Asset allocation / rebalancing with very small portfolio

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Topic Author
posh spaz
Posts: 12
Joined: Fri Jul 24, 2015 11:10 pm

Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

Hi folks, I was wondering if you had any insight for me. I'm a corporate accountant, but I don't know a whole lot about personal finance. I have some fairly specific questions but I'm open to any comments/criticisms about my plans in general.

Emergency funds: 7-9 months in checking, 2.25% return on the account.
Debt: $84k student loans, avg interest 5.06%, range is 1.79% to 6.8%
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal
Age: 28
Desired Asset allocation: ?
Desired International allocation: ?

I set up a taxable Vanguard portfolio along the lines of Swensen, with the exception of the TIPS bonds. I don't really see a point in investing in those given the macroeconomic situation.

Current portfolio:
Total value = $15k
45.00% VTI Vanguard Total Stock Market  and
VOO S&P 500
15.00% VEA FTSE Developed Markets
5.00% VWO FTSE Emerging Markets
15.00% VNQ REIT
5.00% VNQI Global ex-U.S. Real Estate
15.00% VGLT Long-Term Government Bond

I've run into an issue where the high price per share relative to my portfolio size makes rebalancing difficult. The market swings have to be pretty wide to make rebalancing viable, and I feel like I'm missing out on locking in some of the gains by not rebalancing. For instance the portfolio was up over the last couple weeks, but the last week wiped out most of those gains.

I'm wondering if it would make sense if I increase the amount of bonds and move into similar assets at a lower price-point.

Here's what I'm thinking:
30.00% MGK Mega Cap 300 Growth (tight correlation with VOO, but lower price per share and higher historical return)
15.00% VEA FTSE Developed Markets
5.00% VWO FTSE Emerging Markets
20.00% VNQ REIT (Do I need/want int'l real estate? VNQI seems fairly correlated with VWO so I'm not sure what I get from it)
30.00% EDV Extended duration maturity (tight correlation with VGLT, but price swings a bit wider opposite equities)

I figure by holding a smaller number of funds, and by holding more bonds I'll be able to rebalance more effectively and be more conservative with my capital.

I'm still pretty young, but I'd feel comfortable with a more conservative approach with an eye toward preserving capital, given the large amount of student debt I have right now. As far as cash flow goes, I can service all of our debt and cover all the other expenses with my salary, and anything my wife makes goes towards paying down the highest-interest debt, and/or gets put into the brokerage account.

Any comments are appreciated, thanks!

Current retirement assets

Taxable
Total value = $15k
45.00% VTI Vanguard Total Stock Market  and
VOO S&P 500
15.00% VEA FTSE Developed Markets
5.00% VWO FTSE Emerging Markets
15.00% VNQ REIT
5.00% VNQI Global ex-U.S. Real Estate
15.00% VGLT Long-Term Government Bond

His 401k
100% in SPTN TOT MKT IDX ADV 0.10%
Company match? Yes 40% of first 5% of gross

His Roth IRA at Vanguard
N/A

His Rollover IRA at Schwab
N/A

Her 403b
N/A

Her SIMPLE IRA at Fidelity
N/A

Her Traditional IRA at Vanguard
N/A

Contributions

New annual Contributions
$2500 his 401k
$0 her 403b
$0 - $11k? his IRA/Roth IRA
$0 her IRA/Roth IRA
$0 - $40k? taxable (for retirement, not short term goals)

Available funds
AF GROWTH OF AMER R5 (RGAFX) 0.38
ALZGI NFJ DIV VAL I (NFJEX) 0.7
FID BLUE CHIP GR (FBGRX) 0.8
FID EQUITY INC (FEQIX) 0.69
FID MAGELLAN K (FMGKX) 0.6
FID OTC PORTFOLIO (FOCPX) 0.77
SPTN TOT MKT IDX ADV (FSTVX) 0.07
ARTISAN MID CAP VAL (ARTQX) 1.19
FID MID CAP STOCK (FMCSX) 0.76
WFA SM CAP VAL INST (WFSVX) 0.97
FID DIVERSIFD INTL (FDIVX) 0.91
SPTN EM MKTS IDX ADV (FPMAX) 0.35
SPTN GLB XUS IDX ADV (FSGDX) 0.28
SPTN INTL INDEX ADV (FSIVX) 0.17
FID FREEDOM 2005 (FFFVX) 0.56
FID FREEDOM 2010 (FFFCX) 0.6
FID FREEDOM 2015 (FFVFX) 0.63
FID FREEDOM 2020 (FFFDX) 0.66
FID FREEDOM 2025 (FFTWX) 0.7
FID FREEDOM 2030 (FFFEX) 0.74
FID FREEDOM 2035 (FFTHX) 0.75
FID FREEDOM 2040 (FFFFX) 0.75
FID FREEDOM 2045 (FFFGX) 0.75
FID FREEDOM 2050 (FFFHX) 0.75
FID FREEDOM 2055 (FDEEX) 0.75
FID FREEDOM 2060 (FDKVX) 0.76
FID FREEDOM INCOME (FFFAX) 0.49
FID INTERMED BOND (FTHRX) 0.45
PIM TOTAL RT INST (PTTRX) 0.46
SPTN US BOND IDX ADV (FSITX) 0.17
FID RET GOVT MM (FGMXX) 0.42
Last edited by posh spaz on Sat Jul 25, 2015 4:35 pm, edited 2 times in total.
mhalley
Posts: 10431
Joined: Tue Nov 20, 2007 5:02 am

