Portfolio review request

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Topic Author
digitalcheese
Posts: 4
Joined: Sat Aug 18, 2018 1:03 am

Portfolio review request

Post by digitalcheese »

My wife and I (both 30) are recently married and are working to reassess and integrate our investment strategy. Currently, roughly 25% of our assets are in stocks of my company (a private tech company), 25% are invested in the market (from savings and sales of shares from my ISO), and 50% of our assets are currently cash from are a recent inheritance due to the untimely and unexpected passing of one of our parents.

Currently her savings are in individual stocks and my savings are in index ETFs with a small cap value tilt. We are planning on selling these (in a tax efficient way) to achieve the target allocation below. We are moving all our accounts over to Vanguard.

Emergency funds: 6-12 months
Debt: None
Tax Filing Status: Married filing TBD (consulting with tax professional)
Tax Rate: 24% Federal, 9.3% State
State of Residence: CA for now, moving next year
Age: 30
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 40% of stocks

Proposed allocation (total assets $3.80M): ** updated **
* His 401k:
0.8% ($31k) Fidelity US Bond (FSITX)
* His IRA:
0.6% ($22k) Vanguard total bond market (VBTLX)
* Her IRA:
1.3% ($51k) Vanguard total bond market (VBTLX)
* Her TSP (Thrift Savings Plan):
0.7% ($25k) G fund
* Taxable:
33.3% ($1.28M) - Vanguard total US (VTSAX)
22.2% ($855k) - Vanguard Total International (VTIAX)
16.6% ($640k) - Intermediate-term tax-exempt bond (VWIUX)
Privately held
[/b]24.5% ($950k) - private tech company. Will reduce this position to <20% at next opportunity


The private tech company (my current employer)’s stock has the potential to increase substantially in the future (company is attempting to enter new lucrative markets), but also carries high risk. I have been slowly selling this and diversifying, but because of the large possible upside (and the fact that this stock is not on public markets) I think it makes sense to continue to hold a substantial dollar value of this stock. For reference, this stock increased ~12x over the past 6 years, although I know this is unlikely to repeat over the next 6 years.


Questions:
  • Does this plan generally seem reasonable, and any suggestions for improvements?
  • Does the position in my employer seem too high, even given the upside? If the stock continues to rise, I am planning on continuing to sell to hold roughly this position.
  • Any opinions on best way to implement stock strategy (60% VTSAX / 40% VTIAX vs. 90% VT / 10% VTSAX). The latter seems tempting as it will continue to track the world balance with a small home country tilt, but it has slightly higher fees
Thank you
Last edited by digitalcheese on Sun Aug 26, 2018 12:51 pm, edited 2 times in total.
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 11:25 am

Re: Portfolio review request

Post by PFInterest »

For taxable account, you need to use munis VWIUX and partly VCAIX, not total bond.
HEDGEFUNDIE
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Joined: Sun Oct 22, 2017 2:06 pm

Re: Portfolio review request

Post by HEDGEFUNDIE »

How liquid is your private employer stock?

Can you sell as much as you like, any time you like? Any restrictions?
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Portfolio review request

Post by retiredjg »

digitalcheese wrote: Sat Aug 18, 2018 12:32 pm Does this plan generally seem reasonable, and any suggestions for improvements?
I think you are headed in the right direction,but...

Does the position in my employer seem too high, even given the upside? If the stock continues to rise, I am planning on continuing to sell to hold roughly this position.
The position is not too high if you can actually afford to lose it. Now, take some time and really think about what that means.

You already know it is risky. Big risk can bring big rewards or big losses.

The problem with this loss is that it could mean the loss of your daily income at the same time you lose a huge chunk of your nest egg. Yes, it happens. And always at the worst possible time.

How much can you actually afford to lose and continue on? You are in very good shape now. How much do you want to risk not being in such good shape in the future?

I suggest keeping some but not being greedy.

