Appreciate some feedback

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Topic Author
bluman
Posts: 3
Joined: Sun May 13, 2018 10:07 am

Appreciate some feedback

Post by bluman »

Hello! I am a new member and this is my first post. Portfolio listed below followed by questions.

Background

Emergency funds: $100,000
Debt: Primary house $1,250,000 mortgage at 3.875%
Rental townhouse $400,000 mortgage at 4.125% (rents for $3000/month)
Tax filing status: Married filing jointly
Tax rate: 35% Federal / 10.3% State
State Residence: CA
Age: 46
Desired Asset Allocation: 70% stocks / 30% bonds
Desired International Allocation: 15-20% of stocks

Current retirement assets ($780,600)

Taxable Joint Account ($198,000)
0 % cash
22.3% Vanguard California Intermediate Tax Exempt Investor VCAIX (0.19%)
16.2% Vanguard Limited Term Tax-Exempt Investor VMLTX (0.19%)
33.3% Vanguard Total Stock Market Admiral VTSAX (0.04%)
28.2% Vanguard FTSE All-world ex-US Fund Admiral VFWAX (0.11%)

His Roth IRA at Vanguard ($93,000)
38.3% Total Stock Market Index Admiral VTSAX (0.04%)
36.1% Small-cap Index Admiral VSMAX (0.05%)
18.9% FTSE All-world ex-US Fund Admiral VFWAX (0.11%)
6.7% Health Care Fund VGHCX (0.37%)

His 401k at DFA ($360,000) Expense ratio: 0.25%

Asset Category Investment Target %
Cash Equivalents TD Bank USA, N.A. Institutional MMDA 3.00%
Short Term Bonds Vanguard Short-Term Bond Index Admiral (VBIRX) 11.00%
Inflation Adjusted Bonds DFA Inflation-Protected Securities (DIPSX) 8.00%
Intermediate Term Bonds Vanguard Intermediate-term Bond Index Signal (VIBSX) 18.00%
U.S. Real Estate Investment Trusts DFA U.S. Real Estate Securities Portfolio (DFREX) 3.00%
U.S. Large Company Stocks DFA U.S. Large Cap Equity Portfolio (DUSQX) 10.00%
U.S. Large Co. Value Stocks DFA U.S. Large Cap Value Portfolio (DFLVX) 11.00%
U.S. Small Company Stocks DFA U.S. Micro Cap Portfolio (DFSCX) 5.00%
U.S. Small Company Value Stocks DFA U.S. Small Cap Value Portfolio (DFSVX) 10.00%
International Real Estate Stocks DFA Intl. Real Estate Securities Portfolio (DFITX 3.00%
International Stocks DFA International Value Portfolio (DFIVX) 10.00%
International Stocks DFA International Small Cap Value Portfolio (DISVX) 4.00%
International Stocks DFA Emerging Market Index Portfolio (DFEMX) 4.00%
Portfolio Totals 100.00%

His SEP IRA at Vanguard ($24,000)
42.9% Small-cap Index Admiral VSMAX (0.05%)
29.6% Total Stock Market Index Admiral VTSAX (0.04%)
27.5% FTSE All-world ex-US Fund Investor VFWAX (0.23%)

Her SEP IRA at Vanguard ($4,600)
100% Total Stock Market Index Investor VTSMX (0.14%)

Her Roth IRA at Vanguard ($92,000)
40.9% Total Stock Market Index Admiral VTSAX (0.04%)
27.7% Total Bond Market Index Admiral VBTLX (0.05%)
19.7% FTSE All-world ex-US Fund Admiral VFWAX (0.11%)
6.6% REIT Index Investor VGSIX (0.26%)
5.1% Health Care Fund Investor VGHCX (0.37%)

His HSA Account – Optum Bank ($9,000)
100% Total Stock Market Index

529 Plans – Iowa Vanguard
Child #1 (age 19) $90,000
Child #2 (age 15) $15,000

New annual contributions
$50,000 to his 401k ($18,500 from employee and $31,500 from employer match/pension program)
$50,000 to taxable Vanguard joint accounts listed above for retirement

Questions:
1. Please provide feedback on current portfolio.
2. Due to a recent, unexpected inheritance, we have an infusion of $900,000 in cash. Please provide suggestions for this rare opportunity to invest a large sum of money. We are considering paying off the rental townhouse in full with the first $400k and then investing the remaining $500k in our taxable Vanguard accounts.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Appreciate some feedback

Post by retiredjg »

Welcome to the forum.

