Newbie with Portfolio help needed

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zenmusic
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Joined: Mon Jul 10, 2017 1:31 am

Newbie with Portfolio help needed

Post by zenmusic » Fri Jul 14, 2017 4:46 pm

**** Updated with missing information *****

Hi guys,

I became a huge fan of this forum when I started reading few weeks ago. This forum made me realize how wrong my whole approach to investing was.


**** Updated ****
Emergency funds: 6 months of expenses
Debt: None
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 0% State
State of Residence: TX
Age: Me 36, Wife 32, Kid 1 year old
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks
Total Household Income since 2016: ~240k (both work for same employer)
Current total 401k contribution: 14%
Employee match: 100 percent of the first 4.5 percent of pay that we contribute, pre-tax
Roth IRA: Dont Qualify
IRA Account: None
** End ****


1. Paid off the house (I prefer the stress free feeling of no debt). Have no debts besides a leased car which is the last lease I will ever have.

2. I started maxing out by 401K since this year. I have 110k in 401K, my wife has 10k in 401k. Currently both us us are with Fidelity and financial engines manages it with 0.35% fee (yikes!). Our portfolio is Blackrock funds with 40% domestic, 40%international and 20% bonds. - Want to move to self directed brokerage of Fidelity (only option available) and do 3 lazy fund portfolio with Fidelity low cost index funds.

3. My wife and I also hold a lot of Employee stock purchase plan stock (close to 100k) - Want to sell all qualified ones and move the money it to individual taxable Vanguard brokerage account with low cost index funds.

4. I have around 30k in betterment (Taxable investment account) in 80/20 stock/bond split. Wanted to move that to Vanguard with low cost index funds.

5. I have a 12k in VTSAX in Vanguard taxable brokerage account.

Questions:

1. After reading your forum, I was thinking of having a total portfolio (including taxable and tax deferred accounts) into portfolio with 50% domestic, 30%international, 20% bond. What do you guys think?

2. Do I go heavy in bonds on 401k for tax efficiency and then go heavy on total domestic and international index funds in taxable?

3. I am struggling with portfolio allocation and choice of funds.

Help!!!
Last edited by zenmusic on Sat Jul 15, 2017 10:55 pm, edited 4 times in total.

mhalley
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Re: VWITX (Intermediate Term Tax Exempt) vs Vanguard Tax-Exempt Bond ETF (VTEB) Taxable

Post by mhalley » Fri Jul 14, 2017 9:19 pm

Welcome to the forum!
1. Looks reasonable
2.Ditto
3. The three fund portfolio for vanguard, plus the fidelity version. https://www.bogleheads.org/wiki/Three-fund_portfolio
I started adding bonds to my taxable account as I approached retirement. Some do not like bond ETFs if you do elect to put some in taxable.

mega317
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Re: Newbie with Portfolio help needed

Post by mega317 » Sat Jul 15, 2017 12:50 am

Here is the sorry state of my finances:
1. I have no debt. I own a home free and clear. I do have a lease which I don't plan to do again.
2. I max my 401k. I have 120 thousand dollars, and a sound plan for what to do with it.
3. I also have another 100 thousand dollars with a plan.
4. And another 30 thousand.
5. And another 12 thousand.

You're doing great! Your asset allocation sounds reasonable. Maybe a little stock-heavy at your age but that's very much a matter of opinion. (I am 75/25 at about the same age so it's not really my opinion).

It sounds like you have either decided, or are about to decide, to implement a three fund portfolio. Given what you seem to already know, it shouldn't take you longer than the weekend (do you have kids? then maybe longer) to do enough reading and to fully come up with the plan. My opinion is that if (you don't have kids and) you don't have trade orders in with your 401k and employer stock by Monday then you have a behavioral investing problem.

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dratkinson
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Re: Newbie with Portfolio help needed

Post by dratkinson » Sat Jul 15, 2017 10:16 am

Emergency fund (EF). It is advised to slowly build and keep an EF containing 6-12 months of living expenses. Why? So you don't need to invade your retirement investments to handle a ST financial emergency. Keep this money in a taxable account and tiered in cash or near-cash equivalents: credit cards, checking, savings, mmkt account/fund, bonds, savings bonds (one year lockout), HELOC, ... stocks.

