Evaluation of Portfolio

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RickBoglehead
Posts: 957
Joined: Wed Feb 14, 2018 9:10 am

Evaluation of Portfolio

Post by RickBoglehead » Wed Oct 17, 2018 7:19 am

Joined 8 months ago, been soaking in all the info on the site as well as reading several of the recommended texts. Finally felt it was worth getting other perspectives, I've always self-managed our investments, and over the years have made some mistakes (individual stocks, tech investments before the crash of 2000 and rode them all the way down, and I'm sure many more).


Emergency funds: 3 months (use taxable bond funds if need more)

Debt: Adjustable rate mortgage, 3%, balance of $420,000. Rate adjusts in November 2021, max of 5%, then annually thereafter. Indexed to Libor plus 2.5%.

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 4.25% State

State of Residence: Michigan

Age: 60/61

Desired Asset allocation: 65% stocks / 35% bonds (CD ladder is included in bonds)

Desired International allocation: 5% max

Planned retirement summer of 2021 (just under 3 years from now), likely selling house with above mortgage and buying new home. No pension for myself, DW will get just over $3,100 a year (in today’s dollars) beginning in 2021, will adjust up each year. Plan on delaying SS until 70 for both, subject to regular re-evaluation. Medical benefits available at discount from state at retirement, as well as supplemental coverage upon start of Medicare. Portfolio size is adequate for 4% withdrawal during retirement at projected level of spending, if future growth exceeds ~ 3.5% withdrawal rate could be higher.

Taxable / Retirement: Each year a very large percentage of earnings is put into retirement accounts, even in low year where earnings might be less than actual expenses (i.e. sell taxable to put into retirement). Taxable will always be larger than retirement accounts due to makeup of assets.

CURRENT TAXABLE INVESTMENT ASSETS (REPRESENTS 67.08% OF ALL INVESTMENT ASSETS):

Some investments existed years ago, collapsing to 3 fund portfolio would incur high taxable gains.
  • Stock/stock mutual funds:
    16.01% Vanguard Primecap Admiral (VPMAX) – 0.32%, this fund is 43% long term gains.
    18.60% Vanguard Value Index Admiral (VVIAX) – 0.05%, this fund is 26% long term gains.
    17.77% Vanguard Extended Market Index Admiral (VEXAX) – 0.08% - this fund is 32% long term gains.
    0.71% Vanguard Total International Stock Index Admiral (VTIAX) – 0.11%
    2.44% IBM (owned since 1984, huge taxable gains)
    =====
    55.54% of total
  • Bonds/bond mutual funds:
    4.00% Vanguard Short-Term Investment-Grade Admiral (VFSUX) – 0.10%
    0.89% Vanguard Intermediate-Term Investment Grade (VFICX) – 0.20%
    5.18% Vanguard Total Bond Market Index Admiral (VBTLX) – 0.05%
    1.39% Vanguard Total International Bond Index Admiral (VTABX) – 0.11%
    0.08% Tennessee Valley Authority (TVC) – inherited, matures 2028, 3.55% rate
    =====
    11.54% of total

CURRENT RETIREMENT INVESTMENT ASSETS (REPRESENTS 32.92% OF ALL INVESTMENT ASSETS):

Overall, 88.8% of retirement assets are ROTH, 11.2% are taxable. Conversion done last year (15% tax bracket), likely won’t be done this year due to 22% tax bracket. Current contributions (IRA, 403b, i401K) are ROTH, except for company contribution to i401K which is taxable.
  • His 401k

    Solo 401K. Maxed out each year, both company and individual contributions. Currently 33.93% taxable, 66.07% ROTH. Individual contributions are ROTH, company contributions are taxable.

