Asset Allocation Help for 24 year old

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strcmp
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Asset Allocation Help for 24 year old

Post by strcmp » Thu Jun 07, 2007 7:12 am

Hi all

I've found this to be a helpful forum for financial advice and would like some help with my AA.

Background Info that may or may not help:
I am 24 years old with a pretty aggressive risk mindset with regards to investing. I believe in 100% stock equity portfolios. I put probably 90+% of my paychecks into savings/investing. I have no debt, no car, etc.

I realize I have too much in individual stocks and will probably be rebalancing as soon as I find a good passive investing allocation that I can contribute to regularly.

Taxable
Individual Stocks 31.61%
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) 3.17%
Vanguard New Jersey Tax-Exempt Money Market Fund (VNJXX) 2.35%
Vanguard REIT Index Fund Investor Shares (VGSIX) 3.93%
===========================================================
Taxable Subtotal 41.07%

Non-Taxable
Roth IRA
xxxxxxxxxx US Hotel Property REIT Fund 15.66%

SEP-IRA
Fidelity International Real Estate Fund (FIREX) 0.49%

Rollover IRA
Fidelity Growth Company (FDGRX) 1.85%
Fidelity Puritan (FPURX) 1.82%
Spartan International Index Investor Class (FSIIX) 0.71%
Spartan US Equity Index Investor Class (FUSEX) 4.42%

401k
Vanguard 500 Index Fund 0.24%
Vanguard Global Equity Fund 0.47%
Vanguard Windsor II Fund 0.23%
===========================================================
Non-Taxable Subtotal 25.89%

Cash 33.05%


===========================================================
Total 100.00%





These are my possible choices for 401k.
Vanguard Retirement Savings Trust
Bond Funds
Vanguard Total Bond Mkt Index Inv
Balanced Funds (Stocks and Bonds)
Vanguard Target Retirement Income
Vanguard Target Retirement 2005
Vanguard Target Retirement 2010
Vanguard Target Retirement 2015
Vanguard Target Retirement 2020
Vanguard Target Retirement 2025
Vanguard Target Retirement 2030
Vanguard Target Retirement 2035
Vanguard Target Retirement 2040
Vanguard Target Retirement 2045
Vanguard Target Retirement 2050
Vanguard Wellington Fund Inv
Domestic Stock Funds
Vanguard 500 Index Fund Inv 25.0%
Vanguard Explorer Fund Investor
Vanguard Morgan Growth Fund Inv
Vanguard Strategic Equity Fund
Vanguard Windsor II Fund Inv 25.0%
International Stock Funds
Vanguard Global Equity Fund 50.0%
Vanguard International Growth Inv

Update 07/07/07: Removed emergency funds from cash portion.
Last edited by strcmp on Thu Jun 07, 2007 9:50 pm, edited 2 times in total.

ramsfan
Posts: 434
Joined: Mon Mar 19, 2007 3:27 am

Post by ramsfan » Thu Jun 07, 2007 7:54 am

Are these your only investments? One thing I learned about 10 years too late,is to treat your entire portfolio as a whole..... this includes 401k, IRA< and after tax investments.

From there, pick your desired allocation, and even for someone your age, I would have 90/10 stock bond split at a minimum, but this is a personal choice.

From there, determine how much of your equity you want in domestic, international, small cap, mid cap, value etc....

The easy button is all of this is to select one of the Target Retirement portfolios, and forget about it. In fact, I would be inclined to do that if I were you.

YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Post by YDNAL » Thu Jun 07, 2007 8:14 am

I am 24 years old with a pretty aggressive risk mindset with regards to investing. I believe in 100% stock equity portfolios.
strcmp,
There's been a few threads for young folks lately.
Page 3 - Advice for young investors
Page 4 - Ultimately want to slice & dice.....

Regards,
YDNAL

strcmp
Posts: 26
Joined: Thu Jun 07, 2007 7:04 am
Contact:

Post by strcmp » Thu Jun 07, 2007 8:23 am

ramsfan wrote:Are these your only investments? One thing I learned about 10 years too late,is to treat your entire portfolio as a whole..... this includes 401k, IRA< and after tax investments.

From there, pick your desired allocation, and even for someone your age, I would have 90/10 stock bond split at a minimum, but this is a personal choice.

From there, determine how much of your equity you want in domestic, international, small cap, mid cap, value etc....

The easy button is all of this is to select one of the Target Retirement portfolios, and forget about it. In fact, I would be inclined to do that if I were you.
No, they aren't.
I thought about putting all of my investments up here and then doing the asset allocation, but I would have to organize them into a neat list as I have too many spread out. I will work on that later today and reupdate my first post.

strcmp
Posts: 26
Joined: Thu Jun 07, 2007 7:04 am
Contact:

Post by strcmp » Thu Jun 07, 2007 8:23 am

YDNAL wrote:
I am 24 years old with a pretty aggressive risk mindset with regards to investing. I believe in 100% stock equity portfolios.
strcmp,
There's been a few threads for young folks lately.
Page 3 - Advice for young investors
Page 4 - Ultimately want to slice & dice.....

