Portfolio Advice for a Novice

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Book Junkie
Posts: 2
Joined: Wed Feb 12, 2020 8:50 pm

Portfolio Advice for a Novice

Post by Book Junkie » Wed Feb 12, 2020 11:10 pm

As I am sure has been repeated numerous times.....I wish I discovered this site sooner. I have been a lurker here for awhile resulting in me looking at our current investments and being horrified by the ERs of our funds and that the number of our funds in our portfolio would rival the number of items on a cheese cake factory menu. Accordingly, a change was necessary and below is my best effort to rebalance our portfolio into a 3/4 fund portfolio. I would like to thank you all in advance for any comments or tips. The people on this forum should be commended for the assistance they have provided to thousands of people.

Emergency Funds: 6 months although we really view this fund as our operating account and if big ticket expenses arises like replacing AC units, etc.
Debt $339k mtg/3.75%, Around 850k equity
Tax Filing Status: Married Filing Jointly
Tax Rate 35% fed. 6% state
State of Residence: GA
Age 40
Desired Asset Allocation: 75% stocks, 25% bonds
Desired International allocation: 20%
Portfolio size: mid six figures

Current retirement accounts

taxable
8% cash
6.6% Schwab SP Index SP500 SWPPX (.02)

His tIRA (401k rollover)
2.9% Schwab SP Index SP 500 (.02)

Her 401k (prior job but low ER so not sure we would rollover)
13% Fidelity 500 FXAIX (.015)

Her 401k (current)
34.9% Vanguard Inst. Index VINIX (.035)

His 401k
Vanguard Target 2025 VTTVX (.13)[current target fund holdings 36.41 total stock, 24.51 total I stock, 27.77 total bond, 11.32 total I bond]
12.17% total stock
8.1% total I stock
9.2% total bond
3.7% total I bond

Edit to include Options

Options:

His 401k
Vanguard Target Retirement Income Inv VTINX (.012)
Vanguard Target Retirement 2015 VTXV (.13)
Vanguard Target Retirement 2020 VTWNX (.13)
Vanguard Target Retirement 2025 VTTVX (.13)
Vanguard Target Retirement2030 VTHRX .14
Vanguard Target Retirement 2035 VTTHX .14
Vanguard Target Retirement2040 VFORX .14
Vanguard Target Retirement2045 VTIVX .15
Vanguard Target Retirement2050 VFIFX .15
Vanguard Target Retirement2055 VFFVX .15
Vanguard Target Retirement 2060 VTTSX .15
American Funds New Perspective RNPGX .42
American Funds New World RNWGX .60
JP Morgan Mortgage Backed Securities JMBUX .37
T Rowe Price Global Tech PGTIX .77
PGIM QMA Small Cap Value Z TASVX .7
Vanguard Explorer Adm VEXRX .34
Vanguard Small Cap Index Adm VSMAX .05
Great West T Rowe Price Mid Cap Gr Inst MXYKX .67
Principal MidCap SP 400 Index MPSIX .2
Vanguard Mid Cap Value Index VMVAX .07
Putnam Equity Income PEQSX .55
Putnam Growth Oppertunities PGOEX .66
Vanguard 500 Index Admiral VFIAX .04
Vanguard Balanced Index Adm VBIAX .07
BlackRock Inflation Prted Bd BPLBX .50
Federated Instl High Yield Bond Instl FIHBX .55
JP Morgan Global Bond Opportunities GBONZ .59
Pimco Income Instl PIMIX 1.05
Key Guaranteed Portfolio Fund fixed (interest rate 1.15%

Her 401k (current)
FID Contrafund K FCNKX .73
Oakmark Fund Investor OAKMX .88
Vanguard Institutional Index Fund VINIX .035
T Rowe Price Mid Cap Growth Fund RPMGX .75
Vanguard Extended Market Index Fund VEXAX .07
JH Venture T JAVTX .91
VRTS C SMCP Val eq SCETX 1.18
AMG TX Intl SMCP TQTIX 1.06
Causeway Intl Val CIVIX .9
IO Develip Mkt ODVIX .83
IO Intl Growth OIGIX .67
Vang TOT Intl Stk VTIAX .11
Van Real Est Indx AVSLX .12
JPM Mid Cap Value JMVRX .85
TRP Stable Value A .3
Metwest Tot Rtn BD I MWTIX .44
PGIM High Yeild Z PHYZX .54
Pim Real Return Inst PRRIX .98
Vang St Bond Indx Adm VBIRX .07
Vang Treasury MM VUSXX .09

