Newleyweds Portfolio Review: Updated

[Allan12]

Long time lurker, learned so much though out the years. Thank you everyone.

Emergency Fund: have over 9 months
Debt: 320,000 mtg @ 3.625 (30 yr), just took out 2 months ago
Tax Filing Status: married filing jointly
Tax Rate: 25%, 6.45% state
State: NY
Age: 25 and 26
Desired AA: 90/10%
Desired International: 30%
Portfolio Size: $55k

Taxable: N/A used for down payment

His 401k at new York life 19% of portfolio
82% Mainstay S&p 500 Index Fund(mspix)(.44) 8,728
18% Thornburg International Value Fund(thvrx)(1.41) 1,925
No company match-no longer contributing. Will contribute at next company, however still employed.

His Roth IRA at Vanguard 51% of portfolio
42% American funds growth fund class a (agthx)(.71) 11,831
42% money market (vmmxx)(.20) 11,692
9% ETF pro shares ultra oil and gas (dig)(1.00) 2,666
7% vanguard target date 2060 (vttsx)(.18) 1,895

Her Roth IRA at Vanguard 30% of portfolio
71% money market (Vmmxx)(.20) 11,441
18% vanguard growth etf (vug)(.10) 2,993
8% vanguard financials etf (vfh)(.23) 1,231
3% vanguard ftse all world small cap eft (vss)(.28) 562


We each plan on contributing 5500 to Roth IRAs in 2013. We would like to set up automatic bi-monthly drafts to purchase vanguard mutual funds that align with our asset allocation.

401k available funds
Stable value(.65)
Intermediate bond fund(.78)
Target dates in 10 year increments from 2010 to 2050 (1.25 to 1.6)
Loomed sayles small cap value (1.61)
Mainstay iCap select equity (.96)
Mainstay large cap growth (.82)
Victory special value (1.28)

Questions
1. How can I invest my money to achieve a very aggressive allocation over time and by satisfying vanguard fund minimums? I would prefer to space my investments over a couple of months.
2. Any help would be great I am willing to sell any positions. I've picked many of them up over time as a result of following the markets. However, I now want and need a strategy.

Thank you very much.

-A

[Duckie]

Allan12, you want an AA of 90% stocks, 10% bonds (that's low), with 30% of stocks in international. That breaks down to 63% US stocks, 27% international stocks, and 10% bonds. Here is a possible retirement portfolio:

His 401k at New York Life -- 19%
19% (MSPIX) MainStay S&P 500 Index Fund Class I (0.44%)

His Roth IRA at Vanguard -- 51%
18% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%)<-- Your next contribution will get this to cheaper admiral shares.
6% (VEXMX) Vanguard Extended Market Index Fund Investor Shares (0.28%) <-- Roughly 80% large caps (500 Index) plus 20% mid/small caps (Extended Market) makes up the total US stock market. This is a smidge high to meet fund minimums.
27% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

Her Roth IRA at Vanguard -- 30%
20% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
10% (VBMFX) Vanguard Total Bond Market Index Fund Investor Shares (0.22%)

-- I think you should increase your bond allocation to at least 15% if not 20%.
-- For His 401k you wrote "No company match-no longer contributing. Will contribute at next company, however still employed." If still employed there why is he no longer contributing? MSPIX is a good fund with a decent expense ratio.

Something to think about.

[Allan12]

Allan12, you want an AA of 90% stocks, 10% bonds (that's low), with 30% of stocks in international. That breaks down to 63% US stocks, 27% international stocks, and 10% bonds. Here is a possible retirement portfolio:

His 401k at New York Life -- 19%
19% (MSPIX) MainStay S&P 500 Index Fund Class I (0.44%)

His Roth IRA at Vanguard -- 51%
18% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%)<-- Your next contribution will get this to cheaper admiral shares.
6% (VEXMX) Vanguard Extended Market Index Fund Investor Shares (0.28%) <-- Roughly 80% large caps (500 Index) plus 20% mid/small caps (Extended Market) makes up the total US stock market. This is a smidge high to meet fund minimums.
27% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

Her Roth IRA at Vanguard -- 30%
20% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
10% (VBMFX) Vanguard Total Bond Market Index Fund Investor Shares (0.22%)

-- I think you should increase your bond allocation to at least 15% if not 20%.
-- For His 401k you wrote "No company match-no longer contributing. Will contribute at next company, however still employed." If still employed there why is he no longer contributing? MSPIX is a good fund with a decent expense ratio.

