First 401k & Portfolio Review

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First 401k & Portfolio Review

Postby Utkap » Mon Jul 15, 2013 6:55 am

Hi everyone. I've been following bogleheads for several years in order to construct a portfolio in my taxable account. Firstly, thank you for everything that you have taught me. I found this site when googling for valuation formulas to try to beat the market. It was a relief to finally find the reason why they didn't exist.

I now have access to my first 401k, and I would please appreciate advice on how to proceed, as well as comments on the comparably large taxable account that is already fully invested. I have a large annual income and reserve funds. Barring extraordinarily bad planning, I will never need to access any funds I invest, but I am on this forum to prevent that.

My thought process on the allocations:
I have a very large time horizon, so I wanted to try to increase the risk/return a bit. I tried to tilt to just about double the US market's mid cap and small cap percentages. I also wanted a value tilt. I realize I have no idea if this will pay off in the end, but this is my best guess at trying to increase returns a little. Having both blend and value funds for mid/small should also allow me to tax loss harvest if I choose to, unless I'm mistaken.

I have a spreadsheet to help me rebalance, so having a few extra funds as opposed to a 3-fund portfolio does not really bother me. Accounting might get messy down the road.

I plan to rebalance mostly through deposits, not through selling funds in the taxable account.

Emergency funds: Yes.
Debt: None.
Tax Filing Status: Single
Tax Rate: 39.6% Federal, 10.3% State
State of Residence: California
Age: 24
Desired Asset allocation: 85% stocks / 15% bonds
Desired International allocation: 40% of stocks

Current retirement assets

Taxable at Vanguard
Total: $400,000
US (60% of stocks), percentages are for US stocks only:
65% VTSAX (total) - ER: 0.05%
10% VIMAX (mid blend) - ER: 0.10%
10% VMVAX (mid value) - ER: 0.10%
7.5% VSMAX (small blend) - ER: 0.10%
7.5% VSIAX (small value) - ER: 0.10%

Style boxes illustrating that I tried to double mid & small, instead of quadrupling small cap value:

100% VTSAX - total US
Image

70% VTSAX, 30% VSIAX - small cap value (suggested by a poster below)
Image

My US allocation
Image

International (40% of stocks), percentages are for international stocks only:
85% VTIAX (total, ex-US) - ER: 0.16%
15% VSS (ex-US small/mid blend) - ER: 0.25%

Bonds (15% of portfolio), percentages are for bonds only
100% VCADX (intermediate term, california muni) - ER: 0.12%

401k
Nothing yet. Planned max contribution per year.

IRA
None.

Contributions
17.5k/year 401k
Taxable contributions unlikely this year.

Available Funds
Fidelity BrokerageLink is available with no annual fees. From here, I can buy Fidelity funds with no transaction fees. I can also buy ETFs for a $7.95 commission.

In addition to BrokerageLink, I have access to the following funds:

Fidelity Government Securities (FGOVX) - ER: 0.45%
Dimensional Emerg Mrkts ValueP (DFEVX) - ER: 0.61%
Fidelity Institu Money Mkt - I (FMPXX) - ER: 0.21%
Fidelity Contrafund - Class K (RCNKX) - ER: 0.62%
Fidelity OTC Port - Class K (FOCKX) - ER: 0.77%
Fidelity LowPrice Stk - ClassK (FLPKX) - ER: 0.76%
American EuroPac Grwth R6 (RERGX) - ER: 0.50%
Amer Capital Wrld Grwth&Inc R6 (RWIGX) - ER: 0.45%
Vanguard Windsor II Adm (VWNAX) - ER: 0.27%
American Beacon Sml Cap Val (AVFIX) - ER: 0.92%
PIMCO Total Return Inst (PTTRX) - ER: 0.46%
Vanguard Explorer Fund-Admiral (VEXRX) - ER: 0.32%
Vanguard Inst Index Fund (VIIIX) - ER: 0.02%
Vanguard Target Ret 2015 (VTXVX) - ER: 0.16%
Vanguard Target Ret 2025 (VTTVX) - ER: 0.17%
Vanguard Target Ret 2035 (VTTHX) - ER: 0.18%
Vanguard Target Ret 2045 (VTIVX) - ER: 0.18%
Vanguard Target Ret Income (VTINX) - ER: 0.16%
Vanguard Mid-Cap Index Fund (VMCPX) - ER: 0.06%

