Portfolio critique

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Portfolio critique

Postby Streptococcus » Sun Mar 24, 2013 5:52 pm

Hello!
I am new to investing. After a 1 year learning process during which I read about 25 books, I became a disciple of the FF 3 factor model; I would really appreciate to have the seasoned investors in this forum critique my portfolio.
Here it is:
Age 39;
Stocks/Bonds: 70/30 with 40% international allocation

1. 403b account: There is an awful choice of funds. How can I max out my 403b to 22,500 a year, including my employers match, with the following limited choice of funds?
15% spartan US bonds index - exp ratio 0.17
15% Blackrock inflation protection bond - ER 0.48
4% Fidelity real estate inv - ER 0.84

2. Roth 403b: I do not qualify for roth IRA and my employers Roth 403b has a limited choice of funds. But I want to take advantage of tax free growth
15% Spartan extended market index - ER 0.07

3. Taxable accounts
15% vanguard 500 index fund - ER 0.17
4% vanguard small cap value - ER 0.35
4% ishare microcap ETF - ER 0.69
10% vanguard pacific stock index - ER 0.26
10% vanguard europe stock index - ER 0.26
8% vanguard emerging market index - ER 0.33

I know, these are many accounts; I would have preferred to adopt the lazy portfolio philosophy but I have to take advantage of my 403b employer's match and I want tax free growth through my roth 403b. How do I combine these needs with simplicity? Please be brutally honest.
many thanks in advance
Strep
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Re: Portfolio critique

Postby livesoft » Sun Mar 24, 2013 6:32 pm

Are these things you have invested in at the moment? Or are they things that you have just decided on and need to implement?

A typical FF 3-factor portfolio around here is quite simplified:
a. Pick equities/bonds split
b. Of equities, just use 4 funds equally weighted to start with: Total US Stock Market Index, Small-cap value index, Total Int'l Stock Market Index, Small-cap int'l index.
c. Add the bond funds you want.

So you would end up with 5 funds or maybe 6 funds.

Look in your taxable account: You have only one of the above funds.

As for your tax-advantaged accounts, I used to have extended market until a recent rebalancing move, but it is a fine fund that would cover the same area as the small-cap value index fund.
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Re: Portfolio critique

Postby Occupier » Sun Mar 24, 2013 6:32 pm

I would substitute Total US Stock Market and Total International for the 500 and three international funds in taxable and call it done. Mostly I would do this for tax effiency and simplicity. Dave
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Re: Portfolio critique

Postby bkkchris » Sun Mar 24, 2013 11:09 pm

Based off the great advice on this site I am moving towards what livesoft basically recommended above.

20% Total bond (BND) - i401k
20% Total US (VTI) - i401k/Taxable
20% Small-cap Value (VBR) - i401k/Taxable
20% Total Int (VXUS) - Taxable
20% Small Cap Int (VSS) - Taxable

Easy to maintain and balance. Once my portfolio gets to within 5% of the above, I may tweak my allocation slightly to either favor US a bit more or reduce the small tilt slightly, but this is the basic plan.
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Re: Portfolio critique

Postby Streptococcus » Mon Mar 25, 2013 8:41 am

Livesoft, bkkchrist, occupier, Thank you very much for the precious guidance.

Livesoft, I have not implemented the portfolio yet, but I plan to do so starting april 1st. Is an equal allocation of equities efficient? Rick Ferri wrote somewhere in this forum that it was not, that it was better to have a core total stock index and add small value and microcap according to risk tolerance. That's what I'm trying to do.

Occupier, can I replace vanguard 500 with vanguard total stock in my taxable if I already have spartan extended market in my roth? Wouldn't there be a midcap redundancy? I dont want to have a midcap overexposure because of their high correlation with large caps.

Also, according to Ferri, it is better to have Europe and pacific indexes separated owing to the fact that the developed market funds tends to overweight on one side, reducing the exposure to the other. Does that occur with the total international index?