To understand your portfolio, you need to be able to see each holding in relation to the rest of the portfolio. That is why we use % of portfolio rather than % of account.

Below, I've added $500k to your taxable account and changed all the percentages to % of portfolio. As you can see, you have created a lot of very small slices of the portfolio - way too many. A lot of it is just clutter, not diversification. However, the funds do not care. :happy

By the way it is presented, I'm assuming your 401k account is some kind of all in one fund. If that is incorrect, I'll need to change that.


Taxable Joint Account 54.5% ($698,000)
39 % cash (the $500k inheritance)
12% Vanguard California Intermediate Tax Exempt Investor VCAIX (0.19%)
8.7% Vanguard Limited Term Tax-Exempt Investor VMLTX (0.19%)
18.1% Vanguard Total Stock Market Admiral VTSAX (0.04%)
15.3% Vanguard FTSE All-world ex-US Fund Admiral VFWAX (0.11%)

His Roth IRA at Vanguard 7.3% ($93,000)
2.8% Total Stock Market Index Admiral VTSAX (0.04%)
2.6% Small-cap Index Admiral VSMAX (0.05%)
1.4% FTSE All-world ex-US Fund Admiral VFWAX (0.11%)
0.5%% Health Care Fund VGHCX (0.37%)

His 401k at DFA 28.1% ($360,000) Expense ratio: 0.25%. <---are all these funds in one fund?
Asset Category Investment Target %
Cash Equivalents TD Bank USA, N.A. Institutional MMDA 3.00%
Short Term Bonds Vanguard Short-Term Bond Index Admiral (VBIRX) 11.00%
Inflation Adjusted Bonds DFA Inflation-Protected Securities (DIPSX) 8.00%
Intermediate Term Bonds Vanguard Intermediate-term Bond Index Signal (VIBSX) 18.00%
U.S. Real Estate Investment Trusts DFA U.S. Real Estate Securities Portfolio (DFREX) 3.00%
U.S. Large Company Stocks DFA U.S. Large Cap Equity Portfolio (DUSQX) 10.00%
U.S. Large Co. Value Stocks DFA U.S. Large Cap Value Portfolio (DFLVX) 11.00%
U.S. Small Company Stocks DFA U.S. Micro Cap Portfolio (DFSCX) 5.00%
U.S. Small Company Value Stocks DFA U.S. Small Cap Value Portfolio (DFSVX) 10.00%
International Real Estate Stocks DFA Intl. Real Estate Securities Portfolio (DFITX 3.00%
International Stocks DFA International Value Portfolio (DFIVX) 10.00%
International Stocks DFA International Small Cap Value Portfolio (DISVX) 4.00%
International Stocks DFA Emerging Market Index Portfolio (DFEMX) 4.00%
Portfolio Totals 100.00%

His SEP IRA at Vanguard 1.9% ($24,000)
0.8% Small-cap Index Admiral VSMAX (0.05%)
0.6% Toall Stock Market Index Admiral VTSAX (0.04%)
0.5% FTSE All-world ex-US Fund Investor VFWAX (0.23%)

Her SEP IRA at Vanguard 0.3% ($4,600)
0.3% Total Stock Market Index Investor VTSMX (0.14%)

Her Roth IRA at Vanguard 7.2% ($92,000)
3% Total Stock Market Index Admiral VTSAX (0.04%)
2% Total Bond Market Index Admiral VBTLX (0.05%)
1.4% FTSE All-world ex-US Fund Admiral VFWAX (0.11%)
0.5 REIT Index Investor VGSIX (0.26%)
0.36% Health Care Fund Investor VGHCX (0.37%)

His HSA Account – Optum Bank .7% ($9,000)
0.7% Total Stock Market Index

1. Please provide feedback on current portfolio.
All in all, probably a good portfolio. Some things that can be improved...

a) The number of funds you have is a bit mind boggling and unnecessary. If you want, that number can be reduced to a handful.


b) You have the portfolio set up so that you could trigger wash sales quite easily. If you don't know what that is, here's the short version. If you sell a fund in taxable at a loss, you cannot take that loss off your taxes if you have bought or do buy the same fund in IRA 30 days before or after the sale in taxable.

An example - if you decide to sell $1,000 of total stock in taxable at a loss and 3 weeks ago you reinvested a dividend in total stock in Her Roth, you cannot take all of your loss off your taxes. Same is true if you reinvest in IRA after the sale in taxable.

