Portfolio Analysis and Questions

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Topic Author
cja19
Posts: 2
Joined: Wed Jul 29, 2020 10:04 pm

Portfolio Analysis and Questions

Post by cja19 » Wed Jul 29, 2020 10:14 pm

Hello everyone,

I’m a somewhat new investor who just finished The Little Book of Common Sense Investing and The Bogleheads’ Guide to Investing. Both were really great books and clarified things for me. I had no idea that this online community existed, and it looks really cool.

I had a couple of questions about restructuring/reallocating my portfolio. I started investing about two years ago, but as I gain new knowledge I realize my “mistakes” back when I first started setting up accounts and buying investments. (For example, I opened up an account at Fidelity and planned to buy a bunch of different stocks to diversify, but that was before I really understood the purpose of an index fund.)

Portfolio

Emergency Funds:
Yes, about 3 months’ worth

Debt: None

Tax Filing Status: Single

Tax Rate: 12% Federal, 5.9% State

State of Residence: NY

Age: 24

Desired Asset Allocation: 100% stocks, 0% bonds
Desired International Allocation: 0%, but may reconsider

Current retirement assets


Taxable
48.5% = Cash, 5 - 10% max could go towards investments. This is reserved for short-term goals, such as paying for school (I went back to school full time for a master’s and will finish next year)

Vanguard Brokerage Account
8.0% = Vanguard Large-Cap Index Fund Admiral Shares (VLCAX) (0.05%)
5.0% = Vanguard Mid-Cap Growth Index Fund Admiral Shares (VMGMX) (0.07%)
4.6% = Vanguard Small-Cap Growth Index Fund Admiral Shares (VSGAX) (0.07%)

Fidelity Brokerage Account
5.0% = Fidelity 500 Index Fund (FXAIX) (0.015%)
0.8% = Apple (AAPL)
4.2% = Amazon (AMZN)
0.1% = Disney (DIS)
1.3% = Con Edison (ED)
0.7% = Johnson & Johnson (JNJ)
0.1% = Microsoft (MSFT)
0.2% = Schwab Strategic Tr US Small-Cap ETF (SCHA)
0.1% = Target (TGT)

1.3% = Lending Club notes


Retirement

403(b) – from first job; no longer contributing
6.1% = Vanguard 500 Index Fund Investor Shares (VFINX) (0.14%)
No company match

Roth IRA at Vanguard
6.6% = Vanguard S&P 500 (VOO) (0.03%)
3.2% = Vanguard 500 Index Fund Admiral Shares (VFIAX) (0.04%)
4.1% = Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

Contributions
Maxed out Roth IRA (2018 – 2020)
90% of income to taxable accounts (for retirement) – income currently varies and will go up when I return to full-time work

Questions

1. I learned the importance of diversifying early on but bought several index funds that essentially tracked the same thing (such as VOO and VFIAX). Would it make more sense to reallocate the assets into one index fund? Or would it be better to leave everything as is while contributing to the fund with the lowest cost? I know I’d have to take capital gains into account if I sell.

2. In terms of turnover, is there a percentage considered “too high?” Is 25% turnover considered high? 50%?

3. I was advised to put cash for short-term goals into a high-yield savings account. However, after reading the Bogle books, I’m considering moving some of those short-term assets into bond funds. Can index bond funds be effectively used, together with a high-yield savings account, to yield a decent return with lower risk? (I have to do my own research and reflection on what would be the right bonds for me and how much risk I want to take.)

lakpr
Posts: 5810
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Analysis and Questions

Post by lakpr » Thu Jul 30, 2020 8:52 am

cja19,

Welcome to the forum.

Since you said you are in 12% bracket, I am not sure if you are aware that capital gains and qualified dividends will have 0% tax? But the pre-condition is, your income + long term capital gains should be less than $52k.

If you have access to a retirement plan at work, you can contribute on a Traditional basis to that plan, to increase your room for harvesting capital gains in your taxable account at 0%. By that I mean -- say you are earning $50k per year now. You have capital gains approximately $6000 to realize. You can, if you have access to a 401k /403b / 457 plan at work, defer $4k to those plans, then your AGI becomes $46k, plus capital gains of $6k, taking you back to $52k threshold and those $6k will attract $0 taxes. The $4k you deferred today, perhaps in a few years you will be able to roll it to an IRA and convert to Roth at that time paying the 12% tax.

