Portfolio review for newbie?

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Glockenspiel
Posts: 18
Joined: Thu Feb 08, 2018 1:20 pm

Portfolio review for newbie?

Post by Glockenspiel » Thu Feb 08, 2018 1:52 pm

Hi, I just started lurking on these boards about a month ago, and have learned a lot, so I thought I'd take the time to jump in.

Emergency funds: ~6 months of expenses
Debt:
178k 15-year mortgage at 2.50% (about 9.5 years remaining) (current value $375-$400k)
6k balance on car loan at 1.90% (16 months remaining)
Tax Filing Status: Married Filing Jointly with a 2 year old child and another one on the way
Marginal Tax Rate: 22% Federal/7.05% State
State of Residence: MN
Age: Me 33/Wife 33
Gross Annual Income: 185k
Desired Asset allocation: 92% stocks / 8% bonds
Desired International allocation: 20% of stocks

46.2% Large-Caps/Total Stock Market
19.3% International Stock
16.4% Small-Caps
8.3% Bonds
4.8% REITs/Real Estate
5.0% individual stocks
Current value of investment accounts: $350k combined
Tax-deferred, tax-free, and taxable accounts split: 51%/44%/6%

Current retirement assets:

Taxable
2.73% Apple (AAPL)
1.63% Amazon (AMZN)
0.62% Cisco (CSCO)
0.40% High-Dividend Yield ETF (0.08%)
0.31% Small Cap Value ETF (0.07%)

His 401k
6.67% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) (0.15%)
2.42% iShares MSCI EAFE International Index Fund Class K (BTMKX) (0.06%)
1.79% Fidelity Small-Cap Index Fund Premium Class (FSSVX) (0.05%)
0.62% Vanguard Intermediate Term Bond Index Fund Admiral Shares (VBILX) (0.07%)
0.60% Vanguard REIT Index Fund Admiral Shares (VGSLX) (0.12%)
3% Company Match

His Roth IRA at Vanguard
11.84% Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
4.41% Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%)
3.44% Small Cap Value Index Fund Admiral Shares (VSIAX) (0.07%)
2.37% Intermediate-Term Bond Index Fund Investor Shares (VBIIX) (0.15%)
1.14% REIT Index Fund Investor Shares (VGSIX) (0.26%)

His Rollover IRA at Vanguard
10.78% Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
4.72% Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%)
4.64% Small Cap Value Index Fund Admiral Shares (VSIAX) (0.07%)
2.22% Intermediate-Term Bond Index Fund Investor Shares (VBIIX) (0.15%)
1.15% REIT Index Fund Investor Shares (VGSIX) (0.26%)

Her Roth IRA at Vanguard
7.92% Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
3.32% Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%)
2.76% Small Cap Value Index Fund Admiral Shares (VSIAX) (0.07%)
1.71% Intermediate-Term Bond Index Fund Investor Shares (VBIIX) (0.15%)
0.83% REIT Index Fund Investor Shares (VGSIX) (0.26%)

Her Rollover IRA at Vanguard
6.77% Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
3.50% Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%)
2.73% Small Cap Value Index Fund Admiral Shares (VSIAX) (0.07%)
1.17% Intermediate-Term Bond Index Fund Investor Shares (VBIIX) (0.15%)
0.84% REIT Index Fund Investor Shares (VGSIX) (0.26%)

H.S.A. at H.S.A. Bank
1.68% JP Morgan Equity Index (HLEIX) (0.20%)
0.74% iShares Russell 2000 Small Cap Index (MDSKX) (0.38%)
0.74% First Eagle Overseas A (SGOVX) (1.14%)
0.37% PIMCO Total Return (PTTAX) (0.80%)
0.18% Nuveen Real Estate Securities (1.30%)

Annual Contributions
$18,500 to his 401k + 3% match = $21,000
$5,500 to his Roth IRA
$5,500 to her Roth IRA
$13,000 to taxable
$6,900 to H.S.A

Background
From lurking on these boards, I’ve set up a spreadsheet summarizing our entire portfolio, set a goal asset allocation, and tried to simplify the number of funds, as I previously had $$ in many many different funds across our different accounts with no way of easily seeing what my allocation was. I also set a goal of having (Age minus 25) in bonds. I may slide that to (Age minus 20) in bonds as I get older. Due to some fortunate circumstances, our children have a trust account set up for them by grandparents, which will be used to pay for their college. My wife doesn’t currently have a 401k, so we’ve been putting money in a taxable account to make up for it.

