After a Month Here, Here is my Asset Allocation

[LFKB]

I've been here for just over a month now and after reading "The Little Book of Common Sense Investing" (thanks to Taylor's post on the Apple sale), portions of the Wiki, speaking with a Vanguard planner and making and reading many posts on this forum I am now ready to implement my asset allocation. Thanks to all those who have answered questions in my previous threads, especially lviesoft, nedsaid and stan1. I believe I have thought of all the major concerns, but below is my planned asset allocation which will be going into effect later this week. I would welcome any additional thoughts. Thanks!

Info
Emergency funds: Yes, 6 months
Debt: No debt, both cars are paid off. Currently renting so no mortgage.
Tax Filing Status: Single (live with girlfriend, we each currently file as single and have roughly equal assets and income. The below information is our combined information)
Tax Rate: 35% Federal, ~10% State
State of Residence: California
Age: 26/27
Desired Asset allocation: 65% stock, 10% real estate, 25% bonds, excluding money saved for home downpayment (setting aside $100k right now for an estimated at $200k to $300k downpayment in the next 3-5 years)
Desired International allocation: ~30% of stocks

Current taxable portfolio: ~$637k
Current retirement portfolio: ~$147k
Current yearly combined income: ~$600k before taxes. Which gives the ability to save about $200k per year after taxes

I am going to set aside $100k of the house downpayment right now in California Intermediate Term Tax Exempt and plan to set aside additional money for the house downpayment as we continue to save. My 65/10/25 asset allocation excludes this $100k.

Most all of our money is in cash currently, aside from our retirement accounts and about $63k in brokerage accounts (which we are going to leave as is).

Liquid
Checking and savings accounts: $84k or 11% (emergency funds, checking accounts and one big ticket item)

Taxable
Bonds in Taxable
California Intermediate-Term Tax-Exempt (VCAIX): .20% expense ratio: $135k or 17% (includes $100k for house downpayment)
Intermediate-Term Tax-Exempt (VWITX): .20% expense ratio: $35k or 5%

Stocks in Taxable
Vanguard Total Stock Market (VTSAX) with .06% expense ratio: $116k or 15%
Vanguard Total International Stock (VTIAX) with .18% expense ratio: $112k or 14%
Vanguard Small Cap Index (VSMAX) with .16% expense ratio: $53k or 7%
S&P 500 Index Funds (currently invested through brokerage accounts): $48k or 6%
Gold/commodity stocks (currently invested through brokerage accounts): $15k or 2%
Capital Committed to a Private Equity Fund: $40k or 5%

401k / Traditional IRA / Roth IRA
The plan here is to rebalance from our current funds which are mainly equities into bonds and real estate for tax efficiency. It will look something like this.
PIMCO Total Return Fund with 0.46% expense ratio: $85k or 11%
Invesco Real Estate Fund with 0.86% expense ratio: $62k or 8%

I hate paying the higher expense rations in the 401k when there are lower cost S&P 500 index funds available but I believe on an after tax basis this is the right decision.

Thanks for all the past help and if anyone has any comments, thoughts or questions please post!

[Taylor Larimore]

LFKB:

It appears to me that you have done a fine job of researching how to invest successfully--and your proposed portfolio reflects your knowledge with a superior portfolio: It reflects a plan that is low cost, diversified, tax-efficient, and easy understand and maintain.

Congratulations and best wishes.
Taylor

[LFKB]

LFKB:

It appears to me that you have done a fine job of researching how to invest successfully--and your proposed portfolio reflects your knowledge with a superior portfolio: It reflects a plan that is low cost, diversified, tax-efficient, and easy understand and maintain.

Congratulations and best wishes.
Taylor

Thanks for your help with it!

[letsgobobby]

The only issue I have is whether you really need/want to have a 75/25 portfolio in your position. There's nothing wrong with it given your age and your human capital, but you also probably don't need to take the risk.

Also given your human capital - I hope you have airtight disability insurance, umbrella insurance, and a big ol' life insurance policy.

[LFKB]

The only issue I have is whether you really need/want to have a 75/25 portfolio in your position. There's nothing wrong with it given your age and your human capital, but you also probably don't need to take the risk.

Also given your human capital - I hope you have airtight disability insurance, umbrella insurance, and a big ol' life insurance policy.

I don't know if she'll work forever so who knows if our income will stay as high as it currently is. We both bring in similar levels of income so losing half of it would be a big deal, although I would hope that my income would be higher than it is now were she to stop working. We also live in an expensive part of southern California so the cost of living (especially real estate) is very high. Based on those factors, I feel the 75/25 risk is needed.

We don't have any disability, umbrella or life insurance, outside of some disability and life insurance what is provided by our employers. Nor do we have any kids. At our age, it's not something that I worry about but maybe something I should think about. I haven't put any thought into it in the past and didn't even know what umbrella insurance was until I just googled it.

