Portfolio help - Windfall 1.5M to 5M

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Topic Author
mammonman
Posts: 75
Joined: Mon Feb 11, 2008 5:41 pm

Portfolio help - Windfall 1.5M to 5M

Post by mammonman »

Looking to this fantastic community for help with handling the proceeds from a sale of a business. My current portfolio is a little over 1.5M constructed through the excellent advice offered on this forum. My business is being sold and will be receiving approximately 4 million after tax. I have been a slice and dicer with small value tilt. I would ideally like to keep doing so but am wondering if I need the complexity - lack of tax advantaged space being a major issue. Portfolio and questions below.

Emergency Funds - yes plus HELOC if I need it
Debt: none, will be paying off house with proceeds from sale (400k)
Tax Filing Status: Married Filing Jointly
Tax Rate: 39% Fed 6% State State: MO
Age: 40/40
Desired Asset Allocation: 60% Stocks / 40% Bonds?
Desired International: 35%

Current Plan
Domestic 28.75%
SCV 7.50%
Foreign 17.00%
Foreign SC 5.00%
Emerging markets 3.00%
Reits 8.25%
Bonds 22.75%
Tips 7.75%
100.00%

Equity Percentages
Dom % 52.16%
Intl % 35.97%

Small cap tilt
Dom SCV 20.69%
Intl SC % 20.00%

Bond % 30.50%

Current retirement assets - I left the expense ratios off the vang funds as they are mostly admiral

Taxable
at Wells Fargo and Vanguard
12.26% VTI/VTSAX Vanguard Total Stock
3.20% OAKBX Oakmark Equity & Income (0.74 ER) - long story have a 10k capital gain
10.76% Large Cap individual stocks - have large cap gains in all these and am comfortable keeping them (primarly AMZN, BRK-B, V, and BA)
2.88% VWO/VEMAX Vang Emerging Markets
3.36% VEU/VFWAX Vang FTSE All-World exUS
8.23% VXUS/VTIAX Vang Total International
4.39% VSS Vang Int Small Cap
1.22% Ibonds
0.61% Crowd Real Estate Investment - experiment - lumped in with REITS
0.94% Crowd Debt Investment - experiment - lumped in with bond %

His 401k at Vanguard ~ 260k
6.45% VTIAX Vang Total Int
5.94% VTBLX Vang Total Bond
1.46% VFIAX Vang 500 index
0.86% VGSLX Vang Reit
0.70% VSMAX Vang Small Cap Index

His Roth IRA at Vanguard ~ 93k
0.19% VBIIX Vang Interm Bond
2.00% VGSLX Vang Reit
3.40% VSIAX Vang Small Cap Value

Her 401k ~ 80k
1.22% VINIX Vang Inst Index
2.05% VBIMX Vang Interm Bond
1.57% VIPSX Vang Tips

Her 403b ~ 255k
4.31% VINIX Vang Inst Index
6.16% VBIMX Vang Interm Bond
4.93% VIPSX Vang Tips

Her 457b ~ 46k
2.74% VBIMX Vang Interm Bond

Her Roth IRA ~98k
0.85% VBILX Vang Iterm Bond
1.73% VGSLX Vang Reit
3.31% VSIAX Vang Small Cap Value

Vang Variable Annuity - started long time ago - transferred from NWM crooks ~ 43k
2.28% VGSLX Vang Reit



His 401k
Vanguard Target Retirement 2060 Inv 0.18%
Vanguard Target Retirement 2055 Inv 0.18%
Vanguard Target Retirement 2050 Inv 0.18%
Vanguard Target Retirement 2045 Inv 0.18%
Vanguard Target Retirement 2040 Inv 0.18%
Vanguard Target Retirement 2035 Inv 0.18%
Vanguard Target Retirement 2030 Inv 0.17%
Vanguard Target Retirement 2025 Inv 0.17%
Vanguard Target Retirement 2020 Inv 0.16%
Vanguard Target Retirement 2015 Inv 0.16%
Vanguard Target Retirement 2010 Inv 0.16%
Vanguard Target Retirement Income Inv 0.16%
Morley Stable Value Fund Fee Class 125 0.56%
T. Rowe Price Capital Apprec Inv 0.71%
Templeton Global Bond Adv 0.66%
American Beacon Large Cap Value Inst 0.59%
Delaware Select Growth Instl 1.00%
Eaton Vance Atlanta Capital SMID-Cap A 1.23%
American Beacon Small Cap Value Other 1.20%
Janus Triton I 0.79%
American Funds EuroPacific Gr R6 0.49%
Oppenheimer Developing Markets Fund I 0.87%
(CL) American Century Mid Cap Value Inv 1.01%
* Vanguard REIT Index Admiral 0.10%
Vanguard Mid Cap Index Admiral 0.09%
* Vanguard Total Intl Stock Index Admiral 0.14%
* Vanguard Total Bond Market Index Adm 0.08%
* Vanguard Small Cap Index Admiral 0.09%
* Vanguard 500 Index Admiral 0.05%
Metropolitan West Total Return Bond I 0.45%


