Portfolio Reallocation Request

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The 19th hole
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Portfolio Reallocation Request

Postby The 19th hole » Fri Apr 21, 2017 8:45 am

Greetings Bogleheads. I am a long time investor who started gambling with options back in the 80’s but learned over time that “cost effective” is the way to go. I am 60 years old and have recently retired with a pension that is satisfactory to cover all of my living expenses for the foreseeable future. It is NOT indexed, so it will fall behind based on inflation. Also, no SS in the future. My emergency fund is set (6 months). I have no debt.

Married filing jointly (stay at home wife). Two adult children with good financial habits. I live in NY with marginal tax rates of 15% (Fed) and 10% (NY). I expect the marginal rate to go up to 28% for the next several years due to the sale of EE bonds and 2 years of "one time" payouts from work.

I am NOT risk averse. I stayed fully invested (almost 100% in stocks) through the past 3 decades and I am currently realigning my finances for the rest of my days and my heirs.

My preliminary asset allocation is 70/30 as follows:
Domestic stock 42%
International stock 28%
Medium term corporate bonds 20%
NY tax exempt 10%

I plan on overweighting the domestic stock component with value stocks (28% total market, 7% large cap value, and 7% small cap value)
I plan on spreading the international 21% all international and 7% emerging markets

Total portfolio is approximately $900K with $400K in a 457 plan (which I will be moving to an IRA) and $100K in a Roth. The balance is in taxable accounts. Also I will be cashing in just over $30K of EE bonds that reach final maturity during the next 2 years.

I am going to have to adjust current investments, which I should be able to do with minimal tax consequences. One fly in the ointment is that in addition to the above I have approximately $200K in 529 plans for my children but both are finished college and grandkids are a low probability.
Questions:
1. Is my allocation that far out of line? I realize that 70/30 is aggressive for someone in my circumstance, but my primary concern is inflation and I expect stocks to outperform if we are in an inflationary environment.
2. Would you recommend a different allocation in the sub-groupings?
3. What funds do you recommend for each of the categories mentioned?
4. Where (IRA, Roth IRA, taxable accounts) would you recommend I place each investment category?
5. While I generally have no interest in market timing, considering the current elevated level of the US stock market and the significant rebalancing I will be undertaking should I “park” funds and invest in the stock market over time? If so, where should the funds stay in the interim?
6. Is there an efficient way to extract the $$ from the 529 plans?

Thanks in advance for your input.
Last edited by The 19th hole on Fri Apr 21, 2017 11:26 am, edited 1 time in total.

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ruralavalon
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Re: Portfolio Reallocation Request

Postby ruralavalon » Fri Apr 21, 2017 10:29 am

Welcome to the forum :) .

You clearly have given this a lot of study and understand what is involved. My allocations would be very close to what you have in mind, it's almost not worth mentioning the difference.

The 19th hole wrote:Greetings Bogleheads. I am a long time investor who started gambling with options back in the 80’s but learned over time that “cost effective” is the way to go. I am 60 years old and have recently retired with a pension that is satisfactory to cover all of my living expenses for the foreseeable future. It is NOT indexed, so it will fall behind based on inflation. Also, no SS in the future. My emergency fund is set (6 months). I have no debt.

Married filing jointly (stay at home wife). Two adult children with good financial habits. I live in NY with marginal tax rates of 15% (Fed) and 10% (NY). I expect the marginal rate to go up to 28% for the next several years.

I am NOT risk averse. I stayed fully invested (almost 100% in stocks) through the past 3 decades and I am currently realigning my finances for the rest of my days and my heirs.

My preliminary asset allocation is 70/30 as follows:
Domestic stock 42%
International stock 28% [= 40% of total stocks]
Medium term corporate bonds 20%
NY tax exempt 10%

I plan on overweighting the domestic stock component with value stocks (28% total market, 7% large cap value, and 7% small cap value) [= 33% of domestic stocks]
I plan on spreading the international 21% all international and 7% emerging markets

Total portfolio is approximately $900K with $400K in a 457 plan (which I will be moving to an IRA) and $100K in a Roth. The balance is in taxable accounts. Also I will be cashing in just over $30K of EE bonds that reach final maturity during the next 2 years.

I am going to have to adjust current investments, which I should be able to do with minimal tax consequences. One fly in the ointment is that in addition to the above I have approximately $200K in 529 plans for my children but both are finished college and grandkids are a low probability. (emphasis added).

Why do you expect that your marginal tax rate will go up to 28% for the next several years?

