Relative newbie Portfolio Review, please!

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Relative newbie Portfolio Review, please!

Postby boston2013 » Sat Jun 15, 2013 1:18 pm

Hello and thanks in advance for any advice you can give me. I’ve been saving money at a decent rate but investing in a disorganized way. I recently moved all my taxable investments into Vanguard index funds and opened backdoor Roths for my wife and I. After reading this EXCELLENT forum and the associated wikis I realize that I could use to get more organized by looking at my taxable and tax sheltered investments as a whole (something I had never done before). Please take a look and let me know what you think. Thanks!

Emergency Funds: 6mo

Debt:
Home mortgage ~50/50 equity 3.625% $1.17mil, 9 years left on a 10 year ARM
Rental Property mortgage: ~50/50 equity 4.375% $437k, 27 years left on a 30yr fixed
HELOC: 3.49% $46k

Tax filing status: Married Joint
Tax rates: 39.6% fed, 5.3% MA state
Age: 36
Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: 30%
Current asset allocation:
US: 69.7%
Int.: 21.0%
Bond: 9.4%

Portfolio size: Low-mid six figures
Available cash to add now is an additional %14 to portfolio

Investment - %ER - % of holdings
Taxable Vanguard
Vanguard Total Stock Market Index Fund (VTSAX) 0.05 8.66
Vanguard Total International Stock Index Fund (VTIAX) 0.16 3.2
Vanguard Total Bond Market Index Fund (VBTLX) 0.1 3.37

Her 401k American Fund
American Funds The Growth Fund of America R3 (RGACX) 0.98 4.2
American Funds New Economy Fund Class R-3 (RNGCX) 1.18 4.18
American Funds SMALLCAP World Fund (RSLCX) 1.42 4.03

His 401k Fidelity
Dreyfus Basic S&P 500 Stock Index Fund (DSPIX) 0.21 7.44
Janus Triton Fund Class I (JSMGX) 0.79 7.39
BlackRock Equity Dividend Fund Institutional (MADVX) 0.72 7.29
Ivy International Core Equity I (ICEIX) 1.07 7.16
Heartland Value Plus Inst Fund (HNVIX) 0.93 7.15
T. Rowe Price New America Growth Fund (PRWAX) 0.81 6.54
Ivy Mid Cap Growth I (IYMIX) 1.05 5.72
Oppenheimer Developing Markets Fund Class Y (ODVYX) 1.03 5.28
JPMorgan Mid Cap Value Fund Institutional Class (FLMVX) 1.02 4.93
Fidelity Advisor Real Estate Fund Institutional (FHEIX) 0.93 4.82
Fidelity Advisor Materials I (FMFEX) 0.85 4.27
Franklin Utilities Class Advisor (FRUAX) 0.61 .69

His rIRA Vanguard
Vanguard Total Stock Market Index Fund (VTSAX) .05 1.85

Her rIRA Vanguard
Vanguard Total Bond Market Index Fund (VBTLX) 0.1 1.86

Options for American Fund 401k

Name (symbol) ER
American Funds AMCAP Fund Class R-3 (RAFCX) 1.04
American Funds The Growth Fund of America R3 (RGACX) 0.98
American Funds New Economy Fund Class R-3 (RNGCX) 1.18
American Funds New World Fund Class R-3 (RNWCX) 1.36
American Funds SMALLCAP World Fund (RSLCX) 1.42
American Funds Capital World Growth and Income (RWICX) 1.1
American Funds Fundamental Investors Fund (RFNCX) 0.96
American Funds Capital Income Builder Fund (RIRCX) 0.98
American Funds Income Fund of America Fund (RIDCX) 0.96
American Funds Bond Fund of America Fund (RBFCX) 0.92
American Funds Money Market Fund (RACXX) 0.52

Options for Fidelity 401k

Name (symbol) - us - int - bond - ER
BlackRock Equity Dividend Fund Institutional (MADVX) 85 10 5 0.72
Dreyfus Basic S&P 500 Stock Index Fund (DSPIX) 98 2 0 0.21
T. Rowe Price New America Growth Fund (PRWAX) 87 5 8 0.81
Ivy Mid Cap Growth I (IYMIX) 93 1 6 1.05
JPMorgan Mid Cap Value Fund Institutional Class (FLMVX) 94 1 5 0.76
Heartland Value Plus Inst Fund (HNVIX) 100 0 0 0.93
Janus Triton Fund Class I (JSMGX) 85 7 8 0.79
Ivy International Core Equity I (ICEIX) 3 90 7 1.07
Oppenheimer Developing Markets Fund Class Y (ODVYX) 0 92 8 1.03
Fidelity Advisor Materials I (FMFEX) 42 20 38 0.85
Fidelity Advisor Real Estate Fund Institutional (FHEIX) 96 0 4 0.93
Franklin Utilities Class Advisor (FRUAX) 91 6 3 0.61
Wells Fargo Stable Return Fund Class M (couldn't find asset breakdown, ER = 0.55)
American Century Investments Short Duration (APOIX) 0 0 100 0.58
Federated Institutional High Yield Bond Fund (FIHBX) 0 0 100 0.5
JPMorgan Government Bond Fund Select Class (HLGAX) 0 0 100 0.49
PIMCO Total Return Fund Institutional Class (PTTRX) 0 0 100 0.46
Eaton Vance Floating - Rate Fund Institutional (EIBLX) 0 0 100 0.77


