3 Fund Portfolio at Schwab?

[ZiziPB]

Fellow investors, I have an IRA at Schwab (~$87.5K) that I will be "converting" from individual stocks to a 3 fund portfolio. I want to achieve 60/40 stock/bond AA with 25% of stock allocated to international. I was planning to use:

40% SWTSX (Total Stock) .09% ER
20% SWISX (International) .19% ER
40% SWLBX (Total Bond) .29% ER

However, the international fund appears not to include emerging markets. Should I split my international holding in this account between SWISX and VWO (Vanguard Emerging Market ETF)? Due to trading restrictions at work, I cannot use Schwab ETFs but I am allowed to invest in VWO w/o restrictions. For purposes of this question, assume that the rest of my portfolio follows my desired AA and utilizes low cost index funds.

In anticipation of standard suggestions on this board :

- I am not willing to transfer this account to Vanguard
- I would consider transfering this account to Fidelity where the rest of my accounts are but I see some value in continuing my relationship with Schwab so for now I would rather keep this account where it is (barring some very compelling reasons to move).

Thank you in advance for your thoughts.

[matjen]

I wouldn't split it but perhaps a ratio of about 3 to 1 or 4 to 1 Int'l to Emerging. Either way little difference.

[ruralavalon]

I would add the emerging markets exposure, for increased diversification. Vanguard R-squared Correlation Results: Developed Markets Index and Emerging Markets Index have a correlation of: 86. link.

matjen's suggested ratio is about right.

In my opinion that's too big a piece of the world economy to omit on purpose, when there is an inexpensive investment vehicle you can use to reach it.

[ZiziPB]

Thanks for your thoughts. It's not going to be a ton of money but I want to get this right so that I don't have to deal with this account too often. So I think it would make sense to include emerging markets and I appreciate the tips on the correct ratio.

[galeno]

If you want to use Schwab ETFs to make the equivalent of Vanguard's World Equity Index (VT) use: 50% SCHB + 40% SCHF + 10% SCHE.

[stlutz]

Can you use VXUS? For the lump sum I would put it in that, then put any new contributions in the Schwab fund. When you get enough in the fund to make another purchase of VXUS worthwhile (i.e. the commission is insignificant), then do so.

[binaryhermit]

If you transfer the account to Fidelity, you can get a bunch of iShares ETFs commission free.
This would give you 40% ITOT (.07% ER), 20% IXUS (.16% ER), 40% AGG (.08% ER).

[retiredjg]

I don't know if this matters to you or not.

The Schwab fund SWLBX is not a total bond market INDEX fund. Instead, it is an actively managed fund that seeks to perform like the TBM Index. Unfortunately, it has not done a very good job of it. A good example of active management failing to perform.

http://quotes.morningstar.com/fund/SWLBX/f?t=SWLBX

It may be a perfectly good fund, but I think you have assumed it is an index fund...and it is not.

Is it critical that this account at Schwab contain all 3 funds? Since you have other accounts at other places, could you just hold Total Stock Market Index there and still achieve what you want?

Edited: what I wrote was incorrect.

[in_reality]

Is it critical that this account at Schwab contain all 3 funds? Since you have other accounts at other places, could you just hold Total Stock Market Index there and still achieve what you want?

I agree.

Not only because of the bond fund, but SWISX lacks small caps (and is light midcaps).

So SWTSX is fine.
SWISX lacks small/mid caps and emerging.
SWLBX doesn't have to follow the index. This is very different than their ETFs, such as SCHZ, that all do.

It's too bad you can't use the ETFs!!!

So 100% SWISX in the 401k and rebalance to your overall AA in other accounts.

[toblerone]

I have nearly the same situation with a 401k at Schwab. Their int'l and bond index funds are weak, and I wanted to keep it simple, so I use:
SWTSX
VXUS
BND

Happy so far

[kdub]

I have had a Schwab IRA for years, but I've never really liked their international or bond fund options. I just fill the IRA with SWTSX and use other accounts (401k, HSA) to get the international and bond exposure I want. I use their banking products (free ATMs worldwide is dynamite for international travelers), so I leave the IRA there for simplicity. Vanguard certainly has better fund options for the true Boglehead.

[ZiziPB]

I'm glad I came back to this thread - lots of new info and good points made! Thank you all.

