Portfolio Advice for beginner...

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Topic Author
learning2save
Posts: 2
Joined: Fri Oct 19, 2018 2:42 pm

Portfolio Advice for beginner...

Post by learning2save »

Hi Everyone! I'm finally(!) ready to start thinking more seriously about retirement savings/investing in general so I was hoping to ask for some advice from this forum. I'm very late to the game, but hopefully, still time to make some smart choices. Sorry in advance for the very basic questions below - and I've tried to stick to the format recommended!

Emergency funds: Six months of expenses saved
Debt: None

Tax Filing Status: Single
Tax Rate: 35 % Federal,10.3 % State

State of Residence: California

Age:42

Desired Asset allocation: 80% stocks / 20% bonds (though if I look at my target retirement fund – it looks like that AA that Vanguard picked is more like 15% bonds)

Desired International allocation: ? of stocks (I'm not sure - but I'm somewhat relying on what Vanguard has put in the TR fund.


Current Total portfolio: high five-figure, low six-figures

No current taxable retirement accounts, no Roth or IRA



Current retirement assets

401k

50% Vanguard Institutional Index Plus - VIIX (0.02%) 

25% Vanguard Institutional TR 2040- VIRSX (0.09%)

Company match? 4%

457b 

25% Vanguard Institutional TR 2040 -VIRSX (0.09%)

Company match? no



Contributions


New annual Contributions 

$18,500 401k 

$18,500 457b
$5,500 IRA/Roth IRA

$10,000 taxable (for retirement, not short term goals)



Available funds

401(k)
Target Retirement funds:

VANG EXT MKT IDX ISP (VEMPX) (0.05%) 

VANG INST TR INCOME (VITRX) (0.09%) 

VANG INST TR 2040 (VIRX) (0.09%) -- plus other years that I will likely not retire by :)
BrokerageLink

VANG INST INDEX PLUS (VIIIX) (0.02%)
VANG TOT INTL STK IP (VTPSX) (0.07%)
VAN SF INF PS IDX IS PL (VBMPX) (0.03%
VANG VMMR-FED MMKT (VMFXX) (0.11%)


Funds available in 457b

There are 256 investment options for the 457b, so I didn’t think I should list them all here. Everything that is listed above, plus funds from all asset classes – including fidelity funds.

Questions:

1. I would like to open a IRA/backdoor Roth IRA – but am unsure of which funds to place in that account. Since my current asset allocation is more heavily geared towards stocks, I’m wondering if I can balance this allocation by placing more bond funds in the Roth IRA account?



2. Similar question with the taxable account – I have no idea what to put in this account. Since it’s taxable income, I was hoping to put tax efficient investments in this account – but I’m not sure what this should be? Municipal bond fund?



Thanks in advance for all advice!
Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Portfolio Advice for beginner...

Post by Ron Scott »

I would suggest reconsidering your AA as you prepare for the second half and increase exposure to bonds. Your age in bonds by the time you retire if not a bit earlier. You can start to move in this direction by investing in CA munis if you need room for bonds in taxable. I think VGs CA munis are relatively intermediate. Total bond market (US only) would work in tax deferred too.

Also, start planning conservatively, to be robust in retirement.

Your lifestyle and portfolio combine to form a system that is either robust or fragile to down markets.

Those who need to spend a relatively high % of assets for living expenses, rely on higher returns from equities, and who may need to sell equities at a low to fund living expenses are relativity fragile to market volatility.

Those who spend a relatively low % of assets for living expenses, can live with relatively low returns, and who will not need to sell equities at a low to fund living expenses are relativity robust.

2 final thoughts:

1. There is no need to predict why or when a downturn will occur. Being prepared for it is sufficient.

2. Financial success does not rely on understanding stocks and bonds, but in knowing what they can do to your net worth and planning accordingly.
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.
Chip
Posts: 3994
Joined: Wed Feb 21, 2007 3:57 am

Re: Portfolio Advice for beginner...

Post by Chip »

Hi, and welcome!

You have excellent options in your 401k/457. That will make setting up your portfolio easy.

Since you have room for all of your bonds within your tax-deferred accounts, there is no need to buy municipal bonds in your taxable account. Buy a regular taxable bond fund in your tax-deferred account to fill out your bond allocation.

In your taxable account most here would recommend a US total market stock fund, such as Vanguard's Total Stock Market Index fund (VTSAX). It has a relatively low dividend payout and most of those dividends are qualified, meaning they receive a favorable tax treatment. It is considered extremely tax efficient by most here. The other MAJOR benefit is that it something that you can hold forever. You will never have to worry about changing funds and facing a large capital gain to do so.

