Off the top – I’m going to be sharing my personal Asset Allocation with the world and with that comes some disclaimers and important notes.
First I’m just some random dude on the internet, treat my opinions as such, opinions. Anything expressed here should not be considered financial, tax, investment, fitness, health, or career advice. I’m not a licensed financial advisor, tax professional, legal, health, or career expert but I am passionate about Health, Wealth, and Career advancement and have dedicated a lot of time to be versed in these interests and have demonstrated personal success in these areas. I achieved my FIRE milestone and I’m just here to hopefully get others to adopt a FI mindset, to free themselves and their families from income dependence on trading time for money. I’m risk adverse and my investment thesis can be best described as follow:
Optimize investment blueprints that drive current income generation while positioning for long term capital preservation, with a secondary emphasis on capital appreciation.
I’m aiming to utilize my asset base to fund my lifestyle now, at the tradeoff of caping the upside. Instead of working longer and focusing on accumulating a massive stockpile of ‘assets‘ and slowly withdrawing from it when older. I’m choosing to live life while relatively young, and potentially dying with a much, much, much smaller nest egg than if continued to grind away in the accumulation phase.
Second, each individual’s circumstances are personal to the individuals themselves, no one cares about your health, career, and money more than you do – it is your responsibility to do your own due diligence and always consult a qualified financial advisor, tax professional, legal, health, or career professional before making any decision. Your investment goals may or may not align with mine. Personal finance is just that – personal. Invest the time necessary to study and select an investment approach that works for you.
Third, you’re aware and well versed with the 4% Rule and the necessary Asset Allocation required to replicate and achieve that strategy which has been backtested and proven to have success over long time periods. My method and the assets held to achieve my method do not have long track histories. New investment products are introduced every month and as such there is an active component to this investment strategy wherein a newer fund may employ a superior strategy than that of a prior fund and reallocation of funds may be necessary to better achieve my investment thesis. This entails dedicating time towards researching funds. One of the intents of this blog is help you along that journey as well – but again, no one cares more about your money than you.
Treat this as pure entertainment 🙂
Concepts to Understand
As a foundation you’ll need to have an understanding of each of the following:
High Level Strategy
My asset allocation adopts a hybrid approach between Growth and Income with sub-strategies employed within each category. I leverage the 4% rule for future me while adopting an income investment approach to realize gains today at the tradeoff of future growth for present me. To enjoy life now, as opposed to later, while still looking out and planning financially for elder me.
Growth Component
My growth assets are primarily housed in age restricted accounts (401k, Roth IRA, HSA etc.) Since I don’t plan to draw from them in early retirement they can grow until I need them. Either at age 59.5 or even beyond to allow them to grow further.
How much to allocate to growth? I touched on this in my previous post here. Target the value you want at the age of traditional retirement and work backwards from that number to determine the value of account required in today’s dollars. This is essentially determining your CoastFIRE number and striving for it.
CoastFIRE involves reaching a point where your investments can grow to cover your expenses at a traditional retirement age without any further contributions. Once CoastFIRE is achieved, individuals can have confidence in knowing that their financial future is secure.
Note that your target number can be relaxed to some degree as you’ll still have assets invested into your Income Component at the age of 59.5. So if your CoastFIRE number is $2,000,000, your desired income is $80,000 per annum at a 4% withdraw rate. If you Income Component is producing $40,000 per annum, you can adjust your CoastFIRE number and thus your Growth Component target down to $1,000,000.
Priority of accounts for Growth investments :
- 401k to attain employer match.
- Roth IRA to meet yearly maximum contribution limit.
- HSA to meet employer match.
- Taxable brokerage account.
If you’re an active investor you can use your Roth IRA accounts to target higher growth type assets such as cryptocurrencies or technology based assets (companies or ETFs). I recommend this because the total proportion of invested assets is limited to the annual contribution maximum and the investments will grow tax free here with after tax contributions. Do remember we’re investing, not gambling. As such make well educated, long term decisions.
Income Component
This component comprises of a combination of income producing assets spanning Credit, Closed End, and Derivative Income funds. This is the portion of your overall portfolio that will fund your early retirement, acting as a bridge between your income needs today and availability of your funds housed in age restricted accounts. These funds are are invested into yield producing assets as opposed to growth assets at the tradeoff of long term capital appreciation. Let’s dive a bit deeper.
