Did I choose wrong index and allocations?

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Topic Author
Blue55
Posts: 12
Joined: Thu May 14, 2020 5:40 pm

Did I choose wrong index and allocations?

Post by Blue55 » Mon May 18, 2020 1:36 pm

Emergency funds: 3 Months—— I had about 6 months but since I had the opportunity to contribute to 2019 I took out 5K and opened a Roth IRA. Our office closed our 401k last year. Currently Furloughed.

Debt: Mortgage

Tax Filing Status: single head of household

Tax Rate: 22%

State of Residence: New York City

Age: 55

Desired Asset allocation: 80% stocks / 20% bonds —-for better possible returns since I don't have much.
Desired International allocation: ?? don't know % of stocks

Current portfolio Under 100K

My Portfolio

13.0% Stocks

1.4% Bonds

85.6% Short-term reserves —VMFXX


Current retirement assets


Taxable—-My rollover 401k held in VMFXX Vanguard federal money market fund

VTI - Vanguard total stock ETF
VOO - Vanguard s&p index ETF
VGT- Technology
VHT- Health care
XOP- SPDR trust Oil & Gas ETF
Glop - Gaslog partners - Stock
All expense ratios below 0.10 % except Glop doesn't mention.

cash for investing— just what I have in my market fund


Tax - deferred Roth IRA at Vanguard

VBIAX - Balance index fund



Late start in life; But I'm starting. Like everyone else I want the best chance at the best returns.


Planned Contributions
Max out my Roth $7k per year
and put as much as I can monthly in my VTSAX (Haven't purchased yet)


I’m reading The Bogelheads guide to investing up to chapter 10
And now I feel like I'm all over the place. I want simple, set and forget it.
I would like a 2-3 fund portfolio.

1. I want to purchase VTSAX Total market and auto invest monthly, in traditional IRA

2. I purchased VBIAX to auto invest monthly but I read in the book to avoid high turnover index or etf”s . I hope I understood that correctly. VBIAX has a 37% turnover rate , and according to the book that's a lot of extra fees and not a good choice.

My Questions:
Should I keep or sell VBIAX, and is it in the right place, Roth? I took the vanguard questionnaire and it advised 60/40 allocation. I Looked into the Life strategy VSMGX fund as an alternative same 60/40 it has 8.8 % turnover instead of 37% with VBIAX … returns are higher with VBIAX. I also liked at Target retirement fund VTTHX 2035.... Should i go higher than the 60/40????

2. What should I do with the ETF’s ? Keep them and let them be ? or sell and invest the sum into VTSAX ? I can not afford to invest in everything, I feel overwhelmed.


3. Should I Lower my 3 month Emergency fund by $2k and finish my max on 2019 Roth? I’m torn because I wont ever have that opportunity again to contribute to the 2019, yet I will be lowering my emergency fund.

4. The book also mentions International stocks, any thoughts on that?


Thank you all in advance,

blue

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Duckie
Posts: 7394
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Re: Did I choose wrong index and allocations?

Post by Duckie » Mon May 18, 2020 4:48 pm

Blue55, welcome to the forum.
Blue55 wrote:Age: 55

Desired Asset allocation: 80% stocks / 20% bonds —-for better possible returns since I don't have much.
At your age 20% bonds is too aggressive. Stocks tend to crater at the worst time.
Taxable—-My rollover 401k held in VMFXX Vanguard federal money market fund
A rollover IRA is not what we consider a taxable account. It is tax-sheltered. Are the following ETFs and the cash in your Rollover IRA? Is it held at Vanguard?
  • VTI - Vanguard total stock ETF
    VOO - Vanguard s&p index ETF
    VGT- Technology
    VHT- Health care
    XOP- SPDR trust Oil & Gas ETF
    Glop - Gaslog partners - Stock
    All expense ratios below 0.10 % except Glop doesn't mention.

