Portfolio review & questions

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fsh71
Posts: 26
Joined: Mon Jun 04, 2018 3:03 pm

Portfolio review & questions

Post by fsh71 » Mon Jun 04, 2018 3:20 pm

Hey there,

I wanted to open by passing along my sincere thanks to all the contributors here at bogleheads. It has been an invaluable resource as I have worked towards financial literacy. I've included my portfolio details below, as per the suggested format, and I've included a few specific questions at the bottom of my post. I welcome any and all criticism / feedback / suggestions, etc. Thanks for your time.

------------------------------------------------------------------------

Emergency fund: ~5 months expenses in a high-interest savings
Debt: Mortgage, 30-year fixed, 101k balance @ 3.75% (Equity of approx. 110k on the house). No other debt.
Tax Filing Status: Married Filing Jointly
Tax Rate: 24% Federal (2018), No state income tax
State of Residence: TX
Age: 36, spouse 33
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 40% of stocks

Total invested retirement assets approx. ~300k.

I work, wife stays home with our 2 kids (2 & 7). Expected 2018 income ~100k. In an effort to keep things simple, I try to hold a single fund in most accounts, and rebalance in my 401k.


Current assets

Taxable (Vanguard)
25% Vanguard Total World Stock ETF (VT) (0.10%)
11% Vanguard Wellesley Income Fund (VWINX) (0.22%)

My 401k (Fidelity)
23% Fidelity Total Market Index Prem. (FSTVX) (0.035%)
13% Fidelity Total International Index Prem. (FTIPX) (0.10%)
11% Fidelity US Bond Index Prem. (FSITX) (0.045%)

Company match? Yes, see below in annual contrib. section.

My Roth IRA (Vanguard)
2% Vanguard Lifestrategy Growth (VASGX) (0.14%)

My Rollover IRA (Vanguard)
5% Vanguard Lifestrategy Growth (VASGX) (0.14%)

Wife's 401k (Merrill Lynch)
2.8% Vanguard Instl 500 Index Trust (0.01%)
0.6% Vanguard Instl Extended Market Trust (0.02%)
0.6% Vanguard Instl Total Bond Market Trust (0.03%)
2% Vanguard Instl Total Intl Stock Trust (0.06%)

Company match? No, not actively employed.

Wife's Roth IRA (Vanguard)
2% Vanguard Lifestrategy Growth (VASGX) (0.14%)

Wife's Traditional IRA (Vanguard)
2% Vanguard Lifestrategy Growth (VASGX) (0.14%)

Total: 100%


Contributions

New annual Contributions

~$17,000, my 401k (17% of gross pay -- 82% of my contrib (~14k) is traditional, 12% (~3k) is roth)
~$6,000 employer match (6% of gross pay, all traditional)

401k contrib set to increase 1% / year. Plan to max out 401k in next 1-2 years, then add regular contributions to IRAs


Other relevant contributions:

$220 per month total ($110 each) to kids' 529 plans. (Total value approx $10k)
~$150 per month to HSA. This covers the majority of routine medical expenses, barring injury, etc, but isn't invested. Balance <$1k.
$200 per month into savings for anticipated vehicle expense in 2-4 years.


Questions:

1. The VWINX in taxable was my first foray into investing in a taxable account and was before I discovered bogleheads. The money was excess savings (above my emergency fund) that had been sitting in a savings account. My thought at the time was to put it in a conservative allocation fund, to preserve more principle in a downturn, at the expense of upside (this was before I learned to rebalance my entire portfolio as a single account). I know now I sacrificed some expense ratio by putting it into an actively managed fund, and the 60% bond allocation of VWINX isn't ideal for taxable, but you live and learn. I've avoided moving this as I have unrealized gains. Currently I just rebalance around VWINX, and hold a bit less bonds in my 401k than I otherwise would if all of my taxable was in VT.

To my questions -- is it worth it to exchange this for VT and take the tax hit (all long-term cap gains)? Also, according to Morningstar, VWINX is slanting my total bond allocation from 100% high-quality credit, to 67% high-quality, 33% medium quality. What are the implications / concerns related to this slant?

