Hi all,
I have some questions about making changes to my portfolio. Details below:
Emergency Fund: Yes, 6 months of expenses in HYSA.
Debt: Mortgage that will be paid off in ~ 3 years
Tax Filing Status: Married Filing Jointly
Age: mid 30s
Desired Asset Allocation: 85% Stocks / 15% Bonds
Desired International Allocation: 30% of Stocks
Current Assets (Approx. $1.4M Portfolio) Outside of Emergency Fund:
- 70% US Total Stock Market (VTI)
- 30% International Total Stock Market (VXUS)
I know that many people will poo-poo the 100% equity exposure. I've been investing every month since I opened a Roth IRA at age 18 and I think I have the disposition for taking risk. As you'll see below, my personal risk appetite has been changed a bit by family dynamics.
The Problem: I work in the tech industry. My salary, bonuses, and career trajectory are heavily correlated with the success of US Large-Cap Tech. As I enter my final 10-year "sprint" toward early retirement (will likely have a passion project that may or may not make money after I retire), I am concerned about two specific risks:
- Lost Decade Risk: If Large-Cap Tech enters a period of stagnation similar to 2000–2010, my human capital and my current portfolio would be impacted at the same time.
- Sequence of Returns Risk: Having already accumulated a substantial portfolio (at least to me!), I want to protect against a major backslide while I'm still in my peak earning years. I have young children which is making me feel a bit more risk adverse.
Proposed New Allocation: I am considering moving from my current "Pure Equity" 70/30 split to a diversified 85/15 split with a Small-Cap Value (SCV) tilt to hedge my tech-heavy career:
- 45% US Total Stock Market (VTI)
- 15% US Small-Cap Value (AVUV or VIOV)
- 20% International Total Stock Market (VXUS)
- 5% International Small-Cap Value (AVDV)
- 15% Intermediate Treasuries (VGIT)
Note on SCV: I know that someone will bring up the recent underperformance of SCV. I know about this. However, I am specifically looking to exploit the "Rebalancing Bonus" as described by William Bernstein. My current 70/30 Total Market split has high correlation (approx. 0.88), leaving little "volatility to harvest." By adding Small-Cap Value (which has historically lower correlation to Large-Cap Tech) and Intermediate Treasuries, I’m creating a portfolio of "jagged" assets that I can rebalance. I’m betting that the systematic "buy low, sell high" process will provide a small but consistent tailwind that offsets the higher expense ratios of the factor funds.
Questions for You All:
- Tech Hedge: For those in tech, do you find the SCV tilt a sufficient "career insurance" policy, or is it just adding unnecessary complexity?
- Bond Ballast: Is 15% in Intermediate Treasuries sufficient to prevent a "catastrophic backslide" for a $1M+ portfolio 10 years out, or should I be looking at a higher fixed-income percentage?
- Simplicity vs. Factors: Am I overthinking this? Should I just stay the course with the 3-fund and just add more bonds to lower my beta?
1) No, and there is no career insurance available
2) what is catastrophic? You can easily do the math, but a 35-50% drop in US equities still results in a huge drop at 15% bonds. You can't go much higher though. Even 25% and the potential drop is still huge.
3 yes, you're over thinking it
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You're in your mid 30s. Stocks always rebound. Why miss out on 20-30 years of compounding?
I don’t think you need to add bonds until you are within 5 years or so of early retirement.
Yes, adding small value is a good idea especially working in tech IMO. I’d prioritize US small value over international personally (most of the difference between US and international equities is explained by 1) value factor and 2) FX). Yes, value has underperformed the last decade but there have been many decades it outperformed growth and it’s not possible to predict when value vs growth will go in and out of favor.
The general idea is valid, but at the end of the day, if you still need to work, no portfolio tilt is going to make up for the loss of earning (and therefore saving) capacity.
That said, I do have serious concerns about the concentration of the US market into a handful of tech mega-caps even if I manage to stay employed in tech until I hit FI. So, I have tilted my portfolio away from US large-cap growth by adding weight in mid-cap, small-cap, developed, emerging and value.
I'd pick the minimal bond allocation that would help prevent you from panic selling during a 50% equity downturn. Whether its 0% or 20% isn't going to move the needle more than helping prevent behavior mistakes.
This is more of an investing question than a HENRY question. But I also work in tech and also worry about tech concentration in the stock indices since most of the growth of the S&P has come from a few tech companies.
I personally have no interest in owning bonds so I'm looking for investments that are good long term growth investments but which are not correlated or at least loosely correlated to tech companies and the US economy and USD. These are hard to find because 99% of the headlines and analysis are for those companies. I prefer to buy individual stocks rather than ETF's but I own a few of the top holdings of VXUS for example.
At the same time, the tech companies are dominating the economy and the indices because they are performing very well and consuming a lot of industries, a trend which isn't likely to change anytime soon. There are some tech stocks that I have no interest in owning such as TSLA or PLTR but others like GOOG and AMZN look like good long term holdings to me.
I personally have never seen the point of "bond ballast" in a portfolio. These days bonds will earn 3-4%, the same as cash, and holding these for a long period just means that your overall returns will be lower. Yes this will be nice to own in a downturn but it's far more likely that the markets will go up than down in a given year. I hold a little bit of cash so that I can opportunistically make investments when there is a downturn but not much besides that.
Your plan is fine.
VT + VTI + GOVT (or BND) and call it a day.
GOVT is great for high earners in high tax states. You can look into muni funds that are specific to your state as well.
https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy#:~:text=Alternatively%2C%20John%20Bogle%20recommends%20%22roughly,with%20high%20stock%20market%20allocations.
Aim for roughly your age as a % of your portfolio in bonds.
I have significant capital gains in my equity funds, so I’ll be putting new cash into bond funds to rebalance and avoid the tax bill