any help is appreciated!

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any help is appreciated!

Postby lbs22 » Sun Jul 21, 2013 1:25 am

After reading and asking some questions on this board I am thinking I might go with the plan below:

I was hoping that you all could help me with my proposed asset allocation plan.

I just received an inheritance of about $200k. I am planning on investing it for 7-10 years (I then plan on buying a home in cash and I am flexible about when I actually do that) In the meantime, I will not need any of this money for my day to day expenses and I already have an emergency fund. I am wanting to have some risk in hope that I can grow this money, and I am not wanting to just put it all in a savings account.

I do not have any retirement savings ( I am only 21 and just starting to save) so I do not have any room for bonds in a tax sheltered account. So this will all have to be in a taxable account.

I am in the 25% bracket and about 5% at the state level.

The portfolio that I am thinking about is as follows:

50% VTI
25% Vanguard intermediate municipal bond fund
25% Vanguard intermediate treasury fund

What do you all think about this portfolio? Do you think that it is too aggressive or too conservative? Also, any suggestions or changes that you would make?

Any suggestions are appreciated
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Re: any help is appreciated!

Postby JamesSFO » Sun Jul 21, 2013 7:34 am

(1) Remember to save money to pay taxes

(2) 7-10 years could turn out to be a challengingly short length of time to have 50% of the money in the stock market. What do the age-based college savings plans have at for age 16 (~3 years to college thus ~7 years to end of college) [arguably you could pick an earlier bracket but the portfolios can give you a sense of age-based risk]? Hint: in the AGGRESSIVE portfolio 25% stocks and in the other portfolios nothing.

(3) Why mix your bonds between municipal and treasury? Why not just go all muni bond fund?
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Re: any help is appreciated!

Postby ruralavalon » Sun Jul 21, 2013 7:39 am

I think the same thing I thought the last time you asked the same question only 3 days ago, Young person needs portfolio advice : use less VTI if you do this.

And as another much more astute poster correctly observed
pkcrafter wrote:You may be overlooking the bigger picture here. You mentioned you have nothing saved for retirement, so what is your plan to fund retirement? Do you have a company plan? I think allocating all of this 200k to a home is probably not optimal for you because if you invested a good portion of this for retirement now the power of long-term compounding would make a very significant difference in the amount in your portfolio in 30 years.

As to how to save money needed in 7-10 years, you can use some equity, but the more you use the more variability you will have in the total when you need the money. As an example, you set aside 100k with 40% equity for 7 years, you might end up with between 105,000 and 130,000.


if you don't like the advice, thats OK, its up to you. Its your money, not mine. But asking again won't change the advice, unless there is new and important information which was omitted last time. So if there is important additional information on this subject, please add that.
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Re: any help is appreciated!

Postby lbs22 » Sun Jul 21, 2013 11:14 am

JamesSFO wrote:(1) Remember to save money to pay taxes

(2) 7-10 years could turn out to be a challengingly short length of time to have 50% of the money in the stock market. What do the age-based college savings plans have at for age 16 (~3 years to college thus ~7 years to end of college) [arguably you could pick an earlier bracket but the portfolios can give you a sense of age-based risk]? Hint: in the AGGRESSIVE portfolio 25% stocks and in the other portfolios nothing.

(3) Why mix your bonds between municipal and treasury? Why not just go all muni bond fund?


Thanks for the tax suggestion. I will be sure to do that!

Thank you for your input. Perhaps I will dial down my stock allocation some. I just thought that since I was flexible with the timing, I could afford to take more risk.

As for the all munis. I was unsure if this would be too risky? I thought that putting all of my bond allocation in munis could be considered a risk. I also was thinking about going with treasuries because of their inverse relationship with stocks.

As far as my previous posts, my brother suggested this portfolio to me and I wanted to get others opinions on it.
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Re: any help is appreciated!

Postby JamesSFO » Sun Jul 21, 2013 11:56 am

lbs22 wrote:Thank you for your input. Perhaps I will dial down my stock allocation some. I just thought that since I was flexible with the timing, I could afford to take more risk.


