Help with Asset Allocation for a novice investor

[iris_k_not]

Hi everyone,

I would be grateful for any assistance on simplifying my investing. I have been investing for a while, but just finished reading the Bogleheads Guide to Investing and realized that I hadn’t been understanding what I was doing. I’m eager to try a whole portfolio asset allocation, but I’m unsure how to do this, given that I’d like to also replace my current high cost funds with index funds before I do the AA. I would like to have a 70/30 AA (70% US stocks, 30% foreign stocks) using only index funds.

I’m also a grad student with at least 2 more years before I graduate, so I don’t have much money to contribute but I’d also like to open a taxable account for short-term goals (~5 year). I’m wondering if I should just stick with these retirement accounts since I’m not even contributing the max to them yet.


Emergency funds are in place
Debt: None
Tax Filing Status: Single
Tax Rate: 15% Federal, 7% State Income, 7.25% State Sales Tax
State of Residence: NC
Age: 29
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 30% of stocks
Size of total portfolio = mid 5 figures

Taxable Accounts:
9.0% AllianceBernstein Global Thematic Growth A (ALTFX) (1.57%)
4.2% Columbia Mid Cap Growth Fund A (CBSAX) (1.23%)

403b at TIAA CREF
(No ticker symbols because they are not publicly traded)
2.2% CREF Stock (0.49%)
2.2% CREF Equity Index (0.52%)
2.2% CREF Global Equity (0.43%)
2.2% CREF Social Choice (0.46%)
Company match? No

401a at TIAA CREF
8.3% CREF Stock (0.49%)
8.0% CREF Equity Index (0.52%)
7.4% CREF Global Equity (0.43%)
8.8% CREF Social Choice (0.46%)
Company match? Yes, up to 5% (I think)
I stopped contributing once I switched jobs

Roth IRA at Vanguard
45.8% Target Retirement 2045 fund (VTIVX) (0.19%)
(consisting of:
28.8% Vanguard Total Stock Market Index (0.18%)
12.4% Vanguard Total International Stock Index Fund (0.22%)
4.6% Vanguard Total Bond Market II Index Fund (0.22%)

Contributions
New annual Contributions
$2500 into Roth IRA

Available funds
Index Funds recently available in the 403(b)/401(a) at TIAA CREF (I only show index funds less than 0.50%)
TIAA Bond Index (TBIIX) (0.23%)
TIAA International Equity Index (TCIEX) (0.19%)
TIAA Large Cap Growth Index (TILIX) (0.18%)
TIAA Large Cap Value Index (TILVX) (0.18%)
TIAA Small Cap Blend Index (TISBX) (0.25%)


Questions:
1. I want to close the AllianceBernstein & Columbia Management Accounts and use that money to contribute to one taxable account that I could use for short-term goals – probably a Vanguard Index Fund like LifeStrategy Growth. What would be the most effective way to do this without triggering capital gains bills/taxes?
2. I realize I should place less tax efficient funds in the tax-free/deferred accounts and need to change my asset allocations overall. How should I go about this? I’d like to do the “whole portfolio” asset allocation that’s mentioned in the wiki page on “Asset Allocation in Multiple Accounts”, but should I just stick to doing a “mirrored” asset allocation instead?
3. Currently, I’ve not been able to max out anything while I’ve been in school – I just contribute $2500 to my Roth. Am I crazy to even consider opening up a taxable account at this time?

Thanks very much! Any help is much appreciated.

[damjam]

Welcome to the forum.

Questions:
1. I want to close the AllianceBernstein & Columbia Management Accounts and use that money to contribute to one taxable account that I could use for short-term goals – probably a Vanguard Index Fund like LifeStrategy Growth. What would be the most effective way to do this without triggering capital gains bills/taxes?

Since your in the 15% federal bracket there are 0 capital gains taxes on long-term capital gains on the federal level. Short-term gains are taxed at your marginal tax rate. I don't know your states rules for taxation.
Vanguard LifeStrategy Growth is inappropriate for short-term needs, unless your planning on increasing your bond allocation in your tax deferred accounts. This way when you need money you sell stock in your taxable, then you sell enough bonds in your tax deferred account to then purchase stock in the tax deferred account and regain your target AA. (This is an advanced technique, if its too complicated just keep your short-term reserves in your taxable account and invest them in something like a short-term bond fund or a CD.) Also if you are looking to create a unified portfolio having LifeStrategy Growth in one account and a Target Retirement fund in another account will make determining your AA more complicated. I would probably use Total International Stock as part of a Three-fund portfolio if I were using the advanced technique, or as I said a short-term bond fund or CD.

