Modest portfolio makeover - please help

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newbie1920
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Joined: Sun Mar 26, 2017 12:50 pm

Modest portfolio makeover - please help

Post by newbie1920 » Mon May 15, 2017 10:57 pm

Thank you for reading this post and apologies for the length. This is my second post - with the answers to my first post I was able to decide not to opt for a self directed account for my 401K and start educating myself so I can manage my own portfolio with confidence :happy. So far, I have been focused on reading & learning from several recommended sources topics including tax efficient placement, 3 fund portfolio as well as the Boglehead Guide to Investing. Now I feel ready to start getting my portfolio in shape - but would welcome some advice from you.

My questions:

1. Portfolio makeover: How would you re-organize my portfolio? Given my below detailed assets and desired allocation (20% bonds / 20% Intl stock / 60% US stock) how would you recommend putting this in practice across my 3 accounts? Would you do one fund per account for simplicity or 2 funds per account so that I can rebalance? Is 6 funds in 3 accounts a lot? Would you avoid the only Bond fund offered within my 401K due to somewhat higher ER (Metropolitan West Total Return Bond I Intermediate-Term Bond, MWTIX, ER = 0.44) and put all of my bond allocation to my Vanguard Roth IRA? If using Vanguard Institutional Index I Large Blend VINIX as my key 401K holding, should I be worried about this being only S&P 500 fund and add extended market or small cap? In such case how much is enough proportionally to the S&P 500 in my 401K?

What I am considering:
401K (57% of assets) - mostly US stock (S&P 500) & possibly some (or all of) my bond allocation
Roth IRA (16% of assets) - extended market/small cap (not sure how to determine whether & how much of it I need) and/or international stock; or bonds (if not enough in 401K)
Taxable (27% of assets) - US and/or international stocks

2. Growth vs. Income Funds: Should I care or not? I am 32 and expect to be in accumulation stage for some next 30 years or so. As I read about the differences between Growth/Income/Blend, I wonder should that be a consideration for me? I am guessing Blend is the way to go since that's what Vanguard Total Stock Market Index Fund is - and so is the fund with the lowest ER (0.04) in my 401K - Vanguard Institutional Index I Large Blend - VINIX ... but the T. Rowe Price Retirement 2050 (TRRMX) that I have been holding in my 401K is actually Large/Growth, so that is throwing me off.

3. Foreign Tax Credit: Will it make my tax return a nightmare if an international fund is used in my Taxable? In case I would end up buying any of the Vanguard International funds in my Taxable account (which sounds to be frequently the recommendation), how difficult is it to do foreign tax credit forms if I plan to do our tax returns myself? I plan to buy and hold with regular monthly contributions (and no distributions) for all of my accounts. I realise this is a subjective question but want to get at least an idea what I am getting myself into. Does it also impact state and city tax return? We file jointly, two incomes from being employed, no debt or dependents, max deduction for my 401K (my husband has Roth 401K) plus personal deductions...that's pretty much it.

Appreciate SO much any comments and/or recommendations!

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

About me:

Emergency Funds: 12K to cover 6 months at Barclays Online Savings (1% interest); plan to continue until reaching 12 months of funds
Debt: none
Tax Filing Status: married filing jointly (no children or dependents)
Tax Rate: federal 25% (13% effective in FY 2016), state approx. 3.5% (second highest bracket)
State of Residence: Ohio
Age: 32
Desired Asset Allocation: 80% stocks / 20% bonds
Desired International Allocation: 25% of stocks (i.e. 20% of total portfolio)

$74K (100%) of Current Retirement Assets:

$12K (16%) at Roth IRA (Vanguard)
Vanguard Target Date Fund 2050 (VFIFX, ER=0.16)

$20K (27%) at Taxable (Vanguard)
Available to invest (yep, planning to deploy this soon, just want to first clarify to myself what my "buy and hold" strategy exactly is (=what to buy and hold...) so I avoid any unnecessary (and taxable) movements here.