I think the point is to understand the level of risk you are taking better and just how flexible you are.

lbs22 wrote:
As for the all munis. I was unsure if this would be too risky? I thought that putting all of my bond allocation in munis could be considered a risk. I also was thinking about going with treasuries because of their inverse relationship with stocks.


The national muni bond funds are fairly well diversified, so I'm not sure why you would pair it with a treasury fund? PS - I'm assuming you live in a state with taxes...

lbs22 wrote:As far as my previous posts, my brother suggested this portfolio to me and I wanted to get others opinions on it.


I think looking at your other thread and this, you need to decide for yourself what to do, and the other thread had good suggestions about saving money in an IRA/401K now.
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Re: any help is appreciated!

Postby lbs22 » Sun Jul 21, 2013 12:09 pm

JamesSFO wrote:
lbs22 wrote:Thank you for your input. Perhaps I will dial down my stock allocation some. I just thought that since I was flexible with the timing, I could afford to take more risk.


I think the point is to understand the level of risk you are taking better and just how flexible you are.

lbs22 wrote:
As for the all munis. I was unsure if this would be too risky? I thought that putting all of my bond allocation in munis could be considered a risk. I also was thinking about going with treasuries because of their inverse relationship with stocks.


The national muni bond funds are fairly well diversified, so I'm not sure why you would pair it with a treasury fund? PS - I'm assuming you live in a state with taxes...

lbs22 wrote:As far as my previous posts, my brother suggested this portfolio to me and I wanted to get others opinions on it.


I think looking at your other thread and this, you need to decide for yourself what to do, and the other thread had good suggestions about saving money in an IRA/401K now.


I consider myself a pretty risk adverse person and I think I could stay the course during a fairly large drop.

So you do not see any benefit in me being in a treasury fund? (for diversification or inverse to stock) Do you think 50/50 VTI and Vanguard int muni fund would be better than the above allocation?

Ultimately it will be my decision. He was just making a suggestion and I thought that it sounds good and wanted to run it by you all. I also plan on maxing out my roth IRA and my 401K each year now.
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Re: any help is appreciated!

Postby ogd » Sun Jul 21, 2013 12:35 pm

lbs22 wrote:I consider myself a pretty risk adverse person and I think I could stay the course during a fairly large drop.

So you do not see any benefit in me being in a treasury fund? (for diversification or inverse to stock) Do you think 50/50 VTI and Vanguard int muni fund would be better than the above allocation?

I think it is a very reasonable thing to do. Munis are pretty safe, but during the financial crisis they can be observed dropping 5% or so alongside stocks because of worries about local finances. Whereas Treasuries held up very well, even gaining 10% (intermediate-term) at the height of the crisis. Which is what you want to see if you need to rebalance into stocks.

Munis also have periods of specific underperformance, e.g. from late 2010 to late 2011 due to the famous Meredith Whitney market call. Or worries about a big city going bankrupt. And the muni market is relatively illiquid and subject to bad pricing during selloffs.

I say this as somebody who has a very large allocation to munis, and loves them dearly :greedy But I've always felt the need to have something very safe alongside them. Treasuries fit the bill, so does cash, and that's about it. With more room in tax-advantaged, lbs22 would gradually rid himself of the tax penalty.

lbs22: lots of things can happen during your 7-10 years. For example, homes values could change in one direction or the other, mortgages might become attractive again (or you might change your perspective about them), or you may simply end up moving around a lot or not liking the idea of buying the home after all. I would treat it as a "nebulous" horizon as opposed to a rigid one like others assume; you can use that flexibility of yours to compensate for stock market hiccups by waiting for a few more years of earnings. In other words, I'd be more aggressive at your age even with the home buying plan in the back of my mind.
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Re: any help is appreciated!

Postby lbs22 » Sun Jul 21, 2013 1:24 pm

ogd wrote:
lbs22 wrote:I consider myself a pretty risk adverse person and I think I could stay the course during a fairly large drop.

