Discussion with Adviser

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knopflergrass
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Discussion with Adviser

Post by knopflergrass »

Reader of this site over past year, first time poster. :sharebeer

I am a recent med school and surgery residency graduate with my first job, and starting with a new financial adviser over the past year that I've felt i can trust. He's recommended a broad portfolio with a fair number of low cost index funds, about 10 or so in the non-qualified funds. I'll post my portfolio for advice soon hopefully.

After reading The Bogleheads Guide to Investing, I thought I should really start to consider doing my own investment management on my own and save the 1% i'm paying him.

I reviewed a lot of the theory presented here with him, and i'll likely be moving my funds to low cost vanguard index investing, but a few questions.

1) He did recommend using more than three funds in a lazy nonquaified portfolio for tax reasons upon withdrawal (more like 10 with his strategy), stating that having more diversified number of funds would allow for strategic withdrawal when i need that in the future and hence less taxes from under performing funds. Response?

2) If I just have him as my adviser only, what is a fair hourly fee in the midwest or a yearly fee for these services?
Grt2bOutdoors
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Re: Discussion with Adviser

Post by Grt2bOutdoors »

knopflergrass wrote:Reader of this site over past year, first time poster. :sharebeer

I am a recent med school and surgery residency graduate with my first job, and starting with a new financial adviser over the past year that I've felt i can trust. He's recommended a broad portfolio with a fair number of low cost index funds, about 10 or so in the non-qualified funds. I'll post my portfolio for advice soon hopefully.

After reading The Bogleheads Guide to Investing, I thought I should really start to consider doing my own investment management on my own and save the 1% i'm paying him.

I reviewed a lot of the theory presented here with him, and i'll likely be moving my funds to low cost vanguard index investing, but a few questions.

1) He did recommend using more than three funds in a lazy nonquaified portfolio for tax reasons upon withdrawal (more like 10 with his strategy), stating that having more diversified number of funds would allow for strategic withdrawal when i need that in the future and hence less taxes from under performing funds. Response?

2) If I just have him as my adviser only, what is a fair hourly fee in the midwest or a yearly fee for these services?

Hello and welcome to the forum!

If you have not already checked it out - www.whitecoatinvestor.com blog, written by EmergDoc.
The Doc does a great job of disputing the notion that you need an adviser to be able to invest.

Question 1 - My response to the adviser is "please elaborate in detail, I'm dying to hear how "more funds results in less taxes" :o You can develop a widely diversified portfolio with 3 or 4 low cost index funds. In the words of John Bogle "you don't need to own 5 or 10 funds to create a diversified portfolio.

For the record, I use a simple 4 fund portfolio for the fund portion of my non-qualified contributions - Total Stock Market, Total International, two municipal funds. Very simple to track, re-balance, I tax loss harvest as necessary using equivalent type (similar to stay within IRS parameters) funds, and it allows for strategic withdrawals as needed. Best of all, I'm not paying any fees other than those charged by the funds.

Question 2 - Rick Ferri who posts on this forum "read his blog at rickferri.com or check out the Investments, News & Theory sub-forum to read his posts" charges a very respectable and low fee of 37bps (that is 0.37%) per year. If your "adviser" is charging you 1% and the market is returning 4% - how do you feel about giving up 25% of your annual return to your adviser who offers a complicated investment strategy (10 or more funds :shock: ) for questionable returns? May I offer this - it seems your adviser is trying to justify his 1% fee by making your investment portfolio extremely complicated. Simplicity is the key here, less can be more in the world of index investing.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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grabiner
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Re: Discussion with Adviser

Post by grabiner »

Welcome to the forum!
knopflergrass wrote:1) He did recommend using more than three funds in a lazy nonquaified portfolio for tax reasons upon withdrawal (more like 10 with his strategy), stating that having more diversified number of funds would allow for strategic withdrawal when i need that in the future and hence less taxes from under performing funds. Response?
This is theoretically true, but probably not beneficial in practice. If you have separate growth and value funds, and the growth fund is up but the value fund is down, then you can tax-loss harvest in the value fund; you wouldn't be able to do that if you held a blend fund. However, if you use a blend fund instead of separate growth and value funds, you will have lower overall expenses because the blend indexes cost less, and you won't need to rebalance when one class goes up more than the other.

