In uncertain times, let me share with you my recommended net worth allocation by age and work experience. A good net worth allocation is important to weather the consistent financial storms that seem to come every 5-10 years. The last thing you want is to have a net worth allocation mismatch with your risk tolerance and objectives.
To start, the median 401(k) is hovering only around $100,000. The average 401(k) balance at retirement age 60 is only around $230,000. Therefore, many Americans will have a difficult time retiring comfortably. Let’s not even talk about those Americans without a tax-advantageous retirement plan.
Just do the math yourself. Add the average Social Security payment per person of ~$18,000 a year to a 4% withdrawal rate on $230,000. You get $27,200 a year to live happily ever after until you die. We need to do more to boost our wealth.
Can you imagine spending almost 40 years of your life working just to live off minimum wage in retirement? At least, hopefully, you were able to live it up during your working years.
Blowing lots of money is OK if you expect to live with financial uncertainty every day when you’re old. However, the better way to do things is to smooth out your spending across your expected life expectancy. This way, you can reduce stress and live a much steadier lifestyle.
A Proper Asset Allocation Is Important
We’ve talked in detail about the proper asset allocation of stocks and bonds by age. If you had 100% of your investment allocation in stocks before 2008-2009, and wanted to retire by 2010, well then you are out of luck. You’ll be forced to work for many more years.
To find out how many more years you would be forced to work, calculate how much you lost. Equate your loss to how many years it took you to save the value of the loss. Now expect to work that many more years of your life.
Know your true risk tolerance with Financial SEER. You must quantify your risk tolerance in terms of potential time lost. After all, time is our most precious commodity.
The Average American Is Not Diversified Enough
Although I love real estate, the average American is either too heavy into real estate or has poor net worth diversification. The lack of diversification is because most of the average American’s net worth is tied up in his or her primary residence.
Let’s take a look at what happened during the last financial crisis. By 2010, the median net worth plunged by 39% to $77,300 from a high of $126,400 in 2007. Meanwhile, the median home equity dropped from $110,000 to $75,000.
In other words, the median American’s net worth consisted almost entirely of home equity. No wonder why Americans were in such great pain between 2008 – 2010.
Take a look at this chart below. It highlights how a record high 30% of American households have no wealth outside their primary residence. That’s not good enough. Building more wealth outside your primary residence is a must.
Anybody who has lived through the 1997 Russian Ruble crisis, the 2000 internet bubble, and 2006 – 2010 housing correction probably has a good portion of their net worth in CDs, bonds, and money markets because they’ve been burned so many times before.
With tremendous uncertainty returning in the new decade, figuring out a proper net worth allocation is more important than ever before.
Figuring Out The Numbers
The question we must all ask ourselves is, “What is the right net worth allocation to allow for the most comfortable financial growth?” There is no easy answer to this question as everybody is of different age, intelligence, work ethic, and risk tolerance.
I will attempt to address this question based on what has worked for me so far. I believe these net worth frameworks can help anybody serious about building enduring financial wealth for the long run. You’ve always got to do what works best for you.
I’ve spent over 30 hours writing and revising this post over the years in hopes that every Financial Samurai reader can build a rock steady net worth portfolio. The goal is to make money in good times and lose less money in bad times.
Further, I’m always looking for more input from the community to make the recommended net worth allocation figures better.
Before we look at the charts, let’s go through the mental framework for investing and building wealth.
Mental Framework For The Recommended Net Worth Allocation
1) You are not smarter than the market
I don’t care how much you’ve been able to outperform the stock market over the years with your $10,000 stock trading account. The fact of the matter is your performance will normalize over the medium-to-long run. As you grow your assets to the hundreds of thousands or millions of dollars, you aren’t going to be whipping around your capital as easily as before. Your risk tolerance will change.
The most dangerous person is one who has only experienced a bull market. They think they are invincible, confusing a bull market with their brains until the next inevitable downturn comes and wipes them out.
Get it in your head you will lose money at some point. There is no risk-less investment unless you are putting less than $250,000 in CDs, money markets, or buying US treasuries.
Take a look at the active versus passive equity fund performance yourself. It is shocking how many professional money managers underperform their respective indices. The below chart shows that 81%+ of equity mutual funds underperformed over the past 10 years.
2) You are not a financial professional
Even if you were a financial professional, your investment returns will likely underperform. I’ve been investing since 1995, and still regularly blow myself up. As a result, I’ve followed a net worth asset allocation model to minimize potential damage.
Know your expertise. If you are a software engineer, your expertise is in creating online programs not giving investment advice. If you are a doctor, your expertise may be in giving a patient a catheter, not going all in on real estate syndication.
It would be nice to know the future. If I did, I’d probably be on a mega yacht in the South of France getting a massage right now! The only thing I can do is come up with rational expectations, and invest accordingly. If you can’t come up with a coherent 5-minute presentation to a loved one why you are investing the way you are, you might as well be throwing darts.
3) You only have at most 110 years to live
Statistics say the median life expectancy is around 82-85 years old. Less than 0.1% of the 6 billion people on earth live past 110 years old. As a result, you must plan for roughly 80-90 years of life after secondary school. The good thing is you have a time frame to plan for your financial well being. The bad thing is you might die too early or live too long.
It’s better to plan for a longer retirement and have money left over to give to others than come up short. This is why managing your finances consistently is so important. You need to predict the future, then spend, save, and earn accordingly.
4) Your risk tolerance will change over time.
When you’ve only got $20,000 to your name and you’re 25 years old, your risk tolerance is likely going to be higher than when you have a net worth of $2 million and are five years away from retirement at 60. When you’re young, you naively think you can work at your same job for years. The feeling of invincibility is incredible until something happens.
Do not forget to give yourself a thorough financial assessment at least once a year to make sure your net worth allocation is appropriately dispersed. Ignoring your finances is not the way to financial prosperity. If you gamble with your finances during the latter stages of your life, you will have a much lower chance of recovering.
5) Black swan events happen all the time
Hello global pandemic! A black swan is supposed to be rare, but if you’ve been paying attention for the past couple decades, incredible financial disruption happens all the time.
Nobody knows when the next panic induced correction will incur. When Armageddon arrives, practically everything gets crushed which is not guaranteed by the government. It’s important to always have a portion of your net worth in risk-free assets.
Further, you should consider investing your time and money in things that you can control. If you want evidence of people not knowing what they are talking about, just turn on the TV. Watch stations trot out bullish pundits when the markets are going up and bearish pundits when the markets are going down.
Not many people could have predicted a coronavirus pandemic would shutdown the entire global economy for at least a quarter and cause tens of millions of Americans to lose their jobs. Always be prepared for a black swan event, especially if you’ve already reached financial independence.
6) Bull markets can make you incredibly rich
Not everyone got crushed in the dot com bubble. Plenty of people sold their Webvan stock at the top! Bull markets generally last in 5-10-year cycles. The direction is almost always up and to the right over a long enough time period.
It often times feels worse missing out on a huge gain than losing money. We call this investing FOMO. Therefore, it’s important to have at least half of your net worth exposed to a potential bull market. The power of inflation cannot be underestimated. If you are a price taker without inflating assets, you are losing.
The issue with getting rich is that you must take extra risk. Even if the NASDAQ closes up 42%, like it did in 2020, you aren’t richer if everybody is up 42%. To get rich, you must outperform various financial benchmarks.
Recommended Net Worth Allocation By Age: Base Case
I’m now going to offer up three net worth allocation frameworks to follow. Let’s start with the Base Case recommended net worth allocation.
Base Case Assumptions
* All percentages are based off a positive net worth. If you have student loans right out of school, or a negative net worth due to negative equity, use these charts for the asset side of the balance sheet equation. Systematically look to reduce non-mortgage debt as you build your wealth building assets.
* Stocks include individual stocks, index funds, mutual funds, ETFs, structured notes. Bonds include government treasuries, corporate bonds, municipal bonds, high yield bonds, and TIPs.
* For the first eight years of work, the majority of your net worth is in stocks and risk free assets such as CDs, higher yielding online savings accounts, and money market funds.
* By the age of 30, you should have some idea of where you want to live. You should at least know what you want to do for a living. With this confidence, you shift a major portion of your net worth into buying your first home.
* One of your financial goals should be to get neutral real estate as soon as you know where you want to live and what you want to do. The return on rent is always -100%. After 40 years of renting, you have nothing to pass on. Nor do you have a place to live rent free in retirement. As long as the government is subsidizing homeownership, and as long as people don’t have the discipline to save and invest the difference, renting is discouraged if you can afford to own.
* Risk-free assets also start off high given you’ve first got to save money to build a financial foundation. It’s not wise to dump all your savings in the stock market if you don’t know what you’re doing. Gradually leg in the more comfortable you become with investing. Stocks have proven to be the most straightforward way to grow one’s net worth over the long run. You’re also not that interested in bonds because your risk tolerance is high and interest rates are so low. The Risk Free column can also be called the “Emergency Fund” column if you like.
* If you just don’t want to own property, then you should consider gaining real estate exposure through REITs or real estate crowdfunding. Real estate crowdfunding allows you to invest in cheaper, higher yielding real estate across America.
* Alternative investments stay at 0%. It’s already hard enough to get people to save more than 20% of their income and buy a house. To then ask to invest in stocks and buy alternative investments may be too much.
* The ultimate goal is to have a roughly equal balance mix between stocks, bonds, and real estate. Have a 10% risk free buffer in case the world comes to an end. In a difficult economic environment, stocks and real estate will decline (60% of net worth). However, at least 30% of your net worth (bonds) will increase, while your 10% emergency fund remains intact.
Recommended Net Worth Allocation: New Life
The New Life framework changes things up after around 40. You’ve already experienced the normal way of living for 22 years after high school. You now want to experience a “new life” in the second half.
New Life Assumptions
* After five years of savings, you purchase your first property and reduce your Risk-Free percentage down to 10% from 30%. If you own the property you live in, you are neutral real estate. The only way you can make money in real estate is if you buy more than one property. If you are a renter, you are short real estate.
* After 13 years of saving and investing, your net worth increases handsomely. The decline in stocks as a percentage of net worth doesn’t mean a decline in the value of your stock portfolio. Rather, due to the increase in your overall net worth, the absolute value of your stock portion increases despite a decrease in the percentage of total.
* With a larger net worth, you invest some of your savings into Alternative asset classes by age 35. Alternative asset classes may include: private equity, venture capital / angel investing, or starting your own company. You’ve got stocks, bonds, and real estate down pat. With free liquidity, you dable into the unknown because you never want to look back and say, “what if.”
* After the age of 40, you’re looking for a more balanced mix in your net worth. As a result, you purposefully invest less in stocks and more into bonds and alternative investments. Your real estate equity also holds steady, market willing.
* Starting around age 40, you’re also wondering what else is there to life. You’re getting burned out doing the same old thing for almost 20 years. Maybe you negotiate a severance to start your own business. Maybe you just take a long sabbatical to do something new. You are anxious to start a new, more exciting life with the only one you’ve got.
* By the time you’re 60, you have a wonderful net worth balance that is practically implosion proof. Your Risk-Free percentage increases along with your Bond percentage. You enjoy the feeling of stability and security as you plan to live until 110 years old.
Recommended Net Worth Allocation: Self-Belief
The Self-Belief framework is one where you bet more on yourself. You believe the traditional way of building wealth is getting outdated. However, you still diligently build your financial foundation in your 20s. The 20s is when you’re learning so that you can really start earning in your 30s and beyond.
Self-Belief Assumptions
* The Self-Belief framework assumes you have better control your own financial future than other investments. When you invest in stocks, bonds, and real estate, you are depending on someone else and favorable macro conditions to make you money. When you invest in You, you believe you have a superior ability to build wealth.
* The Alternative column’s name changes to the X Factor. The X Factor assumes you finally start your own business or side venture. It is your X Factor which could really boost your wealth.
