Need to Set Allocations. New Vanguard Acct.

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Sloburn
Posts: 9
Joined: Thu Dec 15, 2016 12:42 pm

Need to Set Allocations. New Vanguard Acct.

Postby Sloburn » Mon Mar 20, 2017 5:35 pm

Hi,

My wife and I are just getting started with Index Fund Investing. We had a financial adviser and we are unhappy for all the reasons we read about here. We want to simplify and do things the Boglehead way. As newbies, we have contacted a Vanguard Personal Adviser and gotten his suggestions but we have not pulled the trigger on allocating the funds yet.

I thought I would run his suggestions past you all and see if they sound right to you. We had originally thought we would use a four fund approach but he is saying that for tax reasons, we should have more funds than that. Let me give you the basics:

We are both 55 years old. We have a good cash emergency fund. We live in California and make enough salary to be in a high tax environment. The suggested portfolio from the Vanguard personal adviser is as follows (all Admiral shares):

VG 500 Index
VG Total Stock Market
34%

VG Developed Markets Fund
VG FTSE All World Ex US ETF
VG FTSE Emerging Markets
25%

VG Tax Exempt Limited Term Bonds 11%
VG Intermediate Term Tax Exempt Bond 14%
VG Long- Term Tax Exempt Bond 11%

Vanguard Small Cap ETF 5% This is my suggestion- not the adviser. This would be the "gambling" portion of the portfolio I guess.

I am a bit confused and I have to talk to him again because I am sure he said we had International Bonds covered but all I see is the three Tax exempt California bond funds. He recommends those because we are in a high tax situation and he is saying this is best.

So what do you think? I guess if he is right about the tax implications of a single bond fund or maybe two with one being International, then having four bond funds total is best? I didn't want that much complexity though.

What about having two domestic and three International Equities funds? The percentages going to each fund are not broken down for me further than what I show above. Would one domestic and one International be better? When I asked about that he says the bigger number of funds is better for tax reasons.

Lastly, Is my tilt toward Small Cap Value unwise? The adviser seems to think so and I freely admit my lack of experience (it just looks like it would work out in the long run- based on past performance, which I understand does not predict the future).

Any input would be very welcome. Thanks in advance.

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Duckie
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Joined: Thu Mar 08, 2007 2:55 pm

Re: Need to Set Allocations. New Vanguard Acct.

Postby Duckie » Mon Mar 20, 2017 5:54 pm

Sloburn wrote:So what do you think?

I think this is too complex. Total Stock Market, Total International Stock and, since this looks like a taxable account, Intermediate-Term Tax-Exempt Bonds. You don't need the rest.

If you want to tilt 5% to small caps choose Small Cap Value.

Do you have any tax-sheltered assets like a 401k or IRA? Your bonds would be better of there (depending on expense ratios). You should be looking at all your retirement assets as one big portfolio. If you provide the information in the Asking Portfolio Questions template we can give you more complete advice.

Sloburn
Posts: 9
Joined: Thu Dec 15, 2016 12:42 pm

Re: Need to Set Allocations. New Vanguard Acct.

Postby Sloburn » Mon Mar 20, 2017 6:09 pm

Thanks for the reply.

We do both have 401Ks that we max out each year but they have terrible options (especially mine). We are both in target date funds that are doing fine. I asked if we should put bonds there and equities in the Taxable act. and the VG guy said it would be complicated and advised against it. It would be more complicated to re-balance but we would do it anyway unfortunately the 401(k) options we have are not impressive at all.

I kind of agree with you and I asked about just the intermediate bond fund but he said more funds capture more of the bond market. He said we should have international bond exposure too but it didn't make it to the summary he sent us. There is no tax exempt Total Bond Fund or we would get just that.

I can believe that there are SOME tax advantages to a bunch of Index Funds rather than just a few but from what I read here, the complexity counters what advantages there are.

Regarding the Small Cap ETF, I asked if that is a Small Cap Value fund and he said it is. I am new enough at this to not know if there is a difference between a small cap ETF and small cap Value fund. What he has listed just says "VG Small-Cap ETF".

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jhfenton
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Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Need to Set Allocations. New Vanguard Acct.

Postby jhfenton » Mon Mar 20, 2017 6:10 pm

There's unnecessary overlap. Total Stock Market includes the S&P 500, and tracks it very closely. The All World ex-US includes both developed and emerging markets. If you're going to own a separate emerging fund, I'd keep the separate developed markets fund and drop the combo fund. And for the tax exempt funds, I'd drop the intermediate and just own limited-term and long in whatever ratio you need to get your desired duration. Vanguard's long-term tax-exempt funds don't have that much longer a duration than the intermediate, so I moved most of the intermediate into long.

VG 500 Index
VG Total Stock Market 34%
VSIAX/VBR (Small Cap Value) 5%
34%39%

VG Developed Markets Fund 15%
VG FTSE All World Ex US ETF
VG FTSE Emerging Markets 10%
25%

VG Tax Exempt Limited Term Bonds 11%15%
VG Intermediate Term Tax Exempt Bond 14%
VG Long- Term Tax Exempt Bond 11%21%

Sloburn
Posts: 9
Joined: Thu Dec 15, 2016 12:42 pm

Re: Need to Set Allocations. New Vanguard Acct.

Postby Sloburn » Mon Mar 20, 2017 6:15 pm

This is very useful. Thanks.

What about replacing both International funds with just the Total International Stock Fund VTIAX? That was my original suggestion but he recommended three funds to ....cover more I guess.

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jhfenton
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Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Need to Set Allocations. New Vanguard Acct.

Postby jhfenton » Mon Mar 20, 2017 8:42 pm

Sloburn wrote:This is very useful. Thanks.

What about replacing both International funds with just the Total International Stock Fund VTIAX? That was my original suggestion but he recommended three funds to ....cover more I guess.

Total International Stock is a great single international holding…the best single international fund for most folks.

Splitting Total International into two funds gives you Developed Markets and Emerging Markets. (Like Total International, they include large, mid, and small caps.) One might do that for two reasons: (1) to tilt to greater than a market weight (~18%) of emerging markets and/or (2) to allow for rebalancing between developed and emerging markets as they are not 100% correlated. But splitting doesn't really cover more.

Sloburn
Posts: 9
Joined: Thu Dec 15, 2016 12:42 pm

Re: Need to Set Allocations. New Vanguard Acct.

Postby Sloburn » Tue Mar 21, 2017 11:28 am

I can understand splitting them up to tilt one way or the other. Since I don't really want to predict which is the best way to tilt on that, I would keep them pretty much in line with the single fund (I think).

Regarding the re-balancing, does that not take care of itself with the single fund? Thanks.


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