Help! I'm maxed out with cash lying around

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Help! I'm maxed out with cash lying around

Postby M_to_the_G » Mon Jan 21, 2013 11:36 am

Hi all,

This is my first post, so please be gentle. :) Here’s my breakdown:

33 years old
Federal Employee (Foreign Service)
Retirement goal: 2034, 55 years old with 80% of final income (probably around $100,000, so $80,000)
Debt: zero, no mortgage, nothing

I have been in the Foreign Service since I turned 29, and I have consistently maxed out my TSP since I joined in 2009 and Roth since 2010 and will continue to do so until I retire. I am all-in in L2030 and VFORX. I like the somewhat conservative nature of the L2030, as I will be depending on it to meet my retirement goals. I like the more aggressive nature of the VFORX for my Roth. They are both pretty diverse funds, both target-date funds, and largely concentrated in stocks and then bonds, with a significant cash component for the L2030. Since I will have a pension with 25 years in the Foreign Service and a supplemental annuity, I've run some numbers and I should be able to meet my goals with the TSP alone. The Roth will just be a nice bonus when I turn 59.5. I currently have about $100,000 in my L2030 and about $26,000 in my VFORX.

Here's my problem:

I live pretty frugally, and I am saving large amounts of cash despite maxing out my TSP and Roth, and this has worried me. I have about $60,000 (and growing) in a Money Market account with my credit union (on top of my $15,000 emergency fund, which probably isn’t even very necessary as I am healthy, have no dependents, have a very stable job, and have excellent health care) that is just sitting there. I want to do something with it. I know I should do something with it as it isn’t serving any purpose sitting there. I don’t need it for security. Here are some things I am categorically not interested in: 1) buying a rental property or any type of property is out of the question for me (I don’t like anything about that idea), 2) I am also very wary of things like precious metals and stock-picking.

Given that my goals are long-term and more-or-less already met by my current plan, and given that I have a fairly large appetite for risk with this cash lying around, I was thinking of putting that $60,000 (and any future savings) into taxable Vanguard funds. I want to pick funds that address possible (or perceived) shortcomings in my current portfolio. I was thinking of this:

VFWAX ($25,000) an index fund, to shore up the international stock hole (the TSP I fund is a pretty lame international index) and add some risk and further diversity
VGSLX ($15,000) adding the real estate sector which is otherwise absent from my portfolio, adding further diversity beyond stocks and bonds with REIT's
VGHCX ($20,000) to add diversity and risk and to get into health care, in which I have great faith (and which is completely lacking in my current portfolio)

A propos, I will probably end up occasionally stockpiling cash like this throughout my career, due to my low living expenses and total lack of debts/obligations (not even a cat). Should I continue to plow money into taxable mutual funds? Are there any potential pitfalls I need to take into account? Do you have any alternative suggestions on what to do with this cash (and future cash surpluses)? Am I okay going with all-Vanguard? Should I diversify with another company like Fidelity? Am I completely missing something and way off my rocker with this plan?

Thoughts, criticisms, and alternative suggestions HIGHLY welcome, as I’m still thinking about this and haven't pulled any triggers yet.

Sincerely,

MG
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Re: Help! I'm maxed out with cash lying around

Postby jah » Tue Jan 22, 2013 1:16 am

Hello, and thanks for posting! I am relatively new here, so take what I say with a grain of salt. What I write below I have picked up from more "senior" members of this forum.

I would suggest that you first set aside an amount you feel comfortable with in an emergency fund - bank account/cd ladder/money market.

Next, I would determine what asset allocation (stock/bond ratio, etc) you want in your retirement account. People have different views on what the best allocation is, but you should pick one that reflects your retirement date and your risk tolerance. A good strategy - albeit some would say a bit conservative - is to match your bond % with your age. Within your planned stock assets you should divide into domestic and international stocks (Vanguard suggests holding between 20-30% of your stocks in international).

I use (with a little variance) a three fund portfolio: Vanguard Total Bond Market, Vanguard Total Stock Market, and Vanguard Total International Stock Market. These three funds give you a very diversified portfolio with quite low expense ratios. Load up your tax-advantaged accounts (IRA, etc.) with the bond fund, and place the stock funds in your taxable account.

Hope this helps.