* You don’t have to own real estate in the Self-Belief framework given you’d rather use the downpayment capital on your own business. Feel free to increase the X Factor column percentage by the Real Estate column percentage if this better fits your goals.
* After decades of building your X Factor, you take some risk off the table. You increase your Risk-Free percentage. By this time, your net worth has grown large enough where you can live off returns as low as 2-4%.
* If you are wildly successful in building your own business, the X Factor column can easily dwarf all other columns. See the below chart from my post, Net Worth Composition By Levels Of Wealth. Notice how the X Factor, the dark blue portion grows as one gets wealthier.
The Proper Net Worth Is Well Diversified
Financial returns are not guaranteed. As a result, it’s best to keep a diversified net worth mix that can withstand the hits of severe economic downturns, while benefitting from multi-year bull runs.
You are free to follow my recommended net worth allocation guide closely or not at all. Only you know your financial objectives and your ability to withstand shocks the best.
When it comes to building wealth, I encourage everyone to focus on a realistic worst case scenario where all assets except for the risk-free portion tanks by 30% – 50%. This way, you’ve addressed your biggest fears so you can move on with your quest.
Imagining a best case scenario is fine as it’s always good to dream. There just has to be a balance with your wealth building approach as to not come up short when you can no longer work.
I’m confident that if you follow any one of these net worth allocation frameworks, you will achieve an above average net worth over time.
Remember, the average American has ~90% of their ~$100,000 net worth in their primary residence. This is dangerous. It means the average American i not actively investing in other asset classes. I would limit real estate to no more than 50% of your net worth and ideally 35% of your net worth.
Perhaps my recommended net worth allocation guides are too conservative. Or maybe they are too aggressive. Whatever your beliefs, you must at least come up with your own net worth allocation framework to follow throughout your life. Just remember to enjoy the journey along the way.
Net Worth Allocation Tool
The easiest way to monitor your net worth allocation is with Personal Capital. It is a free online tool that lets you not only track your net worth allocation, but track your cash flow, and investment as well.
My favorite feature is the Retirement Planning Calculator that let’s you forecast your future cash flow. If your forecast is light, you can make adjustments well in advance. Don’t gamble with your financial future.
I’ve used Personal Capital to track my net worth since 2012. It’s the best free tool on the web.
Hello Everyone! I’m 22 years old, and I’m trying to figure out how to allocate my assets moving forward. Does anyone know if an emergency fund in a high yield savings account, counts towards the “Risk Free” column? Or since it is strictly for emergencies, should it be ignored when looking at asset allocation?
Yes high yield savings is risk-free category.
Love your posts, and have read this specific one several times in the past. I realize your answer will need to have tons of asterisks associated with it, but am just curious – in the current US market, and pursuant to your note in this article on Bull Markets…would you generally recommend that people move money from stocks into bonds to ride out potential dips coming as there is a leveling from historic highs? Or would you leave money in current stock-based allocations? Total timeline/horizon before tapping into funds is 20+ years.. just trying to figure out how to juggle investments in this odd time.
Great articles Sam and thought provoking information, thank you. Curious about a statement above seemed to indicate equity in a primary residence was excluded in the model. While I agree that’s good conservative planning, home equity tax free profits have been an important, perhaps lucky, part of my growth. Bought home in San Jose in ‘09 for $560k, sold in ‘17 for $975k. This created a meaningful tax free profit to use for my next home purchase in Walnut Creek for $1.39 now valued $1.75. We have children raising in this home so *unfortunately* will likely exceed the $500k profit but are considering this when looking at primary residence planning. What are your thoughts on primary residence equity planning?
Feel free to count your home equity as part of your net worth. Just be conservative with the calculation.
Ive used Personal Capital for a couple years, as a suggestion from this site. I cannot express the value it brings as it really shows you what you have and your direction. The ability to link all of your assets and liabilities along with you spending has helped me cut unnecessary costs and dial in my direction.
I love all your posts Sam, they have truly helped me get closer to retirement.
Hi Gary, great to hear you’ve made so much progress! Let’s all pray that the coronavirus pandemic gets under control and that everything will get better over time. It’s more important than ever to stay on top of our finances!
Thanks for this article, I like breakdowns like this. I’m not sure if I agree for myself personally, particularly in this environment. I’m self-employed, I have only been investing since last summer since I learned about it. Povertyish (1-2x/fed limit- this year I’m at least 4x!!) until this past year, no regrets tho and a great lifestyle. I’ve gone from $0 net worth to $29k since 10/19 (it’s 7/20 now) so I’m pretty stoked.
I started late and feel ok to take more risk having a higher % of allocation in stocks, at least while I’m working on growth. My CoL is very low.
I don’t feel super confident in bonds in this current market. I also feel like keeping liquidity is good. I have my IRA from last year fully in ETF’s, about half foreign half US (small, large, emerging, REITs etc). I found out it wasn’t too late to open a SEP IRA for last year so I’ve got that 20% invested in gold and silver instead of bonds right now (in total, it’s about 10% of my total retirement accounts rn). Considering Mix of physical (mostly) and miners stocks/ETFs.
Also there’s a part of me that feels like I can get a higher RoR outside the market- my current plan is to keep cash on hand until I fund the retirement accounts each year. I have been doing bank bonuses for some years, and I’ve recently accumulated enough cash to start with Kickfurther, hoping to do some other opportunities like Groundfloor (I’ve only tiny money there, it’s been good so far), CrowdStreet, or even the Vinovest. The crowdfunding opportunities look good to me, more ability to choose? My REIT ETF has done terrible this year (still down 23%, yikes) so I’m hesitant on only it as a percentage of my RE. I live in my bf’s place and we are trending towards the M word, and he doesn’t want me to be responsible for paying off his mortgage (yes, I do contribute equally to household expenses and tiny amt rent. He’s close to paying it off anyway). So I don’t expect to have any of my net worth in any physical RE that I live in. I’d also like to have a small amount invested in crypto (<5%).
Also wondering if it's worth it or not to pay the extra $ to set up something with mysolo401k etc to include alternative investments, or to just keep with Schwab doing their version, and keep the alternatives in taxable accounts. We're not talking massive moneys but I guess every bit counts?
I’ve always wondered about this statement (seen similar in other sites regarding 401k balances). “To start, the median 401(k) is hovering only around $100,000. The average 401(k) balance at retirement age 60 is only around $230,000. ”
Is this the combined 401k of a person across all accounts or just each account? A person changes jobs during his career and usually has multiple 401k accounts (or may have converted to an IRA). So wouldn’t his 401k savings (including those converted to IRA) actually be more than what this suggests? Thank you.
That is a good point. The average and median balances are based on Fidelity and Vanguard median and average balances per account.
So yes, the likely combined 401(k) balance per person is probably a little bit higher. However, I think most people will transfer the 401(k) to the new employer. For those who do not, they will roll it over to a IRA.
Since I started this site in 2009, I’ve received a lot of pushback from my 401(k) by age balance post, saying the numbers are too aggressive. But many of the same people 5 to 10 years later have said actually, they are just right.
What’s your situation?
The assumption that “most people rollover their 401(k) to their new employer” is a bit presumptuous.
I think there’s more likely three way even mix of (a) people who roll it over to the new employer, (b) people who roll it over to an self-directed IRA and (c) the people who have no clue and just leave it at the old employer because they can’t be bothered with a little paperwork.
To me the most adventitious is to do the self-directed IRA at a discount broker – so many more investment options available to insure your well-balanced portfolio.
It just makes more sense in the long run.
I’m glad you mentioned REITs. They’re especially useful for busy parents who want to get into real estate but don’t have the bandwidth to manage rental properties with a full-time job.
I’m not sure about the allocations. The stock allocation seem to be a bit conservative especially since people are living longer.
Also, historically downturns last only a couple of years then the market recovers (i.e., there are more good years than bad by far). So as long as people can stomach a couple of years of major losses, it seems like their portfolio should be fine.
REITs are a good alternative, however, REITs proved to be MORe volatile than stocks during the 1Q2020 downturn, so folks need to beware.
Do you consider the home equity the RE portion of your net worth or the full value of the home regardless of mortgage?
Yes. Although it’s good to value the equity conservatively.
Hi Sam,
I’m 51 and am very real estate heavy with just over $1.2 million in equity from 4 rentals and my primary home and have 200K in cash. I retired from the Army 5 years ago and receive two pensions (Army and VA disability, which is tax free) the two total 7K each month. I just started a Roth which I really will never have to touch with the pensions I receive each month. The rentals are all single families and always rent easily and total cash flow is $1500 a month in total. I live just outside Seattle. I am comfortable with them but I have been thinking of selling 1 or 2 in order to pay off 2. Any suggestions/advice is greatly appreciated.
Thank you
Big Sarge,
If you end up selling, let me know. I live outside Seattle as well.
MI,
Lol, you sound like a younger version of me!
I know if I sell, I will most likely regret it 3-5 years from now. As you know everybody around here is pushing south for affordability and the homes are in Yelm, perfect location for the military.
Thank you for your service Big Sarge. I’ve been hearing that the “rent to own” contracts allow for the owner to take a much larger deposit upfront and then rent it out for high prices. Typically, 90% of the time the renter doesn’t end up buying.
Hey Robert,
Thank you, it’s much appreciated. I have no idea about the rent to own subject. I have never looked into it and more than likely never will. I have property management. As I was promoted up through the senior levels I learned a very important aspect of leadership and business. “Keep one person between you and the task”. Property management is the way to go, especially when dealing w/multiple properties.
What’s your overall net worth?
If I had $1.2 million in real estate equity, my goal would be to have a total net worth of between $3 to 4 million.
Then again, you’ve got to do what’s most comfortable for you. As you pay off your real estate, the leverage decreases, and so does the risk.
Sam,
My overall net worth is 1.5 million. I know it’s more because of my life time pension, but it’s hard to factor in and put a value on it as the pension is for life. Like you I love real estate. I know I’m over leveraged on it, but I have a big cash reserve and made it through the real estate bust of 2007-2009 w/no issues of vacant rentals. I just started a Roth for both myself and wife that we will max out each month and won’t ever have o tap in to but will begin at mandatory age 70.
This is an excellent article for people to pay attention to regardless of their financial goals. Finding your net worth, keeping track of it, thats one thing. The underlying asset allocation and it’s actual risk tolerance is another. Warren Buffet once said, never lose money. This is very true the more you age where it becomes increasingly difficult to make that money back.
Really great insights in this post thanks! I’ve gone into savings mode for the rest of the year. My goal is to save up some cash to slowly deploy over the next 6-12 months, declutter my house, reuse as many things as I can, and only buy things that I need or that my kids will benefit from. The one minor snag is most of the donation places are still shut down so I’ve got boxes piling up. But it’s gonna be a great feeling when I can finally get them all out.
It always feels great to save up cash during times of uncertainty!
It also feels great to pay down mortgage debt and any type of debt there is.
We can almost treat this time. Like a game. Let’s make it fun and at the very least!
I just turned 50 years old expat living and working outside of USA, $2M in US real-estate investments fetching me cashflow of $5K per month. Saved $450K thru 401k+IRA mostly in 2030 vanguard retirement mutual funds. Zero debt. One kid starting college another two in middle school.
Should I be investing in alternative, stock and bonds? or stick to real-estate? I can save upto $5 to $10K per month depending on my work. I plan to work another 5 to 8 years. I spend over 20K per year on international vacations with family before kids go to college which I would like to continue.
It’s really what you’re most comfortable with. Stocks and bonds provide more passive income. However, stocks are much more volatile.
I think you’d enjoy these posts:
Ranking The Best Passive Income Investments
Why Real Estate Will Always Be More Attractive Than Stocks
The Proper Asset Allocation Of Stocks And Bonds By Age
I will share my situation. Nearly 30 years old with net worth of 110k.
I have 30k in stocks and 80k in cash. I intend to keep at least 50k as an emergency buffer.
