Portfolio Reallocation

[diceman]

Greetings all. I originally setup my asset allocation in 2008 and had been doing a decent job continuing the course.

I have made a real mess of my asset allocation with a bonds/cash portfolio weighted at ~84% of the portfolio vs. 35% goal. I know this is very inefficient at my age and want to revise my portfolio. This was partly due to some bond funds which were gifted, and subsequently left in a taxable account since 1Q/2Q 2012. Yep, I missed quite a bit of this equity market run-up over the last year. The largest problem is the majority of my portfolio space is in taxable accounts and I do not have as much room in my 401k and Roth IRA. Below are my metrics.

Emergency funds: 1 year
Debt: Mortgage - $79k (7 years @ .84% family loan)
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 0% State
State of Residence: TX
Age: 39, Wife - 38
Desired Asset allocation: 65% stocks / 35% bonds
Desired International allocation: 30% to 35% of stocks
Current Total Portfolio = ~$528k not including emergency funds

Current Retirement Portfolio

401k ($58k with 4% match initially into company stock. another 2% match at year's end.)
2.64% Dodge & Cox Income (DODIX) (.43%)
5.62% Vanguard Institutional Index (VINIX) (.04%)
2.65% Company Stock

ROTH IRA ($41k)
2.30% Vanguard Total Stock Market Adm (VTSAX) (.06%)
2.34% Vanguard Extended Market Adm (VEXAX) (.14%)
0.73% Vanguard REIT Index (VGSIX) (.24%)
2.32% Vanguard Total International Stock Adm (VTIAX) (.18%)

Taxable ($429k)
27.43% Cash
9.69% Vanguard GNMA Adm (VFIJX) (.11%)
20.58% Vanguard Wellesley Income Adm (VWIAX) (.18%)
23.70% Vanguard ST Investment-Grade Adm (VFSUX) (.11%)

100% Total Assets Contributions

New annual Contributions
$17.5k 401k (plus 6% match). Plan to utilize cash instead of paycheck income for living expenses which will subsidize 401k to max.
$5.5k Roth IRA
$0 taxable –reallocate

401k Investment Options
Vanguard Institutional Index (.04%)
Company Stock Fund
Dodge & Cox Income (.43%)
Crm Small Mid Cap Val Inst (.87%)
Dodge & Cox International Stock (.64%)
Dreyfus/The Boston Co Sm Mcp Gr Ins (.77%)
Eaton Vance Atl Cap Smid-Cap-I (1.13%)
Pimco All Assets Fd-Inst (.96%)
Pioneer Bond-Y (.61%)
Pioneer Classic Balanced-Y (.84%)
Pioneer Fundamental Growth-Y (.78%)
Pioneer Fundamental Value-Y (.78%)
Pioneer-Y (.72%)
T Rowe Price Instl Large Cap Growth (.57%)
T Rowe Price Retirement 2005 (.58%)
T Rowe Price Retirement 2010 (.61%)
T Rowe Price Retirement 2015 (.65%)
T Rowe Price Retirement 2020 (.69%)
T Rowe Price Retirement 2025 (72%)
T Rowe Price Retirement 2030 (.74%)
T Rowe Price Retirement 2035 (.76%)
T Rowe Price Retirement 2040 (.76%)
T Rowe Price Retirement Income (.56%)
T. Rowe Price Retirement 2045 (.76%)
T. Rowe Price Retirement 2050 (.76%)
T. Rowe Price Retirement 2055 (.76%)
Vanguard Windsor II Adm (27%)

I will need to sell GNMA, Wellesley, and Vanguard ST Investment-Grade due to the inefficiency in taxable accounts. Now is the time to sell GNMA (-$215) & Vanguard ST Investment-Grade ($777 LT gain). Wellesley ($4478 ST gain) would not go to a LT gains until June. I like Wellesley but understand it is hard to keep asset allocation % due to the fund managed plus not enough room in my Roth.