You can simply add this to your original post using the edit button, so that all of your information is in one place.


The 19th hole wrote:Questions:
1. Is my allocation that far out of line? I realize that 70/30 is aggressive for someone in my circumstance, but my primary concern is inflation and I expect stocks to outperform if we are in an inflationary environment.

In my opinion 70/30 is probably OK at age 60 and retired, given that you have no debt, your living expenses are fully covered by a pension, you have been almost 100% stocks thru several crashes, and are investing for your heirs. Nevertheless my suggestion would be 60/40.


The 19th hole wrote:2. Would you recommend a different allocation in the sub-groupings?

In my opinion your 40% of stocks in international stocks is within the range of what is reasonable, but my usual suggestion is 20-30% of stocks in international stocks.

In my opinion your 33% of domestic stocks in value stocks is within the range of what is reasonable, but my usual suggestion is around 25-30% of domestic stocks in a small-cap value index fund the rest in a large cap or total stock market index fund.

A total international stock fund will include emerging markets, so no separate emerging markets fund is necessary.


The 19th hole wrote:3. What funds do you recommend for each of the categories mentioned?

Assuming the accounts are at Vanguard, these are the funds I suggest.

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.12% (includes both developed and emerging markets)
Vanguard Value Index Fund Admiral Shares (VVIAX) ER 0.08%
Vanguard Small-cap Value Index Fund Admiral Shares (VSIAX) ER 0.07%
Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBIAX) ER 0.07%


The 19th hole wrote:4. Where (IRA, Roth IRA, taxable accounts) would you recommend I place each investment category?

In general place bond funds in a tax-protected account, use only very tax-efficient stock index funds in a taxable account. Please see the wiki article "tax-efficient fund placement".

I can't be more specific without knowing what percentage of your total portfolio is in each specific account, and where each account is located or will be located.


The 19th hole wrote:5. While I generally have no interest in market timing, considering the current elevated level of the US stock market and the significant rebalancing I will be undertaking should I “park” funds and invest in the stock market over time? If so, where should the funds stay in the interim?

Do you expect that the recasting of your portfolio will take an extended period of time?


The 19th hole wrote:6. Is there an efficient way to extract the $$ from the 529 plans?

Sorry, 529s didn't exist when we were putting our children through college so I have no experience with this issue.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

The 19th hole
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Re: Portfolio Reallocation Request

Postby The 19th hole » Fri Apr 21, 2017 11:43 am

Thanks ruralavalon for the quick and helpful reply! :D

Why do you expect that your marginal tax rate will go up to 28% for the next several years?

Two reasons. A 2 year payout from work and cashing over $30K in EE bonds. Both taxable events.

The 19th hole wrote:
4. Where (IRA, Roth IRA, taxable accounts) would you recommend I place each investment category?

In general place bond funds in a tax-protected account, use only very tax-efficient stock index funds in a taxable account. Please see the wiki article "tax-efficient fund placement".

I can't be more specific without knowing what percentage of your total portfolio is in each specific account, and where each account is located or will be located.


IRA will be about 45%, Roth about 10% and Taxable about 45%. Location will either be Schwab (taxable and Roth) or Vanguard (IRA)

The 19th hole wrote:
5. While I generally have no interest in market timing, considering the current elevated level of the US stock market and the significant rebalancing I will be undertaking should I “park” funds and invest in the stock market over time? If so, where should the funds stay in the interim?

Do you expect that the recasting of your portfolio will take an extended period of time?


Hopefully not, but that depends on how responsive the 457 manager is when moving the funds to Schwab or Vanguard. I'm more concerned with putting a significant sum into the top of the equities market all at once. Since I am going to be adjusting a lot of positions, I am wondering if I should keep a significant portion in MM or bond funds and gradually buy into the stock positions until I get to my target allocation.

Chip
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Re: Portfolio Reallocation Request

Postby Chip » Fri Apr 21, 2017 11:52 am

Hi, and welcome!

I'm a little confused. Have you already cashed out of the market or are you close to 100% stocks?

The 19th hole
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Re: Portfolio Reallocation Request

Postby The 19th hole » Fri Apr 21, 2017 12:17 pm

I'm a little confused. Have you already cashed out of the market or are you close to 100% stocks?


Currently sitting about 65 stocks and 35 cash & short term instruments.

