Portfolio Puzzle and Optimization

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Topic Author
shyronnie
Posts: 2
Joined: Sun Jan 27, 2019 5:12 pm

Portfolio Puzzle and Optimization

Post by shyronnie »

Hello Bogleheads!
I appreciate all the amazing info on this form – I’ve learned quite a bit from you all. Before I discovered this community, I think I learned just enough about investing to be dangerous. I’m glad I started early but the more I learn the more I think I can optimize this whole thing a bit. I wanted to get your opinion and had a few specific questions, but I’ll just share my current situation first:

Emergency funds: Have 6 month of expenses in HYSA
Debt: no debt
Tax Filing Status: Single
Tax Rate: 24% Federal, 4.95% State
State of Residence: Illinois
Age: 27
Desired Asset allocation: 80% stocks / 10% bonds / 10% REIT
Desired International allocation: 20% (or more – need to do more research) of stocks

Total in investment accounts: 115,000
Total in savings account (2.2% APY): 74,000
Total in checking: 7,500
Monthly expenses (not including savings and investments): 3,000

Current Accounts and Assets (all Vanguard):
SEP IRA (company contributes 13% of each paycheck – about 1,000 a month)
33.54% Total Market Index/Equities VTSAX
16.45% Total International Index VTIAX
4.73% US treasury bond index VFISX
2.60% Money market fund

Roth IRA (max out every year)
11.35% Vanguard REIT Index VGSIX
4.20% Intermediate term treasury fund VFITX
4.25% Long term treasury fund VUSTX
1.45% Money market fund

Brokerage (add any extra cash to this monthly)
4.17% TIPS bond index VIPSX
17.26% Vanguard Emerging Markets Index Fund VEMAX
0.01% Money market fund
Also in this account is $23,000 invested in Vanguard’s Life Strategy Growth Fund

HSA (company contributes some, I max out the rest)
$7849.54 Vanguard Target Retirement 2055 VFFVX

Current allocation (not including Life Strategy fund [VASGX] or target fund [VFFVX] because the assumption is they already have the asset allocation built in)
67.24% Stocks
17.3% Bonds
11.35% Real Estate
4.06% Cash


Risk Tolerance:
I don't think my current allocation is aggressive enough. I’m 27, single, with a pretty stable job and am not a reactionary person. I’d prefer a higher risk/return approach since most of these investments are for retirement way down the road. Recommendations for rebalancing are appreciated.

Notes:
1. I took this investment strategy from “A Random Walk Down Wall Street” then added the Vanguard Life Strategy Growth to hold any excess investments and the Target Retirement fund in my HSA
2. I’d like to have ~70k for a down payment on a house in the next 5 years – was planning on keeping this in the HYSA but open to better ideas.

Questions:
1. I’d be happy moving my whole portfolio to the “Three Fund Portfolio” but wondering if the juice is worth the squeeze to make the transactions required to re-allocate what I currently have. I’d still have to make the math work across the 4 accounts and fight the contribution limits and fact that I can’t contribute to my SEP (only my company can).
2. I’d like to move 15k from my savings account into the markets. This would allow me to keep a 20k emergency fund and have ~5 years to save for that house down payment. This might help me get my asset allocation more optimized – any thoughts or recommendations for where to put this?
3. Taxes confuse me – but after reading the https://www.bogleheads.org/wiki/Tax-eff ... _placement it looks like I’m ok with my bond funds and REIT in my tax advantaged accounts, and probably not worth moving my international fund into my taxable account - agree?
4. Open to any other comments on the whole portfolio!

Thanks, Bogleheads!
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ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Portfolio Puzzle and Optimization

Post by ruralavalon »

Welcome to the forum :) .

It's good to see that you have good earnings with a stable job, an emergency fund, no debt, substantial savings and investments at age 27, and are using diversified index funds with low expense ratios.

It looks like you are off to a good start.


Asset allocation.
At age 27 I usually suggest around 20% in bonds.

I usually suggest around 20-30% of stocks in international stocks. Historically 20% of stocks in international stocks would have captured about 85% of the maximum diversification benefit, and 30% of stocks in international stocks would have captured about 99% of the maximum diversification benefit. Vanguard paper "Considerations for Investing in Non-U.S Equities", p. 6.


Funds and placement.
At age 27 I do not suggest a TIPS fund, at your age your inflation protection is your earning capacity and a relatively high stock allocation. Also the REIT fund gives some inflation protection.

