Here is my current plan: (update: please see my new plan)
Emergency cash: No. The allocation below is 100% of my portfolio. Living expenses are paid for via bond/REIT income as well as via my job salary (I plan to keep working).
Debt: $1.1M 5/1 ARM mortgage at 2.6%
Tax Filing Status: Single
Tax Rate: 35% Federal, 13.3% State
State of Residence: California
Age: 29
33% Vanguard Total Stock Institutional (VITSX) 0.05%
12% Vanguard Small-Cap Value Institutional (VSIIX) 0.19%
10% Vanguard FTSE All-World ex-US Institutional (VFWSX) 0.13%
10% Vanguard All-World ex-US Small-Cap Institutional (VFSNX) 0.25%
10% high risk / experimental (currently Vanguard REIT Institutional (VGSNX) 0.08%, could be LendingClub or individual stocks in the future)
25% Vanguard California Intermediate-Term Tax-Exempt Admiral (VCADX) 0.12%
Overall portfolio ER: 0.115%
I have maxed out Roth IRAs and 401ks, as well as a 529 plan. Collectively, however, these comprise a miniscule small portion of my portfolio. I plan to hold a portion of my REIT in this tax-advantaged space, with the remainder of the REIT (as well as everything else above) going in taxable. I will tax-loss harvest once per year using Schwab's new low-cost ETFs, and rebalance once per year by selling off winners to buy losers.
Here are a few high-level points before I dive into my questions:
- Although I would like to take a good amount of risk, I am not wedded to the particular types of risk inherent in my portfolio above. If there are ways to simplify my portfolio or reduce its expenses while still taking commensurate risk, I would be very interested.
- Simplicity is important to me. I intend to manage my portfolio myself so I have more to give to charity over the years rather than to a financial advisor. Of course, I do have a very good CPA and an estate planning lawyer for advice.
- My windfall is such that even small improvements in expense ratios or other attributes can provide a meaningful amount of return in absolute dollars. Even if these absolute amounts are not relevant to me in the context of my portfolio, they would be meaningful to many people, so I don't want to wave them away. I point this out not to be a jerk but simply to highlight that issues which tend to get dismissed in other threads, such as miniscule differences in expense ratios, may actually be worth thousands of dollars annually in my portfolio.
- Since I'll be managing this myself, I don't plan to make changes all that often. So I will essentially be investing a large sum of money right now and letting it grow for decades. As in the preceding bullet point, then, I would ask you to please point out anything that comes to mind even if it seems trivial.
- As you consider improvements to the portfolio, please keep in mind the tax impact. I'm currently in (and expect to remain in) the highest marginal tax brackets in the state with the highest income tax, on the eve of potential hikes in federal income tax rates, and the vast majority of my space is taxable.
General
- I can't figure out the meaningful difference between what I listed above, FTSE All-World ex-US Institutional (VFWSX; 0.13%), and Total International Stock Institutional (VTSNX; 0.13%). The latter seems to include a little bit of small cap, but I'm already holding that separately anyway. Is there any reason at all to prefer one to another?
- TIPS, I-Bonds, etc: I'll be honest, I know virtually nothing about these. Do they deserve a place in my portfolio?
- There does not seem to be a "Total Bond Market" equivalent of Vanguard California Tax-Exempt Bond; I need to choose between intermediate and long term maturities. Any guidance on how I should go about making this choice? Or should I split my bond allocation between the two of them?
- Does it make sense to pay off the mortgage? On the one hand, the interest rate is very low -- the mortgage tax deduction puts it in the mid 1% percent -- and I could likely beat that in the market. On the other hand, this is effectively equivalent to investing on margin as I understand it, and my portfolio size qualifies me for 1% margin loans that are themselves deductible [via the interest income deduction]. So if I really want to invest on margin, it seems better to just use a margin loan. The only downside I see there is that the low mortgage rate is fixed for five years whereas the margin rate could conceivably increase, but that seems unlikely in the short term.
However, it's not even clear that I should be investing "on margin." If I want to increase the risk profile of my portfolio, I might as well just change my allocation, right? - Am I holding enough international? 20% of total portfolio seems low. If I should increase the percentage, what should I decrease to make room?
- What are the elements of risk in my portfolio? I see 4: I am overweighting US small cap value; I am overweighting international small cap; I am holding fewer bonds than someone my age would typically hold; and I have a 10% allocation toward experimental/alternative investments. Are there other hidden risks that I am not considering?
- Is there some good way of determining how much risk I am taking to ensure that it's as much as I want but not more? For instance, it'd be great to know: If things go really well, by how much might this outperform a market-weighted portfolio? If things go really badly, by how much am I likely to underperform? What sort of drop should I be emotionally prepared to stomach in the bad times? 40%? 60%? 80%? These are the questions I'm most curious about. All I know right now is that I want to take "a good amount of risk", but I don't know how to quantify what that means or whether I have achieved it.
- There are so many different ways to add risk to a portfolio: reduce the bond allocation; increase the international allocation; weight small-caps; weight emerging markets; add REITs; or even invest on margin. How do risk seekers typically decide which types of risk to add? For instance, I'm not (as far as I know) overweighting emerging markets. Is this purely a personal judgment call based on outlook?
- Is it dumb to hold REIT if I have to hold the bulk of it in taxable? I'm never sure where it makes sense to let the tax tail wag the dog, but surely there are more tax-efficient ways to add risk and diversity to my portfolio (which is my intent in holding REIT)?
- Given all the taxable attributes listed earlier, should I be looking at tax-managed funds? I rarely see talk of those on this board (except for grabiner's excellent http://www.bogleheads.org/forum/viewtop ... 10&t=95518) and I'm not clear on when (if ever) they should be used.
One thing I definitely don't understand is how the tax-managed funds often are so cheap. For instance, the Vanguard Tax-Managed International Institutional (VTMNX) is only 0.08% ER, which is the cheapest I've ever seen for an international fund. Why would I *not* want tax-managed at such a cheap rate, and how is a tax-managed fund (which would seem to require more active management) cheaper than a passive/index fund? - The "general rule of thumb" is that ETFs are more tax-efficient than mutual funds, but this board also has a "general rule of thumb" that Vanguard ETFs and Vanguard mutual funds share a common foundation such that there is absolutely no tax-efficiency difference between the two. Given that I'm about to make a decades-long decision between the two: Is this accurate as things stand today?
- Given the tax hit, is it a bad idea to do annual rebalancing by selling off winners? Instead of reinvesting my bond/REIT income as it comes in, I could pool it and use it to purchase more of the losers at a year end... but then that money would be out of the market throughout the course of the year.