Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

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joeschmo
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Joined: Thu Mar 23, 2017 2:37 pm

Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Tue Jan 28, 2020 3:47 pm

Hello,

I sold a business a decade years ago and have since been managing part of my money at Vanguard and part of it has been with a financial advisor (0.5% AUM). My Vanguard funds have done better than the professionally managed portfolio in almost every year, even the down years. Anyway, due not to my returns but to wanting to learn, simplify, and reduce costs, I'm going to DIY (with a CPA's help) and would love any feedback on my thinking.

Objectives
- Maintain current worst-case annual spending of ~$160k
- Increase charitable giving via donor-advised fund
- Someday invest in a future business or perhaps buy a house, but that's far away
- Don't lose to inflation/taxes/crashes - but don't go nuts trying to squeeze out every last drop of return

Risk Tolerance/Need
I believe I can tolerate a ~25% drop in value, but I don't need to take on that much risk. I have never invested through bad times and have zero data on how I would respond. I have always been wary of the stock market and even preferred savings accounts before I had this money. My main goal is not to lose money.

Debt: None
Tax: Single, no dependents and currently no plans to have any, 35% Federal, 9% state
State of Residence: CA
Age: mid-30s
Estate plan done
Insurance umbrella policy
Portfolio size: $20-30m; > 98% in taxable

CURRENT

Stocks 55% - 70/30 US/ex-US
Bonds 17% - 85% municipal, medium to high credit quality, mostly interim term
Cash 25% - FDIC-insured savings accounts
Other 3% real estate, etc

Current self-managed 3-fund portfolio (% = expense ratios)
VTSAX Vanguard Total Stock Market Index Fund Admiral Shares 0.04%
VTIAX Vanguard Total International Stock Index Fund Admiral Shares 0.11%
VWALX Vanguard High-Yield Tax-Exempt Fund Admiral Shares 0.09%
(Malkiel recommended VWALX but since then I've learned that it's unnecessarily risky.)

Legacy advisor-managed 17-fund portfolio (% = expense ratios)
DFEOX DFA US CORE EQUITY I 0.19%
DFIEX DFA INTERNATIONAL CORE EQUITY 0.30%
DFGEX DFA GLOBAL REAL ESTATE SEC PORTFOLIO 0.42%
DFEMX DFA EMERGING MARKETS PORTFOLIO 0.47%
...other funds I don't understand, as expensive as 1.05%

TARGET

Stocks 50%
Bonds 33%
Cash 17%

Stocks
Geography Risk: 60/40 US/ex-US is my target. Actual world balance is 55/45 but I'll get there eventually - it's already a huge rebalance. To get to this new target I will end up selling + donating large amount of appreciated DFA shares since cap gains are like 100%...

Bonds
Geography Risk: 70/30 US/ex-US is my target, but I don't know how to meet this tax efficiently in a taxable account.

Credit Risk: target only high credit quality

Issuer Risk: 50/50 government/municipal is my target
- Government portion: 100% treasury indexes
- Municipal portion: 50/50 national/California is my target. Given my tax bracket, municipal bonds make sense, but despite Bogle's portfolio to the contrary, I feel I shouldn't have all my eggs with one issuer. Even a Total Bond Market Index fund, though not tax efficient, seems to be higher yielding than short/medium treasuries? - see this post.

Duration Risk: 67/33/0 short/medium long is my current thinking. Vanguard PAS told me 30/40/30, at least for munis, but I prefer to take my risks on the stock side.

Cash
I have been keeping ~30 years of living expenses in cash, which seems ridiculous, even if studies (Bank of America / US Trust) have shown that double-digit cash percentages are not uncommon among people in my situation. The cash is all in FDIC-insured savings accounts. I could move to CDs (or CDARs, but even lower rates) but the interest rate difference isn't much. I want to get the cash allocation to 15% but am worried I should leave a cushion for tax.

Of course, moving away from cash but keeping 50% in stock effectively means transferring cash to bonds, which is hard to justify with current interest rates. I could just keep the money in cash...?

Custodian Risk
50/50 Vanguard/Fidelity is my target. Wish Vanguard's security were better. :(

Other Diversifiers
I considered REITs but Vanguard PAS said the total stock market is like 5% real estate anyway. Still, Malkiel and Swensen both recommend them and I wonder if I should include some. Energy and natural resources seem like they'd be covered by equities. In stocks, I prefer not to do any tilting and stay pure in my worship of market efficiency. Re gold I tend to agree with Swensen and Buffet that it doesn't make sense.

Security Selection
I'm looking at the standard ETFs and funds from the Bogleheads wiki. Thinking to fill the US Gov Bond allocation with short and interm term treasury funds; and in tax-advantaged, FIPDX Fidelity TIPS. In some cases, e.g. short and interm treasury index funds, Vanguard is over double the price of Fidelity alternatives. I wonder if rather than mirroring funds at Vanguard/Fidelity I should just go with the cheapest at either place? As another example, IXUS iShares Ex-US costs 50% more than FTIHX Fidelity Ex-US or SCHF Schwab Intl Equity ETF. I heard some rumors about tax inefficiency for FTIHX and it's hard to judge which security to select.

Maintenance Policy
– Take dividends as cash in order to later redirect them to underweighted classes during rebalancing
- Report using 5-year returns, since yearly returns are too noisy (idea from Vanguard PAS that I loved). Operationally I'm not sure if that's rolling 5-year windows?
- Rebalance anything 5%+ points out of whack:
1. Charitable giving – choose high expense ratio, high capital gains
2. Selling to rebalance – choose high expense ratio, low capital gains
3. Offset sales with losses, chosen by tax lot

Questions
1. The bond portfolio seems unnecessarily complicated, and yet I still don't feel I have enough diversification since all my eggs are in the US. I don't know how else to get good diversification without the complexity I have now, and I don't know how to get tax efficiency without losing diversity by being all in munis. I believe Vanguard's research that up to 20-30% foreign bonds reduced volatility - but with my high tax bracket, it's hard to justify not going for munis + treasuries. In retirement accts I was originally planning to hold Total Bond Mkt + Foreign Bond Mkt, in accordance with Vanguard's findings, but I have lately been thinking TIPS would make more sense given the very long time horizon? So, given a long time horizon and very little space in tax-advantaged accounts, what's the best thing to do to ensure the greatest diversification?

1a. For treasuries, Swensen suggests matching average maturity to the market. I'm wondering if there's any disadvantage to doing that for treasuries and/or munis instead of my more complex active approach above.

3. I think if the stock market crashed by 80% I'd really regret having taken on even the 50/50 stock/bond risk. I am pretty sure I wouldn't sell, but I'm worried it might be hard for me to rebalance - even if trying to rebalance now with unrealized gains is proving scary too. I'm wondering if others who have been through past crashes could share ways of estimating how one will feel when the actual crash happens. I have a feeling my eventual target allocation might be closer to 30/70, but then that is a huge rebalance (cap gains) to take on at once.

4. Re security selection, I'm frequently finding cheaper options than Vanguard in ETFs offered by iShares and Fidelity. ETFs already freak me out a bit due to added complexity (bid/ask spreads, limit orders) and I have heard of non-Vanguard funds having poorer index tracking or tax behavior. Is that something to be afraid of or should I just do whatever is cheapest?

5. For settlement cash I should use tax-exempt money funds - is that really possible on Vanguard/Fidelity? Didn't find an option for that, and I especially hate their 0.42% ER settlement fund.

6. Would any of this change if I spend significant time abroad in GBP or EUR? I have read some references to "investing in the currency you're spending" but have never understood the rationale.