It won't help much in retirement. If your shares with the lowest capital gain are in your value fund, then you will minimize your tax bill by selling shares in the value fund first, but you are also presumably overweighted in growth and need to sell the growth fund to rebalance. If you have a blend fund, you will still have shares with a variety of different capital gain amounts, based on when you bought them.

There are some situations in which holding multiple funds makes sense even though there is a single fund:
  • The separate funds are less expensive than the whole (Total Stock Market and Total International rather than Total World Stock)

    Your 401(k) options force you to have a partial fund there (an S&P 500 index as the only good choice in a 401(k), and Extended Market or Tax-Managed Small-Cap in your taxable account)

    You need multiple funds to get your target allocation (Total Stock Market, Small-Cap Index, Value Index, and Small-Cap Value Index if you want to overweight small-cap value).
But if you have a lazy portfolio and aren't constrained by a bad 401(k), I see no reason to have more than Total Stock Market and Total International in your taxable account, and a muni fund if you must hold bonds there.
Wiki David Grabiner
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bottlecap
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Re: Discussion with Adviser

Post by bottlecap »

Question 1: Huh? I don't get it. The three fund portfolio has bonds. Why would bonds have less taxes anyway? You pay taxes on gains, which may or may not be more with a bond fund. But when you pay taxes, that means you have gains. Isn't that good? You don't buy a bond fund because is gives you a worse return that results in lower taxes.

Question 2: not sure, $150 - $300 an hour? The better question is if you go to a three fund portfolio, why do you need to pay him at all?

JT
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knopflergrass
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Re: Discussion with Adviser

Post by knopflergrass »

Thanks so much everyone for the replies, all are very helpful for a new investor.

Gbrainer: when you mention the tax benefit of separating growth and value funds within a nonqualified plan not helping much in retirement, i understand that given index funds have lower expense ratios. But if I withdraw a larger sum of money to buy a car let's say from an underperforming fund, rather than having only a single larger fund, say a VF total stock market, to withdraw from, won't that result in substantial tax savings?
OverTheHill
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Re: Discussion with Adviser

Post by OverTheHill »

knopflergrass wrote:Thanks so much everyone for the replies, all are very helpful for a new investor.

Gbrainer: when you mention the tax benefit of separating growth and value funds within a nonqualified plan not helping much in retirement, i understand that given index funds have lower expense ratios. But if I withdraw a larger sum of money to buy a car let's say from an underperforming fund, rather than having only a single larger fund, say a VF total stock market, to withdraw from, won't that result in substantial tax savings?
I guess that's as good a reason as any for deliberately putting together a portfolio that has at least one fund that has capital losses so you can withdraw without paying taxes. Seems to me that the better course would be to have funds that make money, not lose it, but that's just me, then you can pay for a car with your gains as opposed to your initial prinicpal.
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bottlecap
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Re: Discussion with Adviser

Post by bottlecap »

knopflergrass wrote:Thanks so much everyone for the replies, all are very helpful for a new investor.

Gbrainer: when you mention the tax benefit of separating growth and value funds within a nonqualified plan not helping much in retirement, i understand that given index funds have lower expense ratios. But if I withdraw a larger sum of money to buy a car let's say from an underperforming fund, rather than having only a single larger fund, say a VF total stock market, to withdraw from, won't that result in substantial tax savings?
Money you are going to use to buy a car is likely going to come from cash. Typically, it's not advisable to use money in funds to make anticipated large purchases, as that money can vanish quickly in a downturn.

If you chose to do things in the manner your advisor suggests, you are putting the cart before the horse and letting tax strategy dictate your investment strategy. This is bad for several reasons. First, your asset allocation should be based on your risk profile, not on the possibility to save taxes in the future. As a result, if you had only taxable accounts (for simplicity) and it consisted of 50% total stock market and 50% total bond market, your allocation should not substantially change after your withdrawal. If you sold 25% of you lower performing bonds to save on taxes, to get back to your allocation, you'd have to sell even more your higher performing asset to bring your asset allocation into line. Then you're paying taxes again, anyway.

Second, part of the reason we keep short term (under say 7 years) spending money in cash or near cash is so that we don't lock in our losses by selling an under performing asset which is more likely to to revert to the mean and do well again. If the asset always lost money and wasn't expected to revert back, we wouldn't buy it in the first place.

So I may have what your advisor is getting at wrong, but it sounds to me like his plan is to sell the under performing assets at a loss to minimize taxes, not rebalance back into that asset and lock in a loss. That's not a sound plan.

