2 Fund + International?

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Put it on the list
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2 Fund + International?

Post by Put it on the list » Wed Oct 22, 2014 1:26 pm

New investor here trying to figure out a new plan to start off 2015. My accounts are only a few months old, so I am not dealing with large sums of money...yet. :)
Currently I am following the 3 fund approach with VBMFX (total bond) in my TIRA and VTSMX (total stock) and VGTSX ( total international stock) in my taxable account with a 40/20/40 allocation. Since I'm in my early forties, this is the allocation I think I'll be comfortable with for several years. In January 2015 I will add the max (5500) to my TIRA. The problem for me is that I will be able to add much more money throughout the year to my taxable account throwing off my allocation. Then I would have to add a tax friendly bond fund to my TA to keep my allocation percentages where they should be - taking me away from the easy 3 fund portfolio to 4 and in general driving me nuts.
My question is... Is it easier for me to 'start fresh' and have VBIAX ( balanced index) in my TIRA and VTMFX( tax managed balanced) in my TA, and keeping my VGTSX. I figure I can add to those two funds throughout the year without really changing my target allocation numbers.
I've read a lot of people on here are fans of the two balanced funds, but I haven't read where anyone uses this approach. Any input would be appreciated.

BTW- this is a great site and feel that this is one of the few websites that you can believe what you read!

bloom2708
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Re: 2 Fund + International?

Post by bloom2708 » Wed Oct 22, 2014 1:46 pm

I use a 3 fund portfolio inside each account. You end up with more funds, but there is no extra cost.

Taxable: VWITX, VTSMX, VGTSX (Admiral versions: VWIUX, VTSAX, VTIAX)

Tax sheltered accounts: VBMFX (Admiral version: VBTLX) + US + Int

Add VWITX to your taxable account and then rebalance with new money into taxable.

Once you get enough in your Roth IRA for example to own all 3 inside, when you add your $5,500 for the year, just split it up based on your 40/20/40 AA.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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abuss368
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Re: 2 Fund + International?

Post by abuss368 » Wed Oct 22, 2014 1:52 pm

Hi Put It On The List,

That is really a strategy question to your portfolio in general.

Essentially one strategy is based on "asset location" where stocks are in one account and bonds in another.

The other strategy is "equal location" where basically the same funds are in the same accounts. There may be minor differences and most often it is the bond allocation. An example is Total Stock and Total International in all accounts. The bond allocation may be Total Bond in tax advantaged accounts and Intermediate Tax Exempt in taxable accounts.

I employ an "equal location" strategy as Rick Ferri and his firm Portfolio Solutions recommend. Here is a link to Rick's excellent website with a very good article titled "Does Asset Location Make Sense?"

http://www.rickferri.com/blog/strategy/ ... ake-sense/

Also keep in mind that Treasury bonds and TIPS provide state and local tax benefits.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

retiredjg
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Re: 2 Fund + International?

Post by retiredjg » Wed Oct 22, 2014 1:59 pm

The balanced funds are only a good idea if they have what you want. Neither has international and adding international changes the stock to bond ratio. What results from that may or may not be the stock to bond ratio you want. So you always have to juggle back and forth to get the percentages you want. Something will have to give - it should probably be the amount of international since the stock to bond ratio is more important than the US to International Ratio.

I'm not saying the Balanced Funds can't be used - I'm just not sure that is the easiest thing to do.

The easiest thing is to just add a bond fund to your taxable account. What type of fund will depend on your tax bracket. In a low bracket, taxable bonds might be better most of the time. In a higher bracket, tax-exempt bonds would be better pretty much all of the time. In the 25% bracket, it could go either way and may change over time.

All that said, you don't mention any type of 401k/403b/457b/SEP IRA/SIMPLE IRA at work. That is the most common place to hold your bonds. Do you not have a plan at work?

retiredjg
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Re: 2 Fund + International?

Post by retiredjg » Wed Oct 22, 2014 2:00 pm

P.S. There are other alternatives for fixed income in your taxable account. I Bonds and CDs come to mind. The Wiki has information about I Bonds.

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Re: 2 Fund + International?

Post by Put it on the list » Wed Oct 22, 2014 2:13 pm

Abuss- thanks for the link. I will check it out when I'm on a bigger device (old eyes). I know I'm not dealing with large amounts of money, but I thought you should not put international into a IRA. That was one of the issues I was dealing with. Which also brings me to the amounts in the account are not large enough to do a 3 fund in each. They will be come January, so I suppose it's an option.

