Portfolio Help

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Portfolio Help

Postby gemini1 » Sat Jan 26, 2013 4:28 pm

Hello Everyone,

My parents have entrusted me to help them with some of their retirement investment portfolio. Any advice on this would be much appreciated. I am not aware of their complete financial situation; they have a house paid off, plenty of emergency cash, and other investments. Rest assured, these are not the only assets they have, but I intend to do the best with what they gave me to work with.

Tax Filing Status: Married, one child
Federal Tax Rate: 33% State Tax Rate: 5%
His Age: 59
Her Age: 51
AA goals: 60E/40B
Desired International allocation: 30% *Updated
Current portfolio is: 986k
Expected future portfolio contribution: 30.5k annually to His 403b for another 10-15 years, 24.5k annually to Her 403b for another 8-10 years

Current Portfolio

Taxable - Vanguard
41.9% Cash

His 403B – Fidelity
14.2% SPTN 500 INDEX INST (FXSIX) (.05%)
3.6% SPTN EXT MKT IDX ADV (FSEVX) (.07%)
17.2% SPTN US BOND IDX IS (FXSTX) (.07%)

Her 403B – Fidelity
9.4% SPTN 500 INDEX INST (FXSIX) (.05%)
2.3% SPTN EXT MKT IDX ADV (FSEVX) (.07%)
11.4% SPTN US BOND IDX IS (FXSTX) (.07%)

Proposed Portfolio *Updated

Taxable - Vanguard -- 42%
24% VG TOTAL STOCK MARKET INDEX ADMIRAL (VTSAX) (.06%)
18% VG TOTAL INTERNATIONAL STOCK INDEX ADMIRAL (VTIAX) (.18%)

His 403B – Fidelity
14% SPTN 500 INDEX INST (FXSIX) (.05%)
4% SPTN EXT MKT IDX ADV (FSEVX) (.07%)
17% SPTN US BOND IDX IS (FXSTX) (.07%)

Her 403B – Fidelity
23% SPTN US BOND IDX IS (FXSTX) (.07%)

The main reason for the portfolio change is to invest the Vanguard funds (obviously) and to have all the bond investments in the tax advantaged account. Here are the 403b choices:

403B Choices (Same for His and Her)
FID FREEDOM K 2000 (FFKBX) 0.39%
FID FREEDOM K 2005 (FFKVX) 0.46%
FID FREEDOM K 2010 (FFKCX) 0.50%
FID FREEDOM K 2015 (FKVFX) 0.51%
FID FREEDOM K 2020 (FFKDX) 0.54%
FID FREEDOM K 2025 (FKTWX) 0.58%
FID FREEDOM K 2030 (FFKEX) 0.59%
FID FREEDOM K 2035 (FKTHX) 0.62%
FID FREEDOM K 2040 (FFKFX) 0.62%
FID FREEDOM K 2045 (FFKGX) 0.63%
FID FREEDOM K 2050 (FFKHX) 0.64%
FID FREEDOM K 2055 (FDENX) 0.64%
FID FREEDOM K INCOME (FFKAX) 0.39%
BROWN SMALL CO INST (BCSSX) 1.15%
CRM MID CAP VAL INST (CRIMX) 0.82%
DAVIS NY VENTURE Y (DNVYX) 0.64%
FID CONTRAFUND K (FCNKX) 0.69%
FID DIVERSIFD INTL K (FDIKX) 0.84%
FID GROWTH CO K (FGCKX) 0.70%
FID LOW PRICED STK K (FLPKX) 0.76%
LD ABBETT SMCPVAL I (LRSYX) 0.93%
SPTN 500 INDEX INST (FXSIX) 0.05%
SPTN EXT MKT IDX ADV (FSEVX) 0.07%
WM BLAIR SM CP GR I (WBSIX) 1.35%
PIM TOTAL RT INST (PTTRX) 0.46%
SPTN US BOND IDX IS (FXSTX) 0.07%
FID RETIRE MMKT (FRTXX) 0.42%


Questions

1. With contributions going only to the 403b account, what is the best way to maintain my desired international allocation?
2. Any thoughts on my AA and decision to go with a 3 Fund-like approach? Is there a better approach for their situation?
3. How often should I rebalance? Are there any tax implications of rebalancing the taxable Vanguard account?

Thanks in advance!
Last edited by gemini1 on Sat Jan 26, 2013 10:26 pm, edited 1 time in total.
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Re: Portfolio Help

Postby Duckie » Sat Jan 26, 2013 7:21 pm

gemini1, for your parents you want an AA of 60% stocks, 40% bonds, with 20%-25% of stocks in international. I'll pick 25%. That breaks down to 45% US stocks, 15% international stocks, and 40% bonds. Here is a possible retirement portfolio:

Taxable at Vanguard -- 42%
27% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
15% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

His 403b at Fidelity -- 35%
14% (FXSIX) Spartan 500 Index Fund Institutional Class (0.05%)
4% (FSEVX) Spartan Extended Market Index Fund Advantage Class (0.07%) <-- Roughly 80% large caps (500 Index) plus 20% mid/small caps (Extended Market) makes up the total US stock market.
17% (FXSTX) Spartan U.S. Bond Index Fund Institutional Class (0.07%)

Her 403b at Fidelity -- 23%
23% (FXSTX) Spartan U.S. Bond Index Fund Institutional Class (0.07%)

My comments:
-- Your folks are doing great.
-- It's great that you are planning to put TISM in the taxable account because of the 
Foreign tax credit.
-- You realize that the other non-specified assets they have may overlap or conflict with this proposed portfolio.