Updated Concerns:
1) There don't seem to be any Fidelity index funds tracking value stocks.
2) I don't have anything to sell in my taxable account (capital gains from the market surge, and my muni bond fund was recently taken to the minimum value for admiral class). I don't have any new money to add to it, but the 401k is getting large deposits every 2 weeks. Should I buy a Spartan international fund in the 401k and forget about the tax implications?
3) The large cap fund in my 401k with a 0.02% expense ratio tracks the S&P 500, not the total stock market. My allocation up to this point has been based on the total stock market VTSAX fund. Buying just large caps would throw off my intended 2x the market in mid & small caps. Should I switch to the S&P 500 fund, or get a Spartan total market?

I didn't take into account a 401k when I originally set up my taxable, so I am slightly regretting having a mid cap value fund in my allocation, but I think there is a way to make it all work. Do you have any suggestions for how I can structure my 401k to reach my target allocation, using my available 401k funds and/or the BrokerageLink account?

Thank you very much for your time. I greatly respect your opinions and appreciate your responses.
Last edited by Utkap on Wed Aug 28, 2013 4:18 pm, edited 4 times in total.
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Re: First 401k & Portfolio Review

Postby zaboomafoozarg » Mon Jul 15, 2013 11:04 pm

A traditional 401k is better in a vast majority of situations than a Roth 401k, or at least has been historically.
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Re: First 401k & Portfolio Review

Postby zebrafish » Mon Jul 15, 2013 11:48 pm

You have a very high tax rate currently. Most individuals have lower income tax during retirement. Thus, a traditional 401k beats out a Roth 401k IMO.

If you don't have any pretax traditional IRA accounts or pretax SEP-IRA accounts, then you should be able to make a "backdoor" Roth. Check the Wiki for more information.

I would max your 401k and make the max backdoor Roth contribution. That way, you are taking maximum advantage of both mechanisms for retirement contributions and minimizing taxes.
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Re: First 401k & Portfolio Review

Postby Utkap » Tue Jul 16, 2013 6:01 pm

Thank you both for your responses.

Could you please explain what you mean when you say the traditional 401k tends to beat out the roth? I sketched out some quick math that shows that one $17,500 contribution invested for 41 years (5-8% return), a roth and a traditional with reinvested tax savings break even around a 30% tax rate in retirement. I.e. anything above 30% favors the roth. By today's numbers in California, that would mean I'd need to make less than $40,000 a year in retirement for the traditional to be beneficial. Due to the nature of my business, this is very unlikely. Am I missing the reason you suggest the traditional, or is my math/logic incorrect?

I looked more into the backdoor roth. Quick questions, if you don't mind.
1) When you backdoor by converting the IRA into a Roth, do you have to open a new account every time, or can the conversion be into the same roth IRA account every year? Is it basically just a transfer of funds from the traditional to the roth, or is it more complex/time consuming than pressing a few buttons on Vanguard's site?
2) Does a backdoor roth make accounting more difficult? If so, how?

Thank you very much.
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Re: First 401k & Portfolio Review

Postby ruralavalon » Tue Jul 16, 2013 7:03 pm

Welcome to the forum :) .

For tax your income rates, please give the marginal rates.

In taxable domestic if just starting out (don't know what taxable gains you may have already built up), I would for simplicity and expected efficiency go with this (adjusted for whatever you ultimately decide for the 401k):
70% Total Stock Market; and
30% Small Cap Value.
Rick Ferri blog post, Winning with Small Value Stocks . 70/30 TSM/SCV seems to be the historical efficient frontier.

In taxable might (again, don't know what taxable gains you may have already built up) shift more toward international, to avoid having to use the more expensive less diversified international funds in the 401k.

In the 401k, is the $75 fee for some funds for any transation, even reinvestment of dividends etc., or just for the initial purchase, or just for initial purchase and any periodic or monthly purchase?

In the 401k, for domestic stocks clearly:
Vanguard Inst Index Fund (VIIIX) - ER: 0.02%

In the 401k, for bonds:
Fidelity Government Securities (FGOVX) - ER: 0.45%; or
PIMCO Total Return Inst (PTTRX) - ER: 0.46%; or perhaps the brokerage link.

