Asset Allocation / Portfolio Help

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Topic Author
fauji
Posts: 14
Joined: Thu Aug 01, 2013 8:49 pm

Asset Allocation / Portfolio Help

Post by fauji »

First time poster … I have been lurking for a long time but honestly it took me a while to muster the courage to make my first post. I have come across a lot of valuable tips on investing, personal finance, benefit of index investing, difference low cost funds make etc.

As you will notice that our current portfolio is quite complicated especially the taxable accounts. They are spread across 2 advisors and some that we try to manage on our own. We were naïve when we first started and didn’t foresee the challenges and ended up making some sub-optimal choices.

We are looking for your expert advice to help put us on the right track. We have contemplated of moving our un-invested taxable savings to one of the managed accounts but with the insights draw from the forum, we believe we can save tons of fees and, by consolidating into low cost index funds will set us up to meet our goals.

That being said, we appreciate you taking the time to go over our rather complicated financial situation. Thanks for your advice in advance!

Details in the suggested format below:

Emergency funds: $125K (30% in ING / 70% in Wellsfargo Checking)
Debt:
mortgage – Primary residence for $1MM + (Outstanding Loan: $600K, 7/1ARM @ 2.75%, Monthly payment $2550)
car loans – $360 / mth for 2 ½ yr (3yr lease, 6 months in)
credit card – $0 (paying off full amount each monthly)
Tax Filing Status: Married Filing Jointly + 1 Dependent child (Age: 8 yrs)
Tax Rate: I guess max% Federal, max% State
State of Residence: CA
Age: His: 41, Her: 36
Current Income: (His: 250K, Her: 150K)
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks

Current Portfolio:
Tax advantaged: Mid six-figures,
Taxable: High six-figures,
529: Mid five-figures


Current retirement assets

Taxable

With an Independent Advisor 1 (Mgmt fees: 1.25%, Short term Gains: 7%)
% Alloc Name Ticker ER%
5.40% Cash for investing
5.50% 80/20 Equity vs. CA Muni – DFA funds

With an Independent Advisor 2 (Mgmt fees: 1.5%, Long Term Gains: 25%)
% Alloc Name Ticker ER%
2.52% iShares S&P SmallCap 600 Value Index IJS 0.30%
1.78% iShares S&P MidCap 400 Value Index IJJ 0.27%
1.12% SPDR S&P Emerging Markets Small Cap EWX 0.65%
0.94% iShares S&P 500 Value Index IVE 0.18%
0.85% iShares S&P SmallCap 600 Growth IJT 0.26%
0.72% iShares S&P MidCap 400 Growth Index IJK 0.25%
0.42% Vanguard Information Technology ETF VGT 0.14%
0.39% iShares MSCI Emerging Markets EEM 0.69%
0.14% Cash for investing

Self Managed – Individual Stocks (LT Gains: 40%)
% Alloc Name Ticker
10.00% Large Cap Dividend Paying Companies (JNJ, PEP, CVX, SLB, RDS-A, ORCL, UL, GOOG, DIS)

Self Managed – Full Vested Stock Options (LT Gains: 100%)
% Alloc Name Ticker
9.98% (His) Large Tech Company
6.65% (Her) Large Tech Company


Self Managed – Vanguard
% Alloc Name Ticker ER%
16.72% Vanguard Tax-Exempt Money Market Inv VMSXX 0.16%
1.53% Vanguard Total Stock Market ETF VTI 0.05%
0.50% Vanguard Wellington Inv VWELX 0.25%
0.36% WisdomTree India Earnings EPI 0.83%
0.35% Vanguard Total Intl Stock Idx ETF VXUS 0.16%
0.31% EGShares Brazil Infrastructure BRXX 0.85%
0.22% Vanguard Dividend Growth Inv VDIGX 0.29%

Her IRA @ Independent Advisor 1 (Management fees: 1.25%)
% Alloc Name Ticker ER%
5.80% Cash for investing
5.30% 80/20 Equity vs. ST bonds DFA funds 0.19%

His IRA @ Independent Advisor 1 (Management fees: 1.25%)
% Alloc Name Ticker ER%
8.15% Cash for investing
7.40% 80/20 Equity vs. ST bonds DFA funds 0.19%

His IRA @ Independent Advisor 1(Management fees: 1.25%)
% Alloc Name Ticker ER%
0.58% Cash for investing
0.39% DFA Global Equity I DGEIX 0.33%

His 401K
% Alloc Name Ticker ER%
0.61% Vanguard Total Bond Market Index Inst VBTIX 0.07% Intermediate-Term Bond
0.54% MFS Blended Research US Core Equity I MFSUSC 0.27% Large Value
0.52% International Core Stock Fund SYMICS 0.49% Foreign Large Blend
0.40% Vanguard Institutional Index Fund VG-IND 0.04% Large Blend
0.28% Vanguard Small Cap Index Instl VSCIX 0.08% Small Blend
0.27% MidCap Core Stock Fund SYMCC 0.74% Mid-Cap Blend

