Seeking feedback on portfolio

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MockeryOfCrockery
Posts: 3
Joined: Tue Apr 11, 2017 9:41 pm

Seeking feedback on portfolio

Post by MockeryOfCrockery » Tue Apr 11, 2017 11:25 pm

Hello, I'm happy to be here. I would welcome input on my portfolio and have a few specific questions at the bottom of the post. Here we go...

Emergency funds: I don't maintain an emergency fund per se, so I think I know where the feedback will start :). Instead, I set up an automatic transfer of funds to a separate account after each paycheck, to cover large but expected events like property taxes, insurance, etc. What usually happens is there is enough slush in that fund to use for unexpected events. For really big items, I rely on a taxable portfolio, which I'll cover below. I've only done this once, and it was voluntary (down payment on a car).

Last point on EF - a recently deceased relative left me low-five figures from a life insurance policy, so my thought was to use part of it to fund a true EF.

Debt:
- Mortgage: $80k @ 3.25%; 5 years remaining
- Auto: $11k @ 2.5%; 4 years remaining

Taxes: MFJ; 25% federal; 4.63% state

Residence: CO

Age: 41

Desired asset allocation: 85/15, current actual is spot-on desired. I'm fairly risk tolerant and have a solid support system in place in case of catastrophe, so am willing to take some more risk.

Desired international allocation: My current allocation is 90 US / 10 international, but I'm not sure if that's right for me.

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Portfolio summary:

High-six figures in total across several accounts:

Tax-advantaged:
- 401(k) @ 26% of total
- Rollover IRA (me) @ 18% of total
- Rollover IRA (spouse) @ 10% of total
- Roth IRA (me) @ 14% of total
- Roth IRA (spouse) @5% of total

Taxable:
- Individual stocks @ 16% of total
- Vanguard funds @ 11% of total

Contributions (annual): $11k to the Roth IRAs; $14k-18k to 401(k); $3k to college savings.

Tax-advantaged / taxable split = 75/25
Equities / bonds = 85/15

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Portfolio details:

- 401(k) is 100% in VITSX (Vang Total Stock Market Index). There are also some TRFs, but they have expenses of 0.15% vs. 0.04% for VITSX. The other options are managed and/or sector funds with much higher expenses, and I don't think I need to tell this crowd how I made my choice :).

- IRAs are split across several Vanguard funds with expense ratios from 0.04% to 0.08% (VTIAX is an outlier at 0.12%).

My Rollover IRA:
- Small-cap growth index (VSGAX) @ 5% of total
- Total bond mkt index (VBTLX) @ 3% of total
- Total int'l stock mkt index (VTIAX) @ 3% of total
- Total stock mkt index (VTSAX) @ 7% of total

Spouse Rollover IRA:
- Total bond mkt index (VBTLX) @ 3% of total
- Total int'l stock mkt index (VTIAX) @ 6% of total

My Roth IRA:
- Total bond mkt index (VBTLX) @ 2% of total
- Total stock mkt index (VTSAX) @ 12% of total

Spouse Roth IRA:
- Total bond mkt index (VBTLX) @ 5% of total

Taxable funds account:
- S&P 500 index (VFIAX) @ 4% of total
- Midcap index (VIMAX) @ 3% of total
- Total bond mkt index (VBTLX) @ 2% of total
- Total int'l stock mkt index (VTIAX) @ 2% of total

----------------------------------

Questions:

- I suspect I'm not as tax efficient as I could be, e.g. because of the interest and dividends in the taxable account. Is there anything I can be doing better here?

- I have the same holdings in multiple accounts (e.g VBTLS in all five and VTSAX in three of five). This feels untidy, but I'm not sure it matters as long as I maintain my target allocation across all?

- I don't even remember when or why I bought the S&P 500 and mid-cap funds in the taxable account. Part of me wants to sell them and consolidate the funds into the into the total stock market index to further simplify. However, between the two of them, they're in an unrealized gain position of $20k. Given that it would cost me $3k in capital gains for little or no benefit that I can tell, I haven't done it. Am I missing any reasons why I should do it anyway?

- Would you recommend any changes to my international allocation?

- Do you see any other gaps / sub-optional choices / areas for improvement? I'd appreciate any insights.


Thank you!

Lobster
Posts: 282
Joined: Sat Mar 26, 2016 3:11 pm

Re: Seeking feedback on portfolio

Post by Lobster » Wed Apr 12, 2017 12:51 am

MockeryOfCrockery wrote: Emergency funds: I don't maintain an emergency fund per se, so I think I know where the feedback will start :).
Emergency funds are valuable because they avoid forcing difficult situations like selling appreciated assets and incurring cap gains (especially when already dealing with a stressful scenario). 6 months of living expenses is a common target, but some people are okay with 3 while others prefer 12. One thing to consider is that in a crisis it's common for multiple bad things to happen at once. Many people lost their jobs at the same time the market was cut nearly in half in 2008.
MockeryOfCrockery wrote: - I suspect I'm not as tax efficient as I could be, e.g. because of the interest and dividends in the taxable account. Is there anything I can be doing better here?