Questions:
1. Do you believe, based on gut feeling and the numbers, that we’re making sufficient progress towards early retirement, in our mid/late 50s? I think we'd be looking to live a lifestyle with annual spending around $80-$100k in today's dollars in retirement.

2. What would you do differently, if you were me?

Thanks all,
Bryan
Last edited by Glockenspiel on Thu Feb 08, 2018 10:33 pm, edited 1 time in total.

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Duckie
Posts: 5388
Joined: Thu Mar 08, 2007 2:55 pm

Re: Portfolio review for newbie?

Post by Duckie » Thu Feb 08, 2018 6:27 pm

Glockenspiel, welcome to the forum.
Glockenspiel wrote:Age: Me 33/Wife 33
Gross Annual Income: 185k
Desired Asset allocation: 92% stocks / 8% bonds
Desired International allocation: 20% of stocks
<snip>
I also set a goal of having (Age minus 25) in bonds. I may slide that to (Age minus 20) in bonds as I get older.
I think you should be at least 20% bonds right now.
What would you do differently, if you were me?
I would add more bonds. Also, I would not mirror your accounts trying to put the same things in each. I would put the best/cheapest options in each account and simplify so not only are there fewer funds, but you could have more lower cost funds. I would also put all bonds in pre-tax.

You have a desired AA of 92% stocks, 8% bonds, with 20% of stocks in international. That breaks down to 74% US stocks, 18% international stocks, and 8% bonds. You could have:

Taxable -- 6%
6% Various US stocks

His 401k -- 12%
4% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.15%)
8% (VBILX) Vanguard Intermediate-Term Bond Index Fund Admiral Shares (0.07%)

His Rollover IRA at Vanguard -- 23%
5% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
18% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Her Rollover IRA at Vanguard -- 15%
15% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

His Roth IRA at Vanguard -- 23%
3% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
15% (VSIAX) Vanguard Small-Cap Value Index Fund Admiral Shares (0.07%)
5% (VGSLX) Vanguard REIT Index Fund Admiral Shares (0.12%)

Her Roth IRA at Vanguard -- 17%
17% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Health Savings Account at HSA Bank -- 4%
4% (HLEIX) JP Morgan Equity Index Fund Class I (0.20%)

My comments:
  • I would drop the two ETFs in taxable. Actually I'd sell all the stocks but you definitely don't need anything high-yield in taxable.
  • This puts all the bonds in pre-tax and all the REITs in Roth.
  • I'm surprised his 401k has admiral and premium shares for several funds but only investor shares for Total Stock Market.
  • This puts all international at Vanguard in a total market fund.
  • This has small-cap value because you already had it, but I don't think you need it.
Something to think about.

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Watty
Posts: 12562
Joined: Wed Oct 10, 2007 3:55 pm

Re: Portfolio review for newbie?

Post by Watty » Thu Feb 08, 2018 8:10 pm

Duckie wrote:
Thu Feb 08, 2018 6:27 pm
I think you should be at least 20% bonds right now.
+1

For comparison the Vanguard 2035 target date fund is 20% bonds.

https://personal.vanguard.com/us/funds/ ... irect=true

A reasonable case could be made for even a bit more bonds since you don't have an obvious need to take risk.
Glockenspiel wrote:
Thu Feb 08, 2018 1:52 pm
1. Do you believe, based on gut feeling and the numbers, that we’re making sufficient progress towards early retirement, in our mid/late 50s?
I might have missed it but I didn't see anything mentioning what sort of income you expect to need in retirement. That will be tough to do now but some people want to be part of the country club set and fly first class a lot while other people would be happy with a modest lifestyle.
Glockenspiel wrote:
Thu Feb 08, 2018 1:52 pm
2. What would you do differently, if you were me?
I would pay off the car ASAP and start a car fund to pay cash for future cars.