Her 401k/403b/457f
ABF LG CAP VAL INST (AADEX) 07/17/1987 0.59%
PIF LGCP GRTH I I (PLGIX) 12/06/2000 0.63%
VANGUARD INST INDEX (VINIX) 07/31/1990 0.04%
VANG EXT MKT IDX INS (VIEIX) 12/21/1987 0.08%
TARGET SM CAP VAL T (TASVX) 01/05/1993 0.68%
VANG EXPLORER ADM (VEXRX) 12/11/1967 0.35%
DODGE & COX INTL STK (DODFX) 05/01/2001 0.64%
OPP DEVELOPING MKT Y (ODVYX) 11/18/1996 1.08%
OPPHMR INTL GROWTH I (OIGIX) 03/25/1996 0.70%
VANG TOT INTL STK IS (VTSNX) 04/29/1996 0.12%
JPM CORE BOND R6 (JCBUX) 06/03/1991 0.41%
VANG INTM BOND INST (VBIMX) 03/01/1994 0.07%
VANG INFL PROT INST (VIPIX) 06/29/2000 0.07%
PIF DVRSD REAL AST I (PDRDX) 03/16/2010 0.86%
JPM US GOVT MM CAP (OGVXX) 06/14/1993 7 day yield as of 01/30/2015   0.01% 0.21%


Questions:
1. Do I need to simplify my portfolio? Do I keep the small cap value tilt? I believe in the small cap tilt, but do I still need to? Harder with less tax advantaged space. Reits?
2. With this portfolio and limited tax advantaged space, are Tips necessary? Ibonds?
3. I was thinking 2/3 Vanguard Intermediate-Term Tax Exempt (VWIUX) 1/3 Vanguard Limited-Term Tax Exempt VMLUX for Munis in taxable - have never needed Muni's before but I am increasing my bond% to 40% and will not be able to fit my bonds in taxable. Does this make sense?
4. I have a variable annuity with vanguard - came from a 1035 exchange, is this a case where it might be useful? For instance if I wanted to keep contributing to Reits and there isn't any tax advantage space left
5. Would like opinions on CDs as a place in my portfolio. Was thinking of doing a 5 year CD ladder at Ally 100k each year. - where do I put the rest while I'm waiting? Munis? Online savings account? I have opened up a few new accounts at ally paying attention to titiling rules to increase my FDIC insured space there. Online savings now at 0.99% 5 year CD is at 2.00% 2 year raise your rate CD at 1.29%
6. I was considering putting half my proceeds into the market lump sum then contributing 25% of the remaining each subsequent quarter. Thoughts?
7. Proposed new portfolio allocation - keeping most of the slice and dice - I am eliminating my over-weight in Emerging Markets - I don't plan to sell what I have there, I will just lump it into my Foreign % - Another thought - go to a simple 3 fund or 4 fund portfolio going forward, ignoring small cap tilt. Just need to figure out how easy I can make this...

Proposed new Portfolio
Domestic 26.00%
scv 6.00%
Foreign 18.00%
Foreign SCV 3.75%
Reits 6.50%
Bonds 30.00%
Tips 9.75%
100.00%


Sorry for the long post. This sale came out of nowhere and am just trying to get things in order before it closes April 1. Thank you all for your help.

Edited to clean up some formatting issues when I cut and paste
Last edited by mammonman on Wed Feb 25, 2015 11:56 am, edited 1 time in total.
Anon1234
Posts: 798
Joined: Sat Feb 26, 2011 9:32 pm

Re: Portfolio help - Windfall 1.5M to 5M

Post by Anon1234 »

Congratulations on the sale and and your success. You must have built quite an impressive business.

At $5M, how many times your annual spending do you have?

I'm having a hard time understanding this
Desired Asset Allocation: 60% Stocks / 40% Bonds?
Desired International: 35%
And this
Current Plan
Domestic 28.75%
SCV 7.50%
Foreign 17.00%
Foreign SC 5.00%
Emerging markets 3.00%
Reits 8.25%
Bonds 22.75%
Tips 7.75%
100.00%

Equity Percentages
Dom % 52.16%
Intl % 35.97%

Small cap tilt
Dom SCV 20.69%
Intl SC % 20.00%

Bond % 30.50%
And this
Proposed new Portfolio
Domestic 26.00%
scv 6.00%
Foreign 18.00% Bond % 39.75%
Foreign SCV 3.75%
Reits 6.50% Bonds 75.47%
Bonds 30.00% Tips 24.53%
Tips 9.75%
100.00%
Have you tried to estimate the increase in annual returns that a slice and dice portfolio will add?
Have you tried to estimate the tax cost of rebalancing that slice and dice portfolio?
My impression is that selling to rebalance in taxable will overwhelm the benefit. And, you don't have anything listed for "New annual contributions"
It appears your new portfolio will be only 10-15% tax advantaged.

