Portfolio Q&A -- Probably Some Low-Hanging Fruit!

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Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Sun Apr 28, 2013 6:23 pm

Basics

Emergency funds: three months of expenses
Debt: Private Note ($150,000 @ 3% with payment due in full 2023); Mortgage ($270,000 now refinancing to 3.375%).
Tax Filing Status: Married Filing Separately
Tax Rate: 28%/25% Federal, 3% State
State of Residence: PA
Age: 30
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 25% of stocks
1 kid

Current assets

Taxable
20k cash (the allocation is a bit off now and I will correct it with these funds once I decide how much to keep in short-term money market or similar)
10k Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) [.1% ER]
20k Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) [.05% ER]
10k Vanguard Total International Stock Admiral Shares (VTIAX) [.16% ER]
10k Vanguard Small Cap Index Fund Admiral Shares (VSMAX) [.1% ER]

His 401k
15k SPTN US BOND IDX ADV (FSITX) [.17% ER]

Options include:
ALZGI NFJ DIV VL ADM (ANDAX) 0.96%
FID CONTRAFUND (FCNTX) 0.74%
FID GROWTH COMPANY (FDGRX) 0.90%
FID INDEPENDENCE (FDFFX) 0.78%
SPTN 500 INDEX ADV (FUSVX) 0.07%
ALL/B DISC VAL A (ABASX) 1.28%
COL MID CAP GRTH Z (CLSPX) 0.98%
SPTN EXT MKT IDX ADV (FSEVX) 0.07%
FID SM CAP DISCOVERY (FSCRX) 1.07%
JANUS TRITON T (JATTX) 0.95%
HARBOR INTL INV (HIINX) 1.15%
SPTN INTL INDEX ADV (FSIVX) 0.17%
FID FREEDOM 2045 (FFFGX) 0.76%
PIMCO TOT RETURN ADM (PTRAX) 0.71%
SPTN US BOND IDX ADV (FSITX) 0.17%


Her Old 401k
8k Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) [.2% ER]

Options include:
Vanguard Target Retirement 2050 .18
Vanguard I-T Investment-Grade Inv VFICX .2
Vanguard Short-Term Bond Index Inv VBISX .2
Vanguard Total Bond Mkt Index Inv VBMFX .2
Vanguard Balanced Index Fund Inv VBINX .24
Vanguard LifeStrategy Consrv Grwth VSCGX .15
Vanguard LifeStrategy Growth Fund VASGX .17
Vanguard LifeStrategy Income Fund VASIX .14
Vanguard LifeStrategy Mod Growth VSMGX .16
Vanguard 500 Index Fund Inv VFINX .17
Vanguard Capital Opportunity Inv VHCOX .48
Vanguard Explorer Fund Investor VEXPX .49
Vanguard Extended Mkt Index Inv VEXMX .28
Vanguard PRIMECAP Fund Investor VPMCX .45
Vanguard Selected Value Fund VASVX .38
Vanguard Small-Cap Index Fund Inv NAESX .24
Vanguard Windsor II Fund Inv VWNFX .35
Vanguard International Growth Inv VWIGX .49

Her new 401k
Just started a new job. Nothing deposited yet.

Options include:
PIMCO Total Return A Fund [1.08 ER]
Calvert Social Investment Balanced A Fund 1.31
Principal LifeTime 2050 1
Alliance Bernstein LargeCap Value III .94
Principal LargeCap S&P 500 Index .31
CCI LargeCap Growth .71
Principal MidCap Value III .81
Principal MidCap S&P 400 Index .31
CCI MidCap Growth .81
Principal SmallCap Value .91
Principal SmallCap Blend .91
Emerald SmallCap Growth II 1.18
Calvert World Values International A Fund 1.87
Principal Diversified International 1.06

Her old IRA
3k Money Market

Coverdell
[Not funded yet -- open to decision]

529
[Not funded yet -- open to decision]

Intended Annual Contributions

15k his 401k (plus employer discretionary match (i.e., amount is not set in plan, more like a regular bonus, usually 1-to-1)
3k her 401k (her employer will match of $1750 per year on her 3k, which is the max match)
2k Coverdell
2k 529
5k back-door Roth [I have not yet opened a Roth yet, will do so this year]
12k Investment for 2023 payment
10k Unallocated

Questions:

I need to fix the allocations, and possibly the contributions. But I'm feeling a little confused. Hoping you'll help me sort things out.

Thanks!
Last edited by PortlandHead on Tue Apr 30, 2013 2:58 pm, edited 7 times in total.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby ieee488 » Sun Apr 28, 2013 9:19 pm

PortlandHead wrote:Basics
Debt: Private Note ($150,000 @ 3%); Mortgage ($270,000 @ 4.25% effectively 3% after tax deduction).

It is 4.25%. No one I know here lists it as 3% effective.
I would consider re-financing.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby Occupier » Sun Apr 28, 2013 9:19 pm

You can roll the old IRA and 401 into a new IRA. Vanguard or other low cost fund family is fine.
Now the expense in 10 years is fine if you allow for it in the taxable account. I would have a slightly higher bond allocation and call that my reserve for that expense.
Most rebalance once or twice a year some quarterly. I do it October and April. I don't think you need a money market account other than your emergency fund. I would not bother with REIT till you have room for it in a tax free account. Note Vanguard Small Value is 15% REIT so that is one way to kill two birds with one stone. Dave
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Mon Apr 29, 2013 9:54 am

Thanks for the replies.

On refinancing, is it just a matter of whether I can get a low-enough rate to make up for the transaction costs given my expected longevity in the house? Or are there other considerations?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby ruralavalon » Mon Apr 29, 2013 12:07 pm

Welcome to the forum :) .

Your desired asset allocation looks reasonable in my opinion.

Necessary information is missing, please see -- viewtopic.php?t=6212 . Primarily, we need to know what investment choices are offered in all (both active and old) of the 401ks (fund names, tickers, expense ratios). That will help decide the questions of: what to do with her old 401k; what to do with the taxable account; whether its best to max out her current 401k such as by using some of the money from the taxable account; etc.