    cash for investing— just what I have in my market fund
Tax - deferred Roth IRA at Vanguard
With what looks like a rollover IRA and a Roth IRA, right now what are the account percentages (totaling 100%)? For example:
  • Rollover IRA -- 95%
    Roth IRA -- 5%
I want to purchase VTSAX Total market and auto invest monthly, in traditional IRA
So you're planning to contribute $7K to a TIRA for 2020? Have you already earned $7K this year?
Should I keep or sell VBIAX, and is it in the right place, Roth?
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. I would put just VTI or VTSAX in the Roth IRA.
I took the vanguard questionnaire and it advised 60/40 allocation.
60/40 is reasonable for your age. That AA is across all your retirement assets.
What should I do with the ETF’s ? Keep them and let them be ? or sell and invest the sum into VTSAX ?
If the ETFs are in a rollover IRA you can sell without a tax-issue and I would, just to simplify.
Should I Lower my 3 month Emergency fund by $2k and finish my max on 2019 Roth? I’m torn because I wont ever have that opportunity again to contribute to the 2019, yet I will be lowering my emergency fund.
You can withdraw your Roth IRA contributions (but not earnings) at any time for any reason. So fund the Roth IRA. In an emergency you can pull it out.
The book also mentions International stocks, any thoughts on that?
Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the Vanguard paper link and the discussion. I usually split the difference and recommend 30% of stocks but anything between 0% and 50% of stocks is reasonable if that's what you want.
________________________

The following example has an AA of 70% stocks and 30% bonds (more than the 20% less than the 40%), with 20% of stocks in international. That breaks down to 56% US stocks, 14% international stocks, and 30% bonds. Using guesstimated percentages you could have something like:

Rollover IRA at Vanguard -- 95%
51% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
14% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)
30% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

Roth IRA at Vanguard -- 5%
5% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Something to think about.

Topic Author
Blue55
Posts: 12
Joined: Thu May 14, 2020 5:40 pm

Re: Did I choose wrong index and allocations?

Post by Blue55 » Mon May 18, 2020 6:17 pm

Thank you so much for your response.


At your age 20% bonds is too aggressive. Stocks tend to crater at the worst time.
Excuse me but did you mean to write stocks, not bonds? Stocks are too aggressive?
A rollover IRA is not what we consider a taxable account. It is tax-sheltered. Are the following ETFs and the cash in your Rollover IRA? Is it held at Vanguard?
I only have a vanguard account, the ETF's are under and purchased with my IRA Money market settlement fund (VMFXX)
With what looks like a rollover IRA and a Roth IRA, right now what are the account percentages (totaling 100%)? For example:

Rollover IRA -- 95%
Roth IRA -- 5%

I'm assuming yes, since I haven't figure out how to do the %
So you're planning to contribute $7K to a TIRA for 2020?

No, to my roth.
Have you already earned $7K this year?
yes
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. I would put just VTI or VTSAX in the Roth IRA.
So your saying yes; sell VBIAX and just put VTSAX in its place. I was under the assumption that if I place VTSAX under my rollover ira that i can continuously contribute no limit, but Roth only up to $7k ?
Or since they are both IRA's I can only contribute a total of $7k max in both? $3500 in each. (Which would be a bummer)
Oh and in your opinion was VBIAX a bad choice base on Bogelheads?

Under your example which I like the 70/30 AA , you put VTSAX in traditional ira and you also placed it in my Roth? mistake or on purpose ?
You can withdraw your Roth IRA contributions (but not earnings) at any time for any reason. So fund the Roth IRA. In an emergency you can pull it out.
Very glad to hear this.


Thanks,

Blue55

Robert20
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Joined: Fri Apr 10, 2020 10:51 pm

Re: Did I choose wrong index and allocations?

Post by Robert20 » Mon May 18, 2020 6:44 pm

Blue55 wrote:
Mon May 18, 2020 6:17 pm
You can withdraw your Roth IRA contributions (but not earnings) at any time for any reason. So fund the Roth IRA. In an emergency you can pull it out.
After 5 years?.. right?

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BolderBoy
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Location: Colorado

Re: Did I choose wrong index and allocations?

Post by BolderBoy » Mon May 18, 2020 7:44 pm

Blue55 wrote:
Mon May 18, 2020 1:36 pm
Age: 55

Desired Asset allocation: 80% stocks / 20% bonds —-for better possible returns since I don't have much.
I know you didn't ask for opinions about this but at age 55, 80% stocks is waaaaaay too aggressive. And for the wrong reason, too, "for better possible returns".