Retired - no savings plan at work ( don't work). Although my husband has a pension and also a 401-? With Fidelity that is employer funded, only about $1,500/year, right now it's invested automatically invested into a Freedom Fund, which I am working on changing. There aren't many good options with that. I am treating that and my husbands IRA (fidelity) as it's own separate entity. I know I probably shouldn't.... I've read all the Wiki articles on dealing with different accounts, and I just figured the easiest way to keep track of everything- for me. Also, I'm putting more into my accounts than his.

Also, I wasn't sure if you should count IBonds into your AA. I kind of thought of them as a CD/ cash alternative.

retiredjg
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Re: 2 Fund + International?

Post by retiredjg » Wed Oct 22, 2014 2:42 pm

Put it on the list wrote:Retired - no savings plan at work ( don't work). Although my husband has a pension and also a 401-? With Fidelity that is employer funded, only about $1,500/year, right now it's invested automatically invested into a Freedom Fund, which I am working on changing. There aren't many good options with that. I am treating that and my husbands IRA (fidelity) as it's own separate entity. I know I probably shouldn't.... I've read all the Wiki articles on dealing with different accounts, and I just figured the easiest way to keep track of everything- for me. Also, I'm putting more into my accounts than his.

Also, I wasn't sure if you should count IBonds into your AA. I kind of thought of them as a CD/ cash alternative.

It appears you want to keep all the accounts separate. That is no ideal, but it can be worked with. But we have to know information about your situation - your post sounds like you are a single working person. Apparently, you are a married not-working person.

In truth, for the specific question you asked, it really does not matter and we don't have to know about your situation. But these types of questions often morph into something bigger and then people give you advice that is not at all appropriate because they think your situation is one thing when it is really a much different thing. Just be careful asking questions like this because the answer is often dependent on the situation as a whole.

I Bonds and CDs and cash are all fixed income investments, just like bonds are fixed income investments. When we say "bonds" we often mean the "fixed income side of the portfolio". Yes, all of this is counted as part of your AA. Exceptions might be cash that is held in an emergency fund or money that is being held or invested for some other goal than retirement - those are sometimes left out of the AA. It depends on the situation.

You have misunderstood where to hold international. Index stock funds, both US and international, can be held in any type of account. An IRA is a fine place for international stocks. But if you have to choose whether to put bonds in a tIRA or whether to put stocks in the tIRA, the answer is bonds.

As for where your family money is going....if the money is for retirement, you should be filling your husbands 401k, His IRA/Roth IRA, and your IRA/Roth IRA before putting retirement money in taxable. There are occasional reasons to do something different. We don't know enough about your situation to say.

So the simple answer to your question is to fill your IRA with bonds and put the remainder of your bonds into the taxable account (type of bond unknown at this point). The real answer to to put the bonds into His 401k and Your IRA and only hold stock index funds in taxable (if you must use taxable at all).

Apparently, there are limits on how many funds you can buy with the money at hand. You are probably going to need to give more details to get accurate answers.

Regarding the tax-managed balanced fund...you only need that in higher tax brackets. If you are in one of the lower brackets you might not need tax-management. Do you know your current tax bracket?

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Re: 2 Fund + International?

Post by Put it on the list » Wed Oct 22, 2014 5:10 pm

Sorry! I was hoping I had an easy question with an easy answer....


Emergency Funds- $15,000
Income: base 100,000/year plus disbursement totaling about 175,000
Our taxes are filed as an S- corp
Debt- parent Plus Loan 20,000 will be paid off at end of year

Mortgages: none
house value. 850,000 paid
Vacation home value. 400,000 paid

Tax filing status- married filing jointly
2 dependents

Tax rate- 25%+. Not entirely sure, I'm guessing on this
State 5%. I live in Illinois so you never know what it will end up being
State: IL

Age: 42 her. 44 him

Desired allocation. 40/20/40. Stock/intl stock/bond

Union pension: 200,000
Union 401-b. 14,000. This is a supplemental pension paid quarterly by the employer into a Fidelity account. You cannot add to it or take anything out until retirement. By default it's in a Fidelity Freedom 2035.