    Bond mutual funds:
    1.16% Vanguard Intermediate-Term Investment-Grade (VFICX) – 0.20%
    2.44% Vanguard Long-Term Investment-Grade Fund (VWESX) – 0.22%
    =====
    3.60% of total
  • His ROTH IRA at Vanguard (19.39% of total)

    Stock mutual funds:
    9.73% Vanguard Primecap Fund Admiral (VPMAX) – 0.32%

    Bond mutual funds:
    6.32% Vanguard Intermediate-Term Investment-Grade Admiral (VFIDX) – 0.10%
    0.67% Vanguard Total Bond Market Index Admiral (VBTLX) – 0.05%
    0.99% Vanguard Total International Bond Index Admiral (VTABX) – 0.11%
    1.68% 2.65% CD maturing 4/2020
    =====
    9.66% of total
  • Her 457/401K

    0.41% State Street Global Advisors S&P 500 Index (no stock symbol exists) – no idea of expense ratio, very hard to get info. This is the best fund choice they have. DW puts in mandatory 2% of pay, nothing more, because she maxes out on her 403b and that is the max that the company will match against. Due to low earnings (public school teaching assistant), this is only a few hundred dollars a year.
  • Her 403b

    0.49% Fidelity U.S. Bond Index Fund Premium Class (FSITX) – 0.02%
    Last year emptied fund into Rollover IRA, will do that every year to get lower expense and shift to bonds to help overall AA%. Currently 0.48% of total investments due to shifting assets out last year (allowed at 59 ½). Contributes all her net pay to this.
  • Her Rollover IRA at Fidelity

    0.37% Fidelity U.S. Bond Index Fund Premium Class (FSITX) – 0.02%
  • Her Rollover IRA at Vanguard (1.68% of total)

    0.92% Vanguard Primecap Fund (VPMCX) – 0.39%
    0.76% 2.1% CD maturing 4/2019
  • Her ROTH IRA at Vanguard (6.98% of total)

    3.86% Vanguard Primecap Admiral (VPMAX) – 0.32%

    0.97% Vanguard Total International Bond Admiral (VTABX) – 0.11%
    0.49% 2.1% CD maturing 4/2019
    1.64% 2.35% CD maturing 10/2019
    0.01% Misc stock
    =====
    3.12% of total
Summary

65/35 desired allocation, currently 70.47/29.53
67.48/32.52 taxable/retirement
95.94/4.06 US/international

Total Holdings Composition (combined taxable and retirement to show total holdings summarized)
  • Stock/stock mutual funds:
    2.44% - IBM
    0.01% - Misc stock
    0.41% - SSGA S&P 500
    17.77% -Vanguard Extended Market Index (VEXAX) – 0.08%, this fund is 32% long term gains in taxable holding.
    30.53% - Vanguard Primecap (VPMAX) – 0.32%, this fund is 43% long term gains in taxable holding.
    0.71% - Vanguard Total International Stock Index (VTIAX) -0.11%
    18.60% - Vanguard Value Index (VVIAX) – 0.05%, this fund is 26% long term gains in taxable holding.
    ======
    70.47% of total

    Bond/bond mutual funds:

    4.57% - CDs
    0.08% – Tennessee Valley Authority (TVC)
    8.38% - Vanguard Intermediate-Term Investment-Grade (VFIDX) – 0.20%
    2.44% - Vanguard Long-Term Investment-Grade (VWESX) – 0.22%
    4.00% - Vanguard Short-Term Investment-Grade (VFSUX) – 0.10%
    6.71% - Vanguard Total Bond Market Index (VBTLX) – 0.05%
    3.35% - Vanguard Total International Bond Index (VTABX) – 0.11%
    =====
    29.53% of total


Contributions

New annual Contributions

Maximum contributions for company and individual (ROTH) on solo 401k are made each year.

Entire net pay contributed to DW’s 401k.

$6,500 to each ROTH IRA each year.

Other

Each year, evaluate whether ROTH conversions make sense. Some years, when in lower bracket, do conversions to top of bracket.

