High net worth portfolio advice

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Topic Author
buzztrot
Posts: 6
Joined: Sat Jun 20, 2020 10:42 am

High net worth portfolio advice

Post by buzztrot »

Hi fellow Bogleheads,

I believe to be in a fairly unique financial situation, and I would appreciate hearing what others think. I'm looking for simple and honest financial advice, and I can't think of a better community to ask this question. I've done my best to be concise but comprehensive in describing my situation. Thank you in advance for taking the time to help.

Long story short: I just sold ~10m worth of Facebook shares, which are sitting as cash in a brokerage account doing nothing. I have another ~5m worth of Facebook shares, which I'm inclined to keep for now and donate to charity later. Finally I have a couple smaller assets (as explained below), and a large tax bill for next year of ~1.5m. I'd like to start improving my asset allocation, while also planning to buy a home in the next year.

Here are more details about me and my wife.

Emergency funds: 200k in wife's bank account (we have prenup and separate property)

Debt: None

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 0% State (I'm retired, wife works)

State of Residence: We're green-card holders residing abroad (wife works for a US company)

Age: 36 (wife 35)

Desired Asset allocation: 100% stocks / 0% bonds (Unsure about international allocation)

My asset allocation:
* About 10m cash (-1.5m to be paid in taxes next year)
* About 5m in FB stock
* About 200k in roth ira tracking SP500
* Negligible cash
* Family home (~2m) to split with brother and cousin (probably will give my share to my brother)

Wife's asset allocation:
* About 200k in cash and cash equivalents
* About 50k in 401k
* Negligible inheritance

Our lifestyle and plans:
* We rent, no car, no kids, live frugally, but spend on some things (e.g. travel)
* We're planning to buy a home in San Francisco in the next year
* We're planning to start a family (2 kids, maybe more, if everything goes well)

I'd like to acknowledge that my current financial situation is a mess. It is the result of several factors, from growing up in a working family with no financial education, to working hard and lucking out, and, most importantly, finding an amazing partner that has been willing to ride this crazy adventure with me.

My goal is to make the first steps in the right direction with the help of this community. In a more normal situation, I would start by moving the 10m in two fidelity tax-managed SMAs for US equities and international equities (unsure on the split between the two). I've always found stocks more attractive than bonds, and I believe this is even more true in today's environment.

However, besides not being sure if the tax-managed SMAs are my best option, I'm also not sure if I should make a move now or wait for things to stabilize. Should I move the money in the SMAs as quickly as possible (while DCA'ing), or should I park it in a money market or in gold or in something else?

Finally, other factors make the decision more complicated. There's the large tax bill on my capital gains, which arguably is a point in favor of moving the money into the tax-managed SMAs quickly to start harvesting tax losses. On the other end, we'd like to buy a home in San Francisco in the next year.

I have been through large swings in my net worth as FB went on a couple of rollercoaster rides, so I believe I have a good grasp of my financial psychology and risk propensity. However, I recognize I have somewhat limited understanding of the investment landscape, and I'm eager to hear the opinion of more knowledgeable people on this situation.

Thank you in advance for your time and your help.
livesoft
Posts: 73520
Joined: Thu Mar 01, 2007 8:00 pm

Re: High net worth portfolio advice

Post by livesoft »

I am going to say stay away from a Fidelity SMA (or any other firm's SMA). I think those things are an expensive way to learn about investing and all the fees that one can avoid. While they will probably tout the tax-savings, all those potential tax savings will be less than the fees that you will end up paying over the long term.

Welcome to the forum. What investing books are now on your reading list?
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coffeeblack
Posts: 236
Joined: Wed Jun 19, 2019 10:20 am

Re: High net worth portfolio advice

Post by coffeeblack »

buzztrot wrote: Sat Jun 20, 2020 10:55 am Hi fellow Bogleheads,

I believe to be in a fairly unique financial situation, and I would appreciate hearing what others think. I'm looking for simple and honest financial advice, and I can't think of a better community to ask this question. I've done my best to be concise but comprehensive in describing my situation. Thank you in advance for taking the time to help.

Long story short: I just sold ~10m worth of Facebook shares, which are sitting as cash in a brokerage account doing nothing. I have another ~5m worth of Facebook shares, which I'm inclined to keep for now and donate to charity later. Finally I have a couple smaller assets (as explained below), and a large tax bill for next year of ~1.5m. I'd like to start improving my asset allocation, while also planning to buy a home in the next year.

Here are more details about me and my wife.

Emergency funds: 200k in wife's bank account (we have prenup and separate property)

Debt: None

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 0% State (I'm retired, wife works)

State of Residence: We're green-card holders residing abroad (wife works for a US company)

Age: 36 (wife 35)

Desired Asset allocation: 100% stocks / 0% bonds (Unsure about international allocation)

My asset allocation:
* About 10m cash (-1.5m to be paid in taxes next year)
* About 5m in FB stock
* About 200k in roth ira tracking SP500
* Negligible cash
* Family home (~2m) to split with brother and cousin (probably will give my share to my brother)

Wife's asset allocation:
* About 200k in cash and cash equivalents
* About 50k in 401k
* Negligible inheritance

Our lifestyle and plans:
* We rent, no car, no kids, live frugally, but spend on some things (e.g. travel)
* We're planning to buy a home in San Francisco in the next year
* We're planning to start a family (2 kids, maybe more, if everything goes well)

I'd like to acknowledge that my current financial situation is a mess. It is the result of several factors, from growing up in a working family with no financial education, to working hard and lucking out, and, most importantly, finding an amazing partner that has been willing to ride this crazy adventure with me.

My goal is to make the first steps in the right direction with the help of this community. In a more normal situation, I would start by moving the 10m in two fidelity tax-managed SMAs for US equities and international equities (unsure on the split between the two). I've always found stocks more attractive than bonds, and I believe this is even more true in today's environment.

However, besides not being sure if the tax-managed SMAs are my best option, I'm also not sure if I should make a move now or wait for things to stabilize. Should I move the money in the SMAs as quickly as possible (while DCA'ing), or should I park it in a money market or in gold or in something else?

Finally, other factors make the decision more complicated. There's the large tax bill on my capital gains, which arguably is a point in favor of moving the money into the tax-managed SMAs quickly to start harvesting tax losses. On the other end, we'd like to buy a home in San Francisco in the next year.

I have been through large swings in my net worth as FB went on a couple of rollercoaster rides, so I believe I have a good grasp of my financial psychology and risk propensity. However, I recognize I have somewhat limited understanding of the investment landscape, and I'm eager to hear the opinion of more knowledgeable people on this situation.

Thank you in advance for your time and your help.
I would like to start this discussion by asking you a couple of questions. Why do you want a 100% stock asset allocation? Have you ever lived through a massive bear market? If you haven't how do you know you can withstand it? You have just under 14 million (if I did the math right). So even if you bought a house in SF region you could still walk away now and be just fine. Why risk so much? If you are still working or plan on working then you won't even be touching that money, so why risk so much?
Topic Author
buzztrot
Posts: 6
Joined: Sat Jun 20, 2020 10:42 am

Re: High net worth portfolio advice

Post by buzztrot »

Thank you for the initial feedback!

livesoft:

I've read The Investor's Manifesto by Bernstein and A Man for All Markets by Ed Thorp. I plan to work my way through Bogleheads' recommended reading list (1, 2), but I also just started a new company and I know it will take time to cover it. In the meantime, I'm perusing the wiki, and asking questions here.