Re: Asset allocation / rebalancing with very small portfolio

Post by mhalley »

Welcome to the Forum!
Where in the world do you get 2.25% on checking? Inquiring minds want to know.
I wonder if you might have a misconception about rebalancing. It is not about "locking in gains" It is about maintaining your asset allocation over time, so it does not become unbalanced. Over time, due to the outperformance of stocks, you will become more stock heavy. Then when the inevitable crash happens, you will lose more money than your risk tolerance.. It is not something you should be doing very often. The optimum frequency of rebalancing is unknown, but once or twice a year is fairly common. You also might open yourself up to paying more taxes. Some only advocate doing it every 4 years during a presidential election! The other way to do it is using bands, ie if the aa gets out of whack by more than 5%. You might consider Larry Swedroes guidelines:
(from the wiki)
Larry Swedroe uses a "5/25 rule" which can be restated:

For allocations 20% or greater: When asset classes deviate from their target by an absolute percentage of 5%. For example, if your target asset allocation is 60% equities and 40% fixed income, you would rebalance your portfolio when your portfolio reaches (65% equities / 35% fixed income) or (55% equities / 45% fixed income).
For allocations less than 20%: When asset classes deviate from their target by a relative percentage of 25%. For example, if your target equities asset allocation is 60%, composed of 45% Total Stock Market and 15% Total International, you would rebalance Total International if it changes by more than +/- 3.75% (25% of 15%).
From the Vanguard White Paper on rebalancing:
"...we
conclude that for most broadly diversified stock and bond fund portfolios
(assuming reasonable expectations regarding return patterns, average
returns, and risk), annual or semiannual monitoring, with rebalancing at
5% thresholds, is likely to produce a reasonable balance between risk
control and cost minimization for most investors. Annual rebalancing is
likely to be preferred when taxes or substantial time/costs are involved."

Another problem I see with your asset allocation is having REIT funds in the taxable account. These are very tax heavy funds, and should go in roth, or 401k accounts. Total stock market and S&P 500 are so similar that you don't need both. Certainly having fewer funds makes rebalancing easier. I would suggest the classic three fund portfolio of total stock market, total international stock market and total bond fund. http://www.bogleheads.org/wiki/Three-fund_portfolio (There is certainly nothing wrong with owning reits, I have a ton myself, in my tax deferred accounts).
Another suggestion about the bond fund: Most on the forum would say to avoid long duration bond funds as interest rates are bound to go up, thus causing the price of long term bonds to go down. Total bond fund is considered to be an intermediate duration fund, and is the one most often recommended here.
I suggest you review the rebalancing portion of the wiki also. http://www.bogleheads.org/wiki/Rebalancing
This all being said, with this small of a portfolio a lot of the rebalancing can be done when you add funds to the account (I assume you will be adding more money to the account in the future).
Hope this helps.
Mike
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Rainier
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Re: Asset allocation / rebalancing with very small portfolio

Post by Rainier »

I'd rather knock out that high rate debt, that is a guaranteed return. You can beat that by investing in the market but only over long periods of time.

Or maybe reduce the emergency fund, 6% versus 2% is a no brainer
livesoft
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Re: Asset allocation / rebalancing with very small portfolio

Post by livesoft »

Why did you set up a taxable account? What are the goals for this money?

What's going on with your 401(k) and your Roth IRA?

Have you thought about an overall portfolio asset allocation and not trying to have a separate asset allocation in a taxable account?

It looks to me like you are just "playing" with your money in a non-serious way. If that is the case, it does not matter what you do with your play money. If not, then just put 100% total US stock market index fund in your taxable account (rebaalancee to 100% VTI) and then adjust your 401(k) and Roth IRA appropriately.