$42K (57%) at Employer's 401K*
$30K at T. Rowe Price Retirement 2050 (TRRMX, ER=0.76)
$12K at Vanguard Institutional Index I Large Blend (VINIX, ER=0.04)
(already started to shift to VINIX as per advice I got in my first post ... leaving space to first determine my full strategy, before I shift most/all to VINIX)

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

*Employer's 401K:
- 4% employer's match (100% vested) + 3% annual retirement employer's contribution at fiscal year end (right now I am at 40% vested, will be fully vested in the next 3 years)
- I am contributing max annual limit to both 401K and Roth IRA ($18K / $5.5K) and have reached these limits for FY 2017
(I am contributing to taxable as I can, so far ~$10K/year (this is an average, that might change year to year)

*Funds core offerings within my employers 401K plan (managed by Wells Fargo):
The SARP Stable Value Fund (0.48%)
Metropolitan West Total Return Bond I Intermediate-Term Bond (0.44%) - MWTIX
T. Rowe Price Retirement 2005 (0.60%) - TRRFX
T. Rowe Price Retirement 2010 (0.59%) - TRRAX
T. Rowe Price Retirement 2015 (0.62%) - TRRGX
T. Rowe Price Retirement 2020 (0.66%) - TRRBX
T. Rowe Price Retirement 2025 (0.69%) - TRRHX
T. Rowe Price Retirement 2030 (0.72%) - TRRCX
T. Rowe Price Retirement 2035 (0.74%) - TRRJX
T. Rowe Price Retirement 2040 (0.76%) - TRRDX
T. Rowe Price Retirement 2045 (0.76%) - TRRKX
T. Rowe Price Retirement 2050 (0.76%) - TRRMX
T. Rowe Price Retirement 2055 (0.76%) - TRRNX
T. Rowe Price Retirement 2060 (0.76%) - TRRLX
Dodge & Cox Stock Large Value (0.52%) - DODGX
Vanguard Institutional Index I Large Blend (0.04%) - VINIX
PRIMECAP Odyssey Growth (0.66%) - POGRX
RidgeWorth Ceredex Mid-Cap Value Equity I Mid-Cap Value (1.12%) - SMVTX
Hartford MidCap HLS IA Mid-Cap Growth (0.70%) - HIMCX
RidgeWorth Ceredex Small Cap Value Equity I Small Blend (1.21%) - SCETX
Prudential Jennison Small Company Z Small Growth (0.84%) - PSCZX
Artisan International Fund Investor Foreign Large Growth (1.19%) - ARTIX

Lafder
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Re: Modest portfolio makeover - please help

Post by Lafder » Tue May 16, 2017 9:01 am

You have a nice simple plan. We were at 80/20 until our late 40's.

Your choice of 25% of stocks being International may be lower than some of the Target Date retirement funds use. The simplicity of all in one funds that rebalance for you is hard to beat!

Given the large % of total your 401k is, you do need to hold at least a % of bonds there.

If you are going to have the subfunds, instead of all in one funds that rebalance for you, you will need to have enough stocks and bonds in one account that you can rebalance in stock market crashes. You also need International and US stock in the same account so you can rebalance there. Yes you can hold just one of them until there is a market shift big enough to rebalance. But for example if you only hold International stock in one account, and the International stock market crashes badly, you do not have bonds or US stock in the same account to sell and buy International low, also called rebalancing :)

If you have a single holding in one account that goes up, yes you can sell some and buy the asset class you need to add. The problem is if the single holding account drops and you can not add to it to buy low and rebalance. I have just a single holding in my smaller accounts. But I have enough of the same asset classes to rebalance in other accounts if there is a big market shift. Our 401ks have all asset classes. Out Roths with much smaller balances have just US stock, mine. And US and International (husband's Roth which is larger enough I wanted rebalance space there).

These 3 funds in your 401k can be used for a 3 fund portfolio to get your 60/20/20 AA:
Vanguard Institutional Index I Large Blend (0.04%) - VINIX
Artisan International Fund Investor Foreign Large Growth (1.19%) - ARTIX
Metropolitan West Total Return Bond I Intermediate-Term Bond (0.44%) - MWTIX

At your proposed 60/20/20 the average/total ER is 0.35 if you use the subfunds (check my math) which is a little less than half of the 0.76 of the target date 2040 fund. But for that lower cost, you have to do the rebalancing.

Consider the in one fund for the majority of your holdings for simplicity in your 401k and to let them rebalance, and single holdings in smaller accounts until the balance gets high enough to make a difference.

Here is detail on the Target Date 2040 fund.

https://www3.troweprice.com/fb2/fbkweb/ ... cker=TRRDX

In our taxable account, I primarily hold a Total Stock Market Index, and 3 individual stocks (small % of total). So to rec what I do, a total stock market fund for taxable is what I do.

