Hi, I have been asked by my wife to manage her $100k worth of cash(!) in her bank account savings.
1) Can someone give me an idea of a $100k portfolio construction / asset allocation for this huge amount of unmanaged cash?
Any ideas / insights / questions that I should ask myself are welcome.
Our family background for this:
She doesn’t have a return target, but would be upset if there was a 10+% loss. She would be more than happy with a near-5% return. (Please feel free to 2) convince us to change our risk tolerance, unlike the ethics test…)
We don’t know about an investment horizon, we just want to start investing early. She is considering going to an MBA once the saving gets $200k, so there is a chance that we might use it in about 2-3 years if that happens.
Given this background and my limited knowledge in money managing (Took CFA Dec Level 1, Real Estate investment analyst), I need some ideas for this.
Currently I’m thinking on a fully passive and diversified portfolio, all passive ETFs - is this going to be a disaster?
30% S&P500
20% emerging country equities
20% developed country bonds
10% for emerging countries bonds
20% for developed REITs
*I am actually a Japanese living in Japan, and it’s highly costly to invest in individual foreign stocks - the realistic option is an investment trust or ETF, which the management fees are about 30bps if they are passive.
50% equity is high for aversion to 10% draw down, especially given the FX risk layered on as a Japanese based investor. At the same time, the 5% return hurdle seems tough to hit given the risk tolerance and your geography. I do think passive investing is the way to go. I’m not really familiar with investing returns profile from the JP market so I could be off base but it seems you may want to spend time talking about investing and realistic return goals and examining the past performance and draw downs of the portfolio you’re recommending with her. If these are long term funds you need to lose the short term draw down aversion in my mind, especially as we move on from quantitative easing.
Even fixed income can decline 10 percent. Will she actually know if it declines 10 percent? What I am asking if she’s actually going to keep checking the balance.
If you need the money in a couple a years, probably best to not put it in equities. Stick with short and medium duration bonds.
You may want to dollar cost average. It’s probably lower expected return but should help ease you two into dealing with the volatility.
Japan is awesome place. But probably best not to invest much in the Japanese economy. Your allocation looks good for a long time horizon. But not if you need the money in two years.
That’s not a 2-3 year portfolio, brah. If you are going to take out the money in a couple of years, you should be 50% to 75% in bonds.
Other things - I don’t know if I would put 30% in emerging markets. Basically, assume those will have double the risk of developed markets. You might not need to put 20% in REITs either, as most broad based indexes have real estate sectors. Also, consider the taxation on REIT distributions - in the US, it’s not the same as capital gains or dividend tax. For you, maybe it is different.
Big thanks to you guys. Good I asked for additional input before I started.
I wanted to put emerging markets to diversify my portfolio - but are they just too risky to begin with?
I understand now I need to decide if this is a long/short-term portfolio - going to have a talk and assess about the actual possibility of withdrawing this money.
Return hurdles: is 2% a reasonable ballpark for this purporse? She will only be looking at the accounts once every month or so.
Though I said 10% drawdown, I wouldn’t consider pulling the plug the minute it sinks below this drawdown, like a temporary volatility spike like February - or, should I have a hard drawdown %?
Living there, I’m very pessimistic about Japan - so I’m not planning on buying JP equities.
Agree with ohai on 2-3 years not being a portfolio. A 3 year CD will get a little over 3%. Is it worth it to get less than $2k/year pre-tax (5% return) and have to deal with volatility? That’s up to you.
if you plan to use the money in that time, i would just stick in short term ig bonds. they are least likely to decline among other bonds and you’ll collect 3%.
a long term play is more like below, also you wont double the money in 2 to 3 years, more like 5 to 20.
40-60 us eq
15-25 developed eq
0-10 emerging eq
10-20 real estate
0-10 bonds
even buffett recommends people to have a 90/10 allocation eq/bond
It really depends on how badly she would need that money for her MBA. She can contribute another 100k in 2-3 years so if there were a really bad market downturn say 30% downturn on lets say 150K average value over the year (150k*.70) = 45K loss on 200K = 155K. she would be set back one year from her 200K goal (She would need to save up another 40-50K in the year or she could borrow the money). Would she comfortable having to borrow money or being pushed back a year?
Her standard of living doesn’t depend on that money. 90/10 rule seems appropriate. You can reduce risk by going more defensive industries and having less EM stocks too. I think the passive investing is a good idea too to reduce trading costs and increase diversification.
2 percent would be low for an American investor. But I don’t know what is realistic for a Japanese investor, given the forex impacts. 3 month tbill in America is like 2.4%
Thanks guys, this was very helpful! Looks like this decision making and getting advice sure can’t be substituted by robo-advisors or artificial intelligence just yet!
I’m going to take in to account that I should consider my investing period as 2-3 as of now and put more weights in a lower risk, fixed-income based investments… I do feel that I don’t want to put up with so much volatility just yet.
PS I was a bit surprised with not seeing any negative comments on passive investments - thought there may be some comments on including active mutual funds or ETFs.
She’ll be comfortable to be pushed back 1 - 2 years, there’s not really a definitive timeframe. She can probably also add up 100k ( -150k?) in 2-3 years as I’m paying all the bills and stuff, I guess she’s not depending on this money to live, in that context.
fo reference, its like >0.5% in Japan. This is why I mentioned my return as 5%, considering the risk free rate in US.
I figured my return should be like (risk free rate) +250bps = 5%ish - but as I should be considering currency risk, I guessI should use my country’s risk free rate for my target return, therefore 2-3%ish.
I grew up in Philly until 10, and after I watched a lot of 24 and Jack Bauer saving the day. Thanks to that experience now I work in a Chicago-based AM firm