Good luck,

JT
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ruralavalon
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Re: Discussion with Adviser

Post by ruralavalon »

knopflergrass wrote: 1) He did recommend using more than three funds in a lazy nonquaified portfolio for tax reasons upon withdrawal (more like 10 with his strategy), stating that having more diversified number of funds would allow for strategic withdrawal when i need that in the future and hence less taxes from under performing funds. Response?

2) If I just have him as my adviser only, what is a fair hourly fee in the midwest or a yearly fee for these services?
1) I don't know what his reasoning was on tax issues. Ten is not an outrageous number of mutual funds to use, but is more complex than necessary. We use six funds, which is probably fairly typical here -- http://www.bogleheads.org/forum/viewtop ... 10&t=89766 .

2) We used a fee-only adviser in downstate Illinois about 10 years ago to help set up our plan for a fixed fee, which as I recall worked out to a rate of about $150 -250/hr. No portfolio management was involved. Here is an on-line book chpater on hiring advisors vs DIY investing . http://investingroadmap.wordpress.com/2 ... n-advisor/ .

Two links for finding an advisor:
http://www.napfa.org/consumer/index.asp
http://www.garrettplanningnetwork.com/ .
Last edited by ruralavalon on Tue Jun 04, 2013 3:21 pm, edited 1 time in total.
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Taylor Larimore
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The Three Fund Portfolio

Post by Taylor Larimore »

knopflergrass:

Welcome to the Bogleheads forum!

I am one of the authors of your Bogleheads Guide to Investing. If you have questions about our book, ask them here.

Consider something like this:

The Three Fund Portfolio

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
TRC
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Re: Discussion with Adviser

Post by TRC »

bottlecap wrote: The better question is if you go to a three fund portfolio, why do you need to pay him at all?

JT
+1. You don't need him. He's already offering you bad advice by saying you need 10 funds.
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Re: Discussion with Adviser

Post by White Coat Investor »

I use ten funds, but wouldn't do so in a taxable account. I'd put one big fat tax-efficient fund there and do all my diversifying in my tax-protected accounts. Hard to give much more specific advice without seeing your whole portfolio.

If you don't like paying 1%, there are lots of options between that and doing it completely on your own. Flat fee advisers, cheaper full service advisers, hourly advisers etc.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Discussion with Adviser

Post by Peter Foley »

I too use about 10 funds - but for cost reasons associated with some funds in our deferred accounts. I personally would not choose a three fund option, but I could probably go with 4 or 5: Total U.S. Stock Market, Total International Stock, Total Bond, TIPs, and Stable Value. As you can see my preference is to diversify a little more on the bond side. While I have been doing this for some time, if I didn't have access to a couple stable value funds paying 4% with current rtes as low as they are, I would probably skip the stable value fund. I think having some inflation protection in one's bond allocation is prudent. This can be done with TIPs or slowly but surely with I-Bonds.


That being said, I did find it advantageous to hold two stock funds when we went through the last recession. I basically sold my S&P fund at a loss and consolidated into Total stock market. It gave me about 4 years worth of capital losses to use up. I had held the S&P fund for a number of years so it took a really deep recession for the tax loss harvesting to pay off.
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Re: Discussion with Adviser

Post by Default User BR »

I have lots of funds, mostly ETFs. Some of that is a result of having several custodians over time. Some is due to tax-loss harvesting. I started with VEU, which went to VEA+VWO. Later I added VSS. Some of the VEA was split into VPL+VGK. So right there I have five.

I don't really worry about it. The Big Spreadsheet worries about it.


Brian
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Re: Discussion with Adviser

Post by Beat The Street »

TRC wrote:
bottlecap wrote: The better question is if you go to a three fund portfolio, why do you need to pay him at all?

JT
+1. You don't need him. He's already offering you bad advice by saying you need 10 funds.
I wouldn't say it is bad advice just because he recommended using 10 funds.
“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.” -Taleb
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Re: Discussion with Adviser

Post by Leif »

EmergDoc wrote:I use ten funds, but wouldn't do so in a taxable account. I'd put one big fat tax-efficient fund there and do all my diversifying in my tax-protected accounts. Hard to give much more specific advice without seeing your whole portfolio.

If you don't like paying 1%, there are lots of options between that and doing it completely on your own. Flat fee advisers, cheaper full service advisers, hourly advisers etc.
+1

Simplicity is oversold by some here, IMO. Sure you don't want 20-30 overlapping funds that we sometimes see presented here by new posters.