Her old 401K
AF Amcap R6 RAFGX .36
Fid 500 Index FXAIX .015
MFS Value R6 .47
Crln E Mid Cap GR HRAUX .66
Fid Extd Mkt Idx FSMAX .045
Victory S Est Val VEVRX .57
CBA SM Cap Value GSSUX .96
Fid Diversfd Intl K6 FKIDX .6
IO Global OGLIX .67
Stable Value Fund .41
Fid Ltd Term Govt FFXSX .45
Metwest Tot Rtn Bd MWTSX .37
MS MK HY Corp Bd MHYSX .58



I understand the percentages are a bit off but that's likely due to rounding errors on my end. Also, the other "investment choices" in the 401ks have high ERs and the choices above are the best for low cost index funds. Happy to provide other options is anyone thinks that would have value. My questions would be as follows:
1) We have the good fortune of coming into our prime earning years. Therefore, we anticipate having an extra $10k-$12k per month to invest in the foreseeable future (in addition to fully maxing out both our 401k contributions and 529 plans). My thoughts were that those additional investments would flow into our taxable schwab account but that would throw off the bond ratio since bonds are not a good place for a taxable account. I was thinking I could rebalance my 401k target account annually to a heavier bond holding target fund, but would be interested in comments on that approach. Is Schwab SP 500 and Schwab International Index Funds good options? Would it be better to utilize the Target fund to hold more total stock rather than bonds and purchase muni bonds in the taxable account? If nontaxable muni bonds in the taxable account, any recommendations on funds to look at?
2) Her current contributions into her 401k will be 73% into Vanguard Inst Index (.035), 17% into Vanguard international stock VIAX (.11) and 10% Vanguard short term bond VBIRX. Should she even put funds into that bond account or should I continue to rebalance my Vanguard target for a fund with a larger bond holding to account for our AA?
3) I am thinking that rather than doing another rebalance that we gradually reach our AA goal from our contributions. We will likely payoff our mortgage in 15 years (not planning on retiring for at least 20 years). When our kids leave the home we will likely downsize leaving us with a decent amount of equity appreciation. Understanding that real estate can fall (albeit it will always retain some value unless society has collapsed) should we necessarily be placing that much of a value on bonds (given their current performance) if we have real estate equity to fall back on?
4) we also recently had an HSA option we intend to fully fund. Whereas we have children so we do utilize money from the HSA for medical expenses, there will be excess which I intend to place in Vanguard Total Stock and likely a bond funds. Note we will fully fund the account but not sure what excess will be until end of year.

Again, thank you for any comments or suggestions. You all are amazing and I am sure there are some financial advisors who wish this site never went live.
Last edited by Book Junkie on Thu Feb 13, 2020 8:40 pm, edited 1 time in total.

HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: Portfolio Advice for a Novice

Post by HomeStretch » Thu Feb 13, 2020 8:46 am

Welcome!

You have done a good job moving your portfolio towards 3-4 diversified low-cost funds. Several comments:

1. What bond funds (symbol/name/ER) are available in each 401k? You need to increase bonds if your desired bond allocation is 25% as it looks like your current allocation is ~14%. Suggest you hold the bonds in one of the 401k accounts (and not your Taxable account). You can do this by using a different target date fund in His 401k with a higher bond allocation or by using a separate bond fund in any 401k.

2. For the $10-$12k/month available for long-term savings (after maxing 401k and 529), consider the following:

A) Fully fund the HSA as a retirement account and do not use any HSA funds to pay health out-pocket-costs until retirement.