I want to double exposure in stocks but seems not ideal in the current market. It may take a while, I thought of adding 1k every month, and more if market drops.
Maybe I will start to think about owning a house/appartment but right now, renting is the way to go for my situation. I also considered buying reverse mortgages as a “cheaper” way to have ownsership but I´m not an expert.
One aspiration would be, as others wrote as well, is to own several income-producing properties to retire early.
Newkid,
Did you take advantage of the stock market dip in Feb/March 2020? If so, that would have been an opportunity.
I retired 20 years ago at age 42. I own triple net commercial real estate and it’s paid the bills and allowed me to save other funds. In addition to giving me a good income, it’s gone up in value more than I expected which has caused my portfolio to be a bit lopsided:
Real Estate 80%
Stock 7%
Bonds 1%
Cash 12%
The stocks, bonds and cash are $600K.
I’ve been thinking of selling some of the real estate and doing a 1031 into DSTs to avoid tax and add diversification, but with the great cash flow, it’s just easier to do nothing.
i retired at the same age as you, but followed a different path to financial security… your approach appears to work well for you (especially if your real estate generates income through housing rentals – there will always be a need for housing no matter what market conditions exist [it’s local government that can make being a landlord unprofitable])…
we all have comfort levels… some folks need to spend $50,000 a month, while others are quite happy with $50,000 per year…
we’re happy to have no debt, enough money for any financial hardship, a roof over our heads, food on the table, but most important – good health… we swim 1200 meters in the morning, walk several miles each day, cook healthy and nutritious meals, don’t smoke, and tipple moderately… life is good!
it’s heartening to read here of folks doing well for themselves and exhibiting financial common sense
That is a very sensible approach to live off rental income. But I imagine the beginning might have been difficult.
My plan would be: pay rent and, (pay mortgage+rent property). That way, the mortgage would be paid with the rent and I may be able to go after the next property.
Worst case scenario: I would pay rent and mortgage. That´s why I would need spare cash.
Enjoy life!
Sam, I am 64 and retired. I will be selling the family house next Spring and will buy a house in a lower property tax location. After selling the house, my net worth will be $1.7 million.
How much house would you say I can afford?
I’m assuming my new house will be my last. I’m just looking for some directional input…
From experience, other advisers would just use maths on this one.
How much do you need to live the rest of your life till say 100?
Make sure you have access to that figure.
Balance goes on the house as a maximum.
Enjoy retirement :)
Chuck- I’m always interested in that question too!
From articles/comments that I’ve read before on Sam’s blog from past readers…I think 15-20% of your total net worth should be on your final housing. If you want to sleep at night….no mortgage obviously. So if your net worth is $1.7M- I’d only buy a $250-340K home. I’m curious to see what others think…
Sam- your advice?
Hello!
I am a young 28 year old attorney, and I have been working only for 2 years. Can you explain on what bases you would recommend following the base allocation or the new life allocation?
My net worth is currently about 71k (I payed my small student loan right away after I started working as first priority, and saved as a result more than $5,000).
This is my current allocation, and I would like to know if I should follow the base or the new life guidelines:
36k low risk (cd/yis, etc.) this is high as I want to save cash as a safety net and in wait for a market downturn.
7,5k real estate crowfunding
16,2k in Stocks
2k P2P lending
1,5k alternative investments
8k in 401k and ROTH IRA (I know this is low, my first job offered 401k and I was making contributions, but then I changed jobs and I could not make contributions anymore, then I got married and was not eligible anymore for Roth IRA contributions).
Thank you! I am from Europe, not from the US, but I learned much about this system and importance of savings through your website!
VS,
FinSam’s allocations are conservative for my taste, but they provide more stability and security in a volatile market. I would say invest based on your risk tolerance and invest what you can afford to lose. Here in the U.S. stocks, bonds, and real estate are three of the biggest investment vehicle investor rely on to achieve millionaire status and/or FI.
$27k per year isn’t enough? Where the hell do you plan to retire? Unless you are still renting or paying a mortgage at retirement age, that’s plenty to live comfortably, not in luxury, but you won’t be suffering either.
So, 27K per year? This is a VERY personal thing, this number.
My number is closer to 27K per month, not per year. Seriously. I have zero debt, and if I spend 27K per month, I’ll still leave millions to charity when I croak. I’m 60 now.
I live a very good lifestyle and I can afford it. I owned a business for 30 years and sold it for very good money.
Don’t imagine that you can pick a number for anybody but yourself.
Heck, my social security payments will be well in excess of 27K per year before tax, which I will pay on 80% of the payments because my dividend and interest income is high (yay).
All that said, I don’t know a lot of folks that would want to live on 27K per year. That’s a VERY low number.
But then, I don’t know you or your lifestyle, so I won’t judge. 27K might be a fine number for you, and you might die and leave millions to charity too.
I suppose if I’m married, with children that are still dependent, $27k a year is definitely not enough. But even just double, lets call it $50k a year, that is an amount that 10’s of millions of American families live off of. Wish I had learn to go into business on my own, or learn more about investing earlier on, else I’d be close to where you are financially.
Yeah, really depends. TBH my FIRE number is about half that. Tho that means I still plan to do a touch of side hustle a month still- playing music, deliveries (aka getting paid to exercise on my bike), other misc one-off gigs. Maybe even something more passive eventually. Comments like $27k per year isn’t enough is very offputting to myself and the majority of people I know who would do amazing on that (especially if it included a neutral-RE situation (tho I know plenty of people doin ok who aren’t neutral-RE yet). I’m just glad to see someone else who can see things in a similar light to me, I’m not crazy.
Can you elaborate? Your FIRE number is half of $27K/year? So $13.5K/year is what you expect to live in retirement?
I’d love to get an idea of your expenses. Thanks
Sam,
Why, ideologically, is your asset allocation so far removed from Personal Capital’s? No snark, just curious – I utilize them, somewhat adhere to their Monte Carlo scenarios for my allocation, but always feels it’s too stock heavy.
Thanks,
Mark
Personal Capital looks mainly/only at stocks, bonds, alternatives, cash in your public investment portfolio. Real estate is missing. So the overall number is different.
That’s the one thing digital wealth advisors have a tough time seeing, and therefore making pertinent recommendations: your entire net worth.
It’s striking how my asset allocation matches this list pretty well. Longtime lurker here, for the last 6 years since I graduated. I had negative assets first 6 months out of school and decided to pay off my 30k of student loans before the grace period expired and the usurious interest rate of 6% hit in. Then I focused on building a cash pile of about 25k and maxing IRA (did not qualify for 401k since my employer did not offer). This came in handy when I was fired from a new job 2 years into my career and was unemployed for 5 weeks (thankfully 1 month severance so I didn’t need to file for unemployment). Being fired made me more risk adverse so I doubled my cash pile (also was saving in case I needed to do an MBA but ended up deciding against it). It was also a blessing in that I switched from asset management into tech, where employment prospects seem much more stable for the time (there’s a wage floor of 100k+ if you know how to code and are willing to live in a high cost of living city). Thus I could afford a higher risk tolerance. After that, each year I’ve been dumping money into 50/50 international and US equity ETFs, mainly through 401k/IRA and Robinhood. Now heading into year 7 I’m thinking about liquidating some of my equities and using my cash pile for real estate. I still have roomates and am renting but if they move out and I lived on my own, mortgage + maintenance would actually be about equal to or lower than than rent for a 1 bedroom or studio.
Thank you so much for this article. It took a long time for me to find it but it was just what I needed and couldn’t quite describe. Well worth the effort.
About real estate: for a childless couple, both past age 70, who will never own any real estate directly: Would you think that buying a few REIT ETFs would do the trick? And would you tweak the 30% target (base case framework) at all?
Sincerest thanks.
If you are past age 70 and are childless, I wouldn’t change anything. Clearly, things have worked great for you guys. No need to complicate things.
I am in a somewhat strange position, I have my home which increased dramatically in value to about 1.5 million from the purchase price of $500,000 , and I was lucky to inherit the family home that is worth about 1.8 million. My cash and stocks are only about 250K and my income isn’t very high, but I get rental income on the house I inherited.
So over $2 million in realestate and a 1/10 in stocks and cash…..
Should I get a mortgage on the inherited rental property and try to buy more property or invest that cash some other way?
i feel more confident in managing property than in managing stock investments.
But houses can fall in value, need to be repaired, tennants can sue you etc….
i am 58 and work as an artist. Once I am 65 I might be able to get by on the rental income and social security but not with much cash to spare…
At 58, I don’t think it’s wise or worth it to get into debt/more debt. Enjoy debt freedom instead.
Hi Sam,
I re-read this old post from your newsletter. Question- the real estate column in the charts. Should I be adding up my equity in my primary house, rental property equity, and REITs together?
Regards
Todd
Yes, that makes sense Todd.
Thank you for sharing this. I find it helpful because I have difficulty finding this kind of information elsewhere, especially when it comes to asset allocation between stocks and real estate (rental property). Could someone explain how these net worth mix recommendations were created? Are there any good literature references that would help me understand how to modify these recommendations for my needs?
Elliot did you get an answer on this? I like the breakdown but didn’t understand the methodology behind it.
Unfortunately no. If you find out please let me know! Thanks :)
The methodology is based on my own experience and what has worked for me and several other close friends who achieved financial freedom by 40 as well.
If you read each bullet point under each framework, it will explain the WHY.
And if you don’t agree, develop your own net worth allocation framework.
thx
I have a question about the self belief framework….For example, at age 35 you have 25% toward “X Factor” which I believe is your own business in most cases. Here is my question – What if someone has their own business selling stock options? Would that fall under the stocks category or X-Factory category? I would assume stock but I could also see an argument for x-factor being that it would be run as a side business.
If your business has value (can be sold), it would be classified under X Factor.
Hi Sam, I have been your reader for a few years. While calculating my asset allocation today, I was thinking what exactly I should count as my RE allocation. I will explain. For example, say I have a house currently worth $800,000 with a mortgage balance of $300,000. I have been using my equity of $500,000 as my allocation in RE. But today I was thinking, I should use the entire $800,000 as RE and a -$300,000 as Bond for this property, since when house price fluctuates, the only moving part is the house value. The load balance is not going to change, except we are paying down the mortgage. What are your thoughts on this?
Did you ever get an answer on this? I have the same question/issue. Thank you
Use $500,000 equity as your RE portion. Then discount it due to transaction costs and to be conservative.
Thanks for the helpful article.
I’m 34, have very little investments, but my wife and I have been saving for three years and I’m ready to allocate our money into different areas. My plan is to invest and save for two to three more years and then buy our first home.
Here is my asset allocation plan for now:
40% stocks
25% REITs
15% bonds
10% student debt repayment
10% savings account
We are a bit risk averse but I still want to have a decent yield which is why 65% will be in stocks and real estate funds.
Is this too conservative, or sounds like a reasonable plan?
dunno about you, but i’d knock that student debt out right away, then go 70 percent equities in indexed funds – cash at 10-20 percent is always good (6-12 months living expenses will cover any emergencies)
but i’m not expert… however, life is good in retirement with no debt whatsoever (nada, zip, zilch, zero, etc.)
:-)
willie
Thanks Willie:
I don’t have enough savings to allocate any imvestment money after paying off student debt. Therefore, the way I see it, I can put cash in index funds to get the 10-20% as you said but keep paying consistently our student which is at 3-5% interest. If I pay off student debt now it feels nice but then I have no principal left to invest and get those nice returns. I might increase the percentage of debt payment to pay it off quicker though. :)
Best,
Alex
61, retired engineer with pension and wife 53 with real estate business.
We use the bucket approach strategy for allocations. We have 4% cash, 20% Bonds, 25% Stocks, 33.5% Real Estate Equity, and 17.5% Rental Equity (X-Factor) with a 40% net profit.
Concerned about too much of our net worth is in Real estate due to our rental. Reading your article, is our allocation diversified enough?
