course correction

[jsbmoney]

Greetings. I'm looking for some advice on correcting my portfolio. I started investing in Edward Jones in late 2002. My single taxable account, ROTH IRA and rolled-over IRA (into Advisory Solutions) accounts are all managed by Edward Jones. I was also sold a Hartfold Life Insurance through Edward Jones, I have no dependants and now think this is fairly poor investment and would like to get out of it. I think the Advisory Solutions account may be a poor decision as well and would like advice on also moving this, possibly to a Vangard Target Retirement account like VTTHX. I'm wondering if then makes sense to also move the ROTH IRA to another administrator. I have an old 401K as well, can I still contribute to this since it's a retirement account and has a higher contribution limit than does an IRA? Would I need my current employer to allow this rather than contributing to my 457? I appreciate any advice. Thanks.

Emergency fund: 4 months of expenses
Debt: none
Tax filing status: Single
Tax Rate: 25% Federal, 2.82% State
State of residence: ND
Age: 40
Desired asset allocation: 60% stocks/40% bonds
Desired international allocation: 20% of stocks
Current portfolio size: low six-figures

Current retirement assests:

Taxable at Edward Jones
6% Euro Pacific Growth Fund CL A (AEPGX)
5% Growth Fund of America CL A (AGTHX)
5% Income Fund of America CL A (AMECX)
4% Investment Co of America CL A (AIVSX)
4% New World Fund CL A (NEWFX)

Roth IRA at Edward Jones
1% WA Mutual Inv Fund CL A (AWSHX)
3% AMCAP Fund CL A (AMCPX)
3% American Intl Grw&Inc A (IGAAX)
3% Capital World Bond Fund CL A (CWBFX)
7% Fundamental Invstrs Fund A (ANCFX)
3% SMALLCAP World Fund CL A (SMCWX)

Old 401K
11% Target Retirement 2035 (Not sure of constituent funds)

Rollover IRA at Edward Jones
34% Advisory Solutions

11% Hartford Life Insurance

New 457
0% TIAA Cref LifeCycle 2035 (TCLRX)

Annual Contributions
$16500 New 457 (TCLRX)
$2400 Hartford Life Insurance
$5000 Roth IRA

[NYBoglehead]

OP,

I don't have time to answer this just yet, I've got some suggestions but wanted to give your post a bump so that the other Bogleheads can take a bite at the apple.

[Elbowman]

If you add the expense ratios for each of your funds you will get more responses. That's actually a crucial piece of information. If you could also list some of the lower cost funds available in your 457 that would be better still. Maximum diversification at minimum cost is the name of the game.

[Duckie]

jsbmoney, you want an AA of 60% stocks, 40% bonds, with 20% of stocks in international. That breaks down to 48% US stocks, 12% international stocks, and 40% bonds. Here is a possible retirement portfolio:

Taxable at Vanguard -- 27%
15% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
12% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

457 plan -- 0%
0% Stock fund, either total US or 500 Index type.

Rollover IRA at Vanguard -- 51% <-- This includes the Rollover IRA at EJ and the Old 401k (assuming this is from a former employer).
11% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
40% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.10%)

Roth IRA at Vanguard -- 22%
22% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)

My comments/questions:
-- This removes the 11% Hartford Life Insurance from the portfolio and refigures the percentages.

-- This ignores the tax cost of selling in taxable.

-- This has TISM in taxable to take advantage of the 
Foreign tax credit.

-- Is the New 457 plan a government or non-government plan? It makes a big difference.

-- Stop paying $2,400 annually for life insurance. Buy term-life if you think you need it (does your job offer any?) and get as much cash value out of the Hartford plan as you can.

-- Under "Annual Contributions" it should be:
• $17,500 457 plan
• $5,500 Roth IRA

-- What are the options in your 457 plan (fund names, ticker symbols, and expense ratios).

-- You need to increase your emergency fund. Four months isn't enough.

-- Putting assets in balanced funds (VTTHX & TCLRX) is not recommended when you mix taxable with tax-sheltered.

-- You wrote: "I have an old 401K as well, can I still contribute to this since it's a retirement account and has a higher contribution limit than does an IRA? Would I need my current employer to allow this rather than contributing to my 457?"
• Is the old 401k through your current employer? If it's not then you can't contribute to it. If it is then you probably can. My assumption in the above portfolio is that it is from a former employer that can be rolled over. If this is wrong, that would seriously change things.

Something to think about.

