Portfolio Review for 29yo

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Portfolio Review for 29yo

Postby moto112233 » Sun Feb 10, 2013 4:23 pm

Hi there; first poster here, though I've followed & learned quite a bit from this site in the past. I've just turned 29. I volunteered abroad for a couple years in the past so therefore limited savings. I was in graduate school, which I financed entirely with debt, but was lucky enough to land a couple of jobs. I have spent 1 year in the private sector, currently doing a year in government, with a job with my old firm lined up for when I go back in fall of 2013.

Here is my financial snapshot:

Emergency fund: Three months of expenses in Amex personal savings + various CDs.
Debt: Student loan debt ($ 153k total, from a high of $185); no other debt.
- $40k at 6.55% fixed;
- $7k at 5.00% fixed;
- $40k at 3.71% variable;
- $34k at 2.21% variable; and
- $32k at 2.5% variable.
Tax Filing Status: Single.
Tax Rate: 2013 -- 28% Federal, 6.45% State, 3.648% NYC.
2014 -- 28% Federal, 6.65% State; 3.648% NYC.
*I am currently working for the government (salary ~$70k/yr), but will return to my private-sector job by the end of 2013 (salary ~$170k/yr).
State of Residence: NY
Age: 29
Desired Asset allocation: 90% stocks / 10% bonds, tilting toward value/mid-low cap stocks
Desired International allocation: 50% of stocks
--------------
Current retirement assets

Taxable ($20k)
36.00% cash

401k ($20k) (Alas, no company match.)
14.41% Vanguard 500 Index Fund Signal Shares (VIFSX) (0.05%)
7.43% Vanguard International Value Fund (VTRIX) (0.41%)
5.51% Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) (0.24%)
3.74% Vanguard Small-Cap Index Fund Investor Shares (NAESX) (0.24%)
5.27% Vanguard Wellington Fund Investor Shares (VWELX) (0.27%)

Roth IRA ($15k)
27.27% money market account
------------------
Contributions
Presently, I am not eligible for a 401k.
When in private practice, and when I return to my firm:
- $17k in 401k
- $5k in IRA/Roth (with back-door Roth transfer if Roth ineligible)
- $10k in taxable (the balance of my taxable account was cash I had saved in the past)
------------------
Available funds in employer plan (in addition to what I hold):
- Artisan International Fund Class Investor (ARTIX) -- Redemption Fee: 2% if held < 90 days
- Dodge & Cox Stock Fund (DODGX)
- PIMCO Total Return Fund Institutional Class (PTTRX)
- Royce Total Return Fund Institutional Class (RTRIX)
- Vanguard Explorer Fund Investor Shares (VEXPX)
- Vanguard GNMA Fund Investor Shares (VFIIX)
- Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)
- Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)
- Vanguard PRIMECAP Fund Investor Shares (VPMCX)
- Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
- Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
- Vanguard Windsor II Fund Investor Shares (VWNFX)
------------------
Comments / Questions:
1. I recently liquidated my taxable account & Roth at TDAm to transfer everything to Vanguard (where my employer plan is). Without thinking, I liquidated -- expecting that I would have to, rather than transferring the investments directly, but what's done is done. The reasons for the transfer were simplicity (having all accounts in one place), a desire to move toward a more passive investment strategy, and trading Vanguard funds without a transaction fee. I think my risk tolerance is high, and I'm willing to commit to higher risk-higher reward strategy, at least for the next 10 years or so, before slowly moving into more conservative investments.

2. My situation is slightly complicated in that my salary / savings of the past few months is not reflective of what I'll be earning and (hopefully) saving in the future. Living in a high cost area, I've struggled to save for retirement or pay extra on my loans this year (partly my fault, as I've failed to cut spending with salary as much as I should have). I'm almost thinking of it as a "lost year", savings-wise, which is terrible. It's several months yet before I switch back to my old job, but I'd like to hit the ground running once I get there.

3. I'd like to save for what constitutes a starter home out here too ($400-500k). Timeline was going to be 3-5 years, but as I put this all on paper, that seems unlikely, considering what I'm carrying in loans alone constitutes a significant mortgage in many parts of the country. Is it possible? Suggestions for how to go about it (alongside student loan payments & retirement savings)? i.e., how should I allocate?