Will your federal tax bracket remain 39% going forward? (of course your actual federal marginal rate is 42.1% with the standard medicare and 0.9% obamacare medicare tax)

Questions
1) see comments above
2) I like I-bonds, and EE-bonds (hold EEs 20 years until they double). Safe, tax deferred. I think you can get $40k per year for you and wife, more if you make some trusts.
3) I am also in the 39% federal bracket. A Few months ago I looked at 13 vanguard funds for taxable bond holdings. I looked at tracking error (to the benchmark), correlation to VTSAX, standard deviation, and SEC yield (after tax) per year of duration. Then I looked at a 2.47% taxable CD. I decided to go with the taxable CD. You can ignore the orange coloring.
Image
In the chart below, SECY/dur is current SEC Yield per year of fund duration. AT SECY/dur is After Tax SEC Yield per year of fund duration. AT 1YR/dur is the 1YR historical return divided by current fund duration (a bit of a hack, but I didn't try to find historical durations). The reason the CD is 0.00% after 1-year and increasing is because I included the early withdrawal penalty in the "historical" returns. The CD "historical" returns are actually forward looking returns with the EWP included.
Image
4) As bernstein put it, you have to decide if the Reit benefit is worth the VA cost. Long payoff. Here is his website post. http://www.efficientfrontier.com/ef/701/annuity.htm
5) I like CDs. Remember that you can build a ladder with 5 years CDs. It is the Early withdrawal penalty that defines the actual minimum CD period, and the CD length defines the longest period. If you have a 5 Year ladder of 5 year CDs, at the end of year 1 you get to decide if it's worth swapping one of the old 5 year CD for a new 5-year CD (considering the EWP). If rates go down you just do nothing. For the holding period I suggest you check out a product called CDARs. It is a type of account that has unlimited FDIC protection with all your money in one account (somehow they open multiple accounts at multiple banks to increase the limit). I have never used them.
6) totally a behaviorial thing. I would probably do something like that. I would jump all in the stocks, then DCA the bonds maybe over 1, 2 or 3 years. Holding in CDARs in the meantime.
7) generally speaking, the portfolio you had was good. Your need to take risk has decreased. You can offload risk by going to a eg 40% stock, simpler, less tilted portfolio. Or you can offload risk by going to a tilted portfolio with only 35% stock. I am biased to the simplicity, but ask Larry Swedroe and he would probably say keep the tilt and get more bonds and cash. No way to know which is better. BTW - you ability to take risk has increased. You could consider the bucket approach. One conservative portfolio for you that you plan to exhaust, another very risky portfolio for your heirs - which also serves as a backup if SHTF 3 decades from now. This is why I asked about your ratio of assets to expenditures at the top.
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: Portfolio help - Windfall 1.5M to 5M

Post by letsgobobby »

Big picture. For most of us, $5 million is qualitatively different than $1.5 million. If your need for risk has considerably decreased, you should consider decreasing your portfolio risk commensurately.

In this context if you continue to tilt, you are adopting a Larry or barbell portfolio.
Topic Author
mammonman
Posts: 75
Joined: Mon Feb 11, 2008 5:41 pm

Re: Portfolio help - Windfall 1.5M to 5M

Post by mammonman »

Thanks for the very comprehensive reply! I am still digesting, but let me clear some things up.
Anon1234 wrote:Congratulations on the sale and and your success. You must have built quite an impressive business.

At $5M, how many times your annual spending do you have? I estimate I have 30 years times my yearly spending.

I'm having a hard time understanding this
Desired Asset Allocation: 60% Stocks / 40% Bonds?
Desired International: 35%
my current portfolio is 70% Equities / 30% Bonds - I was thinking after the sale to decrease risk changing to 60% Equities/40% Bonds. The 35% is amount of international equities desired in the equity portion.

And this
Current Plan
Domestic 28.75%
SCV 7.50%
Foreign 17.00%
Foreign SC 5.00%
Emerging markets 3.00%
Reits 8.25%
Bonds 22.75%
Tips 7.75%
100.00%

Equity Percentages
Dom % 52.16%
Intl % 35.97%

Small cap tilt
Dom SCV 20.69%
Intl SC % 20.00%

Bond % 30.50%
Above are current percentages of my existing portfolio. Below is the new portfolio I am considering but I realize there were some formatting issues when I copied/pasted from excel.
And this
Proposed new Portfolio
Domestic 26.00%
scv 6.00%
Foreign 18.00%
Foreign SCV 3.75%
Reits 6.50%
Bonds 30.00%
Tips 9.75%
100.00%


Have you tried to estimate the increase in annual returns that a slice and dice portfolio will add? I have not done this, but we can only go from history can't we...
Have you tried to estimate the tax cost of rebalancing that slice and dice portfolio? I have always rebalanced using new monies and don't believe to much in frequent rebalancing, but to answer your question, no. That is something I think I need to consider if I want to continue this way or go a bit less complicated.
My impression is that selling to rebalance in taxable will overwhelm the benefit. And, you don't have anything listed for "New annual contributions" My new contributions will be 59k going forward - my 401k, her 403b, her 457f, both of our roths, my HSA. I am not sure I will have enough to contribute to taxable after the sale.
It appears your new portfolio will be only 10-15% tax advantaged.