A question for you: the two fidelity SMAs I mentioned have a annual management fee of 0.2%, which I am under the impression would easily justify the higher returns from tax-loss harvesting. Could you help me where I'm making a mistake? What instruments would you invest in?

coffeeblack:

Your math is correct and your questions are more than valid. I didn't have any money during the 2008 recession, so I haven't experienced that environment first hand. I did, however, go from a net worth of ~14m (pre tax) to ~8m during the FB Cambridge Analytica scandal. And I went through a similar swing just recently during the Feb-Mar crash. I wasn't bothered in the least in the first occasion, while I admit I was more worried the second time around.

With that said, it is my understanding that over a 10+ year period stocks have historically consistently beat bonds and other cash equivalent assets. Because my wife and I generate enough income for our needs, I liked the idea to "park" the money in index-like SMAs that track the overall economy and do tax-loss harvesting on top. I even considered investing in private equity, with the idea of trading liquidity that I don't need for higher returns, however I find those options too opaque.

I have thought about it quite a bit but I do recognize I have a somewhat naive take on things. I'd love to hear what you would do in this situation, considering the factors I listed in my original post (tax bill, house, current market).

Thank you again for your help
retired@50
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Re: High net worth portfolio advice

Post by retired@50 »

livesoft wrote: Sat Jun 20, 2020 11:32 am I am going to say stay away from a Fidelity SMA (or any other firm's SMA).
+1
If you get in with the wrong crowd (financial adviser) your nest egg will be consumed by a tapeworm.
See link before hiring an adviser: https://jasonzweig.com/the-19-questions ... l-adviser/

Also, by moving to California, you'll be making a substantial addition to your annual tax burden.

Even with a portfolio the size you're dealing with, the three-fund portfolio is a solid choice. More complexity isn't necessary.

Regards,
This is one person's opinion. Nothing more.
Khmer7749
Posts: 3
Joined: Mon Jun 15, 2020 4:40 pm

Re: High net worth portfolio advice

Post by Khmer7749 »

Having 1/3 of your net-worth in 1 stock is way too risky for me. You made your money; if I were in this position I’d sell about 4.8 million of those FB stocks.
Even if the market drops 50% you’re in a good position. I’d reallocate to 50% large cap 15% small/mid cap 20% international and 15% in a tech ETF (since that’s where you made your money this exposure should scratch your itch to be in tech yet insulate you from wild swings from having 1 stock constitute over 1/3 of your portfolio)
Last edited by Khmer7749 on Sat Jun 20, 2020 12:04 pm, edited 1 time in total.
retiredjg
Posts: 42238
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Re: High net worth portfolio advice

Post by retiredjg »

Welcome to the forum. :happy

So far, it appears you have done 1 very smart thing and 1 not very smart thing. The smart thing was to sell the $10m in Facebook. You improved your portfolio considerably by doing that. I don't mean there is anything wrong with FB. What I mean is that it is incredibly risky to hold a large amount of any individual stock.

The not very smart thing was to keeping $5 million in FB (or any individual stock, not just FB). That is 1/3rd of your portfolio in an individual stock and that is WAY too much unless you donate it to charity now.

As for your large tax bill, you probably need to be making estimated payments each quarter (or all now) in order to avoid penalties by trying to pay it all next April.

I'd like to start improving my asset allocation, while also planning to buy a home in the next year.
Good plan. How much of this are you planning to put in the house? Keep that in cash, money market, CDs, with maybe some short term bonds. Invest the rest.

State of Residence: We're green-card holders residing abroad (wife works for a US company)
You are probably paying state income tax aren't you? That is what that question is for.

My goal is to make the first steps in the right direction with the help of this community. In a more normal situation, I would start by moving the 10m in two fidelity tax-managed SMAs for US equities and international equities (unsure on the split between the two). I've always found stocks more attractive than bonds, and I believe this is even more true in today's environment.
I don't know what an SMA is, but if livesoft does not like them, I'm sure I would not either. Yes, I know it means "separately managed account" but that doesn't tell us anything about what it is. Whatever it is, somebody is trying to sell you something so they will have more money to buy a boat. You don't need that.

However, besides not being sure if the tax-managed SMAs are my best option, I'm also not sure if I should make a move now or wait for things to stabilize. Should I move the money in the SMAs as quickly as possible (while DCA'ing), or should I park it in a money market or in gold or in something else?
It this were my money, I'd invest it all next week in a combination of a total stock and a total international stock index fund. I'd add bonds too, but this money is not mine.

There is no logic in using a DCA method - the money just came out of the stock market, in an incredibly risky individual stock. There is no reason to fear for a sideways move in the stock market into a much more diversified and less risky stock position.

If you simply must DCA, invest at least 1/3rd now and get the rest invested in the next 6 months or year.

Finally, other factors make the decision more complicated. There's the large tax bill on my capital gains, which arguably is a point in favor of moving the money into the tax-managed SMAs quickly to start harvesting tax losses. On the other end, we'd like to buy a home in San Francisco in the next year.
Separate your house money from what you plan to invest. Invest the rest. Forget the SMAs.

I have been through large swings in my net worth as FB went on a couple of rollercoaster rides, so I believe I have a good grasp of my financial psychology and risk propensity. However, I recognize I have somewhat limited understanding of the investment landscape, and I'm eager to hear the opinion of more knowledgeable people on this situation.
First, consider adding some bonds to your portfolio. You have no reason or need to have the risk of 100% stock. Set up a simple portfolio that is tax-efficient and contains most of the stocks available world wide. That can be just two funds - total stock and total international.
Spencer
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Re: High net worth portfolio advice

Post by Spencer »

As you may know, if you're set on the Fidelity SMA products (which aren't bad fee-wise), and invest at least $2m into those products, you'll qualify for their Private Wealth Management platform which gets you a small dedicated fiduciary team that will handle your financial planning, investment advice, estate planning, etc which can help you with all these issues.
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Ricchan
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Re: High net worth portfolio advice

Post by Ricchan »

This wiki article on managing a windfall addresses several of the questions you raised, as well as some you may not have considered but may still be helpful to read through.

Note that this is an updated version of the original wiki article, and as such contains much more information. Even though it's still officially a work in progress, it seems it's mostly finalized according to this thread.
RocketShipTech
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Re: High net worth portfolio advice

Post by RocketShipTech »

OP, with a $10M taxable account you are right to be concerned about tax efficiency.

The S&P 500 yields 1.8%. As you intend to live in CA, those qualified dividends will likely be taxed at close to 30%. That’s $60k out of $180k in gains every year lost to taxes.

I would consider the following alternative funds, sorted by SEC yield:

SCHG (large cap growth): 0.7%
JKH (mid cap growth): 0.2%
WCLD (B2B SaaS index): 0.0%

PS: what employee # were you at FB?
retiredjg
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Re: High net worth portfolio advice

Post by retiredjg »

buzztrot wrote: Sat Jun 20, 2020 11:58 am A question for you: the two fidelity SMAs I mentioned have a annual management fee of 0.2%, which I am under the impression would easily justify the higher returns from tax-loss harvesting. Could you help me where I'm making a mistake? What instruments would you invest in?
Let's say you invest $2 million in the SMAs for a year. That would be $4,000 in management fees. You can reduce your taxable income by $3,000 a year if you have banked losses from tax loss harvesting.

You pay them $4k to eliminate the taxes on $3k of income? Even if you are in a very high tax bracket state and federal, you would pay them $4k to save you about $1,500 a year. So far, that is not looking real good to me.