Child’s 529 @ American Funds (Adding $250 monthly)
% Alloc Name Ticker ER%
0.63% American Funds Fundamental Invs 529A CFNAX 0.73%
0.63% American Funds Inc Fund of Amer 529A CIMAX 0.68%
0.59% American Funds New Perspective 529A CNPAX 0.88%
0.56% American Funds Capital World G/I 529A CWIAX 0.89%
0.28% American Funds Interm Bd Fd of Amer 529A CBOAX 0.70%




Contributions
New annual Contributions
• $17,500 his 401k ($6000 company match)
• $0 her 401K (current employer does not provide 401K)
• $2500 taxable (for retirement)

Available funds

Funds available in his 401(k)
Vanguard Total Bond Market Index Fund Institutional Shares Intermediate-Term Bond 0.07%
MFS Blended Research US Core Equity I Large Value 0.27%
International Core Stock Fund Foreign Large Blend 0.49%
Vanguard Institutional Index Fund Institutional Shares Large Blend 0.04%
Vanguard Small-Cap Index Fund Institutional Shares Small Blend 0.08%
MidCap Core Stock Fund Mid-Cap Blend 0.74%
Frontegra Small Cap Core Fund Small Blend 0.65%
Metropolitan West Total Return Bond Fund Plan Class Intermediate-Term Bond 0.40%
Putnam Stable Value Fund: 15bps Stable Value 0.27%
T. Rowe Price - Retirement 2005 Trust Target Date 2000-2010 0.47%
T. Rowe Price - Retirement 2010 Trust Target Date 2000-2010 0.47%
T. Rowe Price - Retirement 2015 Trust Target Date 2011-2015 0.47%
T. Rowe Price - Retirement 2020 Trust Target Date 2016-2020 0.47%
T. Rowe Price - Retirement 2025 Trust Target Date 2021-2025 0.47%
T. Rowe Price - Retirement 2030 Trust Target Date 2026-2030 0.47%
T. Rowe Price - Retirement 2035 Trust Target Date 2031-2035 0.47%
T. Rowe Price - Retirement 2040 Trust Target Date 2036-2040 0.47%
T. Rowe Price - Retirement 2045 Trust Target Date 2041-2045 0.47%
T. Rowe Price - Retirement 2050 Trust Target Date 2046-2050 0.47%
T. Rowe Price - Retirement 2055 Trust Target Date 2051+ 0.47%
T. Rowe Price Retirement Income Trust Retirement Income 0.47%
Vanguard Mid-Cap Index Fund Institutional Shares Mid-Cap Blend 0.08%
Vanguard Total International Stock Index Fund Institutional Shares Foreign Large Blend 0.12%

Current thinking:

1. After long stints at high paced fast growing Silicon Valley companies, it’s unlikely we will go back to a start-up but plan to continue to work in high tech for the foreseeable future to maintain our current lifestyle and save for retirement and well-being / education of our child.
2. We wish to semi-retire at 55. It won’t be complete shutdown, but engage in part time consulting jobs but will certainly take more time off. However this decision will be contingent on house paid off (zero debt)
3. Mortgage  Adding $500 each month as extra principal. I hope to take advantage of the low interest rates and use the extra cash to invest for retirement. However, I do plan to pay additional $50K (proceeds from ESPP, bonus etc) each year to payoff mortgage in ~ 10 years
4. I believe we are not eligible for backdoor but will continue to max out “His” employer 401K. “Her” 401K eligibility is round the corner and will look to max in the remaining months of this year.
5. Sold considerable amount of stock options last year to pay down the mortgage and diversify. Today they make up ~ 15% of our portfolio (~10% of NW). We are comfortable holding them for some time but would like to get your opinion.

Investment Goals
1. Save for retirement and ensure good college education for kid
2. Willing to take risk till kid goes to college (10+ years)
3. Maintain current income kid goes to college
4. Limit monthly expenses to one salary, the other goes towards retirement savings (taxable accounts)
5. No active management of portfolio … stay the course and only rebalance

Questions:
1. Are we taking too much risk with 80/20 portfolio, international alloc ?
2. What will be an ideal allocation and mix (equity vs bonds) across our retirement and taxable portfolio? 4 fund, slice/dice, SV tilt ?
3. We have no complaints against our advisors … but it’s the extra fees and complexity that comes along. What will be best way to part ways ?
4. Will Vanguard be able to facilitate the transfers? I already have a taxable account with them.
5. Can I have Vanguard as the custodian for our trust even if we manage the accounts ourselves?
zyx
Posts: 25
Joined: Mon May 19, 2008 10:39 am

Re: Asset Allocation / Portfolio Help

Post by zyx »

Fauji,

Welcome to the forum.

