Longtime Lurker - First Portfolio Post

[NewInvestor1]

Hi all,

I have been reading the boards for a long time and have been trying to implement the advice that you give to others and each other. I wanted to post a snap shot of the current state of my portfolio in the hopes of advice on any changes to contemplate or reassurance nothing is out of whack.

Thanks for taking time out of your day to review and comment.

Emergency Funds: No. I always have around 3k in my checking and any money over that goes straight into taxable account.

Debt: None - I rent. Paid off car. No student loans.

Tax Filing Status: Single

Tax Rate: 28% Federal, 7.5% State

Income: $130k/year

Age: 30

Current Portfolio

Vanguard Taxable Account (~100k)
Wellington 15%
Extended Market 7%
REIT 5%
Healthcare / Energy 5%
FTSE ex-US All World Small Cap 7%

Traditional 401(K) Account (~50k)
PIMCO Total Return 9%
Vanguard Extended Market 12%
Vanguard Total International 10%

Roth IRA (~50k)
S&P 500 Index 30%

Annual Contributions

Next Year:
$13K for 401k Account, company matches 5% of annual pay
$0 for Roth IRA, casue of MAGI contribution limits
The rest of the money I save after living and entertainment expenses goes straight into my taxable. Big fan of continual invetment each month to apply dollar cost averaging method.

I do not have specfic questions. Just looking for more experienced bogleheads to read the snap shot and just give their brief opinion ie., Soild or not enough diversification, too much slicing, appropriate risk, etc.

Thanks guys.

[NYBoglehead]

Well you certainly have a lot of assets for 30, so congrats on that. My thoughts:

-I would keep more than 3k for emergencies. If you have a stable job maybe you only need 3 months liquid instead of the usually advised 6, but I would want a larger emergency fund if I were you. You don't want to be forced to sell if the market tanks. And you don't want to find yourself out of a job and liquidating investments that you spent more to buy than you are getting to sell.

-I don't like Wellington in taxable because of the bond income. Ditto for REITs, they are taxed as ordinary income and not qualified dividends, so you are paying more in taxes than necessary.

-If you don't have any rollover IRAs you can contribute to a backdoor Roth IRA and get another 5.5k into tax-advantaged space.

Overall you are doing awesome, you are able to save a ton of money and already have a large balance. Having Wellington and REITs in taxable is not very tax-efficient but with 200k at 30 you might not particularly care.

[hoppy08520]

Hello and welcome to the forum. A few thoughts:

• You can do backdoor Roth IRA even if you're over MAGI limit. See https://personal.vanguard.com/us/insigh ... 3-03082012 and https://personal.vanguard.com/us/insigh ... hannel=IPF and wiki page "Backdoor Roth IRA".
• You're better off holding REIT and Wellington in tax-advantaged accounts since REITs and high-yield bonds (in Wellington) are not ideal for taxable accounts. See "Principles of Tax-Efficient Fund Placement" page in wiki. Depending on tax considerations, if you want all these holdings, you should reverse this: 500-index in taxable and Wellington/REIT and Small-cap international in Roth IRA.
• Looks like you have 15% of your portfolio in bonds (when you include 1/3rd of Wellington). On the aggressive side but not by much, as long as you're aware of that.
• You don't mention fund expenses or choices in 401(k) plan. We might be able to steer you to the best funds with that information. Given that you have Vanguard funds in your 401(k), though, you probably are in good shape.
• Why the PIMCO bond fund in 401(k)? Is there a Vanguard bond fund? There are a number of arguments back and forth about that fund. You can search the ticker symbol for the fund if you want to read them and learn more.

[NoVa Lurker]

Congrats on what appears to be a really strong, responsible personal financial situation.

What jumps out to me is that you've got $100k in taxable. What's on the horizon for you? Marriage and kids, at some point in your 30s? Or is that not what you want? Do you want to buy a home, or are you happy renting? Any other big purchases, or risks? You don't have to answer these questions in this thread - but these are the things you should be thinking about.

The problem for many people in your situation is that they treat all of their savings as if it is part of a long-term retirement portfolio, even if a big chunk of it is actually medium-term or even short-term savings. Obviously, if you have money that is going to be used for a home downpayment in a few years, you don't want to be investing it in all-world small cap, etc.

