Help With Portfolio

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EMDW
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Help With Portfolio

Post by EMDW » Thu Sep 24, 2015 5:32 pm

Ages: late 40's. Debt: none. Portfolio: low 7 digits. Retirement 10-15 years from now.
Current asset allocation: 2 fund portfolio
1. 70-60% stocks (vanguard total stock market index admiral: VTSAX): all in taxable account now.
2. 30-40% bonds (vanguard total bond market index admiral: VBTLX): all in employer's 401K and maxing out each year, 53K for 2015. Soon I will run of this space and would need a tax exempt bond fund.
3. Backdoor roth ira yearly (vanguard total bond market index admiral: VBTLX)
4. I-bonds yearly

Question: I can add about 15-20K a month to the taxable account (vanguard total stock market index admiral: VTSAX). Should I do this as a dollar cost average on a monthly basis or save all in cash and lump sum at a future date keeping in mind the asset allocation?

When I run out of room for the bonds in the 401k, backdoor roth and I bonds, which specific tax exempt bond fund would you suggest?

A little background: I was sitting on a large amount of cash since 2013 and finally decided to jump in and invested a 7 figure lump sum on 9/21/15 in the taxable account. Waited because I was learning more from this site.

Thank you

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Hodor
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Re: Help With Portfolio

Post by Hodor » Thu Sep 24, 2015 6:42 pm

It makes sense to invest the money as soon as you can, although that's not really dollar-cost averaging in the usual sense of the term.

Vanguard Intermediate-Term Tax Exempt is a good choice for a tax-exempt fund. They also have a new Tax-Exempt Index, but I know others have some reservations about that fund.

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Kevin M
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Re: Help With Portfolio

Post by Kevin M » Thu Sep 24, 2015 7:05 pm

What state do you live in, and what are your federal and state marginal tax rates?

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Topic Author
EMDW
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Re: Help With Portfolio

Post by EMDW » Thu Sep 24, 2015 8:07 pm

Kevin M wrote:What state do you live in, and what are your federal and state marginal tax rates?

Kevin
39.6% fed, 5.25% state. Since I don't live in CA or NY, I don't qualify for the state specific tax-exempt muni. So perhaps, VWITX (vanguard intermediate term tax-exempt fund) might help. May consider the addition of cd ladder when interest rates becomes more attractive. Thank you.

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Kevin M
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Re: Help With Portfolio

Post by Kevin M » Fri Sep 25, 2015 12:35 pm

sari wrote:
Kevin M wrote:What state do you live in, and what are your federal and state marginal tax rates?

Kevin
39.6% fed, 5.25% state. Since I don't live in CA or NY, I don't qualify for the state specific tax-exempt muni. So perhaps, VWITX (vanguard intermediate term tax-exempt fund) might help. May consider the addition of cd ladder when interest rates becomes more attractive. Thank you.
CA and NY are not the only states for which a muni fund is offered by Vanguard; others are MA, NJ, OH, and PA.

If not in one of those states, and you want to stick with Vanguard funds, then yes, int-term TE is a reasonable choice, unless you want to take even more term risk and go with long-term TE. I have used both in the past, but just sold the last of my int-term TE yesterday to buy a 2-year CD earning 2.28%, thinking that I may add to my CA int-term and/or long-term funds when some CDs mature over the next few months.

Larry Swedroe has stated that his firm has used CDs in taxable accounts even for investors in high tax brackets, as CDs sometimes have a higher after-tax yield, especially at shorter-term maturities.

Of course the other thing to consider is that you're trading off yield and risk. A CD offers a clearly superior risk-adjusted yield, since generally CD yields have been 50-100 basis points higher than yields on Treasuries of same maturities. The 2-year CD I'm buying has a premium of more than 150 basis points over a 2-year Treasury at about 0.7%.

The conventional wisdom seems to be that munis are priced to be competitive with taxable bonds at the 25% marginal rate (on a risk-adjusted basis), so at your high rate, munis are a better deal than Treasuries or corporate bonds on a risk-adjusted basis. But it's a harder decision comparing to good CDs because of the premium over Treasuries.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Lafder
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Re: Help With Portfolio

Post by Lafder » Fri Sep 25, 2015 9:31 pm

You should put the money in when you have it, otherwise years may go by and you will miss out on growth :)

DId you purposely leave out all International funds? I know some folks advocate 0% and some are all the way at 50%

With a past history of sitting out with a large amount of cash, you may need to resist the urge jump out of the market dring the next crash. The right move will be to rebalance and buy more stocks the next time stocks are "on sale"

lafder

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EMDW
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Re: Help With Portfolio

Post by EMDW » Fri Sep 25, 2015 9:55 pm

Lafder wrote:You should put the money in when you have it, otherwise years may go by and you will miss out on growth :)

DId you purposely leave out all International funds? I know some folks advocate 0% and some are all the way at 50%

With a past history of sitting out with a large amount of cash, you may need to resist the urge jump out of the market dring the next crash. The right move will be to rebalance and buy more stocks the next time stocks are "on sale"

lafder
I don't believe international funds are necessary (per Bogle), but maybe I'm wrong. I totally agree with you about putting the money in as it comes; I don't want to ever sit on it again and plan on adding new money this Monday. Thank you.