I will also guess that your $15K in that taxable account is less than the amount of money in your emergency fund. Where is your emergency fund held and what is it invested in?
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Louis Winthorpe III
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Re: Asset allocation / rebalancing with very small portfolio

Post by Louis Winthorpe III »

Your portfolio is too complicated. I'd invest in a Life Strategy fund or a Target Retirement fund and be done with it. Less "fun" if you like to tinker, but you'll benefit in the long run.
Lafder
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Re: Asset allocation / rebalancing with very small portfolio

Post by Lafder »

Others have already said what I was thinking above :)

I say KISS, keep it simple stupid, or is it stupid simple :). Get comfortable with simplicity and investing and rebalancing. You can always add complexity later if you decide you really do want it.

I try to follow a 3 fund portfolio in my retirement accounts as well as taxable accounts. See this viewtopic.php?f=10&t=88005

In general bonds are more held in retirement accounts, see this http://www.bogleheads.org/wiki/Principl ... _placement

Do you have a work retirement plan ? What are you doing there ?

lafder
Topic Author
posh spaz
Posts: 12
Joined: Fri Jul 24, 2015 11:10 pm

Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

Thanks so much for the replies. I'll try to provide some more info, assumptions and reasoning, but please feel free to correct me.

Re: rebalancing, I read that Swensen reallocates very frequently, and I assumed part of the outsized returns he generates are due to pumping through at the bottom of the swings, in order to swing higher the following cycle. With broad index investing, reversion to mean is gonna happen, so it seemed logical to sell in the hump and buy in the troughs. I have enough finance background that I know market timing is a fool's errand for individual securities, but I assumed mean reversion was reliable enough in broad index funds.

Re: checking interest, I have a Kasasa cash account. These are offered by a lot of credit unions and other small banks. They vary a bit, I had one account that paid 2% on balances up to $25K, but they cut it to 1% so I opened a new account, which pays 2.25% up to $15k, and a fraction of a percent for balances over that. The only requirement is you have to do 10 debit transactions and one ACH per month, and use e-statements. So I used to have like $35k in my checking account, and a substantial chunk wasn't generating interest. It seemed crazy to keep more than a year's expenses in a checking account, so I cut the emergency fund down to a more reasonable level, and put the difference in the brokerage account.

I don't really want to cut the emergency fund any more. Having a big cushion let me be unemployed for a while care-free and hold out until I got my current, good job. I've been in situations before where I had to take whatever job to make ends meet, and that ends up being really expensive in the long-run.

I have a 401k set up through work, and I have it set up to max out the employer contribution, but the match sucks so it's only a few grand per year.

Re: student loans, they will all be paid off with income in 6 years pessimistically, 2 years optimistically, but I think 3 is most likely. All those times assume I'm not divorced and/or hit by a bus. I assumed, due to the compounding effects of investing, that it would be better to invest now, rather than wait until my loans are paid off.

I looked at IRAs, but it's fairly likely I'll need to withdraw some or all of the portfolio money in the next 5-10 years. In that time frame, I'm planning on buying a house, starting a CPA firm, and paying off debt. My tax rate will probably be lower at retirement, so I'm not sure a Roth IRA would make sense. My income tax now isn't very high, so I'm not sure how much of a benefit a traditional IRA would be, given the withdrawal penalties if I need to use the money before retirement.

My reasoning for I can always sell the assets later to pay off debt if I need to down the line.I could pull the money out of the portfolio now and pay off a chunk of the debt, but it's not so easy to borrow new money unsecured for 5%. My loans are currently in deferment because I'm in school part-time working on my CPA requirements. Since they're subsidized loans, I won't be paying any interest on those for at least another year, maybe a bit longer.

The main reason I own VTI and VOO was because the price for VOO is almost $200, and VIT is a bit over $100. Given the small amount of the portfolio, it was difficult to hit my target allocation with such big chunks. I was looking at MGK because its trading around $85, and the movements are very closely correlated with VTI and VOO.
Last edited by posh spaz on Sat Jul 25, 2015 1:42 pm, edited 1 time in total.
livesoft
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Joined: Thu Mar 01, 2007 7:00 pm

Re: Asset allocation / rebalancing with very small portfolio

Post by livesoft »

You need to read up about Roth IRAs and why they are better than a taxable account for many purposes. Hint: One can withdraw contributions without penalty and without taxes. There are other benefits, too. So it would seem that some of your goals for this money could be achieved with a Roth IRA.

