 8% (VWO)

US Real Estate= 10%

US Real Estate Investment Trust: 10% (VNQ)