Review of 31yr old's portfolio [was Help with 403b fund options]

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
mchriton
Posts: 53
Joined: Sat Oct 24, 2015 3:26 pm

Review of 31yr old's portfolio [was Help with 403b fund options]

Post by mchriton »

[Edit 11/2: updating original post with more details and extended questions beyond my wife's 403b options]

Debt: Mortgage of 740k at 2.5% for 7/1 ARM, 2 years since moving in (residence worth ~1.6 MM)
Tax Filing Status: Married Filing Jointly
Tax Rate: 39.6% Federal, 12.30 % State
State of Residence: California (Bay Area)
Income: $560 total; $470k/yr (him-primary) / $30k/yr (him-self employment) / $60k/yr (her-new job)
Age: 31 (him) / 30 (her)
Desired Asset allocation: 50% stocks / 50% bonds
Desired International allocation: 50% of stocks
Net Worth: ~1.2 MM (mostly in my house)

Situation
Wife started a new job and I have a few questions on her options.

Our house is expensive, there aren't other options that work for our situation in the area (SF bay area). Most of my 20s went to saving up the down payment and then I aggressively paid down the mortgage after I moved in.

I've been hesitant to put too much in the market given past experiences (I started investing in 1999/2000 albeit with a relatively small amount) and now we're near all time highs. However, rounding out the bond portion of the portfolio seems 'lowish' risk and I like the idea of increased liquidity vs continuing to direct majority of after tax savings to the mortgage.

I'm also interested in feedback on our overall portfolio. Both to simplify and intelligently introducing more bond funds. The increase in bonds would come from purchases not by decreasing the overall stock positions.

Current retirement assets ($309,000)

Taxable (55%):
$40,884 (13%) - Vanguard Total International Stock ETF (VXUS)
$25,247 (8%) - VANGUARD TOTAL STOCK MKT ETF (VTI)
$33,519 (11%) - VANGUARD HIGH DIVD YIELD ETF W (VYM) [Cap gains of trivial amount]
$24,237 (8%) - ISHARES TR S&P 500 INDEX (IVV) [Cap gains of 10k]
$8,457 (3%) - VANGUARD EMERGING MARKET ETF (VWO) [Cap loss of 3k]
$15,324 (5%0 - Vanguard REIT Index Fund Admiral Shares (VGSLX) [Cap gains of 4k]
$11,882 (4%) - Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
$7,833 (2.5%) - Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)[Cap loss of 3k]

His 401k (45%):
$49,075 (16%) - DODGE & COX INCOME (DODIX) (ER: 0.44%)
$47,944 (16%) - VANGUARD TOTAL STOCK MARKET INVESTOR (VTSMX) [FEE of $75 to trade]
$44,732 (15%) - VANGUARD TOTAL INTL STOCK INDEX INV (VGTSX) [FEE of $75 to trade]

Her 403b
$0 - but will be VFIAX

IRAs:
$0 - getting started for 2015 with backdoors and SEP IRA

Current Asset Allocation
International - 36%
US - 47%
Bonds - 16%

Previous Yearly Contribution Plan:

$18500 his 401k (+few thousand matched)

Taxed Account - minimal additions recently.

Future Yearly Contribution Plan:

$18000 his 401k (+few thousand matched)
$18000 her 403b
$5500 his backdoor Roth IRA
$5500 her backdoor Roth IRA
$5000 SEP IRA (to be converted to Roth IRA to avoid pro-rata) - a small amount of my income is from self-employment

Total Tax Advantaged: $51000
Future Taxable: $50,000-$150,000 (either in combination of stocks, bonds, and extra mortgage payments)

Questions
1.) [Edit 11/2: question #1 answered, thanks].

My wife recently started a new job, and her 403b fund options have higher ER than typical vanguard funds. Her 403b is with empower.

It does have Vanguard 500 index (VFIAX) with an ER of 0.05.

Do any of her other fund options look good enough to construct a balanced portfolio?

If not, I have 'VANG SM CAP IDX INST (VSCIX) ' and 'VANG MIDCAP IDX INST (VMCIX) ' in my 401k. Can I pair them with the VFIAX to create something that tracks total stock market (VTSMX) -- if so, what are the ideal ratios? If those funds don't work, what other funds would be good to pair up with VFIAX (that I could purchase in a taxable account)?

2.) I'd like to get as close to a simple three fund portfolio as possible, or something that tracks it. Given the existing investments in taxable accounts what makes sense to sell/keep given capital losses/gains?

