Questions regarding larger portfolios

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Questions regarding larger portfolios

Postby mongo » Tue Dec 25, 2012 6:05 pm

By a combination of hard work, luck and being part of the wealth engine that is Silicon Valley, we are fortunate to have recently amassed a net worth in the low/mid eight figures. Our goal is to stay productive, find ways to do good via donations/volunteering, and possibility raise our current modest standard of living.

Emergency funds: 24 months of expenses
Debt: Home mortgage at $3k/month.
Tax Filing Status: Married Filing Jointly, no children
Tax Rate: 35% Federal, 13.3% State
State of Residence: California
Age: 53 (Both His and Hers)
Employment: His - $200k salary, with $23.5k contributed to 401-k. Her – Not employed.
Desired Asset allocation: 43% stocks / 27% bonds / 30% real estate
Desired International allocation: 33% of stocks

Current Portfolio:
Stocks
VTI – 30%
VXUS – 13%

Bonds
BND (Taxable) – 10.5%
BND (Non-Taxable, IRA) – 3%
VCADX – 13.5%

Real Estate
Direct ownership/LLC’s – 30%

Questions:
1. My high allocation towards real estate is an outgrowth of my career in the field and preferred access to related investments opportunities. This real estate portfolio is geographically distributed throughout the US, primarily backed by well capitalized companies, and no single investment makes up more than 4% of the total real estate portfolio. I believe the investment to be conservative, but worry I may be assuming greater risk than prudent. Comments?
2. How does recommended asset allocation change as portfolios grows in size? Some recommend an increasing conservative portfolio as net worth increases, while others advise that greater wealth allows the option to accept a higher level of risk. Or is a recommendation for a $1 million portfolio, the same as for $5 million, $20 million, etc.?
3. After reading thousands of pages of investment advice, I found the Three Fund Portfolio to be the most intellectually attractive, but emotionally am struggling to fend off the urge to “do more” and/or increase the portfolios complexity. Any reason to listen to my emotional side?
4. We plan to stay in California, even with what seems to be a limitless push for higher state taxes, which makes California Muni’s attractive. But given our states inability to address basic fiscal issues, I’m worried that the risk out weights the rewards, and am considering reducing our exposure. Would be interest in others view of a reasonable allocation to California Muni’s.
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Re: Questions regarding larger portfolios

Postby KyleAAA » Tue Dec 25, 2012 6:17 pm

1.) I think your allocation is reasonable. If you have specific expertise in real estate, are geographically diversified, and don't mind doing the work involved (no idea how much work is involved, but I'm assuming it's not completely passive) then go for it. If you're worried about over-reaching, you could pare it down to 20% or so.

2.) You should allocate according to your ability and need to take risk. Obviously, your ability and need to take risk has changed dramatically. If you don't need the money to live on, it really doesn't much matter how you invest it so long as you do so reasonably. Should you swing for the fences and try to leave 9 figures to your heirs or should you invest it all in short-term treasuries? It's up to you. Both are valid approaches for you at this point. Which are you more comfortable with? There is no rule here.

3.) Nope. No reason to listen to your emotional side.

4.) I probably wouldn't invest more than 1/3 of my bond portfolio in any single state's muni bonds. That's just me based on my willingness to take risk. Sure, you'd have to pay California income tax on a national muni fund, but you still wouldn't owe federal income tax. You're rich enough that paying an extra half a percent in state income tax isn't going to make a difference in your standard of living, so why push your luck?
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Re: Questions regarding larger portfolios

Postby livesoft » Tue Dec 25, 2012 6:37 pm

Forum member windfall900 asked some similar questions, so you may wish to review his posts. Here's a first link: viewtopic.php?f=1&t=106098

If you wish to "do more" than the 3-fund portfolio, I and others have added US small-cap value and foreign small-cap index to get to a 5-fund portfolio which I am rather fond of. And you can always have somebody do more for you.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Questions regarding larger portfolios

Postby grabiner » Wed Dec 26, 2012 12:37 am

mongo wrote:4. We plan to stay in California, even with what seems to be a limitless push for higher state taxes, which makes California Muni’s attractive. But given our states inability to address basic fiscal issues, I’m worried that the risk out weights the rewards, and am considering reducing our exposure. Would be interest in others view of a reasonable allocation to California Muni’s.


Half your bond allocation is reasonable. For the taxable part of the other half, you might use TIPS, which are exempt from CA state income tax.
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Re: Questions regarding larger portfolios

Postby elgob.bogle » Wed Dec 26, 2012 1:04 am

Recommend that you read Larry Swedroe's article and posts concerning it in the Theory Section of this Forum.
http://seekingalpha.com/article/1081411 ... -for-yield
He discusses California munis.

Best regards
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Re: Questions regarding larger portfolios

Postby DualIncomeNoDebt » Wed Dec 26, 2012 3:36 am

mongo wrote:4. We plan to stay in California, even with what seems to be a limitless push for higher state taxes, which makes California Muni’s attractive. But given our states inability to address basic fiscal issues, I’m worried that the risk out weights the rewards, and am considering reducing our exposure. Would be interest in others view of a reasonable allocation to California Muni’s.


We have a large liquid portfolio of stocks and bonds. I considered investing in some California-focused muni bonds and funds, but decided to pass.