So you do not see any benefit in me being in a treasury fund? (for diversification or inverse to stock) Do you think 50/50 VTI and Vanguard int muni fund would be better than the above allocation?

I think it is a very reasonable thing to do. Munis are pretty safe, but during the financial crisis they can be observed dropping 5% or so alongside stocks because of worries about local finances. Whereas Treasuries held up very well, even gaining 10% (intermediate-term) at the height of the crisis. Which is what you want to see if you need to rebalance into stocks.

Munis also have periods of specific underperformance, e.g. from late 2010 to late 2011 due to the famous Meredith Whitney market call. Or worries about a big city going bankrupt. And the muni market is relatively illiquid and subject to bad pricing during selloffs.

I say this as somebody who has a very large allocation to munis, and loves them dearly :greedy But I've always felt the need to have something very safe alongside them. Treasuries fit the bill, so does cash, and that's about it. With more room in tax-advantaged, lbs22 would gradually rid himself of the tax penalty.

lbs22: lots of things can happen during your 7-10 years. For example, homes values could change in one direction or the other, mortgages might become attractive again (or you might change your perspective about them), or you may simply end up moving around a lot or not liking the idea of buying the home after all. I would treat it as a "nebulous" horizon as opposed to a rigid one like others assume; you can use that flexibility of yours to compensate for stock market hiccups by waiting for a few more years of earnings. In other words, I'd be more aggressive at your age even with the home buying plan in the back of my mind.


So would you say that the 50/25/25 allocation would be good? Or do you think that I should change those numbers around? Also do you think I should add any other funds?

I like what you are saying about the flexibility and buying when I am ready for the house and taking the situation there as it comes up.
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Re: any help is appreciated!

Postby ogd » Sun Jul 21, 2013 2:26 pm

lbs22 wrote:So would you say that the 50/25/25 allocation would be good? Or do you think that I should change those numbers around? Also do you think I should add any other funds?

I like what you are saying about the flexibility and buying when I am ready for the house and taking the situation there as it comes up.

I would simply recommend the Three fund portfolio with tweaked allocations; it's wonderfully simple and it just flows naturally into your lifetime investment plans. You are starting with a higher than normal amount relative to your earnings in the immediate future and have the home buying possibility in mind, so I would take that as a hint to lower the equity allocation from the age-based 80% to something like 70 or 60; I wouldn't go as low as 50, you are too young for that. Because of that same windfall, you are starting out with significant amounts of bonds in taxable so munis make sense for part of the bonds (which makes it a four-fund portfolio); 50% munis/treasuries is nice and simple. Treasuries have a (smaller) tax advantage of their own, the 5% state tax. As you accumulate tax-advantaged funds, gradually move the treasuries there or use whatever conservative bond funds are available in the plan.

Btw, your brother's recommendation was actually a very good starting point, nicely done. What I say above is more about your attitude vs investment horizon at this age than the specific recommendation. Otherwise the only difference is holding some internationals in addition to VTI.
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Re: any help is appreciated!

Postby pkcrafter » Sun Jul 21, 2013 4:25 pm

lbs22, You seem to be fixating on your asset allocation for a home purchase and not considering your total financial position. Your choice, or course, but is a good idea to look at the big financial picture when planning the optimum use of your assets.

I consider myself a pretty risk adverse person and I think I could stay the course during a fairly large drop.

Risk aversion is a mental or emotional fear of risk (losing money). If you truly are risk averse, then you might not stay the course during a fairly large market drop. What is a fairly large market drop?



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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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Re: any help is appreciated!

Postby hollowcave2 » Mon Jul 22, 2013 4:07 pm

The only thing I'll suggest is simplify the bond portion by just going with the short or intermediate term bond index. Since you specified a shorter horizon of less than 10 years, I'd prefer the short term total bond index.
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Re: any help is appreciated!

Postby lbs22 » Tue Jul 23, 2013 10:55 am

hollowcave2 wrote:The only thing I'll suggest is simplify the bond portion by just going with the short or intermediate term bond index. Since you specified a shorter horizon of less than 10 years, I'd prefer the short term total bond index.


