Asset allocation, starting business soon

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Topic Author
humpty
Posts: 3
Joined: Mon Jan 01, 2018 4:12 pm

Asset allocation, starting business soon

Post by humpty » Mon Jan 01, 2018 4:36 pm

Hi all, happy new year! Thought I'd start off the year with a resolution I hope to keep by planning my finances better (and hope for it to become a habit :)). This is just info for myself, but will be filing jointly since I was married in 2017.

Emergency fund: 3 months
Debt: None
Tax Filing Status: Married in 2017
Effective Tax Rate: 18.5%
State of Residence: WA
Age: 35
Desired asset allocation: 90% stocks/10% bonds
Desired international allocation: none? (I figure nowadays in such a global economy, companies have diverse assets internationally. Is that a correct way to think about it?)

Vanguard brokerage account - 116k: Bonds(VBTLX) 11.6k and VTSAX 105k
Traditional IRA - 29.4k: Target retirement 2045 (VTIVX) 1.8k and VTSAX 27.6k
142k in cash
Income: > 200k

Should I be less risky in my traditional IRA? The target retirement fund has a relatively high expense ratio.
I am also planning on starting a business this year, and the norm is it takes about 2 years for it to become profitable. I'm lost as to all the different ways to set up business retirement plans/other incentives to reduce tax. Is there a good book/link or financial planner/tax adviser someone would recommend? Thanks!

betablocker
Posts: 504
Joined: Mon Jan 11, 2016 1:26 pm

Re: Asset allocation, starting business soon

Post by betablocker » Mon Jan 01, 2018 6:09 pm

I’d seriously consider putting your bonds in the ira and stocks in your taxable. Your tax rate is low but look at the new tax bill and figure out the spread between income and capital gains for your situation. Most likely you are paying too much tax on the interest. If you are starting a business and need cash flow I think 90/10 is super aggressive. I am also a business owner and we tend to be a bit of an overconfident lot. If your business does well great but if it doesn’t do you need the cash? Maybe dial it down a bit. Depends on how risky the venture is, your alternatives, and if you have mouths to feed. Lastly although many companies are international the markets move somewhat independently. There certainly is a diversification benefit. Given that the S&P is so high, it is particularly important to diversify now.

Topic Author
humpty
Posts: 3
Joined: Mon Jan 01, 2018 4:12 pm

Re: Asset allocation, starting business soon

Post by humpty » Wed Jan 03, 2018 2:59 am

betablocker wrote:
Mon Jan 01, 2018 6:09 pm
I’d seriously consider putting your bonds in the ira and stocks in your taxable. Your tax rate is low but look at the new tax bill and figure out the spread between income and capital gains for your situation. Most likely you are paying too much tax on the interest. If you are starting a business and need cash flow I think 90/10 is super aggressive. I am also a business owner and we tend to be a bit of an overconfident lot. If your business does well great but if it doesn’t do you need the cash? Maybe dial it down a bit. Depends on how risky the venture is, your alternatives, and if you have mouths to feed. Lastly although many companies are international the markets move somewhat independently. There certainly is a diversification benefit. Given that the S&P is so high, it is particularly important to diversify now.
Thanks, will look into putting bonds in the IRA...think I saw the reasoning for that in the past but will look it up again. Also, thanks on the insight of diversification!

My business loan should account for enough working capital in the beginning stages...but if not, that is why I'm thinking of keeping some of the cash as backup (not all though, so trying to find out where to best put it. Plus, it will take several months to get started so while that gets rolling, I plan on more aggressively save more of my income). The business is in a stable enough field and I also have the option to work part time until things get busier. My wife is working as well.

Lafder
Posts: 4026
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Asset allocation, starting business soon

Post by Lafder » Wed Jan 03, 2018 9:26 am

Bogle and Buffett have said 100% US stocks are a perfectly fine %.

Vanguard recs 30-50% of stocks be international.

That makes me think 0-50% is a reasonable range, and you are within it, more than you think :).

