Need a Fresh Start with Portfolio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Need a Fresh Start with Portfolio

Postby FreshStart » Sat Mar 30, 2013 12:11 pm

I have been investing in many different ways and want to consolidate and have a fresh start now. The posts on this site have been very helpful and would like some targeted suggestions.

Emergency funds: Yes (6 months)
Debt: None
Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Federal, 3.08% State
State of Residence: PA
Age: 41
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 15% of stocks

Total portfolio Mid six-figures

Current retirement assets

Taxable
10% cash (In Cash/CD ready for investing)
3% TRowe Spectrum Growth Fund (PRSGX, 0.8)
8% Bristol Myers Squibb (BMS )
3.5% in QQQ, XOM, JCI, DUK, SE, PFE, BP (each holding is 0.50-0.7% and was accumulated as DRIPS but stopped additional contributions)

His 401k
53% spread across a few funds but want to take a fresh look
Company match: Yes, get full amount

His Roth IRA at Vanguard
10% cash waiting to start investing
Her Roth IRA at Vanguard
10% cash waiting to start investing

3% in I Bond

Contributions

New annual Contributions
$17,500 his 401k (5% employer matching contributions)
$5500 his IRA/Roth IRA
$5500 her IRA/Roth IRA

Available funds:

Funds available in his 401(k)
S&P 500 Index (0.02)
Spartan Total Bond Index (0.05)
Stable Value (0.28)
Small Cap Index (0.04)
Vanguard Total International (0.10)

Trowe Target Retirement Funds
American EuroPac (0.55)
Managed Small Cap (0.7)
Fidelity Growth (0.9)

Funds available in his Roth (Vanguard)
Vanguard funds
Funds available in her Roth (Vanguard)
Vanguard funds

Questions:
1. I want a fresh start and am looking for the best allocation across my 401K, IRA and taxable accounts. I am thinking of buying bonds only in the 401K account. and 100% stocks in IRA. Is this a good strategy ?

2. What should I do with the taxable account to complement my retirement accounts. Should I DRIP more with the above stocks or with new stocks
3. Should I sell TRowe and Stocks and move to index funds/ETFs. I am worried of the tax hit on this change
FreshStart
 
Posts: 4
Joined: Sat Mar 30, 2013 11:57 am

Re: Need a Fresh Start with Portfolio

Postby sometimesinvestor » Sat Mar 30, 2013 6:18 pm

I think you should have a mixture of stocks and bonds in both your 401k and Roth. One reason is that your purchases in your 401k are periodic and thus you are dollar cost averaging which will reduce your chances of a big loss (and also big gain). In your Roth you ought to take advantage of gaps in your 401k.Thus a small investment in Reits and/or TIPS and/or emerging markets in your Roth has appeal.

By having stocks and bonds in both accounts the option of rebalancing easily is available. Euro Pacific Growth is not a bad fund but it may be better to make your international Stock purchases in the Vanguard fund. The decision regarding your taxable account is more about taxes. I assume you have gains in all.I am uncertain how large the distributions are for the Spectrum fund . If you owe a good deal of taxes each year that might suggest a sale. Again Spectrum Growth has been a pretty good fund over timeThe DRIP investments should require a fair amount of time The companies are all sound but if you own individual stocks you should be paying attention.

In your taxable account something like Vanguard's tax managed funds have some appeal.

Finally what is the interest rate paid by the stable income fund. If its over 2.5 % I would make some investment in that (up to a third of your bond investments)
User avatar
sometimesinvestor
 
Posts: 893
Joined: Wed May 13, 2009 7:54 am

Re: Need a Fresh Start with Portfolio

Postby Occupier » Sat Mar 30, 2013 9:30 pm

I don't completely agree with the advice you just got. I often post the order of tax efficiency of asset classes worst to best. It is Taxable bonds, REIT, Small Value, Large Value, Large Blend, International/Emerging due to the foreign tax credit. Ideally you have just Total Stock and/or Total International in taxable, the rest in tax free. In the 401the Spartan bond fund is very low cost which matters a lot when you have an asset class that yields a paltry 2-3% and the Vanguard International is a good deal. I would have the Vanguard Small Cap. Value fund in the Roth and consider that to be my REIT allocation as well - it's 15% REIT. I would dump the high cost fund in taxable and whichever of the stocks your willing to part with after calculating the gains. Also in the 401 the 500 index is low cost it does about the same as a total market fund. I think your international allocation is low. Most have 25% and some equal weight international/Emerging. By market cap they are 55% of the worlds equity markets.

