portfolio advice

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portfolio advice

Postby xdfa » Wed May 22, 2013 9:36 am

I am 28, and recently had a kid. I am looking for a downpayment (300K) for a house within 5 years, and less saving for retirement on the side. We live in NYC, and the downpayment would be a signicant amount of money for me.

If I liquidate all my assets, I would have enough to pay for the downpayment of my desired house. My goal now is to save for the emergency fund after I spend all my money on the house (downpayment, renovation and closing cost). At the same time, I would contribute 6% which company would match for, and max to roth IRA which I can tap in to my contribution as emergency fund in the future. Retirement is always in the back of my mind, but since I am young and I am vested to a traditional pension, I wouldnt stress myself out too much now.


Tax Rate: 28% Federal, ~12% State + City
Married and filed jointly, and she is not working now.
State of Residence: NY
Desired Asset allocation: 70% stocks / 30% bonds
Emergency fund: 1 year


NON RETIREMENT ACCOUNT

Taxable
29% cash (not emergency fund)
14% VTSAX
14% VWINX
9% in scottrade for stocks
29% company stock
5% iBond

Total: ~ 300K


RETIREMENT ACCOUNT
401k (Match 50% up to 6%, and I put 6% now)
50% Target retirement 2045.

Roth IRA (5500 a year, consider 11000 since I am married)
50% VWINX

Total: ~ 100K


My company offers traditional pension now, however, I feel it might not be there when I am going to retire. Also, company offers both traditional and roth 401 (k).
I have no debt, except my co-op mortgage, which I am planning to sell before buying a house.
I also have iBonds and have 529 set up.


1, How should I balance tax efficency with short term saving goal? I am debating to slowly move VWINX to roth IRA and maintain 70/30 allocation total, or keep my retirement account and short term goal completely seperate.

2, Should I start to contribute to ROTH 401(K)? Assuming when I retire, I would be in a lower tax bracket. Is it still benificial to contribute to roth 401 (k)?

3, Any advice with my current asset allocation and portfilo? Any personal finance advice would be appreciated.

Thanks!
Last edited by xdfa on Thu May 23, 2013 7:55 am, edited 5 times in total.
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Re: portfolio advice

Postby Grt2bOutdoors » Wed May 22, 2013 12:58 pm

What is your tax bracket - Fed + State/Local?
Tax efficiency in regards to home downpayment or maximize Traditional 401k over Roth 401k option?
Also, if you are in a high tax bracket combined (assuming that since you live in NYC - likely paying AMT now, if not will soon be with your new addition (congrats)) holding an income stock doesn't help your cause for "tax efficiency". Also, holding 30% of ones net worth in one stock (2X so, since you are also employed by them) bears significant undiversified risk - what are your plans for that holding? Are you willing to drop below 10% or more in it? Assuming downpayment money from sale of co-op will not be staying all that long to impact your taxes in a meaningful way.
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Re: portfolio advice

Postby mnvalue » Wed May 22, 2013 1:25 pm

Can you follow the template, please? http://www.bogleheads.org/forum/viewtopic.php?t=6212 Is this cash in the bank your emergency fund or not? Also, can you provide some more hints on the numbers... like how much the downpayment goal is?
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Re: portfolio advice

Postby xdfa » Wed May 22, 2013 2:39 pm

I understand the concern for the 30% in company stock. It is a very safe stock, to a point that I actually feel as safe as a bond fund. It weathered through the recession really well. I would not contribute less than the max limit for contribution.
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Re: portfolio advice

Postby mnvalue » Wed May 22, 2013 3:04 pm

xdfa wrote:I understand the concern for the 30% in company stock. It is a very safe stock, to a point that I actually feel as safe as a bond fund.

It's not. Really, it's not. You have three risks with company stock: 1) it's an undiversified holding in any individual company, 2) you lose your job at the same time it tanks, 3) you may think you know better when something is going to happen, which isn't necessarily the case. (Look at Enron, for example.) And you did know better in some specific case, doesn't that run into insider trading issues? I'm not a lawyer. Anyway, get out of the company stock when you have an overall plan.
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Re: portfolio advice

Postby Grt2bOutdoors » Wed May 22, 2013 3:46 pm

xdfa wrote:I understand the concern for the 30% in company stock. It is a very safe stock, to a point that I actually feel as safe as a bond fund. It weathered through the recession really well. I would not contribute less than the max limit for contribution.