7. My original plan was to grow investments in taxable, and contribute appreciated shares to the donor-advised fund (0.6% expenses) invested at 30/70 for capital preservation. But I could also try to fill the DAF with the kind of assets one would normally put in an IRA? Or even make the DAF 100% stock, removing from my overall stock allocation? I am really unclear how to think about this.

8. As I move from the advisor-managed funds to my own, I will have huge capital gains, mainly from DFA appreciated US stock. Despite my hatred of 0.4% expense ratios, in terms of capital gains, I wouldn't break even on the difference for a decade in some cases. Am I missing anything in that calculation?

9. Anything else I'm missing? I realize I am unbelievably fortunate and I could make lots of dumb decisions and still have a lot of money, but I just want to do this right and not squander good fortune.
Last edited by joeschmo on Sat Feb 01, 2020 4:11 am, edited 4 times in total.

retired@50
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by retired@50 » Tue Jan 28, 2020 5:00 pm

joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
Anyway, due not to my returns but to wanting to learn, simplify, and reduce costs, I'm going to DIY (with a CPA's help) and would love any feedback on my thinking.

5. For settlement cash I should use tax-exempt money funds - is that really possible on Vanguard/Fidelity? Didn't find an option for that, and I especially hate their 0.42% ER settlement fund.


9. Anything else I'm missing? I realize I am unbelievably fortunate and I could make lots of dumb decisions and still have a lot of money, but I just want to do this right and not squander good fortune.
For question 5 above, Vanguard offers a California Municipal Money Market Fund (VCTXX) that might suit you.

For question 9 above, Have you considered moving out of California? That could save you 9% on your taxes. That alone would easily cover the few basis points here and there that you seem to be fretting about with regard to ETFs and mutual funds from Vanguard or Fidelity.

Regards,
This is one person's opinion. Nothing more.

Topic Author
joeschmo
Posts: 177
Joined: Thu Mar 23, 2017 2:37 pm

Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Tue Jan 28, 2020 6:00 pm

retired@50 wrote:
Tue Jan 28, 2020 5:00 pm
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
Anyway, due not to my returns but to wanting to learn, simplify, and reduce costs, I'm going to DIY (with a CPA's help) and would love any feedback on my thinking.

5. For settlement cash I should use tax-exempt money funds - is that really possible on Vanguard/Fidelity? Didn't find an option for that, and I especially hate their 0.42% ER settlement fund.


9. Anything else I'm missing? I realize I am unbelievably fortunate and I could make lots of dumb decisions and still have a lot of money, but I just want to do this right and not squander good fortune.
For question 5 above, Vanguard offers a California Municipal Money Market Fund (VCTXX) that might suit you.

For question 9 above, Have you considered moving out of California? That could save you 9% on your taxes. That alone would easily cover the few basis points here and there that you seem to be fretting about with regard to ETFs and mutual funds from Vanguard or Fidelity.
Thanks for your reply and the VCTXX tip. Unfortunately my friends in CA are reason enough not to move away. Re a few bps expense ratio / tax implications, I'd just like to buy and hold these funds for a long time and I'm worried that I'll choose wrong and regret it later. Also, .05 vs .10 is just a few bps but one's double the price of the other.

retired@50
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by retired@50 » Wed Jan 29, 2020 2:22 pm

joeschmo wrote:
Tue Jan 28, 2020 6:00 pm
retired@50 wrote:
Tue Jan 28, 2020 5:00 pm
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
Anyway, due not to my returns but to wanting to learn, simplify, and reduce costs, I'm going to DIY (with a CPA's help) and would love any feedback on my thinking.

5. For settlement cash I should use tax-exempt money funds - is that really possible on Vanguard/Fidelity? Didn't find an option for that, and I especially hate their 0.42% ER settlement fund.


9. Anything else I'm missing? I realize I am unbelievably fortunate and I could make lots of dumb decisions and still have a lot of money, but I just want to do this right and not squander good fortune.
For question 5 above, Vanguard offers a California Municipal Money Market Fund (VCTXX) that might suit you.

For question 9 above, Have you considered moving out of California? That could save you 9% on your taxes. That alone would easily cover the few basis points here and there that you seem to be fretting about with regard to ETFs and mutual funds from Vanguard or Fidelity.
Thanks for your reply and the VCTXX tip. Unfortunately my friends in CA are reason enough not to move away. Re a few bps expense ratio / tax implications, I'd just like to buy and hold these funds for a long time and I'm worried that I'll choose wrong and regret it later. Also, .05 vs .10 is just a few bps but one's double the price of the other.
I guess my age is showing.
I come from the old days back when one mutual fund cost 10 or 20 times more than today's index funds. Having the ability to put an entire portfolio together for under 10 bps is a relatively new thing...

Regards,
This is one person's opinion. Nothing more.

Topic Author
joeschmo
Posts: 177
Joined: Thu Mar 23, 2017 2:37 pm

Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Thu Jan 30, 2020 8:53 pm

Just wanted to bump this in case anyone else had feedback on my thoughts and questions above. Thank you!

MJS
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by MJS » Thu Jan 30, 2020 10:02 pm

Have Vanguard move all the investments to your account there. Hire Vanguard's Personal Advisor Service for 18 months (2 tax years) -- at 0.3% I think. Have them create your preferred allocation. Vanguard knows how to do what you want without unfortunate side effects. Selling lots of bits and pieces in the right order is far more complicated than managing a portfolio.

I'd put half my 30 years cash in a 2035 target retirement fund to manage inflation and the other 15 years in a high interest savings account at Red Neck Bank (because the name amuses me.)

Have fun!

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Wiggums
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by Wiggums » Thu Jan 30, 2020 10:16 pm

Vanguard Advisory fee

The annual advisory service fee paid to VAI for clients enrolled in the ongoing advised service will be as follows:
0.30% on Portfolios below $5 million
0.20% on Portfolios from $5 million to below $10 million
0.10% on Portfolios from $10 million to below $25 million 0.05% on Portfolios of $25 million and above

Topic Author
joeschmo
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Thu Jan 30, 2020 11:36 pm

Thanks for the replies! I talked to PAS but unfortunately they would only manage the Vanguard piece. I am looking to split between Vanguard and Fidelity, and Fidelity is where I have the complex holdings from the 17-fund portfolio (AUM advisor).

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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by retired@50 » Fri Jan 31, 2020 12:28 am

joeschmo wrote:
Thu Jan 30, 2020 11:36 pm
Thanks for the replies! I talked to PAS but unfortunately they would only manage the Vanguard piece. I am looking to split between Vanguard and Fidelity, and Fidelity is where I have the complex holdings from the 17-fund portfolio (AUM advisor).
I'm not sure I understand why you feel the need to split the money between two custodians. You mention "custodian risk" in your original post, but what are the security concerns at Vanguard? If you held all your money at one place, you'd likely get better treatment.

Regards,
This is one person's opinion. Nothing more.

Topic Author
joeschmo
Posts: 177
Joined: Thu Mar 23, 2017 2:37 pm

Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Fri Jan 31, 2020 12:55 am

retired@50 wrote:
Fri Jan 31, 2020 12:28 am
joeschmo wrote:
Thu Jan 30, 2020 11:36 pm
Thanks for the replies! I talked to PAS but unfortunately they would only manage the Vanguard piece. I am looking to split between Vanguard and Fidelity, and Fidelity is where I have the complex holdings from the 17-fund portfolio (AUM advisor).
I'm not sure I understand why you feel the need to split the money between two custodians. You mention "custodian risk" in your original post, but what are the security concerns at Vanguard? If you held all your money at one place, you'd likely get better treatment.
I'd love to have everything in one place but elected a multi-custodian approach due to mainly to gross lack of security at Vanguard:

viewtopic.php?f=11&t=299851&p=4968706
viewtopic.php?f=10&t=299834&p=4963535

I also admit to perhaps irrational concern about Vanguard safety

Particularly with such a large portfolio, it is just scary having all my eggs in one basket, especially a basket with a subotimal lock. Vanguard PAS confirmed that it's quite common for their higher-net-worth clients to split assets among a few different custodians.