Do you think that I should not hold any Munis as my bond portion even though it will all be in taxable?

Do you think the intermediate term bond index will not be too tax ineffiencent?
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Re: any help is appreciated!

Postby lbs22 » Wed Jul 24, 2013 6:57 am

Are muni funds risk not generally worth the tax efficiency?
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Re: any help is appreciated!

Postby JamesSFO » Wed Jul 24, 2013 8:20 am

lbs22 wrote:Are muni funds risk not generally worth the tax efficiency?


You probably should actually tell us your tax rate federal + state/state tax rate to provide provide more insight.
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Re: any help is appreciated!

Postby JamesSFO » Wed Jul 24, 2013 9:38 am

PS interesting piece here about muni bonds, returns and risks - http://www.ritholtz.com/blog/2013/07/mo ... ey-wilson/
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Re: any help is appreciated!

Postby lbs22 » Wed Jul 24, 2013 1:49 pm

JamesSFO wrote:
lbs22 wrote:Are muni funds risk not generally worth the tax efficiency?


You probably should actually tell us your tax rate federal + state/state tax rate to provide provide more insight.


My federal bracket is 25% and about 5% for the state.
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Re: any help is appreciated!

Postby lbs22 » Thu Jul 25, 2013 8:40 am

And I expect to be in those brackets for some time.
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Re: any help is appreciated!

Postby Dumbo » Thu Jul 25, 2013 9:36 am

pkcrafter wrote:lbs22, You seem to be fixating on your asset allocation for a home purchase and not considering your total financial position. Your choice, or course, but is a good idea to look at the big financial picture when planning the optimum use of your assets.

I consider myself a pretty risk adverse person and I think I could stay the course during a fairly large drop.

Risk aversion is a mental or emotional fear of risk (losing money). If you truly are risk averse, then you might not stay the course during a fairly large market drop. What is a fairly large market drop?


In "Four Pillars of Investing" the author talks about risk aversion and how often times people think they are able to handle all this "risk" they are taking on with investing and therefore will do an 80/20 allocation only to liquidate their portfolio after a 30-50% drop which is the worst possible thing you could do. We often miscalculate how much risk we are truly willing or not willing to take on. At 21 you were most likely financially sheltered by your parents during the terrible 2008 crash when a lot of people lost everything. As Bernstein points out, it's difficult to know how "risk averse" we really are until we get a statement showing a 50% drop across the board for 3 years straight and in some periods of our history for 10+ years.
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Re: any help is appreciated!

Postby lbs22 » Fri Jul 26, 2013 8:25 am

What do you all think about having a little bit of a TIPS fund in my portfolio too?
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Re: any help is appreciated!

Postby JamesSFO » Fri Jul 26, 2013 1:05 pm

lbs22 wrote:
JamesSFO wrote:
lbs22 wrote:Are muni funds risk not generally worth the tax efficiency?


You probably should actually tell us your tax rate federal + state/state tax rate to provide provide more insight.


My federal bracket is 25% and about 5% for the state.


Ok so given the current returns, what would a 30% reduction in the VG Total Bond fund return look like vs. The VG Int. Muni Bond fund?
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Re: any help is appreciated!

Postby lbs22 » Fri Jul 26, 2013 1:10 pm

JamesSFO wrote:
lbs22 wrote:
JamesSFO wrote:
lbs22 wrote:Are muni funds risk not generally worth the tax efficiency?


You probably should actually tell us your tax rate federal + state/state tax rate to provide provide more insight.


My federal bracket is 25% and about 5% for the state.


Ok so given the current returns, what would a 30% reduction in the VG Total Bond fund return look like vs. The VG Int. Muni Bond fund?




Even before taxes the muni is yielding more than the total bond fund.
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Re: any help is appreciated!

Postby JamesSFO » Fri Jul 26, 2013 9:33 pm

lbs22 wrote:
Even before taxes the muni is yielding more than the total bond fund.


Right so there is some higher risk but with the tax impact, maybe the muni bond fund is a much better choice? It's up to you, the future is uncertain, you could split the difference but why?
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