r2i - asset allocation plans

[rajsriadit]

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r2i - asset allocation plans




From: RRK (Original Message)Sent: 1/9/2003 11:37 AM

Folks,
I would like to seriously consider the asset allocation as the most serious thing in your financial planning. If you get this right, everything will fall in place automatically. You get this wrong, your whole financial planning is screwed up. Consider this as making the foundation for your house.

Now looking at Gujju's thread and TMUS thread, I see lot of similarities in the situation. Hence this post to integrate the planning.

[LIST=1]

First decide Equity allocation in AAP. If you are young, go for higher equities. Time is on your side and will work out to your advantage. Have the disciplince to invest regularly without looking the WSJ or prices of your holdings everyday.

If you have unstable job, unhealthy life style, bas savings habits, reduce your risk in equities.

Dont invest the money you plan to withdraw within 5 years in equities.

If you have firm plan to r2i, reduce your stock portion in AAP.

If you wish to leave the money here even after r2i, go up to 70% and not more than that.

If you are paranoid, would like to move all your money to India on return, never exceed 50% of stocks. Also follow rule #3

If you are in between (5) and (6), go for 60% or something between 50%-70% as your risk tolerance, investment horizon allows.

If you are not sure, follow Bogle's rule. start with 50:50 and adjust it in the direction you like most.

Once you decide the decide your stock allocation, decide cash allocation.

Cash allocation will be your emergency fund+your day to day account balance. If you have Ultra short term needs, ( money reqd within a year), put that in cash too.

Now you will have C:B:S like 10:40:50 or 20:20:60 etc. This is key. You only can do that. Sit with your spouse and agree on this number.

Rest goes to bond portion.

Now look at your entire portfolio as % of ret funds and taxable account.

First decide 401k funds. You dont have all the choices there. So, it is important you choose good funds from your options. Rest you can adjust in taxable account.

Fill up your ret fund using bond/cash allocation first. This is like putting big blocks first, then going for smaller blocks.

Keep emergency funds outside ret-accts.

Stocks are best in taxable account. They give you opportunity to harvest CG losses and reduce taxes. Also allow 0% tax for r2i-NRA. Since they dividend yield is lower they are tax efficient.

After you filled up the bond/cash in 401k, if you still find room, go for stocks. Choose the best stocks funds available in your choices. Choose the funds in following order in your stock portion inside 401k
(1) REIT (2) Value (3) Small cap (4) Mid cap (5) Large cap

Always choose index funds where available, keep an eye on expense ratios. These are the only choices you can control. You dont know what stocks your fund manager is buying while you are working or sleeping. It could be next Enron or World Com. You cann't do anything about that.

Once your 401k is filled up, go for IRA and then taxable account.

If you are running out of room for bonds, even before your 401k is covered, consider savings bonds first, they are tax efficient, and offer other advantages. No expense to maintain. Invest in all type of bonds. I already wrote about how to choose bonds. refer to http://rrkind.tripod.com/articles/rrk_cur_20910.htm

Always review your portfolio in line with your r2i plan and what you want to do after that. Keep your AAP even after r2i. So, it is very important to decide what is good for you for long time. Otherwise, when you need money urgently, it may not be there.

Sleeping well is important, but remember to sleep well, you must eat good. So, eating is also important as well as sleeping. Because some folks, decide higher Fixed Income/Bond/Cash allocation and have less in stocks. These folks can sleep for some time very well and even can laugh at others for a while. But at old age, there is not much left for eating, also empty stomach does not sleep very well. The point here is only stock provides money to last after taxes and inflation, and other asset classes dont. Remember this when you are deciding your Asset Allocation.

Saving and prudent living is more important than your investments. They are the brick stones of your house.

The goal for Financial planning is to be happy and enjoy the life. So, be aware, all the time, that you are enjoying the life and make sure you enjoy all the moments.[/LIST]Good Luck !
** RRK

[rajsriadit]

From: hawapaniSent: 1/9/2003 2:26 PM

RRK: U did it again , A very good post. In point# 18 , I will appreciate if u can name some of the fund name also ( Vanguard and Fidelity) in that point. I have a 401k account with fidelity should I plan to open an IRA and other accounts with them after R2I or I can also open with Vanguard. I mean costwise which one is better. I think there must be some cost involve when we move 401k account to IRA account.

