How I think about asset allocation

Last updated: Jan 30, 2021

This is from an email I sent to my brother in August 2019. I've forwarded it to a couple people since and thought it's worth sharing more broadly. If there are any parts you find interesting or that you disagree with, let me know.


I would say there are basically two smart ways to invest and lots of dumb ways to do asset allocation. Your goals should be to minimize fees, get broad diversification and just keep money in the market as long as you can. Thinking about different pools of money in different ways is good. Some is for retirement in something like 20 or 40 years. Some is to buy a house soon. You should take much less risk with money you need to use for a specific purpose soon. The least risk pool is for an "emergency fund" in the first link above that would just be in cash. Vanguard has a good yield on cash right now compared to other ways to hold cash.

As far as where to open an account, it doesn't make a huge difference but I use Vanguard for two reasons. One, they have that good yield on cash. Two, their funds are super cheap because they are the biggest and continuously lower them to stay as cheap as possible. Their interface is terrible which is kind of good because if you can avoid thinking about what's happening day to day, it's better. I can't do this but good advice is to only look at it every 3 or 4 months or maybe only once a year. The only thing that might make a difference is to make sure that the brokerage allows you to automatically reinvest dividends and capital gains distributions from the funds.

You should focus on stocks/equities, but keep a decent chunk in bonds. An old rule of thumb is to keep your age as the percentage of your assets in bonds and the rest in equities. So maybe 35% bonds / 65% stocks. Newer advice is usually to put everything in stocks that you don't need for at least 20 years or so. The biggest question ("risk aversion") is how you would personally/psychologically deal with the portfolio being down 30-50% if you're all in stocks.... It's hard to deal with and hard to know in advance what you would do.

Then you need to figure out US vs international. Most advisors in the US recommend a pretty extreme focus on the US, in my view. It's not obvious to me that the US will be as good a place to invest for, say, the next 20 years as the last 100. So I weight a little more toward international than a lot of US-focused advice.

So I mentioned there are two smart ways... one is to pick individual funds, usually 3-6 funds, and then rebalance (sell the best performers and buy more of the worst performers) about every year.

The other way is to just buy a "target date" fund. That is the much easier way and makes it much easier to decide what to sell if you want to buy a house or whatever. The way to do that is not necessarily to pick a fund based on the date but to decide what percentage stocks and bonds you want and pick based on what the funds do. In my retirement accounts, I only use a target date fund (VTIVX, the 2045 fund).

What I do:
75% stocks/25% bonds
Within stocks: 65% US / 35% international
Within bonds: 50% US / 50% international

Actual funds (all Vanguard Admiral share funds):
VTSAX - US stocks - 45%
VTIAX - International stocks - 12.5%
VWILX - International growth stocks - 12.5%
VGSLX - REITs - 5%
VBTLX - US bonds - 12.5%
VTABX - International bonds - 12.5%

These percentages are approximate. I do not think that 1% here or there is going to make much difference. The only fund in there that is unusual is VWILX which is much higher fees (0.44%) than the rest and is more aggressive and volatile. I'm not sure if it's a good idea. The performance has been good but who knows what will happen.