But to really rec what I do, we use a 3 fund portfolio in our 401k's, so I do not hold all in one funds myself. But I always say that some day I will switch to all in ones for simplicity in case I go before my husband. I have not made the change, and I am not dead yet :)

I do not pay attention to value vs growth and aim for Total market funds. Large cap is the majority of the total stock market anyway at about 86%. But I prefer total to large cap if available. If total stock market is not easily available in your 401k using sub funds, you can add mid and small cap as the balances of your accounts get bigger. Your Roth and taxable may eventually (hopefully) grow enough for the balances to make more difference

To capture total market, consider as you proposed:

401k either Target Date 2040, or the 3 fund you can control yourself.
(If you use a Target date consider less aggressive than 2040 since you have the other accounts with stocks only so your stock % is even higher than in just the 401k).
Roth Total stock market (or small and/or midcap) ok to use Target Date for simplicity.
Taxable total stock market (with or without some International and/or tax advantaged bonds here. (I have no taxable bonds)).

The fewer funds per account, the simpler it will be to manage it all.

Lafder

Beensabu
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Re: Modest portfolio makeover - please help

Post by Beensabu » Tue May 16, 2017 10:13 am

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Last edited by Beensabu on Wed Jun 21, 2017 12:48 am, edited 1 time in total.

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ruralavalon
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Location: Illinois

Re: Modest portfolio makeover - please help

Post by ruralavalon » Tue May 16, 2017 10:50 am

Asset allocation.
newbie1920 wrote:Age: 32
Desired Asset Allocation: 80% stocks / 20% bonds
Desired International Allocation: 25% of stocks (i.e. 20% of total portfolio)

In my opinion your desired asset allocation is within the range of what is reasonable.


Fund selection.
newbie1920 wrote:Would you avoid the only Bond fund offered within my 401K due to somewhat higher ER (Metropolitan West Total Return Bond I Intermediate-Term Bond, MWTIX, ER = 0.44) and put all of my bond allocation to my Vanguard Roth IRA? If using Vanguard Institutional Index I Large Blend VINIX as my key 401K holding, should I be worried about this being only S&P 500 fund and add extended market or small cap? In such case how much is enough proportionally to the S&P 500 in my 401K?

In the 401k Metropolitan West Total Return Bond I (MWTIX) ER 0.44% is a very good actively managed, intermediate-term bond fund, with a modest expense ratio. I would not hesitate to use it.

In the 401k Vanguard Institutional Index I (VINIX) ER 0.04% is an S&P 500 index fund. I would not be concerned at all about using that by itself for a domestic stock fund.

I suggest using a total stock market index fund where available; otherwise an S&P 500 index fund (such as Vanguard Institutional Index I, VINIX) is good enough for domestic stocks. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations". An S&P 500 index fund covers 80% of the U.S. stock market, and in the 25 years since the creation of the first total stock market fund the performance of the two types of funds has been almost identical. Morningstar “growth of $10k” graph, VFINX vs VTSMX. See also Allan Roth, CBS Moneywatch, "John C. Bogle on the S&P 500 vs. the Total Stock Market". So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically added little in performance.

Roth IRA If you wanted to add the extended market fund do that in the Roth IRA. You could use an 81/19 mix of S&P 500 (in the 401k) and extended market (in the Roth IRA) to approximate the content of a total stock market index fund. Wiki article, "Approximating total stock market". If you don't want to bother with an extended market fund then you could just use Vanguard Total Stock Market Index Fund in the Roth IRA, which would would be my personal preference.

In the taxable account I suggest using Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05% and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%. Both are very tax-efficient. Wiki article "Tax-efficient fund placement". Those funds are also well suited to any type of account. Both are very diversified with very low expense ratios.


Coordinating investments.
newbie1920 wrote: . . . my husband has Roth 401K . . .

It is often best to look at all accounts of a married couple together as a single unified whole, rather than consider the accounts of each person separately. Start fund selection by choosing only the one or two best funds (diversified + low ER) in the 401ks, where the choices offered are limited. Then complete the rest of the asset allocation using the nearly unlimited choices available in the IRAs and taxable accounts.

So it may be better to coordinate investments with those in your husband's accounts.



Example portfolio.
newbie1920 wrote: Given my below detailed assets and desired allocation (20% bonds / 20% Intl stock / 60% US stock) how would you recommend putting this in practice across my 3 accounts? Would you do one fund per account for simplicity or 2 funds per account so that I can rebalance?

Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to accommodate the fund offerings in your 401k. Current portfolio size = $74k. New annual contributions = about $33.5k plus employer match and contribution. The asset allocation is: 20% bonds; 20% international stocks; and 60% domestic stocks. The percentages given are percentages of the total portfolio, not of a given account. The suggestion is to switch both the existing balances and the new contributions to the funds indicated. All percentages and dollar amounts are rounded off, so may not add up exactly.

Taxable account @ Vanguard (27% of assets; $20k; adds about $10k/yr = < 30% of new annual contributions)
07%, $05k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.15%
20%, $15k, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%.