4. I want aggressive, but not unreasonable. Is my desired target allocation given the foregoing too aggressive?

5. In the aggregate, my student loan payments are currently approximately $800/month. I changed the payment schedule for this year as I took a significant salary cut, but expect to revert to my former payment plan of approximately $1500/month once I'm back in my old job. I generally paid approximately $700 more, for a total of $2200 /month). Since I have liquidated, however, I'm wondering whether I should use some/all of the money in my taxable account ($20k) to pay off some of my higher-rate student loans.

6. Any thoughts generally on the available funds would be appreciated.

7. I am very high on Gabelli Focus Five Fund (GWSVX) (1.71%) (http://www.gabelli.com/Template/fund_ob ... d_code=840), or at least the idea behind it. I was in it earlier, and it's one of my few former holdings that I would consider re-purchasing. The expense ratio, however, seems quite high. Are there comparable funds that would provide a similar investment strategy at lower expense cost? I've seen a couple "similar" funds at vanguard, but they seem to limit themselves to a couple hundred stocks rather than just dozens.

Thanks for reading, and your help/consideration. It's much appreciated!
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Re: Portfolio Review for 29yo

Postby grok87 » Sun Feb 10, 2013 10:31 pm

motomotome wrote:Hi there; first poster here, though I've followed & learned quite a bit from this site in the past. I've just turned 29. I volunteered abroad for a couple years in the past so therefore limited savings. I was in graduate school, which I financed entirely with debt, but was lucky enough to land a couple of jobs. I have spent 1 year in the private sector, currently doing a year in government, with a job with my old firm lined up for when I go back in fall of 2013.
...

7. I am very high on Gabelli Focus Five Fund (GWSVX) (1.71%) (http://www.gabelli.com/Template/fund_ob ... d_code=840), or at least the idea behind it. I was in it earlier, and it's one of my few former holdings that I would consider re-purchasing. The expense ratio, however, seems quite high. Are there comparable funds that would provide a similar investment strategy at lower expense cost? I've seen a couple "similar" funds at vanguard, but they seem to limit themselves to a couple hundred stocks rather than just dozens.

Thanks for reading, and your help/consideration. It's much appreciated!

hello motomotome and welcome to the forum!
Re the Gabelli fund, i had a quick glance at their prospectus. One of the glaring things that stand out is that they keep comparing themselves to the S&P 500 when they are really a midcap fund. That's one of the oldest tricks in the book in the fund business. If you look at this morningstar page
http://performance.morningstar.com/fund ... ture=en-us
you will see that over the past 10 years they actually lagged the midcap index by -0.57%. That's not surprising. It means that before their 1.8% fee they actually beat the index by 1.2%. But their egregious fees sucked out all of the alpha or excess return that they generated and left shareholders in the whole by 0.6% per year. That's basically standard operating procedure in the fund word. It is possible that some fund managers may have skill. But they capture all the benefits of that skill for themselves through their egregious fees and leave shareholders with nothing or worse. Just say no!
cheers,
grok, CFA | Danon delenda est
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Re: Portfolio Review for 29yo

Postby Occupier » Mon Feb 11, 2013 1:10 am

As the previous posted pointed out high cost funds usually have clever marketing strategy but the payoff gets consumed by the costs. I would put the taxable in NY tax free at Vanguard. That assumes your saving that money for the down payment. Then I would invest no new money in taxable, and aggressively pay off the higher rate student loans. 1) that gives you a guaranteed return from getting rid of the payment and 2) improves your debt to assets ratio to help you get financing for a home. I would invest the Roth money in a target retirement -2040 or 2050. Eventually when you get back in the private sector you will want to have bonds and higher yielding stocks in retirement and total stock, and total international in taxable. These are very tax efficient, but you are years away from needing to do that and you have a lot of debt to get rid of. Yes, you want to maximize the 401 when you get back in the private sector, but use the rest of your earnings to reduce debt. Dave
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Re: Portfolio Review for 29yo

Postby moto112233 » Tue Feb 12, 2013 12:30 am

Thanks for the initial thoughts!! A couple of follow ups.

