Roast my portfolio. VEMAX instead of VTIAX?

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Topic Author
lumens
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Roast my portfolio. VEMAX instead of VTIAX?

Post by lumens » Sat Jan 12, 2019 1:19 pm

I'm designing a 3-fund 65/35 early-retirement portfolio that will live in a taxable account.

55% VDADX - Vanguard Dividend Appreciation Index Fund Admiral Shares
10% VEMAX - Vanguard Emerging Markets Stock Index Fund Admiral Shares
35% VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares

VDADX - chosen instead of VTSAX. I like having some valuation screen. Market-cap weighted (VTSAX) can mean a harder landing when people realize vaporware.com valuations make no sense.
VEMAX - chosen instead of VTIAX. I want just the more uncorrelated, potentially growthy EM part of the global market. The normal guidance for EM is 5%, which for me seems in the noise.
VBTLX - no one got fired for buying and holding VBLTX long-term.

That's what I've got. Roast me!
Last edited by lumens on Sun Jan 13, 2019 1:27 pm, edited 1 time in total.

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nedsaid
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by nedsaid » Sun Jan 13, 2019 1:16 pm

lumens wrote:
Sat Jan 12, 2019 1:19 pm
I'm designing a 3-fund 65/35 early-retirement portfolio that will live in a taxable account.

55% VDADX (Vanguard Dividend Appreciation Index Admiral)
10% VEMAX (Vanguard Emerging Markets Stock Index Admiral)
35% VBTLX (Vanguard Total Bond Index Admiral)

VDADX - chosen instead of VTSAX (Vanguard Total Stock Market Index Admiral). I like having some valuation screen. Market-cap weighted (VTSAX) can mean a harder landing when people realize vaporware.com valuations make no sense.
VEMAX - chosen instead of VTIAX (Vanguard Total International Stock Index Admiral). I want just the more uncorrelated, potentially growthy EM part of the global market. The normal guidance for EM is 5%, which for me seems in the noise. EM is 10% of the global market so I am matching that.
VBTLX - no one got fired for buying and holding VBLTX long-term.

That's what I've got. Roast me!
Could you list the fund names rather than ticker symbols? That would be hugely appreciated.
A fool and his money are good for business.

Topic Author
lumens
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by lumens » Sun Jan 13, 2019 1:27 pm

Added the names.

DSInvestor
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by DSInvestor » Sun Jan 13, 2019 1:36 pm

What assets do you have in tax advantaged accounts? If you're retired early and living off a taxable account, you can take advantage of low cost or even tax free Roth conversions to fill up 0% brackets provided by standard deduction and also by the favorable tax treatment of Qualified Dividend Income and Long Term Capital gains.

The income from a taxable bond fund like Vanguard Total Bond Market will generate non-qualified dividend income and thus eat into your tax free space for Roth conversion. For example if your taxable bonds in taxable generate 20K of non-QDI income and the standard deduction is 24K (MFJ), you'd only have 4K of room for tax free roth conversion. If your taxable account threw off 20K of QDI, you'd still have the full 24K of 0% tax bracket to do tax free Roth conversion. The 20K of QDI is stacked on top of your 24K of Roth conversion ordinary income and that QDI is still taxed at 0% Fed despite falling into higher tax brackets.

If you have tax advantaged space such as 401k, Trad/Rollover IRA, that would be a better place to hold your bond allocation if you want to hold Total Bond Market. If your taxable space is larger than the size of your desired bond allocation (35%), you may want to consider holding all of the bond allocation in your tax advantaged space for tax efficiency reasons. If you're concerned about selling stocks when stocks are low to withdraw from taxable, simply place an offsetting trade in IRA to exchange bonds for stock. This will effectively have you selling bonds when stocks are low.

You will get better portfolio suggestions if you post more details about your portfolio like account types, relative sizes of each account, tax filing status, state of residence etc.
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nedsaid
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by nedsaid » Sun Jan 13, 2019 1:40 pm

nedsaid wrote:
Sun Jan 13, 2019 1:16 pm
lumens wrote:
Sat Jan 12, 2019 1:19 pm
I'm designing a 3-fund 65/35 early-retirement portfolio that will live in a taxable account.

55% VDADX (Vanguard Dividend Appreciation Index Admiral)
10% VEMAX (Vanguard Emerging Markets Stock Index Admiral)
35% VBTLX (Vanguard Total Bond Index Admiral)

VDADX - chosen instead of VTSAX (Vanguard Total Stock Market Index Admiral). I like having some valuation screen. Market-cap weighted (VTSAX) can mean a harder landing when people realize vaporware.com valuations make no sense.
VEMAX - chosen instead of VTIAX (Vanguard Total International Stock Index Admiral). I want just the more uncorrelated, potentially growthy EM part of the global market. The normal guidance for EM is 5%, which for me seems in the noise. EM is 10% of the global market so I am matching that.
VBTLX - no one got fired for buying and holding VBLTX long-term.