Our long term goal is to sell the rental in 20 to 25 years but have seen the combined rental and home equity becoming 51% of our net worth. Thoughts?
We feel fortunate but fell into this position somewhat by accident and luck in the right market and place at the time.
Would you recommend the same asset allocation at 35-40 for a physician who only started making good money around 34 years of age?
No. I’d follow more the work experience column.
So I was making some money as a resident and fellow (total of 7 years), up to $120 one year. But have been doing very well the last four years. You would put me in the 10% risk free, 40% real estate, 50% stock bracket of the New Life Framework? I already own a home. I’m thinking of increasing my real estate holdings using Realty Shares.
Thank you! Great article, read it twice.
Hi Samurai,
I’ve been reading your blog for several months now but first time commenting. I’m a recent early retiree(age 53) and came across this earlier post and found it timely for me. I would most likely feel the base case framework would make most sense for me. If I was invested this way now it would probably provide adequate income without using principal. My goal is to basically live off dividends,etc. One thing about this allocation is it would leave me with such a large cash/bond allocation that it alone could cover my lifestyle for roughly 20 years. This seems a little heavy to me. If you were lowering this somewhat, would you move it evenly to stocks and real estate? Also I must say I’m not allocated according to the base case framework yet. I’m still cash heavy as I keep thinking the market is too high. Should I just bite the bullet and get properly allocated or do you think there is merit to doing it slower at this point? It seems when looking back the last few years I’ve regretted not putting more money to work. At the time(like now) I thought the market was expensive. Your insight would be appreciated. Thanks for providing us FIRE folks your experience in the FIRE life.
enjoy your Web site…
it is so sad to see so many of our neighbors in our retirement community who still have mortgages and sons and daughters living with them… i have always followed the philosophy of diversification and asset allocation in lifestyle, investing, and savings… the old adage of not putting all one’s eggs in one basket seems to have held me in good stead for the last 25 years…
moving from a saving mindset to a spending situation in early retirement four years ago was not easy – but i also realize that even in my 60s i still have a 20-year investing horizon… my approach has always been (for net worth and investing):
10 percent cash
50 percent investing (60/40 mix of equities/bonds with 15 percent in tax-free ROTH IRA)
25 percent real estate (our downsized retirement home is free of any mortgage)
15 percent life insurance (Vanguard variable annuity – no eating dog food in our dotage)
in addition, a military pension…
we’re still at least five to 10 years away from SS FRA… i guess we’re OK? our needs are modest… i wish the best of luck to the millions of Boomers behind me… the ‘pig in a snake’ is moving to retirement, and i fear it’s not going to be a pretty situation for many, many folks!
p.s. investing in one’s health is the best investment one can make – i’d rather be fit as a fiddle and poor as a church mouse than have billions of dollars and be in bad health
Hello Samurai,
Even though you wrote this article four years ago, it’s still very relevant! I have a question about the ‘Real Estate’ category. You stated in one scenario “If you own the property you live in, you are neutral real estate. The only way you can make money in real estate is if you buy more than one property. If you are a renter, you are short real estate.”
Does this mean if i own and live in my own home, it’s value should be excluded from my net worth and if I rent, I need to enter some negative percentage (presumably offset by investment property or REITs)? Thanks!
Hi Brian,
Actually, I update all my articles for the current year, including this one for 2017!
If you own your primary residence, and that’s it for real estate, you are indeed neutral real estate b/c you have to live somewhere. You can conservatively exclude your primary home from your NW calculation, or you can include its conservative equity value. Up to you.
See:
Buy Real Estate As You As You Possibly Can
It’s Fine To Include Your Primary Residence As Part Of Your Net Worth Calculation
Real Estate Crowdsourcing Review – A More Surgical Way To Invest In Real Estate
Sam,
I have about 15% of my net worth in real estate which is my paid for home. I’m not interested in owning rental property but could I buy a REIT fund instead to diversify? The remaining asset base is 60% broad based stock funds, 20% bond funds and 5% cash. Have a seven figure net worth and mid-fifties. I would be grateful for your wisdom please?
Hi TR,
Well done paying off your home and having it only account for 15% of your net worth! I’m assuming you are over 40? If so, you’re basically like me now where you want a simplified life with income. I’m not interested in buying more physical real estate.
After interest rates rose post Trump election victory, bonds and REIT funds got hit by 3% – 10% mostly. I think the space looks good. REITs like ticker: O and OHI look attractive to me. I’m building a tax free municipal bond portfolio myself.
But what I’m most interested in real estate crowdsourcing and investing in the heartland of America now that Trump will be president. Cap rates/returns are much higher in places like Utah, Nebraska, Tennessee, than SF and NYC. Check out RealtyShares. They are the largest real estate crowdsourcing platform based in SF. You can peruse through all their deals for free. I plan to surgically invest $10,000 or so in various cheaper parts of the country to try and earn a 8% – 15% return.
Sam
Thanks so much! Your work on this blog is so valuable and greatly appreciated!
TR
I don’t have enough money for a down payment on a house in the bay area and won’t for a long while. Even if I did have enough, given your recommended asset allocation, I would need that down payment to be, at most, 35% of my portfolio. Would it make sense to buy real estate in another part of the country to start out in real estate or is owning your primary residence that important. I’m under rent control at the moment and some of the rent vs. buy calculators are showing that I would need to own a place in the bay area for 8 years before I break even. I’m guessing this is because the price to rent ratio is so high here in the bay. Wondering what you think about this.
Hi Robert,
If you are under rent control, you’ve got time to really think things through. The housing market is softening now with higher rates and a slowdown in the high end. BUT, I think it will reignite after Uber, Pinterest, Airbnb, etc goes public. There is huge pent up demand to buy from those 10,000+ employees. I’ve interviewed probably around 100 of them on what they want to do w/ their money, and almost all say buy a place.
I think it’s worth check out real estate crowdsourcing in HIGHER income yielding areas of the country. The coastal cities are out of whack with rental yields/cap rates at only 2% – 4% versus 9% – 15% in the heartland of America. My favorite platform is RealtyShares b/c they are based in SF, and I’ve met all their management including the CEO, who went to Berkeley for his MBA like me.
Check out the platform. You can invest in deals for as little as $5,000… unlike a $200,000+ downpayment here in the Bay.
Sam
Thanks for the quick reply. It appears that I’m not an accredited investor so I can’t use the platform. I’ve been looking at data taken from Zillow and found some properties with around a 40k down payment (I could swing this pretty soon) which would mean around a $1000 monthly mortgage (with taxes and insurance). I could possibly get $1300-1500 a month in rent from one of these properties which would mean that after a year, I’ve gained almost half of what I put down on the property in equity. I’ve been looking at properties in areas of Charlotte and Miami Beach since I’m familiar with the areas and I have family there. Disadvantages of this approach include 1. not being able to take advantage of the tax write-offs because it’s not my primary source of residence and 2. I can’t live in the property because I would be renting it out and 3. I’m still paying crazy high rent living in SF (I pay around $2600 so it’s not so bad). I really like the idea of actually owning a place vs the REITs because it’s tangible and I could always sell it later and pocket the 250k tax-free.
If I can get my CA home to 20-30 percent of net wealth by retirement I will be quite happy…
Goals….
Would you consider REITs as part of the Real Estate bucket or Stocks bucket?
Good question.
Thanks
Sam,
I am 23 and I have just bought a house that was at the higher end of my mortgage limit. I am very excited to have 3 roommates as well who will be paying me about 85% of my monthly payment. You don’t necessarily recommend having real estate in your investment portfolio by 23, however, I only plan to live in this house maybe 2-3 years and then rent it out. What do you think of this idea? In 3-4 years time, hopefully I will be making enough at work to comfortably handle a mortgage payment and other various expenses (right now it would be about 60% of my post-tax income), so I’m not at all worried, but just curious.
Thanks for your time,
Erik
Hi, how did it turn out? Hopefully, it went as planned!
This is great work!
I have been looking for a long time to use something along the Self Belief table. Little did I figure to be nearly allocated there (a bit conservative). With the market still at all time highs and once a real correction occurs, we plan on ratcheting up the Equity allocation and minimize the Bonds to 10%. Our plan is to Semi-Retire @60/58 to spend our time as we see fit both leisure and in the business. Currently allocated as such in 2015 at Ages 32/30:
31% Equities (Ultimate Portfolio by Paul Merriman)
22% Bonds (US Govt., Corporate High Yield, International)
36% Real Estate (CA Primary Residence with 254K 19yr Mort @3.5%)
4% Risk Free (Cash)
7% X Factor (Side Business 25% Owner, business is reinvesting small profits)
We are debating currently whether to stop max 401k contributions (currently all equity contributions). I would like to build the Side Business into a Self-Employed position (3yr proposition) and 40% Ownership. I would love to live out of the business, as would my partner.
Sorry, but your guidelines are impossible to follow since I cannot buy one eighth of a house!
Are the rows in your tables maximums for the category? The table for Base Case rows age 45 and 50 percentage totals do not add up to 100%. The other two tables have similar issues. New Life age 27, Self Belief age 40 for example, I did not check them all.
I have just come across your site today and appreciate your writing. Good food for thought.
Howdy! I think all the rows add up to 100%. But, they are all just guidelines. Welcome to my site!
How do those tables change if someone has been in college – grad school forever? I will be graduating with my PhD (Physics) next year when I’m… 33 and I only started investing in a Roth IRA last year using my petty grad student stipend. Is it too late to jump on the bandwagon and make up for “lost” time?
Forever is a long time Nikos!
Use the work experience years as a benchmark instead of age.
trying to decide if i want to try to manage my own money or hire a one advisor or to go with an a big management company
Here are some posts that may help you get there:
https://www.financialsamurai.com/wealth-management-company-personal-capital/
https://www.financialsamurai.com/questions-to-ask-think-before-hiring-a-financial-advisor/
Yes, I started out young in software, shortly after college working at a couple of dot-coms. I was a web manager implementing a full-blown ecommerce site. It was a time ripe with opportunity.
Yes, I started out young in software, shortly after college working at a couple of dot-coms. I was a web manager implementing a full-blown ecommerce site. It was a time ripe with opportunity.
Considering that someone investing a million in 1935 in S&P would yield 2.4 billion now, and with 79 major world shattering events in the interim, I plan to achieve that using plan outlined earlier.
A continuum of small, mid, large, multi capped quality funds with an eye on growth, focused on a dirty dozen “fortress stocks” like V, DLTR, SBUX, COST, TSLA that have a wide sustainable moat.
A number of folks have suggested I refocus – my facebook is replete with economic postings. In honesty, I’m polymathic, which is a twist on your talent/effort posting.
I will probably setup a lifehacker style site that covers financial economics, computing, to life extension. I know it is not the typically category focused site. But it spans my interests.
Along lines of Paltrow’s goop.com. It’s time in my life to set aside my career and do what interests me. Incidentally, you’ve done a great job with your site. A lot of germane, thoughtful topics.
I am a bit bound since i’m using my real name at present.
Our net worth is a million @38/37. I work in the software industry for almost 20 years now, latest as a product management director.
Here’s what I can share from my compound interest table:
by 44- 2.2 million
47- 3.3 million
50- 4.2 million
53- 5.1 million
by 65- 12.6 million
This assumes +/-10% returns with savings rate double average for our income level.
There’s 1-2% in bonds as nested in various caps’ mutual funds, outside my direct control. I completely divested from PIMCO bonds
There’s 4-5% in dividend funds. Vanguard Dividend Growth (VDIGX) stands ready at any time to freeze dry my capital the next time markets gyrate 10+% in a week.
1/5 lies in large cap growth – Fidelity Growth, which has performed the worse, ironically or not. Another fifth in mid-cap – Fidelity Midcap. That was employer set too like Growth. Another fifth in small cap – Fidelity Discovery. Chart and compare against S&P or other portfolio funds and see how it outperforms and thus charges a 1.08% gross expense. Another fifth in multi-sector/cap aggressive growth – POAGX, which also performed well in 2009 and 2011.