Also, make sure 401ks and IRAs either of you you have are included (you mention a backdoor Roth, but don't include it anywhere in the portfolio; you mention old and new 401ks for her, but list only one 401k in the portfolio).

Also need to know the approximate size of the portfolio.

You should not be holding bonds in the taxable account, thats very tax INefficient. Wiki article link: Principles of Tax-Efficient Fund Placement . The problem is where else to put them. The other funds you are currently using in the taxable account are tax efficient. No you should not be looking at REITs for the taxable account; same reason of tax INefficiency.

On debt the interest rates are modest, but still thats a lot of debt. I wouldn't want to make any suggestion about more rapidly paying down the debt without knowing the missing information on what your 401k choices are. In other words, what else is available for use of your money.

Please add the new information to your original post using the "edit" button; it helps a lot to have all of your information in one place.
Last edited by ruralavalon on Mon Apr 29, 2013 12:19 pm, edited 1 time in total.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Mon Apr 29, 2013 12:18 pm

PortlandHead wrote:Mortgage ($270,000 @ 4.25% effectively 3% after tax deduction)

This is somewhat high. I'd look at refinancing if possible.


20% cash (the allocation is a bit off now and I will correct it with these funds once I decide how much to keep in short-term money market or similar)

Is this for your goal that is 10 years out?


10% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) [.1% ER]

This is ordinarily not a good choice for a taxable account. It's not hurting you a lot now because interest rates are so low, but consider exchanging it into an intermediate term tax-exempt bond fund.


1. Since my debt is relatively low-interest, I’m assuming I’m right to be paying it off with minimum payments. Is that right?

Opinions vary. Some people want to be out of debt, even low rate debt.


2. I want to save for an expected expense in 2023. Because of the different time horizon from my other long-term goals, should I be opening a separate taxable account, or is it just a matter of marginally rebalancing my current account more conservatively? Or neither?

Personal preference.


3. What’s the standard advice for what to do with her old IRA and old 401k? Can I consolidate them with her current 401k somehow?

If the back door Roth is for Her, you'll have to move Her Old IRA to her Current 401k. Have you checked to see if Her IRA and Her 401k can be rolled into Her Current 401k? If so, are the choices there good enough to want to do that?


4. Should I be considering other asset classes in my taxable portfolio? REITS? Commodities? Tax-managed funds?

No. REIT and most commodities don't belong in taxable accounts. You don't really need tax-managed funds unless you want to be more tax-efficient than what you currently have.


5. How frequently do I need to rebalance things?

Quarterly, once a year, once every other year - personal preference.


6. In addition to an emergency account, should I also have a short-term money market type account?

What would the money be for? Do you mean short-term money market (does such a thing exist) or in money market for short term? There is not much need to use money market except to hold money for a short term.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Mon Apr 29, 2013 12:19 pm

P.S. You have a very large taxable account. Is there a reason you are not filling up both 401ks and 2 IRAs each year? That would be the standard suggestion.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Mon Apr 29, 2013 12:51 pm

ruralavalon wrote:Necessary information is missing. . . . Also need to know the approximate size of the portfolio.


Ok, I think I've included all of it, unless you need to know the equities options as well. The options in my wife's new 404c are all pretty terrible. The old 401k Vanguard is exactly what you'd expect, and my Fidelity 401k technically has the ability to buy anything through a BrokerageLink, but I figured their bond index was just fine.

The portfolio is roughly 100k right now.

ruralavalon wrote:You should not be holding bonds in the taxable account, thats very tax INefficient. Wiki article link: Principles of Tax-Efficient Fund Placement .


Is that true even if I have a medium-term (10 year) expense about which I want to be fairly conservative?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Mon Apr 29, 2013 12:58 pm

retiredjg wrote:
PortlandHead wrote:Mortgage ($270,000 @ 4.25% effectively 3% after tax deduction)

This is somewhat high. I'd look at refinancing if possible.


Doing this today.

retiredjg wrote:
20% cash (the allocation is a bit off now and I will correct it with these funds once I decide how much to keep in short-term money market or similar)

Is this for your goal that is 10 years out?


Nope. I just haven't gotten my act together to put it where it needs to go yet.

retiredjg wrote:
10% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) [.1% ER]

This is ordinarily not a good choice for a taxable account. It's not hurting you a lot now because interest rates are so low, but consider exchanging it into an intermediate term tax-exempt bond fund.


I see. That sounds like a better compromise than getting rid of the bond holdings altogether from the taxable, given my concern over the medium-term expense.

retiredjg wrote:
3. What’s the standard advice for what to do with her old IRA and old 401k? Can I consolidate them with her current 401k somehow?

If the back door Roth is for Her, you'll have to move Her Old IRA to her Current 401k. Have you checked to see if Her IRA and Her 401k can be rolled into Her Current 401k? If so, are the choices there good enough to want to do that?


Unfortunately, her current plan, has very poor options. So I probably don't want to move anything in there.

retiredjg wrote:P.S. You have a very large taxable account. Is there a reason you are not filling up both 401ks and 2 IRAs each year? That would be the standard suggestion.


Mainly because I felt like our retirement accounts would be adequate for retirement, and I wanted to have an account from which I can take money for living life while I'm relatively young, not to mention upgrading our house, etc.

That said, I should probably take a closer look at whether my estimation of what will be adequate is correct.

Edited: Apparently 404c is just a fully-ERISA-compliant 401k? Anyway, her current plan is a 404c/401k.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby ruralavalon » Mon Apr 29, 2013 2:43 pm

2. I want to save for an expected expense in 2023. Because of the different time horizon from my other long-term goals, should I be opening a separate taxable account, or is it just a matter of marginally rebalancing my current account more conservatively? Or neither?
What we had done in the past was use 2 separate accounts, which made it much easier to keep track of where we were in saving for the intermediate term expense as well as easier to see that our asset allocations were where we wanted them to be. But this is personal preference, as opposed to any kind of rule.

Use a distinct and more conservative asset allocation for your 10 year investment horizon, perhaps something like 40/60. And in a taxable account consider tax exempt bond funds for the bond part of the allocation, http://files.thefinancebuff.com/calcula ... lator.html .