It appears that your portfolio does not add up to 100%. It breaks down as follows:

Taxable
1. With an Independent Advisor 1: 10.9%
2. With an Independent Advisor 2: 8.88%
3. Self Managed - Individual Stocks: 10%
4. Self Managed - Full Vested Stock Options: 16.63%
5. Self Managed - Vanguard: 19.99%

Assuming Tax-advantage accounts
6. Her IRA @ Independent Advisor 1: 11.1%
7. His IRA @ Independent Advisor 1: 15.55%
8. His IRA @ Independent Advisor 1: 0.97%
9. His 401K: 2.62%
Total 96.64%

10. Child's 529: 2.69%

FIrst, I would consider the 529 separately from your total portfolio. Currently, your portfolio is quite chaotic. You definitely need to simplify. Any holding less than 5% of your total portfolio will complicate your life and your time.

Secondly, Vanguard would be able to accommodate any accounts you want to transfer. After your are done with the transfer. You have several parts as follows:
1. Self Managed - Individual Stocks (10%). I have no opinion on this.
2. Self Managed - Fully Vested Options (16.63%). I have no opinion on this. If you are comfortable to sell them as in the past then do so.
3. Self Managed - Vanguard with new percentage (39.77%). I would split in half to Tax-Managed International and Tax-Managed Small Cap
4. Her IRA in Vanguard (11.1%): put in Total Bonds
5. His IRA in Vanguard (16.52%) : put in Total Bonds
6. His 401K (2.62%): put in Index Fund which I believe S&P 500 fund.

So your new portfolio will have Large Cap (26.63%), Large Blend (2.62%), Small Blend (20%), International (19.77%), Bonds (27.62%). Your ration between equity and income is 69/28. A minor adjustment is needed to bring them to 100% total.

You may incur some taxes when you transfer your taxable accounts to Vanguard. Hopefully, this is just a start.

Caution: Any online advise, including mine, on investment should be taken with a lot of caution.

Good luck too you and your family. You are on the right path to be financially independent.
Topic Author
fauji
Posts: 14
Joined: Thu Aug 01, 2013 8:49 pm

Re: Asset Allocation / Portfolio Help

Post by fauji »

Thanks zyx! Appreciate you taking the time. I would have never thought about the asset placement this way ... indeed it does make the portfolio clean, simple and easy to manage.

Others thoughts welcomed!
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

Sure, I will make some comments on your personal situation. Rather than comment on your individual investments, lets take a big picture look your situation. I don't want to comment on each investment individually.

First of all 80/20 asset allocation is aggressive but this is doable. You and your wife are still fairly young at 41 and 36. My recommendation for someone your age is 70% stocks and 30% bonds and fixed income. My recommendation for the allocation of your funds depends on your school of thought.

If you are a pure indexer, go with a US Total Stock Market Index, an International Total Stock Market Index (one that includes emerging markets), and a US Total Bond Market Index. Some of these folks like a TIPS fund on the bonds side for a bit more inflation protection and perhaps a REIT Fund for additional diversification on the equity side. Your International allocation should be anywhere between 20% and 50% of your equity portfolio. If you look at the efficient frontiers, 30% seems to be the sweet spot. But this is a matter of preference. REITs if you include them, should be part of your equity portfolio and should not be more than 10-15% of your equities.

If you are a pure indexer, you are accepting the market return on your investments. You stay the course and rebalance your portfolio as needed. You are taking advantage of rock bottom costs. A 3-5 fund portfolio is very easy to maintain. Rebalancing is easy. Keep in mind, REITs are part of the Total Stock Market Indexes. TIPS are NOT included in the US Bond Market Index. If you want TIPs, get the TIPs fund.

If you believe in the value and small cap premiums (slice and dice), here are some ideas. First, build the base of your portfolio on the broad indexes. So on the equity portion, split your funds between broad index funds and value funds. The US portion could be split between the S&P 500, S&P Small Cap 600, Large Value Index, and Small Cap Value Index. Or you could go total market index and a Small Cap Value Index. You can also do this on the International side. There are many ways to do this, but the key idea is to tilt your portfolio so that you have more value stocks and more small stocks than what reside in the broad indexes. How much you want to tilt is based on your preferences. The slice and dicers also include REITs as part of their equity allocation. On the bond side, you want to keep your bonds investment grade and in the intermediate maturities. The Total Bond Market Index does this. TIPS are Treasury instruments so they are the highest investment grade. If you want a bit more yield, buy a good corporate bond fund.

The slice and dicers attempt to beat the market a bit by attempting to capture premium performance mainly from the value and small cap premiums. Not everyone believes that these exist. So what you are attempting to do is to increase return and perhaps even reduce volatility by adding volatile non-correlating asset classes. This is what I call putting a tiger in your tank.