Your questions:
1. With contributions going only to the 403b account, what is the best way to maintain my desired international allocation?
-- See #3 below.

2. Any thoughts on my AA and decision to go with a 3 Fund-like approach? Is there a better approach for their situation?
-- I like your AA. However, you wrote: "Desired International allocation: 20%-25%", but then wrote "25% VG Total International..." Usually the international allocation is a percentage of the total equity percentage, not the total portfolio. For example, 25% of 60% stocks equals 15% international stocks. You had it as ~40% of 60% stocks which equals 25% international. That's on the high edge but if that's what you want I can refigure it.

Vanguard has found 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.

3. How often should I rebalance? Are there any tax implications of rebalancing the taxable Vanguard account?
-- Rebalance once or twice a year. For the taxable account, take all dividends and capital gains distributions in cash. In other words, don't automatically reinvest them. Have them put in a money market or savings account. Most if not all will be used to purchase more TISM.

Alternatively, have all dividends and capital gains distributions from both funds reinvested in TISM. This limits your options a bit (you may need the money for something else, including taxes), but may be easier. Avoid selling to rebalance.


Something to think about.
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Re: Portfolio Help

Postby gemini1 » Sat Jan 26, 2013 10:18 pm

Duckie, this is excellent advice. Thanks a lot for your help.

I initially meant for the desired international allocation to be 25% for my entire portfolio and not just the stock portion. But after reading through your post, I thought it would be better to follow the Vanguard approach and allocate 30% of my stock investment (18% of the overall portfolio) as TISM.

For the taxable account, take all dividends and capital gains distributions in cash. In other words, don't automatically reinvest them. Have them put in a money market or savings account. Most if not all will be used to purchase more TISM.


I did not know that taking cash from dividends/capital gains was an option and will definitely use the approach you suggested to maintain my desired international allocation.

As there will continue to be contributions to the 403B accounts, do you suggest I spread out the incoming funds this way for both accounts?:

SPTN 500 INDEX INST (FXSIX) (.05%) Contribute 30%
SPTN EXT MKT IDX ADV (FSEVX) (.07%) Contribute 20%
SPTN US BOND IDX IS (FXSTX) (.07%) Contribute 50%

Also, because of the desired international allocation change, I just updated my proposed portfolio in my original post. Please let me know if it's consistent with your thoughts. Thanks again!
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Re: Portfolio Help

Postby Peter Foley » Sun Jan 27, 2013 12:13 am

A few observations: For the most part they are doing fine in terms of savings and investing in their deferred accounts. The one exception to this is their need to increase their bond allocation using one of their deferred accounts. Your proposed solution in their 403b acccount looks fine.
If I'm not mistaken the maximum one can contribute to a 403b account is $22,500/year. Is there an employer match that is making up the rest?
It looks like your father wants to work up to the point that he is taking RMDs. Taxes are going to be horrible unless they take some action to start putting some of their money in Roths. They should start by doing a back door Roth now and then do Roth conversions if their tax rate drops significantly when your mother retires. At the 33% rate now, it doesn't make any sense to do conversions at this point in time.

Your proposed solution for their taxable account is fine. I would be tempted to move 25% fo the money now and add the rest over the next year or two. I say this because you are working your parent's money. If you put it all in at once, might they panic and want to pull it out if the market drops? You need to have some handle on their risk tolerance and dollar cost averaging would be one way to help mitigate the risk.
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Re: Portfolio Help

Postby Duckie » Sun Jan 27, 2013 7:59 pm

gemini1 wrote:As there will continue to be contributions to the 403B accounts, do you suggest I spread out the incoming funds this way for both accounts?:

SPTN 500 INDEX INST (FXSIX) (.05%) Contribute 30%
SPTN EXT MKT IDX ADV (FSEVX) (.07%) Contribute 20%
SPTN US BOND IDX IS (FXSTX) (.07%) Contribute 50%

For Her 403b I recommend contributions of 100% to the US Bond Index. For His 403b make it 40% 500 Index, 10% Extended Market, and 50% US Bond Index at least to start. After a couple of years of rebalancing you may find a better ratio.
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Re: Portfolio Help

Postby gemini1 » Mon Jan 28, 2013 10:50 am

Peter,

Yes, the contribution amount above represents the new $23,000/year limit along with the employer match. It's based on last year's match. I discussed backdoor Roth IRA with my parents, and it turns out they started one already on the advice of their tax accountant. :) I do like your idea of easing into the investments as opposed to dumping it all in at once, but I am not too worried as they have other money on the side, and I hope I have conveyed the ideas of long term investing well enough for them to handle any sudden initial drops.

Duckie,

I am curious how you decided on starting contributions this way. Assuming a constant rate of return from each fund (I realize this never happens, but bear with me), wouldn't the bond allocation increase beyond 40%?

40% 500 Index, 10% Extended Market, and 50% US Bond Index


If I used this allocation for both funds, wouldn't this bring me closer to my original AA?

Thanks again for your help.
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