I realize we are just a bunch of random, anonymous internet posters here, now let me give you some real examples of safe, blue chips with a decent dividend that have weathered the test of time but have inevitably been through a few hiccups throughout the years:

Proctor & Gamble - hit a hiccup back in 1994 - earnings miss, and then panic, like it was really going to go out business :oops: - made no difference, the stock got cut in half in the span of months, all the retirees in Cinncinati, Ohio were having heart papiltations - they had the bulk of their retirement money in the stock and it was still paying the dividend, they never cut it - the stock eventually recovered and went on to more than double.

ExxonMobil - some say it's like a bank, with a fortress balance sheet, decent dividend, hard assets in the ground still waiting to be found and pumped. Exxon Valdez - is that enough? Took a few years, stock tripled from there.

British Petroleum - 17 billion barrels of oil in the ground, the stock is like a pariah, trades at book value, they elimnated the dividend for 3 quarters, then reinstated it, have been raising it like clockwork, even after placing $40 billion in reserves for court costs, the stock is still down 50%, doesn't matter how many billions they make each quarter.

The point is - you can have a very viable business, a fortress balance sheet, fantastic cash flow, be on the Fortune 10 - you fall into animal spirits, and it doesn't matter what you think, believe, feel - it only matters what everyone else is doing, if it's you versus the crowd, guess who wins usually in the short term/mid term? Now, do you really feel like risking 30% of your networth in just 1 (one) company? You're young, but not that young to have recalled these two names - Bear Stearns - used to trade for $160 a share; I knew someone who had over $150,000 in the retirement plan - I begged them to get the heck out of it, way before the crisis. I get a phone call a day after they closed their doors, the person was still holding it - they were cashed out by JP Morgan for $8,000. Lehman Brothers - zero or was it a $1?

Unless it's Apple stock that you bought at a $1, and even then I'd lighten up, just ask those who bought it at $730 a share how it feels.
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Re: portfolio advice

Postby Grt2bOutdoors » Wed May 22, 2013 3:49 pm

xdfa wrote:I understand the concern for the 30% in company stock. It is a very safe stock, to a point that I actually feel as safe as a bond fund. It weathered through the recession really well. I would not contribute less than the max limit for contribution.


Safe is cash in hand or a US Treasury. Everything else is subject to a "haircut" or worse - "taken to the woodshed, like Lehman and Bear Stearns".
I'll bet you can't find one instance of any senior executive in your company saying "our company is a very safe company, our equity is very safe, our dividend is sacrosant". Not one!!! That you can take to the bank.
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Re: portfolio advice

Postby xdfa » Wed May 22, 2013 4:14 pm

The company had been listed with NYSE since the beginning. And it is like a culure to put money in the stock. Seniors would walk to the new hires, and their first adivce is to put as much as you can to the stock. It had been a good investment, I made more profits after tax than my total contribution since I started working here 6 years ago. It is not "safe", but no one gets panic when it goes down.

I understand the risk of not diversified, you don't put all eggs in one basket. It is a safety that I get too confortable with, which might be bad. But looking at bonds, cd or any one star risk vanguard funds, it makes no sense to pull money out and let it sit there.
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Re: portfolio advice

Postby Grt2bOutdoors » Wed May 22, 2013 4:22 pm

xdfa wrote:The company had been listed with NYSE since the beginning. And it is like a culure to put money in the stock. Seniors would walk to the new hires, and their first adivce is to put as much as you can to the stock. It had been a good investment, I made more profits after tax than my total contribution since I started working here 6 years ago. It is not "safe", but no one gets panic when it goes down.

I understand the risk of not diversified, you don't put all eggs in one basket. It is a safety that I get too confortable with, which might be bad. But looking at bonds, cd or any one star risk vanguard funds, it makes no sense to pull money out and let it sit there.


Don't hold back then, don't you want to share it with us Bogleheads especially since that would create even more demand and more profits for you?
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Re: portfolio advice

Postby mnvalue » Wed May 22, 2013 10:13 pm

xdfa wrote:it is like a culure to put money in the stock.

At my company, it's culture to stay in our default high-cost mutual funds. This shouldn't affect the decisions you make.
xdfa wrote:But looking at bonds, cd or any one star risk vanguard funds, it makes no sense to pull money out and let it sit there.

