As of 2018, with the average savings rate hovering around 4%, a median 401(k) of only $110,000, and an average 401(k) balance at retirement age 60 of around $230,000, many Americans are financially screwed. 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 and you get $27,200 a year to live happily until you die at 85. That’s clearly not enough!
Let’s think about this some more. You spend almost 40 years of your life working just to live off minimum wage in retirement. Hopefully you were able to live it up during your working years, otherwise, how else can we explain a national sub 5% savings rate? Blowing lots of money for fun is fine if you expect to live like a pauper when you’re old. The better way to do things is to smooth out your spending across your expected life expectancy to reduce stress and live a much steadier lifestyle.
We’ve talked in detail about the proper asset allocation of stocks and bonds by age. Just know that stocks should be a minority portion of your net worth by the time you are middle age. If you so happen to have 100% of your investment allocation in stocks before retirement and 2009 happens, well then you are out of luck. Calculate how much you lost, equate your loss to how many years it took you to save the value of the loss, and expect to work that many more years of your life. Now that’s depressing.
We also found out that the median net worth for 2010 plunged 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 almost ENTIRELY consists of home equity! Take a look at this chart highlighting how a record high 30% of American households have no wealth outside their primary residence.
Finally, despite a ~200%+ rebound in stocks since the bottom of the crisis and savings interest rates of only 0.1% due to a dovish Fed, a lot of people missed out on the recovery as evidenced by a tremendous amount of cash still sitting on the sidelines due to fear. 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.
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 based on what has worked for me, and what I believe will work for anybody who is serious about building enduring financial wealth for the long run. I’ve spent over 20 hours writing this post in hopes that every Financial Samurai reader can build a rock steady net worth portfolio to make money in good times and lose less in bad times.
THE MENTAL FRAMEWORK FOR NET WORTH ALLOCATION
* 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 because 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 that you will underperform and 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.
* You are not a financial professional. If you are a software engineer, your expertise is in creating online programs not giving investment advice. If you are an artist, your expertise may be in painting portraits, not recommending a pair trade with Apple and Google stock. If you are a Major League pitcher, your expertise is throwing a nasty cutter, not investing $50 million in a gaming company and going broke like Curt Schilling did of the Boston Red Sox.
I’ve spent the last 20 years investing my own money since opening up a Charles Schwab account in 1995. I worked in equities on Wall St. for 13 years and I received my MBA in finance. Regardless of my credentials, I’m still going to make suboptimal financial decisions because I don’t know the future. If I knew the future, 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 10 minute presentation to a loved one why you are investing the way you are, you might as well be throwing darts.
* 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 easily in one place is important. Personal Capital makes staying on top of your net worth easy and free. The internet has made things free and easy to track your net worth, analyze your investments, and run various retirement scenarios.
* 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.
* Black swan events happen all the time. 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. Furthermore, 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 CNBC and watch them trot out bullish pundits when the markets are going up and bearish pundits when the markets are going down.
* 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 4-7 year upward 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. Therefore, it’s important to have at least half of your net worth exposed to an improving market. The power of inflation cannot be underestimated. If you are a price taker without inflating assets, you are losing.
NET WORTH MIX RECOMMENDATION – BASE CASE FRAMEWORK
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. Online banking is the best place to park your cash and it’s very convenient to deposit or withdraw money. Don’t let traditional banks get away with paying you nothing in interest as you fall way behind due to inflation! At the age of 30, you should have some idea of where you want to live, and 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.
* 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.
* 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 different, renting is discouraged if you can afford to own. And if you just don’t want to own property, then you should consider gaining real estate exposure through REITs or real estate crowdfunding across lower value, higher yield parts of America. I’ve personally invested $260,000 in real estate crowdfunding to gain exposure to the heartland.
* Alternative investments stay at 0% given it’s hard enough to get people to save more than 20% of their income, come up with a downpayment for a home, consistently invest in stocks and bonds, and pay off debt.
* The ultimate goal is to have a roughly equal balance mix between stocks, bonds, and real estate with 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), but at least 30% of your net worth (bonds) will increase, while your 10% emergency fund remains intact.
NET WORTH MIX RECOMMENDATION – NEW LIFE FRAMEWORK
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.
* 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 because you enjoy the feeling of stability and security as you plan to live until 110 years old.
* I’m currently following the New Life framework, but plan to work towards the Self Belief framework below. In order to do so, I need to aggressively grow a business.
NET WORTH MIX RECOMMENDATION – THE SELF BELIEF FRAMEWORK
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 no longer invest the majority of your savings in stocks, bonds, and real estate, but in building a business that may one day grow to be an enormous percentage of your net worth. The X Factor can also include creating anything of financial value.
* 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 and increase your Risk Free percentage. By this time, your net worth has grown large enough where you can live off interest rates 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.
THE PROPER NET WORTH ALLOCATION IS WELL DIVERSIFIED
As we discussed in the Mental Framework portion of this post, financial returns are not guaranteed. Given there are no sure things, 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.
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 goes to zero. This way, you’ve addressed your biggest fears so you can move on with your quest. Imagining a realistic 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 recommendation charts, you’ll do just fine and achieve an above average net worth. Remember, the average American has over 90% of their ~$100,000 net worth in real estate. This is absolutely preposterous because it means that the average American either is buying more house than they can afford, is no longer saving after they buy a house because they think a house is savings account, or is not actively investing in other asset classes. Beware of having the large majority of your net worth in any single asset class.
My goal is to help every reader achieve financial peace of mind in order to do whatever your heart desires. Good luck everyone! Please share your current net worth mix and your desired mix if interested.
Recommendation To Build Your Wealth
The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online tool which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.
One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. Their Investment Checkup tool is also great because it graphically shows whether your investment portfolios are property allocated based on your risk profile. Finally, they just came out with their Retirement Planning Calculator, which uses real data to come up with various financial scenarios based on Monte Carlo simulations. You can input multiple expenses to come up with as realistic an assessment of your finances as possible.
How is your retirement outlook doing? PC’s Retirement Planning Calculator
There is no better free online tool that has helped me stay on top of my finances more than Personal Capital. It’s important to aggregate all your accounts to get an entire overview of your net worth to make proper changes. It only takes a minute to sign up.
Updated for 2018 and beyond. The bull market is alive and kicking due to optimism about earnings growth, low interest rates, and a business friendly environment that has cut taxes and reduced red tape.
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.)
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!
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.
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.
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!
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.
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).
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.
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!
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.
“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 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.
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 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.
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?
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
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/
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.
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.
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!
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.
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.
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 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.
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?
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.
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.
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!
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.
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?
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.
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.
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
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.
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?
Yes I am. And at the current silver/gold ration I am buying 100% silver.
@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.
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
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.
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
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 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?
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.
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.
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/
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.
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!
Sorry, but your guidelines are impossible to follow since I cannot buy one eighth of a house!
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.
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
Thanks
Would you consider REITs as part of the Real Estate bucket or Stocks bucket?
Good question.
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.
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
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
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
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.
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.
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.
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
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?
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.
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?