Vanguard vs Boglehead advice

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Topic Author
cynthia
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Joined: Sat Oct 25, 2008 12:58 am

Vanguard vs Boglehead advice

Post by cynthia » Wed Nov 05, 2008 11:57 am

Back around Oct. 25 I posted my portfolio here for review by the Bogleheads. I had also submitted the information to the Vanguard investment advisors but, at the time of my posting, I had not yet had my interview with the Vanguard advisor.

Vanguard proposed two portfolios. This was the more simplified one:

Consolidated portfolio

21% PRIMECAP (VPMCX)
3% Health Care (VGHCX)
19% Total International (VGTSX)
3% Emerging Markets (VEIEX)
6% Value Index Fund (VIVAX)
13% Total Stock Market Index (VTSMX)

Federal Govt Thrift Savings Plan
Recommended converting to the following Vanguard funds
20% Total Bond Market (VBMFX)
7% Value Index (VIVAX)
1% Extended Market (VEXMX)
1% Diversified Equity (VDEQX)

Traditional IRA (they accidentally omitted my REIT fund)

5 % Extended Market Index (VEAXX)
1% Developed Markets Index (VDMIX)

--------
Vanguard's was not as simple as the one suggested here by Landy:

Taxable:
43% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (ER .07%)
20% Vanguard FTSE All-World ex-US Index Fund Investor Shares (VFWIX) (ER .40%)

Tax Exempt:
Traditional IRA
5% Small Cap Value Index ( VISVX) (ER .22%)
5% Vanguard REIT Index (VGSIX) (ER .20%)

Thrift Savings Plan
27% G Fund – Gov't Securities Fund (0.015%)
-------

After my interview with the Vanguard advisor, this is the portfolio they finally recommended:

Taxable
13% Total International (VGTSX)
50% Total Stock Market Admiral (VTSAX)

Traditional IRA
4% REIT Index (VGSIX)
3% Total Stock Market Investor (VTSMX)
3% Total Bond Market (VBMFX)

Thrift Savings Plan
27% F- Fund (bond fund)


-------------

My original portfolio included the following in the taxable portion of my portfolio:

4% Vanguard Total International Stock (VGTSX) (ER .27%)
3% Vanguard Emerging Markets Stock Inv. (VEIEX) (ER .37%)
14% Health Care Fund Adm . (VGHAX) (ER .18%)
21% PRIMECAP Fund Adm. (VPMAX) (.ER .31%)
6% Mid Cap Index (VIMSX) (ER .21 %)
5% Small Cap Value Index ( VISVX) (ER .22%)

Questions:

1 -If I implement Landy's suggested portfolio and sell all of the above, will I be able to TLH and buy VFWIX immediately or will there be a wash sale? Are VFWIX and VGTSX substantially different?

2 -I will have to wait 31 days to buy back the VISVX in my IRA. Is that correct?

3 - I think I will still have capital gains even with TLH this year. If I plan to convert my Traditional IRA to a ROTH, will this income be figured into the $100,000 income threshold? Would it make sense to do only a partial conversion this year or wait until 2010 when the income restriction is lifted?

Any comments would be appreciated.

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Rick Ferri
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Post by Rick Ferri » Wed Nov 05, 2008 12:23 pm

Vanguard cannot be biased toward index funds or active management because they have both types of products and will not lean one way or the other. So all of their proposals will split between active funds and index funds in a hodgepodge slapped-together recommendation.

The question is, what would Jack Bogle recommend that you do? The answer is, use low cost index funds in every asset class. That is the advice you need.

Rick Ferri

RetiredInNH
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Post by RetiredInNH » Wed Nov 05, 2008 4:40 pm

When Vanguard did my financial plan they initially suggested a half index, half active portfolio. I told my planner that I wanted an all index portfolio, and a few days later he provided me with one.