Another part of the equation. Cash (non-emergency) I have included in my current retirement portfolio is earmarked for investing ASAP. I plan to utilize about $15k of the cash instead of paycheck income for living expenses which will allow to max the 401k this year. This will help increase tax sheltered accounts a tad.

I believe this will take quite a bit shuffling of funds in the different accounts (401k, Roth, Tax) to achieve my 65/35 asset allocation goal. Do I sell off all equities in my 401k and Roth to get to 35% bonds, even with the low expense of Vanguard Institutional Index (.04%)? Or add some tax-exempt bond funds in taxable until tax sheltered accounts grow? I know my tax bracket does not allow for benefits quite yet.

I also would like to add small cap tilt to taxable accounts in the form of tax managed funds. I am not married to Vanguard although they do have some solid low cost funds. I do appreciate anyone who has recommendations, as I know there are tons of assumptions to take into account.

Thanks
Jason

[Occupier]

It's worth it to wait till the gains become LT in June. The nice thing about Texas (or Nevada) is you can get a national tax free bond fund and not worry about state taxes. I would go a combination of Intermediate term tax free and high yield tax free at Vanguard as my bond holdings. Then your less upset about making changes in the tax free accounts because you don't have to put all the bonds there. I notice you have been good about selecting low cost funds in the 401 which is good because you lose a lot of appreciation to costs over the 25+ years to retirement. So I would not change that much there. If your upset about parting with Wellington, I note that Wellsley is also a mix of large value stocks and taxable bonds. And it's fairly low cost in the 401. Frankly I would just stick with the institutional index.

Here is something to think about regarding small caps and you can confirm this by getting one of the earlier Swedroe books from your library. The lowest performing asset class, over long periods, of the 9 Morningstar tracks is small growth, the best is small value. The latter is not very tax efficient. Why not have the tax free bonds in taxable and have small value in the tax free Roth. If you go with a tax managed small cap fund you get a growth tilt which wont perform as well as small value. Think about it. That's my .02 worth. I did not work out the percentages except in my head. Dave

[diceman]

Thank you for giving me input and ideas. Below is my revised portfolio after I sell all my taxable bonds. I added Small Cap Value to my Roth exchanging everything except the Extended Market which combined with Vanguard Institutional Index replicates Total Stock Market I believe.

I added my company match for 2013 (4%) which I was intending to leave in the company stock (mid cap financial). I will fund $5.5k for the 2013 Roth limit. At the end of 2013, I will be at 65/35 with a nice blend of international (20%), small cap value tilt (5%). I believe these portfolio allocations will give me flexibility when it comes to re-balancing when I add to taxable, max out 401k, etc.

I hope others can weight in with some recommendations.

401k ($57.5k)
2.72% Dodge & Cox Income (DODIX)
5.79% Vanguard Ins Index (VINIX)
2.73% Company Stock Mid Cap Financial

ROTH IRA ($40.5k)
5.08% Vanguard Small Cap Value Index Adm(VTSAX)
2.84% Vanguard Extended Market Adm (VEXAX)
0.00% Vanguard REIT Index (VGSIX)

INDIVIDUAL ACCOUNT ($413k)
16.53% Vanguard Interm-Term Tx-Ex Adm (VWIUX)
17.50% Vanguard High-Yield Tax-Exempt Adm (VWALX)
20.90% Vanguard Total International Stock Adm (VTIAX)
25.91% Vanguard Total Stock Market Adm VTSAX

100.00% TOTAL ASSETS

Fund Class
31.71% Large Cap
5.57% Mid cap
5.08% Small Cap
20.90% International
36.75% Bonds
0.00% REIT
100.00% Total

2013 Contributions (4% matched during 2013, 2% in 1Q14)

401k
$15.4k Vanguard Ins Index (VINIX)
$2.2k Company Stock Mid Cap Financial

ROTH IRA
$1.5k Vanguard Small Cap Value Index Adm (VTSAX)
$4k Vanguard Extended Market Adm (VEXAX)

