Step 4 of 10 towards simplifying investments

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Iowa David
Posts: 91
Joined: Mon Dec 18, 2017 9:53 pm

Step 4 of 10 towards simplifying investments

Post by Iowa David » Tue Apr 24, 2018 10:25 am

[Updated/Edited Post]

I am still on steps #4 & #5 (of 10) as part of the journey to simplify our investments, minimize fees & taxes and increase our overall investment knowledge. Here are the steps for context, but for this post I need guidance with #4 & #5.

1. Migrate IRA to Vanguard - Complete (Currently enrolled in Vanguard PAS)
2. Liquidate investment account and apply towards mortgage principal - Complete
3. Create new investment account with Vanguard - Complete
4. Close existing brokerage account and use proceeds towards funding Vanguard investment account - In Process
5. Sell individual stock holdings - Starting
6. Migrate his Roth IRA to Vanguard - Not Started
7. Migrate her Roth IRA to Vanguard - Not Started
8. Migrate 2nd investment account to Vanguard (or Fidelity?)- Not Started
9. Determine what to do with children’s 529 plans - Not Started
10. Determine what to do with whole life insurance policy - Not Started

Emergency funds: Six months of expenses (Not part of our asset allocation, online bank generating a 1.5% APY)
Debt: Mortgage, 3.625%
Tax Filing Status: Married Filing Jointly
Tax Rate: 24% Federal, 5.7% State
Age: 38
Desired Asset allocation: 80/20
Desired International allocation: Unknown
He is maxing out the annual 401K & Roth IRA
She is contributing $10K towards annual 403B & Maximum towards Roth IRA
We do not have an HSA (but will likely consider this during the next open enrollment)

In regard to step #4:

We have multiple goals with different time horizons. I think it’s safe to say we can lump into three buckets:
* 1-4 years (funds set aside to fund future Roth Contributions, 529 Plans and looming car & home expenses)
* 5-9 years (Not necessarily earmarked for anything in particular, but would like to see realistic growth of 3-6%)
* 10+ years (Not necessarily earmarked for anything in particular, but would like to see realistic growth of 5-8%)

In regard to step #5:

A large part of my stock allocation is tied up with one technology firm. The stock has since increased 20x and I face a fairly large long-term capital gains if I sell them. I realize this is risky to hold these and I was thinking about doing a gradual sell off every 3-4 months. I would take the proceeds and reinvest to support step #4.

Questions:

We incurred capital gains in item #2 from closing our investment account. Most of the mutual funds in #3 are showing a capital loss. Is the most tax advantageous step to sell the mutual funds now to minimize capital gains for this tax year?

For the new Vanguard investment account #3, it's my understanding that for the most tax-efficient funds should be placed in the taxable account and the least tax-efficient funds should be placed in our tax-deferred IRA.

So should we place 100% of our funds in the taxable account with a total stock market fund and then increase the IRA's holding of bonds to maintain the 80/20 asset allocation? (Keep in mind that we currently have the Vanguard PAS only on the IRA account and I believe they won't automatically re balance the IRA from accounts that are not in their view/management.)

Or would we be better off maintaining a 50/50 or 60/40 allocation in the taxable account since we know this may be needed for the 5-9 or 10+ year time frame?

While I want to gain the knowledge from managing the investment account myself, I am also giving consideration to the the various LifeStrategy Funds as a starter step. (Which may also stop me from trying to "tinker" too much with the account balancing.)

Please let me know if any additional detail is needed - thank you to everyone who has replied to my previous posts.
Last edited by Iowa David on Sat Jun 23, 2018 10:02 am, edited 3 times in total.
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

123
Posts: 5112
Joined: Fri Oct 12, 2012 3:55 pm

Re: Step 4 of 10 towards simplifying investments

Post by 123 » Tue Apr 24, 2018 10:52 am

Iowa David wrote:
Tue Apr 24, 2018 10:25 am
I am on step #4 (of 10)...
4. Close existing brokerage account and use proceeds towards funding Vanguard investment account - In Process

In regard to step #4:

We have multiple goals with different time horizons. I think it’s safe to say we can lump into three buckets:
* 1-4 years (funds set aside to fund future Roth Contributions, 529 Plans and looming car & home expenses)
* 5-9 years (Not necessarily earmarked for anything in particular, but would like to see realistic growth of 3-6%)
* 10+ years (Not necessarily earmarked for anything in particular, but would like to see realistic growth of 5-8%)
Funds needed in the short-term 1-4 years in your case, should be in banks accounts/CDs. You intend to have cash available to meet these specific needs. Funds for the 5-9 year period could probably be in a 50/50 mix of stocks/bonds. Funds needed for 10 years and beyond could be 100% stocks.