401K (57% of assets; $42k; adds $18k/yr + 4% employer match and 3% employer contribution = > 54% of new annual contributions)
37%, $27k, Vanguard Institutional Index I (VINIX) ER 0.04%
20%, $15k, Metropolitan West Total Return Bond I (MWTIX) ER 0.44%

Roth IRA @ Vanguard (16% of assets; $12k; adds $5.5k/yr = < 16% of new annual contributions)
16%, $12k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%
OR
11%, $09k, Vanguard Extended Market Index Fund Investor Shares (VEXMX) ER 0.21% (60% x .19 =11%)
05%, $03k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.15%



Rebalancing.
Because the funds will grow at different and unpredictable rates, it may be necessary every year or two to rebalance in order to maintain the desired asset allocation. Wiki article, "Rebalancing". You can easily adjust the stock/bond allocation by exchanging between funds inside the 401k. You can easily adjust the domestic/international allocation by how you direct new contributions in the taxable account.

Avoid exchanging between funds in the taxable account, which can create income tax liability.

. . . . .

I suggest that you read one or two books on general investing. Wiki article, "Books: recommendations and reviews".

If you have any questions just ask.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

newbie1920
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Joined: Sun Mar 26, 2017 12:50 pm

Re: Modest portfolio makeover - please help

Post by newbie1920 » Tue May 16, 2017 11:46 pm

First of all, wow! Thank you so much for all the replies, links and detail recommendations!!! I appreciate you taking the time to provide your feedback and suggestions.
ruralavalon wrote:Taxable account @ Vanguard (27% of assets; $20k; adds about $10k/yr = < 30% of new annual contributions)
07%, $05k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.15%
20%, $15k, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%.

401K (57% of assets; $42k; adds $18k/yr + 4% employer match and 3% employer contribution = > 54% of new annual contributions)
37%, $27k, Vanguard Institutional Index I (VINIX) ER 0.04%
20%, $15k, Metropolitan West Total Return Bond I (MWTIX) ER 0.44%

Roth IRA @ Vanguard (16% of assets; $12k; adds $5.5k/yr = < 16% of new annual contributions)
16%, $12k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%
OR
11%, $09k, Vanguard Extended Market Index Fund Investor Shares (VEXMX) ER 0.21% (60% x .19 =11%)
05%, $03k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.15%

This is just great. Thank you, ruralavalon! 3 follow up questions:

1. Sounds like stock over bonds for Roth IRA. Is that because of the relative share of my Roth IRA on my total portfolio (which is less than my AA of 20% to bonds), or the lower returns of bonds in general - and therefore stocks being preferable in tax advantaged Roth? (I was initially thinking of possibly splitting my bond AA of 20% between my 401K and Roth IRA...)

2. Also just like Lafder recommended, you suggest it might be a good idea to have possibly 2 funds in each account to rebalance. Assuming I have the 2 above suggested funds in Taxable and only rebalance through new contributions (no withdrawals), will I be able to avoid having any tax liability?

ruralavalon wrote:In the 401k Metropolitan West Total Return Bond I (MWTIX) ER 0.44% is a very good actively managed, intermediate-term bond fund, with a modest expense ratio. I would not hesitate to use it.

3. This might be a dumb question. What do you find to be the best source to make the evaluation of Metropolitan West Total Return Bond I (MWTIX, ER 0.44%)? (or any other fund) Though I saw 5 stars by Morningstar, I thought the ER was somewhat high (well compared to Vanguard's Total Bond Market Fund) and the turnover high (now I am guessing the active management is the driver?). How do I navigate public resources to evaluate a fund like this, what should I look for?

Fund Selection:
Lafder wrote:Given the large % of total your 401k is, you do need to hold at least a % of bonds there.

You have a point, Lafder. I do not mind rebalancing every once a year or so and actually think it might be a useful exercise to help me learn. Just want to keep it reasonably simple. Reading about impact of ER in the long term, plus a possible outlook of lower equities returns for the coming decade, I might not use the T.Rowe Funds (ER range 0.6-0.76) or the Artisan International Fund (ER>1.0) and try to stay with funds with ER<0.50.

ruralavalon wrote:Morningstar “growth of $10k” graph, VFINX vs VTSMX. See also Allan Roth, CBS Moneywatch, "John C. Bogle on the S&P 500 vs. the Total Stock Market". So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically added little in performance.

ruralavalon wrote:You could use an 81/19 mix of S&P 500 (in the 401k) and extended market (in the Roth IRA) to approximate the content of a total stock market index fund. Wiki article, "Approximating total stock market".

Thank you, Ruralavalon, super helpful! I am reading along, and it sounds like I might end up skipping on the Extended Market for the sake of simplicity - pretty much along of what you suggested.