One more thing to consider are small cap stocks such as the Vanguard International/Emerging ETF VSS. A rule of thumb is that by market cap. large stocks are 70%, Mid 20%, and Small are 10%. Some want to overweight small which returns better than large but with greater volatility. So if you held a total market fund, a typical overweight for a person your age would be to have an additional small equaling about 10% Think about whether such an overweight makes sense to you. Over longer periods they will out perform, but they will have the occasional bad year. In the US most hold small value as the only fund to tilt to small. Small growth does not do as well over time. The theory for that is speculators bid up the price of small cap. growth stocks hoping to find the "next Microsoft" which holds their returns down. I think you can work through this general advice into a plan of your own. In your library I recommend any of the Swedroe or William Bernstein books on investing. Dave
Occupier
 
Posts: 284
Joined: Wed Feb 01, 2012 11:21 pm

Re: Need a Fresh Start with Portfolio

Postby tyler_cracker » Sun Mar 31, 2013 2:20 am

1. I want a fresh start and am looking for the best allocation across my 401K, IRA and taxable accounts. I am thinking of buying bonds only in the 401K account. and 100% stocks in IRA. Is this a good strategy ?


sure, seems reasonable.

2. What should I do with the taxable account to complement my retirement accounts. Should I DRIP more with the above stocks or with new stocks


you place the tax-efficient parts of your AA in it. see http://www.bogleheads.org/wiki/Principl ... _Placement.

like most bogleheads, i don't own individual stocks. i would hold TSM and TISM instead.

3. Should I sell TRowe and Stocks and move to index funds/ETFs. I am worried of the tax hit on this change


if you're happy with those investments, then you don't *have* to sell them.

if you do want to change positions, do you have any previous losses you can apply or new losses you can harvest to offset the gains?



i took a crack at a portfolio for you. for simplicity i liquidated the individual stocks; if you want to keep them i suppose you'd count them against your us stock allocation.

15% of 70% is about 11% international, leaving 59% us.

FreshStart wrote:Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 15% of stocks

Taxable
12% TISM <-- 15% of 70%. standard advice is to have more like 30-50% international however.
12% TSM

His 401k
27% Spartan Total Bond Index (0.05) <-- + 3% I Bonds = 30% fixed income allocation
26% S&P 500 Index (0.02)
Small Cap Index (0.04)

His Roth IRA at Vanguard
5% Small Cap Index <-- Optional; see below
5% TSM

Her Roth IRA at Vanguard
10% TSM

3% in I Bond


Contributions

New annual Contributions
$17,500 his 401k (5% employer matching contributions) --> About 30% TBM and the rest S&P 500
$5500 his IRA/Roth IRA --> Small Cap to pair with the S&P 500 contribution in the 401k, rest TSM -- OR -- just TSM
$5500 her IRA/Roth IRA --> TSM


With only an S&P 500 Index available in 401k, I would add some small caps to get a better approximation of TSM. See http://www.bogleheads.org/wiki/Approxim ... ock_Market. This is a small optimization however; if you prefer simplicity, it's unlikely to matter much that you are slightly underweighting mid- and small-caps by holding S&P 500 instead of TSM in your 401k.
User avatar
tyler_cracker
 
Posts: 262
Joined: Sat Dec 03, 2011 3:50 pm
Location: sending out the kicking team

Re: Need a Fresh Start with Portfolio

Postby nedsaid » Sun Mar 31, 2013 11:24 am

I have given a lot of thought about the tax efficiency of investments.