I would just use target date funds in the retirement accounts, if you have access to low cost funds.

I would consider the HSA as being separate from my retirement accounts.

I would sell of the individual stocks in the taxable account. In addition to the Apple and Amazon stock that you directly own the index funds also own those so you may have more exposure to those than your realize. If you support a charity then you can give them shares of stock instead of cash to avoid paying the capital gains tax.

Glockenspiel
Posts: 18
Joined: Thu Feb 08, 2018 1:20 pm

Re: Portfolio review for newbie?

Post by Glockenspiel » Thu Feb 08, 2018 10:52 pm

Duckie wrote:
Thu Feb 08, 2018 6:27 pm
Glockenspiel, welcome to the forum.
Thanks, Duckie.
Also, I would not mirror your accounts trying to put the same things in each. I would put the best/cheapest options in each account and simplify so not only are there fewer funds, but you could have more lower cost funds. I would also put all bonds in pre-tax.
I just thought it would be easier to re-balance with the way I set it up. Though I guess the way you've laid out probably makes more sense, since I can get potentially get into lower cost funds quicker. Is the reason you put riskier funds in Roth IRA because I've already paid taxes so might as well try to make those accounts grow as large as possible before retirement, to reduce tax rates?
My comments:
  • I would drop the two ETFs in taxable. Actually I'd sell all the stocks but you definitely don't need anything high-yield in taxable.
  • This puts all the bonds in pre-tax and all the REITs in Roth.
  • I'm surprised his 401k has admiral and premium shares for several funds but only investor shares for Total Stock Market.
  • This puts all international at Vanguard in a total market fund.
  • This has small-cap value because you already had it, but I don't think you need it.
Something to think about.
So all my bonds should be in pre-tax account? Is that because they are expected to provide the lowest return, keeping my tax rates slightly lower in retirement? I guess I need to get more familiar with the BH advice on tax efficiency.
I think it's strange too, that the Total Stock Market fund is only investor shares. There are 4 other funds available in my 401k that are all admiral. Large Cap Growth Index, Large Cap Value Index, Explorer, and Real Estate. I personally believe in the small-cap value performance premium over the long-term, so I'd prefer to keep some in that one for now. Thank you for taking the time to respond! Definitely a lot to think about.

Glockenspiel
Posts: 18
Joined: Thu Feb 08, 2018 1:20 pm

Re: Portfolio review for newbie?

Post by Glockenspiel » Thu Feb 08, 2018 11:07 pm

For comparison the Vanguard 2035 target date fund is 20% bonds.
The Vanguard 2045 target date fund is 10% bonds, and the 2040 target date fund is 14% bonds. We're probably looking to try to retire somewhere between 2040 and 2045. I concur though that I should probably up my bonds.
A reasonable case could be made for even a bit more bonds since you don't have an obvious need to take risk.
What do you mean I don't have a need to take risk? I guess retirement is still about 25 years away so I'd like to maximize returns while I can.
I might have missed it but I didn't see anything mentioning what sort of income you expect to need in retirement. That will be tough to do now but some people want to be part of the country club set and fly first class a lot while other people would be happy with a modest lifestyle.
I updated the original post with more info. We're pretty modest people and don't need to live the high life. We'd like to do some traveling (not 1st class), but I have no desire to have a country club membership. I'd estimate we'd like our annual retirement spending to be around $100k/year in today's dollars.
I would pay off the car ASAP and start a car fund to pay cash for future cars.
We could have paid cash for this car, but with a low 1.9% rate, we thought it'd be better to keep our cash and have the flexibility to invest more. Do you really think paying off a 1.9% loan quickly is best for growing our net worth?
I would consider the HSA as being separate from my retirement accounts.
Thanks. I mostly agree, though if we don't need to use it all prior to retirement, that'd be great. Thanks so much for your thoughtful response.