How are Europe and Pacific stock indexes together less tax efficient than total international stock index?
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Re: Portfolio critique

Postby Occupier » Mon Mar 25, 2013 10:31 am

The reason for the suggestion to stick with the fidelity small was costs. Also tax placement because VBR is not super tax efficient. My opinion is that when you own separate European and Pacific stock indexes you trade more rebalancing than you would if you just had total international. Hence not tax inefficient. Also I believe the regional indexes don't have emerging. I really don't have a problem with your final plan. The pursuit of supposed investment perfection is not the goal, just a good working portfolio. Dave
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Re: Portfolio critique

Postby Streptococcus » Mon Mar 25, 2013 10:39 am

Thanks Dave, your point makes a lot of sense to me.
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Re: Portfolio critique

Postby Twins Fan » Mon Mar 25, 2013 10:47 am

It seems you may be selling your 403b fund choices a bit short. The ones you listed have very low/reasonable ERs. You might want to list all the funds available to you there, so folks know all options available to you.

I think the other recommendations about total stock and total international had more to do with your want for simplicity than any differences in tax efficiency.

Also, how much do you plan to contribute to taxable each year? You say, new to investing, so I'm assuming you don't have anything invested at this point. The way you have the percentages, you will max out both 403b accounts at $28,000/year and have an equal amount to put into taxable each year? Along those lines, what do you have saved up now? Will that be going into taxable? I.E. some more info on your situation would be helpful.

You seem to have a very good plan, but it could be simpler. If that's what you want? It seems you might be chasing the "perfect" plan. JMHO

What's that saying about, while chasing a perfect plan one might pass up a perfectly good one? Or, something like that. :happy
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Re: Portfolio critique

Postby Peter Foley » Mon Mar 25, 2013 11:08 am

I would suggest a slightly simplified version of what you are proposing. If your plan is like mine, you have to split your annual $22,500 between your regular 403b and your Roth 403b. Keeping that in mind:

You proposed:
1. 403b account: There is an awful choice of funds. How can I max out my 403b to 22,500 a year, including my employers match, with the following limited choice of funds?
15% spartan US bonds index - exp ratio 0.17 I would increase this to 17%.
15% Blackrock inflation protection bond - ER 0.48 I would increse this to 17%
4% Fidelity real estate inv - ER 0.84 I would eliminate this.
2. Roth 403b: I do not qualify for roth IRA and my employers Roth 403b has a limited choice of funds. But I want to take advantage of tax free growth
15% Spartan extended market index - ER 0.07 This is fine. Keep it in mind when eliminating duplication in taxable.
3. Taxable accounts
15% vanguard 500 index fund - ER 0.17 Use Vanguard Total Stock Market instead. Increase to 25%.
4% vanguard small cap value - ER 0.35 Eliminate as this overlaps Roth 403b
4% ishare microcap ETF - ER 0.69 Eliminate for simplification.
10% vanguard pacific stock index - ER 0.26 Use Vanguard Total International instead.
10% vanguard europe stock index - ER 0.26 Use Vanguard Total International instead.
8% vanguard emerging market index - ER 0.33 Reduce this to about 5%-6% to complete equity allocation.


This get you close to what the others have recommended. There seems to be overall concensus toward some simplification.
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Re: Portfolio critique

Postby livesoft » Mon Mar 25, 2013 11:19 am

Streptococcus wrote:Livesoft, I have not implemented the portfolio yet, but I plan to do so starting april 1st. Is an equal allocation of equities efficient? Rick Ferri wrote somewhere in this forum that it was not, that it was better to have a core total stock index and add small value and microcap according to risk tolerance. That's what I'm trying to do. I would not bother with microcaps. Waste of time. You don't have to do everything Mr Ferri says, but you don't have to do anything I say either.

Occupier, can I replace vanguard 500 with vanguard total stock in my taxable if I already have spartan extended market in my roth? Wouldn't there be a midcap redundancy? I dont want to have a midcap overexposure because of their high correlation with large caps.You should have NO PROBLEM exchanging out of spartan extended market in your Roth. Since you said Spartan, that pretty much means your Roth is at Fidelity. You should have NO PROBLEM moving your Roth from Fidelity, too. (Full disclosure: I use Fidelity for my 401(k).) Or use something like IJS at Fidelity to get small-cap value.