There’s another opportunistic tranche in a dirty dozen of stocks. The latest of which is TSLA, IRBT, SBUX, etc., divesting half my APPL holdings to fund.
Now one must recognize that life intervened. At a younger time, my goal was to have a networth of 40 million by 40. Looks like that will arrive @78 ideally now.
A good 6-7 years were set aside for family illnesses, spanning my grandmother, father, and recently newborn son, all having heart surgery, and all that entails. Dub that fate intersecting finance. So while grounded and well-versed in economics at a young age, life taught me a few lessons along the way, and I ended up optimizing for other things besides money.
That said, my proposal stands, I believe. [Economic] History repeats itself. If we learn, we can benefit and bound risk and estimate its duration, tranche our assets accordingly with the right ratio of financial ballast and bunsen burn, and have the right balance of risk versus reward.
Thanks for sharing. 10% annual compounded returns is aggressive, but possible.
Did you happen to start in the software industry right after highschool? 20 years is great work experience for someone only 38.
Sounds like you are very interested in investing. Ever thought of getting into finance instead of software?
Fair critique though a bit beside the point made.
I am rather happy that I weathered the 2009 financial crisis rather than bonded up and withdrew because the gain was so significant, in one of the worse financial crisis.
I don’t find “anything is possible”, so put up half your capital in deep freeze advice helpful, factual, if rather dogmatic.
This is in midst of personal medical issues in the family that took its toll. Fortunately, insurance was in place to mitigate that.
Long story short, having put my money where my mouth is, my proposal above is for those that are quants and can go to Yahoo or Google Finance for themselves to do their own personalized Monte Carlo/what-if simulations, in preparation for good and bad times.
Putting aside 6-mos cash/bonds, plus 2 years dividends funded stake, while leaving 2/3 of your assets in a diversified small/mid/large cap portfolio will yield superior returns, as evidenced by one of the most interesting, real-world, earth-shattering economic experiments since the great depression.
How Fidelity Discovery Small Cap or Vanguard Dividend fund handled 2009 and 2011 in a superior way is material experience that informs my future investing decisions. In both cases, they rebounded quickly and robustly. And if you map back to 2000, they are orders magnitude better yielding than S&P.
Putting my behavioral economic hat on, I assign higher confidence in both funds for enduring future crisis. That includes for example, PIMCO bond funds if I indeed need to deep freeze my capital preventing further free fall.
Long story short, observe and learn from 2009 as an inflection point. And while it may indeed stand as plain luck these funds bettered their peers during times of stress, it is compelling when you see a whole class of capital yield superior returns over two decades time versus brute force splitting the difference between equity and bonds buying the whole market.
Do you mind sharing your current net worth and net worth allocation split? What net worth goal do you hope to achieve by your retirement date? What is it that you so for a living so I can gain some context.
Thanks
I have to disagree with the canonical investment advice offered by this article and personal finance advice in general that says you must buy into the market and conserve when you get older.
i degreed in economics and have studied economic history, macroecon, and finance in depth. and at 38 have arrived at several out of box conclusions. first, on what i do agree with.
1- one cannot outperform the market most of the time. 3/4 of mutual funds and institutional investors don’t outperform the market for any prolonged stretch of time, eg. decade plus.
2- Paul Samuelson in the 70s established the random walk hypothesis that concludes one cannot predict to great certainty the movement of markets at any given time. Very much the Heisenbergian Uncertainty Principle of financial economics.
3- prudent diversification is key. the loaded word obviously is prudent, that is the eye of beholder. but i will elaborate on my view of prudent.
here’s where i differ from the established institutional point of view where as one ages, one must stick 40% of funds into bonds and snap freeze their returns because one cannot afford the volatility. here’s why:
– we can establish tentpoles, trendlines, and central tendencies that bound risk to a great extent.
for example, during the 2009 crisis, I was well informed by the 2001 dot-com bomb, and the half-dozen recessions that preceded it spanning from Carter’s OPEC crisis through George Bush I’s soft recession, as well as the uber Great Recession.
1- From that I could establish with great confidence, short of nuclear disaster, the average duration peak to trough of a sizable market downturn.
2- It is also axiomatic that smaller caps rebound faster than larger cap instruments.
3- One can also deduce, and this is key, the dynamics and economic history of a class of funds, to specific investors and fund managers and how they behaved and yielded under past economic events of significant duress. That says a lot.
As the 2008-9 crisis unfolded, and hundreds of points fell, I transferred more than 1/3 of my portfolio to a bond fund run by Bill Gross. I did that for a 4 month duration taking that as the avg midpoint of past recessions’ peak to trough. By the 6th month, we were at bottom, and when rumors of rebound occurred I moved funds back to OAKBX which had 1/3 of its funds in defensives like bonds and dividend heavy stocks. By mid-2009, I moved 1/3 of my 1/3 total back to Fidelity Growth and Small Cap.
Long story short, with 2009 under my belt as a bounded tentpole of a worse case real world experiment, I envisage a 1-year bonded income equivalent tranche of emergency funds backed by a 2-yr income equivalent tranche dividend fund (Vanguard’s low-cost dividend growth, for ex.). Taking the 2001, 2009, and 2011 market drops into account, it is imperative that one understands the 4th axiom I left out earlier.
Finance pioneer Fama established axiomatically that top 10 days account for 80% of gains and the inverse applying for losses as well. So the key is slow the 10+% slide with dividend and bond anchored brakes (1/3 ho), leaving 2/3 in to soak up the eventual rebound that occurs a year later.
IOW, most people withdraw from the market far too soon and miss those 10 days a year of gains, and thus the rebound and recovery that inevitably ensues. Consider 1 million invested in the S&P in 1935 would be worth over $2.5 billion today. https://www.forbes.com/sites/robertlenzner/2013/02/14/1-million-invested-in-stocks-in-1935-is-worth-2-4-billion-today-if-you-held-on/
So post recovery missing 1 or 3 ten day gains, one is left with a shallower slope of recovery that is meeker yet has to cover lost ground during the drop while trying to compound forward toward retirement.
In sum, my strategy is to set up tentpoles bounded by past disasters. Put financial ballasts in place at 1/3 warp so to speak that leaves 2/3 skin in the market accruing 80% maximum gains that accrue in those unpredictable animal-spirited top 10 days. And set of tranches of capital reserves as some comfortable percentage, say 10%, of total capital (think Basel 3 banking standards applied to one’s personal finances) in bond and dividend funds.
Knowing bond funds freeze value and dividend funds brake a free fall while capturing gains fairly well; looking at post 2009, 2010 and 2011 drop, in 2012, you’ll see that the rebound when projected to a moving 3 year moving avg was more than double digit recouping for the previous year’s big drop.
At 38, I plan to retire within 10 years. My compound interest calculator tells me that at 10% yield , far below the 18% annual S&P returns of the last 3 years, for another 4 years will secure financial freedom. Another 6 years, a whole new way of life.
In any event, the Forbes article linked sums up my view from a different perspective. Food for thought that folks may find prudent.
You’re welcome to increase your risk as you get older. Whatever works for you. Nobody knows the future. Here is my recommended net worth allocation by age and work experience. I write it from someone who retired at 34 with a six figure annual passive income portfolio. Please contrast that with folks who write about retirement who are not yet retired. How do they know? Cheers
I’m 48 and my wife is 46. Our net worth is about $5.3M, and we have two teenagers who will be going thru’ pvt colleges soon. Our asset allocation is about 48% domestic stocks; 15% international stocks; 20% bonds; 12% real estate and 5% cash, and in general our risk tolerance is high with combined annual income of about $350k/yr. Any thoughts on whether asset allocation ought to be altered? Thanks!
It depends on how much longer you want to work and how you felt and did in 2008-2010?
I would personally recommend you reduce equity exposure to 60% total if and when there is a correction in the bond market, specifically muni bonds for tax purposes based on your income. I love real estate for the long term, but it takes work.
Wonderful article, Sam. You definitely put a great deal of time and effort into writing it, and it raises a lot of interesting thoughts. I’ll definitely have to put more effort into increasing my level of alternative investments and real estate holdings (well, actually every type of investment, and my savings in general, but that’s a whole other story). There seems to be far too much focus among most financial sources on stocks, bonds, and ‘cash’ assets, in these sorts of recommended allocations, without acknowledging the advantages (dare I say, requirements) of having a more diverse portfolio, one that doesn’t depend entirely on traditional paper resources. I’ll have to rethink my investment plans for the next several years, and decades, for that matter.
Hi Rog,
Great to hear from you! Hope the baby is doing well. With dependents, it’s more important that ever to keep your assets safe and growing, even if it’s not growing as much as the market.
S
@John C., thanks for sharing your story and worldview. Very compelling background, and the story of your economics professor’s most memorable lesson. Maybe that one class will turn out to have paid for your kids’ college.:-) Well done on the impressive results achieved in your financial journey!
I’m just a little older than you, and recall quite well the Gold runup in the late ’70s, and especially the Hunt Brothers’ attempt to corner the market on Silver.
The Financial Samurai may, or may not recall this, but I dug the Hunt Brothers as they sponsored an indoor tennis circuit in the U.S. then, the WCT. They did something very cool, created a championship trophy entirely out of Gold and it was valued at $33,333.33. I know that sounds like a mid-range car price today, but in 1975 that was crazy money! Nice work, if you can get it!
Interesting story Jay on the trophy, i didn’t know that.
Yes I am. And at the current silver/gold ration I am buying 100% silver.
In don’t trade very much, a little re-balancing here and there but my staple stocks for the most part have been PM, JNJ, XOM, PG, VZ, LMT, always reinvesting the dividend. If you remember back in the dotcom era 1999 to early 2000, when people though tech stocks would just go up and up, well I bailed out of two tech companies I had at the time before the crash with a very nice profit and invested it all in Altria.
Back then Altria had major litigation problems but I just kept thinking, if people are willing to go to jail for drugs why the hell would they stop smoking which is just as addictive. Then I got real stupid and kept adding to it. LOL. Anyway currently is by far my biggest position between Sep-IRA, 401K and regular account. 24,000 shares. All I did with it was to sell Altria when it split to PM-International and invest it all minus capital gain taxes in PM. Needless to say PM has been on a huge run. I sold all my KFT shares when they split off and bought my current house cash(sold my original house for a nice capital gain also this was back in 2006 where people were outbidding people for houses). It also helps that I live in NOVA which has held real well.
During the entire time however, after 9/11 I have been buying gold and silver. This goes back to what I have read about hard money, Central Banks, etc. Its not a good thing when the central bank dumps cheap money left and right to “create” a desired outcome in the markets. Hell that is not even their mandate from what I know. What I do know and I am sure you do also, no nation in history has been able to keep its currency after 40 years completely fiat. We are the first and that I think is because every other fiat currency is pegged to ours plus we are forcing oil to be bought with dollars. When not if this thing collapses it will be epic. This is why I don’t believe in bonds, ETFs, or any other paper investment although you can make the argument that stocks are paper investments. There I say if the system collapses so badly where even stock certificates of major companies become worthless then we are all on the same boat. I don’t see that. I see major real inflation but not total collapse.
Yes we are sitting at a 5 year high but we also seeing the Fed doing everything possible to keep interest rates low and stock assets high. Don’t bet against the Fed, just protect yourself because they most certainly will go too far. And lets say we correct 30%. So what? I am getting my dividend on all my stocks, which is more than a CD gives me or a treasury right now. Real inflation is at least twice the “official” numbers. That means you are actually loosing money by being in cash.
The reason for working until 55 is simple for me. I like my job plus that is when my two kids will be in college, therefore i don’t need to worry about health insurance for them just my wife and I. And to be honest there are some major squeezes happening right now at my work place so if it stops being “fun” I probably walk much earlier. That is the best part of being financially set. You don’t have to take it if it doesn’t suit you.