When we have enough. Senior investors advise that when we have "enough" (as defined by us), then we don't need a dedicated EF as all of our investments become our EF.

But until we get to the point of having enough, we can extend our normal retirement investing into taxable (after filling all annual tax-advantaged accounts) and plan to use that money as the last tier of our formal EFs, before tapping our tax-advantaged accounts.

If your EF is >6-12mos (your choice) and you feel that's enough (after maxing your annual tax-advantaged space), then can use the excess to begin taxable retirement investing. Maybe skew taxable toward cash/bonds (munis if appropriate) to better serve its ST cash-stability EF role, and skew tax-advantaged accounts toward equities to better serve its LT tax-advantaged-growth retirement role.



Municipal bonds. For taxable accounts and if in 25%+ fed tax bracket, a municipal (tax-exempt) bond fund can be used as part of our taxable retirement investing (substitute for TBM in 3-fund portfolio) and do double-duty as one tier of our savings/EFs*. The use of munis is not "all or nothing" as you can mix taxable bonds in your tax-advantaged accounts with munis in your taxable accounts.
See: https://www.bogleheads.org/wiki/Municipal_bonds

* "Daily-accrual" muni funds. Daily accrual muni funds (not ETFs) are exempt from IRS 6mo holding period requirement to protect tax-exempt dividends. Meaning they can perform multiple duties: (1) as part of our (taxable account) retirement bond allocation, (2) as a tier of our formal emergency funds, (3) to save for near-term goals, and (4) as dry powder during a market correction.
See "Loss on mutual fund shares held 6 months or less": https://www.bogleheads.org/wiki/Tax_los ... harvesting

An intermediate-term (taxable, or national muni) bond fund is reported to be the sweet sport for total return investing (= share price appreciation + distributions (dividends + capital gains)). Vanguard's IT national muni fund is VWITX.

Vanguard's daily accrual national muni funds are: VWSTX (ST), VMLTX (ltd-term), VWITX (IT), and VWLTX (LT). Match fund's duration to your goal's horizon.


Disclosure. Many prefer shorter-term muni funds to minimize risk---increase price stability, ~10-cents 52wk price spread. I prefer Vanguard's longer-term muni funds (VWITX and VWLTX)---<$1 52wk price spread. Why? When considering total return (= share price appreciate + distributions (dividends + capital gains)), the majority of a bond fund's total return comes from dividends. So, within reason and since I'm not selling (don’t care about share price stability), I prefer more dividends to less.

I do use VWIUX (~50-cents 52wk price spread) as a portion of my bond allocation, last/largest tier of my formal EFs, home project/new car fund, and dry powder. But my major muni holdings are in VWLUX (<$1 52wk price spread) and a single-state muni. A single-state muni is not your worry.



3-fund portfolio. The 3-fund portfolio is recommended for all account types (self-employed, employer, personal, tax-free, tax-deferred, and taxable). It can be replicated in each account, or spread across all guided by your investment options’ availability/costs. However you get to an age-appropriate 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund.

If you have not already done so, then see: https://www.bogleheads.org/wiki/Princip ... _placement



Taxable investing. Use only the most tax-efficient options. As there is no annual contribution limit, it's easy, after populating your limited annual tax-advantaged space with your best options, to rebalance to your desired AA with new money in taxable. This is also the best place to hold emergency funds as it avoids the need to steal eggs from the golden goose sitting on your tax-advantaged retirement investments.

All-in-one funds. Do not use an all-in-one fund in your taxable space. Why? Most use taxable bonds that are inappropriate in a taxable account, and you can’t buy/sell only stocks/bonds (must buy both) so it’s more difficult to rebalance and harvest CGs/tax losses (TLH). This is also true of tax-managed (using municipal bonds) funds.



Taxable accounts configuration.