Any opinions on best way to implement stock strategy (60% VTSAX / 40% VTIAX vs. 90% VT / 10% VTSAX). The latter seems tempting as it will continue to track the world balance with a small home country tilt, but it has slightly higher fees.
Financially, I don't think it matters much. I prefer individual funds in taxable. You can sell US without selling foreign and vice versa. And the individual funds are easier to tax loss harvest.
Topic Author
digitalcheese
Posts: 4
Joined: Sat Aug 18, 2018 1:03 am

Re: Portfolio review request

Post by digitalcheese »

Thanks for the replies!

My employer stock it's not very liquid; we have had company-arranged sale opportunities every 6-12 months but there is no guarantee these will happen, particularly if the stock valuation were to drop.

I am planning to change jobs within the next year (location change), which will decouple my paycheck from the performance of this stock.

Appreciate the thoughts on individual US/international mutual funds versus using a total world fund; I hadn't considered the tax loss harvesting option.
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retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Portfolio review request

Post by retiredjg »

The best you can do is sell as much as you can, keeping a small to moderate amount in reserve for the big payoff....if it happens. :happy

Don't get in the habit of thinking of that almost million dollars as yours forever. It might not work out that way. Instead, concentrate on what you can actually control. If the company stock works out, all the better. But remember that the company stock may just go to $0.

In fact, since it is pre-IPO......does it actually have a real value?
Topic Author
digitalcheese
Posts: 4
Joined: Sat Aug 18, 2018 1:03 am

Re: Portfolio review request

Post by digitalcheese »

Thanks again for the suggestions. I updated our proposed allocation, and would appreciate a final sanity check before I make the changes. I updated the first post with this allocation

* His 401k:
0.8% ($31k) Fidelity US Bond (FSITX)
* His IRA:
0.6% ($22k) Vanguard total bond market (VBTLX)
* Her IRA:
1.3% ($51k) Vanguard total bond market (VBTLX)
* Her TSP (Thrift Savings Plan):
0.7% ($25k) G fund
* Taxable:
33.3% ($1.28M) - Vanguard total US (VTSAX)
22.2% ($855k) - Vanguard Total International (VTIAX)
16.6% ($640k) - Intermediate-term tax-exempt bond (VWIUX)
* Privately held
24.5% ($950k) - private tech company. Will reduce this position to <20% at next opportunity
Kevin8696
Posts: 162
Joined: Mon Oct 08, 2012 7:45 pm

Re: Portfolio review request

Post by Kevin8696 »

Digitalcheese,

Regarding your proposed allocation to International Stocks, consider the following facts:

1. Diversification: Over 40% of the revenues of the S&P 500 come from international operations. So, the S&P 500 already has international covered.

2. Performance: International stocks as a class have underperformed the US Market over the past 20 years... 5.66% vs 7.52%, using Vanguard International Stock Index fund (VTIAX) and Vanguard Total Stock Market Fund (VTSAX).

3. Volatility: International stocks as a class have been more volatile than the US Market over the past 20 years... Std Deviation of 21.2% vs 17.6% using the above funds.

4. Correlation: International stocks and the US Market are highly correlated... 0.90 correlation over the past 20 years using the above funds. (1.00 is perfect correlation).

5. Currency Risk: International stocks are denominated in foreign currencies. The US dollar is up this year, international stocks are down. Last year it was the opposite. Why take the risk associated with the never-ending changes in the exchange rate ?

Summary... Since the S&P 500 is already internationally diversified, why add international stocks to your portfolio that have underperformed the US Market, were more volatile than the US Market, have been highly correlated to the US Market, and are loaded with currency risk ?

As of Friday 8/24... VTSAX (ETF is VTI) year-to-date total return = 9.37%.

VTIAX (ETF is VXUS) year-to-date = (3.52%).

A 12.89% difference !!!


Lastly, I attribute all of the above observations to Jack Bogle.

Read his book "The Little Book of Common Sense Investing". He boils it all down in the asset allocation chapter. Available on Amazon.