- I have the same holdings in multiple accounts (e.g VBTLS in all five and VTSAX in three of five). This feels untidy, but I'm not sure it matters as long as I maintain my target allocation across all?

- I don't even remember when or why I bought the S&P 500 and mid-cap funds in the taxable account. Part of me wants to sell them and consolidate the funds into the into the total stock market index to further simplify. However, between the two of them, they're in an unrealized gain position of $20k. Given that it would cost me $3k in capital gains for little or no benefit that I can tell, I haven't done it. Am I missing any reasons why I should do it anyway?

- Would you recommend any changes to my international allocation?

- Do you see any other gaps / sub-optional choices / areas for improvement? I'd appreciate any insights.
Thank you!
Your tax efficiency looks okay, the only thing that stands out is the small bond position in your taxable account. The general advice is to hold tax efficient index funds (like TSM and TISM) in taxable and bond funds in tax advantaged.

Being untidy in terms of holding the same position in multiple accounts isn't a problem per se, you might try to consolidate when you do annual rebalancing just for simplicity, but it's not worth worrying about as long as it's not causing you any difficulty maintaining your AA.

I would advise against a $3k cap gains hit just to simplify, both those funds are fine in the amounts you hold. You might consider gifting those positions to charity at some point as a very tax efficient way to simplify down the road.

International is one of the most oft debated topics here. Some hold at the world market cap (~50%) while others hold none. A few people have suggested 20% of the equity position as a reasonable compromise.

For those who choose to tilt to small cap, often people tilt to small cap value rather than small cap growth, but it's not a significant part of your portfolio so it is not likely to have much long term effect.

Overall the portfolio looks great.

Good luck! :sharebeer
Submit to the relentless rules of humble arithmetic and avoid the tyranny of compounding costs.

MockeryOfCrockery
Posts: 3
Joined: Tue Apr 11, 2017 9:41 pm

Re: Seeking feedback on portfolio

Post by MockeryOfCrockery » Wed Apr 12, 2017 10:12 pm

Thank you! I appreciate the review. I'll keep on keepin' on and hope for the best.

Fishing50
Posts: 259
Joined: Tue Sep 27, 2016 1:18 am

Re: Seeking feedback on portfolio

Post by Fishing50 » Thu Apr 13, 2017 1:23 am

I like your EF strategy, no need to hold large cash positions. A $5K - $10K cushion is enough for a real emergency.

Jack Bogle argues international exposure isn't necessary, but he allows less than 20%. 10% is probably fine.

For tax efficiency:
Hold bonds in tax deferred accounts like Rollover IRA or 401K because bonds have lower expected growth.
Hold equities in Roth to maximize tax free growth. Maybe just enough bonds to act as EF.

Don't pay capital gains tax to simplify index funds in taxable. Probably worth getting rid of the bond fund in taxable because of the tax drag. Cleaning up the individual stocks is probably a larger problem. If you wouldn't buy the stock now, might be worth considering paying the capital gains tax to the top of your tax bracket. If that's a bit too far, quit reinvesting dividends.

Choose wisely with future taxable investments to ensure you can tax loss harvest without wash sales caused by reinvested dividends.
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

zuma
Posts: 378
Joined: Thu Dec 29, 2016 12:15 pm

Re: Seeking feedback on portfolio

Post by zuma » Thu Apr 13, 2017 2:38 am

Looks pretty solid overall.

Things that jumped out at me:

1) 16% in individual stocks. Bogleheads typically avoid holding individual stocks. 16% seems high to me.

2) International at 10% of equities. This is a frequently debated topic with no consensus. You'll see anywhere from 0–50% recommended here. Personally, I think at least 20% of equities in international makes sense in order to have any meaningful diversification effect. I've thought about increasing to 30% but decided it doesn't matter much. For my 60/40 portfolio it would be a difference of 12% vs. 18% overall.

(Btw, your international numbers don't quite add up for me. Is it 11% of the total or 10% of equities which would be 8.5% of total?)

3) Bonds in taxable. It's only 2% of the total, which isn't much, but if there's a way to consolidate all bonds in tax-advantaged accounts, that would be a better long-term strategy. Perhaps you could address the tidiness issue while doing this.

traveltoomuch
Posts: 516
Joined: Fri Mar 15, 2013 5:48 am

Re: Seeking feedback on portfolio

Post by traveltoomuch » Thu Apr 13, 2017 7:11 am

As others have said, this looks pretty good. I'd get the bonds out of the taxable accounts and consider selling individual stocks.

