Help with Portfolio please

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CRTR
Posts: 119
Joined: Sat Apr 11, 2015 1:15 pm

Help with Portfolio please

Post by CRTR » Tue Oct 10, 2017 2:03 am

Hi, I'm relatively new to the forum and have even posted a couple things, for fun. Now, I've come for some help/advice. . . .

I'm 50 years old and have been slogging away as an anesthesiologist for the past 22. Early on (~1997-8), I received some investing advice from a long time friend who used to work in the industry (DFA then Schwab). I followed her instructions to the letter (so unlike me) and, as a result, I find myself fully 10 years ahead of schedule in my retirement plan. In fact, I could stop working tomorrow if I wanted (or, at least when I hit 55 to avoid the 10% penalty).

Originally, the plan was to add some bond funds to my portfolio when I was within 10 years of retirement, gradually increasing the allocation to 50% by 5 years before retirement and hold it there until I was 5 year past. Given that I'm already within spitting distance of retirement, I wanted to acutely add the 50% bond allotment . . . . which brings me to my problem . . . . which bond funds, bonds or even CDs (higher yields right now) should I add??

I received a free CFP consult from Vanguard who recommended: 20% VFICX (Intermediate TermInvestment Grade), 10% VFSTX (Short term Investment Grade), 15% VTABX (International Bond Fund) What I found curious: a Vanguard CFP would recommend 2 actively managed bond funds with higher ER than their passive counterparts?.

I went to the well again and asked my friend. She wasn't fond of the CFP's recs at all. She said I would be much better served with VBISX (Short Term Bond Index) and VBIIX (Intermediate Term Bond Index) instead of the actively managed funds. She said in terms of overall portfolio performance and volatility, it is better to chase lower correlations to my equity investments than to chase returns.

I also was intrigued by the thought of using a CD ladder. 5 year CD yields were at 2.6% last I looked and there's NO interest rate risk there!

Any thoughts and advice will be most appreciated! Thanks



Emergency funds: see VG NQ Brokerage account below
Debt: none
Tax Filing Status: Single
Marginal Tax Rate: 28% Federal, 9.3% State (Ugh!)
State of Residence: California
Age: 50
Desired Asset allocation: 50% equities/50% fixed income in my IRA

Current Portfolio Details:

Vanguard IRA: $3100K
25% VEXAX, Vanguard Extended Market Index,
25% BRSIX Bridgeway Micro Cap,
25% VINEX, Vanguard International Explorer,
25% VGSLX, Vanguard REIT

Vanguard NQ Brokerage: $850K
33% VTCLX, Vanguard Tax Managed Large Cap,
33% VTMSX, Vanguard Tax Managed Small Cap,
33% VTMGX, Vanguard Tax Managed International - now called Developed Markets Index Fund)

I'm still working and added $60K to my work 401k this year and immediately rolled it over into the IRA (as I've done for the past 20 years). In the future, not sure if I will work enough to continue contributing to 401K. I plan to go to part-time and enjoy my friends/family come January 1.
Last edited by CRTR on Fri Sep 14, 2018 12:25 pm, edited 5 times in total.

mega317
Posts: 2554
Joined: Tue Apr 19, 2016 10:55 am

Re: Help with Portfolio please

Post by mega317 » Tue Oct 10, 2017 11:13 am

You should replace all the tickers in your post with fund names, most of us don't have all those memorized.

Without knowing more, I would lean towards holding the bonds in your IRA rather than the taxable account since you likely have lots of capital gains; I wouldn't want to pay the taxes to exchange funds.

CDs are certainly attractive for risk-free bond-like returns. With 2 million dollars I would find it way too much of a pain to buy CDs, even just brokered CDs through Vanguard. I personally would just use Vanguard Total Bond index and call it a day. Some people prefer to hold more or less corporates, or mortgage-backed, or international bonds, or shorter duration, or a million other tweaks. My opinion is that it doesn't matter much.

I'm impressed that you're in the 28% bracket, in cali, and have 4 million dollars at 50. Good work.

CRTR
Posts: 119
Joined: Sat Apr 11, 2015 1:15 pm

Re: Help with Portfolio please

Post by CRTR » Tue Oct 10, 2017 11:59 am

Thanks very much for the response and your thoughts.

Initially, I didn't think buying 15 jumbo CDs was that much work. I'd only have to roll over 2 per year thereafter. Having said that, funny you should say that about the Total Bond Fund. I'm about ready to throw in the towel and go with it. All these options/possibilities are starting to make my head spin. Plus, as you can tell from my investment history, I'm fond of simplicity.

I wish I were in the 28% bracket for the rest of my career. I listed that bracket based on my anticipated earnings next year. As for the savings amount, thanks for the complement. All I did was max out my 401k each year and tossed in ~$20k/year into my nonqualified account. I was lucky to get some simple, sound, good investment advice early on and stayed the course, following it. Hope my experience will serve as a good illustration of what a good plan and a little discipline can do.

Good point on the ticker symbols. I'll edit the post above.

betablocker
Posts: 400
Joined: Mon Jan 11, 2016 1:26 pm

Re: Help with Portfolio please

Post by betablocker » Tue Oct 10, 2017 12:39 pm

I would say your current asset allocation is very risky with all equity and equity like risk (i.e. REITS). You are very tilted to small caps and have no bonds so it is great you are thinking about this. I'd recommend allocating your bond portion to intermediate term treasuries or a 5 year CD ladder. You should also do the math on a CA muni bond fund for your taxable account as you are from CA. Might want to wait until the tax bill is done or dead though. I'd pick which mechanism based on that math and how much work you want to do. Is shopping for a CD each year as one rolls off too much hassle? If so go with a vanguard admiral intermediate treasury fund. Total bond is fine but contains some riskier bonds and I believe a slightly higher duration so a bit more credit and interest rate risk. But it doesn't really matter that much. Make sure to hold CDs and bonds in your IRA. 50% sounds like a good level of bonds. At $4m and with a good, steady, and high paying job it would strike me that your need to take risk is very low. Then I would look at reducing your tilt to small caps or diversifying that tilt. There's value, small cap value, emerging markets, and if you want to get a bit more advanced, momentum, etc. I'd also look at making your equity allocation 50/50 domestic/international. You are a bit overweight the US right now especially when you include REITs but not as badly as most Americans. Net, net you are doing great. The big glaring thing is how much you have in equities and you are fixing that. How you fix it will have marginal effects. Read a book like the Only Guide You'll Ever Need to the Right Financial Plan or one of the other asset allocation books on the wiki and you'll do great.