I have two very tax efficient stock funds in taxable, Total Stock Market (US), and an EAFE (Europe, Asia, Far East) for international. Other funds are in my tax advantaged accounts. The main point is to get to ASSET CLASS diversification. Also, research by Fama/French indicates you can get unique risk/reward by investing in small and value funds. Good luck.
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Re: Discussion with Adviser

Post by fishndoc »

There was a post on this forum a good many years back that I copied and have pasted above my desk, just in case I get the urge to do something stupid with my portfolio. Sorry, I don't have the name of the original author:
...I continue to think investing is as much or more psychological/behavioral as it is mathematical. I think a simple portfolio probably reduces the odds of making psychological/behavioral mistakes for most people.
A simpler portfolio keeps smart people from doing stupid things.
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle
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Re: Discussion with Adviser

Post by abuss368 »

10 funds? That is crazy. Have you thought through that rebalancing nightmare?

3 - 5 funds tops is all that is needed. Really anything more is diminishing returns and probably won't move the needle.

Keep investing simple.
John C. Bogle: “Simplicity is the master key to financial success."
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grabiner
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Re: Discussion with Adviser

Post by grabiner »

knopflergrass wrote:Gbrainer: when you mention the tax benefit of separating growth and value funds within a nonqualified plan not helping much in retirement, i understand that given index funds have lower expense ratios. But if I withdraw a larger sum of money to buy a car let's say from an underperforming fund, rather than having only a single larger fund, say a VF total stock market, to withdraw from, won't that result in substantial tax savings?
It's the same issue during accumulation as during retirement. If your growth fund has increased more than your value fund, then you are currently overweighted in growth, so making a withdrawal from your value fund to buy a car will move your portfolio out of balance.
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Taylor Larimore
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Selling low.

Post by Taylor Larimore »

knopflergrass wrote:
If I withdraw a larger sum of money to buy a car let's say from an underperforming fund, rather than having only a single larger fund, say a VF total stock market, to withdraw from, won't that result in substantial tax savings?

You are selling low. This is the opposite of what you should do. A wise investor sells over-performing funds which brings the portfolio back to the desired asset-allocation.

I think the adviser confused you about taking tax losses in taxable accounts. This is done when there are losses in a taxable fund. The investor sells losing shares for the tax-loss benefit, but buys the shares back after 30 days.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Discussion with Adviser

Post by Grt2bOutdoors »

fishndoc wrote:There was a post on this forum a good many years back that I copied and have pasted above my desk, just in case I get the urge to do something stupid with my portfolio. Sorry, I don't have the name of the original author:
...I continue to think investing is as much or more psychological/behavioral as it is mathematical. I think a simple portfolio probably reduces the odds of making psychological/behavioral mistakes for most people.
A simpler portfolio keeps smart people from doing stupid things.
i agree. Since the OP specifically indicated this is non-qualified or "after-tax" money in a taxable account as opposed to tax-deferred plan monies which are qualified, the use of both value and growth funds whether indexes or not, will potentially expose the OP to paying unecessary income taxes since many of the value funds can have high taxable dividend income streams. The OP is also contemplating taking on the task himself, as a new investor I would not want to have to keep track of 10 funds. Also, depending on when OP becomes practicing doctor that will place OP in a much higher tax bracket keeping dividend income to a minimum will be desirable to avoid those special 0.9% Medicare tax and additional 3.8% tax on investment income.
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nedsaid
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Re: Discussion with Adviser

Post by nedsaid »

Run your portfolio through the Morningstar X-Ray. See if you are as diversified as you think you are.

Think of your investment advisor as training wheels on your bike. Learn what you can from him or her. At whatever point you feel you are no longer getting a benefit, you can go out on your own.

I have sought out advice. I have had portfolio reviews done several times by different folks and learned something new each time. I am mostly do it yourself, the problem with this approach is that there are always things that one doesn't think of.

The question is, are you getting what you are paying for? In many cases, folks pay fees for what is a sophisticated sales pitch rather than unbiased advice.

I give you much credit for seeking advice. Hopefully, you will learn something from the 1% you are paying.
A fool and his money are good for business.
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Leif
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Re: Discussion with Adviser

Post by Leif »

abuss368 wrote:10 funds? That is crazy. Have you thought through that rebalancing nightmare?