Yes, I did think that the Total Bond fund was an index fund (the Wiki seems to say so). And it sounds like the international fund is seriously lacking as well. Maybe I will reconsider this strategy and try to rebalance with my other accounts (I have another IRA at Fidelity, 401k and HSA). BTW, I sold my individual stock holdings in the Schwab IRA yesterday morning so it's now $88K in cash and available to invest. Seems like it's time for another portfolio question

[retiredjg]

Not sure what you read in the Wiki. If it is an error, please point that out so it can be corrected. Or you might have mis-interpreted what you read.

Something called "total bond" is not necessarily an index fund. If it is an index fund, it will have the word "index" in the name. If it does not have "index" in the name, it is an actively managed fund that is attempting to cover the "total" bond market. Both Schwab and Fidelity have a fund like this and this is not the first time they have been mis-construed as index funds when they are not.

We get lazy with our terminology here and everybody knows that "total bond" means "total bond index", at least here on the forum. This is just a little thing you have to watch for when picking your funds.

[matjen]

Not sure what you read in the Wiki. If it is an error, please point that out so it can be corrected. Or you might have mis-interpreted what you read.

Something called "total bond" is not necessarily an index fund. If it is an index fund, it will have the word "index" in the name. If it does not have "index" in the name, it is an actively managed fund that is attempting to cover the "total" bond market. Both Schwab and Fidelity have a fund like this and this is not the first time they have been mis-construed as index funds when they are not.

We get lazy with our terminology here and everybody knows that "total bond" means "total bond index", at least here on the forum. This is just a little thing you have to watch for when picking your funds.

Well it does appear the Wiki is confusing.

Under "Schwab Index Mutual Funds" you find this: "Schwab manages two indexed bond funds, a total bond market index fund (SWLBX) and a short term bond index fund (SWBDX). [4] Expense ratios for bond index funds are 0.29% after waivers."

http://www.bogleheads.org/wiki/Schwab

[retiredjg]

Well, I'm baffled. And it appears I was incorrect in stating that this fund is not an index fund.

The Schwab site says that both SWLBX (Total Bond) and SWBDX (Short Term bond) are index funds. They also list an inflation protected fund as an index fund. I am so sorry for the confusion I've introduced.

There is still the problem with the tracking error though. There was a big bobble back several years back and things have improved, but the fund does not track its index very closely.

[bowtie]

Toblerone:
Why do you say those Schwab international funds are 'weak'? What do you mean, that they do not contain what one would need specifically or that there just aren't enough in number and diversity?
Thanks
Also if you don't want a bond fund can you just substitute CD's as it suggests on the Wiki page? (There's a footnote that says several well -informed Bogleheads recommend CD's in place of a bond fund, correct?).

[ruralavalon]

Why do you say those Schwab international funds are 'weak'? What do you mean, that they do not contain what one would need specifically or that there just aren't enough in number and diversity?

Schwab international Index Fund, SWISX, covers only large companies in developed markets outside North America, so does not cover emerging markets, small companies or Canada. SWISX @ Morningstar.

Also if you don't want a bond fund can you just substitute CD's as it suggests on the Wiki page? (There's a footnote that says several well -informed Bogleheads recommend CD's in place of a bond fund, correct?).

You are correct, CDs can substitute for a bond fund. Make sure they are federally insured, and intermediate or shorter duration.

[in_reality]

Well, I'm baffled. And it appears I was incorrect in stating that this fund is not an index fund.

The Schwab site says that both SWLBX (Total Bond) and SWBDX (Short Term bond) are index funds. They also list an inflation protected fund as an index fund. I am so sorry for the confusion I've introduced.

You were correct. These are not index funds.

The fund uses the index as a guide in structuring the fund’s portfolio and selecting its investments. However, the fund is not required to invest any percentage of its assets in the securities represented in the index

That is very different than than either the ETFs or SWTSX which are true index funds as stipulated in their prospectus.

I was at Vanguard before they froze me for being overseas and had to move. I carefully read everything I could about Schwab before moving. Schwab's, I forget the exact name perhaps but..., savings plus money market and this fund both were into mortgage backed securities as a way to boost the returns. Well we know how 2008 turned out... I don't think Schwab did anything that they shouldn't have done per their prospectus...

Anyway, the ETFs and SWTSX are truly index and don't have the same manager risk....

[retiredjg]

You were correct. These are not index funds.

The fund uses the index as a guide in structuring the fund’s portfolio and selecting its investments. However, the fund is not required to invest any percentage of its assets in the securities represented in the index

That is very different than than either the ETFs or SWTSX which are true index funds as stipulated in their prospectus.