What asset classes put a tiger in your tank? REITS, Small Cap Value, Microcaps, and Emerging Markets are your top candidates. You also want large cap value as well. The small cap and value premiums also exist in the International Markets also. So add these to your broad index funds to get increased performance and perhaps even reduced volatility.

The problem with slice and dice is that the portfolio can get pretty complicated in a hurry. The pizza gets sliced into a lot of slices. With a lot of pieces, rebalancing and maintaining all of this gets pretty complicated. When each slice gets to be just a few percentage points, you wonder if any one slice really contributes that much to the performance of the portfolio. I slice and dice myself. I am drawing the line at adding more asset classes.

The reason I am not giving you precise recommendations and percentages is that asset allocation is not an exact science. The correlations between asset classes change over time. Sometimes in really bad markets, everything correlates at the precise moment you don't want them to. In other words, in really bad markets everything can go down in value. There are rare occasions that diversification doesn't work too well and you just have to ride out the bad markets. There are also many opinions on how to accomplish the small stock and value tilts. Whether you have 5.14367% or 4.9834% in Emerging Markets isn't going to make much difference in the performance of your portfolio.

My recommendation is to tilt but not to overdo it. The asset classes you are adding to an index portfolio to "put a Tiger in your tank" are each very volatile asset classes by themselves. For example, I have seen REITs fluctuate as much as 8-10% in one day. That is incredible volatility. Small Cap Value can also be incredibly volatile. So add enough octane for increased performance but not so much that you blow up your portfolio in a really bad market. The core of your investments are still the broad indexes.
A fool and his money are good for business.
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

You want to pay attention to the tax consequences of your investments. You have substantial taxable and non-taxable portfolios. There are two schools of thoughts on this.

One is to allocate your taxable and tax-deferred portfolios the same. Your taxable bonds go in the tax-deferred accounts and of course you use tax-free bonds for the taxable accounts if your tax bracket warrants it. In your case, it does. This is the easiest to manage. I am of this school of thought. My lifetime earnings have been more modest than yours and the bulk of my investments are in tax deferred retirement accounts. So I invest my retirement accounts for maximum return given my age and the level of risk I want to take. These accounts are deferred salary, so to me I think in terms of making my future "paychecks" from my deferred accounts as large as possible. I am of the opinion that one can turn their life and their investments into a pretzel trying to avoid taxes. Don't go overboard on trying to manage the tax bite of your investments.

The other school of thought is to stuff the tax deferred accounts with tax inefficient investments like REITs and Taxable Bonds. One should try to put more of your stocks in taxable accounts because of the preferential capital gains treatment upon sale of your stock investments. Anything coming out of tax deferred retirement accounts in retirement comes out as ordinary income (with the exception of Roth accounts which are tax free). Dividends from stocks are also tax advantaged in many cases. This works best if you have substantial taxable and tax deferred investment porfolios, which you do.

If you want to leave your advisor, open up a brokerage account with Vanguard. Have your securities in your taxable accounts transferred directly to Vanguard so that your transfer won't generate taxable events. Then you can take into account the tax consequence of any sales at your leisure. With tax-deferred accounts you can liquidate the securities if you like and do a cash transfer to Vanguard if that is what you want. I am not sure Vanguard would accept DFA funds. The representatives at Vanguard will be able to walk you through all of this.
A fool and his money are good for business.
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

Just eyeballing your portfolio, you have a lot of the "Tiger in your Tank" investments in your portfolio. It looks like you don't have enough "core" investments in your portfolio. What I mean by "core" are the broad US and International Stock Indexes. You might have too much octane in your gas tank, the portfolio might be too aggressive.

I am not against individual stocks, I own them myself. The stocks you own look pretty good to me. Owning them is an awful lot of fun. It is very doubtful you will beat the indexes doing this and this might add unneeded complexity to your portfolio. I have had stocks blow up on my (Lucent, Nortel, AIG) and it isn't a pleasant experience. But I had my winners as well and it balanced out.

The stock options I can't advise you on. I have worked mostly for not for profits and have never had them offered to me. You know the risks of these and your own company better than I do. Just don't overdo these. I am sure these have been lucrative for you. 16% of your portfolio in one company is an awful lot. You should trim this if you can. As a rule of thumb, you don't want to own more than 10% of your portfolio in company stock (or in this case stock options). You might have tax reasons or other reasons for holding so much of these. One has to consider his or her own individual situation.

Without doing the math and going through all your investments, it appears to me you have a very aggressive portfolio. I think you need to dial down the risk. First by owning more bonds (30% instead of 20%) and secondly by owning more core investments. I think you have too much octane in your portfolio. You own a lot of really volatile stuff.
A fool and his money are good for business.
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

As an investor you need a plan. That is an investment policy statement. The Morningstar website has a good worksheet.