[Easy Rhino]

Well, living together can make the "jointness" planning difficult, especially when buying a house. Unless this is planned to be a long term thing, but I'm sure you and your girlfriend can work that out between yourselves. But if you're planning separately, then you each would need your own separate asset allocations, insurance, etc.

life insurance may not be necessary if you don't have any dependents (including each other), but disability and liability could be big.

I think your percentages are a little off:
- if you want to exclude the house down payment from your AA, then don't count all of the $135k in muni bonds
- similarly, unless you want to keep checking account or emergency fund as part of your allocation (as "cash"), then also exclude those amounts
- you'll probably need to re-figure your percentages.

If you have IRAs, you might look into the Vanguard REIT fund for lower expenses than the Invesco fund you list. If you want more advice there you could post the breakdown between the various 401k/IRAs and avaialble funds in each.

I don't think gold stocks are going to be particularly tax efficient in a taxable account, I think GLD cap gains gets taxed at a 28% collectible rate. But you're short on room in your tax-advantaged so that doesn't seem like a terrible problem.

You might want to see what other methods are avaialble to increase your tax-deferred savings:
- I-bonds
- HSAs
- 403b or 457 plans

[bottlecap]

More complicated than I'd personally like, but it looks well thought out and thorough.

Good luck,

JT

[LFKB]

Well, living together can make the "jointness" planning difficult, especially when buying a house. Unless this is planned to be a long term thing, but I'm sure you and your girlfriend can work that out between yourselves. But if you're planning separately, then you each would need your own separate asset allocations, insurance, etc.

life insurance may not be necessary if you don't have any dependents (including each other), but disability and liability could be big.

I think your percentages are a little off:
- if you want to exclude the house down payment from your AA, then don't count all of the $135k in muni bonds
- similarly, unless you want to keep checking account or emergency fund as part of your allocation (as "cash"), then also exclude those amounts
- you'll probably need to re-figure your percentages.

If you have IRAs, you might look into the Vanguard REIT fund for lower expenses than the Invesco fund you list. If you want more advice there you could post the breakdown between the various 401k/IRAs and avaialble funds in each.

I don't think gold stocks are going to be particularly tax efficient in a taxable account, I think GLD cap gains gets taxed at a 28% collectible rate. But you're short on room in your tax-advantaged so that doesn't seem like a terrible problem.

You might want to see what other methods are avaialble to increase your tax-deferred savings:
- I-bonds
- HSAs
- 403b or 457 plans

Thanks for the response. We'll be getting married in the next 24 months which is why I posted the joint information. Because we have similar asset bases, we will basically each be hold exactly half of the overall portfolio I posted, with some minor differences.

It's probably difficult to figure out from my post, but if you back out what I have in checking in savings and the $100k for the downpayment, then you get to my 65/10/25 split. So the percentages do work out but the way I posted it was confusing to follow.

Good point on placing the Vanguard REIT in the IRAs. I only have $5k in a Roth (I did backdoor this year for first time based on advice from the board) but she has a good chunk in a traditional IRA, so we can buy the Vanguard REIT there to save on the expense ratio. I didn't think of that!

[Easy Rhino]

There may also be significant differences between your two 401ks that might argue for investments in one vs the other. Although they're a small percentage of your funds so it's not as big a deal.

By the way, since taxes are not your friend, I just realized you may want to check out the tax-managed international and tax-managed small cap funds. Any small cap fund is going to be slightly tax-inefficient in taxable. And Total International is probably very efficient, but tax-managed intl might be even more tax efficient. maybe.

[letsgobobby]

The only issue I have is whether you really need/want to have a 75/25 portfolio in your position. There's nothing wrong with it given your age and your human capital, but you also probably don't need to take the risk.

Also given your human capital - I hope you have airtight disability insurance, umbrella insurance, and a big ol' life insurance policy.

I don't know if she'll work forever so who knows if our income will stay as high as it currently is. We both bring in similar levels of income so losing half of it would be a big deal, although I would hope that my income would be higher than it is now were she to stop working. We also live in an expensive part of southern California so the cost of living (especially real estate) is very high. Based on those factors, I feel the 75/25 risk is needed.

We don't have any disability, umbrella or life insurance, outside of some disability and life insurance what is provided by our employers. Nor do we have any kids. At our age, it's not something that I worry about but maybe something I should think about. I haven't put any thought into it in the past and didn't even know what umbrella insurance was until I just googled it.

your human capital is your entire future, you need to protect it.

[grapeape]

The only issue I have is whether you really need/want to have a 75/25 portfolio in your position. There's nothing wrong with it given your age and your human capital, but you also probably don't need to take the risk.

Also given your human capital - I hope you have airtight disability insurance, umbrella insurance, and a big ol' life insurance policy.

I don't know if she'll work forever so who knows if our income will stay as high as it currently is. We both bring in similar levels of income so losing half of it would be a big deal, although I would hope that my income would be higher than it is now were she to stop working. We also live in an expensive part of southern California so the cost of living (especially real estate) is very high. Based on those factors, I feel the 75/25 risk is needed.