If you want/need someone to manage your money, .2% is not a bad price to pay at all. But don't do it because you think that you will get that much benefit back from tax loss harvesting.
livesoft
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Re: High net worth portfolio advice

Post by livesoft »

buzztrot wrote: Sat Jun 20, 2020 11:58 amA question for you: the two fidelity SMAs I mentioned have a annual management fee of 0.2%, which I am under the impression would easily justify the higher returns from tax-loss harvesting. Could you help me where I'm making a mistake? What instruments would you invest in?
The main problem I see with SMA is that they buy way way way too many different investments that make it difficult to understand and to unwind if you decide to ever switch to another style of investing or advisor. Some folks might consider me well-versed in tax-loss harvesting (is that an understatement or a humble brag? I'll let other comment on that) and I certainly love to do it, but one can do tax-loss harvesting (TLH) very easily with a simple portfolio consisting of the broad-market, tax-efficient, passively-managed, low-expense-ratio index funds often mentioned on the forum with way less complexity than a portfolio of dozens of different ticker symbols each paying various amounts of dividends at different times. Plus once a portfolio is set up, TLHing happens less often or not at all.

If one needed "advice", then I would think the Vanguard Portfolio Advisory Service at 0.3% AUM (less for portfolios of your size) would get you going AND if you wanted to discontinue PAS, then you just stop and you are left with an outstanding portfolio that would need no unwinding.

I don't know, but perhaps Fidelity could do an SMA with less than 5 ticker symbols of broad-market index funds, so that it would be trivial to also end the arrangement and let things be self-managed.
Last edited by livesoft on Sat Jun 20, 2020 12:25 pm, edited 1 time in total.
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TomatoTomahto
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Re: High net worth portfolio advice

Post by TomatoTomahto »

Read up on Liability Matching Portfolio. If it were me, at your age, I would sell all vested FB and put aside whatever is needed to pay taxes in a MM fund and also pay estimated. I would put $5 or $6M in fixed income and a healthy emergency fund, to the extent possible in tax advantages accounts. I would invest the remainder, and new money, in equity funds (I personally would overweight international, but that’s me).

Congratulations. You won the game. You’re ahead by a large margin. Don’t screw it up by pulling your goalie.
I get the FI part but not the RE part of FIRE.
Topic Author
buzztrot
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Joined: Sat Jun 20, 2020 10:42 am

Re: High net worth portfolio advice

Post by buzztrot »

Thank you all for the feedback! I'm taking notes and I'll read all your links.

Re Fidelity SMAs:

I would like to clarify a couple of points here. First, I'm certainly not set on these, but they do seem to make sense for me. If I understand correctly, tax-loss harvesting is limited to 3k on taxable income but is unlimited on capital gains. Also, these two SMAs roughly correspond to US large-cap market and international total market, which is similar to what retiredjg recommended.

Fidelity Tax-Managed U.S. Equity Index Strategy — Index strategy using a subset of securities from the Fidelity U.S. Large Cap Index.

Fidelity Tax-Managed International Equity Index Strategy — Index strategy using a subset of securities from the Fidelity Developed ex North America Focus Index

Re bonds:

Many are disagreeing with my idea to not hold bonds. I understand this goes against Bogleheads' philosophy. Would be people be willing to help me understand why I should still invest in bonds, even in the current climate of almost negative rates, even if I don't need investment income, and even if I don't plan to access this money in the next 10 years?

Re tax efficiency:

Some people seem to agree that I should be concerned about tax efficiency, while others recommend I simply follow the 3-fund strategy. I've read most wiki content I could find on the topic, but it's not always relevant to my situation, so I'm still having an hard time making sense of it all. I would appreciate any additional thoughts on the subject.

--

I think I was able to follow up on most points. I will continue to study your feedback as it comes in.

Thank you so much!
livesoft
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Re: High net worth portfolio advice

Post by livesoft »

A 3-fund strategy is exceedingly tax-efficient. Replace total bond market index fund with a California Tax-exempt muni bond fund, a national tax-exempt muni bond, and/or a US Treasury bond index fund. Or mix/match all 3 of those bond funds.

I will also write that it is easier to go from such a simple 3 to 5 fund portfolio to a multi-investment SMA than it is to go the other way. So if one wanted to explore the waters one could put some in the SMA and some in the simpler self-managed portfolio. That way, one could get see first-hand what the story is without making any guesses.
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TomatoTomahto
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Re: High net worth portfolio advice

Post by TomatoTomahto »

buzztrot wrote: Sat Jun 20, 2020 12:43 pm Re bonds:

Many are disagreeing with my idea to not hold bonds. I understand this goes against Bogleheads' philosophy. Would be people be willing to help me understand why I should still invest in bonds, even in the current climate of almost negative rates, even if I don't need investment income, and even if I don't plan to access this money in the next 10 years?
Read about LMP. We also don’t need the investment income and will probably never spend it or the (admittedly paltry) income it generates. Safety. Ballast. Don’t you have enough to risk only 2/3 of your money?
I get the FI part but not the RE part of FIRE.
coffeeblack
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Re: High net worth portfolio advice

Post by coffeeblack »

buzztrot wrote: Sat Jun 20, 2020 11:58 am Thank you for the initial feedback!

livesoft:

I've read The Investor's Manifesto by Bernstein and A Man for All Markets by Ed Thorp. I plan to work my way through Bogleheads' recommended reading list (1, 2), but I also just started a new company and I know it will take time to cover it. In the meantime, I'm perusing the wiki, and asking questions here.

A question for you: the two fidelity SMAs I mentioned have a annual management fee of 0.2%, which I am under the impression would easily justify the higher returns from tax-loss harvesting. Could you help me where I'm making a mistake? What instruments would you invest in?

coffeeblack:

Your math is correct and your questions are more than valid. I didn't have any money during the 2008 recession, so I haven't experienced that environment first hand. I did, however, go from a net worth of ~14m (pre tax) to ~8m during the FB Cambridge Analytica scandal. And I went through a similar swing just recently during the Feb-Mar crash. I wasn't bothered in the least in the first occasion, while I admit I was more worried the second time around.

With that said, it is my understanding that over a 10+ year period stocks have historically consistently beat bonds and other cash equivalent assets. Because my wife and I generate enough income for our needs, I liked the idea to "park" the money in index-like SMAs that track the overall economy and do tax-loss harvesting on top. I even considered investing in private equity, with the idea of trading liquidity that I don't need for higher returns, however I find those options too opaque.

I have thought about it quite a bit but I do recognize I have a somewhat naive take on things. I'd love to hear what you would do in this situation, considering the factors I listed in my original post (tax bill, house, current market).

Thank you again for your help

So this is just my opinion.
You have more than enough to live well for the rest of your life even if you stopped now. That's the financial reality. You may choose to work because what are you going to do for the next potential 60 years. But you can choose what and how to do it now.

I get that you want your money to grow and perhaps leave some for children that you may have in the future. I think that is a great idea. I also know the math behind stocks vs. bonds etc.

If you were in vegas and won 14 million would you play again or walk away. Perhaps you would play with some of it and put the rest someplace safer.

I would use a 30/70 to a 50/50 portfolio for the cash you have. You can decide if you want to put a lump sum of the cash or DCA. Remeber you are already in an individual stock of facebook. As you said their stock fell not long ago. Sometimes these social media sites like any product have a shelf life. So you are already taking more risk than 100% stocks because about 1/3 of your portfolio is in a single stock. So why take such a big risk with the other 2/3rd? It is true that over time a 100 percent stock portfolio will do well. However, the fluctuations during that time could cause some issues. Much of this depends on your spending. If you are taking 2% a year from your portfolio, chances are you can do 100% and a 50% drop won't make any difference and you can ride it out.

So a 50% drop in 10million is 5 million dollars. Think about that for a minute. 5 million loss and potentially several years before making it back.
Last edited by coffeeblack on Sat Jun 20, 2020 12:57 pm, edited 1 time in total.
retired@50
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Re: High net worth portfolio advice

Post by retired@50 »

buzztrot wrote: Sat Jun 20, 2020 12:43 pm Also, these two SMAs roughly correspond to US large-cap market and international total market, which is similar to what retiredjg recommended.

