Please check advice from Vanguard PAS

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Shaoya
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Joined: Fri Sep 14, 2007 8:51 am

Please check advice from Vanguard PAS

Post by Shaoya » Mon Sep 26, 2016 1:32 pm

Recently, an advisor from Vanguard Personal Advisor Services provided a complementary review of our overall financial situation (to left) and proposed some changes (to right, in red). As Bogleheads have really helped us out in the past, I'd appreciate your comments on the suitability of his proposed changes as well as on some specific questions below.

Thank you! - Shaoya

Investments
CURRENT..................................................................................................... Proposed by Vanguard PAS advisor:
Equities/Bond – 70%/30%.............................................................................80%/20%
Percent Asset

Taxable
13.4% Vanguard Total Stock Mkt Idx (VTSAX) (0.05%)
11.8% Total Int'l Stock Index (VTIAX ) (0.16%)

Tax-advantaged

Roth IRA
5.7% Vanguard REIT Index Adm (VGSIX) (0.10%) >>>>>>>>>>>>>>>>Exchange to Total Stock Mkt Idx (VTSMX) (0.09%)
4.1% Vanguard FTSE All-World Except US (VFWIX) (0.15%)>>>>>>>> Exchange to Total Int'l Stock Index - (VTIAX ) (0.16%)
4.1% Vanguard ShortBond Index (VBIRX) (0.10%)>>>>>>>>>>>Exchange to Total Inter. Bond Idx (VTABX)(0.14%) [Goal: 30% of bonds)
8.2% Vanguard Windsor II (VWNFX) (0.35%) >>>>>>>>>>>>>>>>>>> Exchange to Total Stock Mkt Idx (VTSMX) (0.09%)
1.1% Vanguard Total Stock Mkt Idx (VTSMX) (0.09%) >>>>>>>>>>>>> increased
7.1% Vanguard Inflation-Protect Sec (VIPSX) (0.20%) >>>>>>>>>>>>>>Exchange to Total Stock Mkt Idx (VTSMX) (0.09%)
7.5% Vanguard Total Bond Market Index – Admiral (VBTLX) (0.10%)

Her 457 (City of Portland Deferred Compensation - ING)
6.4% Vanguard Total Bond Market Index Fund – Institutional (VBTIX) (0.07%)
4.8% Vanguard Institutional Index Fund – Institutional (VIIIX) (0.04%)
4.8% Vanguard Small Cap Index - Institutional (VSCIX) (0.08%)

His 457 (Oregon Growth Savings Plan)
1.4% Stock Index Option (tracks BlackRock Russell 3000 Idx) (0.045%)
4.3% Intermediate Bond Option (compilation) (0.09%)>>>>>>>>>>>>>>>>>>>Exchange to Stock Index Option (0.045%)
5.6% Large Company Value Stk Option (tracks BlackRock Russell 1000 Value) (0.04%)

529 Funds (Oregon College Savings Plan) for Classes of 2030 & 2032)
4.0% TIAA-CREF Equity Index Fund (TINRX) (0.32%)
5.6% Total Int'l Stock Index -Investor (VTIAX) (0.37%)
100.0% TOTAL [Portfolio ~$500K]

Monthly Investment: we allocate $2349 from salaries in these amounts:

Pre-tax
457b Plans:
+ $300 to Vanguard Institutional Index Fund – Institutional (VIIIX) (0.04%)
+ $300 to Large Company Value Stk Option (tracks BlackRock Russell 1000 Value) (0.04%)
+ $433 to Vanguard Institutional Index Fund – Institutional (VIIIX) (0.04%)

Post-tax
+ $400 to college funds [$200 to each child's 529's US Equity & International Equity Index]>>>>>>advisor recommends much more (~$1200/month)
+ $458 to Her Roth IRA – Windsor II (VWNFX) (0.39%)
+ $229 to His Roth IRA - Total Stock Mkt Idx Admiral (VTSAX) (0.05%)
+ $229 to His Roth IRA - Vanguard FTSE All-World Except US (VFWIX) (0.40%) [Exchange to Total Int'l Stock Index - (VTIAX ) (0.16%)]

Current Situation

Stable jobs in local/state government with an annual gross salaries of ~$179K. Expect this to increase incrementally (not dramatically) relative to inflation later in our careers. Intend to stay in our current house/city indefinitely.

Debt
Mortgage –30 year fixed at 3.87% (refi’d Nov 2010)
Credit card debt – none
Student – 1.6% fixed @ $130 a month ($8K remaining)
Car – no debt

Emergency Fund – 6-9 months living expenses in Ally Savings (1.00%) & CD (1.45%) (not included in portfolio above)

Tax Filing Status
Married, filing jointly – 25% Fed in 2015; 9% Oregon (2015)

Age
Hers – 41
His – 44
Son (b. 2008), Daughter (b. 2010)

Our expected ROI on all our investments, going forward, is 3-4% real returns/annualized.

