Portfolio Question

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Portfolio Question

Postby OneDay » Tue Feb 05, 2013 8:36 pm

Hi all,

Been lurking for a while and want to jump on in. After getting some ideas I bought both the Boglehead books and have read through those in the last week. Most the info can be found here on the boards but I find having it all concentrated in one area makes referencing easy. Plus I like the idea of community helping out. :happy

Ideally I want a simple 3 asset portfolio or potentially 4 over all the investment vehicles.

Age: Him 34/ Her 28
Income: 180K gross
Emergency Fund: Yes 12 months
Debt: 23k car loan at 0%, 265K 30 year fixed at 4%.
Tax filing Status: MFJ
Tax Rate: 25%
State of residence: Arizona
Desired Asset Allocation: 80/20
Desired International allocation: 35-40%

Size of portfolio: ~160k

Current Retirement assets

Taxable: (See below)
His 401K – 72%
His Roth IRA at Vanguard – 20%
Her 403b – 4%
Her Roth IRA at Vanguard – 4%

Contributions

New Annual Contributions
His 401K: 17500 (30% company match not included so in total $22750)
Her 403b: 17500 (6% match on salary or roughly $2900. We are moving hers to max above the match total $20380)
His/Hers Roth IRA: 5500 each
Taxable: (See below)

Available funds
Funds available in his 401K:
Bond Index BlackRock US Debt Index Fund 0.27
Large Cap Blend Index BlackRock Equity Index Fund 0.27
Mid Cap Index BlackRock Mid-Cap Equity Index Fund 0.27
Bond PIMCO Total Return Fund (PTRAX) 0.71
Stable Value Putnam Stable Value Fund 0.75
Target Maturity American Century LIVESTRONG Income Fund (ARTOX) 0.77
Target Maturity American Century LIVESTRONG 2015 Fund (ARFIX) 0.8
Target Maturity American Century LIVESTRONG 2020 Fund (ARBVX) 0.83
Foreign Large Growth EuroPacific Growth Fund (REREX) 0.85
Target Maturity American Century LIVESTRONG 2025 Fund (ARWIX) 0.86
Target Maturity American Century LIVESTRONG 2030 Fund (ARCVX) 0.88
Target Maturity American Century LIVESTRONG 2035 Fund (ARYIX) 0.91
Target Maturity American Century LIVESTRONG 2040 Fund (ARDVX) 0.95
Target Maturity American Century LIVESTRONG 2045 Fund (AROIX) 0.98
Target Maturity American Century LIVESTRONG 2050 Fund (ARFVX) 1
Specialty - Real Estate Cohen & Steers Realty Shares Fund (CSRSX) 1.03
Large Cap Value JP Morgan Equity Income Fund (OIEIX) 1.05
Foreign Large Value Oakmark International Value Fund (OAKIX) 1.06
Large Cap Growth Putnam Voyager (PVOYX) 1.07
Mid Cap Value RidgeWorth Mid-Cap Value Eq Fund (SMVTX) 1.07
Small Cap Blend Columbia Small Cap Core Fund (SMCEX) 1.13
Small Cap Growth Invesco AIM Small Growth Fund (GTSAX) 1.27
Mid Cap Growth Goldman Sachs Mid-Cap Growth Fund (GGOAX) 1.35
Diversified Emerging Oppenheimer Developing Markets Fund (ODMAX) 1.36

Funds available in her 403b (TIAA-Cref funds… no symbols that I could find)
Money Market 0.42%
Equity Index 0.43%
Bond Market 0.45%
Inflation-Linked Bond 0.45%
Social Choice 0.46%
Growth 0.47%
Stock 0.49%
Global Equities 0.52%
Equity Index 0.82%
Money Market 0.88%
Small-Cap Blend Index 0.90%
Real Estate 0.92%
Social Choice Equity 0.94%
Inflation Linked Bond 1.03%
Bond 1.08%
Bond Plus 1.10%
Lifecycle Retirement Income 1.13%
Lifecycle Fund 2010 1.16%
Lifecycle Fund 2015 1.17%
Lifecycle Fund 2020 1.19%
Lifecycle Fund 2025 1.21%
Lifecycle Fund 2045 1.21%
Lifecycle Fund 2050 1.21%
Mid-Cap Value 1.21%
Growth & Income 1.22%
Large-Cap Value 1.22%
Lifecycle Fund 2030 1.22%
Large-Cap Growth 1.23%
Lifecycle Fund 2035 1.23%
Lifecycle Fund 2040 1.24%
Mid-Cap Growth 1.24%
International Equity 1.28%
Small-Cap Equity 1.28%
Real Estate Securities 1.29%


Questions
Hopefully I have provided enough info. If I haven’t just ask and I can provide more. The taxable account is a company stock account where I get RSUs. I generally get 10K worth a year, and they vest over 4 years. I don’t count it in the portfolio because I sell every year and transfer the funds to other accounts. Basically I don’t want it counting as stock I own but rather another income stream.