PortlandHead wrote:3. What’s the standard advice for what to do with her old IRA and old 401k? Can I consolidate them with her current 401k somehow?

Since her old 401k has low cost Vanguard funds, I would just leave that where it is. The new 401k does not offer anything better, and moving to a rollover IRA will interfere with doing backdoor Roth in the future.

My suggestion would be that you take some of the cash and/or some funds from selling off the bond fund in taxable, and use that money to max out her 401k each year using the PIMCO fund to try to increase your tax-protected bond holdings. Right now because of low interest rates its less harmful than usual to have bonds in a taxable account, but for the long term you'll want to get the bond investing moved to tax protected.

I think its a good move to try to refinance the mortgage to a lower interest rate.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Mon Apr 29, 2013 5:32 pm

PortlandHead wrote:Unfortunately, her current plan, has very poor options. So I probably don't want to move anything in there.

What about rolling the old IRA into the Old 401k? Are the options better there?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Mon Apr 29, 2013 5:37 pm

PortlandHead wrote:
retiredjg wrote:P.S. You have a very large taxable account. Is there a reason you are not filling up both 401ks and 2 IRAs each year? That would be the standard suggestion.

Mainly because I felt like our retirement accounts would be adequate for retirement, and I wanted to have an account from which I can take money for living life while I'm relatively young, not to mention upgrading our house, etc.

At 30 years old and in the 25 and 28% tax brackets, I don't see how your retirement accounts could be adequate yet. I could be wrong though. Do you have something like 25 times your joint salary?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby englishgirl » Mon Apr 29, 2013 5:44 pm

I don't understand what is going on with your money. You list a Coverdell and a 529 - why both? And who is this for? You didn't list any kids - is this for you or your wife, or for kids?

There is some nebulous mention of a 10-year expense, and then also some money to live on while you're young. And it's all mixed in with retirement funds, with the taxable money mostly in stocks. I suggest mentally separating the short and medium term money. Invest (or save) that more conservatively. I would decide what is part of your retirement fund and what isn't - otherwise, there's a danger that ALL your taxable funds become spendable, and then once you've spent it all, all your retirement funds have been in low-earning bond funds lagging behind where they could have been. Also, I've been there with money that I'd earmarked for a certain expense sitting in stocks in 2008. And yes, it dropped by half right when I wanted to spend it. That is not fun.

You've only listed an expensive bond fund for your wife's new 401k. This is presumably because you think you should only put bonds in that account to balance out the stocks in the taxable account, right? But it's got an ER of 1.08%. What if there's Vanguard 500 Index at 0.05% lurking in there? I would snap that fund up in a heartbeat to get the lower ER, and then work around it for the rest of the portfolio. I think you're trying to rigidly think of some things (like, "got to put bonds in the 401k"), and yet you're not being rigid about defining what your money is for. Can you give us ALL the 401k options? New and old?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Mon Apr 29, 2013 8:35 pm

Thanks again to all for the advice. I locked in 3.375% with no closing costs for the refi. Seems like a good deal to me.

englishgirl: You're right to be confused, because I'm confused! Fortunately, the allocations are all very recent as is the creation of the taxable account, so there'll be no harm in fixing it.

Coverdell + 529 is because the Coverdell allow us to fund private elementary or secondary school, which we will likely do since the Philadelphia public schools are quite bad. This is for my son.

The notion of the taxable account was that I need a fairly conservative account to fund an anticipated expense in 2023 (the full payment of principal on the 150k private note), and I also wanted a riskier account just for general investment under the (perhaps mistaken) notion that my retirement accounts would be adequately funded. The taxable account therefore reflected a blending of these goals.

But I hadn't really been thinking through it clearly, as your post reveals, since if I make the retirement accounts hold only bonds, then I'm going to need to fund them more. Alternatively, if I want to reserve some of the equities in the taxable account for retirement, then they should be in the retirement account.

Either way, I really need to rethink things a bit from step 1. So what is step 1? :D

(While I wait for further advice, I'll type out the 401k options into the original post.)

retiredjg wrote:At 30 years old and in the 25 and 28% tax brackets, I don't see how your retirement accounts could be adequate yet. I could be wrong though. Do you have something like 25 times your joint salary?


No, I meant that I thought our current level of funding would be adequate (i.e., approx $27,500/yr., depending on my employer's match in any given year). But that obviously turns on the asset allocation, which I might have mucked up a bit (see above).
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Tue Apr 30, 2013 9:08 am

Some of this depends on that 3% private loan. Is there a reason it cannot be paid off earlier? Could it be paid in annual payments? I realize the lender might not want money to trickle in, but it does not make a lot of sense to me to be paying 3% out and not be bringing 3% in. To bring 3% in, some of this money will need to be invested in stocks.

About how much of the money you currently have saved and invested is set aside in your mind for the loan?

It is usually not in your best interest to file taxes separately. Are you certain this is the best approach? Do you know how long this will last?

See if this approach makes sense to you. Wiki article link: Placing Cash Needs in a Tax-Advantaged Account In order to use this approach, you must be emotionally able to sell stocks in a crash. Could you do that?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 9:15 am

The 3% loan: I'm free to pay it earlier. I just thought that I could easily beat 3% investing the money very conservatively. I had intended to save (i.e., contribute to the taxable fund) $1,000/mo. for the loan, and not to deplete the 50k principal in the taxable fund until then in case I need more because the investment does unexpectedly poorly or I have to sell in a down market. A 0% return over 10 years would still yield 170k, which seems conservative enough.

Filing separately: It qualifies my wife for income-based repayments and the magnitude of the debt relief makes it a no-brainer. That will last until 2023. (I did not include her student loans because even the IBR payments are covered by her grad school -- in other words, we pay nothing each month and so have no interest in paying it down faster.)