Do a Google search for "the efficient frontier" and look at the various graphs. You'll see that the difference in returns between an 80/20 AA and a 50/50 AA is a couple of %, while the volatility and risk of the 80/20 AA is very high.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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Horton
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Joined: Mon Jan 21, 2008 3:53 pm

Re: Did I choose wrong index and allocations?

Post by Horton » Mon May 18, 2020 7:49 pm

If you are furloughed, I would not recommend touching the emergency fund. How is your income situation right now?

sixtyforty
Posts: 463
Joined: Tue Nov 25, 2014 12:22 pm
Location: USA

Re: Did I choose wrong index and allocations?

Post by sixtyforty » Tue May 19, 2020 8:18 am

Blue55 wrote:
Mon May 18, 2020 1:36 pm
....

2. I purchased VBIAX to auto invest monthly but I read in the book to avoid high turnover index or etf”s . I hope I understood that correctly. VBIAX has a 37% turnover rate , and according to the book that's a lot of extra fees and not a good choice.
VBAIX has an expense ratio of .07% which is pretty low. No sure what fees your referring to. The turnover may generate some taxes but overall I think it's a fairly tax efficient fund.

My Questions:
Should I keep or sell VBIAX, and is it in the right place, Roth? I took the vanguard questionnaire and it advised 60/40 allocation. I Looked into the Life strategy VSMGX fund as an alternative same 60/40 it has 8.8 % turnover instead of 37% with VBIAX … returns are higher with VBIAX. I also liked at Target retirement fund VTTHX 2035.... Should i go higher than the 60/40????

I think 60/40 is a good allocation, especially considering it's what the Vanguard questionnaire also recommended for you. As far as the funds, I don't think you can make a wrong choice with either of those selections. VBIAX doesn't contain any international so that would be a factor to consider.

...
"Simplicity is the ultimate sophistication" - Leonardo Da Vinci

Topic Author
Blue55
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Joined: Thu May 14, 2020 5:40 pm

Re: Did I choose wrong index and allocations?

Post by Blue55 » Tue May 19, 2020 9:52 am

HI all,
@robert20 After 5 years?.. right?
You are correct that withdrawal without penalties start at 59 1/2 But I think Duckie is also right in that I can take out what I contributed, minus earnings.
@Bolderboy I know you didn't ask for opinions about this but at age 55, 80% stocks is waaaaaay too aggressive. And for the wrong reason, too, "for better possible returns".

Do a Google search for "the efficient frontier" and look at the various graphs. You'll see that the difference in returns between an 80/20 AA and a 50/50 AA is a couple of %, while the volatility and risk of the 80/20 AA is very high.
I asked for everyone's opinion and guidance, thank you for taking the time to respond; I appreciate it.
I did a goolge search and didn't find what you were referring too, but I know what your saying. There is a table in the bogelhead to investing that shows what you mentioned.
@Horton If you are furloughed, I would not recommend touching the emergency fund. How is your income situation right now?
I'm collecting unemployment like the rest of the world :( . I work one day a week. But my heart tells me to take out the $2k and invest in 2019. I will just build it up my emergency fund again, but I will never have another chance to contribute to 2019 when that window closes.
@sixtyforty VBAIX has an expense ratio of .07% which is pretty low. No sure what fees your referring to. The turnover may generate some taxes but overall I think it's a fairly tax efficient fund.


So far tied one to one. Duckie said sell , you say keep. I was very happy with my research and choice until I started reading the bogelhead book which says stay away from high turnover funds, it will eat away your returns. That's the main reason I asked the question. I couldn't find anything to sway me one way or the other. I feel uneasy about it so, Im going to sell it and replace it with another one Maybe the VTTHX 2035

I would love just one fund to put in my roth. But it seems everyone suggest the same 3 funds, VTSAX, VTIAX and VBTLX. I agree its a great allocation. Can anyone comment on why you think duckie would recommend VTSAX in both my traditional and my Roth? Anyone?
he hasn't had the chance to responded yet so I am curious?

And OK I acquiesce, I will do 60/40

Thanks,

Blue

muffins14
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Re: Did I choose wrong index and allocations?

Post by muffins14 » Tue May 19, 2020 10:01 am

It is generally recommended to keep bonds in a traditional IRA rather than a Roth IRA, which is why he recommended selling VBIAX and replacing with an all-stock fund.