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PiperWarrior
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Post by PiperWarrior » Wed Nov 05, 2008 7:44 pm

cynthia wrote:1 -If I implement Landy's suggested portfolio and sell all of the above, will I be able to TLH and buy VFWIX immediately or will there be a wash sale? Are VFWIX and VGTSX substantially different?
They don't have to be substantially different. They just have to be "not substantially identical". I hope they are not considered substantially identical, but I don't have an authoritative answer.
cynthia wrote:2 -I will have to wait 31 days to buy back the VISVX in my IRA. Is that correct?
Correct.
cynthia wrote:3 - I think I will still have capital gains even with TLH this year. If I plan to convert my Traditional IRA to a ROTH, will this income be figured into the $100,000 income threshold? Would it make sense to do only a partial conversion this year or wait until 2010 when the income restriction is lifted?
If I remember correctly, they have a couple of different definitions of MAGI depending on the purpose (Roth IRA contribuion v.s. Roth conversion). My memory is vague. Check with Publication 590.

I don't know your tax situation or whether you are in the accumulation phase or withdrawal phase), but if you retire with a sizable taxable account, you may be selling shares that you've recently purchased in your taxable account just before you retire, especially if you are using specific identification of shares. If that's the case, you have little taxable income except some dividends from your taxable holdings because sales of recently purchased shares are mostly return of capital, which is not taxed, so you may want to do a gradual Roth conversion to the extent that the conversion amount does not put you in a high tax bracket. I wouldn't rush for a Roth conversion. If you are retired and convert the amount equal to the standard/itemized deduction + personal exemption, then you are converting a Traditional IRA to a Roth IRA essentially tax free. You might convert a bit more as you see fit. I wouldn't use low brackets for capital gains.

Having said all this, blanket tax advice is often downright dangerous. Evaluate your situation carefully, consult a professional as needed, and do your best.

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fishnskiguy
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Re: Vanguard vs Boglehead advice

Post by fishnskiguy » Wed Nov 05, 2008 8:09 pm

cynthia wrote: 3 - I think I will still have capital gains even with TLH this year. If I plan to convert my Traditional IRA to a ROTH, will this income be figured into the $100,000 income threshold? Would it make sense to do only a partial conversion this year or wait until 2010 when the income restriction is lifted?

Any comments would be appreciated.
If I remember correctly, all money converted from TIRA to Roth will count as ordinary income, so you may want to make sure the conversion doesn't, in Emeril's words, "kick you up a notch" tax bracket wise.

However, the conversion dollars do not count in the income threshold for Roth contribution.

Chris
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Topic Author
cynthia
Posts: 10
Joined: Sat Oct 25, 2008 12:58 am

Post by cynthia » Thu Nov 06, 2008 10:38 am

Rick,

You said:
Vanguard cannot be biased toward index funds or active management because they have both types of products and will not lean one way or the other. So all of their proposals will split between active funds and index funds in a hodgepodge slapped-together recommendation.
I guess I understand their reluctance to show bias toward index or active funds in general. However, in my request for a portfolio review, I specifically stated I wanted to take the Health Care and PRIMECAP funds out of my taxable portfolio because the capital gains were kicking me into the next higher tax bracket.

They did recommend selling the active funds after my interview with them. I'm glad I had the benefit of all the advice on this forum prior to that interview though.

However, I'm still not sure why they did not recommend replacing the Total International with FTSE, All-World ex-US. As of yesterday, I still have a loss in the Total International and I'm going to need all the losses to offset the gains I'll realize by selling the PRIMECAP and Health Care.

I have a call into them to ask that question. I also made an appointment with a tax adviser at their recommendation.
The question is, what would Jack Bogle recommend that you do? The answer is, use low cost index funds in every asset class. That is the advice you need.
Very good advice. Thanks. :)

Topic Author
cynthia
Posts: 10
Joined: Sat Oct 25, 2008 12:58 am

Post by cynthia » Thu Nov 06, 2008 10:57 am

Chris and PiperWarrior,

Thank you both for your comments.

At the recommendation of the Vanguard adviser, I did make an appointment with a tax adviser for tomorrow.

I have a secure government pension with COLAs so I cannot envision a scenario where I would need the money in this IRA.

The primary reason I want to convert my TIRA to a Roth is to make it easier for my 41 year old daughter to inherit eventually. My thinking is that if I don't have to take distributions, it can continue to grow until she inherits it and she can take tax-free RMDs over her lifetime...or she can disclaim it and it will go to my granddaughter and grow even more. :D

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