Let's assume I'm convinced to max my 401k, max a Roth rollover for my wife, and probably open a separate IRA for her. I also will contribute 2k each to the 529 and Coverdell (annually), and 1k/mo. to the loan payment fund. How should I think about allocations? I had it in my mind that I only need to be concerned about overall portfolio allocation, but I guess that's not quite right because it might mean I have all of my retirement in bonds, no?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Tue Apr 30, 2013 9:57 am

PortlandHead wrote:The 3% loan: I'm free to pay it earlier. I just thought that I could easily beat 3% investing the money very conservatively.

This was true in the past. It might have even been true when you took the loan, but it is not true now. There are no very conservative investments paying 3% that I know of. So you might want to consider whether you want to just pay off a chunk of that loan right now.

I noticed you dodged the question of how much of that money is set aside in your mind for the loan.... :wink:


I had intended to save (i.e., contribute to the taxable fund) $1,000/mo. for the loan, and not to deplete the 50k principal in the taxable fund until then in case I need more because the investment does unexpectedly poorly or I have to sell in a down market. A 0% return over 10 years would still yield 170k, which seems conservative enough.

What $50k principle? Until when? A 0% return over 10 years on what? I don't think we know anything about a $50k principle. You are going to have to be more precise in what you say if you want people to understand what is going on.


Let's assume I'm convinced to max my 401k, max a Roth rollover for my wife, and probably open a separate IRA for her.

What do you mean by the part in blue?


How should I think about allocations? I had it in my mind that I only need to be concerned about overall portfolio allocation, but I guess that's not quite right because it might mean I have all of my retirement in bonds, no?

It can be done either way. You can throw it all in one pot and have a stock to bond ratio that reflects all those needs or you can segregate the money into goals or times the money will be needed.

No, it does not mean all your retirement would be in bonds because some retirement money would be in your taxable account.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 10:04 am

retiredjg wrote:
PortlandHead wrote:The 3% loan: I'm free to pay it earlier. I just thought that I could easily beat 3% investing the money very conservatively.

This was true in the past. It might have even been true when you took the loan, but it is not true now. There are no very conservative investments paying 3% that I know of. So you might want to consider whether you want to just pay off a chunk of that loan right now.

I noticed you dodged the question of how much of that money is set aside in your mind for the loan.... :wink:


Not dodging, just communicating inartfully. My expectation was that $1000/mo. contributed to the taxable account would be sufficient for the loan, and my backup plan was to use as much of the 50k now invested in the taxable account as necessary. In other words, I envisioned one big sinking fund that would be able to pay the loan even if it did quite poorly, and would yield some profit if it did well.

Since I'm saving the money to pay debt, inflation is not really a risk factor, I thought. So why shouldn't I consider bonds a conservative approach to 3% gains?

retiredjg wrote:
I had intended to save (i.e., contribute to the taxable fund) $1,000/mo. for the loan, and not to deplete the 50k principal in the taxable fund until then in case I need more because the investment does unexpectedly poorly or I have to sell in a down market. A 0% return over 10 years would still yield 170k, which seems conservative enough.

What $50k principle? Until when? A 0% return over 10 years on what? I don't think we know anything about a $50k principle. You are going to have to be more precise in what you say if you want people to understand what is going on.


That's the 50k currently in the taxable account. 0% return over 10 years on that totality of that account, however we allocate it.

retiredjg wrote:
Let's assume I'm convinced to max my 401k, max a Roth rollover for my wife, and probably open a separate IRA for her.

What do you mean by the part in blue?


What I meant was that my intention was to do a backdoor Roth IRA for her annually, and potentially also begin to fund a Traditional IRA unless the tax consequences of the yearly rollover preclude it.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Tue Apr 30, 2013 10:34 am

PortlandHead wrote:Not dodging, just communicating inartfully. My expectation was that $1000/mo. contributed to the taxable account would be sufficient for the loan, and my backup plan was to use as much of the 50k now invested in the taxable account as necessary. In other words, I envisioned one big sinking fund that would be able to pay the loan even if it did quite poorly, and would yield some profit if it did well.

OK. So the $50k currently invested is for the loan if needed. What is the other $20k that is listed in your taxable account for?

Since I'm saving the money to pay debt, inflation is not really a risk factor, I thought. So why shouldn't I consider bonds a conservative approach to 3% gains?

What bonds do you think will pay you 3%? There are a couple of choices, but they are not what we usually consider to be the wisest of investment choices. What choices are you considering? Or have you not realized that bonds don't pay that much anymore?


What I meant was that my intention was to do a backdoor Roth IRA for her annually, and potentially also begin to fund a Traditional IRA unless the tax consequences of the yearly rollover preclude it.

You don't get to put $5,500 into both a Roth and a traditional IRA. She can do back door contributions to Roth IRA or she can fund a traditional IRA or she can split the money between the two (which would not be very smart).

Furthermore, she can't do the back door contributions to Roth IRA while that old IRA is in the way. The old IRA can be converted to Roth (there will need to be cash available on the side to pay the taxes) or it can possibly be rolled into Her Old 401k or Her Current 401k.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 10:59 am

The other 20k is just cash sitting in savings. I was waiting to decide where to put it until I had a better sense that I had a good overall strategy.

Re:bonds. Investment grade corporate bonds are averaging about 3% right now. Am I misunderstanding that somehow?

Re:Roth. I think she can still backdoor even with the old IRA, she just might have to pay taxes on any gains from that fund, right? Since it's in a money market, we're not talking about a lot of money.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Tue Apr 30, 2013 11:19 am

PortlandHead wrote:Re:bonds. Investment grade corporate bonds are averaging about 3% right now. Am I misunderstanding that somehow?

It is true that some investment grade corporate bonds are averaging about 3%. But....that is before you pay your 28% + 3% in taxes, so they are only paying you 2.07% after state and federal taxes. And a corporate bond fund that is paying 3% is likely to be a long term bond fund which may lose significant value if/when interest rates rise. For example, if the duration of that fund is 8 years, the fund will likely lose 8% in value every time interest rates rise 1%.

So you'd be paying out 3% while bringing in 2.07% and facing the prospect of losing value as well. Does that make things look differently?


Re:Roth. I think she can still backdoor even with the old IRA, she just might have to pay taxes on any gains from that fund, right? Since it's in a money market, we're not talking about a lot of money.

