Bogleheads

[cardude]

Hello all. I recently took early early retirement and am considering my options on transitioning my portfolio to a somewhat more normal type of retirement portfolio using Vanguard funds. However, I want to keep a fairly large percentage of Berkshire Hathaway as a core holding (30-40%-- currently 48.8%), but the rest is fair game. I need to structure a portfolio around the core holding to give me some security against long periods of underperformance of this particular stock. I know this serious overwieght in Berkshire may sound crazy, but I have made some good money on Berkshire over the last 15 years buying and selling at mostly the right times and think I may have some success going forward. I do worry a little about a Black Swan type of event from time to time however........Any ideas are appreciated!

At this time I am pulling 2.5-3% per year out of my cash pile to pay for living expenses. Here is my info in the standard format:

Emergency funds = don't have a seperate account set aside for this due to the large % of portfolio in cash for living expenses.

Debt: home mortgage at 5.125 %. This is an ARM that can adjust in 5 years so I may need to pay it off. My plan was to pay it off when the market recovered, but if that does not happen in 5 years I may need to reserve the cash to do so or just refi and lock for a longer term.

Tax Filing Status: married filing jointly, wife works.

Tax Rate: Federal -- 25% State of Residence-- TX

Age: 44

Desired Asset allocation: (stocks/bonds) 70/30

Intl allocation: 5%

Current portfolio : mid 7 figure portfolio size

Taxable
16.5% cash
48.8% Berkshire Hathaway (brka, brkb)
18.3% managed account that is slowly turned into cash as it slowly recovers-- mostly small caps. 1% fee
5.4% angel investments, locked up for 5 years
2.4% Wellesley (VWINX) .23 exp ratio
1.6% Longleaf Internatonal (LLINX) 1.6 exp ratio
1.6% Third Ave Value (TAVLX) 1.11 exp ratio
.6% conoco phillips (cop)
.4% Wells Fargo (wfc)

His 401K at Sentry (soon to be rolled to Vanguard)
2.5% cash

His Vanguard IRA brokerage
1.1% Berkshire (BRKB).

Her IRA at Vanguard
.8% various stocks (GE, DIS, Brkb)

[Lauren Vignec]

Hello Cardude,

Retiring early is no small feat--congratulations. Many Bogleheads retired early, and hopefully one or two of them will chime in on this thread.

You have done an exceptionally good job of saving up a retirement portfolio. Are you, or were you before you retired, an entrepreneur? You might be an exception, but normally people who achieve what you have took some big risks to get there.

Taking big risks with wealth you have already accumulated, especially once retired, is an entirely different story from taking risks while accumulating.

Here is a question: would you buy that managed small cap account today, if you hadn't owned it previously? If not, then there is no reason to keep holding it, unless taxes are the issue. A bad investment is just a bad investment. If the managed account doesn't make sense in your portfolio it is best to let it go, and replace it with something more diversified.

The Berkshire stock is certainly a good investment, but at such a large portion of the portfolio it is, as you are aware, very risky.

When you say you are withdrawing 3%, do you mean 3% of the whole portfolio, or 3% of your cash position? Berkshire is an excellent company, and if your income needs are small enough relative to your whole portfolio, maybe you can afford the risk. But think of the other side of the equation. How much will your life really be improved by keeping BRK, instead of a more diversified portfolio, even if BRK outperforms the diversified portfolio?

Imagine if you only kept 10% of the portfolio in the Berkshire stock, sold the investments that you don't really want, and put together a portfolio of Vanguard index funds, cash, and short or limited term tax-exempt bond funds. There would be much less risk, and even if the investments you currently hold had great returns, those returns might not be much better than the more diversified portfolio anyway. How much will you really care about the additional wealth you might have missed out on?

Sincerely,

L

[pkcrafter]

Cardude,

Lauren's concerns are probably going to be reinforced by most other posters. It isn't wise to fall in love with a stock. Holding half your portfolio in that one stock is simply not prudent. You ask that we work around it, but there really is no good way to do that if you want to improve your portfolio and manage risk. Most of the rest of your portfolio is in amounts too small to have any effect on diversification and then there is the tax efficiency issue. You really need to look at this more objectively.