I was at Vanguard before they froze me for being overseas and had to move. I carefully read everything I could about Schwab before moving. Schwab's, I forget the exact name perhaps but..., savings plus money market and this fund both were into mortgage backed securities as a way to boost the returns. Well we know how 2008 turned out... I don't think Schwab did anything that they shouldn't have done per their prospectus...

Anyway, the ETFs and SWTSX are truly index and don't have the same manager risk....

Well, that is even more confusing since the Schwab website identifies this fund as an index fund.

http://www.schwab.wallst.com/Prospect/R ... mbol=SWLBX

Fund Strategy
The investment seeks high current income by tracking the performance of the Barclays U.S. Aggregate Bond Index. The fund normally invests at least 80% of its net assets in debt instruments of varying maturities. It primarily invests in a diversified portfolio of debt instruments that is designed to track the performance of the Barclays U.S. Aggregate Bond Index. The fund invests primarily in investment grade instruments. It may invest in fixed-, variable- or floating-rate debt instruments. The fund also may invest in debt instruments of domestic and foreign issuers, including mortgage-backed or asset-backed securities.

Fund Profile
Inception Date 03/05/1993
Total Assets $985.8M
Total Holdings 1396
Portfolio Turnover 165%
Fund Company Schwab Funds
Index Fund Yes

So what makes an index fund an index fund? I thought I knew the answer. Now it doesn't seem as clear if what you quoted comes from a current prospectus which it does.

[rixer]

Just use a 4 fund portfolio at Schwab then. You can purchase SCHE, an etf for emerging markets.

[in_reality]

So what makes an index fund an index fund? I thought I knew the answer. Now it doesn't seem as clear if what you quoted comes from a current prospectus which it does.

I think it's truly an index fund when it is required to invest according to the index. So while SWLBX could be being run as an index fund, that is probably what Schwab is doing now and why they state it is an index fund on their site, I don't see the prospectus as requiring that. They only require tracking the performance of the index and using 80% debt instruments to do so. That debt doesn't have to be holdings in the index though. They tell you in the prospectus though there is tracking error risk for this!

Compare that to SCHZ which specifies their holdings will be from the index and under what circumstances they can deviate (ex. include a holding they anticipate will be added).

So I didn't conclude the SWLBX tracking error means that Schwab is bad at indexing, I concluded SWLBX wasn't really an attempt at indexing, that they told you so, that they believed like everyone that the price of homes never drop ... and that it would be safe to use more mortgage backed securities as a way to increase returns.

SWTSX and the ETFs meet my criteria for index funds which is that the prospectus must require them to follow the index and not merely track returns on the index.

By the way, I wouldn't use a synthetic ETF that are popular in Europe to reduce ERs for this same reason. If the underlying holdings don't match the index, you have additional risk.

[pingo]

People keep bringing up Schwab ETFs, which are great, but...

Due to trading restrictions at work, I cannot use Schwab ETFs but I am allowed to invest in VWO w/o restrictions.

…and since...

[…]the international fund appears not to include emerging markets. Should I split my international holding in this account between SWISX and VWO (Vanguard Emerging Market ETF)?

...if you're going to be paying a commission in order to ensure complete International diversification anyway…just forget about SWISX+VWO. Instead, use Vanguard Total International Stock ETF (VXUS) to bring the portfolio back down to 3 again:


40% Schwab Total U.S. Stock (SWTSX) .09
20% Vanguard Total International Stock (VXUS) .14
40% Schwab Total Bond (SWLBX) .29 <--Okay, so this appears to be a debated issue, as well.

[toblerone]

...if you're going to be paying a commission in order to ensure complete International diversification anyway…

Exactly, which is why I suggested SWTSX, VXUS, and BND above (if the ETFs are available for a nominal fee) for a "3 Fund Portfolio at Schwab".
If you are really trying to keep it simple with 3 funds, and rebalance VXUS and BND only once a year or so, the $9 fee is peanuts compared to the diversification benefit.

[ZiziPB]

Exactly, which is why I suggested SWTSX, VXUS, and BND above (if the ETFs are available for a nominal fee) for a "3 Fund Portfolio at Schwab".
If you are really trying to keep it simple with 3 funds, and rebalance VXUS and BND only once a year or so, the $9 fee is peanuts compared to the diversification benefit.

I appreciate all the suggestions but my ETF trading ability is very limited. The permitted list is the most random selection possible - I have no idea what criteria are used to determine which are permitted and which are not. VXUS and BND are not on the list.

For bonds I can do AGG. For international I can do EFA and EEM or VWO. There is also a random selection of others like IEV, ILF, INDY, EWJ. Completely without rhyme or reason...

