Too many funds in our portfolio… your recommendations?

[ChrisKtdf12]

In trying to make sense of the investments and savings we have accumulated over 35 years of marriage, we came across the Bogleheads website two months ago. As Vanguard Admiral shares account holders, we regret that we never found you before now. We have been studying the Bogleheads wikis and reading the books you recommended.

We have too many funds and too much cash in CDs and money market accounts. Although we are frugal savers, we neglected to ever create an actual investment plan while we were raising a family. Thank you very much for your suggestions on how to shift our assets into a 4-fund portfolio.

Emergency Funds: one year (We have also saved enough to pay for a wedding, college, and LTCi 10-pay premiums. These
additional savings are not included in the retirement assets listed below.)

Debt: no debt (We own our $240K house with no mortgage.)
Tax Filing Status: Married Filing Jointly (adult children)
Tax Rate: 15% federal (marginal rate), 5% state
State of residence: NY
Age: both 57, one spouse retired, the other spouse to retire in 10-13 years

Desired Asset Allocation:

40% stocks
50% bonds
10% cash
(but open to suggestions)

Desired International Allocation: low %

Current Asset Allocation:

34% Stocks
16% Bonds
50% Cash

Large Cap Growth Stocks 7%
Large Cap Value Stocks 14%
Mid Cap Stocks 11%
International Stocks 2%

100% Total

Current Retirement Assets: $2 million (includes all the accounts listed below)
Taxable Split: 38% taxable, 62% tax-advantaged

38% Taxable
4.5% Certificates of deposit
2.2% American Funds cash reserves (AFAXX) 0.39% ER
13.3% Franklin cash reserves (FMFXX) 0.59%
0.7% Vanguard Tax Exempt cash reserve (VMSXX) 0.17%
1.6% AMCAP Fund Class A (Am. Funds) (AMCPX) 0.73%
5.7% Washington Mutual Investors Fund A (Am. Funds) (AWSHX) 0.62%
1.9% Templeton World Fund Class A (Franklin) (TEMWX) 1.07%
2.4% Vanguard Tax Managed Growth & Inc. Adm. Sh. (VTGLX) 0.12%
2.5% Vanguard Tax Managed Capital Apprec. Adm. Sh. (VTCLX) 0.12%
1.6% Vanguard 500 Index Fund Adm. Sh. (VFIAX) 0.05%
0.6% Vanguard Strategic Equity Fund (VSEQX) 0.33%
1.0% I bonds

3.6% His 401k
3.6% Fidelity Spartan Bond Index (401k) (FSITX) 0.11%
0.0% Fidelity Spartan Small Cap Index (401k) (FUSVX) 0.06% (was considering beginning with Jan. 2013 contributions)

25.2% His Traditional IRA
4.4% Fidelity Cash Reserves (FDRXX) 0.37%
5.4% (at Fidelity) PIMCO Total Rt. Class D (PTTDX) 0.75%
6.5% (at Fidelity) Manning Napier Equity (EXEYX) 1.05%
6.3% Fidelity Low Price Stock Fund (FLPSX) 0.88%
2.6% Vanguard Inflation Protected Sec Adm Sh (VAIPX) 0.11%

16.2% Her Traditional IRA plus old TIAA-CREF 403b
9.4% Vanguard Cash Reserve (VMMXX) 0.22%
0.1% Vanguard Morgan Growth (VMRGX) 0.42%
2.8% Vanguard Inflation Protected Sec Adm Sh (VAIPX) 0.11%
3.0% Vanguard Strategic Equity Fund (VSEQX) 0.33%
0.4% TIAA Traditional
.5% CREF Stock

4.4% His Roth IRA
1.6% Vanguard Strategic Equity Fund (VSEQX) 0.33%
2.5% Vanguard Inflation Protected Sec Adm Sh (VAIPX) 0.20%
0.3% Vanguard Small Cap Value Index (VISVX) 0.35%

2.9% Her Roth IRA
1.0% Vanguard Strategic Equity Fund (VSEQX) 0.33%
1.4% Vanguard Inflation Protected Sec Adm Sh (VAIPX) 0.11%
0.5% Vanguard Morgan Growth (VMRGX) 0.42%

3.8% His Inherited IRA
0.3% Fidelity Cash Reserves (FDRXX) 0.37%
3.5% Fidelity Strategic Div & Inc (FSDIX) 0.84%

5.7% Her Inherited IRA
5.7% Fidelity Cash Reserves (FDRXX) 0.37%

100% Sum of investments

Contributions to 401k and IRAs - We always contribute the maximum amounts allowed every year.
2013 contributions: 401k: $23,000, Roth IRAs: $13,000

Starting eight years ago, we began using savings from the taxable accounts above to fund these 401k and IRA contributions. (The working spouse's entire salary is needed to cover current living expenses.) No pension for either spouse.