Also, according to Ferri, it is better to have Europe and pacific indexes separated owing to the fact that the developed market funds tends to overweight on one side, reducing the exposure to the other. Does that occur with the total international index?That's the old Ferri. You need to get up to 2013. :)

How are Europe and Pacific stock indexes together less tax efficient than total international stock index?Euro and Pac are missing Canada, emerging markets, and small-caps. In the old days, total int'l did not have these. Nowadays, it does (and so do some other int'l funds). Basically, times have changed, so one has to stay abreast of current developments.
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Re: Portfolio critique

Postby Streptococcus » Mon Mar 25, 2013 11:54 am

Peter and twins fan, thanks so much for your advices

Twin fan,
Yes, I'm new to investing. I'm only a few years into my career and I have a 8 month emergency fund. I also have a couple of accounts that I can tap for short term urgencies. I've had a 15 year 285K mortgage for the past year, in which I have 37K equity right now.
My plan is to invest 50K a year for at least 20 years. in a nutshell, get a million to the market over a 20 year periods. I really appreciate the constant reminder that I need a simpler, workable plan, not the perfect one.

I plan to max out my 403b to 22,500/ year (that includes about 6000 a year of employer's match) and invest 27,500 in taxable and roth 403b. My big problem was the fact that my 403b and roth 403b only have 4 low cost indexes (spartan 500, extended market, spartan us bond and spartan international). And i know that a 403b is not the best location for extended market and international investing, but I considered having them in as a rebalancing tool. But that would go against simplicity.

My 403b contains the following funds
1. Fidelity freedom 2020 through 2050
2. fid equity income ER 0.68
3. spartan 500 ER 0.07
4. Spartan extended market ER 0.07
5. Fid diversified international ER 1.01
6. Spartan international index ER 0.17
7. Pimco low duration fund (pldax) ER 0.71
8. Spartan us bond index ER 0.17
9. Blackrock inflation protected bond fund ER 0.48
10. Fid emerging market ER 1.09
11. Fid europe ER 0.83
12. Fid pacific ER 1.28
13. Fid real estate ER 0.84
There are other dozens of managed funds with ER ranging between 1-1.5
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Re: Portfolio critique

Postby Streptococcus » Mon Mar 25, 2013 11:57 am

Thank you livesoft, it is unbelievable how things change fast in this business
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Re: Portfolio critique

Postby Streptococcus » Mon Mar 25, 2013 12:07 pm

Livesoft said "You should have NO PROBLEM exchanging out of spartan extended market in your Roth. Since you said Spartan, that pretty much means your Roth is at Fidelity. You should have NO PROBLEM moving your Roth from Fidelity, too. (Full disclosure: I use Fidelity for my 401(k).) Or use something like IJS at Fidelity to get small-cap value"

What do you mean by exchanging out of spartan extended market? Or moving my roth from fidelity? According to my HR, I can only invest in a roth 403b through fidelity. And income wise, i do not qualify for roth IRA.
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Re: Portfolio critique

Postby Twins Fan » Mon Mar 25, 2013 12:23 pm

Streptococcus wrote:Twin fan,
Yes, I'm new to investing. I'm only a few years into my career and I have a 8 month emergency fund. I also have a couple of accounts that I can tap for short term urgencies. I've had a 15 year 285K mortgage for the past year, in which I have 37K equity right now.
My plan is to invest 50K a year for at least 20 years. in a nutshell, get a million to the market over a 20 year periods. I really appreciate the constant reminder that I need a simpler, workable plan, not the perfect one.


I think you will do fine with that plan!! You and I are the same age, I am new to all this and learning as well, and I WISH I was in a position to save like that!! :sharebeer
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Re: Portfolio critique

Postby Streptococcus » Mon Mar 25, 2013 3:21 pm

Thanks Twins fan
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Re: Portfolio critique

Postby livesoft » Mon Mar 25, 2013 5:38 pm

Streptococcus wrote:Livesoft said "You should have NO PROBLEM exchanging out of spartan extended market in your Roth. Since you said Spartan, that pretty much means your Roth is at Fidelity. You should have NO PROBLEM moving your Roth from Fidelity, too. (Full disclosure: I use Fidelity for my 401(k).) Or use something like IJS at Fidelity to get small-cap value"

What do you mean by exchanging out of spartan extended market? Or moving my roth from fidelity? According to my HR, I can only invest in a roth 403b through fidelity. And income wise, i do not qualify for roth IRA.