Lou354
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Re: Portfolio Reallocation Request

Postby Lou354 » Fri Apr 21, 2017 12:45 pm

If you were to delay cashing the EE savings bonds until the year after the one-time payouts from work are received, would your marginal tax rate be lower than 28% during either of those time periods? If so would the tax savings outweigh the cost of leaving the savings bonds sitting earning no interest for a couple of years?

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ruralavalon
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Re: Portfolio Reallocation Request

Postby ruralavalon » Fri Apr 21, 2017 2:06 pm

Is this a governmental or non-governmental 457 plan?

What is the reason you want to do a rollover of the 457 to an IRA?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | | Wiki article link:Getting Started

Chip
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Re: Portfolio Reallocation Request

Postby Chip » Fri Apr 21, 2017 2:16 pm

The 19th hole wrote:Currently sitting about 65 stocks and 35 cash & short term instruments.


Given that, going to 70/30 isn't much of a change. Yes, you're moving some things around, but the primary driver of risk and return is the stock/bond ratio. Since you're barely moving the needle on that, just get it all done and quit worrying about the overall level of the stock market.

And Lou354's idea is interesting....

The 19th hole
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Re: Portfolio Reallocation Request

Postby The 19th hole » Fri Apr 21, 2017 2:47 pm

If you were to delay cashing the EE savings bonds until the year after the one-time payouts from work are received, would your marginal tax rate be lower than 28% during either of those time periods? If so would the tax savings outweigh the cost of leaving the savings bonds sitting earning no interest for a couple of years?


Close to a push. Additional tax (13% of 24K interest) is a little over 3K. two year return on $33K will hopefully exceed that.

s this a governmental or non-governmental 457 plan?

What is the reason you want to do a rollover of the 457 to an IRA?


Government plan. I'm looking to move for better investment choices and (slightly) lower expenses.

Given that, going to 70/30 isn't much of a change. Yes, you're moving some things around, but the primary driver of risk and return is the stock/bond ratio. Since you're barely moving the needle on that, just get it all done and quit worrying about the overall level of the stock market.


Agreed. I was just thinking that 30/70 moving gradually to 70/30 would lessen the risk. Since the consensus :wink: is that the market is fully valued and I will be making adjustments to individual assets, it would lessen the impact of a sharp downturn in the near future.

And Lou354's idea is interesting....


Yes it is.

Thanks all.

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ruralavalon
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Re: Portfolio Reallocation Request

Postby ruralavalon » Fri Apr 21, 2017 2:58 pm

Fund placement.
Tjhe 19th hole wrote:IRA will be about 45%, Roth about 10% and Taxable about 45%. Location will either be Schwab (taxable and Roth) or Vanguard (IRA)

Schwab has no inexpensive value funds, and no value index funds, so your value tilt will need to be in an account with Vanguard.

Schwab has just introduced a total bond market index fund, which has no real history at this point. Vanguard has several good, diversified, inexpensive, intermediate-term bond funds which have long histories (including a total bond market index fund) which you could consider using. I suggest that your bond allocation be in a tax-protected account at Vanguard.

Schwab International Index Fund tracks the MSCI EAFE (Europe, Asia, Far East) indexes, covering stocks of larger companies in developed markets except Canada. In other words it omits emerging markets, Canada, and stocks of smaller companies. It would be more diversified if you can use a Vanguard international fund in the Vanguard account. In my opinion the most important missing piece in the Schwab international fund is emerging markets.

In the taxable account the most tax-efficient funds are large cr total market type stock index funds. Wiki article "Tax-efficient fund placement".


Example portfolio.
Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to add the value tilt you wanted in domestic stocks,and to accommodate the shortcomings of the Schwab international index fund. The asset allocation is: 30% bonds; 25% international stocks; and 45% domestic stocks. The percentages given are percentages of the total portfolio, not of a given account.

Taxable account @ Schwab (45%)
20%,Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%
25%, Schwab International Stock Index Fund (SWISX) ER 0.08%

Roth IRA @ Schwab (10%)
10%, Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%

traditional rollover IRA @ Vanguard (45%)
30%, Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBIAX) ER 0.07%
10%, Vanguard Small-cap Value Index Fund Admiral Shares (VSIAX) ER 0.07%
05%, Vanguard Emerging Markets Index Fund Admiral Shares (VEMAX) ER 0.15%

. . . . .

If you have any questions just ask.