Jason
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Re: Help! I'm maxed out with cash lying around

Postby Duckie » Tue Jan 22, 2013 1:23 am

M_to_the_G, you have roughly 80% at 70/30 and 20% at 90/10. Why don't you average it and make it all 75/25. Or 52% US stocks, 23% international stocks, and 25% bonds. It'll be easier to rebalance once you have taxable assets if you don't have TR or L funds. Here is a possible retirement portfolio:

Taxable at Vanguard -- $60K -- 32%
9% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
23% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

Thrift Savings Plan -- $100K -- 54%
23% C Fund (0.025%) <-- Roughly 80% large caps (C Fund) plus 20% mid/small caps (S Fund) makes up the total US stock market.
6% S Fund (0.024%)
10% F Fund (0.024%)
15% G Fund (0.025%)

Roth IRA at Vanguard -- $26K -- 14%
9% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
5
% (VGSIX) Vanguard REIT Index Fund Investor Shares (0.24%)

My comments:

-- This has TISM in taxable to take advantage of the 
Foreign tax credit and at Vanguard because the TSP I Fund is the only weak link in the plan. It only has developed markets. It's missing emerging markets, small-caps, and Canada.

-- This has REITs because you want them, but they're already in TSM at the market weight. And they definitely belong in tax-sheltered. There are alternatives for bonds in taxable, but not for REITs.

-- Keep the fixed income in the TSP. The G Fund is practically a free lunch.

-- You could also think about 
I Savings Bonds through Treasury Direct in your taxable account. Besides being good for retirement they work as a second-tier emergency fund.

-- If you have the Roth TSP option consider this: Most TSP Participants Should Switch To The Roth TSP.

Something to think about.
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Re: Help! I'm maxed out with cash lying around

Postby M_to_the_G » Tue Jan 22, 2013 7:28 am

personal attack removed by admin alex. followups also deleted - please report posts rather than responding to violations in the thread
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Re: Help! I'm maxed out with cash lying around

Postby M_to_the_G » Tue Jan 22, 2013 7:36 am

Thank you. I appreciate that you took the time to actually read and think about my post. In fact, your response is downright thoughtful. I understand the reasoning behind self allocating, but for the moment my TR funds are meeting my needs. I know this is heresy in these woods, but I have looked at the L2030 and VFORX, and I'm good with the philosophy of thes funds. I'm also okay with my portfolio's AA.

I take your point about REIT's, and I'll keep them out of taxables. Thank you for pointing that out. I might consider another index. Your two taxable suggestions make sense.

Sincerely,

MG


Duckie wrote:M_to_the_G, you have roughly 80% at 70/30 and 20% at 90/10. Why don't you average it and make it all 75/25. Or 52% US stocks, 23% international stocks, and 25% bonds. It'll be easier to rebalance once you have taxable assets if you don't have TR or L funds. Here is a possible retirement portfolio:

Taxable at Vanguard -- $60K -- 32%
9% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
23% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

Thrift Savings Plan -- $100K -- 54%
23% C Fund (0.025%) <-- Roughly 80% large caps (C Fund) plus 20% mid/small caps (S Fund) makes up the total US stock market.
6% S Fund (0.024%)
10% F Fund (0.024%)
15% G Fund (0.025%)

Roth IRA at Vanguard -- $26K -- 14%
9% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
5
% (VGSIX) Vanguard REIT Index Fund Investor Shares (0.24%)

My comments:

-- This has TISM in taxable to take advantage of the 
Foreign tax credit and at Vanguard because the TSP I Fund is the only weak link in the plan. It only has developed markets. It's missing emerging markets, small-caps, and Canada.

-- This has REITs because you want them, but they're already in TSM at the market weight. And they definitely belong in tax-sheltered. There are alternatives for bonds in taxable, but not for REITs.

-- Keep the fixed income in the TSP. The G Fund is practically a free lunch.

-- You could also think about 
I Savings Bonds through Treasury Direct in your taxable account. Besides being good for retirement they work as a second-tier emergency fund.

-- If you have the Roth TSP option consider this: Most TSP Participants Should Switch To The Roth TSP.

