Preretiree Portfolio -- Comments?

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Topic Author
tsplinter
Posts: 31
Joined: Sun Jun 29, 2008 7:30 pm

Preretiree Portfolio -- Comments?

Post by tsplinter »

Hi folks -
I've been lurking on this website for a couple of weeks and wolfing down books--two by Rick Ferri, one by Jack Bogle, one by William Bernstein, one by Bob Clyatt--to make up for a lifetime of inattention to financial matters. It's time to redeploy our resources soon and I've roughed out the plan below. Any and all comments will be much appreciated.
T


Emergency funds (6 mos.) in separate MMF

Debt: 12% of current value of home; 4.5% interest rate

Tax Filing Status: Married filing jointly

Tax Rate: 28% Federal; 9.3% State (CA)

Age: Him 59; Her 61

Desired Asset Allocation: 55% stock; 45% bonds

More specifically:
20% U.S. Total Stock Market
7% U.S. Small Cap Value
8% REIT
20% International Stocks
35% Bonds
10% TIPs

Size of portfolio: Low 7 figures

Taxable (68.9%)
10.0% TIAA-CREF Social Choice Equity (TICRX) (.32)
10.0% Vanguard Total U.S. Stock Market (VTSAX) (.07)
7.0% Vanguard Small Cap Value Index Fund (VISVX) (.22)
20.0% Vanguard FTSE Ex-US (VFWIX) (.40)
21.9% Vanguard Total Bond Market Index (VBTLX) (.10)

His Roth at Vanguard (5.4%)
5.4% Vanguard Total Bond Market Index (VBTLX) (.10)

Her IRA at Vanguard (5.8%)
5.8% Vanguard Total Bond Market Index (VBTLX) (.10)

His 401k at Schwab (19.9%)
1.9% Vanguard Total Bond Market Index (VBTLX) (.10)
10.0% Vanguard Inflation-Protected Securities (VIPSX) (.20)
8.0% Vanguard REIT Index Fund (VGSIX) (.20)

Footnote on TIAA-CREF Social Choice Equity:
I realize that the 10% allocation to TIAA-CREF Social Choice Equity may raise some eyebrows, particularly for those who are not familiar with this Fund. The division of the total U.S. stock market allocation between Vanguard’s great Total Stock Market Index and TIAA-CREF Social Choice Equity is based on personal choice. The TIAA-CREF Social Choice Equity Fund appears to be the only SRI Fund that attempts to, and fairly well does, track a broad market index (Russell 3000) and, therefore, (1) won’t wreak havoc on our efforts to establish and maintain an asset allocation; (2) is transparent in terms of real cost (including whatever premium we may be paying by choosing to put some of our “total stock market” allocation in an SRI fund). The TIAA-CREF Social Choice Equity Fund lags Vanguard Total Stock Market Index Fund slightly in performance. This is in part caused by its ER of .32% (25 basis points more than the ER of the Vanguard Total Stock Market Admiral shares and 125-175 basis points less than many other SRI funds). Obviously, some folks would have no interest in deviating this way from choosing investment vehicles strictly by the numbers, but we’re willing to do so with a modest portion of our portfolio.

Questions:

1. At our average age of 60, are we overweight in stocks (including REITs) at 55%? I have run into reports that Bogle says the percentage of bonds should match your age.

2. Are we overweight in international stock? Bogle recommends 15% of equities in international. I’ve also seen reasonable arguments that the U.S. stock market provides significant overseas exposure because transnationals that are headquartered in the U.S. do lots of business overseas. On the other hand, we live in a world economy and companies headquartered in the U.S. no longer generate so large a part of the total investible assets in the world. Then again, I am tempted to think like a market-timer and favor U.S. stocks because of how low the U.S. dollar is now, but I also think the U.S. faces unprecedented challenges that it hasn’t begun to face: the growing debt to foreign interests. I suppose those are the kind of imponderables that should lead us to give up on trying to see the future. That said, does our international allocation look “very aggressive”? We’re not trying to be “very aggressive,” just prudent and pragmatic.

3. Should we substitute Vanguard California Intermediate-Term Tax-Exempt (VCADX) (.08) for the Vanguard Total Bond Market Index (VBTLX) (.10) in the Taxable Account?

4. Should we dump the 1.9% Total Bond Market in the 401k into the 10.0% Inflation-Protected category just to simplify things?

5. Should we substitute ETFs for mutual funds in the Schwab 401k?

For example:
Move the 1.9% Vanguard Total Bond Market Index (VBTLX) (.10) to Vanguard Total Bond Market Index ETF (BND) (0.11);
10.0% Vanguard Inflation-Protected Securities (VIPSX) (.20) to iShares Lehman TIPS (TIP) (0.20); and
8.0% Vanguard REIT Index Fund (VGSIX) (.20) to Vanguard REIT Index ETF (0.07).