Most folks have the bulk of their investments in tax deferred accounts. I fall into that camp. My take is that these retirement accounts should be invested for maximum return. What you are doing is deferring part of your paycheck now for a paycheck later in retirement. My question to you is, do you want a smaller paycheck in retirement or a larger paycheck? I choose the larger paycheck. So invest in a manner appropriate for your age.

Some folks in this forum have substantial incomes and have large taxable investment accounts and large tax deferred retirement accounts. For these folks, it makes more sense to put stock indexes in your taxable accounts and have the tax deferred accounts stuffed with bonds and REITS.

Tax efficiency of your investments and the proper placement into the correct accounts is something that deserves consideration. Sometimes I think this is a case of the tail wagging the dog. My concern is that putting too many bonds in retirement accounts in the name of tax efficiency will doom those accounts to years of very low returns. Also, your wages are taxed as ordinary income. Pre-tax contributions to Traditional IRA's and Traditional 401k's are deferred wages and when they come out are taxed as ordinary income. You will be taxed at ordinary income rates regardless of the asset mix that you had in those accounts. The tax man could care less if those accounts were "tax efficient" or not. It is still ordinary income. So it makes sense to me to maximize the returns in the accounts.

Again, if you have substantial investments in taxable accounts then the tax efficiency becomes a much bigger factor and these strategies make more sense.

Keep in mind, that health care reform imposes new taxes on investments of higher earners and this complicates the calculations.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2578
Joined: Fri Nov 23, 2012 1:33 pm

Re: Need a Fresh Start with Portfolio

Postby stan1 » Sun Mar 31, 2013 11:42 am

FreshStart wrote:I have been investing in many different ways and want to consolidate and have a fresh start now. The posts on this site have been very helpful and would like some targeted suggestions.


Questions:
1. I want a fresh start and am looking for the best allocation across my 401K, IRA and taxable accounts. I am thinking of buying bonds only in the 401K account. and 100% stocks in IRA. Is this a good strategy ?

2. What should I do with the taxable account to complement my retirement accounts. Should I DRIP more with the above stocks or with new stocks
3. Should I sell TRowe and Stocks and move to index funds/ETFs. I am worried of the tax hit on this change


1) You have some very good choices in your 401K, including Spartan Total Bond Index with an ER of 0.05%. Your approach of using the 401K with that fond fund sounds fine to me.
2) If you are investing for retirement in your taxable account use Total Stock Market and Total International Stock Market and include in your overall asset allocation.
3) I would sell the actively managed fund and the individual stocks if there is a loss or a small long term gain. Don't reinvest any dividends/capital gains distributions. For simplicity I would include these legacy holdings in my domestic equity allocation (meaning I would buy less Total Stock Market that I otherwise would) and monitor them regularly for opportunities to sell at a loss or small gain. When that happens I would replace with Total Stock Market. Yes, I know the fund is a "fund of funds" and has some international funds inside it, but they will account to a trivial portion (less than 1%) of your overall portfolio.
stan1
 
Posts: 3508
Joined: Mon Oct 08, 2007 5:35 pm

Re: Need a Fresh Start with Portfolio

Postby tyler_cracker » Sun Mar 31, 2013 1:16 pm

nedsaid wrote:My concern is that putting too many bonds in retirement accounts in the name of tax efficiency will doom those accounts to years of very low returns. Also, your wages are taxed as ordinary income. Pre-tax contributions to Traditional IRA's and Traditional 401k's are deferred wages and when they come out are taxed as ordinary income. You will be taxed at ordinary income rates regardless of the asset mix that you had in those accounts. The tax man could care less if those accounts were "tax efficient" or not. It is still ordinary income. So it makes sense to me to maximize the returns in the accounts.