You wanted a 80/20 portfolio (I am recommending a 70/30). You want 30% of your equities in international investments. You have posted some goals on this forum. So you have a good start. Get it on paper. You have to decide on an investment philosophy (pure indexing, slice and dice, something else?). Get that on paper. How much risk do you want to take? Over how much time? What benchmarks will you use to measure your performance? Hint: The broad stock market and bond market indexes.

Next, you need to find out what you really own. Take your portfolio and put it through the Portfolio X-Ray at Morningstar. You will know the distribution of your stock and bond investments. How much large cap do I own? How much small cap? How much value? How much growth? What is the credit quality and average maturity of my bonds? What are the percentages of my stock investments by country? How much US? How much Europe? How much Asia? The X-Ray will tell you that.

My suspicion is that your advisor has done something like this for you. Pull out the reports and such that he gave you and look them over. If you don't have the paperwork, do the X-Ray at Morningstar.

So know where you are now. Make a plan for where you want to go. Then plan what you need to do get from where you are to where to want to go.
A fool and his money are good for business.
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

Disclosure. So you know a bit about where I am coming from in giving you recommendations.

I am 54 years old. My retirement portfolio right now is about 69% stocks and 31% fixed income. A little over 25% of my portfolio is indexed with funds and ETF's and about 15% is in individual stocks that I rarely trade. The remainder is in managed mutual funds. I tilt the portfolio towards small and value. About 7% of my equities are small value vs. 3% in the total market index. I have worked my expense ratios down to less than 0.60%. Hard to know exactly. I am indexing my portfolio more and more. Have been investing for about 30 years.

I looked at the performance of my funds at my favorite mutual fund company and they are comparable to what I would have gotten at Vanguard. Recent comments by Larry Swedroe confirmed this. At this point, I don't want the hassle of switching to Vanguard and have been happy with the performance of those funds. Some of these funds are aggressive and I look towards them to put a "tiger in my tank."

The reason that I am stock heavy at my age is that bonds are expensive now and I don't see them as a good value. Nevertheless, I am doing mild rebalancing selling stock investments to buy bond investments. A lot of my new funds for investing are going into bonds. I would like to be more like 60% stocks and 40% bonds. It is hard to get excited about 2 1/2% yields on bonds.

I am a firm believer in eating your own cooking. Not recommending necessarily that you do what I am doing. Nothing irritates me more than folks who do not practice what they preach. I also have not done the "full Boglehead" and I own some things that are not necessarily recommended by most posters on this forum. But I buy into the principles of John Bogle and keep an eye on low turnover and low cost. And I own investments that are similar to what you have.

Hope you find this helpful.
A fool and his money are good for business.
Default User BR
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Re: Asset Allocation / Portfolio Help

Post by Default User BR »

nedsaid wrote:The problem with slice and dice is that the portfolio can get pretty complicated in a hurry. The pizza gets sliced into a lot of slices. With a lot of pieces, rebalancing and maintaining all of this gets pretty complicated.
That's not really been my experience. With modern tools, it's not that much harder to deal with.


Brian
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

The problem is that they keep coming up with new factors and new asset classes to invest in. Someday, you won't really be a slice and dicer unless you hold Southern Sudan Small Cap Value. I am exaggerating to make a point.

The Merriman portfolio had the equity portion of a 60/40 portfolio in ten slices. Let's see if I can recite them by memory.
6% S&P 500, 6% Large Value, 6% Microcap, 6% Small Cap Value, 6% REITs, 6% International Index, 6% International Value, 6%
International Small Cap, 6% International Small Cap Value, and 6% Emerging Markets. Then the Merriman folks talked about splitting the REITs into US and International at 3% each.

I am now seeing folks like Swedroe recommend Emerging Markets Small Cap Value. There gets to be a point where the pizza gets sliced into too many pieces. Adding asset classes just to be adding asset classes. The pizza tastes the same whether you slice it into 4 or even 8 slices.

I am a believer in the slice and dice approach and have added most of the recommended asset classes. There does get to be a point where all this starts to break down. Diworseification. I am just pointing out that there are limitations to this approach.
A fool and his money are good for business.
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

If you have everything at one fund company, rebalancing shouldn't be hard.

There is a rebalancing tool where you tell the fund company that you want x percent here, and y percent there, and z percent somewhere else. Doing that, rebalancing even with a lot of positions isn't hard.

