New to Investing - Portfolio help please

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Yeti
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New to Investing - Portfolio help please

Post by Yeti » Wed Oct 01, 2008 9:50 am

Hello everyone! I’ve been digging through posts for a few months now while reading some of the books suggested in the Boglehead’s library. I’m still very new to investing (started earlier this year) and I appreciate any help/comments/suggestions you have to offer.

Emergency funds = Yes, currently sitting @ 3.0% in a savings account.

Debt: Mortgage

Tax Filing Status: Single

Tax Rate: 25% Federal / 6.45% Kansas

Age: 24

Desired Asset allocation: (95/5)

Portfolio: 5 Figures

Taxable
41% Vanguard Total Stock Market Index (VTSMX) (0.15%)
27% Mid-Cap Index (VIMSX) (0.21%)

Roth at Vanguard
32% Target Retirement 2050 (VFIFX) (0.21%)


Comments:
1. I am eligible for my company’s SIMPLE IRA after this year. They place 6% of my salary into this IRA w/ no match required. I'll have pleanty of questions concerning this at a later date.

Questions:
1. I would like to get more exposure in the area of Small caps, possibly NAESX? Should I trade my Mid-Cap for this fund even though the VIMSX is down quite a bit this year?
2. I’ve read in a few places that if you have a Target fund in a tax deferred account, like I have, you really don’t want VTSMX in a taxable account because of overlapping. I understand that the VFIFX has the VTSMX inside of it but is it all that bad to have a little more? Better options out there?
3. I’d like to add an international fund to my portfolio, recommendations?

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ruralavalon
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Re: New to Investing - Portfolio help please

Post by ruralavalon » Wed Oct 01, 2008 8:26 pm

Yeti wrote:
Desired Asset allocation: (95/5)


Taxable
41% Vanguard Total Stock Market Index (VTSMX) (0.15%)
27% Mid-Cap Index (VIMSX) (0.21%)

Roth at Vanguard
32% Target Retirement 2050 (VFIFX) (0.21%)


Questions:
1. I would like to get more exposure in the area of Small caps, possibly NAESX? Should I trade my Mid-Cap for this fund even though the VIMSX is down quite a bit this year?
2. I’ve read in a few places that if you have a Target fund in a tax deferred account, like I have, you really don’t want VTSMX in a taxable account because of overlapping. I understand that the VFIFX has the VTSMX inside of it but is it all that bad to have a little more? Better options out there?
3. I’d like to add an international fund to my portfolio, recommendations?
Welcome to the forum. Since the many more knowledgeable posters on this forum haven't responded, I'll try to get you started toward some answers.

Responses:

1. Everything is down. Small Cap, NAESX, is a good fund if that is what you want, but I wouldn't put it in a taxable account if I could at all help it. It is not very tax effecient.
2. There is a good deal of overlap between Total Stock Market, VTSMX, and your Target Retirement, VFIFX. You could go with more Total Stock Market in your taxable account, and eliminate the Total Retirement, and avoid the overlap that way.
3. Either Total International, VGTSX, or FTSE All World x-US, VFWIX. It would depend on whether you would be putting it in a taxable account or a tax protected account.


Questions:

1. What allocation to International do you have in mind? Most here see 20-40% of equities as the proper range. You might read other threads for dscussion on this (there is a search function you can use to locate discussions on this). There is a good article on the Vanguard site on this issue, I'm sorry but I don't know how to post a link to that article :( .
2. Do you wish to drop the Target Retirement? Or wish to keep it? Or have no real feeling one way or the other? (You didn't really say in your post).
3. Since most Vanguard funds have $3000 minimums, do you have the portfolio size to be considering 2-3 more funds? (Maybe the simplicity of Total Retirement is what you need to stay with).

You could think about something along these lines, but it will all depend on how your answers to the 3 questions above--

Taxable
xx% Total Stock Market, VTSMX
xx% FTSE All World x-US
68% total

Roth at Vanguard
xx% Small Cap, NAESX
xx% Total Stock Market, VTSMX, and/or xx% Total International, VGTSX
05% Total Bond Market, VBMFX, or TIPS, TIPSX
32% total

You might want to think thru those 3 questions, and post again in this thread. Then I or others could give you some more definite thoughts and recommendations.

Yeti
Posts: 115
Joined: Wed Oct 01, 2008 8:58 am

Re: New to Investing - Portfolio help please

Post by Yeti » Thu Oct 02, 2008 9:58 am

ruralavalon wrote: Welcome to the forum. Since the many more knowledgeable posters on this forum haven't responded, I'll try to get you started toward some answers.