EOY 2013 Portfolio

401k
2.60% Dodge & Cox Income (DODIX)
8.43% Vanguard Ins Index (VINIX)
3.02% Company Stock Mid Cap Financial

ROTH IRA
5.14% Vanguard Small Cap Value Index Adm (VTSAX)
3.46% Vanguard Extended Market Adm (VEXAX)
0.00% Vanguard REIT Index (VGSIX)

INDIVIDUAL ACCOUNT
15.81% Vanguard Interm-Term Tx-Ex Adm (VFIJX)
16.75% Vanguard High-Yield Tax-Exempt Adm (VFIJX)
20.00% Vanguard Total International Stock Adm (VFSUX)
24.79% Vanguard Total Stock Market Adm (VWIAX)

100.00% TOTAL ASSETS

Fund Class
33.22% Large Cap
6.48% Mid cap
5.14% Small Cap
20.00% International
35.16% Bonds
0.00% REIT
100.00% Total

[stan1]

Do you think you'll stay at the same company for a long time (and have they stayed with the same 401K administrator for a long time)?

The reason I'm asking is that because you have a high percentage of your assets in a taxable account the poor bond choices in your 401K are driving you to invest in municipal bonds. If there was a chance that you expected to be able to roll your 401K over into an IRA within a few years I'd invest the taxable account primarily in Total Stock Market and Total International Stock Market and accept the high cost bond funds in your 401K for a few years. You should think of everything you buy in a taxable account as being a permanent holding since the idea isn't to pay capital gains until you are retired (or leave it to your heirs so they get stepped up basis and owe no tax).

[diceman]

Do you think you'll stay at the same company for a long time (and have they stayed with the same 401K administrator for a long time)?

That is a great point. My gut feeling is no I will not be there in 5 years. Administrator has changed a couple times with not much change in fund offerings. Expenses have actually lowered at tad over the last 5 years.

The reason I'm asking is that because you have a high percentage of your assets in a taxable account the poor bond choices in your 401K are driving you to invest in municipal bonds. If there was a chance that you expected to be able to roll your 401K over into an IRA within a few years I'd invest the taxable account primarily in Total Stock Market and Total International Stock Market and accept the high cost bond funds in your 401K for a few years. You should think of everything you buy in a taxable account as being a permanent holding since the idea isn't to pay capital gains until you are retired (or leave it to your heirs so they get stepped up basis and owe no tax).

Are you recommending to go to 100% bonds in my 401k with no tax exempt in taxable? I believe you are, and that equates to only 14% bond portfolio by the end of 2013. I would not feel comfortable with that low of a bond position now. I do agree with you about everything in the taxable account being permanent holding until retirement. I made a mistake buying Wellesley in a taxable account last June.

[diceman]

Do I need to reconsider sticking tax exempt in taxable accounts to reach a 35% bond weight due to my tax bracket? I would really like to try and move into equities quickly in taxable (Total Stock and Total Int) by selling GNMA and ST Investment Grade. I guess until Wellesley would be a long term gain in June (before the 2Q13 dividend hits) I would still have some bond exposure plus Dodge and Cox Income in the 401k.

[YDNAL]

Tax Rate: 25% Federal, 0% State
State of Residence: TX
Age: 39, Wife - 38
Desired Asset allocation: 65% stocks / 35% bonds
Desired International allocation: 30% to 35% of stocks
Current Total Portfolio = ~$528k not including emergency funds

Current Retirement Portfolio

401k ($58k with 4% match initially into company stock. another 2% match at year's end.)
ROTH IRA ($41k)
Taxable ($429k)

New annual Contributions
$17.5k 401k (plus 6% match). Plan to utilize cash instead of paycheck income for living expenses which will subsidize 401k to max.
$5.5k Roth IRA
$0 taxable –reallocate

Jason,

Taxable
16% Vanguard Interm-Term Tx-Ex Adm (VWIUX)
25% Vanguard Total International Stock Adm (VTIAX)
40% Vanguard Total Stock Market Adm (VTSAX)