2. I realize I should place less tax efficient funds in the tax-free/deferred accounts and need to change my asset allocations overall. How should I go about this? I’d like to do the “whole portfolio” asset allocation that’s mentioned in the wiki page on “Asset Allocation in Multiple Accounts”, but should I just stick to doing a “mirrored” asset allocation instead?

I only know how to think about my portfolio as a whole at this point. It takes a little getting used to but in the end everything makes more sense. Also since the majority of your funds are in tax-deferred accounts there are no tax consequences for moving things around as needed. You've chosen an AA which is reasonable for someone your age. I'm not as familiar with TIAA CREF as I would like to be to be able to recommend specific fund choices. As noted above I'm a fan of the Three-fund portfolio. If I were putting a portfolio together using your choices, I would start with the best matched funds in the TIAA CREF accounts and then balance out the rest with the Vanguard account. You have the flexibility in the Vanguard account to fill in what the TIAA CREF accounts are missing.

3. Currently, I’ve not been able to max out anything while I’ve been in school – I just contribute $2500 to my Roth. Am I crazy to even consider opening up a taxable account at this time?

I'm not sure what you mean by "opening up a taxable account" since you already have a taxable account. Do you mean: "Should I open a taxable account at Vanguard?" Sure, why not?
How much money you keep in taxable accounts depends on your short to medium term plans. I see you have an emergency fund, that's great. Would you feel more comfortable if the fund were a little bigger? Do you have some other near term expenses that you need to set aside money for? Such as moving. I would want enough in taxable accounts to avoid having to tap the retirement accounts in an emergency or for foreseeable big purchases.

Actually I don't think your current portfolio is so tragic. Take your time. Read. Ask more questions.

[rickmerrill]

I’m also a grad student with at least 2 more years before I graduate, so I don’t have much money to contribute but I’d also like to open a taxable account for short-term goals (~5 year). I’m wondering if I should just stick with these retirement accounts since I’m not even contributing the max to them yet.

Your debate is should you fund short or long goals. Does the amount really matter?

Taxable Accounts:48548.08

9.0% AllianceBernstein Global Thematic Growth A (ALTFX) (1.57%)
4.2% Columbia Mid Cap Growth Fund A (CBSAX) (1.23%)

Crazy expensive. If you decide to fund short term goals think conservative. High yield savings account, CD's, I-bonds - markets hum?

403b at TIAA CREF
(No ticker symbols because they are not publicly traded)
2.2% CREF Stock (0.49%)
2.2% CREF Equity Index (0.52%)
2.2% CREF Global Equity (0.43%)
2.2% CREF Social Choice (0.46%)
Company match? No

401a at TIAA CREF
8.3% CREF Stock (0.49%)
8.0% CREF Equity Index (0.52%)
7.4% CREF Global Equity (0.43%)
8.8% CREF Social Choice (0.46%)
Company match? Yes, up to 5% (I think)
I stopped contributing once I switched jobs

I'm not clear, is the 401 from a previous employer and the 403b available for contributions?

Roth IRA at Vanguard
45.8% Target Retirement 2045 fund (VTIVX) (0.19%)
(consisting of:
28.8% Vanguard Total Stock Market Index (0.18%)
12.4% Vanguard Total International Stock Index Fund (0.22%)
4.6% Vanguard Total Bond Market II Index Fund (0.22%)

Perfect! You might want to move it to it's constituent parts for a three fund portfolio. This will make asset allocation and rebalancing easier.

Available funds
Index Funds recently available in the 403(b)/401(a) at TIAA CREF (I only show index funds less than 0.50%)
TIAA Bond Index (TBIIX) (0.23%)
TIAA International Equity Index (TCIEX) (0.19%)
TIAA Large Cap Growth Index (TILIX) (0.18%)
TIAA Large Cap Value Index (TILVX) (0.18%)
TIAA Small Cap Blend Index (TISBX) (0.25%)


Questions:
1. I want to close the AllianceBernstein & Columbia Management Accounts and use that money to contribute to one taxable account that I could use for short-term goals – probably a Vanguard Index Fund like LifeStrategy Growth. What would be the most effective way to do this without triggering capital gains bills/taxes?
No taxes but those are not appropriate for short term.
2. I realize I should place less tax efficient funds in the tax-free/deferred accounts and need to change my asset allocations overall. How should I go about this? I’d like to do the “whole portfolio” asset allocation that’s mentioned in the wiki page on “Asset Allocation in Multiple Accounts”, but should I just stick to doing a “mirrored” asset allocation instead?
First decide on the long/short term goal then the experts will break it down.
3. Currently, I’ve not been able to max out anything while I’ve been in school – I just contribute $2500 to my Roth. Am I crazy to even consider opening up a taxable account at this time?
Maybe, unless you have necessary short term goals - then taxable is fine.