Will your federal tax bracket remain 39% going forward? (of course your actual federal marginal rate is 42.1% with the standard medicare and 0.9% obamacare medicare tax) I will be going from 39 to 35% most likely.

Questions
1) see comments above
2) I like I-bonds, and EE-bonds (hold EEs 20 years until they double). Safe, tax deferred. I think you can get $40k per year for you and wife, more if you make some trusts. I will probably continue doing this since the only place I can get Tips is 401ks/Iras
3) I am also in the 39% federal bracket. A Few months ago I looked at 13 vanguard funds for taxable bond holdings. I looked at tracking error (to the benchmark), correlation to VTSAX, standard deviation, and SEC yield (after tax) per year of duration. Then I looked at a 2.47% taxable CD. I decided to go with the taxable CD. You can ignore the orange coloring. Thanks for this! - exactly the kind of info I am looking for. If I may ask, where did you find the 2.47% CD?
Image
In the chart below, SECY/dur is current SEC Yield per year of fund duration. AT SECY/dur is After Tax SEC Yield per year of fund duration. AT 1YR/dur is the 1YR historical return divided by current fund duration (a bit of a hack, but I didn't try to find historical durations). The reason the CD is 0.00% after 1-year and increasing is because I included the early withdrawal penalty in the "historical" returns. The CD "historical" returns are actually forward looking returns with the EWP included.
Image
4) As bernstein put it, you have to decide if the Reit benefit is worth the VA cost. Long payoff. Here is his website post. http://www.efficientfrontier.com/ef/701/annuity.htm I will read - thanks
5) I like CDs. Remember that you can build a ladder with 5 years CDs. It is the Early withdrawal penalty that defines the actual minimum CD period, and the CD length defines the longest period. If you have a 5 Year ladder of 5 year CDs, at the end of year 1 you get to decide if it's worth swapping one of the old 5 year CD for a new 5-year CD (considering the EWP). If rates go down you just do nothing. For the holding period I suggest you check out a product called CDARs. It is a type of account that has unlimited FDIC protection with all your money in one account (somehow they open multiple accounts at multiple banks to increase the limit). I have never used them. I don't much about CDARs but will look into them. I need to do more research on CDs - I have never owned one.
6) totally a behaviorial thing. I would probably do something like that. I would jump all in the stocks, then DCA the bonds maybe over 1, 2 or 3 years. Holding in CDARs in the meantime.
7) generally speaking, the portfolio you had was good. Your need to take risk has decreased. You can offload risk by going to a eg 40% stock, simpler, less tilted portfolio. Or you can offload risk by going to a tilted portfolio with only 35% stock. I am biased to the simplicity, but ask Larry Swedroe and he would probably say keep the tilt and get more bonds and cash. No way to know which is better. BTW - you ability to take risk has increased. You could consider the bucket approach. One conservative portfolio for you that you plan to exhaust, another very risky portfolio for your heirs - which also serves as a backup if SHTF 3 decades from now. This is why I asked about your ratio of assets to expenditures at the top.
Thanks for your thoughts on this and thanks again for the comprehensive reply. I really appreciate it. This sale was a bit unexpected, so I am still trying to wrap my head around what to do here. A good problem I know...
Anon1234
Posts: 798
Joined: Sat Feb 26, 2011 9:32 pm

Re: Portfolio help - Windfall 1.5M to 5M

Post by Anon1234 »

I found the CD at http://www.depositaccounts.com There are a handful paying more than 2% now with 2.75% the highest I see for 6+ year CDs.

With 30X spending a mine/heirs bucket approach may not be right for you. Before I give up, let me ask another way. Instead of portfolio/spending ratio, what is the ratio of portfolio divided by portfolio withdrawals?
If you are not planning to withdrawal from your portfolio for the next 10 years, your portfolio may be 50% larger by then. Maybe do some FIREcalc simulations, or if you have access to a monte carlo simulator you could use that.
Topic Author
mammonman
Posts: 75
Joined: Mon Feb 11, 2008 5:41 pm

Re: Portfolio help - Windfall 1.5M to 5M

Post by mammonman »

Anon1234 wrote:I found the CD at http://www.depositaccounts.com There are a handful paying more than 2% now with 2.75% the highest I see for 6+ year CDs.

