Portfolio simplification help

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goldenbell12
Posts: 5
Joined: Sun May 17, 2015 10:33 am

Portfolio simplification help

Post by goldenbell12 » Sun Feb 11, 2018 6:08 pm

Hi all,
My wife and I are finally reaping the benefits of many years of hard work and sacrifice. We are both physicians and have completed our training within the last couple of years. We are both on the same page and want to save aggressively so we can reach financial independence as soon as possible while still enjoying some of the fruits of our labor as we go. Ultimately our goal is to have the option to retire if we so desire at age 50 along with the ability to travel frequently, maybe have a home in a warm locale for winters, etc.

Over the years I have gotten a little too consumed by my investments and desire to reach financial independence. I need simplification. When I started investing about 8-9 years ago I was almost exclusively stock picking/stock collecting. I think I liked to idea of buying beaten up stocks with the knowledge that I had a long term horizon. I still have a long term horizon but want to maximize my free time for my family and my career. Bottom line, I have spent too much of my most valuable resource (time) without the appropriate gain over average market returns. I know that is not a surprise to anyone on this site!

Fortunately I have slowly decreased my individual stock allocation and increased my index funds. I have ideas about how I want to consolidate and simplify across the many retirement accounts we have accumulated through residency, fellowship, and now into our first jobs out of training. In general, I want to simplify things as much as possible across all retirement accounts. I have a desire to “set and forget” my accounts that are no longer getting contributed to. I want to eliminate or nearly eliminate my individual stocks, get bonds out of Roth space and into non-Roth tax advantaged accounts, and rebalance with brokerage account by adding US/international equity indexes and tax exempt bond EFT (VTEB).

I have come to realize there are a lot of very smart people on here and I would love some opinions.


Emergency funds: Yes - Three months cash
Debt:
Mortgage: 395K at 3.5% (15 yr fixed) – 3.2K/month payments
Student loans: 175K at 3.25% (5 yr fixed) – 3.1K/month payments
Parental loan: 65K at 0%

Tax Filing Status: Married Filing Jointly
Tax Rate: 37% Federal, 8.98% State
State of Residence: IA
Age: 36
Desired Asset allocation: Vanguard questionnaire states 100% equities which is too aggressive in my opinion. Probablly somewhere between 80/20 and 90/10.
Desired International allocation: Not sure – 20-30 percent??

Portfolio size: 650K

Taxable: 130 K (Vanguard brokerage account)
VEU (4.2 %) – Vanguard FTSE all world ex US ETF – ER 0.11
VTI (2.6 %) – Vanguard Total index ETF – ER 0.04
VTEB (3.1 %)– Vanguard Tax exempt municipal bond ETF – ER 0.09
Stock (10.1%) – BAC, BRK-B, BPL, EIX, EXAS, XOM, IBM, MGEE, NKE, PCGE

My proposed plan: Stop adding individual stocks. Slowly eliminate individual stock holdings when it makes sense for loss harvesting, etc. Stop automatic reinvestment of stock dividends. Convert VTI to VEU. Rebalance overall portfolio stock to bond allocation by adding either to VTI/VEU or VTEB.

Tax-advantaged: 520 K

Non-Roth (mix of self directed and non-self directed investments)

403b – Self directed account at Fidelity. No longer making contributions as this was from a prior employer.
FFNOX (4.3 %) Fidelity 4-in-1 Index – ER 0.13
FPMAX (2.6 %) Fidelity EM Index – ER 0.13

My plan: Convert to FSIVX – Fidelity Total Internation Index – ER 0.06. Decreases expense ratio and increases international exposure.

Profit sharing plan – self directed at Schwab
SCHA (2.5%) – Schwab US small cap index – ER 0.05
SCHX (2.5%) – Schwab US large cap index – ER 0.03

My plan: Continue contributing to these indexes in a roughly equal distribution.

Cash Balance Plan (40/60 split) – Non-self directed at Schwab.
SCHZ (4.8%) – Schwab US aggregate bond EFT – ER 0.04
SCHB (3.5%) – Schwab US broad market ETF – ER 0.03
BNDX (2.1%) – Vanguard Total international bond ETF – ER 0.12
SCHF (1.4%) – Schwab international equity ETF – ER 0.06
SCHE (0.4%) – Schwab EM ETF – ER 0.13
SCHC (0.3%) – Schwab international small cap ETF – ER 0.12
CDs (1.4%)

My plan: Continue as is. This will continue to increase the bond portion of my entire portfolio as the contributions increase over the years.