Unfortunately, the 401k apparently cannot be moved to Vanguard because, according to the Vanguard rep I spoke to, Vanguard, unlike Schwab and Fidelity who are both happy to cooperate with our 401k plan, cannot open a trust account with my company’s self-directed 401(k) plan trustees as the trust account trustees and with me designated as a person authorized to make trades but not withdraw funds. My company wants to pay an administrator to execute trades and is perfectly happy to leave that up to the individual 401k participants. With Schwab and Fidelity, each of us can simply log onto our accounts online and make trades when we deem it necessary. As a consequence, my 401k will remain at Schwab and my $20,000/yr in 401k contributions will be flowing into the Schwab money market account requiring periodic reinvestment. If anyone thinks that the Vanguard rep was overlooking something, please let me know as I would much rather get everything under one roof.

6. Finally, a question about location, rather than allocation. I have never dealt with Vanguard and find the whole VG/VBS distinction somewhat confusing. Does it make sense to hold the TIAA-CREF Social Choice Equity in a VBS account and the Vanguard funds in a Vanguard mutual fund account? I am used to dealing with Schwab where everything is in a brokerage account, including Schwab funds. With Vanguard, it seems that the idea is to invest directly with Vanguard in Vanguard funds and through VBS in other funds, including Vanguard ETF funds. Or does everything go into the brokerage account, once you need one? The Vanguard website is not a model of clarity on this point.
Chip
Posts: 3994
Joined: Wed Feb 21, 2007 3:57 am

Post by Chip »

1. Equity allocation is very personal, so you have to make the choice. But if you can stick with 55% through a down market, it's not at all unreasonable at your age. Do you plan to reduce it in future years?

2. 36% (of equities) in international is well within the range usually recommended here. Studies have shown that, despite exposure to international transactions, the returns of multinational equities tend to be much more influenced by the returns of their home market than their non-domestic sales. So, for example, you can't buy Coke, P&G and GE and expect to get a 50/50 blend of domestic/foreign returns.

3. Almost certainly. You can run the numbers using tfb's calculator. You might also think about how much you really want those REITS. Replace those with TSM and you can put more taxable bonds in your tax-deferred accounts.

4. Your choice, but I don't think that's a huge simplification. My preference is for more TIPS than you have allocated anyway. Many here recommend 50/50 nominal/TIPS. I'm closer to 70% TIPS.

5. Just buy whatever is cheaper long term, figuring in both the expense ratio and the commissions. And perhaps a touch for the ETF spread, though that's often a squishy number. Usually buying Vanguard funds at a brokerage incurs a hefty fee ($75 at Fidelity), vs. a flat commission of around $8-$15 to buy the ETF. Don't forget that you may be eligible for the Admiral shares (lower expenses) of some of the funds if you hold them at Vanguard

6. I understand the confusion about VG/VBS. They don't make it easy to understand. My recollection is that all your Vanguard open-end funds (not ETFS) are held at Vanguard. Everything else is held at VBS, including other non-Vanguard open-end funds and Vanguard ETFs.
Topic Author
tsplinter
Posts: 31
Joined: Sun Jun 29, 2008 7:30 pm

Post by tsplinter »

Thanks, Chip. Your perspective is very helpful. I've been pouring over my Excel spreadsheet in obscurity and it is very encouraging to get thoughtful feedback.
1. Equity allocation is very personal, so you have to make the choice. But if you can stick with 55% through a down market, it's not at all unreasonable at your age. Do you plan to reduce it in future years?
The test of intestinal fortitude appears to be how comfortable I'd be with a portfolio that goes down 27 1/2%. If that were to happen in the next few years, I suppose I'd be working a few more years. I'm suspecting I should cut it somewhat now. If I understand the theory correctly, we would be making a mistake to cut our stock allocation if there is a lot of bear market in the next ten years as we will need to maintain the stock BEmarket exposure to join in the recovery that follows the bear. On the other hand, if the market does well in the next ten years, we could move towards a more conservative allocation because we'd be adequately assured of having enough so long as we didn't lose it.
You might also think about how much you really want those REITS. Replace those with TSM and you can put more taxable bonds in your tax-deferred accounts.
I see your point. REITS were my little effort to liven things up with an asset class that doesn't track stocks or bonds so as to tap into the "rebalancing premium." There aren't a whole lot of option in the taxable account because rebalancing adds costs and some of the options for stock asset categories are no good in taxable accounts anyway. Will have to think this one through, but maybe REITs should go to 5% if we keep them at all.

Best, T
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