So who cares what Swenson thinks? There are many such "gurus" and you just happened to pick Swenson. Have you critically reviewed what 9 other gurus think? Why Swenson? Is he a better Pied Piper than some others? Maybe his advice was for folks with mid-7-figure portfolios and not for folks with low 4-figure portfolios?
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Topic Author
posh spaz
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Joined: Fri Jul 24, 2015 11:10 pm

Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

The contribution limits for a Roth IRA are pretty low. Let's assume my wife and I max out Roth contributions every year. What should I do with the rest of the money?

I don't think Swensen is the be-all and end-all. All the lazy portfolios have about the same return and volatility, so I just picked one that made sense to me.
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retiredjg
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Re: Asset allocation / rebalancing with very small portfolio

Post by retiredjg »

Something you may want to consider is tax-efficiency. Basically, that means not paying extra taxes.

Several things in your taxable account are not tax-efficient - REIT, the bonds, the global real estate - all of those are raising your taxes. To the extent you hold them at all, they should be held in a tax-advantaged account. Keeping costs low (and that includes taxes) is important.

I think you've underestimated Roth IRA. Whatever money you put in either taxable or Roth now is going to be taxed at your current rate. In taxable, the earnings will also be taxed at some point. In Roth, the earnings will not be taxed (after age 59.5 and meeting the 5 year clock). Roth is a no brainer.

Choosing Roth (as opposed to taxable) has nothing to do with your tax rate now vs in retirement. Tax rates do have something to do with the decision between Roth and traditional IRA which is probably what you are thinking of.

If you do decide to use Roth IRA for your shorter term goals, you need to keep up with how every penny gets into the Roth IRA. Well, people should do that anyway. The ordinary contributions (not the earnings) can be taken out any time for any reason. If contributions get there through a conversion, it gets a little more complex. Find out about that if/when you get to that step.

The other problem with using Roth IRA for your shorter term goals is that you may not be saving enough for retirement. In fact, if you are only putting a few thousand into the 401k, you are definitely not saving enough for retirement. If that is a short term issue, that's fine. But keep it in mind.

This will sound harsh, but I think your whole approach to your taxable account and all that rebalancing is wasted effort. If there is a rebalancing bonus (and not everyone believes there is) it is small and is dwarfed by the things that are more important. What is important is how much you save. What is important is costs and not wasting money to extra taxes. I'm not saying not to buy on the dips if you have the opportunity, but don't think all that manipulation is going to grow your money a lot.

I've got nothing against Swensen's portfolio if it can be done in tax-advantaged accounts, but it is too tax-inefficient to put it in a taxable account in my opinion.
Topic Author
posh spaz
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Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

One reason I don't want to fund the 401k beyond enough to max the match is it's a Fidelity thing, and the investment choices are limited and have high MERs. Vanguard ETFs have much lower MERs.

I guess I can see how a Roth would make sense. It's possible I won't actually need to pull money out in the next 5-10 years, in which case a Roth would be a good option. And since most of the expected growth in the account would be due to contributions, I'd be able to pull most of it out tax-free if I do need to use it.

So I can open a Roth IRA account, fund it with $11k for the year.

What would be a tax-efficient use of the remaining $4k in the taxable account? Or does it even make sense for me to have a taxable account?
mhalley
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Re: Asset allocation / rebalancing with very small portfolio

Post by mhalley »

I don't think you can say Swensons performance at Yale is due to frequent rebalancing. In addition to the asset classes that makes up the "Swenson portfolio" Yale was also investing in things that normal folks can't access. Check out this article about some of the different asset classes in the yale model. There were things like timber, private equity, venture capital, etc if I recall. SO investing in Swensons portfolio is not EXACTLY like investing in the Yale portfolio.
http://david-swensen.com/2009/02/17/the ... n/#more-18
http://investments.yale.edu/index.php/2 ... allocation
Other institutions have tried to institute the yale model and failed.
http://www.forbes.com/sites/rickferri/2 ... ale-model/
So, the main takeaway: David Swenson invested a lot of money and made a lot of money for Yale. He had access to assets normal folks don't have. He attempted to translate his success into a portfolio that normal folks could invest in. His portfolio is quite reasonable, but you should not expect to reap Yale-like returns.
If you really want to delve into it, you should Read BOTH of his books, Unconventional Success AND the one about Yale, Pioneering Portfolio
Management. WHile investing for Yale, he provided an Active Management portfolio style. From the intro to PPM:
"No middle ground exists. Low cost passive strategies, as outlined in Unconventional Success, suit the overhwelming number of individual and institutional investors WITHOUT THE TIME, RESOURCES, and ABILITY to make ACTIVE INVESTMENT DECISIONS." (emphasis added).
SO all in all, I think you are trying to be too active. Good luck!
A couple of other things: Bonds are no longer felt to be as bad in taxable due to the very low returns. As to paying off loans, I like the Financial Samurai model.
"The percentage of one dollar you should consider allocating to paying down debt is simply the debt interest level X 10. In other words, if your debt interest level for your student loan or mortgage is 3%, then allocate 30% of your savings to pay down your debt, and 70% of your savings towards investments. - See more at: http://www.financialsamurai.com/pay-dow ... MPlG1.dpuf