The other option would of course be to house everything at Fidelity, but I think they do a very immoral thing in their web design by hiding expense ratios from the user. Vanguard shows you ERs right in the list of holdings, whereas with Fidelity you have to really hunt around. I asked Fidelity how to show them and they said it was impossible. I'm sure people are more likely to stay with high-ER Fidelity funds if they can't see the expense ratio!

heyyou
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by heyyou » Fri Jan 31, 2020 2:26 am

I would transfer your DFA funds to Evanson Asset Management (EAM) to avoid the cap gains of selling them. You can transfer any stock funds to TDA brokerage which is the broker that EAM uses. EAM charges $2500 a year for managing a portfolio of DFA index funds, with you choosing a risk tolerance that determines your ratio of stock/bond funds. Calculate what the new management expense % will be relative to your portfolio size there, it will be far less than what you have been paying. Expect to slowly sell your appreciated stock fund shares each year, relative to what suits your tax bracket. Your EAM rep, who will be a CFP, will help you choose what to sell for keeping your taxes low, if ask to do so.

Here at Bogleheads, some believe we get paid to tolerate the fluctuations of the stock market, which we limit by the relative size of our portfolios' money market and bond fund holdings to our stock fund holdings. It isn't about no losses, it is about limiting our portfolio losses to a tolerable % of portfolio amount, when they do occur, AND not ever deciding to sell large amounts of stock fund shares at depressed prices. As you mentioned, you could spend from only your money market and bond holdings for many years while waiting for your stock funds to recover, after a stock market crash. The longest bad time to own stock funds was longer than the Depression, it was during the years of 1966 to 1982 when there was acute inflation with no real stock gains.

Note the significant difference between tolerating some level of fluctuation in portfolio value, and actually selling off any of those stock fund shares at depressed prices, because you just can't stand any further losses. Bear in mind, what you paid of your stock shares a decade ago, instead of you watching the losses from their recent peak prices just before the next stock market crash. The media need sensational headlines so they will present the worst view of any situation.
Good luck to you on getting your changes made.

sycamore
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by sycamore » Fri Jan 31, 2020 8:59 am

I'll try to answer some of the questions...
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
1. The bond portfolio seems unnecessarily complicated, and yet I still don't feel I have enough diversification since all my eggs are in the US. I don't know how else to get good diversification without the complexity I have now, and I don't know how to get tax efficiency without losing diversity by being all in munis. I believe Vanguard's research that up to 20-30% foreign bonds reduced volatility - but with my high tax bracket, it's hard to justify not going for munis + treasuries. In retirement accts I was originally planning to hold Total Bond Mkt + Foreign Bond Mkt, in accordance with Vanguard's findings, but I have lately been thinking TIPS would make more sense given the very long time horizon? So, given a long time horizon and very little space in tax-advantaged accounts, what's the best thing to do to ensure the greatest diversification?

1a. For treasuries, Swensen suggests matching average maturity to the market. I'm wondering if there's any disadvantage to doing that for treasuries and/or munis instead of my more complex active approach above.
From what I've read, geographical diversification doesn't seem to bring all that much benefit. All US fixed income is good. Your 50/50 Treasury/muni allocation is great.

As far as duration goes, your 67/33/0 (short/med/long) is good if that's what you're comfortable with. If 30/40/30 would cause lost sleep (or whatever), then it's not worth it.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
3. I think if the stock market crashed by 80% I'd really regret having taken on even the 50/50 stock/bond risk. I am pretty sure I wouldn't sell, but I'm worried it might be hard for me to rebalance - even if trying to rebalance now with unrealized gains is proving scary too. I'm wondering if others who have been through past crashes could share ways of estimating how one will feel when the actual crash happens. I have a feeling my eventual target allocation might be closer to 30/70, but then that is a huge rebalance (cap gains) to take on at once.
For the dot-com bust and bear market in 2000-2002, I looked at my monthly statements (paper statements was a thing back then :) ) and said "how about that - the balance is down again. Oh well." Repeat that, for many months. It did get to be frustrating and there was some regret (especially at how much I'd had in various individual stocks that flew high and dropped even farther. But I held on with the hope that it would all come back. That's because I fully adopted the "buy and hold" approach when I started investing. I truly believed the people (and Vanguard) who said stocks will rise and fall and it'll be hard, but just stick with it through thick and thin. That attitude helped me, but not everyone has it.

By the time of the 2007-2009 crash, I was busy with family/life and wasn't checking my portfolio balance, just stuck to bi-monthly 401k contributions and IRA contributions. Periodically rebalance/tax-loss harvest, and didn't worry too much about it.

So think about how you felt during December 2018 when we had a drop of ~20% from the recent highs. Then imagine feeling that for several months in a row, or maybe a whole year. If you feel like you'd bail on the stock holdings at that point, then your stock AA was too high.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
4. Re security selection, I'm frequently finding cheaper options than Vanguard in ETFs offered by iShares and Fidelity. ETFs already freak me out a bit due to added complexity (bid/ask spreads, limit orders) and I have heard of non-Vanguard funds having poorer index tracking or tax behavior. Is that something to be afraid of or should I just do whatever is cheapest?
Personally I think all the major players (Fidelity, iShares, Schwab, Vanguard, State Street) have good processes in place to make sure their funds follow the relevant indexes. They'd lose a lot of credibility if they had high tracking error.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
5. For settlement cash I should use tax-exempt money funds - is that really possible on Vanguard/Fidelity? Didn't find an option for that, and I especially hate their 0.42% ER settlement fund.
I don't know about at Fidelity. At Vanguard, the settlement fund has to be Federal Money Market Fund. You would hold the tax-exempt MMF separately. You can buy/sell a Vanguard bond or stock fund by simply "exchanging" from/to the tax-exempt MMF. But I think to buy/sell ETFs and non-Vanguard funds means going through the Federal MMF since it's the settlement fund.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
7. My original plan was to grow investments in taxable, and contribute appreciated shares to the donor-advised fund (0.6% expenses) invested at 30/70 for capital preservation. But I could also try to fill the DAF with the kind of assets one would normally put in an IRA? Or even make the DAF 100% stock, removing from my overall stock allocation? I am really unclear how to think about this.
Side note: from what I remember, 0.6% ER sounds high for the DAF (at least for Vanguard Charitable or Fidelity's DAF). Maybe double check that ER.

I don't count my DAF as part of my overall asset allocation. For me the charitable giving has its own investment goals and horizon, separate from my retirement portfolio. Ditto for 529. Some people like to consider all those things together in one AA but that just doesn't feel right to me. Does it help clarify things if you consider charitable contributions a yearly "line item" or expense, and then deal with the DAF AA separately.

30/70 is good - it allows for some growth to keep up with inflation. Some people argue that charitable contributions should go to the ultimate recipient (from the DAF) as soon as possible (because there's a pressing problem to be dealt with ASAP). That suggests a 0/100 AA, or even an 100% cash/short-term bonds allocation.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
9. Anything else I'm missing? I realize I am unbelievably fortunate and I could make lots of dumb decisions and still have a lot of money, but I just want to do this right and not squander good fortune.
Some people concerned about losing a fortune will hedge things by buying put options. Basically it's insurance. There are a few posts about that topic, might be worth your time. I don't use options myself; I just adjust my AA so I have enough in fixed income.