2. I feel like I don't have a rationale for the $220 / month I'm putting in the 529's. I kind of just picked a number a couple years ago. Any thoughts on what this should be? There are many variables that make this hard, I think (Uncertainty regarding school choice / cost, my income / opportunity cost of investing in 529 vs retirement). Your thoughts are appreciated.

3. More generically, are there any red flags / blantant issues / things you'd recommend changing?

Thank you!

venkman
Posts: 628
Joined: Tue Mar 14, 2017 10:33 pm

Re: Portfolio review & questions

Post by venkman » Mon Jun 04, 2018 10:44 pm

fsh71 wrote:
Mon Jun 04, 2018 3:20 pm
1. The VWINX in taxable was my first foray into investing in a taxable account and was before I discovered bogleheads. The money was excess savings (above my emergency fund) that had been sitting in a savings account. My thought at the time was to put it in a conservative allocation fund, to preserve more principle in a downturn, at the expense of upside (this was before I learned to rebalance my entire portfolio as a single account). I know now I sacrificed some expense ratio by putting it into an actively managed fund, and the 60% bond allocation of VWINX isn't ideal for taxable, but you live and learn. I've avoided moving this as I have unrealized gains. Currently I just rebalance around VWINX, and hold a bit less bonds in my 401k than I otherwise would if all of my taxable was in VT.

To my questions -- is it worth it to exchange this for VT and take the tax hit (all long-term cap gains)? Also, according to Morningstar, VWINX is slanting my total bond allocation from 100% high-quality credit, to 67% high-quality, 33% medium quality. What are the implications / concerns related to this slant?
Wellesley actually has quite a few BH fans. The ER is higher than most VG index funds, but 0.22% isn't high enough to be a deal breaker, if the fund is what you're looking for. I don't see anything wrong with holding on to VWINX as part of your emergency fund (though for planning purposes I would build in an assumption that you would only be able to access 80% of the balance, in case you needed to pull out the money in a bear market.) It's not tax efficient, but neither are most vehicles that people keep their emergency money in.

Another approach is to have all the dividends from VWINX sent to cash, and invest the cash into VT. With your ongoing contributions to other accounts, your VWINX balance will start to become insignificant eventually.

I think Morningstar defines "medium-quality" bonds as investment-grade corporates. The odds of default are non-zero, but still pretty low. If you were 100% in total bond funds, you already have significant exposure to corporate bonds. Probably the funds had more government bonds than corporates, so the 'average' was high-quality.

pkcrafter
Posts: 12896
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Portfolio review & questions

Post by pkcrafter » Mon Jun 04, 2018 11:00 pm

Welcome,

I suppose you haven't got responses because everything looks pretty good. Well done!

I have just a few comments to bump you up.

80/20 is acceptable for your age and situation.
40% international is higher than most would recommend. 15-30% is usually recommended.
Wellesley in taxable is the one thing you need to fix. Here's the tax-cost ratio from Morningstar. Take a look, then type VTSMX into the quote box to compare to TSM.

http://performance.morningstar.com/fund ... ture=en-US

The fund fees at Merrill are low, but what are the costs related to fund operation?

Usual recommendations for investing are 401k up to the match, then fund IRA/Roth, then if there is anything left, go back to 401k. If you are getting the match for every dollar, then go all in with the 401k.

You are doing an excellent job and I think you can reduce the 529 contributions for awhile.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

ExitStageLeft
Posts: 717
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio review & questions

Post by ExitStageLeft » Tue Jun 05, 2018 2:41 pm

I'd consider bumping up the tax-advantaged contributions. Even if it's just this year, putting that VWINX in the Roth accounts rather than taxable will give you tax free earnings and withdrawals. After maxing out your 401k you'll have up to $11k that can go into tradional or Roth IRAs. If your wife might be going back to work in a few years, your tax bracket will be higher then. Roth IRAs make more sense now, but it's not always a slam dunk decision. But take advantage of your currently low taxes to move funds from taxable to tax-advantaged, either tIRA or Roth.