Mike
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retiredjg
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Re: Asset allocation / rebalancing with very small portfolio

Post by retiredjg »

posh spaz wrote:One reason I don't want to fund the 401k beyond enough to max the match is it's a Fidelity thing, and the investment choices are limited and have high MERs. Vanguard ETFs have much lower MERs.
Mostly we see decent choices in Fidelity 401k plans. Occasionally, we see one that is really bad. Even with high expense ratios, a 401k is usually worth using. And you only need 1 or 2 usable funds to make it workable - other things can be held in IRA and taxable.

Another good plan is meet the match and put excess money toward your higher expense loans.


What would be a tax-efficient use of the remaining $4k in the taxable account? Or does it even make sense for me to have a taxable account?
The short answer is to hold total stock and/or total international in taxable. But to get a real answer to your question, more information is needed. See the link at the bottom of this message for how to present that information. It is some work on your part, but you will learn a lot just by doing the work.

Regarding selling your taxable account and putting it into Roth IRAs, it sounds like you've just started this - short term cap gains will be taxed pretty heavily. I'd do some more planning before jumping into anything.
Topic Author
posh spaz
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Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

The financial samurai ratio makes sense. I might try that to pay down some of the debt.

Re: capital gains, wouldn't it make more sense to sell it sooner if I'm going to sell it? If I sell everything now I'll have about $200 in capital gains to pay at 25%, so that'd be $50 in tax. If I wait a year, and the investments grow by 5%, the new portfolio value would be $15960, and 15% of $960 is $144 in tax.

I read the asking portfolio questions post before I started this one. What info did I miss?
inbox788
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Re: Asset allocation / rebalancing with very small portfolio

Post by inbox788 »

posh spaz wrote:One reason I don't want to fund the 401k beyond enough to max the match is it's a Fidelity thing, and the investment choices are limited and have high MERs. Vanguard ETFs have much lower MERs.

I guess I can see how a Roth would make sense. It's possible I won't actually need to pull money out in the next 5-10 years, in which case a Roth would be a good option. And since most of the expected growth in the account would be due to contributions, I'd be able to pull most of it out tax-free if I do need to use it.

So I can open a Roth IRA account, fund it with $11k for the year.

What would be a tax-efficient use of the remaining $4k in the taxable account? Or does it even make sense for me to have a taxable account?
retiredjg makes some really good points, review his comments until you understand what he's saying!

Put the $4k in the Roth account next year?

How much cash will you have to invest and pay back student loans next year?
Topic Author
posh spaz
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Joined: Fri Jul 24, 2015 11:10 pm

Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

Ok, so just pull the money out and hold cash until next year?

Next year I'll have about $2500 going into my 401k and about $6000 for savings/debt service. My wife just quit her job and is looking for another, so depending on what she finds that's another $0-30k for savings/debt service after taxes.

Here are all my 401k options:
FID FREEDOM 2005
FID FREEDOM 2010
FID FREEDOM 2015
FID FREEDOM 2020
FID FREEDOM 2025
FID FREEDOM 2030
FID FREEDOM 2035
FID FREEDOM 2040
FID FREEDOM 2045
FID FREEDOM 2050
FID FREEDOM 2055
FID FREEDOM 2060
FID FREEDOM INCOME
FID INTERMED BOND
PIM TOTAL RT INST
SPTN US BOND IDX ADV
FID RET GOVT MM
AF GROWTH OF AMER R5
ALZGI NFJ DIV VAL I
FID BLUE CHIP GR
FID EQUITY INC
FID MAGELLAN K
FID OTC PORTFOLIO
SPTN TOT MKT IDX ADV
ARTISAN MID CAP VAL
FID MID CAP STOCK
WFA SM CAP VAL INST
FID DIVERSIFD INTL
SPTN EM MKTS IDX ADV
SPTN GLB XUS IDX ADV
SPTN INTL INDEX ADV

My current allocation is 100% in SPTN TOT MKT IDX ADV
mhalley
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Re: Asset allocation / rebalancing with very small portfolio

Post by mhalley »

Taxes are a drag on your portfolio. When you pay taxes, that money is GONE, and is no longer giving you capital gains, dividends, interest, growth, or anything. So you ALWAYS want to postpone taking any capital gains as long as possible. That being said, paying taxes is a good thing. That means you MADE MONEY. If there are no taxes, that means you did NOT make money.
Mike
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BL
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Re: Asset allocation / rebalancing with very small portfolio

Post by BL »

You have Spartan funds which usually have a low ER, and are good index funds:
SPTN US BOND IDX ADV

SPTN TOT MKT IDX ADV
SPTN GLB XUS IDX ADV
SPTN INTL INDEX ADV
I defer to expert opinion that GLB is better.
The above is basically the 3-fund portfolio in the % you desire. I don't see much harm in the total market fund since you have so little there right now.

