Completing My Portfolio Re-balance - Feedback?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
olliema
Posts: 29
Joined: Sun Mar 11, 2018 10:34 pm

Completing My Portfolio Re-balance - Feedback?

Post by olliema » Mon Oct 15, 2018 10:37 pm

I welcome constructive feedback / critique on my planned portfolio balance re-balance approach.
Details on my situation, objectives (and non-objectives) are below; I put current investments and future investments is in code tables at bottom.

In-scope problems:
1. Simplify investment mix
2. Reduce investment portfolio expenses
3. Reduce investment volatility

Out-of scope problems
1. Consolidating accounts (confirming admin. costs of inactive 401(k)s and IRAs as a sep. exercise)
2. Tinkering for recreation, market timing, etc.
3. Debt management or cash flow management (both are important, don't see how they affect my portfolio re-balance)

Approach to solving:
1. Re-balance current portfolio / future investments as: 80% US Stock, 15% US Bonds, 5% Int’l Stock
2. Consolidate 8 funds into 3 funds (95% of investment below 0.03 ER; 5% below 0.15 ER)

Background:
  • Married, filing jointly, one spouse mid 40s who works, one spouse mid 30s at home raising baby
  • Emergency cash $15K (covers 3 months living expenses)
Debt $128K
  • $68K HELOC @ 6.24%
  • $46K 401(k) loan @ 6.0% interest paid back into 401(k)
  • $14K Mortgage @ 5.25%
Investments $1M
  • $30K annual 401(k) ($18.5K contribution + $11.5K employer match to 401(k))
  • $1.5K annual contribution to Roth IRA
  • Investment Portfolio details in code table at bottom
Long Term Goals:
1. Provide a stable home environment including health care, housing, and access to education for children
2. Ensure we’re financially self-sustainable and don’t burden our children in our older years
3. Enable choice of exiting full-time workforce in 10-15 years by growing investments to 33x annual post-tax income needs
4. Enable an investment portfolio post-tax income of > $75K per year at 3% inflation
5. Have zero dependence on Social Security for meeting our financial needs
6. Buy 2nd home & rent current home to generate a second stream of income in addition to investment portfolio
7. Ensure the mortgage of home(s) are paid off upon exit of workforce to reduce living costs

Short Term Goals:
1. Increase emergency cash reserves to 6 months by March 2019 to hedge single income household risk
2. Pay Mortgage in full by October 2019 to increase cash flow to pay HELOC and 401(k) loan
3. Reduce HELOC & 401(k) principal by 14K by October 2019
4. All operating expenses paid in full every month to ensure positive cash flow
5. No loans for automobiles, appliances, vacations, etc. all of which should be minimal until 1-4 complete

Investor Behaviors:
  • Risk tolerance: High - if portfolio fell 50% in next 1-5 years my commitment would be same; I don’t think I will need access to my portfolio for at least 10 years
  • Tinkering factor: Low - in past 10 years I changed investment mix once (this year moved from mostly Mid-Cap to mostly Large-Cap, via a trip to cash for couple months) Note: I started a re-balance earlier this year but I never completed it - I left a significant amount in cash and I did not invest in bonds as I had intended - hence I see this as completing my re-balance rather than starting anew
  • Buy & hold low cost index funds; monitor allocations twice per year
  • Defer savings for children’s education until debts are paid in full and retirement is fully funded at 33X savings (will work an extra 1-2 years if needed to pay for education)
  • Plan, monitor, and calibrate our spending on a daily basis; cutting waste and reducing costs
Portfolio Re-balance Details
1. Simplify
OLD: 8 funds across 3 IRAs (2 Traditional + 1 Roth), 1 active 401(k) and 2 inactive 401(k)
NEW: 3 funds across 2 IRAs (1 Traditional + 1 Roth), 1 active 401(k) and 2 inactive 401(k)

2. Reduce Expenses
OLD: 92% of investments w/expense ratios over 0.1
NEW: 100% of investments w/expense ratios below 0.1

3. Balance Investment Mix
OLD: Contains actively managed funds blending stocks, bonds and short-term investments
NEW: All funds are single purpose – U.S. Stock, U.S. Bonds, International Stock

4. Diversify
OLD: >90% U.S. Large Cap Stock plus ~10% cash; minimal bonds via two active funds
NEW: 80% U.S. Large Cap Stock, 15% U.S. Bonds, 5% International

DETAIL - Current Mix

Code: Select all

Large Cap	87.52% of Portfolio			

	VIIIX	0.02% ER
		Vanguard Institutional Index Fund Institutional Plus Shares	
		Seeks to track the performance of the SP500	
	FXSIX	0.03% ER
		Fidelity 500 Index Fund - Institutional Class 
		Provide results corresponding to total performance of US common stocks; Investing at least 80% of assets in stocks included in SP500	
					
Mid Cap		0.47% of Portfolio				

	VMCPX	0.03% ER
		Vanguard Mid-Cap Index Fund Institutional Plus Shares	
		Provides broad mid-capitalization U.S. equity exposure	
					
Stable Funds	8.16% of Portfolio				

	PRTXX	0.39% ER
		T. Rowe Price U.S. Treasury Money Fund	
		Invests at least 80% in U.S. Treasury securities; remainder is invested in other government securities	
	VUSXX	0.09% ER
		Vanguard Treasury Money Market Fund
		Invests in short-term U.S. Treasury bills	
	VMFXX	0.11% ER
		Vanguard Federal Money Market Fund
		Invests in short-term U.S. government securities	
					