Maybe I should consider moving this account to Fidelity? The reason I wanted to keep the Schwab relationship is that I am planning to live overseas in a few years and from what I understand Schwab seems to be most accommodating at the moment to US citizens living abroad.

[in_reality]

Maybe I should consider moving this account to Fidelity? The reason I wanted to keep the Schwab relationship is that I am planning to live overseas in a few years and from what I understand Schwab seems to be most accommodating at the moment to US citizens living abroad.

You could go straight SWTSX and hold bonds and international in your other accounts, right? That seems easiest.

Schwab took me in when Vanguard froze me out for being overseas. Yes, you can buy etfs but not mutual funds. Mutual funds can only be held and sold.

Schwab seems to have come under pressure from overseas regulators to not allow new accounts to be opened for their residents. They are still friendlier in that they seem to be maintaining accounts that were open in places where they don't currently accept new customers. I say that though about international accounts that were previously opened. You might have to switch over to an international brokerage account, and they may or may not be able to do that. Your employer might arrange an address for you stateside too. I've heard of that.

Do you know what country? Restrictions seem to be country specific. If your country is on the restricted list, you might pop in to a branch and see if/how they can help you out.

I haven't heard anything about Fidelity allowing ETF trading for expats.

I don't think there is anything morally wrong with using a relatives address... you'll still be paying taxes.

[retiredjg]

Maybe I should consider moving this account to Fidelity? The reason I wanted to keep the Schwab relationship is that I am planning to live overseas in a few years and from what I understand Schwab seems to be most accommodating at the moment to US citizens living abroad.

It is hard to make a suggestion about one account because we don't know what the big picture looks like. Do you really have to have all 3 funds in this one account? Or could us use the Total Stock Index mutual fund there and hold the other stuff in your Fido accounts?

[ZiziPB]

@in_reality and retiredjg, thank you for the continued suggestions. Your questions and recommendations are very helpful.

As to US citizen investing from abroad question, I will be moving to Poland in about 4 years so that's why I thought I should keep the Schwab account and relationship (seems worth it not to have all eggs in one basket and keep some options open).

And having read all the responses, it seems that it my original idea of trying to have a separate AA for this account will not work. I have another IRA at Fidelity (over $200K) so there is definitely room to hold just a Total Market Fund in this account and get bond and international exposure at Fidelity. I will post a "portfolio help" question soon to see how to best utilize this opportunity to rebalance and simplify my portfolio.

Thank you again!

[in_reality]

@in_reality and retiredjg, thank you for the continued suggestions. Your questions and recommendations are very helpful.

As to US citizen investing from abroad question, I will be moving to Poland in about 4 years so that's why I thought I should keep the Schwab account and relationship (seems worth it not to have all eggs in one basket and keep some options open).

Trying to open an account in Poland gets me a "Due to industry regulations, Schwab will need to review the details of your specific situation before proceeding with your account application." message.

So I don't know what would happen ... You might want to stop in and ask. When I was with Wells Fargo, they wouldn't even talk to be on the phone when I was overseas, but when I stopped in the office they checked off a "known to me personally" box and got my account set up. I'd been a customer for years ... but had to talk to them in person. They always kept a US address as the official one but then had a separate mailing address for me overseas [at 1.5% advisor fee I had to move though]. So your best bet might be going in and seeing what they can do.

Their debit card is said to be really good overseas. No ATM fee. I haven't actually ever used mine so don't know the exchange rates. Haven't heard anything bad.

And having read all the responses, it seems that it my original idea of trying to have a separate AA for this account will not work. I have another IRA at Fidelity (over $200K) so there is definitely room to hold just a Total Market Fund in this account and get bond and international exposure at Fidelity. I will post a "portfolio help" question soon to see how to best utilize this opportunity to rebalance and simplify my portfolio.

That should work for you then!

[ZiziPB]

Thank you, @in_reality!

I have just posted my portfolio in this thread http://www.bogleheads.org/forum/viewtop ... 1&t=145078
so if you have any additional thoughts, I would appreciate it!

[LadyGeek]

Just when things got comfortable...

As to US citizen investing from abroad question, I will be moving to Poland in about 4 years so that's why I thought I should keep the Schwab account and relationship (seems worth it not to have all eggs in one basket and keep some options open).

Take a look at this wiki article: Taxation as a US person living abroad

You'll need to pay attention to US residency requirements. For example: US citizens abroad cannot invest through [Fidelity]