New-ish Investor--Advice on strategy

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irl
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Joined: Sun May 07, 2017 6:13 pm

New-ish Investor--Advice on strategy

Post by irl » Sun May 07, 2017 6:23 pm

Hey there!

I'm a relatively new investor (~4 years) and would like some advice on my portfolio. Some background: I've read Bogleheads guide to investing and refer to it often, so I have a pretty good grasp on the basics of asset allocation. I've tried to choose funds with low expense ratios, and in general, I'm trying to keep things simple. That said, a number of these fund choices we made with advice from of my parents' investment advisor, who offered to help me as I began investing. This person was doing me a favor, so the advice has been here-and-there, not long-term strategic stuff.

According to my Fidelity account analysis, I think my funds are actually doing a pretty job of adhering to the Bogleheads way. Its says I'm slightly larger and more growth-y than the Dow Jones U.S. Total Market Index, but not by much. And I have 20% of my equity in Vanguard High Dividend Yield Index Fund. And again, pretty low expense ratios.

My contributions strategy has been to max out my Roth IRA (mostly funded through an IRA inheritance I've been receiving), then put 10% of my income in the taxable account, and try and keep my assets across these two accounts allocated the way they are now: 80% in U.S. stocks, 20% in Int'l stocks, and track with the overall market as much as possible.

I think its worth mentioning here that I will likely receive a low six-figure inheritance from my parents, the luck and privilege of which doesn't escape me. It makes me think I can probably afford to be aggressive in my investment choices at my age, but basically I want to save for retirement/the future in a responsible way.

I guess my main questions are: am I on the right track in terms of my funds representing the overall market? If not, how can I tweak them without getting too complicated? Should I buy any bonds at this point? Any tweaks to my overall strategy given my financial situation?

Basic Info
- Emergency funds: Yes
- Debt: $2,500 @ 6.8% (educational loans)
- Tax Filing Status: Single
- Tax Rate: Not sure, but probably the lowest bracket
- State of Residence: IL
- Age: 30
- Desired Asset allocation: 90-100% stocks, 0-10% bonds
- Desired International allocation: 20% of stocks
- I'm a small-business owner and at the moment, I don't have access to a 401(k) or other tax-protected account.

Taxable @ Fidelity
17% Cash
32% T. Rowe Price Value (TRVLX) (.82% expense ratio)
26% Fidelity Blue Chip Growth (FBGRX) (.82% expense ratio)
26% Vanguard High Dividend Yield Index Fund (VHDYX) (0.15% expense ratio)

Roth IRA @ Fidelity
55% Fidelity Blue Chip Growth (FBGRX) (.82% expense ratio)
23% Vanguard High Dividend Yield Index Fund (VHDYX) (0.15% expense ratio)
22% Vanguard Total International Stock Index Fund (VGTSX) (.18% expense ratio)

Current total retirement assets: mid-five-figures.

I currently own no bonds, and at present I have ~20% of my total equity assets in the Vanguard Total International Stock Index Fund.

Lou354
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Re: New-ish Investor--Advice on strategy

Post by Lou354 » Sun May 07, 2017 7:01 pm

You can reduce your investing costs by using index funds such as Fidelity Freedom index funds. Maybe a Fidelity Freedom Target retirement index fund for the tax-advantaged account. If you want Vanguard mutual funds you might as well transfer your IRA to Vanguard. Look into opening an individual 401k or SEP IRA for your business.

irl
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Joined: Sun May 07, 2017 6:13 pm

Re: New-ish Investor--Advice on strategy

Post by irl » Mon May 15, 2017 9:20 am

Thanks. I'm not really looking to transfer to Vanguard, just looking to see if I'm reasonably following the Bogleheads principles.

alex_686
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Re: New-ish Investor--Advice on strategy

Post by alex_686 » Mon May 15, 2017 9:31 am

I will second Lou354 suggestion and move to Fidelity's index funds. Passive investing is the Bogglehead way. It is hard to justify the costs associated with active management.

3 things to think about.

The 17% cash in the taxable account seems high.

Why Dividend stocks? The default breakdown is between Growth and Value. You can find many threads on this topic but I am not a fan of "Dividends" as a parameter. It relays less information than you think. I prefer "Value" as a parameter.

Can I ask about the split between Growth and Dividend? Why those weights? The neutral weight would be 50/50, assuming "Dividend" is a substitute for "Value". The default option is to have growth in taxable and dividends in tax advantage accounts. Lower tax drag that way.

