Understanding Our Asset Allocation

A Twitter conversation with the Freedom 35 blog a couple weeks ago got me thinking about our asset allocation.  I’ve always been semi-consciously diversifying our funds across several sectors and investment types, but there hasn’t been a clear, structured plan or method to my madness.  If we had spare money and saw a good investment opportunity, we’d take it.  We have various retirement accounts, rental properties, brokerage accounts, and savings without a unifying strategic vision.  Although I keep a rough idea of what money is where, if we’re serious about early retirement, we need to have a better understanding and purpose for how and why our money is divvied up the way it is.   

After some quick number crunching, I determined that we have the following asset allocation.

July 2015 Asset Allocation

Totaling our funds and realizing that nearly a third of our portfolio is in individual stocks that I’m actively managing and trading myself is somewhat alarming.  Even though I’ve done well in the stock market the last few years, I probably shouldn’t be “playing” with such a large percentage of our assets.  To be clear though, I don’t actively trade all these stocks.  Some I plan on holding long term for dividend growth and reinvestment.  In a future post, I’ll calculate how much of our individual stock positions are long term holds versus short term trades and determine whether or not this needs to be adjusted.

Secondly, our retirement accounts are a mixture of Vanguard index funds, TSP lifecycle funds, and index funds through my current employer’s 401(k).  I don’t have any issue with these accounts and plan to continue normal contributions.

Next, we have five Vanguard index funds in a taxable account.  We contribute to these monthly and I’d like to increase these contributions by 50-100% by this time next year.  I may do this simply by adding a second contribution each month to take further advantage of dollar cost averaging.

After index funds, we have the private real estate loans I’ve briefly mentioned before and will likely discuss in more detail in a future post.  This value can fluctuate based upon what projects are active at any given time and I’d like to keep it at 10-15% of our portfolio.

Coming in at 8% are cash equivalents.  This includes our savings, checking, and money market accounts.  I feel like we are slightly high right now, but 5-10% is probably fine.  If we ever need money in a major emergency, we can always sell some of our stocks and/or index funds.  The current amount easily covers six months’ worth of expenses and I’d rather keep the majority of our money working for us.

Lastly, we have our kids’ savings and trust accounts.  We add a small amount to these each month in addition to money they get for birthdays or other gifts.  Mrs. DTG and I also transferred our Post 9/11 GI Bills to the kids which should cover the majority of their undergraduate tuition.  Thus, we do not have a 529 for any of our kids.

One thing you may notice that is missing is our home equity, both in our primary residence and rental properties.  Had I included this, it would’ve accounted for about 18% of our net worth.  Even though it is a fairly substantial amount, I chose not to include home equity since it can be fairly subjective.

In all, I think our current asset allocation is fairly decent.  Over the next year or so, I plan on bumping up contributions to our index funds, while taking a deep look at our individual stock holdings.  I’ll likely seek to reduce the amount of money I’m actively trading, shifting it into index funds and more stable dividend growth stocks.  Our strategy is still evolving and I feel that posts like this one are helping to bring it more into focus.

2 thoughts on “Understanding Our Asset Allocation

  1. our next life says:

    Interesting to see your breakdown. We should map out ours, just since it’s always fun to see things represented visually! 🙂 We’re torn on cash allocations, too. We keep hearing that people, especially close to retirement (we’re 2.5 years), should keep at least a year, possibly two, in cash. We have well over a year in cash now, because we put our year-end bonuses into Ally and then dollar cost average from there into Vanguard each month, slowly drawing down cash over the course of each year to get us to a single year of expenses in cash at the end of the calendar year. But we also wish that money would be working harder for us — of course, we’ll be glad to have the cash cushion in the event of a market crash!

    FWIW, we track net worth with and without home and rental property equity (three ways, actually — just financial instruments, money + rental equity since we could liquidate that and still have a place to live, and total net worth). It’s just another few data points that are interesting to track over time. 🙂

    Liked by 1 person

  2. Ditching the Grind says:

    Aside from making quick mental calculations, we’ve never really tracked and written down our net worth. I’m sure we’ll be watching it a lot closer now that we’re blogging and I’ll probably borrow your method of tracking it three ways 😉

    It’s always good to have some extra cash on hand to take advantage of nice opportunities that may come up!

    Like

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