[325e]

Are you only allowed to put 10% into 401k, or is that your choice? I would max that out first. You can always roll it into a roth and pay taxes but not penalties if you need access to it. And then you have investments making tax free returns. A 401k isn't that hard to get a hold of if you need to.

As others have said:
Tax efficient into the taxable, tax inefficient in the 401k.
Imagine that 100k in your taxable went to 50k, and you lost your job. Could you survive without touching it? If not, beef up the emergency fund some.
Backdoor roth
And - what are you trying to do? Short term goals, long term goals. Write those down and then adjust accordingly.

[NewInvestor1]

Hey guys,

Thanks for taking the time to comment. These past couple of months I have been trying to apply the above advice and sharpen my portfolio. I would love it you guys could comment on the new portfolio - did I apply the reccomendations correctly and other adjustments I need to make. Also, thanks for telling me about backdoor Roth. What a sweet trick!

I do not really have any specific goals in mind. No serious gf so starting a family and buying a house are not really a concern of mine. Just want to be dilligent in saving and investing to give me flexibility and freedom as I get older.

Emergency Funds: $8k

Debt: None

Tax Filing Status: Single

Tax Rate: 28% Federal, 7.5% State

Income: $130k/year

Age: 30

Current Portfolio - Percentages map to each account, not whole portfolio

Vanguard Taxable Account (100k)
Energy 5%
Healthcare 10%

Total Stock 25%
Extended Market 25%

Developed Index 7.5%
Emerging Market 7.5%
FTSE ex-US Small Cap 10%

High Yield Tax Exempt 5%
High Yield Corporate 5%

Traditional 401(K) Account (65k)
PIMCO Total Return 15%
Vanguard Instituinal Index 25%
Vanguard Extended Market 30%
Vanguard Total International 30%

Roth IRA (65k)
Global ex-US REIT 10%
US REIT 15%
Total Stock 75%

[Laura]

I agree you are off to a great start but you decided to slice and dice your portfolio into too many pieces in my opinion. Going with broader index funds then tilting is probably a better and easier way to go.

I agree with the other posters that you should slow down investing temporarily and build up a cash emergency fund. You may not be worried about having cash now but when you need it you may not be able to get it easily. Just a few years ago many people had credit cards canceled just when they needed access to cash. This is sort of like having insurance and it is a good idea.

In terms of your portfolio, I suggest you look at far fewer funds.

Vanguard Taxable Account (100k)
Total Stock 25%
Total Intl Stock Market (holds both developed and emerging markets)

Traditional 401(K) Account (65k)
PIMCO Total Return 15%
Vanguard Institutional Index 25%
Vanguard Extended Market 30%
Vanguard Total International 30%

Roth IRA (65k)
Global ex-US REIT 10%
US REIT 15%
small cap value

I don't know how much new money is going into each of your accounts each year so I cannot give you a specific suggestion on percentages and new contributions. Hopefully this gives you a suggestion on how to streamline this a bit. I wouldn't hold sector funds like energy or health in taxable. I also wouldn't hold small cap or mid cap because as companies grow the index is forced to sell them as they become large companies which triggers the possibility of taxes. Bonds also shouldn't be held in taxable if you have room in tax advantaged accounts. One of your bond funds is taxable and while the other is tax exempt, it will come with lower returns because of that. You should receive a higher return by investing in taxable bonds in a tax advantaged account.

I suggest you go ahead and make these changes now before you have more money in your portfolio.

Laura

[NewInvestor1]

Thanks Laura. I have a couple of questions and comments.

1. Prevailing advice here is extreme focus on tax efficiency and I understand the concept. Bonds in tax advantaged is optimal. But in the real world, you have quick access to your taxable account first. So shouldn't you have some bonds in there for the sake of lower volatility? That was my logic for the high yield tax exempt fund. Do you feel any type of bond is appropriate for a taxable account?

2. For Total International vs. Developed + Emerging Market + FTSE ex-US small cap is there a huge difference besides the majesity of simplicity? Like tax efficiency consequences or something else? I ask this becuase pyschologically I like have more control over exact pieces of my portfolio. I am young and in a finance related field. I understand that index beat 90% of active management activity. But psychologically I do not think I can handle something like the three fund portfolio. It would feel too much like auto pilot and me not doing enough to take a hand in my retirement planning. Again this is just a psychological issue. So if you think the only benefit is simplicity than is it ok to dice this way?

