Portfolio review and advice - update 2

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Portfolio review and advice - update 2

Postby BigOilTexan » Tue Jun 25, 2013 3:54 pm

Here's my first portfolio Q&A thread from April last year.

I'm happy to report that with the help of some patient forum members I...

  • closed my Scottrade and Schwab accounts and moved the holdings into a WellsFargo PMA brokerage account
  • reduced my total number of holdings from 33 to 16 while paying $0 in commissions or fees
  • decided on an actual allocation plan instead of whatever I felt was 'on sale' that month and reallocated to approximate it
  • learned about the tax-advantages of different types of investments and started to reallocate accordingly between accounts
  • learned how to take advantage of backdoor RothIRA contributions
  • started reading The Four Pillars of Investing

Additionally my wife and I have this week finished paying off her $180,000 ($160,000 in principle, only $20,000 in interest) @6.8% med school loans in only 20 months! :beer

To celebrate I've come back for another portfolio review to make sure I'm on the right track and seek more of the boglehead collective wisdom. Here we go...hopefully less confusing this time.

Emergency funds: 1 month, much more if I liquidated my WellsFargo brokerage portfolio and transfered to checking which would take ~ 1 week.
Debt: $0.00 !!
Tax Filing Status: Married filing Jointly
Tax Rate: 28% Federal 0% State
State of Residence: Texas
Age: 26, spouse 27
Combined gross income: $215,000

Desired Asset allocation:
  • 85% stocks/15% bonds/0% cash
  • 65% US stocks/35% international stocks
  • 75% large cap stocks with tilt towards value over growth, 10% mid-cap and 15% small cap
  • 20% of international stock in emerging markets
  • overweight in energy (15% of sector), real estate (10% of sector) and basic materials (5% of sector)
  • even split between short, medium and long-term bonds

Current portfolio: ~$200,000

Taxable – Vanguard/WellsTrade - % total, fund, (ticker), (expense ratio), unrealized gain/loss
Funds
  • 11.4% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.22%) new
  • 3.3% Vanguard Total International Stock Index Fund Investor Shares (VGTSX) (0.22%) 5.3%
  • 2.8% Vanguard Dividend Appreciation ETF (VIG) (0.13%) 30%
  • 6.4% Vanguard Growth Index Fund Admiral Shares (VIGAX) (0.10%) 23%
  • 3.2% Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) (0.24%) 54%
  • 3.2% Vanguard Small-Cap Growth Index Fund (VISGX) (0.24%) 52%

Stocks
  • 4.0% Apple Inc (AAPL) 44%
  • 4.3% Anadarko Petroleum Corp (APC) 48%
  • 3.0% ExxonMobil Corp (XOM) 26%
  • 1.8% Valero (VLO) 107%

His Roth IRA at Vanguard
  • 2.4% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) (0.22%)
  • 5.4% Vanguard REIT ETF (VNQ) (0.10%)
  • 6.1% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.16%)

Her 403(b) at Fidelity – 2% company match
  • 9.8% Spartan Total Market Index Fund - Fidelity Advantage Class (FSTVX) (0.07%)

His 401(k) at ING - 7% company match
  • 14.3% Equity Units (tracks S&P 500) (0.01% management fee, ?? expense ratio)
  • 9.5% International Equity Units (tracks Morgan Stanley Capital International EAFE) (0.025% management fee, ?? expense ratio)
  • 9.6% Bond Units (tracks Barclay’s Capital Aggregate Bond Index) (0.01% management fee, ?? expense ratio)

New annual Contributions
~$28,600 his 401k (including employer match)
~$18,500 her 403b (including employer match)
~$75,000 taxable
$5,000 each backdoor Roth