In your IRA you have an all in one fund VG target date 2045 and a stock index fund. This tells me that you may not understand what the all in one target date fund is, plus it DOES have international holdings in spite of you believing you have 0% International :). These all in one funds are designed to be the only fund you need. They rebalance for you and add a higher % bonds as the target date approaches. They are a "fund of funds" made up of these subfunds (% taken from Morningstar today)

Vanguard's target date 2045 fund is:

54.38% Vanguard total stock market index
35.65% Vanguard total International stock market index
6.96% Vanguard total bond market index
3.01% Vanguard total international bond market index

The VG all in one funds are simple invest and forget funds that rebalance for you. It does not make sense to have an all in one fund plus the stock market index. It is fine to use just the target date fund, or the stock index plus bond index if you really want US stocks only.

If you want an even higher than 90% stocks, you can pick a later date target date fund.

With your business venture, will you be the only employee ? Will a solo401k be an option?

lafder

betablocker
Posts: 504
Joined: Mon Jan 11, 2016 1:26 pm

Re: Asset allocation, starting business soon

Post by betablocker » Wed Jan 03, 2018 1:56 pm

humpty wrote:
Wed Jan 03, 2018 2:59 am
betablocker wrote:
Mon Jan 01, 2018 6:09 pm
I’d seriously consider putting your bonds in the ira and stocks in your taxable. Your tax rate is low but look at the new tax bill and figure out the spread between income and capital gains for your situation. Most likely you are paying too much tax on the interest. If you are starting a business and need cash flow I think 90/10 is super aggressive. I am also a business owner and we tend to be a bit of an overconfident lot. If your business does well great but if it doesn’t do you need the cash? Maybe dial it down a bit. Depends on how risky the venture is, your alternatives, and if you have mouths to feed. Lastly although many companies are international the markets move somewhat independently. There certainly is a diversification benefit. Given that the S&P is so high, it is particularly important to diversify now.
Thanks, will look into putting bonds in the IRA...think I saw the reasoning for that in the past but will look it up again. Also, thanks on the insight of diversification!

My business loan should account for enough working capital in the beginning stages...but if not, that is why I'm thinking of keeping some of the cash as backup (not all though, so trying to find out where to best put it. Plus, it will take several months to get started so while that gets rolling, I plan on more aggressively save more of my income). The business is in a stable enough field and I also have the option to work part time until things get busier. My wife is working as well.
You put bonds in taxed deferred because the interest payments are regular and taxed as ordinary income. Equities may pay dividends but not all do and the dividends and capital gains are paid at capital gains rates. Those are usually lower but I haven't checked with the new tax structure given that you have a relatively low tax rate. Keeping some kind of cash reserve should help. Cash is king and all. Also as a business owner think about how correlated your business is with the economy and stock market. If it is highly cyclical, you'd probably want to diversify away from US equities and maybe add foreign and emerging or some kind of managed futures/commodities.

TerryDMillerMBA
Posts: 118
Joined: Tue Jul 05, 2011 8:32 pm

Re: Asset allocation, starting business soon

Post by TerryDMillerMBA » Wed Jan 03, 2018 5:28 pm

I am going to skip the long paragraphs, charts, links, etc. and just help you:

1. Increase your emergency fund to AT LEAST six (6) months, but a year would be even better.

2. Make sure you are thorough in your business planning, or you have paid someone to be thorough. It is one thing you are in control of that increases your chances for success in your venture exponentially.

Topic Author
humpty
Posts: 3
Joined: Mon Jan 01, 2018 4:12 pm

Re: Asset allocation

Post by humpty » Thu Oct 25, 2018 12:44 am

Hey everyone, with all the "excitement" over the market (sorry, can't avoid looking! Especially since I put a large windfall lumpsum in Feb this year). I thought I'd get some thoughts on AA and how to potentially mitigate the risk of the current market (I understand that some people consider this timing the market).

I'm at 77% stocks (18% of which is in int'l stock), 23% bonds. My traditional IRA I have moved to 100% bonds as suggested in the past posts. Thanks!

smitcat
Posts: 4642
Joined: Mon Nov 07, 2016 10:51 am

Re: Asset allocation, starting business soon

Post by smitcat » Thu Oct 25, 2018 6:45 am

"My business loan should account for enough working capital in the beginning stages."
What is the proposed interest rate and terms on your business loan?

Lafder
Posts: 4026
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Asset allocation, starting business soon

Post by Lafder » Thu Oct 25, 2018 9:01 am

At age 35, I was at 80/20, 30% International. Your International is between the recommended 0-50%

So I would say your AA is reasonable. :)

How is the business venture going?

lafder

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