ShowMeTheER
Posts: 354
Joined: Mon May 24, 2010 9:12 am

Re: Portfolio review & questions

Post by ShowMeTheER » Tue Jun 05, 2018 4:12 pm

I am interpreting that you should be in the 12% Fed tax bracket for 2018; and therefore might want to reconsider your pre-tax vs Roth mix in 401(k), at a minimum. Am I missing something?

fsh71
Posts: 26
Joined: Mon Jun 04, 2018 3:03 pm

Re: Portfolio review & questions

Post by fsh71 » Tue Jun 05, 2018 9:31 pm

Thanks to you both, venkman & pkcrafter, for your guidance. I'll try to address your questions and I have a few follow-ups as well.

Paul, with regards to the tax cost ratios of VWINX vs VTSMX, it looks like the difference is approx. 0.75% - 1% per year. Assuming $35k invested in Wellesley, this represents approx. $260 to $350 per year I'm losing to taxes vs VTSMX. Is it that simple?

Given that I'd take a 15% hit this year on all my gains in VWINX if I exchanged, (representing approx. ~$1k), it looks like the breakeven isn't that far out, at 3-4 years. Would swapping out VWINX for VT & muni-bonds (VWITX), in a similar 40/60 ratio to what VWINX holds, be an acceptable tax efficient solution that would maintain a similar risk profile? Although I'm not too keen on having to rebalance in taxable. Perhaps putting it all into VT and exchanging some stocks for bonds in my 401k is the superior choice.

As for the costs related to the operation of the funds at Merrill -- I looked through the last year+ of statements, and the only fees I see line-itemized are a record-keeping fee of <$1 in any quarter. I do see a note on the statements that says,

"Some plan administrative expenses may be covered through indirect revenue received from the annual operating expenses of the investments offered through the plan. The expense ratio represents the fund's cost of doing business, divided by the net assets in the fund. This amount is deducted from the fund's assets and lowers the return that fund holders achieve. These expenses generally include management and operating fees and are "unsubsidized", meaning that they are shown gross of any fee waivers and/or expense reimbursements."

On the specific fund fact sheets (there is no prospectus because it isn't a registered investment), the only items listed in the expense section are:

Fees and Expenses as of 03-31-18
Gross Expense Ratio 0.01%
Redemption Fee/Term --

That's for the S&P trust, but they're all similar.

Is there somewhere else I should be looking for hidden fees? My wife worked for Merrill so I'm thinking she may just have a decent plan.

Venkman -- Thanks for the suggestion regarding sending the dividends to cash and reinvesting in VT. If I decide to hold on to VWINX I may go that route.

fsh71
Posts: 26
Joined: Mon Jun 04, 2018 3:03 pm

Re: Portfolio review & questions

Post by fsh71 » Tue Jun 05, 2018 9:33 pm

ShowMeTheER wrote:
Tue Jun 05, 2018 4:12 pm
I am interpreting that you should be in the 12% Fed tax bracket for 2018; and therefore might want to reconsider your pre-tax vs Roth mix in 401(k), at a minimum. Am I missing something?
I just checked again and I looked at the individual column on the tax bracket chart for 2018. But it looks like I'm in the 22% bracket for 2018, @ 100k, according to forbes. https://www.forbes.com/sites/robertberg ... 0d8e5292a3

fsh71
Posts: 26
Joined: Mon Jun 04, 2018 3:03 pm

Re: Portfolio review & questions

Post by fsh71 » Tue Jun 05, 2018 9:36 pm

ExitStageLeft wrote:
Tue Jun 05, 2018 2:41 pm
I'd consider bumping up the tax-advantaged contributions. Even if it's just this year, putting that VWINX in the Roth accounts rather than taxable will give you tax free earnings and withdrawals. After maxing out your 401k you'll have up to $11k that can go into tradional or Roth IRAs. If your wife might be going back to work in a few years, your tax bracket will be higher then. Roth IRAs make more sense now, but it's not always a slam dunk decision. But take advantage of your currently low taxes to move funds from taxable to tax-advantaged, either tIRA or Roth.
I could contribute to the IRAs with a portion of VWINX in 2019, but our IRA's are maxed for 2018.