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patrick013
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Re: Help With Portfolio

Post by patrick013 » Fri Sep 25, 2015 10:05 pm

I'd go muni's intermediate term. Last time I looked a
33-35% tax rate would advantage muni's.
age in bonds, buy-and-hold, 10 year business cycle

RCL
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Re: Help With Portfolio

Post by RCL » Sat Sep 26, 2015 11:49 pm

Excuse the hijack
Kevin, is that the USAlliance FCU offer?
It Is Best To Consult Others Before Taking Unusual Actions

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dratkinson
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Re: Help With Portfolio

Post by dratkinson » Sun Sep 27, 2015 11:55 am

Preferred investing choices.
See: https://www.bogleheads.org/wiki/Three-fund_portfolio
See: https://www.bogleheads.org/wiki/Princip ... _placement

However you get to a 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund. The 3-fund portfolio is recommended for all account types: employer tax-advantaged, personal tax-advantaged, and taxable. It can be replicated in each account or spread across all, guided by investment options availability/costs. Your choice.

Choosing to have 0% international is an acceptable option.

For taxable accounts and being in the 25+% fed tax bracket, substitute VWITX (intermediate-term national municipal bond fund) for the 3-fund's recommended TBM.

If appropriate, single-state muni fund. Vanguard has some single-state muni funds, but not all. Can search for others, but will need to do your own due-diligence. Should also research "death spiral states".

Idea. I note you use only bonds in your tax-advantaged (TA) accounts. That is an acceptable option. However, without stocks your TA accounts have less chance for growth and could lose to inflation. On the other hand, there have been long periods of time when bonds have out-performed stocks. Since we don't know the future, the 50/50 (stocks/bonds) allocation is called the "I don't know" allocation and might be a better TA choice. Since you can use muni bonds with TSM in taxable and your annual contributions are unlimited, this opens the possibility of using TSM with TBM in your TA space and making it easier to maintain your chosen AA. Your choice.

For a structured overview of the forum's investing philosophy and methodology, suggest reading The Boglehead's Guide to Investing. Get it from your local library or through inter-library loan.

Can begin reading in the Wiki (link: screen top right) while waiting for your book. Read the Wiki introductory material and all else that interests you. The Wiki also contains a list of recommended books/authors to further your study. In Wiki, search for "books".

As long as you can sleep well at night with your decision, then it is correct for you.



Welcome
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
EMDW
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Re: Help With Portfolio

Post by EMDW » Sun Sep 27, 2015 2:32 pm

dratkinson wrote:Preferred investing choices.
See: https://www.bogleheads.org/wiki/Three-fund_portfolio
See: https://www.bogleheads.org/wiki/Princip ... _placement

However you get to a 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund. The 3-fund portfolio is recommended for all account types: employer tax-advantaged, personal tax-advantaged, and taxable. It can be replicated in each account or spread across all, guided by investment options availability/costs. Your choice.

Choosing to have 0% international is an acceptable option.

For taxable accounts and being in the 25+% fed tax bracket, substitute VWITX (intermediate-term national municipal bond fund) for the 3-fund's recommended TBM.

If appropriate, single-state muni fund. Vanguard has some single-state muni funds, but not all. Can search for others, but will need to do your own due-diligence. Should also research "death spiral states".

Idea. I note you use only bonds in your tax-advantaged (TA) accounts. That is an acceptable option. However, without stocks your TA accounts have less chance for growth and could lose to inflation. On the other hand, there have been long periods of time when bonds have out-performed stocks. Since we don't know the future, the 50/50 (stocks/bonds) allocation is called the "I don't know" allocation and might be a better TA choice. Since you can use muni bonds with TSM in taxable and your annual contributions are unlimited, this opens the possibility of using TSM with TBM in your TA space and making it easier to maintain your chosen AA. Your choice.

For a structured overview of the forum's investing philosophy and methodology, suggest reading The Boglehead's Guide to Investing. Get it from your local library or through inter-library loan.

Can begin reading in the Wiki (link: screen top right) while waiting for your book. Read the Wiki introductory material and all else that interests you. The Wiki also contains a list of recommended books/authors to further your study. In Wiki, search for "books".

As long as you can sleep well at night with your decision, then it is correct for you.

Welcome
Thank you for your reply. First, I thought it's best to fill the taxed advantaged spaces (401K) first? In my case, that space is completely full with total bond market index fund and I needed an additional space for more bonds in order to reach my desired asset allocation, hence, the bonds in the roth ira and I bonds. This is still not enough and thus the national municipal bond fund was suggested above. Are you suggesting I put stocks in my tax advantaged space (401k) and thus be able to buy more national municipal bonds (than total bond market index admiral) since my state doesn't have muni?

Lafder
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Re: Help With Portfolio

Post by Lafder » Sun Sep 27, 2015 3:32 pm

As your taxable accounts grow you will have to add bonds there to keep your AA since the contributions to taxable are outpacing the contributions to retirement accounts. In a stock market crash you can sell bonds in retirement accounts to rebalance and add stocks there too.