With 30X spending a mine/heirs bucket approach may not be right for you. Before I give up, let me ask another way. Instead of portfolio/spending ratio, what is the ratio of portfolio divided by portfolio withdrawals?
If you are not planning to withdrawal from your portfolio for the next 10 years, your portfolio may be 50% larger by then. Maybe do some FIREcalc simulations, or if you have access to a monte carlo simulator you could use that.
I do not plan on withdrawing much from the portfolio for the next 10 years. Maybe for a vacation or two, but the goal is to try to live off my salary and have this in my back pocket if I want to retire early. I messed around with firecalc - seems like I should be ok thankfully. The big question I am still wrestling with is to continue to slice and dice or keep my existing holdings, but for the windfall money, settle into a simpler 3 fund portfolio.
Lafder
Posts: 4127
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Portfolio help - Windfall 1.5M to 5M

Post by Lafder »

I would want things as SIMPLE as possible. Complex is ok if you enjoy it and want it. I do not believe there is a growth advantage to complex. But it does add work to manage. ((I do not break my accounts/holdings into the categories you do, so it hurts my head to look at all of your sub categories))

I generally like 3 fund simplicity (Total stock, Total International Stock, Total Bond), but have added a 4th of International Bond.

I don't personally have REITs as a separate holding due to feeling over weighted in real estate due to rental property I own. If your house is your only real estate I would have REITS if I were you, unless you want to do more actual real estate investing.

You have financially won the game. To make it easier I would simplify the retirement accounts while you are at it. Is there a single find option for those? The less accounts/funds you have the easier it is to take a quick look at your finances, and rebalance if ever needed.

There is an advantage to holding bonds and International stock in retirement accounts. Therefore you could make retirement accounts heavier on bonds. However your bond space will fill into taxable due to the size of your taxable accounts.

I am curious what Vanguard would rec for you. If you let them know the size of portfolio you want to move to them, you will qualify for Flagship service and they will make suggestions on where to put the money. You absolutely do not need to sign up for the 0.3% management service. You will get a high level of service including investment planning help for no additional fee.

I would lose the Wells Fargo and switch those holdings to Vanguard as well.

Be sure you have your estate planning in place.

Congrats on having built a successful business.
lafder
Topic Author
mammonman
Posts: 75
Joined: Mon Feb 11, 2008 5:41 pm

Re: Portfolio help - Windfall 1.5M to 5M

Post by mammonman »

Lafder wrote:I would want things as SIMPLE as possible. Complex is ok if you enjoy it and want it. I do not believe there is a growth advantage to complex. But it does add work to manage. ((I do not break my accounts/holdings into the categories you do, so it hurts my head to look at all of your sub categories))

I generally like 3 fund simplicity (Total stock, Total International Stock, Total Bond), but have added a 4th of International Bond. I have thought about international bond, but due to lack of tax advantage space and no taxable option, I will probably leave this out for now. The case for holding international bond isn't strong enough for me yet to add that in

I don't personally have REITs as a separate holding due to feeling over weighted in real estate due to rental property I own. If your house is your only real estate I would have REITS if I were you, unless you want to do more actual real estate investing. I do like REITs and was planning to try to include them, but again with the percentage of holdings that I can fit into my retirement accounts being so small compared to the overall portfolio, I have to figure out if this is possible. They are not an option in taxable and Anon1234 linked an excellent article from bernstein regarding putting REITs in a VA. I am also planning on educating myself on rental properties to see if I want to go into that arena. I am used to passive income from the business, that will be gone once the sale goes through, and I would love to replace some of it.

You have financially won the game. To make it easier I would simplify the retirement accounts while you are at it. Is there a single find option for those? The less accounts/funds you have the easier it is to take a quick look at your finances, and rebalance if ever needed.

There is an advantage to holding bonds and International stock in retirement accounts. Therefore you could make retirement accounts heavier on bonds. However your bond space will fill into taxable due to the size of your taxable accounts. I understand the advantage of holding bonds in retirement accounts, but am confused about the international stock. I was under the impression that international stock was reasonably tax efficient and if held in a retirement account, you would not be able to take advantage of the foreign tax credit.

I am curious what Vanguard would rec for you. If you let them know the size of portfolio you want to move to them, you will qualify for Flagship service and they will make suggestions on where to put the money. You absolutely do not need to sign up for the 0.3% management service. You will get a high level of service including investment planning help for no additional fee. I might try this just to see what they would recommend

I would lose the Wells Fargo and switch those holdings to Vanguard as well. I am grandfathered in with 100 free trades with the wells fargo PMA account, and I like their interface actually a bit better than Vanguards. I might consider this just for simplicity.

