Relatively New BH: Request for Assistance with Portfolio

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Rushmore
Posts: 55
Joined: Thu Feb 14, 2013 9:41 pm

Relatively New BH: Request for Assistance with Portfolio

Post by Rushmore » Fri Feb 22, 2013 9:08 pm

EMERGENCY FUNDS: Three to six months of expenses
DEBT: $23,000 auto loan (PenFed, 0.49% for 4 years); $265,000 home mortgage (7-year ARM, 2.50%)
CURRENT HOME EQUITY: $200,000
TAX FILING STATUS: Married Filing Jointly
TAX RATE: 33% Federal, 5.3% State
STATE OF REDSIDENCE: Massachusetts
AGE: 37
DESIRED AA: 70% stocks / 30% bonds
DESIRED INTERNATIONAL ALLOCATION: 50% of stocks
TOTAL PORTFOLIO SIZE: $1,609,700 [$500,000 of which should be viewed as deposit on new home over next 1-2 years]
NEW ANNUAL CONTRIBUTIONS: $17,500 his 401k; $5,500 his Roth IRA; $5,500 her Roth IRA; $36,000 taxable
KEY QUESTION: Hello BHs. Taking into account the $500,000 for deposit on a new home over the next 1-2 years (remainder of the money should be viewed as long-term money), what would be your suggested method for investing the portfolio (including new contributions) across all accounts? Thank you in advance for your assistance! Thanks - Rushmore.

***

I. TAXABLE ACCOUNTS: $1,059,700
Vanguard Short-Term Investment Grade Fund – Admiral (0.11% TER) – VFSUX – $500,000
Vanguard Intermediate-Term Tax-Exempt Fund – Admiral (0.12% TER) – VWIUX – $450,000
Vanguard Total Stock Market Index Fund – Admiral (0.06% TER) – VTSAX – $55,000 ($19,000 unrealized long-term gain)
Vanguard FTSE All-World ex-US Index Fund – Admiral (0.18% TER) – VFWAX – $30,000 ($9,000 unrealized long-term gain)
Vanguard Total International Stock Index Fund – Admiral (0.18% TER) – VTIAX – $15,700 ($700 unrealized long-term gain)
Vanguard Tax-Exempt Money Market Fund – 0.17% TER – VMSXX – $9,000

