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

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

Postby nwrolla » Tue Apr 30, 2013 9:46 pm

Ah thanks for the update I missed that, was skimming the previous posts during class.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby citromike » Wed May 01, 2013 1:12 am

PortlandHead,

You sound very bright, and stubborn.

You have come to a website populated with risk- and expense-averse investors who generally follow a common investing strategy. Pay down debt, invest simply, minimize risk, reduce expense.

No one has agreed with your repayment strategy.

You don't have to agree but when a small group of long-term, experienced investors say "this is a better way than what you have proposed", please don't demand that we generate abstract numbers to convince you. We've convinced ourselves either by watching other people (like you, perhaps) lose money, or by losing our own and learning from that. Either way is no fun and can be very painful.

Cheers and good luck
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Wed May 01, 2013 5:59 am

Fair enough. Not all wisdom can be articulated in numbers.

I hope my pushback on the debt issue hasn't come across as too petulant. I really am just trying to understand and make rational choices.

Once I get the retirement info we can proceed on that front.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby englishgirl » Wed May 01, 2013 8:24 am

I think we as humans have a great tendency to look on the bright side of things. Which is a wonderful trait, and probably led us to do some amazing things that we otherwise wouldn't have risked. The downside is that when we are younger we only focus on the success stories, and not so much the people that got burned along the way. As we age, we start to have experiences of getting singed, if not outright burned, and we start to remember the casualties along the way. So, we get more cautious. It's a "there but for the grace of God go I" kind of thing. We have seen people on this very board lose big money when trying the same thing that you're trying.

It seems like your plan should work. You should be able to earn more than 3% per year in your investments. You should come out with a profit. But anything other than cash is volatile. You are not guaranteed to be positive every year. If you have a year with negative returns (yes, that's possible even with bonds), then the next year you need to earn more to be able to claw back what you lost. You need to take taxes into account, as the money is in a taxable account, so really, you need to earn 4% just to break even. To beat a savings account earning 1%, now we're talking about having to earn 5+%. Such requirements might force you to go riskier and riskier with the investments, which opens you up to more risk of losing everything. And yet, you will feel the need to keep your $150k safe, so there'll be a constant push-pull on your emotions, where you'll be fretting and worrying what to do. This situation could very easily result in a major headache. A 10-year long headache.

But! Think how much simpler life would be if you just used that money you have and paid that loan off right now. There it is, gone. No more headache. You can start investing in your taxable account however you want. You don't need to do mental gymnastics to separate off the money you'd earmarked for the loan. You don't need to worry about keeping the principle safe. Ahhh, the simple life.

I think this is not just a math or numbers issue, which is why we haven't thrown numbers at you. I can come up with a scenario where you fail. You can come up with a scenario where you succeed. We battle our numbers against one another. Nobody knows the "right" answer at the end of the day even if we come up with pretty charts. But there's a big emotional component here.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby ruralavalon » Wed May 01, 2013 2:58 pm

PortlandHead wrote:Fair enough. Not all wisdom can be articulated in numbers.

I hope my pushback on the debt issue hasn't come across as too petulant. I really am just trying to understand and make rational choices.

Once I get the retirement info we can proceed on that front.

To add to what englishgirl and citromike have said about this, most of us here:
try to mitigate risk;
try to control investing expenses;
try to mitigate the tax bite;
try not to make predictions about what the market will do;
try to avoid debt.

I have been thru several market "crashes" (1987, 2000, 2008) and a long stretch of economic "malaise" (the 1970s - early 80s), and recall how good it felt in about 1996 to get out of debt (the mortgage) when I hadn't even realized it was bothering me. Its emotionally satisfying, and frees up money for lots of other purposes. That background makes me want to encourage paying down debt: (1) when the debt is large; (2) the debtor is able to accelerate paying down the debt; and (3) the interest rate on the debt is higher than can be earned on a very safe investment.

Pushback is OK, and asking questions is expected. I don't take it personally. I'll try to help on retirement investing to the extent I can.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby HopeToGolf » Thu May 02, 2013 4:00 am

Portlandhead

While I am not a fan of using leverage for investments, it is a viable strategy. In my opinion, you are underestimating the amount of returns you need to break even, forget making a profit.

