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Alright so I'm 30 years old. I'm sitting on cash to invest for the long haul. It's decision time.

Here is what I have learned from my research over the last few months:

  1. Proper asset allocation combined with annual rebalancing is the best long-term low-effort investing strategy
  2. Low-cost index funds (Vanguard) are the best way to own an asset class as they give broad diversification with minimal fees

Below is my working asset allocation based on my research. I want my money to work hard for me and I have a 5 out of 5 risk tolerance. Would love comments on this mix:

  • 20% US Stocks (VTSAX) (-5% from all-time high)
  • 20% International Stocks (VWILX) (-27% from all-time high)
  • 10% Emerging Market Stocks (VEMAX) (-25% from all-time high)
  • 20% REITs (VGSLX) (at all-time high right now)
  • 15% US Long Term Treasuries (VUSUX) (-1% from all-time high)
  • 15% US Treasury Inflation-Protected Securities (VAIPX) (-11% from all-time high)

So basically, I'm at the point where I need to lock in which asset allocation mix I want and then deploy my cash. My problem is that most of the asset classes listed above are basically near their all-time highs. I have a feeling that investing near all-time highs is a terrible idea. It'd be fine if I was investing money every paycheck over the next 30 years, but I am trying to deploy a lot of cash at once. This leaves me only comfortable deploying into international stocks, long-term treasuries, and maybe TIPS.

Should I wait for these asset classes to be more like 30-50% away from their all-time high before investing?

Is it fine for me to be just sitting in cash for a long time and wait for these asset classes to become distressed before deploying? Is there anything better than sitting in 1% APY online savings accounts? It looks like the average inflation rate is 3% for the United States, so the longer I sit in US dollars I just get eaten by the monetary and credit supply outgrowing me.

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    How certain are you that those funds will actually have drops of 30-50% from the high? That would seem to be a big question that I'm not sure I'd want to say yes to that question myself. – JB King Jan 16 '15 at 22:44
  • I'm not certain at all which is why I need help! :) – Kirk Ouimet Jan 16 '15 at 22:48
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    The question is well presented, and valid, but the answers will likely be a survey of opinions. I have to ask, do you really believe long term treasuries will be at or below their current yields 3-5 years from now? If not, this is the worst investment on the list, and the only one I'll comment on. – JoeTaxpayer Jan 17 '15 at 0:27
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    A couple of comments: (1) instead of an "all or nothing" approach, if you are concerned that the markets are overvalued but are also concerned that cash is a bad long-term investment, you could put half of your money in the portfolio that you describe and keep the rest in cash until you feel that prices are more reasonable. (2) I don't see the need to overweight REITs. They are already represented in the Vanguard Total Stock Market Index Fund, as they trade on stock markets. If everyone overweights REITs like this, their prices will be inflated above actual real estate. – Trevor Wilson Jan 17 '15 at 2:26
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As JoeTaxpayer notes in his comment, "answers" to this are really just opinions, so here's mine, for what it's worth.

If your risk tolerance is 5 out of 5, you shouldn't have anything in Treasuries. Those are basically the most conservative of all investments. This would probably mean no TIPS as well. If you're more like 4.5 out of 5, you could have some, but just a little; a 30% allocation to government securities is quite conservative. If you want to diversify across different asset classes, you could consider a bond fund like (for instance VBMFX, the Vanguard total bond market index fund). Your portfolio doesn't currently contain any (non-government) bonds, which is something to consider.

20% seems like quite a large allocation to REITs. Most sample portfolios I've seen allocate no more than 10% to REITs, often no more than 5%. There are some that have more like the 20% you're envisioning, but you might want to ponder that a bit more especially in light of your concerns about REITs being at an all-time high.

As for your question about all-time highs, it's reasonable to think about, but I think waiting for 30-50% off all-time highs is unrealistic. Looking at a chart of VFINX (essentially the S&P 500), I see that at the nadir of the recent downturn, in early 2009, the market was at about 50% of its pre-crash all-time high. At the nadir of the dot-com bust, the market was about 45% off its pre-crash high. If you're waiting for it to be 50% off it's all-time high, you're not just waiting for "a good time to invest", you're waiting for a major crash.

It could certainly make sense not to immediately put everything into US stocks, but that doesn't mean you should put nothing in. As Trevor Wilson commented, you could put some of the money in and then gradually add the rest over time, reducing the risk of unluckily buying at the peak. (This can also reduce the psychological angst of worrying about whether you're doing the right thing, which is worth taking into account.) Also note that if you get rid of the treasuries, you eliminate a good chunk of the stuff that you thought was too close to the peak anyway.

Your two basic points (asset allocation and low-cost funds) have a strong Boglehead flavor. You may already have looked at the Bogleheads wiki; if not you should take a look. If you are comfortable with that philosophy (and I think it's a sound one), you should remember that part of that philosophy is not worrying about "timing the market". You pursue a buy-and-hold strategy if you believe the market will go up in the long term and don't care much about what it does in the short term. That said, as mentioned above, you might want to ease in your investment over time, rather than buying all at once, if only to avoid tearing your hair out if the market goes down in the short term.

Incidentally, your proposed portfolio is similar to this one that they mention, although as I said above I think this is too conservative if you are 30 years old and consider yourself a "5 out of 5" in terms of risk tolerance. I'm not sure if you already saw that in your research, but since that portfolio apparently has a name and is known, you might be able to find information about its risks and benefits by searching for discussion of it by name.

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