Something to think about.

Duckie. Thanks for your feedback! I felt like 10% of bonds would be ok since I have around 15k in ee and hh bonds and cash value life insurance. Given that, would you still suggest 10%? Either way I would be fine with going to 15%.

No longer contributing because I want to get comfortable with mtg pmt and household expenses. By that time I hope to have a new job.

I really like your suggestions and can't wait to hear from other members. My biggest challenge is implementation. Is there one piece that I should do first? How can I essentially build this portfolio over a few months to protect myself.

-A

[Duckie]

Allan12, since your assets are tax-sheltered there is no financial reason to wait. You can do it all at once. However, if you are determined to do it piecemeal, then this is the order I would choose:

1. In His 401k move everything to the 500 Index fund.
2. In His Roth IRA sell the DIG ETF because of the high expense ratio and move the money to Prime.
3. In Her Roth IRA use 10% of Prime to buy TBM.
4. In His Roth IRA use 27% of Prime to buy TISM.
5. In Her Roth IRA sell the other three ETFs and buy 20% of TSM.
6. In His Roth IRA use 6% of Prime to buy Extended Market.
7. In His Roth IRA sell the other two funds and buy 18% of TSM.

I felt like 10% of bonds would be ok since I have around 15k in ee and hh bonds and cash value life insurance. Given that, would you still suggest 10%? Either way I would be fine with going to 15%.

Are the EE and HH bonds for retirement? If so, they are part of your retirement bond allocation and should be included in the portfolio. If they are part of your emergency fund or part of your short-term needs fund (new car, fancy vacation, etc.) then they aren't part of the portfolio. As for the cash value life insurance I'm ignoring it because unless you withdraw it, it can't be rebalanced. It may be an asset, but it's not part of the portfolio.

[Elbowman]

Hi Allan12,

Duckie's recommendations look great. Portfolio basics are pretty simple: you want to achieve maximum diversification (total market funds or approximations thereof) at minimum cost (expense ratios).

Are you still contributing to your cash value life insurance? Do you need a permanent death benefit? Most people are much better off buying term life insurance and investing the difference. Again, with investments you are looking at diversification and cost. For permanent life insurance, the costs you pay are huge, and the diversification is low (your investment rides on the solvency of a single company, your life insurance company).

[Allan12]

Allan12, since your assets are tax-sheltered there is no financial reason to wait. You can do it all at once. However, if you are determined to do it piecemeal, then this is the order I would choose:

1. In His 401k move everything to the 500 Index fund.
2. In His Roth IRA sell the DIG ETF because of the high expense ratio and move the money to Prime.
3. In Her Roth IRA use 10% of Prime to buy TBM.
4. In His Roth IRA use 27% of Prime to buy TISM.
5. In Her Roth IRA sell the other three ETFs and buy 20% of TSM.
6. In His Roth IRA use 6% of Prime to buy Extended Market.
7. In His Roth IRA sell the other two funds and buy 18% of TSM.

I felt like 10% of bonds would be ok since I have around 15k in ee and hh bonds and cash value life insurance. Given that, would you still suggest 10%? Either way I would be fine with going to 15%.

Are the EE and HH bonds for retirement? If so, they are part of your retirement bond allocation and should be included in the portfolio. If they are part of your emergency fund or part of your short-term needs fund (new car, fancy vacation, etc.) then they aren't part of the portfolio. As for the cash value life insurance I'm ignoring it because unless you withdraw it, it can't be rebalanced. It may be an asset, but it's not part of the portfolio.