Occupier -- I'm not sure what you meant by NY tax free? I did a general search on Vanguard and it came up with four non-vanguard funds. Is that correct?

For Grok87 -- I'm not sure if we're discussing the same fund. I think GWSVX -- at least as focus five -- is quite new, opened in the last twelve months or so. It may have operated under a different investment strategy in the past, but I would be surprised to hear it compared to the S&P 500 when they only invest in 30 or so value stocks. But, I suppose that research does bear a cost, and perhaps I should say no!
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Re: Portfolio Review for 29yo

Postby grok87 » Tue Feb 12, 2013 12:34 am

motomotome wrote:Thanks for the initial thoughts!! A couple of follow ups.

Occupier -- I'm not sure what you meant by NY tax free? I did a general search on Vanguard and it came up with four non-vanguard funds. Is that correct?

For Grok87 -- I'm not sure if we're discussing the same fund. I think GWSVX -- at least as focus five -- is quite new, opened in the last twelve months or so. It may have operated under a different investment strategy in the past, but I would be surprised to hear it compared to the S&P 500 when they only invest in 30 or so value stocks. But, I suppose that research does bear a cost, and perhaps I should say no!

http://www.google.com/search?client=saf ... 8&oe=UTF-8
see above and click on max

see below and go to page 14
http://www.gabelli.com/Template/prospec ... &pid=psorp
cheers,
grok, CFA | Danon delenda est
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Re: Portfolio Review for 29yo

Postby pingo » Tue Feb 12, 2013 1:00 am

First off, looking at your employer options you might be one of the lucky few who can actually do Trev H's ingenious simplification of the Merriman "Ultimate Buy and Hold" value strategy the simple way Trev H intended it. I highly recommend you read the thread.

Second, check whether your former employer 401k allows after-tax contributions. Here are 4 links talking about after-tax contributions: here, here, here and here.

If you are allowed to make regular in-service withdrawals of your 401k after-tax contributions (not the same as Roth 401k contributions), you can have them directly rolled over to your VG Roth account and they will be tax-free forever after. They do not affect your Roth IRA contribution limits.
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Re: Portfolio Review for 29yo

Postby moto112233 » Mon Feb 18, 2013 11:30 pm

Thanks so much for your thoughts. (Please excuse the delayed reply as my computer's been hijacked by the Genius Bar.)

I am looking through the cited thread and learning quite a bit. Thanks for the recommendation!
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Re: Portfolio Review for 29yo

Postby grok87 » Tue Feb 19, 2013 12:56 am

motomotome wrote:Thanks so much for your thoughts. (Please excuse the delayed reply as my computer's been hijacked by the Genius Bar.)

I am looking through the cited thread and learning quite a bit. Thanks for the recommendation!

sure no problem.
just had another look at that Gabelli fund and the other issue is turnover. which is 140%. That is really high and quite deadly in a fund. see this thread for example
viewtopic.php?f=10&t=111030&newpost=1617991
cheers,
grok, CFA | Danon delenda est
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Re: Portfolio Review for 29yo

Postby pingo » Tue Feb 19, 2013 12:59 am

motomotome wrote:When in private practice, and when I return to my firm:
- $17k in 401k <-- It's now $17.5k/yr.
- $5k in IRA/Roth (with back-door Roth transfer if Roth ineligible) <-- Now it's $5.5k/yr.
- $10k in taxable (the balance of my taxable account was cash I had saved in the past)


I forgot to point out this oversight, just in case. :wink:
Last edited by pingo on Wed Feb 20, 2013 1:50 am, edited 4 times in total.
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Re: Portfolio Review for 29yo

Postby pingo » Tue Feb 19, 2013 1:45 am

grok87 wrote:just had another look at that Gabelli fund and the other issue is turnover. which is 140%. That is really high and quite deadly in a fund. see this thread for example
viewtopic.php?f=10&t=111030&newpost=1617991


Grok has you covered concerning GWSVX, but I got curious so here's what I saw:

GWSVX may say it's a Mid Cap fund (while comparing itself to Large Caps, sheesh), but you can click this link to find Morningstar's Holding Style Box, which shows that GWSVX is mostly invested in Small Caps. By contrast, index funds prevent style drift. Otherwise there is a risk that active management will stray from where you think it's going to be.