Cost basis. Set all taxable account investments to use "specific lot identification" cost basis for selling. Why? To give you more control over tax reporting when you need to sell.
--So you can choose to sell shares with the highest cost basis to minimize CG (capital gain) reporting.
--So you can choose to sell shares with the highest cost basis to maximize TLH (tax loss harvest) reporting.

Distributions. Set all taxable account investments to NOT automatically reinvest distributions. Why?
--Helps avoid the hassle of small-lot tax reporting.
--Helps avoid inadvertent purchase of “replacement shares” which trigger a “wash sale” when you TLH.
--Makes it easier to rebalance in large chunks.

Instead of automatically reinvesting all distributions, direct them to a bank/CU checking account or investment mmkt fund. (Remember bank/CU savings/mmkt accounts have a 6-withdrawals limit/mo, checking/mmkt funds do not. Vanguard has a tax-exempt/municipal mmkt fund.)

TLH (tax loss harvest). Be aware that TLHing presents some problems when using duplicate funds in family accounts---any account belonging to your or your spouse. In this case it helps to own all-in-one funds in your tax-advantaged accounts, and discrete funds in your taxable accounts. Doing this removes one source of the replacement-shares/wash-sale issue.



Suggestions.


Congratulations on owning your home.


Fund selection. Choose the cheapest broadest index funds you can find to build your 3-fund portfolio: total stock market index (TSM: VTSAX), total international stock market index (TISM: VGTSX or VFWIX), and total bond market index (TBM: VBMFX; or a comparable IT national muni: VWITX). Or the Fidelity equivalents.


If you use some munis in taxable, then can use more equities in your 401k for more tax-deferred growth. That's a win^2.


Many sources recommend having not less than 25-30% bonds, just for investment stability. The excess above your current 20% plan can be multi-duty munis in taxable.


The sweet spot for an international allocation seems to be ~30% of equities. But a range of 0-50% is acceptable. Why? Most large US companies (~80% of TSM) receive a significant portion (>40%) of their annual income from foreign sales, so a 0% additional investment in TISM is acceptable because >30% of TSM annual return comes from foreign dividends. As TISM is ~50% of the world market, so a 50% additional investment in TISM is also acceptable. Your choice. (Disclosure: I like having some TISM so I can maybe buy low when I need equities and the US market is high.)



Welcome.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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ruralavalon
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Re: Newbie with Portfolio help needed

Post by ruralavalon » Sat Jul 15, 2017 1:15 pm

Welcome to the forum :) .

Congratulations on paying off the mortgage note, and being debt free.
zenmusic wrote:Hi guys,

I became a huge fan of this forum when I started reading few weeks ago. This forum made me realize how wrong my whole approach to investing was.

I am 36 years old, 28 % federal tax bracket with combined married jointly filed taxes, no state tax. And I wanted to get your help in creating a portfolio. Here is the sorry state of my finances.

1. Paid off the house (I prefer the stress free feeling of no debt). Have no debts besides a rental car which is the last lease I will ever have.

2. I started maxing out by 401K since this year. I have 110k in 401K, my wife has 10k in 401k. Currently both us us are with Fidelity and financial engines manages it with 0.35% fee (yikes!). Our portfolio is Blackrock funds with 40% domestic, 40%international and 20% bonds. - Want to move to self directed brokerage of Fidelity (only option available) and do 3 lazy fund portfolio with Fidelity low cost index funds.

3. My wife and I also hold a lot of Employee stock purchase plan stock (close to 100k) - Want to sell all qualified ones and move the money it to individual taxable Vanguard brokerage account with low cost index funds.

4. I have around 30k in betterment (Taxable investment account) in 80/20 stock/bond split. Wanted to move that to Vanguard with low cost index funds.

5. I have a 12k in VTSAX in Vanguard taxable brokerage account.

Questions:

1. After reading your forum, I was thinking of having a total portfolio (including taxable and tax deferred accounts) into portfolio with 50% domestic, 30%international, 20% bond. What do you guys think?
In my opinion that asset allocation is within the range of what is reasonable at age 36.
zenmusic wrote:2. Do I go heavy in bonds on 401k for tax efficiency and then go heavy on total domestic and international index funds in taxable?
I suggest putting all of the bond allocation in your 401k using Fidelity U.S. Bond Index Fund, and using only very tax-efficient stock index funds in the taxable account.