Nobody is suggesting that. Even if you're going to stay in the company stock, it's still stock not a bond. So it should count as part of your stock allocation, and the appropriate comparison is between company stock and Total Stock Market.
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Re: portfolio advice

Postby xdfa » Wed May 22, 2013 10:47 pm

I am here for advice, aside from the company stock been too much. Anything else? Should I slowly move VWINX to Roth IRA to keep my account more tax efficient? Should I contribute Roth 401k or stay with traditional 401k?

And where would you suggest if I want to lower company stock? Move them to vanguard and VTSAX? I am relative new to vanguard, barely one year with personal account.
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Re: portfolio advice

Postby mnvalue » Thu May 23, 2013 2:50 am

1. You need to go edit your original post and recalculate the percentages as percentages of the total value of all of your retirement assets together, not as percentages of the individual account.
2. If any of these (e.g. the taxable account) are non-retirement assets, break them out into a separate section, where that section totals 100% separately. Then list what these assets are for--probably the house downpayment in 5 years. How much is your goal for the house payment? Don't include your emergency fund. The I Bonds, unless they're part of your emergency fund, should be in either the retirement or non-retirement section. You might want to list the 529 too, to solicit opinions on that.
3. You mentioned a child. Are you married? If so, include your spouse's accounts as well.
4. It'd be nice to know what choices you have in your 401k (and your spouse's, if applicable). We don't even know if this is a Vanguard or other company's target fund.
5. It would be helpful to know what the total values of the portfolios (retirement, non-retirement) are, approximately. This matters, for example, if you have enough for small percentages to meet fund minimums, cross the threshold into Admiral shares, etc.
6. Do you have huge capital gains in the taxable positions? Any losses to offset? Are these all long-term gains? Any rough idea you can provide here would be helpful.
7. Do you have a desired international allocation? Otherwise, we can assume 30% of stocks.
8. Does your company match any 401k contributions? If so, up to how much (usually defined as a percentage of your income)?
9. How much cash flow do you have to contribute each year to all of these goals?
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Re: portfolio advice

Postby xdfa » Thu May 23, 2013 8:04 am

1. updated
2. updated, I just started 529, ignore it for now since it is a small account now.
3. updated, she is not working now.
4. I would say most Vanguard funds.
5. updated
6. only signicant gain is the company stock. Scottrade account has some gains too, but it is alot smaller account. And about 10K gain in Vanguard since I started last year.
7. I don't buy the international stocks, especially with current european crisis and volatility of emerging markets. I had only bad experiences with foreign stocks in my scottrade.
8. 6%, and that is how much I contribute
9. updated
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Re: portfolio advice

Postby mnvalue » Thu May 23, 2013 11:43 am

Assuming you want to take some risk (meaning if things go bad, you may not get to buy the house on your current schedule), here's one possible idea:
Taxable (Move stocks not being sold to Vanguard in-kind)
29% cash Ally Bank 5-year High Yield CD
14% VTSAX (exchange for VSCGX or VWIAX about a year from now)
14% VWINX VWIAX (a tax-free exchange to Admiral shares)
9% in scottrade for stocks VSCGX or VWIAX
29% company stock VSCGX or VWIAX
5% iBond

Then, slowly sell the long-term gains (and any lots with losses to offset where possible) in the funds and park it in High-Yield CDs (of shorter durations) or High Yield Savings or Checking so you end up with 100% cash by year 4 or 5. If you're not comfortable with the idea of missing your house purchase, then cash it all out now and put it into a 5 year High-Yield CD and you're done.

RETIREMENT ACCOUNT
401k (Match 50% up to 6%, and I put 6% now)
10% Total Bond Market Admiral Shares
12% Total International Stock Admiral Shares
28% Total Stock Market Admiral Shares

Roth IRA (5500 a year, consider 11000 since I am married)
15.3% Total International Stock Admiral Shares
34.7% Total Stock Market Admiral Shares

This is exactly what you have now in the target fund just broken out into individual funds. The Admiral shares will save you money. If the 401k offers Signal or Institutional or Institutional Plus versions instead of Admiral, use those. If none of these are offered, provide a list of what they do have, and we can help you allocate between the two accounts using the best of whatever is in the 401k and filling in using the Roth IRA. This is a reasonable allocation for your age. If you're risk averse, then increase the bond holding (to 20% or 30%), but keep the international at 20-30% of stocks.
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Re: portfolio advice

Postby DiscoBunny1979 » Thu May 23, 2013 11:57 am

xdfa wrote:If I liquidate all my assets, I would have enough to pay for the downpayment of my desired house.