Topic Author
joeschmo
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Fri Jan 31, 2020 4:03 pm

heyyou wrote:
Fri Jan 31, 2020 2:26 am
I would transfer your DFA funds to Evanson Asset Management (EAM) to avoid the cap gains of selling them. You can transfer any stock funds to TDA brokerage which is the broker that EAM uses. EAM charges $2500 a year for managing a portfolio of DFA index funds, with you choosing a risk tolerance that determines your ratio of stock/bond funds. Calculate what the new management expense % will be relative to your portfolio size there, it will be far less than what you have been paying. Expect to slowly sell your appreciated stock fund shares each year, relative to what suits your tax bracket. Your EAM rep, who will be a CFP, will help you choose what to sell for keeping your taxes low, if ask to do so.
Hey heyyou, thank you for the reply! $2.5k is definitely less than I've been paying, but are there any special DFA-specific considerations in figuring out what to sell? My thinking was:

- Donate very highly appreciated shares
- Sell less-appreciated DFA shares
- Keep DFA structure of Ex-US Developed split off from US Developed, since the fee savings in moving to Vanguard wouldn't outweigh the capital gains tax for like 30 years haha.
- Keep anything with short-term capital gains
- Perhaps keep DFA real estate since despite it not being in my allocation, Malkiel and Swensen both recommend it and perhaps it wouldn't hurt to be 5% real estate.
heyyou wrote:
Fri Jan 31, 2020 2:26 am
Here at Bogleheads, some believe we get paid to tolerate the fluctuations of the stock market, which we limit by the relative size of our portfolios' money market and bond fund holdings to our stock fund holdings. It isn't about no losses, it is about limiting our portfolio losses to a tolerable % of portfolio amount, when they do occur, AND not ever deciding to sell large amounts of stock fund shares at depressed prices. As you mentioned, you could spend from only your money market and bond holdings for many years while waiting for your stock funds to recover, after a stock market crash. The longest bad time to own stock funds was longer than the Depression, it was during the years of 1966 to 1982 when there was acute inflation with no real stock gains.

Note the significant difference between tolerating some level of fluctuation in portfolio value, and actually selling off any of those stock fund shares at depressed prices, because you just can't stand any further losses. Bear in mind, what you paid of your stock shares a decade ago, instead of you watching the losses from their recent peak prices just before the next stock market crash. The media need sensational headlines so they will present the worst view of any situation.
Good luck to you on getting your changes made.
Thanks for the luck and the perspective on limiting loss of value. I have tried to be very focused on Vanguard's historical info of "largest loss since 1926" for various stock/bond allocations and that is how I arrived at 50/50 - I felt I could tolerate the "largest loss" at 60/40 but thought I should come down a notch in risk tolerance. But imagining a decline in value is different from living it, and every time that old thread "Stocks in freefall" comes up, I get a little anxious!

Topic Author
joeschmo
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Fri Jan 31, 2020 4:32 pm

sycamore wrote:
Fri Jan 31, 2020 8:59 am
I'll try to answer some of the questions...
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
1. The bond portfolio seems unnecessarily complicated, and yet I still don't feel I have enough diversification since all my eggs are in the US. I don't know how else to get good diversification without the complexity I have now, and I don't know how to get tax efficiency without losing diversity by being all in munis. I believe Vanguard's research that up to 20-30% foreign bonds reduced volatility - but with my high tax bracket, it's hard to justify not going for munis + treasuries. In retirement accts I was originally planning to hold Total Bond Mkt + Foreign Bond Mkt, in accordance with Vanguard's findings, but I have lately been thinking TIPS would make more sense given the very long time horizon? So, given a long time horizon and very little space in tax-advantaged accounts, what's the best thing to do to ensure the greatest diversification?

1a. For treasuries, Swensen suggests matching average maturity to the market. I'm wondering if there's any disadvantage to doing that for treasuries and/or munis instead of my more complex active approach above.
From what I've read, geographical diversification doesn't seem to bring all that much benefit. All US fixed income is good. Your 50/50 Treasury/muni allocation is great.

As far as duration goes, your 67/33/0 (short/med/long) is good if that's what you're comfortable with. If 30/40/30 would cause lost sleep (or whatever), then it's not worth it.
Thanks so much for the detailed reply, sycamore - really grateful to you for taking the time to help a random stranger!

Your comment that geographical diversification and doesn't seem to bring all that much benefit inspired me to try to measure the diversification benefit in terms of my other decisions. It seems that asset correlation is the best way to see that (even though I understand past performance ≠ future):

VTI Total Stock Market vs VTABX Total Bond = -0.04
VTI Total Stock Market vs MUB iShares National Muni Bond ETF = -0.08
VTI Total Stock Market vs SHY iShares 1-3 Year Treasury Bond ETF = -0.26
VTI Total Stock Market vs TLT iShares 20+ Year Treasury Bond ETF = -0.48

I'm no statistician, but those results seem to demonstrate tremendous diversification power of long-term treasuries, as Swensen mentions. If that negative correlation continues into the future, then I'd think long-term treasuries would actually help me sleep better at night than short-term ones, and I could imagine putting everything into long-term treasuries.

What's the argument against that that leads to Buffett and Bogle going for short and intermediate, respectively?
sycamore wrote:
Fri Jan 31, 2020 8:59 am
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
3. I think if the stock market crashed by 80% I'd really regret having taken on even the 50/50 stock/bond risk. I am pretty sure I wouldn't sell, but I'm worried it might be hard for me to rebalance - even if trying to rebalance now with unrealized gains is proving scary too. I'm wondering if others who have been through past crashes could share ways of estimating how one will feel when the actual crash happens. I have a feeling my eventual target allocation might be closer to 30/70, but then that is a huge rebalance (cap gains) to take on at once.
For the dot-com bust and bear market in 2000-2002, I looked at my monthly statements (paper statements was a thing back then :) ) and said "how about that - the balance is down again. Oh well." Repeat that, for many months. It did get to be frustrating and there was some regret (especially at how much I'd had in various individual stocks that flew high and dropped even farther. But I held on with the hope that it would all come back. That's because I fully adopted the "buy and hold" approach when I started investing. I truly believed the people (and Vanguard) who said stocks will rise and fall and it'll be hard, but just stick with it through thick and thin. That attitude helped me, but not everyone has it.

By the time of the 2007-2009 crash, I was busy with family/life and wasn't checking my portfolio balance, just stuck to bi-monthly 401k contributions and IRA contributions. Periodically rebalance/tax-loss harvest, and didn't worry too much about it.

