help with asset allocation for an early-30s guy with an uncertain future?

Question

I've read a lot of guidelines on asset allocation but am basically hoping for more individualized advice like I've seen on so many posts here. I'll do my best to keep this brief:

Me - 32 years old, currently make ~$200-$220k per year, feeling restless. I've got no debt and no expenses other than rent (~$1800/month) and whatever I spend (probably $1000/month for food and drink, which may be a little excessive but I spend money on very little other than eating out and going out, with the exception of travel).

Mint.com says my current net worth is ~$530k. The current allocation is roughly:
cash: $125k
401k + rollover IRAs in a variety of funds: $150k
taxable investment accounts:
Vanguard S&P 500 index fund: $108k
Vanguard tax-free NY bond fund $62k
Vanguard emerging markets fund: $46k
GLD: $7k
Misc stocks + China ETF (7 positions between $1k and $7k): $33k

I have nothing in particular to save for. I'm not in a relationship, so I would guess that kids are 5 years off at the absolute minimum, best guess would be more like 10 years (and possibly not at all).

By the end of the year I could be: a) making half as much money at some startup with an uncertain equity stake b) making nothing as I quit my job and travel around the world c) making roughly the same amount but paying a lot more in rent ($3k?) if I move

I contribute about $12k/year + a company match of (I think) $5k to my 401k (split evenly between a regular and Roth 401k). No IRA. My reasoning is that I have absolutely no idea when I'll need the money, so a non-retirement account should have as much as possible (but I'm happy to be convinced otherwise). I'm not even completely maxing out the 401k.

I put $60/day into the S&P 500 fund and will gamble with a tiny percentage (say $1000 every couple months) on some near-expiry options. I like playing the market too, with a reasonable amount of money (whatever that is).

I know I have WAY too much in cash. I feel like I should be more risky but at the same time am approaching an amount where I could come close to being able to travel for a year just on modest returns if I invested that way ($350k * 5% would give me ~$50 a day to travel, which is pretty close to what I'd need).

Any advice in general? On asset allocation/how much I should be saving/life?

One very specific question: I've got nearly $190k in cash and the NY tax-free bond fund. I know that's too much cash, and I'm skeptical about the bond fund. If everything else remained the same, how would you allocate this $190k?

Thanks in advance for reading all of this. I apologize if the personal details are a little to "chatty" but I hope they could give a little insight into my situation and contribute to better answers.

Answer 1

Nice work saving. If you do find yourself in a relationship or with children, you'll be glad you saved now; family members increase the expenses ;-)

Some observations large and small, no conclusions,

• your immediate plans make a big difference. If you're going to travel the world, I don't know that you have too much in cash at all; you probably want a good buffer there for travel expenses, travel emergencies, and then possible employment gap or startup when you get home.
• I bet you could really benefit from "autopiloting" all this more and pretty much thinking about it less. I'm a software guy with startup tendencies too, and I used to spend a lot more time with a more complex portfolio, and ultimately decided it just didn't make sense as a use of time. (Here are my conclusions: http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/ - I'm still not down to a single fund, but I have simplified a lot.)
• if you're world-traveling, autopilot might be extra good. Who wants to be at some awesome destination, trying to use crappy wifi to wrestle with a brokerage account instead of seeing the sights?
• I like to choose from only a few asset allocations: 20% stocks, 40% stocks, 60% stocks. Most people would add 80% stocks to that if you're young and risk-tolerant. (I tend to think this young, risk-tolerant person is a bit mythical, and don't think 80% stocks adds enough extra return to mess with.) Anyway, if you narrow down to 3 or 4 allocation choices, it's easier to choose than if you are open to any number from 0 to 100%.
• I sure hate Fidelity 401ks, though lots of others are worse. Fidelity has a "create tons of funds to see which ones stick" kind of vibe to it, and the target date funds are then packed full of their fund grab-bag with little rhyme or reason, sort of like they internally had to agree to let all their funds get in on the target date gravy. Anyway, I know you can't do anything about your employer's choices. Morningstar.com is useful to dig through all the Fidelity noise, or stick to their index funds. (Their 4-in-1 index is a useful tool, I've found, though one Fidelity 401k I've had didn't have it included, and 4-in-1 is only 15% bonds so I always have to add a bond fund.)
• The mix of S&P500 index, bond fund, and emerging markets fund seems like a sensible simple portfolio at Vanguard. You could diversify it more broadly by using Vanguard Total Stock, Vanguard Total International, and an entire-US tax-exempt bond fund like Intermediate Term Tax-Exempt. You sort of have to weigh risk of your bonds in only one state, vs. tax benefits of staying in-state. Also it looks like the NY fund is long term rather than intermediate term, which adds an unwelcome risk. A more complex option is to mix Vanguard Limited-Term Tax Exempt with Vanguard High-Yield Tax Exempt. A simpler option is Vanguard Tax-Managed Balanced, including both stocks and tax-exempt bonds, though it doesn't include international so you'd still need an international fund. Unfortunately Vanguard doesn't have an "everything fund" including domestic and international and tax-exempt bonds as far as I know. Inside a tax-sheltered account, you can use the Target Retirement or LifeStrategy funds to get a great all-in-one option, but in a taxable account, these use taxable bonds which is a downside. So there isn't an awesome all-in-one option in a taxable account as far as I know.
• for individual options and stocks, and probably gold too, I'd literally treat them as a hobby or entertainment expense - I'm not sure I'd even put them under "investments," I'd tend to put them in your finances wherever you list electronic toys and going to the movies. It's not that you won't ever make money here, it's just that there's not really a reason to do this stuff other than entertainment. (I have done plenty of stuff like this, I'm not knocking you at all, I just think it's best to keep the line crisp between sensible investments and fun investments.)
• The "how much is enough" question is a pretty valuable one I think: Saving for retirement: How much is enough?
• And in general, what are your goals in life? Financial answers are just in support of that, you don't want to let the tail (money) wag the dog (actual living).

I bet it would be awesome to do the world travel and the startup, and get a ton out of those. The money you've saved gives you the freedom to do all that great stuff that matters.

Answer 2

The topic you are apparently describing is "safe withdrawal rates", more here. Please, note that the asset allocation is crucial decision with your rates. If you continue to keep a lot in cash, you cannot withdraw too much money "to live and to travel" because the expected return from cash is too low in the long run. In contrast, if you moved to more sensible decision like 30% bonds and 70% world portfolio -- the rates will me a lot different. As you are 30 years old, you could pessimist suppose to live next 100 years -- then your possible withdrawal rates would be much lower than let say over 50 years. Anyway besides deciding asset allocation, you need to estimate the time over which you need your assets.

You have currently 24% in liquid cash and 12% in bonds but wait you use the word "variety of funds" with about 150k USD, what are they? Do you have any short-term bonds or TIPS as inflation hedge? Do you miss small and value? What is your sector allocation between small-med-large and value-blend-growth? If you are risk-averse, you could add some value small.

Read the site, it does much better job than any question-answer site can do (the link above).