I need help with the next step to a three fund portfolio

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nasrullah
Posts: 153
Joined: Fri Feb 10, 2017 11:40 am

I need help with the next step to a three fund portfolio

Post by nasrullah » Mon Sep 24, 2018 5:24 pm

Emergency funds: Six Months
Debt: Mortgage $1.164M 30 year fixed 3.65%
Tax Filing Status: Married Filing Jointly, 2 Children
Tax Rate: 33% Federal, 10.3% State
State of Residence: California
Age: 39
Desired Asset allocation: 75% Stocks / 25% Bonds
Desired International allocation: 20%

Current portfolio value ~ $1.4M. Since taxes are a factor I've included a full breakdown of my current holdings including short/long term gain/loss amounts in a Google Sheet here:

https://docs.google.com/spreadsheets/d/ ... sp=sharing

When I made the decision to move from Wealthfront to Vanguard I decided that I would approach my portfolio alignment in two steps. The first earlier this year (viewtopic.php?f=1&t=242230 forum link if you're curious) was done with Vanguard PAS and was focused on cleaning up my holdings created by Wealhfront. VPAS was tasked with removing individual stock holdings and simplification and based their plan around my tax implications and fees/costs to make the changes. VPAS has been fantastic and I would highly recommend them to anyone with a complicated portfolio from any of the Robos.

I want to execute my second step in January of 2019. Initially this was just about liquidating my FB holdings (spreading out my tax hit), but now I'm more interested in getting as close to a three fund portfolio as feasibly possible so I can stop with VPAS and self manage.

Questions:

1. What would you sell / keep? VIG, VXF, VEA, VB, IEMG, SCHD are not exactly in the common list of three funds. Should I sell them and take the tax hit, keep them and work around them, something else?

2. 96% of my portfolio is in non tax advantaged accounts - what do I do about my bond selection? Purchasing CA Munis (VCADX & VCLAX ) seems like an anti-pattern for bogleheads of having too much of my portfolio concentrated to narrowly. VPAS uses VMLUX, VWIUX, & VWLUX in a 30%/40%/30% ratio, I'm assuming there's an advantage for this, I just don't know what it is. Should I just ignore tax efficiency and buy VBTLX for simplicity?

Reference to fund names listed above:

VIG Vanguard Dividend Appreciation ETF
VXF Vanguard Extended Market ETF
VEA Vanguard FTSE Developed Markets ETF
VB Vanguard Small-Cap ETF
IEMG iShares Core MSCI Emerging Markets ETF
SCHD Schwab U.S. Dividend Equity ETF
VCADX Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares
VCLAX Vanguard California Long-Term Tax-Exempt Fund Admiral Shares
VMLUX Vanguard Limited-Term Tax-Exempt Fund Admiral Shares
VWIUX Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares
VWLUX Vanguard Long-Term Tax-Exempt Fund Admiral Shares
VBTLX Vanguard Total Bond Market Index Fund Admiral Shares
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: I need help with the next step to a three fund portfolio

Post by mhalley » Tue Sep 25, 2018 1:21 am

46% tax bracket is a killer. Munis have a lower default rate than taxable bonds in general, but if you want to diversify you could put have into the national tax exempt fund.

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mhc
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Location: NoCo

Re: I need help with the next step to a three fund portfolio

Post by mhc » Tue Sep 25, 2018 9:27 am

If the funds you currently have are low cost, efficient funds, do not feel compelled to get rid of them if there will be a large tax hit. Many people find themselves in this situation, and they still pull off a "3 fund" portfolio.

I'm in a similar situation as you due to mutual funds I purchased before finding this site and due to TLH. Currently, I donate some of those funds to my DAF every year to eliminate some of the clutter.

I set up a spread sheet to manage this. I used Morningstar Instant Xray to determine the 9-box percentage for each fund. I then determine the 9-box for the 3 fund portfolio I desire. My spreadsheet then tells me what to buy to balance things out. I don't get OCD about this. Close is good enough.

I would not reinvest distributions into any funds you are trying to get rid of.

nasrullah
Posts: 153
Joined: Fri Feb 10, 2017 11:40 am

Re: I need help with the next step to a three fund portfolio

Post by nasrullah » Tue Sep 25, 2018 11:36 am

mhc wrote:
Tue Sep 25, 2018 9:27 am
I set up a spread sheet to manage this. I used Morningstar Instant Xray to determine the 9-box percentage for each fund. I then determine the 9-box for the 3 fund portfolio I desire. My spreadsheet then tells me what to buy to balance things out. I don't get OCD about this. Close is good enough.
Thanks mhc. I've been looking at the 9-box information from Morningstar. I think this is farther than I want to go in terms of complexity or tilt. I'm looking to get as close to the three fund as possible with VTSAX, VTIAX and VBTLX being the core holdings (except unfortunately I don't have nearly enough space in my tax advantaged accounts to fully leverage VBTLX).

I just don't understand what's the most efficient way to get there / what I should do about my bond funds instead of VBTLX.
mhc wrote:
Tue Sep 25, 2018 9:27 am
I would not reinvest distributions into any funds you are trying to get rid of.
Automatic reinvestment has been disabled for some time thankfully.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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mhc
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Re: I need help with the next step to a three fund portfolio

Post by mhc » Tue Sep 25, 2018 12:05 pm

Seems like you have to have munis in your taxable account. I'm not in that boat, so I don't have specific fund recommendations.

If the 9-box is too much, then break down the equity funds into domestic and international. You can then additionally break them down to small and large-cap (I split mid-cap into the small/large buckets to simplify). I also break international into developed and emerging. When I add new funds and/or rebalance, my primary goal is to have my equity/bond ratio correct. My second goal is to have my domestic/international equity ratio correct. Then I try to get my domestic equity small/large ratio correct. Then I try to get my International ratios correct. As long as my primary and secondary goals are close, I'm content. If I can easily work out the lesser goals, I do.

If you don't get a response about the bonds, try starting a new thread titled something like "What muni bonds to use for Ca Resident?"

GMT-8
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Joined: Fri Mar 26, 2010 5:11 pm

Re: I need help with the next step to a three fund portfolio

Post by GMT-8 » Tue Sep 25, 2018 12:28 pm

I live in California and have been holding VCADX and VCLAX (10,000 shares of each) in taxable for about 10 years.
The 10 year return is average 4.5% no tax and I have long-term capital gains of approx $8k.
I'm ok with that performance and that level of risk as these funds represent about 10% of my total holdings.


In my tax-advantages accounts I have VBTLX (total bond market) and VBILX (intermediate-term)

Hopefully this will be helpful.

Cheers,

GMT-8

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