Allocation in Multiple Accounts - Portfolio Review

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Stan Dup
Posts: 762
Joined: Fri May 10, 2013 10:25 am

Allocation in Multiple Accounts - Portfolio Review

Post by Stan Dup » Thu May 16, 2013 7:52 am

This is a story of reducing expenses and simplification. The question is “am I doing this right?” (For the shorter version you can skip down to "MY NEW STRATEGY")

I am 47 years old and I have a traditional IRA with about 80,000 in it. For many years I had it invested in a Wells Fargo S&P 500 type of index fund. I stopped contributing to it in 2009 after recovering from the down turn and instead built up my cash reserves.
Around two years ago I began listening to Ric Edelman on the radio. I bought his book “The Lies About Money” which I found educational about how expensive and poor performing most mutual funds are in comparison. I also remember having two discussions with two different friends; one told me that I was not diversified enough, and the other explained the concept of re-balancing a portfolio, which he did quarterly.

The advice I followed from Edelman was that I needed 6-12 months of cash reserves, which I had succeeded in saving. It indeed allows me to breathe a little easier.

I was a little hesitant about using a financial planner because of the fee. I finally decided last year to go with Edelman because I have no interest in re-balancing every three months, let alone watching it to rebalance it on a percentage basis. I transferred my traditional IRA and opened a Roth IRA for some extra contributions at the same time. I have been happy with the returns so far. Of course, the past few months have been pretty good overall.
That all changed after watching the PBS Frontline episode a few weeks ago about how expensive the mutual fund industry is to savings. When he showed what a 2% fee eats up over thirty years, I was shocked. He said it left me with only about 30% of the total return, and I was taking all of the risk.

Time to transfer out of Edelman and reduce my costs.

I googled “edelman vs. vanguard funds” and came across this forum. Wow, I have been looking for you guys for years! I have been reading up here on investment plans and asset allocation.

What I am looking for is a portfolio that is made up of a mix of well diversified low cost index funds in domestic equities, international equities, and bonds. I like the idea of investing in the entire market, an idea taught by Edelman (okay, he does have some good ideas; expensive, but good). Another factor is that my family tends to live for a long time, two grandmothers in the 90s and my father is currently 89. My funds may need to last longer than usual.

I am learning more about rebalancing. I read the conclusion of the Vanguard paper (rebalance 1- 2 times a year if your allocations are 5% or more out) but I have never done it and it seems to be a bother.


Emergency funds: 12 months of expenses in credit union.
Debt: No credit card debt. Car loan: $297/month for 48 months, 1.92%. Mortgage: 30 years, 76,300 at 3.625%.
Tax Filing Status: Single
Tax Rate: 25% Federal, 4.25 % State
State of Residence: Michigan
Age: 47
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 15% (?)


Current retirement assets
Traditional IRA at Edelman, $79,348, 73% of total
Roth IRA at Edelman, $11,427, 11% of total
401k, $17,937, 16% of total
Total: $108,714, 100%

Contributions
Minimum: $3960/year in 401k includes employer matching contributions.
Additional: Up to $5500/year in ROTH IRA
Additional: Up to $3540 in 401K after initial 401K and ROTH are funded.


Available funds
Last year I started contributing to our new 401k at work.

ALL THE FUNDS AVAILABLE IN MY 401K
Investment, [Category], ER
PIMCO Total Return Instl [PTTRX, Intermediate-Term Bond], .46
PIMCO Real Return [PRRIX, Inflation-Protected Bond], 1.60
PIMCO High Yield Institutional [PHIYX, High Yield Bond], .55
Templeton Global Bond Advantage [TGBAX, World Bond], .64
, , , ,
Van Kampen Growth & Income [ACGIX, Large Value], .90
DFA US Large Value [DFLVX, US OE Large Value], .27
American Beacon Small Cap Value Inst [AVFIX, Small Value], .82
, , , ,
Schwab S& P 500 Cap Index [SWPPX, Large Blend], .09
Goldman Sachs Mid Value Institutional [GSMCX, Mid Blend], .75
Vanguard Mid-Cap Index [VIMSX, Mid-Cap Blend], .24
VANGUARD SMALL CAP INDEX SIGNAL [VSISX, Small Blend], .10
AMERICAN FUNDS EUROPACIFIC GR R6 [RERGX, Foreign Large Blend], .50
, , , ,
AMERICAN FUNDS AMCAP R6 [RAFGX, US OE Large Growth], .38
Oppenheimer Developing Markets A [ODMAX, Large Growth], 1.36
Morgan Stanley Institutional Mid Cap Growth Fund [MPEGX, Mid Growth], .96
Vanguard Small Cap Growth Index [VISGX, Small Growth], .08
, , , ,
Van Eck Global Hard Assets I [GHAAX, Natural Resources], 1.01
Cohen and Steers Realty Shares [CSRSX, Real Estate], 1.03
Prudential Global Real Estate Z [PURZX, US OE Global Real Estate], .97
Total: $17,937.58, 100.00%