This is not a big deal. It is not illegal and it can be managed, but most people would just rather avoid the burdensome task of keeping up with it and reporting it properly on their taxes. It is a hassle with no benefit so why not avoid it in the first place?

The way to avoid it is not to hold the same exact funds in taxable and in your IRAs. You could hold 500 Index and Extended Market Index in the IRAs and have essentially the same thing as total stock. You could move all the international out of IRAs - there is no reason to hold those tiny slices of international in the IRA accounts.

I have not mentioned the 401k or HSA because these accounts have not been included in accounts subject to wash sale by the IRS.


c) Her SEP IRA is so small as to just be a nuisance. I'd convert it to Her Roth IRA.


d) His SEP IRA is too small to worry about as well. Either convert it to His Roth IRA or roll it into His 401k


e) The vast majority of your bonds are being held in taxable. This is not optimal in my mind although there is a decent argument to do this if you live in California. Nevertheless, I think your portfolio needs to have a broader range of bonds. I'd suggest no more than half your bonds be in taxable.


f) I suggest you fish or cut bait on Health Care, REIT, and small cap. It is OK to have a tilt, but you don't have enough of any of those to make any difference in your portfolio. Those positions are just adding clutter. The smallest allocation you to to anything should be 5% (many people believe even that is too little). (Yes, I realize they were a larger percentage before I added in that $500k. :happy). The point is to get on board or get out and your space for holding this assets (Roth IRA) is getting smaller and smaller.

2. Due to a recent, unexpected inheritance, we have an infusion of $900,000 in cash. Please provide suggestions for this rare opportunity to invest a large sum of money. We are considering paying off the rental townhouse in full with the first $400k and then investing the remaining $500k in our taxable Vanguard accounts.
That is what I'd do.


As for how to actually set up the whole portfolio, I'd like to hear your comments and desires before making an overall suggestion.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Appreciate some feedback

Post by retiredjg »

One other comment. Are you aware of or have you considered using the "back door" in order to contribute to Roth IRA?

I no longer suggest this maneuver because so many people mess up the paperwork, but someone will suggest it and it is only right that you are aware that it is an option.

If you decide to go that route, figure out the paperwork first. If you can't get the paperwork right, don't do it. And don't expect your tax person to know what to do because most don't.


Do you know if your 401k offers the ability to make after-tax contributions (not the same as Roth 401k)? The (confusing) name for this in your 401k documents will be "employee contributions". If yes, this is a better way to get money into Roth status.
Topic Author
bluman
Posts: 3
Joined: Sun May 13, 2018 10:07 am

Re: Appreciate some feedback

Post by bluman »

Thanks retiredjg! I appreciate your comprehensive and thoughtful comments. A few thoughts:

a. The number of funds outside of the 401k is high. I would like to simplify.

c. Her SEP IRA is small. I will convert it to HER Roth IRA. This will trigger a tax event but the amount is small and tolerable.

d. I will covert His small SEP IRA to His 401k. This will avoid a tax event that would be incurred by rolling into the Roth.

e. I thought the general principle was to park your bonds in your taxable account to make more room for stocks in your non-taxable accounts (Roth and 401k). I am a California resident and at my income level, I was looking for a tax-savy choice for my bond funds.

f. I agree with your comment here about the small percentage of Health Care, REIT and will close these. I favor small cap index because I don't mind a little more risk. Maybe I just need to allocate to this fund?

A few more follow-on questions:

1. The entire inheritance is $900,000. Do you agree with taking $400,000 and paying off the rental townhouse in full (4.125% interest rate)? In theory, this will likely provide some "piece of mind."

2. If I take the remaining $500,000 and infuse it into the taxable account, I think the biggest issue is properly determining the funds and asset allocation. Given my current situation (age, income, state of residence -- CA), what would you advise for the taxable account composition?

Thanks.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Appreciate some feedback

Post by retiredjg »

bluman wrote: Mon May 21, 2018 11:07 pm e. I thought the general principle was to park your bonds in your taxable account to make more room for stocks in your non-taxable accounts (Roth and 401k). I am a California resident and at my income level, I was looking for a tax-savy choice for my bond funds.
This is an area of much discussion and no consensus. It concerns whether you can make more money by holding bonds in a tax-advantaged account (401k, IRA) and eventually paying tax on the earnings or whether you can make more money by holding tax-exempt bonds in a taxable account.

Original Boglehead guidance was to hold all your bonds in a tax-advantaged account - 401k, IRA, even Roth IRA - instead of a taxable account because more money could be made that way over the long run. Then along came a period of very low interest rates and some people felt they could make more money by using tax-exempt bonds in a taxable account. Not everyone agreed this was a good idea.