Usually it is suggested:
1. invest enough in 401k to match
2. invest in Roth IRA (5.5k/person)
3. invest up to the total 18k in 401k.
After 1. I would consider the student loans (and other debts). Is the interest growing even though they are deferred? If so, perhaps you could pay down some interest (it might even be a tax credit.) If interest is not accumulating, perhaps you could store up extra cash to pay ASAP when that happens. Pay off high interest loans first, or possibly snowball with smallest loans first if that makes more sense.
Last edited by BL on Sat Jul 25, 2015 2:55 pm, edited 1 time in total.
mhalley
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Re: Asset allocation / rebalancing with very small portfolio

Post by mhalley »

Trying to make sense of your tax post. So if you have 200 in st cap gains, that means your cost basis is 15000-200=14800. Paying taxes on the gains now leaves you with 14550 dollars in the account. Assuming you leave it and gain 5%, next year you would have 15k x 1.05 = 15750. Now you have 15750-14800 = 950 in lt cap gains. x .15 = 142.50 in taxes. So 15750-142.5 = 15,607 left in your account.
I am not great at math, so please correct me if I am wrong.

Mike
Last edited by mhalley on Sat Jul 25, 2015 2:28 pm, edited 2 times in total.
livesoft
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Re: Asset allocation / rebalancing with very small portfolio

Post by livesoft »

posh spaz wrote:SPTN GLB XUS IDX ADV
SPTN INTL INDEX ADV
For some folks the difference between FSGDX and FSIVX may be important. The latter does not include emerging markets stocks, while the former has all the stock of the latter plus emerging markets stocks.
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livesoft
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Re: Asset allocation / rebalancing with very small portfolio

Post by livesoft »

posh spaz wrote:SPTN GLB XUS IDX ADV
SPTN INTL INDEX ADV
For some folks the difference between FSGDX and FSIVX may be important. The latter does not include emerging markets stocks, while the former has all the stocks of the latter plus emerging markets stocks.
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Topic Author
posh spaz
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Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

BL wrote: Is the interest growing even though they are deferred? If so, perhaps you could pay down some interest (it might even be a tax credit.) If interest is not accumulating, perhaps you could store up extra cash to pay ASAP when that happens. Pay off high interest loans first, or possibly snowball with smallest loans first if that makes more sense.
I only have one unsubsidized loan, so a small amount (~$80) of interest is accruing monthly, but it's on a low interest loan. I've been paying an equivalent amount toward the higher interest loans that aren't accruing, so the total balance stays the same but the effective int rate decreases. I haven't been aggressively paying down the loans because I was hoping to generate some returns on the brokerage account.

OK, so I think we're narrowing in on a plan:
1. Max out employer match on 401k - Done
2. Set up and max out Roth IRA
3. Take any other savings and use the samurai ratio to pay off debts with 50% of any excess savings
4. Put other 50% of excess savings somewhere, maybe the taxable account? Hold cash? I dunno.
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retiredjg
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Re: Asset allocation / rebalancing with very small portfolio

Post by retiredjg »

posh spaz wrote:Re: capital gains, wouldn't it make more sense to sell it sooner if I'm going to sell it? If I sell everything now I'll have about $200 in capital gains to pay at 25%, so that'd be $50 in tax. If I wait a year, and the investments grow by 5%, the new portfolio value would be $15960, and 15% of $960 is $144 in tax.
Since the amount in cap gains is so little, it probably is not worth it to wait. However, I still would not jump into anything very quickly. I feel like you have more planning to do.
I read the asking portfolio questions post before I started this one. What info did I miss?
You missed quite a lot. :happy And if all you are interested in is how to invest money that might get used later for a house or something, some of the other stuff is not important. If you are interested in getting some help with your overall retirement/house scenario, all the information is needed - all the other accounts both his and hers, the expense ratios, how much you will save each year, etc.

Your 401k has Spartan funds - any of those would be good choices. You didn't list the expense ratios, but they should be quite low unless your plan has a hefty add-on fee. Why do you think the fees are high?
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posh spaz
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Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

OK, I updated the OP. Let me know if I missed anything.