I believe I should sell VWO substitute with VANGUARD TOTAL INTL STOCK INDEX INV (VGTSX)
$8,457 (3%) - VANGUARD EMERGING MARKET ETF (VWO) [Cap loss of ~3k]

For IVV, not sure why I bought this fund. I will buy Vanguard Small-Cap Index Institutional (VSCIX) to approximate a total stock market index fund between IVV and VSCIX.

$24,237 (8%) - ISHARES TR S&P 500 INDEX (IVV) [Cap gains of ~10k]
$7,833 (2.5%) - Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)[Cap loss of 3k]

Not sure what I should do with the REIT (as it's in taxable), probably just sell it (and rebalance to another fund)?
$15,324 (5%0 - Vanguard REIT Index Fund Admiral Shares (VGSLX) [Cap gains of ~4k]

Planning on swapping VYM to total stock market:
$33,519 (11%) - VANGUARD HIGH DIVD YIELD ETF W (VYM) [Cap gains of trivial amount]

3.) For my bond allocation (current only 16%), I'm currently considering buying municipal bonds in a taxed account. The generally recommendation seems to be to put bonds in taxed advantage account, however, with a 50/50 allocation cannot fit all my bonds in taxed advantaged -- though I could get close with removing all the VTSMX/VGTSX. However, I'm concerned with <1> limited growth of my tax advantaged space and <2> selling VTSMX/VGTSX is $75/each and buying them back if I eventually do would be another $75/each; as a overall percentage the trading fees are minor; so perhaps not worth concerning myself with. I just bought those funds earlier in the year :(

For bonds in my 401k, the only option is DODGE & COX INCOME (DODIX) [ER: 0.44%]. Other than using the $75/trade for self-direction trade option.

If I go with municipal bonds in taxable, I'm thinking Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX ), has a duration of 4.8

Thoughts?

4.) Is accumulating bond funds now a good idea (vs paying down mortgage further)? I like the increased liquidity but concerned with the potential rate increases. The increased liquidity hopefully positions me to take advantage of any major corrections (shifting out of 50/50 to something more aggressive).

His 401k Options
Funds below. Option to do self-directed brokerage at $75/trade; VANGUARD TOTAL STOCK MARKET INVESTOR (VTSMX) were purchased in previous years when no vanguard fund were available (lump conversion for $75).

VANGUARD INST INDEX (VINIX) [ER 0.04%]
VANG MIDCAP IDX INST (VMCIX) [ER 0.08%]
VANG SM CAP IDX INST (VSCIX) [ER 0.08%]
DODGE & COX INCOME (DODIX) [ER 0.44%]

Other options have high ERs

Her 403b Options

Image
Image
Image
Last edited by mchriton on Mon Nov 02, 2015 11:32 pm, edited 7 times in total.
User avatar
Garco
Posts: 1078
Joined: Wed Jan 23, 2013 1:04 am
Location: U.S.A.

Re: Help with 403b fund options

Post by Garco »

I like the idea of pairing up your wife's only good option with your two other VG funds.

What a terrible, esp. high ER set of funds your wife has!

A reasonable approach would put about 75-80% in the LC fund, then you could complement that with your funds in 1:1 ratio of those funds.
User avatar
ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Help with 403b fund options

Post by ruralavalon »

A 5 to 1 ratio of Vanguard 500 Index Admiral (VFIAX) and Vanguard Small-Cap Index Institutional (VSCIX) will approximate a total stock market index fund.

Please see the wiki article "approximating total stock market", or use Morningstar's "Instant X-Ray" tool.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
User avatar
Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: Help with 403b fund options

Post by Duckie »

mchriton, welcome to the forum.
mchriton wrote:Do any of her other fund options look good enough to construct a balanced portfolio?
The best options in the 403b are:
  • (VFIAX) Vanguard 500 Index Fund Admiral Shares (0.05%)
    (MXBIX) Great-West Bond Index Fund Initial Class (0.50%)
    (N/A) Great-West Daily Interest Guarantee Fund currently paying 4%
The mid-cap and small-cap options are too expensive as are the international options (which are not very good either).
If not, I have 'VANG SM CAP IDX INST (VSCIX) ' and 'VANG MIDCAP IDX INST (VMCIX) ' in my 401k. Can I pair them with the VFIAX to create something that tracks total stock market (VTSMX) -- if so, what are the ideal ratios?
Those two funds will work fine with the 500 Index. Roughly 81% 500 Index plus 6% Mid-Cap Index plus 13% Small-Cap Index makes up the total US stock market. See here.
If those funds don't work, what other funds would be good to pair up with VFIAX (that I could purchase in a taxable account)?
For a taxable account the best options are:
  • (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.17%)
    (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)
Putting international in taxable allows you to take advantage of the 
Foreign tax credit.
User avatar
graveday
Posts: 516
Joined: Sun Oct 05, 2008 2:03 am
Location: Upstate Calif. near Sacramento