Be sure you have your estate planning in place. Taken care of thankfully

Congrats on having built a successful business. Thanks again, and thank you very much for your thoughts on this!
lafder
Lafder
Posts: 4127
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Portfolio help - Windfall 1.5M to 5M

Post by Lafder »

You seem correct about International being fine in taxable, REITS are better in non taxable.

I may have confused myself since we happen to have International holdings in retirement accounts.

With a taxable portfolio of your size, you can not have a perfectly tax optimized placement of all funds.

Oh well, that is not a bad dilemma to have!

Lafder
Anon1234
Posts: 798
Joined: Sat Feb 26, 2011 9:32 pm

Re: Portfolio help - Windfall 1.5M to 5M

Post by Anon1234 »

mammonman wrote: The big question I am still wrestling with is to continue to slice and dice or keep my existing holdings, but for the windfall money, settle into a simpler 3 fund portfolio.
Mammonman, I was reading another thread, and I saw a quote from one of my favorite posters, Simplegift. I thought I'd copy it here for you: viewtopic.php?f=10&t=160342&newpost=2406151
Simplegift wrote:
IndexBeliever wrote:Set your money in a lazy 3 fund portfolio, target date fund or the like and forget it.
Even those of us lucky enough to be exposed to and persuaded by the passive indexing philosophy decades ago didn't always adopt the simple 3-4 fund portfolio approach. Many of us were influenced by the "more diversification, the better" theories of the time (Roger Gibson's classic text from the late 1990s, Asset Allocation: Balancing Financial Risk, comes to mind) — and believing in the rewards of multiple asset classes, we invested in as many of them as we could.

If I had it to over again, I believe the simpler 3-4 fund portfolio would have provided nearly all of the same rewards over time, with just a tad more volatility — and I would have had fewer (now highly-appreciated) funds to manage in my later years. Simpler is better in portfolio construction, I'm now convinced.
I believe these are words from the wise.
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: Portfolio help - Windfall 1.5M to 5M

Post by letsgobobby »

Good quote, and why I recommend something simple and low risk for this situation barring a specific interest in managing complexity or possibly higher returns. To the extent you slice and dice, try to do it in tax advantaged accounts.
Topic Author
mammonman
Posts: 75
Joined: Mon Feb 11, 2008 5:41 pm

Re: Portfolio help - Windfall 1.5M to 5M

Post by mammonman »

Anon1234 wrote:
mammonman wrote: The big question I am still wrestling with is to continue to slice and dice or keep my existing holdings, but for the windfall money, settle into a simpler 3 fund portfolio.
Mammonman, I was reading another thread, and I saw a quote from one of my favorite posters, Simplegift. I thought I'd copy it here for you: viewtopic.php?f=10&t=160342&newpost=2406151
Simplegift wrote:
IndexBeliever wrote:Set your money in a lazy 3 fund portfolio, target date fund or the like and forget it.
Even those of us lucky enough to be exposed to and persuaded by the passive indexing philosophy decades ago didn't always adopt the simple 3-4 fund portfolio approach. Many of us were influenced by the "more diversification, the better" theories of the time (Roger Gibson's classic text from the late 1990s, Asset Allocation: Balancing Financial Risk, comes to mind) — and believing in the rewards of multiple asset classes, we invested in as many of them as we could.

If I had it to over again, I believe the simpler 3-4 fund portfolio would have provided nearly all of the same rewards over time, with just a tad more volatility — and I would have had fewer (now highly-appreciated) funds to manage in my later years. Simpler is better in portfolio construction, I'm now convinced.
I believe these are words from the wise.
Very good advice that I will probably heed. I just need to get over my attachment to reits and small cap value, but I also understand and appreciate the simplicity argument. That thread you posted was exactly what I needed to read. There is some excellent advice in there...

Since I have so much in taxable already - I probably will just leave what I have unless I can take advantage of a tax loss harvesting situation and figure out a 3 fund solution.

Total Stock Market
Total International
Intermediate Munis or I might look into that new Tax Exempt index ETF that is supposed to come out second quarter.

Seems boring when I plan it out that way, but that may be all I need. I will miss tinkering around in my spreadsheets though! More time for fun then :sharebeer
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retiredjg
Posts: 54082
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Re: Portfolio help - Windfall 1.5M to 5M

Post by retiredjg »

mammonman wrote:1. Do I need to simplify my portfolio?
I don't think you "need" to simplify if you have been happy with what you have. But it sounds like at least part of you wants to simplify.

Do I keep the small cap value tilt? I believe in the small cap tilt, but do I still need to? Harder with less tax advantaged space.
Sure, if you want to. I don't think anybody "needs" SCV since we don't know if it will or will not outperform in the future. But if you want it, seems like you can have it. It has turned out (from reading here) that SCV is not so terribly tax-inefficient. Maybe that will change. Maybe not. But if you want SCV use the Vanguard fund (the ETF share class helps with tax-efficiency or so it is said here), just hold it in taxable.