You should probably NOT have a Roth 403(b), but should use a TRADITIONAL 403(b) instead.

You should have a separate Roth IRA at a financial institution of your choice.

Streptococcus wrote:My big problem was the fact that my 403b and roth 403b only have 4 low cost indexes (spartan 500, extended market, spartan us bond and spartan international). And i know that a 403b is not the best location for extended market and international investing, but I considered having them in as a rebalancing tool. But that would go against simplicity.

This is not a big problem and in fact is not a problem at all. Your 403(b) is the best location for all your assets (where did you get the idea otherwise?), but you cannot put everything in your 403(b) because of contribution limits. That means some things have to go elsewhere.

In my 401(k) I use the Spartans: S&P500, extended market (when needed), us bond index, and global ex-US index (used to be international) and do all rebalancing in my 401(k). You seem to appreciate that you can do the same thing. Note that your Spartan International (FSIVX) is a large-cap developed index fund which is missing Canada, emerging markets, and small-cap foreign.

So my initial advice still stands. Your chosen name here suggests someone who works in Infectious Diseases, so a researcher, physician, or pharmacist. You should be able to figure this out then, but perhaps become less detailed oriented and don't follow a recipe in 25 books. Instead, come up with your own recipe using just a few funds based on the principles found in those books.

For simplication purposes, you can equate in your 403(b):
S&P500 = large-cap index = total market index
Extended market = small/mid-cap index = small-cap value index
US Bond index = US bond Index = US Bond index
Int'l Index = large-cap Int'l index = total int'l index.
It's not perfect, but it is just fine for someone who needs to be simple. I can help you get complicated if you want, but start simple first.
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Re: Portfolio critique

Postby Streptococcus » Tue Mar 26, 2013 6:48 pm

Thank you everyone for your recommendations on my portfolio. Still have 5 days to make the investments, so I would still call it a draft.

The final portfolio, which is much simplified, will look as follow:
75/25 stock/bonds with 40% international allocation

24% Fidelity Spartan Total Market index - TAXABLE: I wanted to go with vanguard but I just can digest the fact that apple has 3.17% of that big fund. when apple sneezes, the whole fund gets the flu. Fidelity comes allotted a generous 2.51%, which is not much different from vanguard, but again, its ER is 0.10% versus 0.17% for Vanguard. many little wins make a big one.

24% Vanguard Total internations stock index -TAXABLE: I don't like the fact that UK, Japan, Australia, France, Canada, Germany and Switzerland account for 63% of this fund. I would not call that diversification, considering that most of these countries are in Europe. and the emerging market is marginalized. But I could not find a better fund. I even considered separating the international fund into 3 different funds, Europe, Pacific and emerging markets, but Vanguard Pacific fund, for instance is 85% Japan and Australia.

6% Vanguard emerging market index - TAXABLE: to get a tilt into the risky and therefore rewarding emerging market

6% Spartan 500 index - 403b: It is cheap (ER 0.07) and I will use it as a rebalancing tool in my 403b
12.5% Spartan total US bond - 403b
12.5% Blackrock Inflation protected bond fund - 403b

15% Fidelity Extended Market index fund - Roth 403b: cheap (ER 0.07), small cap tilt and opportunity to have tax free growth

I still come up with 7 funds
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Re: Portfolio critique

Postby livesoft » Tue Mar 26, 2013 6:53 pm

So you have abandoned the FF 3-factor portfolio idea? :)

Also your putative difference in Apple in FSTMX and VTSMX is probably just because of different dates the funds reported their portfolios. They probably have the same fraction of Apple within experimental error.

I don't like the fact that UK, Japan, Australia, France, Canada, Germany and Switzerland account for 63% of this fund. I would not call that diversification, considering that most of these countries are in Europe. and the emerging market is marginalized.