B) Do backdoor Roths for each of you of $6k each. You have until 4/15/20 to do this for tax year 2019. In order to not be subject to pro-rated taxes, you would need to rollover the pretax IRA balances into your current 401k’s if they accept rollovers in. Link to BH wiki page:
https://www.bogleheads.org/wiki/Backdoor_Roth

C) Do mega backdoor Roths for each of you up to the IRS limit, if offered by your 401k plans. Link to BH wiki page:
https://www.bogleheads.org/wiki/After-tax_401(k)

D) Pay extra mortgage principal to pay off mortgage by your desired retirement date.

E) invest in a Taxable account using tax efficient funds like the S&P 500 fund you currently hold.

Prioritize investing in Options A, B, C before investing in a Taxable account (Option E) as A-C accounts grow tax free whereas income/growth in a Taxable account are subject to taxes.

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ruralavalon
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Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Portfolio Advice for a Novice

Post by ruralavalon » Thu Feb 13, 2020 12:10 pm

Welcome to the forum :) .

What funds are offered in his employer's 401k plan?

What funds are offered in her current employer's 401k plan?

What funds are offered in her former employer's 401k plan?

Please give fund names, tickers and expense ratios. Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

It will probably be better to drop the target date fund in his 401k account. It will probably be best to place the bond allocation in one of more of the 401k accounts. This will all depend on what funds are offered in the 401k plans.

Both Schwab® S&P 500 Index Fund (SWPPX) ER 0.02% and Schwab International Index Fund (developed markets only) (SWISX) ER 0.06% are good fund choices. If this is in a taxable account then ETFs will be better, because more tax-efficient.

Please read this: TFB blog post "The Elusive Mega Backdoor Roth". Do either or both of the current 401k plans include these features?

"1. whether your employer’s 401k/403b plan allows non-Roth after-tax contributions; and

2a. if it does, whether such contributions can be distributed while you are still working there (“in-service distribution”); or

2b. if the plan also offers a Roth 401k option, whether the non-Roth after-tax contributions can be rolled over to the Roth 401k part of the plan (“in-plan Roth rollover”)"
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
Book Junkie
Posts: 2
Joined: Wed Feb 12, 2020 8:50 pm

Re: Portfolio Advice for a Novice

Post by Book Junkie » Thu Feb 13, 2020 8:55 pm

Thank you both for the comments. I never thought about rolling the tIRA into the 401k so that both of us could participate in backdoor Roth IRA. I went ahead and put the rollover in motion today and also edited the above with the other available funds. I would very much appreciate thoughts on where I should target in on increasing bond holdings. It is taking some getting used to, but it makes so much more sense to manage all accounts as total portfolio rather than trying to diversify in each fund.

Unfortunately I found out today that the mega back door would not be permitted by either plan. Sounds like plans allowing it are unicorns. Regarding the backdoor roth, since I am converting the tIRA in his name into the 401k this year, does that mean he would be unable to take advantage of a backdoor roth for both 2019 and 2020?

retired@50
Posts: 1364
Joined: Tue Oct 01, 2019 2:36 pm

Re: Portfolio Advice for a Novice

Post by retired@50 » Thu Feb 13, 2020 9:06 pm

Duplicate.
Last edited by retired@50 on Thu Feb 13, 2020 9:09 pm, edited 1 time in total.
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

retired@50
Posts: 1364
Joined: Tue Oct 01, 2019 2:36 pm

Re: Portfolio Advice for a Novice

Post by retired@50 » Thu Feb 13, 2020 9:08 pm

Book Junkie wrote:
Thu Feb 13, 2020 8:55 pm
I would very much appreciate thoughts on where I should target in on increasing bond holdings.
You've got several choices for bond funds but none of them stand out as a clear winner.

Sometimes, folks use a fund like this:
Vanguard Target Retirement Income Inv VTINX (.012)
Because it actually holds about 70% in bonds.

Or you could use this fund:
Vanguard Balanced Index Adm VBIAX .07
Because it holds 40% in bonds.

This will lead to a bit of math to get your desired allocation correct, but you wind up saving quite a bit on the expense ratio.