The fact that you are already contributing what you can and asking these questions means you are off to a great start!

[iris_k_not]

Welcome to the forum.

Questions:
1. I want to close the AllianceBernstein & Columbia Management Accounts and use that money to contribute to one taxable account that I could use for short-term goals – probably a Vanguard Index Fund like LifeStrategy Growth. What would be the most effective way to do this without triggering capital gains bills/taxes?

Since your in the 15% federal bracket there are 0 capital gains taxes on the federal level. I don't know your states rules for taxation.
Vanguard LifeStrategy Growth is inappropriate for short-term needs, unless your planning on increasing your bond allocation in your tax deferred accounts. This way when you need money you sell stock in your taxable, then you sell enough bonds in your tax deferred account to then purchase stock in the tax deferred account and regain your target AA. (This is an advanced technique, if its too complicated just keep your short-term reserves in your taxable account and invest them in something like a short-term bond fund or a CD.) Also if you are looking to create a unified portfolio having LifeStrategy Growth in one account and a Target Retirement fund in another account will make determining your AA more complicated. I would probably use Total International Stock as part of a Three-fund portfolio if I were using the advanced technique, or as I said a short-term bond fund or CD.

2. I realize I should place less tax efficient funds in the tax-free/deferred accounts and need to change my asset allocations overall. How should I go about this? I’d like to do the “whole portfolio” asset allocation that’s mentioned in the wiki page on “Asset Allocation in Multiple Accounts”, but should I just stick to doing a “mirrored” asset allocation instead?

I only know how to think about my portfolio as a whole at this point. It takes a little getting used to but in the end everything makes more sense. Also since the majority of your funds are in tax-deferred accounts there are no tax consequences for moving things around as needed. You've chosen an AA which is reasonable for someone your age. I'm not as familiar with TIAA CREF as I would like to be to be able to recommend specific fund choices. As noted above I'm a fan of the Three-fund portfolio. If I were putting a portfolio together using your choices, I would start with the best matched funds in the TIAA CREF accounts and then balance out the rest with the Vanguard account. You have the flexibility in the Vanguard account to fill in what the TIAA CREF accounts are missing.

3. Currently, I’ve not been able to max out anything while I’ve been in school – I just contribute $2500 to my Roth. Am I crazy to even consider opening up a taxable account at this time?

I'm not sure what you mean by "opening up a taxable account" since you already have a taxable account. Do you mean: "Should I open a taxable account at Vanguard?" Sure, why not?
How much money you keep in taxable accounts depends on your short to medium term plans. I see you have an emergency fund, that's great. Would you feel more comfortable if the fund were a little bigger? Do you have some other near term expenses that you need to set aside money for? Such as moving. I would want enough in taxable accounts to avoid having to tap the retirement accounts in an emergency or for foreseeable big purchases.

Actually I don't think your current portfolio is so tragic. Take your time. Read. Ask more questions.

@damjam - Wow, that was fast! Its reassuring to know it'll be easier than I thought to reallocate everything!

Re: 1. Thanks for the clarification on capital gains/taxes. It's good to know I can move things around without incurring taxes - I'll look into NC's laws on capital gains taxes. I think I’ll stick to the simple technique for now until I know more. I like the idea of a short-term bond fund or CD in the taxable account.

Re: 2 - I'm not sure I understand when you say you'd start with the best matched funds in TIAA-CREF? I don't believe the employer is matching anymore, since I no longer work there or contribute anything to that account.

Re: 3. Sorry for the confusing question - I asked because the mantra seems to be to fund your retirement accounts first, then move on to other accounts. But I still have short-term goals I want to invest in. Short-term goals include saving for a wedding, used car purchase, and some travel in the next 5 years. I'm happy with my emergency fund - I have funds for a year's expenses + extra savings.

Yes – I meant opening up another taxable account in Vanguard once I close the AllianceBernstein & Columbia Management ones (vs. just putting the money that had been invested in AllianceBernstein & Columbia into my Roth IRA at Vanguard).

Thanks again!

[iris_k_not]

@rickmerrill - Thanks for the advice! My answers (and a few more questions) are below

I'm not clear, is the 401 from a previous employer and the 403b available for contributions?