I think your overall AA makes more of a difference than where you hold your bonds. Yes there can be a slight tax advantage to bonds in retirement accounts. But it is not as important to me as your overall AA and making a plan and sticking to it.

With your overall accounts now, what is your overall AA vs AA in retirement vs taxable accounts?

lafder

Topic Author
EMDW
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Re: Help With Portfolio

Post by EMDW » Sun Sep 27, 2015 3:58 pm

Lafder wrote:As your taxable accounts grow you will have to add bonds there to keep your AA since the contributions to taxable are outpacing the contributions to retirement accounts. In a stock market crash you can sell bonds in retirement accounts to rebalance and add stocks there too.

I think your overall AA makes more of a difference than where you hold your bonds. Yes there can be a slight tax advantage to bonds in retirement accounts. But it is not as important to me as your overall AA and making a plan and sticking to it.

With your overall accounts now, what is your overall AA vs AA in retirement vs taxable accounts?

lafder
As of today, I have 63% stocks/37% bonds. I will be fine if it drifts between 60-70% stocks/40-30% bonds.

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Kevin M
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Re: Help With Portfolio

Post by Kevin M » Mon Sep 28, 2015 2:01 am

RCL wrote:Excuse the hijack
Kevin, is that the USAlliance FCU offer?
Yes.
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

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dratkinson
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Re: Help With Portfolio

Post by dratkinson » Mon Sep 28, 2015 5:33 pm

sari wrote:... I thought it's best to fill the taxed advantaged spaces (401K) first? In my case, that space is completely full with total bond market index fund and I needed an additional space for more bonds in order to reach my desired asset allocation, hence, the bonds in the roth ira and I bonds. This is still not enough and thus the national municipal bond fund was suggested above. Are you suggesting I put stocks in my tax advantaged space (401k) and thus be able to buy more national municipal bonds (than total bond market index admiral) since my state doesn't have muni?
I should have been more clear. I'm suggesting this idea:
401k: 63/37 TSM/TBM, assuming you have a TSM offering
rIRA: 63/37 TSM/TBM
Taxable: 63/37 TSM/IT national muni

In this way every account has the same allocation and an equal market growth/risk opportunity. It is the middle ground between holding only bonds in TA to tax-shelter tax-inefficient bond income, and holding only stocks in TA for tax-sheltered growth. The latter approach is called "shoot for the moon in TA space" and has a 1-sentence Wiki reference. I follow the latter in my smaller, less significant TA space.

When you think about the end of your successful investing career and withdrawing from TA during retirement, which do you prefer? A smaller TA space, the result of low-growth bonds; a larger TA space, the result of high-growth stocks; or a mix of both. Your answer then must be planned/executed now.

All-bonds in TA is the safe conservative answer; but is it too safe/conservative for someone able to invest $15-20K/month? (<10% = $23.5K/$240K {$20K/mo x 12 mo}. $23.5K/yr = $18K {401k} + $5.5K {IRA}.) I ask because your higher-growth taxable space---its preponderance being TSM---will eventually dwarf your <10% TA space into insignificance---more quickly so if TA is populated only by low-growth bonds. So is it reasonable to take less risk (bonds only) with your smaller less significant TA space, when you are already taking more risk with your taxable space? Your choice.


Single-state munis. Your state may have muni bonds as they are a popular municipal financing option, but Vanguard may not offer a fund: market too small, or one of the few states with no state income tax. In my case, Colorado state income tax but no Vanguard offering, I researched offerings elsewhere.


US savings bonds (EE and I, paper and electronic) vs. munis. I bought savings bonds for several years---including winning the paper I-bond federal tax refund game---but no more, and have sold all I owned. Why? Savings bonds have annual purchase limits, munis don't. The savings bond state tax benefit is less then muni's federal tax benefit. The savings bond yield was lower than muni's. An acceptable single-state muni's tax benefit/after-tax income would be greater. If we every again have an I bond fixed rate >3%, then I may revisit the issue, or may not. Why? Because simplicity becomes more important as I age: the logistics of navigating annual purchase limits was a hassle, redeeming paper bonds was a hassle, logging into TD to check/record monthly dividends was a hassle; much easier to invest in munis, check investment statement, and accept higher-after tax income. Your choice.



Full disclosure. I didn't find this investing concept until after retirement. Prior to retirement my TA space was filled with only safe insured bank CDs. What a monumental waste of compound interest time! As a result, my retirement taxable space dwarfs my TA space into insignificance. In a belated attempt to undo some of the damage, I now "shoot for the moon in TA", meaning my only bonds are in taxable: munis and savings bonds. And this year I redeemed all savings bonds because I tired of the extra hassle and opted for greater simplicity.

I did try for several years to follow the BH advice to use safe bonds in TA, but couldn't stand it. Eventually realized that I'd rather "shoot for the moon in TA" and lose, than to continue using low-growth bonds and guarantee my TA space remained insignificant. In this case, boring bonds were boring me to tears.

Your choice.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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