Newbie Questions on Asset Allocation

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SierraG
Posts: 6
Joined: Tue Jan 23, 2018 7:17 pm

Newbie Questions on Asset Allocation

Post by SierraG » Sun Sep 09, 2018 4:34 pm

Hi all,
I've finally sat down with the Mister and looked at where all our accounts are invested so I can decide where to invest my remaining assets. Please take a look and tell me what you think.
Thank you,
Sierra


Emergency funds: Three to six months of expenses.
Yes


Debt: Indicate if you have any debt (credit card, school loans, car loans, mortgage) and the interest rate you are paying on each loan.

Credit Card: $5,000 (paid in full every month)
Car loan: $37,000 at 3.56%
Solar panel loan: $22,000 at 3.99%
Life Insurance Loan: $55,000 at 7% (interest has been paid through 12/31/18; interest paid to Ins. co.)
401K loan: $25,000 at 5% (interest paid back to the 401K)
Mortgage: none (paid in full)

Tax Filing Status: Married Filing Jointly
Tax Rate: 22% Federal, 3.84% State
State of Residence: AZ
Age: 40
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 20% of stocks


Total investment assets: mid six-figures

Current retirement assets

Non-taxable accounts

His 401k
16.7% JPMorgan SmartRetirement® 2040 Fund Class R5 (SMTIX) (0.6%)

[Bonds: 19%]
[Stocks: 81%]
[Foreign stocks: 32%]
[Domestic Stocks: 47%]

Company match? Yes 4%

His Self-Directed Roth IRA used for personal loans to coworkers
37.4% (0% ER) Interested collected (ROI) varies per loan, weighted average is 9.87%

Her Self-Directed Roth IRA used for personal loans to coworkers
14.8% (0% ER) Interest collected collected (ROI) varies per loan, weighted average is 6%

Her Self-Directed Roth IRA held in cash account at Fidelity (this is one of the assets I’d like to invest in the market)
8.5%

Universal Life Insurance - invested in long-term bonds
20.7% (ROI is about 2.6% currently, after the 1% ER)



Taxable Accounts

Cash (this is the other asset I’d like to invest in the market)
1.8%



Contributions

Annual Contributions
$6,569 his 401k (4% match)
{I know I need to be contributing. I will start in Jan when my company is bought out by a new one that provides a 4% match}
{We should be contributing to a taxable account as well. Up until now we have been funneling this extra investment capital into paying off 2 mortgages, which are finally paid in full.}

Available funds in his 401K:

Ready-mix options:
JPMorgan SmartRetirement® 2020 Fund Class R5
(JTTIX) (0.55%)
… all the way up to...
JPMorgan SmartRetirement® 2060 Fund Class R5
(JAKIX) (0.61%)
JPMorgan SmartRetirement® Income Fund Class R5
(JSIIX) (0.51%)

Core Investment Options:
American Funds EuroPacific Growth Fund® Class R-5 (RERFX) (0.53%)
Dodge & Cox Stock Fund (DODGX) (0.52%)
Fidelity® Growth Company Commingled Pool (no ticker symbol?) (0.43%)
Legal & General MSCI EAFE® Collective Investment Trust Fund Class A (no ticker symbol) (0.02%)
Legal & General Russell 2000 Collective Investment Trust Fund Class A (no ticker) (0.01%)
Legal & General S&P 500® Collective Investment Trust Fund Class A (no ticker) (0.01%)
PIMCO All Asset Fund Institutional Class (PAAIX) (1.005%)
BlackRock Total Return Fund Class K Shares (MPHQX) (0.63%)
Managed Income Portfolio II Class 2 (no ticker) (0.47%)
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%)



Questions:
1. How should I designate the self-directed Roth IRAs that are invested in personal loans in the stock/bond mix? I think they’re similar to junk bonds, in that we’ll receive the decent ROI for the life of the loan but it has a decent chance of defaulting. But bonds are usually considered low-risk so, considering the high risk of personal loans, should I consider them to be stocks in my evaluation?