Combined governmental 457 – self directed but no long making contributions as this was from prior employment.
VIVLX (7.2%) – Vanguard 2055 –ER 0.09
VWETX (3.4%) – Vanguard investment grade bond fund – ER 0.11
VWENX (5.2%) – Vanguard Wellington – ER 0.16
Cash (4.5%)

My plan: Convert three funds and cash to VIIIX – Vanguard Institutional Indx Instl Pl – ER 0.02. Simplifies in that is a single US large cap holding. I plan to leave it as is for the duration.

Combined Roth (individual and Roth 401K) – self directed
VNQ (3.8%) - Vanguard REIT ETF – ER 0.12
BND (3.5%) - Vanguard Total Bond Index ETF – ER 0.05
Stocks (18.2%) – T, BP, NTR, MO, ADM, XOM, RDS-B, WFC
FTBFX (1.9%) – Fidelity Total Bond – ER 0.45
SCHA (3.3%) – Schwab US small cap index – ER 0.05
SCHX (3.2%) – Schwab US large cap index – ER 0.03

My Plan: Slowly remove individual stocks and stop automatic stock dividend reinvestment. Eliminate bonds from Roth space. Increase VNQ REIT to 5%. Complete the rest with either VTI or SCHA/SCHX depending on the account.

529 plan – 30K – will continue to contribute with 2 young non-school aged children.


Overall current asset allocation
Stock: 71.9%
Bond: 22.2%
CD: 1.4%
Cash: 4.5%

With proposed changes
Stock: 88.6%
-US – 84.5%
-International – 15.5%
Bond: 10%
CD: 1.4%
Cash: 0%


New Annual Contributions:

Retirement (tax advantaged) contributions:
Combined Backdoor Roth: 11K
Combined Cash Balance Plan: 90K
Combined Profit sharing contribution: 34K
Roth 401K: 18.5K
Non-Roth 401K: 18.5K

Total: 172 K (29.5K Roth/ 142.5K non-Roth)

Non-retirement investments:

360K remain for investing outside of tax-advantaged spaces after subtraction for taxes, yearly expenses, and 75K of discretionary spending. As of right now, we plan on roughly investing 30K/month in some way, shape or form whether that be brokerage account, whole life insurance, paying down debt, etc.

Questions:
1. Any issues with my proposed rebalancing? Again, I will be primarily using my brokerage account for rebalancing using VTI/VEU to help with US/international equities and tax exempt muni fund for bond rebalancing. I will not be selling in my brokerage account for rebalancing but adding where needed.
2. Does it make more sense to pay off debt at 3.25-3.5% interest as opposed to invest in bonds (VTEB) within a taxable account at this point? My debt doesn't keep me up at night but I don't want to be stupid about it either.
3. Am I crazing for considering a whole life policy? I am skeptical and would have this analyzed by a third party fee only insurance advisor prior to signing up. I am primarily interested in being able to add some more tax advantaged space and well as having a buffer to prevent drawing down retirement assets in a down market in an early retirement.

Thanks,
GoldenBell12

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BolderBoy
Posts: 3879
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Portfolio simplification help

Post by BolderBoy » Sun Feb 11, 2018 11:26 pm

goldenbell12 wrote:
Sun Feb 11, 2018 6:08 pm
Desired Asset allocation: Vanguard questionnaire states 100% equities which is too aggressive in my opinion. Probablly somewhere between 80/20 and 90/10.
Desired International allocation: Not sure – 20-30 percent??
At age 36ish 80/20 is plenty aggressive. And 20% international is quite enough, IMO.
2. Does it make more sense to pay off debt at 3.25-3.5% interest as opposed to invest in bonds (VTEB) within a taxable account at this point? My debt doesn't keep me up at night but I don't want to be stupid about it either.
I think this is a splendid idea. Go for it.
3. Am I crazing for considering a whole life policy?
Yes. Keep investing (the whole life salesman will tell you it is a good "investment") separate from needing life insurance. If you want/need life insurance, buy term life.

Have you visited the "White Coat Investor" website?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

mnvalue
Posts: 1086
Joined: Sun May 05, 2013 2:22 pm

Re: Portfolio simplification help

Post by mnvalue » Mon Feb 12, 2018 12:29 am

1)

Can you roll the 403b and 457 into your 401k? Your 401k has decent choices. You should avoid rolling them to a Traditional IRA, as that would prevent you from making "backdoor" Roth IRA contributions.

It would help me provide a better plan if you could split the "Combined Roth" into the two accounts.

Given your desire to retire early, I will use the conservative end of your range: 80/20. Vanguard uses 40% of stocks as International, so that is my default recommendation, but I will use the high end of your range: 30%. That amounts to .3 * .8 = 24% International, .7 * .8 = 56% U.S. Stocks, and 20% Bonds. You specified 5% REIT in the Roth, so I'll use that, taking it out of U.S. Stocks.