Coordinating investments:
ruralavalon wrote:So it may be better to coordinate investments with those in your husband's accounts.

This is the plan one day in the future. For now, I want to get a grip on how to work with my 3 accounts. My husband has all of his retirement savings in his employer's Roth 401K - which holds one Target Date Fund with our target AA (80:20) at a great ER (0.04) so we decided to leave it as is for now and just get my ducks (well, accounts :D ) in a row.

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ruralavalon
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Re: Modest portfolio makeover - please help

Post by ruralavalon » Wed May 17, 2017 12:05 pm

newbie1920 wrote:1. Sounds like stock over bonds for Roth IRA. Is that because of the relative share of my Roth IRA on my total portfolio (which is less than my AA of 20% to bonds), or the lower returns of bonds in general - and therefore stocks being preferable in tax advantaged Roth? (I was initially thinking of possibly splitting my bond AA of 20% between my 401K and Roth IRA...)

Both reasons apply.

But basically the process is: (1) first select the best one or two funds to use in the 401k (and Metropolitan West Total Return Bond is one of the best offered in the 401k); (2) then select tax efficient funds for the taxable account; and (3) the Roth IRA receives what is left over.


newbie1920 wrote:2. Also just like Lafder recommended, you suggest it might be a good idea to have possibly 2 funds in each account to rebalance. Assuming I have the 2 above suggested funds in Taxable and only rebalance through new contributions (no withdrawals), will I be able to avoid having any tax liability?

The most important part of asset allocation is the stock/bond allocation, that's easily rebalanced by exchanging between the two funds inside the 401k.

I think you can rebalance the domestic/international stock allocation in the taxable account just by using your new contributions. Vanguard Total Stock Market Index Fund and Vanguard Total International Stock Index Fund are highly correlated (correlation = 80, where 100 = perfect correlation), meaning they tend to move up or down together. So it's very unlikely that in any given year they will move far enough apart that you couldn't bring them back into balance with the infusion of $10k into whichever fund was below its target allocation.


newbie1920 wrote:
ruralavalon wrote:In the 401k Metropolitan West Total Return Bond I (MWTIX) ER 0.44% is a very good actively managed, intermediate-term bond fund, with a modest expense ratio. I would not hesitate to use it.

3. This might be a dumb question. What do you find to be the best source to make the evaluation of Metropolitan West Total Return Bond I (MWTIX, ER 0.44%)? (or any other fund) Though I saw 5 stars by Morningstar, I thought the ER was somewhat high (well compared to Vanguard's Total Bond Market Fund) and the turnover high (now I am guessing the active management is the driver?). How do I navigate public resources to evaluate a fund like this, what should I look for?

I look for information on Morningstar.

If there were a good bond index fund in the 401k, I would suggest that over a good managed bond fund. But no bond index fund is offered, so you work with what is available. An expense ratio of 0.44% is good, it's low for a managed bond fund. That is in line compared to other good managed intermediate-term bond funds -- Dodge & Cox Income Fund (DODIX) has an expense ratio of 0.43%, and PIMCO Total Return Institutional Class (PTTRX) has an expense ratio of 0.46%.

in addition to expense ratio and good diversification, in a bond fund I look at: (1) average effective duration; (2) average credit quality: and (3) how the fund held up in 2008. For Metropolitan West Total Return Bond I (MWTIX) the average effective duration = 5.61 years (intermediate-term, longer is riskier), the average credit quality = BBB (that's investment grade, only 7% of its bonds are below investment grade), and its value dipped very little in the crash of 2008 (see growth of $10k graph). The idea of having a bond allocation is for relative safety during a stock market collapse.

Turnover is not a key in selection of a bond fund. Any bond fund will have high turnover. As bonds held by a fund mature, the fund replaces them by buying new bonds. In an intermediate-term bond fund as bonds held by the fund get closer to maturity they are sold, and the fund replaces them by buying new bonds of intermediate maturity.


newbie1920 wrote:Coordinating investments:
ruralavalon wrote:So it may be better to coordinate investments with those in your husband's accounts.

This is the plan one day in the future. For now, I want to get a grip on how to work with my 3 accounts. My husband has all of his retirement savings in his employer's Roth 401K - which holds one Target Date Fund with our target AA (80:20) at a great ER (0.04) so we decided to leave it as is for now and just get my ducks (well, accounts :D ) in a row.

That's a reasonable plan for now in my opinion, since he is very diversified with a very low expense ratio in his Roth 401k.