Something to think about.
Last edited by M_to_the_G on Tue Jan 22, 2013 8:01 am, edited 1 time in total.
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Re: Help! I'm maxed out with cash lying around

Postby Johm221122 » Tue Jan 22, 2013 7:44 am

With your extra cash index funds are fine considering you want risk. You may want to consider tax efficient placement
http://www.bogleheads.org/wiki/Principl ... _Placement
Reits belong in taxed Deffered, health care is a sector bet(market is efficient is common thought) I would consider emerging market or international small cap too make up for TSP.Roth TSP as mentioned is a idea
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Re: Help! I'm maxed out with cash lying around

Postby Aptenodytes » Tue Jan 22, 2013 7:57 am

M_to_the_G wrote:Thank you. I appreciate that you took the time to actually read and think about my post. I understand the reasoning behind self allocating, and I might consider it in the future, but for the moment my TR funds are meeting my needs.

I was specifically asking for advice on what to do with extra cash on hand, after you've already met your savings goals. Perhaps I should be more clear and direct here: I have an emergency fund already and am happy with my TSP and Roth allocations. I Realize that's the bread and butter of this place.

Sincerely,

MG

I think there's not going to be much of an alternative to Duckie's advice, even if you don't like it. You have been pretending your portfolio is entirely in tax-advantaged space, but it really isn't. While you were pretending that, you had the tax-advantaged in target-date funds and the taxable in cash. Now you are seeking advice on how to manage things better. Best practices call for you to manage the tax implications efficiently. That means keeping bonds out of your taxable accounts. That means you have to reduce your bond exposure in your tax-advantaged account; otherwise you change your AA. If you have taken the time to read posts here and to compose one of your own, you surely have enough stamina for managing a simple 3-fund portfolio.

If you really want to rule out something like that, then you might be able to approximate it by switching to a different target-date fund that is more bond-heavy. I personally would find that more difficult than a 3-fund portfolio, because most of the target-date funds have uneven glide paths, and shifting the date would shift the slope of the path as well as the fraction in bonds -- a mess to manage for my taste.

You drop hints that you want to adopt separate risk/return profiles in the taxable and the tax-advantaged accounts. That isn't considered best practices either, unless the taxable is so small that it just doesn't matter. The recommend approach is to adopt a single risk/return profile and apply it across your portfolio as a whole.

If you really don't want to follow any of this advice, then I'd say just pick a broad-based stock fund and carry on. Your finances are in good shape, so you'll be fine.

This is all premised on the assumption that you want the cash savings to grow. You say you have met all your savings goals, so that assumption isn't necessarily correct. Obviously, alternatives include giving the money away or spending it on luxurious treats.
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Re: Help! I'm maxed out with cash lying around

Postby livesoft » Tue Jan 22, 2013 8:08 am

Duckie has given great advice.

To shore up the hole by the TSP I fund, I would use something completely different to the I fund rather than the somewhat similar VFWAX. I would use the Vanguard FTSE ex-US small-cap fund. Indeed, a good foreign fund combo is to use both the VTIAX and VSS in order to get to market weights, but then overweight foreign small-caps.

That health care fund selected by the OP is a complete waste of money since their other funds altready have all the stocks found in the VGHCX. That is, health care is completely covered by the OP's current portfolio, but they do not apparently realize that. Also, selecting VGHCX is essentially like stock-picking despite the OP having written "I am also very wary of things like ... stock-picking."
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: Help! I'm maxed out with cash lying around

Postby M_to_the_G » Tue Jan 22, 2013 8:26 am

Yeah, I take the point about taxes. I also appreciated Duckie's thoughts on taxable funds. You are correct in assuming that I want to take a different risk/reward tack with my taxable because I'm not relying on it for my retirement and financial security goals. I can stomach more risk that way with the taxables. What's inadvisable about that? Yes, I want the cash to grow. I have no interest in conspicuous consumption or charity, either, so no luxuries and no gifts.



Aptenodytes wrote:
M_to_the_G wrote:Thank you. I appreciate that you took the time to actually read and think about my post. I understand the reasoning behind self allocating, and I might consider it in the future, but for the moment my TR funds are meeting my needs.

I was specifically asking for advice on what to do with extra cash on hand, after you've already met your savings goals. Perhaps I should be more clear and direct here: I have an emergency fund already and am happy with my TSP and Roth allocations. I Realize that's the bread and butter of this place.