I hope that this helps.
Last edited by ruralavalon on Fri Apr 21, 2017 4:25 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | | Wiki article link:Getting Started

Artisan
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Re: Portfolio Reallocation Request

Postby Artisan » Fri Apr 21, 2017 3:11 pm

The 19th hole wrote:Greetings Bogleheads. I am a long time investor who started gambling with options back in the 80’s but learned over time that “cost effective” is the way to go. I am 60 years old and have recently retired with a pension that is satisfactory to cover all of my living expenses for the foreseeable future. It is NOT indexed, so it will fall behind based on inflation. Also, no SS in the future. My emergency fund is set (6 months). I have no debt.

Married filing jointly (stay at home wife). Two adult children with good financial habits. I live in NY with marginal tax rates of 15% (Fed) and 10% (NY). I expect the marginal rate to go up to 28% for the next several years due to the sale of EE bonds and 2 years of "one time" payouts from work.

I am NOT risk averse. I stayed fully invested (almost 100% in stocks) through the past 3 decades and I am currently realigning my finances for the rest of my days and my heirs.

My preliminary asset allocation is 70/30 as follows:
Domestic stock 42%
International stock 28%
Medium term corporate bonds 20%
NY tax exempt 10%

I plan on overweighting the domestic stock component with value stocks (28% total market, 7% large cap value, and 7% small cap value)
I plan on spreading the international 21% all international and 7% emerging markets

Total portfolio is approximately $900K with $400K in a 457 plan (which I will be moving to an IRA) and $100K in a Roth. The balance is in taxable accounts. Also I will be cashing in just over $30K of EE bonds that reach final maturity during the next 2 years.

I am going to have to adjust current investments, which I should be able to do with minimal tax consequences. One fly in the ointment is that in addition to the above I have approximately $200K in 529 plans for my children but both are finished college and grandkids are a low probability.
Questions:
1. Is my allocation that far out of line? I realize that 70/30 is aggressive for someone in my circumstance, but my primary concern is inflation and I expect stocks to outperform if we are in an inflationary environment.
2. Would you recommend a different allocation in the sub-groupings?
3. What funds do you recommend for each of the categories mentioned?
4. Where (IRA, Roth IRA, taxable accounts) would you recommend I place each investment category?
5. While I generally have no interest in market timing, considering the current elevated level of the US stock market and the significant rebalancing I will be undertaking should I “park” funds and invest in the stock market over time? If so, where should the funds stay in the interim?
6. Is there an efficient way to extract the $$ from the 529 plans?

Thanks in advance for your input.


I think you received a lot of good advice on all your questions. #5 is market timing.

If the money is destined for investment then invest it. Parking, holding, waiting, etc. are just other terms. What you are really saying is:

I think the market is going down soon.
I think I will be able to determine when it gets to the bottom.
Even though every financial talking head will be screaming that the markets are doomed and to sell, I will have the fortitude to determine they are wrong and I will invest my money then.


I hope your plan works.

The 19th hole
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Re: Portfolio Reallocation Request

Postby The 19th hole » Fri Apr 21, 2017 7:56 pm

Thanks for all your help.

I think you received a lot of good advice on all your questions. #5 is market timing.

If the money is destined for investment then invest it. Parking, holding, waiting, etc. are just other terms. What you are really saying is:

I think the market is going down soon.
I think I will be able to determine when it gets to the bottom.
Even though every financial talking head will be screaming that the markets are doomed and to sell, I will have the fortitude to determine they are wrong and I will invest my money then.


I'm looking at the buy in as more of a dollar cost averaging mechanism than a timing one. I'm not looking for the bottom, just trying to not put a lump sum in at the top. I would think a monthly transfer over 6 months moving from 30/70 to 70/30 would be less risky.

Example portfolio.
Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to add the value tilt you wanted in domestic stocks,and to accommodate the shortcomings of the Schwab international index fund. The asset allocation is: 30% bonds; 25% international stocks; and 45% domestic stocks. The percentages given are percentages of the total portfolio, not of a given account.

Taxable account @ Schwab (45%)
20%,Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%
25%, Schwab International Stock Index Fund (SWISX) ER 0.08%

Roth IRA @ Schwab (10%)
10%, Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%

traditional rollover IRA @ Vanguard (45%)
30%, Vanguard Intermediate-term Bond Index Fund Admiral Shares (VBIAX) ER 0.07%
10%, Vanguard Small-cap Value Index Fund Admiral Shares (VSIAX) ER 0.07%
05%, Vanguard Emerging Markets Index Fund Admiral Shares (VEMAX) ER 0.15%

. . . . .

If you have any questions just ask.

I hope that this helps.



Helps TONS. Thanks. I'm not locked in to Schwab, but they have given me good service for a number of years. You've given me plenty of ideas. One last question. What is the advantage of the Mutual Funds over the ETFs? That's one vehicle I've never looked at too closely.