Planned Contributions
Max 401k and rIRAs
Going to each max a 529 this year.
Have cash to contribute now = 14% of total portfolio

Questions:
1. My wife just stopped working, we should roll her 401k into a Vanguard IRA when the year ends? There will be no difference from a tax point of view to leaving it in the 401k but more investment options with lower er. Is this correct?
2. I like the three fund style of investing. What is the best way to work the fidelity 401k into this with the available funds?
3. I have never paid any attention to tax efficiency while investing but we are in such a high tax bracket that we might really benefit from it. What’s the best way to achieve this?
4. Do you factor the 529 into your total portfolio even though it's not for retirement? I would think no and that it should have it's own asset allocation.
Thanks again for any advice!
Last edited by boston2013 on Sat Jun 15, 2013 4:16 pm, edited 4 times in total.
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Re: Relative newbie Portfolio Review, please!

Postby Grt2bOutdoors » Sat Jun 15, 2013 1:31 pm

It would help if you typed out the name of the funds you own - as much as we like to help, we just don't have the time to decipher what each fund is using it's symbols. Typing it out will at least ensure that someone else will respond, other than myself.
"Luck is not a strategy" Asking Portfolio Questions
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Re: Relative newbie Portfolio Review, please!

Postby Bob's not my name » Sat Jun 15, 2013 1:34 pm

boston2013 wrote:we should roll her 401k into a Vanguard IRA when the year ends? There will be no difference from a tax point of view to leaving it in the 401k but more investment options with lower er. Is this correct?
The difference was explained by respondents in your other thread. Don't do it.
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Re: Relative newbie Portfolio Review, please!

Postby damjam » Sat Jun 15, 2013 1:38 pm

boston2013 wrote:Questions:
1. My wife just stopped working, we should roll her 401k into a Vanguard IRA when the year ends? There will be no difference from a tax point of view to leaving it in the 401k but more investment options with lower er. Is this correct? My quick glance at your portfolio is that you do not have a traditional IRA now. Is that correct? It looks like you have Roth IRAs. IF this is correct you may wish to keep the old 401k money where it is to keep open the option of backdoor Roths.
2. I like the three fund style of investing. What is the best way to work the fidelity 401k into this with the available funds? I need a little more time to look over your funds.
3. I have never paid any attention to tax efficiency while investing but we are in such a high tax bracket that we might really benefit from it. What’s the best way to achieve this? Generally you just want to keep bonds out of taxable, REIT also if you are going to invest in it.
4. Do you factor the 529 into your total portfolio even though it's not for retirement? I would think no and that it should have it's own asset allocation. Some people do it different than me, but I like to keep retirement money in one bucket, other needs in other buckets.
Thanks again for any advice!
Top


Please, keep the tickers but add the full names of the funds as well.
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Re: Relative newbie Portfolio Review, please!

Postby boston2013 » Sat Jun 15, 2013 1:47 pm

Edited to show full names of funds.
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Re: Relative newbie Portfolio Review, please!

Postby Bob's not my name » Sat Jun 15, 2013 2:17 pm

Since your income is over half a million, you are subject to all the new surtaxes, including the ACA taxes on investment income, the ATRA rates on capital gains, and the ATRA phaseouts. The $50,000 you have invested in taxable and the additional $50,000 you have in cash might be best applied to some of your debt. To allow respondents to comment on that, you may wish to elaborate on the debt and on the unrealized gains in the taxable investments, noting also that MA taxes short term gains at 12%.
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Re: Relative newbie Portfolio Review, please!

Postby boston2013 » Sat Jun 15, 2013 4:02 pm

Thanks for restating the downside of rolling over the 401k if we want to backdoor roth in the future.
I edited top post to put value on debt and to show fund options for my wife's 401k. Since it looks like we will be keeping it I would like help picking funds for both 401ks.
I just bought the Vanguard index funds in the taxable so very little unrealized gain at this point.
Hopefully this additional info helps. Thanks again!
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Re: Relative newbie Portfolio Review, please!