With your short-term needs funded with bank accounts/CDs you could probably use a consolidated blend of stocks 75% and bonds 25% for your more ambiguous investment goals. The fewer the accounts the easier it gets. If it was all in one account you could use brokered CDs or Treasuries for more immediate requirements and ETFs or mutual funds for the long-term goals.
The closest helping hand is at the end of your own arm.

bloom2708
Posts: 6841
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Step 4 of 10 towards simplifying investments

Post by bloom2708 » Tue Apr 24, 2018 10:56 am

(Currently enrolled in Vanguard PAS)

What is PAS recommending?

Your 3 bucket strategy is not going to really work. 1-4 years should be high yield money market/CD/online savings.

Your overall asset allocation should cover your full portfolio (exclude Emergency Fund). Count everything else. If you are 80/20 but segregate $X over here, then you are not 80/20.

Are you maxing pre-tax 401ks? Roth IRAs? HSA? If so, then your taxable account can be where you sell from for specific needs. You can't pick 3-6% for 4 years and 6-8% for 10 years. The market doesn't work like that.

You can mix LifeStrategy funds. If you use 20/80, 40/60 and 80/20, those average out to some mix of stocks and bonds. Let's say 60/40. You could just use 60/40. LifeStrategy may not be optimal in taxable. Bond interest is 100% ordinary income.

You have a detailed plan. The complexity of it all may be clouding things. Forest and trees. Hopefully others can offer some additional advice to see you through the steps.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words. Whole food, plant based. Bing it.

senex
Posts: 284
Joined: Wed Dec 13, 2017 4:38 pm

Re: Step 4 of 10 towards simplifying investments

Post by senex » Tue Apr 24, 2018 11:20 am

Regarding capital losses, yes, the best tax situation is to sell losers to offset the gains.

Regarding separate accounts, it's a personal choice. In my experience, simplicity (fewer accounts) is better.

Regarding AA, for car & home expenses in the next 1-4 years, I agree with others who say high-yield checking. I personally think a short-term bond fund is fine too. For stuff you're going to put into Roth/529, you're going to fully invest it anyway, so you might as well fully invest it now. Personally, I would do the simple thing and just lump all that money together (along with the 5-9 and 10+ buckets) into one lump sum and do any reasonable asset allocation. At your age, anything from 50/50 to 100/0 (stocks/bonds) is fine, given your risk tolerance. There are many roads to Rome -- just pick one and stick with it.

Simplicity is great! It's good you have a plan. Keep reducing accounts and expenses.

Topic Author
Iowa David
Posts: 91
Joined: Mon Dec 18, 2017 9:53 pm

Re: Step 4 of 10 towards simplifying investments

Post by Iowa David » Tue Apr 24, 2018 5:19 pm

bloom2708 wrote:
Tue Apr 24, 2018 10:56 am
(Currently enrolled in Vanguard PAS)

What is PAS recommending?
Have not checked with them because I wasn’t planning to use their services for this account, but I may as starting point to get everything in order.

bloom2708 wrote:
Tue Apr 24, 2018 10:56 am

Your overall asset allocation should cover your full portfolio (exclude Emergency Fund). Count everything else. If you are 80/20 but segregate $X over here, then you are not 80/20.

Are you maxing pre-tax 401ks? Roth IRAs? HSA? If so, then your taxable account can be where you sell from for specific needs. You can't pick 3-6% for 4 years and 6-8% for 10 years. The market doesn't work like that.
Just to clarify - are you suggesting that when I take in all assets (IRA, Roth & Investment Account(s) they should equal the target asset allocation?

I’m just trying to get my head around this because when you combine all of the funds they are not all necessarily supporting the same goal.