Responses:

1. Everything is down. Small Cap, NAESX, is a good fund if that is what you want, but I wouldn't put it in a taxable account if I could at all help it. It is not very tax effecient.
2. There is a good deal of overlap between Total Stock Market, VTSMX, and your Target Retirement, VFIFX. You could go with more Total Stock Market in your taxable account, and eliminate the Total Retirement, and avoid the overlap that way.
3. Either Total International, VGTSX, or FTSE All World x-US, VFWIX. It would depend on whether you would be putting it in a taxable account or a tax protected account.
Thanks for the welcome and the responses, Ruralavalon.
ruralavalon wrote: Questions:

1. What allocation to International do you have in mind? Most here see 20-40% of equities as the proper range. You might read other threads for dscussion on this (there is a search function you can use to locate discussions on this). There is a good article on the Vanguard site on this issue, I'm sorry but I don't know how to post a link to that article :( .
2. Do you wish to drop the Target Retirement? Or wish to keep it? Or have no real feeling one way or the other? (You didn't really say in your post).
3. Since most Vanguard funds have $3000 minimums, do you have the portfolio size to be considering 2-3 more funds? (Maybe the simplicity of Total Retirement is what you need to stay with).

You could think about something along these lines, but it will all depend on how your answers to the 3 questions above--

Taxable
xx% Total Stock Market, VTSMX
xx% FTSE All World x-US
68% total

Roth at Vanguard
xx% Small Cap, NAESX
xx% Total Stock Market, VTSMX, and/or xx% Total International, VGTSX
05% Total Bond Market, VBMFX, or TIPS, TIPSX
32% total

You might want to think thru those 3 questions, and post again in this thread. Then I or others could give you some more definite thoughts and recommendations.
Responses:

1. I'd prefer to keep about 25% of my allocation dedicated to international. These international fund(s) would be placed in my taxable account.
2. I would like to keep my Target Retirement fund, especially for the time being. I feel that it gave me the most diversity at the lowest cost. Due to this being the first year for my Roth I'm unable to have more than one fund in it because of the 3k minimums. I find it attractive that over the years it will self-allocate to a more conservative side when nearing retirement. I figure the less likely I have to mess with it the less likely I will do something that I'll regret.
3. I would be able to add 2-3 more funds by the end of this year, but not in the Roth since it is currently maxed at 5k.

Questions:

1. I currently reinvest all dividends back into the fund, is this a bad idea?
2. Would a money market fund be beneficial in my situation?
3. After each paycheck I've been adding to my funds in the taxable accounts, is there any reason not to invest so often?

Let's say by the end of next year I have 50k in my portfolio and the roth is maxed I'd like it to look a bit like this:

Taxable - 40k
20k - Total Stock Market, VTSMX
12.5k - International Fund
7.5k - Something else tax friendly / more diversification

Roth at Vanguard - 10k
3.3k - Small Cap, NAESX
3.4k - Target Retirement 2050, VFIFX
3.3k - Total Bond Market

Over time the % that my Roth makes up in my portfolio is going to shrink when compared to the taxable accounts due to it's 5k/yr limitations so I'd like to add something to my Taxable account that would be a bit more conservative.

Hope this all makes sense; I'm pretty new at this so please set me straight if I'm off on a tangent! Thank you again for all the help.

-Yeti

jhd
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Location: San Francisco, CA

Post by jhd » Thu Oct 02, 2008 1:52 pm

Welcome, Yeti!

-- Instead of holding a small-cap fund, why not go with a small-cap value fund? That way, you capture both Small and Value premiums (if they exist over your time horizon) in a single fund. And historically, Small Growth stocks have done pretty badly.

-- Reinvesting dividends is fine, and probably a good idea.

-- A money market fund would be beneficial if you're looking for a place to store some cash, as long at the current credit crisis doesn't get much worse. :) But it isn't something you need otherwise.

-- Investing often, and automatically if possible, is a great idea. It keeps you from forgetting to invest, or spending your investment money.

-- It's up to you, but I would vote for getting rid of the target retirement fund. It doesn't buy you much diversification and it makes things more difficult to manage. Keep your portfolio simple - 5% bonds, 25% total international, 10% small (value), 60% TSM. Maybe shift to 5%-10% REITs once you have more tax advantaged space.

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ruralavalon
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Location: Illinois

Re: New to Investing - Portfolio help please

Post by ruralavalon » Thu Oct 02, 2008 5:26 pm

Yeti wrote:
Responses:

1. I'd prefer to keep about 25% of my allocation dedicated to international. These international fund(s) would be placed in my taxable account.
2. I would like to keep my Target Retirement fund, especially for the time being. I feel that it gave me the most diversity at the lowest cost. Due to this being the first year for my Roth I'm unable to have more than one fund in it because of the 3k minimums. I find it attractive that over the years it will self-allocate to a more conservative side when nearing retirement. I figure the less likely I have to mess with it the less likely I will do something that I'll regret.
3. I would be able to add 2-3 more funds by the end of this year, but not in the Roth since it is currently maxed at 5k.

-Yeti
Yeti--

Good evening.