Fidelity Tax-Managed U.S. Equity Index Strategy — Index strategy using a subset of securities from the Fidelity U.S. Large Cap Index.

Fidelity Tax-Managed International Equity Index Strategy — Index strategy using a subset of securities from the Fidelity Developed ex North America Focus Index
The devil is in the details. These SMA options appear to still be purchasing individual stocks, not stock index mutual funds. In other words, it's unnecessarily complex and difficult to unwind.

See point #3 on the PDF - quoted here:
3. Individual security ownership
This personalized portfolio features individual security ownership, which enables you to see what you own at any time, and can be managed to your tax situation and desire to exclude certain securities.
Regards,
This is one person's opinion. Nothing more.
retiredjg
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Re: High net worth portfolio advice

Post by retiredjg »

buzztrot wrote: Sat Jun 20, 2020 12:43 pm Re Fidelity SMAs:

I would like to clarify a couple of points here. First, I'm certainly not set on these, but they do seem to make sense for me. If I understand correctly, tax-loss harvesting is limited to 3k on taxable income but is unlimited on capital gains.
This is correct and I was not considering that you have the large cap gain tax bill this year. You could get lucky and have a nice tax loss harvest in the next 6 months to offset some of those gains.
Also, these two SMAs roughly correspond to US large-cap market and international total market, which is similar to what retiredjg recommended.
At first look, yes. And no. The large cap market is not the total stock market. And the developed markets index is certainly not the total international index. These two have considerably less diversification than what I mentioned. However, performance wise, they are not all that different so I'm not sure how important that is other than philosophy.

One stumbling block I have is this idea of "subset of securities from the Large Cap Index". They do not explain how they are doing these subsets.

Will you end up with value stocks until they go down and then get put in growth stocks as the TLH partner? Or will they have you in certain sectors (say health care precious metals) until they go down and then put you into other sectors (say tech and financials)? All of that would simply be market timing moves and I'm not sure that is a good thing to base your tax loss harvesting on.

I suppose they could split each sector into portions A and B. First you'd be in the A funds and then get moved to the B funds after the A funds drop. That would be true TLH and not market timing. But it sure cuts down on numbers of stocks you'd be invested in at one time.

Many are disagreeing with my idea to not hold bonds. I understand this goes against Bogleheads' philosophy. Would be people be willing to help me understand why I should still invest in bonds, even in the current climate of almost negative rates, even if I don't need investment income, and even if I don't plan to access this money in the next 10 years?
The main reason to hold bonds is to preserve what you have rather than risk losing half of every once in awhile. And then there are times that bonds actually do pay more than stocks but this is only seen in retrospect.

Some people seem to agree that I should be concerned about tax efficiency, while others recommend I simply follow the 3-fund strategy. I've read most wiki content I could find on the topic, but it's not always relevant to my situation, so I'm still having an hard time making sense of it all. I would appreciate any additional thoughts on the subject.
Total stock and total international are very tax efficient. And you could use tax-exempt bonds which are also very tax efficient.
livesoft
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Re: High net worth portfolio advice

Post by livesoft »

retiredjg wrote: Sat Jun 20, 2020 1:02 pm
buzztrot wrote: Sat Jun 20, 2020 12:43 pm Re Fidelity SMAs:

I would like to clarify a couple of points here. First, I'm certainly not set on these, but they do seem to make sense for me. If I understand correctly, tax-loss harvesting is limited to 3k on taxable income but is unlimited on capital gains.
This is correct and I was not considering that you have the large cap gain tax bill this year. You could get lucky and have a nice tax loss harvest in the next 6 months to offset some of those gains.
If the OP is "lucky" and has a nice tax loss harvest from a SMA portfolio in the next 6 months, then they will also have pretty much the same nice tax loss harvest from broad-market index funds in the next 6 months, too. We can write about correlations and why that would be the case. Or in other words, we are not talking about tax-loss harvesting versus no tax-loss harvesting. Certainly, any taxable portfolio will allow for tax-loss harvesting even if only one single fund was used at the outset.
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retiredjg
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Re: High net worth portfolio advice

Post by retiredjg »

Agree. There is nothing magical about TLH in the SMA account. You can do the same on your own in ways that will be a lot easier to report on your taxes.
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Ricchan
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Re: High net worth portfolio advice

Post by Ricchan »

buzztrot wrote: Sat Jun 20, 2020 12:43 pm Re bonds:

Many are disagreeing with my idea to not hold bonds. I understand this goes against Bogleheads' philosophy. Would be people be willing to help me understand why I should still invest in bonds, even in the current climate of almost negative rates, even if I don't need investment income, and even if I don't plan to access this money in the next 10 years?
I believe it mainly boils down to risk tolerance. There are plenty of people in their 30's who are 100% stock. If they're able to sleep at night, I won't chastise them for their decision.

There may be another psychological phenomenon at play where eliminating the last 1% of risk (e.g. going from 99% chance of success to 100%) is valued much more than reducing risk at any other point in the curve by 1% (e.g. going from 50% chance of success to 51%). If someone believes that holding a certain minimum amount of bonds absolutely guarantees FI, they may insist on maintaining that minimum even if there are better risk/reward trade-offs to be had at other allocation levels.

If you donate the FB stock you haven't sold yet to a charity or a donor-advised fund this year, you can deduct the current market value amount from your AGI (which includes capital gains), and the charity can then sell the stock without capital gains due to their tax-exempt status. The allowed deduction is 30% of AGI for appreciated assets. I know the CARES act increases the allowed deduction to 100% of AGI for cash contributions for 2020, but I'm not sure if that also applies to appreciated assets (my hunch is no). In any case, you can carry forward unused deductions for up to 5 years.
Last edited by Ricchan on Tue Jun 23, 2020 12:30 am, edited 1 time in total.
RocketShipTech
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Re: High net worth portfolio advice

Post by RocketShipTech »

retiredjg wrote: Sat Jun 20, 2020 1:02 pm
Some people seem to agree that I should be concerned about tax efficiency, while others recommend I simply follow the 3-fund strategy. I've read most wiki content I could find on the topic, but it's not always relevant to my situation, so I'm still having an hard time making sense of it all. I would appreciate any additional thoughts on the subject.
Total stock and total international are very tax efficient. And you could use tax-exempt bonds which are also very tax efficient.
I think we need to quantify what we mean when we say “very tax efficient”.

As I posted above, Total Stock Market pays out 1.8% return in the form of dividends, and the OP is likely paying 0.6% in taxes. Let’s assume total return is 7% per year. That means the OP will lose 9% of the fund’s total return every year in taxes. Is that “very tax efficient”?

It depends on the alternatives. In this case we have SCHG which is 95% correlated to Total Stock Market and pays out one third the dividends. Let’s conservatively assume that Growth offers total returns around the same as Total Stock (despite all recent evidence to the contrary). So OP would only lose 3% of total return to taxes by investing in SCHG instead.