401K
8% Dodge & Cox Income (.43%)
https://www.dodgeandcox.com/incomefund_character.asp

Roth IRA
11% Intermediate Bond Index VBILX
https://personal.vanguard.com/us/funds/ ... =INT#tab=2

This gives you 65/35 Stocks/Bonds right away - but consider taxes before changing anything in Taxable (besides the Cash you hold). Then, since you plan to use this Taxable money to be able to max the 401K contributions, use Tax-Exempt Bonds to fund living expenses and direct all new contributions to Bonds in 401K and Roth IRA. Eventually - for new contributions - you can add Vanguard Institutional Index (.04%) in the 401K and Vanguard Total International in the Roth IRA.

I hope that helps.

[retiredjg]

I agree with Landy's idea. I'd head that direction now, but wait to sell the Wellesley in June for the lower tax rate.

If you want the small cap tilt, you can use either a tax-managed small cap or a small cap index in the taxable account (in place of some total stock market). For the present, you don't need the extended market at all (if you use Landy's idea) but when/if you do need it, that could be held in taxable as well

I would hold off on REIT until you have the extra tax-advantaged space to hold it.

[diceman]

Jason,

Taxable
16% Vanguard Interm-Term Tx-Ex Adm (VWIUX)
25% Vanguard Total International Stock Adm (VTIAX)
40% Vanguard Total Stock Market Adm (VTSAX)

401K
8% Dodge & Cox Income (.43%)
https://www.dodgeandcox.com/incomefund_character.asp

Roth IRA
11% Intermediate Bond Index VBILX
https://personal.vanguard.com/us/funds/ ... =INT#tab=2

Landy, Thank you for laying out this simple portfolio . Would there be any benefit keeping my company stock which would equate to 3% of the total portfolio? It has some upside as a mid cap financial. Or is having at least 5% of an asset class/tilt the minimum to be worth keeping or building on?

If you want the small cap tilt, you can use either a tax-managed small cap or a small cap index in the taxable account (in place of some total stock market). For the present, you don't need the extended market at all (if you use Landy's idea) but when/if you do need it, that could be held in taxable as well

retiredjg, I appreciate you taking the time to respond as well. What is the max tilt % of Vanguard Tax-Managed Small Cap Adm (VTMSX) I should target? I agree my REIT % currently is not large enough in the relation to the whole portfolio. Probably the same could be said of my company stock, as well.

Jason

[YDNAL]

Landy, Thank you for laying out this simple portfolio . Would there be any benefit keeping my company stock which would equate to 3% of the total portfolio? It has some upside as a mid cap financial. Or is having at least 5% of an asset class/tilt the minimum to be worth keeping or building on?

Jason, I find that a 3% allocation to anything does NOT matter - one way or the other. Some people like to use some money as "gambling" money, if you will, but I don't.

retiredjg, I appreciate you taking the time to respond as well. What is the max tilt % of Vanguard Tax-Managed Small Cap Adm (VTMSX) I should target?

TM Small Cap can be used IF:
1. You don't use the Total Stock Market approach thus you should *complete* the S&P 500 - that's not what I proposed previously.
2. You want to overweight Small Caps even when holding Total Stock Market - that is something that could provide added return/risk, but we just don't know.

I agree my REIT % currently is not large enough in the relation to the whole portfolio. Probably the same could be said of my company stock, as well.

See my first response.

[retiredjg]

What is the max tilt % of Vanguard Tax-Managed Small Cap Adm (VTMSX) I should target?

Opinions vary.

I would probably not set up anything smaller than a 5% slice. Whether that is 20% of your stocks or 50% of your stocks will depend on how large your stock slice is.

With 40% of your portfolio in US stocks, 35 TSM/5 Small seems a reasonable place to start to me. This is just a little tilt. I suspect many would consider it too little and would go to 30/10. Some might even go 25/15 or 20/20 but in my mind, that would be for someone with a lot of experience, not someone who is starting out.