I wonder intently on gold now at $1,581. Its 50 day moving average is close to breaking its 200 DMA. We have become inured to easy money, which is worrisome given each successive ease by central banks become less effective.
I totally agree with this. its like a drug addict he needs more and more to get high and in the end he needs massive quantities just to function which leads to death. I am not sure I can’t trust technical on gold or especially silver when we don’t even know how much physical metal is backing all the “paper metal” that is floating around.
Just take a look what gold and silver did when QE3 and QE4 was announced…not much at all really. Why not? How can that be possible with the Fed pumping 85 billion per month and Japan’s Central bank hell bend on devaluing the Yen.
And yet that is exactly what happened in 2008 both metals crashing when they should have been soaring. If you check out the COMEX you have billions of ounces of silver traded every week, yet we only product 850 million ounces per year..in the entire world. Something doesn’t make sense. Especially the fact that the Fed has more than tripled its balance sheet and yet silver is still below its all time high, only asset that I know of to be so.
So in conclusion, are you a buyer of gold and silver in this pull back, a waiter, or seller now?
You are more an optimist than I. Individuals can beat the market for maybe 40% of the time, but what about the remaining 60% of the time? Let’s hope an individual doesn’t severely lose or underperform.
RE is a tricky one as you get older, b/c as you get older, you don’t want to spend any more time than you have to on passive income.
Well I posted my opinion on this article but I guess it never got approved. Way too much “paper investments” Sam, which means way too much debt in today’s environment. Like I stated before, no way I would consider cash or bonds right now, not when the FED is pushing 85 billion per month into bonds and God knows what else. Nor would I trust any “paper” precious metal investments. Physical only. My allocation of my “liquid” assets right now is 75% dividend paying stocks and 25% physical precious metals.
I am a firm believer this government and most of the Western World will try very had to inflate their debt away. They have no choice, way too many promises have been made and austerity is not something taught in schools.
I don’t disagree with the devaluation of the USD and USD denominated assets over time. As you are new here, spend some time reading my predictions post series over the past three years through the search box.
With an almost 7% rise YTD in the SP500 and a 40% move higher in treasury yields since last fall, I’m rebalancing my assets now.
What is the rest of your 25% allocated towards? Please also share your experience and goals (work, income stream, etc). Thx
25% of my portfolio (not including real estate) is in physical gold and silver. The breakdown there is about 80% silver 20% gold in monetary value.
Started investing right out of college and I own it to one of my economic professors. He had a bonus question on the midterm, simply asking what is your long term plan to become financially independent. Every answer was, I will open my own business, or get a graduate degree, etc etc. no one wrote money management. So when we got our midterms back, he took the entire period of going over some of the answers and then he simply said money management is the key. Spent less than you make, save and invest. He proceeded to point out how its easy to grow ones wealth with compounding interest. I know simple right? But for a 20 year old, like myself at the time, a totally foreign concept. I wonder how foreign is the concept with today’s 20 year olds.
Another twist he told us how to do it. He said 50/50. 50% of your gross goes into paying taxes and the rest savings. The other 50% spend it for you living expenses. That is if you are debt free. If not then you take care of any debt first and never ever get into debt again. He also suggested to always strive to educate ourselves about money, the role of the central banks play in creating money etc. I am almost certain he was a libertarian, hard money kind of guy. Remember folks that was back in late 1982, we had a recession going on and interest rates were double digits because of Volcker.
Anyway I have been doing this now for over 30 years and made sure my wife understood this before we got married. Since she came from a very frugal family she had no issues. I have invested almost always in stocks but since 2001 I have been buying physical precious metals also. I own my house outright, I also own two properties, one in upstate PA one overseas. I also have a decent art collection. Wife and I make a little over 200K and I work in IT management. Total estimated net worth 5.5 million (not counting educational funds for our two kids which currently equal 381K). Goal, retire in 5 years, currently 50 years old.
Thanks for providing more of your background. An excellent financial situation your family is in. I’m very interested in hearing more about the asset allocation switch you made in 2001 as well as how your net worth held up during 2009-2010. Did the economic crisis change your thoughts and did you so anything during that time period to change your allocations?
Most of the readers who say 100% of one’a net worth should be allocated in stocks are much younger and haven’t gone through the downcycles with significant assets. Hence, perhaps you can provide more perspective in your thought process as we sit at 5 year highs now.
Also, what are the main reasons for working until 55 with your net worth? Love of job? It’s one of my theories why people don’t save and why people work for a while. Things are rational. How do you decide how much is enough and when is enough?
Thanks
Great article Sam!
This article reminded me I may need to diversify more. At age 34, I’m currently:
Stocks: 29%, Bonds, 9.3%, Real Estate 48% and Risk Free 13%. $42k (34% of my real estate) is cash I’m applying to a refinance (conversion from 30 yr note to 15 yr note) to pay off my investment property mrtg. Going from a 4.75 30-yr note with a 358k balance to a 3.12 15-yr note with $316k balance. I’m a bit heavy real estate based off your chart, do you think converting to a 20 yr note instead might be safer? I could take some of that $42k and apply it elsewhere like stocks.
I like your diversification and your action to refinance your mortgage Kent. A 15y vs a 20yr fixed note isn’t going to make that much of a difference since the 20yr note is going to have a higher interest rate. I’m more risk loving in this regard and borrow at a 5yr fixed or shorter as I don’t see rates rising much, nor do I plan to have a mortgage for longer than 10 years.
Match your fixed rate to how long you think you’ll have the mortgage.
You need to be in equities all your life. My mother was married to a brilliant general surgeion who died at age 39 of pancreatic cancer. Mom raised four boys, ages 2,5,8 and 13. Dad left her $50,000 in 1958. She met with a financial advisor, and she began investing in equities. At age 88 she passed away. She funded 10 grandchildren’s college education and left over a million dollars to her four boys. How could that be possible? Equities. You need to be in equities. Mom was also a buy and hold investor, holding some stocks for 50 years.
Great to hear your mother did so well in equities. The past 50 years were quite a golden age for equities indeed. The question is what percentage of one’s net worth should be allocated to equities.
Sammy Baby…..great work. I can see that you put a lot into this one. Kudos sir Sam! I actually don’t go this route even though I respect your opinion and genius level thought process. Here is the way I think. Forget about MY age…..think about how long I want the MONEY to live. A 90 year old who wants her money to go to her great grand kids might have a much longer investment horizon than a 20 year old grease ball who needs to get the scratch together to pay off his Harley this year. Right? I am fully invested in equities and real estate because I have the cash flow not to have to worry about short-term needs and I have a 20 year time frame for 98% of my net worth. Come on in Sammy….the water is fine!
Sounds terrific Neal. If having 100% of your net worth in stocks and bonds works for you, that’s great. Were you at all not concerned during the most recent downturn?
I do not fall into any of these cases. I am 26 and have the following breakdown:
Stock — 50%
Bonds — 15%
Cash — 35%
My 401K is 85%stock and 15% bonds. This seems conservative but I want to buy a house with my cash and leave my other investments intact. Does this seem realistic?
AR, doesn’t seem conservative, seems highly realistic given you want to buy a house. Buying at least one house is one of the foundations for my Base and New Life net worth allocation frameworks.
I know A TON of people in 2000 who also wanted to buy a house. They ended up losing 50-100% of their equity worth (margin) as a result of the internet burst. Then they missed out on huge real estate price appreciation from 2000-2007. It was a double whammy that permanently have left them struggling to catch up to their peers.
Great article Sam. I was wondering if you ever considered investing in precious metals as an alternative investment.
Thanks Dave. I have a Vanguard Precious Metals fund which is currently sucking wind. I expect precious metals to start outperforming when talks of QE Infinity and/or a stock market correction occurs. It’s my hedge. You can see my old balance here: https://www.financialsamurai.com/2012/12/16/how-to-reduce-401k-fees-through-portfolio-analysis/. I say old as I’ve since sold a lot of stock recently (2/12/13-2/13/13) given the markets are up 6%+ and I only expect the market to be up about 9% for the year.
I’m not a buyer of the physical commodity, unless you count gold watches!
Today I sold about 17% of my stock funds and increased my cash position to near 25%. For a little while, this will be my “Sleep Well Tonight” framework:
38.91% Real Estate
24.26% Cash
18.17% Stock funds – VTSMX/VGTSX
18.67% Bonds – VBMFX
0.00% Alternatives
With that balance, you should certainly sleep well Marcel! Can you share your age or work experience and when you plan to hang up your boots?
Hi Sam – I’m 42 and worked about 7 years in tech-PR, 3 years as owner of my own bar and three years teaching tennis at Club Med. I’m exploring the possibility of hanging up my boots this year.
Mate, teaching tennis in Club Med somewhere is one of my dream jobs! You do know I am a tennis fanatic yes?
If love to hear more about this job of yours. Meet cool people? Gets boring feeding balls after a while? Does living in a resort paradise ever get old?
I think you’ll enjoy this post! https://untemplater.com/untemplate/how-to-find-the-motivation-to-kick-your-opponents-ass/
Cheers
Hey Sam – Cool you’re a tennis player too. Yea, teaching tennis at Club Med is definitely a dream job. You meet a mix of people from all over the world. Depending on which Club Med you work at, the levels can vary. In Turks and Caicos where I worked for a couple years, it was more of a party/adult village, so there were more beginners who wanted to take advantage of the included group lessons. In Columbus Isle, in the Bahamas, the players were definitely more advanced and mostly from Europe. You teach beginner, intermediate and advanced classes every morning and usually split them up with another instructor.
Yes, feeding balls can get a little old. Like any job, especially working at Club Med, you need to manage your energy and enthusiasm and keep mixing it up. If I found myself getting bored I’d immediately change the drill so the students never noticed any drop in energy. You also have to deal with the ex-college player that wants to kick the pros ass. I usually was able to beat them, since they were up drinking all night and I had home court advantage ;)
You only get one day off a week, so it can be exhausting if you party too hard. I learned quickly and was usually the first one on the sports team to go to bed, by midnight if I was lucky. Again, this job like any “dream job” is about managing your energy. When you’re on the court you trying to teach, entertain and connect with each student. Big secret weapon for me was remembering every student’s name. Once you make it personal, they love you, and that makes it easier and more fun for everyone.
Does it ever get old? Well, that depends on a lot of things. Mostly on your attitude. I never get sick of living in beautiful locations. Sometimes you miss the variety and choices of restaurants and cultural activities you have in the big cities, like SF. On the other side, you don’t miss the traffic, the dependency on cars, the insane expenses of rent, gas, entertainment and whatever else. You do have to learn to live with a lot less and not much free time.
Also, in addition to teaching tennis, Club Med expects you to participate in the nightly cabarets, so expect to dance, dress up and lip synch every night of the week. Fortunately, I’m a guitar player and made a deal with management that any show I participated in would involve playing live music. They love staff with additional talents such as singing, dancing or instruments. I even got a weekly live beach bar gig at Sharkie’s bar in Turks and Caicos.
Club Med gives you housing, which is another way of saying “miniature dorm room” and sometimes you have to share with another employee. You get paid a monthly salary of between $750 and $1000. However, you have no other expenses and can be a great opportunity to lower your monthly nut and save some money at the same time. I have rental properties, stocks and bonds, so it’s been a great way for me to love my job, meet amazing people and stay fit.
I’m moving to Punta Cana in a month and giving it a go as a tennis instructor on my own. See you there!?
Nice! OK, perhaps I will see you in Punta Cana soon. Let me look up where that is first!
I hope one of the other benefits of working at Club Med is the after hours romance. Tell me there wasn’t countless stories of love?
I hear you on the ex-college tennis players wanting to kick ass. I just tell them, yes, please kick my ass so I can get a free lesson for once!