Paul
_________________

[LH]

I would chime in, the BRK is a big risk. Its hard for me to see past that, and talk about other things. Its like a guy standing in a lions cage, and asking me about whether the mosquito on his arm is going to give him west nile virus, dude, get out of the cage is what I would say.

10 percent mad money sounds like a fine behavorial compromise, time BRK with it, keep the 90 percent, design the portfolio around it.

[DSInvestor]

To paraphrase Larry Swedroe, you seem to want to keep playing a game that you've already won. Here's a link to Larry Swedroe's blog article How do you know when you have enough?. It's a 4 part series. Please follow the links at the bottom of the article.

The rest of the portfolio is not set for tax efficiency. Please see Principles of Tax-Efficient Fund Placement on the Bogleheads Wiki.

You're looking for 70/30 AA but only have 4.5% tax advantaged space. Considering filling the tax advantaged space with taxable bond funds first, then use tax exempt bond funds in taxable accounts to complete bond allocation.

- Shift all tax advantaged accounts to fixed income investments (Inflation Protected Securities VIPSX/VAIPX or Total Bond Market VBMFX/VBTLX)
- If you have losses on the managed account, harvest the losses and shift into tax efficient investments. This would give you years of income reduction into the future and help you offset capital gains when you sell your taxable holdings.
- Wellesley Income fund is an excellent fund but it is not tax efficient and should not be held in taxable accounts.

You indicated that your wife is working but I do not see a 401k for her. If she has access to 401k, she should consider making max contributions to the 401k so you can grow your tax advantaged space.

[cardude]

[cardude]

[gw]

Expenses....

1% of $1M costs about $10,000/year more than a cheap index fund. That's huge, and all the evidence says managers don't add value---don't be confused by the extremely rare example of Buffett. Expenses, expenses, expenses.

What's the advantage of "selling into the recovery" or whatever it was, with the high-fee small-cap fund? If you like small caps for some reason, Vanguard has an index fund that charges more than a full percent less than your fund (ER 0.28%). What's it costing you to not switch, about $10K/year? That's like an extra 7% income tax. Plus, you'll probably decide at some point that small caps make no sense in your portfolio, so why not switch it to a broad index fund now?

I won't try to get into whether or not it makes sense for BRK to be such a big part of your portfolio---there are arguments both ways. But what about limiting it to half your stocks? Then, even if some very unlikely event wipes out BRK, the loss is somewhat contained. Together with your 70/30 plan, it suggests an elegantly simple goal for your portfolio:

35% BRK.x
35% VTSAX
30% VBTLX

It's simple, so you can enjoy your retirement, and it's extremely cheap, which is the only thing that matters after basic risk management. Remember to use the tax-advantaged accounts optimally (first bonds, then dividend-paying stocks).

Expenses, expenses, expenses....

[DSInvestor]

Hi Cardude,

OK, you have indicated that you'd like to have 70/30 AA. Have you given any thought to how much foreign stock you'd like to have? Vanguard recommends 20-40% of stocks. For this example, I'll go down the middle of Vanguard's recommendations and use 30%.

As long as your wife has earned income, you can grow your tax advantaged space by maxing out your 403b (16.5K/yr or 22K if over age 50) and His and Her ROTH-IRAs (5K/yr each or 6K if over age 50)

If you plan on staying in your house for the long term, consider paying it off with the money that you have in the taxable account. The mortgage simply increases your fixed expenses and increases the amount that you need to withdraw from the retirement portfolio. How big is the 5.125% mortgage?

In this example, I will assume that all other stocks, value funds and managed, have been liquidated. This is not a recommendation but simply to show you what it could look like for max simplicity. It will at least show you how to set up the fixed income side using a combination of TIPS fund in tax advantaged accounts and Tax exempt bond fund in taxable accounts.