Specific Questions:


1. Overall, the Vanguard advisor reports we're very likely to have solid retirements (99%), but very unlikely to save enough for kids' college. He recommends dramatic increases in our investments in 529s by redirecting some money saved for retirement. [I always thought retirement should be goal number one.] Thoughts?

If a greater shift to 529's is advisable, should we re-direct Roth IRA or 457 contributions?

2. Putting aside the small difference in fees/costs (+/- 0.04%), is there a strategic difference between holding Vanguard Total Bond Market in a Roth vs a 401K/457 account?

3. VG Advisor's recommending we put 6% of retirement holdings into Total International Bond Index (VTABX). I don''t understand International Bond Funds in terms of currency risks, other risks.

Could I please have some perspectives on whether International Bond Funds are appropriate for us?

4. Overall, when should we make these changes? Should the Election factor (on way or the other) into our timing?

5. Our kids are 11 and 13 years away from college. Our 529's are in 100% equities (50%US; 50%International). Is that an appropriate equity/bond split at this point in time? Given our overall situation, what should the AA "glidepath" be on college savings?

Finally, we've decided not to become involved with Vanguard PAS. At 0.3% of assets under investment/year, I couldn't see the benefit vs DIY.
Do any of you?

Please let me know if clarifications are needed. Thank you very much for your help! - Shaoya

Morik
Posts: 706
Joined: Tue Nov 25, 2014 12:26 pm

Re: Please check advice from Vanguard PAS

Post by Morik » Mon Sep 26, 2016 2:58 pm

I can answer some of your questions.
2. Putting aside the small difference in fees/costs (+/- 0.04%), is there a strategic difference between holding Vanguard Total Bond Market in a Roth vs a 401K/457 account?
Yes, but its small. $1 in a Roth account is worth more than $1 in a traditional IRA/401k/457 account: when you withdraw that $1 from Roth, you get $1.
When you withdraw it from a traditional account, you get ($1 * (1 - <some_tax_rate>)). So if you are in the 25% bracket, for instance, and are withdrawing at your marginal rate, you would get $0.75 for each $1 in your account.

Because of this, some people try split up assets like this:
- Those with the highest potential for growth go in Roth.
- Those with a lower potential for growth go in Traditional.

Its a minor thing though, and I wouldn't worry about it unless you enjoy this sort of thing.
3. VG Advisor's recommending we put 6% of retirement holdings into Total International Bond Index (VTABX). I don''t understand International Bond Funds in terms of currency risks, other risks.

Could I please have some perspectives on whether International Bond Funds are appropriate for us?
There is a Vanguard whitepaper on this. Basically they show that the risk-adjusted return is better (somewhat lower risk, slightly lower return), and that the goal of the bond portion is stability so it is reasonable to take that slightly lower return in exchange for even greater stability.
https://personal.vanguard.com/pdf/icrifi.pdf

I don't have a strong opinion on this. I don't personally have international bonds, but that is because the only bonds available in my vanguard 401k are the total US bond market. (I could get some in my Roth account, but I don't bother).
4. Overall, when should we make these changes? Should the Election factor (on way or the other) into our timing?
As soon as possible. No, all public information about the election is already factored into the market.
Finally, we've decided not to become involved with Vanguard PAS. At 0.3% of assets under investment/year, I couldn't see the benefit vs DIY.
Do any of you?
I DIY. If you weren't comfortable with DIY I'd say use PAS (it is priced reasonably, IMO). Sounds like you'd be fine with DIY.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Please check advice from Vanguard PAS

Post by retiredjg » Mon Sep 26, 2016 3:45 pm

Most of these are not significant changes. His suggestions just get you in line with the current portfolio they suggest for pretty much everyone.


CURRENT..................................................................................................... Proposed by Vanguard PAS advisor:
Equities/Bond – 70%/30%.............................................................................80%/20%
Percent Asset
This is one thing that I disagree with but simply because it is more aggressive than my personal sideboard of holding at least age minus 20 in bonds. You picked 70/30 for a reason. Does that number still make sense to you? If it does, I would not change.

5.7% Vanguard REIT Index Adm (VGSIX) (0.10%) >>>>>>>>>>>>>>>>Exchange to Total Stock Mkt Idx (VTSMX) (0.09%)
The Vanguard standard suggestion for everyone does not contain extra REIT. If you want extra REIT, you should keep it.