Sounds like one really needs a lot of energy. At my age, I don’t know if I can hang. I’d just like to teach some lovely clients in Bora Bora for 3 hours a day at most and return to my villa above the water and feed the fishies.
Hey Sam – Yes, there’s definitely a lot of after hours romance going on at Club Med. It can be fun as hell for a long time and a lot of the Club Med staff become addicted to that easy hook-up lifestyle. Some of the more interesting love stories end up happening between staff members, who even as they’re hooking up with the guests, they also start to hooking up withe each other. Sometimes those relationships end up sticking and they become a “Club Med Couple”. That happened to me and I ended up leaving with my girlfriend and we’re moving to Punta Cana together. Anyway, figure your first six months will be a giant hook-up fest. There’s usually very little way around it, unfortunately ;)
Yes, you need a lot of energy and at your age and fitness level you can definitely hang. You just have to decide if it’s the kind of lifestyle you want to live. For sure, it’s worth the experience for a year or two.
Cheers.
My current net worth mix is as follows and I follow it closely. I agree with you that as your portfolio grows, you will risk less and less. But what if you don’t? Granted, I’m still young and have a higher net worth than most my age, but here is my allocation:
Cash – 15.5%
Stocks (Only Equities) – 50%
Real Estate (including house & REITs) – 20%
Bonds – 14.5%
I’m a total worst case scenario investor (why I hold a lot of cash). However, if the stock market were to drop tomorrow 40% – I’d be all in with my cash…so, I don’t know if that says something?
I like that net worth allocation split for you Robert. 30% of your net worth is defensive in case all hell breaks loose.
If the stock market were to drop 40% tomorrow, I have a feeling you and very few others would want to risk investing in stocks given we’d be in the midst of some attack w/ the fear of another 50% drop the next day.
Interesting article Sam. I’d actually say that its investing in bear markets that really make you wealth, you just realize the returns in bull markets. I look at a stock as a bond with fluctuating principle. While the black swan events can temporarily hurt your principle, as we saw even with things like 9-11, and LTCM, stock markets eventually recover their losses. Perhaps age will dim my cavalier attitude to risk, but I’m confortable with most of my net wealth in dividend paying stocks for now, with real estate (owned) as the balance.
True, if one has the capital to invest. It’s been hard on a lot of young folks who graduated in 2008-2011. So much opportunity to start investing, but no money, and no experience either.
How old are you now?
Great assumptions, but I’ll stick with my ultra conservative bond fund/real estate mix as I am ver risk adverse in this economy. With all the financial turmoil going on in this economy it won’t be long until the powers at be pick up a telephone to say, “sell, sell, sell.” Then we will be right back where we were in 2008-2009. If you can explain where this bull market is coming from maybe I’ll buy in to your asset allocation model. Of course, Sam, I mean no disrespect, but it’s easy to create an asset allocation model that says invest X% in stocks and Y% in real estate. The problem is that there are thousands of stocks and various geographical locations by which to purchase real estate. This means that even under these models someone can find oneself screwed if they choose poor underlying investments with their asset allocation.
Romeo,
May I ask whether you were ever majority in stocks and got hit to cause your ultra conservative outlook? Yes, there is no guarantee in anything. Maybe I need to reemphasize this point event more and again as I thought this message was clear.
S
No, I would not. Thanks for asking. I just realized that stocks are much more volatile than bonds, and that there is far more to learn about stocks than the majority of people realize. The chapter, We are Horrible Investors, of “How We Prevent Wealth” details my position. I’m not necessarily anti-stocks. I’m just against people who invest in them without enough education to support their reasons to invest in stock a, b, or c. These same people can’t even tell you what a P/E ratio measures or how to even analyze a Cash Flow Statement, yet they invest in stocks. Learning to invest on stocks, rather than speculate in stocks, takes time and a genuine interest to learn what one is investing in. I’m against blanket “invest in stocks” advice that does not give specifics. I don’t have the time (or would rather not put in the time as stock investing is not a part of my retirement plan) to learn what I truly need to know about stocks, despite my MBA, so I just stick with debt instruments that also can provide 6-9% returns.
Got it. I think folks have taken my category “Stocks” too literally in this post, and think just stocks. I’ve updated the column to include Equities), and the assumption:
* Stocks include individual stocks, index funds, mutual funds, ETFs, structured notes. Bonds include government treasuries, corporate bonds, municipal bonds, high yield bonds, and TIPs.
Thanks for the feedback.
When do you plan to reach financial independence? Are you not worried that perhaps having your entire net worth in stocks might disrupt your path to financial independence?
It’s all fine and dandy if you have a dividend stock providing a 4% annual yield. But what if it goes down 30%? Just hold on I guess.
On real estate, it’s important to be able to afford real estate before buying real estate. If you are happy renting a one bedroom apartment, that’s fine. Just know you are by default shorting the real estate market here.
Old homes = more maintenance indeed. SF is full of classic Edwardian and Victorians that require frequent upkeep. I’m gravitating towards newer myself as I age for simplicity reasons.
Great post! I’m going to study this intensively over the coming weekend. Now I understand why you think 90% in stocks at 29 is way too much in stocks.
I really do hope you diversify more this year. All is good when it’s a bull market. But, bull markets don’t last forever.
Great column, really appreciate all the time and effort spent explaining strategy. All three of the described allocations are great for those in the stage of building net worth. One has to assume risk to get the big jumps. If one is building a ‘critical mass’, stocks and real estate are the only possible paths (other than the ‘X Factor’).
My own allocation is conservative, based on capital preservation, at this time. I would call it a “Self-Unbelief Framework”. I do admire those who bet on themselves, especially when that bet turns out well. For myself, I use history as predictor, and have determined that at this time I will be better off hanging on to what I have accumulated. This may appear to be ‘risk-free’, but it does assume the potential for inflation, and devaluation. But I have proven to myself that I have the financial ‘Midas touch’; everything I touch turns to mufflers.
I no longer see a correlation with stocks/equities, and economic performance. Real estate values are driven by jobs; very few regions have seen a recovery in RE. I also do not see a home as an investment; it is a place to live, and enjoy life. These observations are based on my own experiences, and what I see moving forward.
So, at the moment, I am white-knuckling it. I have never seen this kind of disconnect between economic reality and asset performance, and waiting for some clear path forward. Until the Federal government can pass a budget (they haven’t in almost four years), remove the 7-year long ZIRP which penalizes savers and rewards debtors, and find a way to eventually remove the excess QEs and >$1 trillion annual spending deficits, I will stay on the porch while the ‘big dogs’ run. Or don’t.:-)
Oh man, TOO FUNNY!
Well, if you ever decide you want to write a post about the “Self Unbelief Framework” and turning everything into mufflers, let me know! Will help the young guns now who think their middle name is Buffett.
Really good points. I hate the article that came out recently about Orlando the cat picking stocks better than investment professionals. Investment professionals are trying to beat the market without losing their shirts. Orlando the cat picking random stocks in a bull market is probably likely to do better than pro’s. Just like a non-pro investor picking stocks in a bull market is going to do well even with little knowledge of how to pick stocks. Risky stocks might perform the best when times are good. The real question is how much you lose when the market does poorly. The non-pro is likely leaving themselves over-exposed have way too much risk in their portfolio and can potentially lose everything where the pro’s understand that once you lose everything the music stops and the game is over. Everyone is a genius in a bull market.
Interesting perspective. Never heard of Orlando. Everyone is indeed a genius in a bull market. Furthermore, I’ve never met anybody on the internet who has ever lost money in the markets either. Now you know why I’m so bullish!
Do you have a chart of “ideal net worth” based on age , especially for those living in expensive areas such as the Bay Area?
Take a look at this post, “The Average Net Worth For The Above Average Person.”
Should tie in pretty well with this post. Lots of debate, but it’s the way I see it. Folks forget to realize the words “above average” in the title.
Very nice article. I’ve been fiddling around with how to allocate net worth between different classes the past year, and will do some this year as well. I’m closest to new life framework, where that I’m dabbling in all areas trying to understand the risk/gains.
I’m surprised at the amount of percentage put into savings/MM/CD. I understand that some people have those high yield CD before the interest rates tanked, and some were able to sign up for high yield savings account, but those are in the past. Is there anything that’s low risk these days with reasonable yields?
Sure, here is an article with Risk Free alternatives: https://www.financialsamurai.com/2013/01/23/cd-investment-alternatives-why-im-no-longer-investing-in-cds/
I don’t think having 5-10% of your net worth in Risk Free is too much at all.
I hear what you’re saying – let me use the example and you can provide input perhaps?
$150k risk free
$200k stocks
$50k bonds
$300k mortgage/$300k value ($400k value at purchase)
Thoughts?
wait for it to rise and rebalance as appropriate? Right now the real estate portion has a net zero effect on portfolio allocation.
From the little I know about your situation, hang on to your home, enjoy life and create fond memories. You bought your home for a better living situation I presume. If you have multiple properties, it’s a different question and answer.
Your equity will eventually build back up again through a recovery and principal pay down.
Fair enough! Honestly at this stage I’m just trying to figure out if I should pile more cash, or possibly invest in a second home… which would increase that percentage of my portfolio. That’s what I was thinking anyway. Hence my question.
I’m bullish on real estate. It is my favorite asset class to build long term wealth. Hence, if you find a property that works based on conservative assumptions, go for it! Just hold on for the long term.
https://www.financialsamurai.com/2012/10/16/real-estate-is-my-favorite-investment-asset-class/
when you suggest real estate should be 35% (30yro, New Life)… are you implying 35% equity portion should be real estate portfolio. or 35% total asset?
example – my home is about breakeven with my mortgage (tough market here). so technically i have no equity.
does that make sense?
Good question. My hope is that the real estate equity is there and can account for 30% of one’s net worth at that age. It all depends on when the financial snapshot is taken.
Say you have a $70,000 in stocks, 30% in Risk Free and suddenly put your entire 30% risk free into a downpayment. Then Risk Fre goes to 0% and Real Estate goes to 30%. Of course values change. With real estate, I’m hopeful we are in a Multi year upswing.
Don’t take my numbers as given. Use them as guides instead.
Regards
Sam:
I saw the Kevin said that his first comment did not go through. The same thing happened to me. So I thought I would also try again.
I think it is great that you posted this article. We all need to be directing more attention to this important question.
As you know, I developed the Valuation-Informed Indexing strategy, based on the research of Yale Economics Professor Robert Shiller. Valuation-Informed Indexers take a very different view of things.
You say that “you can’t beat the market.” There is a hidden assumption implicit in that claim — that the nominal price is the market price. The market doesn’t only tell us the nominal price. It also tells us the extent to which we need to adjust the nominal price to identify the real price. It does this through the P/E10 metric.
In 2000, the market was priced at three times fair value. Was the market saying that the real value of the market was the nominal price being cited in the media. Or was it saying that you need to divide by three to know the real price. Shiller’s research (and the research of others who have come along since) show that you needed to divide by three.
You obviously want to be at a low stock allocation at a time when the market is in the price of losing two-thirds of its value. Conversely, when the market is underpriced and prices are headed upward over the long term, you want to be going with a high stock allocation. It is not posssible to decide on the right stock allocation without taking valuations into consideration.
Rob
Interesting ideas from Bennett. Two questions:
* What is your personal asset allocation, given current market conditions including PE10?
* What was your highest stock allocation over the last 15 years of widely varying PE10? It seems you’ve had a lot of opportunities to test your theories first hand, so your portolio’s returns must have beat the overall market substantially over the period, is that correct?
I guess I am in trouble since I only plan to live to 100 years old. If I run out of money there is always a reverse mortgage! At my withdrawal rate (3%), I will still have my principal, so I will be fine. Liquidity becomes important as you age because you no longer can generate income.
The real problem will be all the people who should retire and won’t because of insufficient savings. They will continue working and those jobs will not be filled by the younger generation. We need younger people working to support Social Security.
Speak to Kevin up top on how to live past 110.