I have my investments in a few different accounts, making this more complicated to do.
A fool and his money are good for business.
Default User BR
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Re: Asset Allocation / Portfolio Help

Post by Default User BR »

nedsaid wrote:The Merriman portfolio had the equity portion of a 60/40 portfolio in ten slices. Let's see if I can recite them by memory. 6% S&P 500, 6% Large Value, 6% Microcap, 6% Small Cap Value, 6% REITs, 6% International Index, 6% International Value, 6% International Small Cap, 6% International Small Cap Value, and 6% Emerging Markets. Then the Merriman folks talked about splitting the REITs into US and International at 3% each.
That doesn't look like the Ultimate Buy and Hold portfolio.


Brian
island
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Re: Asset Allocation / Portfolio Help

Post by island »

Lots of funds....and fees.
If your IRAs are funded with pre-tax $ you could simplify and reduce fees by transferring them to your current 401Ks.
Looks like your husband has some good low fee options and I think you mentioned you'll soon have a 401k also?
The biggest advantage of moving the IRAs is it clears the path for both of you to fund tax exempt Roths thru back door conversions, repeatable every year. My husband will be doing that this year.
You could also convert the existing IRAs to Roths, but that would be taxable.
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

Hate to break it to you, my recollection of the Ultimate Buy and Hold Portfolio was correct. Just looked it up. I also have Paul Merriman's book and have read it several times. It is 10 slices on the equity side at 6% each, though they may have
broken the REIT slice into US and International at 3% each.
A fool and his money are good for business.
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

Fauji,

I have looked at your investments and I really like what I see. Without seeing a Morningstar type X-Ray of your portfolio, it is hard to evalute your portfolio. My brain has a hard time working with 2% of this, 1.5% of something else, and 1.6% of this and that. What a person needs to see are percentages of stocks/bonds, US stocks/International stocks, Value stocks/growth stocks, short term bonds/medium term bonds/long term bonds, etc. The Morningstar Styleboxes that the X-Ray produces really helps see the big picture. Perhaps when it is all put together, you portfolio won't be as aggressive at it appears to me at this time.

The choices you and your advisor have made look sensible.

It looks like the advisor is value tilting, which is what I would do. He does the value tilting a bit differently than the way I would do it, but that is okay. The question is whether you feel the management fee you are paying him is worth it. One of the portfolios managed by the advisor looks very aggressive but I like what he is doing. This is in regards to the portfolio with all the ETFs in it. This is where my comments came from that what you had looks really aggressive.

I am okay with your stocks. I own individual stocks too. I work with a broker and don't spend the time anymore analyzing these. Doing the individual stocks correctly takes a lot of research time. But they are a lot of fun to own.

The other portfolio managed by an advisor looks like a portion being a DFA portfolio managed 80/20 and a whole bunch of cash.

The two IRA's look similar, a portion managed at 80/20 and a bunch of cash.

Your 401k fund selections look sensible.

It appears to me that you have a lot of emergency cash available also.

The college investments in your 529 plan are in American Funds, which is a fund family that I like a lot. It might also be all that is available for that plan. If you have to have funds in managed funds, the American Funds are about as good as it gets. I like that they are value oriented as a fund company and they have achieved solid performance. Their funds are low turnover and lower cost.

I have a high regard for the DFA funds, they are among the best in the business but for myself I won't pay 1% or more a year to an advisor to get into them. DFA claims they can better capture the small stock and value stock premiums better than Vanguard for three reasons. Most of their funds hold more stocks than the comparable Vanguard funds, their Value Funds have better Value characteristics (price to book value) than the comparable Vanguard funds, and their funds tend to have stocks in them that have lower market capitalization than comparable Vanguard funds. Their funds don't blindly follow indexes so they don't have to sell a small cap stock when it leaves the small cap index. They can operate with even lower turnover than Vanguard.

You are doing a good job with your finances.

If you could run the Morningstar X-Ray and post the Equity and Fixed Income style boxes as well as the percentages of
stocks/fixed income and US Stocks/International Stocks, that would be helpful.

As long as you get the big picture right and keep your investment expenses reasonable, you will do just fine. We have our individual preferences about particular investments we might choose or the exact asset allocation percentages. This is why I don't want to spend too much time obsessing over the details. Arguments over the precise index ETF's to use (S&P Indexes vs. the Russell Indexes) and things like that won't make much difference in the performance of your portfolio over the long term.

The big picture of what I recommend for you is a 70/30 stocks/bonds portfolio (80/20 is aggressive but you are still young),
30 percent of your equities invested internationally, and your fixed income in investment grade intermediate term bonds. I recommend to everyone 3-6 months of expenses in emergency funds which you have. I recommend keeping your investment expenses as low as you can. It is up to you to determine if the fees you pay the advisor are worth it to you.
A fool and his money are good for business.
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g$$
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Re: Asset Allocation / Portfolio Help

Post by g$$ »

I see you have 2 IRA's. One quick an easy thing you could do to simplify your portfolio would be to roll one IRA into the other. Alternatively, if your 401(k) is decent, you could roll both of the IRA's into the 401(k).

