Portfolio review: Net-worth-based glide path?

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Topic Author
78anecdote
Posts: 4
Joined: Sun Jul 12, 2020 3:12 pm

Portfolio review: Net-worth-based glide path?

Post by 78anecdote »

Hello Bogleheads, I have been a long-time lurker here and have learned a lot. I’m looking for a general portfolio review, and for thoughts on bond holdings and bond allocation/glide path. Here we go:

Emergency funds: Small amount of cash in high-yield savings account; generally using cash flow and overall taxable account as emergency fund.

Debt: No debt

Tax Filing Status: Single

Tax Rate: 35% Federal, 0% State

State of Residence: WA

Age: 39

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 45% of stocks, 30% of bonds
I am tolerant of risk and downturns; this year’s drop caused some butterflies but I held on and continued buying.

Portfolio size: Approx $1 million invested assets allocated as listed below, plus home equity about $500k (no mortgage.)

Current retirement assets

TreasuryDirect
0.92% EE Bonds
3.22% I Bonds

Taxable Brokerage 1 (Fidelity)
6.54% VTI Vanguard Total Stock Market (ER 0.03%)
12.65% VXUS Vanguard Total International Stock (0.08%)
4.65% IJS iShares S&P Small-Cap 600 Value (0.25%)
4.61% RPV Invesco S&P 500 Pure Value (0.35%)
4.35% IJR iShares Core S&P Small-Cap (0.06%)
3.69% VEA Vanguard FTSE Developed Markets (0.05%)
3.62% FNDC Schwab Fundamental International Small Company Index (0.39%)

Those last 5 are leftovers from a failed attempt at Merriman’s UB&H portfolio; I learned I feel safer in simpler, market-cap-weighted broad index funds. I bought in at the March bottom so I’m avoiding selling now due to capital gains. If there’s another market drop, I’ll sell them and reinvest into VTI/VXUS. Their dividends are reinvested into VTI/VXUS.

Taxable Brokerage 2 (M1 Finance)
This is where most new taxable contributions go:
1.71% VTI Vanguard Total Stock Market (ER 0.03%)
1.41% VXUS Vanguard Total International Stock (0.08%)

Trad 401k (via Fidelity Brokeragelink)
1.96% FBIIX Fidelity International Bond Index (ER 0.06%)
2.62% FXNAX Fidelity U.S. Bond Index (0.025%)
10.05% FZILX Fidelity ZERO International Index (0.00%)
13.16% FZROX Fidelity ZERO Total Market Index (0.00%)

Roth 401k (via Fidelity Brokeragelink)
1.87% FZILX Fidelity ZERO International Index (ER 0.00%)
2.39% FZROX Fidelity ZERO Total Market Index (0.00%)
1.12% ICLN iShares Global Clean Energy (0.46%)

ICLN is just for fun, I’m not adding new money to that ETF.

Roth IRA 1 (Fidelity)
2.72% VTI Vanguard Total Stock Market (ER 0.03%)
2.23% VXUS Vanguard Total International Stock (0.08%)

Roth IRA 2 (Merrill, for BofA rewards)
14.3% VT Vanguard Total World Stock (ER 0.08%)


Contributions

New annual contributions
$19,500 trad 401k
+ ~$7500 employer matching to trad 401k
$27,500 Roth 401k (via mega backdoor)
$6,000 Roth IRA (via backdoor)
$200,000 taxable (approx)

Available funds

401k is via Fidelity Brokeragelink, within which almost everything is available with no fees.

Goals
My goal is to retire early with an invested portfolio of around $3m to $5m (depending on how long I can put up with working in a high-stress field.) Expenses are low, about $3.5k/month. In retirement I would expect expenses to climb a bit, for example to cover health insurance. I expect I’ll reach this range within 5 to 10 years, depending upon job stability and market conditions.

Questions:
1. Bond allocation: I'm not sure what my glide path should be. I’m leaning toward adjusting my allocation based upon portfolio size rather than age. For example, my allocation might trend toward 60/40 as I move toward my $5m goal.
2. Bond holdings: I’m going to keep buying EE and I series bonds, and use FBIIX/FXNAX (total int’l and total US) bonds in 401k for the rest of the bond allocation, but open to suggestions. Bonds are tricky in this era of low rates.