So think about how you felt during December 2018 when we had a drop of ~20% from the recent highs. Then imagine feeling that for several months in a row, or maybe a whole year. If you feel like you'd bail on the stock holdings at that point, then your stock AA was too high.
Thanks for the story about 2007-09 and the reminder that we had a little of this in Dec 2018. In Dec 2018 I too was busy with family/life and wasn't checking my balance (even to rebalance...) and remember seeing a report and thinking "wow, that's less money than I had before...," but my quality of sleep was completely unaffected and my gut felt unpunched.
sycamore wrote:
Fri Jan 31, 2020 8:59 am
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
4. Re security selection, I'm frequently finding cheaper options than Vanguard in ETFs offered by iShares and Fidelity. ETFs already freak me out a bit due to added complexity (bid/ask spreads, limit orders) and I have heard of non-Vanguard funds having poorer index tracking or tax behavior. Is that something to be afraid of or should I just do whatever is cheapest?
Personally I think all the major players (Fidelity, iShares, Schwab, Vanguard, State Street) have good processes in place to make sure their funds follow the relevant indexes. They'd lose a lot of credibility if they had high tracking error.
Thanks. What about the complexity of ETF trading? I've heard of folks doing limit orders and I am a bit afraid of Fidelity charging me hidden fees etc.
sycamore wrote:
Fri Jan 31, 2020 8:59 am
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
5. For settlement cash I should use tax-exempt money funds - is that really possible on Vanguard/Fidelity? Didn't find an option for that, and I especially hate their 0.42% ER settlement fund.
I don't know about at Fidelity. At Vanguard, the settlement fund has to be Federal Money Market Fund. You would hold the tax-exempt MMF separately. You can buy/sell a Vanguard bond or stock fund by simply "exchanging" from/to the tax-exempt MMF. But I think to buy/sell ETFs and non-Vanguard funds means going through the Federal MMF since it's the settlement fund.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
7. My original plan was to grow investments in taxable, and contribute appreciated shares to the donor-advised fund (0.6% expenses) invested at 30/70 for capital preservation. But I could also try to fill the DAF with the kind of assets one would normally put in an IRA? Or even make the DAF 100% stock, removing from my overall stock allocation? I am really unclear how to think about this.
Side note: from what I remember, 0.6% ER sounds high for the DAF (at least for Vanguard Charitable or Fidelity's DAF). Maybe double check that ER.

I don't count my DAF as part of my overall asset allocation. For me the charitable giving has its own investment goals and horizon, separate from my retirement portfolio. Ditto for 529. Some people like to consider all those things together in one AA but that just doesn't feel right to me. Does it help clarify things if you consider charitable contributions a yearly "line item" or expense, and then deal with the DAF AA separately.

30/70 is good - it allows for some growth to keep up with inflation. Some people argue that charitable contributions should go to the ultimate recipient (from the DAF) as soon as possible (because there's a pressing problem to be dealt with ASAP). That suggests a 0/100 AA, or even an 100% cash/short-term bonds allocation.
Ah duh, of course I should view the DAF as a separate allocation with a shorter-term time horizon. I'll start reading up on short-term time horizons. Only exception is if I end up contributing a few million dollars of shares there and have trouble using it up within a year or two.

I wish I were wrong about the DAF expense ratio but:

https://www.fidelitycharitable.org/givi ... costs.html
https://www.vanguardcharitable.org/givi ... d-minimums

Actually I'm partly wrong! Vanguard's fees decrease for the 500k-$29M range. Golly, I wish I needed to find out what their fee for $100M+ donations is. That would be so fun to be able to donate that much money! Anyway, looks like I need to put everything at Vanguard, even though their site makes it a bit harder to donate. Thanks very much for the tip.
sycamore wrote:
Fri Jan 31, 2020 8:59 am
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
9. Anything else I'm missing? I realize I am unbelievably fortunate and I could make lots of dumb decisions and still have a lot of money, but I just want to do this right and not squander good fortune.
Some people concerned about losing a fortune will hedge things by buying put options. Basically it's insurance. There are a few posts about that topic, might be worth your time. I don't use options myself; I just adjust my AA so I have enough in fixed income.
I'm totally with you on handling this through AA.

Thanks again for the thoughtful replies!

Topic Author
joeschmo
Posts: 177
Joined: Thu Mar 23, 2017 2:37 pm

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Fri Jan 31, 2020 5:06 pm

Re the diversifying power of various treasury durations, seems alas that this is quite complicated...

viewtopic.php?f=10&t=276568
viewtopic.php?t=141749#p2100970
viewtopic.php?f=10&t=141749&start=50#p2539499

I admit I haven't taken the time to understand all the math in those threads.

If I were 100% long-term treasuries on the bond side - no munis at all, even though it is a taxable portfolio and I'm in a high bracket - then in 2008 I'd have seen 50% drop in US equities but 50% increase in treasury value! Of course, I'd have to cope at some point then with a big drop in treasury value at some point, but if it is accompanied by a big increase in stocks, I shouldn't care...at least rationally speaking?

Inflation risk seems to be the biggest concern:

viewtopic.php?t=184392#p2796828

Since TIPS can't protect effectively against that in taxable portfolios,* seems I'm stuck with just keeping a higher equity allocation than I might want?

* or can they: viewtopic.php?t=214433#p3385042

Topic Author
joeschmo
Posts: 177
Joined: Thu Mar 23, 2017 2:37 pm

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Fri Jan 31, 2020 5:24 pm

From Swedroe (below). Given my long time horizon, I guess the big risk is inflation, but I need to read more to understand why that implies short-term for bonds....

https://www.google.com/books/edition/Th ... =en&gbpv=1

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sycamore
Posts: 676
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Re: Large portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by sycamore » Fri Jan 31, 2020 5:45 pm

joeschmo wrote:
Fri Jan 31, 2020 4:32 pm
Your comment that geographical diversification and doesn't seem to bring all that much benefit inspired me to try to measure the diversification benefit in terms of my other decisions. It seems that asset correlation is the best way to see that (even though I understand past performance ≠ future):

VTI Total Stock Market vs VTABX Total Bond = -0.04
VTI Total Stock Market vs MUB iShares National Muni Bond ETF = -0.08
VTI Total Stock Market vs SHY iShares 1-3 Year Treasury Bond ETF = -0.26
VTI Total Stock Market vs TLT iShares 20+ Year Treasury Bond ETF = -0.48

I'm no statistician, but those results seem to demonstrate tremendous diversification power of long-term treasuries, as Swensen mentions. If that negative correlation continues into the future, then I'd think long-term treasuries would actually help me sleep better at night than short-term ones, and I could imagine putting everything into long-term treasuries.

What's the argument against that that leads to Buffett and Bogle going for short and intermediate, respectively?
^^ I agree there are good reasons to go long. In addition to those correlations, the other basic idea is to duration match liabilities. For younger investors, that means using long-term bonds. Which is occasionally recommended around here.

Not to speak for either Mr B. (BTW, Bogle suggested 50% corporates), but I think many people simply want their bonds to be an anchor when the storm's a-blowing. Minimizing volatility is really important. They (and I) are willing to sacrifice some long-term return and take on re-investment risk in order to avoid the potentially large losses when "rates rise". NAV changes of +/- 15% or more is too much choppy waters.
joeschmo wrote:
Fri Jan 31, 2020 4:32 pm
sycamore wrote:
Fri Jan 31, 2020 8:59 am
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
4. Re security selection, I'm frequently finding cheaper options than Vanguard in ETFs offered by iShares and Fidelity. ETFs already freak me out a bit due to added complexity (bid/ask spreads, limit orders) and I have heard of non-Vanguard funds having poorer index tracking or tax behavior. Is that something to be afraid of or should I just do whatever is cheapest?
Personally I think all the major players (Fidelity, iShares, Schwab, Vanguard, State Street) have good processes in place to make sure their funds follow the relevant indexes. They'd lose a lot of credibility if they had high tracking error.
Thanks. What about the complexity of ETF trading? I've heard of folks doing limit orders and I am a bit afraid of Fidelity charging me hidden fees etc.
^^ Just a few basic points about ETF trading. (1) You get to experience intra-day volatility and maybe some regret if you buy at noon but the ETF drops 2% the rest of the day. (2) You'll probably use mainstream ETFs, but if you go for goofy "3x Leveraged Small-Cap Value Bitcoin Cannabis" funds, it's likely to be shut down after a couple years by the provider because there's not enough trading volume. (3) Use a limit order to buy or sell, and set your limit price to within a 1 or 2 pennies of the current market price. That way you know the worst you'll pay (or get) and your order will be filled.