If someone posted on BH that they were paying a 6% annual fee for the slight improvement in diversification that Total Stock offers above Large Cap Growth, how many of us would nod in approval? Anyone?
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Re: High net worth portfolio advice

Post by goodenyou »

Your decision of what to do with your money will depend on your risk appetite. Simple portfolios are scalable. You may have more money than you need, but not a lot more money than many people here on this forum. Your best option is to educate yourself and not overpay people to do the easy parts of investing. Most financial advisers will not outperform a simple portfolio without significantly more risk. I would be more interested in return of principal than return on principal on a significant portion of my portfolio. I would sell most if not all of my Facebook stock and put it in a diversified portfolio. But that is me. I don't have the nerve to put it all on one horse. You were fortunate that it worked out well. I would have had the bad fortune of having picked Enron and would be living on the streets of San Francisco and not looking for a home in San Francisco.
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livesoft
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Re: High net worth portfolio advice

Post by livesoft »

RocketShipTech wrote: Sat Jun 20, 2020 1:31 pmAs I posted above, Total Stock Market pays out 1.8% return in the form of dividends, and the OP is likely paying 0.6% in taxes. Let’s assume total return is 7% per year. That means the OP will lose 9% of the fund’s total return every year in taxes. Is that “very tax efficient”?
They would pay the same taxes on dividends from the individual stocks held in an SMA portfolio which would have a very similar dividend yield. Yes, they could select a growth index fund or a total market fund or another fund or lots of individual stocks or tax-exempt muni bond funds.

So all things are relative and one must make the proper comparisons as you noted. And in those comparisons are the expense ratios and the advisor fees and non-tangibles like ego-stroking or not.
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reln
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Re: High net worth portfolio advice

Post by reln »

buzztrot wrote: Sat Jun 20, 2020 10:55 am Hi fellow Bogleheads,

I believe to be in a fairly unique financial situation, and I would appreciate hearing what others think. I'm looking for simple and honest financial advice, and I can't think of a better community to ask this question. I've done my best to be concise but comprehensive in describing my situation. Thank you in advance for taking the time to help.

Long story short: I just sold ~10m worth of Facebook shares, which are sitting as cash in a brokerage account doing nothing. I have another ~5m worth of Facebook shares, which I'm inclined to keep for now and donate to charity later. Finally I have a couple smaller assets (as explained below), and a large tax bill for next year of ~1.5m. I'd like to start improving my asset allocation, while also planning to buy a home in the next year.

Here are more details about me and my wife.

Emergency funds: 200k in wife's bank account (we have prenup and separate property)

Debt: None

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 0% State (I'm retired, wife works)

State of Residence: We're green-card holders residing abroad (wife works for a US company)

Age: 36 (wife 35)

Desired Asset allocation: 100% stocks / 0% bonds (Unsure about international allocation)

My asset allocation:
* About 10m cash (-1.5m to be paid in taxes next year)
* About 5m in FB stock
* About 200k in roth ira tracking SP500
* Negligible cash
* Family home (~2m) to split with brother and cousin (probably will give my share to my brother)

Wife's asset allocation:
* About 200k in cash and cash equivalents
* About 50k in 401k
* Negligible inheritance

Our lifestyle and plans:
* We rent, no car, no kids, live frugally, but spend on some things (e.g. travel)
* We're planning to buy a home in San Francisco in the next year
* We're planning to start a family (2 kids, maybe more, if everything goes well)

I'd like to acknowledge that my current financial situation is a mess. It is the result of several factors, from growing up in a working family with no financial education, to working hard and lucking out, and, most importantly, finding an amazing partner that has been willing to ride this crazy adventure with me.

My goal is to make the first steps in the right direction with the help of this community. In a more normal situation, I would start by moving the 10m in two fidelity tax-managed SMAs for US equities and international equities (unsure on the split between the two). I've always found stocks more attractive than bonds, and I believe this is even more true in today's environment.

However, besides not being sure if the tax-managed SMAs are my best option, I'm also not sure if I should make a move now or wait for things to stabilize. Should I move the money in the SMAs as quickly as possible (while DCA'ing), or should I park it in a money market or in gold or in something else?

Finally, other factors make the decision more complicated. There's the large tax bill on my capital gains, which arguably is a point in favor of moving the money into the tax-managed SMAs quickly to start harvesting tax losses. On the other end, we'd like to buy a home in San Francisco in the next year.

I have been through large swings in my net worth as FB went on a couple of rollercoaster rides, so I believe I have a good grasp of my financial psychology and risk propensity. However, I recognize I have somewhat limited understanding of the investment landscape, and I'm eager to hear the opinion of more knowledgeable people on this situation.

Thank you in advance for your time and your help.
Consider Vanguard's advisory service.

Otherwise stick with VTI and mix in VEU if you want international stocks for the 8.5m.

The 1.5m keep in a few savings accounts.

For the 5m donation, consider Vanguard's DAFs
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Re: High net worth portfolio advice

Post by retiredjg »

RocketShipTech wrote: Sat Jun 20, 2020 1:31 pm I think we need to quantify what we mean when we say “very tax efficient”.

As I posted above, Total Stock Market pays out 1.8% return in the form of dividends, and the OP is likely paying 0.6% in taxes. Let’s assume total return is 7% per year. That means the OP will lose 9% of the fund’s total return every year in taxes. Is that “very tax efficient”?
I didn't follow your math. Maybe an example would help.

It depends on the alternatives. In this case we have SCHG which is 95% correlated to Total Stock Market and pays out one third the dividends.
I suppose you have to define "95% correlated". A maxi large growth fund certainly does not contain mostly the same stocks as the total stock so the correlation is not about what is invested in.
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Re: High net worth portfolio advice

Post by livesoft »

retiredjg wrote: Sat Jun 20, 2020 1:58 pm
RocketShipTech wrote: Sat Jun 20, 2020 1:31 pm I think we need to quantify what we mean when we say “very tax efficient”.

As I posted above, Total Stock Market pays out 1.8% return in the form of dividends, and the OP is likely paying 0.6% in taxes. Let’s assume total return is 7% per year. That means the OP will lose 9% of the fund’s total return every year in taxes. Is that “very tax efficient”?
I didn't follow your math. Maybe an example would help.
33% tax (US and Calif) on 1.8% dividends is 0.6%. 0.6% is about 9% of the 7% total return. Get lower-yielding investments and the 1.8% dividends gets lower and the overall tax gets lower. That is, an anti-dividend strategy may mean lower taxes. Losing money also means lower taxes. Paying an advisor can also mean lower taxes. All those things don't mean more money for the investor though. :twisted:
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Re: High net worth portfolio advice

Post by RocketShipTech »

retiredjg wrote: Sat Jun 20, 2020 1:58 pm
RocketShipTech wrote: Sat Jun 20, 2020 1:31 pm I think we need to quantify what we mean when we say “very tax efficient”.

As I posted above, Total Stock Market pays out 1.8% return in the form of dividends, and the OP is likely paying 0.6% in taxes. Let’s assume total return is 7% per year. That means the OP will lose 9% of the fund’s total return every year in taxes. Is that “very tax efficient”?
I didn't follow your math. Maybe an example would help.
Total annual return of Total Stock Market: 7%
Return attributable to dividends: 1.8%
OP’s qualified dividend tax rate: 28%
OP’s tax cost: 1.8% * 28% = 0.5%
Tax cost as a proportion of annual total return: 0.5% / 7% = 7%

Total annual return of Large Cap Growth: 7%
Return attributable to dividends: 0.7%
OP’s qualified dividend tax rate: 28%
OP’s tax cost: 0.7% * 28% = 0.2%
Tax cost as a proportion of annual total return: 0.2% / 7% = 3%

So a 4% hit to total return by investing in Total Stock instead of Large Cap Growth.
A maxi large growth fund certainly does not contain mostly the same stocks as the total stock.
It does not but then the extra stocks in Total Stock also don’t seem to make much of a difference:

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retiredjg
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Re: High net worth portfolio advice

Post by retiredjg »

livesoft wrote: Sat Jun 20, 2020 2:04 pm 33% tax (US and Calif) on 1.8% dividends is 0.6%.....
Last I heard, qualified dividends do not trigger ordinary tax rates on the federal level. So I guess you are assuming a 20% LTCG rate and NIIT as well?
RocketShipTech
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Re: High net worth portfolio advice

Post by RocketShipTech »

livesoft wrote: Sat Jun 20, 2020 2:04 pm
retiredjg wrote: Sat Jun 20, 2020 1:58 pm
RocketShipTech wrote: Sat Jun 20, 2020 1:31 pm I think we need to quantify what we mean when we say “very tax efficient”.