Reits?
Different story. You need all your tax-advantaged space for bonds. You don't have room for REIT there so use the Vanguard VA or drop the REIT.

2. With this portfolio and limited tax advantaged space, are Tips necessary? Ibonds?
I Bonds would be fine. I don't know enough about TIPS in taxable to have an opinion. I recall there were some threads on this several years ago. Maybe the google search box in the upper right (which finds things on this forum) would help.

3. I was thinking 2/3 Vanguard Intermediate-Term Tax Exempt (VWIUX) 1/3 Vanguard Limited-Term Tax Exempt VMLUX for Munis in taxable - have never needed Muni's before but I am increasing my bond% to 40% and will not be able to fit my bonds in taxable. Does this make sense?

It makes sense if you mean you will not be able to fit your bonds in tax-advantaged accounts. :happy Is there a muni bond for your state? If so, you might use some of that. I'd also use some long term CDs.

4. I have a variable annuity with vanguard - came from a 1035 exchange, is this a case where it might be useful? For instance if I wanted to keep contributing to Reits and there isn't any tax advantage space left
Put REIT here or drop REIT entirely.

5. Would like opinions on CDs as a place in my portfolio. Was thinking of doing a 5 year CD ladder at Ally 100k each year. - where do I put the rest while I'm waiting? Munis? Online savings account? I have opened up a few new accounts at ally paying attention to titiling rules to increase my FDIC insured space there. Online savings now at 0.99% 5 year CD is at 2.00% 2 year raise your rate CD at 1.29%
I would probably use some CDs in addition to bonds and tax-exempt bonds and I bonds. I don't think it matters a lot where you hold money in the meantime. You could put it in shorter term CDs. Remember that the interest from these CDs will be taxable. Don't forget and make tax plans that don't include the CD interest.

6. I was considering putting half my proceeds into the market lump sum then contributing 25% of the remaining each subsequent quarter. Thoughts?

Sounds reasonable.


For things you don't want to keep (such as maybe the Oakmark Equity and Income) - if you give money to charity set up a donor advised fund at Fido or Vanguard . This gets you the tax deduction without the capital gains.

It seems to me you could retire if you want. Have you considered that?
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mammonman
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Re: Portfolio help - Windfall 1.5M to 5M

Post by mammonman »

Thanks for the detailed reply -I really appreciate it.
retiredjg wrote:
mammonman wrote:1. Do I need to simplify my portfolio?
I don't think you "need" to simplify if you have been happy with what you have. But it sounds like at least part of you wants to simplify. Part of me thinks I should, but the other part of me really likes the slice and dice and enjoys doing it. I have simplified a bit by eliminating the overweight in emerging markets. I may also choose to eliminate the VSS as an ongoing part of the portfolio and be satisfied with just total international for my foreign holdings.

Reits?
Different story. You need all your tax-advantaged space for bonds. You don't have room for REIT there so use the Vanguard VA or drop the REIT. I need to look more into the rules/costs of my VA, but as of now, I have decided am going to probably keep Reits unless I stray into rental properties

2. With this portfolio and limited tax advantaged space, are Tips necessary? Ibonds?
I Bonds would be fine. I don't know enough about TIPS in taxable to have an opinion. I recall there were some threads on this several years ago. Maybe the google search box in the upper right (which finds things on this forum) would help. from what I have read, Tips in taxable are not an option, so I think I will keep some Tips (I orginally wanted 25% of my bonds in tips, I might have to settle on 10% and increase that percentage as my tax advantage space grows)

3. I was thinking 2/3 Vanguard Intermediate-Term Tax Exempt (VWIUX) 1/3 Vanguard Limited-Term Tax Exempt VMLUX for Munis in taxable - have never needed Muni's before but I am increasing my bond% to 40% and will not be able to fit my bonds in taxable. Does this make sense?

It makes sense if you mean you will not be able to fit your bonds in tax-advantaged accounts. :happy Is there a muni bond for your state? If so, you might use some of that. I'd also use some long term CDs. I live in Missouri, which does not have a good low cost muni fund. I definitely won't be able to fit all my bonds in tax-advantaged accounts - so Munis it is...

4. I have a variable annuity with vanguard - came from a 1035 exchange, is this a case where it might be useful? For instance if I wanted to keep contributing to Reits and there isn't any tax advantage space left
Put REIT here or drop REIT entirely.