For me, the big issue is not necessarily asset allocation. The issue is whether the $300K is all the OP's money earned before marriage? Or, are some of the $300K assets earned during marriage?

New York is NOT a community property state. New York is an equitable distribution state. That means in a divorce, property is divided fairly, not necessarily 50/50. The OP must consider that if the $300K was all "his" property then putting it all down on a house that might be titled jointly could be redefining separate property as joint - giving the spouse fair right to such assets in a divorce. Therefore, if the OP does do anything with 'his' money, make sure that the new property is titled properly and consider a post-nup if one has not been done.
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Re: portfolio advice

Postby xdfa » Thu May 23, 2013 1:08 pm

Thank you for the advices. Glad to know that I can exchange to admiral tax free. It is still few thousands shy, but I will buy more.
I have my cash in credit union now, which give about 1%.
Isnt the whole idea of retirement fund is that it will change allocation as I get old?? There is signals for the funds you suggested, except international. There is also a client specific fixed income fund which been generating 3% a year, worth to take a look at it? I actually parked all the money in there during the recession.
For roth IRA, I am acttually planning to use it as part of the emergency fund, do you think I should put more bond instead and especially tax effiency in Roth?

We just celebrated our first anniversary, I would just ignore the last post. Lol
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Re: portfolio advice

Postby mnvalue » Thu May 23, 2013 1:35 pm

xdfa wrote:I have my cash in credit union now, which give about 1%.

That's a good rate on savings. If you're going to hold a lot for a while, the CDs are worth it, as they're around 1.51%.

xdfa wrote:There is signals for the funds you suggested, except international.

Place in this order: TBM in 401k & international in Roth IRA. Fill in the rest in each account with the TSM piece. (But see below.)

xdfa wrote:There is also a client specific fixed income fund which been generating 3% a year, worth to take a look at it?

Yes, if it stays at that level, it'd be an excellent piece for some or all of your bond allocation. However, I've read that many stable value arrangements prohibit you from trading directly from stable value to bonds when things move up. To avoid that if things change later (i.e. the stable value's return falls), you might need to shuffle some TSM into TBM, then stable value into TBM.
xdfa wrote:I actually parked all the money in there during the recession.

Market timing is a losing strategy. I hope you didn't miss the upside as things improved.
xdfa wrote:For roth IRA, I am acttually planning to use it as part of the emergency fund, do you think I should put more bond instead and especially tax effiency in Roth?

In general, I feel like people should hold more aggressive investments in the Roth. If they perform well over the long-term, it'll have the effect of decreasing your tax burden (since Roth is tax free and traditional is only tax-deferred). On the other hand, if things go bad, it'll have the opposite effect.

In your specific case, if you're going to use the Roth IRA as an extended emergency fund, you may want to make it more conservative. By "extended", I mean, don't use it as your only emergency fund; keep cash in savings. But that's what you're doing, it sounds like. Then, you'd make your 401k more aggressive to keep the same overall asset allocation. To accomplish this, just trade some of the bond allocation from the 401k with some of the total stock allocation from the Roth IRA. But right now, you have 300k in other investments. Using the Roth IRA as an extended emergency fund is really not necessary until you actually spend that on a house.

This isn't portfolio related, so if you want to discuss in depth, please start a new thread in the personal finance forum, but you should make sure you have appropriate disability and term life insurance for both of you. Appropriate is the key word, and varies a lot by circumstances.
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Re: portfolio advice

Postby xdfa » Thu May 23, 2013 2:22 pm

I have disability insurance and limited life insurance free with my job, and I am still in the process of convincing my wife that term makes more finacial sense than whole life, the insurance sales do a great job marketing whole life.

I can start contribute after tax (roth) 401K, and current allocation with 10% bond only is pretty aggressive already. And conservative with Roth IRA which I plan to use as emergency fund.
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Re: portfolio advice

Postby mnvalue » Thu May 23, 2013 2:27 pm

xdfa wrote:I can start contribute after tax (roth) 401K

With your tax rate (especially the state & city tax), traditional 401k contributions make more sense.
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