Blended Funds	3.85% of Portfolio
				
	TRSGX	0.66% ER
		T. Rowe Price Personal Strategy Growth Fund
		80% stocks, 16% bonds, money market securities and cash reserves; 4% alternative investments
	VIRSX	0.09% ER
		Vanguard Institutional Target Retirement 2040 Fund
		Invests in four Vanguard index funds holding approximately 90% of assets in equities and 10% in bonds	
DETAIL - Future Mix

Code: Select all

U.S. Large Cap	80% of Portfolio			

	VIIIX	0.02% ER
		Vanguard Institutional Index Fund Institutional Plus Shares	
		Seeks to track the performance of the SP500
				
Bonds		15.00% of Portfolio
	VBMPX	0.03% ER
		Vanguard Total Bond Market Index Fund Institutional Plus Shares
		Invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities	
					
International	5.00% of Portfolio
	VTIAX	0.11% ER
		Vanguard Total International Stock Index Fund Admiral Shares
		Invests in non-U.S. stocks, including those in developed and emerging market	
Last edited by olliema on Tue Oct 16, 2018 8:23 am, edited 1 time in total.

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Portfolio Re-balance Feedback

Post by Ron Scott » Mon Oct 15, 2018 11:08 pm

I’m confused. Didn’t you pull all of your money out of investments in March and go to cash so you could , as you say, re-balance?

Did you reinvest most of it then and now want to do it again?
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

Topic Author
olliema
Posts: 29
Joined: Sun Mar 11, 2018 10:34 pm

Re: Completing My Portfolio Re-balance - Feedback?

Post by olliema » Tue Oct 16, 2018 8:35 am

Ron thanks for reading my write-up - to answer your question I started a re-balance earlier this year but never completed it as intended - I left a significant amount in cash, didn't move money to bonds as planned, and did not eliminate the blended/target date funds.

I intend to complete my re-balance rather than start anew, my objectives haven't changed, and the sooner I finish it the sooner I can leave it alone to do it's thing. To reflect this I've updated the title to "Completing My Portfolio Re-balance".

Do you have any feedback on the AAs given time to needing the funds and my risk profile?

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Completing My Portfolio Re-balance - Feedback?

Post by Ron Scott » Tue Oct 16, 2018 8:52 am

I have three thoughts for you:

1. The concept of rebalancing you describe is not what people on this forum mean when they use the term, so be careful of misinterpreting. People here are transferring smaller percentages of their investable assets between stocks and bonds to maintain an overall asset allocation, not going to cash first and then reallocating.

2. Consider the equivalent of a 2-fund portfolio. Total US Stocks and Total US Bonds. You'll have to use a few different investments to achieve this with tax deferred and taxable accounts but you can get very close. I don't think there's much need for international stocks or bonds and I don't see the value in target funds; others disagree. I'd prefer to dollar cost average into stocks; others will disagree. I like the your-age-in-bonds approach but you might want to be more in stocks. Stay between 25% and 75% stocks.

3. Read the wiki on this board and these:
https://www.amazon.com/Bogleheads-Guide ... +investing

https://www.amazon.com/Bogleheads-Guide ... +investing
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

Topic Author
olliema
Posts: 29
Joined: Sun Mar 11, 2018 10:34 pm

Re: Completing My Portfolio Re-balance - Feedback?

Post by olliema » Tue Oct 16, 2018 9:27 am

Thanks for the reply - this is helpful. Agree that moving to cash is not part of re-balancing unless the goal is to make the long-term AA cash, which I didn't. I think that moving my fund to cash then to the new AA, even if had completed it all, was market timing, which is not my strategy to build wealth, since I don't know how to time the market with great certainty.

For your 2 fund portfolio suggestions:

The Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX) available to me claims "broad exposure to U.S. investment grade bonds. Reflecting this goal, the fund invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities (short-, intermediate-, and long-term issues)" - does this align with your idea of Total US bonds?

For Total US Stocks - I presume I would need to roll my own between small, mid, and large cap, and if I knew the ratios I could set that up. I will re-read the wiki and search posts to see if there is a formula I can copy.

Earlier this year I read my library's copy of Bogle's Enough, the Bogleheads Guide to Investing, and I just borrowed our library's Bogleheads Guide to Retirement.

megabad
Posts: 2524
Joined: Fri Jun 01, 2018 4:00 pm

Re: Completing My Portfolio Re-balance - Feedback?

Post by megabad » Tue Oct 16, 2018 2:09 pm

olliema wrote:
Mon Oct 15, 2018 10:37 pm
In-scope problems:
1. Simplify investment mix
2. Reduce investment portfolio expenses
3. Reduce investment volatility

DETAIL - Future Mix
U.S. Large Cap 80% of Portfolio

VIIIX 0.02% ER
Vanguard Institutional Index Fund Institutional Plus Shares
Seeks to track the performance of the SP500

Bonds 15.00% of Portfolio
VBMPX 0.03% ER
Vanguard Total Bond Market Index Fund Institutional Plus Shares
Invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities

International 5.00% of Portfolio
VTIAX 0.11% ER
Vanguard Total International Stock Index Fund Admiral Shares
Invests in non-U.S. stocks, including those in developed and emerging market
I dig your future mix choices (assuming you only have tax advantaged accounts).

Based on your indicated "in-scope problems":
1) Simplify. 8 Funds to 3 is definitely simpler in my eyes.
2) Expenses. Your overall fund expenses are already very low, but you will likely slightly reduce them further with the new portfolio.
3) Volatility. You are reducing your equity exposure which may reduce volatility. Be aware that moving from Money Market Funds to Total Bond will generally increase the volatility of that section of your portfolio. Overall I would predict slightly less volatility though.

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Completing My Portfolio Re-balance - Feedback?

Post by Ron Scott » Tue Oct 16, 2018 2:18 pm

I believe the wiki shows a straightforward approach for using large, mid, and small-cap funds to emulate total market
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

Post Reply