i'm a noob so maybe i'm missing something but the way i understand it is all your investments are one big portfolio. you have to hold bonds somewhere and bonds are tax-inefficient so you hold them in tax-advantaged space. the individual return rate from your 401k or your taxable accounts don't matter; the return on the entire portfolio is what matters.

if you don't like holding fixed income in a 401k, where is it that you want to hold these vehicles?
User avatar
tyler_cracker
 
Posts: 262
Joined: Sat Dec 03, 2011 3:50 pm
Location: sending out the kicking team

Re: Need a Fresh Start with Portfolio

Postby FreshStart » Sun Mar 31, 2013 6:05 pm

sometimesinvestor wrote:I think you should have a mixture of stocks and bonds in both your 401k and Roth. One reason is that your purchases in your 401k are periodic and thus you are dollar cost averaging which will reduce your chances of a big loss (and also big gain). In your Roth you ought to take advantage of gaps in your 401k.Thus a small investment in Reits and/or TIPS and/or emerging markets in your Roth has appeal.

By having stocks and bonds in both accounts the option of rebalancing easily is available. Euro Pacific Growth is not a bad fund but it may be better to make your international Stock purchases in the Vanguard fund. The decision regarding your taxable account is more about taxes. I assume you have gains in all.I am uncertain how large the distributions are for the Spectrum fund . If you owe a good deal of taxes each year that might suggest a sale. Again Spectrum Growth has been a pretty good fund over timeThe DRIP investments should require a fair amount of time The companies are all sound but if you own individual stocks you should be paying attention.

In your taxable account something like Vanguard's tax managed funds have some appeal.

Finally what is the interest rate paid by the stable income fund. If its over 2.5 % I would make some investment in that (up to a third of your bond investments)


Thank you for the insights. I also believe in dollar cost averaging and am considering doing the same with our IRA's, for example investing ~400 per month. The stable income fund's dividend as of last December was 2.3%. I will hold some of it.
FreshStart
 
Posts: 4
Joined: Sat Mar 30, 2013 11:57 am

Re: Need a Fresh Start with Portfolio

Postby FreshStart » Sun Mar 31, 2013 6:22 pm

Occupier wrote:I don't completely agree with the advice you just got. I often post the order of tax efficiency of asset classes worst to best. It is Taxable bonds, REIT, Small Value, Large Value, Large Blend, International/Emerging due to the foreign tax credit. Ideally you have just Total Stock and/or Total International in taxable, the rest in tax free. In the 401the Spartan bond fund is very low cost which matters a lot when you have an asset class that yields a paltry 2-3% and the Vanguard International is a good deal. I would have the Vanguard Small Cap. Value fund in the Roth and consider that to be my REIT allocation as well - it's 15% REIT. I would dump the high cost fund in taxable and whichever of the stocks your willing to part with after calculating the gains. Also in the 401 the 500 index is low cost it does about the same as a total market fund. I think your international allocation is low. Most have 25% and some equal weight international/Emerging. By market cap they are 55% of the worlds equity markets.

One more thing to consider are small cap stocks such as the Vanguard International/Emerging ETF VSS. A rule of thumb is that by market cap. large stocks are 70%, Mid 20%, and Small are 10%. Some want to overweight small which returns better than large but with greater volatility. So if you held a total market fund, a typical overweight for a person your age would be to have an additional small equaling about 10% Think about whether such an overweight makes sense to you. Over longer periods they will out perform, but they will have the occasional bad year. In the US most hold small value as the only fund to tilt to small. Small growth does not do as well over time. The theory for that is speculators bid up the price of small cap. growth stocks hoping to find the "next Microsoft" which holds their returns down. I think you can work through this general advice into a plan of your own. In your library I recommend any of the Swedroe or William Bernstein books on investing. Dave


Dave:
Thanks for your response and thoughts.
What did you mean by "I would have the Vanguard Small Cap. Value fund in the Roth and consider that to be my REIT allocation as well - it's 15% REIT" Are you suggesting 15% Small Cap and 15% REIT ?
What are your thoughts about the Russell 2000 Equity Index Fund (Exp 0.05) over the Small Cap value ?
FreshStart
 
Posts: 4
Joined: Sat Mar 30, 2013 11:57 am

Re: Need a Fresh Start with Portfolio

Postby dickenjb » Sun Mar 31, 2013 6:33 pm

I would sell all the individual stocks. I would own just TSM/TISM/TBM or Stable Value Fund.
(Or Fido Spartan equivalents).

