Subject: Portfolio Diversification
Executive summary: For portfolios that don't need to be touched and worry about pulling funds out in a down market isn't an issue, why diversify?


Recently went for a sanity check up by checking out a financial planner. We are about 5 years into retirement, and living well below our means. He told us we could easily more than double what we are spending, and still have a large terminal value to our portfolio, even without his reconfiguring our allocation and managing the process for us. We are not big spenders out of choice, which is why we are in this position to begin with, but had indeed intended to bump up our travel expenditures greatly, now that we are true empty nesters and only have ourselves to worry about.

At some point, having someone take over our portfolio will be a good thing, unless I can simplify what we hold and give one of our kids oversight/control. Alzheimer's runs deep on my dad's side of the family, and I have learned the need to protect ourselves from ourselves as we age. I turn 60 this year and do not feel I am close to that point yet.

For reasons I do not regret, we are very cash heavy at this time. While I realize that is not optimal long term, according to the FP, even with the large cash holdings and more than doubling our expenses, we would not touch the principal we have accumulated, though via inflation it certainly would have less spending power at our death. So as was expressed in a prior post on this board, we could be extremely cautious in our investments and not outlive our funds. That tends to be contrary to my nature, however, which is why I am putting this out for your consideration.

We are putting off taking SS until DH is 70 and I am full retirement age, which should, assuming no decrease in the SS payouts or means testing, fully cover our base needs, keeping us from having to sell stocks in a down market. To bridge the 7 years until we take SS, we are keeping 1 year of base expenses in a money market earning 4+%, have 1.5+ years worth of base expenses in I bonds earning over 13% currently, that mature in 2030, (to which we will continue adding $20K/year,) and will be locking in these nice rates with Treasury bond purchases for the other years to get us to SS. From an allocation POV, this safety net amounts to about 10% of our assets. This is the cautious part of me.

I consider this 10% to be my bond allocation, as is the not quantified lost opportunity costs from not taking SS earlier and investing it. Unlike the FP, I consider this to be sufficient allocation to bonds. My exposure to FPs lead me to generically believe that simplicity is not one of their goals, as they have to impress you with how difficult it is to manage your own funds, in order to justify their fee. Having buckets of purpose like this would also prompt me to keep those funds outside of their fee territory, which would also not be their preferred choice. (That is not to say that FPs do not fill an important role for those with no interest in managing their own accounts or keeping up with what is happening in the retirement investing/benefits world. I know a number of people who have benefitted greatly from them and were more than happy to pay someone to manage things for them rather than learn to do so themselves.)

I was not unimpressed with the FP we spoke with, but having made the choice not to proceed with him at this time, I am tackling setting up a plan to reinvest the cash we hold. First hurdle is to set the allocation. I understand that a diversified portfolio should essentially temper the volatility, eliminating the soaring highs and blistering lows to give a tighter band of less extreme positive and negative returns. Having to sell stocks for expenses in a down market can not only hurt the portfolio, but give great amounts of indigestion. However, (and yes I am finally getting to the point,) if one's portfolio is only needing to be touched for discretionary purchases, is diversification necessary? Wouldn't it be better to invest in the assets that typically do best most often, rather than spread across the entire financial options because you don't know what will do best in one specific year? Looking at the annualized returns over 20 years, https://www.mfs.com/content/da..., why would you invest in anything other than US stocks in a portfolio that doesn't need to be touched and volatility isn't a concern? The 96 year average return of the S&P500 is 10.08%. https://www.officialdata.org/u.... (Note this link uses returns to the end of 2023, which is curious as we are not there yet. Change the end date to 2022 to get my posted number.)

Surely I must be missing something. The FP and others on line are suggesting high amounts of foreign stocks and emerging markets. I am more tempted to wait for a pull back in the US markets and throw the cash in there, ignoring further bonds or international stocks and bonds.

IP,
who is not proposing this is right for you, but wondering why it might not be right for me