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Duckie
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Re: Portfolio review for newbie?

Post by Duckie » Fri Feb 09, 2018 5:39 pm

Glockenspiel wrote:Is the reason you put riskier funds in Roth IRA because I've already paid taxes so might as well try to make those accounts grow as large as possible before retirement, to reduce tax rates?
<snip>
So all my bonds should be in pre-tax account? Is that because they are expected to provide the lowest return, keeping my tax rates slightly lower in retirement?
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already the paid the taxes in the Roth accounts so future growth is tax-free.
The Vanguard 2045 target date fund is 10% bonds, and the 2040 target date fund is 14% bonds. We're probably looking to try to retire somewhere between 2040 and 2045. I concur though that I should probably up my bonds.
You pick a target-date fund by the AA inside, not the date in the title. If you want 8% bonds in your portfolio (and I think that's way too low) you pick a target-date fund that has close to 8% bonds.

echidna
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Re: Portfolio review for newbie?

Post by echidna » Fri Feb 09, 2018 6:59 pm

My thought (if you haven't already done so) would be to set up a simple spreadsheet, showing, for each year going forward, your initial portfolio balance, annual contributions, and portfolio gain based on some assumed percentage return on the portfolio per year. Then you can calculate the portfolio value for the beginning of the next year and project forward.

Also, assume a certain rate of inflation and calculate the inflated value of a dollar moving forward. Dividing the portfolio value by this number gives you the inflation-adjusted total.

I'm sure people can recommend websites and software tools that do this, but for scenarios of manageable complexity, I like to do spreadsheets by hand as I get a much better feel for things and have total flexibility.

For instance, you can estimate how much your contributions might grow in time with salary increases (hopefully at least matching inflation), lifestyle changes, when the mortgage payments end, and so on. Each year, you can update the spreadsheet with real data for the previous year, and if desired, update your future rate of return and inflation guesses (for instance, rebalancing to a higher percentage of bonds in later years will tend to reduce overall returns).

My very crude figures suggest that with about $52k savings currently, you will need a (constant) rate of return of about 4.5% above inflation to achieve 3,000,000 in current dollars at age 57. With a very conservative initial withdrawal rate of 3%, that would provide 90,000 per year. But the devil will be in the details here.

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Watty
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Re: Portfolio review for newbie?

Post by Watty » Fri Feb 09, 2018 7:55 pm

Glockenspiel wrote:
Thu Feb 08, 2018 11:07 pm
We could have paid cash for this car, but with a low 1.9% rate, we thought it'd be better to keep our cash and have the flexibility to invest more. Do you really think paying off a 1.9% loan quickly is best for growing our net worth?
Using debt like car loans and a mortgage to leverage your investments is essentially like a negative bond so in figuring out your risk it effect reduces your bond asset allocation and make your portfolio more aggressive than you might realize. For example in 18 months when your car is paid off you could get a new car loan and use the money to buy more Apple stock and that would be little different than what you are doing now.

I would not recommend it, in fact I would discourage it, but you can also get low cost margin loans to leverage your investments and margin investing adds a lot to your risk has gotten a lot of people into trouble. For example this brokerage has low margin rates.

https://www.interactivebrokers.com/en/index.php?f=18069

You could also run up balances on low interest rate credit cards or get a home equity loan to invest the money.

All of these are all bad ideas.

Your bond asset allocation is already low but you do have some bonds and you are in essence buying bonds that are paying something like 2% while you have a 1.9% loan. If you wanted to be more aggressive(not recommended) then you should just decrease your bond asset allocation and not try to use an auto loan for leverage.