Regards,
YDNAL
Thanks, I will check it out.

Laura
Posts: 7973
Joined: Mon Feb 19, 2007 7:40 pm

A few questions

Post by Laura » Thu Jun 07, 2007 1:59 pm

strcmp,

Thanks for posting the details of your portfolio. I have a couple of questions that need to be answered before we can make any suggestions.

1. Which of these many accounts are receiving new money on a regular basis?

2. Can you convert any of your IRA accounts into a Roth? If you can you should consider this in an effort to simplify your rather complicated account structure. If you are not sure Vanguard can help you answer the question Should I Convert My IRA to a Roth?

3. What is your tax bracket?

4. You listed cash. Is this in a taxable account and are you planning to invest that money or is it your emergency fund? If it is your emergency fund then please exclude it from the percentages shown in your example.

A quick look at your portfolio brought a couple of issues to light. First is tax efficiency. The REIT fund is not suitable for a taxable account. Taylor Larimore posted this list that helped me.

4-Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..
2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-
3. Put what's left into your taxable account.
4. Try to use only tax-efficient funds in taxable accounts.

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):
Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds

Next, you have a lot of very small holdings. Some cannot be avoided because of the small account size like your SEP-IRA but for the most part you should try to stick to a minimum of 5% in a particular fund. Why? Well if one of your tiny holdings had a terrific year and even returned 100% you wouldn't see much impact on the bottom line since it makes up such a small percentage of your portfolio.

You already recognize the individual stock issue and are prepared to take action. That is great.

I encourage you to do some reading if you haven't done any yet. The Bogleheads' Guide to Investing is a great place to start. Alternatively, John Bogle has just come out with a terrific new book called The Little Book of Common Sense Investingg. While working to get your hands on those terrific books you might enjoy Rick Ferri's online book Serious Money.

I agree with the other posters that you should add enough bonds to bring your total holdings up to 10%. If nothing else this gives you the opportunity to rebalance between stocks and bonds.

Once you answer the questions I will try and make a suggestion for a new streamlined, integrated portfolio.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

haban01
Posts: 654
Joined: Thu Mar 01, 2007 9:55 pm
Location: Wisconsin

Good Afternoon

Post by haban01 » Thu Jun 07, 2007 4:32 pm

Laura has given you excellent advice. She has trumped me :-).

Congratulations on saving & investing at a young age. (I'm 25). I would look to have a retirement portfolio allocation seperate from any money you may have set aside for other goals, ie: automobile, school, house downpayment, emergency fund, etc. I wouldn't want to invest that 37K in cash and see you lose 1/2 in 3 years and then need to take a loan for what you wanted to purchase.

I think that as one's portfolio grows and the monthly fixed burden decreases, a diehard could include the emergency fund in the overall Asset Allocation because it will probably make up a small percentage of the portfolio.

Pick up a copy of "The Bogleheads' Guide". You won't regret it! :P
Eric Haban | | "Stay the Course" | "Press on Regardless" | | Wisconsin Bogleheads Chapter Coordinator

strcmp
Posts: 26
Joined: Thu Jun 07, 2007 7:04 am
Contact:

Re: A few questions

Post by strcmp » Thu Jun 07, 2007 9:38 pm

Laura wrote:strcmp,

Thanks for posting the details of your portfolio. I have a couple of questions that need to be answered before we can make any suggestions.

1. Which of these many accounts are receiving new money on a regular basis?

2. Can you convert any of your IRA accounts into a Roth? If you can you should consider this in an effort to simplify your rather complicated account structure. If you are not sure Vanguard can help you answer the question Should I Convert My IRA to a Roth?

3. What is your tax bracket?

4. You listed cash. Is this in a taxable account and are you planning to invest that money or is it your emergency fund? If it is your emergency fund then please exclude it from the percentages shown in your example.

A quick look at your portfolio brought a couple of issues to light. First is tax efficiency. The REIT fund is not suitable for a taxable account. Taylor Larimore posted this list that helped me.

4-Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..
2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-
3. Put what's left into your taxable account.
4. Try to use only tax-efficient funds in taxable accounts.

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):
Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds

Next, you have a lot of very small holdings. Some cannot be avoided because of the small account size like your SEP-IRA but for the most part you should try to stick to a minimum of 5% in a particular fund. Why? Well if one of your tiny holdings had a terrific year and even returned 100% you wouldn't see much impact on the bottom line since it makes up such a small percentage of your portfolio.

You already recognize the individual stock issue and are prepared to take action. That is great.