II. RETIREMENT ACCOUNTS: $550,000

A. HIS 401K: $230,000
Self-Directed Brokerage Option [TDAmeritrade platform; only mutual funds and not ETFs available; $50 annual fee; $25 per Vanguard/Fidelity mutual fund trade; if Vanguard/Fidelity fund shares are purchased regularly via systematic purchase, $25 fee is waived]
Putnam S&P 500 Index Fund – 0.08% TER
Putnam Bond Index Fund (tracks Barclays Aggregate Bond Index) – 0.10% TER
Putnam Growth Opportunities Fund – R6 – 0.64% TER – PGOEX
Putnam International Growth Fund – Y – 1.34% TER – PINYX
Putnam Multi-Cap Growth Fund – Y – 0.89% TER – PNOYX
Putnam Small Cap Growth Fund – Y – 1.06% TER – PSYGX
Putnam Voyager Fund – R6 – 0.55% TER – PVOEX
Putnam Asia Pacific Equity Fund – Y – 2.54% TER – PAPYX
Putnam Capital Opportunities Fund – R6 – 0.75% TER – PCOEX
Putnam Capital Spectrum Fund – Y – 1.07% TER – PVSYX
Putnam Emerging Markets Equity Fund – Y – 1.46% TER – PEMYX
Putnam Equity Spectrum Fund – Y – 1.30% TER – PYSYX
Putnam Europe Equity Fund – Y – 1.20% TER – PEUYX
Putnam Global Equity Fund – R6 – 0.96% TER – PGLEX
Putnam International Capital Opportunities Fund – Y – 1.16% TER – PIVYX
Putnam International Equity Fund – R6 – 0.84% TER – POVEX
Putnam Investors Fund – R6 – 0.67% TER – PIVEX
Putnam Multi-Cap Core Fund – Y – 2.57% TER – PMYYX
Putnam Research Fund – Y – 1.00% TER – PURYX
Putnam Convertible Securities Fund – Y – 0.87% TER – PCGYX
Putnam Equity Income Fund – R6 – 0.62% TER – PEQSX
George Putnam Balanced Fund – Y – 0.79% TER – PGEYX
Putnam International Value Fund – Y – 1.10% TER – PNGYX
Putnam Multi-Cap Value Fund – Y – 0.92% TER – PMVYX
Putnam Small Cap Value Fund – Y – 1.15% TER – PVSVX
The Putnam Fund for Growth and Income – R6 – 0.57% TER – PGREX
Putnam Dynamic Asset Allocation Conservative Fund – R6 – 0.74% TER – PCCEX
Putnam Dynamic Asset Allocation Balanced Fund – R6 – 0.76% TER – PAAEX
Putnam Dynamic Asset Allocation Growth Fund – R6 – 0.68% TER – PAEEX
Putnam Dynamic Risk Allocation Fund – R6 – 1.16% TER – PDRGX
Putnam American Government Income Fund – R6 – 0.51% TER – PAMEX
Putnam Diversified Income Trust – Y – 0.73% TER – PDVYX
Putnam Floating Rate Income Fund – Y – 0.78% TER – PFRYX
Putnam Global Income Trust – R6 – 0.79% TER – PGGEX
Putnam High Yield Advantage Fund – Y – 0.79% TER – PHAYX
Putnam High Yield Trust – Y – 0.75% TER – PHYYX
Putnam Income Fund – R6 – 0.53% TER – PINHX
Putnam Short Duration Income Fund – R6 – 0.30% TER – PSDQX
Putnam U.S. Government Income Trust – Y – 0.60% TER – PUSYX
Putnam Absolute Return 100 Fund – R6 – 0.42% TER – PRREX
Putnam Absolute Return 300 Fund – R6 – 0.62% TER – PTREX
Putnam Absolute Return 500 Fund – R6 – 0.88% TER – PJMEX
Putnam Absolute Return 700 Fund – R6 – 1.04% TER – PDMEX
Putnam Global Consumer Fund – Y – 1.64% TER – PGCYX
Putnam Global Energy Fund – Y – 1.44% TER – PGEIX
Putnam Global Financials Fund – Y – 1.94% TER – PGFYX
Putnam Global Health Care Fund – Y – 1.02% TER – PHSYX
Putnam Global Industrials Fund – Y – 1.88% TER – PGILX
Putnam Global Natural Resources Fund – Y – 1.03% TER – PGRYX
Putnam Global Sector Fund – Y – 2.66% TER – PPGYX
Putnam Global Technology Fund – Y – 1.70% TER – PGTYX
Putnam Global Telecommunications Fund – Y – 1.83% TER – PGBYX
Putnam Global Utilities Fund – Y – 1.05% TER – PUTYX

B. HIS OLD 401K: $100,000
Self-Directed Brokerage Option [Chase platform; mutual funds and ETFs available; no annual fee; $24.95 per Vanguard mutual fund trade; Fidelity Funds (including Spartan Funds) available as NTF funds; $14.95 per ETF trade (up to 1,000 shares; $0.02 per share thereafter)]
BlackRock S&P 500 Equity Index - 0.07% TER
BlackRock Midcap Equity Index (tracks S&P 400 Index) – 0.09% TER
BlackRock Russell 2000 Index – 0.07% TER
BlackRock MSCI ACWI ex-US IMI (tracks developed and emerging markets) – 0.10% TER
BlackRock US Debt Index (tracks Barclays Aggregate Bond Index) – 0.07% TER
PIMCO Total Return Fund – Administrative – 0.71% TER – PTRAX
Dodge & Cox International Stock Fund – 0.64% TER – DODFX
Artisan Mid Cap Fund – Investor Shares – 1.33% TER – ARTMX
JPMorgan Prime Money Market Fund – Institutional – 0.26% TER – JINXX
JPMorgan Short Duration Bond Fund – Class R6 – 0.36% TER – JSDUX
JPMorgan Small Cap Equity Fund – Class R5 – 0.97% TER - JSERX
JPMorgan US Equity Fund – Institutional – 0.68% TER – JMUEX