I am not going to do the math for you but here are a few thoughts:

Create a spreadsheet that shows your base and investment returns over 10 years
Do not forget to tax effect your returns (you said that you are a high earner so the rate going to hurt a decade from now)

What I expect you to find is the return rate you need to make this work is pretty high.

Two things are going to drag on you here: 1) unlike a typical leveraged investment, you are paying on debt of $150k but early on your returns are on a base of $50k + $12k a year and 2) taxes.

In my opinion, if you start to figure it all out and look at the required after-tax returns to "win" it may not be worth it from a risk/reward standpoint. You have to beat $4500 after-tax per year starting with that $50k + $12k per year base sounds hard....high earner, affordable care act additional investment taxes, behavioral temptation to not save the full $12k per year due to "life" getting in the way, not particularly financially savvy, etc...

What you want to do can be done but based on your posts and lack of financial acumen (no offense), I am not sure your chances of success are high. Even for the most informed among us, in the end I think the math would indicate this is no more than a gamble rather than investment.

If I get interested enough to run the math, I will post again but you should do it yourself and if you are not capable, then that is an indicator to listen to the good people here and SIMPlIFY things.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Thu May 02, 2013 7:15 am

50,000+12k/yr. needs a rate of return of 3% to reach over $200k after taxes in 10 years, assuming monthly compounding. (My wife pays the capital gains on this account.)
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Thu May 02, 2013 3:46 pm

On the retirement front:
I am convinced to begin maxing out my 401k contributions and will make that change. My wife will be doing 5.5k worth of backdoor Roth per year, in addition to the minimum 401k contribution to get her employer match. I'm moving her old IRA over to Vanguard.

That will be an annual retirement contribution of $31,750 (conservatively assuming a 4k discretionary match from my employer), presumably increasing to some extent as the 401k and Roth caps increase.

The questions are:

What is the argument that we should be saving more than this? And if we should be saving more, where should it go?

How should I allocate the assets? Should the allocation take into account investments with other goals (like college savings)?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Thu May 02, 2013 4:10 pm

PortlandHead wrote:What is the argument that we should be saving more than this? And if we should be saving more, where should it go?

You should save what you can afford to save. If you would get rid of this dumb debt, you could afford to save more several years sooner. :D

If you could save more, it should go into Her 401k.

How should I allocate the assets? Should the allocation take into account investments with other goals (like college savings)?

One allocation can take all of your goals into account, but we usually suggest keeping them separate. This is because most folks don't have the experience to know how to manage multiple time frames/goals in one portfolio or have a portfolio large enough to do it.

With a large portfolio and some experience, I'd say it is just personal preference. Since it will be quite some time before you have a large portfolio, I'd suggest you keep your goals separated by when the money is needed.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Thu May 02, 2013 4:13 pm

retiredjg wrote:If you could save more, it should go into Her 401k.


Notwithstanding the poor options? Why is that a better choice than me opening a Trad IRA?

One allocation can take all of your goals into account, but we usually suggest keeping them separate.


Meaning allocate for each as if it were the only portfolio (i.e., retirement accounts will be 70/30)?
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Thu May 02, 2013 4:31 pm

PortlandHead wrote:
retiredjg wrote:If you could save more, it should go into Her 401k.

Notwithstanding the poor options? Why is that a better choice than me opening a Trad IRA?

Her 401k has one very good option - the S&P 500 Index fund. A second decent option is the Mid Cap Index. It does seem to be missing a good bond choice, but I wonder if there is a stable value fund that is separate from the list. Since you have good bond choices, she could hold the large cap stocks and you could hold the bonds and the rest of the retirement portfolio could be built around that.

It is a better choice because you cannot deduct contributions to a tIRA. Your only (good) choice for IRA is Roth IRA through back door contributions. Roth IRA is fine and good, but tax-deferred savings can be even better.

One allocation can take all of your goals into account, but we usually suggest keeping them separate.

Meaning allocate for each as if it were the only portfolio (i.e., retirement accounts will be 70/30)?

