401k Portfolio Advice needed

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Topic Author
clivebixby
Posts: 8
Joined: Mon Mar 03, 2014 9:52 am

401k Portfolio Advice needed

Post by clivebixby »

Hi all,

After reading the bogleheads guide to investing and lurking on this forum for a while, I'm finally ready to ask for help with my portfolio. I realize it's a mess right now, but I had very little knowledge of investing until recently. Thanks in advance for your help!

Emergency funds: 6 months
Debt: 169,000 mortgage loan @ 4.5% fixed APR. No other debt.
Tax Filing Status: Single
Tax Rate: 28% Federal, 7.75% State
State of Residence: I live in SC but work in NC
Age: 33
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 10-15% of stocks

Current Portfolio is in the high six-figures

Current retirement assets

Taxable
5% cash (for investing – do not include emergency funds)
2% Fidelity Select Biotechnology (FBIOX) (0.81%)
2% Fidelity Select IT Services Portfolio (FBSOX) (0.81%)
1% iShares International Dividend (IDV) (0.5%)
1% iShares S&P Mid Cap 400 Growth ETF (IJK) (0.25%)
1% iShares S&P SmallCap Growth ETF (IJT) (0.26%)
1% iShares Core S&P Total US Stock Market ETF (ITOT) (0.07%)
1% GE
2% BP
1% F
1% KO
4% Company Stock
1% TGT

His 401k
14% Vanguard Growth Index Fund Institutional Shares (VIGIX) (0.08%)
12% Vanguard Institutional Index Fund Institutional Plus (VIIIX) (0.02%)
10% Vanguard Small-Cap Growth Index Fund Institutional Shares (VSGIX) (0.08%)
10% Artisan Mid Cap Account (0.5037%)
10% Company Stock
9% Vanguard Short-Term Bond Index Fund Institutional Plus Shares (VBIPX) (0.05%)
7% PIMCO Total Return Account (0.27%)
5% Russell International Value Account (0.594%)

Contributions

New annual Contributions
$17,500 401K + (3% company match = $3,429)
$17,500 taxable

The 17,500 in taxable comes from my company's ESPP plan. As part of the plan I buy the company's stock at a 10% discount and am able to sale at the end of every quarter.

Available funds

Funds available in his 401(k)

LifePath Index Retirement Fund L (0.10%)
LifePath Index 2020 Fund L (0.10%)
LifePath Index 2030 Fund L (0.10%)
LifePath Index 2040 Fund L (0.10%)
LifePath Index 2050 Fund L (0.10%)
Vanguard Value Index Fund Institutional Shares (VIVIX) (0.08%)
Vanguard Growth Index Fund Institutional Shares (VIGIX) (0.08%)
Vanguard Institutional Index Fund Institutional Plus (VIIIX) (0.02%)
Fidelity Growth Company Commingled Pool (0.43%)
Fidelity Contrafund ® Commingled Pool (0.43%)
Artisan Mid Cap Account (0.5037%)
Vanguard Small-Cap Growth Index Fund Institutional Shares (VSGIX) (0.08%)
DFA Small/Mid Cap Value Account (0.2528%)
Russell International Value Account (0.594%)
PIMCO Inflation Response Multi-Asset Fund Institutional (PIRMX) (0.9%)
PIMCO All Asset All Authority Fund Institutional Class (PAUIX) (1.89%)
PIMCO Total Return Account (0.27%)
Vanguard Short-Term Bond Index Fund Institutional Plus Shares (VBIPX) (0.05%)
Company Stock

Questions:
1. I want to consolidate my money in both my 401k and taxable accounts. I feel like I'm spread out across too many investments. What would be the best way to accomplish this? What investments should I look into in my taxable account?

2. What funds should I invest in in my retirement account and what percentage of my contributions should go to each fund?

3. Am I too heavily invested in my company stock? I hold quite a bit in my 401k and my taxable account. Should I consider exchanging out of company stock in my 401k and investing in other funds?
Last edited by clivebixby on Wed Mar 26, 2014 3:00 pm, edited 4 times in total.
kerplunk
Posts: 842
Joined: Sun Apr 17, 2011 9:58 pm

Re: 401k Portfolio Advice needed

Post by kerplunk »

Your three questions/thoughts are correct. I have written a portfolio (below) which I believe will take care of all of your concerns.