I bought my first Primecap holding in 1995, long before I switched to indexing. Great long term performance, big gains (in the taxable holdings). Limited to $25,000 additional investment per year, per account type per person (his IRA, her IRA, his solo brokerage, her solo brokerage, joint account). I re-evaluate each year whether I want to put new money into Primecap or convert existing funds (take IRA holding and convert to Primecap). For 2018, I can invest another $75,000 if I choose to. Additional investments in Primecap in the years I make them have thrown off my AA as one would expect.

Questions:

1) Due to my desired AA of 65/35, plus the fact that I want to keep my Primecap holdings (some of which are in retirement accounts as you see), I have to hold bonds in my taxable account. State tax rate is relatively low. Would you hold something different, and why? I will likely be TLH the bonds (see #3 below), so a different approach can be easily implemented in early 2019.

2) I have a spread of short, intermediate, and long term bonds, as well as total bond market. Any comments about those holdings? Since I will likely be liquidating them to TLH (in taxable account, see #3 below) and take advantage of Ally’s 1% bonus, would you place these funds differently early next year?

3) Tax loss harvesting - I haven’t done really any tax loss harvesting. I’m thinking this year of selling my taxable bonds to get the loss to offset sizeable gains as I sell off IBM, purchased mostly 30+ years ago (losses won’t begin to cover the gains). I have about $4,750 in short term losses (Vanguard Intermediate-Term Investment-Grade, Vanguard Short-Term Investment Grade, Vanguard Total Bond Market, and Vanguard Total International Bond) and $5,700 in long term losses (Vanguard Short-Term Investment-Grade and Vanguard Total Bond Market). My short-term losses become long term losses in 7 days. I have no short-term gains. I plan on moving as much as can qualify to Ally for the 1% bonus, the rest to Prime Money Market and then reassess. Comments?

4) I see many posts about the tax efficiency of holdings, certain funds not being efficient because they throw off more gains than other funds. I have huge gains in 3 large holdings (which is why they never were changed to a 3 fund portfolio, 4 counting IBM), so I can’t shift much without creating gains. IBM will be reduced dramatically prior to end of year if I TLH.

5) I can rollover assets out of the Solo 401K (hit 59½). I understand the different legal protections between 401ks and IRAs, but this is a small percent of our assets. I am considering doing this to get Admiral Shares, and have less assets in Investor funds. Each year we convert some to ROTH (depending on our tax bracket), but right now DW’s conversions eat it up any room we have, so I guess leaving the company contribution in the i401k for now makes sense, just pull the ROTH contribution. Comments?

Thank you very much.

carolinaman
Posts: 3288
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: Evaluation of Portfolio

Post by carolinaman » Wed Oct 17, 2018 7:45 am

I recommend consolidating your bond holdings into one fund that covers the market at a low cost. VBILX is an excellent choice as it is 50% govt/treasury and 50% investment Grade corporate. You apparently do not have to worry about capital gains with bonds so this should be an easy thing to do and simplifies your portfolio. Performance should be about the same with probably less risk due to higher govt bond holdings. If you believe in International bonds, just keep that as is.

FWIW, 65% equity in retirement when your living expenses will be coming from your portfolio for about 7 years until age 70, seems aggressive. You have some good funds, but they are also aggressive funds which means higher risk and higher rewards. You may experience a greater drop in them than average risk funds. If you can live off your bond funds until SS kicks in, you may be ok.

There are plenty of Bogleheads with similar AA, but I wonder how many have weathered a bear market while in retirement with that high an equity allocation. Just my opinion.

RickBoglehead
Posts: 957
Joined: Wed Feb 14, 2018 9:10 am

Re: Evaluation of Portfolio

Post by RickBoglehead » Wed Oct 17, 2018 7:54 am

carolinaman wrote:
Wed Oct 17, 2018 7:45 am
I recommend consolidating your bond holdings into one fund that covers the market at a low cost. VBILX is an excellent choice as it is 50% govt/treasury and 50% investment Grade corporate. You apparently do not have to worry about capital gains with bonds so this should be an easy thing to do and simplifies your portfolio. Performance should be about the same with probably less risk due to higher govt bond holdings. If you believe in International bonds, just keep that as is.