I could however max out my 401k this year and take the same amount out of VWINX if I need it for current expenses, effectively shifting the money from my taxable to my 401k as you mentioned.

fsh71
Posts: 26
Joined: Mon Jun 04, 2018 3:03 pm

Re: Portfolio review & questions

Post by fsh71 » Wed Jun 06, 2018 7:37 am

pkcrafter wrote:
Mon Jun 04, 2018 11:00 pm

40% international is higher than most would recommend. 15-30% is usually recommended.
Paul, I decided on the 40% because I had read about home country bias, and how most investors are underweight foreign stock and therefore missing out on some diversification. I had seen 15% or so on the low end as you mentioned, but others recommending a true market weight near 50%.
I settled on the 40% after peaking into Vanguard's Target date funds, which hold 40% of their stock allocation in foreign stocks.

I appreciate the help and would be interested in the rationale for lowering my foreign component. Thanks.

ShowMeTheER
Posts: 354
Joined: Mon May 24, 2010 9:12 am

Re: Portfolio review & questions

Post by ShowMeTheER » Wed Jun 06, 2018 8:06 am

fsh71 wrote:
Tue Jun 05, 2018 9:33 pm
ShowMeTheER wrote:
Tue Jun 05, 2018 4:12 pm
I am interpreting that you should be in the 12% Fed tax bracket for 2018; and therefore might want to reconsider your pre-tax vs Roth mix in 401(k), at a minimum. Am I missing something?
I just checked again and I looked at the individual column on the tax bracket chart for 2018. But it looks like I'm in the 22% bracket for 2018, @ 100k, according to forbes. https://www.forbes.com/sites/robertberg ... 0d8e5292a3
But you're filing Married Joint; and you'll have a significant amount of deductions/exclusions off of your ~$100 Gross Income thanks to healthcare, HSA, 401(k) and the standard deduction (I'm assuming you have provided Gross as opposed to Taxable in your summary). You may want to do some reading up on this and/or study your 2017 1040.

pkcrafter
Posts: 12896
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Portfolio review & questions

Post by pkcrafter » Wed Jun 06, 2018 9:39 am

fsh71 wrote:
Wed Jun 06, 2018 7:37 am
pkcrafter wrote:
Mon Jun 04, 2018 11:00 pm

40% international is higher than most would recommend. 15-30% is usually recommended.
Paul, I decided on the 40% because I had read about home country bias, and how most investors are underweight foreign stock and therefore missing out on some diversification. I had seen 15% or so on the low end as you mentioned, but others recommending a true market weight near 50%.
I settled on the 40% after peaking into Vanguard's Target date funds, which hold 40% of their stock allocation in foreign stocks.

I appreciate the help and would be interested in the rationale for lowering my foreign component. Thanks.
No objections to 40% international, that's what Vanguard uses in their target date funds. Here's a link to an article that explores international allocation.

https://www.wallstreetphysician.com/int ... llocation/

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

megabad
Posts: 362
Joined: Fri Jun 01, 2018 4:00 pm

Re: Portfolio review & questions

Post by megabad » Wed Jun 06, 2018 12:29 pm

fsh71 wrote:
Mon Jun 04, 2018 3:20 pm
1. is it worth it to exchange this for VT and take the tax hit (all long-term cap gains)? Also, according to Morningstar, VWINX is slanting my total bond allocation from 100% high-quality credit, to 67% high-quality, 33% medium quality. What are the implications / concerns related to this slant?
I would sell. Capital gains tax should be at or close to 0% for you.

2. I feel like I don't have a rationale for the $220 / month I'm putting in the 529's. I kind of just picked a number a couple years ago. Any thoughts on what this should be? There are many variables that make this hard, I think (Uncertainty regarding school choice / cost, my income / opportunity cost of investing in 529 vs retirement). Your thoughts are appreciated.
Personally, I would stop 529 altogether until 401k, IRA, and HSAs are maxed. My strategy for 529s is to fund them up front and just let it grow (ie. $10k at age zero and no more, rather than monthly), but this does not appear to be popular notion. In Texas, you don't get any additional state tax benefit so less advantageous, imo.

