Portfolio Question please Help

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Portfolio Question please Help

Postby felizmh » Mon Jul 01, 2013 11:37 am

We have an extra $50K that is sitting in savings and earning almost to zero. I've been reading this forum and trying to educate me as to what would be the best way to invest this extra $50K. We really don't need the money right now, but our desirable investment horizon would be 5 years. Finally, has anyone heard of managed funds with USAA? They told me they charge 1% to manage the funds but since our investment hoirzon it's not long I think paying them the 1% might eat up all our earnings. I really appreciate your comments:

Emergency funds: Yes
Debt: Mortage (250K) @ 3.00% 15 years
Tax Filing Status: Married Filing Jointly
Tax Rate:28% Federal
State of Residence: VA
Age: 40
Desired Asset allocation: Not sure

Current retirement assets

Taxable
50K cash (for investing)

His 401k
None (Not needed - pension plan)

His Roth IRA at USAA
$25,0000
URFRX Target Retirement 40 (expense ratio 0.84%)
His Traditional IRA at USAA
$7,000
URFRX Target Ret. 40 – (expense ratio 0.84%)

Her Roth
$23,000 URFRX Target Retirment 40
Her Traditional
$7,000 URFRX Target Retirement 40
Her TSP
$35,000
L Fund 2040

Contributions
We max both IRAs according to allowable limits
5% salary contribution to TSP with company matching another 5% so total of 10%

The following was USAA's suggestion for the 50K (this is the free service they gave if we were to go with Managed funds the suggestio might change a bit)

USAA Short-Term Bond Fund (10.6%) - expense ratio 0.63%
USAA Growth and Income Fund (13.5%) - expense ratio 1.01%
USAA Value Fund (13.5%) - expense ratio 1.15%
USAA International Fund (20%) - expense ratio 1.21%
USAA Income Fund (42.4%) - expense ratio 0.59%

I am not familiar with VANGUARD products but from reading reviews about them they look like really good funds. Thanks in advance for taking the time to reply to this post! ;)
felizmh
 
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Re: Portfolio Question please Help

Postby damjam » Mon Jul 01, 2013 2:36 pm

Welcome to the forum. :)

felizmh wrote:The following was USAA's suggestion for the 50K (this is the free service they gave if we were to go with Managed funds the suggestio might change a bit)

USAA Short-Term Bond Fund (10.6%) - expense ratio 0.63%
USAA Growth and Income Fund (13.5%) - expense ratio 1.01%
USAA Value Fund (13.5%) - expense ratio 1.15%
USAA International Fund (20%) - expense ratio 1.21%
USAA Income Fund (42.4%) - expense ratio 0.59%

Personally, I think this allocation is totally inappropriate for a 5 year time horizon. In addition the expense ratios are considerably higher than comparable funds at Vanguard. The 1% managed funds fee would just add insult to injury.

If you need this money in 5 years, you need a much less risky allocation. I would suggest maxing out your I-Bond allowance (10K per year, per person). Then putting the remainder in bank CDs. If you are willing to take some risk you might go into a bond fund, however if rates rise as many expect you will take a hit. Stock funds are only appropriate if you can afford to keep the funds invested through a market downturn. Most recommend you only consider stocks when you have at least a 10 year time horizon.
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Re: Portfolio Question please Help

Postby Jim180 » Mon Jul 01, 2013 2:49 pm

I agree with damjam. Sounds like they want to put you in a 50/50 mix with a 5 year time horizon. Not good! Stick with I-bonds, laddered CD's and perhaps a short-term bond fund.
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Re: Portfolio Question please Help

Postby felizmh » Mon Jul 01, 2013 3:50 pm

Thank you damjam and Jim180 for the reply! The Managed funds did not make much sense to me when I read about them. Just out of curiosity if our horizon for investing was 10 years instead of 5 what type of allocation/Vanguard funds would you suggest? Thanks!
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Re: Portfolio Question please Help

Postby Jim180 » Mon Jul 01, 2013 4:34 pm

felizmh wrote:Thank you damjam and Jim180 for the reply! The Managed funds did not make much sense to me when I read about them. Just out of curiosity if our horizon for investing was 10 years instead of 5 what type of allocation/Vanguard funds would you suggest? Thanks!

IMO you could look at a more balanced approach with a 10 year horizon. Perhaps one of the Lifestrategy funds (Conservative growth or Moderate growth). I still think there might be a place for some CD's in the mix, even at 10 years.
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Re: Portfolio Question please Help

Postby damjam » Mon Jul 01, 2013 5:03 pm

I would suggest a Three-fund portfolio.
From Vanguard's list of "core funds," the funds that are best for a three-fund portfolio are:

Vanguard Total Stock Market Index Fund (VTSMX)
Vanguard Total International Stock Index Fund (VGTSX)
Vanguard Total Bond Market Fund (VBMFX)

Given your tax bracket I would consider substituting I-Bonds and possibly a tax-exempt municipal bond fund for Total Bond Market.

You could get more sophisticated by placing your bond holdings inside your tax-deferred accounts and increasing your stock holdings in your taxable account. That would require you to rejigger your entire portfolio as you are currently entirely invested in Target Date funds. However I would give this serious consideration since you have access to the G Fund through Her TSP account. The G fund is an excellent fund to use for your bond allocation as you can not loose principal unlike what can happen with standard bond funds.

Your asset allocation for the 50K is more a personal choice. When I had some excess money that was not earmarked for anything in particular I put it into almost 100% stock. That turned out to be fine since I did not need the money and have since added it to my "Retirement" pot which has a long time horizon. But if you foresee needing the money 10 years out, I would be fairly conservative with it. No more than 50% stock, and probably less.

I like Jim180's suggestion of LifeStrategy for the simplicity. The only difficulty I see with those funds is the tax treatment of the bond portion. I might look into Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX), if an all in one fund is what you are looking for. You could put say 40K into the fund and put 10K into I-Bonds or CDs to moderate the risk level.

I realize my suggestions are somewhat contradictory, but that is because you need to make some decisions as to how much tinkering you wish to do.
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Re: Portfolio Question please Help

Postby felizmh » Tue Jul 02, 2013 9:38 am

Thank you both for the good advise! I think those are good ideas now we just have to discuss what type of strategy we want to adopt. I was looking through what USAA posted under my saved items and I got confused and I posted their 10year recommendation vs. their 5 year recommendation; they actually suggested the following for a 5 year horizon:

Stocks 17% /Bonds 83%
USAA Short Term Fund 16.6%
USAA World Growth Fund 17%
USAA Income Fund 33.2%
USAA Intermediate Bond Fund 33.2%

The above split makes more sense now; I was wondering why they would have given me such an aggresive scenario but it was my mistake because I asked for both 5 year and 10 year recommendations. I still think I need to take a closer look into Vanguard funds too since their expense ratio seem way lower than USAA.
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