2. Is it ok to consider the Universal Life insurance as a bond? I know these financial planning experts are against Whole and Universal Life policies but we have evaluated our policies and, since we’ve been paying them for nearly 8 years already, the return on investment is not terrible (about 2.5% after the 1% ER).

If I can consider the ULs as bonds then I can invest my cash in stocks (no bonds) and get my 80/20 mix (that’s figuring in the personal loans as stocks). Currently we really only have 13.6% of our retirement assets in the actual stock market. If I put the remaining capital in all-stocks then we would have 23.9% in stocks.

If I cannot consider the UL as part of my investments and I want an 80/20 mix, I would have to put all my leftover investable assets in bonds and the bond rates are terrible now, no? Another option is to change his asset allocation in his 401K to be all bonds, then invest our cash in all stock. That would give us the 80/20 mix also but then I’m still looking at a very low ROI on the newly-acquired bonds. Or maybe I just put the cash in all-stocks and change my desired mix to 96/4 (without counting the ULs as bonds).
Last edited by SierraG on Tue Sep 11, 2018 9:48 am, edited 1 time in total.

bloom2708
Posts: 4634
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Newbie Questions on Asset Allocation

Post by bloom2708 » Mon Sep 10, 2018 10:42 am

Welcome.

I think you are in the right place to make some good changes.

You need to start cleaning up some of those debts and saving more. I don't think Universal Life would be considered a bond at any point. There is probably a cash value offset by the loan.

What is interesting is I would much rather have a fixed rate, 15 year mortgage backed by my house than those various debts/rates. I would likely take out a mortgage at a 15 year fixed rate and pay them all off. No history, but I would dump the UL. Loans are not stocks. They are risky items. I guess I would not consider whole life or loans on the asset side of my net worth.

80/20 at 40 is in the reasonable range. You should probably think about 75/25 or 70/30 over the next 10 years. The 401k has good funds. S&P 500, Russell 2000 and Total US Bond. Low cost. Good funds.

You could do a Total International in Roth. Fidelity has decent, total market index funds with low costs. As you spend more time here, a plan will form. Think of your portfolio as one entity.

Pre-tax 401k: Bond allocation (20%-30%) and then S&P 500 + Russell 2000 for the balance (80/20 ratio)
Roth: Total International
Taxable: Total US and/or Total International. No need to do this (more) until you are maxing pre-tax 401k + Roth IRA for both of you. This should come after the first 2.

I am not an expert on whole/universal life. I would much rather have adequate term insurance and invest in total market/broad based/low cost index funds.

Hopefully my advice doesn't come off as harsh. I don't know your total income or the rationale for universal life loans or 401k loans. In general I would work to clean those off the books. I know it is a winding road to get to where everyone is.

Using your pre-tax 401k space and $5,500 x 2 into Roth IRAs seems critical.

Hopefully others will correct/update my advice.
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend very little time here! | 3. You have no control <--spend no time here

soccerrules
Posts: 803
Joined: Mon Nov 14, 2016 4:01 pm

Re: Newbie Questions on Asset Allocation

Post by soccerrules » Mon Sep 10, 2018 11:07 am

Sierra-

Welcome to BH-! My advice is to read the wikis, books on the reading list and then read the forum to learn from others.

You have a lot going on and I think Bloom gave you some good advice.

It appears you somewhat dislike debt by paying off the mortgage but in turn have loans against 401K, UL and then debt on car and solar panels. This coupled with what appears to be a pretty low savings rate. I don't really understand the personal loans to coworkers out of your Roth -- that just seems like trouble and driving against your ability to growing wealth

If your nest egg is 4 figures (less than $10K) then I would put it in a Target Date fund that matches your AA. This is the least of your focus points right now.

I would really focus on getting a handle on your budget, paying off bad debt and increasing your savings rate. If you have done some of this--then you may need to look at increasing your income by switching jobs, adding a side hustle or selling some stuff around the house.

Now is the time to get a hold of your financial picture and goals to be able to make a change over the next 20-25 years.