FWIW I am also a PA resident and our state tax rate is 3.07% unless I have missed something.
Philly Chapter Coordinator
dickenjb
 
Posts: 2940
Joined: Tue Jan 05, 2010 2:11 pm
Location: Philadelphia PA

Re: Need a Fresh Start with Portfolio

Postby Occupier » Mon Apr 01, 2013 12:09 am

No to the 15% small cap and 15% REIT. I did not mean to confuse you. REITS generally fit into the small value category on the Morningstar box of stock market components. Or put another way most REITS are also small value stocks. In terms of market capitalization REITS are about 2% of the total stock market. So if you get the Vanguard Small Value fund, 15% of it's composition is REITS. I think it's fine for a person your age to have 10-15% of your portfolio in Small Value. So you really don't need to have REITS in addition. You are already overweight in them.
Getting the Russel 2000 fund is a bit different. It consists of both small growth stocks and small value stocks. So it does not have as much in REITs. There is nothing wrong with having that fund and it's low cost. Since you have the 500 fund in the 401 which is almost entirely large cap stocks, having the 2000 fund does give you a broader chunk of the market in smaller caps.
When I first posted I was trying not to just tell you what I would own but give you some information to affect your thinking. So I avoided making choices for you. I did this for a couple of reasons. First I don't know how strongly you feel about keeping the individual stocks. Secondly I don't know if your going to follow my advice about holding more international stocks. The US market is hitting market highs and international stocks have been held back by problems in Europe which seem to be slowly ending. Hence my suggestion for a guy starting over to get a larger international allocation and to have a tilt to international small in addition. Your buying international at a low right now as compared to buying stocks in the US at a market high.
I also wanted you to see which asset classes are tax efficient and which are not so you could understand where to place assets. Now if you wanted to know how I would do it, see below:

Taxable:
Vanguard Total Stock Market 12%
Vanguard Total International 12% (or there ETF equivalents)
401
10% Vanguard Total International
14% 500 Index
27% Spartan Intermediate bond
Roth IRA
10% Vanguard Small Value
Roth IRA

5% Vanguard International Small
5% Vanguard Small Value

IBonds 3%

I realize I am a couple of % off 100%
Dave
Occupier
 
Posts: 284
Joined: Wed Feb 01, 2012 11:21 pm

Re: Need a Fresh Start with Portfolio

Postby nedsaid » Fri Apr 05, 2013 11:25 pm

Hey Tyler:

I do hold bond funds in my IRAs and 403b. I invest my tax deferred retirement portfolio in a manner appropriate for someone my age. I am 53 and have 2/3 stocks and 1/3 bonds in my retirement accounts.

Most of my investable assets are in tax deferred retirement accounts. So I invest for return first and tax efficiency for me is a secondary concern. I want to maximize my "retirement paycheck."

If my investable assets were 50% in taxable accounts and 50% in tax deferred retirement accounts, of course I would treat it as one portfolio and have most of my stocks in taxable accounts and the tax deferred accounts stuffed with bonds and REITs.

But seeing that I am pretty lopsided towards retirement accounts and away from taxable accounts, I invest my retirement accounts for maximum return at an age appropriate risk level. Otherwise all my taxable accounts would be stocks and I would have little money in the bank!!! Money in the bank is very tax inefficient but we all need a liquid emergency fund.

What I am saying is that other concerns sometimes trump tax efficiency.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2578
Joined: Fri Nov 23, 2012 1:33 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Fclevz, Google [Bot], juggyjt, LongerPrimer, nervousnovice, retiredjg and 61 guests