As I posted above, Total Stock Market pays out 1.8% return in the form of dividends, and the OP is likely paying 0.6% in taxes. Let’s assume total return is 7% per year. That means the OP will lose 9% of the fund’s total return every year in taxes. Is that “very tax efficient”?
I didn't follow your math. Maybe an example would help.
33% tax (US and Calif) on 1.8% dividends is 0.6%. 0.6% is about 9% of the 7% total return. Get lower-yielding investments and the 1.8% dividends gets lower and the overall tax gets lower. That is, an anti-dividend strategy may mean lower taxes. Losing money also means lower taxes. Paying an advisor can also mean lower taxes. All those things don't mean more money for the investor though. :twisted:
Unless you dispute Modigliani-Miller, an anti-dividend strategy does mean more money for the investor.
Last edited by RocketShipTech on Sat Jun 20, 2020 2:15 pm, edited 1 time in total.
RocketShipTech
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Re: High net worth portfolio advice

Post by RocketShipTech »

retiredjg wrote: Sat Jun 20, 2020 2:11 pm
livesoft wrote: Sat Jun 20, 2020 2:04 pm 33% tax (US and Calif) on 1.8% dividends is 0.6%.....
Last I heard, qualified dividends do not trigger ordinary tax rates on the federal level. So I guess you are assuming a 20% LTCG rate and NIIT as well?
15% LTCG + 9.3% CA tax + 3.8% NIIT
fourwheelcycle
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Re: High net worth portfolio advice

Post by fourwheelcycle »

I recommend you open a Vanguard Flagship Select account and put 40% of the money you don't need for taxes in Vanguard's Total Stock Market Index, 40% in Vanguard's 500 Index, 17% in Vanguard's Intermediate Term Tax Exempt Index, and 3% in Vanguard's Federal Money Market, Prime Money Market or Tax Exempt Money Market funds. Also, put your pending tax bill money in one of the money market funds.

This means selling your remaining Facebook stock, which I also advise. If you want to keep your FB stock as part of your 80% equity go ahead - you'll probably be OK and if something happens to FB you'll still have your other savings.

This approach is nothing fancy, but long term I bet it will come close to your other fancy investment ideas. The big plus is that you can set it and forget it, spend less time worrying about alternative investment ideas, spend less money on advisor fees, and spend more time enjoying your wonderful spouse and your future children.

If possible you should fill the ROTH and 401k accounts with Vanguard's Intermediate Term Bond Index, but that won't reduce much of the 17% bonds I think think you should put in your overall portfolio. Basically, this is an 80/20 portfolio. During periods when the market is way down you can live off the bonds and cash if your other income does not cover your expenses.
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Re: High net worth portfolio advice

Post by retiredjg »

RocketShipTech wrote: Sat Jun 20, 2020 2:10 pm OP’s qualified dividend tax rate: 28%
What is this number made of? Disregard, I see you answered that above.


I get your point that growth stocks are more tax-efficient than blend or value. And I'm not saying that growth stocks are a bad choice for people who know enough to be interested in them for the right reasons. And I'm certain that some BHs invest just that way for just those reasons.

But I do not believe that investing mostly in large cap growth is a suggestion that should be made to strangers on the internet who probably have no idea what a growth stock is. There are factors other than tax-efficiency involved in picking funds.

"Owning the haystack" seems to be tax-efficient enough even if there might be something more tax-efficient in the universe. Owning the haystack offers important things that the LCG style box does not offer and is a more reasonable suggestion for people who are asking for help in picking their investments....in my opinion. :happy
retired@50
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Re: High net worth portfolio advice

Post by retired@50 »

The tax elephant in the equation is California.

Move to Texas or Washington or Florida and save 9.3% or more if income and/or taxes go up.

Regards,
This is one person's opinion. Nothing more.
oldfort
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Re: High net worth portfolio advice

Post by oldfort »

There’s no way I would want 1/3 of my net worth tied up in an individual stock. I would sell all the vested FB stock.
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buzztrot
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Re: High net worth portfolio advice

Post by buzztrot »

Thank you all for the feedback so far! I can't overstate how grateful I am. I'm going to sleep now and will pick up tomorrow.
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celia
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Re: High net worth portfolio advice

Post by celia »

My questions for you are about your plans for future residence(s). Many of us do not know much about US taxes for non-resident non-citizens (US). So if you want to attract the attention of those who do, may I suggest editing the thread title to add ‘Non-resident Living in <country>’. I don’t know if the country matters but at least it should attract others in ‘similar’ situations.

What country will your permanent residence be in? What country do you want to live in after age 60? (I was going to say ‘retire’ but you already retired early.) :D

Are you aware California has one of the highest state income tax rates? Your wife’s wages and investment distributions and capital gains for both of you will be taxed by the IRS and the state you live in (if you live in a state with state income taxes). In addition, your wife’s wages will be subject to Social Security and Medicare taxes.
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Re: High net worth portfolio advice

Post by nigel_ht »

I don’t think I saw how much you were planning to spend in SF...I’d keep that much in cash equivalents.

I still wouldn’t do 100/0 but 90/10 even if I didn’t care what happened. That said, what’s the long term plan for your wealth?

I would figure that out first before getting to worried about AA or being in or out of the market in 2020.

Maybe split the difference and go $5M total market and keep $5M cash for the house and dry powder. You can easily spend a few mil in SF real estate...
zie
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Re: High net worth portfolio advice

Post by zie »

buzztrot wrote: Sat Jun 20, 2020 12:43 pm
Re bonds:

Many are disagreeing with my idea to not hold bonds. I understand this goes against Bogleheads' philosophy. Would be people be willing to help me understand why I should still invest in bonds, even in the current climate of almost negative rates, even if I don't need investment income, and even if I don't plan to access this money in the next 10 years?
You won the game, take what you need to live off of for the next 70 years and put that in fixed income. It doesn't matter that it's not paying anything right now, as that's not the point. The point is, get yourself a nice safe place for all of your future living expenses, so that no matter what happens in the future, you never have to worry about being hungry, or having a roof over your head. That's the entire point of Fixed Income investments. The ultra-safe is put "keep me comfortable $'s" in Treasuries doing something called an LMP (liability matching portfolio - something to research). The less safe, but still quite safe is TBM(Total bond market).

After you have socked away whatever you think you need for the next 70 years in safety, then you can do *ANYTHING* with the rest of your money and it matters not one bit if it grows more or not. The rest can be 100% HTZ(Hertz rental company that just filed bankruptcy) and it won't affect your life. Obviously I'm not suggesting you actually invest in HTZ, but others here have much better suggestions on what to do with your equity portion, like TSM(total stock market), etc.

You've won, don't gamble or invest in what you need to live for the rest of your life.
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Re: High net worth portfolio advice

Post by HEDGEFUNDIE »

retiredjg wrote: Sat Jun 20, 2020 2:28 pm
RocketShipTech wrote: Sat Jun 20, 2020 2:10 pm OP’s qualified dividend tax rate: 28%
What is this number made of? Disregard, I see you answered that above.


I get your point that growth stocks are more tax-efficient than blend or value. And I'm not saying that growth stocks are a bad choice for people who know enough to be interested in them for the right reasons. And I'm certain that some BHs invest just that way for just those reasons.

But I do not believe that investing mostly in large cap growth is a suggestion that should be made to strangers on the internet who probably have no idea what a growth stock is. There are factors other than tax-efficiency involved in picking funds.