Since GWSVX moves in and out of Small and Mid Caps, let's pull up 3 year charts for all of them, joint and several:

Vanguard Small Cap Index Fund (NAESX) ER 0.24% <--17% turnover.
Vanguard Extended Market Index Fund (VEXMX) ER 0.24% <--50:50 Sm/Md; 14% turnover.
Vanguard Mid Cap Index Fund (VIMSX) ER 0.24% <--22% turnover.
Gabelli Focus Five AAA (GWSVX) ER 2.01% <-- 140% turnover means another 2.84% in costs.
Image
Source: Morningstar 3 year chart.



Meh, let's try 5 years:

Vanguard Small Cap Index Fund (NAESX) ER 0.24% <--17% turnover.
Vanguard Extended Market Index Fund (VEXMX) ER 0.24% <--50:50 Sm/Md; 14% turnover.
Vanguard Mid Cap Index Fund (VIMSX) ER 0.24% <--22% turnover.
Gabelli Focus Five AAA (GWSVX) ER 2.01% <-- 140% turnover means another 2.84% in costs.
Image
Source: Morningstar 5 year chart.



Meh, let's try 10 years:

Vanguard Small Cap Index Fund (NAESX) ER 0.24% <--17% turnover.
Vanguard Extended Market Index Fund (VEXMX) ER 0.24% <--50:50 Sm/Md; 14% turnover.
Vanguard Mid Cap Index Fund (VIMSX) ER 0.24% <--22% turnover.
Gabelli Focus Five AAA (GWSVX) ER 2.01% <-- 140% turnover means another 2.84% in costs.
Image
Source: Morningstar "Maximum" chart.



• GWSVX is working it's butt off just to stay in the running with the indexes, but with fewer holdings (i.e. less diversification).

• The index funds assume the same role without breaking a sweat.

• GWSVX is likely to run out of steam relative to the index funds (see 10 year chart).

• The index funds also have Admiral shares which would cut the listed expense ratios by more than half.

All the more reason to love index funds. :beer
Last edited by pingo on Wed Mar 06, 2013 7:36 pm, edited 6 times in total.
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Re: Portfolio Review for 29yo

Postby moto112233 » Sat Feb 23, 2013 3:40 pm

I understand, and appreciate, the concerns regarding GWSVX, and I'm planning to stick with Vanguard funds. As a side note, however, is it fair to chart a 3-year, 5-year, or even 10-year comparison given that the strategy changed completely in late 2012?
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Re: Portfolio Review for 29yo

Postby pingo » Mon Mar 04, 2013 8:53 pm

^ Good question. I don't know if I'll be able to give a satisfactory answer as my responses tend to be squarely "inside the box", but perhaps something is better than nothing...

motomotome wrote:I understand, and appreciate, the concerns regarding GWSVX, and I'm planning to stick with Vanguard funds.


I'm glad to know you will stick with VG funds. Based on your questions, I honestly never doubted it. However, I was in a great mood when I posted those charts, which also is when I tend to become cocky and flippant. My intent was definitely not to take pot shots at you, although the charts presented the temptation to pick on GWSVX.

The charts are a simple indicator of relative asset/fund behavior in order to address the following question:

motomotome wrote:Are there comparable funds that would provide a similar investment strategy at lower expense cost?


I think the charts answered with a resounding, "Yes!"

As to your more recent question...

motomotome wrote:...is it fair to chart a 3-year, 5-year, or even 10-year comparison given that the strategy changed completely in late 2012?


...it depends.

Past returns are no guarantee of future performance, but changes in fund strategy aren't either. In fact, I would expect an actively-managed fund to alter at least some strategies to navigate changing market environments. In that regard, GWSVX would be no different than my expectation. My questions for GWSVX would be:

a. Is the degree of change different than in the past?
b. If not, has shifting strategies given it an edge in the past? (The charts would suggest, "No.")
c. Regardless, will it give it an edge in the future? (Unknowable at present.)

Yes, the answer to the last question is unknowable at present and it will always be the answer regardless of strategy.