No special hidden fees or gotchas that I know of. Make sure your settlement fund has enough funds and place your order; typically an order gets filled quickly (unless you're dealing with a super huge order, or your limit price is far off). Settlement is T+2 now I believe, not T+1 like mutual funds.
joeschmo wrote:
Fri Jan 31, 2020 4:32 pm
I wish I were wrong about the DAF expense ratio but:

https://www.fidelitycharitable.org/givi ... costs.html
https://www.vanguardcharitable.org/givi ... d-minimums

Actually I'm partly wrong! Vanguard's fees decrease for the 500k-$29M range. Golly, I wish I needed to find out what their fee for $100M+ donations is. That would be so fun to be able to donate that much money! Anyway, looks like I need to put everything at Vanguard, even though their site makes it a bit harder to donate. Thanks very much for the tip.
^^ That sure would be fun! And it would be doing immense good with your good fortune :)

You're right about the ERs, I somehow thought they were lower. Another reason to make donations from the DAF rather quickly rather than paying .60% or whatever.
joeschmo wrote:
Fri Jan 31, 2020 4:32 pm
Thanks again for the thoughtful replies!
You're welcome, best of luck!

Topic Author
joeschmo
Posts: 177
Joined: Thu Mar 23, 2017 2:37 pm

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Tue Feb 04, 2020 5:33 pm

Hi all, in case it helps others, I just wanted to post some updates:
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
1. The bond portfolio seems unnecessarily complicated, and yet I still don't feel I have enough diversification since all my eggs are in the US. I don't know how else to get good diversification without the complexity I have now, and I don't know how to get tax efficiency without losing diversity by being all in munis. I believe Vanguard's research that up to 20-30% foreign bonds reduced volatility - but with my high tax bracket, it's hard to justify not going for munis + treasuries. In retirement accts I was originally planning to hold Total Bond Mkt + Foreign Bond Mkt, in accordance with Vanguard's findings, but I have lately been thinking TIPS would make more sense given the very long time horizon? So, given a long time horizon and very little space in tax-advantaged accounts, what's the best thing to do to ensure the greatest diversification?

1a. For treasuries, Swensen suggests matching average maturity to the market. I'm wondering if there's any disadvantage to doing that for treasuries and/or munis instead of my more complex active approach above.
I'm beginning to accept having all my bond eggs in the US. Swensen's advice against munis is mainly around call options and credit risk; there are funds like BMBIX that are very high quality munis but at 3x the cost of Vanguard. Vanguard's actively managed fund goes below AA credit rating but I am considering just accepting that given the low cost...

So I'm considering:

- 50/50 Treasury/munis
- Duration curve matched to the market for as much maturity diversification as possible. That way I have let the market decide for me. :) For treasuries that looks like about 35/50/15 short/interm/long. For munis looks like about 30/40/30, as Vanguard PAS recommends, though that sacrifices the long end a bit. That means there is less volatility in that individual fund but higher volatility in the whole pie, but I might have to live with that.

I have thought long and hard about just going for interm term and not having so many separate funds but it seems too bad to put all my eggs in the interm-term basket and miss out on long-term treasury diversification benefit + short-term stability and lack of interest rate risk.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
3. I think if the stock market crashed by 80% I'd really regret having taken on even the 50/50 stock/bond risk. I am pretty sure I wouldn't sell, but I'm worried it might be hard for me to rebalance - even if trying to rebalance now with unrealized gains is proving scary too. I'm wondering if others who have been through past crashes could share ways of estimating how one will feel when the actual crash happens. I have a feeling my eventual target allocation might be closer to 30/70, but then that is a huge rebalance (cap gains) to take on at once.
This question was about "how does someone with a large portfolio and lack of investing experience decide how much risk to take on." For now I feel all right with 50% in stocks and am focusing my energy on how to make the 50% bond portion lead to the sleepiest total picture possible.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
4. Re security selection, I'm frequently finding cheaper options than Vanguard in ETFs offered by iShares and Fidelity. ETFs already freak me out a bit due to added complexity (bid/ask spreads, limit orders) and I have heard of non-Vanguard funds having poorer index tracking or tax behavior. Is that something to be afraid of or should I just do whatever is cheapest?
I still find ETFs terrifying relative to TIFs but am gradually gaining comfort. Setting limit orders to sell at the bid price. Hopefully won't get too confused about all this down the road when rebalancing.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
5. For settlement cash I should use tax-exempt money funds - is that really possible on Vanguard/Fidelity? Didn't find an option for that, and I especially hate their 0.42% ER settlement fund.
Will use VCTXX Vanguard California tax exempt as a settlement fund for Vanguard and just accept what Fidelity lets me use since I can't change it.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
6. Would any of this change if I spend significant time abroad in GBP or EUR? I have read some references to "investing in the currency you're spending" but have never understood the rationale.
I haven't heard anything from anyone about this, nor have I been able to learn anything on my own.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
7. My original plan was to grow investments in taxable, and contribute appreciated shares to the donor-advised fund (0.6% expenses) invested at 30/70 for capital preservation. But I could also try to fill the DAF with the kind of assets one would normally put in an IRA? Or even make the DAF 100% stock, removing from my overall stock allocation? I am really unclear how to think about this.
Makes more sense to grow in taxable and take the tax deduction (up to 30% AGI). Vanguard's DAF is cheaper than Fidelity's (or community foundation's) for large balances.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
8. As I move from the advisor-managed funds to my own, I will have huge capital gains, mainly from DFA appreciated US stock. Despite my hatred of 0.4% expense ratios, in terms of capital gains, I wouldn't break even on the difference for a decade in some cases. Am I missing anything in that calculation?
In the case of owning DFA funds in amounts that fit my asset allocation - that is, "right allocation, wrong security" - and for which the difference in ER relative to "right allocation, right security" isn't enough to offset the capital gain tax cost within a few decades, I will just retain these. I could donate them to the DAF in a future year or sell when market crashes. Does that sound right?
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
9. Anything else I'm missing? I realize I am unbelievably fortunate and I could make lots of dumb decisions and still have a lot of money, but I just want to do this right and not squander good fortune.

retired@50
Posts: 3049
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by retired@50 » Wed Feb 05, 2020 12:46 am

joeschmo wrote:
Tue Feb 04, 2020 5:33 pm
Hi all, in case it helps others, I just wanted to post some updates:

...
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
6. Would any of this change if I spend significant time abroad in GBP or EUR? I have read some references to "investing in the currency you're spending" but have never understood the rationale.
I haven't heard anything from anyone about this, nor have I been able to learn anything on my own.
Are you talking about buying international stocks and bonds using Euros? I presume you're an American citizen, so opening foreign bank accounts and investment accounts sounds like a tax hassle that nobody needs.

While I've never done it, I'm always glad I can answer "No" to the "Do you have any foreign accounts" question in Turbo Tax.

Regards,
This is one person's opinion. Nothing more.