"Owning the haystack" seems to be tax-efficient enough even if there might be something more tax-efficient in the universe. Owning the haystack offers important things that the LCG style box does not offer and is a more reasonable suggestion for people who are asking for help in picking their investments....in my opinion. :happy
The typical BH advice is appropriate for typical BH OPs.

The typical BH OP does not have $10M in taxable accounts.

Giving the OP the lazy answer that we typically give around here will only set him up for heartache when he has to write an unexpected $60k check to the IRS for accrued dividend taxes next year (plus penalties?), plus whatever capital gains he will incur to unwind his Total Stock Market position once he belatedly realizes how terribly inefficient it is for his situation.
oldfort
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Re: High net worth portfolio advice

Post by oldfort »

HEDGEFUNDIE wrote: Sat Jun 20, 2020 3:25 pm
retiredjg wrote: Sat Jun 20, 2020 2:28 pm
RocketShipTech wrote: Sat Jun 20, 2020 2:10 pm OP’s qualified dividend tax rate: 28%
What is this number made of? Disregard, I see you answered that above.


I get your point that growth stocks are more tax-efficient than blend or value. And I'm not saying that growth stocks are a bad choice for people who know enough to be interested in them for the right reasons. And I'm certain that some BHs invest just that way for just those reasons.

But I do not believe that investing mostly in large cap growth is a suggestion that should be made to strangers on the internet who probably have no idea what a growth stock is. There are factors other than tax-efficiency involved in picking funds.

"Owning the haystack" seems to be tax-efficient enough even if there might be something more tax-efficient in the universe. Owning the haystack offers important things that the LCG style box does not offer and is a more reasonable suggestion for people who are asking for help in picking their investments....in my opinion. :happy
The typical BH advice is appropriate for typical BH OPs.

The typical BH OP does not have $10M in taxable accounts.

Giving the OP the lazy answer that we typically give around here will only set him up for heartache when he has to write an unexpected $60k check to the IRS for accrued dividend taxes next year (plus penalties?), plus whatever capital gains he will incur to unwind his Total Stock Market position once he belatedly realizes how terribly inefficient it is for his situation.
The Total Stock Market index is tax efficient. It has low turnover, which reduces capital gains taxes. The potential tax benefits of a growth fund may come at the expense of investment returns. To the extent you believe there is a value premium, growth funds should be expected to under-perform the total stock market index over the long term.
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Re: High net worth portfolio advice

Post by HEDGEFUNDIE »

oldfort wrote: Sat Jun 20, 2020 3:49 pm
HEDGEFUNDIE wrote: Sat Jun 20, 2020 3:25 pm
retiredjg wrote: Sat Jun 20, 2020 2:28 pm
RocketShipTech wrote: Sat Jun 20, 2020 2:10 pm OP’s qualified dividend tax rate: 28%
What is this number made of? Disregard, I see you answered that above.


I get your point that growth stocks are more tax-efficient than blend or value. And I'm not saying that growth stocks are a bad choice for people who know enough to be interested in them for the right reasons. And I'm certain that some BHs invest just that way for just those reasons.

But I do not believe that investing mostly in large cap growth is a suggestion that should be made to strangers on the internet who probably have no idea what a growth stock is. There are factors other than tax-efficiency involved in picking funds.

"Owning the haystack" seems to be tax-efficient enough even if there might be something more tax-efficient in the universe. Owning the haystack offers important things that the LCG style box does not offer and is a more reasonable suggestion for people who are asking for help in picking their investments....in my opinion. :happy
The typical BH advice is appropriate for typical BH OPs.

The typical BH OP does not have $10M in taxable accounts.

Giving the OP the lazy answer that we typically give around here will only set him up for heartache when he has to write an unexpected $60k check to the IRS for accrued dividend taxes next year (plus penalties?), plus whatever capital gains he will incur to unwind his Total Stock Market position once he belatedly realizes how terribly inefficient it is for his situation.
The Total Stock Market index is tax efficient. It has low turnover, which reduces capital gains taxes. The potential tax benefits of a growth fund may come at the expense of investment returns. To the extent you believe there is a value premium, growth funds should be expected to under-perform the total stock market index over the long term.
This is speculation that is no better than market timing.
retired@50
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Re: High net worth portfolio advice

Post by retired@50 »

HEDGEFUNDIE wrote: Sat Jun 20, 2020 3:25 pm
The typical BH advice is appropriate for typical BH OPs.

The typical BH OP does not have $10M in taxable accounts.

Giving the OP the lazy answer that we typically give around here will only set him up for heartache when he has to write an unexpected $60k check to the IRS for accrued dividend taxes next year (plus penalties?), plus whatever capital gains he will incur to unwind his Total Stock Market position once he belatedly realizes how terribly inefficient it is for his situation.
What's your advice to the OP?

Regards,
This is one person's opinion. Nothing more.
HEDGEFUNDIE
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Re: High net worth portfolio advice

Post by HEDGEFUNDIE »

retired@50 wrote: Sat Jun 20, 2020 4:03 pm
HEDGEFUNDIE wrote: Sat Jun 20, 2020 3:25 pm
The typical BH advice is appropriate for typical BH OPs.

The typical BH OP does not have $10M in taxable accounts.

Giving the OP the lazy answer that we typically give around here will only set him up for heartache when he has to write an unexpected $60k check to the IRS for accrued dividend taxes next year (plus penalties?), plus whatever capital gains he will incur to unwind his Total Stock Market position once he belatedly realizes how terribly inefficient it is for his situation.
What's your advice to the OP?

Regards,
My advice is for him to find a trusted tax advisor before doing anything.

If he insists on managing his money himself then I would advise him to use one of the growth funds that rocketshiptech already mentioned.
retiredjg
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Re: High net worth portfolio advice

Post by retiredjg »

The typical BH OP does not have $10M in taxable accounts.
Well, if someone has a better suggestion based on the fact that the assets are $10 million instead of something less, maybe that should be posted with an explanation of why that is better in this particular scenario. This has not yet happened.

Keep in mind that we are dealing with a novice investor, not someone with extensive experience. Better to suggest a good approach that is understood than to suggest what may be a better approach in some areas but not all areas and expecting the novice investor to know how to make the choice.

A novice investor will not truly understand the choices and the consequences of those choices. It's not fair to say "this is better in this regard" without explaining all the consequences of making that choice. The consequences of investing mostly or solely in LCG is that the portfolio is going to have times when it lags. Nobody has mentioned this so far. Do we even know if our original poster would be OK with that or not?

I agree that LCG will result in lower taxes on annual dividends and cap gains distributions. I'm not yet convinced that is a better portfolio for this poster. It might be. It might not be. But unless the original poster has a full understanding of the consequences of making one decision over another, we are doing a dis-service in making our suggestions.
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: High net worth portfolio advice

Post by HEDGEFUNDIE »

retiredjg wrote: Sat Jun 20, 2020 4:08 pm
The typical BH OP does not have $10M in taxable accounts.
Well, if someone has a better suggestion based on the fact that the assets are $10 million instead of something less, maybe that should be posted with an explanation of why that is better in this particular scenario. This has not yet happened.

Keep in mind that we are dealing with a novice investor, not someone with extensive experience. Better to suggest a good approach that is understood than to suggest what may be a better approach in some areas but not all areas and expecting the novice investor to know how to make the choice.

A novice investor will not truly understand the choices and the consequences of those choices. It's not fair to say "this is better in this regard" without explaining all the consequences of making that choice. The consequences of investing mostly or solely in LCG is that the portfolio is going to have times when it lags. Nobody has mentioned this so far. Do we even know if our original poster would be OK with that or not?