Sincerely,

MG

I think there's not going to be much of an alternative to Duckie's advice, even if you don't like it. You have been pretending your portfolio is entirely in tax-advantaged space, but it really isn't. While you were pretending that, you had the tax-advantaged in target-date funds and the taxable in cash. Now you are seeking advice on how to manage things better. Best practices call for you to manage the tax implications efficiently. That means keeping bonds out of your taxable accounts. That means you have to reduce your bond exposure in your tax-advantaged account; otherwise you change your AA. If you have taken the time to read posts here and to compose one of your own, you surely have enough stamina for managing a simple 3-fund portfolio.

If you really want to rule out something like that, then you might be able to approximate it by switching to a different target-date fund that is more bond-heavy. I personally would find that more difficult than a 3-fund portfolio, because most of the target-date funds have uneven glide paths, and shifting the date would shift the slope of the path as well as the fraction in bonds -- a mess to manage for my taste.

You drop hints that you want to adopt separate risk/return profiles in the taxable and the tax-advantaged accounts. That isn't considered best practices either, unless the taxable is so small that it just doesn't matter. The recommend approach is to adopt a single risk/return profile and apply it across your portfolio as a whole.

If you really don't want to follow any of this advice, then I'd say just pick a broad-based stock fund and carry on. Your finances are in good shape, so you'll be fine.

This is all premised on the assumption that you want the cash savings to grow. You say you have met all your savings goals, so that assumption isn't necessarily correct. Obviously, alternatives include giving the money away or spending it on luxurious treats.
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Re: Help! I'm maxed out with cash lying around

Postby sscritic » Tue Jan 22, 2013 8:40 am

M_to_the_G wrote: You are correct in assuming that I want to take a different risk/reward tack with my taxable because I'm not relying on it for my retirement and financial security goals. I can stomach more risk that way with the taxables. What's inadvisable about that?

I am old. I am retired. When I go to the grocery store to buy food, the clerk doesn't ask me if the money came from my IRA or from my taxable account at Vanguard. The clerk just wants money. If you are thinking about having money to spend in retirement, taxable money is accepted at all the usual places.

If you end up with $2 million in taxable and $2 million in the TSP, which will you rely on? Which one would you then put 100% in risky investments because you are not relying on it?

Making a distinction between this money and that money doesn't make sense to me, except where there are differences between the two monies. Taxes is one such difference (that's why the taxable money is called taxable). What other significant differences do you see?
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Re: Help! I'm maxed out with cash lying around

Postby SamGamgee » Wed Jan 23, 2013 9:29 am

My question for the OP is, what are you trying to accomplish, really? Maybe you left some important details out, but it sounds like you are over-saving. It seems that you expect to remain frugal throughout your career (not even a cat). You have no interest in conspicuous consumption or charity. If your goal is to generate $80k per year in today's dollars, what on earth is the $80k for?

Just food for thought.
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Re: Help! I'm maxed out with cash lying around

Postby Old Guy » Wed Jan 23, 2013 11:38 am

Retired Fed here and the spouse of a retired Fed. We didn't always use our money wisely, but we did use it well and enjoyed ourselves living in the DC area.

Your life sounds kind of bleak. Why don't you take some of the money and use it on yourself; have some fun. When you are on a foreign assignment use the money to travel. The State Department is not exactly a fun agency. Do something for yourself, or as another poster noted, for someone else.
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Re: Help! I'm maxed out with cash lying around

Postby M_to_the_G » Wed Jan 23, 2013 12:10 pm

I'm almost embarrassed to admit that I didn't know anything about tax-efficient fund placement. In fact, I'm overwhelmed by my own ignorance at the moment. I never even thought about that because I didn’t plan on having cash beyond my tax-advantaged accounts. I should have, though. Most Foreign Service people accumulate cash. And most people in the Foreign Service who accumulate extra cash buy a house. The size of the house is determined by the pile of cash. If another pile of cash builds up, another house is bought. Sadly, that’s the way it usually goes. But I’ve seen too many of them suffering while working in a very stressful and high-profile job in a war zone because a property management company wrote to them to tell them that their renters hadn’t paid rent in five months… and the carpets are missing. So I wanted to find alternatives to rental property. That’s what led me here.