Yes – The 401a/403b are part of the same retirement package from 1 previous employer. From the statements, it seems like the employer-matched contributions went to the 401a and any amount above that that I contributed went to the 403b. But the 4 individual funds I chose were the same for both the 401a and 403b. I stopped contributing to both the 401a/403b once I switched jobs. I don’t know that either of them are available for contributions – but I will ask.

Questions:
1. I want to close the AllianceBernstein & Columbia Management Accounts and use that money to contribute to one taxable account that I could use for short-term goals – probably a Vanguard Index Fund like LifeStrategy Growth. What would be the most effective way to do this without triggering capital gains bills/taxes?
No taxes but those are not appropriate for short term.

Maybe I’m missing something. So is it not advisable to save for both long-term and short-term goals at the same time? My plan for the taxable account was for short-term goals I want within 5 years: wedding, car, and travel.

2. I realize I should place less tax efficient funds in the tax-free/deferred accounts and need to change my asset allocations overall. How should I go about this? I’d like to do the “whole portfolio” asset allocation that’s mentioned in the wiki page on “Asset Allocation in Multiple Accounts”, but should I just stick to doing a “mirrored” asset allocation instead?
First decide on the long/short term goal then the experts will break it down.

Gotcha -goal for taxable is short-term

Thanks again!

[damjam]

Re: 1. Thanks for the clarification on capital gains/taxes. It's good to know I can move things around without incurring taxes - I'll look into NC's laws on capital gains taxes. I think I’ll stick to the simple technique for now until I know more. I like the idea of a short-term bond fund or CD in the taxable account.

I made a bit of a mistype , I said there are no taxes on capital gains at your tax rate. I should have said there are no taxes on long-term capital gains. There is tax on short-term capital gains. Your broker will be able to give you a breakdown of your long/short gains. If you are reinvesting dividends, stop that to avoid creating any more short-term gains. The short-term gains will be taxed at your marginal tax rate of 15%. [I edited the original post to reflect the accurate info.]

Re: 2 - I'm not sure I understand when you say you'd start with the best matched funds in TIAA-CREF? I don't believe the employer is matching anymore, since I no longer work there or contribute anything to that account.

I meant choose TIAA-CREF funds that match the Three-fund portfolio. If you go to the link and scroll down a bit you will see funds recommended from various vendors including TIAA-CREF. This will allow you to build your own Three-fund portfolio with what you have available.

Re: 3. Sorry for the confusing question - I asked because the mantra seems to be to fund your retirement accounts first, then move on to other accounts. But I still have short-term goals I want to invest in. Short-term goals include saving for a wedding, used car purchase, and some travel in the next 5 years. I'm happy with my emergency fund - I have funds for a year's expenses + extra savings.

No problem I'm easily confused.

The rule of thumb for money that is to be invested for retirement, you:
1. Invest in employer sponsored plan (401k, 401a, etc.) up to match. You don't want to pass up free money.
then if you have any more to invest
2. Roth IRA or traditional IRA (which one depends on your tax situation, in your case you would choose Roth)
then if you have more to invest
3. fill out the 401k, 401a, etc. to the max allowed.
then...
4. taxable accounts.

In general you only begin to fill retirement accounts once your emergency fund is in place and your other short term needs are being met.
Of course it's a balancing act. Spend too much money now and you won't have enough for later. The earlier you begin to save for retirement the more time the money has to grow. You can save a smaller percentage of your income if you start now.
You might want to try some of the Retirement calculators that are out there. I realize at your age it's highly speculative, but it might give you some food for thought.

[damjam]

iris_k_not, I can help you more with building your portfolio but I need a couple more pieces of information from you.

From what I gather from your previous post, it looks like you need to earmark all or nearly all of your taxable funds to non-retirement needs. You need to confirm that because it would imply this:

Current Retirement Portfolio (% of assets in each account)
13.2% Taxable
8.8% 403b
32.5% 401a
45.8% Roth

New Retirement Portfolio (if I got my math correct, assumning all taxable is for non-retirement needs)
10.3% 403b
37.3% 401a
52.6% Roth

Also you need to consider whether or not you would like to rollover your old 403b and 401a into a traditional IRA at Vanguard (or other firm). If you choose to do a rollover it will simplify building and keeping the portfolio. However there may be some reason, that I don't know of, for you to keep your funds in the old 403b and 401a.
If anyone knows a reason why someone would not want to rollover these funds please speak up.