I would allocate all the retirement money from her accounts, your accounts, and your joint accounts at 70/30 (or whatever your choice is). This might mean one person has more of this and one has more of that, but overall it would be 70/30 (or whatever your choice is).
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby retiredjg » Thu May 02, 2013 4:33 pm

If you want to get a better idea of whether you are saving enough, there are some retirement calculators in the Wiki. FireCalc gets a lot of discussion, so I guess it might be one of the better ones. And something called iorp or something close to that.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby bayview » Thu May 02, 2013 5:35 pm

PortlandHead wrote:50,000+12k/yr. needs a rate of return of 3% to reach over $200k after taxes in 10 years, assuming monthly compounding. (My wife pays the capital gains on this account.)

Well, as someone who watched her TSP plummet in 2008, I would simply tell you that if the market drops 25% in the year that you hit $200K and have to make the $150K balloon payment, you won't feel happy paying that entire amount (now $150K after the drop) without a possibility of recovering it. Whereas I watched my portfolio plummet, but because I didn't have to spend it on anything, I was able to grit my teeth and continue contributing (at fire-sale prices, I might add), and I got it all back and more.

If the market drops MORE than 25% when you need to make the balloon payment, you will lose all that you have saved (the once-upon-a-time $200K), AND you'll have to sell other investments at a really bad price, because you'll be short. Say you wind up $30K short. Maybe in a good time, you could sell 1000 shares of something to generate $30K. But with the market (temporarily) tanked, now you have to sell 1300 or 1500 or more shares of that same something to raise that same $30K. And again, since those shares are gone forever, you won't be able to recoup when things recover.

You never want to sell in a low, and your plan is awfully risky that that might happen. It doesn't matter what 10-year averages might be; it matters what is going on in the markets when it's time to cough up $150K. And that is something that NO ONE can predict. That's why, as another poster said, this isn't investing; it's gambling.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Thu May 02, 2013 6:19 pm

bayview wrote:I would simply tell you that if the market drops 25% in the year that you hit $200K and have to make the $150K balloon payment, you won't feel happy paying that entire amount (now $150K after the drop) without a possibility of recovering it. Whereas I watched my portfolio plummet, but because I didn't have to spend it on anything, I was able to grit my teeth and continue contributing (at fire-sale prices, I might add), and I got it all back and more. . . . You never want to sell in a low, and your plan is awfully risky that that might happen. It doesn't matter what 10-year averages might be; it matters what is going on in the markets when it's time to cough up $150K. And that is something that NO ONE can predict. That's why, as another poster said, this isn't investing; it's gambling.


Respectfully, investing for the medium-term is not the same thing as gambling, and I suspect you'd never make the same argument about a 529 plan. Among other things, what distinguishes gambling from investing is expected return. Risking money when your expected return is positive, rather than equal or negative (as in all casinos), and when the return is a consequence of something more than chance, is called investing. The difference between this investment and the decision to invest in a 529 instead of paying off a mortgage faster, or buying stocks instead of bonds, or bonds instead of money market shares, or any number of other investment decisions, is only one of degree, not kind. And fundamentally, it's not something that can be right or wrong because it turns on probabilistic assessments and risk aversion, just like the decision to ride a moped instead of drive a mini-van cannot be wrong.

That said, there are some logical flaws in your argument, which is part of why I don't find it persuasive. The main problem with your reasoning is your mistaken premise that the only thing that matters is the market performance in year 10. The reason that premise is wrong is two things: (1) the effect of the market drop in year 10 depends on how well the investment did in years 1-9; and (2) the likelihood of a precipitous drop in year 10 is correlated with the performance of the market over the prior 9 years. It is logically possible for the markets to limp along at just above inflation (i.e., nominal 3%) for ten years and then crash 25%, but the odds of that event are radically lower than the odds of what happened in 2008 (or 2001, or 1987, or 1929).