First, look at the current crop of California bankruptcies, including San Bernardino, Stockton, Atwater, and Mammoth Lakes -- more are coming, guaranteed. Second, review what public employee unions are saying in bankruptcy court, namely, (a) public employee pension and healthcare benefits must be preserved, and (b) bondholders can be forced to suffer losses to preserve these benefits. The reasoning is pensions and healthcare purportedly are sacrosanct promises guaranteed by the California constitution, whereas investors can be forced to eat losses. I don't care / am not discussing the politics of this issue. What I am saying is, this is an issue you need to consider. A bankruptcy court, or a higher court, may very well issue a ruling that vaporizes your California muni bond investment, giving preference to current/former employees over investors like you. Why even bother rolling the dice with that kind of hand?

Finally, never forget just three years ago, California issued IOUs because it couldn't pay its bills, including issuing IOUs to taxpayers owed refunds. No wonder California has the worst credit rating in the United States.

California's fiscal and financial record is abysmal. This isn't politics, it's simple fact. Proceed accordingly.
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Re: Questions regarding larger portfolios

Postby Outer Marker » Wed Dec 26, 2012 10:25 am

mongo wrote:Our goal is to stay productive, find ways to do good via donations/volunteering, and possibility raise our current modest standard of living.

Desired Asset allocation: 43% stocks / 27% bonds / 30% real estate
Desired International allocation: 33% of stocks

Questions:
1. My high allocation towards real estate is an outgrowth of my career in the field and preferred access to related investments opportunities. This real estate portfolio is geographically distributed throughout the US, primarily backed by well capitalized companies, and no single investment makes up more than 4% of the total real estate portfolio. I believe the investment to be conservative, but worry I may be assuming greater risk than prudent. Comments?
2. How does recommended asset allocation change as portfolios grows in size? Some recommend an increasing conservative portfolio as net worth increases, while others advise that greater wealth allows the option to accept a higher level of risk. Or is a recommendation for a $1 million portfolio, the same as for $5 million, $20 million, etc.?
3. After reading thousands of pages of investment advice, I found the Three Fund Portfolio to be the most intellectually attractive, but emotionally am struggling to fend off the urge to “do more” and/or increase the portfolios complexity. Any reason to listen to my emotional side?
4. We plan to stay in California, even with what seems to be a limitless push for higher state taxes, which makes California Muni’s attractive. But given our states inability to address basic fiscal issues, I’m worried that the risk out weights the rewards, and am considering reducing our exposure. Would be interest in others view of a reasonable allocation to California Muni’s.


Why keep playing the game when you've already won? Your goals are modest, and can easily be met with little or no risk. 73% of your current portfolio is exposed to volatile equities and real estate sector bets. If I had eight figures, I would dial it way back -- with 50-75% in high quality fixed income (bonds and CDs), and the rest in broad index funds. I might indulge myself in a bit of small cap value tilt and/or real estate if you feel compelled for entertainment. But, it would be a much smaller slice of a much more conservative portfolio. Don't take on more risk than you need. Congratulations on your success.
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Re: Questions regarding larger portfolios

Postby retiredjg » Wed Dec 26, 2012 1:40 pm

If you don't want to put everything into California munis, why not use a federal muni fund?
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Re: Questions regarding larger portfolios

Postby stan1 » Wed Dec 26, 2012 2:05 pm

Personally, as a lifelong California resident I'd be comfortable with up to 20% of my portfolio in diversified CA muni bonds. My view is that balance and compromise are generally a better way to manage risk than all or nothing propositions.
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Re: Questions regarding larger portfolios

Postby grabiner » Wed Dec 26, 2012 7:08 pm

DualIncomeNoDebt wrote:A bankruptcy court, or a higher court, may very well issue a ruling that vaporizes your California muni bond investment, giving preference to current/former employees over investors like you. Why even bother rolling the dice with that kind of hand?


Because the market knows it as well (and also counteracting factors such as which bonds have insurance and which municipalities are finanically sound), and you are rewarded for taking that risk, just as with any other bonds. I wouldn't expect a AA-rated California bond to be any riskier than a AA-rated New York bond; the condition of the state means that California has more bonds rated below AA than New York does, and thus Vanguard's CA fund has a higher yield than Vanguard's NY fund. (In fact, the question is more commonly asked in the other direction; why should a New Yorker hold the NY fund when the national long-term fund has a higher yield even after NY tax?)

There are good reasons to avoid putting too much in any one state (or any other single factor, such as too much in one industry), but these are not specific to CA.

Finally, never forget just three years ago, California issued IOUs because it couldn't pay its bills, including issuing IOUs to taxpayers owed refunds. No wonder California has the worst credit rating in the United States.


The market views this as a political move, not a default. The federal government does the same thing regularly; when Congress has failed to raise the debt ceiling, several government accounts such as the Thrift Savings Plan are issued IOUs rather than actual bonds, but Treasury prices don't collapse when this happens.
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Re: Questions regarding larger portfolios

Postby ripete » Wed Dec 26, 2012 7:18 pm

To echo the comment already posted. You have already won the game. It's time to step away from the table. You could place it in US Treasuries, in bank deposits, and gold, and also buy a really big mattress.
Congratulations on your success. I think if you're in the low to mid 8 figures, you shouldn't worry about leaving 9 figures to your heirs. Really, how high is up? You're there. Relax. Safety, not growth, should be your ONLY concern.
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