I prefer to use Roth space for equities, leaving bonds in the 401k/IRA tax-deferred accounts.

It looks like you're considering not maxing your 401k even though you have taxable investments. I would max out the 401k even if it means spending from the taxable accounts. Is your spouse working? Does your spouse have a 401k, also?

Having the same holdings in multiple accounts is not a problem unless you're doing tax loss harvesting and might encounter an unplanned wash sale. You can sort that out later, if needed.

When managing a 3-fund portfolio or similar, and yours counts, I like to have one account (or one per spouse) as the designated "pivot" point - the account in which all rebalancing happens. I'd probably pick your IRA(s) for that. Since your inflows are imbalanced (for good cause), pay attention to rebalancing.

MockeryOfCrockery
Posts: 3
Joined: Tue Apr 11, 2017 9:41 pm

Re: Seeking feedback on portfolio

Post by MockeryOfCrockery » Thu Apr 13, 2017 11:17 pm

Cleaning up the individual stocks is probably a larger problem. If you wouldn't buy the stock now, might be worth considering paying the capital gains tax to the top of your tax bracket. If that's a bit too far, quit reinvesting dividends.
16% in individual stocks. Bogleheads typically avoid holding individual stocks. 16% seems high to me.
Interesting point. I haven't contributed to that account in a long time; it just happens to have done well through the last ten years' run so I've been able to grow it by reinvesting dividends and moving losers into new winners. I'm not sure I'm ready to unload it yet but I'm open to hearing more.

2) International at 10% of equities. This is a frequently debated topic with no consensus. You'll see anywhere from 0–50% recommended here. Personally, I think at least 20% of equities in international makes sense in order to have any meaningful diversification effect. I've thought about increasing to 30% but decided it doesn't matter much. For my 60/40 portfolio it would be a difference of 12% vs. 18% overall.
That's helpful context. Sounds like I could afford to nudge it up a bit but I'm not doing anything outrageously stupid, which was my concern.
(Btw, your international numbers don't quite add up for me. Is it 11% of the total or 10% of equities which would be 8.5% of total?)
Sorry that isn't clear; it's 11% of the total portfolio.
Probably worth getting rid of the bond fund in taxable because of the tax drag.
3) Bonds in taxable. It's only 2% of the total, which isn't much, but if there's a way to consolidate all bonds in tax-advantaged accounts, that would be a better long-term strategy. Perhaps you could address the tidiness issue while doing this.
Sounds like a win-win would be to sell the 2% of bonds in taxable and put the proceeds into the int'l fund. It would get rid of those pesky taxable dividends and increase my int'l exposure at the same time.
Hold bonds in tax deferred accounts like Rollover IRA or 401K because bonds have lower expected growth.
Hold equities in Roth to maximize tax free growth. Maybe just enough bonds to act as EF.
I haven't contributed anything to the traditional IRAs, only the Roth IRAs, to diversify tax exposure. But I realize now I haven't paid any attention to how that was stacking up. Running the numbers now, I see that my portfolio is 55% pre-tax, 20% after-tax, and 25% taxable. I haven't generated any expectations in that regard so I have no idea if that's good or bad. :?

The question this raises is, should I transfer my Roth IRA bond holdings into equities, then re-balance by putting my contributions into bonds in the traditional IRAs?
It looks like you're considering not maxing your 401k even though you have taxable investments. I would max out the 401k even if it means spending from the taxable accounts.
Yes, that's correct. It simply hadn't occurred to me to dip into the taxable accounts to supplement monthly cashflow, to make sure I can max out the 401(k). That's... painfully obvious in hindsight. I literally just changed my contribution amount so I max out this year. :idea: The life insurance money means I probably won't even have to sell any of the taxable holdings. :idea:
Is your spouse working? Does your spouse have a 401k, also?
My spouse used to have a career but stopped to stay at home with kids. We rolled the 401(k) into an IRA.

zuma
Posts: 378
Joined: Thu Dec 29, 2016 12:15 pm

Re: Seeking feedback on portfolio

Post by zuma » Fri Apr 14, 2017 3:55 am

MockeryOfCrockery wrote:
Cleaning up the individual stocks is probably a larger problem. If you wouldn't buy the stock now, might be worth considering paying the capital gains tax to the top of your tax bracket. If that's a bit too far, quit reinvesting dividends.
16% in individual stocks. Bogleheads typically avoid holding individual stocks. 16% seems high to me.
Interesting point. I haven't contributed to that account in a long time; it just happens to have done well through the last ten years' run so I've been able to grow it by reinvesting dividends and moving losers into new winners. I'm not sure I'm ready to unload it yet but I'm open to hearing more.
Normally an investor takes on more risk in exchange for more expected return. By holding 16% of your portfolio in a small set of stocks you've increased your overall risk but you haven't increased your expected return when compared to a large set of stocks.

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