Love the 7 step plan. Will work on steps 1 and 2 today. Had a question about step 3. We won't meet the $3000 minimum investment. Should I go ahead and buy the eft instead (bnd)?

HH and EE bonds are for emergency fund/home improvements so they are on sidelines. Cash value insurance should be ignored in this context, I agree.

Lastly, will vanguard automatically convert to admiral shares?

-A

[Allan12]

Hi Allan12,

Duckie's recommendations look great. Portfolio basics are pretty simple: you want to achieve maximum diversification (total market funds or approximations thereof) at minimum cost (expense ratios).

Are you still contributing to your cash value life insurance? Do you need a permanent death benefit? Most people are much better off buying term life insurance and investing the difference. Again, with investments you are looking at diversification and cost. For permanent life insurance, the costs you pay are huge, and the diversification is low (your investment rides on the solvency of a single company, your life insurance company).

I contribute appx 5k a year for $400,000 with Northwestern Mutual. My wife contributes around $2500 for I believe $200,000. We like the idea of permenant insurance and the benefits. We are also aware of negatives but feel pros outweigh the cons.

-A

[Grt2bOutdoors]

Hi Allan12,

Duckie's recommendations look great. Portfolio basics are pretty simple: you want to achieve maximum diversification (total market funds or approximations thereof) at minimum cost (expense ratios).

Are you still contributing to your cash value life insurance? Do you need a permanent death benefit? Most people are much better off buying term life insurance and investing the difference. Again, with investments you are looking at diversification and cost. For permanent life insurance, the costs you pay are huge, and the diversification is low (your investment rides on the solvency of a single company, your life insurance company).

I contribute appx 5k a year for $400,000 with Northwestern Mutual. My wife contributes around $2500 for I believe $200,000. We like the idea of permenant insurance and the benefits. We are also aware of negatives but feel pros outweigh the cons.

-A

What are the pros? You could purchase more than $3 million in coverage for 30 years at your age for less than $5K. I'm curious what type of illustration was provided to you by NWM - that is prohibitively expensive.

[Allan12]

Hi Allan12,

Duckie's recommendations look great. Portfolio basics are pretty simple: you want to achieve maximum diversification (total market funds or approximations thereof) at minimum cost (expense ratios).

Are you still contributing to your cash value life insurance? Do you need a permanent death benefit? Most people are much better off buying term life insurance and investing the difference. Again, with investments you are looking at diversification and cost. For permanent life insurance, the costs you pay are huge, and the diversification is low (your investment rides on the solvency of a single company, your life insurance company).

I contribute appx 5k a year for $400,000 with Northwestern Mutual. My wife contributes around $2500 for I believe $200,000. We like the idea of permenant insurance and the benefits. We are also aware of negatives but feel pros outweigh the cons.

-A

What are the pros? You could purchase more than $3 million in coverage for 30 years at your age for less than $5K. I'm curious what type of illustration was provided to you by NWM - that is prohibitively expensive.

Protecting my insurability. Cash value build up. I've been buying in since 2007.

[ihckennedy]

Since these are retirement savings accounts and you are in your 20s, you should have zero cash and zero bonds. You should be invested 100% in equities, and should keep it as simple as pie by investing in total market index funds.

Why no bonds? Because future bond returns are dependent on the starting yield, and today the starting yield is so low that you are very unlikely to earn a positive return after inflation. In other words, there's nothing "conservative" about bond investing today because you'll probably fail to conserve capital.

Starting valuations also play a significant role in equity returns and for this reason I would recommend an asset allocation tilt that underweighted the U.S. and overweighted non-US equity and emerging markets.

Rebalance religiously, come hell or high water, and over your 35+ year working life you will build a terrific retirement fund!

Ah to be 26 again! (But I was totally broke at that age!).

ihckennedy

[Default User BR]

I would use the 401(k) in spite of the lack of match. You have one decent fund in there, and that's enough. When you leave, you'll be able to roll the funds over to an IRA or new plan. Don't pass up valuable tax-advantaged space.