You currently have a mix of target date funds and regular stock funds. That's okay, but it makes the math of figuring out exactly what your allocations are a little more difficult. I would recommend going with individual funds since you are going to have investments in a taxable account.

Your Roth IRA (you will have to do a "backdoor" Roth) can contain anything. At this point it is fine just to put a Total US Market fund there. I would recommend a stock fund here rather than bonds. We can discuss why if you're interested.

Here is a ONE suggested allocation based on the 3 fund portfolio, with 30% of stocks in international (arbitrary choice on my part):

401k/403b:
20% VAN SF INF PS IDX IS PL (VBMPX) (0.03%)
24% VANG TOT INTL STK IP (VTPSX) (0.07%)
45% VANG INST INDEX PLUS (VIIIX) (0.02%)
11% VANG EXT MKT IDX ISP (VEMPX) (0.05%) 


Note: VIIIX is an S&P 500 fund. VEMPX is an S&P "completion" index fund. Using VIIIX and VEMPX in about a 4:1 ratio, as above, approximates a total stock market index fund.

Taxable Account
0% Vanguard Total Stock Market Index (VTSAX) (.04%)

Roth IRA (via backdoor)
0% Vanguard Total Stock Market Index (VTSAX) (.04%)

Each year you will be contributing a total of 52,500 to all of the accounts. 20%, about 11k, to your bond fund. 24%, about 13k, to international (VTPSX). The rest goes to VTSAX in your taxable and Roth and VIIIX/VEMPX in a 4:1 ratio in the 401k/457. On some frequency (maybe once a year or after major market moves), look at your overall allocations and rebalance in the 401K/457.

There are certainly other ways to approach this, but this should be a good start. You should probably think hard about your desired stock/bond allocation as well your allocation to international stocks. There aren't any "right" answers to these questions, but it's important that you be comfortable with the choices that you make.
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ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Portfolio Advice for beginner...

Post by ruralavalon »

Welcome to the forum :) .

Age 42 is late, but not too late to make a difference with good fund choices and a reasonable plan.

You have excellent funds offered in your 401k, you are fortunate. It's great to see that you are debt free, and will be making the maximum contributions to your 401k, your 457, and an IRA. How much (in dollars) is the employer match in your 401k?



Asset allocation.
learning2save wrote: Fri Oct 19, 2018 2:59 pm Age:42

Desired Asset allocation: 80% stocks / 20% bonds (though if I look at my target retirement fund – it looks like that AA that Vanguard picked is more like 15% bonds)

Desired International allocation: ? of stocks (I'm not sure - but I'm somewhat relying on what Vanguard has put in the TR fund.
At age 42 I suggest about 30 % in bonds. This is expected to substantially reduce portfolio volatility (risk), with only a relatively modest decrease in 3portfolio return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk", and "Asset allocation".

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). (You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box (upper right, this page).

That works out to about 30% bonds, 15-20% international stocks, and 50-55% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.



Fund selection & placement.
In selecting funds strive for a combination of broad diversification (to reduce risk) and low expense ratios (to increase your net gain). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Wiki article "Three-fund portfolio". Forum discussion, "The Three-Fund Portfolio".

In my opinion in the 401k the funds to consider using include:
1) Vanguard Institutional Index Fund Institutional Plus (a S&P 500 index fund) (VIIIX) ER 0.02%;
2) Vanguard Total International Stock Index Fund Institutional (VTSPX) ER 0.07%; and
3) Vanguard Total Bond Market Index Fund Institutional (VBMPX) ER 0.03%.

For domestic stocks I suggest using a total stock market index fund where available; otherwise an S&P 500 index fund is good enough by itself for domestic stocks. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations".

An S&P 500 index fund covers 81% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies, and in the 26 years since the creation of the first total stock market index fund the total return of the two types of funds has been almost identical. Morningstar, "growth of $10k" graph, VTSAX vs VFIAX. In the first 10 years the S&P 500 fund did better, in the last 10 years the total market fund did better, and over the 26 years the total market fund gave a little more return (0.11% per year), but at the cost of a little more volatility (risk): nisiprius post, in the forum discussion "Exchanging the S&P 500 for the TSM". See also Allan Roth, CBS Moneywatch, "John C. Bogle on the S&P 500 vs. the Total Stock Market". So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically made little difference in performance.