Remember that we don't really know if tilting to small cap is going to juice your returns or not. It has in the past. That might not continue.

[diceman]

Jason, I find that a 3% allocation to anything does NOT matter - one way or the other. Some people like to use some money as "gambling" money, if you will, but I don't.

retiredjg, I appreciate you taking the time to respond as well. What is the max tilt % of Vanguard Tax-Managed Small Cap Adm (VTMSX) I should target?

TM Small Cap can be used IF:
1. You don't use the Total Stock Market approach thus you should *complete* the S&P 500 - that's not what I proposed previously.
2. You want to overweight Small Caps even when holding Total Stock Market - that is something that could provide added return/risk, but we just don't know.

I definitely like your initial proposal holding TSM, Total International, and VWIUX in taxable; VBILX in Roth; and exchanging VINIX for Dodge and Cox Income in my 401k.

Opinions vary.

I would probably not set up anything smaller than a 5% slice. Whether that is 20% of your stocks or 50% of your stocks will depend on how large your stock slice is.

With 40% of your portfolio in US stocks, 35 TSM/5 Small seems a reasonable place to start to me. This is just a little tilt. I suspect many would consider it too little and would go to 30/10. Some might even go 25/15 or 20/20 but in my mind, that would be for someone with a lot of experience, not someone who is starting out.

Remember that we don't really know if tilting to small cap is going to juice your returns or not. It has in the past. That might not continue.

Yes, past performance is not an indicator of future performance, however, I am leaning to adding some TM Small Cap tilt to my portfolio. I think a max of 30/10 tilt would be the most risk I would take at this time. That said, I see equities pulling back sometime this year so I might be more comfortable with 25/5. I realize that market timing is tough to gauge........

Would there ever be a time when I would add Small Cap Value Index to my Roth?

Thanks again to the both of you. J

[retiredjg]

Would there ever be a time when I would add Small Cap Value Index to my Roth?

If you want to tilt to both small and value, why not just use only small cap value?

It's not the very best choice for taxable, but it has done OK there for awhile. At least that's what I understand.

[diceman]

Thank you again for all the help. If I wanted to keep one account at Fidelity, what would be the equivalent of the Total Stock Market and Total International Stock Mkt?

Jason

[ignatz]

Thank you again for all the help. If I wanted to keep one account at Fidelity, what would be the equivalent of the Total Stock Market and Total International Stock Mkt?

Jason

At Fidelity, here are some choices:

Fidelity Spartan Total Stock Market FSTMX; ER .10

Fidelity Spartan International Index FSIIX; ER .20

You could also buy Vanguard ETFs for Total Stock Market (VTI) and Total International (VXUS or maybe VEU) at Fidelity for 7.95 per trade.

Or you could buy iShares ETFs for Total Stock Market (ITOT) and Total International (IXUS) at Fidelity for no commission.

[retiredjg]

Thank you again for all the help. If I wanted to keep one account at Fidelity, what would be the equivalent of the Total Stock Market and Total International Stock Mkt? Jason

If you want to use mutual funds, Spartan Total Stock should be essentially identical to Vanguard's Total Stock.

The international market is not as simple. Fido doesn't have a fund that follows the same index as Vanguard's Total International. They do have a (relatively) new fund that is a reasonable substitute - Spartan Global except US Index. This fund is essentially the same as the Vanguard fund except it does not contain small cap stocks. If you want the complete international market in one fund, use the Vanguard fund at Vanguard or use the iShares ETF (IXUS) at Fido. These follow the same index and should be essentially identical.

I'm suggesting you should not pay a transaction fee (even $7.95) to buy the Vanguard ETF (VXUS) at Fido unless you only trade once or twice a year. And, as I understand it, if you sell an ETF and buy another ETF, that is 2 transactions (2 x $7.95). If that is correct, it does not take a lot of trades to have high expenses.