3 - 5 funds tops is all that is needed. Really anything more is diminishing returns and probably won't move the needle.

Keep investing simple.
Mine is in a spreadsheet, so the answer is always there. However, even if I did not have that I would not expect it to take even 30 minutes a year to re-balance a 10 fund portfolio.

You are taking an unneeded risk if you are not asset class diversified. I don't believe that is possible with 3-5 funds. Perhaps in the early years, with not much assets and time to make up, it is acceptable. Otherwise, I think such a lack of asset class diversification is an unacceptable risk.
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Re: Discussion with Adviser

Post by Aptenodytes »

Leif Eriksen wrote:
abuss368 wrote:10 funds? That is crazy. Have you thought through that rebalancing nightmare?

3 - 5 funds tops is all that is needed. Really anything more is diminishing returns and probably won't move the needle.

Keep investing simple.
Mine is in a spreadsheet, so the answer is always there. However, even if I did not have that I would not expect it to take even 30 minutes a year to re-balance a 10 fund portfolio.

You are taking an unneeded risk if you are not asset class diversified. I don't believe that is possible with 3-5 funds. Perhaps in the early years, with not much assets and time to make up, it is acceptable. Otherwise, I think such a lack of asset class diversification is an unacceptable risk.
I agree rebalancing across 10 funds is just as easy as across 3. If you acquire a lot of funds through path dependence and high transaction costs, as I have done, it isn't hard to maintain balance. I have 18 funds and execute no more than 1-2 rebalancing transactions per year, and 30 minutes would be the upper limit on the time it takes.

BUT

that's very different from acquiring 10 funds at the outset because you think you have 10 different asset categories across which you need to maintain balance. That seems bonkers to me.

You have piqued my curiosity though: what are your 10 asset categories?
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Leif
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Re: Discussion with Adviser

Post by Leif »

Aptenodytes wrote:

You have piqued my curiosity though: what are your 10 asset categories?
There is nothing magic about 10, just the number mentioned in previous posts.

You want non-overlapping funds. Some come here with 20-30 funds and have less asset class diversification then a 3-5 fund portfolio.

I accept the Fama/French research the says there is unique risk/reward in the small and value categories. I think the following are important.

US blend (TSM) - In taxable
Interational Blend (ITSM) - in taxable

Others I hold in tax advantaged.
Small Value US
REITS US
Small Value International
Emerging market
Total Bond fund - US
TIPS
Short Term bond - US
Commodity fund (I only have 5%, so it is optional, IMO. Inflation hedge for those retired)
Money market fund (now try to minimize in favor of CDs)

I agree with Larry, when he said, paraphrasing, simplicity is overrated.
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Re: Discussion with Adviser

Post by ogd »

Leif Eriksen wrote:You are taking an unneeded risk if you are not asset class diversified. I don't believe that is possible with 3-5 funds.
...
Leif Eriksen wrote:US blend (TSM) - In taxable
Interational Blend (ITSM) - in taxable
Small Value US
REITS US
Small Value International
Emerging market
Total Bond fund - US
TIPS
Short Term bond - US
Commodity fund
Money market fund
So I'm sure you know this, but five of your funds are not additional diversification, they are tilts -- concetration in specific sectors in the belief that the market is consistently underpricing them. The sixth I highlighted, cash, is not normally taken into account in a 3 fund portfolio. What's left is five funds that offer pretty much maximal diversification. So it certainly looks possible to me.
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Leif
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Re: Discussion with Adviser

Post by Leif »

ogd wrote:
So I'm sure you know this, but five of your funds are not additional diversification, they are tilts -- concetration in specific sectors in the belief that the market is consistently underpricing them. The sixth I highlighted, cash, is not normally taken into account in a 3 fund portfolio. What's left is five funds that offer pretty much maximal diversification. So it certainly looks possible to me.
I don't believe the marketing is under-pricing anything. I believe they are priced according to perceived risk.