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 30% of stocks

A portfolio with your desired AA would be like this:
49% Total Stock Market
21% Total International Stock Market
30% Total Bond

If all your funds are at Vanguard it's easy just use:
Vanguard Total Stock Market (VTSMX or VTSAX)
Vanguard Total International Stock Market (VGTSX or VTIAX)
Vanguard Total Bond (VBMFX or VBTLX)

If you decide to keep the 403b and 401a some research will need to be done to find the funds available that most closely resemble the Vanguard funds.

I hope that helps.

[iris_k_not]

O yea - these conversations have been incredibly helpful at helping me see a way forward!

To answer your questions:
Yes, that’s right – I do want to earmark all my taxable funds for non-retirements needs. I got the same math you did.

Honestly, I never considered rolling over the 403b/401a into a IRA. I don’t know the advantages/disadvantages of doing it at TIAA-CREF. I can give them a call to see what the process is. Although, I like the idea of having retirement accounts at two different institutions (probably a result of my dad’s adage of not putting all my eggs into one basket), I also like the simplicity of the AA you presented.

btw – I discovered that NC capital gains taxes are 7.75% regardless of if its short-term or long-term.

So what I’m hearing/learning is this:

For retirement, I could either:
1a) Rollover the 401a/403b into a traditional IRA. If it’s at Vanguard, I buy those 3 funds you suggested. If it’s at TIAA-CREF, I buy the TIAA-CREF equivalent of the 3 Vanguard funds you suggested (maybe Bond Index (TBIIX), International Equity index (TCIEX) and Large Cap Growth Index (TILIX)?)

OR

1b) Keep the 401a/403b accounts but get rid of the funds I currently have, and buy the TIAA-CREF equivalent of the 3 Vanguard funds.

AND

2) Separate the Vanguard Target Retirement fund in my Roth IRA into its constituent parts, to make it easier for reallocating later on.

Then for the non-retirement accounts:
1) Stop the automatic reinvesting of the dividends, to stop incurring short term capital gains
2) Sell those funds
3) Buy low-cost funds – CDs or bonds, or something appropriate to short-term time horizons

More questions:
If that’s right, then how would I go about selling the funds? Would I be able to sell the shares I’ve had for >1 year (so I only pay 0% for long-term capital gains taxes on that) and then hold onto the other shares until I’ve had them for a year?

I’ve also read about selling fund shares before the distribution date, and selling “profitable” funds after the new year, but am unclear on what profitable actually means.

Thanks in advance!

[damjam]

Rather than duplicate the 3-fund portfolio in each separate account,

It could be like this:

403b (10.3%)
10.3% Bond Index (TBIIX)

401a (37.3%)
21% International Equity index (TCIEX)
16.3% Bond Index (TBIIX)

Roth (52.4%)
3.4 % Vanguard Total Bond Index (VBMFX)
49 % Vanguard Total Stock Market (VTSMX)


New contributions to the Roth would be divided like this:
49% Total Stock Market
21% Total International Stock Market
30% Total Bond
so you would add Total International Stock Market when you make future contributions.

Then for the non-retirement accounts:
1) Stop the automatic reinvesting of the dividends, to stop incurring short term capital gains
2) Sell those funds
3) Buy low-cost funds – CDs or bonds, or something appropriate to short-term time horizons

Yes.

If that’s right, then how would I go about selling the funds? Would I be able to sell the shares I’ve had for >1 year (so I only pay 0% for long-term capital gains taxes on that) and then hold onto the other shares until I’ve had them for a year?

Yes.
That will require using Specific Identification of Shares.
It might help if you make a spreadsheet, or hand write a table on paper, or use a program like Quicken.
But the gist of the idea is that you tell your broker to sell only the shares you purchased more than a year ago and not to sell any "younger" shares. You would then hold the remaining shares until they age to one year + one day.
Your broker will tell you their procedure. Some brokers can handle everything online, others like Vanguard require you to write a letter or email detailing your instructions.
If you have ever sold shares in the past it can get complicated if you didn't use Specific Id then and you want to use it now. Hopefully you have the simple case of having never sold anything.

I’ve also read about selling fund shares before the distribution date, and selling “profitable” funds after the new year, but am unclear on what profitable actually means.

Profitable simply means that you are selling the fund shares for more than you paid for them. If you sell for less than you paid for them then you have a loss. Losses can be deducted from your income on your taxes, just the reverse of profits (capital gains) being added to your income.

[iris_k_not]

Thanks damjam! You've helped me tremendously! I appreciate it