Thank you for all your thoughts and advice!
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David Jay
Posts: 9634
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Portfolio review: Net-worth-based glide path?

Post by David Jay »

Welcome to the forum!

1. Asset Allocation (AA) has several, overlapping functions:
a. It is the primary “control knob” for expected return versus volatility. The most important issue for AA is not selling equities in a down market due to behavioral issues or need to pay expenses.
b. As human capital decreases, the need to take less risk increases.
c. Sequence of risk in the early years of retirement.
d. As people age there is a general tendency to take less risk.

Portfolio size interacts with these, but I would much rather see someone select an AA based on stress testing (will one stay the course in the face of a 50% drop in market value) and holding a minimum of 5-7 years of living expenses in fixed income at retirement.

2. We teach that bonds are for stability, not for yield. To many people are getting themselves twisted in knots over current bond yields. An intermediate term bond fund is still a functional strategy for a long-term portfolio.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
GMT-8
Posts: 190
Joined: Fri Mar 26, 2010 5:11 pm

Re: Portfolio review: Net-worth-based glide path?

Post by GMT-8 »

My General Review: Your portfolio is too complicated and each position is too small.
Bonds will reduce your volatility, and simplifying will benefit you in many ways.
I prefer to have at least 10% in any single holding.

Good luck in the long gradual climb.

GMT
LeeMKE
Posts: 1993
Joined: Mon Oct 14, 2013 9:40 pm

Re: Portfolio review: Net-worth-based glide path?

Post by LeeMKE »

At your age I was also 90/10.

Read about sequence of returns risk. It may be time for you to trim the sails for awhile if retirement is 5 - 7 years away.
http://www.bairdfinancialadvisor.com/ch ... 20Risk.pdf

In my case, I glided from 90/10 to 60/40 (I hold 40% of equities in Intl, nothing in Intl bonds) to have extra stability during the sequence of returns risk period (5-7 years before retirement and 5-7 years after retirement). I'm now a few years past retirement, and this has worked great for me.

Once I exit the poor sequence of returns period, I'll begin a glide back to 85/15 or 90/10, based on the Michael Kitces study: Rising Equity Glide Path.
https://www.kitces.com/blog/should-equi ... ly-better/

You may also be interested in looking at the counter balancing of equities with Long Term Govt. Bond index funds. When I was picking bond funds, I noticed that the LTGB behaved in opposition to equities (SP500). Since my bond holdings were intended as ballast against equities taking a dive, that behavior was attractive to me. Makes rebalancing more fun when I'm harvesting gains from bonds to buy more depressed equities. This behavior is not historically common, but it is working today and has for the last two decades.

Finally, and this may not apply to you, I took a portion of my bond allocation and put it in a CD ladder, and this is where I take my withdrawals twice a year. Each maturing batch of CDs is more than double what I'll withdraw, and I think of that as an emergency fund I could tap if needed, and of course, I could sell CDs if I had a major emergency. This is my version of a bucket plan.
https://www.youtube.com/watch?v=LK_XJJVrRiw

When I rebalance, I check to see if I want to refill the CD ladder. When the market is roiled, I tend to take some money off the table and refill the CD ladder, when things are calm, I'm less concerned about taking some money off the table. I am keeping no less than 2 years and up to 4 years of withdrawals in my CD ladder.

Good luck on your FIRE!
The mightiest Oak is just a nut who stayed the course.
Topic Author
78anecdote
Posts: 4
Joined: Sun Jul 12, 2020 3:12 pm

Re: Portfolio review: Net-worth-based glide path?

Post by 78anecdote »

GMT-8 wrote: Mon Jul 13, 2020 3:45 pm My General Review: Your portfolio is too complicated and each position is too small.
Bonds will reduce your volatility, and simplifying will benefit you in many ways.
I prefer to have at least 10% in any single holding.
Thank you for the feedback! I recognize that I have too many ETFs in my Fidelity brokerage account and I intend to clean that up, but otherwise I'm trying to stick to the Bogleheads 4-fund plan. Maybe I have too many accounts? I have two taxable accounts, two Roth IRAs, trad and Roth 401ks, and the Treasury Direct account. I could combine the two taxable accounts and the two Roth IRAs, perhaps!
LeeMKE
Posts: 1993
Joined: Mon Oct 14, 2013 9:40 pm

Re: Portfolio review: Net-worth-based glide path?