3. More generically, are there any red flags / blantant issues / things you'd recommend changing?
Looks pretty good to me, looks like you have a pretty great setup with low cost funds and low cost 401ks. As mentioned in prior posts, I would go 100% Roth until you fill up 12% bracket and it looks like you will be at or close to 12% bracket to me.

ExitStageLeft
Posts: 717
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio review & questions

Post by ExitStageLeft » Wed Jun 06, 2018 1:03 pm

If the $100k is gross income, you are definitely in the 22% bracket for 2018. Give the H&R Block tax estimator a spin: https://www.hrblock.com/tax-calculator/#/en/te/aboutYou

Remember the reported income on your W2 will be gross pay minus your 401k withholding, and any other pre-tax benefit program you are paying for. As a quick guesstimate:

+$100k Gross pay
-$17k 401k and other benefits
= $83k Adjusted Gross Income

-$24k Standard deduction (MFJ)
= $59k Taxable Income

Based on that, taxes for you in 2018 will be $6,699. You will also get a $4k child tax credit, so your taxes owed for 2018 will be $2,699. That screams Roth contribution to me, so any way you can increase your Roth 401k this year would be beneficial.

fsh71
Posts: 26
Joined: Mon Jun 04, 2018 3:03 pm

Re: Portfolio review & questions

Post by fsh71 » Fri Jun 08, 2018 5:54 pm

ExitStageLeft wrote:
Wed Jun 06, 2018 1:03 pm
If the $100k is gross income, you are definitely in the 22% bracket for 2018. Give the H&R Block tax estimator a spin: https://www.hrblock.com/tax-calculator/#/en/te/aboutYou

Remember the reported income on your W2 will be gross pay minus your 401k withholding, and any other pre-tax benefit program you are paying for. As a quick guesstimate:

+$100k Gross pay
-$17k 401k and other benefits
= $83k Adjusted Gross Income

-$24k Standard deduction (MFJ)
= $59k Taxable Income

Based on that, taxes for you in 2018 will be $6,699. You will also get a $4k child tax credit, so your taxes owed for 2018 will be $2,699. That screams Roth contribution to me, so any way you can increase your Roth 401k this year would be beneficial.
Thanks for all the detail. I'm considering reducing or stopping the 529 contributions and redirecting it to my 401k & IRAs. As for Roth vs traditional, I think I'll adjust from 14% trad / 3% roth, to 6% trad (to get the full employer match) / remainder roth.

I should add, my 2017 AGI was ~$210,000 due to cashing out 80% of a one-off investment (crypto), and there's a non-zero chance I dump the rest of my holdings this year, which would increase my AGI again, albeit not to the same extent. At what AGI does it not make since for me to prioritize the Roth contributions?

ExitStageLeft
Posts: 717
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio review & questions

Post by ExitStageLeft » Fri Jun 08, 2018 7:04 pm

fsh71 wrote:
Fri Jun 08, 2018 5:54 pm
...
At what AGI does it not make since for me to prioritize the Roth contributions?
That's a simple question with a complex answer. Having all your assets in Roth IRA/401k when you retire is ideal. Deferring taxes on all your IRA/401k contributions is also ideal, at least for most folks. The tax on the earned income seemss to be the most analyzed aspect, but probably ends up to be the least significant. The ability to access Roth IRA contributions at any time is huge, as is the impact of required minimum distributions (RMD) for a traditional IRA with a large balance. If your income is near the threshold for saver's credit, capital gains bracket, medicare premium, etc, there may be strong arguments to prefer traditional over Roth.

So I don't have an answer, too many variables. I just suggest you keep reading, keep yourself flexible, and stay the course.

Chip
Posts: 2130
Joined: Wed Feb 21, 2007 4:57 am

Re: Portfolio review & questions

Post by Chip » Sat Jun 09, 2018 4:43 am

ExitStageLeft wrote:
Wed Jun 06, 2018 1:03 pm
If the $100k is gross income, you are definitely in the 22% bracket for 2018. Give the H&R Block tax estimator a spin:
[...]
= $59k Taxable Income
Didn't you mean 12% bracket since the OP is married filing jointly?