In the future he could look at adding an IRA.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

newbie1920
Posts: 10
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Re: Modest portfolio makeover - please help

Post by newbie1920 » Wed May 17, 2017 9:28 pm

Thank you, ruralavalon, for your analysis. It shows me how much I still have to learn and it's helpful to follow your thought process in making that assessment. To your point on bonds vs. stocks - I recall reading in several sources that is the key decision and everything beyond is more of a tweaking. Still, I'd like to get the rest set up as good as I can. Maybe that's a rookie wishful thinking or my personality, who knows :happy

ruralavalon wrote:I think you can rebalance the domestic/international stock allocation in the taxable account just by using your new contributions. Vanguard Total Stock Market Index Fund and Vanguard Total International Stock Index Fund are highly correlated (correlation = 80, where 100 = perfect correlation), meaning they tend to move up or down together. So it's very unlikely that in any given year they will move far enough apart that you couldn't bring them back into balance with the infusion of $10k into whichever fund was below its target allocation.


Interesting point about the correlation. I did not think about it that way but it makes a lot of sense. If I do my key rebalancing (bonds vs. stocks) in my 401K, what would be the risk of leaving all of my Roth in Vanguard Total Stock Market Index Fund, and all of my Taxable in Vanguard Total International Stock Index Fund? (say until my portfolio grows to be $100K or $150K)

I am wondering whether for the start this simple approach would be a reasonable compromise (or not?). The benefits would be easier management, tracking and slightly lower ER. Based on your above assessment of correlation of the two it seems like the benefit of rebalancing between Total US vs. International Equities might not be material until my portfolio grows bigger (say 100K or 200K?). So the major flaw would be not being at my AA of 60 US / 20 Intl / 20 Bonds. The target date funds I currently hold in my 401K and Roth have international equity allocation between 26.93% (T.Rowe TDF) and 36.14% (Vanguard TDF).

... so that leads me back to the question - is it too much of a trade-off/risk to increase my international equities AA to fill my Taxable and leave my Roth all US equities to keep things simple? (but deviate from my initial US vs. International Equities AA)

I am thinking if I were to do that I would re-evaluate AA when hitting 100K or in case of a big market spin as to not let the international go beyond 35% of total portfolio ... depending how the market evolves and whichever of the two (Roth or Taxable) grows to be higher % of total, that account would eventually have both US and Intl Equities with the other account possibly just carrying one of the two funds. Is this making sense or would you say deviating from the AA from the get go is a slippery slope and it might just be better to do US+Intl Equities in Taxable and US Equities in Roth to get to my AA exactly?

This would look like this:

A. AA: 53/20/27 (UE Eq/Bond/Intl Eq)

Taxable account @ Vanguard (27% of assets; $20k)
27%, $20k, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%

401K (57% of assets; $42k)
37%, $27k, Vanguard Institutional Index I (VINIX) ER 0.04%
20%, $15k, Metropolitan West Total Return Bond I (MWTIX) ER 0.44%

Roth IRA @ Vanguard (16% of assets; $12k)
16%, $12k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%

vs.

B. AA: 60/20/20 (UE Eq/Bond/Intl Eq)

Taxable account @ Vanguard (27% of assets; $20k)
07%, $05k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.15%
20%, $15k, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%

401K (57% of assets; $42k)
37%, $27k, Vanguard Institutional Index I (VINIX) ER 0.04%
20%, $15k, Metropolitan West Total Return Bond I (MWTIX) ER 0.44%

Roth IRA @ Vanguard (16% of assets; $12k)
16%, $12k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%

OR

C. AA: 60/20/20 (UE Eq/Bond/Intl Eq)
(but least efficient from ER perspective until the holdings would all grow >$10K)

Taxable account @ Vanguard (27% of assets; $20k)
17%, $13k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSMX) ER 0.05%
10%, $07k, Vanguard Total International Stock Index Fund Investor Shares (VTIAX) ER 0.18%

401K (57% of assets; $42k)
37%, $27k, Vanguard Institutional Index I (VINIX) ER 0.04%
20%, $15k, Metropolitan West Total Return Bond I (MWTIX) ER 0.44%

Roth IRA @ Vanguard (16% of assets; $12k)
06%, $05k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.15%
10%, $07k, Vanguard Total International Stock Index Fund Investor Shares (VTIAX) ER 0.18%

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ruralavalon
Posts: 11102
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Modest portfolio makeover - please help

Post by ruralavalon » Thu May 18, 2017 9:11 am

newbier1920 wrote:Interesting point about the correlation. I did not think about it that way but it makes a lot of sense. If I do my key rebalancing (bonds vs. stocks) in my 401K, what would be the risk of leaving all of my Roth in Vanguard Total Stock Market Index Fund, and all of my Taxable in Vanguard Total International Stock Index Fund? (say until my portfolio grows to be $100K or $150K)

