more money - allocation 101
I'm kind of blindly stumbling through this, but it helps to write about it.
A few weeks ago, I posted that I'd worked out how my retirement funds were allocated. ... I had, sort of. That is, I'd figured out what funds my money was in, and what percentage of my total retirement investment each fund represented. I still didn't know what it meant, big-picture, or how the funds might overlap.
A few days later, this post led me to a really cool (and free!) tool at Morningstar, called the X-Ray Overview (how super-heroic!). I can enter what I already know (list of my funds and the % of my investments it represents), and those lovely Morningstar people show me what it means. Like this:
That graphic is pretty small, but it's useful.
Looking at it, I now know two things:
1. my portfolio is hugely weighted toward large-cap companies, and
2. I don't have any bonds.
I don't know enough (yet) to know if or how much the first matters to me, but I do know that The Ubiquitous They recommend that I have at least 20% in bonds (based on my age, time of expected retirement, risk tolerance, etc.).
The market's been pretty wacky lately but I'm certainly not going to sell. However it might be a good idea if I changed my ongoing investments to include also purchasing bonds, until I hit that 20% rule of thumb. For no good reason, I decided I'll take the next three years to build up my bonds investment. So the question is, about how much will my retirement account be worth in 3 years, so I can figure out what 20% of that is, so I can figure out how to change my ongoing investment allocation?
I'll make up numbers to show how I'm doing this.
The math
First, I figured I'd estimate my investments will gain a fairly conservative 6% per year. Say I have 10k in retirement accounts right now. 10k * .06 = 600.
But I'll also have contributed 16% of my salary. Say (for ease of math, don't worry!) that's another 4k.
So, 2007 balance + 1 year of earnings + 1 year of deposits is 10,000 + 600 + 4,000 = 14,600 as of August 2008, I repeated those steps (6% of the new balance + another year's investments) to calculate the numbers for August 2009 and 2010.
By doing that, I got a rough idea of how much I'll have in retirement savings 3 years from now. Then I calculated what 20% of that is, to see how much I'd want in bonds. Then I figured out how much per month over 36 months I'd need to contribute to get to that number. I should probably account for earnings, but my brain started smoking out my ears, so I just took the 20% of the estimated 2010 balance and divided by 36.
The new investment strategy
If I include the company match in my calculations, 68% of my monthly contributions need to go to bonds. I did NOT include the match in my earnings or investment calculations above, so I should probably not count it here. Which means that to get to a 20% bond allocation in 3 years, 85% of my ongoing investments need to go to bonds.
Emotionally I don't love that, but I think it's the right thing to do. Now to pick a bond fund. I'll deal with my stock market allocation later!