Yes, she can do the back door, but that 3k will be pulled into the calculations of the tax due. If the money in that IRA is from deductible contributions, all $3k will be taxed (although maybe not all in one year). If the money in that IRA is from non-deductible contributions, only the gains will be taxed.

Bottom line, in deciding what to do with Her old IRA, the first thing you have to find out is whether that money is from deductible contributions, non-deductible contributions, or both.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 11:31 am

I understand the taxation issue for the bonds. What I'm trying to wrap my head around is the effect of inflation. I had thought that the risk of inflation was essentially that they bond is gonna pay out what it pays out, and unlike an equity, it's not gonna increase with inflation. So it's not that inflation would affect the expected return, it's just that the expected return won't keep up with inflation.

But that reasoning might be incorrect when applied to a bond fund as opposed to a single bond, is that right?

Understood on the IRA. Step one is figuring out where it came from. I don't think my wife remembers for sure, so I'll need to poke around a bit.

Thanks again for your patient help. As you can tell, I'm just sort of getting my financial feet under me.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Tue Apr 30, 2013 11:50 am

PortlandHead wrote:I understand the taxation issue for the bonds. What I'm trying to wrap my head around is the effect of inflation. I had thought that the risk of inflation was essentially that they bond is gonna pay out what it pays out, and unlike an equity, it's not gonna increase with inflation. So it's not that inflation would affect the expected return, it's just that the expected return won't keep up with inflation.

I'm not sure what to think on this. Maybe someone else will comment.

To me, inflation is simply not an issue in deciding this question. I see your debt as a canoe with a little hole in the bottom and the leak is letting in more water than you are bailing out. You have to fix the leak to keep the canoe from swamping. It would be different if you were bailing out more water than the leak is letting in.


Thanks again for your patient help. As you can tell, I'm just sort of getting my financial feet under me.

Everybody has to start somewhere. I think you'll make more progress if you tackle this thing in little bites. Her Old IRA is a good place to start. We can get to other issues later, a few little bites at a time.


What I'd like for you to do is look at your situation in perhaps a different way. You two are 30 years old with a kid, you make good money, but you only have $26k set aside for retirement and you only plan to set aside a limited amount each year. You have some other assets, but they are dwarfed by your amount of debt (both the $150k and her debt which is unknown).

This whole situation is just backwards and I think a lot of that is because you are trying to make money on a loan rather than just paying off the loan so you can save for retirement. This is risky business (using a loan to try to make money) and could easily backfire. I don't think this is in your best interest and I hope you'll give this further consideration.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby ruralavalon » Tue Apr 30, 2013 2:36 pm

I hesitate to jump back in, for fear of adding to the confusion, but . . . .

It was a good first step to refinance the mortgage note to down to 3.375%.

I still think its best to leave her old 401k where it is. The new 401k does not offer anything better, and moving to a rollover IRA will interfere with her doing backdoor Roth in the future.

Will her old 401k (which has some nice investment options) accept a transfer of her old IRA? As Retiredjg said, that might be the next part to look at.

Understanding now: that the 10 year out expense is repayment of the $150k note at 3%; and that its possible to pay now on the note rather than wait -- its probably best to pay on the note rather than invest hoping to beat the interest rate on the note. In effect investing hoping to beat the 3% interest rate on the note would be leveraging or investing on margin; that is, it would be using borrowed money to invest. This is rightly considered to be dangerous.

You have large debt, and at age 30 relatively little set aside for retirement.

So this is starting to look to me more like (first of all) an issue of -- how to use the $20k cash and $50k in mutual funds you now have in the taxable account and where to put (what account) and how to best use your approx. $49k anticipated annual contributions. So I'm going to ask again for some additional information.

Does your 401k have an employer match? Does her current 401k have an employer match? If so, what is the match for each? And how much in dollars would you (or she) have to contribute to get the full match for that account?

Again, please add the add'l info to your original post using the "edit" button.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 2:57 pm

Ok. Next step is that I will look at whether her old 401k will accept transfer of her old IRA.

Re: payments on 3% debt vs. investing the savings for balloon payment: I certainly understand there's risk involved, but it isn't so obvious to me that the risk is undue. How many ten-year periods are there in the last 100 years in which a diversified portfolio posted an overall loss without including inflation? Vanishingly few, as best I can tell. I think it's much more likely than not that conservative investments will exceed 3% after taxes over the next 10 years. I also think that the downside risk is mostly that the return will be less than 3, but not so low that I couldn't have the money given the amount I plan to invest. The extreme downside risk--the return is negative over that period--would mean that I would have to take out a home equity loan or something. (In the circumstances of such an extreme and prolonged bear market, I will be buying stocks for my retirement accounts cheaply!) Anyway, I see where you're coming from, but the choice doesn't seem so obvious to me. Am I missing something fundamental in the risk analysis, or is this just a matter of temperament and risk-aversion?

Edited to add: "Vanishingly few" might even be understating it. An S&P Index fund open since the beginning of the S&P would only have posted a nominal loss in the decade ending 1940 and 2009, and the nominal loss was very small, possibly small enough to have been prevented altogether if other asset classes are included. Since I'm saving money to pay a fixed debt, I think nominal value is all I care about. So I really think the downside risk is just that I could have made some money paying off the debt, and is therefore fairly compared to whether I think more likely that I'd make more money by investing (as opposed to if the risk were that I would default on the note, etc.)

One more edit: I think the retirement funding is a separate question. There's enough surplus income that I can both maximally fund retirement and save for the note without investing the savings if I'm convinced that's the best course.

(Editing to expand on the match info in OP.)
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Tue Apr 30, 2013 3:27 pm

Portlandhead, it's a scheme that might work or might not work. Even if it works, you won't make much money on it. Why do it at all? Why not just do it the old fashioned way and save money for retirement? The more you put into His 401k and Her 401k, the more you'll have later and the less you pay in taxes now. That's something that actually does work. Why not do that?

Investing involves taking some risk. That's how you make money in investing. But there is necessary risk and unnecessary risk. Investing borrowed money is an unnecessary risk and it carries the possibility of backfiring. Why would you want to do that?

