Is This a Reasonable Allocation for a Working-Age Investor?

Question: I’m considering changing our retirement portfolio allocations as indicated below. Would you mind commenting on this? Nearly all is in tax sheltered retirement accounts and we probably will begin easing into retirement in 12 years at age 60. I read your blog and think it makes sense for us to maintain separate asset classes and re-balance periodically (when an allocation strays 20% from target). Your articles on modern portfolio theory really hit home with me.

Two things in particular I’m wondering about:

Targeting a US equity allocation of 20-30% (including REITs) just “feels” low and I’d appreciate a sanity check.
Since I re-balance and am fairly risk tolerant, should I be skipping minimum volatility funds for more volatility (say choose VWO over EEMV)?

		Current Target	New Target	Change
US Lg	SPY/ RSP	25%	15%	-10%
Commodity Futures	HACMX	20%	20%	0%
Foreign Lg	EFAV	16%	15%	0%
Foreign REIT	DRW/ RWX	10%	10%	0%
US REIT	VNQ	10%	10%	0%
Emrg Mkts Lg	VWO/ EEMV	8%	15%	7%
US Sm Val	RZV	5%	5%	0%
Foreign Sm Val	DLS	4%	5%	1%
Emrg Mkts Sm Val	DGS	2%	5%	3%

Answer: Given an investor more than ten years from retirement, both the current and new allocations suggested here strike me as eminently reasonable. I wouldn’t seriously question either.

To answer the reader’s two questions:

Of the 60% allocated to broad stocks, 20% each is allocated to the U.S., Other Developed, and Emerging markets. I consider that a very reasonable approach. As I discussed in another blog post, I might have also allocated the REITs to the three broader small-cap-value options in your portfolio, but I don’t think it is a big deal either way. As for the 20% in hedges, I think that is optional given how far away from retirement you are at the moment, but certainly defensible. And I do prefer the new targets because of the greater percentage of global activity emerging markets now represent, and because of their very different performance from U.S. markets (as we saw in the negative sense in the last couple of years), which adds to diversification. Definitely a thumbs-up for the proposed change (as a strategy change: I’m not predicting the immediate future).

The two minimum-volatility funds you are using (EFAV for developed markets and EEMV for emerging markets) are favorites of mine; I prefer them to the pure market-cap index funds for reasons I also discussed in a recent blog post on alternative indexing. I believe they provide superior diversification without reducing long-run expected returns (and possibly increasing them). If you’re willing to up the volatility in a quest for higher returns, you might consider reducing the allocation to hedges and/or increasing the allocation to small-cap-value funds.

This is a good time for me to remind people that there are plenty of reasonable ways to allocate a portfolio. As long as a portfolio is adequately diversified, the equity percentage is in line with the investor’s goals, and the expenses are reasonably low, I know of no way to demonstrate that one particular allocation is superior to another. But I really, really like this reader’s selections for long-term investing in tax-sheltered accounts.