Funds available in 401k: Choice of many Fidelity funds

Portfolio Questions:

1 We would like to invest some of the cash that is in the CDs and cash reserve accounts.
2 We would like to consolidate and simplify the number of funds.
3 We would like to do smart tax moves. We already maxed out our capital gains harvesting for the year to take advange of 0% taxes on them.

Thank you so much for your comments and suggestions.

Chris K.

[Peter Foley]

There is a lot you could do in terms of simplification, but I'm unsure of the consequences in doing so with your taxable account. Ignoring tax consequences in your taxable account, reduce the number of funds to 3-4 maximum. Use a US total stock market, an international, and (perhaps) an index fund or two that you have reason to believe would diversify your holdings more and enhance your overall return. From your current holdings, you might favor something like the Vanguard tax managed capital appreciation. Many investors would be inclined to add a small cap index fund or an emerging market fund or an REIT. Your top priority in this account, however, is to consolidate these holdings into equity mutual funds, eliminating all but a year or two of the cash reserves and CDs which you will use to fund retirement contributions. It is not tax efficient to hold bonds in a taxable account. I bonds are fine.

Make Vanguard inflation protected and Vanguard total bond your two holdings in your Traditional IRAs.

Your "Other retirement accounts" are fairly small so if you are not making contributions to one or both, roll them into your IRAs for additional simplification.
(It appears that "Hers" is the inactive one.)

If you are taking steady withdrawals from the inherited IRAs, that is one place you could consider holding some cash reserves if you are inclined to do so.

Use your Roths to fill out your AAs. For simplicity, use the same funds that you use in your Traditional IRAs and taxable accounts.

Overall, try not to have position of less than 5% of your total portfolio. Small positions don't really add much diversification nor do they have much of an impact on total return of the portfolio.

[livesoft]

Wow. You have basically one day left this year, December 31st, in order to do any tax-gain harvesting that you could do with your taxable assets. Are you prepared to sell things on Monday?

If you sold ALL the following funds on Monday, would the net capital gains be taxed at 0% in 2012?

1.6% AMCAP Fund Class A (Am. Funds) AMCPX 0.73%
5.7% Washington Mutual Investors Fund A (Am. Funds) AWSHX 0.62%
1.9% Templeton World Fund Class A (Franklin) TEMWX 1.07%
2.4% Vanguard Tax Managed Growth & Inc. Adm. Sh. VTGLX 0.12%
2.5% Vanguard Tax Managed Capital Apprec. Adm. Sh. VTCLX 0.12%
1.6% Vanguard 500 Index Fund Adm. Sh. VFIAX 0.05%
0.6% Vanguard Strategic Equity Fund VSEQX 0.33%

I don't think any changes in the tax-advantaged accounts are time critical.

[livesoft]

We have several IRAs like you all do. We try to put just one (1) fund in these IRAs. For example, we have Vanguard Short-term Bond Index fund (VBIRX) in a small inherited IRA. That IRA has one transaction per year, namely the RMD withdrawal.

We do all portfolio rebalancing in the largest tax-advantaged account with good fund choices. So that account has 4 funds: S&P500, extended market index, total bond index, and total int'l index. No matter how any of the other accounts have performed or what they hold, we can do a few exchanges in this one 401(k) to get back into balance if needed.

You can do the same thing. Your taxable account can have just 2 things in it: Cash (the CD's e.g.) and a Total US Stock Market Index fund. That would take care of the 10% cash you desire and 28% of the equities that you desire.