I recommend at least 20% of your stock allocation being international. Vanguard does as well. If you would rather use 10% to 15%, that's fine too. My example, below, will use 20%.

64% Domestic stock
20% Bonds
16% Foreign stock

Organize your existing portfolio to this:

401(k) (77%)
45.6% Vanguard Institutional Index Fund Institutional Plus (VIIIX) (0.02%)
20.0% Vanguard Short-Term Bond Index Fund Institutional Plus Shares (VBIPX) (0.05%)
11.4% Vanguard Small-Cap Growth Index Fund Institutional Shares (VSGIX) (0.08%)

Taxable (23%)
16% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
7.0% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)


New contributions:

401(k)
+24% ($8,400) Vanguard Institutional Index Fund Institutional Plus (VIIIX) (0.02%)
+20% ($7,000) Vanguard Short-Term Bond Index Fund Institutional Plus Shares (VBIPX) (0.05%)
+6% ($2,100) Vanguard Small-Cap Growth Index Fund Institutional Shares (VSGIX) (0.08%)

Taxable
+34% (11,900) Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
+16% ($5,600) Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
Stan Dup
Posts: 776
Joined: Fri May 10, 2013 10:25 am

Re: 401k Portfolio Advice needed

Post by Stan Dup »

kerplunk wrote:Your three questions/thoughts are correct. I have written a portfolio (below) which I believe will take care of all of your concerns.

I recommend at least 20% of your stock allocation being international. Vanguard does as well. If you would rather use 10% to 15%, that's fine too. My example, below, will use 20%.

64% Domestic stock
20% Bonds
16% Foreign stock

Organize your existing portfolio to this:

401(k) (77%)
45.6% Vanguard Institutional Index Fund Institutional Plus (VIIIX) (0.02%)
20.0% Vanguard Short-Term Bond Index Fund Institutional Plus Shares (VBIPX) (0.05%)
11.4% Vanguard Small-Cap Growth Index Fund Institutional Shares (VSGIX) (0.08%)

Taxable (23%)
16% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
7.0% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)


New contributions:

401(k)
+24% ($8,400) Vanguard Institutional Index Fund Institutional Plus (VIIIX) (0.02%)
+20% ($7,000) Vanguard Short-Term Bond Index Fund Institutional Plus Shares (VBIPX) (0.05%)
+6% ($2,100) Vanguard Small-Cap Growth Index Fund Institutional Shares (VSGIX) (0.08%)

Taxable
+34% (11,900) Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
+16% ($5,600) Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)

+1

Decent plan. Simple and low cost.
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti
pingo
Posts: 2638
Joined: Sat Sep 19, 2009 8:24 pm

Re: 401k Portfolio Advice needed

Post by pingo »

clivebixby wrote:State of Residence: I live in SC but work in NC
Just curious. How does that work for state taxes? Do both states want you to pay them?
clivebixby wrote:Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 10-15% of stocks
You appear to want an aggressive portfolio, but few international stocks, which always strikes me as strange. Is there some reason for it?
clivebixby wrote:Taxable
5% cash (for investing – do not include emergency funds)
Some of that needs to fund an Roth IRA (whether directly or through the backdoor) for 2013 and 2014 NOW. I'll explain in a minute.
clivebixby wrote:His 401k
14% Vanguard Growth Index Fund Institutional Shares (VIGIX) (0.08%)
12% Vanguard Institutional Index Fund Institutional Plus (VIIIX) (0.02%)
10% Vanguard Small-Cap Growth Index Fund Institutional Shares (VSGIX) (0.08%)
10% Artisan Mid Cap Account (0.5037%)
10% Company Stock
9% Vanguard Short-Term Bond Index Fund Institutional Plus Shares (VBIPX) (0.05%)
7% PIMCO Total Return Account (0.27%)
5% Russell International Value Account (0.594%)
Also, how do you feel about tilting to Growth and Small Growth? Academically speaking, the most Growth that any investor should have is at market weight, which in your case eliminates any need for growth funds. Remember, just because the "growth" is in it, doesn't mean the asset class grows any more or less than the rest of them. "Growth" in those fund only refers to "growth companies". Growth companies can be great companies, but it doesn't necessarily translate into higher returns for the investor.
clivebixby wrote:New annual Contributions
$17,500 401k (3% company match) $17,500 + 3% match = $ ________ ?
$17,500 taxable