To answer your other question, yes - I am maxing out my pre-tax 401K and plan to fully fund the Roth each year (if eligible). We do not have a HSA. (I have also edited the original post to reflect this information.)

bloom2708 wrote:
Tue Apr 24, 2018 10:56 am

You have a detailed plan. The complexity of it all may be clouding things. Forest and trees. Hopefully others can offer some additional advice to see you through the steps.
Thank you, it helps if I break things into steps (even it takes a bit longer to get done.)
senex wrote:
Tue Apr 24, 2018 11:20 am
Regarding capital losses, yes, the best tax situation is to sell losers to offset the gains.

Regarding separate accounts, it's a personal choice. In my experience, simplicity (fewer accounts) is better.

Regarding AA, for car & home expenses in the next 1-4 years, I agree with others who say high-yield checking. I personally think a short-term bond fund is fine too. For stuff you're going to put into Roth/529, you're going to fully invest it anyway, so you might as well fully invest it now. Personally, I would do the simple thing and just lump all that money together (along with the 5-9 and 10+ buckets) into one lump sum and do any reasonable asset allocation. At your age, anything from 50/50 to 100/0 (stocks/bonds) is fine, given your risk tolerance. There are many roads to Rome -- just pick one and stick with it.

Simplicity is great! It's good you have a plan. Keep reducing accounts and expenses.
Thank you - appreciate the words of support.
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

Topic Author
Iowa David
Posts: 91
Joined: Mon Dec 18, 2017 9:53 pm

Re: Step 4 of 10 towards simplifying investments

Post by Iowa David » Sat Jun 23, 2018 11:13 am

Updated this previous post and would welcome any additional insight.

Thanks!
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

JBTX
Posts: 5480
Joined: Wed Jul 26, 2017 12:46 pm

Re: Step 4 of 10 towards simplifying investments

Post by JBTX » Sat Jun 23, 2018 3:46 pm

Just to clarify - are you suggesting that when I take in all assets (IRA, Roth & Investment Account(s) they should equal the target asset allocation?

I’m just trying to get my head around this because when you combine all of the funds they are not all necessarily supporting the same goal
Collectively, together they should. That doesn't mean that every account has to separately equal the allocation.

There are at least 2 schools of thought on this:

Some will advocate always having your stock allocation in taxable and bond allocation in tax deferred, as it is potentially more tax efficient. Whether you need the money in 5 years or 40 years makes no difference in this argument, as money is "fungible".

The other strategy is more of a bucket approach, where your asset allocation for each major account is dependent upon when you plan to use the money. Thus a house down payment fund or a college fund may not have as much equities as a retirement fund. The argument here could be optimizing your risk for the various needs of your money is more Important than the small tax advantages of the former strategy.

Of course you could have some combination of the above.

Topic Author
Iowa David
Posts: 91
Joined: Mon Dec 18, 2017 9:53 pm

Re: Step 4 of 10 towards simplifying investments

Post by Iowa David » Sun Feb 10, 2019 7:31 am

I originally posted this last April, but wanted to briefly provide an update on our progress and give thanks to those who had offered help. Thought it might also be helpful for folks who are just getting started to provide encouragement that this process takes time and patience, but if you follow a plan you'll eventually make progress.

1. Migrate IRA to Vanguard - Complete (Currently enrolled in Vanguard PAS)
2. Liquidate investment account and apply towards mortgage principal - Complete
3. Create new investment account with Vanguard - Complete
4. Close existing brokerage account and use proceeds towards funding Vanguard investment account - Complete
5. Sell individual stock holdings - Complete
6. Migrate his Roth IRA to Vanguard - Complete
7. Migrate her Roth IRA to Vanguard - Complete
8. Migrate 2nd investment account to Vanguard (or Fidelity?)- Complete (We sold our holdings - in September - and applied the gains to pain down our mortgage)
9. Determine what to do with children’s 529 plans - Complete (We rolled over the existing accounts to new 529 Plans with Vanguard)
10. Determine what to do with whole life insurance policy - Not Started. This is still up in the air and I will likely submit a new question for the community.
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

lakpr
Posts: 2751
Joined: Fri Mar 18, 2011 9:59 am

Re: Step 4 of 10 towards simplifying investments

Post by lakpr » Sun Feb 10, 2019 9:27 am

8. Migrate 2nd investment account to Vanguard (or Fidelity?)- Complete (We sold our holdings - in September - and applied the gains to pain down our mortgage)
Wow, can you tell me how did you manage to time your selling at the precise market peak? Congratulations, and if you have any market timing tips I am all ears :sharebeer :thumbsup

Post Reply