These are also available but I am not interested in them (annuities, or fees too high)

MetLife Stable Value $0.00
Schwab Managed Retirement Trust 2010 $0.00 (.89 ER)
Schwab Managed Retirement Trust 2020 $0.00 (.89 ER)
Schwab Managed Retirement Trust 2030 $0.00 (.89 ER)
Schwab Managed Retirement Trust 2040 $0.00 (.89 ER)
Schwab Managed Retirement Trust 2050 $0.00 (.89 ER)
CONSERVATIVE LIFESTYLE MODEL PORTFOLIO $0.00
MODERATELY CONSERVATIVE LIFESTYLE MODEL PORTFOLIO $0.00
MODERATE LIFESTYLE MODEL PORTFOLIO $0.00
MODERATELY AGGRESSIVE LIFESTYLE MODEL PORTFOLIO $0.00
AGGRESSIVE LIFESTYLE MODEL PORTFOLIO $0.00

THIS IS WHAT I INVESTED IN
I tried to match my Edelman portfolio with the available funds in my 401k (as you can see, 10 funds is a lot to rebalance!)

Investment, [Category], ER, Balance, Original Allocation Percent
PIMCO Total Return Instl [PTTRX, Intermediate-Term Bond], .46, $1,092.71, 7.00%
PIMCO Real Return [PRRIX, Inflation-Protected Bond], 1.60, $306.79, 2.00%
PIMCO High Yield Institutional [PHIYX, High Yield Bond], .55, $817.84, 5.00%
Templeton Global Bond Advantage [TGBAX, World Bond], .64, $822.64, 5.00%
Schwab S& P 500 Cap Index [SWPPX, Large Blend], .09, $6,733.02, 34.00%
Vanguard Mid-Cap Index [VIMSX, Mid-Cap Blend], .24, $1,795.37, 10.00%
VANGUARD SMALL CAP INDEX SIGNAL [VSISX, Small Blend], .10, $2,145.12, 12.00%
AMERICAN FUNDS EUROPACIFIC GR R6 [RERGX, Foreign Large Blend], .50, $2,574.00, 15.00%
Van Eck Global Hard Assets I [GHAAX, Natural Resources], 1.01, $770.15, 5.00%
Cohen and Steers Realty Shares [CSRSX, Real Estate], 1.03, $879.94, 5.00%
Total: $17,937.58, 100.00%

MY NEW STRATEGY
  • I want to transfer my Edelman funds to Vanguard to reduce my expenses.
  • My strategy is then to have, or mirror, the Vanguard Target Retirement 2025 Fund (VTTVX) in all three accounts.
  • I want to simplify the fund allocation in my 401K to mirror the Total Stock Fund in the Vanguard Target Retirement 2025 Fund.
  • I want to rebalance as few funds as practical.
I went to these instructions on the wiki to see how I should do this: http://www.bogleheads.org/wiki/Asset_Al ... e_Accounts

That link informs me to use the table here to approximate the entire stock market: http://www.bogleheads.org/wiki/Approxim ... ock_Market. I chose the third option for my selection below because I have three funds that fit that model.


I want to change my 401k allocation to this
Schwab S& P 500 Cap Index [SWPPX, Large Blend], .09, 81%
Vanguard Mid-Cap Index [VIMSX, Mid-Cap Blend], .24, 6%
VANGUARD SMALL CAP INDEX SIGNAL [VSISX, Small Blend], .10, 13%

I want to have this fund in my Roth IRA
Vanguard Target Retirement 2025 Fund

I want these funds in my traditional IRA
Vanguard Total Stock Market Index Fund Investor Shares
Vanguard Total Bond Market II Index Fund Investor Shares
Vanguard Total International Stock Index Fund Investor Shares

Key Points
  • With this strategy the Roth fund will not need to be rebalanced.
  • The 401k will grow with payroll contributions. I may need to balance within the 401k to match the Total Stock Fund.
  • I will rebalance the Traditional IRA when necessary to keep it in line with the growing 401k. At the same time I can rebalance the domestic stock fund with the international stock and bond funds.
  • I greatly reduce the number of funds to track and will need to only rebalance the three funds to keep all my accounts in balance.
  • I get better diversification.