Target: 51% U.S. Stocks, 24% International Stocks, 20% Bonds, 5% REIT

Your rebalancing plan is nowhere near that. I'll work through a different example plan.

Your plan for taxable is reasonable, and changes would have tax consequences, so I'll use that to start:

Taxable at Vanguard
4.2% Vanguard FTSE All World ex US
2.6% Vanguard Total Stock Market
3.1% Vanguard Tax exempt municipal bonds
10.1% Individual U.S. Stocks

Remaining: 38.3% U.S. Stocks, 19.8% International Stocks, 16.9% Bonds, 5% REIT

Your choice in the 403b is reasonable, so I'll use that:

403b at Fidelity
6.9% Fidelity Total International Index

Remaining: 38.3% U.S. Stocks, 12.9% International Stocks, 16.9% Bonds, 5% REIT

Your choice in the 457 plan is reasonable, so I'll use that:

Combined governmental 457
20.3% Vanguard Institutional Index

You want a ratio of 80:20 large:small cap to approximate the total stock market, so you need 20.3 / 4 = 5.1% small cap to balance this out.

Remaining: 18% U.S. Stocks (including 5.1% small cap), 12.9% International Stocks, 16.9% Bonds, 5% REIT

Let's use only the small cap at Schwab. This is simpler, and coincidentally is what you need to balance out the above large cap:

Profit sharing plan at Schwab
5% Schwab US small cap index

Remaining: 13% U.S. Stocks, 12.9% International Stocks, 16.9% Bonds, 5% REIT

The cash balance plan is way too complicated with too many small positions. Let's fold it all into bonds:

Cash Balance Plan at Schwab
1.4% CDs -- fold into U.S. bonds as allowed
12.5% Schwab US Aggregate Bond

Remaining: 13% U.S. Stocks, 12.9% International Stocks, 3% Bonds, 5% REIT

There is no need to do anything slowly in the Roth space. There are no tax consequences for changes there, so make changes immediately. If you have huge trading fees, probably still just take the hit and move on.

Combined Roth (individual and Roth 401K)
13% Vanguard Total Stock Market or 80:20 of Schwab US Large:Small Cap
12.9% Vanguard or Schwab International
5% Vanguard REIT
3% Vanguard or Schwab Bonds

2) I'd pay off the debt before buying bonds. That makes for a 3.25-3.5% risk free bond investment.

3) You'd almost certainly be crazy to buy one.

goldenbell12
Posts: 5
Joined: Sun May 17, 2015 10:33 am

Re: Portfolio simplification help

Post by goldenbell12 » Mon Feb 12, 2018 10:03 pm

Thank you to the both of you for your thoughtful responses.

mnvalue - Your approach was very helpful and makes the process seem less daunting. Breaks it down to simple arithmetic with fewer moving targets. I feel like I should have thought of that earlier! I can live with 80/20. It is aggressive but not off the rails. 40% international probably makes sense too. I do not want to underweight international in these times.
Can you roll the 403b and 457 into your 401k? Your 401k has decent choices. You should avoid rolling them to a Traditional IRA, as that would prevent you from making "backdoor" Roth IRA contributions.
Nope. We cannot roll over the 403b and 457 funds into the current 401K. That would be wonderful if we could. From a simplification standpoint, I think the best option is to convert to core stock funds that won't requiring rebalancing within the individual 403b and 457 funds.
The cash balance plan is way too complicated with too many small positions. Let's fold it all into bonds:

I agree. But this is a predetermined allocation (~40/60 stock to bond) that is not controlled by me. I only determine how much I am contributing and I choose to max it out as it is a great way to pile pre-tax money into tax advantaged space. This will become a larger portion of my portfolio in the future with current yearly contributions at ~50K and toping out at ~200K at age 50. As a result this will become a significant bond portion of my portfolio and may evolve to become my entire bond holding.

I think I will plan to use our taxable account to keep the portfolio in balance (primarily with Vanguard total index, Vanguard FTSE ex US, and Vanguard tax exempt muni bond ETF). I am thinking we will not need to sell in the taxable account for rebalancing purposes given that we are planing on making large yearly taxable contributions that will exceed our maxed out tax advantaged contributions . Does this make sense or have I not thought this through enough?

All in all, I feel like I am getting closer....

Thanks again,
GoldenBell12

mnvalue
Posts: 1086
Joined: Sun May 05, 2013 2:22 pm

Re: Portfolio simplification help

Post by mnvalue » Wed Feb 14, 2018 3:03 am

If the cash balance plan is not something you control, you'll have to treat that as fixed like I did for taxable, and work around it.

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