Best of luck
Don't let your outflow exceed your income or your upkeep will be your downfall.

JBTX
Posts: 3883
Joined: Wed Jul 26, 2017 12:46 pm

Re: Newbie Questions on Asset Allocation

Post by JBTX » Mon Sep 10, 2018 11:19 pm

SierraG wrote:
Sun Sep 09, 2018 4:34 pm




Questions:
1. How should I designate the self-directed Roth IRAs that are invested in personal loans in the stock/bond mix? I think they’re similar to junk bonds, in that we’ll receive the decent ROI for the life of the loan but it has a decent chance of defaulting. But bonds are usually considered low-risk so, considering the high risk of personal loans, should I consider them to be stocks in my evaluation?
I have to say, the idea of having personal loans in a self directed 401k is sketchy enough, but to have employee coworker loans just seems like a really bad idea. The advice I used to hear about dating at your workplace kind of applies here..." don't crap in your own back yard".
2. Is it ok to consider the Universal Life insurance as a bond? I know these financial planning experts are against Whole and Universal Life policies but we have evaluated our policies and, since we’ve been paying them for nearly 8 years already, the return on investment is not terrible (about 2.5% after the 1% ER).

If I can consider the ULs as bonds then I can invest my cash in stocks (no bonds) and get my 80/20 mix (that’s figuring in the personal loans as stocks). Currently we really only have 13.6% of our retirement assets in the actual stock market. If I put the remaining capital in all-stocks then we would have 23.9% in stocks.

2.5% is pretty bad. You can get that in risk free bonds these days. But if the paltry return is guaranteed and its a reputable insurer, yes you could treat it as a bond.
If I cannot consider the UL as part of my investments and I want an 80/20 mix, I would have to put all my leftover investable assets in bonds and the bond rates are terrible now, no? Another option is to change his asset allocation in his 401K to be all bonds, then invest our cash in all stock. That would give us the 80/20 mix also but then I’m still looking at a very low ROI on the newly-acquired bonds. Or maybe I just put the cash in all-stocks and change my desired mix to 96/4 (without counting the ULs as bonds).
Bonds are not any worse than 2.5%. I bonds are around 2.5%. Vanguard short term treasuries are about 2.5%. And tax deferral of gains on cash value policies is way overrated. It isn't saving you much. You'll just have to pay it later at ordinary income rates, vs now at ordinary income rates.

SierraG
Posts: 6
Joined: Tue Jan 23, 2018 7:17 pm

Re: Newbie Questions on Asset Allocation

Post by SierraG » Thu Sep 13, 2018 3:57 pm

Hi everyone,

Thanks so much for your responses. I appreciate the input.

I corrected my OP for Total Investment Assets: Mid four-figures -> Mid Six-Figures.

Our salary is too high to contribute to Roth. The only reason we have them now is we converted several prior employer-sponsored 401K's to Roth IRAs.

I will look into Fidelity's Total International for my Roth and taxable account, and start contributing to 401K in New Year.

We are planning on having our loans (401K, UL, car, solar) paid off in next 1.5 yr.

Yes the personal loans are risky. The reason we got into them is my hubby has been very pessimistic about the market since the '08 recession. I'm ready to get back into the mark after watching it climb that past 10 yr and reading some of the investment books recommended on here. As long as the borrowers keep making their monthly payments then we'll be happy but it's too risky for me, going forward.

I know Paralysis by Analysis is one of my biggest threats to wealth-accumulation. The Quantitative Tightening talks have my feet getting cold again but I just need to remember that no one can predict the market and the nay-sayers will always be there, so I just need to toss my hat in the ring and remember that "Time in the Market" is my friend.

My husband really wants the UL. Cancelling the UL and getting Term is probably a wash when we look at the penalty we'd pay to cash it out at this point. The return rate is guaranteed but the fees can always change, which can impact the ROI. So that's something we'll have to evaluate yearly but considering it is decent enough right now and we've had it this long, I think there's a good chance we'll keep it.

Thanks again for your thoughts everyone!

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