4.1% Vanguard FTSE All-World Except US (VFWIX) (0.15%)>>>>>>>> Exchange to Total Int'l Stock Index - (VTIAX ) (0.16%)
The Total International fund is now the most complete international fund they have. Your fund used to be the best, but is now a bit old fashioned in that it does not contain small caps. This is one change I think you should make.

[/color]8.2% Vanguard Windsor II (VWNFX) (0.35%) >>>>>>>>>>>>>>>>>>> Exchange to Total Stock Mkt Idx (VTSMX) (0.09%)

The Vanguard standard portfolio does not tilt to value. Windsor is a value fund. If you want a modest tilt to value, keep it.


1. Overall, the Vanguard advisor reports we're very likely to have solid retirements (99%), but very unlikely to save enough for kids' college. He recommends dramatic increases in our investments in 529s by redirecting some money saved for retirement. [I always thought retirement should be goal number one.] Thoughts?
Retirement is pushed as number one around here. My guess is that the advisor believes you can do both and your income and financial habits support that you can probably do both. Remember that all college money does not have to come from a 529. I don't think it would hurt to put more in the 529s but be careful that you do not save too much there.


2. Putting aside the small difference in fees/costs (+/- 0.04%), is there a strategic difference between holding Vanguard Total Bond Market in a Roth vs a 401K/457 account?
Some people prefer to have stocks in Roth IRA. Others think it does not matter.

3. VG Advisor's recommending we put 6% of retirement holdings into Total International Bond Index (VTABX). I don''t understand International Bond Funds in terms of currency risks, other risks.

Could I please have some perspectives on whether International Bond Funds are appropriate for us?
International bonds are now a part of the standard Vanguard suggestion. They have put international bonds into the Target funds and the LifeStrategy funds. Vanguard believes in them. Some of us have added international bonds. Some have not. I think either choice is fine.

4. Overall, when should we make these changes? Should the Election factor (on way or the other) into our timing?
I don't think so.



Overall, the suggestions are fairly minor. What he suggested is the same thing that is suggested to everybody because it is what Vanguard believes is best.

Apparently there was a time when you wanted a little value tilt and a little extra REIT. I think these are not things to jump into and out of. Make a decision and stick to it. Unless you were already considering getting rid of those things, I'm not sure I would because I believe there is some value in staying the course unless you realize you are on the wrong course.

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Taz
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Location: Florida

Re: Please check advice from Vanguard PAS

Post by Taz » Mon Sep 26, 2016 3:58 pm

Shaoya wrote: 1. Overall, the Vanguard advisor reports we're very likely to have solid retirements (99%), but very unlikely to save enough for kids' college. He recommends dramatic increases in our investments in 529s by redirecting some money saved for retirement. [I always thought retirement should be goal number one.] Thoughts?
If you wanted to begin investing in 529 plans without specifically adding "new money," you could take dividends/distributions from your taxable account (turn them off) and redirect them to 529 plans. A quick Google search indicated that Oregon offers state tax advantages for contributions.

Cheers - Taz
The destination matters.

JoinToday
Posts: 679
Joined: Sat Mar 10, 2007 9:59 pm

Re: Please check advice from Vanguard PAS

Post by JoinToday » Mon Sep 26, 2016 4:21 pm

Shaoya wrote: Investments
CURRENT..................................................................................................... Proposed by Vanguard PAS advisor:
Equities/Bond – 70%/30%.............................................................................80%/20%
Percent Asset
I 80/20 is too high is my opinion. 70:30 maximum. again, this is my opinion

Roth IRA
5.7% Vanguard REIT Index Adm (VGSIX) (0.10%) >>>>>>>>>>>>>>>>Exchange to Total Stock Mkt Idx (VTSMX) (0.09%)

I sold my REITS awhile ago. Strive to simplify

4.1% Vanguard FTSE All-World Except US (VFWIX) (0.15%)>>>>>>>> Exchange to Total Int'l Stock Index - (VTIAX ) (0.16%)
4.1% Vanguard ShortBond Index (VBIRX) (0.10%)>>>>>>>>>>>Exchange to Total Inter. Bond Idx (VTABX)(0.14%) [Goal: 30% of bonds)
I just reviewed my portfolio with PAS. I am not convinced of the benefit of international bonds, and did not add them to my portfolio. Either with or without could be OK.

2. Putting aside the small difference in fees/costs (+/- 0.04%), is there a strategic difference between holding Vanguard Total Bond Market in a Roth vs a 401K/457 account?
best to hold highest appreciating assets (stock) in Roth, not bonds for tax impact. Nothing to do with expense ratio

3. VG Advisor's recommending we put 6% of retirement holdings into Total International Bond Index (VTABX). I don''t understand International Bond Funds in terms of currency risks, other risks.