Elbowman
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Re: New-ish Investor--Advice on strategy

Post by Elbowman » Mon May 15, 2017 9:53 am

The Three Fund Portfolio page has a section which shows the best Fidelity funds to use for your portfolio. These funds:

32% T. Rowe Price Value (TRVLX) (.82% expense ratio)
26% Fidelity Blue Chip Growth (FBGRX) (.82% expense ratio)

are way too expensive.

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

Re: New-ish Investor--Advice on strategy

Post by retiredjg » Mon May 15, 2017 10:42 am

I see a couple of non-Bogleheaded issues.

1) You are using several actively managed funds. They have high expense ratios and the ones you have in taxable are not tax-efficient. I'd suggest you replace them with the excellent Fidelity Index Funds.

2) You have bought Vanguard funds at Fidelity where there is a $50 or $75 trading fee unless you have free trades. This defeats the purpose of having the Vanguard funds. Again, Fidelity has some excellent index funds which you could use.

You asked about whether you funds represent the overall market? Without looking up what is in each of those funds, I'd guess you do not have much mid or small cap representation.

Yes, you should have some bonds.

irl
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Joined: Sun May 07, 2017 6:13 pm

Re: New-ish Investor--Advice on strategy

Post by irl » Fri May 19, 2017 6:44 pm

Thanks to all for the feedback! I had a feeling the picks I got from this advisor wasn't necessarily lining up with what I read in Bogleheads...

So, if I wanted to convert to Fidelity passive index funds, selling and then buying within my Roth is not a "taxable event," correct? Is there any way to reduce my tax exposure in my taxable account in this regard?

retiredjg
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Re: New-ish Investor--Advice on strategy

Post by retiredjg » Sat May 20, 2017 8:10 am

Exchanging from one fund to another inside the Roth IRA does not trigger any taxes. You might check for frequent trading or minimum holding periods though.

You can reduce taxes in the taxable account by using losses to offset gains. I'm not sure you would have any losses since the market is high, but you should check.

But....you say you may be in the lowest tax bracket. If that is correct, you may avoid (federal) tax on your long term capital gains. So let's start there.

To determine your federal tax bracket, compare your taxable income (line 43 on Form 1040) to this chart.

http://www.moneychimp.com/features/tax_brackets.htm

How long have you held those funds? What are your unrealized gains on each fund? You should be able to look that up on your internet account.

irl
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Joined: Sun May 07, 2017 6:13 pm

Re: New-ish Investor--Advice on strategy

Post by irl » Tue May 23, 2017 11:18 am

Hey @retiredjg:

I fall into the 15% tax bracket.

Unrealized gains in my taxable account:

FBRGX: + $60 (most gains are long-term)
TRVLX: + $196 (short-term gains)
VHDYX: - $79 (short-term gains)

I think this means that my capital gains tax will be 15% either way, right?

Thanks for your help! I'm learning a lot here.

For all: I know timing the market is not usually worth pursuing, but is there any case here for waiting to sell/re-buy index funds after a market dip?

retiredjg
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Re: New-ish Investor--Advice on strategy

Post by retiredjg » Tue May 23, 2017 11:38 am

irl wrote:Hey @retiredjg:

I fall into the 15% tax bracket.

Unrealized gains in my taxable account:

FBRGX: + $60 (most gains are long-term) <----long term gains, as long as you remain in the 15% bracket, are taxed at 0%
TRVLX: + $196 (short-term gains)<--short term gains would be taxed at 15%
VHDYX: - $79 (short-term gains)<--short term gains would be taxed at 15%
If you can sell all this without pushing yourself into a higher bracket, I'd just get rid of it now and buy Index funds (total stock and total international) in your taxable account. Hold Fidelity's new Total International Index and Fidelity's Total Bond Index in the Roth IRA.

You should not be holding Vanguard funds at Fidelity because of the trading costs. Not a problem - the Fidelity funds are just fine.

If you tell us how large each of your accounts is, we can tell you how to split things up.

Have you considered opening a SIMPLE IRA for your business?

irl
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Re: New-ish Investor--Advice on strategy

Post by irl » Sun May 28, 2017 12:04 am

@retiredjg:

The Roth has $26K
The taxable has $10K

We haven't looked too closely into a 401(k)/SIMPLE IRA for the business because we're a small business in the arts and it would have to be super minimal in terms of costs to the company.

retiredjg
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Re: New-ish Investor--Advice on strategy

Post by retiredjg » Sun May 28, 2017 12:10 pm

Using the numbers you posted, the portfolio looks like this. Note that the whole portfolio adds up to 100%.