What are all fees associated with using the brokerage link? Usually there is an annual charge, a per transaction charge, or both. The usefullness of the brokerage link depends at lot on what the fees are.

On Roth vs trad 401k, please see :
TFB post, The Case Against Roth 401(k) ;
Wiki article link: Traditional versus Roth ; and
Forum Discussion, Roth vs. Traditional 401K .

In general:

"if the marginal tax rate at retirement is the same as it is now, the Traditional and Roth 401(k)’s are equivalent. If the marginal tax rate is higher now than in retirement, one is better off contributing to a Traditional 401k. If the current marginal tax rate is lower, one is better off contributing to a Roth 401k.

But that applies only to the marginal dollar, which is the last dollar you can shift between Traditional and Roth 401(k). It is not necessarily the case for the entire contribution or the average dollar."


Please add any further information to your original post using the "edit" button; it helps a lot to have all of your information in one place.
Last edited by ruralavalon on Tue Jul 16, 2013 7:48 pm, edited 1 time in total.
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Re: First 401k & Portfolio Review

Postby maxim81 » Tue Jul 16, 2013 7:43 pm

400K and 24? Good job! Keep it up for starting early.... you'll retire soon!
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Re: First 401k & Portfolio Review

Postby Utkap » Wed Jul 17, 2013 1:54 am

Thank you. The general opinion seems to be for the traditional 401k, so that is where I will start. A line from an article ruralavalon posted does bother me though. "A Roth 401(k) is also good for people who are already in the top tax bracket and expect to be there forever." This may be me, but I don't have a crystal ball.

ruralavalon wrote:In taxable domestic if just starting out (don't know what taxable gains you may have already built up), I would for simplicity and expected efficiency go with this (adjusted for whatever you ultimately decide for the 401k):
70% Total Stock Market; and
30% Small Cap Value.
Rick Ferri blog post, Winning with Small Value Stocks . 70/30 TSM/SCV seems to be the historical efficient frontier.

My intent was to double the US market's holdings of small/mid for both value and blend. Using the allocation you suggest, mid caps are barely affected, but small cap value is at 460% of normal values. Please see the following pictures of morningstar style boxes to illustrate what I mean. Also note that I do not claim to have a superior allocation. It is just based on a gut feeling, and also that I have a soft spot for mid caps.

100% VTSAX - total US
Image

70% VTSAX, 30% VSIAX - small cap value
Image

My US allocation I listed in the OP
Image

Holding 6-7 funds to accomplish what 2 could do does bother me, but with the electronic records that Vanguard keeps for me, I think I am ok with it, unless anyone can foresee a problem down the road?

ruralavalon wrote:In the 401k, is the $75 fee for some funds for any transation, even reinvestment of dividends etc., or just for the initial purchase, or just for initial purchase and any periodic or monthly purchase?
What are all fees associated with using the brokerage link? Usually there is an annual charge, a per transaction charge, or both. The usefullness of the brokerage link depends at lot on what the fees are.

Honest answer is I don't know. I haven't been given information on the 401k yet, but that will come soon.
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Re: First 401k & Portfolio Review

Postby ruralavalon » Wed Jul 17, 2013 7:37 am

Utkap wrote:The general opinion seems to be for the traditional 401k, so that is where I will start. A line from an article ruralavalon posted does bother me though. "A Roth 401(k) is also good for people who are already in the top tax bracket and expect to be there forever." This may be me, but I don't have a crystal ball.

Also it is hard to predict what the Congress will have enacted for tax brackets 20, 30, 40 or 50 years from now. So it is hard to turn the decision into just an arithmetic problem.


Utkap wrote:My intent was to double the US market's holdings of small/mid for both value and blend. Using the allocation you suggest, mid caps are barely affected, but small cap value is at 460% of normal values. Please see the following pictures of morningstar style boxes to illustrate what I mean. Also note that I do not claim to have a superior allocation. It is just based on a gut feeling, and also that I have a soft spot for mid caps.

It is a bit unusual to have that "soft spot" for midcaps, but not a bad idea. You could search for "mels unloved midcaps" on the forum and find you are not alone and are in good company, for example:
2008 Forum Discusson, Mel's Unloved Midcaps ;
2007 Forum Discussion, Mel's Unloved Mid Caps Still Get No Respect ; and
2011 Forum Discussion, Revisiting Mel's Unloved Mid-Caps . . . again .