Topic Author
joeschmo
Posts: 177
Joined: Thu Mar 23, 2017 2:37 pm

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Wed Feb 05, 2020 1:53 am

retired@50 wrote:
Wed Feb 05, 2020 12:46 am
joeschmo wrote:
Tue Feb 04, 2020 5:33 pm
Hi all, in case it helps others, I just wanted to post some updates:

...
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
6. Would any of this change if I spend significant time abroad in GBP or EUR? I have read some references to "investing in the currency you're spending" but have never understood the rationale.
I haven't heard anything from anyone about this, nor have I been able to learn anything on my own.
Are you talking about buying international stocks and bonds using Euros? I presume you're an American citizen, so opening foreign bank accounts and investment accounts sounds like a tax hassle that nobody needs.

While I've never done it, I'm always glad I can answer "No" to the "Do you have any foreign accounts" question in Turbo Tax.

Regards,
Yes - or just weight to foreign. What I'm referring to is this conversation that I've seen repeated a lot, including from Bogle:

A: I should probably have some intl bonds (or stock or ...).
B: You make and spend your money in US$ - why do you need all this ex-US stuff?

I've never understood this logic, but assuming it is sensible, it would follow that if I make and spend money in EUR then I shouldn't need to have money in US stocks/bonds...which of course doesn't seem right. But the above conversation comes up so often that I figured I was missing something.

retired@50
Posts: 3049
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by retired@50 » Wed Feb 05, 2020 11:05 am

joeschmo wrote:
Wed Feb 05, 2020 1:53 am
retired@50 wrote:
Wed Feb 05, 2020 12:46 am
joeschmo wrote:
Tue Feb 04, 2020 5:33 pm
Hi all, in case it helps others, I just wanted to post some updates:

...
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
6. Would any of this change if I spend significant time abroad in GBP or EUR? I have read some references to "investing in the currency you're spending" but have never understood the rationale.
I haven't heard anything from anyone about this, nor have I been able to learn anything on my own.
Are you talking about buying international stocks and bonds using Euros? I presume you're an American citizen, so opening foreign bank accounts and investment accounts sounds like a tax hassle that nobody needs.

While I've never done it, I'm always glad I can answer "No" to the "Do you have any foreign accounts" question in Turbo Tax.

Regards,
Yes - or just weight to foreign. What I'm referring to is this conversation that I've seen repeated a lot, including from Bogle:

A: I should probably have some intl bonds (or stock or ...).
B: You make and spend your money in US$ - why do you need all this ex-US stuff?

I've never understood this logic, but assuming it is sensible, it would follow that if I make and spend money in EUR then I shouldn't need to have money in US stocks/bonds...which of course doesn't seem right. But the above conversation comes up so often that I figured I was missing something.
For what it's worth...
I hold between 20% - 25% of my stock and bond holdings in internationally focused mutual funds. Think VTIAX for international stocks and VTABX for international bonds. I do this because sometimes these funds have a higher return than the domestically focused stock and bond funds. I don't intend to spend much time in Europe or Asia, but since I really don't know which corner of the world of investments will have the best return each year, or any year, I try to hold a bit of everything. To me, this admission that "I just don't know" is liberating and relaxing. If you are interested in reading more about this sort of mentality, Bill Schultheis wrote a book called "The Coffeehouse Investor" that goes a bit deeper on the topic.

Regards,
This is one person's opinion. Nothing more.

spindrift103
Posts: 25
Joined: Fri Jan 10, 2020 7:28 pm

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by spindrift103 » Mon Feb 24, 2020 5:34 pm

Responding to your comment in my thread here: viewtopic.php?f=1&t=304513

Regarding the more complex approach below of a ladder for both treasuries and munis (rather than keeping it super simple with Vanguard Total Bond Market, for example), it sounds like the higher tax bracket could be a reasonable compelling event to go that route. (My bracket isn't as high since about half my assets are in a NING trust held at 'arms length'; it functions as it's own taxpaying independent entity, and it has no state taxes) I also recognize and share your discomfort with just putting all the treasury portion and all the muni portion into intermediate terms, and now you have me thinking along the same lines!

All that said, I still suspect that over a very long term, simply holding intermediates would pan out about the same. Heck, maybe even total bond would, as well. But again, if that sense of greater diversification can lead to better sleep at night, then great. The issue becomes, how far do you take that to make it truly all weather in terms of uncorrelated assets? Why not buy gold? Commodoties? etc... ;-)

Anyway, congrats, and as long as we don't put it all in equities or gamble it away on individual stocks (or in Vegas!), we are set for rest of our lives, and will be able to help many others as well....

joeschmo wrote:
Tue Feb 04, 2020 5:33 pm
Hi all, in case it helps others, I just wanted to post some updates:
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
1. The bond portfolio seems unnecessarily complicated, and yet I still don't feel I have enough diversification since all my eggs are in the US. I don't know how else to get good diversification without the complexity I have now, and I don't know how to get tax efficiency without losing diversity by being all in munis. I believe Vanguard's research that up to 20-30% foreign bonds reduced volatility - but with my high tax bracket, it's hard to justify not going for munis + treasuries. In retirement accts I was originally planning to hold Total Bond Mkt + Foreign Bond Mkt, in accordance with Vanguard's findings, but I have lately been thinking TIPS would make more sense given the very long time horizon? So, given a long time horizon and very little space in tax-advantaged accounts, what's the best thing to do to ensure the greatest diversification?

1a. For treasuries, Swensen suggests matching average maturity to the market. I'm wondering if there's any disadvantage to doing that for treasuries and/or munis instead of my more complex active approach above.
I'm beginning to accept having all my bond eggs in the US. Swensen's advice against munis is mainly around call options and credit risk; there are funds like BMBIX that are very high quality munis but at 3x the cost of Vanguard. Vanguard's actively managed fund goes below AA credit rating but I am considering just accepting that given the low cost...

So I'm considering:

- 50/50 Treasury/munis
- Duration curve matched to the market for as much maturity diversification as possible. That way I have let the market decide for me. :) For treasuries that looks like about 35/50/15 short/interm/long. For munis looks like about 30/40/30, as Vanguard PAS recommends, though that sacrifices the long end a bit. That means there is less volatility in that individual fund but higher volatility in the whole pie, but I might have to live with that.

I have thought long and hard about just going for interm term and not having so many separate funds but it seems too bad to put all my eggs in the interm-term basket and miss out on long-term treasury diversification benefit + short-term stability and lack of interest rate risk.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
3. I think if the stock market crashed by 80% I'd really regret having taken on even the 50/50 stock/bond risk. I am pretty sure I wouldn't sell, but I'm worried it might be hard for me to rebalance - even if trying to rebalance now with unrealized gains is proving scary too. I'm wondering if others who have been through past crashes could share ways of estimating how one will feel when the actual crash happens. I have a feeling my eventual target allocation might be closer to 30/70, but then that is a huge rebalance (cap gains) to take on at once.
This question was about "how does someone with a large portfolio and lack of investing experience decide how much risk to take on." For now I feel all right with 50% in stocks and am focusing my energy on how to make the 50% bond portion lead to the sleepiest total picture possible.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
4. Re security selection, I'm frequently finding cheaper options than Vanguard in ETFs offered by iShares and Fidelity. ETFs already freak me out a bit due to added complexity (bid/ask spreads, limit orders) and I have heard of non-Vanguard funds having poorer index tracking or tax behavior. Is that something to be afraid of or should I just do whatever is cheapest?
I still find ETFs terrifying relative to TIFs but am gradually gaining comfort. Setting limit orders to sell at the bid price. Hopefully won't get too confused about all this down the road when rebalancing.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
5. For settlement cash I should use tax-exempt money funds - is that really possible on Vanguard/Fidelity? Didn't find an option for that, and I especially hate their 0.42% ER settlement fund.
Will use VCTXX Vanguard California tax exempt as a settlement fund for Vanguard and just accept what Fidelity lets me use since I can't change it.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
6. Would any of this change if I spend significant time abroad in GBP or EUR? I have read some references to "investing in the currency you're spending" but have never understood the rationale.
I haven't heard anything from anyone about this, nor have I been able to learn anything on my own.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
7. My original plan was to grow investments in taxable, and contribute appreciated shares to the donor-advised fund (0.6% expenses) invested at 30/70 for capital preservation. But I could also try to fill the DAF with the kind of assets one would normally put in an IRA? Or even make the DAF 100% stock, removing from my overall stock allocation? I am really unclear how to think about this.
Makes more sense to grow in taxable and take the tax deduction (up to 30% AGI). Vanguard's DAF is cheaper than Fidelity's (or community foundation's) for large balances.
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
8. As I move from the advisor-managed funds to my own, I will have huge capital gains, mainly from DFA appreciated US stock. Despite my hatred of 0.4% expense ratios, in terms of capital gains, I wouldn't break even on the difference for a decade in some cases. Am I missing anything in that calculation?
In the case of owning DFA funds in amounts that fit my asset allocation - that is, "right allocation, wrong security" - and for which the difference in ER relative to "right allocation, right security" isn't enough to offset the capital gain tax cost within a few decades, I will just retain these. I could donate them to the DAF in a future year or sell when market crashes. Does that sound right?
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
9. Anything else I'm missing? I realize I am unbelievably fortunate and I could make lots of dumb decisions and still have a lot of money, but I just want to do this right and not squander good fortune.