I'm still not 100% sure that investing heavily in my 401k makes sense when I've got substantial expenses on the horizon. A down-payment on a house will be around $80k-100k, and starting my CPA firm will be another $50k-100k, depending on a bunch of factors that are difficult to estimate.
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retiredjg
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Re: Asset allocation / rebalancing with very small portfolio

Post by retiredjg »

I don't think anyone has suggested that you invest heavily in your 401k if you need the money for shorter term goals.

What was suggested is that your 401k is worth investing in (to the extent that you can put money away for retirement) even if the expense ratios are high (which they are not).

If you need maybe $200k for other things you will have to somehow save it. This might mean you save less for retirement.

If I understand correctly you currently have $15k saved for the "house/CPA firm" goal. How much is in the 401k?


New annual Contributions
$2500 his 401k
$0 - $11k? his IRA/Roth IRA
$0 her IRA/Roth IRA
$0 - $40k? taxable (for retirement, not short term goals)
I think there are some problems with this.
  • -You can only contribute $5,500 a year to IRA and that includes both tIRA and Roth IRA.

    -Maybe it is a typo, but you said you plan to save $0 - $40k in taxable for retirement. Isn't that the money you want for the other goals?

Just an opinion - if you can only save $2500 a year for retirement, maybe you really can't afford to save that much right now for these other goals. I'm wondering if you are rushing it a little.
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posh spaz
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Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

retiredjg wrote: If I understand correctly you currently have $15k saved for the "house/CPA firm" goal. How much is in the 401k?
About $1250 right now. Will be about $3500 by the end of the year after they kick in the matching for this year.
retiredjg wrote:
  • -You can only contribute $5,500 a year to IRA and that includes both tIRA and Roth IRA.

    -Maybe it is a typo, but you said you plan to save $0 - $40k in taxable for retirement. Isn't that the money you want for the other goals?
Just an opinion - if you can only save $2500 a year for retirement, maybe you really can't afford to save that much right now for these other goals. I'm wondering if you are rushing it a little.
I believe for married filing jointly I can contribute up to $11k in an IRA. Is that not the case?

The ranges I can contribute are contingent upon decision I make and circumstances I can't really control, so I can't really put a specific figure. If I pay off a lot of loans I can't invest much in the taxable, if I put a lot in the Roth I can't put much in the taxable, etc. It also depends to a huge degree on how much my wife makes next year, so it's hard to say.

I think I said further up next year I'll have about $2500 going into my 401k and about $6000 for savings/debt service. My wife just quit her job and is looking for another, so depending on what she finds that's another $0-30k for savings/debt service after taxes. So combined I think realistically, based upon her past employment, the most likely outcome would be to have about $40k free for saving/investing/paying debt.

I know my goals are optimistic, but I'm frugal, good with budgets, and I've managed to save $30k in 18 months making a lot less money than I make now.
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Re: Asset allocation / rebalancing with very small portfolio

Post by retiredjg »

posh spaz wrote:I believe for married filing jointly I can contribute up to $11k in an IRA. Is that not the case?
No, that is not the case. But, you can contribute $5,500 to your IRA and your wife can contribute $5,500 to Her IRA.

It is already apparent that you have some skills with managing and saving money and for that you should be commended. It is also apparent that you are sort of throwing things together in a hurry and some of your decisions are based on erroneous information.

Please don't take that the wrong way but you should realize that your impatience is causing you to make mistakes. I think with some education and research and some planning you will be able to go far, but if you continue rushing things you will simply be creating more things that need to be fixed.

I hope that you can slow down a bit and let this situation unfold as it will. Life is not an emergency and all of it does not have to happen right now. Your financial situation is very fluid right now and it is hard to plan around that, but there are ways to plan that will work in a variety of situations.

It's late and I'm tired. I'll have some more thoughts tomorrow if you are interested.
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posh spaz
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Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

OK, I can open a Roth for my wife. That's not a big deal and doesn't seem like a constraining factor on my plan.

If you can think of any particular resources you can share, I'm happy to look into them. I've actually done quite a bit of research on this, but as I'm sure you know there is a lot of conflicting, and outright bad, financial information in the world. It sounds like you guys have a lot more experience with this stuff and can point me toward better resources.
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retiredjg
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Re: Asset allocation / rebalancing with very small portfolio

Post by retiredjg »

posh, I've been mulling this over in the back of my mind. I've pretty much decided that the idea I had may not suit your personality very well. I was thinking it might be best to just have percentages for each of your goals - X% of income set aside for retirement, Y% for debt, and Z% for the shorter term goals. This would take care of the issue of 1 income vs 2 incomes - either way, every goal would get its fair share.