Other pure bond funds that are decent choices include:
Vang St Bond Indx Adm VBIRX .07
Metwest Tot Rtn Bd MWTSX .37
Metwest Tot Rtn BD I MWTIX .44

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

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ruralavalon
Posts: 17391
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Location: Illinois

Re: Portfolio Advice for a Novice

Post by ruralavalon » Fri Feb 14, 2020 11:43 am

Asset allocation.
Book Junkie wrote:
Wed Feb 12, 2020 11:10 pm
Age 40
Desired Asset Allocation: 75% stocks, 25% bonds
Desired International allocation: 20%
In my opinion your desired asset allocation is within the range of what is reasonable.



Fund selection.
In selecting funds strive for a combination of both broad diversification (to reduce risk) and low expense ratios (to increase your net return). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Please see:
1) Wiki article "Three-fund portfolio";
2) Forum discussion, "The Three-Fund Portfolio"; and
3) Taylor Larimore post, "Articles recommending the three-fund portfolio".


In my opinion the best fund to use in his employer's 401k plan is:
Vanguard 500 Index Fund (VFIAX) ER 0.04%

In my opinion the better funds to consider using in her current employer's 401k plan are:
1) Vanguard Institutional Index Fund (S&P 500 index fund) (VINIX) ER 0.035%
2) Vanguard Total International Stock Index Fund (VTIAX) ER 0.11%
3) Metropolitan West Total Return Bond Fund Institutional (intermediate-term, investment-grade bonds) (MWTIX) ER 0.44%
4) Vanguard Short-term Bond Index Fund (VBIRX) ER 0.07%

In my opinion the better funds to consider using in her former employer's 401k plan are:
1) Fidelity 500 Index (FXAIX) 0.015%
2) Metropolitan West Total Return Bond Plan (intermediate-term, investment-grade bonds) (MWTSX) ER 0.37%

Bonds.
Although actively managed Metropolitan West Total Return Bond is a good intermediate-term (effective duration = 5.92 years), investment-grade (credit quality = BBB) bond fund with good diversification (31% government bonds, 20% corporate bonds, and 45% securitized). Morningstar MWTIX, portfolio tab. The fund has a fairly low expense ratio. It has performed well compared to a total bond market index fund. Portfolio Visualizer, 1998-2020.

Despite the higher expense ratio Metropolitan West Total Return Bond has given a higher total return (dividends reinvested, net of expenses) at the cost of higher volatility, compared to Vanguard Short-term Bond Index Fund. Portfolio Visualizer, 1998-2020. Either of those two bond funds would be a good choice in my opinion, my personal preference would be Metropolitan West Total Return.



Domestic stocks.
"In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations".

In my opinion in a plan that lacks a total stock market index fund, a S&P 500 index fund is good enough by itself for a domestic stock allocation. A S&P 500 index fund covers 84% of the U.S. stock market, investing in stocks of selected large-cap and mid-cap U.S. companies. In the 28 years since the creation of the first total stock market index fund the performance (total return with dividends reinvested) of the two types of funds has been almost identical. Morningstar, "growth of $10k" graph (1992 – 2020), VTSAX vs VFIAX. So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically made little difference in performance.

See also:
1) Allan Roth, CBS Moneywatch (02/03/2010), "John C. Bogle on the S&P 500 vs. the Total Stock Market"; and
2) Wall Street Physician (01/17/2019), "Should You Invest in the S&P 500 or the Total Stock Market?".


Account consolidation.
To simply a bit she could consider rolling over her old 401k account into her current 401k account. That gives one less account to keep track of and manage. The downside is slightly higher expense ratios.

To enable use of a backdoor Roth IRA he could rollover his traditional IRA into his 401k account.

Do you want to have the backdoor Roth IRAs at Schwab?


Extra contributions.
Book Junkie wrote:
Wed Feb 12, 2020 11:10 pm
Debt $339k mtg/3.75%, Around 850k equity
. . . . .
We have the good fortune of coming into our prime earning years. Therefore, we anticipate having an extra $10k-$12k per month to invest in the foreseeable future (in addition to fully maxing out both our 401k contributions and 529 plans).
I agree with the suggestion to contribute $6k each to backdoor Roth IRAs.