[jsbmoney]

Thanks for the assessment Dukie. If I sold my taxable funds, would I then pay capital gains of 20% on the growth since I bought them? The new 457 is indeed government and the old 401K is from a former employer. My question about whether I could still contribute to the old 401K was simply because of it's higher contribution limit so it could potentially allow me to protect more money. What are the advantages of rolling an old 401K over to an IRA? Can you also explain further why the balanced accounts aren't recommended? Thanks again.

Below are my current retirement assests with expenses.

Current retirement assests:

Taxable at Edward Jones
6% Euro Pacific Growth Fund CL A (AEPGX) (0.84%)
5% Growth Fund of America CL A (AGTHX) (0.71%)
5% Income Fund of America CL A (AMECX) (0.59%)
4% Investment Co of America CL A (AIVSX) (0.61%)
4% New World Fund CL A (NEWFX) (1.07%)

Roth IRA at Edward Jones
1% WA Mutual Inv Fund CL A (AWSHX) (0.62%)
3% AMCAP Fund CL A (AMCPX) (0.73%)
3% American Intl Grw&Inc A (IGAAX) (0.93%)
3% Capital World Bond Fund CL A (CWBFX) (0.89%)
7% Fundamental Invstrs Fund A (ANCFX) (0.63%)
3% SMALLCAP World Fund CL A (SMCWX) (1.14%)

Old 401K
11% Target Retirement 2035 (Not sure of constituent funds)

Rollover IRA at Edward Jones
34% Advisory Solutions

11% Hartford Life Insurance

New 457
0% TIAA Cref LifeCycle 2035 (TCLRX) (0.70%)

Annual Contributions
$16500 New 457 (TCLRX)
$2400 Hartford Life Insurance
$5000 Roth IRA

New 457 Options
------------------------------------------------
(PARRX) PIMCO Real Return Admin (0.70%)
(PTRAX) PIMCO Total Return Admin (0.71%)
(PHYZX) Prudential High Yield Z (0.63%)
(TGBAX) Templeton Global Bond Adv (0.64%)
(CSRSX) Cohen & Steers Realty Shares (1.03%)
(PACLX) T. Rowe Price Capital Appreciation Adv (1.01%)
(FCGAX) Franklin Growth Adv (0.68%)
(SGRKX) Wells Fargo Adv Growth Adm (0.96%)
(VIFSX) Vanguard 500 Index Signal (0.05%)
(NVORX) Nuveen Tradewinds Value Oppt I (0.95%)
(HDGTX) Hartford Dividend & Growth R5 (0.75%)
(PRFDX) T. Rowe Price Equity Income (0.68%)
(PEGZX) Prudential Jennison Mid Cap Growth Z (0.79%)
(ABMIX) ASTON/Fairpointe Mid Cap I (0.89%)
(NTIAX) Columbia Mid Cap Index A (0.46%)
(SMVTX) RidgeWorth Mid Cap Value Equity I (1.07%)
(BCSIX) Brown Capital Mgmt Small Co Inv (1.35%)
(PARSX) Parnassus Small Cap (1.20%)
(PVADX) Allianz NFJ Small Cap Value Admin (1.03%)
(MDISX) Mutual Global Discovery z (1.01%)
(VTSGX) Vanguard Total Intl Stock Index Sig (0.18%)
(ODVYX) Oppenheimer Developing Markets Y (1.00%)
(TCLRX) TIAA-CREF Lifecycle 2035 (0.70%)
(TLIRX) TIAA-CREF Lifecycle Ret Income (0.63%)

[Duckie]

If I sold my taxable funds, would I then pay capital gains of 20% on the growth since I bought them?

It depends on your marginal tax bracket. See this Capital Gains Calculator. I think most of the brackets are still accurate for 2013. (And when doing your figuring don't forget about any reinvested dividends.)

The new 457 is indeed government and the old 401K is from a former employer.

Being a government plan is good and because the old 401k is from a former employer you can roll it over either to an IRA or possibly to your current 457 plan, depending on if they allow it and if the plan has good choices. Yours has a couple (VIFSX & VTSGX) but unless you are near the income limits for Roth IRAs and may need the 
Backdoor Roth IRA
 option in the future, rolling the old 401k to the new 457 is probably not a good idea.

My question about whether I could still contribute to the old 401K was simply because of it's higher contribution limit so it could potentially allow me to protect more money.

You aren't allowed to contribute to an employer plan when you're no longer an employee there. You sometimes are allowed to rollover assets into an old plan.

