Lurker, first post- VWIUX, VTIAX advice

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reisender
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Joined: Wed Mar 18, 2020 10:09 am

Lurker, first post- VWIUX, VTIAX advice

Post by reisender » Wed Mar 18, 2020 10:43 am

Hello,

I have been reading this website off and on for many years and have decided to post for the first time in light of recent activity. I use the three fund portfolio- VTSAX, VWIUX, and VTIAX (Vanguard Total stock, Vanguard intermediate term tax exempt bond, and Vanguard total international.)

I'll get the easiest one out of the way first, my wife and I have 100% VTIAX as our ROTH IRA holdings and we do this because the dividend payments are higher than VTSAX and since there is limited room in our ROTH as a percentage of our total portfolio it makes sense since I really don't want international to be much higher than around 20% of our stock portfolio. I understand I do not get to use the foreign tax credit by having this in my ROTH, I also can't tax loss harvest VTIAX. Are those last two points really so important that I am making a mistake or is my original premise correct that shielding the ~3% dividend from taxes versus VTIAX's ~1.9% makes holding it in the ROTH the right choice? Also doesn't a tax loss harvest really just shift taxation to a later date since you potentially change your basis?

Now this is really the reason I am posting- I am 36 and hope to live a long time, so I have for several years now contemplated going 100% stocks because my holding time frame is potentially 50 years and that holding period drastically reduces the risk of stocks. I originally set up my portfolio after the financial crisis in 2008 and went 75/25 stocks and bonds, because I knew less about investing back then and that was a conventional asset allocation (age as a percentage of bonds). I could tax loss harvest VWIUX and potentially move it over to VTSAX at a very attractive price in the coming days/weeks/months where it would sit for many decades. I am not suddenly a market timer getting greedy, as I said I have contemplated making this move since around 2014 when I realized my risk tolerance was higher than where I set my asset allocation. I did not make the shift earlier because I felt US stocks were pricey relative to their P/E ratio and I didn't I think being 75/25 was such a boneheaded move that it needed correcting when it seemed ever more likely that a recession would eventually come and then I could get more for my money so to speak. I did buy more VTSAX during the brief dip in 2016, and I continued to buy VTIAX with our ROTH IRA contributions, but now I feel the time is right to become a two fund portfolio. Please share your thoughts and definitely point out any flaws in my reasoning or if I am overvaluing the benefit of changing my risk profile.

Thank you for reading!

Quaestner
Posts: 238
Joined: Tue Jul 18, 2017 6:39 pm

Re: Lurker, first post- VWIUX, VTIAX advice

Post by Quaestner » Wed Mar 18, 2020 2:51 pm

I wondered why you didn’t reset your asset allocation in 2014, when you were younger. What’s changed? Another reflection for you might be your job security. Would a web of possible bankruptcies affect your job? How do you know? I realize you’re supposed to be greedy when others are fearful. But if things bounce back, will you really regret maintaining a 75/25 allocation? I’m not smart enough to market time. Are you?

Topic Author
reisender
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Joined: Wed Mar 18, 2020 10:09 am

Re: Lurker, first post- VWIUX, VTIAX advice

Post by reisender » Wed Mar 18, 2020 3:16 pm

In 2014 I left the military and was not working so I let the dividends from VWIUX go directly to my bank account, but since then I got married to a medical doctor (recession proof job) and have started using my education benefits so I feel very secure in giving up the bond safety net at this point in time. As far as timing the market goes, I don't think it's unrealistic to say that stock prices today look like a great deal compared to what they will be in 30-40 years, and while that is pretty much always true it is more true now and perhaps even more true in a week or month, wouldn't you agree?

Quaestner
Posts: 238
Joined: Tue Jul 18, 2017 6:39 pm

Re: Lurker, first post- VWIUX, VTIAX advice

Post by Quaestner » Wed Mar 18, 2020 5:06 pm

I can't agree or disagree. We're in a new world. All those earlier earnings expectations are out the window. Still, I I've been buying stocks this week, back to our usual 50/50 allocation. I try to balance the optimism and pessimism. You've thought about your ability to take risk, so go for it. I can find arguments on both sides for our plans. I expect and hope it will work out for you!