But I've migrated away from that - I think your current approach just might suit you better. I think that is meet the match for the 401k and split the rest half and half for debt vs house/CPA business. Or maybe you meant meet the 401k match, fund a Roth IRA for retirement (not short term goals) and then split the rest half and half for debt vs house/CPA business. I'm not sure which you meant but I think the second idea would be better as I'm concerned that saving only $2,500 a year for retirement is not enough.

As for references, the IRS has lots of information on the internet when you are looking for tax information. For example you could search for 2015 IRA limits and find this info very easily if you look for topics with IRS in the url. http://www.irs.gov/Retirement-Plans/Pla ... ion-Limits

As for other references, if you have not found it yet, the information in the Wiki just goes on forever. Link in the upper right corner.
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posh spaz
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Re: Asset allocation / rebalancing with very small portfolio

Post by posh spaz »

retiredjg wrote: Or maybe you meant meet the 401k match, fund a Roth IRA for retirement (not short term goals) and then split the rest half and half for debt vs house/CPA business. I'm not sure which you meant but I think the second idea would be better as I'm concerned that saving only $2,500 a year for retirement is not enough.
Yeah, I'm sorry if that wasn't clear above. I've been considering a number of options but I was leaning more toward the above. I don't want to be totally left in the lurch if my business plans don't work out, but if they do, the amount of marginal income I'll get from owning a successful company will be orders of magnitude greater than what I could get from investing in securities.
retiredjg wrote: As for other references, if you have not found it yet, the information in the Wiki just goes on forever. Link in the upper right corner.
That wiki is actually how I ended up here. The Larry Swedroe article referenced in the wiki page on rebalancing says to rebalance daily to eliminate style drift, or failing that due to transaction costs, to reduce style drift to an acceptable level. So my original question was, how do I handle that, given the high cost per share.

Swedroe also said that rebalancing when bonds outperform stocks would increase returns. During some of the recent stock downturns the bond portion of my portfolio went up a fair bit, but selling those to buy stocks would've put my portfolio more out of balance than doing nothing, so I did nothing.
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retiredjg
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Re: Asset allocation / rebalancing with very small portfolio

Post by retiredjg »

posh spaz wrote:The Larry Swedroe article referenced in the wiki page on rebalancing says to rebalance daily to eliminate style drift, or failing that due to transaction costs, to reduce style drift to an acceptable level. So my original question was, how do I handle that, given the high cost per share.
Let's talk about what that means. Larry didn't mean to rebalance daily in the real world. Even if that were possible (which it is not unless you use all ETFs and have no trading costs and can trade at the same time every day while the market is open) he was trying to make a point that you want an acceptable level of style drift. This is so that you never have too much or too little risk.

Later on, he talks about what is "acceptable". For your 85% in stocks, he would say anything between 80%/20% and 90%/10% is fine. That's a pretty big swing and you may go months or years without needing to do a rebalance on your stock to bond ratio.

For your smaller allocations, you might want to use tighter bands but remember the ratio of US stocks to international or developed to emerging is not nearly as important as the ratio of stocks to bonds. So even those smaller allocations don't need that much attention. However, if you take a look at your portfolio and see that your 5% emerging markets slice has grown to 12%, you might want to sell a bit of it and get back closer to 5% (although you don't need to go all the way back to 5%).

Swedroe also said that rebalancing when bonds outperform stocks would increase returns. During some of the recent stock downturns the bond portion of my portfolio went up a fair bit, but selling those to buy stocks would've put my portfolio more out of balance than doing nothing, so I did nothing.
Again, I think you've taken Larry's words too literally. He is talking about much bigger swings than (I think) you think. We have not had any recent stock downturns - last one was about 2007 and if you were investing back then, you most certainly would have sold bonds to buy stocks if you were rebalancing your portfolio.

Yes, there've been some little blips here and there that you might think of as a downturn and people might call a downturn, but I don't think that is what he is talking about.

Remember that until your portfolio is larger, none of this makes much difference anyway. If you have a $20k portfolio and you add $5k a year, your portfolio will grow by 25% just due to the contribution. It would matter little if the portfolio were all stock or all bonds or anywhere in-between, you're going to have huge growth just by putting money in there.

Now consider that your portfolio is $200k and you add $5k. Hmmm, not much growth due to just the contribution any more - only 2.5% At some point, your actual investments become what grows the portfolio, not the contribution so much.

For now, keep learning but just concentrate on adding money and try to stay somewhere in the ball park of 85/15. Adding money is the only thing that matters (other than not doing stupid stuff). Don't worry about some of these smaller details. Keep learning about them and when the time comes, you'll know what to do.
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