That's what I've got. Roast me!
Could you list the fund names rather than ticker symbols? That would be hugely appreciated.
The Dividend Appreciation Index is a good choice for your US stocks. You are investing in the best of US companies. I think you will find that it has performed in similar fashion to the US Total Stock Market Index, last I checked Dividend Appreciation did a little bit better.

The Emerging Markets Index will probably do well over time but with more volatility than a Total International Stock Index or a Developed Markets Index. It also seems to contradict your "best company" strategy you are using for your US Stocks. If you are committed to a Dividend Growth strategy, why not find a similar fund on the International side? Your point about Emerging Markets non-correlation with the US Stock Market is well taken. Have you tested your portfolio at Portfolio Visualizer? Back testing does give you some idea of how such a portfolio might perform in the future.

My critique is that the "Total" stock indexes will have less single stock risk than your choices. I favor the concept of wider diversification and not narrower diversification.

Not a bad portfolio at all. I would have made different choices but it should do fairly well over time. No one knows the optimal portfolio for the future. Some of this is a matter of taste.
A fool and his money are good for business.

Topic Author
lumens
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by lumens » Sun Jan 13, 2019 2:41 pm

DSInvestor wrote:
Sun Jan 13, 2019 1:36 pm
What assets do you have in tax advantaged accounts? If you're retired early and living off a taxable account, you can take advantage of low cost or even tax free Roth conversions to fill up 0% brackets provided by standard deduction and also by the favorable tax treatment of Qualified Dividend Income and Long Term Capital gains.

You will get better portfolio suggestions if you post more details about your portfolio like account types, relative sizes of each account, tax filing status, state of residence etc.
I have around 175k in tax-advantaged accounts and both hold a vanguard target fund. Bulk of the assets are in taxable--over 5M. Married, state is CA, but am considering a move to WA, which has a friendlier tax policy.

Topic Author
lumens
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by lumens » Sun Jan 13, 2019 2:48 pm

nedsaid wrote:
Sun Jan 13, 2019 1:40 pm
If you are committed to a Dividend Growth strategy, why not find a similar fund on the International side?
That would be nice--I don't think one exists in the vanguard universe though. There is DGRE with an expense ratio of 0.32%.

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whodidntante
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by whodidntante » Sun Jan 13, 2019 3:13 pm

Your portfolio so fat, even the dividends are growing.

drk
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by drk » Sun Jan 13, 2019 3:32 pm

It seems like VIGI/VIAAX would be in keeping with your strategy, albeit not just EM.

As for the dividend emphasis, you could swap it out for a factor fund with an explicit quality emphasis (e.g., VFQY, VFMF(X), QUAL), but it’s up to you.

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nedsaid
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by nedsaid » Sun Jan 13, 2019 8:01 pm

lumens wrote:
Sun Jan 13, 2019 2:48 pm
nedsaid wrote:
Sun Jan 13, 2019 1:40 pm
If you are committed to a Dividend Growth strategy, why not find a similar fund on the International side?
That would be nice--I don't think one exists in the vanguard universe though. There is DGRE with an expense ratio of 0.32%.
I am just raising the question to see if you have thought all of this through.
A fool and his money are good for business.

drk
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by drk » Sun Jan 13, 2019 8:45 pm

lumens wrote:
Sun Jan 13, 2019 2:48 pm
That would be nice--I don't think one exists in the vanguard universe though. There is DGRE with an expense ratio of 0.32%.
nedsaid wrote:
Sun Jan 13, 2019 8:01 pm
I am just raising the question to see if you have thought all of this through.
There is an ex-US complement to VIG: VIGI. See my reply above.

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nedsaid
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by nedsaid » Sun Jan 13, 2019 8:57 pm

The most important question to ask the original poster is if he or she has written up an Investment Policy Statement. In other words, is there a strategy behind this?

A few things I can tease out.
1) the original poster believes in very low-cost funds.
2) the original poster likes dividend growth. Thus the portfolio on the US side will have a Profitability/Quality tilt. (Does the original poster know about factors?)
3) the original poster is concerned about higher returns with low correlation with the US Stock Market, hence his interest in Emerging Markets.

Go to the Wiki and read up on what an Investment Policy Statement is. There is a good worksheet on the Morningstar website.

If one has a lot of thought and solid evidence behind the investment strategy, this will help one stick with the plan when things get tough. In other words, there needs to be an intellectual commitment to whatever investment strategy the original poster settles on. Otherwise, one will be tempted to change the portfolio whenever he or she comes across a compelling article or book.
A fool and his money are good for business.

DA200
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by DA200 » Sun Jan 13, 2019 9:43 pm

lumens wrote:
Sat Jan 12, 2019 1:19 pm
I'm designing a 3-fund 65/35 early-retirement portfolio that will live in a taxable account.