What are the advantages of rolling an old 401K over to an IRA?

You have more options in an IRA, more choices and quite often cheaper expense ratios.

Can you also explain further why the balanced accounts aren't recommended?

You shouldn't have bonds in a taxable account if you can help it. They kick out too much non-qualified income. Balanced funds have bonds in them so they don't belong in taxable. Although it doesn't hurt (tax-wise) to have them in tax-sheltered, when you try to consider your AA and rebalancing, the math can get a little complicated. You can do it, but it's easier to have individual funds (TSM, TISM, TBM, REIT, etc.) rather than balanced funds which are a basket of individual funds (Target Retirement, LifeStrategy, Wellesley, etc.). Also, the individual funds may be cheaper with admiral shares if your portfolio is big enough and yours is.

Do you have a pension?

Are you contributing to Social Security? (Some government jobs don't.)

I recommend you use 100% (VIFSX) Vanguard 500 Index Fund Signal Shares (0.05%) in your new 457 plan. When its value gets up to $12K start adding (VEXMX) Vanguard Extended Market Index Fund Investor Shares (0.28%) in the Roth IRA. Roughly 80% large caps (500 Index) plus 20% mid/small caps (Extended Market) makes up the total US stock market. (If you're wondering, I say $12K because VEXMX has a $3K minimum. $12K plus $3K is $15K and $3K is 20% of $15K.)

[jsbmoney]

It looks like I would be taxed at 15% for the capital gains in my taxable account which would amount in several thousand dollars. I'm not certain how to determine the dividends reinvested, but it may be considerable. Is there any easy way to find this information? Wouldn't I already be taxed on dividends in my taxable account? If not wouldn't it be possible to be taxed twice, once for the capital gains (total growth) and once for the dividends reinvested (which would be a portion of the total growth)? I assume it would take a number of years to recoup the amount lost to taxes, but would eventually pay off since I'll be paying less in fees? I do have a pension though I'm not fully vested yet. I am contributing to Social Security as well.

[Duckie]

I'm not certain how to determine the dividends reinvested, but it may be considerable. Is there any easy way to find this information? Wouldn't I already be taxed on dividends in my taxable account?

EJ will probably provide the cost basis information but you're going to have to check your statements to verify. Every month or quarter that you received a dividend in your taxable account and automatically reinvested it, you created a new tax lot. It's the same as if you took the dividends in cash, then turned around and bought more shares in the fund. You have already been taxed on the dividends. In order not to be taxed again you have to track them. They are part of your basis. (This is the main reason we recommend not automatically reinvesting dividends/capital gains distributions in taxable accounts.)

For example:
• In March 2009 you bought 500 shares of Fund A for $5,000.00 or $10.00 a share.
• In June there was a dividend of $0.12 a share or $60.00. This dividend was automatically reinvested and bought 4 shares at $15.00 a share.
• In December there was a dividend of $0.11 a share or $55.44. This dividend was automatically reinvested and it bought 3.82 shares at $14.50 a share.
• In April 2010 you sold all 507.82 shares for $13.25 a share totaling $6,728.62.
• Your total gain for this sale was $1,613.18 ($6,728.62 - $5,115.44 [$5,000.00 + $60.00 + $55.44]). You had a short-term loss of $11.82 and a long-term gain of $1,625.00.

You figure this out on IRS Form 8949 and Schedule D.

I assume it would take a number of years to recoup the amount lost to taxes, but would eventually pay off since I'll be paying less in fees?

One way to do it would be to sell everything with a loss, then everything with a gain up to the loss (making it even, tax-wise). After that you sell based on how much in taxes you are willing to pay each year. Obviously this takes longer. Some people would rather just bite the bullet and get it over with.

[jsbmoney]

So if Edwards Jones does provide me the cost basis, they would be providing me the total amount paid (initial cost + reinvested dividends) for each fund in my taxable account? In your example below is the $5115.44 the basis? If Edward Jones doesn't provide this value, then I have to figure this out from my statements or I'll be taxed twice for it? Am I understanding that correctly? If it's not recommended to automatically reinvest dividends/capital gains distributions in taxable accounts, what do you do with them? I assume it's ok to reinvest them in tax-deferred accounts?

[nedsaid]

I actually like the American Funds. They are value oriented, have relatively low expense ratios, and are team managed. So you aren't dependent on star fund managers. They tend to have low turnover portfolios. Their managers also tend to have long tenures. They have a good long term focus and good long term records. If you had to buy loaded funds from someone, these would be the guys to buy them from. American Funds are a good fund family.