In the taxable brokerage account I suggest using only very tax-effective large-cap or total market type stock index funds. Please see the wiki article "Tax-efficient Fund Placement". Examples of very tax-efficient stock index funds include 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%.

You are right that the bond fund and REIT fund should be in a tax-advantaged account, preferably a tax-deferred account like your SEP IRA.

The LifeStrategy Fund is a balanced fund, holding bonds, and is also not very tax-efficient and if used should be held in a tax-advantaged account.

So I suggest dropping the TIPS fund, and the LifeStrategy fund from your taxable brokerage account.


Savings.
Savings for a house in 5 years should not be in the stock market. Instead use very safe savings vehicles.

You can find a better rate than 2.2%. For federally insured savings accounts or federally insured short-term CDs see www.bankrate.com.

For a money market fund consider Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.48%.

You could consider Vanguard Ultra Short-term-term Bond Fund (VUBFX) current SEC Yield = 2.73%, or any Vanguard short-term bond fund.


Three-fund allocation.
It should not be very difficult to set up (no squeezing required) a three-fund portfolio among your retirement/long-term investing accounts.

Leaving out the savings for a home purchase, emergency fund or any other short-term goals, what percentage of the total portfolio is in each account?

How much (in dollars) will likely be contributed annually to each account (again leaving out any savings for short-term goals)?

What index funds are available in your HSA? Please give fund names, tickers and expense ratios?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
shyronnie
Posts: 2
Joined: Sun Jan 27, 2019 5:12 pm

Re: Portfolio Puzzle and Optimization

Post by shyronnie »

Sorry for the delayed response.
Portfolio percentages per account are as follows:
SEP - 43%
Roth - 15%
Brokrage - 35%
HSA - 7%

Monthly Contributions:
SEP - $1,100
Roth - $500 (will max out by the end of the year)
Brokrage - $500
HSA - $100 (already contributed so I will max out by the end of the year)

Available HSA Funds:
VIMAX - Vanguard Mid Cap Admiral - 0.05
VSMAX - Vanguard Small Cap Admiral - 0.05
VSEQX - Vanguard Strategic Equity Investor - 0.17
VTINX - Vanguard Target RET INC FD Investor CL - 0.12
VFFVX - Vanguard Target Retirement 2055 (and other years) - 0.15
VTIAX - Vanguard Total INTNL Stock Index Admiral - 0.11
VBTLX - Vanguard Total Bond Market Index Admiral - 0.05
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ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Portfolio Puzzle and Optimization

Post by ruralavalon »

shyronnie wrote: Sun Feb 17, 2019 2:18 pm Sorry for the delayed response.
Portfolio percentages per account are as follows:
SEP - 43%
Roth - 15%
Brokrage - 35%
HSA - 7%

Monthly Contributions:
SEP - $1,100
Roth - $500 (will max out by the end of the year)
Brokrage - $500
HSA - $100 (already contributed so I will max out by the end of the year)

Available HSA Funds:
VIMAX - Vanguard Mid Cap Admiral - 0.05
VSMAX - Vanguard Small Cap Admiral - 0.05
VSEQX - Vanguard Strategic Equity Investor - 0.17
VTINX - Vanguard Target RET INC FD Investor CL - 0.12
VFFVX - Vanguard Target Retirement 2055 (and other years) - 0.15
VTIAX - Vanguard Total INTNL Stock Index Admiral - 0.11
VBTLX - Vanguard Total Bond Market Index Admiral - 0.05
Fund placement.
The taxable account should use only very tax-efficient stock index funds. Please see the wiki article "Tax-efficient Fund Placement". Examples include Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX). Those funds are also suitable for any type of account.

Bond funds are not very tax-efficient so ordinarily should be in a tax-advantaged account, preferably a tax-deferred account like your SEP IRA or HSA.

To make portfolio management easy it's often better to have at least one large tax-advantaged account which contains all of the asset types. That could be your SEP IRA.


Example portfolio.
Here is an example portfolio which you could consider. This is a three fund type portfolio, but adds a REIT allocation. The asset allocation is 20% bonds, 20% international stocks, 10% REIT, and 50% other domestic stocks.