Fortunately in your 401k you have an excellent tool to help you get your midcap fix with good diversification and a low expense ratio, namely: Vanguard Mid-Cap Index Fund (VMCPX) - ER: 0.06%.

When it gets down to putting together a plan, it will be best to look at the allocation across all accounts and at the choices in all accounts, and not just the allocation in the taxble account by itself.


When you get the fee informaton, add it to your original post using the "edit" button, and we can start looking at exactly what you might want to buy in the 401k and whether and how to best use the brokerage link. There are ways to organize purchases in order to mitigate the effect of otherwise high fees. Also, if you want to indicate the gain/loss situation in each of the taxable holdings, we could think about any changes there.
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Re: First 401k & Portfolio Review

Postby Utkap » Wed Aug 21, 2013 5:34 pm

Hi,

I have access to the Brokerage Link information now. I updated my original post.

There are no annual fees for the Brokerage Link account, and I can buy Fidelity funds with no transaction fee. ETFs are $7.95 per trade.

I would like to get a total bond fund or intermediate bond fund into the 401k account. I've been reading some of the threads on Fidelity vs Vanguard bond funds, and I'm still undecided. What are some opinions on paying the commission for the Vanguard fund over using Fidelity? Which funds should I consider?

I would also like to get my small cap funds into the 401k if possible. Same question...Vanguard + commission or which Fidelity funds?

Thank you.
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Re: First 401k & Portfolio Review

Postby patrick » Wed Aug 21, 2013 6:15 pm

Are you sure the $75 fee applies when using the standard 401K plan menu? I believe that is the usual fee for retail mutual fund trades but shouldn't usually apply to the standard lineup of a 401K.

I would generally favor using the Fidelity funds (and perhaps a few of the lower cost of their free trade ETFs if their spreads are low) instead of Vanguard fund in the BrokerageLink account. The expense ratios of the Fidelity Spartan funds are quite low, and though you'd have to calculate it for each investment I presume the total cost would be lower. For some of the Spartan funds, such as REITs or inflation protected bonds, they have the exact same expense ratio as the comparable Admiral shares from Vanguard. Also, if you like value tilting, you could load up on the DFA fund instead -- it's very hard to get a value tilt on emerging markets anywhere else.
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Re: First 401k & Portfolio Review

Postby ruralavalon » Thu Aug 22, 2013 8:47 am

Utkap wrote:Hi,

I have access to the Brokerage Link information now. I updated my original post.

There are no annual fees for the Brokerage Link account, and I can buy Fidelity funds with no transaction fee. ETFs are $7.95 per trade.

I would like to get a total bond fund or intermediate bond fund into the 401k account. I've been reading some of the threads on Fidelity vs Vanguard bond funds, and I'm still undecided. What are some opinions on paying the commission for the Vanguard fund over using Fidelity? Which funds should I consider?

I would also like to get my small cap funds into the 401k if possible. Same question...Vanguard + commission or which Fidelity funds?

Thank you.

For the 401k, I suggest using the Fidelity Spartan funds rather than pay commission for Vanguard funds. The Fidelity funds to consider are:

Fidelity Spartan U.S. Bond Index Fund Advantage Class, FSITX; and
Fidelity Spartan Small Cap Index Fund Advantage Class FSSUX.

It is odd to have any transaction fee for the regular 401k choices, are you certain of that $75 fee for the standard menu?

You indicate that you plan to rebalance in taxable primarily through new deposits. I suggest that as you do so you plan to move more into international in that account for reasons of tax efficiency.
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Re: First 401k & Portfolio Review

Postby Utkap » Wed Aug 28, 2013 4:17 pm

Thank you both for your replies. It's taken me this long to formulate an intelligent reply of my own.

I think you are both right and the $75 fee does not apply since it is being bought through the 401k.

The Spartan funds look like good alternatives, rather than paying the commission for Vanguard ETF's. However, I'm still struggling to figure out how I want to set up my 401k funds.

