Emerging Markets

[spsbo1]

Hi all,

I spoke with a financial advisor in December who suggested I invest in some emerging markets.

Here's the current makeup of my portfolio:

INDIVIDUAL ACCT
VTIAX $106,437 (total intl stock market)
VBTLX $108,206 (total bond market)
VTSAX $107,660 (total stock market)

ROTH IRA
VTSMX $6,786 (total stock market)
VBTLX $10,754 (total bond market)

401K
SSGA $74,000

CASH (emergency funds)
$54,000

TOTAL STOCK MARKET - $294,883
TOTAL BOND MARKET - $118,960
TOTAL CASH - $54,000
TOTAL - $467,843

I am 41, live in NYC, earn approximately $150K pa depending on bonus's and am paying off my apt with my partner.

Do you think emerging markets would be a good addition to my portfolio for diversity? If so, which fund would you recommend?

Cheers,

Mark

[mhc]

VTIAX already has the market weight of emerging markets. There is no need to add additional emerging market.

Did the adviser tell you why you needed more emerging market?

[RobInCT]

Is there a reason you investing in bonds in a taxable account when you have so much space in your tax-advantaged account?

[Occupier]

My guess is that since the adviser took some of your money he thought he had to say something. As pointed out, total international has a market weight in emerging. So your there with your three fund portfolio. Personally if your going to transition to a 4 or 5 fund portfolio, the next stop would be either US Small Value as in VBR, or International Small such as VSS. Some would say add REITS but they are at a really high valuation and unlikely to out perform into the future. They are also a 15% component of VBR. Dave

[nedsaid]

If you want market-weighted investments, then you are fine. If you want to overweight in particular asset classes, then you could add an additional Emerging Markets Index fund. It depends on whether or not you believe that overweighting in Emerging Markets will increase your return. It will certainly increase your risk.

Other posters have pointed out that you already have Emerging Markets in the Total International Stock Index. I think you are fine.

[Dandy]

Emerging market stocks are already included in the total Int'l stock market. emerging markets are volitile. If you want to tilt toward emerging markets that can be ok but do it as a well thought out philosophy not because some FA told you. Ask him/her why. If it makes sense then there should be no problem using VGs EM fund.

[ramsfan]

The advice so far on emerging markets is spot on.

Someone else mentioned that you should work hard to NOT hold bonds in taxable accounts, as they are not tax efficient.

Assuming you are happy with your overall allocations, then it is easy sell stock funds in IRA/401k accounts, and replace with bond funds and sell bond funds in taxable accounts and replace with stock funds.

ALso, for remaining bonds you may have in taxable, consider Muni Bond Funds.

[spsbo1]

Thanks everybody. I really appreciate the advice. Sounds like I'm good on the Emerging Markets front.

I do have a question though on the tax advantage/bonds issue:

The advice so far on emerging markets is spot on.

Someone else mentioned that you should work hard to NOT hold bonds in taxable accounts, as they are not tax efficient.

Assuming you are happy with your overall allocations, then it is easy sell stock funds in IRA/401k accounts, and replace with bond funds and sell bond funds in taxable accounts and replace with stock funds.

ALso, for remaining bonds you may have in taxable, consider Muni Bond Funds.

I like this suggestion from ramsfan (thanks!)...I guess the upshot is I should max out my 401K with bond funds - right? Following are the bond funds available on my companies 401K menu:
INCOME
Morgan Stanley Liquid Assett Fund (09/1975) DWLXX GROSS ER .67
Eaton Vance Govt Obligations Fund - Class A (08/1984) EVGOX GROSS ER 1.17
JPMorgan Core Bond Fund - Class A (05/1992) PGBOX GROSS ER .99

My questions are:
Which of the above bond funds would you recommend I buy?
How would I convert my current 401K holdings (currently 100% in SSgA S&P 500 Index Fund (01/1978) N/A GROSS ER .35) to bond funds without incurring capital gains or un-necessary charges?
How would I sell my bonds in my taxable account and buy stock index funds without incurring capital gains tax?

Many thanks! I'm a bit of an investing novice so appreciate the help. Please treat me like a dummy - I really don't know much about investing.