FWIW, 65% equity in retirement when your living expenses will be coming from your portfolio for about 7 years until age 70, seems aggressive. You have some good funds, but they are also aggressive funds which means higher risk and higher rewards. You may experience a greater drop in them than average risk funds. If you can live off your bond funds until SS kicks in, you may be ok.

There are plenty of Bogleheads with similar AA, but I wonder how many have weathered a bear market while in retirement with that high an equity allocation. Just my opinion.
Thanks for the observations. Bond portfolio can provide roughly 7 years of spending which would fit exactly, assuming zero change over the next few years (and they should grow). Plan on reducing equity percentage as we enter retirement mostly by spending assets, with significant ROTH holdings that may not need to happen.

RickBoglehead
Posts: 957
Joined: Wed Feb 14, 2018 9:10 am

Re: Evaluation of Portfolio

Post by RickBoglehead » Fri Oct 19, 2018 5:44 am

On 10/18 I liquidated my Vanguard Short-Term Investment-Grade Admiral (VFSUX), Vanguard Intermediate-Term Investment Grade (VFICX), and Vanguard Total Bond Market Index Admiral (VBTLX) positions in my taxable account to TLH. They represented ~10% of my total portfolio.

I plan on maximizing Ally's 1% bonus, occupying much of these funds through at least 1/16/19.

Very interested in other portfolio recommendations.

dcarste
Posts: 130
Joined: Mon Apr 27, 2015 4:55 pm

Re: Evaluation of Portfolio

Post by dcarste » Fri Oct 19, 2018 4:08 pm

Due to all those taxable gains and so much of a portion in your taxable accounts for stocks, even though it would be nice to simplify to 3 fund portfolio, the stock mutual funds you hold are very good and low expense. I'd just work on getting rid of IBM over time first and foremost and put into bonds. I wouldn't worry about your stock holdings in taxable, just trickle out of very long period of time due to capital gains, I don't think your mutual fund holdings will perform better or worse than if you were able to consolidate it into the total stock market index fund, your funds are really good and stuck with capital gains. so no issues there.

I see issues with how much you want in stock allocation, very aggressive for age, you should reduce risk so your retirement plans don't get thrown back a few years, if the market dumps just before retirement. I'd take every holding in tax deffered accounts and get them into bond index funds, short or long term that hold at least 50% treasuries, and a duration under 7. Then if that isn't enough to move your stock allocation down enough, trickle out some stock out of the taxable account, at most I'd say at your age 50% stocks if you follow Mr. Bogle, age in bonds.

I'd also be holding 8 to 12 months in cash at ally bank high yield savings accounts on top of 50% bonds.

Just me, but I wouldn't risk delaying retirement when you are already on track and rode one of the biggest bull markets with a pretty high stock allocation for your age. I'd consider yourself blessed, and move on. That's just me though. You made it, why risk? even 60% bonds. Sorry I couldn't say to move to 3 fund portfolio due to taxable gains, but those mutual funds and bond funds are great anyways I don't see any problems. It'll just take 10 years to simplify as you spread taxable gains out. But I'd pay up some capital gains this year and next to get to my higher bond allocation, first by all tax deffered in bonds, then rest from IBM, then from others if you still cant get to 50 or 60% Bonds (don't add any new long term bonds...and bond fund I'd just use total us bond market index for new bond purchases.

Good luck, a little complicated in your situation due to captial gains, but still yea a lot of funds, but they are good and cheap, and I don't see them performing better or worse than the total stock market index. I think first getting bond allocation up most important soon, and then just slowly as you have to sell to fund retirement just pay the capital gains.

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