Optimize asset allocation for your journey to financial independence

We have too much cash….but we have basically zero dollars in bonds. Bottom line: our asset allocation is a total mess! We’ve historically been extremely aggressive investing towards financial independence (FI). Every available dollar for the past several years has been crammed directly into low-cost index funds. Since nearly all of our investments are with Fidelity, most of these funds are in FZROX (Fidelity’s “new” total stock market index fund that has a 0.00% expense ratio)1. Asset allocation methods should change over time. This article will cover how we plan to optimize our asset allocation based on where we’re at on our journey to financial independence.

Big pile of various currencies. Perhaps the kind of cash stash someone may be if they retired early and were traveling the world.
Not our actual cash. We did have the money in the bank.

Crap, were we really prepared for me to quit my job?

We had been accumulating a big pile-o-money, but we didn’t actually have a strategy for how it would be deployed. The plan was to continue to march towards FI whilst ignoring the many ups and downs the stock market was bound to experience during our working years. However, over the past 6-12 months it was becoming increasingly apparent that my job was not a good long-term fit. Maybe I should have just found another job like a normal person, but I was over-worked to the point that making the time to find another job was very difficult. I was also really drawn to the idea of taking a sabbatical to work on various projects (like this blog) that have been floating around my head for a long time. So I quit my job.

And what’s the point of saving half of your income for 10+ years if you can’t take a break when you feel like you REALLY need a break?

A couple enjoying the sun on a beautiful beach. They probably saved money and optimized their asset allocation to gain financial independence and retire early.
Not us

Because Mrs. Middle is apparently some kind of saint, she actually agreed to this sabbatical idea. Therefore, our preparation for the past several months has been to basically stop investing our cash. Our paychecks rolled in, our bonuses were paid and I cashed out some restricted stock awards…then we just let the cash sit there. I knew I would be uncomfortable with 100% of our wealth in the stock market while I wasn’t working, but I wasn’t able to make the time to figure out what we should do differently. To be ultra-conservative (and lazy), we just hoarded cash.

So what is our asset allocation mix at this point in our journey to financial independence?

I’m embarrassed to say I didn’t know the answer to. this very basic question. At last count, we have 15 separate investment, retirement, banking and HSA accounts. I went through each of them to see what was held in each. We currently have 91.5% stocks, 0.2% bonds and 8.3% cash. Yikes! This would seem like a very scary allocation if not for Mrs. Middle and her previously mentioned sainthood. She is still getting up every morning, going to soul-suck tower and bringing home the bacon (as well as still maxing out her 401k). Her income, combined with a little money from our side gig; which will be introduced in future posts, can basically cover our monthly expenses.

So what should we do now?

Since Mrs. Middle still intends to keep going to work for the foreseeable future2, it doesn’t make sense to be holding 18 months of expenses in cash. However, we are not prepared to take those dollars and throw them into the market. 91.5% stocks feels like a lot of exposure. Here’s our plan:

  1. Keep six months of expenses in cash. No magic formula. This just “feels” right to me. I know this will still seem like a crazy amount of cash to some, but we place a high value on security. We have at least six months before we have to do anything differently if we do find ourselves suddenly unemployed. That is very comforting.
  2. We will move the remainder of this cash to bond funds. Since these dollars are outside of our retirement accounts, there will be some income tax impacts. However, the money will be readily available if we need cash and we don’t want to withdraw from our stock market funds ( i.e. if the market is in a period of decline).
  3.  I also want to reallocate some of our retirement funds to bond accounts. It will be another 20 years before we can access these funds without penalty (unless we deploy some fancy loophole tactics3). Therefore, it is tempting to leave these funds with a nearly 100% stock allocation. There will obviously be numerous ups and downs in the market during that period. However, I think Mrs. Middle and I are ready to start smoothing the ride a little. Nothing crazy, but we’re planning on taking 6.5% of our allocation and moving it from FZROX to bonds. This will give us a new overall allocation of 85% stocks and 15% bonds and cash.

Are we potentially sub-optimizing our asset allocation in favor of security and simplicity?

Yep. That exactly what we’re doing. Rather than always making the math-based optimized decision, we believe the best solution for us can be found as we move ‘into the middle.’

A series of rocks carefully balanced. Similar to how carefully you need to optimize your asset allocation to retire early.

1I’m not saying I would turn it down if they offered, but I am not an affiliate sponsor for Fidelity. These are just the facts of our situation.

2She is, of course, free to walk out anytime she pleases. We certainly have enough F-you money to avoid stuff we really don’t want to do even if we aren’t “retired”.

3We will likely need to leverage some of these tactics as my current projection predicts that if we retired today we would deplete our taxable accounts 6 years before we reach age 59 ½. Many of these tactics are more efficient to deploy when your income is lower so we plan on waiting until a more opportune time.

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