Back to the charts: they illustrate tendencies that many of us accept on this forum:

1. On average, average fund performance is average.
2. It is difficult to beat the market average, especially after costs.
3. Costs are the only consistent determinant of relative fund performance, and as such...
4. Research suggests that the best way to be in the top 25% of funds is to be in the bottom 25% of costs.
5. The harder a fund pushes to beat the market, the more headwinds are created by the costs and risks of doing so. Thus...
6. Funds with higher costs have a harder time keeping up with the market average, let alone outperforming the market average. With total costs of 4.85% (ER + turnover costs), GWSVX is at a huge disadvantage to any of the listed index funds.

Because of its high costs, GWSVX must have outperformed the relevant index/indices before costs in order to have underperformed by less than the amount of costs. (Perhaps it's exceptional in that regard?) However, it does not appear to have outperformed the market average for any meaningful period after costs, which makes it unexceptional in every regard.

When looking to the future, the relative ranking of funds becomes a matter of odds based on the relentless rules of humble arithmetic that have been demonstrated to be true in the past, and of which John Bogle is the most passionate of proponents.

:beer
Last edited by pingo on Thu Mar 07, 2013 11:40 am, edited 1 time in total.
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Re: Portfolio Review for 29yo

Postby pingo » Wed Mar 06, 2013 7:45 pm

I edited my last post in red and I corrected the GWVSX turnover costs (above each chart) from >1% to 2.84%, based on Grok's link about turnover costs.
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Re: Portfolio Review for 29yo

Postby 2stepsbehind » Wed Mar 06, 2013 8:16 pm

OP--are you clerking? And if so, will your firm provide a clerkship bonus? Those might be useful pieces of information in terms of counseling you on your strategy.
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Re: Portfolio Review for 29yo

Postby Caduceus » Wed Mar 06, 2013 10:12 pm

Welcome! The most optimal strategy mathematically may not be the most optimal behaviorally when it comes to paying down significant amounts of debt. One way of doing this might be to take it step by step:

Immediate Term

1. Keep the $15k in the Roth IRA and $10,000 (out of your $20k) in the taxable as an emergency fund.
2. Liquidate $10,000 of stocks in the taxable account at a long-term capital gains tax rate, and pay off the $7k debt at 5%. That's the first of your two high-rate debts gone, so we're started with the debt repayment snowball!
3. Throw what's left at the $40k debt at 6.55%.

Medium-Term

1. Invest in your 401(k) only up to the match, and throw all your income towards the $40k debt at 6.55%. At a repayment rate of $2200 a month (as you were paying before), you'd be done with the debt in slightly more than 1.5 years. I'm not sure if this $2200 was before/after your 401(k) contributions, so you might be able to do it even faster. Given your high marginal tax rate, it is true that you can shield a great deal of your income from taxes by contributing to a traditional 401(k), but getting rid of the second of your two high-rate debts in less than two years may be worth it.
2. In the meantime, start monitoring your credit history/score if you haven't already since you want to take on a mortgage in the future.
3. If you haven't already, you might consider purchasing a solid long-term disability policy to protect your biggest asset - your income-earning power.

Long-Term

1. With only the lower-rate debts left, and assuming you are still earning a high salary at a high marginal tax bracket, I would max out your traditional 401(k), whether or not there is a match, and invest them in a diversified portfolio of index funds. Have you read the bogleheads' guide to investing yet, or William Berstein's The Four Pillars of Investing? If not, these might be good introductions to how to keep a simple but effective and cost-efficient portfolio, and why so many here are huge fans of index funds/etfs.
2. Continue paying down your student debts with residual income. The more frugally you can live during this period, the faster you'll pay this off.
3. Personally, I would not think about purchasing a house until the debt obligations were significantly reduced. Taking on a mortgage while paying off significant amounts of student loans may create a lot of stress financially and emotionally, and it leaves you more vulnerable in the event of a loss/reduction of income. In high cost of living areas, it is usually possible to rent a smaller place for much less than the imputed rent of the place you would buy (a "dream home")

I think it's better not to rely on spectacular market returns/choice of particular stock funds to help you accomplish your goals. Just invest in broad market indices and earn the market return patiently. Save as much as you can, and invest in yourself.

good luck!!
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