I don't see a risk. I don't see a drawback other than not having your desired allocation of international stocks.


newbier1920 wrote:I am wondering whether for the start this simple approach would be a reasonable compromise (or not?). The benefits would be easier management, tracking and slightly lower ER. Based on your above assessment of correlation of the two it seems like the benefit of rebalancing between Total US vs. International Equities might not be material until my portfolio grows bigger (say 100K or 200K?). So the major flaw would be not being at my AA of 60 US / 20 Intl / 20 Bonds. The target date funds I currently hold in my 401K and Roth have international equity allocation between 26.93% (T.Rowe TDF) and 36.14% (Vanguard TDF).

... so that leads me back to the question - is it too much of a trade-off/risk to increase my international equities AA to fill my Taxable and leave my Roth all US equities to keep things simple? (but deviate from my initial US vs. International Equities AA)

I am thinking if I were to do that I would re-evaluate AA when hitting 100K or in case of a big market spin as to not let the international go beyond 35% of total portfolio ... depending how the market evolves and whichever of the two (Roth or Taxable) grows to be higher % of total, that account would eventually have both US and Intl Equities with the other account possibly just carrying one of the two funds. Is this making sense or would you say deviating from the AA from the get go is a slippery slope and it might just be better to do US+Intl Equities in Taxable and US Equities in Roth to get to my AA exactly?

In my opinion it's better to stick to a desired asset allocation, rather than let account size dictate asset allocation.

Your desired allocation of 25% of stocks in international stocks is exactly what I normally suggest. I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6).

But I don't see great risk in the change that you now suggest.

. . . . .

How much (in dollars) is the 4% employer match and 3% employer contribution in your 401k?

That will tell me more about the percentage of new annual contributions going into each account, and how different allocations will work out in future years.

Taxable account @ Vanguard (27% of assets; $20k; adds about $10k/yr = < 30% of new annual contributions)
401K (57% of assets; $42k; adds $18k/yr + 4% employer match and 3% employer contribution = > 54% of new annual contributions)
Roth IRA @ Vanguard (16% of assets; $12k; adds $5.5k/yr = < 16% of new annual contributions)
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

newbie1920
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Joined: Sun Mar 26, 2017 12:50 pm

Re: Modest portfolio makeover - please help

Post by newbie1920 » Thu May 18, 2017 6:08 pm

ruralavalon wrote:In my opinion it's better to stick to a desired asset allocation, rather than let account size dictate asset allocation.

Good to know no major risks, though in line with boglehead approach having a plan and sticking to it sounds like what you advocate as well, which makes me lean towards option B, in which only Roth has single fund and Taxable can be rebalanced between US and International to get to my exact AA.
ruralavalon wrote:Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6).

Thanks for the reference - I will read on!
ruralavalon wrote:How much (in dollars) is the 4% employer match and 3% employer contribution in your 401k?

That will tell me more about the percentage of new annual contributions going into each account, and how different allocations will work out in future years.

Taxable account @ Vanguard (27% of assets; $20k; adds about $10k/yr = < 30% of new annual contributions)
401K (57% of assets; $42k; adds $18k/yr + 4% employer match and 3% employer contribution = > 54% of new annual contributions)
Roth IRA @ Vanguard (16% of assets; $12k; adds $5.5k/yr = < 16% of new annual contributions)

The 4% employer 401K match (100% vested) is currently $3,880 per year (or ~$150 contributed biweekly/26x per year). The 3% retirement contribution is $2,910 and is contributed as a lump sum once per year at the end of March. For the retirement contribution I am currently 40% vested and will be fully vested in Spring 2020, at that same time it will go from 3% to 4% assuming I am still with my employer, thus automatically increasing weight of total contributions more towards 401K.

My plan has been to contribute $10K per year to Taxable (managed for 2016 and 2017 already). That being said my husband and I want to buy either a small house or a condo and if we would decide to do it next year my Taxable contribution in 2019 would go down. We have not decided about this, yet, and have been pushing it off due to a number of factors, which might push it even further down the road. I am mentioning this as that would temporarily change the mix of my contributions - skewing them even more heavily to 401K as even with buying a house/condo I would still contribute max to my 401K and Roth (and only $200/month to Taxable).

newbie1920
Posts: 10
Joined: Sun Mar 26, 2017 12:50 pm

Re: Modest portfolio makeover - please help

Post by newbie1920 » Tue May 23, 2017 7:03 pm

@ruravalon So I read through the Vanguard article on international stocks and feel stronger about sticking to international as 20% of total portfolio.

