Asset Allocation & Drawing Strategies

The 60-40 split between stocks and bonds was once solid financial advice—but no longer

They suggest seeking more diversification in other assets, instead, recommending high-dividend stocks and riskier bonds, such as municipal debt and short-term, high yield (aka junk) bonds. JP Morgan is making a similar recommendations. The bank suggests other income generating assets, like real estate.


The purpose of safe bonds is not diversification, it is hedging—and there is a big difference between the two.

The problem is the safest bonds are offering very low returns, and so savers face a dilemma. They can save more or take more risk. While moving out of a 60-40 allocation is the riskier option, it may be necessary for some investors, but it is no free lunch. Even more diversification can’t reduce the risk of loss. Odds are there will be a recession in the next 10 years and big drop in risky asset prices. That may be a bigger problem for savers than persistent low yields.

Just my 2 cents: 60-40 rules are mainly for those who earn hand-to-mouth, trying to save for retirement at their 40s !

None of that applies to any one in this forum as I see most of them well placed above average wealthy !

There is also a thumb rule bond = (100 - age), stock = age simply for normal savers. Again this will not apply to forum members.

This 60-40 or any other rules assumes stock is the high risk high reward, bond is low risk low reward, trying to maximize individual returns (for those average people).

Most of the forum members are earning here and the rules may change case to case: However, I will try to provide some information.

First calculate your monthly expenses, including combined PITI (minus rent)+all your expenses in total. Apply a factor of safety 10%-20% on that (that we may miss calculations) say X

  • Keep cash for 6-12 months expenses in savings. I say 12x in savings
  • Keep 2-3 years of expenses , say 24x-36x, into bonds
  • And balance is for stocks.

12x cash can be used in case of any emergency to hold 12 months (loss of job or income)

24x can be withdrawn in case of prolonged recession (as no one knows when).

Balance stock will grow as usual even if there is a recession.

BTW: Real estate investing is a business and is like 3x leveraged bond investment. If we are having 60% real estate, we can assume 60% bond (with added risk of leverage on that bond). RE is solid than bond in terms of liquidity. Rent is considered as interest income.

This is what I learnt so far. Please no Q & A.


If you want to know more, here is the thread, read completely page 1 through 8. If too long, see page 7 that I linked for summary.


Bogleheads said this or you misquoted? Stock = age = 60% for me :star_struck:

Have always prefer RE over bonds.

Is stocks refer to those with dividends only? I am presuming since we need passive income, those without shouldn’t be considered. AAPL issues dividends :grinning:

How about this scheme for passive income? Put 1M into a margin account, invests all in VOO and every year borrow 50k cash out.

In 20 years you would have taken out 1M in cash but since long term return of S&P is around 10% your 1M investment would have turned into 8M. So after you subtract the cash out the equity would still be around 7M.

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You need to relearn maths.

1.1 to the power of 20 = 6.727 not 8

You can borrow interest free?

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Stock is (100-age).

If you are 60 age, 40% stock, 60% bonds (Including RE)

If you are 80 age, 20% stock, 80% bonds (Including RE)

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Rule of 72, approximately without use of calculator. 7 is close to 8.

Interests is low if you are talking about 50k cash out a year.

There is an alternative proposal, I will illustrate using AAPL (can be replaced by any dividend-paying stocks/ETFs),

Proposal: Buy $1M worth of AAPLs, sell covered calls vs them to obtain ($50k less dividends).

At Friday’s close price of $267.25, $1M will get you 3741 shares.
AAPL pays $3.08 per year (will be more next year, ignore for simplicity), so annual dividends = 3741*3.08 = $11.5k.
$50k less annual dividends = $38.5k.
Premium needed from selling covered calls = 38.5k/3741 = $10.29.
Looking at calls expiring in Jan 2021, the strike price that is closer to $10.29 is $320.
The buy write position would be to buy 3741 shares and write 37 calls (L21 $320)@$11.20.
You get your $50k+ today :slight_smile:

Followup Action on OE Jan 2021,
If AAPL trades above $320, your shares would be assigned. So you would have 320*3741 - 1M = $197k cash to spend or approximately 4 years worth of expenses. You can rinse and repeat or short puts (L22 ATM).

If AAPL trades below $320, you still have your shares. Rinse and repeat.

If you don’t need $50k immediately, there are other strategies such as roll, sell calls at higher strike price, sell monthly calls, … to growth wealth exponentially and yet have passive income.

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Would you not have to pay interest (generally at higher rate) on 50 K borrowed each year?

Since you guys like to account for second order effects here’s a chart of IB’s margin rates. Use Excel to calculate the exact numbers.

Are you suggesting selling naked calls? How is that different from selling covered calls you explained earlier?