You'll save time (by having fewer accounts to manage), and possibly money (by taking advantage of economies of scale).

-g$$
Default User BR
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Re: Asset Allocation / Portfolio Help

Post by Default User BR »

nedsaid wrote:Hate to break it to you, my recollection of the Ultimate Buy and Hold Portfolio was correct. Just looked it up. I also have Paul Merriman's book and have read it several times. It is 10 slices on the equity side at 6% each, though they may have
broken the REIT slice into US and International at 3% each.
I see that the newer version is on Merriman.com, not on FundAdvice.com. The original versions are still on the latter for those that want to compare.

Were I starting over, I'd take a hard look at Trev's Four-Fund Ultimate version.


Brian
Last edited by Default User BR on Mon Aug 05, 2013 11:45 am, edited 1 time in total.
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

It looks like the Fund Advice website has not been updated for quite a while. The action seems to be on the Merriman site.

I think it is a good model portfolio but there are a lot of ways to value tilt. I noticed Rick Ferri goes for the small and value tilts but his portfolio is different from what Merriman uses.

I am a fan of the folks that suggest that we should invest to try to capture certain investment premiums. I really like what Larry Swedroe has to say. There get to be more and more performance factors and it makes portfolio construction potentially very complicated. You can't go wrong with the three fund portfolio or five if you add TIPs and REITs.

I notice also that Larry Swedroe likes to use a bit of commodities to hedge risk a bit. After a while, it gets to be too much.

Thanks Brian for the response.
A fool and his money are good for business.
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fauji
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Re: Asset Allocation / Portfolio Help

Post by fauji »

Thank you Nedsaid ! Lot's of actionable advice. Need a few days to digest and incorporate the learnings. Will post soon for feedback
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fauji
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Re: Asset Allocation / Portfolio Help

Post by fauji »

Adding M* X-Ray details:

38% Cash
44% U.S. Stocks
10% Intl Stocks
8% Bonds

Equity Style Boxes
11 12 49
05 04 04
05 06 04

Fixed Style Boxes
13 15 00
23 00 02
00 04 00

Please Note: My portfolio is skewed towards cash as I have significant % of cash in both Taxable and Non-taxable waiting to be invested.

Cash positions as a % of entire portfolio:

Taxable
5.40% Cash for investing (Advisor 1)
15.12% Vanguard Tax-Exempt Money Market Inv (Self Managed)
--------
20.5%

Tax Advantaged
0.58% Cash for investing - His Roth
5.80% Cash for investing - Her IRA
8.15% Cash for investing - His IRA
--------
14.5%

We plan to keep the remaining ~ 3% in cash (besides the emergency fund)
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

Wow, thanks Fauji. My suspicion is that your stylebox is tilted large growth because of the stock options you own and also your individual stocks.

16% in small caps. Very good. The Total Market is 9%.

13% in mid caps versus about 20% for the Total Market. (I love mid-caps, so does Mel Lindauer). I think I would fatten up here. In my opinion, you want to have at least a market weight in mid caps if not a bit more. Mid caps act a lot like small caps but with a bit less return and less risk. You can capture a lot of the small cap premium in the mid-cap part of the market. If you are overweighted in small caps and underweighted in mid-caps, you might be cancelling out the very small cap premium you are trying to capture.

Your fixed income styleboxes look great. Mostly high and medium quality in shorter term bonds. Looks good. The DFA philosophy is to take risks on the stock side and not the bond side. I am a believer in the Intermediate Term Investment Grade bonds funds. 5-7 year average maturities. You are young and can reinvest the dividends for years to come and not be worried about the direction of interest rates. But what you are doing is A-OK. If you want to keep doing what you are doing and not be heavy in mid-term bonds, that is okay. Just differences in investing taste and philosophy.

It looks like you need more international stocks. They are about 18-19% of your stocks and you wanted 30% of equities here. You can tilt these to small and value as well. The academics say that the value and small cap premiums work almost everywhere in the world they look. If you don't believe in the small and value premiums, use the broad indexes.

So as you sell down your stock options, you could consider buying into the international portion of your portfolio as well as into more mid-caps. You said you have available cash in your investment accounts. I still think you have too much in your stock options. Think this over and consider the tax consequences of selling.

Look at your recent tax returns. Know what tax brackets (Federal and State) you are in. Understand the difference between capital gains tax rates and ordinary income tax rates. Understand the difference between short term and long term capital gains. Understand best you can how your investments are taxed. Understand how Traditional IRA's and Roth IRA's work. Know about 401k's (some companies offer Roth 401k's. Taxes can have a big effect on your investments. Think through the tax implications before making major changes on the taxable side of your portfolio. Knowing this stuff can save you big bucks.