The 17,500 in taxable comes from my company's ESPP plan where I contribute another. As part of the plan I buy the company's stock at a 10% discount and am able to sale at the end of every quarter.
Also, no IRA(s)? I don't have much time, so I'll pretty-much copy and paste from another thread:

If you do not qualify to contribute directly to a deductible Traditional IRA or a Roth IRA, you can contribute to a Roth IRA via what we call "the backdoor" even though it's really an open door for everyone. The government wants people with Traditional IRAs to convert them to Roths in order to increase tax revenue rather than wait for it to come in down the road. Since anyone of any income level can convert, and since anyone at any income level can contribute to a non-deductible Traditional IRA, you are able to do contribute to a non-deductible TIRA and then convert the assets to a Roth:

Wiki: Backdoor Roth IRA

The Finance Buff: The Backdoor Roth: A Complete How-to

The Finance Buff: Make Backdoor Roth Easy on Tax Return

The Finance Buff: How to Report Backdoor Roth in TurboTax

Discussion: Backdoor Roth process

Discussion: Backdoor Roth in money market

And please look into this:
[url=http://www.irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401(k)-plans-in-2014]Here[/url], IRS.gov wrote: The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000.
After you max out your 401k personal contributions, be sure to look into His and Her 401k Plan Documents and 401k websites to find out whether or not He or She can get more of after-tax savings into your Roth account via the backdoor via the 401k. Does either 401k allow after-tax contributions plus the ability to regularly take distributions/withdrawals of (only) the after-tax contributions? I am not referring to Roth 401k contributions (which are also after-tax), rather a separate way to save after-tax money inside the 401k in addition to your employer match and the Traditional/Roth 401k contribution limit of $17,500/year. (If you don't find the option, call the 401k provider and ask, but it's best to find it in writing, in case Customer Service misses it.) Here are 4 links talking about 401k after-tax contributions: here, here, here and here.

If either 401k allows regular in-service withdrawals/distributions of elective after-tax contributions to your employer plan, you can have them directly rolled over to a Roth account where they will be tax-free forever. They do not affect Roth IRA contribution limits (whether direct or backdoor). If I understand correctly, the pro-rata rule for IRAs does not apply to a 401k-to-Roth conversion. If in-service withdrawals of the after-tax money are not allowed on a regular basis, then it is not a desirable option, but please let us know if this is the case, regardless.
Last edited by pingo on Wed Mar 26, 2014 9:58 am, edited 2 times in total.
kerplunk
Posts: 842
Joined: Sun Apr 17, 2011 9:58 pm

Re: 401k Portfolio Advice needed

Post by kerplunk »

I just noticed the small-cap fund in your 401(k) is a small-cap growth fund. Ideally, it would be a small-cap blend fund (or extended market index). As your taxable account grows, you will want to phase that holding out of your 401(k) and replace it with the Vanguard Extended Market Index fund in your Taxable account.

As pingo noticed, I did not include the match in my calculations. Please adjust for that, as well as backdoor Roth.
Topic Author
clivebixby
Posts: 8
Joined: Mon Mar 03, 2014 9:52 am

Re: 401k Portfolio Advice needed

Post by clivebixby »