Brian

[Allan12]

Love the 7 step plan. Will work on steps 1 and 2 today. Had a question about step 3. We won't meet the $3000 minimum investment. Should I go ahead and buy the eft instead (bnd)?

-A

Can anyone help in case I go ahead and purchase the bond fund?

[Duckie]

Had a question about step 3. We won't meet the $3000 minimum investment. Should I go ahead and buy the eft instead (bnd)?

Can anyone help in case I go ahead and purchase the bond fund?

I don't understand. If you have $55K in retirement assets, then 10% ($5.5K) is more than enough to meet the $3K minimum. It's 10% of the entire portfolio, not 10% of Her Roth IRA or 10% of Prime in Her Roth IRA. (I guess I worded it wrong. I should have written "In Her Roth IRA sell Prime to buy 10% TBM.) However, if the numbers are off and you have less than $55K, still contribute the $3K minimum to TBM. It doesn't matter right now if your AA is not exactly correct.

As for ETFs versus the funds, I prefer the funds. I find them less hassle.

Lastly, will vanguard automatically convert to admiral shares?

Vanguard automatically converts to admiral shares usually around the end of the month. Or you can do it manually online.

[Allan12]

Had a question about step 3. We won't meet the $3000 minimum investment. Should I go ahead and buy the eft instead (bnd)?

Can anyone help in case I go ahead and purchase the bond fund?

I don't understand. If you have $55K in retirement assets, then 10% ($5.5K) is more than enough to meet the $3K minimum. It's 10% of the entire portfolio, not 10% of Her Roth IRA or 10% of Prime in Her Roth IRA. (I guess I worded it wrong. I should have written "In Her Roth IRA sell Prime to buy 10% TBM.) However, if the numbers are off and you have less than $55K, still contribute the $3K minimum to TBM. It doesn't matter right now if your AA is not exactly correct.

As for ETFs versus the funds, I prefer the funds. I find them less hassle.

Lastly, will vanguard automatically convert to admiral shares?

Vanguard automatically converts to admiral shares usually around the end of the month. Or you can do it manually online.

Thank you for insight. I am proceeding ahead with the recommendations and will update this thread with my progress. I hadn't realized that the efts and American funds would take time to settle. Of course I knew but it just hadn't dawned on me. Therefore, I should have an AA in about a week. I feel so relieved!

[Easy Rhino]

Are you going to try to rebuild an emeregncy fund also? Relying on the savings bonds for that?

I will second the idea that it wouldn't be a bad thing if you had extra money to contribute to use the 401k. It's always good to save on taxes. Just stick with the SP500 index as the other funds have pretty high expenses.

[ddb]

Since these are retirement savings accounts and you are in your 20s, you should have zero cash and zero bonds. You should be invested 100% in equities, and should keep it as simple as pie by investing in total market index funds.

Why no bonds? Because future bond returns are dependent on the starting yield, and today the starting yield is so low that you are very unlikely to earn a positive return after inflation. In other words, there's nothing "conservative" about bond investing today because you'll probably fail to conserve capital.

Starting valuations also play a significant role in equity returns and for this reason I would recommend an asset allocation tilt that underweighted the U.S. and overweighted non-US equity and emerging markets.

Rebalance religiously, come hell or high water, and over your 35+ year working life you will build a terrific retirement fund!

Ah to be 26 again! (But I was totally broke at that age!).

ihckennedy

This is very bad general advice. Age has something to do with risk tolerance, but certainly there is much more that goes into it. I know 30-year olds who bailed on stocks in 2008/2009 out of fear. These were people who, on paper, could afford the risk of 100% stocks, and even understood that stocks come with risk and they'll probably come back and buy-and-hold and blah blah blah. Still, when the stuff hit the fan, they couldn't do it. This doesn't make them wrong. This makes them intolerant of the risk of 100% stocks.

- DDB

[ruralavalon]

Since these are retirement savings accounts and you are in your 20s, you should have zero cash and zero bonds. You should be invested 100% in equities, . . . .
. . .

A really bad idea , in my opinion.