You should be filling up both 401k plans and 2 IRAs before you venture out into the weeds into something that might backfire. You are not even close to saving enough and you are looking for some shortcut to take. Shortcuts are rarely the road to riches.

I just think you are headed in the wrong direction. It might be a matter of temperament - perhaps you lack the patience to do things the slow and steady way. But I don't think it is a difference in risk-aversion. This is not about risk-aversion. It's about wisdom. In my opinion, there is no wisdom in your plan.

Getting out of this get-rich-quick-scheme is the low hanging fruit in your situation. I know that is not what you wanted or expected to hear. But it's the truth and I'm assuming that's what you want to hear - the truth.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 3:40 pm

Why do it at all?


Because rational decision-making compels that if someone offers you 5:1 odds on a coin flip, you take it so long as you can deal with the consequences of losing. Here, losing most likely means I pay a little more on the loan than I would have if I started paying down the principal. I can afford to do that without jeopardizing my retirement or college funding accounts because I live frugally and have a high income.

You should be filling up both 401k plans and 2 IRAs before you venture out into the weeds into something that might backfire.


It's not either/or. I agree that 30k/yr in investment contributions is slightly less than I should be putting in (though I don't see how you conclude that it's way off the mark of what will be necessary for modest retirement), and I will instead max my 401k and consider the best options for my wife. I can put in more without it affecting how I decide to save for the balloon payment.

Getting out of this get-rich-quick-scheme is the low hanging fruit in your situation. I know that is not what you wanted or expected to hear. But it's the truth and I'm assuming that's what you want to hear - the truth.


That is what I want to hear. That my scheme is fundamentally wrong-headed is the best kind of advice! I'm just not quite there yet, but that may be my pig-headedness rather than your explanations.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Tue Apr 30, 2013 4:09 pm

PortlandHead wrote:
Why do it at all?

Because rational decision-making compels that if someone offers you 5:1 odds on a coin flip, you take it so long as you can deal with the consequences of losing.

I don't disagree with this in theory. However, your plan is not 5:1 odds. I don't think it's even 1:1 if you use bonds as the investment.


I agree that 30k/yr in investment contributions is slightly less than I should be putting in (though I don't see how you conclude that it's way off the mark of what will be necessary for modest retirement), and I will instead max my 401k and consider the best options for my wife. I can put in more without it affecting how I decide to save for the balloon payment.

Your original post didn't have anything near $30k a year going into retirement savings. Things are somewhat better now that we know you are getting a large match. But I still think it is foolish not to just save your money rather than investing borrowed money. If you save your money, it could be growing during these next 10 years. If you invest the borrowed money, you may or may not have some profit in 10 years. Isn't that a no brainer?

What happened to the other $100k that you borrowed? Is it possible that some other risky business is/was going on? Did that prove profitable or did it take $100k to get out of that hole? Obviously, you don't need to answer this question. But you should think about it. :happy


Getting out of this get-rich-quick-scheme is the low hanging fruit in your situation. I know that is not what you wanted or expected to hear. But it's the truth and I'm assuming that's what you want to hear - the truth.

That is what I want to hear. That my scheme is fundamentally wrong-headed is the best kind of advice! I'm just not quite there yet, but that may be my pig-headedness rather than your explanations.

Ok then. Your scheme is fundamentally wrong-headed. I'll leave it at that. :wink:

In the meantime, you have $26k saved for retirement. When you find out about the money in the IRA, we can figure out the best approach to investing this money. And I agree that you should keep Her Old 401k. Whether to roll that IRA into it will depend on what you find out.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby Twins Fan » Tue Apr 30, 2013 4:18 pm

Ok, now I'm jumping in to confuse things. :happy Or, clarify things.

I'm confused about this $150K at 3%, a "baloon payment", and it being a "personal note". How is this structured... is there a monthly payment plan, or is the balance just sitting at $150K with the agreement being it will be paid off in 2023? Is that balance sitting at 150K and getting hit with 3% APR over and over? Is the 3% owed whether you pay it off tomorrow or in 2023?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 4:31 pm

retiredjg wrote: I don't disagree with this in theory. However, your plan is not 5:1 odds. I don't think it's even 1:1 if you use bonds as the investment.


Well, not bonds then. Let's talk about a 70/30 portfolio. You don't think it is much more likely than not that a portfolio allocated 70/30 will return greater than 3% nominal gains after taxes in any given ten year period? Or is it that you think we can safely predict that this particular ten-year period will be among the worst in history?

retiredjg wrote:
What happened to the other $100k that you borrowed?


It paid off debt at a much higher interest rate. I had 150k debt at 8%. I borrowed 150k at 3% to pay it off.

Twins Fan wrote:
I'm confused about this $150K at 3%, a "baloon payment", and it being a "personal note". How is this structured... is there a monthly payment plan, or is the balance just sitting at $150K with the agreement being it will be paid off in 2023? Is that balance sitting at 150K and getting hit with 3% APR over and over? Is the 3% owed whether you pay it off tomorrow or in 2023?


There is an annual interest payment of $4500 with $150,000 due in 10 years. The interest will never be added to the principal so long as I make the annual payment.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby Twins Fan » Tue Apr 30, 2013 4:45 pm

PortlandHead wrote:There is an annual interest payment of $4500 with $150,000 due in 10 years. The interest will never be added to the principal so long as I make the annual payment.


So, you're going to pay 3% on $150K ten times, or nine times if you pay it all off that last year?

I'm nowhere near as good with numbers as many in here are, but I don't think that makes financial sense there.

What if you knock it down to $75K... do you then pay 3% of 75K?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 4:52 pm

Yes and yes, to your questions.

It seems to me that the financial question really is just a question of (1) will I more likely than not make more than 3% nominal after taxes and (2) can I afford it if I don't.

If the answer to (1) and (2) are both "yes," then I fail to see why it isn't a no-brainer just like the uneven odds on the coin flip. The only difference is that the downside risk has a very long tail (unlike a coin flip). But even when I look at the entire history of US markets, there is no ten-year period in which an equity-index-only investment would have returned a nominal loss great enough to become a fiscal problem for me. By contrast, most of the time, I will come out handsomely ahead.