I am adverse to paying the loads. So I don't advise that readers of this forum rush out and buy them. If one has worked with an advisor who put you into American Funds and have already paid the loads, don't rush and sell them either. The performance has actually been really good, particularly in bad markets. When value stocks do well, these funds tend to do well. When growth predominates, then these funds will lag a bit.

So if you already own some of these funds and are interested in a slice and dice, you could do an active/passive strategy using index funds along side the American Funds. This would give you a value tilt. Sometimes, American Funds are available in workplace retirement plans without the loads and at lower expense ratio share classes.

That being said, indexing over long periods of time beat the pants off of most managed funds. You can buy index funds without any sales loads and never have to worry about underperforming the market. So I am not advertising for American Funds. I am just saying that if you happen to already own them, think twice about selling.

[Duckie]

So if Edwards Jones does provide me the cost basis, they would be providing me the total amount paid (initial cost + reinvested dividends) for each fund in my taxable account?

Yes, the cost basis would be all purchases whether reinvestments or not.

In your example is the $5115.44 the basis?

Yes.

If Edward Jones doesn't provide this value, then I have to figure this out from my statements or I'll be taxed twice for it? Am I understanding that correctly?

Yes. You've already paid the taxes on the dividends. Since you reinvested them they are part of your basis and go on Form 8949 when you sell. However, if you're ever audited you need to be able to prove that the dividends were reinvested and that your numbers are correct. (Even if EJ does provide the basis, you might want to verify their numbers.)

If it's not recommended to automatically reinvest dividends/capital gains distributions in taxable accounts, what do you do with them?

Most people have them paid into an account which doesn't create a gain or loss when sold. This could be a money market fund or a savings or checking account. In my particular case, my taxable account for retirement purposes is at Vanguard and I only hold TSM and TISM there. The distributions are paid to the Prime Money Market. I normally keep $XX in there as my emergency fund. When the account gets to $5K more than $XX I shift $5K to whichever of the two stock funds is below its AA. I like big round numbers. I find them easier to track. Fewer, larger purchases mean fewer tax lots to track and you can rebalance as you go. When I had less money I rebalanced with $500 or $1000, but still round numbers. But that's just me. Other people do it differently. You'll need to find what works best for you.

I assume it's ok to reinvest them in tax-deferred accounts?

It's not only ok, it's recommended. There is no tax issue when rebalancing in tax-sheltered accounts.

[Default User BR]

For non-covered shares, if you've been with the same custodian the entire time then likely you'll get basis information. Where you can have trouble is when you switched, or as my case, when the brokerage was bought and merged. I had an investment in AIVSX that went way back. I only had a few years of basis from US Bank. I was able to back-calculate the basis with a table of historic distributions I got from American Funds.


Brian

[jsbmoney]

Thanks for all the replies. I have another question about investing in bond funds at this time. I'd like to allocate about 40% of my portfolio to bonds, probably a total bond market index fund, but since the interest rate is so low right now I've read that this may be ill-advised at this time. Should I be allocating a smaller portion of my portfolio to bonds? Also, for anybody's interest I've looked into my Edward Jones Advisory Solutions account. It seems there is 1.35% annual program fee for an account my size plus a .09% administrative fee on top of the cost of the mutal funds within the account. The funds in my Advisory Solutions account are below. Probably need to move this.

EJ Advisory Solutions Load Expenses Turnover
---------------------------------------------------- --------- ------------ -------------
Buffalo Small Cap (BUFSX) 0.00 1.00 24%
Columbia International Value (NIVLX) 5.75 1.41 16%
Columbia Select Large Cap Gr (ELGAX) 5.75 1.11 53%
Dodge & Cox Stock (DODGX) 0.00 0.52 16%
Euro Pacific Growth Fund Cl F1 (AEGFX) 0.00 0.86 24%
Federated Kaufman (KAUAX) 5.50 1.95 61%
Federated Total Return Bonds (TLRAX) 4.50 0.90 63%
Fidelity New Insights (FNIAX) 5.75 1.07 58%
Goldman Sachs Commodity Strategy A (GSCAX) 4.50 0.92 581%
Harbor International (HIINX) 0.00 1.14 11%
Hotchkis & Wiley Large Cap Value (HWLIX) 0.00 1.05 59%
Invesco Global Real Estate (AGREX) 5.50 1.51 54%
Invesco Growth & Income Fund Y (ACGMX) 0.00 0.58 25%
John Hancock Disc Value (JVLAX) 5.00 1.24 44%
JPMorgan Core Bond (PGBOX) 3.75 0.75 20%
JPMorgan Federal MMkt Inst (JFMXX) 0.00 0.10
JPMorgan Value Advantage (JVAAX) 5.25 1.25 49%
Keystone Large Cap Growth (KLGIX) 0.00 1.10 114%
Principal Mid Cap Blend (PEMGX) 5.50 1.08 21.1%
T.Rowe Price Equity Income (PRFDX) 0.00 0.68 15.3%
T.Rowe Price International Stock Fund (PRITX) 0.00 0.85 33.5%
Virtus Emerging Markets Opportunities (HIEMX) 0.00 1.36 29%