What everyone agrees on is that people in high tax brackets like you should use tax-exempt bonds if you do hold bonds in taxable.

I think (not sure) that everyone agrees that tax-exempt bond funds carry more risk than a taxable bond fund of similar characteristics. Tax-exempt bonds are a narrower category of bonds - I would want more diversification myself.

My preference is to hold all bonds (for retirement) in the tax-advantaged accounts to the extent possible. What I'm suggesting for you is to hold at least half your bonds in the tax advantaged accounts and continue using the split of CA and a national tax-exempt fund ifor the bonds that are held in taxable.

https://www.bogleheads.org/wiki/Tax-eff ... _placement


f. I agree with your comment here about the small percentage of Health Care, REIT and will close these. I favor small cap index because I don't mind a little more risk. Maybe I just need to allocate to this fund?
I agree that picking one is a good idea.

1. The entire inheritance is $900,000. Do you agree with taking $400,000 and paying off the rental townhouse in full (4.125% interest rate)? In theory, this will likely provide some "piece of mind."
That is what I'd probably do, but it is a personal choice.

2. If I take the remaining $500,000 and infuse it into the taxable account, I think the biggest issue is properly determining the funds and asset allocation. Given my current situation (age, income, state of residence -- CA), what would you advise for the taxable account composition?
I need to understand the 401k plan first. Is that all one fund? Some sort of managed formula?
Topic Author
bluman
Posts: 3
Joined: Sun May 13, 2018 10:07 am

Re: Appreciate some feedback

Post by bluman »

My 401k is a "Moderate Portfolio" group of mutual funds with Dimensional. It is approximately 60% stocks and 40% bonds. The thirteen individual funds are listed on my original post. This "portfolio" is one of the options I can choose for my 401k funds. I would like to attach the prospectus to this string but I don't see any mechanisms to do so.

There is another option for my 401k which is the "Aggressive Portfolio." It is approximately 85% stocks and 15% bonds. Given the fact that I am "relatively" young and that I have a stable income, I am considering changing my allocation from the Moderate to the Aggressive Portfolio. What are your thoughts?

Thanks!
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Appreciate some feedback

Post by retiredjg »

bluman, sorry for the delay. I had to think. :happy

There is more than one way to approach this. I'm not sure which you would prefer.
  • Option 1 - leave the 401k at 60% stocks and 40% bonds. If you choose this option, the "rest of the portfolio" would be invested at something more aggressive than 70/30 to achieve something close to 70/30 overall.

    On the upside, this puts more of your bonds in a tax-advantaged account. And it slows the growth of your 401k which has the possibility of being a burden when you reach RMDs (unless you retire early enough to convert a big portion of it to Roth at a lower tax rate than your current one).


    Option 2 - Adjust your 401k to your target AA of 70/30 by mixing the aggressive and moderate portfolios. Then adjust the rest of your portfolio, independent of the 401k, to the same 70/30.

Either option is a good one. It is mostly personal preference which you choose.




Making some of the moves discussed earlier, your portfolio (including $500k from the inheritance) will look more like this (5 accounts instead of 7 accounts):

  • Taxable Joint Account 54.5% ($698,000)


    His Roth IRA at Vanguard 7.3% ($93,000)


    His 401k at DFA 28.1% ($360,000) + His SEP 1.9% = 30% Expense ratio: 0.25%.


    Her Roth IRA at Vanguard 7.2% ($92,000) + Her SEP .3% = 7.5%)


    His HSA Account – Optum Bank .7% ($9,000)
I would still suggest you move all the international to the taxable account, combine all your little tilts into one (you said small cap but I wonder if you really want small cap value?), and use 500 index and extended market (or small cap or small cap value) in the IRAs instead of Total Stock. Again, all of those are good choices.

Something to consider is that you may no longer need a portfolio as aggressive (risky) as 70/30. Your portfolio just grew a lot and your liabilities will shrink if/when you pay off the mortgage. You do need to reduce risk as you age and as you approach retirement. I'm just suggesting that you might be able to do that a little sooner and/or a little faster than you had previously planned.

If you have a preference for option 1 or 2, I'd be happy to give a suggestion for exactly which funds to put where if you want that. If you can't decide, it would be too hard to give a suggestion for both options.


Two things I don't know which could make one option seem better than the other - If you plan to retire early and live on a lot less than your current income and/or if you will have a pension.
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