Portfolio Review

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Portfolio Review

Postby MartyMcFly » Thu May 02, 2013 4:09 pm

Hi, I am new to this board. Hope to be a regular member!

Emergency funds: Yes, we have a minimum of 6 months expenses in a savings account.
Debt: $380k mortgage at 2.55% APR. 15 years remaining. No other debt.
Tax Filing Status: Married Filing Jointly, 1 child.
Tax Rate: 28% Federal, 5.75% State
State of Residence: VA
Age: 31
Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: 25% of stocks

Current retirement assets

His Taxable at Vanguard:

Large Cap:
27.5% Vanguard 500 Index Fund Admiral Shares (VFIAX)(0.05%)
2% Vanguard Growth Index Fund Admiral Shares (VIGAX)(0.10%)

Mid Cap:
20% Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)(0.10%)

Small Cap:
20% Vanguard Small-Cap Index Fund Admiral Shares (VSMAX)(0.16%)

International:
15% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)(0.10%)
9% Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)(0.18%)

Specialty:
6% Vanguard REIT Index Fund Admiral Shares (VGSLX)(0.10%)

0.5% Vanguard Total Stock Market Index Fund Investor Shares (0.17%)(VTSMX)


His SEP-IRA at Vanguard:

Large Cap:
26% Vanguard 500 Index Fund Admiral Shares (VFIAX)(0.05%)
5% Vanguard Growth Index Fund Admiral Shares (VIGAX)(0.10%)

Mid Cap:
20% Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)(0.10%)

Small Cap:
20% Vanguard Small-Cap Index Fund Admiral Shares (VSMAX)(0.16%)

International:
15% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)(0.10%)
9% Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)(0.18%)

Specialty:
5% Vanguard REIT Index Fund Admiral Shares (VGSLX)(0.10%)

Total portfolio size hint: low seven-figures

Contributions

New annual Contributions
$40k his SEP-IRA
$100k taxable (for retirement, not short term goals)

Questions
1. How do the allocation percentages look?

2. I realized after making my fund selections that I should've allocated all of the REIT money into the IRA instead of using the same allocation for both the IRA and Taxable. I plan on waiting at least 12 months after buying the fund to sell the REIT from the Taxable and reallocate it to the IRA. Is this a smart move?

3. You may see I don't have any bonds. I feel that at my age with my income level, I would be fine weathering a 50% drop if needed. I plan on ramping up the bonds after age 35/40. Is this a smart move?

4. The 0.5% in the Taxable - VTSMX fund is from an old investment. Should I just sell this and invest in the other funds I currently hold? I've been holding onto it to prevent paying income tax.

5. I don't recall why, but I invested in both the VTIAX and VEMAX funds. After further analysis, the VTIAX by itself seems the most appropriate for an international allocation. Should I continue to hang on to the VEMAX, or sell and invest that into the VTIAX?


Notes
- I've omitted the 'hers' investments since they're less than 1% of the 'his'.

Thanks in advance for your help!
- Marty
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Re: Portfolio Review

Postby Grt2bOutdoors » Thu May 02, 2013 6:10 pm

Hi Marty! You're a few days late - the clock on Docs Delorean reads April 30, 2013. Welcome to the future.
Since you are MFJ, you should get used to the taxable account as being "Ours" as opposed to "his".

If you don't have a big gain in it, toss the 2 percent Growth Index.
"Luck is not a strategy" Asking Portfolio Questions
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Re: Portfolio Review

Postby MartyMcFly » Sun May 05, 2013 3:17 pm

Hi Gr2bOutdoors, thanks for the reply. Do you (or anyone?) have any input on the questions I have?
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Re: Portfolio Review

Postby DaveS » Sun May 05, 2013 4:10 pm

OK I will bite. 1) The book you want to get from your library is the first Swedroe book, The Only Guide to a Winning Investment Strategy You'll Ever Need. Or one of his later books. 2) A portfolio that contains some bonds, over longer periods, consistently beats a 100% equity portfolio because it does not go down as much on the bad equity years. So go 10% intermediate bonds at least in a tax free account. 3) Over longer periods of time the lowest performing asset class is always Small Growth. So why do you want to have a small fund with the growth component, when you could have VBR which is just small value? The reason for this seems to be that small growth stocks are always over priced by people hoping to hold the "next Microsoft" or Apple. 4) Why do you want to tilt to mid cap stocks? Over longer periods of time they perform about in between small cap stocks and large cap stocks. Normally people who tilt have a large blend fund like VTI, Vanguard Total US Stock Market, and then tilt by having up to an equal amount of Small Value. 5) I have a mid 7 figure portfolio too, but I took the trouble of reading a few books and learning a few things before I started investing it. You should too. Dave
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Re: Portfolio Review

Postby Default User BR » Sun May 05, 2013 5:48 pm

DaveS wrote:A portfolio that contains some bonds, over longer periods, consistently beats a 100% equity portfolio because it does not go down as much on the bad equity years.