pingo wrote:
clivebixby wrote:State of Residence: I live in SC but work in NC
Just curious. How does that work for state taxes? Do both states want you to pay them?
I pay income tax in NC since I work there. The only taxes I pay to SC are for property and any income I make from stocks or any other source.
clivebixby wrote:Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 10-15% of stocks
pingo wrote:You appear to want an aggressive portfolio, but few international stocks, which always strikes me as strange. Is there some reason for it?
Not really. The main reason is that after reading the bogleheads guide to investing it suggested not holding very much in international stocks since domestic stocks have proven to perform better over the past few years. I'm fine with investing more in international if it makes sense.
pingo wrote:Also, how do you feel about tilting to Growth and Small Growth? Academically speaking, the most Growth that any investor should have is at market weight, which in your case eliminates any need for growth funds. Remember, just because the "growth" is in it, doesn't mean the asset class grows any more or less than the rest of them. "Growth" in those fund only refers to "growth companies". Growth companies can be great companies, but it doesn't necessarily translate into higher returns for the investor.
I'm perfectly fine with this. Again, I knew very little about investing when I made these investment decisions. When I saw "growth" in the title, I thought "This must be good" :)
clivebixby wrote:New annual Contributions
$17,500 401k (3% company match) $17,500 + 3% match = $ ________ ?
$17,500 taxable
Sorry. Updated employer match in original post.
pingo wrote:Also, no IRA(s)? I don't have much time, so I'll pretty-much copy and paste from another thread:


If you do not qualify to contribute directly to a deductible Traditional IRA or a Roth IRA, you can contribute to a Roth IRA via what we call "the backdoor" even though it's really an open door for everyone. The government wants people with Traditional IRAs to convert them to Roths in order to increase tax revenue rather than wait for it to come in down the road. Since anyone of any income level can convert, and since anyone at any income level can contribute to a non-deductible Traditional IRA, you are able to do contribute to a non-deductible TIRA and then convert the assets to a Roth:
I don't qualify to contribute directly and wastn' aware of the backdoor method. This is definitely something I'll look into.
pingo wrote:After you max out your 401k personal contributions, be sure to look into His and Her 401k Plan Documents and 401k websites to find out whether or not He or She can get more of after-tax savings into your Roth account via the backdoor via the 401k. Does either 401k allow after-tax contributions plus the ability to regularly take distributions/withdrawals of (only) the after-tax contributions? I am not referring to Roth 401k contributions (which are also after-tax), rather a separate way to save after-tax money inside the 401k in addition to your employer match and the Traditional/Roth 401k contribution limit of $17,500/year. (If you don't find the option, call the 401k provider and ask, but it's best to find it in writing, in case Customer Service misses it.) Here are 4 links talking about 401k after-tax contributions: here, here, here and here.

If either 401k allows regular in-service withdrawals/distributions of elective after-tax contributions to your employer plan, you can have them directly rolled over to a Roth account where they will be tax-free forever. They do not affect Roth IRA contribution limits (whether direct or backdoor). If I understand correctly, the pro-rata rule for IRAs does not apply to a 401k-to-Roth conversion. If in-service withdrawals of the after-tax money are not allowed on a regular basis, then it is not a desirable option, but please let us know if this is the case, regardless.
My 401k does offer the ability to make after-tax contributions as well as Roth contributions. Thank you for all of the links! I never knew of the benefits of after-tax contributions.
Last edited by clivebixby on Wed Mar 26, 2014 12:43 pm, edited 1 time in total.
Topic Author
clivebixby
Posts: 8
Joined: Mon Mar 03, 2014 9:52 am

Re: 401k Portfolio Advice needed

Post by clivebixby »

kerplunk wrote:I just noticed the small-cap fund in your 401(k) is a small-cap growth fund. Ideally, it would be a small-cap blend fund (or extended market index). As your taxable account grows, you will want to phase that holding out of your 401(k) and replace it with the Vanguard Extended Market Index fund in your Taxable account.

As pingo noticed, I did not include the match in my calculations. Please adjust for that, as well as backdoor Roth.
Thanks. I updated the match in my original post. My 401k does allow me to make after-tax contributions so I can do a backdoor Roth since I'm not eligible to contribute to a Traditional or Roth IRA.
kerplunk
Posts: 842
Joined: Sun Apr 17, 2011 9:58 pm

Re: 401k Portfolio Advice needed

Post by kerplunk »

clivebixby wrote:Thanks. I updated the match in my original post. My 401k does allow me to make after-tax contributions so I can do a backdoor Roth since I'm not eligible to contribute to a Traditional or Roth IRA.
Do you like my proposed portfolio plan? If so, I will adjust it to include your match and your Backdoor Roth IRA contribution, but I don't want to re-do the calculations if you aren't seriously planning on using it. Thanks!
Topic Author
clivebixby
Posts: 8
Joined: Mon Mar 03, 2014 9:52 am