Your largest IRA could have some Total US index, Total Int'l index, and Total Bond Index to finish up the equity allocation. The rest of your accounts could all have a single bond fund in them. The single bond fund in each account could be a TIPS fund or Total Bond Index or a Short-term bond fund. Each of these accounts with a single bond fund would need no rebalancing whatsoever.

And have you thought about Roth conversions?

[bdpb]

Tax Rate: 10% federal, 5% state

Are these marginal or effective rates?

[ChrisKtdf12]

Thank you all very much for your replies. This has already helped a lot!

Peter, we will do all your suggestions to get to 3-4 funds in the taxable account. That was exactly the nudge we needed in order to begin consolidating.

livesoft, I just edited our post to add this to the last line: "We already maxed out our capital gains harvesting for the year to take advange of 0% taxes on them." That's how we ended up with the cash reserve accounts. We will plan to do more next year. We had thought about Roth conversions, but decided against them so that we could take more capital gains at 0%. Now that we finally know about Roth conversions and tax harvesting, we will make sure to do one or both every year when it makes sense.

We really liked your idea to put the Vanguard Short-term Bond Index fund in the inherited IRAs that already require the one transaction a year for the RMD withdrawal. We'll also rebalance in the Traditional IRA accounts which are the largest tax-advantaged accounts.

bdpb, thanks for catching that - I just edited our post to correct it to 15% marginal rate for federal taxes. The 5% state tax rate is also a marginal rate.

We welcome any and all advice. These retirement assets essentially represent what we'll be living on in 13 years, along with Social Security, so we are trying to figure out whether we are on track. Simplyfying the portfolio will help us see what we actually have.

Chris K.

[livesoft]

...
We really liked your idea to put the Vanguard Short-term Bond Index fund in the inherited IRAs that already require the one transaction a year for the RMD withdrawal.

Although that's the fund we use, you could use any bond fund(s) that fit your asset allocation.

[ChrisKtdf12]

We will add $6,500 in January to each of our Roth IRAs. To limit the Roths to only two funds, does it make sense to keep the Vanguard Inflation Protected Securities (VAIPX) and Vanguard Small Cap Value Index (VISVX) in the Roths and change the Vanguard Strategic Equity Fund (VSEQX) and Vanguard Morgan Growth (VMRGX) to those, too?

[livesoft]

^ I think so. Roth IRAs are precious tax-free space, so I do not want them to lose money. A mix of 1 bond fund and 1 equity fund would be OK, then be sure to buy-low the equity fund whenever it tanks. For example, in my Roth I have a REIT index fund and a short-term corporate bond index fund.

[ChrisKtdf12]

The Roth IRAs are really important to us and we want to now put the correct funds in them rather than the funds that we seemed to randomly pick on the first day in January each year. Maybe we should reconsider our past choices for these Roths since a REIT index fund and a short-term corporate bond index fund weren't on our radar. Back to the drawing board for us, I think.

[livesoft]

Uh-oh. It may be time to back up and think. You know there is the "3-fund portfolio" thing on this forum which is a good default or core portfolio of 3 funds in the ratios that you want: Total US Stock Market, Total Int'l Stock, and Total US Bond Market. Proponents claim one doesn't need any more funds than that to divide up among all your accounts.

Obviously, I am not a proponent of the 3-fund portfolio, but it should be the starting point of any portfolio. Only after this starting point is committed to should one venture into adding other funds. I have mentioned other funds, but I didn't expect you to write something like "Great, we'll use those funds, too." I'll stop mentioning funds, so that they stop popping up on your radar.

Quiz time: What is the one single fund that you will have your 401(k) devoted to now going forward?

[ChrisKtdf12]

No problem having mentioned other funds. We are committed to reorganizing our portfolio into the three fund portfolio, but would like to use the Roth space well.

Quiz reply: We had planned to change from Fidelity Spartan Bond Index (FSITX) to Fidelity Spartan Small Cap Index (FUSVX) for all future additions to the 401k.

[livesoft]

Sorry, but that was not the answer I was expecting at all. I'm not sure where the problem lies or even if there is a problem, but I do know that the Fidelity Spartan Small Cap Index is not a member of the "3-fund portfolio" and does not have ticker symbol FUSVX.

[petrico]

Oops...

[retiredjg]

Emergency Funds: one year (We have also saved enough to pay for a wedding, college, and LTCi 10-pay premiums. These
additional savings are not included in the retirement assets listed below.)