I suppose the Japanese, Australians, and Canadians would argue with you about them being in Europe. But what you wrote is true: 4 of the 7 countries you mentioned are in Europe. In the world economy are you disappointed that Africa and South America are not big players?
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Re: Portfolio critique

Postby Streptococcus » Tue Mar 26, 2013 7:25 pm

Livesoft,
For practical reasons, I had to abandon the FF 3 factor portfolio. As I was constantly reminded, this business is not about creating your perfect portfolio but one that works. I hope that it'll work for me.

Also, being european myself, I could hardly mistakenly include Canada, japan and Australia in Europe :happy I am very familiar with the social, political and economical situation in Europe and I am firmly convinced that our Euro is an agonizing dude. There is no way he is going to survive. There is no way most european countries will continue to afford the socialize State, with the aging population, the shrinking working force and the high cost of living there. This is slow agony that will be followed by the inevitable death of the Euro. A crisis will ensue, our indexes will go deep south and then, there will be a recovery. Overall, I'm optimistic because I'm in this business for the long term (20-30 years). I just don't like the fact that my International fund is heavy on that Europe that I see as the culprit of the next big financial crisis.
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Re: Portfolio critique

Postby hoppy08520 » Tue Mar 26, 2013 7:53 pm

Streptococcus wrote:24% Fidelity Spartan Total Market index - TAXABLE: I wanted to go with vanguard but I just can digest the fact that apple has 3.17% of that big fund. when apple sneezes, the whole fund gets the flu. Fidelity comes allotted a generous 2.51%, which is not much different from vanguard, but again, its ER is 0.10% versus 0.17% for Vanguard. many little wins make a big one.

As livesoft mentioned, this is indeed because of the dates. As of right now, M* has 1/31/2013 for Fidelity, 12/31/2013 for Vanguard. The two funds are going to be extremely similar since both track broad-market indexes. If you don't like the Vanguard fund because it has too much Apple, well, the Fidelity fund is the same.

The reason Vanguard had Apple at 3.17% on 12/31/2013 is because Apple was approximately 3.17% of the US stock market and that fund tracks the US stock market index. And there's an index for that. And Vanguard tracks that index. That's just how index funds work.

Streptococcus wrote:24% Vanguard Total internations stock index -TAXABLE: I don't like the fact that UK, Japan, Australia, France, Canada, Germany and Switzerland account for 63% of this fund. I would not call that diversification, considering that most of these countries are in Europe. and the emerging market is marginalized. But I could not find a better fund. I even considered separating the international fund into 3 different funds, Europe, Pacific and emerging markets, but Vanguard Pacific fund, for instance is 85% Japan and Australia.

The fact that those countries are 63% of the fund is because they make up 63% of the investable international (non-US) stock market. Again, that's how index fund works.

I'm sure somewhere in those 25 books there's a part about the benefits, and criticisms, of investing in total market index funds. I just think it's important for you, if you are going to start a total-market portfolio, to not do so while holding your nose, or you won't stick with it and you won't be happy with it. You should understand the rationale behind total-market investing and embrace it or not. This investing philosophy means you're not trying to pick winners or losers -- you're spreading your money proportionally across the investable market.

All that being said, many people start with total-market investing as a base and then tilt/overweight one or more regions/sector/class or another, for various reasons. If that works for you, then go for it but understand why you're doing it and what you want to accomplish.
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Re: Portfolio critique

Postby Streptococcus » Tue Mar 26, 2013 8:18 pm

Hoppy08520, excellent point. This is precisely why I love this forum
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Re: Portfolio critique

Postby hoppy08520 » Tue Mar 26, 2013 8:32 pm

Streptococcus wrote:[Fidelity Total US Stock Market] ER is 0.10% versus 0.17% for Vanguard. many little wins make a big one.

One more thing I forgot to mention about the Vanguard fund -- as soon as your fund balance gets to $10,000, then the Vanguard Total Stock Market Index Fund can convert to Admiral share class which is 0.06% ER. Same fund, but lower expenses. You pay 0.17% ER only when your balance is between $3,000 and $9,999.
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