CRTR
Posts: 119
Joined: Sat Apr 11, 2015 1:15 pm

Re: Help with Portfolio please

Post by CRTR » Tue Oct 10, 2017 2:03 pm

Betablocker,
Thanks for the thoughtful and complementary response.

I think you and I might have some philosophical differences. At first glance, I 100% agree with you: 3 of 4 four funds in my IRA seem very risky. When taken as a whole, on the other hand, the portfolio is not that risky. It is a nice illustration of diversification benefit. The friend who recommended it referred me to "Asset Allocation - Balancing Financial Risk, by Roger Gibson. (which I highly recommend reading). By way of comparison, I ran a 20 year backtested portfolio analysis on PORTFOLIOVISUALIZER. I compared my portfolio vs the ultimate buy/hold (viewtopic.php?t=38374 -- an excellent post!!!) vs a 50/50 mix of Vanguard Total Stock and Total International Stock. My 4 item portfolio had a lower standard deviation, higher risk adjusted returns (Sharpe ratio) and higher overall returns than the other 2. (https://www.portfoliovisualizer.com/bac ... tion9_3=50) Now, of course, the 50/50 mix might win out in the future but, without a crystal ball, I'm gonna stay the course.

Where I'm getting stuck is what/how to do the bond portion. I'm starting to think I'm overthinking the whole situation and should just go with something really simple. The odds that I will run out of money in this lifetime are almost nil and, thus, it probably doesn't matter that much . . . it might to my estate beneficiaries though.

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patrick013
Posts: 2372
Joined: Mon Jul 13, 2015 7:49 pm

Re: Help with Portfolio please

Post by patrick013 » Tue Oct 10, 2017 3:42 pm

CRTR wrote:
Tue Oct 10, 2017 2:03 pm
Where I'm getting stuck is what/how to do the bond portion. I'm starting to think I'm overthinking the whole situation and should just go with something really simple. The odds that I will run out of money in this lifetime are almost nil and, thus, it probably doesn't matter that much . . . it might to my estate beneficiaries though.
Ever think of Intermediate TRSY index in the IRA ? In a market downturn
it helps upside quite well. Or ticker BIV.

Most CA investors have CA muni's as well. There's even a CA money market
fund to provide some safety and lower taxes.
age in bonds, buy-and-hold, 10 year business cycle

betablocker
Posts: 400
Joined: Mon Jan 11, 2016 1:26 pm

Re: Help with Portfolio please

Post by betablocker » Tue Oct 10, 2017 4:04 pm

I'd be cautious about using a one time backtest against one one asset allocation especially at a time of high S&P 500/CAPE valuations. After a 20-50% correction, that backtest will look a lot different. Also I think the buy and hold portfolio is 10% across 10 asset classes so a bit different. Although he has many versions. Regardless the asset allocation is about accomplishing your goals not getting the best return. If there's a huge drawdown 5 years before you retire, it doesn't matter that you have an asset allocation that outperforms in 10 year periods. Larry Swedroe's story about the retired couple that went from $13m to $3m during the tech recession is a good example.

CRTR
Posts: 119
Joined: Sat Apr 11, 2015 1:15 pm

Re: Help with Portfolio please

Post by CRTR » Tue Oct 09, 2018 1:34 pm

betablocker wrote:
Tue Oct 10, 2017 4:04 pm
I'd be cautious about using a one time backtest against one one asset allocation especially at a time of high S&P 500/CAPE valuations. After a 20-50% correction, that backtest will look a lot different. Also I think the buy and hold portfolio is 10% across 10 asset classes so a bit different. Although he has many versions. Regardless the asset allocation is about accomplishing your goals not getting the best return. If there's a huge drawdown 5 years before you retire, it doesn't matter that you have an asset allocation that outperforms in 10 year periods. Larry Swedroe's story about the retired couple that went from $13m to $3m during the tech recession is a good example.
Thanks for the response and sorry about my delay. Don't know how I missed your post . . . .

Your point about basing decisions on a single 20 year backtest is well-taken and valid. On the other hand, I have to pick a horse. I'm pretty comfortable with my previous equity allocation. It weathered two market downturns well. In 2001-2, it only dropped 5%. It's largest drawdown was 2008. It lost ~50% but fully recovered by early 2010. In addition to having better risk-adjusted and absolute returns, it's been much less volatile than a TSM/TISM portfolio.

Although it took me a while, I finally made a decision. I made some moves and locked in some of my winnings. I went with $250k in 5 year CD ladder, 50/50 BND/BNDX and reduced overall equity exposure ~70%. I converted the low basis lots in my taxable account but made the biggest moves in my IRA. I also got rid of the REIT in my IRA too. I figure I have enough non-equity exposure to weather a big drop or a prolonged sub-par equity returns period. Ironically and in contrast to most new retirees, I wouldn't mind a big market drop . . . sooner rather than later! It would allow me to make bigger ROTH conversions (as a % of holdings) while tax rates are low and market valuation depressed.

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