Are the emergency funds included in the retirement assets listed below? If yes, the desired 10% allocation to cash makes some sense. If your emergency fund is separate, I don't see any purpose in holding an additional 10% allocation in cash. For the idea below, I'm assuming it is separate.

Here's an idea that sells some of your cash reserves and a couple of your mutual funds. The rest of the taxable account is left intact for now, but you should get rid of almost everything there (except CDs, I Bonds, Total Stock and Total International). I'm guessing at some things below. Like which account is your 401k. And where some of these things are housed.


38% Taxable
19% Total Stock Market Index
4.2% Vanguard Total International Index
1.6% AMCAP Fund Class A (Am. Funds) (AMCPX) 0.73%
5.7% Washington Mutual Investors Fund A (Am. Funds) (AWSHX) 0.62%
2.4% Vanguard Tax Managed Growth & Inc. Adm. Sh. (VTGLX) 0.12%
2.5% Vanguard Tax Managed Capital Apprec. Adm. Sh. (VTCLX) 0.12%
0.6% Vanguard Strategic Equity Fund (VSEQX) 0.33%

4.5% Certificates of deposit
1.0% I bonds


His 401k 3.6%
1.8% Spartan Total Stock
1.8% Spartan Bonds (to be determined)

His Traditional IRA 25.2% <---appears to be a Fido and Vanguard?
25.2% Bonds (to be determined)

Her Traditional IRA 15.3% + .9% from Her old 403b = 16.2% <---appears to be at Vanguard?
16.2% Bonds (to be determined)

His Roth IRA 4.4% <---appears to be at Vanguard?
2.2% Vanguard Total International Index
2.2% Vanguard Total Bond Market Index

Her Roth IRA 2.9% <---appears to be at Vanguard?
2.9% Bonds (to be determined)

His Inherited IRA 3.8%
3.8% Fidelity Spartan Bonds (to be determined)

Her Inherited IRA 5.7%
5.7% Fidelity Spartan Bonds (to be determined)

This idea is 40% stock ad 60% bonds and other fixed income investments. It has about 16% of the stocks in international (assuming the other mutual funds don't contain any - I didn't look them up).

You would maintain the ratios with your contributions. I'm not quite sure how that is going to work since I'm not sure what you would be selling in order to buy. But here's a place to start:

His 401k $23k: $11,480 to bonds, $11, 520 to stocks
His Roth IRA: $3k to International, $3500 to Bonds
Her Roth IRA: $6,500 to Bonds

In order for your international to not grow too much, you might need to reduce the international contribution after the first year.

This whole thing would be a great deal easier if you would just sell all the clutter in your taxable account now - even if you have to pay some capital gains taxes. This would reduce your taxable account to

Total Stock
Total International
CDs
I Bonds
some short term bonds to use for expenses and to fund your Roth IRAs each year

If you did this, the ratios in the other accounts might have to be adjusted, but that would not be difficult.

[livesoft]

I'd make a small change to retirejg's proposal. I'd make his 401(k) 100% FSITX, so that it was in "set-and-forget" mode. I would not have 100% bonds in his traditional IRA, but would use it for rebalancing and have the "3-fund" funds (US index, Int'l index, Bond Index) in this largish account.

[retiredjg]

I played around with that idea first. In theory, I like it better. However, I ran into two problems.

First, His tIRA appears to be in at least 2 places - it's not one tIRA at this point. I didn't know how much was where and the poster didn't say he plans to consolidate them (although that could happen).

So I tried it using Her tIRA (16.2% of the portfolio which appears to be all at Vanguard) split into the 3 basic funds. But, since that account is not getting new money, I had trouble feeding in the contributions each year. There would need to be stock funds in one or both Roth IRAs because Her tIRA could not handle the really big rebalances necessary if stock funds don't feed into Roth IRAs each year. That "de-simplified" things a lot and drew even more stocks out of taxable and into tax-advantaged accounts.

So I ended up with what I posted. Like you, I don't think it is really the best idea possible. This is probably one of the most difficult portfolios I've wrangled with and it kind of drove me nuts. It would be easier if the taxable account were liquidated and if all the different IRAs were split up by custodian.