We do need to encourage more of our youth to work longer for the older generation. Perhaps my blog, and others who talk about early retirement our doing our nation a disservice then. Keep on working folks. We need you!
Very interesting, I only want to live that long if I can still do things. The thought of just sitting around in a nursing home and someone wiping my drool is not living. I plan on avoiding the nursing home for as long as possible.
The country needs lots of young people who are earning lots of money (W-2 or entrepreneurs) and paying lots of taxes to support the baby boomer generation or perhaps other generations.
Hey Sam,
My comment didn’t seem to go through last time so I’ll give it another shot. ;) I think that even 110 is on the short side, as we can expect medical advances over the next 2 or 3 decades to dramatically increase lifespans far beyond that. I believe the focus should definitely be on extending the portfolio as far as possible, as you don’t want to run out of money.
Hopefully if you’re able to last to 110 you can also last another few decades. Maybe I’m just overly conservative, but I don’t plan on using principal at all for retirement.
Sounds good Kevin. Maybe we can write a derivative bet? You bet me you will live longer than 110, and if you don’t, you can put it in your will to donate the money to charity. If you do, I’ll do the same, but I’ll be dead by then.
Just the point I was going to make, Kevin. Operating under the assumption that you’ll live to be older than the oldest person to ever (Jeanne Calment, who lived 122 years) seems like a a decent plan. Planning to live much longer than most people currently live, possibly as long as 120, 130, or even 150 years, strikes me as a decent plan. At worst, you’ll have that much more money to leave to your children (or great, great grandchildren); at best, you’ll have that much more money to afford your cybernetic impacts as you become more machine than man.
I am closer to your base case framework, but I’m transitioning. At 30 with 6 years of work experience, my current allocation is around 83% in stocks, 10% in bonds, and 7% in risk-free investments.
The risk-free investments represent about 1 year of living expenses, and they were built in my first year of working (so year 1 was 100% risk-free investments). For the past 5 years I’ve been focused primarily on growing my stock portfolio with just the left-overs going towards bonds and risk-free investments.
Now I’m comfortable with the amount of stock exposure that I have and I’m working on building up my risk-free investments to purchase a primary residence. I expect that by the time I hit the 8 years of working mark I won’t be too far off from your “New Life” framework. I’ll probably still be slightly over-exposed to stocks based on your model (closer to 50%), but I have a very healthy risk tolerance.
Sounds good. You’ve got a plan, which is really more than half the battle here. The other part is to make sure you execute. I’ve know way too many folks who thought equities would go up forever only to get slaughtered when the downturn came.
I was shocked to find out that many of my friends who work in finance had their net worth fully geared towards equities, leveraged in effect. When things are going up, always think what could go wrong and vice versa.
“The most dangerous person is one that has only experienced a bull market” – This is one of the most important lessons I learned from playing poker. Everyone is a genius when everything is going their way, but its when things turn bad that you really see who’s for real and who was just along for the ride.
Even pocket Aces loses to pocket Kings one out of every five hands. Bad beats happen all the time.
Couldn’t have summed it up better myself! It really doesn’t take much to know the odds on losing, but it takes losing to know the odds.
Nice Work Sam!
I don’t think a regular investor can outperform the market in the long term either. At least I know I can’t. That’s why I invest mostly in index funds and have a smaller account for dividend stocks. I’m overweight in stock and real estate right now. When the interest rate improve, I’ll shift more toward bonds and Risk Free. I’m too risk averse to invest a huge amount in my own business, but that may change in the future when I have more time.
Great article.
Just by dedicating more time to your own business is an investment in itself. You can take some of the lost $60,000 a year and allocate a portion of it towards your business if you like. That might keep the motivation up for longer.
Great article Sam. I’d be interested in hearing more about alternative investments, especially as to how they would fit into the “new life” scenario. I always thought of angel investing for people who were multi-millionaires. Anyone have any thoughts on how to get access to angel investing deals?
There’s Angel List where you can look for ideas to provide seed capital. I strongly encourage you to only invest in money you can seriously afford to lose, b/c most investments end up as zeros.
I’ll check it out. Thank you, Sam!
A key factor in asset allocation is your personal risk tolerance. It’s tough to know how you will respond to drops in the market until you have experienced one. Amanda, there’s nothing wrong with investing into a target date fund. As long as you understand the parameters of the fund, it’s a great asset allocation decision. Zvi Bodie in Risk Less and Prosper recommends keeping your minimal retirement expenses in inflation protected instruments such as TIPs and I Bonds. (He is exceedingly risk averse). You really have to understand that markets are both cyclical and unpredictable.
Bingo on risk tolerance and not knowing until you know. The day of reckoning will always come. It’s how we pick up the pieces that matters most.
Right now I am in a target fund (I know…you are probably cringing:)). About 40% of our net worth is in stocks, 20% is in our home, and 40% is in risk-free. I actually just had my free consultations with Personal Capital and they pointed out a lot of great things for me to look into with our portfolio and overall net worth. A great service!
Not cringing at all Amanda. If you are comfortable with the target date fund allocation, then go for it. You might as well compare the fees of your target date fund with Personal Capital since you’re using the tool. I can’t believe how much I was paying for my Fidelity Growth Fund after running the fee analyzer. Made me sick!
I like your balance given you’ve just taken the leap of faith into self-employment. I’d give it another good year of 40% Risk Free and then mobilize some of that money to other investents if you start experiencing some financial success.
Thanks for your thoughts and strategy!
Fortunately, my fees are pretty low (according to my account my projected fees over the next 20 years $5,700; I think it’s less than half a percent).
Rock solid article Sam! I can see how this took a long time to write. I am totally with you that one can never outsmart the market. Even the best fund managers in the world can’t get everything right. This is why I will never put the majority of my money in the markets alone. And having everything tied up in property isn’t ideal either. I tend to stay widely allocated with my investments because I am not comfortable putting all my eggs in one basket. And I definitely don’t want to live off minimum wage levels in my retirement!
Thanks Sydney. It’s eye opening to see the resumes of some of the best money managers in the world underperform or blow themselves up. Nobody can consistently outperform the markets.
Sam, what a comprehensive picture you paint. You must have worked extremely hard on this! It is going to take some time to digest….I have a few properties that I own. I love the “Self Belief” framework. That’s where I am at right now. Thanks!!
Good luck Tony. My goal is to transition to the Self Belief Framework as well, but it’s going to take a lot of time and effort. Let’s give ourselves 5 years and see where we end up!
Probably the best article I’ve read on this site…maybe because it is one of the questions that I always ask myself! Asset allocation is tricky and I think there are alot of other variables that would come into play depending on geography and at what point in life you really start to ratchet up the earnings, but for the most part your analysis was spot on. For the HNW individuals, most of the time you get there earlier in life is because of a business, and it is critical I believe to start to transfer some of those X-Factor assets to the other side of the balance sheet to smooth out the risk of a high concentration being in one area.
Thanks mate. I’d learn to learn more about how you plan to shift the mix of your $10 mil net worth. That’s quite a pretty penny that can easily generate hundreds of thousands a year in passive income if you so choose to hang up your boots.
I’m lucky enough that its still a ton of fun and exciting, so I sort of am already doing what I love and don’t feel tied down at all. This week for “work”, I’ll be touring a snowboarding company, then making a long weeknd in Park City and hitting the slopes…Life is good! As far as transferring, I’m still happy to be in the building stage, but my partners and I do a nice job of being disciplined to take distributions regularly without affecting growth. I’ve also turned my cashed my real estate investments that have links to my business, into other paid for real estate that generates income, levered the non-passive back up (no PG btw) and will rinse and repeat in another 8 years on that investment. It truly is amazing the cash flow that starts churning if you have the patience to be disciplined.
I hear what you are saying about individuals in retirement being too conservative at the risk of not having enough to live on. My mother (and father–now deceased) did a good job of saving, but she could live another 25 years. She really doesn’t understand cash flow so I have been trying to help her with this.
JT, hope your mom lives a long and healthy life. And if she runs out of money, at least she has you.
Definitely bookmarked this! I’ll need to be referring to it a lot in the coming weeks since I am looking to transition more into my own place!
It’s funny because I don’t have any money in stocks any more. How do you feel about a split of real estate (rental properties not primary residence) and investing in yourself in your 20s?
You’re following The Self Belief Framework, which I think suits you fine given you’ve decided to work on your online business right out of college full-time. If you can build your business much faster than you think stocks can grow, then go for it! You have plenty of time to rebuild if things don’t work out.
Why did you increase your allocation to bonds recently as the interest rates are the lowest ever? Why buy at the top when there isn’t much upside possible?
Not sure if you’ve been paying attention to US treasuries, but the 10-year yield moved from 1.4% in August 2012 to just recently 2.04%. That is a 46% move higher. The top isn’t now. The top so far in Treasuries was last Fall. Furthermore, the S&P 500 is up 6.5% in the first 1.5 months of 2013. I expect a roughly 9-10% return for 2013, hence why I’ve shifted my allocation.
Please share with us your viewpoints about the markets, economy, and your current net worth allocation. It does concern me that now that the stock market is close to all time highs, everybody is all-in.
Thanks.
Hi Sam,
So are you agreeing that the maximum upside has been met with bonds by saying the top was last Fall?
You believe there is another 3% in the S&P, but how much more do you think are in bonds, your actions reveal you think there is greater than 3% upside.
My viewpoint on the market is to get as much money as possible to retire early. Earnings are good and I think will continue to be for sometime as so many marginal competitors went under/purchased during the greatest recession and therefore my allocation is 100% equities, 60% domestic, 40% Asia ex-japan. I’m in my late 20’s so my investment horizon is quite far. As your message, and the general FIRE ideas are spread, I would like to know your thoughts on if you think the greatest threat to FIRE is government.
I think its great you have the conviction to have 100% of your net worth in equities. Clearly you have a lot of upside as someone in your 20s and you are doing what you think is most comfortable for you. Perhaps your perspectives will change as you age and gain more money, or perhaps it won’t. This post highlights my recommendation based on my experience.
Last Fall might have been the top of the bond market, who knows? If we rally 30% in bonds to reach the peak again last fall, I’d say that would be a mighty fine return. Feel free to suggest a net worth allocation recommendation for me.
You check the 10-year yield as of 4/26/2013? 1.67% vs. 2.05% when I bought. Check out VUSUX during this time frame and let me know if you have any questions on “why buy at the top.”
I’m curious what you think about a 30 year old keeping roughly 20% of their net worth in cash…most of which in a high yield savings account. Is this too much?
my $0.02:
20% cash at your age is a bit off-balance, IMHO… i’ve always tried to use a balance in our financial networth ‘basket’ – for us, that means:
– 50% investments (indexed or low-fee equities/bonds and ROTH level at 30% of the 50%),
– 25% real estate (smaller home = lower repair/maintenance/taxes),
– 15% insurance (term life policy when young to protect family, then small Vanguard annuity after 45 – same as a policy without price gouging in rising payments and no cancellation),
– and 10% cash…
and of course, living with no debt aside from a small mortgage…
now in retirement,
– there is absolutely no debt, mortgage paid off,
– no term or whole life insurance, but Vanguard annuity has tripled in value
– one- to two-years of living expenses in cash
– living off taxable investments until SS FRA (or 70 years of age)
after Club Fed starts demanding its cut of your already taxed savings we’ll have a nice tax-free ROTH and an annuity that can be used as a nursing home policy
my whole (long-winded) point is that we always thought it was a good idea to have a long-term strategy that incorporates life-style choices early on… (i had a good teacher at a young age – my Mom, who grew up in war-time Europe, and who, later in life in America reused her aluminum foil, recycled her paper grocery bags, and washed out ziplock baggies – a bit extreme, i admit)
everyone’s situation is different – if you have a big house and a mortgage, perhaps 20% cash is not a bad idea (catastrophic repairs, potential job loss, etc.)