Chip
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Re: Portfolio Reallocation Request

Postby Chip » Sat Apr 22, 2017 4:10 am

The 19th hole wrote:I'm looking at the buy in as more of a dollar cost averaging mechanism than a timing one. I'm not looking for the bottom, just trying to not put a lump sum in at the top. I would think a monthly transfer over 6 months moving from 30/70 to 70/30 would be less risky.


You can call it DCA, or you can call it chocolate pudding, but it is TIMING. You are proposing to sell down right now from 65/35 to 30/70, then buy back in over six months up to 70/30.

You're not putting in a lump sum at the top, you're moving 5% from bonds to stocks if you go from 65/35 to 70/30.

You might need to re-evaluate your risk tolerance. You say you're not risk averse, but your timing idea says that maybe you are. Perhaps something more like 50/50 would suit you better.

For perspective, I'm about your age, retired, at 60/40. No pension, so the portfolio has to cover all of our needs.

One last question. What is the advantage of the Mutual Funds over the ETFs? That's one vehicle I've never looked at too closely.


The wiki has a page on just that question right here. If you haven't already, I suggest spending a good bit of time reading the wiki. There is a wealth of useful information there.

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ruralavalon
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Re: Portfolio Reallocation Request

Postby ruralavalon » Sat Apr 22, 2017 12:05 pm

The 19th hole wrote:Thanks for all your help.

Artisan wrote:I think you received a lot of good advice on all your questions. #5 is market timing.

If the money is destined for investment then invest it. Parking, holding, waiting, etc. are just other terms. What you are really saying is:

I think the market is going down soon.
I think I will be able to determine when it gets to the bottom.
Even though every financial talking head will be screaming that the markets are doomed and to sell, I will have the fortitude to determine they are wrong and I will invest my money then.


I'm looking at the buy in as more of a dollar cost averaging mechanism than a timing one. I'm not looking for the bottom, just trying to not put a lump sum in at the top. I would think a monthly transfer over 6 months moving from 30/70 to 70/30 would be less risky.


The 19th hole wrote:Currently sitting about 65 stocks and 35 cash & short term instruments.

Moving just 5% from bonds to stocks is not a big change. It's almost no change in risk. If this is a market high, then you are selling at a high and buying at a high. If this is a market low, then you are buying at a low and selling at a low. Either way it makes no difference in your risk.

Please read the Vanguard paper, "Dollar-cost averaging just means taking risk later".


The 19th hole wrote:You've given me plenty of ideas. One last question. What is the advantage of the Mutual Funds over the ETFs? That's one vehicle I've never looked at too closely.

Mutual funds are easier to use. You can buy fractional shares, it's easier to set up automatic investment and automatic reinvestment, and you never have to be concerned about bid/ask spreads or use limit orders. At Vanguard index mutual funds are just as tax-efficient as ETFs, and the expense ratios for Admiral Shares are just as low. as for ETFs. Wiki article, "ETFs vs Mutual Funds".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | | Wiki article link:Getting Started

The 19th hole
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Re: Portfolio Reallocation Request

Postby The 19th hole » Sat Apr 22, 2017 2:33 pm

Mutual funds are easier to use. You can buy fractional shares, it's easier to set up automatic investment and automatic reinvestment, and you never have to be concerned about bid/ask spreads or use limit orders. At Vanguard index mutual funds are just as tax-efficient as ETFs, and the expense ratios for Admiral Shares are just as low. as for ETFs. Wiki article, "ETFs vs Mutual Funds".


Thanks. That's what I was looking for. I had read the article and understood the academic differences but wanted a short, real world answer.

Moving just 5% from bonds to stocks is not a big change. It's almost no change in risk. If this is a market high, then you are selling at a high and buying at a high. If this is a market low, then you are buying at a low and selling at a low. Either way it makes no difference in your risk.


I agree, but the way I see it is I'm currently 65/35 going to (approximately) 20/0/80 cash for a brief period while I adjust to 70/30. Essentially, my question relates to direction for the next six months. The referenced paper, in a nutshell, agrees. Lump sum outperforms in an increasing market and dollar cost averaging outperforms in a declining market.

Please read the Vanguard paper, "Dollar-cost averaging just means taking risk later".

I think Vanguard moved the paper. I found it at the link below (sorry, couldn't figure out how to change the verbiage of the link).

https://personal.vanguard.com/pdf/s315.pdf


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