Postby boston2013 » Sat Jun 15, 2013 5:40 pm

The reason why I wanted to get some money in the market and stop paying off debt as aggressively (and you can tell me if this makes sense) is that my debt is all real estate so I see paying off my debt as the same thing as investing in real estate. From this point of view I feel like I have a wildly disproportionate amount of my money in real estate already. If the real estate market where I live crashed I would be in trouble. Thoughts on this line of thinking?
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Re: Relative newbie Portfolio Review, please!

Postby Duckie » Sat Jun 15, 2013 9:38 pm

boston2013, you want an AA of 75% stocks, 25% bonds (a little low for age 36), with 30% of stocks in international. That breaks down to 52% US stocks, 23% international stocks, and 25% bonds. Here is a possible retirement portfolio:

Taxable at Vanguard -- 15%
9% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.05%)
6% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.16%)

His 401k at Fidelity -- 69%
34% (DSPIX) Dreyfus Basic S&P 500 Stock Index Fund (0.21%)
9% (JSMGX) Janus Triton Fund I Class (0.79%) <-- Roughly 80% large caps (S&P 500) plus 20% mid/small caps (Triton) makes up the total US stock market.
13% (ICEIX) Ivy International Core Equity I Class (1.07%)
13% (PTTRX) PIMCO Total Return Fund Institutional Class (0.46%)

Her 401k at American -- 12%
12% (RBFCX) American Funds Bond Fund of America R3 Class (0.92%)

His Roth IRA at Vanguard -- 2%
2
% (VEIEX) Vanguard Emerging Markets Stock Index Fund Investor Shares (0.33%) <-- Roughly 75% developed markets plus 25% emerging markets makes up most of the international stock market. It's still missing small caps and Canada, but it'll do.

Her Roth IRA at Vanguard -- 2%
2
% (VEIEX) Vanguard Emerging Markets Stock Index Fund Investor Shares (0.33%)

My comments:
-- This ignores the tax cost of selling in taxable.
-- Bonds don't belong in taxable unless there's no room in tax-sheltered, and you have room, so I removed them.
-- This has TISM in taxable to take advantage of the 
Foreign tax credit. You could have it all TISM but I left TSM there because of the potential tax hit.

Your questions:
1. My wife just stopped working, we should roll her 401k into a Vanguard IRA when the year ends? There will be no difference from a tax point of view to leaving it in the 401k but more investment options with lower er. Is this correct?
-- An IRA gives you better options, but if you're going to need to use the 
Backdoor Roth IRA method in the future, rolling to an IRA is not a good option because of the pro-rata rule.

2. I like the three fund style of investing. What is the best way to work the fidelity 401k into this with the available funds?
-- See above. This does not put the three funds (or equivalents) into each account, but uses the best/cheapest choices available.

3. I have never paid any attention to tax efficiency while investing but we are in such a high tax bracket that we might really benefit from it. What’s the best way to achieve this?
-- Put bonds in tax-sheltered (except 
I Savings Bonds through Treasury Direct). Put TISM in taxable for the FTC.

4. Do you factor the 529 into your total portfolio even though it's not for retirement? I would think no and that it should have it's own asset allocation.
-- No. It has a different purpose and time-frame.

Something to think about.

Edited to correct His 401k international fund.
Last edited by Duckie on Wed Jun 19, 2013 2:17 pm, edited 1 time in total.
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Re: Relative newbie Portfolio Review, please!

Postby connya » Sat Jun 15, 2013 10:19 pm

boston2013 wrote:The reason why I wanted to get some money in the market and stop paying off debt as aggressively (and you can tell me if this makes sense) is that my debt is all real estate so I see paying off my debt as the same thing as investing in real estate. From this point of view I feel like I have a wildly disproportionate amount of my money in real estate already. If the real estate market where I live crashed I would be in trouble. Thoughts on this line of thinking?


You became fully invested as soon as you bought the properties. Paying down your mortgage is going to decrease your liability but not change the amount of real estate assets you own, so no, it does not make sense to equate paying down debt with investing in real estate. The only way you can reduce your real estate exposure (if that's what you want to do) is by selling some.
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Re: Relative newbie Portfolio Review, please!

Postby boston2013 » Sun Jun 16, 2013 8:47 am

Thank for the replies. I calculate that at my tax rate I need to get roughly a 5.8% return or higher, otherwise I should have use the money to pay off the mortgage with the highest rate (4.375%). I'm using 20% long term capital gains and 3.8% unearned income medicare. Can anyone verify that this figure is correct?

Duckie, thanks for this. I hope this is not a dumb question but: Why did you use the (VEIEX) Vanguard Emerging Markets Stock Index instead of the (VTIAX) Vanguard Total International Stock Index Fund in the IRAs?
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Re: Relative newbie Portfolio Review, please!