Taxable:
0% Money Market Fund to collect dividends (Tax Exempt MMF or Prime MMF)
5.4% Angel Investments locked up for 5 yrs (counts as US stocks)
44.5% Total Stock Market Index VTSAX er=0.09% - US Stocks
21% FTSE All World ex-US VFWIX er=0.40% or VEU ETF share class er=0.25% - Foreign stocks
23.6% Intermediate Term Tax Exempt Bond Admiral VWIUX er=0.12% - completes bond AA using tax efficient bond fund.

Her 403b:
0% Inflation Protected Securities VIPSX er=0.25% or VAIPX er=0.12%

His Trad IRA Vanguard 3.6% (1.1% plus 2.5% rollover):
3.6% Inflation Protected Securities VIPSX er=0.25% or VAIPX er=0.12%

Her Trad IRA Vanguard 0.8%:
0.8% Inflation Protected Securities VIPSX er=0.25% or VAIPX er=0.12%

His ROTH-IRA:
0% Inflation Protected Securities VIPSX er=0.25%

Her ROTH-IRA:
0% Inflation Protected Securities VIPSX er=0.25%

Total=100%

Portfolio re-balancing will need to be done in the taxable account since that's where you hold both stocks and bonds. To reduce the number of fund sales which trigger capital gains events, you may want to consider not reinvesting dividends in the taxable holdings. You can direct all dividends to a money market fund for spending and re-balancing.

Dividends in taxable accts: Direct to MMF
Dividends in tax advantaged accounts: Re-invest

New Contributions:
403b: $16,500 to Inflation Protected Securities
His ROTH-IRA: $5,000 to Inflation Protected Securities
Her ROTH-IRA: $5,000 to Inflation Protected Securities
Taxable: unknown amount.

Where will the money come from to build a 23.6% position in the Intermediate Term Tax exempt Bond fund?

[Lauren Vignec]

[livesoft]

Here is something shorter than a book on portfolio construction:
https://institutional.vanguard....uction.pdf

[YDNAL]

[cardude]

[ResNullius]

[ozob]

I didn't retire quite so early as you did, but I do count 59 1/2 as a tad "early".

I moved a bit off the table and went heavily into fixed-income. It was counter-intuitive (I sold into the bear rally of the period), but it helped me sleep.

If you have done well, take a bit off the table, as I did. There's no shame in taking some profits.

O

[cardude]

I read the Swedroe articles, and I agree, and that's why I'm trying to figure out what to do. It really is hard giving up what's made you some money in the past, but I do need to trim it down some, and I will.

I like the simple AA that was posted earlier by GW because it's, um, simple and it may get me started:

35% BRK.x
35% VTSAX
30% VBTLX

As suggested by DSInvestor, I think I would substitute VWIUX for VBTLX since I don't have much tax advantaged room. Would it make sense to put our approx 5% in tax advantaged account money in VIPSX and reduce the VWIUX to 25%? And also, is the bond portion allocation where I put the cash? I would want to keep at least two years of expenses in cash to keep me happy.

[YDNAL]

[cardude]

[elgob.bogle]

Cardude Said "It really is hard giving up what's made you some money in the past, but I do need to trim it down some, and I will".

I am guessing that it was really hard to give up your business until you considered the possibilities of life without it. Now you are at another big turning point considering investment possibilities. I can tell you that I wish that I had taken piperwarrior's advice to move many stocks $$ to bonds when I was only 10% down in early 2008. Piperwarrior gave the same kind of good advice that you are getting now.

best regards,

elgob (formerly a millionaire because I was too stubborn to take good advice from the knowledgeable folks at this forum)

[Lauren Vignec]

Hello Again Cardude,

Umm...when I read your earlier response to my post I kind of...misread it. In fact, I basically got what you were saying backwards. So let me try again.

[YDNAL]

[livesoft]

This portfolio suggestion was posted on another forum that cardude visits:

[pkcrafter]

cardude