So as long as I value gaining $1 the same as a value avoiding losing $1, I don't see the problem. But I fully appreciate that I could be missing something.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby Twins Fan » Tue Apr 30, 2013 5:00 pm

I'm not sure really.

I can see the point of not paying down a typical loan, say a mortgage, that has a low interest rate because the expected return is higher than the low interest rate. But, I don't know about a baloon payment deal like that. I just can't help but think there's some "losing" aspect to paying interest over and over again on a balance that doesn't go down.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Tue Apr 30, 2013 5:10 pm

PortlandHead wrote:Well, not bonds then. Let's talk about a 70/30 portfolio. You don't think it is much more likely than not that a portfolio allocated 70/30 will return greater than 3% nominal gains after taxes in any given ten year period?

In some 10 year periods? Yes. In any given 10 year period? No.

In fact, not only no, but HECK NO.

Somebody help me out here. Isn't this exactly what market timer tried to do a few years ago, only to come back and say (courageously) "I was wrong - it backfired and I lost a lot of money"?


It paid off debt at a much higher interest rate. I had 150k debt at 8%. I borrowed 150k at 3% to pay it off.

At least some of this was smart - lowering your interest rate. But it appears you borrowed $150k when you only needed $80k to pay off the debt. I think that was a mistake and it could come back to bite you. I think you may very well regret this.


There is an annual interest payment of $4500 with $150,000 due in 10 years. The interest will never be added to the principal so long as I make the annual payment.

So you are going to pay $45k in interest (that you can't even deduct from your taxes) in hopes of making how much? What are you going to do in 2023 if there is a market crash in 2021 or 2022 and the value of your savings drops by 35% (not unusual for a 70/30 investment)? I think your earlier answer was an escrow loan on your house or something along that line.

Have you considered that once you realize you are in a hole that maybe you should stop digging deeper?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 5:20 pm

retiredjg wrote:
PortlandHead wrote:Well, not bonds then. Let's talk about a 70/30 portfolio. You don't think it is much more likely than not that a portfolio allocated 70/30 will return greater than 3% nominal gains after taxes in any given ten year period?

In some 10 year periods? Yes. In any given 10 year period? No.

In fact, not only no, but HECK NO.


There's an important difference between "the vast majority" and "all." For 90%+ of decade-long periods, such a portfolio will outperform 3% nominal gain after taxes. I think that's the relevant statistic, no?

retiredjg wrote:
There is an annual interest payment of $4500 with $150,000 due in 10 years. The interest will never be added to the principal so long as I make the annual payment.

So you are going to pay $45k in interest (that you can't even deduct from your taxes) in hopes of making how much? What are you going to do in 2023 if there is a market crash in 2021 or 2022 and the value of your savings drops by 35% (not unusual for a 70/30 investment)? I think your earlier answer was an escrow loan on your house or something along that line.


I couldn't deduct it before, either, because of the income cap on such deductions.

The hope is to make around 4% nominal surplus a year, which is consistent with the long-term average of US markets. But so long as the expected return is $1, that's all that really matters to make it a rational decision, isn't it?

If the value drops by 35% in 2021 after having gained all the way through 2020, I'll still be ahead. If you mean what happens if it drops by 35% from what it would be if I never invested it, then I'll have to make it up somehow. But you might as well be asking what happens if North Korea nukes Vanguard. There has never in our entire history been a 35% nominal loss over a ten-year period.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby ruralavalon » Tue Apr 30, 2013 5:20 pm

You were right yesterday when you said replying to Englishgirl -- "Either way, I really need to rethink things a bit from step 1. So what is step 1? "

In my opinion step one is what is referred to as "Investing prioirty", and the general consensus is -- Wiki article link: Paying down loans versus investing ; and Wiki article link: Prioritizing investments -- which I summarize as follows:
1. Invest enough in the 401ks to get the full match (the match is free money, never pass up free money);
2. pay down higher interest debt (higher interest as measured by returns of alternative safe investments);
3. max out 401ks or start IRAs, depending on tax rates, investments offered in the 401ks etc.

1. Thats why I asked about the match in the two current 401ks, to look at point one in the prioity list.

2. As to point two, an alternative safe investment would be 10 year Treasuries, which currently give 1.68% interest. Short term bond funds, also fairly safe, now have average annual returns (for the last 12 months) in the range of 0.82 - 1.88%. You cannot find a safe investment that is guaranteed to give you 3% return. So Paying down the $150k 3% note is a good "investment", a good use of your money.

You can take on risk and invest more aggressively such as by adding a stock component, but that involves great risk.
In October 1987 U.S. stocks lost 23% in the space of a couple of days.
In 2000-01, the dotcom bubble burst, and the NASDAQ lost 54% (7932 to 4238) in single day on 3/20/00.
In 2007-08, the housing bubble burst and U.S. stocks declined over 50% during a period of 17 months, taking until 2013 to recover.
You would be in an awful fix if any of these events, or something similar, were to occur in 2023 or just before that.

The risk does not disappear just because you are thinking in terms of 10 year blocks of time.


PortlandHead wrote:But so long as the expected return is $1, that's all that really matters to make it a rational decision, isn't it?

You are taking an awful risk (default on the note) for that hypothetical $1. So, no thats not being rational :( .
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 5:41 pm

ruralavalon wrote:You are taking an awful risk (default on the note) for that hypothetical $1. So, no thats not being rational :( .


That's not correct. This isn't like a coin flip where it's heads I win a dollar and tails I default on the note. In order for me to default on the note, my 170k of saved cash (50k plus 12k a year) would have to lose 10% of its nominal value over a ten-year period (which has never happened in all of U.S. history!), and I would have to be unable to make up the difference with any of my other resources. Never say never, but the odds of that happening aren't worth seriously considering.

Instead, the realistic risk-reward equation is more like having a 90% chance of at least breaking even, a 30% chance of making a lot of money, a 5% chance of losing a little money, and a 5% chance of losing a moderate amount of money. That's not just made-up numbers. You can look up for yourself the likelihood of a 70/30 portfolio returning 4% plus over a decade. The likelihood is very high.