Re: Help with 403b fund options

Post by graveday »

I also suggest researching the site for previous 403b fund articles. These wretched options foisted on teachers and nurses should be run out of town.
pingo
Posts: 2638
Joined: Sat Sep 19, 2009 8:24 pm

Re: Help with 403b fund options

Post by pingo »

Duckie wrote:mchriton, welcome to the forum.
mchriton wrote:Do any of her other fund options look good enough to construct a balanced portfolio?
The best options in the 403b are:
  • (VFIAX) Vanguard 500 Index Fund Admiral Shares (0.05%)
    (MXBIX) Great-West Bond Index Fund Initial Class (0.50%)
    (N/A) Great-West Daily Interest Guarantee Fund currently paying 4%
The mid-cap and small-cap options are too expensive as are the international options (which are not very good either).
If not, I have 'VANG SM CAP IDX INST (VSCIX) ' and 'VANG MIDCAP IDX INST (VMCIX) ' in my 401k. Can I pair them with the VFIAX to create something that tracks total stock market (VTSMX) -- if so, what are the ideal ratios?
Those two funds will work fine with the 500 Index. Roughly 81% 500 Index plus 6% Mid-Cap Index plus 13% Small-Cap Index makes up the total US stock market. See here.
I agree 100% with the recommendations, but I'm not so sure about the following statement:
Duckie wrote:The mid-cap and small-cap options are too expensive [...]
Using an 80:20 combination of the 500 fund (ER 0.05%) and the GW S&P 600 Small Cap Index fund (ER 0.60%) to approximate the total U.S. stock market results in a weighted ER of 0.16% for U.S. stocks. That's 1 basis point cheaper than the otherwise acceptable Vanguard Total U.S. Stock Market Index Fund - Investor Class (ER 0.17%).
User avatar
ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Help with 403b fund options

Post by ruralavalon »

Since she is just starting with this 403b, I still think that the best choice is to combine the Vanguard 500 Index Admiral (VFIAX) ER 0.05% in her 403b with the Vanguard Small-Cap Index Institutional (VSCIX) ER 0.08% in your 401k to approximate a total stock market index fund at the lowest possible weighted average expense ratio.

In this situation I believe it's best if she doesn't try to buy the entire asset allocation in her 403b.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
pingo
Posts: 2638
Joined: Sat Sep 19, 2009 8:24 pm

Re: Help with 403b fund options

Post by pingo »

^ You and Duckie are, of course, right. My post was more of a "for the sake of argument" kind of thing. (One more way to make lemonade from lemons, were it to become necessary.) I realize that going to the principle of the matter, there are those who would never use (or recommend) a 0.60% ER small cap fund--period--given that there's a 500 index fund ER 0.05%. Different roads and all that.

:thumbsup
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Help with 403b fund options

Post by sawhorse »

Do you have more details about the guaranteed fixed rate funds on the bottom of the last page? They look like they could be good.
Topic Author
mchriton
Posts: 53
Joined: Sat Oct 24, 2015 3:26 pm

Re: Review of 31yr old's portfolio [was Help with 403b fund options]

Post by mchriton »

Thanks for all the responses. Sorry for the sluggish follow-up; the number of follow-on questions I had just kept getting larger. I've updated the original post with more details and questions.
ruralavalon wrote:Please see the wiki article "approximating total stock market"
Ah right, I've been reading this site on and off for the past 3-4 years. I remember reading that wiki page long ago and thought I would never need it :)
ruralavalon wrote:Morningstar's "Instant X-Ray" tool.
The X-Ray tool is pretty cool :) Thanks.
Duckie wrote:Putting international in taxable allows you to take advantage of the
Foreign tax credit.
Good advice. I have been doing a suboptimal job balancing taxable / non-taxable so far. I had a few bonds funds (e.g.: vbmfx) in my taxable account :(
sawhorse wrote:Do you have more details about the guaranteed fixed rate funds on the bottom of the last page? They look like they could be good.
I do not but I will ask about them.
User avatar
Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: Review of 31yr old's portfolio [was Help with 403b fund options]