If you want to add the extended market fund (VEMPX), then an 81/19 mix of S&P 500 and extended market will approximate the content of a total stock market index fund. Wiki article, "Approximating total stock market". In my opinion this is not necessary, it is optional if you prefer to do this.

It is often better coordinate investments across all accounts, in other words treat all accounts together as a single unified portfolio, rather than view each account separately. To make portfolio management and rebalancing easy it is often better to have at least one large tax-advantaged account which contains all three basic asset types (bonds, international stocks, and domestic stocks). Don’t try to put all components of the asset allocation in every account


learning2save wrote: Fri Oct 19, 2018 2:59 pm 
Funds available in 457b

There are 256 investment options for the 457b, so I didn’t think I should list them all here. Everything that is listed above, plus funds from all asset classes – including fidelity funds.
Does the 457 offer a domestic total stock market index fund? If so please give the fund name, ticker and expense ratio.


learning2save wrote: Fri Oct 19, 2018 2:59 pm Questions:
1. I would like to open a IRA/backdoor Roth IRA – but am unsure of which funds to place in that account. Since my current asset allocation is more heavily geared towards stocks, I’m wondering if I can balance this allocation by placing more bond funds in the Roth IRA account
In general prefer using stock index funds in your Roth IRA.




learning2save wrote: Fri Oct 19, 2018 2:59 pmTax Filing Status: Single Tax Rate: 35 % Federal,10.3 % State
State of Residence: California
. . . . .
2. Similar question with the taxable account – I have no idea what to put in this account. Since it’s taxable income, I was hoping to put tax efficient investments in this account – but I’m not sure what this should be? Municipal bond fund?
In general use very tax-efficient stock index funds in a taxable account. Wiki article "Tax-efficient fund placement". Examples include using Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04% and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%. Both are very tax-efficient. Those funds are also well suited to any type of account. Both are very diversified with very low expense ratios.

You can also consider a combination of Vanguard Short-Term Tax-Exempt Fund Admiral Shares (VWSUX) ER 0.09% and Vanguard California Long-Term Tax-Exempt Fund Admiral Shares (VCLAX) ER 0.09%.
Last edited by ruralavalon on Sat Oct 20, 2018 1:49 pm, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
spencer99
Posts: 486
Joined: Thu Apr 01, 2010 5:17 pm

Re: Portfolio Advice for beginner...

Post by spencer99 »

You have a 457b. So, I assume you are a public sector employee. That poses two questions:

1) Are you covered by a defined benefit pension?
2) Are you covered by Social Security?

These factors may, but do not necessarily, affect your desired asset allocation.

... and

Is your federal tax rate 35% after the 401k and 457b contributions? If so, or anything close, I wondered why you would want to contribute to a Roth IRA. Note - the desirability of contributing to a Roth IRA in a higher marginal tax bracket changes a little if one will receive a defined benefit pension.

S
Topic Author
learning2save
Posts: 2
Joined: Fri Oct 19, 2018 2:42 pm

Re: Portfolio Advice for beginner...

Post by learning2save »

Thanks everyone for the welcome and the helpful advice.

Definitely want to start planning conservatively to be robust (as much as possible with this late start) - so it's helpful to reconsider my asset allocation. I had been comfortable trying to be more aggressive to grow things but definitely thinking somewhere between 20-30% in bonds makes more sense now.

Helpful to realize that I might be able to get what I need not using the target date funds, so will move towards the regular stock funds, as you suggested Chip. I also (having not read enough) did not realize that the VIIIX was not a total stock market index fund and would need completion or at least, I should read about total stock market completion.

I will take a look at the funds mentioned and am excited to figure some of these things out!

Ruralavalon -
(a) I actually don't know what the dollar amount is for the company match - and in reading our retirement benefits page - I'm a little bit more confused about the match than I had first realized - so I will try to figure out their matching contributions tomorrow when I get a benefits person on the phone.

(b) The 457 has the following domestic total market index funds (I think these are the only ones based on the options I see.. though every asset class seems well represented...)
Fidelity® Total Market Index Fund - Premium Class (FSTVX)
Expense Ratio: 0.015%

Vanguard Total Stock Market Index Fund Admiral Shares - VTSAX
Expense Ratio: 0.04%

Spencer99,

I'm not a public sector employee so don't have a pension but should be eligible for social security. Yes, I think I'm still at 35% or close to it after contributions. I'm not sure why I want to contribute to a backdoor Roth - other than I have read this should be maxed out prior to investing in a taxable account.


Thanks again everyone!
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