Could I please have some perspectives on whether International Bond Funds are appropriate for us?

I don't have a strong opinion, but I don't have them in mine, and doubt if it will make a big difference one way or the other.

4. Overall, when should we make these changes? Should the Election factor (on way or the other) into our timing?
If you are concerned, do half now, half after the election. I doubt that the future impact is clear regarding this.

5. Our kids are 11 and 13 years away from college. Our 529's are in 100% equities (50%US; 50%International). Is that an appropriate equity/bond split at this point in time? Given our overall situation, what should the AA "glidepath" be on college savings?
When I was in your shoes, I used our asset allocation (60:40 or 70:30, whatever it was at the time) with the knowledge that if the 529 was short, additional funds would come out of my taxable account or earned income.

Finally, we've decided not to become involved with Vanguard PAS. At 0.3% of assets under investment/year, I couldn't see the benefit vs DIY.
Do any of you?

I agree. 0.3% is too much because the effort and time is not great, and I didn't agree with their recommendations regarding international bonds
I wish I had learned about index funds 25 years ago

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Shaoya
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Joined: Fri Sep 14, 2007 8:51 am

Re: Please check advice from Vanguard PAS

Post by Shaoya » Thu Sep 29, 2016 10:14 pm

Morik, retiredjg, Taz, & JoinToday - Thank you for your very helpful responses. I appreciate them. :happy

One of my questions I was hoping to get additional feedback on: Given our overall situation, what should the AA "glidepath" be on college savings?

Though I understand that one can use taxable funds (if they're there!) to supplement 529 funds, in the 10-12 years leading up to college, is there a specific ratio (equities/bonds/cash-equivalents) that one should strive for across 529 accounts?

Thank you, again - Shaoya

Grt2bOutdoors
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Re: Please check advice from Vanguard PAS

Post by Grt2bOutdoors » Thu Sep 29, 2016 10:38 pm

Each 529 plan account should have their own asset allocation to reflect the declining risk each child should take as they get closer to college. Take a look at the various asset allocations used by the Vanguard 529 plan - https://investor.vanguard.com/529-plan/ ... ed-options or the Utah 529 plan - http://www.uesp.org/Investment-Info/Inv ... tions.aspx or NYS 529 Direct plan - https://www.nysaves.org/home/which-inve ... tions.html for ideas The advisors recommendation on contributions seems high unless you have aspirations that children will attend high cost private universities with no chance of receiving merit/grant aid. Have you tried using the Vanguard college planner?, you can run various scenarios to give you a ballpark estimate of what different schools may cost in the future, the planner assumes continuous 5% annual increases in collegiate costs - personally, I think that will not hold unless starting salaries for new graduates increases dramatically.

https://vanguard.wealthmsi.com/csp.php
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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in_reality
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Re: Please check advice from Vanguard PAS

Post by in_reality » Thu Sep 29, 2016 10:53 pm

Shaoya wrote: Could I please have some perspectives on whether International Bond Funds are appropriate for us?
I think Vanguard is making a dubious claim to say that a negative yield 10 yr. German bond is going to have the same return as a 10 year US one yielding 1.6%.

They say the hedge yield will make up the difference, but using their formula to calculate the hedge yield at current rates, you will get 0.88% back from a German bond and 1.55% from a US one.

Of course, your volatility is reduced because if US rates go up, the NAV of the German bonds will be unaffected. So Vanguard is using this to lower volatility with the "same yield".

However, as stated, it's a dubious claim to suggest the yield will be the same. The only way it works is if you assume there is no term premium for bonds (Note: the hedge yield is based on short term interest differences, so larger differences down the curve won't be earned by short term hedging like Vanguard does. If you assume though that today's short term rates predict future 10 yield rates, then it works but that is empirically not really true unless you account for a term premium which breaks Vanguard's promise).

So you are switching short term bonds for International. I don't see much benefit. Perhaps the hedge yield is a little higher than the yield for your short term fund, but then again, if German rates go up, the international funds will see a loss in NAV. That is why International bonds have done well recently. For instance, short term German bonds are at negative 0.75%. Ten year at negative 0.12. Don't you think those might rise at some point?

So I don't really see the case for International bonds. It's dubious to suggest they will earn the same as US ones as Vanguard does. I think it's more like trading the term premium for less volatility but isn't that what shorter term bonds do anyway?

Reference: viewtopic.php?f=10&t=199232

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Shaoya
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Re: Please check advice from Vanguard PAS

Post by Shaoya » Mon Oct 10, 2016 4:21 pm

Grt2bOutdoors - thank you for your 529 perspective. in_reality, I appreciate your thinking on international bonds. I think I'll stick to US bonds, at least until I read a compelling case for International bonds. - Shaoya

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