The Roth is tax-free, so you may want to keep only stocks in it for now, in order to maximize your expected after-tax portfolio value

muffins14
Posts: 213
Joined: Wed Oct 26, 2016 4:14 am

Re: Did I choose wrong index and allocations?

Post by muffins14 » Tue May 19, 2020 10:05 am

It is also true that your total IRA contributions are $6000 plus $1000 “catch-up”, so, not $7000 per account but $7000 in total

Topic Author
Blue55
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Joined: Thu May 14, 2020 5:40 pm

Re: Did I choose wrong index and allocations?

Post by Blue55 » Tue May 19, 2020 10:51 am

@ muffins14. Thank you.

Topic Author
Blue55
Posts: 12
Joined: Thu May 14, 2020 5:40 pm

Re: Did I choose wrong index and allocations?

Post by Blue55 » Tue May 19, 2020 3:37 pm

Update :happy

I just got the call, back to work next week :D

I retook the AA test in Vanguard since I became employed again; and I changed unstable to stable income it now gave me 70/30 🤷🏻‍♀️

I exchanged vbiax to vtsax today in my Roth , Thank you guys 🙏🏼

I will look into the other recommendations, international and bonds.

So from my understanding, place bonds in my rollover ira and I guess the international has to go into my Roth as well.

Stay safe. 👋🏼

Blue

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Duckie
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Re: Did I choose wrong index and allocations?

Post by Duckie » Tue May 19, 2020 3:38 pm

Blue55 wrote:
At your age 20% bonds is too aggressive. Stocks tend to crater at the worst time.
Excuse me but did you mean to write stocks, not bonds? Stocks are too aggressive?
Only 20% bonds means 80% stocks. At your age that low amount of bonds is very aggressive.
I only have a vanguard account, the ETF's are under and purchased with my IRA Money market settlement fund (VMFXX)
It looks like you missed a word. The ETFs are under what?
With what looks like a rollover IRA and a Roth IRA, right now what are the account percentages (totaling 100%)? For example:
  • Rollover IRA -- 95%
    Roth IRA -- 5%
I'm assuming yes, since I haven't figure out how to do the %
You add up the dollar amounts in each account, then total them, then figure the percentages. For example if you have $82K in the Rollover IRA and $7K in the Roth IRA that totals $89K. $82K / $89K = 92% of the portfolio in your Rollover IRA.
So you're planning to contribute $7K to a TIRA for 2020?
No, to my roth.
But above you wrote: "I want to purchase VTSAX Total market and auto invest monthly, in traditional IRA" so I'm confused.
So your saying yes; sell VBIAX and just put VTSAX in its place.
In the Roth IRA, yes.
I was under the assumption that if I place VTSAX under my rollover ira that i can continuously contribute no limit, but Roth only up to $7k ?
Or since they are both IRA's I can only contribute a total of $7k max in both? $3500 in each. (Which would be a bummer)
You are allowed to contribute up to $7K total to your personal IRAs. How you decide to split it is up to you. (Although you are allowed to contribute to a Rollover IRA usually it's better to make contributions to a Traditional IRA and leave the Rollover IRA just for employer plan rollovers. It's not required but it's cleaner.)
Oh and in your opinion was VBIAX a bad choice base on Bogelheads?
It's a good fund but bonds don't belong in a Roth IRA if you can avoid it.
Under your example which I like the 70/30 AA , you put VTSAX in traditional ira and you also placed it in my Roth? mistake or on purpose ?
In the example US stocks are 56% of the portfolio and the Roth IRA is only 5% so I filled the Roth IRA with VTSAX and put the remainder in the Rollover IRA.

How exactly is your IRA titled at Vanguard? Is it titled Rollover IRA or Traditional IRA?

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Duckie
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Re: Did I choose wrong index and allocations?

Post by Duckie » Tue May 19, 2020 3:41 pm

Blue55 wrote:I just got the call, back to work next week :D
Congratulations!
So from my understanding, place bonds in my rollover ira and I guess the international has to go into my Roth as well.
International stocks are suitable in taxable, pre-tax, and Roth accounts. Where you put things depends on how much room there is.

Topic Author
Blue55
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Re: Did I choose wrong index and allocations?