All the posts claiming that I am blind to the reality of tax-efficient fund placement are absolutely accurate. I am. I will have to do a lot of catching up. I'll be reading and re-reading the above posts over the next few weeks and the linked articles [comments arguing with moderator action removed, see forum policies for correct procedure if you have a dispute with a mod's actions]

To sscritic, I guess I am willing to take more risk for the potential of higher reward with funds that are above and beyond my savings goals. I do have concrete goals and numbers in mind. I think I’ll hit them, even using conservative projected growth estimates. So I guess that I consider the extra money to be gambling money, I guess, for lack of a better term. That being said, I don’t want to do anything as reckless as real gambling. But currently, my money is just sitting in a savings account. So what to do? I am not sure that I buy into the idea of considering it all to be one big portfolio and allocating it in careful percentages for long-term, slow growth. I buy that for my retirement savings. But the extra cash? Why not consider it to be something else? So I want to take more risk… a lot more risk, for higher potential reward, but in the smartest way possible. I don’t want to put money in horse-racing or non-existent future technologies with no known application yet or junk bonds or anything like that. I want risk that is as calculated as possible. Does that make sense? I’m open to the suggestion that it doesn’t. I’m here to learn. You might even convince me that I *should* consider all my money to be one giant portfolio.

To SamGamgee, that’s a good question. I don’t know. It’s 80% of my salary before retirement, which they say is a pretty good number to shoot for, so I picked it as my goal. In all honesty, I see myself in a comfortable brick house, with a nice fireplace, a cat (yes, at that point), and cup of hot cocoa and a good book… chilling out until they find me in my La-Z-Boy, dead as Spam. I’ll probably travel to see friends and that sort of thing, but I’ve never been a big spender and probably never will be. For those goals, I probably won’t need 80%, but I am a terminal worrywart. I don’t want to just get by. I want to have as much security and flexibility as possible. Plus it will be nice to have income to help people I know and care about and to buy nice gifts. I don’t want to be the old guy people worry about because he’s a burden. I don’t want to be the old guy worrying about money and just scraping by. I want to be the old guy who is comfortable and confident and in a position to help others out. You need money for that, right? The more, the better, right?


To Old Guy, you are assuming a lot about me and my agency. I wouldn’t call my life “bleak,” and I wouldn’t say that State is “not fun.”

- MG
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Re: Help! I'm maxed out with cash lying around

Postby sscritic » Wed Jan 23, 2013 12:21 pm

M_to_the_G wrote: You might even convince me that I *should* consider all my money to be one giant portfolio.

If you have a specific short term goal, many people suggest thinking about separate sets of money, e.g., your friends who will buy a house. You said that wasn't you.

If 50% of your money is 100% stock and 50% of your money is 50% stock, what percentage of your money is in stock? Now switch the locations. Does your answer change? Which puts your money at greater risk? They are the same to me.
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Re: Help! I'm maxed out with cash lying around

Postby M_to_the_G » Fri Apr 05, 2013 7:33 pm

Okay, I’m back. In the past two months, I’ve re-read this entire thread, read all the links (on tax-efficiency, tax loss harvesting, foreign income credit, REIT’s, etc.), and read John Bogle’s book “Common Sense on Mutual Funds.” I’ve decided to go with considering all of my assets to be one big portfolio, so thank you for the thoughtful responses which have greatly enlightened me.


I’ve considered Duckie’s suggestions, and I’ve decided to go with them, with a few tweaks as follows to reduce bonds and international stocks to 20% each (as opposed to 23% and 25% respectively):

55% Total US Stock Market (C fund, S fund, and VTSAX in both Roth and taxable)
20% International Stocks (VTIAX in taxable)
20% Fixed income (10% G fund, 10% F fund)
5% REIT (VGSIX in Roth)


Some questions remaining:

1. Why so much in the G fund? Why not just skip the G fund and put it all in F?
2. If I go with this plan, how often should I rebalance and when? Is once a year sufficient? And looking to the future, when should I consider modifying the above AA?
3. I got pretty stuck on Chapter 2 of Bogle’s book but soldiered on and finished the book (the rest of the book was more digestible). Question: how important is it to thoroughly understand things like real dividend yields/dividend yields at the time of initial investment, growth in earnings/earnings growth generated/subsequent rate of growth in earnings, and price-earning ratio changes during a period of investment? I think it’s going to take a LOT of reading for me to truly wrap my head around those concepts, and I wanted to know if it’s really necessary... and if so, I wanted to ask for suggestions on materials.


Thank you,


MG
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Re: Help! I'm maxed out with cash lying around

Postby Iorek » Fri Apr 05, 2013 8:59 pm

The G fund has no risk of loss-- the F fund, like any bond fund, can lose value with changes in interest rates. There is a lot of discussion on the board about G vs. F.