When you said no additional (individual stock) diversification with the funds I disagree to some extent. Particularly with EM and commodities. I don't believe they are found in my EAFE fund. However, on asset class diversification, which is what I'm striving for, I believe my S&D portfolio is giving me much better diversification. And returning to some of the original discussions on this thread, I think the S&D gives me better/more options when I start drawing down my portfolio in retirement, since it allows me to pull from the better performing asset classes and gives the other classes a chance to recover.
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Re: Discussion with Adviser

Post by ogd »

Leif Eriksen wrote:I don't believe the marketing is under-pricing anything. I believe they are priced according to perceived risk.
This is debatable, see recent thread about risk vs behavioral story. If you were merely adequately compensated for the risk, then there would be nothing special about SV in my opinion -- just hold a little more TSM and be done with it. I think that in the past there has been some persistent risk-adjusted underpricing going on, for whatever reason.
Leif Eriksen wrote:Particularly with EM and commodities. I don't believe they are found in my EAFE fund.
We agree here -- if your fund does not have EM and (guessing) SIV then it's reasonable to add them, but it's [probably] your choice not to hold a complete TISM. I did not dispute commodities at all.
Leif Eriksen wrote:However, on asset class diversification, which is what I'm striving for, I believe my S&D portfolio is giving me much better diversification.
Disagree. TSM is more diversified that TSM + SV, much like 100% TSM is far more diversified than 50% TSM + 50% AAPL, something that I don't think you would dispute. For example, I am quite uncomfortable with VSIAX being 40% in finance + real estate, vs 17% the overall market. You know, those sectors.
Leif Eriksen wrote:And returning to some of the original discussions on this thread, I think the S&D gives me better/more options when I start drawing down my portfolio in retirement, since it allows me to pull from the better performing asset classes and gives the other classes a chance to recover.
I agree with this, although if it was only about rebalancing, holding non-overlapping funds (like your split of internationals, assuming it's market-weighted) would be the right way to do it. Yours is a tilter's portfolio and there's nothing wrong with that at all, but you shouldn't present it as a model of diversification.
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Leif
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Re: Discussion with Adviser

Post by Leif »

Without dragging this on too long I would only add I think the hang-up may be on the word diversification. I try to be careful to say ASSET CLASS diversification. When most think of diversification they ask how many stocks in the fund/portfolio. TSM and ITSM gives you mostly a large growth portfolio. Asset class diversification concentrates balancing out the asset classes. If large is doing good you have that. If small is doing good you also have that.

I've seen enough evidence that asset class diversification has been good over the long run. I do pay a bit more in expense ratio, and it is a bit more complex then a 3-5 fund portfolio, however, I believe it to be worthwhile trade-off. If you want to call this tilting I don't have a problem with that.

Also I believe small and value gives you UNIQUE risk/reward so it is not just a matter of adding more TSM to try to get to the same return and SD.
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knopflergrass
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Re: Discussion with Adviser

Post by knopflergrass »

nedsaid wrote:Run your portfolio through the Morningstar X-Ray. See if you are as diversified as you think you are.

Think of your investment advisor as training wheels on your bike. Learn what you can from him or her. At whatever point you feel you are no longer getting a benefit, you can go out on your own.

I have sought out advice. I have had portfolio reviews done several times by different folks and learned something new each time. I am mostly do it yourself, the problem with this approach is that there are always things that one doesn't think of.

The question is, are you getting what you are paying for? In many cases, folks pay fees for what is a sophisticated sales pitch rather than unbiased advice.

I give you much credit for seeking advice. Hopefully, you will learn something from the 1% you are paying.
Thanks to everyone for their responses; I especially appreciate the above post. Getting back to my original post question 2, I've found that the adviser that I have has provided value for me in the past year. I'm just ready to take the training wheels off and i'm not sure the money is well spent anymore. That being said, the fees have always seemed high and the sales pitch thing is a wolf in sheep's clothing.

In regard to question 1, let's say an investor hypothetically needed to withdraw 10K from their taxable nonqual funds for whatever emergent reason. Bogleheads would say that in a 3, 5, or 10 fund portfolio it doesnt matter which fund the money is withdrawn from in regard to tax considerations?
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White Coat Investor
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Re: Discussion with Adviser

Post by White Coat Investor »

knopflergrass wrote: In regard to question 1, let's say an investor hypothetically needed to withdraw 10K from their taxable nonqual funds for whatever emergent reason. Bogleheads would say that in a 3, 5, or 10 fund portfolio it doesnt matter which fund the money is withdrawn from in regard to tax considerations?
Who said that? It certainly does matter. The higher the basis of the investment, the lower the taxes due upon liquidating it. If you put $10K into each of 10 funds on the same day, and two years later needed $10K, where do you pull the money from to have the lowest possible tax bill?