Concerns:
1) There don't seem to be any Fidelity index funds tracking value stocks.
2) I don't have anything to sell in my taxable account (capital gains from the market surge, and my muni bond fund was recently taken to the minimum value for admiral class). I don't have any new money to add to it, but the 401k is getting large deposits every 2 weeks. Should I buy a Spartan international fund in the 401k and forget about the tax implications?
3) The large cap fund in my 401k with a 0.02% expense ratio tracks the S&P 500, not the total stock market. My allocation up to this point has been based on the total stock market VTSAX fund. Buying just large caps would throw off my intended 2x the market in mid & small caps. Should I switch to the S&P 500 fund, or get a Spartan total market?

I didn't take into account a 401k when I originally set up my taxable, so I am slightly regretting having a mid cap value fund in my allocation, but I think there is a way to make it all work. Do you have any suggestions for how I can structure my 401k to reach my target allocation, using my available 401k funds and/or the BrokerageLink account?

Thank you.
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Re: First 401k & Portfolio Review

Postby ruralavalon » Tue Sep 03, 2013 3:09 pm

I saw your post last week, but was on vacation in the Northwoods where I had no easy way to post a response.

Utkap wrote: . . . I tried to tilt to just about double the US market's mid cap and small cap percentages. I also wanted a value tilt. I realize I have no idea if this will pay off in the end, but this is my best guess at trying to increase returns a little. Having both blend and value funds for mid/small should also allow me to tax loss harvest if I choose to, unless I'm mistaken.
. . . . .
Age: 24
Desired Asset allocation: 85% stocks / 15% bonds
Desired International allocation: 40% of stocks
. . . . .
I think you are both right and the $75 fee does not apply since it is being bought through the 401k.

The Spartan funds look like good alternatives, rather than paying the commission for Vanguard ETF's. However, I'm still struggling to figure out how I want to set up my 401k funds.

Concerns:
1) There don't seem to be any Fidelity index funds tracking value stocks.
2) I don't have anything to sell in my taxable account (capital gains from the market surge, and my muni bond fund was recently taken to the minimum value for admiral class). I don't have any new money to add to it, but the 401k is getting large deposits every 2 weeks. Should I buy a Spartan international fund in the 401k and forget about the tax implications?
3) The large cap fund in my 401k with a 0.02% expense ratio tracks the S&P 500, not the total stock market. My allocation up to this point has been based on the total stock market VTSAX fund. Buying just large caps would throw off my intended 2x the market in mid & small caps. Should I switch to the S&P 500 fund, or get a Spartan total market?

I didn't take into account a 401k when I originally set up my taxable, so I am slightly regretting having a mid cap value fund in my allocation, but I think there is a way to make it all work. Do you have any suggestions for how I can structure my 401k to reach my target allocation, using my available 401k funds and/or the BrokerageLink account?

You state that future contributions will be to the 401k, and seem to indicate that gains in the taxable account make it unwise to reallocate there. Then all we can look at is the new 401k and what can be had there.

So you need to adjust your desired allocation to suit what you can get in your 401k. You want a basic asset allocation of: 15% bonds; 35% international stocks; and 50% domestic stocks -- which should be achievable. Given what you can get in your 401k, you need to adjust the sub-classes of your desired asset allocation (i.e. omit some of the desired value tilt domestically and small tilt internationally).

In my opinion, keeping investing expenses low is more important than trying for strict adherance to a desired asset allocation's sub-classes.

I would not use ETFs thru the brokerage link to get those sub-classes. Using multiple ETFs 26 times per year in order to get the desired overweights to domestic value and international small cap would generate a large commission expense, causing too much cost drag to be efficient.

Here is what I would suggest for the 401k, using the brokerage link for the 3 Spartan funds. I have taken a stab at percentages that may give you the desired 2x overweight for domestic mid/small caps, but did not run a Morningstar instant x-ray to check that.

31%, Vanguard Inst Index Fund (VIIIX) - ER: 0.02%
06%, Vanguard Mid-Cap Index Fund (VMCPX) - ER: 0.06%
13%, Fidelity Spartan Sm Cp Idx
35%, Fidelity Spartan Glb ex US Idx
15%, Fidelity Spartan US Bond Idx

Given that you still have the taxable account allocated as it is, you will still have a very significant tilt to value in domestic and small in international in the overall portfolio.

I hope that this helps.
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