What? Where'd you get this?


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Re: Portfolio Review

Postby MartyMcFly » Mon May 06, 2013 3:56 pm

Hi Dave, Thanks for the book recommendation. I admit that I do have some reading to do, I'll put that one high on the list.

Regarding your recommendations, you seem to imply that over the long term, the large cap outperform the mid cap, which outperform the small cap. However, when I graph those three funds over the past 12 years, it's actually the opposite. The small cap index is slightly ahead of the mid cap, which are both more than triple the large cap.

http://www.google.com/finance?chdnp=1&c ... sfOqQGkhgE

Is that not long term enough? Where did your data come from?

Thanks!
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Re: Portfolio Review

Postby Bob's not my name » Mon May 06, 2013 7:19 pm

MartyMcFly wrote:Tax Rate: 28% Federal, 5.75% State
Total portfolio size hint: low seven-figures

New annual Contributions
$40k his SEP-IRA
$100k taxable (for retirement, not short term goals)
You are saving about $200,000 of gross income and yet your taxable income is under $223,000, so your gross income is under about $300,000. That's pretty impressive. A 70% saving rate and you already have more than a million at age 31. I don't know much about SEP's but shouldn't you be able to put $50,000 in there and $5,500 more in a back door Roth IRA for her?

We can't tell how your savings are distributed between the SEP and taxable since you've stated the percentages independently.
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Re: Portfolio Review

Postby rickmerrill » Mon May 06, 2013 7:45 pm

The telltale chart by Bogle is worth a read http://www.vanguard.com/bogle_site/sp20020626.html. Disclosure, I am not a slicer/dicer but my impression is you better be talking about a sizeable amount of money over a very long time.
If I am stupid I will pay.
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Re: Portfolio Review

Postby Peter Foley » Mon May 06, 2013 7:57 pm

First welcome. You are doing really well in terms of living below your means and you have made some very good choices with respect to broadly diversified low cost investments. One minor point, positions of less that 5% don't really have much impact on your overall portfolio in terms of diversification or return. I agree with others that you should cash in the small position you own.

As to your AA: 80/20 is, in my opinion, the most aggressive AA that one should have. Having at least 20% in bonds gives you a ready source of funds for rebalancing should the stock market drop precipitously as it did in 2000 and 2008.

If your wife is employed she should be doing some income deferral as well. Perhaps, as suggested, a backdoor Roth (spousal if she is not working).
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Re: Portfolio Review

Postby MartyMcFly » Thu May 09, 2013 4:20 pm

Hey Bob's_not_my_name, yes, I could be making up to about $50k in contributions to the SEP-IRA per year, but I only contribute the amount that is deductible from my federal income taxes. This way, I'm not paying tax on the money twice.

The Taxable account has about 70% of the portfolio, and the SEP-IRA has about 30%.

Also, thank you for the backdoor Roth IRA idea. This is the first I've read about the backdoor "loophole". Looks like I picked a good year to file an extension, as I should be able to still make a 2012 contribution to this account. I will be pursuing this for my wife, who already has a 401(k) with her employer.

Hey rickmerrillj, why do you say that a S&D-er should be talking about a sizeable amount of money? The strategy doesn't seem to depend on amount. Thank you for the telltale chart reference, I had not seen that before.

Hey PeterFoley, thank you for the welcome! I agree on your point regarding positions of < 5%. I plan to eliminate them from my portfolio, though I need to wait a few months to ensure I'm not incurring any capital gains taxes from the Taxable account. Are you familar with capital gains taxes regarding funds in an IRA account? I want to make sure I avoid any scenario where I could incur a capital gains tax in the IRA.

I haven't decided what to do about how much, if any, bond funds I should be in. I was a little surprised to read in "The Elements of Investing" by Malkiel,Ellis that Burt recommends 0-10% bonds for those in their 20s - 30s.
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Re: Portfolio Review

Postby Peter Foley » Thu May 09, 2013 4:26 pm

Within a retirement account (401k, IRA, Roth) transactions are not taxable events - either gains or losses. The only potential disadvantage to a short term trade is that the fund in which you have invested might have a redemption fee to discourage taking short term positions.
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Re: Portfolio Review

Postby Default User BR » Fri May 10, 2013 1:26 pm

MartyMcFly wrote:Hey Bob's_not_my_name, yes, I could be making up to about $50k in contributions to the SEP-IRA per year, but I only contribute the amount that is deductible from my federal income taxes. This way, I'm not paying tax on the money twice.

Could you explain what you mean? This doesn't sound right.

MartyMcFly wrote:Also, thank you for the backdoor Roth IRA idea. This is the first I've read about the backdoor "loophole". Looks like I picked a good year to file an extension, as I should be able to still make a 2012 contribution to this account.

No, the deadline was 4/15/2013. Extensions don't affect that.


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