Cheers,

Mark

[mhc]

The first fund you listed is not a bond fund. It is a cash fund. The 3rd one listed (core bond) is the bond fund you would want to use.

Selling in a 401k is not a taxable event.

The bond fund in your taxable account probably does not have significant cap gains. You would have to check though.

Sell the bond fund in taxable and buy S&P500 or Total Stock Market. Use Total Stock Market if you are not currently using an extended market or small cap fund to compliment the S&P500 fund.

Sell the S&P500 hundred fund in 401k and buy the core bond fund.

Just make sure you maintain your desired AA.

[ramsfan]

The first fund you listed is not a bond fund. It is a cash fund. The 3rd one listed (core bond) is the bond fund you would want to use.

Selling in a 401k is not a taxable event.

The bond fund in your taxable account probably does not have significant cap gains. You would have to check though.

Sell the bond fund in taxable and buy S&P500 or Total Stock Market. Use Total Stock Market if you are not currently using an extended market or small cap fund to compliment the S&P500 fund.

Sell the S&P500 hundred fund in 401k and buy the core bond fund.

Just make sure you maintain your desired AA.

All good advice above. your first step is to check to see what (if any) cap gains or losses you may have with the bond fund in your taxable account. I agree with mhc that they will likely not be significant, but you should check.

Then, if you decide to proceed, you should be able to execute these moves in the same trading day, thus maintaining your desired allocation. Not sure how you would feel if you sold the stock fund in your 401kone day, and it went up 2% the next day, when you bought it in taxable. I would try and place all trades early in the day, so they execute at same market close.

[spsbo1]

Thanks for the advice.

[quote="ramsfan"]
All good advice above. your first step is to check to see what (if any) cap gains or losses you may have with the bond fund in your taxable account. I agree with mhc that they will likely not be significant, but you should check.[quote="ramsfan"]

I've checked re: capital gains on my taxable account and if I convert my bond funds to stock index funds I will realize about $2615 in capital gains.

You guys still think this is worth it given I'm in for the long haul? Should I just bite the bullet and do this?

Thanks,

Mark

[Imbros]

It is interesting that the sales person advisor came up with the emerging market thing but didn't say anything about holding Bonds in a taxable account.

[mhc]

Thanks for the advice.

All good advice above. your first step is to check to see what (if any) cap gains or losses you may have with the bond fund in your taxable account. I agree with mhc that they will likely not be significant, but you should check.

I've checked re: capital gains on my taxable account and if I convert my bond funds to stock index funds I will realize about $2615 in capital gains.

You guys still think this is worth it given I'm in for the long haul? Should I just bite the bullet and do this?

Thanks,

Mark

tax = $2615 * 15% = $392.25

I would not worry about the extra ~$400 in taxes, if dividend rates ever go up for bonds, you will be happy you got them out of your taxable account.

That's just one night of dinner and drinks in NYC, right.

[spsbo1]

Thanks so much guys. This is really helpful!

[baw703916]

Given the awful E/R of the 401k bond fund offering, might it not be better for the OP to just switch to the Vanguard NY Tax-exempt Bond Fund (VNYTX) in his taxable account instead? The usual argument against holding tax-exempt bonds compared to taxable bonds in a retirement account is that one pays a penalty in lower yield. But a 0.87% difference in E/R between the 401k bond fund and the admiral class of the Vanguard NY bond fund is an impossible hurdle to overcome, at least in the current interest rate environment.

[learning_head]

Given the awful E/R of the 401k bond fund offering, might it not be better for the OP to just switch to the Vanguard NY Tax-exempt Bond Fund (VNYTX) in his taxable account instead? The usual argument against holding tax-exempt bonds compared to taxable bonds in a retirement account is that one pays a penalty in lower yield. But a 0.87% difference in E/R between the 401k bond fund and the admiral class of the Vanguard NY bond fund is an impossible hurdle to overcome, at least in the current interest rate environment.

+1

Also... if yields ever go up on bond funds, that means their prices will go down in taxable account, and you will be able to tax-harvest the losses and move bonds to tax-advantaged account later if you decide to do so...