I have also found that when paying cash for cars I tend to buy less expensive cars and keep them longer than if I was getting a car loan. Getting the next higher trim level with leather seats might only cost a few bucks more a month with a car loan but if you have to write a check for $3,000 more you will be less likely to do it.

echidna
Posts: 34
Joined: Thu Jan 18, 2018 7:01 pm

Re: Portfolio review for newbie?

Post by echidna » Sat Feb 10, 2018 3:34 am

I fail to see what is wrong with the car loan.

Let's say the OP is buying a car and needs say $10000 for this purpose, and has two options to raise this amount:

(a) pay cash, and effectively deplete his investment portfolio by $10000 immediately;

(b) take out a loan for $10000 at 1.9% interest for say 5 years, and slowly deplete the portfolio over 5 years by $10000 plus the interest charges by making the loan repayments.

It's easy enough to work out that for any significant rate of return on the investment portfolio, case (b) is substantially better.

There's no change in asset allocation involved.

TwstdSista
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Re: Portfolio review for newbie?

Post by TwstdSista » Sat Feb 10, 2018 3:46 am

What would I do, if I were you?

1 - Sell everything in taxable and buy:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
Vanguard Total International Market Index Fund Admiral Shares (VTIAX) ER 0.11%

2 - get bonds out of Roth space, put in pre-tax accounts
3 - less funds per account, no fund should be less than 5% unless that's the total amount of the account (see Duckie's post)
4 - those HSA expense ratios! Ack! Drop all over 0.20%, and fast

5 - leave the car loan, I don't have a problem with low interest debt

Glockenspiel
Posts: 18
Joined: Thu Feb 08, 2018 1:20 pm

Re: Portfolio review for newbie?

Post by Glockenspiel » Mon Feb 12, 2018 10:55 pm

echidna wrote:
Fri Feb 09, 2018 6:59 pm
My thought (if you haven't already done so) would be to set up a simple spreadsheet, showing, for each year going forward, your initial portfolio balance, annual contributions, and portfolio gain based on some assumed percentage return on the portfolio per year. Then you can calculate the portfolio value for the beginning of the next year and project forward.
Thanks echidna! I haven't really done that yet. So far have just set up my spreadsheet with my goal asset allocation and rebalancing information, etc, but I will try your advice and see what my projections show.

Glockenspiel
Posts: 18
Joined: Thu Feb 08, 2018 1:20 pm

Re: Portfolio review for newbie?

Post by Glockenspiel » Mon Feb 12, 2018 11:08 pm

TwstdSista wrote:
Sat Feb 10, 2018 3:46 am
What would I do, if I were you?

1 - Sell everything in taxable and buy:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
Vanguard Total International Market Index Fund Admiral Shares (VTIAX) ER 0.11%

2 - get bonds out of Roth space, put in pre-tax accounts
3 - less funds per account, no fund should be less than 5% unless that's the total amount of the account (see Duckie's post)
4 - those HSA expense ratios! Ack! Drop all over 0.20%, and fast

5 - leave the car loan, I don't have a problem with low interest debt
-I rebalanced my accounts today to try to simplify as much as possible with 1, 2, or 3 funds per account, while also allowing opportunities to re-balance between funds.

-I've sold all my bonds that were in other accounts and put my 10% of total portfolio bond allocation in my 401k in Vanguard Intermediate Term Bond Index.

-I moved all Vanguard Real Estate fund to my Roth IRA.

-I moved all the $$ in my HSA to JP Morgan Equity Index with a 0.20% expense ratio (lowest of any fund offered in my HSA).

-I moved my Small Cap Value to our Roth IRAs.

-I still had some room in my 401k for future contributions, so my international allocation will go in my 401k. I debated between International or Small Cap Value going into 401k, but I didn't like the fund or expense ratio available for Small Caps.

-So far, I'll keep buying VTI in my taxable account.

I plan on leaving the car loan alone. It'll be paid off in a little over a year. It's probably worth like $12-$15k now and we plan on keeping it until the maintenance becomes more expensive than buying a new one.

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