Post by LeeMKE »

Thank you for the feedback! I recognize that I have too many ETFs in my Fidelity brokerage account and I intend to clean that up, but otherwise I'm trying to stick to the Bogleheads 4-fund plan. Maybe I have too many accounts? I have two taxable accounts, two Roth IRAs, trad and Roth 401ks, and the Treasury Direct account. I could combine the two taxable accounts and the two Roth IRAs, perhaps!
IMHO you have the number of accounts you need for your situation.

You have some things you could streamline, but overall you are doing great, taking advantage of tax options available to you. Once you retire, you'll be able to consolidate more. I went from 7 accounts to 3 accounts, but not until I retired and could rollover some into others. IRA and Roth IRA at Fidelity, and 5% of portfolio in Roth IRA at Schwab as cybersecurity insurance (if/when Fidelity gets hacked, if I needed money before they came back online, I'd take from the Schwab account).
The mightiest Oak is just a nut who stayed the course.
Topic Author
78anecdote
Posts: 4
Joined: Sun Jul 12, 2020 3:12 pm

Re: Portfolio review: Net-worth-based glide path?

Post by 78anecdote »

IMHO you have the number of accounts you need for your situation.

You have some things you could streamline, but overall you are doing great, taking advantage of tax options available to you. Once you retire, you'll be able to consolidate more. I went from 7 accounts to 3 accounts, but not until I retired and could rollover some into others. IRA and Roth IRA at Fidelity, and 5% of portfolio in Roth IRA at Schwab as cybersecurity insurance (if/when Fidelity gets hacked, if I needed money before they came back online, I'd take from the Schwab account).
Thank you, and I appreciate your other comment regarding sequence-of-returns risk. It feels "risky" trimming my stock allocation, especially with bond rates being what they are, but it's probably the right thing to start doing if I'm looking at retiring in the next 5-10 years. I'll read over the links you provided.
miket29
Posts: 189
Joined: Tue Jun 20, 2017 9:07 pm

Re: Portfolio review: Net-worth-based glide path?

Post by miket29 »

My goal is to retire early with an invested portfolio of around $3m to $5m (depending on how long I can put up with working in a high-stress field.) I expect I’ll reach this range within 5 to 10 years, depending upon job stability and market conditions.
The number seems a bit problematic. Using a calculator at https://smartasset.com/investing/investment-calculator for $1 million now and $260K annual contributions, you need an annual return of 5.5% to get to $5 million in 10 years. And that's if you got the 5.5% each year. Sequence of returns risk means if the bad years happen near the end of the decade you could end up with considerably less.

You say you want to glide towards 40% in bonds which have a very low return. This means you'll be holding those bonds near your retirement when a good part of the growth in your portfolio happens. You'll need a strong market return overall, and especially towards the end, to hit your goal in a decade. Five years seems even less likely.
Topic Author
78anecdote
Posts: 4
Joined: Sun Jul 12, 2020 3:12 pm

Re: Portfolio review: Net-worth-based glide path?

Post by 78anecdote »

miket29 wrote: Mon Jul 13, 2020 5:46 pm The number seems a bit problematic. Using a calculator at https://smartasset.com/investing/investment-calculator for $1 million now and $260K annual contributions, you need an annual return of 5.5% to get to $5 million in 10 years. And that's if you got the 5.5% each year. Sequence of returns risk means if the bad years happen near the end of the decade you could end up with considerably less.

You say you want to glide towards 40% in bonds which have a very low return. This means you'll be holding those bonds near your retirement when a good part of the growth in your portfolio happens. You'll need a strong market return overall, and especially towards the end, to hit your goal in a decade. Five years seems even less likely.
This is great feedback. I've been considering $3 million to be my "minimum goal" -- I can retire early once I reach that goal -- and $5 million to be a clear signal that I have worked too long, with retirement being a possibility anywhere in between. Playing with that calculator, it looks like I shouldn't consider myself likely to hit $5 million within 10 years given my present income and reasonable expectations of market return. $3 million looks achievable, though perhaps starting at year six rather than five.
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