Taxable account @ Vanguard (35% of total; adds $6k/year)
25%, Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%
10%, Vanguard Total International Index Fund (VTIAX) ER 0.11%

SEP IRA @ Vanguard (43% of total; adds $13.2k/year)
10%%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
10%, Vanguard Real Estate Index Fund Admiral Shares (VGSLX) ER 0.12%
10%, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%
13%, Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%

Roth IRA @ Vanguard (15% of total; adds $6k/year)
15%, Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%

HSA (7% of total; adds $3.5k/year)
07%, Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%


Rebalancing.
Because the funds will grow at different and unpredictable rates you may need to.rebalance every few years, to keep your desired asset allocation. Please see the wiki article "Rebalancing". You can easily and simply rebalance by exchanging between funds inside your SEP IRA.

Avoid exchanging between funds in your taxable account, th a t can create unnecessary income liability.

. . . . .

I suggest that you read one or two books on general investing. Please see the wiki article "Books: Recommendations and Reviews".

If you have any questions just ask.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Quaestner
Posts: 327
Joined: Tue Jul 18, 2017 6:39 pm

Re: Portfolio Puzzle and Optimization

Post by Quaestner »

When I was younger, in my 30's, the Life Strategy Funds seemed like a smart strategy to me. However, as wealth increased, and knowledge increased, it became clear this wasn't optimal for a taxable account. Capital gains have built up and it's hard to do tax loss harvesting with it. Also, now for tax efficiency, I choose to emphasize bonds in sheltered accounts and emphasize stocks in taxable - but I still have that Life Strategy Fund hanging around. So, you might not want to add to it, and you might decide not to reinvest it's dividends and capital gains. It's just a small part of your portfolio and I'm just giving you my 2 cents on one part of it.
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Peter Foley
Posts: 5533
Joined: Fri Nov 23, 2007 9:34 am
Location: Lake Wobegon

Re: Portfolio Puzzle and Optimization

Post by Peter Foley »

Welcome to the forum.

ruralavalon wrote:
Funds and placement.
At age 27 I do not suggest a TIPS fund, at your age your inflation protection is your earning capacity and a relatively high stock allocation. Also the REIT fund gives some inflation protection.

In the taxable brokerage account I suggest using only very tax-effective large-cap or total market type stock index funds. Please see the wiki article "Tax-efficient Fund Placement". Examples of very tax-efficient stock index funds include 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%.

You are right that the bond fund and REIT fund should be in a tax-advantaged account, preferably a tax-deferred account like your SEP IRA.

The LifeStrategy Fund is a balanced fund, holding bonds, and is also not very tax-efficient and if used should be held in a tax-advantaged account.

So I suggest dropping the TIPS fund, and the LifeStrategy fund from your taxable brokerage account.
When I read through your list of holdings "Tax efficient fund placement" came to mind as well. I am on the same page as ruralavalon with respect to your portfolio.
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jakehefty17
Posts: 345
Joined: Fri May 11, 2018 6:48 pm
Location: New York

Re: Portfolio Puzzle and Optimization

Post by jakehefty17 »

ruralavalon wrote: Sun Feb 17, 2019 4:01 pm Example portfolio.
Here is an example portfolio which you could consider. This is a three fund type portfolio, but adds a REIT allocation. The asset allocation is 20% bonds, 20% international stocks, 10% REIT, and 50% other domestic stocks.

Taxable account @ Vanguard (35% of total; adds $6k/year)
25%, Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%
10%, Vanguard Total International Index Fund (VTIAX) ER 0.11%

SEP IRA @ Vanguard (43% of total; adds $13.2k/year)
10%%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
10%, Vanguard Real Estate Index Fund Admiral Shares (VGSLX) ER 0.12%
10%, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%
13%, Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%

Roth IRA @ Vanguard (15% of total; adds $6k/year)
15%, Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%

HSA (7% of total; adds $3.5k/year)
07%, Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%
This is great advice, a simple and logical approach to what you're trying to accomplish.

A few minor adjustments I'd suggest:

Taxable account @ Vanguard (35% of total; adds $6k/year)
20%, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%
15%, Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%

SEP IRA @ Vanguard (43% of total; adds $13.2k/year)
23%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
20%, Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%

Roth IRA @ Vanguard (15% of total; adds $6k/year)
10%, Vanguard Real Estate Index Fund Admiral Shares (VGSLX) ER 0.12%
05%, Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%

HSA (7% of total; adds $3.5k/year)
07%, Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%

Basically just moved all the international into the taxable account, moved all the bonds into the SEP IRA, and moved the REIT to the Roth IRA.
This gives your HSA more growth potential, and sometimes it helps to keep a specific fund class (ie Bonds, REIT, Int) in a specific account.
Can lead to ease in future rebalancing as well, as all accounts have total stock fund in it.
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski
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