1. The international fund to put in your taxable account is FTSE All-World x-US, VFWIX, for its tax effeciency and eligility for the foreign tax credit. The 25% allocation is reasonable.
2. It was a very good decision to open the Roth IRA and fully fund it. Since there is currently room in it for only 1 fund, the Target Retirement 2050 is a good choice. It is 90% stocks, and 10% bonds. Of the 90% stocks, 72% are US, and 18% are international.
3. Rather than add more funds over the course of the coming year, just add new money to the funds in your new allocation. For the taxable account, there are really no other good choices for tax effeciency. The other funds you have in mind are best placed in the Roth, after it has had time to grow with your annual contributions. Given your answers to my questions, your allocation for now could be this--

Taxable Account
43%Total Stock Market, VTSMX
25% FTSE All World x-US, VFWIX
68% Total

Roth IRA
32% Target Retirement 2020, VFIFX

I have assumed you were aware of the international stocks in the TR 2050 fund, and meant that you wanted 25% in addition to what is already there. Combining the 2, this gives you about 31% international overall (still a reasonable allocation). If that is not what you meant, you could just decrease the FTSE by 6% and add that 6% to TSM.

Rather than add 2-3 additional funds over the course of the year, just add new money to these funds. Then at the end of next year, consider a new allocation and additional funds at that time. It is best to keep things as simple as reasonably possible. A lot of long time investors here have only 4-6 funds in their portfolios.

Most people here are against putting less than 5% in a fund, on the basis that smaller holdings just add unnecessary complexity and can do little if anything to add to portfolio performance.

Over the next year keep reading, perhaps a good book on Asset Allocation. If you haven't done so yet, read The Bogleheads' Guide to Investing. There are other good choices listed at "Books of Interest" on this site. Another of my personal favorites is R. Ferri's All About Asset Allocation. Reading up on Asset Allocation will help you make your decisions at the end of next year on what funds to add, and which accounts to put them in. After the initial years of investing and over the long haul, the most important determinant of portfolio performance is Asset Allocation. You should look at Asset Allocation closely, and consider a higher bond allocation, before starting to pick more funds.

Now, your other questions.

1. Yes, keep reinvesting the dividends in the funds. This will likely be a major part of their growth.
2. Not necessary. I use a money market fund as a savings account, on which I can write checks. Its a matter of convenience for me. I see that you have your emergency funds in a savings account. That is fine.
3. Yes, keep making the periodic contributions. In the initial years of investing, the most important determinant of portfolio growth is what you contribute. Keep it up.

I hope that I have understood and answered all of your questions.

Congratulations on getting an early start on your investing.

Best of luck to you.

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ruralavalon
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Location: Illinois

Post by ruralavalon » Sat Oct 04, 2008 1:53 pm

P.S. An additional thought. Toward the end of each year save up (rather than invest in the taxable) so that in January you can make the full year's contribution to the Roth IRA. This gives you the general benefit that the full Roth contribution has the prospect of growing all year tax free.

In your case, this has a more specific benefit. With the TR 2050, you currently have ~ 3% in bonds. If do this putting it all into more TR 2050, in January '09 you will have ~ 6-7% in bonds, very close to your target. If you do that again, in 15 months you will have enough money in the Roth to give serious consideration to adding one of the other finds you are considering in the Roth where it belongs.

Yeti
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Joined: Wed Oct 01, 2008 8:58 am

Post by Yeti » Mon Oct 06, 2008 9:17 am

Thank you for the replies, JHD and Ruralavalon!

I will keep the Target fund for a few years until I can split it up into different funds that will compliment my AA.

If I decide to go with the asset allocation that you laid out, Ruralavalon, should I sell/trade my current shares of the Midcap that I currently have or should I keep ahold of them for the time being? They are down a good 15-18%.

Could I use the short term losses against my annual income? TLH?

Thanks!

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ruralavalon
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Post by ruralavalon » Mon Oct 06, 2008 9:40 am

Yeti wrote:If I decide to go with the asset allocation that you laid out, Ruralavalon, should I sell/trade my current shares of the Midcap that I currently have or should I keep ahold of them for the time being? They are down a good 15-18%.

Thanks!
I would say trade the mid-cap to FTSE. FTSE which you would be acquiring is also down, in fact it is down more YTD (34% vs 28%) than the mid-cap. There is mid-cap in the Total Stock Market fund.

Yeti
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Joined: Wed Oct 01, 2008 8:58 am

Post by Yeti » Mon Oct 06, 2008 9:59 am

Would that be considered tax loss harvesting? Since I began investing this year I don't have much for gains :? . Still trying to figure out what works and what doesn't when it comes to TLH. I believe that is the next section in the book I'm reading.

Thanks!

-Yeti

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ruralavalon
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Post by ruralavalon » Mon Oct 06, 2008 11:29 am

Selling the mid-cap would create a tax loss. Read the article on Tax Loss Harvesting under "Tax Considerations" in the Bogleheads' Wiki about the effect of that loss, and how it would reduce your taxes.

I really am not the person to answer a tax question for you :( .

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