Topic Author
reisender
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Re: Lurker, first post- VWIUX, VTIAX advice

Post by reisender » Wed Mar 18, 2020 6:29 pm

What is your methodology for deciding on a 50/50 asset allocation? Even if I decide to go 100% stocks I do believe I would shift towards bonds at some later stage of life. My thinking at the moment is that being in bonds is more risky than stocks if the risk in question is a matter of amassing sufficient wealth for retirement. To that end bonds are counterproductive when held for multi-decade time spans.

Quaestner
Posts: 238
Joined: Tue Jul 18, 2017 6:39 pm

Re: Lurker, first post- VWIUX, VTIAX advice

Post by Quaestner » Thu Mar 19, 2020 7:10 pm

Yeah, I worry about bonds. Not much upside left, even if rates go negative. Still, over the long term maybe they'll match inflation? At least I expect they won't decline quite like stocks sometimes will. Plus they let us rebalance when stocks fall (buy low, sell high - at least in theory). I'm 57 so am at a different place than you. When I was in my 30's I was more like 80/20 than 50/50. Now I feel lucky to have enough wealth to retire and just don't want to blow it. We're teachers and expect to have pensions. We figure we're investing in stocks to keep up with inflation, have the ability to help kids - if needed, self fund long-term care, and have the ability to donate significantly to charity if things work out well. We expect to stay at 50/50 indefinitely (but we do have a point beyond which we stop rebalancing), getting there has been an evolution. Being able to understand that while we have the ability to take risk, we don't have the need to, took us awhile. It sounds like you recognize you need to take on risk to achieve your goals. Makes sense. Reading Bernstein's "Investor's Manifesto" was very helpful for finding an asset allocation that lets us sleep well. Bogleheads have helped too! Good luck!

Topic Author
reisender
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Re: Lurker, first post- VWIUX, VTIAX advice

Post by reisender » Fri Mar 20, 2020 2:14 pm

Quaestner wrote:
Thu Mar 19, 2020 7:10 pm
Being able to understand that while we have the ability to take risk, we don't have the need to, took us awhile. It sounds like you recognize you need to take on risk to achieve your goals.
You bring up an interesting point, in terms of answering the question "will I have enough to retire" I actually don't need to take on extra risk as we already have $1M+ and our household income is set to at least double soon. But now I get to the question of what is the purpose of bonds in my portfolio? It was easy to answer that question when bonds paid several percentage points above inflation and had low volatility compared to the stock market. For an older person who needs preservation of principle more than return on investment that makes perfect sense. For me my belief was the bonds would hold their value (or appreciate) during market declines and through rebalancing help smooth the volatility of my portfolio without giving up much in terms of total return (since I would be buying stocks low with the bonds it partially offsets their lack of growth.) So that point is still somewhat true, but only in the bittersweet way that bonds haven't gone down to the same extent that stocks have. However I am wondering is it more efficient overall to just keep a fixed percentage in money markets to give even better purchasing power during market declines while keeping the portfolio 100% in stocks to maximize gains the rest of the time? Normally people would probably say the money markets would be a drag on performance, but with bonds probably only paying 2-3% for the foreseeable future with declines in value as interest rates ratchet back up I am not sure conventional wisdom applies anymore. Do you agree or disagree?

Quaestner
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Joined: Tue Jul 18, 2017 6:39 pm

Re: Lurker, first post- VWIUX, VTIAX advice

Post by Quaestner » Fri Mar 20, 2020 4:32 pm

reisender wrote:
Fri Mar 20, 2020 2:14 pm
Quaestner wrote:
Thu Mar 19, 2020 7:10 pm
Being able to understand that while we have the ability to take risk, we don't have the need to, took us awhile. It sounds like you recognize you need to take on risk to achieve your goals.
However I am wondering is it more efficient overall to just keep a fixed percentage in money markets to give even better purchasing power during market declines while keeping the portfolio 100% in stocks to maximize gains the rest of the time? Normally people would probably say the money markets would be a drag on performance, but with bonds probably only paying 2-3% for the foreseeable future with declines in value as interest rates ratchet back up I am not sure conventional wisdom applies anymore. Do you agree or disagree?
I think in normal times, other Bogleheads might chime in on your question to give you different perspectives to consider. As these are not normal times, I imagine their time is occupied on other threads. You should completely discount my opinion because I'm a middle school science teacher, not a financial advisor! Still, I've enjoyed our conversation, and what with "social distancing" and school being suspended - here you go!:

I try to not "bucket" our portfolio. I try to view it as a whole. When I say I'm 50/50, the 50 includes cash (including I bonds). Maybe you want to be at 95% stocks, 5% cash for example? In other words, the plan you describe isn't really 100% stocks, is it? Still I get where you are coming from, you want to have some minimal level of safe assets (and I think a money market fund is fine for that even without the FDIC insurance). But if things go to hell (they aren't there yet), where will your safe funds be replenished from? Does your wife have sufficient life insurance and disability insurance (and of course malpractice insurance)? What if she gets sick - or sick of you? If you have kids, are you're thinking how a huge prolonged market decline might impact raising them? When you say you have 1M, is that after any debt? Sorry to bring up negatives - it's my specialty! If stocks fall another 50 percent, I'll stop rebalancing. I want enough safe money to still sleep well at night. I do think we're in a new world where conventional wisdom might not apply (at least for a while). I do not think I know what new wisdom would apply! Some folks are going to guess right (be lucky) and some are going to guess wrong. It might take years to know which is which. I admit to some FOMO, but I also tend to worry about worst case scenarios.

FWIW, many physicians' families benefit from some of the posts from the "White Coat Investor" at his site. Check him out - much better advice than me!

Topic Author
reisender
Posts: 14
Joined: Wed Mar 18, 2020 10:09 am

Re: Lurker, first post- VWIUX, VTIAX advice

Post by reisender » Fri Mar 20, 2020 7:36 pm

My parents were both school teachers actually; the whole family having summers and holidays off together is a great way to live.

I got my financial education from reading Charlie Ellis, Burton Malkiel, John Bogle, as well as websites like the whitecoat investor and early retirement extreme. It has served me well I think, I look at the market mostly from a statistical standpoint and have absolutely no emotional involvement whether it is up or down. I like to pop in here from time to time to get a feel for what others are thinking since I do believe that is a significant component of the market at both ends of the boom bust cycle. There are quite a few older folks with cool heads who consistently say stick to your plan, stay the course, do nothing and I agree with them so long as your plan is actually the right one! My investment style is quite lazy, so while I initially posted about making a shift to my asset allocation I am still very much mulling over the decision to do so. Without putting to morbid of a spin on it, I do think the worst is yet to come once the medical system overflows and we have to start triaging certain age groups. Maybe I am cynical from my years overseas while serving in the military but our society has become extremely entitled and decadent and those two qualities are going to make this situation far worse. I would not be at all surprised to see the S&P500 go well under 2,000- it wasn't that long ago (end of 2016) when we had the flash crash below 1,900 over some inconsequential news about the Chinese economy if I recall.

At those price levels I think it would be prudent to make my shift, but as you pointed out it would probably be 80% stock 20% cash, as it stands right now I am not actually 75/25 because of the cash I did not factor in, more like 60/20/20 when viewed that way. The cash is for a potential upcoming move but with stock prices and interest rates low enough there is no reason to buy our next home outright. We are zero debt now and I find that is what makes me sleep best at night, not the asset allocation, but I also believe when stocks have already crashed the risk is essentially taken out of stock investing.

As for my retirement goals, my assumption going forward is that social security won't be around for my generation at least not beyond a certain means test threshold, and I hope the cost of medical care/insurance becomes more cost efficient but I will plan for it to continue to be the highest expense we need to plan for in retirement. I do have one child so their education will need to be provided for, but I can't imagine that being more than $200,000 in current dollars and we already have that amount in safe assets so no worries there. We do not carry life insurance or disability beyond what her employer provides but that stems from having such modest income needs (roughly $1,500 a month is what we have averaged for years.) I would like to spend more in retirement than we do now, so beyond providing for my basic needs I hope to grow our wealth to a point where we can do whatever we want (within reason). I find that working on your spending and becoming an efficient consumer does more for wealth building than investing, so doing both together makes the process fairly simple, I just hope the market produces similar long term returns to what it has in the past!

Thanks for posting, I think the news thread is getting all the views as you say!

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