55% VDADX - Vanguard Dividend Appreciation Index Fund Admiral Shares
10% VEMAX - Vanguard Emerging Markets Stock Index Fund Admiral Shares
35% VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares

VDADX - chosen instead of VTSAX. I like having some valuation screen. Market-cap weighted (VTSAX) can mean a harder landing when people realize vaporware.com valuations make no sense.
VEMAX - chosen instead of VTIAX. I want just the more uncorrelated, potentially growthy EM part of the global market. The normal guidance for EM is 5%, which for me seems in the noise.
VBTLX - no one got fired for buying and holding VBLTX long-term.

That's what I've got. Roast me!
Based on a $5M taxable portfolio:
Roughly $150K in dividends per year may be generated from the proposed portfolio. All of the VBTLX dividends will be unqualified (approximately $60K/yr). You might want to consider a portion of the bonds to be in a muni bond fund (California munis if living in CA with higher state taxes). I would also consider switching all tax deferred accounts to 100% VBTLX, to reduce bonds in taxable a bit.

drk
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Location: Seattle

Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by drk » Sun Jan 13, 2019 9:53 pm

Speaking of bonds, you could consider swapping Total Bond for a combination of VGSH/VGIT (exempt in CA) and the California Muni Bond Fund (exempt in CA and federally). That would at least reduce your taxable income. For some more negative correlation with the US market, you could also add VGLT.

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whodidntante
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by whodidntante » Sun Jan 13, 2019 9:59 pm

Are state taxes an issue? And can you move the bonds to tax-deferred accounts?

Topic Author
lumens
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by lumens » Mon Jan 14, 2019 12:44 am

drk wrote:
Sun Jan 13, 2019 9:53 pm
Speaking of bonds, you could consider swapping Total Bond for a combination of VGSH/VGIT (exempt in CA) and the California Muni Bond Fund (exempt in CA and federally). That would at least reduce your taxable income. For some more negative correlation with the US market, you could also add VGLT.
Thanks for the suggestions. Personally, I don't like creating my own mixture of bond funds. It's really hard to say you got the proportion of durations right and just leave things alone. If I'm going to swap VBTLX with something, I would prefer another "total" one-fund solution. Looking at VTEAX, but it has an unfriendly 0.25% purchase fee.

Topic Author
lumens
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by lumens » Mon Jan 14, 2019 1:31 am

DA200 wrote:
Sun Jan 13, 2019 9:43 pm
Based on a $5M taxable portfolio:
Roughly $150K in dividends per year may be generated from the proposed portfolio. All of the VBTLX dividends will be unqualified (approximately $60K/yr). You might want to consider a portion of the bonds to be in a muni bond fund (California munis if living in CA with higher state taxes). I would also consider switching all tax deferred accounts to 100% VBTLX, to reduce bonds in taxable a bit.
If I stay in CA I calculate a ~2k benefit in moving from VBTLX to VCAIX (just using that as an example--of course I would have to buy all the different flavors and get the mix right). If I move to WA, it's better to keep VBTLX.
Last edited by lumens on Mon Jan 14, 2019 3:03 am, edited 1 time in total.

Topic Author
lumens
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by lumens » Mon Jan 14, 2019 1:32 am

whodidntante wrote:
Sun Jan 13, 2019 9:59 pm
Are state taxes an issue? And can you move the bonds to tax-deferred accounts?
I can.

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whodidntante
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by whodidntante » Mon Jan 14, 2019 8:08 am

lumens wrote:
Mon Jan 14, 2019 1:32 am
whodidntante wrote:
Sun Jan 13, 2019 9:59 pm
Are state taxes an issue? And can you move the bonds to tax-deferred accounts?
I can.
Then I suggest bonds in tax deferred and equities in taxable. You'll have the same asset allocation and risk exposure but the ability to defer more taxes, and more favorable long term capital gains tax rates.

DA200
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by DA200 » Mon Jan 14, 2019 8:26 am

whodidntante wrote:
Mon Jan 14, 2019 8:08 am
Then I suggest bonds in tax deferred and equities in taxable. You'll have the same asset allocation and risk exposure but the ability to defer more taxes, and more favorable long term capital gains tax rates.
OP stated $5M in taxable and only $175K in tax deferred (97% in taxable and only 3% in tax deferred).
Thus, for OP to meet desired AA, a significant portion of bonds will need to be in taxable.
Fill tax deferred with 100% bonds (3% of total) and an additional 32% of total in bonds placed in the taxable acount (roughly $1.7M in bonds in taxable).

sophie1
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Re: Roast my portfolio. VEMAX instead of VTIAX?

Post by sophie1 » Mon Jan 14, 2019 8:36 am

This might be like spitting in the wind, but...what about buying US savings bonds?

State/local tax-exempt, all taxes deferred up to 30 years, and inflation protection. Like a cash-only nondeductible IRA. If OP is married and is willing to buy both Series I and EE bonds, that's $40K/year worth of tax protection.

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