[Duckie]

I'd like to allocate about 40% of my portfolio to bonds, probably a total bond market index fund, but since the interest rate is so low right now I've read that this may be ill-advised at this time. Should I be allocating a smaller portion of my portfolio to bonds?

I don't think you should try to time the market. If you want 40% bonds, have 40% bonds.

Also, for anybody's interest I've looked into my Edward Jones Advisory Solutions account. It seems there is 1.35% annual program fee for an account my size plus a .09% administrative fee on top of the cost of the mutal funds within the account. The funds in my Advisory Solutions account are below. Probably need to move this.

Ya think? Yes, sell and move to Vanguard. It's an IRA so there's no tax cost (although they'll ding you with closing fees).

[jsbmoney]

I read an interview with Jack Bogle recently in which, I believe referring to the Vanguard Total Bond Index Fund, he said "So the bond index fund is about 73 percent in government bonds—U.S. Treasury-backed one way or another. And I think that is in fact heavier than most investors should have. So if they can’t handle that very small bond yield of 2 percent, you can lift it pretty close to 3 percent if you want to have 50 percent corporates and 50 percent governments." Should I be looking into alternative bond index funds with different government/corporate allocations? Are there any noted funds that are allocated as such? Thanks.

[Duckie]

Should I be looking into alternative bond index funds with different government/corporate allocations? Are there any noted funds that are allocated as such? Thanks.

Well, you could buy (VBILX) Vanguard Intermediate-Term Bond Index Fund Admiral Shares (0.11%) which holds only 50% government bonds or (VFIDX) Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares (0.10%) which holds only 8% government bonds but is not an index fund.

[BL]

I would immediately make sure they are not authorized to buy or sell anything without your written approval, as everything they do is a cost to you.

Vanguard can pull everything in to them without your dealing with EJ, once you decide how you want it handled. Suggest you talk to Vanguard Brokerage about transferring everything in kind and have them sell it for you (or keep some if you choose). There may be some funds they don't deal with. I have not dealt with VB but there are threads about it here. There may be closing costs but EJ will take all they can. The longer you keep your accounts there, the more it will cost to disentangle yourself from them.

Get Basis costs from EJ immediately. Also get information concerning your existing life insurance. I expect the best thing is to get rid of it. Life insurance is not an investment.

As usual, they have you in a ridiculous number of funds; I think it is to generate money for them as well as make it look so complicated that you wouldn't dare do it yourself. You have multiple costs (loads, high ERs, AUMs) and have not been given good advice about what to do with your money at EJ so don't feel you owe them anything. They might be a "nice guy" but are not looking out for your best interests.

[jsbmoney]

I am now looking at moving my accounts from EJ to Vanguard and have a question about the account rebalancing process. I assume when you rebalance your portfolio you sell from disproportionately high asset classes and buy more of the lesser proportioned asset classes. If this is the case, should I have a bond fund in my Roth? The example portfolio Duckie had defined earlier has bonds in a traditional IRA (which I don't believe I'm allowed to add to, so I wouldn't be able to buy more bonds). If I have a bond fund in my Roth, then when rebalancing I can sell shares from my TSM or TISM funds and purchase TBM shares in my Roth if necessary. Is this correct? Thanks.

[mjsmithz]

You are correct you would sell high asset classes and buy lower asset classes to get back down to your desired asset allocation. You can contribute to your traditional IRA and Roth IRA upto $5,500. You can not contribute to your previous employer's 401(k) if that is still open

[jsbmoney]

I'll be rolling over a traditional IRA and a Roth from EJ. I'll then be rolling over an old 401K from a previous employer and adding this to the rolled over traditional IRA account. Would I still be able to contribute to the rolled over traditional IRA?