Fund 1: $11K
Fund 2: $12K
Fund 3: $9K
Fund 4: $8K
Fund 5: $10K
Fund 6: $15K
Fund 7: $5K
Fund 8: $12K
Fund 9: $10K
Fund 10: $10K

If your goal is to minimize tax due, you can sell one of the funds worth exactly what you paid for it ($10K) and no taxes will be due. Another approach would be to sell a little bit of a winner and a little bit of a loser. Again, no taxes due. You could also tax loss harvest all the losers and lower your tax bill from your regular earned income. You could also transfer one of the funds with a low basis to value ratio to your favorite charity instead of giving cash this year, further saving taxes.

But lowering the tax bill isn't necessarily the goal. The goal is the highest after-tax, risk-adjusted returns. So perhaps you do want to sell some winners in order to rebalance the portfolio, taxes be damned.

At any rate, there are lots of considerations. And no, I don't think "Bogleheads" believe the statement you seem to think they believe. If you want to pay an adviser to help you with this task, that's fine. But keep in mind that understanding how this works is far easier than figuring out how a nephron works. So don't pay anyone too much when you could learn to do it yourself in the time it took you to read my post.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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knopflergrass
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Re: Discussion with Adviser

Post by knopflergrass »

EmergDoc wrote:
knopflergrass wrote: In regard to question 1, let's say an investor hypothetically needed to withdraw 10K from their taxable nonqual funds for whatever emergent reason. Bogleheads would say that in a 3, 5, or 10 fund portfolio it doesnt matter which fund the money is withdrawn from in regard to tax considerations?
Who said that? It certainly does matter. The higher the basis of the investment, the lower the taxes due upon liquidating it. If you put $10K into each of 10 funds on the same day, and two years later needed $10K, where do you pull the money from to have the lowest possible tax bill?

Fund 1: $11K
Fund 2: $12K
Fund 3: $9K
Fund 4: $8K
Fund 5: $10K
Fund 6: $15K
Fund 7: $5K
Fund 8: $12K
Fund 9: $10K
Fund 10: $10K

If your goal is to minimize tax due, you can sell one of the funds worth exactly what you paid for it ($10K) and no taxes will be due. Another approach would be to sell a little bit of a winner and a little bit of a loser. Again, no taxes due. You could also tax loss harvest all the losers and lower your tax bill from your regular earned income. You could also transfer one of the funds with a low basis to value ratio to your favorite charity instead of giving cash this year, further saving taxes.

But lowering the tax bill isn't necessarily the goal. The goal is the highest after-tax, risk-adjusted returns. So perhaps you do want to sell some winners in order to rebalance the portfolio, taxes be damned.

At any rate, there are lots of considerations. And no, I don't think "Bogleheads" believe the statement you seem to think they believe. If you want to pay an adviser to help you with this task, that's fine. But keep in mind that understanding how this works is far easier than figuring out how a nephron works. So don't pay anyone too much when you could learn to do it yourself in the time it took you to read my post.
Good point EmergDoc, but i'm a urologist i'm still not sure i've figured out how a nephron works. :mrgreen: Thanks the response, a lot of great points there.
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Taylor Larimore
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Excellent illustration of how capital gain taxes work.

Post by Taylor Larimore »

EmergDoc:

I love your illustration of how taxes can affect various funds differently. I haven't seen that easy-to-understand illustration before.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
pkcrafter
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Re: Discussion with Adviser

Post by pkcrafter »

fishndoc wrote:There was a post on this forum a good many years back that I copied and have pasted above my desk, just in case I get the urge to do something stupid with my portfolio. Sorry, I don't have the name of the original author:
...I continue to think investing is as much or more psychological/behavioral as it is mathematical. I think a simple portfolio probably reduces the odds of making psychological/behavioral mistakes for most people.
A simpler portfolio keeps smart people from doing stupid things.
fishndoc, that is a quote worth keeping because it shows the brilliance of John Bogle's investing philosophy. Perhaps the main advantage of Bogle's philosophy is not indexing or low costs, but rather the built-in effect of limiting behavioral mistakes.
"Investing is not a science. It is a human activity that involves both emotional and rational behavior." ~John Bogle in The Clash of the Cultures.


Thanks to Fallible for that quote. Although we don't hear much about the psychological side, this quote shows that Mr. Bogle is quite aware of the current thinking in behavioral economics as well as the damage uncontrolled emotions can cause and it's reflected in the Bogleheads' philosophy.

Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple

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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