However, your post makes me consider something that I didn't see earlier. If Her tIRA is set up like this:

3.2% TSM
1.0% TISM
12% bonds

then the sheer magnitude of the 12% slice of bonds (since the portfolio is so large) might be enough to do a rebalance once a year without feeding new money into stocks in the Roth IRAs.

I'm having trouble seeing this through a crash though.

Thoughts? Maybe I'm just blind to something obvious.

[livesoft]

Well, we will just have to bang on them until they consolidate those IRAs, won't we?

[retiredjg]

Well, we will just have to bang on them until they consolidate those IRAs, won't we?

Probably. The poster did say he wants to consolidate, so that might not be too hard.

[ChrisKtdf12]

livesoft and retiredjg, first of all, thank you both so much for all your help. We are back to working on this on Monday.

Some decisions based on your suggestions: 1) we will continue with Spartan Bond Index Fund for new 401k contributions and not switch to small cap index for new contributions, 2) we will sell more of the taxable funds on Monday in order to move more quickly to getting them into TSM and TISM, 3) we will educate ourselves on how to consolidate our Traditional IRAs (our rollover IRAs had been kept separate from our Traditional IRAs, but it looks like we didn't have to do that), 4) we will figure out what to do about his Traditional IRA currently being in both Vanguard and Fidelity if we would like to use his Traditional IRA for rebalancing each year or will decide to use her tIRA for rebalancing if there was some reason not to consolidate his at Vanguard, 5) we will put our inherited IRAs into Fidelity Spartan Short Term Bond Index Fund.

I'm sorry this drove you nuts. It's definitely driving us nuts, too. But at least it drove us to this website and the wikis.

If we've understood correctly, we should rebalance each year from TBM to TSM within one of our tIRAs as we add new contributions to the TBM in our Roth IRAs and to the Spartan Bond Index in his 401k or as the percentages in our entire portfolio move away from our desired asset allocation. Do I have that right?

retiredjg, you mentioned that "I'm having trouble seeing this through a crash, though." We haven't figured out what you meant and it sounds ominous. Thanks so much in advance for explaining what should probably be obvious to us.

Chris K.

[retiredjg]

If we've understood correctly, we should rebalance each year from TBM to TSM within one of our tIRAs as we add new contributions to the TBM in our Roth IRAs and to the Spartan Bond Index in his 401k or as the percentages in our entire portfolio move away from our desired asset allocation. Do I have that right?

If you use livesoft's idea (the 3 funds in one IRA), this is correct. If you use retiredjg's idea, you would be contributing to TSM directly (in the 401k) and not need to get your new TSM from TBM.

retiredjg, you mentioned that "I'm having trouble seeing this through a crash, though." We haven't figured out what you meant and it sounds ominous.

In a stock market crash, you might be rebalancing from bonds into stocks to keep your stock allocation up. The bond allocation in Her tIRA might be exhausted before the crash is over. Don't take that as ominous - you could simply use bonds in other accounts to rebalance into stocks. My brain was just twisted when I got to that point yesterday and I was overlooking it.

I think you are taking the right steps, especially in getting rid of the clutter in taxable. I don't think it is really necessary to consolidate the Fido and Vanguard IRAs if you don't want to. However, not knowing the relative size of each, I didn't know which to work with. On the other hand, reducing the number of accounts would simplify your portfolio some.

[ChrisKtdf12]

I edited the original post to split the percentages into His and Her retirement accounts in order to match what is suggested in the link you provided (the link about asking portfolio questions). That made me recognize that only a tenth of His tIRA is at a different custodian and easy to consolidate.

Thanks, too, for explaining how we could rebalance from bonds into stocks in a stock market crash by using bonds in other accounts should we have exhausted the bonds in Her tIRA. Everything is making a little more sense, slowly but surely.

[retiredjg]

So it seems that almost all of his tIRA is at Fido. So you can use Fido's Spartan Funds for your basic three in that one IRA. Be sure you use their Global ex US Index instead of the International Index. The Global fund contains emerging markets and the other fund does not.

The global fund is missing international small caps, but I would not worry much about that since most of your international will be in the Vanguard Total International Index. Or maybe that's just an assumption I made - that you would use Vanguard for taxable rather than Fido.