So, based on me wanting the 80/20 split with 40% in international, what would be a good game plan? The 401k has the BR equity index at .27 that tracks the S&P 500 TR so that seems like it would be good for the equity side. The Roths are currently in the VFFVX(2055) so at a 90/10 split. Obviously adjusting that to an 80/20 split will make it easier. I have plans that when those get high enough to invest in admiral shares I will convert to those instead of the target date. I welcome all thoughts!


Edited to add company match totals
Last edited by OneDay on Wed Feb 06, 2013 8:32 am, edited 1 time in total.
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Re: Portfolio Question

Postby Mill » Wed Feb 06, 2013 12:32 am

If you want to make it easy, you could both just pick a Target retirement fund which would reflect your 80/20 desire, and buy International in a taxable account with your RSU money. Might not be the most efficient, but it seems to fit your goals.

Digging deeper, her 403b looks like a better international fund, so if you wanted to build up your international, you might consider having her go 100% Global Equities 0.52% with her 17500+match, while you do the meat and potatoes US stocks and bonds in your 401(k). ***Check the prospectus for "global equities", as it might include a large portion of US stocks, which might make the fund a less desireable choice for you.)

You have a lot of options. Play with some scenerios, let us know what you come up with.
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Re: Portfolio Question

Postby pingo » Wed Feb 06, 2013 1:49 am

OneDay wrote:New Annual Contributions
His 401K: 17500 (30% company match not included)
Her 403b: 17500 (6% match on salary or roughly $2900. We are moving hers to max above the match)
His/Hers Roth IRA: 5500 each
Taxable: (See below)


Please indicate total dollar amount: personal contribution + company match.

Or is the company match the same as the taxable company stock that you use as income?
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Re: Portfolio Question

Postby OneDay » Wed Feb 06, 2013 8:33 am

pingo wrote:
OneDay wrote:New Annual Contributions
His 401K: 17500 (30% company match not included)
Her 403b: 17500 (6% match on salary or roughly $2900. We are moving hers to max above the match)
His/Hers Roth IRA: 5500 each
Taxable: (See below)


Please indicate total dollar amount: personal contribution + company match.

Or is the company match the same as the taxable company stock that you use as income?



I have edited the post to reflect the company match as it is seperate than the taxable RSUs I get. Thanks!
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Re: Portfolio Question

Postby OneDay » Wed Feb 06, 2013 9:31 am

Mill wrote:If you want to make it easy, you could both just pick a Target retirement fund which would reflect your 80/20 desire, and buy International in a taxable account with your RSU money. Might not be the most efficient, but it seems to fit your goals.

Digging deeper, her 403b looks like a better international fund, so if you wanted to build up your international, you might consider having her go 100% Global Equities 0.52% with her 17500+match, while you do the meat and potatoes US stocks and bonds in your 401(k). ***Check the prospectus for "global equities", as it might include a large portion of US stocks, which might make the fund a less desireable choice for you.)

You have a lot of options. Play with some scenerios, let us know what you come up with.



Thanks for the reply. Currently we are both in target date funds in all acounts but I feel like I am paying to high of an ER and there should be a better way. You are spot on about the global equities fund as it currently is a 54/46 mix of US/Int. considering her 403B is 20% of our portfolio that means it puts me just under 10% in foreign equities by my calculations. The foriegn funds in my 401K have high ER but it might be the best options for now. I have also thought about turning the Roths into straight foreign investments as that will add a 8% more. It seems the only way I would get the foreign exposer is to pay the higher ER in my 401K for now unless I am missing something. I suppose this is something I could build up to over time. Not sure if I am missing something or what the best option to get foriegn exposure would be.
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Re: Portfolio Question

Postby OneDay » Thu Feb 07, 2013 9:07 am

Any advice out there? Pretty please :)
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Re: Portfolio Question

Postby Occupier » Thu Feb 07, 2013 7:36 pm

It's hard to make a recommendation in this case. An interesting experience for you would be to go over to Vanguard.com and find their cost analyzer. Over a 30 year period run a 8% return, at costs of .27% and then at 1%. That is the difference between the lowest cost fund, and the target retirement that many people would recommend for folks your age. I bet you will be really surprised over how much appreciation you will loose to costs if you chose the higher cost fund. I will give you a hint it's .73% a year x 30 years, plus compounding. Do it in your head and you will see it's quite a bit. This is a common problem, i.e. having to compromise on your asset allocation to avoid the drag of high costs. I would give serious consideration to having your 401 in a combination of the 3 Black Rock funds, bond, large, and mid cap, and your wife in the inflation linked bond fund and TIAA_CREF equity index, then in your taxable Vanguard total international which is very tax efficient. Vanguard small value in the Roth. In a couple of years you should be able to get to your desired allocation by asset class, and over the rest of your life you wont be paying excessive costs. If you do the calculation on a pad of paper I think you will see how you get close to what you want. Vanguard small value is about 15% REIT. Dave
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Re: Portfolio Question

Postby hoppy08520 » Thu Feb 07, 2013 9:44 pm

Here's a possible 3-Fund portfolio (in spirit if not in letter) that does not account for your taxable account:

His 401(k)
20% Bond Index BlackRock US Debt Index Fund 0.27 <-- same benchmark as Vanguard Total Bond Market Index Fund
39% Large Cap Blend Index BlackRock Equity Index Fund 0.27 <-- tracks S&P 500 Index
6% Mid Cap Index BlackRock Mid-Cap Equity Index Fund 0.27 <-- I believe this tracks S&P Midcap 400 Index
7% Small Cap Blend Columbia Small Cap Core Fund (SMCEX) 1.13 <-- not an index fund, but measures itself against Russell 2000 small cap index

His Roth IRA
20% Vanguard Total International Stock Market Index Fund

Her 403(b)
4% Global Equities 0.52% <--- this is a world stock fund, 52/48 US & International

Her Roth IRA
4% Vanguard Total International Stock Market Index Fund

There are two main weaknesses in your plans, from what I see:
  • As you noted, the weaknesses in both His 401(k) and Her 403(b) are the lack of a good international fund. This is typical of many such plans.
  • The other weakness in both your plans is that your only small cap US stock funds are expensive. Her 403(b) has Equity Index which is a good US TSM fund benchmarked to the Russell 3000 index, but it won't help you much now since only 4% of your portfolio is in that account, and you'll need US stocks in His 401(k).

Here's how the portfolio above deals with these:

International

These numbers don't quite get you to your 60/40 (or 65/35) US/International ratio. Starting out, your equities will be 74/26 US/Intl. The only way to boost that number starting out is to use one or more of the international funds in your 401(k), which as you noted aren't very appetizing for a Boglehead.

But that's just for today. After a year of contributions, 38% of your new contributions of $54,000 can go to international in the IRAs and her TIAA-CREF Global Equities. This will get your international allocation up to where you want it in a year or two.

If you really wanted to get there faster, it wouldn't hurt to use some of EuroPacific Growth Fund (REREX) in His 401(k), and take away some from the trio of US stock funds. If you search the forum for REREX, you'll find that a lot of people have observed that historically this fund has behaved a lot like Vanguard Total International Stock Market Index Fund.

The rationale behind choosing TIAA-CREF Global Equities in Her 403(b) is because:
  • It has one of the lower ERs in the plan.
  • The TIAA-CREF International Equity fund is far more expensive, and provides less diversity. It tracks the MSCI EAFE index of large-cap developed markets. By contrast, the MSCI World Index (the Global Equities benchmark) has some emerging markets and Canadian stocks, although no small-caps.
  • By being 50/50 US/Intl, it fits in with you overall asset allocation goal when you put all your accounts together.

Small-Cap US Stocks

The 401(k) and 403(b) have expensive small-cap stock offerings. For His 401(k), that gap is a bit puzzling because you have great good options in the Large Cap and Mid Cap blends from BlackRock. Are you sure there isn't a small-cap blend from BlackRock in your plan? If not, I'd ask about getting it added to your plan.

The 42/6/7 ratio of large/mid/small in His 401(k) is intended to approximate a total US stock market index funds with the three funds from your 401(k) and also to complement the US half of the TIAA-CREF Global Equities fund, which is a large-cap fund. I'm not sure if this ratio is ideal but it's pretty close. Per Approximating Total Stock Market, if you have a trio of 500-Index, S&P 400 Mid-Cap, and a small-cap fund, then you'd hold them at roughly 82/11/7 if you want to replicate a TSM fund. But for the portfolio above, I boosted the small-cap a bit and lowered the 500-index by the same amount, to reflect the fact that the US stocks in the TIAA-CREF Global Equities are weighted to large-cap.

Some people might not like the high ER small cap fund in His 401(k), but I think it's important to not leave that asset class out. The only other way you could hold small-cap is to do so in one of the IRAs, which would mean you'd need to hold more International in His 401(k). Or you could hold the TIAA-CREF Small Cap Equity in Her 403(b) but that's even more expensive (although it's a preferable fund, being an index fund that tracks the Russell 2000 index). So there's no magic solution.

Future Concerns
  • For ongoing contributions, you can contribute to the single funds in the IRAs and her 403(b) and stay in balance, and contribute to the 401(k) with half to bonds and the other half to the US stocks in the same proportion as listed above. As noted above, contributing like that will gradually grow your international allocation up to where you want it to be. You should of course monitor your holdings and rebalance as your rebalancing strategy calls for. Given that your new contributions are so big relative to your current balance, you may need to keep a closer look for the next few years as there might be bigger swings.
  • As her 403(b) grows, in a few years you might want to balance out the gaps in her Global Equities international allocation by holding a small-cap international fund like Vanguard VSS in one of the IRAs. You'd trade some of the Vanguard Total International Stock Market Index fund for VSS. You might to hold $1 of VSS for every $20 of Global Equities, as international small caps are around 10% of the investable international stock market.
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Re: Portfolio Question

Postby OneDay » Fri Feb 08, 2013 7:45 pm

I appreciate your feedbacl!!
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