I agree that LCG will result in lower taxes on annual dividends and cap gains distributions. I'm not yet convinced that is a better portfolio for this poster. It might be. It might not be. But unless the original poster has a full understanding of the consequences of making one decision over another, we are doing a dis-service in making our suggestions.
Times when it lags and times when it gains. Over 30 years of history LCG has outperformed TSM by over 1% CAGR, but again, that has nothing to do with the advice OP needs to hear.

If the OP was in the 0% LTCG bracket and living in FL, I would have no problem with him buying TSM.

But he’s not. And so the advice that OP needs is primarily tax advice. And so advising him to buy TSM in taxable is the true disservice.

Rules of thumb are great for the average investor. This investor is far from average.
Last edited by HEDGEFUNDIE on Sat Jun 20, 2020 4:17 pm, edited 1 time in total.
oldfort
Posts: 1905
Joined: Mon Mar 02, 2020 8:45 pm

Re: High net worth portfolio advice

Post by oldfort »

HEDGEFUNDIE wrote: Sat Jun 20, 2020 3:50 pm
oldfort wrote: Sat Jun 20, 2020 3:49 pm
HEDGEFUNDIE wrote: Sat Jun 20, 2020 3:25 pm
retiredjg wrote: Sat Jun 20, 2020 2:28 pm
RocketShipTech wrote: Sat Jun 20, 2020 2:10 pm OP’s qualified dividend tax rate: 28%
What is this number made of? Disregard, I see you answered that above.


I get your point that growth stocks are more tax-efficient than blend or value. And I'm not saying that growth stocks are a bad choice for people who know enough to be interested in them for the right reasons. And I'm certain that some BHs invest just that way for just those reasons.

But I do not believe that investing mostly in large cap growth is a suggestion that should be made to strangers on the internet who probably have no idea what a growth stock is. There are factors other than tax-efficiency involved in picking funds.

"Owning the haystack" seems to be tax-efficient enough even if there might be something more tax-efficient in the universe. Owning the haystack offers important things that the LCG style box does not offer and is a more reasonable suggestion for people who are asking for help in picking their investments....in my opinion. :happy
The typical BH advice is appropriate for typical BH OPs.

The typical BH OP does not have $10M in taxable accounts.

Giving the OP the lazy answer that we typically give around here will only set him up for heartache when he has to write an unexpected $60k check to the IRS for accrued dividend taxes next year (plus penalties?), plus whatever capital gains he will incur to unwind his Total Stock Market position once he belatedly realizes how terribly inefficient it is for his situation.
The Total Stock Market index is tax efficient. It has low turnover, which reduces capital gains taxes. The potential tax benefits of a growth fund may come at the expense of investment returns. To the extent you believe there is a value premium, growth funds should be expected to under-perform the total stock market index over the long term.
This is speculation that is no better than market timing.
It's a bit glib to write off three decades of academic research, including from a Nobel Prize winner, as market timing.
KyleAAA
Posts: 8634
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Contact:

Re: High net worth portfolio advice

Post by KyleAAA »

I don’t think the SMA really buys you anything, tax-wise. TLH is really easy to DIY. There isn’t yet a cheap product to do it automatically, but there should be. I’d pay $10/month for that. Once you get into 6 figures in your Taxable portfolio, the tax savings are worth it. At $10mm, less than an hour per year could save you tens of thousands of dollars. But paying an extra 0.3% on a $10mm portfolio might wipe out the savings. I’m ambivalent on the total market vs growth argument. I use total market in taxable, but I live in a no-income-tax state. I also aggressively small/value tilt, so growth index would be counter productive. Also note that while it has been quite a few years now, growth index in the past has distributed both short and long-term capital gains, which would completely wipe out any tax advantages of lower dividends and then some. Not that I would expect that going forward.
Last edited by KyleAAA on Sat Jun 20, 2020 4:29 pm, edited 3 times in total.
sf_tech_saver
Posts: 283
Joined: Sat Sep 08, 2018 9:03 pm

Re: High net worth portfolio advice

Post by sf_tech_saver »

buzztrot wrote: Sat Jun 20, 2020 10:55 am Hi fellow Bogleheads,

I believe to be in a fairly unique financial situation, and I would appreciate hearing what others think. I'm looking for simple and honest financial advice, and I can't think of a better community to ask this question. I've done my best to be concise but comprehensive in describing my situation. Thank you in advance for taking the time to help.

Long story short: I just sold ~10m worth of Facebook shares, which are sitting as cash in a brokerage account doing nothing. I have another ~5m worth of Facebook shares, which I'm inclined to keep for now and donate to charity later. Finally I have a couple smaller assets (as explained below), and a large tax bill for next year of ~1.5m. I'd like to start improving my asset allocation, while also planning to buy a home in the next year.

Here are more details about me and my wife.

Emergency funds: 200k in wife's bank account (we have prenup and separate property)

Debt: None

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 0% State (I'm retired, wife works)

State of Residence: We're green-card holders residing abroad (wife works for a US company)

Age: 36 (wife 35)

Desired Asset allocation: 100% stocks / 0% bonds (Unsure about international allocation)

My asset allocation:
* About 10m cash (-1.5m to be paid in taxes next year)
* About 5m in FB stock
* About 200k in roth ira tracking SP500
* Negligible cash
* Family home (~2m) to split with brother and cousin (probably will give my share to my brother)

Wife's asset allocation:
* About 200k in cash and cash equivalents
* About 50k in 401k
* Negligible inheritance

Our lifestyle and plans:
* We rent, no car, no kids, live frugally, but spend on some things (e.g. travel)
* We're planning to buy a home in San Francisco in the next year
* We're planning to start a family (2 kids, maybe more, if everything goes well)

I'd like to acknowledge that my current financial situation is a mess. It is the result of several factors, from growing up in a working family with no financial education, to working hard and lucking out, and, most importantly, finding an amazing partner that has been willing to ride this crazy adventure with me.

My goal is to make the first steps in the right direction with the help of this community. In a more normal situation, I would start by moving the 10m in two fidelity tax-managed SMAs for US equities and international equities (unsure on the split between the two). I've always found stocks more attractive than bonds, and I believe this is even more true in today's environment.

However, besides not being sure if the tax-managed SMAs are my best option, I'm also not sure if I should make a move now or wait for things to stabilize. Should I move the money in the SMAs as quickly as possible (while DCA'ing), or should I park it in a money market or in gold or in something else?

Finally, other factors make the decision more complicated. There's the large tax bill on my capital gains, which arguably is a point in favor of moving the money into the tax-managed SMAs quickly to start harvesting tax losses. On the other end, we'd like to buy a home in San Francisco in the next year.

I have been through large swings in my net worth as FB went on a couple of rollercoaster rides, so I believe I have a good grasp of my financial psychology and risk propensity. However, I recognize I have a somewhat limited understanding of the investment landscape, and I'm eager to hear the opinion of more knowledgeable people on this situation.

Thank you in advance for your time and your help.
If I understand your rough numbers correctly I would do something very simple -- and which I plan to do eventually when I move from around $5M net worth to $10-15M (you are there congrats).

$1M -- municipal bonds
$14M --VTI

Just the qualified dividends of VTI alone should give you $250k to live on at this scale. If you invest $2-3M in a modest SF home closer to $200k but if you are really being frugal it's doable.

Schwab has been super nice for me as a place to just park a chunk of VTI knowing I can walk in and talk to somebody if I really need to but without the hassle/ego of a private bank.

Money isn't your issue anymore. Keep a buffer of municipal bonds just in case -- but the dividends alone can pay your bills allowing you to essentially never sell.

I might not choose SF as a place to retire frugally though :)
VTI is a modern marvel
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