We don't have any disability, umbrella or life insurance, outside of some disability and life insurance what is provided by our employers. Nor do we have any kids. At our age, it's not something that I worry about but maybe something I should think about. I haven't put any thought into it in the past and didn't even know what umbrella insurance was until I just googled it.

Disability insurance is important for most people, even someone of your age. Your earnings potential is your most valuable asset, protect it. The key question to ask yourself is: if i became disabled today, would I be okay financially with the loss of my work income? If not, you need disability insurance. In general, personal policies are stronger policies and portable when compared to group policies. Plus a personal policy paid with post tax dollars results in any pay outs not being taxed as opposed to a policy where pre tax dollars pay the premium and any benefits are taxed. I would certainly look into the details of your group policy and reassess your need for a personal disability insurance policy.

Do not fall into the mistake of thinking just because you are in your late 20s you don't need it. Life happens. You could develop a neurologic disorder, a cancer, a serious injury etc. I have personally seen it happen to young people on more than one occasion so just because you are young does not mean you are immune from the variables life throws at you. This is why people insure. The odds of needing it are relatively low but the consequences of not having it IF you end up needing it can be devastating.

I would also make sure you are properly insured with life (if needed), auto, homeowner (when you buy, i'm not very familiar with the benefits of rental insurance so others can chime in there), and umbrella policies. The total increase in my car insurance premium to go from 25k/50k to 1 million/1 million I believe was about $225/year....nothing for someone at your income level and if you are in an accident that results in injury, the minimum liability policies would hardly touch it. I don't have an umbrella policy yet but from what I have read for like $200-500/year range you can add another million or 2 of coverage, of course rates depends on risk factors the insurance carrier associates with you, including location.

THe other thing to consider is when you have higher policy limits, in addition to protecting your assets, you kind of have a built in lawyer. If something were to happen and someone sued you for a car accident lets say, since the insurance carrier is on the hook for the first million or 2 or 3, they will be addressing it in court since they have a lot to lose at that point. I'm not a lawyer, but I imagine the insurance carriers know what they are doing in litigating these types of cases. Its kind of peace of mind, I know I would feel much more comfortable having big insurance company protecting me.

Don't forget, the best outcome of any insurance policy is you not needing it and money down the drain!

[retiredjg]

You can have joint financial ventures while still single. But you should probably not do a joint retirement portfolio because one of you could be carrying more or less risk than the other and one of you could get more or less return than the other. If you do a joint portfolio, they need to be very similar to be fair....so why go to the trouble? It's easier to do separate portfolios than a joint one that you have to micromanage for fairness.

I'm not suggesting that all of your other finances should be separate, just the stuff that could be divided unfairly in case of a split.

[bertie wooster]

For your taxable stock mutual funds I would simplify it with just Total Stock Market and Total International. We hold small value and international small in IRA's (we don't bother w/ REIT's). You may not be able to get as much small as you want - but why worry about tracking more tax lots with all those different funds?

You also need to get on disability insurance - like now. Umbrella insurance is cheap. Call your current car insurance provider and increase your liability coverage as well as adding an umbrella policy. It will probably cost less than 200/year.

[LFKB]

There may also be significant differences between your two 401ks that might argue for investments in one vs the other. Although they're a small percentage of your funds so it's not as big a deal.

By the way, since taxes are not your friend, I just realized you may want to check out the tax-managed international and tax-managed small cap funds. Any small cap fund is going to be slightly tax-inefficient in taxable. And Total International is probably very efficient, but tax-managed intl might be even more tax efficient. maybe.

Thanks for the recommendations, I had not looked into these but I just did some quick research on the Vanguard site and I think I am going to stick with Total International because Tax-managed International does not provide exposure to emerging markets whereas Total International does. I could do tax-managed international and an emerging markets fund but I prefer to keep things simple if possible. The tax-managed small cap fund is interesting though, it only has about 1/3 the number of stocks but I may use it over Small Cap Index. I haven't seen much about tax managed small cap on the board, does anyone else use this?

You can have joint financial ventures while still single. But you should probably not do a joint retirement portfolio because one of you could be carrying more or less risk than the other and one of you could get more or less return than the other. If you do a joint portfolio, they need to be very similar to be fair....so why go to the trouble? It's easier to do separate portfolios than a joint one that you have to micromanage for fairness.

I'm not suggesting that all of your other finances should be separate, just the stuff that could be divided unfairly in case of a split.

I agree. I'm going to take a look and decide how we can best split our retirement accounts so that we carry similar levels of risk but also minimize fees based on fund options. Thanks

[retiredjg]

I agree. I'm going to take a look and decide how we can best split our retirement accounts so that we carry similar levels of risk but also minimize fees based on fund options. Thanks

Good. Fees are important, but not when there is no protection under the law. In this case, I think fairness is more important than fees...if you have to make a choice. If your plans at work are similar, it may make little difference. But I think you'll find managing them as one is more trouble (until you are married).

[LFKB]

Thanks bertie, grapeape and letsgobobby. I will look into umbrella and disability insurance.