C. HER OLD 401K: $210,000
Self-Directed Brokerage Option [Fidelity platform; only mutual funds and not ETFs available; $100 annual fee; $75 per Vanguard mutual fund trade; Fidelity Funds (including Spartan Funds) available as NTF funds]
Spartan 500 Index Fund – Institutional – 0.05% TER – FXSIX
PIMCO All Asset All Authority Fund – Institutional – 1.68% TER – PAUIX
PIMCO Commodity Real Return Strategy Fund – Institutional – 0.90% TER – PCRIX
PIMCO Global Bond (Unhedged) Fund – Institutional – 0.55% TER – PIGLX
PIMCO High Yield Fund – Institutional – 0.55% TER – PHIYX
PIMCO Real Return Fund – Institutional – 0.47% TER – PRRIX
PIMCO Short-Term Fund – Institutional – 0.46% TER – PTSHX
PIMCO Total Return Fund – Institutional – 0.46% TER – PTTRX
PIMCO Unconstrained Bond Fund – Institutional – 0.91% TER – PFIUX
Ivy Asset Strategy Fund – Class I – 0.75% TER – IVAEX
Artisan Mid Cap Value Fund – Investor Shares – 1.20% TER – ARTQX
Cohen & Steers Realty Shares Fund – 1.03% TER – CSRSX
Federated Strategic Value Dividend Fund – Institutional Shares – 0.95% TER – SVAIX
Fidelity Contrafund – K – 0.69% TER – FCNKX
Fidelity Diversified International – K – 0.84% TER – FDIKX
Invesco Growth and Income Fund – Y – 0.59% TER – ACGMX
Longleaf Partners Small Capital Fund – 0.92% TER – LLSCX
Oppenheimer Developing Markets Fund – Y – 1.03% TER – ODVYX
Prudential Jennison Small Company Fund – A – 1.17% TER – PGOAX
T. Rowe Price Growth Stock Fund – 0.70% TER – PRGFX
T. Rowe Price Mid-Cap Growth Fund – 0.80% TER – RPMGX
Westwood LargeCap Value Fund – Institutional – 0.91% TER – WHGLX
Permanent Portfolio Fund – 0.76% TER – PRPFX
JPMorgan Strategic Income Opportunities Fund – Select Class – 0.97% TER – JSOSX
Westwood Income Opportunity Fund – Institutional – 0.91% TER – WHGIX

D. HIS ROTH IRA AT VANGUARD: $5,000
Vanguard Total Bond Market Index Fund – Investor (0.22% TER) – VBMFX – $5,000

E. HER ROTH IRA AT VANGUARD: $5,000
Vanguard Total Bond Market Index Fund – Investor (0.22% TER) – VBMFX – $5,000

letsgobobby
Posts: 11356
Joined: Fri Sep 18, 2009 1:10 am

Re: Relatively New BH: Request for Assistance with Portfoli

Post by letsgobobby » Sat Feb 23, 2013 1:35 am

First: do you need to take all that risk? You spent 13 years or more sitting out all the volatility; now you want to hit the ground running at 70/30? While 70/30 is perfectly reasonable for most people your age, it does not seem necessary for someone in your situation. How about 60/40, or even 50/50? What are your annual expenses? If you are far along toward your goals already I would urge you to maintain a conservative allocation, given your limited need to take risk and frankly your limited experience with losing large sums of money. What makes your situation unique is that you did not accumulate $1,600,000 slowly through the ups and downs of the market; thus you did not gain valuable experience and the steel stomach of a seasoned investor. If you plop seven figures into the market and it actually goes down 50% or $350,000 for a 70/30 portfolio, will you defnitely have the fortitude to maintain your course?

Second: the $500k down payment should sit in something very liquid, like a short term tax exempt bond fund. You've already got one, so leave it be.

With the $1,000,000 remaining:

25% domestic stocks (taxable)
25% international stocks (taxable)
50% bonds (tax-deferred)

Easy-peasy. :sharebeer

Rushmore
Posts: 55
Joined: Thu Feb 14, 2013 9:41 pm

Re: Relatively New BH: Request for Assistance with Portfoli

Post by Rushmore » Sat Feb 23, 2013 8:50 am

Hi Letsgobobby. I would ordinarily use a 60/40 allocation; however, due to the great bond market performance over the past decade, I would have thought that equities deserve a slight bump-up in most people's long-term allocations.

I would hope to have the fortitude to use a 70/30 allocation. One never knows of course until one goes through a tough bear market. My view is that the long-term money is "set it and forget it" money.... Thanks - Rushmore

Rushmore
Posts: 55
Joined: Thu Feb 14, 2013 9:41 pm

Re: Relatively New BH: Request for Assistance with Portfoli

Post by Rushmore » Sun Feb 24, 2013 5:56 pm

Hi All. I'm not sure of the forum etiquette here, but I was hoping to garner a few more specific suggestions on my portfolio restructuring. Not sure if this is bad form for me to mention it like this!

Also, if folks think I should "re-post" in some kind of better or more simplified way, I'm happy to do that as well.