Post by Duckie »

mchriton wrote:Taxable (55%):
$40,884 (13%) - Vanguard Total International Stock ETF (VXUS)
$25,247 (8%) - VANGUARD TOTAL STOCK MKT ETF (VTI)
$33,519 (11%) - VANGUARD HIGH DIVD YIELD ETF W (VYM) [Cap gains of trivial amount]
$24,237 (8%) - ISHARES TR S&P 500 INDEX (IVV) [Cap gains of 10k]
$8,457 (3%) - VANGUARD EMERGING MARKET ETF (VWO) [Cap loss of 3k]
$15,324 (5%0 - Vanguard REIT Index Fund Admiral Shares (VGSLX) [Cap gains of 4k]
$11,882 (4%) - Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
$7,833 (2.5%) - Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)[Cap loss of 3k]
Sell VYM, VWO, VGSLX, and VEMAX. That will leave you with a capital loss of ~$2K. Buy Total Stock and Total International Stock with the proceeds (either fund or ETF shares). Turn off dividend reinvestment for IVV. Funnel those monies to TSM or TISM. If you eventually need a bond fund in taxable use (VWIUX) Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (0.12%).
His 401k (45%):
$49,075 (16%) - DODGE & COX INCOME (DODIX) (ER: 0.44%)
$47,944 (16%) - VANGUARD TOTAL STOCK MARKET INVESTOR (VTSMX) [FEE of $75 to trade]
$44,732 (15%) - VANGUARD TOTAL INTL STOCK INDEX INV (VGTSX) [FEE of $75 to trade]
Don't buy anymore VTSMX or VGTSX. That $75 fee is a killer. What are the options in His 401k that don't have a $75 fee besides:
  • VANGUARD INST INDEX (VINIX)
    VANG SM CAP IDX INST (VSCIX)
    VANG MIDCAP IDX INST (VMCIX)
    DODGE & COX INCOME (DODIX) (ER: 0.44%)?
And what are the above funds' expense ratios in your plan?
Future Yearly Contribution Plan:

$18500 his 401k (+few thousand matched)
$18500 her 403b
It's $18K for 2015/2016, not $18.5K
$5000 SEP IRA (to be converted to Roth IRA to avoid pro-rata) - a small amount of my income is from self-employment
Can you open a solo 401k, roll the SEP IRA into it, and avoid the conversion?
If those funds don't work, what other funds would be good to pair up with VFIAX (that I could purchase in a taxable account)?
You could aways add (VEXAX) Vanguard Extended Market Index Fund Admiral Shares (0.10%) in taxable at an 80% VFIAX & VINIX & IVV to 20% VEXMX ratio. VEXMX is suitable for taxable.
Topic Author
mchriton
Posts: 53
Joined: Sat Oct 24, 2015 3:26 pm

Re: Review of 31yr old's portfolio [was Help with 403b fund options]

Post by mchriton »

Duckie wrote:Sell VYM, VWO, VGSLX, and VEMAX. That will leave you with a capital loss of ~$2K. Buy Total Stock and Total International Stock with the proceeds (either fund or ETF shares).
Sounds reasonable
Duckie wrote:
His 401k (45%):
$49,075 (16%) - DODGE & COX INCOME (DODIX) (ER: 0.44%)
$47,944 (16%) - VANGUARD TOTAL STOCK MARKET INVESTOR (VTSMX) [FEE of $75 to trade]
$44,732 (15%) - VANGUARD TOTAL INTL STOCK INDEX INV (VGTSX) [FEE of $75 to trade]
Don't buy anymore VTSMX or VGTSX. That $75 fee is a killer. What are the options in His 401k that don't have a $75 fee besides:
  • VANGUARD INST INDEX (VINIX)
    VANG SM CAP IDX INST (VSCIX)
    VANG MIDCAP IDX INST (VMCIX)
    DODGE & COX INCOME (DODIX) (ER: 0.44%)?
And what are the above funds' expense ratios in your plan?
Updated original post.

Note that the VTSMX or VGTSX funds were purchased before VINIX, VMCIX, VSCIX became available in my 401k (only this year!).
Duckie wrote:
Future Yearly Contribution Plan:

$18500 his 401k (+few thousand matched)
$18500 her 403b
It's $18K for 2015/2016, not $18.5K
Fixed in original post.
Duckie wrote:
$5000 SEP IRA (to be converted to Roth IRA to avoid pro-rata) - a small amount of my income is from self-employment
Can you open a solo 401k, roll the SEP IRA into it, and avoid the conversion?
My understanding is that I can't do solo 401k and contribute the max to employer 401k. SEP-IRA bypass the limits.
User avatar
Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: Review of 31yr old's portfolio [was Help with 403b fund options]

Post by Duckie »

mchriton wrote:My understanding is that I can't do solo 401k and contribute the max to employer 401k. SEP-IRA bypass the limits.
When you are self-employed you can contribute to a SEP IRA as the employER. You can contribute to the solo 401k as both the employER and the employEE. You have to share the employEE $18K limit with your 401k but you can choose which account gets the money. In your case your W-2 401k has good US stock fund options but you could use the solo 401k for bonds. And by using the solo 401k instead of the SEP IRA you won't have to convert every year to avoid the pro-rata rule.
Post Reply