Questions:
1. Did I do this correctly? Will my new strategy work?
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti

DaveS
Posts: 1308
Joined: Fri Jun 15, 2007 9:42 am
Location: Reno, NV

Re: Allocation in Multiple Accounts - Portfolio Review

Post by DaveS » Thu May 16, 2013 10:50 am

I don't have a problem with what you propose which is to in general replicate the target fund. From your library take out one of the early Swedroe Books or William Bernstein books. The Swedroe books are The Only Investment Guide You Will Ever Need, and What Wall Street Does Not Want You to Know. The Bernstein, The Intelligent Asset Allocator, or Four Pillars of Investing. If you read and absorb them you will make the following changes. 1) You wont bother with the mid cap fund. Mid caps just perform between small and large, so you just hold the two ends tilting to small if your not risk adverse. 2) You will have small value funds instead of small blend funds. (If available). The reason is that over longer periods of time small growth is one of the poorest performing asset classes because speculators dominate investors in that asset class and they consistently over bid up prices. 3) You may also want to tilt a bit to international small by having the ETF VSS. 4) Because all the accounts hold your money you don't have to make them identical. If there is a better low cost fund in one account have that asset class in that account, not in both. Dave

Stan Dup
Posts: 762
Joined: Fri May 10, 2013 10:25 am

Re: Allocation in Multiple Accounts - Portfolio Review

Post by Stan Dup » Thu May 16, 2013 11:00 am

Thanks Dave.

I am a little new to this so I am not quite as comfortable with that kind of slicing and dicing. But I can see doing that in the future.
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti

moneytobless
Posts: 51
Joined: Wed Feb 06, 2013 6:42 pm
Contact:

Re: Allocation in Multiple Accounts - Portfolio Review

Post by moneytobless » Thu May 16, 2013 1:35 pm

Stan Dup,

Great job reading about approximating the Total Stock Market and asset allocation.

Yes, your strategy will work.

I have a couple of suggestions that I think may help you.

First, with $80,000 in your Traditional IRA, you qualify for the lower-cost admiral shares for all three funds.

Second, you may want to consider putting the Total Stock Market Fund in your Roth instead of the Target Retirement 2025 Fund. It's 70% cheaper.

You can set this up so you still won't need to rebalance your Roth, and just continue to balance the 401k and rebalance the Traditional IRA. Since your allocation to the Total Stock Market will grow faster through contributions to your 401k and Roth IRA, you'll just allocate less money to this fund in your Traditional IRA, and more to the Bond Fund and International Stock Fund.

The number of funds you track stays the same, you still only need to rebalance the three funds in your Traditional IRA, and you lower your costs substantially.

Just a thought. Hope this helps.

Stan Dup
Posts: 762
Joined: Fri May 10, 2013 10:25 am

Re: Allocation in Multiple Accounts - Portfolio Review

Post by Stan Dup » Thu May 16, 2013 3:13 pm

moneytobless wrote:Stan Dup,

Great job reading about approximating the Total Stock Market and asset allocation.

Yes, your strategy will work.

I have a couple of suggestions that I think may help you.

First, with $80,000 in your Traditional IRA, you qualify for the lower-cost admiral shares for all three funds.

Second, you may want to consider putting the Total Stock Market Fund in your Roth instead of the Target Retirement 2025 Fund. It's 70% cheaper.

You can set this up so you still won't need to rebalance your Roth, and just continue to balance the 401k and rebalance the Traditional IRA. Since your allocation to the Total Stock Market will grow faster through contributions to your 401k and Roth IRA, you'll just allocate less money to this fund in your Traditional IRA, and more to the Bond Fund and International Stock Fund.

The number of funds you track stays the same, you still only need to rebalance the three funds in your Traditional IRA, and you lower your costs substantially.

Just a thought. Hope this helps.

I had not thought of this; it sounds great. Thanks!

I have another question being addressed over here about my emergency funds: http://www.bogleheads.org/forum/viewtop ... 1&t=116496

Let me give this some thought. I think I will combine these two ideas and post a new question.
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti

Stan Dup
Posts: 762
Joined: Fri May 10, 2013 10:25 am

Re: Allocation in Multiple Accounts - Portfolio Review

Post by Stan Dup » Thu May 16, 2013 3:48 pm

I combined two threads and posted it here:
http://www.bogleheads.org/forum/viewtop ... 1&t=116547

Please consider this thread closed.
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti

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