ExitStageLeft
Posts: 717
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio review & questions

Post by ExitStageLeft » Mon Jun 11, 2018 1:09 am

:oops:
Chip wrote:
Sat Jun 09, 2018 4:43 am
ExitStageLeft wrote:
Wed Jun 06, 2018 1:03 pm
If the $100k is gross income, you are definitely in the 22% bracket for 2018. Give the H&R Block tax estimator a spin:
[...]
= $59k Taxable Income
Didn't you mean 12% bracket since the OP is married filing jointly?
Thanks for keeping me on my toes!

:oops:

fsh71
Posts: 26
Joined: Mon Jun 04, 2018 3:03 pm

Re: Portfolio review & questions

Post by fsh71 » Wed Jun 13, 2018 12:56 pm

ExitStageLeft wrote:
Wed Jun 06, 2018 1:03 pm
If the $100k is gross income, you are definitely in the 22% bracket for 2018. Give the H&R Block tax estimator a spin: https://www.hrblock.com/tax-calculator/#/en/te/aboutYou

Remember the reported income on your W2 will be gross pay minus your 401k withholding, and any other pre-tax benefit program you are paying for. As a quick guesstimate:

+$100k Gross pay
-$17k 401k and other benefits
= $83k Adjusted Gross Income

-$24k Standard deduction (MFJ)
= $59k Taxable Income

Based on that, taxes for you in 2018 will be $6,699. You will also get a $4k child tax credit, so your taxes owed for 2018 will be $2,699. That screams Roth contribution to me, so any way you can increase your Roth 401k this year would be beneficial.
I've made some changes based on what you and others have suggested here, so thanks for all your help.

Specifically, I have reduced my 529 contributions and redirected the funds into my 401k, bringing my contribution from 17% to 18.5%. I adjusted my contributions to 6% traditional, 12.5% roth, to take maximum advantage of my likely 12% tax bracket this year.

This brings me to one other question. My company offers a stock purchase program, whereby I can purchase company stock at a 15% discount, up to 10% of my annual gross. The money is payroll-deducted and accumulated by the company, then twice a year the company makes a bulk purchase. There is no mandatory holding period for this stock, so I can dump it immediately (still looking into potential administrative lag that could create market risk). My thought was reducing my roth 401k contributions by 10%, and redirecting into the stock purchase program. On 12/31, when then company credits my account, I can immediately sell, realizing 15% gain - short-term cap gains tax. Then fund Roth IRA's for myself and my wife with the proceeds. This seems like free money to me, does this seem like a wise choice?

ExitStageLeft
Posts: 717
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio review & questions

Post by ExitStageLeft » Wed Jun 13, 2018 1:43 pm

Seems like a good idea to me. I'd consider the stock price volatility, but assuming a constant price it's a no-brainer. Withold $10k from take-home pay and buy $11,764 in stock. Sell immediately and you get $1,174 extra income. Put $11k in two Roth IRAs, put $141 towards the additional income tax you pay on the $1,174, and with the remaining $33 buy yourself a bottle of bourbon your spouse a bouquet of flowers.

So what's the standard deviation on stock price from month to month?

fsh71
Posts: 26
Joined: Mon Jun 04, 2018 3:03 pm

Re: Portfolio review & questions

Post by fsh71 » Wed Jun 13, 2018 3:26 pm

ExitStageLeft wrote:
Wed Jun 13, 2018 1:43 pm
So what's the standard deviation on stock price from month to month?
Best way to get at this info? I don't see stddev listed as a stat under the technicals for the stock. Is there a standard methodology for calculating this? Would I just pick the closing price on the 1st of each month for the last year, or should I pick highs and lows in each month?

ExitStageLeft
Posts: 717
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio review & questions

Post by ExitStageLeft » Wed Jun 13, 2018 4:34 pm

Heh, it took my brain a while to process. The actual stock price doesn't matter as long as you can sell it in a timely fashion. Is that something you've got a handle on?

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