With my allocation of 80 to equities and 20 to bonds I will follow option (B) to stick to my AA 80 / 20 / 20 with a minimum # of funds (5 across 3 accounts). Based on my math within a couple of years my Taxable might (or not) be less than 20% of total portfolio depending how much I will continue contributing.

So in case I need to divert my savings to paying down mortgage, my savings towards Taxable would be lower for a few years (horizon of ~5-8 year from when we would buy a condo) and my Taxable would be less than 20% of my portfolio. In that case I think I would hold only International in Taxable and split my Roth IRA between International and Total US market.

Does that sounds reasonable?
newbie1920 wrote:B. AA: 60/20/20 (UE Eq/Bond/Intl Eq)

Taxable account @ Vanguard (27% of assets; $20k)
07%, $05k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.15%
20%, $15k, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%

401K (57% of assets; $42k)
37%, $27k, Vanguard Institutional Index I (VINIX) ER 0.04%
20%, $15k, Metropolitan West Total Return Bond I (MWTIX) ER 0.44%

Roth IRA @ Vanguard (16% of assets; $12k)
16%, $12k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%

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ruralavalon
Posts: 11102
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Modest portfolio makeover - please help

Post by ruralavalon » Wed May 24, 2017 9:49 am

newbie1920 wrote:@ruravalon So I read through the Vanguard article on international stocks and feel stronger about sticking to international as 20% of total portfolio.

With my allocation of 80 to equities and 20 to bonds I will follow option (B) to stick to my AA 80 / 20 / 20 with a minimum # of funds (5 across 3 accounts). Based on my math within a couple of years my Taxable might (or not) be less than 20% of total portfolio depending how much I will continue contributing.

So in case I need to divert my savings to paying down mortgage, my savings towards Taxable would be lower for a few years (horizon of ~5-8 year from when we would buy a condo) and my Taxable would be less than 20% of my portfolio. In that case I think I would hold only International in Taxable and split my Roth IRA between International and Total US market.

Does that sounds reasonable?
newbie1920 wrote:B. AA: 60/20/20 (UE Eq/Bond/Intl Eq)

Taxable account @ Vanguard (27% of assets; $20k)
07%, $05k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.15%
20%, $15k, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%

401K (57% of assets; $42k)
37%, $27k, Vanguard Institutional Index I (VINIX) ER 0.04%
20%, $15k, Metropolitan West Total Return Bond I (MWTIX) ER 0.44%

Roth IRA @ Vanguard (16% of assets; $12k)
16%, $12k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%

I think it's a good idea to stick to the desired asset allocation, rather than let account sizes dictate the asset allocation.

I think that it is likely that in a few years your taxable account will dip below 20% of portfolio, because of the level of contributions to the accounts.

Remember to avoid rebalancing by exchanging between funds in the taxable account, because that would create income tax liability. In other words don't plan on eliminating Vanguard Total Stock Market Index Fund in the taxable account as a way to keep Vanguard Total International Stock Index Fund at 20%.

Instead maintain the desired asset allocation by adding Vanguard Total International Stock Index Fund with new contributions in the Roth IRA, and also by exchanging between funds inside the Roth IRA as needed.

. . . . .

B. AA: 60/20/20 (UE Eq/Bond/Intl Eq)
Current portfolio size = $74k. New annual contributions = about $40k total, "lower for a few years (horizon of ~5-8 year from when we would buy a condo)".

Taxable account @ Vanguard (27% of assets; $20k; adds $10k/yr = 25% of new annual contributions, "lower for a few years (horizon of ~5-8 year from when we would buy a condo)")
07%, $05k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.15%
20%, $15k, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%

401K (57% of assets; $42k; adds 18k.yr + $3.9k employer match + $2.9k employer contribution = $24.8k total = 62% of new annual contributions)
37%, $27k, Vanguard Institutional Index I (S&P 500 index fund) (VINIX) ER 0.04%
20%, $15k, Metropolitan West Total Return Bond I (MWTIX) ER 0.44%

Roth IRA @ Vanguard (16% of assets; $12k; adds $5.5k/yr = 14% of new annual contributions)
16%, $12k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%
00%, $00k, Vanguard Total International Stock Index Fund <= add later as needed
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

newbie1920
Posts: 10
Joined: Sun Mar 26, 2017 12:50 pm

Re: Modest portfolio makeover - please help

Post by newbie1920 » Wed May 24, 2017 5:15 pm

Got, it that sounds like a good plan. Will be careful not to sell/exchange any funds within the taxable and rebalance within Roth IRA instead, or use any future contributions to the taxable to rebalance. Thanks again for your input!!!

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