Postby Bob's not my name » Sun Jun 16, 2013 10:09 am

Since the debt is not equivalent to a stock investment, I think a comparison to bond investments is appropriate and at your income level the total marginal rate is either:

39.6% federal nominal
+ 3.8% ACA tax
+ 1% ATRA itemized deduction phaseout
+ 5.25% MA tax reduced by 39.6% = 3.2%
---------------------
48%

or

28% saturated AMT rate
+ 3.8% ACA tax
+ 5.25% MA tax unreduced
---------------
37%

However, if your debt interest is entirely deductible against federal tax, then I think the only difference between debt and investment interest is the 3.8% tax, the 1% ATRA itemized deduction phaseout, and the 5.25% MA tax (if MA doesn't allow the mortgage interest deduction -- I didn't look this up).

Also consider that the home mortgage and HELOC are not fixed rates, and that the HELOC could be entirely wiped out with what you have in cash.
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Re: Relative newbie Portfolio Review, please!

Postby boston2013 » Sun Jun 16, 2013 10:38 am

MA does not allow for mortgage interest deduction.
According to my CPA I can deduct interest on the home mortgage plus the HELOC up to $1.1mil.
I keep enough cash on hand to pay off the HELOC if the prime goes up.

When comparing the advantages of paying off debt vs investing in stocks and bonds if I keep my portfolio tax efficient wouldn't the tax rate on the return be lower than the numbers you list above?

I really appreciate the help with figuring this out.
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Re: Relative newbie Portfolio Review, please!

Postby Bob's not my name » Sun Jun 16, 2013 10:48 am

Edit: Trying not to confuse the matter. Isn't it true that if you invest the cash on hand rather than paying off the HELOC, you're borrowing at 3.5% (2.1% effectively) to invest? If you "invest" in cash that's available to pay of the HELOC if the rate rises, then your investment return is zero, so why not just pay it off now and have the line of credit still available if you need it? If you invest in tax-efficient equities, then you're borrowing to buy stocks, which isn't usually recommended. If you invest in tax-efficient equities but also rebalance into bonds in tax-advantaged and you're comfortable with the liquidity challenge if the HELOC rate rises at the same time the stock market crashes, the stocks must yield more than about 2.1% after taxes, which would mean about 3%.

22% AMT LTCG rate
+ 3.8% ACA tax
+ 5.25% MA tax
---------------
31% tax rate
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Re: Relative newbie Portfolio Review, please!

Postby boston2013 » Sun Jun 16, 2013 11:38 am

Yes I could, and that is a great way to think about it.

So I still need to rebalance my portfolio. What do you think about the suggested portfolio above? If I'm going to sell within taxable to rebalance I would like to do it soon to avoid selling after unrealized gain.

Thanks
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Re: Relative newbie Portfolio Review, please!

Postby Duckie » Sun Jun 16, 2013 4:22 pm

boston2013 wrote:Why did you use the (VEIEX) Vanguard Emerging Markets Stock Index instead of the (VTIAX) Vanguard Total International Stock Index Fund in the IRAs?

I used VEIEX because of the developed markets fund (ICEIX) in His 401k which is missing emerging markets. VEIEX helps balance that. It's not critical and you could just use TISM (VGTSX) instead.
Last edited by Duckie on Wed Jun 19, 2013 2:18 pm, edited 1 time in total.
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Re: Relative newbie Portfolio Review, please!

Postby boston2013 » Mon Jun 17, 2013 8:06 am

That makes sense, thanks!
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Re: Relative newbie Portfolio Review, please!

Postby boston2013 » Wed Jun 19, 2013 5:20 pm

Thanks for all the help everyone.

Now that I have my accounts set up I'd like to know what the best way is to rebalance going forward.

For example if I add $19k to my taxable keeping the ratio the same between us and international there what's the best way to calculate how I need to reallocate within my 401k to keep the overall us/int/bonds ratio where I want it? I've looked at a bunch of spreadsheets online but none really look at it from this angle.

Thanks!
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Re: Relative newbie Portfolio Review, please!

Postby Duckie » Wed Jun 19, 2013 7:37 pm

When you add to taxable, add only to the international fund until it hits the AA level (23% in my example). First because of the Foreign Tax Credit and second because it will reduce your expensive international option in His 401k.

Some people only rebalance once or twice a year. You can do it more often, say once a month, if you want. I don't know how it works with a spreadsheet, but I just add up all the dollar amounts, figure what the percentages are, then what I want them to be, then go online and move stuff around in tax-sheltered accounts. It takes about 10-15 minutes.

In your taxable account, set it so the dividends and capital gains distributions are not automatically reinvested. Send them to your money market or bank account. That way you can put them where you want them.
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Re: Relative newbie Portfolio Review, please!

Postby boston2013 » Sat Jun 29, 2013 10:45 am

This is awesome. Thanks!
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