Funds available in his 401(k)
Only what’s listed above

Funds available in her 403(b)
About 200 including…
Spartan Total Market Index Fund - Fidelity Advantage Class (FSTVX) (0.07%)
Spartan Global ex U.S. Index Fund - Fidelity Advantage Class (FSGDX) (0.28%)
Spartan Mid Cap Index Fund - Fidelity Advantage Class (FSCKX) (0.20%)
Spartan 500 Index Fund - Institutional Class (FXSIX) (0.05%)
Spartan Real Estate Index Fund - Fidelity Advantage Class (FSRVX) (0.19%)
Spartan Small Cap Index Fund - Fidelity Advantage Class (FSSVX) (0.23%)
Spartan Total Market Index Fund - Fidelity Advantage Class (FSTVX) (0.07%)
Spartan Extended Market Index Fund - Fidelity Advantage Class (FSEVX) (0.07%)
Spartan International Index Fund - Fidelity Advantage Class (FSIVX) (0.17%)
Spartan U.S. Bond Index Fund - Fidelity Advantage Class (FSITX) (0.17%)
Spartan Short-Term Treasury Bond Index Fund - Fidelity Advantage Class (FSBAX) (0.10%)
Spartan Intermediate Treasury Bond Index Fund - Fidelity Advantage Class (FIBAX) (0.10%)
Spartan Long-Term Treasury Bond Index Fund - Fidelity Advantage Class (FLBAX) (0.10%)

------------------------------------------------------------------------------------------------------------------------------

What I'd like advice on:

1) Rebalancing for better tax-efficiency...

-All 15% bond allocation in his 401(k) with Bond Units?

-Moving international funds out of Roth-IRA and 401(k) - and consolidating to VTIAX.

-If I buy international in my taxable accounts with new money and slowly sell the internatinal in the tax-advantaged accounts to keep my overall allocation, what would be the next least tax-efficient fund besides VNG and Bond units to hold in tax-advantaged accounts? ...any future VISGX or VIMSX?...VVIAX to achieve value tilt? (not planning on buying any more VIG).

2) I'm assuming that maxing contributions to both of our 401(k) and 403(b) is top priority, followed by backdoor Roth IRA and taxable last.

3) Now that the loans are payed off we're talking about saving for a house downpayment. I could sell some stuff in taxable to generate $$ pretty easily but admittadly I havent read too much on what the safest short-term investment is besides cash. Are short-term bonds still a better bet than cash? I know I must do more research myself on this.

4) I know I could simplify much further but everything left that I would like to consolidate - all remaining individual stock positions, VIG have too much unrealized capitals gains for me to think its worthwhile selling just for the sake of simplicity. They are included in my calculations for overall asset allocation balance.

5) Is an even split between short/medium/long-term bonds ok for now? Should I wait until I know enough to answer this question myself before trying to get too cute?

6) Wash sale question: If I sell A with a $1000 loss, B with a $500 gain and C with a $500 gain, then use all the proceeds to buy A, does the wash sale eliminate the capital gain/loss offset?
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Re: Portfolio review and advice - update 2

Postby Hastibe » Tue Jun 25, 2013 8:52 pm

BigOilTexan wrote:Additionally my wife and I have this week finished paying off her $180,000 ($160,000 in principle, only $20,000 in interest) @6.8% med school loans in only 20 months! :beer

Congrats! That's terrific! I'm jealous--my wife has almost exactly the same amount of med school loans as your wife originally had (~$215K), and I wish we could pay them off as quickly! If you have any suggestions about how we're thinking of handling them (my portfolio review post is here), definitely let us know! :happy

BigOilTexan wrote:1) Rebalancing for better tax-efficiency...

-All 15% bond allocation in his 401(k) with Bond Units?

-Moving international funds out of Roth-IRA and 401(k) - and consolidating to VTIAX.

-If I buy international in my taxable accounts with new money and slowly sell the internatinal in the tax-advantaged accounts to keep my overall allocation, what would be the next least tax-efficient fund besides VNG and Bond units to hold in tax-advantaged accounts? ...any future VISGX or VIMSX?...VVIAX to achieve value tilt? (not planning on buying any more VIG).

I'm going to let people with more experience answer your questions, but you might find retiredjg's and grabiner's posts in this thread (starting at the post that the link will take you to) helpful in answering some of these questions (their posts were in response to a question I asked about how to calculate the tax efficiency or inefficiency of a fund). Also, if you haven't read the wiki page on principles of tax-efficient fund placement, that might be helpful, too.
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Re: Portfolio review and advice - update 2

Postby BigOilTexan » Thu Jun 27, 2013 1:34 pm

Thanks for the link...here's what I got out of it.

The list below is the funds I would like to invest in to achieve my target asset allocation with the 1/3/5 year difference for tax adjusted returns after distributions (with the account I currently hold it in, if any). If I understand the principle, the benefit of having international funds in the taxable account is to take advantage of the foreign tax credit; however, the international funds seem to have greater tax implications...does this cancel out the benefit of the foreign tax credit and therefore make sense to hold these in tax-advantaged accounts?