See what I mean about looking at the big picture first? Now you have a rational strategy for picking out the particular investments you need to fill in the gaps. Looking at the big picture first makes the task of picking investments and how much of each much easier.

Don't be afraid to look "overweighted" in cash in your total portfolio. I suspect you work in the high tech industry and as you know, employment in this industry is very volatile. Don't be afraid to have one year or even more in expenses in liquid assets (FDIC Insured bank deposits, Savings Bonds at Treasury Direct, Money Market Funds, etc) for emergencies. If you are unlucky and get laid off, you will be glad you did. I love the I-Bonds at Treasury Direct, keep in mind that these are illiquid for one year. Once they get past the one year mark, they are an excellent source of emergency funds.

You are a smart guy and can pick your own investments, I don't want to get too bogged down in specific ETF's or Index funds. But I will give opinions on specific investments you might be interested in. Again look at the big picture. What are you trying to do with your portfolio? Do you want to just index or attempt to capture certain premiums that Larry Swedroe, Rick Ferri, the DFA folks, and the academics talk about. Either way is just fine.
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

Okay now I will venture into an area that will affect your returns more than the specific investments you pick or even more than your asset allocation. That is your behavior.

Let me say it again. Your behavior as an investor will affect your returns more than specific investment choices or perhaps even more than asset allocation. (And yes, the choice of your investments and asset allocation are very important).

Going to the Merriman seminars and reading Mr. Bogle's books, I found out that the investors in mutual funds got lower returns than what the funds themselves produced. It was because of performance chasing. Investors would buy into funds after the funds had achieved great results. The same investors would sell after a period of poor performance and in many cases just before the markets turned around. Buying high and selling low. Hard to fathom how you could make money doing that, but that is what many investors do!

Mr. Bogle citied in his book a 25 year period when the index returned 12.3%, the average equity fund returned 10.0%, and the average equity fund investor just 7.3% a year. Wow!!

Make a promise to yourself not to chase hot asset classes or investments. Also promise yourself to stay the course and not sell when things look really bad. I like Peter Lynch's cocktail theory. He could tell what stage of the market was in by how people reacted to him at cocktail parties. He would introduce himself as a manager of a stock mutual fund. In the early stages of the market, folks didn't seem too interested in what he did. In the middle stages of the market cycle, people would ask him for stock tips. In the late stages of a bull market, people would give him stock tips.

I certainly do not advocate market timing. But look around. When things are euphoric and everyone is an investment expert, it might be time to take some off the top. If no one you know is interested in the financial markets and the financial press predicts the end of the world any day now, it might be time to get in there and buy. As Warren Buffett says many times, "Be greedy when others are fearful and fearful when others are greedy."

One thing that has helped me is to see down markets as opportunities. Opportunities to buy things at low prices. Good investors make their money in down markets, it just doesn't feel that way.

I don't like market volatility. I would love it if my investment would grow like a straight line sloping upwards on a graph. But life isn't like that and neither are the markets. If you don't want all your money laying around at the bank, you have to accept volatility.

I am not superhuman. I experience a bit of anxiety when the markets tank. When things look bad I say to myself, "Man, what the heck was I thinking?" That is where you have to put your cool head and rationality in charge and not your emotional self. It is as hard for me as anyone else.

So get a plan, Stan. Make sure it is based on a solid understanding of human nature and upon good investment principles. And then have the courage to stick to it. And yes, you will make changes to your plan over time. But at least you have a road map of how to get there.
A fool and his money are good for business.
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nedsaid
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Re: Asset Allocation / Portfolio Help

Post by nedsaid »

I will post one more here in this thread to leave a note of encouragement.

If you can avoid the biggest mistakes that most investors make, you will be ahead of the game. You don't have to do the investment game perfectly. You will make mistakes. Believe me, I have made a lot of mistakes as an investor. Just minimize your mistakes and learn from them.

One thing that has helped me is to see my portfolio as a big ship that you turn slowly if there needs to be a course correction. It is a way of saying that I put a lot of thought into any course corrections. If there is a particular adjustment I want to make, sometimes I will wait a while for an opportune time to make the change. For example, I noticed recently as stocks were continuing to advance while bond prices were starting to fall. I did some mild rebalancing from stocks to bonds trying to buy bonds at better prices.

The reason I say this is that changing strategies everytime you read another investment book is a prescription for subpar returns. Every good strategy has its day. Pick a good approach and stick to it. Constantly changing strategies is like the fellow who weaves in and out of traffic trying to save time on the commute. He puts himself in danger and rarely saves very much time at all.

Be patient. Stay consistent in your approach. Look for opportunities to buy asset classes on sale. That is pay attention to valuations. Be a bit contrarian in your thinking.

It sounds like you are off to a great start. Unless you desire more review of your investment plan, I will sign of this thread. Best wishes.

Ned
A fool and his money are good for business.
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