Sell covered calls.

Selling naked calls are for big guys who have lots of balls and $ to lose should the market turns extremely bullish.

My question was on this statement:

If you don’t need $50k immediately, there are other strategies such as roll, sell calls at higher strike price, sell monthly calls, … to growth wealth exponentially and yet have passive income.

What exactly do you suggest?

Also, now that we are talking about second order effects, borrowing with margin is tax free. In fact that expense gets deducted against the yearly dividend of VOO.

S&P for 10 years appx 7%-8% range including dividend 1.8%-2% range (Ignore 2008 onwards as stocks went down way below).

Variable 1: IBKR or other brokers may change time-to-time interest rate with various bracket
Variable 2: S&P500 (VOO) may change returns YOY

You need to have some simulation software to find out various options and range of returns with risk associated with it.

Read Monte-Carlo simulation related to investments like this (not an easy answer)

My scheme is a variation of the quotidian “4% rule”. You can factor in various safety measures like instead of withdrawing 50k only withdraw 40. That would be exactly like the 4% rule. Or assume a margin interests of 10% to make it robust.

Nothing is entirely safe. If you want absolute certainty your only option is treasury.

Unless specifically stated, the conventional is:
Long calls refer to long naked calls.
Short calls refer to short covered calls.

Since you want more details:

Sell monthly calls:
Refer to diagram below:

Say you own 100 AAPL shares and want to sell monthly calls. You look at the near ATM price, and add up the premium of call+put = 8 + 5 = $13. Add to the strike price of $265 = $278. So you sell calls (Jan 3 $280)@$2, calls(Jan 3 $277.50) if you’re aggressive or calls(Jan 3 $282.50) if you’re conservative. The reason is most of the time, AAPL doesn’t close above that strike price - you can verify for AAPL and other stocks. Selling monthly yield higher returns than selling annually**. I have used weekly calls to illustrate, in general monthly calls (e.g. Jan 17, Feb 21) are better since the liquidity is higher.
**Previous post, annually get $11.20, monthly $2 = 12 months $24 which is higher than $11.20.

Roll calls:
Say AAPL hits $280 before Jan 3, you can roll your covered calls to Feb($285+) so long is net credit i.e. Buy back calls(Jan 3 $280), sell calls(Feb 21 $285+) for net cash inflows. This is a general rule but since AAPL earnings is likely to be on Jan 29, should roll to calls(Jan 24 $285+) - IV is pretty high one week before earnings.

Best to look at a few stocks* that you think is rock solid fundamentally, and observe the effect for a few months. Every stocks behave differently, some may be too volatile for you, some may appreciate too slowly for you liking. Choose the one you like.
*Choose those with high liquidity. You don’t want to keep losing $ to brokerage firm because of wide bid/ask and hard to fill order.

Of course you can sell weekly :slight_smile: if you’re that free. If you do it right, should yield about $150k extra cash annually in addition to $11.5k dividends for $1M worth of AAPLs.

On any case, VOO is safer bet than AAPL. With 1M spreading the risk is very important. Single stock, even if it FAAG is not so great as the risk is higher.

ETFs like VOO (S&P500) is too good, at least it must be like OEF (S&P100) or QQQ(Nasdaq). Or you need to identify 20 different stocks (including AAPL as one) to spread the risk.

How manch is going to pay the margin interest? S&P dividends are around 1.8% which is 18000 (1500*12) which will be taxed every year.

Like you are giving AAPL, I can also show another stock OXY (warren buffet owns now)

If you own $1M OXY, you get 8.19% dividend which is $81000 year, assume 25% LTCG, you get $60750 (which is after tax, no need to pay margin interest) every year. This is beyond Manch expectation.

The only risk is company revenue, earnings has to pay 8.19% dividend.

You don’t pay for the margin interests. That’s the point. Just let it accumulate over time. If history is any guide the appreciation of your 1M worth of VOO should be more than enough to pay for it.

@hanera scheme is really a disguise of the “sell assets and take cash out” ordinary 4% rule. Every couple of years you will lose the options bet and forced to sell part of your holding.

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Perfect time for investing in another stock/ETF/RE :slight_smile: for diversification. I see you get the hidden pro of the strategy. Btw, the 4% rule I read about is different from what you said. Everything look like a hammer to you :scream:

If you’re using margin, it is better to just buy VOO and don’t DRIP. Let the dividends take care of the margin. Take whatever cash flow it might yield. At today prices, dividends are not sufficient to pay for margin. 1.95% is less than 6.75%! You would need to add cash instead of getting passive income.


VOO is too new and not sufficiently liquid. So not a good candidate for illustration. It only have 4 series and no weekly series.

AAPL has more series and high liquidity.