The other error is that you mistakenly think the alternative is investing this money for the long-term, such that I would be able to ride out any drop. In fact, the alternative is not investing this portion of my money at all, and instead pump it into a debt with a guaranteed return of the interest savings. With my retirement accounts, I will continue to be able to buy shares during a bear market, and ride out any medium-term drops--just as you describe.
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby HurdyGurdy » Thu May 02, 2013 6:42 pm

On similar plans that go amiss, to read Market Timer's saga is always educational: viewtopic.php?f=10&t=5934
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby PortlandHead » Thu May 02, 2013 7:19 pm

[Still talking about investing the money instead of paying the debt -- feel free to ignore]

I really only have three premises here:

1. My portfolio returning greater than 3% annually over ten years is more likely than not.
2. The magnitude of the risk is such that I can bear the consequences if I'm wrong.
3. My personal willingness to take risk assigns equal value to the gain of $1 as the loss of $1.

That's all it takes for this to be a rational decision.

I think what people are taking issue with, whether they realize it or not, is 2. Here's a test: If I have a billion dollars in assets, and I was planning to risk $100 at 1.01:1 odds, would you advise against it? If the answer is no, then I think our only disagreement is with point 2.

The worst-case scenario here is that the entire investment is wiped out. But, obviously, for that to happen, the S&P 500 has to go to zero. And if that happens, I'll be hiding in my basement from the ravenous looters. Realistically, the worst-case scenario in which there is no apocalypse is a drop that is twice is big as the biggest drop in the history of the country, which would be 20% nominal value (over a decade), or a loss of $34,000 (plus the interest costs over the years). That's one year's bonus. I can handle that. Not quite as surely as the billionaire can afford to lose $100. But we're not talking about risking my retirement. We're talking about risking a Japanese vacation.

Maybe some people are disputing point 1, but if they are, they have no business having any of their portfolio in equities, and we just have a factual disagreement that's probably not gonna get resolved.

[/Still talking about investing the money instead of paying the debt -- feel free to ignore]
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Re: Portfolio Q&A -- Probably Some Low-Hanging Fruit!

Postby ruralavalon » Fri May 03, 2013 6:05 pm

PortlandHead wrote:On the retirement front:
I am convinced to begin maxing out my 401k contributions and will make that change. My wife will be doing 5.5k worth of backdoor Roth per year, in addition to the minimum 401k contribution to get her employer match. I'm moving her old IRA over to Vanguard.

That will be an annual retirement contribution of $31,750 (conservatively assuming a 4k discretionary match from my employer), presumably increasing to some extent as the 401k and Roth caps increase.

The questions are:

What is the argument that we should be saving more than this? And if we should be saving more, where should it go?

How should I allocate the assets? Should the allocation take into account investments with other goals (like college savings)?

I'm glad to see you are going to be maxing his 401k (it has some nice investing choices), maxing her IRA contribution, and contributing at least enough to get the full match in her 401k, for a total into retirement savings/investing of about $31,750/yr.


Should you be saving more?

First, I am of the view that its impossible at your age (30) to predict with reasonable accuracy how much is enough. There are simply too many variables to predict over 4 - 6 decades (inflation rates, rates of return for stocks & bonds or other potential investments, the sequence of the changes in those rates, tax law changes, future earnings, health and disability issues, life expectancy, personal preferences that may change, etc.) to turn the question into an arithmetic problem. There are, however, some on-line calculators that can help give you a very general range of possible outcomes for various rates of investing input : FIREclac, http://firecalc.com/firecalc.php ; Optimal Retirement Planner, http://www.i-orp.com/ ; and many more viewtopic.php?t=1638&mrr=1225308693 .

Second, my general advice is that in the beginning its best to keep your savings rate as high as you can comfortably maintain. That is for two reasons. (A) At the start portfolio growth is determined more by savings input than by any other factor you can control. We endlessly talk about priorities, asset allocation, fund selection, indexing, expense ratios, tax efficiency and fund location, but at the start nothing will influence portfolio growth more than savings input. (B) Because of the benefits of compounding; in other words a dollar saved/invested now is going to be worth more than a dollar saved/invested later simply because of the longer time it has to compound. For a more detailed discussion, please see -- viewtopic.php?t=6833&mrr=1291908362 . I don't advocate being a miser and skipping the enjoyment of whatever it is you enjoy in life, just putting aside whatever you can on a consitent basis. In other words if you can comfortably save/invest more you should.

Third, There are some good diversified index investing choices with low expense ratios in her 401k, being -- Principal LargeCap S&P 500 Index er = 0.31%; and Principal MidCap S&P 400 Index er = 0.31%. A common reason not to invest beyond the match in a 401k is poor choices, but there are good choices here.