Regards,

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

Re: Portfolio review request

Post by retiredjg »

digitalcheese wrote: Sun Aug 26, 2018 12:57 pm Thanks again for the suggestions. I updated our proposed allocation, and would appreciate a final sanity check before I make the changes. I updated the first post with this allocation

* His 401k:
0.8% ($31k) Fidelity US Bond (FSITX)
* His IRA:
0.6% ($22k) Vanguard total bond market (VBTLX)
* Her IRA:
1.3% ($51k) Vanguard total bond market (VBTLX)
* Her TSP (Thrift Savings Plan):
0.7% ($25k) G fund
* Taxable:
33.3% ($1.28M) - Vanguard total US (VTSAX)
22.2% ($855k) - Vanguard Total International (VTIAX)
16.6% ($640k) - Intermediate-term tax-exempt bond (VWIUX)
* Privately held
24.5% ($950k) - private tech company. Will reduce this position to <20% at next opportunity
If you remain in the 24% tax bracket, there is some question about whether you need a tax-exempt bond, especially if you move out of CA which is a particularly high tax state. I would not put total bond there, but a different intermediate term high quality bond fund.
Topic Author
digitalcheese
Posts: 4
Joined: Sat Aug 18, 2018 1:03 am

Re: Portfolio review request

Post by digitalcheese »

retiredjg wrote: Sun Aug 26, 2018 2:08 pm
digitalcheese wrote: Sun Aug 26, 2018 12:57 pm Thanks again for the suggestions. I updated our proposed allocation, and would appreciate a final sanity check before I make the changes. I updated the first post with this allocation

* His 401k:
0.8% ($31k) Fidelity US Bond (FSITX)
* His IRA:
0.6% ($22k) Vanguard total bond market (VBTLX)
* Her IRA:
1.3% ($51k) Vanguard total bond market (VBTLX)
* Her TSP (Thrift Savings Plan):
0.7% ($25k) G fund
* Taxable:
33.3% ($1.28M) - Vanguard total US (VTSAX)
22.2% ($855k) - Vanguard Total International (VTIAX)
16.6% ($640k) - Intermediate-term tax-exempt bond (VWIUX)
* Privately held
24.5% ($950k) - private tech company. Will reduce this position to <20% at next opportunity
If you remain in the 24% tax bracket, there is some question about whether you need a tax-exempt bond, especially if you move out of CA which is a particularly high tax state. I would not put total bond there, but a different intermediate term high quality bond fund.
Fair point, looks like an intermediate term bond fund beats (slightly) the tax-exempt bonds in the 24% bracket (ignoring state taxes):
VBTLX (total bond): 3.12% yield * (1-.24) = 2.37%
VBILX (int-term bond): 3.35% yield * (1-.24) = 2.55%
VWIUX (int-term tax exempt): 2.41%

I also have an AMT credit from past years, so it is advantageous to reduce what my AMT would be even if I don't hit AMT this year, which would be a point against municipal bonds if I'm understanding AMT correctly.

On the other hand, I don't think the 24% marginal rate for my tax bracket will last for too many years, so I was previously leaning towards the tax-exempt bonds if they were close to limit needs to change in the future if tax rates change.
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ps56k
Posts: 980
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Location: Chicago area

Re: Portfolio review request

Post by ps56k »

I also was just looking at the Muni bond question -
Just playing with some current - August 2018 - numbers.

The 2018 tax brackets are....

10% - $19k
12% - $77k
22% - $165k
24% - $315k
32% - $400k
35% - $600k
37% - xxx

And am comparing in this example ...
Vanguard Muni Index (Adm) ---------- VTEAX - with ER = .09% and SEC of 2.49%
Vanguard Intermediate Muni (Adm) - VWITX - with ER = .19% and SEC of 2.36%
Vanguard Total Bond Index (Adm) ---- VBTLX - with ER = .05% and SEC of 3.13%

SO -
Total Bond of 3.13% x 24% tax bracket (.76) = 3.13% x .76 = 2.37% vs Intermediate Muni fund of 2.36% vs Muni Index of 2.49%
or
Total Bond of 3.13% x 22% tax bracket (.78) = 3.13% x .78 = 2.44% vs Intermediate Muni fund of 2.36% vs Muni Index of 2.49%

Coin toss ?
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