Thanks - Rushmore

jhd
Posts: 99
Joined: Fri Jan 18, 2008 6:18 pm
Location: San Francisco, CA

Re: Relatively New BH: Request for Assistance with Portfoli

Post by jhd » Sun Feb 24, 2013 6:32 pm

Hi Rushmore -

Here's how I look at asset allocation: what portfolio could I hold through both 1999 and 2008 (or 1929)? Too aggressive and I wouldn't sleep well in a market crash/Great Depression. Too conservative and I would be tempted to buy stocks at their peak during a boom.

70/30 is a fine asset allocation as long as you don't jump ship during a downturn. If you think you'd shift to 60/40 in a downturn, start out at 60/40. But I wouldn't recommend shift away from bonds since they're "high"; I would just shift towards shorter bonds (and maybe stay there). 1-5 year bonds aren't going to crash. They might not return 6% over the next decade, but they're going to be fairly stable, and will do their job of dampening the volatility of stocks.

Stocks: 50/50 US/International is perfectly reasonable and is a great "set it and forget it" allocation. Consider holding the market weight of emerging markets in your international half, or slightly overweighting emerging markets if you prefer - whichever you think you'll be less likely to regret down the road. Also consider overweighting small cap and value stocks - historically, they've outperformed the overall stock market, but at the cost of slightly increased risk. If you don't overweight small/value, I'd add 5%-10% REITs in your tax-advantaged space.

Bonds: At your age, a case can be made for anywhere between 0% and 50% TIPS. They won't save your portfolio in the case of unexpected inflation (they only hedge themselves, not your other investments), and they won't kill your portfolio either. The same is true of currency-hedged international bonds; they might help lower volatility a bit, but probably won't make a huge difference.

Funds: I'd pony up the $24.95 to buy Vanguard funds in your 401Ks, and avoid rebalancing too frequently.

Down payment: keep the $500K in cash or something cash-like: savings account, CD, money market. You aren't going to get much for it no matter what you, but you might as well make $5K/year in a 1% savings account or CD if you can find it.

letsgobobby
Posts: 11356
Joined: Fri Sep 18, 2009 1:10 am

Re: Relatively New BH: Request for Assistance with Portfoli

Post by letsgobobby » Sun Feb 24, 2013 7:48 pm

VFSUX - how large is your gain there?

Rushmore
Posts: 55
Joined: Thu Feb 14, 2013 9:41 pm

Re: Relatively New BH: Request for Assistance with Portfoli

Post by Rushmore » Sun Feb 24, 2013 8:38 pm

Thanks JHD -- on small cap value, is there an index mutual fund that tracks the S&P 600 value index -- I understand that that index is better (smaller, more value-ey) than Russell 2000? Also, is small cap value appropriate for taxable account? Also, I'm not sure I understand your comments on TIPS and international bonds -- are you suggesting that my bonds should be focused in a combination of short-term bonds, TIPS (mutual fund?) and international bonds (dollar-denominated)? What role would the TIPS and international bonds play here -- sorry for being the slow student, but don't follow your thoughts here... Do you think any of the PIMCO funds in my wife's old 401k would be best here, or do you think I should use the brokerage option here?

Letsgobobby -- I have neither a gain nor a loss in VFSUX -- this is a relatively new investment. Thanks for your interest.

- Rushmore

Default User BR
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Joined: Mon Dec 17, 2007 7:32 pm

Re: Relatively New BH: Request for Assistance with Portfoli

Post by Default User BR » Mon Feb 25, 2013 12:56 am

Rushmore wrote:on small cap value, is there an index mutual fund that tracks the S&P 600 value index -- I understand that that index is better (smaller, more value-ey) than Russell 2000?
You will find some listed here: http://www.altruistfa.com/USsmallcapvaluefunds.htm


Brian

jhd
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Location: San Francisco, CA

Re: Relatively New BH: Request for Assistance with Portfoli

Post by jhd » Mon Feb 25, 2013 1:11 am

Rushmore wrote:Thanks JHD -- on small cap value, is there an index mutual fund that tracks the S&P 600 value index -- I understand that that index is better (smaller, more value-ey) than Russell 2000? Also, is small cap value appropriate for taxable account? Also, I'm not sure I understand your comments on TIPS and international bonds -- are you suggesting that my bonds should be focused in a combination of short-term bonds, TIPS (mutual fund?) and international bonds (dollar-denominated)? What role would the TIPS and international bonds play here -- sorry for being the slow student, but don't follow your thoughts here... Do you think any of the PIMCO funds in my wife's old 401k would be best here, or do you think I should use the brokerage option here?