5. Would like opinions on CDs as a place in my portfolio. Was thinking of doing a 5 year CD ladder at Ally 100k each year. - where do I put the rest while I'm waiting? Munis? Online savings account? I have opened up a few new accounts at ally paying attention to titiling rules to increase my FDIC insured space there. Online savings now at 0.99% 5 year CD is at 2.00% 2 year raise your rate CD at 1.29%
I would probably use some CDs in addition to bonds and tax-exempt bonds and I bonds. I don't think it matters a lot where you hold money in the meantime. You could put it in shorter term CDs. Remember that the interest from these CDs will be taxable. Don't forget and make tax plans that don't include the CD interest. good idea - looking more into CDs and playing with tax yield calculator



For things you don't want to keep (such as maybe the Oakmark Equity and Income) - if you give money to charity set up a donor advised fund at Fido or Vanguard . This gets you the tax deduction without the capital gains. great idea, I am looking into this

It seems to me you could retire if you want. Have you considered that? I could, but I like what I do, and I am not sure I would know what to do with myself. I am going to be working less!


Thanks again for the reply!
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Toons
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Re: Portfolio help - Windfall 1.5M to 5M

Post by Toons »

letsgobobby wrote:Good quote, and why I recommend something simple and low risk for this situation barring a specific interest in managing complexity or possibly higher returns. To the extent you slice and dice, try to do it in tax advantaged accounts.
+1 :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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retiredjg
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Re: Portfolio help - Windfall 1.5M to 5M

Post by retiredjg »

mammonman wrote:from what I have read, Tips in taxable are not an option, so I think I will keep some Tips (I orginally wanted 25% of my bonds in tips, I might have to settle on 10% and increase that percentage as my tax advantage space grows)
You don't want a TIPS fund in taxable. However, I'm not sure what happens with TIPS individual bonds in taxable. It might be something that is worth finding out. However, I'm a lazy investor and it would be too much trouble for me. :happy
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retiredjg
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Re: Portfolio help - Windfall 1.5M to 5M

Post by retiredjg »

There is one other possibility to consider. Vanguard has a tax-managed small cap fund if you are concerned about the tax issues with small cap value. I think small cap value is probably fine most years, but the tax-managed small cap fund would be closer to a "sure thing" as far as tax-efficiency.

If you want a really big tilt to small, you might use a combination of the tax- managed small cap and the small cap value fund in taxable.
cherijoh
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Re: Portfolio help - Windfall 1.5M to 5M

Post by cherijoh »

Lafder wrote:I would want things as SIMPLE as possible. Complex is ok if you enjoy it and want it. I do not believe there is a growth advantage to complex. But it does add work to manage. ((I do not break my accounts/holdings into the categories you do, so it hurts my head to look at all of your sub categories))

I generally like 3 fund simplicity (Total stock, Total International Stock, Total Bond), but have added a 4th of International Bond.

I don't personally have REITs as a separate holding due to feeling over weighted in real estate due to rental property I own. If your house is your only real estate I would have REITS if I were you, unless you want to do more actual real estate investing.

You have financially won the game. To make it easier I would simplify the retirement accounts while you are at it. Is there a single find option for those? The less accounts/funds you have the easier it is to take a quick look at your finances, and rebalance if ever needed.

There is an advantage to holding bonds and International stock in retirement accounts. Therefore you could make retirement accounts heavier on bonds. However your bond space will fill into taxable due to the size of your taxable accounts. <-- If your international stock is in a retirement acct you LOSE the foreign tax credit. What advantage do you see for holding International Stock in retirement accts? I would say the opposite. I do agree with putting bonds in tax-advantaged -- as well as REITs.

I am curious what Vanguard would rec for you. If you let them know the size of portfolio you want to move to them, you will qualify for Flagship service and they will make suggestions on where to put the money. You absolutely do not need to sign up for the 0.3% management service. You will get a high level of service including investment planning help for no additional fee.

I would lose the Wells Fargo and switch those holdings to Vanguard as well.

Be sure you have your estate planning in place.

Congrats on having built a successful business.
lafder
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mammonman
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Re: Portfolio help - Windfall 1.5M to 5M

Post by mammonman »

retiredjg wrote:There is one other possibility to consider. Vanguard has a tax-managed small cap fund if you are concerned about the tax issues with small cap value. I think small cap value is probably fine most years, but the tax-managed small cap fund would be closer to a "sure thing" as far as tax-efficiency.

If you want a really big tilt to small, you might use a combination of the tax- managed small cap and the small cap value fund in taxable.
I haven't looked much into the tax managed small cap.
Found this interesting compared with VBR:
Image

Looking at the tax cost ratio and tax-adjusted return, it looks like the tax managed small cap fund might be the way to go. I did expect more of a difference and I am not sure why the potential cap gains exposure is so much higher in VTMSX vs VBR.

I did a quick forum search comparing the two and I am surprised to find not many people talking about this fund. I wonder if it is because value isn't in the name (but i did see where VTMSX is slightly value tilted...)
Anyone that owns a lot of VBR in taxable wish they would have went with the tax managed fund?
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retiredjg
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Re: Portfolio help - Windfall 1.5M to 5M

Post by retiredjg »

My guess is that most people who tilt want value as well. Morningstar shows the Tax Managed Small as blend, but leaning more toward the growth side. Go figure.
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