So the reason not to do this is either (1) I value avoiding loss higher than I value gain, or (2) I have some information that tells me that the next decade is likely to be among the worst in U.S. history. Right?

Or is there some flaw in my logic?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Tue Apr 30, 2013 5:47 pm

PortlandHead wrote:I think that's the relevant statistic, no?

Not if you end up in one of the wrong 10 year periods. If that happens, it won't matter what the statistics were when you started, will it? This is a risk that can be avoided. If you win, you win a little bit. If you lose, you lose big. It's not investing. It is gambling.

I don't think I can add any more to this discussion. I'll be happy to help you with your retirement investments though.
Last edited by retiredjg on Tue Apr 30, 2013 6:27 pm, edited 1 time in total.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 5:52 pm

retiredjg wrote: If you win, you win a little bit. If you lose, you lose big.


This is the assessment with which I disagree. I believe the evidence shows that it is precisely the opposite.

But we can leave it there. I very much appreciate your help, and will be happy to continue to receive it on the retirement front. I'll let you know what I learn about the IRA.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby ruralavalon » Tue Apr 30, 2013 5:54 pm

Leverage a/k/a margin investing is "extremely risky", http://www.investopedia.com/terms/m/margin.asp . and is therefore by definition speculation rather than investing.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 6:26 pm

Characterizing all margin investing as "extremely risky" without numbers isn't rational. To take an extreme example, if I can borrow money at .01%, it would be foolish not to do so and buy a bunch of T-bills. Whether any particular margin investing is "extremely risky" or not depends on how much interest is paid on the debt, the ability to pay the debt with other resources, the consequences of default, and the risk/return involved with the investment. Categorically declaring any such mix of variables to be risky just isn't sensible. Surely, then, the question is whether the variables in my case make it extremely risky or not.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby Twins Fan » Tue Apr 30, 2013 6:32 pm

PortlandHead wrote:The hope is to make around 4% nominal surplus a year, which is consistent with the long-term average of US markets. But so long as the expected return is $1, that's all that really matters to make it a rational decision, isn't it?


So, paying 3% on 150K year after year for 10 years is better than HOPING to make 4% on an amount that is roughly half of 150K now and will grow to that amount in 10 years???

If you were paying down that loan as you go and the loan would be paid off at the end of the 10 year timeframe, then I can see the case for investing and expecting a higher return. But, to leave a 150K debt just sit at 150K for 10 years hoping for a 1% higher return seems........ I don't even know, someone help me out with how to describe that.

It seems obvious the OP is all about trying to make every $1 they can. Shouldn't the flip side of that be to not lose or give away any $1 they don't have to... I.E. paying 3% on 150K ten times?!
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 6:38 pm

4% surplus, meaning a 7% annualized nominal return over ten years, which is the median nominal return in Vanguard's prediction, and is below historical norms.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby Twins Fan » Tue Apr 30, 2013 6:54 pm

Ok, I mixed that up. I was thinking 4% real return.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby pkcrafter » Tue Apr 30, 2013 8:03 pm

Portlandhead, I may have missed this, but what did you take out the 150k loan for--home purchase, or was it wife's personal loan? Is it secured?

You said you have 50k set aside in riskless or low risk assets in taxable to pay the loan in 2023, but there isn't 50k in low risk assets there. In fact, taxable is the only place you hold any equity. I'm thinking the 40k in equity in taxable is currently part of your retirement savings and you have only 30k in riskless assets marked for the loan.

The 3% loan: I'm free to pay it earlier. I just thought that I could easily beat 3% investing the money very conservatively.


I think you are now aware that you cannot earn 3% investing very conservatively in today's markets. Even if you did earn 3%, you would be just be treading water. You are going to pay $45,000 over the next 10 years and still owe $150,000.

How many ten-year periods are there in the last 100 years in which a diversified portfolio posted an overall loss without including inflation?

Unfortunately, your question has no relevance. If you can tell us with absolute certainty that the next 10 years will not see a market crash, then OK.

I think what posters are trying to convey is this type of debt is a true anchor on your financial health.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 8:21 pm

The 150k was to refinance student debt at a much higher rate.

The allocation of the taxable is an open question. I only created the account recently, so the current allocation hasn't had time to matter yet. I will alter it once I figure out whether it should even continue to exist. :D

As for the rest, I don't see why no one wants to talk numbers. Why does one need "absolute certainty" in order to invest? What you need isn't absolute certainty, but instead a reasonable understanding of the likelihoods of various outcomes. Another market crash is a distinct possibility. A market crash yielding 0 nominal gains in a reasonably-balanced portfolio over a decade is a much lower possibility. A market crash that actually eats away at the money invested in such a portfolio to any significant degree is even lower, chiefly because it has never happened in the history of our stock markets.

Instead of offering generic platitudes about debt and risk, I wish someone would point out what part of my risk analysis reasoning is incorrect. It may well be, but no one seems to want to discuss it in specifics.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby wilked » Tue Apr 30, 2013 10:18 pm

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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 10:31 pm

There are such thing as extremely low-probability events. Therefore? What, exactly? Maybe my creditor will misplace my debt. Should I plan for that?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby nwrolla » Tue Apr 30, 2013 10:35 pm

I have on aside to point out, as a mid high rate tax payer (28/25% respectively) Why would you and your wife choose to file married filing separately, if you have a legitimate reason I could understand, but mathematically especially with a dependant it seems you would save more in taxes year after year filing jointly? Have you run comparative tax returns to try and save some expenses?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Tue Apr 30, 2013 10:42 pm

nwrolla wrote:I have on aside to point out, as a mid high rate tax payer (28/25% respectively) Why would you and your wife choose to file married filing separately, if you have a legitimate reason I could understand, but mathematically especially with a dependant it seems you would save more in taxes year after year filing jointly? Have you run comparative tax returns to try and save some expenses?


As mentioned above, the MFS allows my wife to enroll in federal loan repayment assistance for her student debt, which in conjunction with her grad school means we don't pay any of it and it will be cancelled in 10 years.
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