Letsgobobby -- I have neither a gain nor a loss in VFSUX -- this is a relatively new investment. Thanks for your interest.

- Rushmore
I can never keep track of which small cap fund tracks which index, but Default User's link is useful. There is a case for small cap value in both taxable accounts (tax loss harvesting) and tax-advantaged (dividends, turnover). If you have room, choose tax-advantaged.

As for your bond allocation, what questions do you have in particular? IMO a case can be made for some mix of four types of funds:

• Total Bond Market. Advantage: simplicity, owning the market, and optimizing Really Doesn't Matter too much.
• Short or intermediate treasuries (tax-advantaged) or munis (taxable). Advantage: lower credit risk than TBM, low interest rate risk due to short duration.
• TIPS. Advantage: similar advantages as treasuries, plus additional protection against unexpected inflation. Somewhat more volatile.
• International high-quality bonds, hedged. Advantage: low credit risk, low interest rate risk, AND interest rate risk uncorrelated with US interest rate risk. (Note that dollar-denominated non-US bonds actually don't provide much diversification benefit, since they will move with US interest rate changes. You want bonds from other credit-worthy countries, hedged to US dollars.)

If inflation is higher than expected, you want some TIPS to protect the spending power of your "safe" money, though there are some structural problems with TIPS. (Steven Evanson has a good article on this: http://www.evansonasset.com/index.cfm?Page=55.) Conversely, if inflation is lower than expected, TIPS will underperform other bonds, and they're a bit less "safe" in terms of volatility. As for international bonds, you don't really need them (especially with short US bonds), but you're probably slightly better off with them than without them, so that ALL of your bonds don't move at exactly the same time when interest rates change. Especially now that Vanguard has a low-cost option available.

Honestly, just pick one of TBM, treasuries, or munis, and optionally mix in TIPS and/or international bonds. Keep fees low (so probably no PIMCO), keep durations short in this interest rate climate, and avoid currency risk, and you'll be fine.

letsgobobby
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Re: Relatively New BH: Request for Assistance with Portfoli

Post by letsgobobby » Mon Feb 25, 2013 1:25 am

VWIUX will be your housing fund.

Sell VFSUX since it is not tax efficient and also you need more stocks to be 70/30.

His 401k
$230k Putnam bond index

His old 401k
$100k Blackrock Russell 2000 index

Her old 401k -
$90k PIMCO real return or total return
$120k s&p 500 index

Taxable
$150k Vanguard total stock
$250k vanguard total international stock tax managed (as for exUS don't buy more except to loss harvest, but don't sell any that has a gain)
$100k Vanguard ex US small cap
$60k Vanguard emerging markets

Backdoor Roth IRAs
$10k Vanguard ex US small cap

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nydad
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Re: Relatively New BH: Request for Assistance with Portfoli

Post by nydad » Mon Feb 25, 2013 10:20 am

Why not roll the old 401ks into rollover IRAs at Vanguard, and avoid future fees (and have a full choice of low-cost investments)?

Rushmore
Posts: 55
Joined: Thu Feb 14, 2013 9:41 pm

Re: Relatively New BH: Request for Assistance with Portfoli

Post by Rushmore » Mon Feb 25, 2013 11:10 am

Hi Nydad. My understanding is that, if I were to do rollover IRAs at Vanguard, I would eliminate my ability to do backdoor Roth IRAs without taking a big tax hit. If I am wrong on this, please feel free to correct. With the availability of self-brokerage options and existing index options on the old 401ks, this seems worthwhile to me.

Thanks Letsgobobby and jhd for your extensive comments. These look like terrific ideas to me!

- Rushmore

letsgobobby
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Joined: Fri Sep 18, 2009 1:10 am

Re: Relatively New BH: Request for Assistance with Portfoli

Post by letsgobobby » Mon Feb 25, 2013 11:43 am

You are exactly right. Leave the old 401ks where they are; they have good investment choices to boot.

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nydad
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Re: Relatively New BH: Request for Assistance with Portfoli

Post by nydad » Mon Feb 25, 2013 1:55 pm

My understanding is that, if I were to do rollover IRAs at Vanguard, I would eliminate my ability to do backdoor Roth IRAs without taking a big tax hit. If I am wrong on this, please feel free to correct. With the availability of self-brokerage options and existing index options on the old 401ks, this seems worthwhile to me.
Yes - sorry I had overlooked that - you may be right. There may also be a possibility depending on your plan to roll your old 401ks into your new 401k - just for simplification purposes (but I haven't looked in detail to see if options in your new 401k are better/worse)

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