3. I will focus on building up a cash reserve of about $15k. No arguement there.

4. It seems no one here likes to tout Extended Market as a core fund. Why is this? I checked with the small cap fund. Lower turnover rate, more stocks and both small/mid companies. It seems like at least an adequate choice vs small cap value, small cap growth or small cal index fund.

5. As for the Energy and Healthcare bets, I do not think I will ever be able to eradicate them completely from my portfolio. I have accepted buying individual stocks and playing with options is too time consuming and difficult to consistently make money. But I have to speculate somwhere at some time. And yes I know that past returns are no guarnatee for future results, but the funds have compartively done well in the past. And their ER is so low compared to other sector focused funds.

To sum up - can you ever hold bonds in taxable just for the sake of lower volatility? Is manually breaking out the total international just a pain or fundamentally incorrect? Why not more widespread love for extended market index?

[Laura]

newinvestor1,

Let me try to answer your questions.

1. Prevailing advice here is extreme focus on tax efficiency and I understand the concept. Bonds in tax advantaged is optimal. But in the real world, you have quick access to your taxable account first. So shouldn't you have some bonds in there for the sake of lower volatility? That was my logic for the high yield tax exempt fund. Do you feel any type of bond is appropriate for a taxable account?

Sure, there can be bond funds appropriate for taxable and your tax exempt fund can be one of them. However, you give up return. If you have an emergency fund you may not need bonds in taxable. If you want bonds, look at savings bonds. At treasurydirect.gov you can buy up to $10k in I bonds which are inflation protected and also tax deferred since you are not taxed on gains until you redeem the bonds. You cannot redeem them for the first year so be careful how you do your purchases.

2. For Total International vs. Developed + Emerging Market + FTSE ex-US small cap is there a huge difference besides the majesity of simplicity? Like tax efficiency consequences or something else? I ask this becuase pyschologically I like have more control over exact pieces of my portfolio. I am young and in a finance related field. I understand that index beat 90% of active management activity. But psychologically I do not think I can handle something like the three fund portfolio. It would feel too much like auto pilot and me not doing enough to take a hand in my retirement planning. Again this is just a psychological issue. So if you think the only benefit is simplicity than is it ok to dice this way?

You don't need to do a three fund portfolio but you also need to think about how you do this in a tax efficient manner. Holding all these separate funds in taxable may not be a wise idea. If a country moves from emerging markets to developed, for example, one fund will sell stock and the other will buy it. You end up with the tax bill. If you want to control the different pieces then do it in tax advantaged accounts and just overweight. So you could hold tax efficient Total Intl stock market in taxable and then add emerging markets in a roth to overweight if you believe you want to hold more than the market weight of that particular market.

3. I will focus on building up a cash reserve of about $15k. No argument there.

Good

4. It seems no one here likes to tout Extended Market as a core fund. Why is this? I checked with the small cap fund. Lower turnover rate, more stocks and both small/mid companies. It seems like at least an adequate choice vs small cap value, small cap growth or small cal index fund.

Extended market is one of my favorite funds to use when someone only has a low cost S&P 500 fund in their employer plan. This actually happens a lot and by using that combined with extended market people can hold the entire market. Again, you have the same problem with this meaning a company grows and graduates from a mid cap to a large cap and you hold this in taxable so you end up with a tax bill you can't avoid. It isn't a bad fund but there is a better way to hold the same companies in a total stock market fund in taxable. If you want more than market weighting on mid/small cap then use this fund.

5. As for the Energy and Healthcare bets, I do not think I will ever be able to eradicate them completely from my portfolio. I have accepted buying individual stocks and playing with options is too time consuming and difficult to consistently make money. But I have to speculate somewhere at some time. And yes I know that past returns are no guarantee for future results, but the funds have comparatively done well in the past. And their ER is so low compared to other sector focused funds.

If you want to speculate, do it in your roth or 401k. In a few years if you decide that precious metals is better than health or energy you won't be able to sell these sector bets without incurring a tax liability. It is all about thinking ahead. Many people will hold 5% of their portfolio for this type of betting but do it where it won't cost you.

You are probably thinking that you don't have enough room in your tax advantaged accounts to do all of what I have suggested above and you are probably right today. That won't always be the case so you may need to wait and then add back in some of these other types of accounts once your portfolio grows. This happens to many of us and it isn't a problem.

I hope this answers your questions.

Laura