Fourth, the value of tax-protected investing space. Loss of gain/earnings to taxes is just as important as any other loss. Certain types of investments, like bonds and REITs, are very tax INefficient, because they generate lots of dividends or interest taxable at ordinary income rates. Wiki article link: Principles of Tax-Efficient Fund Placement . In the 25% tax bracket you lose 1/4 of your yield to taxes, which matters little at todays rates but will matter a lot if/when rates go back to say 6%. Without tax protected space you have no good place to hold that type of investment, and in future years you cannot go back and capture the tax protected space you can create now. No backsies.

Fifth, 401k contributions are tax deductible.


Where should Add'l Savings Go? How to Allocate?

As mentioned I would suggest additional savings in her 401k. I would suggest using Principal LargeCap S&P 500 Index, er = 0.31%, as its the best combination in her 401k of low cost and broad diversification.

To get the rest of the desired domestic stock allocation couple that with the Fifelity Spartan S&P 500 and Extended Market funds in his 401k, again for their combination of low cost and broad diversification. For bonds the use Fidelity Spartan US bond index and Vanguard's Total Bond Market, they both follow Barclays Agg. US Bond index, an intermediate term bond index which covers most U.S. traded investment grade bonds including Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. Vanguard's total International is the best and most diversified international stock index fund available anywhere, so I suggest primarily that for international stocks.

Assuming that all or most of your current taxable account will go for eventual pay off of the loan in 2023 or other shorter term goals (you said "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."), and that only the 4 retirement accounts are available for long term investing, using an asset allocation of 70/30 stocks bonds with international at 25% of total stocks, the account and fund allocations could look like this at one year out:

His 401k (51%; $36.5k; add $17.5k/yr plus ~ $4k employer match)
19%, SPTN US BOND IDX ADV (FSITX), er = 0.17%
03%, SPTN INTL INDEX ADV (FSIVX), er = 0.17%
18%, SPTN 500 INDEX ADV (FUSVX), er = 0.07%
11%, SPTN EXT MKT IDX ADV (FSEVX), er = 0.07%, <= 4:1 ratio of S&P 500 to Ext Mkt approximates domestic total stock market
Wiki article link: Approximating Total Stock Market

Her old 401k (11%; $8k; no further contributions)
11%, Vanguard Total Bond Mkt Index Inv VBMFX, er = 0.20%

Her current 401k (26%; $19k; add $17.5k/yr plus $1.75k employer match)
26%, Principal LargeCap S&P 500 Index, er = 0.31%

Her IRA @ Vanguard (12%; $8.5k; add $5.5k/yr)
12%, Vanguard Total International Stock Index Fund Investor Shares (VGTSX), er = 0.22%, <= IMO the best int'l index fund available anywhere, covers developed markets including Canada, emerging markets, and mid/small caps; er drops to 0.16% when you reach $10k and Admiral class shares

The portfolio is broadly diversified (to reduce risk), with very low expenses overall (to increase net returns) using just a few funds. The portfolio should be easy to manage. Because all 3 major asset types are in his 401k, all or almost all rebalancing can be done inside his 401k. Wiki article link: Rebalancing . Its important to do any rebalancing inside tax protected accounts, to avoid creating unnecessary tax liability from realizing the investment gains.

If some future money (initially you indicated perhaps $10k/yr "unallocated") can go to taxable investing for long term goals like retirement, that should go into large cap or total market type stock index funds, Wiki article link: Principles of Tax-Efficient Fund Placement , such as Vanguard Total International Stock Index Fund or Vanguard Total Stock Market Index Fund.



Should the allocation take into account investments with other goals (like college savings)?

In general short term goals require more conservative allocations. Other than that, I'll skip this question. My children are long out of college, there were no tax preferred vehicles for saving or investing for college expenses available back then, and we always paid college expenses out of my current income. So I have no background that would help me answer this further.


Finally, I suggest reading a couple of the books from the General Investing section of this reading list -- http://www.bogleheads.org/readbooks.htm . That will help you understand the reasons for the above suggestions, and help you manage the portfolio going forward.

I hope that this helps.
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