Will you be able to deduct your mortgage interest on your income tax return?

I am very ambivalent about paying off a 3.75% interest mortgage as compared to investing in a taxable account. It is a close call in my opinion. On balance I favor additional investing over accelerated payoff of the mortgage note. You could of course do some of each.


Fund placement.
In a taxable account use very tax-efficient stock index funds. Wiki article "Tax-efficient fund placement". At Schwab use ETFs for better tax-efficiency.

In the taxable account at Schwab how much unrealized capital gain do you have in Schwab SP Index SP500 (SWPPX) ER 0.02%? If the capital gains are large, it may be best to keep that fund and use appropriate tax-efficient ETFs for future contributions.

Bond funds are not very tax-efficient. Ordinarily a bond fund should be placed in a tax-advantaged account, preferably a tax-deferred account like a traditional 401k. Wiki article "Tax-efficient fund placement".

To make portfolio management and rebalancing easy it is often better to have at least one large tax-advantaged account which contains all three basic asset types (bonds, international stocks, and domestic stocks). Don’t try to put all components of the asset allocation in every account.


Example portfolio.
Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to accommodate the fund offerings in the 401ks. Current portfolio size = mid six figures. New annual contributions = $171k. The asset allocation is: 25% bonds; 20% international stocks; and 55% domestic stocks. The percentages given are percentages of the total portfolio, not of a given account.

The suggestion is to switch both the existing balances and the new contributions to the funds indicated. All percentages and dollar amounts are rounded off, so may not add up exactly. Sometimes I state 00% to indicate funds you might want to add in the future.


Taxable account @ Schwab (15% of total; adds ~ $120k annually = ~ 70% of new annual contributions)
15%, Vanguard Total Stock Market ETF (VTI) ER 0.03%
OR
15%, iShares Core S&P Total U.S. Stock Market ETF (ITOT) ER 0.03%
00%, Vanguard Total International Stock ETF (VXUS) ER 0.09%
OR
00%, iShares Core MSCI Total International Stock ETF (IXUS) ER 0.09%

His 401k, includes rollover of his traditional IRA (36% of total; adds $19.5k annually = ~ 11% of new annual contributions)
36%, Vanguard 500 Index Fund (VFIAX) ER .04%

Her current 401k, includes rollover of her old 401k (48% of total; adds $19.5k annually = ~ 11% of new annual contributions)
03%, Vanguard Institutional Index Fund (S&P 500 index fund) (VINIX) ER 0.035%
20%, Vanguard Total International Stock Index Fund (VTIAX) ER 0.11%
25%, Metropolitan West Total Return Bond Fund Institutional (intermediate-term, investment-grade bonds) (MWTIX) ER 0.44%
00%, Vanguard Short-term Bond Index Fund (VBIRX) ER 0.07%

His Roth IRA @ Schwab?, via backdoor (00% of total; adds $6k annually = ~ 04% of new annual contributions)
00%, Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%
00%, Schwab International Index Fund (developed markets only) (SWISX) ER 0.06%

Her Roth IRA @ Schwab?, via backdoor (00% of total; adds $6k annually = ~ 04% of new annual contributions)
00%, Schwab Total Stock Market Index Fund (SWTSX) ER 0.03%
00%, Schwab International Index Fund (developed markets only) (SWISX) ER 0.06%


Rebalancing.
Because the funds will grow at different and unpredictable rates, it may be necessary every few years to rebalance in order to maintain the desired asset allocation. Wiki article, "Rebalancing". You can easily adjust the asset allocation by exchanging between funds inside her current 401k.

Avoid exchanging between funds in the taxable account, which can create income tax liability.


Education.
I suggest that you read one or two books on investing. Wiki article, "Books: recommendations and reviews". When I first stated managing my own investments, I found this tutorial very helpful in learning investing terminology/jargon and some of the investing basics. Morningstar, "Investing Classroom". Also take a look at the Boglehead’s wiki, the "getting started" link I give below. A quick education for a beginning investor is Dr. Bernstein's free short on-line book, "If You Can".

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:Getting Started

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