Re: 401k Portfolio Advice needed

Post by clivebixby »

kerplunk wrote:
clivebixby wrote:Thanks. I updated the match in my original post. My 401k does allow me to make after-tax contributions so I can do a backdoor Roth since I'm not eligible to contribute to a Traditional or Roth IRA.
Do you like my proposed portfolio plan? If so, I will adjust it to include your match and your Backdoor Roth IRA contribution, but I don't want to re-do the calculations if you aren't seriously planning on using it. Thanks!
Yes, absolutely. It's simple and would be very easy to manage. Please re-do the calculations whenever you have time. Thanks!
pingo
Posts: 2638
Joined: Sat Sep 19, 2009 8:24 pm

Re: 401k Portfolio Advice needed

Post by pingo »

pingo wrote:You appear to want an aggressive portfolio, but few international stocks, which always strikes me as strange. Is there some reason for it?
clivebixby wrote:Not really. The main reason is that after reading the bogleheads guide to investing it suggested not holding very much in international stocks since domestic stocks have proven to perform better over the past few years. I'm fine with investing more in international if it makes sense.
If you can , will you give us a reference to where it says that? I'm not saying it doesn't, but it's good to see the point of reference. John Bogle isn't into international investing, but he has very specific reasons for not investing outside the U.S. Kerplunk's suggestion of at least 20% of equity is good because most of the diversification and return benefits from international stocks have come to U.S. investors in the range of 20 to 40% of equities.
pingo wrote:Also, how do you feel about tilting to Growth and Small Growth? Academically speaking, the most Growth that any investor should have is at market weight, which in your case eliminates any need for growth funds.
clivebixby wrote:I'm perfectly fine with this. Again, I knew very little about investing when I made these investment decisions. When I saw "growth" in the title, I thought "This must be good" :)
You're not alone. Thank you for explaining.
clivebixby wrote:My 401k does offer the ability to make after-tax contributions as well as Roth contributions.
Be sure to make pre-tax personal 401k contributions up to the max ($17,500), especially if you do not expect a pension in retirement. In you're case, you may end up with a huge Roth account in retirement which can work synergistically with your pre-tax 401k to make it a better option than a Roth 401k. So, no Roth 401k contributions...at least not until or unless you've done some more reading:

The Finance Buff: The Case Against Roth 401(k)

The Finance Buff: Roth 401(k) For People Who Contribute The Max

Discussion: Roth 401k vs Standard 401k

Discussion: Roth 401(k) Questions

And remember, the after-tax 401k option is usually not a good idea if your employer plan does not permit quarterly or annual distributions/withdrawals where you'd have the money transfered directly into your Vanguard Roth IRA.

Another idea to keep in the back of your mind for the next several years: you might be able to slowly but surely move all retirement investment assets into your tax-advantaged accounts (401k and Roth). Assuming you can fully backdoor $5,500 + $31,071 per year into the Roth via non-deductible IRA and after-tax 401k contributions, you might as well do the following.

Contribute $17,500/yr to the ESPP benefit, $17,500 (+ match) to the pre-tax 401k, and use defer another $31,071/yr from your salary to max the 401k after-tax benefit. Now that you have a lot less money for groceries, etc, you'll liquidate taxable investments (including employer stock) to pay for groceries and to also fund your non-deductible IRA contributions.

Two benefits to this idea:

1. All your investments end up being tax-deferred and/or tax-free in tax-advantaged accounts.
2. Once they're all in tax-advantaged accounts, you can enjoy the ultimate in simplicity: using a single LifePath Index Fund in your employer plan and a single Vanguard LifeStrategy or Target Retirement Fund in your Roth. For more information about the excellent LifePath Index Funds that your employer provides, read the following post:

Here's a direct link to a post explaining BTC/BlackRock LifePath Index Funds

3. By retirement, your sizable Roth account will have compounded and will be used tax-free with no required minimum distributions ever. You'd also be withdrawing and/or converting your pre-tax 401k assets to Roth assets at lower than 28% federal tax rates (which is why it's better than using a Roth 401k).
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