His IRA

Fidelity total bond. 5,500

Her IRA

Vanguard total bond. 5,500

Her taxable
Vanguard total stock 6,000
vanguard total intl stock. 3,000


My husband owns the company, is considered a hourly union employee. Gets his 40 hour a week paycheck. Whenever I needed more that his check would cover, he would take a disbursement. Vehicles, insurance, cell phones, paid by company.
Company has really hit its stride the past 3 years and looks even better for the future. I know there is approx 3,000,000 cash in the company coffers. Husband grew up a little rough, has always been a big believer in cash. I never was really concerned with investing or finances for that matter, until now. The accountant says we have to take a big chunk of money out of the company for ourselves. My father recently passed away due to a rare illness, leaving my siblings and me the beneficiaries of a wrongful death lawsuit. Before he died he gave us each some money, which I decided to invest.
I think it's easier for me to treat my husbands two fidelity account separate from mine. There are few options with the 401-b that I can work with along with his IRA to get a 60/40 stock/bond allocation.

My accounts were what I was wondering about as far as the VBIAX/VTMFX + international.

Don't know if this clears anything up.

nwffdiver
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Re: 2 Fund + International?

Post by nwffdiver » Wed Oct 22, 2014 6:28 pm

Sounds like maybe you should look into a SEP IRA for each of you. I am not a business owner, so can't give all details, but you should each be putting at least the $17,500 into tax advantaged accounts before taxable. Sounds like you are already doing the IRA. Always maximize your tax advantaged space first. It would also lower your taxable income come tax time! :D

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Re: 2 Fund + International?

Post by Put it on the list » Wed Oct 22, 2014 7:36 pm

nwffdiver wrote:Sounds like maybe you should look into a SEP IRA for each of you. I am not a business owner, so can't give all details, but you should each be putting at least the $17,500 into tax advantaged accounts before taxable. Sounds like you are already doing the IRA. Always maximize your tax advantaged space first. It would also lower your taxable income come tax time! :D


I think we would have to offer it to all employees not covered under the union plan. Not sure he would want to do that.

retiredjg
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Re: 2 Fund + International?

Post by retiredjg » Wed Oct 22, 2014 8:37 pm

So do I understand correctly he does not have any plan at work to defer any part of his salary? If that is correct, what you seem to be doing (contributing to two traditional IRAs) is a good approach and everything after that would go into taxable.



Tax rate- 25%+. Not entirely sure, I'm guessing on this
State 5%. I live in Illinois so you never know what it will end up being

Compare your taxable income (line 43 on Form 1040) to this chart. Find a similar chart for your state taxes.

http://www.moneychimp.com/features/tax_brackets.htm

Back to the original question - if you want to keep your accounts separate, you'll need to put some sort of fixed income investment in your taxable account. Your tax bracket will help determine what it should be. It would help to know how much money will be added to that taxable account next year. We'll assume your tIRA is $5.5k or thereabouts.

retiredjg
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Re: 2 Fund + International?

Post by retiredjg » Wed Oct 22, 2014 8:39 pm

Looking at it, though, I think it might be easiest to keep His 401b in a Fidelity Freedom fund and manage His IRA, Her IRA, and Taxable as one asset allocation. This would reduce the amount of bonds that need to go into taxable.

Does His 401b have good choices?

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Re: 2 Fund + International?

Post by Put it on the list » Wed Oct 22, 2014 9:42 pm

retiredjg wrote:Looking at it, though, I think it might be easiest to keep His 401b in a Fidelity Freedom fund and manage His IRA, Her IRA, and Taxable as one asset allocation. This would reduce the amount of bonds that need to go into taxable.

Does His 401b have good choices?


Not really.

I was going to switch it to
Spartan 500 index. 80%
Spartan Extended Market 20%
They both have an expense ratio of .07

The Freedom Fund is .79

There is also a 25.00 per quarter administrative fee.

retiredjg
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Re: 2 Fund + International?

Post by retiredjg » Thu Oct 23, 2014 6:55 am

Put it on the list wrote:
Does His 401b have good choices?


Not really.

I was going to switch it to
Spartan 500 index. 80%
Spartan Extended Market 20%
They both have an expense ratio of .07

I think most here would call these very good choices. :happy And there's probably a decent bond fund in there as well.

It appears to me you could include all the accounts (including this one) and manage them as one portfolio. Let us know if you change your mind.

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