Am I interpreting these number correctly?

Also, why is the difference for FSTVX so high? I got those values from Morningstar, the rest from from Vanguard.

Bonds:
  • Bond Units (401k)
International bonds:
  • ?
US stocks:
  • Equity Units (401k)
  • FSTVX (403b) 0.87%, 0.75%, 0.74%
  • VIG (taxable) 0.45%, 0.39%, 0.37%
US growth stocks overweight
  • VIGAX (taxable) 0.28%, 0.24%, 0.21%
US mid-cap stocks overweight
  • VIMSX (taxable) 0.25%, 0.32%, 0.24%
US small-cap stocks overweight
  • VISGX (taxable) 0.19%, 0.12%, 0.12%
Energy sector overweight
  • Individual stocks (taxable) (just what I currently own)
Real estate overweight
  • VNQ (Roth IRA) 1.15%, 1.18%, 1.28%
Materials sector overweight
  • VAW 0.30%, 0.34%, 0.34%
International stocks:
  • VTIAX (401k) 0.66% / VGTSX (taxable) 0.63%, 0.46%, 0.45%
  • VFWAX 0.66% / VFWIX 0.59%, 0.46%, 0.40% + VSS (taxable) 0.69%, 0.65% (TLH equiv)
International small-cap overweight
  • VSS (taxable) 0.69%, 0.65%
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Re: Portfolio review and advice - update 2

Postby Hastibe » Sun Jun 30, 2013 12:28 am

BigOilTexan wrote:If I understand the principle, the benefit of having international funds in the taxable account is to take advantage of the foreign tax credit; however, the international funds seem to have greater tax implications...does this cancel out the benefit of the foreign tax credit and therefore make sense to hold these in tax-advantaged accounts?

The foreign tax credit is estimated to be 7% of the dividends of the eligible fund in question (see this post). Also, this comparison of tax-managed funds on the wiki may be helpful. So, the foreign tax credit will make the international funds more tax efficient, but I'm not sure how to calculate the benefit exactly, beyond running a rough calculation, like I've done below.

At a 28% marginal (15% qualified) tax rate, the tax consequences of holding $10K of VTIAX and VIGAX could be calculated in this way:

  • VTIAX: $10K * 3.14% = $314 in annual dividends. $213.52 (68%) of those dividends are taxed at 15% and $100.48 (32%) are taxed at 28%, resulting in taxes owed being $60.16 - the foreign tax credit, which is 7% of $314, or $21.98. $60.16 - $21.98 = $38.18 of taxes owed.
  • VIGAX: $10K * 1.38% = $138 in annual dividends. $138 (100%) of those dividends are taxed at 15%, resulting in taxes owed being $20.70.
Thus, this would indicate that VIGAX is more tax efficient than VTIAX. However, this calculation is only as good as the data put into it and is only accurate right now, as next year (or even next month) the distribution yield and percentage of qualified dividends may be different for the funds--if it was possible to get the average distribution yield and percentage of qualified dividends for a fund for the past five years or something, then I think this calculation would carry more weight, but, at least it's something?

BigOilTexan wrote:Also, why is the difference for FSTVX so high? I got those values from Morningstar, the rest from from Vanguard.

Looks like Morningstar's values are wrong or calculated differently in some way--here are the before and after tax differences I got for FSTVX on Fidelity's page for the fund: 0.38% (1 year), 0.34% (3 year), 0.35% (5 year).
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Re: Portfolio review and advice - update 2

Postby grabiner » Sun Jun 30, 2013 11:15 pm

BigOilTexan wrote:Also, why is the [tax] difference for FSTVX so high? I got those values from Morningstar, the rest from from Vanguard.


Morningstar doesn't always know about qualified dividends, and I don't think it adjusts for the foreign tax credit. (In addition, the Morningstar data has some errors; I have noticed the problems with some of Vanguard's international funds.) Numbers from the fund company are more reliable.
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Re: Portfolio review and advice - update 2

Postby BigOilTexan » Tue Jul 02, 2013 11:45 am

Thanks for the info! Looks like I shouldn't worry about transferring international to taxable and creating capital gains in the process as they're close to a wash tax-effiency wise.

I guess everything else is in order for now.
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