Examples of very tax-efficient funds suitable for the taxable account include Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, and the equivalent funds at Fidelity. Those funds are also suitable for any type of account.
zenmusic wrote:3. I am struggling with portfolio allocation and choice of funds.
In my opinion it is a good idea to use the Fidelity BrokerageLink in your 401k to gain access to their total market funds:
Fidelity Total Market Index Fund;
Fidelity Total International Index Fund; and
Fidelity U.S. Bond Index Fund.

In my opinion it's a good idea to sell the company stock, move the money to Vanguard and reinvest in index funds.

In my opinion it's a good idea to move the money in Betterment taxable brokerage account to Vanguard and reinvest in index funds.

. . . . .

A little more information might be helpful.

How much are you currently contributing annually to the 401ks? How much if anything are the employers contributing annually to the 401ks?

Do you have any IRAs?

How much are you contributing annually to the taxable accounts? How much will you be moving from company stock to Vanguard, when you sell the qualified shares?

You can simply add this to your original post using the edit button, it helps a lot if all of your information is in one place.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

zenmusic
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Re: Newbie with Portfolio help needed

Post by zenmusic » Sat Jul 15, 2017 10:49 pm

Thank you guys! Your replies mean a lot. I have updated my original post with more information as requested.

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dratkinson
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Re: Newbie with Portfolio help needed

Post by dratkinson » Sun Jul 16, 2017 1:40 am

Backdoor Roth IRA. Your OP (original post, original poster) does mention this.

When your income gets to be too high, if you want to invest in a rIRA (Roth IRA), then investigate the "backdoor Roth IRA" concept.
See: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Note: owning any tIRA (traditional IRA) causes problems with a backdoor Roth. The suggested fix is to roll any tIRAs into your employer's retirement plan. No tIRA = no backdoor rIRA problem.



After-tax 401k. Your OP does not mention this.

If you have the option to contribute after-tax dollars to a 401k, then consider this.
See: https://www.bogleheads.org/wiki/After_tax_401k
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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ruralavalon
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Re: Newbie with Portfolio help needed

Post by ruralavalon » Sun Jul 16, 2017 1:36 pm

If you sell the company stock that you are now allowed to, then how much will you be adding now to the taxable brokerage account?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

zenmusic
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Re: Newbie with Portfolio help needed

Post by zenmusic » Sat Jul 22, 2017 4:58 pm

I will be putting 50k (all qualified stock) to taxable. One of the questions I had was should I spread the contributions over a period of time as opposed to one time fund purchase as per my portfolio allocation in taxable?

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ruralavalon
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Re: Newbie with Portfolio help needed

Post by ruralavalon » Sat Jul 22, 2017 7:43 pm

zenmusic wrote: Questions:

1. After reading your forum, I was thinking of having a total portfolio (including taxable and tax deferred accounts) into portfolio with 50% domestic, 30%international, 20% bond. What do you guys think?
In my opinion that is a reasonable asset allocation for ages 32 and 36.
zenmusic wrote:2. Do I go heavy in bonds on 401k for tax efficiency and then go heavy on total domestic and international index funds in taxable?
Yes.
zenmusic wrote:3. I am struggling with portfolio allocation and choice of funds.

Help!!!
Current portfolio = $262k. New annual contributions to 401ks = about $44k. The asset allocation is 20% bonds, 30% international stocks, and 50% domestic stocks.

ESOP shares (19% of current portfolio; $50k)
19%, domestic stock shares

taxable account @ Vanguard, includes ex-betterment account + $50k from stock sale (35% of current portfolio; $92k)
05%, $12k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
30%, $80k, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%

his 401k @ Fidelity (42% of current portfolio; $110k)
22%, $58k, Fidelity Total Market Index Fund (FSTVX) ER 0.045%
00%, $00k, Fidelity Total International Index Fund (FTIPX) ER 0.11%
20%, $52k,Fidelity U.S. Bond Index Fund Premium Class (FSITX) ER 0.05%

her 401k @ Fidelity (04% of current portfolio; $10k)
04%, $10k, Fidelity Total Stock Index Fund Premium Class (FSTVX) ER 0.045%
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

zenmusic
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Re: Newbie with Portfolio help needed

Post by zenmusic » Sat Jul 22, 2017 9:23 pm

Thank you! Love your clarity.