[baw703916]

if yields ever go up on bond funds, that means their prices will go down in taxable account, and you will be able to tax-harvest the losses and move bonds to tax-advantaged account later if you decide to do so...

Good point, although there are a few special issues in claiming a tax loss on the sale of tax-exempt bonds.

In thinking about it a little more, it would probably be better for the OP to switch to a 50/50 mixture of the NY tax exempt fund and one of the national tax exempt funds for the sake of diversification, even though this would require paying some NYS and NYC taxes on the interest from the national fund.

Brad

[spsbo1]

Thanks guys for the insight...although this is starting to sound really complicated for someone like me who really doesn't know that much about retirement planning....

Given I run the business where I work I can easily go to the guy at Morgan Stanley who runs our 401K plan and just ask him to add some other bond funds to our menu that have lower expense ratios....I've already asked and Morgan Stanley can't do any Vanguard funds unfortunately....but if you have any other funds you think would make good replacements (that Morgan Stanley could access) please let me know and I will run by him. Just let me know the tickers and the ER.

Also, I have another issue...I had a session with a Vanguard Fin Planner about a month ago and they suggested in my taxable account I move my bond holdings from:
Vanguard® Total Bond Market Index Fund Admiral Shares
to:
Vanguard® Intermediate−Term Tax−Exempt Fund Admiral Shares
I can't remember why they said this was a good idea...I think it had something to do with the fact given my incomehas gone up this year I'm unable to contribute to a Roth IRA.

Thoughts?

Thanks,

Mark

[learning_head]

Tax-exempt fund in taxable account may make sense depending on your tax bracket - it invests in muni's that are better for taxable account for people with high brackets.

Regarding substitutes for vanguard funds, check out funds (and ETFs) at this page (look for two tables in the middle of the page)

[grabiner]

401K
SSGA $74,000

Do you have a good bond option here? If not, then it may be best to use the SSGA S&P 500 just because it is the only good option.

Regardless, if you need to hold bonds in your taxable account, then given this:

I am 41, live in NYC, earn approximately $150K pa depending on bonus's and am paying off my apt with my partner

you should use a NY municipal-bond fund for your taxable bond allocation. You are presumably paying 28%-33% federal and 10% NY state and city tax on your Total Bond Market, and an NY fund is exempt from both.

[spsbo1]

Hi guys,

OK, I've spoken to our 401K guy and he said I have the following options for bonds if I want them:
EVGOX ER 1.14%
IPFIX ER 0.96%

Either of these a contender do you think?

Cheers,

Mark

[baw703916]

Hi guys,

OK, I've spoken to our 401K guy and he said I have the following options for bonds if I want them:
EVGOX ER 1.14%
IPFIX ER 0.96%

Either of these a contender do you think?

Cheers,

Mark

Hi Mark,

I don't think those are good options. Currently the yields on most bonds are in the 1.5-3% range, unless you take a lot of risk, which kind of defeats the purpose of owning bonds. A fund with an expense ratio of 1% reduces the 1.5-3% yield to 0.5-2%, or (more typically) the fund has to take a lot more risk to achieve a competitive return. So basically by investing in those funds, the fund is taking 30-70% of the return (or making you invest in risky bonds).

I like the Vanguard rep's advice, but would recommend modifying it slightly

Convert Total Bond Market to a 50/50 mixture of NY Long-term Tax Exempt Admiral shares (VNYUX) and Intermediate Term Tax Exempt Admiral shares (VWIUX). Both of these funds have expense ratios of 0.12%, minimum investments of $50K for the Admiral shares, and durations of 5-6 years (the NY fund is called "long term" but this is a misnomer).

The NY fund will be free of federal, state, and city taxes. The national fund will be free of federal taxes only. Both are free from AMT.

The NY fund gives a better deal tax-wise. But if there were to be a downturn in the local economy, this might impact your business as well as the credit rating (and price) of the NY fund's bonds. So that's why I would advise putting some of the money in the national fund.

Brad

[spsbo1]

Thanks Brad.

That leaves me with dilemma of what to do with my 401K...should I just leave all of it in SSGA?

Thanks!

MARK