Taxable @ Fidelity 27.8%
4.7% Cash
8.8% T. Rowe Price Value (TRVLX) (.82% expense ratio)
7.2% Fidelity Blue Chip Growth (FBGRX) (.82% expense ratio)
7.2% Vanguard High Dividend Yield Index Fund (VHDYX) (0.15% expense ratio)

Roth IRA @ Fidelity 72.2%
39.7% Fidelity Blue Chip Growth (FBGRX) (.82% expense ratio)
16.6% Vanguard High Dividend Yield Index Fund (VHDYX) (0.15% expense ratio)
15.9% Vanguard Total International Stock Index Fund (VGTSX) (.18% expense ratio)



Here is a way to set up the typical 3 fund portfolio with the money you currently have.

Taxable 27.8%
9.8% Fidelity Total Stock
18% Fidelity Total International Index

Roth IRA 72.2%
50% Fidelity 500 Index
12.2% Fidelity Extended Market
10% Fidelity Total Bond Index

This portfolio is 90% stock, 10% bonds with 20% of the stocks (18% of the portfolio) in international. I split total stock into 2 funds in the Roth IRA to avoid a wash sale if you happen to sell the Total Stock in taxable at a loss. 500 Index and Extended Market at about 80/20 gives you something very similar to total stock.

The funds can be found here. https://www.fidelity.com/mutual-funds/f ... ndex-funds

autopeep
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Re: New-ish Investor--Advice on strategy

Post by autopeep » Sun May 28, 2017 12:15 pm

Use some of the cash in your taxable to rid yourself of the remaining educational debt. That's a guaranteed 7% return.

irl
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Joined: Sun May 07, 2017 6:13 pm

Re: New-ish Investor--Advice on strategy

Post by irl » Tue May 30, 2017 11:16 am

Awesome, thank you all for your help! Its been invaluable.

irl
Posts: 10
Joined: Sun May 07, 2017 6:13 pm

Re: New-ish Investor--Advice on strategy

Post by irl » Sun Feb 18, 2018 1:40 pm

Hi there,

I'm following up to my previous post with a new challenge I've run into. Refresher on my current allocations is below.

I've transferred the maximum in cash to my Roth for 2018 and have roughly the same amount of cash in my taxable account to invest. What this means is that I'm unable to invest all of this cash and maintain my allocation percentages, because 72% of this total cash is more than the Roth limit. So, what to do? Go ahead with a slightly lopsided allocation all year? That doesn't seem great, especially in the long terms, when this could happen again.

Thanks for any help!

---

Advice from @retiredjg that informed my plan-->
retiredjg wrote:
Sun May 28, 2017 12:10 pm
Using the numbers you posted, the portfolio looks like this. Note that the whole portfolio adds up to 100%.

Here is a way to set up the typical 3 fund portfolio with the money you currently have.

Taxable 27.8%
9.8% Fidelity Total Stock
18% Fidelity Total International Index

Roth IRA 72.2%
50% Fidelity 500 Index
12.2% Fidelity Extended Market
10% Fidelity Total Bond Index

This portfolio is 90% stock, 10% bonds with 20% of the stocks (18% of the portfolio) in international. I split total stock into 2 funds in the Roth IRA to avoid a wash sale if you happen to sell the Total Stock in taxable at a loss. 500 Index and Extended Market at about 80/20 gives you something very similar to total stock.

chevca
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Re: New-ish Investor--Advice on strategy

Post by chevca » Sun Feb 18, 2018 1:52 pm

I'm not understanding why you can't maintain your AA? You can shift some around in the Roth if needed. Will nothing more be going into taxable in all of 2018? You could balance things out with future contributions there. There's got to be a way.

If not, it's not a large amount of money with just a Roth contribution and similar to taxable. It can't throw your portfolio off that much, would it?

Lou354
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Re: New-ish Investor--Advice on strategy

Post by Lou354 » Sun Feb 18, 2018 2:38 pm

Asset allocation doesn’t refer to the ratio of tax-advantaged to taxable. It refers to the ratio of different types of investments, e.g., US equities:int’l equities:bonds, regardless of the account type. There’s no reason to try to have 72% of your investments in a tax-advantaged account.

retiredjg
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Re: New-ish Investor--Advice on strategy

Post by retiredjg » Sun Feb 18, 2018 4:53 pm

irl wrote:
Sun Feb 18, 2018 1:40 pm
Hi there,

I'm following up to my previous post with a new challenge I've run into. Refresher on my current allocations is below.
That was a year ago. Did you actually change your allocations to match that suggestion? What are the allocations now?