Couple of questions:
1. Any advantage in placing international equities in Taxable account?
2. For the 6 month emergency fund (~50k) what are the best funds? Money market vs Munis.. any suggestions?
Last edited by zenmusic on Sun Jul 23, 2017 1:59 am, edited 1 time in total.

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ruralavalon
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Re: Newbie with Portfolio help needed

Post by ruralavalon » Sun Jul 23, 2017 8:26 am

zenmusic wrote:Thank you! Love your clarity.

Couple of questions:
1. Any advantage in placing international equities in Taxable account?
Yes. You get to take the foreign tax credit.

zenmusic wrote:2. For the 6 month emergency fund (~50k) what are the best funds? Money market vs Munis.. any suggestions?
There is a Vanguard Municipal Money Market Fund (VMSXX). Also perhaps Vanguard Short-term Corporate Bond Index Fund Admiral Shares (VSCSX).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

zenmusic
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Re: Newbie with Portfolio help needed

Post by zenmusic » Sun Jul 23, 2017 8:53 am

For the taxable account, should I reinvest dividends or have them transferred to money market so you can use lump sum to rebalance annually?

zenmusic
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Re: Newbie with Portfolio help needed

Post by zenmusic » Sun Jul 23, 2017 8:59 am


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dratkinson
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My emergency funds.

Post by dratkinson » Sun Jul 23, 2017 4:50 pm

The short answer. I now keep my first year of living expense liquid... just because. I do this tax-efficiently and don't worry about losing ST return. Everything else is in a 3-fund portfolio earning market return, with VWIUX designated to be the last/largest tier of my formal EFs.



The long answer.

In the past I kept the first tiers---6mos of living expenses---of my EFs liquid (CC, checking, savings, mmkt, CDs). Why? Just to avoid the additional annoyance of Sch D reporting to sell funds during a small emergency.


Livesoft's idea. But have since changed my thinking to follow livesoft's idea to increase tax efficiency. What? Have only investments that produce <$10 of Sch B part I income (taxed as ordinary income), and only Sch B part II income that is offset by QDI/LTCG/FTC(/TE*) income. (* I added that to livesoft's idea because the tax s/w use to add, then subtract, TE income on Sch B.)

--My first tier EFs. Now I keep 2mos in checking/savings (to minimize Sch B part I income), and the remainder of 1yr of living expenses in TE/municipal mmkt (VMSXX).

--Last/largest tier of my formal EFs. Three years of livings expenses in IT muni (VWIUX*). (No longer use CDs as I can get better TEY from IT muni; so a good way to get more after-tax income plus avoid the CDs’ Sch B part I income. *I did, over a few years, work my way through the recommended ST and Ltd-term munis before deciding I could tolerate IT’s extra risk to get the extra return.)

--Everything else that could be considered an extended tier EF in taxable. A 3-fund portfolio (VTSAX, VFWAX, VWLUX, single-state muni). Plan to tap munis first in an extended emergency.


Hidden benefit of livesoft's idea. It also helps to simplify my life. How? Because instead of churning CC/bank accounts to chase ST yields/opening bonuses (all Sch B part I income), I just invest any excess money in my taxable-account 3-fund portfolio. Now my new money gets the market return plus the tax advantages of QDI/LTCG/FTC/TE income. IMO, this is much less work and a better return than churning accounts, so any apparent ST loss is an illusion.


Bottom line. I now keep my first year of living expense liquid... just because. I do this tax-efficiently and don't worry about losing ST return. Everything else is in a 3-fund portfolio earning market return, with VWIUX designated to be the last/largest tier of my formal EFs.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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