marky2kk
Posts: 37
Joined: Tue Feb 11, 2020 10:53 am

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by marky2kk » Mon Feb 24, 2020 10:58 pm

joeschmo wrote:
Wed Feb 05, 2020 1:53 am
retired@50 wrote:
Wed Feb 05, 2020 12:46 am
joeschmo wrote:
Tue Feb 04, 2020 5:33 pm
Hi all, in case it helps others, I just wanted to post some updates:

...
joeschmo wrote:
Tue Jan 28, 2020 3:47 pm
6. Would any of this change if I spend significant time abroad in GBP or EUR? I have read some references to "investing in the currency you're spending" but have never understood the rationale.
I haven't heard anything from anyone about this, nor have I been able to learn anything on my own.
Are you talking about buying international stocks and bonds using Euros? I presume you're an American citizen, so opening foreign bank accounts and investment accounts sounds like a tax hassle that nobody needs.

While I've never done it, I'm always glad I can answer "No" to the "Do you have any foreign accounts" question in Turbo Tax.

Regards,
Yes - or just weight to foreign. What I'm referring to is this conversation that I've seen repeated a lot, including from Bogle:

A: I should probably have some intl bonds (or stock or ...).
B: You make and spend your money in US$ - why do you need all this ex-US stuff?

I've never understood this logic, but assuming it is sensible, it would follow that if I make and spend money in EUR then I shouldn't need to have money in US stocks/bonds...which of course doesn't seem right. But the above conversation comes up so often that I figured I was missing something.
I am a European citizen living in the U.S. and eventually want to move back to Europe, so I have thought about this a bit. In essence, I want to preserve my purchasing power in Euros. If you want to spend money in EUR or GBP, you want to hedge against the USD depreciating against these currencies.

My equity portfolio is 30/30/30/10 across the world regions US, Europe, EM, and Asia/Pacific, which gives me currency exposure to all the underlying stocks' currencies. I do not want to give advice on the allocation in the equity part, just want to emphasize that by having an international equity portfolio you already hold some euros/GBP. I thus hold slightly less than 30% of my equity portfolio in Euros. If the Euro appreciates, the value of my USD denominated European fund goes up, which gives me a hedge.

In addition to that, I hold roughly 30% of my 30% overall allocation to risk-free assets in Euro cash. That money is in European bank accounts. Reporting is not difficult, just FBAR but I hire a tax accountant anyway, costs me $2k per year. The pain is of course that the bank accounts pay virtually no interest and the money is just laying around. I could convert the money to USD, invest with a higher interest rate here.. that would be a classic carry trade, which of course works well when the EUR does not appreciate against the USD, but it is also a risky investment because I would lose if interest rates in the Euro area rise and the EUR appreciates against the USD. Essentially, you are currently doing a carry trade if you expect to have a future liability in EUR. You go long the currency with higher rates (USD) and pocket the difference in interest rates. Works well if currencies follow a random walk. Has in fact worked historically well albeit with occassionally large crashes ("picking up pennies in front of a steamroller"). Doesn't work well if EUR appreciates against USD.

For you it will be almost impossible to open a European bank account, which leaves the option to buy negative yielding European sovereign bonds or to park Euros at 0% interest at some US broker (probably won't work with the size of your portfolio).

Bottom line, if you see a chance of spending money in EUR/GBP some day I would simply shift the equity portfolio more towards EUR/GBP. Your equity portfolio with 70/30 overweights US anyway relative to market cap.


PS: How much do you pay for your Umbrella?

Topic Author
joeschmo
Posts: 177
Joined: Thu Mar 23, 2017 2:37 pm

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by joeschmo » Tue Feb 25, 2020 10:43 am

Thanks @marky2kk for your feedback and help! I am indeed targeting 55/45 (market balance) of U.S./ex-U.S. equities, so it sounds like I'm as set as I could be for that.

Re insurnace, it's through Chubb. I have:

$500k personal liability coverage
$120k renters insurance
----------------------------------------
Premium: $1090

and

$10m excess liability
--------------------------
Premium: $334

I haven't looked at this stuff in years and those numbers seem sort of off balance...seems like insurance in excess of $10m is about as good as nothing at all, no?

ivk5
Posts: 1120
Joined: Thu Sep 22, 2016 9:05 am

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by ivk5 » Tue Feb 25, 2020 11:39 am

joeschmo wrote:
Tue Feb 25, 2020 10:43 am
Thanks @marky2kk for your feedback and help! I am indeed targeting 55/45 (market balance) of U.S./ex-U.S. equities, so it sounds like I'm as set as I could be for that.

Re insurnace, it's through Chubb. I have:

$500k personal liability coverage
$120k renters insurance
----------------------------------------
Premium: $1090

and

$10m excess liability
--------------------------
Premium: $334

I haven't looked at this stuff in years and those numbers seem sort of off balance...seems like insurance in excess of $10m is about as good as nothing at all, no?
The umbrella (excess) policy covers you up to $10M. It will have required amounts of base coverage which you should make sure your renters meets (eg the $500k), otherwise you will have a gap. Auto too, if you have one (or non-owner car insurance for when you rent).

aristotelian
Posts: 7622
Joined: Wed Jan 11, 2017 8:05 pm

Re: Large taxable portfolio - how to maximize charitable giving and minimize loss over long time horizon?

Post by aristotelian » Tue Feb 25, 2020 12:01 pm

joeschmo wrote:
Tue Jan 28, 2020 3:47 pm

7. My original plan was to grow investments in taxable, and contribute appreciated shares to the donor-advised fund (0.6% expenses) invested at 30/70 for capital preservation. But I could also try to fill the DAF with the kind of assets one would normally put in an IRA? Or even make the DAF 100% stock, removing from my overall stock allocation? I am really unclear how to think about this.
I'm not sure what you are asking, but once you donate to the DAF, the fund will liquidate the shares and invest in its own portfolio. At that point your choice is limited to pre-determined funds/allocations, similar to a 529 plan. You aren'g "filling" the DAF with this asset or that asset so much as selling it without having to realize a taxable gain.

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