I think once a year, or maybe 2x a year, is fine for rebalancing, but some people will suggest there might be small benefits from more frequent rebalancing.

Personally what I like to do is look at the TSP L funds asset allocations and use them as an anchor to compare against my internal asset allocation, which are slightly more aggressive (I don't actually have a written investment plan strategy like a true boglehead). I usually end up thinking about asset allocation once a year, because I rebalance when I make my Roth IRA contribution, although I tend to use bands of 5% so my asset allocation doesn't necessarily change every year.

I would suggest you consider buying ibonds with some of your spare cash. They make for a nice, tax-deferred, inflation-indexed, safe emergency fund. There's a limit, of $10k per year, more or less, and they aren't liquid for the first year so it's good to buy some gradually.
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Re: Help! I'm maxed out with cash lying around

Postby connya » Fri Apr 05, 2013 9:16 pm

As to rebalancing, since you have a good chunk of taxable investments, it may save you money and hassle to set tolerance levels for your AA, and only rebalance when you are, say, 5% away from your target allocation.

This is most sensible sounding to me, but from what I've read on this board it seems that your exact plan for rebalancing does not really make much difference.
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Re: Help! I'm maxed out with cash lying around

Postby Duckie » Fri Apr 05, 2013 9:35 pm

M_to_the_G, ok, your AA is now 80% stocks, 20% bonds (that's low for your age), with 25% of stocks in international. That breaks down to 60% US stocks (including REITs), 20% international stocks, and 20% bonds.

I like your proposed portfolio. (Obviously, since I suggested much of it.)

M_to_the_G wrote:Why so much in the G fund? Why not just skip the G fund and put it all in F?

As answered above, it never loses money. It's subsidized by the government. Like I said before, "it's practically a free lunch".

If I go with this plan, how often should I rebalance and when?

Rebalance once or twice a year. And to make it easier, in taxable have your dividends and capital gains distributions set to go to a money market or a bank account. Don't have them automatically reinvested. That way you not only avoid the multiple-tax-lot issue, you are then able to invest the money in the fund that's below the AA without selling something.

And looking to the future, when should I consider modifying the above AA?

Some people modify their plan, making it more conservative, a little bit every year. I think it's easier to change it by chunks every five years or so. The only exception to that would be if other circumstances in your life change (besides your age).

[H]ow important is it to thoroughly understand things like real dividend yields/dividend yields at the time of initial investment, growth in earnings/earnings growth generated/subsequent rate of growth in earnings, and price-earning ratio changes during a period of investment?

I personally don't really understand any of it and don't care. My assets are in index funds and they do what the market does for good or not so good. I don't need to know that stuff. Other people might think differently.
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Re: Help! I'm maxed out with cash lying around

Postby M_to_the_G » Sun Apr 07, 2013 5:14 pm

Thank you again for the thoughtful responses. Thank you, Duckie, for pointing out that my international stocks actually make up 25% of my stock portfolio. I think I'll further reduce that to 20%. A few more questions:

1. With my planned AA, do I need to worry about tax loss harvesting?
2. With my significant contribution (planned) to international stocks in my taxable, will I receive the Foreign Tax Credit?
3. For buying a taxable mutual fund, do I need to first find out when it will make its end of the year distribution and only buy shares after that occurs?
4. The TSP makes it very easy to change AA on the website... and it's free. How about changing funds in my Vanguard ROTH?

Sincerely,

MG
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Re: Help! I'm maxed out with cash lying around

Postby Duckie » Sun Apr 07, 2013 7:02 pm

M_to_the_G wrote:[M]y international stocks actually make up 25% of my stock portfolio. I think I'll further reduce that to 20%.

Vanguard has found that between 20% and 40% of stocks in international to be the "sweet spot". See the discussion and the Vanguard paper link. Vanguard splits the difference and uses 30% in their Target Retirement and LifeStrategy funds.

With my planned AA, do I need to worry about tax loss harvesting?

With assets in taxable TLH is always a possibility. But you don't have to if you handle it right by not reinvesting dividends as mentioned above.

With my significant contribution (planned) to international stocks in my taxable, will I receive the Foreign Tax Credit?

Yes. Even a small amount of international gets the FTC.

For buying a taxable mutual fund, do I need to first find out when it will make its end of the year distribution and only buy shares after that occurs?