I encourage you to do some reading if you haven't done any yet. The Bogleheads' Guide to Investing is a great place to start. Alternatively, John Bogle has just come out with a terrific new book called The Little Book of Common Sense Investingg. While working to get your hands on those terrific books you might enjoy Rick Ferri's online book Serious Money.

I agree with the other posters that you should add enough bonds to bring your total holdings up to 10%. If nothing else this gives you the opportunity to rebalance between stocks and bonds.

Once you answer the questions I will try and make a suggestion for a new streamlined, integrated portfolio.

Laura
1. Which of these many accounts are receiving new money on a regular basis?

The 401k and the bank account are receiving new money on a regular basis.

2. Can you convert any of your IRA accounts into a Roth? If you can you should consider this in an effort to simplify your rather complicated account structure. If you are not sure Vanguard can help you answer the question Should I Convert My IRA to a Roth?

I do have the option, but I'd have to look into it further as I'm not familiar with all the ins and outs of doing so.

3. What is your tax bracket?
25% federal

4. You listed cash. Is this in a taxable account and are you planning to invest that money or is it your emergency fund? If it is your emergency fund then please exclude it from the percentages shown in your example.

Yes, it does include my emergency fund. I'll revise it. It is a taxable savings account (5+% APY). I was planning on using it for a down payment to buy a house, but i'm not sure how committed I am to that route.


Some of the small holdings came about from my old 401k as I didn't stay at my old job long enough for it to become a sizable portion of my accounts. Others were just bought as soon as I had come into cash and I didn't read up much on allocation except for following the basic mantra that "index funds were good because of low expense ratios and mutual funds are bad".

I realize the Vanguard REIT is in the wrong place so to speak as it should be in the tax deferred section due to all the distributions it makes, but I bought it a while ago when I wasn't able to contribute to any retirement accounts and I felt it was priced fairly cheap.

I guess the big question I have is:
Is now the right time to re-balance my portfolio while the markets are at all-time highs?
Should I take a huge tax hit just to rebalance all at once or do it slowly?

I will check out those books, thanks. I've always been a fan of reading investing books. My favorite one so far is A Random Walk Down Wall Street by Burton Malkiel.

strcmp
Posts: 26
Joined: Thu Jun 07, 2007 7:04 am
Contact:

Re: Good Afternoon

Post by strcmp » Thu Jun 07, 2007 9:59 pm

haban01 wrote:Laura has given you excellent advice. She has trumped me :-).

Congratulations on saving & investing at a young age. (I'm 25). I would look to have a retirement portfolio allocation seperate from any money you may have set aside for other goals, ie: automobile, school, house downpayment, emergency fund, etc. I wouldn't want to invest that 37K in cash and see you lose 1/2 in 3 years and then need to take a loan for what you wanted to purchase.

I think that as one's portfolio grows and the monthly fixed burden decreases, a diehard could include the emergency fund in the overall Asset Allocation because it will probably make up a small percentage of the portfolio.

Pick up a copy of "The Bogleheads' Guide". You won't regret it! :P
The one thing I am still debating on whether to set aside cash to pay for is a house downpayment. Everything else is pretty much retirement funds.
It is true about not putting $ into the volatile mkts when you are thinking about a big purchase (like a house) in the next 5 years, that was my reason for having a big % of cash.

By the way, that was 37%, not 37k :) I lowered it now to 33% to exclude emergency funds as Laura suggested.

Everybody here is talking about The Bogleheads Guide. I will have to go pick up a copy myself. :D

strcmp
Posts: 26
Joined: Thu Jun 07, 2007 7:04 am
Contact:

Proposed AA

Post by strcmp » Fri Jun 08, 2007 8:31 pm

Hey

I did some research/thinking and came up with the following AA.

Do you guys think this would be good for me? I tried to add in a good amt. of diversification while making it simple for me to manage.

I would be purchasing these ETFs in a commission-free broker, so I figured the less ETFs I break it up into, the less calculations I'd have to do each month to figure out how much to contribute for each asset.

The S&P 500 would have to be purchased through my 401k, since i'm limited to what I can buy with the 401k. The REIT would be purchased within my IRAs, and the rest would be through a taxable 0 commission broker.

Name | % allocated | Expense Ratio %
================================
S&P 500 (US Largecap) | 30% | 0.18%
Vanguard Extended Market ETF (US Midcap, US Smallcap) | 10% | 0.08%
Vanguard REIT ETF | 10% | 0.12%
Vanguard FTSE All-World ex-US ETF (Europe, Pacific, Emerging) ETF | 30% | 0.25%
??? Precious Metals | 10%
Vanguard Total Bond Market ETF | 10% | 0.11%

I need to find a good Precious Metals ETF. I would have liked VGPRX, but it's an actively managed mutual fund and it's closed to new investors.

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