Also Please put this thread so that it can be accessible easily.

Thanks

[rajsriadit]

From: vinod281Sent: 1/9/2003 3:54 PM

RRK,
Good post. Nice to have a consolidated post of all the info. Would be excellent starting point for all.
Vinod

[rajsriadit]

From: Old-spice2Sent: 1/9/2003 4:11 PM

Good post. Would like to add few more points:

1. If plan to LIA for a long term (> 5 years) consider buying a house. Real Estate is another instrument to diversify your asset. Apart from CBS you can also have some $$ in the house.

2. If plan to r2i soon, then real estate is a safer bet in any major Indian cities. This will offer sound sleep in old age.

[rajsriadit]

From: SomitSent: 1/9/2003 5:13 PM

Excellent post RRK. After reading all the great posts here I am motivated to start investing in stocks. But since I am on H1B and my visa expires next year, I will eventually R2I. I have not applied for GC and have no plans to come back. So I am not sure should I invest here or should I do it in India.

Is it prudent for a non US citizen to leave money here in USA be it stocks or bank account ?

Thanks in advance,
Somit

[rajsriadit]

From: zarasuno_Sent: 1/9/2003 5:32 PM

Excellent Post,

I am starting out on investments and these kinda posts help a great deal. One question on points 15 and 18 and 20

15)Fill up your ret fund using bond/cash allocation first. This is like putting big blocks first, then going for smaller blocks.

18)After you filled up the bond/cash in 401k, if you still find room, go for stocks. Choose the best stocks funds available in your choices. Choose the funds in following order in your stock portion inside 401k (1) REIT (2) Value (3) Small cap (4) Mid cap (5) Large cap

20)Once your 401k is filled up, go for IRA and then taxable account.


What does 401k filled up mean. In my 401k i invest say 10% everymonth within which 50% in bonds 50% in stocks. This is a continuing contribution and will keep my allocation at the same level throughout.

Do you mean to say that if i have an estimate of my 401k being 100k then first years i keep investing 100% in bonds/cash till i reach 50k and then start investing in stocks?
Once your 401k is filled up- what does this mean??

newbee

[rajsriadit]

From: RRKSent: 1/9/2003 5:51 PM

Thanks for all your kind words. Since I wrote this in one stretch, without revising it, I might have selected poor words. If any of this is confusing like newbee post, pls dont assume something I did not mean.
I will try to correct them.

newbee,
I am only taking about AAP - asset allocation plan. It is planning exercise. I am not talking about contribution ( it is your confusion ?)

One one hand you have accounts and another hand you have asset classes. I am talking about the marriage between these two.

1) Account type: Plan for 401k first, IRA next and then taxable account. Since Roth is dropped, I did not consider that. If you have Roth, then Roth comes after regular IRA.

2) Asset type : Bonds/cash, REIT, value, SC, MC, LC in this order.
Ofcourse emergency cash, day to day cash accounts are outside.

Hope this helps !
** RRK

[rajsriadit]

From: SomitSent: 1/9/2003 5:59 PM

RRK, Vinod and other gurus

please answer my question.

Thanks,
Somit

[rajsriadit]

From: vinod281Sent: 1/9/2003 6:24 PM

Somit,

Yes it is prudent to leave money in US after return to India even if you are not a citizen of US. More important is your comfort level. US occasionally blocks money from people from some countries like Libya, Iran, Iraq (the regular suspects). So it can happen in our case also, but it a small chance and if relations deteriorate significantly at any time we might at that time evaluate the situation and consider withdrawing. But for now dont think too much of this. There are other alternatives around this but let us not go there.

Vinod

[rajsriadit]

From: SomitSent: 1/9/2003 7:36 PM

Vinod,

Thanks a lot for your reply.

I am posting another question regarding portfolio allocation in another thread

-Somit