Post by Blue55 » Tue May 19, 2020 4:14 pm

Hi, @Duckie
But above you wrote: "I want to purchase VTSAX Total market and auto invest monthly, in traditional IRA" so I'm confused.
Sorry about the confusion, I initially wanted to have it under my rollover IRA, since I had vbiax in my Roth.
But after listening to you guys, I reconsidered and placed VTSAX in my Roth today and took out VBIAX. I'm happy with the switch.

How exactly is your IRA titled at Vanguard? Is it titled Rollover IRA or Traditional IRA?
Omg, I just went and it read "Roll over Ira Brokerage account" and Roth IRA Brokerage account" :oops:
:confused .... I don't know what I have anymore :confused Does it just mean an account with Vanguard?
International stocks are suitable in taxable, pre-tax, and Roth accounts. Where you put things depends on how much room there is.
ok I purchased minimum VTSAX $3k I have $4k left for another fund in my Roth Brokerage account (what ever that means)

I have $71k in my Rollover IRA Brokerage account, so know I have to allocate to the 60/40 0r the new suggestion or 70/30 with that.

But I want to keep $40k in my Money market fund VMFXX ( Roll over IRA brokerage account) and use $30k to get to the recommended allocation.

Good idea or No?

Blue

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Duckie
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Re: Did I choose wrong index and allocations?

Post by Duckie » Tue May 19, 2020 4:34 pm

Blue55 wrote:I just went and it read "Roll over Ira Brokerage account" and Roth IRA Brokerage account" :oops:
:confused .... I don't know what I have anymore :confused
You have a Rollover IRA and a Roth IRA on the brokerage side of Vanguard, not the mutual fund side.
ok I purchased minimum VTSAX $3k I have $4k left for another fund in my Roth Brokerage account (what ever that means)
Since your Roth IRA is much smaller than your Rollover IRA I recommend you hold only one fund in the Roth IRA. You can do all rebalancing in the Rollover IRA.
I have $71k in my Rollover IRA Brokerage account, so know I have to allocate to the 60/40 0r the new suggestion or 70/30 with that.
The AA of 60/40 or 70/30 will include the Roth IRA.
But I want to keep $40k in my Money market fund VMFXX ( Roll over IRA brokerage account) and use $30k to get to the recommended allocation.
Since this is your Rollover IRA why are you leaving $40K uninvested? Cash isn't paying much.
___________________

The following portfolio example has an AA of 70% stocks, 30% bonds, with 30% of stocks in international. That breaks down to roughly 50% US stocks, 20% international stocks, and 30% bonds. You could have something like:

Rollover IRA at Vanguard -- $71K -- 91%
41% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
20% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)
30% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.05%)

Roth IRA at Vanguard -- $7K -- 9%
9% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Just some more possibilities.

Topic Author
Blue55
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Joined: Thu May 14, 2020 5:40 pm

Re: Did I choose wrong index and allocations?

Post by Blue55 » Tue May 19, 2020 4:53 pm

@ duckie

Thank you sooooooo much.

Blue

Topic Author
Blue55
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Re: Did I choose wrong index and allocations?

Post by Blue55 » Fri May 22, 2020 11:03 am

I have another question, I purchased VTSAX, how does buying more go? Do I have to buy whole shares all the time? or can I contribute like $10 - $25 bucks if I have it ?




Thanks

Blue

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Duckie
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Re: Did I choose wrong index and allocations?

Post by Duckie » Fri May 22, 2020 5:35 pm

Blue55 wrote:I have another question, I purchased VTSAX, how does buying more go? Do I have to buy whole shares all the time? or can I contribute like $10 - $25 bucks if I have it?
You can purchase mutual funds by dollar amounts. (ETFs are purchased by whole share amounts.) If you contribute money to your Roth IRA it usually goes into the settlement fund first. Once there you can use it to buy more VTSAX shares. Since VTSAX shares are currently valued around $72 if you buy $25 worth you'll only get about a third of a share. Buying partial mutual fund shares is allowed

It might be easier to save up your cash and then contribute to the Roth IRA when you have a larger sum.

Topic Author
Blue55
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Joined: Thu May 14, 2020 5:40 pm

Re: Did I choose wrong index and allocations?

Post by Blue55 » Sun May 24, 2020 1:08 pm

ok, I understand now. Thx


Blue

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