Portfolio Makeover

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investor997
Posts: 236
Joined: Tue Feb 07, 2017 3:23 pm

Portfolio Makeover

Post by investor997 » Thu Feb 09, 2017 1:00 am

Hi all,

This is my first post to this forum - please go gentle on me!

I've been using Betterment for the past couple years (Roth IRA and a Taxable account). Due to their recent fee increase I made the decision to pull out and self-manage. The Roth IRA will be liquidated and reset to cash. The taxable account will be transferred in-kind; it's currently set to a 90/10 allocation.

I would like to choose investments in the Roth and the Taxable account that balance out my 401k plan, which is presently much larger than the other two but also much more limited in investment options. As for target allocation, I'm open to suggestion but I'm thinking either 70/30 or 80/20.

Lastly, for the taxable account, there's a possibility I may wish to pull out a decent chunk of it at some point over the next 12-24 months as I'm considering selling or renting my existing property and buying another.

Here are my stats:

Age: 43
Filing Status: Single
State: California
Tax Rate: 28% Federal, 9.3% State
Debt: $14K Mortgage (<1year left on a 15-year fixed)
Emergency Funds: ~6 months

The sum total of everything below is about ~$625K

Taxable Assets:
5% Cash - Online Savings Account earning 1%
17.7% Betterment 90/10 Allocation (42% US Stocks, 48% Int'l Stocks, 6% US Bonds, 4% Int'l Bonds)

Roth IRA:
10% Cash

401k (Fidelity):
27.4% Fidelity 500 Index (FXSIX) - 0.04%
27.4% American Funds Growth Fund of America (RGAGX) - 0.33%
12.4% Fidelity Investment Grade Bond (FBNDX) - 0.45%

401k Fund Selections:
Fidelity 500 Index (FXSIX) - 0.04%
American Funds Growth Fund of America (RGAGX) - 0.33%
Fidelity Equity-Income K (FEIKX) - 0.59%
Franklin Small-Mid Cap Growth R6 (FMGGX) - 0.49%
DFA U.S. Targeted Value (DFVVX) - 0.37%
Fidelity Diversified Int'l (FDIKX) - 0.92%
Fidelity Low Priced Stock Pool (No Ticker) - 0.48%
T Rowe Price Retirement Trust Class A (2020, 2025, 2030, ..., 2060) - 0.54%
Managed Income Portfolio II Class 1 (Stable Value, No Ticker) - 0.57%
Fidelity Investment Grade Bond (FBNDX) - 0.45%

Questions:

1) Given the less than stellar choices in my 401k, how should I allocate? I'm considering moving more of it into FXSIX due to the low costs.
2) How should I allocate my Roth IRA? Heavier on Bonds?
3) For the taxable account I'll likely make few changes to the Betterment 90/10, mainly so I can avoid any taxable events. Most of the ETFs in the portfolio are low cost Vanguard and Schwab funds. My question here is which portion of the allocation should I add to? International equities?
4) Lastly, any advice on where to open a new account? I currently have a brokerage account with Scottrade that's mostly empty. My Roth IRA will also reside there. I like Scottrade because they have a branch nearby my home and it's nice to get human assistance. For the taxable account I'm also considering Schwab and TD Ameritrade (who is in the process of acquiring Scottrade anyway).

Ideally I'd like to set up regular, periodic transfers/deposits from my checking account into the taxable account (dollar cost average). I was doing this with Betterment on a biweekly basis. I admit I'll probably miss this feature of theirs.

Elbowman
Posts: 463
Joined: Tue Apr 03, 2012 2:25 pm

Re: Portfolio Makeover

Post by Elbowman » Thu Feb 09, 2017 11:26 am

Hi investor997,

The general strategy is to think of all of your accounts as one big portfolio, and then allocate to minimize costs. For your portfolio it might look like this:

Assuming you want 80/20 stock/bond, and 60/40 US/international on the stock side, then you want 48/32/20 US stock/international stock/bonds.

Taxable Assets
23% Total International Stock Market

Roth IRA
9% Total International Stock Market
1% Total Bond Market

401k
48% Fidelity 500 Index
19% Fidelity Investment Grade Bond

You can see what I am doing here. The worst thing to hold in you 401k in international stock (0.92% ER), the second worst is bonds (0.45%) and the best is US Stock (0.04%). So you start by filling your non-401k space with international stocks. If you still have room, you start placing your bonds there. Everything thats left over goes in your 401k.

Also, I may even reduce my international allocation before I placed any in your 401k. I'm bullish on international in general, but a 0.88% (0.92% - 0.04%) headwind is huge!

*Edit* Despite my using 80/20 as my example, 70/30 may be more appropriate for your age.

investor997
Posts: 236
Joined: Tue Feb 07, 2017 3:23 pm

Re: Portfolio Makeover

Post by investor997 » Thu Feb 09, 2017 2:11 pm

Hi Elbowman,

Thanks for the reply - it makes much sense. Assuming I want to go 70/30 instead of 80/20, I'm thinking the correct location to place the heavier bond weighting would be in the Roth IRA due to the tax exempt nature of the account. In other words, invest my entire Roth IRA into a Total Bond Market fund. Do you agree?

In the meantime, I sent a request in to our 401k administrator to see if we can re-evaluate our investment options and consider adding some additional low-cost index funds to the mix.

Thanks again!

Elbowman
Posts: 463
Joined: Tue Apr 03, 2012 2:25 pm

Re: Portfolio Makeover

Post by Elbowman » Thu Feb 09, 2017 8:38 pm

Thanks for the reply - it makes much sense. Assuming I want to go 70/30 instead of 80/20, I'm thinking the correct location to place the heavier bond weighting would be in the Roth IRA due to the tax exempt nature of the account. In other words, invest my entire Roth IRA into a Total Bond Market fund. Do you agree?
Not if you are 60/40 US/international on the stocks side. Whatever allocation you choose, you should go though the same process:

Step 1: Figure out your US/international/bonds split. For 70/30 stock/bonds, 60/40 US/international stocks, we get 42/28/30.

Step 2: Fill your non-401k space with international stocks (the highest ER in your 401k)
That gives you:

Taxable Assets
23% Total International Stock Market

Roth IRA
5% Total International Stock Market

Step 3: Fill your remaining non-401k space with bonds
That gives you:

Taxable Assets
23% Total International Stock Market

Roth IRA
5% Total International Stock Market
5% Total Bond Market

Step 4: Place the rest in your 401k
That gives you:

Taxable Assets
23% Total International Stock Market

Roth IRA
5% Total International Stock Market
5% Total Bond Market

401k
42% Fidelity 500 Index
25% Fidelity Investment Grade Bond


You are right that in general you prefer bonds to be in tax-advantaged space over taxable space (if you have to put bonds in taxable they should be munis) . But your 401k is also tax-advantaged space, so it is OK to put your bonds there. If you filled your Roth IRA entirely with bonds you wouldn't have enough non-401k space for your 28% international stocks.

Fishing50
Posts: 219
Joined: Tue Sep 27, 2016 1:18 am

Re: Portfolio Makeover

Post by Fishing50 » Fri Feb 10, 2017 2:00 am

your 401k is also tax-advantaged space, so it is OK to put your bonds there.
401K is the perfect place for bonds. Lower expected future growth reduces future RMDs.
Total stock market index funds are perfect in taxable account because of low tax burden with qualified dividends and darn near no capital gains (unless you sell).
Roth is a great place for higher expected earning of equities.

Wiki on tax efficient fund placement is here https://www.bogleheads.org/wiki/Tax-eff ... _of_stocks
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

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