Also tell us what your expected contributions are, how many dollars will go (or have gone) into each account. Someone will show you how to make it happen.

retiredjg
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Re: New-ish Investor--Advice on strategy

Post by retiredjg » Sun Feb 18, 2018 5:01 pm

Is it possible you thought that suggestion was just talking about your contributions? If so, I'm sorry it was not clear.

I meant for you to change what you already had invested to that suggestion and then add money in roughly the ratios you want for your portfolio.

irl
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Joined: Sun May 07, 2017 6:13 pm

Re: New-ish Investor--Advice on strategy

Post by irl » Mon Feb 26, 2018 7:57 pm

Thanks for the replies, all.
retiredjg wrote:
Sun Feb 18, 2018 5:01 pm
Is it possible you thought that suggestion was just talking about your contributions? If so, I'm sorry it was not clear.

I meant for you to change what you already had invested to that suggestion and then add money in roughly the ratios you want for your portfolio.
Correct, I did in fact change my portfolio and have been adding money to maintain those ratios.

I expect to max my Roth each year and contribute between 2-6k per year in the taxable.

Perhaps I'm overthinking things, but if I'm supposed to be contributing to the Roth more than the taxable (72% vs 27%) then how do I maintain my ratio of the different funds in years when I may contribute more to the taxable than to the Roth? Do I buy shares of funds currently in my Roth in my taxable?

Thanks for the quick replies and help, as always!

retiredjg
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Re: New-ish Investor--Advice on strategy

Post by retiredjg » Wed Feb 28, 2018 9:33 am

You are not supposed to be contributing more to Roth than taxable. The 72% and 27% only represent the relative size of the accounts when we were looking at them back when. Those numbers have nothing to do with the future.


Your desired ratios for the portfolio are 72% US stock, 18% International Stock and 10% bonds. These are the numbers to pay attention to. If the portfolio starts at 72/18/10 and you add money at 72/18/10, it will stay close to 72/18/10 except for large market movements.

You are putting $5,500 into Roth IRA and let's pick $4,500 in taxable for the sake of working with a nice round number. That's a total of $10k contributions for 2018.

  • Put 10% of $10k into bonds (thats $1,000 and it goes to the roth IRA)
    Put 18% of $10k into international (that's $1,800 and it goes to taxable)

    For the Roth IRA, you have $4,500 remaining to split up between the 500 index and the Extended Market. Put about 80% of that $4,500 into the 500 index ($3,600). Put the remaining 20% of that $4,500 into Extended Market ($900)

    Put everything left over into Total Stock Market***

***Since you may not know exactly how much you will contribute to taxable, you don't actually put the first $1,800 into international. Instead, as you put money in put some in each fund, more in the US fund than the international fund. It is only if you contribute $10k that $1,800 is the right number.


If this is not yet making sense, please tell us exactly what you have in each account (how many dollars in each fund or cash) and we'll start from there.

irl
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Re: New-ish Investor--Advice on strategy

Post by irl » Tue Mar 20, 2018 2:21 pm

Wow, it took me typing out a whole response with my actual numbers for it all to suddenly click in place, but yes, its making sense now!

THANK YOU

retiredjg
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Re: New-ish Investor--Advice on strategy

Post by retiredjg » Tue Mar 20, 2018 6:43 pm

Sometimes putting something on paper makes it make more sense. Glad you had the lightbulb moment. :happy

irl
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Re: New-ish Investor--Advice on strategy

Post by irl » Sat Apr 07, 2018 3:41 pm

So, following along with my plan, I've maxed out my 2018 Roth contributions. But I've just received by tax return and would like to invest it, so it'll all have to go in the taxable.

Can I simply buy the the Total Bond Index (or two equivalent indexes to avoid was sale like I did with US stocks) in my taxable account so I can continue to contribute at the right ratio of Bonds/Int'l stocks/US stocks?

retiredjg
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Re: New-ish Investor--Advice on strategy

Post by retiredjg » Sun Apr 08, 2018 9:45 am

I would not put bonds into the taxable account unless the money is for some short term goal. If the money is for retirement, I'd put only US and International stocks in taxable and then go to your Roth IRA and sell a little bit of stocks and buy bonds to get back to your desired stock to bond ratio.

Or maybe the addition of your refund to the taxable account won't throw things so off kilter that it needs to be adjusted in your Roth IRA.

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