You don't want to buy right around the distribution date (which could be monthly, quarterly, semi-annually, or annually), but if you're going to be doing this on a regular basis over a period of years, the best time would be at the beginning of the month. Distributions are usually later in the month. TSM and TISM have quarterly dividend distributions around the 20th of the month. See here.

The TSP makes it very easy to change AA on the website... and it's free. How about changing funds in my Vanguard ROTH?

At Vanguard you can exchange shares (sell in one fund, buy in another) in the Roth IRA without tax consequences. (A few funds have redemption fees if you sell too soon, although not TSM or TISM.) It just takes a couple of minutes online.
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Re: Help! I'm maxed out with cash lying around

Postby M_to_the_G » Fri Jul 05, 2013 11:15 pm

Duckie wrote:M_to_the_G, ok, your AA is now 80% stocks, 20% bonds (that's low for your age), with 25% of stocks in international. That breaks down to 60% US stocks (including REITs), 20% international stocks, and 20% bonds.

I like your proposed portfolio. (Obviously, since I suggested much of it.)

M_to_the_G wrote:Why so much in the G fund? Why not just skip the G fund and put it all in F?

As answered above, it never loses money. It's subsidized by the government. Like I said before, "it's practically a free lunch".

If I go with this plan, how often should I rebalance and when?

Rebalance once or twice a year. And to make it easier, in taxable have your dividends and capital gains distributions set to go to a money market or a bank account. Don't have them automatically reinvested. That way you not only avoid the multiple-tax-lot issue, you are then able to invest the money in the fund that's below the AA without selling something.

And looking to the future, when should I consider modifying the above AA?

Some people modify their plan, making it more conservative, a little bit every year. I think it's easier to change it by chunks every five years or so. The only exception to that would be if other circumstances in your life change (besides your age).

[H]ow important is it to thoroughly understand things like real dividend yields/dividend yields at the time of initial investment, growth in earnings/earnings growth generated/subsequent rate of growth in earnings, and price-earning ratio changes during a period of investment?

I personally don't really understand any of it and don't care. My assets are in index funds and they do what the market does for good or not so good. I don't need to know that stuff. Other people might think differently.



(bolding is mine)

Duckie,

Okay, I'm back. Very close to pulling the trigger on this plan. One question remains: how often should I then reinvest the dividends and capital gains distributions that flow into this bank account?
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Re: Help! I'm maxed out with cash lying around

Postby Duckie » Sat Jul 06, 2013 12:44 am

M_to_the_G wrote:
Duckie wrote:[I]n taxable have your dividends and capital gains distributions set to go to a money market or a bank account. Don't have them automatically reinvested.

Very close to pulling the trigger on this plan. One question remains: how often should I then reinvest the dividends and capital gains distributions that flow into this bank account?

It depends on your personal preferences. Some people do it right away. I like to wait until I have a chunk ($5K) to reinvest. Years ago it was $1K. I like round numbers. Figure out what works for you.
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Re: Help! I'm maxed out with cash lying around

Postby M_to_the_G » Fri Jul 12, 2013 10:00 am

Okay, I've thought about this a bit more and tweaked my AA plan from my earlier plan:

1. Changed U.S. Stock balance to 70/30 vice 80/20 Large Cap/Small & Mid Cap
2. Kept VTSAX exclusively in taxable and exchanged it for VFIAX in ROTH to avoid potential wash sales (and adjusted TSP C and S contributions commensurately to keep U.S. stock at 70/30)
3. Reduced International Stock holdings to 15% vice 20%

(NOTE: The below total percentages are off by +/- 1% due to rounding down/up for whole numbers.)


Taxable at Vanguard -- 32%
17% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.05%)
15% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

Thrift Savings Plan -- 56%
23% C Fund (0.025%)
13% S Fund (0.024%)
10% F Fund (0.024%)
10% G Fund (0.025%)

Roth IRA at Vanguard -- 13%
8% (VFIAX) Vanguard 500 Index Fund Admiral Shares (0.05%)
5
% (VGSIX) Vanguard REIT Index Fund Investor Shares (0.24%)

Total AA -- 100%
42% U.S. Large Cap Stock
18% U.S. Small & Mid Cap Stock
15% International Stock
10% U.S. Bond
10% TSP G Fund
5% REIT


Thoughts and suggestions highly welcome!

Thank you,

MG
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