Why yield producing assets? The 4% rule is tried and true but for every dollar invested you realize only $0.25. To produce meaningful income a large asset base is required, and if you’re retiring early it’s difficult to get there as the runway for compounding is greatly reduced.
For instance if we determine we require $80,000 a year to cover our expenses we’ll need $2,000,000 invested with the 4% rule. If we want to retire at the age of 45 we’ll need to have $2MM invested by this age, a tall task, especially if we’re starting late. But if we target an 8% yield target we’ll only need $1,000,000 invested at the same age. Still a steep climb but one of significantly less grade.
How to we achieve higher yield while minimizing risk to our capital? Through investment of the funds I mentioned earlier: Credit, Closed End, and Derivative Income. *Note that yields indicated in the tables below can and will change. They’re just a snapshot at time of writing.
Closed End Funds (CEF): These funds are investment funds with a fixed pool of money and a fixed number of shares that trade on markets like traditional stocks or ETFs. CEFs typically raise money once, at the launch of a fund through an Initial Public Offering (IPO), then invests that capital in a portfolio of securities. After which point it generally does not continuously create or redeem shares for investors like other investments sometimes do. Investors buy and sell shares of CEFs among themselves which can cause the market price of the fund to be higher or lower than the value of the underlying holdings per share (its net asset value, or NAV). When the market price is below NAV it is said to trade at a discount, when it is above NAV it trades at a premium. The NAV price of a fund is exposed to investors and provides clear indication when a fund is ‘on sale’. CEFs generate income through collection of dividend and interest payments from the underlying holdings which are then distributed to shareholders as regular income. Generally speaking the trade off is limited upside growth, and increased volatility in share price. Weaknesses that are offset with the Growth Component of the overall strategy. Examples include:
Credit Funds: These can be a specific sub-class of Closed End Funds which we’ll get to in a second, that are focused on investment of debt. Including corporate loans, bonds, and other forms of lending. Generation of income (distributions/dividends) are the main goal with a secondary emphasis on capital appreciation. Many of these types of funds use leverage which can amplify both income and losses. Examples include:
Derivative Income Funds: This is my personal favorite class of income generating funds and comprises the largest portion of the Income Component of my investment portfolio. Derivative Income ETFs are exchange-traded funds that generate income by using derivatives, typically selling call options on stocks or indexes they own. Known as a covered call or buy-write strategy. As the market for these funds increases fund managers are innovating, newer funds employ options strategies in addition to the traditional covered call to increase income generation or to preserve net asset value (NAV). The income comes from premiums collected when selling these options contracts which provide higher ‘income’ that is passed along to shareholders than that yielded from dividend producing stocks and ETFs. As with CEFs, Derivative Income Funds generally lack upside growth or even exhibit negative price performance over time. There are a wide array of funds available in the space and in a future post we’ll do a deep dive into the levers fund managers can use to optimize returns, minimize the impacts on NAV, and preserve capital appreciation. To give you a simple framework in identifying and selecting which funds meet your specific income and growth goals. Examples include:
I’d recommend all your income producing assets be invested in Taxable brokerage accounts to eliminate any friction in accessibility of funds during early retirement or sudden loss of income streams such as job loss prior to early retirement.
What about Cash and Bonds?
I don’t currently invest in Bonds as I feel the Income Component of my portfolio provides enough fixed income or bond-likeness that makes Bonds unnecessary. My views may change closer to the time I start to draw from my Growth Component but that’s my stance at the moment. As for cash, I have a fairly large cash pile to serve as an emergency fund, enough to cover nearly a year of expenses. I feel early retirees should be a little more prepared than an individual who is still in the workforce or one who is temporarily removed from the workforce and not yet ready to retire.
My Allocations
At time of writing my rough allocations are as below, further broken down into account type. In future posts I’ll share the tickers and assets I own, we’ll chat about the fundamentals around derivative funds, tax efficiency and bunch of other topics.
Growth Component: 42.2%
- 401k: 45.3%
- Roth IRA/HSA: 14.2%
- Taxable: 40.5%
Income Component: 46.3%
- Taxable: 100%
- 401k: 0%
- Roth IRA/HSA: 0%
Cash: 11.5%
- Taxable: 100%
- 401k: 0%
- Roth IRA/HSA: 0%
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