I do suggest 20% allocation to international equities. I do share your misgivings about international equities, I don't believe they are going to go anywhere (at least compared to US equities). So what I do is to have them in my 401k plan. The beauty of this is that, if international equities do not go anywhere as I expect, I will owe less in taxes to Uncle Sam when I eventually withdraw from the plan. If they do go higher than US equities, well at least I have captured a slice of that rise instead of being locked out, and I am happy to share that good fortune with Uncle Sam.

Why 20%? Because a Vanguard paper back in 2012 said, if you allocate 20% to international equities, you capture 84% of the maximum possible diversification benefit. If you allocate 30%, you capture 99% of it (or practically all the diversification benefit). Even though I am enamored about the diversification benefit on offer, I didn't want to go full 30%, as I AM concerned about the potential drop in my portfolio returns. I thought 20% is a sweet spot.

Regarding your potential turnover: yes, anything above 10% is bad (except for bond funds, but you are 100% stocks at this time). Try to choose funds that cover the entire market (VTSAX, for example) or a major slice of it (VFIAX).

On question-3, here is what I wrote in another post who was looking for a "low/no-risk portfolio". It's up to you if this makes sense for you ...

viewtopic.php?p=5400413#p5399195
lakpr wrote:You may want to consider a two-fund combination: 20% stocks and 80% intermediate term treasuries.
Note that carefully, I did not say 80% bonds, I said 80% intermediate term treasuries. In times of crisis, investors flee to treasuries; thus they zig when the stocks zag. Corporate bonds fare badly too in such times, because investors lose faith in the ability of corporations to repay their debt.

At Vanguard, that is VTSAX and VFIUX. At Fidelity, that is FSKAX and FUAMX.

When we backtest this portfolio, it had only ONE year, 1994, when it lost -3.5%. Never lost money since 1987 otherwise, not during the 2008 crisis, not during the "lost decade" of 2000 through 2009, not after September-11, etc. Remarkably resilient.

Back-test below (Portfolio 1, blue line), with Total Bond Market fund as a benchmark. If you are able to tolerate a little bit more volatility, 30% stocks + 70% bonds blend also performed admirably, but it did lose money in the 2008 crisis.

https://www.portfoliovisualizer.com/bac ... tion3_2=80

Of course, past performance is no guarantee of future results.

dbr
Posts: 33244
Joined: Sun Mar 04, 2007 9:50 am

Re: Portfolio Analysis and Questions

Post by dbr » Thu Jul 30, 2020 9:00 am

cja19 wrote:
Wed Jul 29, 2020 10:14 pm

1. I learned the importance of diversifying early on but bought several index funds that essentially tracked the same thing (such as VOO and VFIAX). Would it make more sense to reallocate the assets into one index fund? Or would it be better to leave everything as is while contributing to the fund with the lowest cost? I know I’d have to take capital gains into account if I sell.

I think it is always nice to arrive at a simple set of low cost fund selections, and if there are going to be costs better sooner than later. It is mentioned above that you may not have any costs and I would clean things up as soon as possible.

2. In terms of turnover, is there a percentage considered “too high?” Is 25% turnover considered high? 50%?

A rough estimate for cost of turnover due to internal brokerage costs in funds is 1% for every 100% turnover. So 10% turnover is a .1% cost, which is low. There can also be tax inefficiency in taxable accounts. I think Vanguard Total Stock is about 4%, so that might be a target.

3. I was advised to put cash for short-term goals into a high-yield savings account. However, after reading the Bogle books, I’m considering moving some of those short-term assets into bond funds. Can index bond funds be effectively used, together with a high-yield savings account, to yield a decent return with lower risk? (I have to do my own research and reflection on what would be the right bonds for me and how much risk I want to take.)

No. You can invest for higher return in bond funds but the risk will increase. Right now there is no game to play. It isn't worth wasting time trying to finagle out more yield from low risk fixed income right now. I think you got good advice.

Topic Author
cja19
Posts: 2
Joined: Wed Jul 29, 2020 10:04 pm

Re: Portfolio Analysis and Questions

Post by cja19 » Sat Aug 01, 2020 7:52 am

lakpr and dbr,

Thank you both for your responses! I understand turnover costs a lot better now.

lakpr, I didn't know that capital gains and qualified dividends would be taxed at 0%. I should take advantage of that while I'm still in school, because I expect my tax bracket and income to go up a decent amount within the next year. As for international equities, my 403(b) has the Vanguard Total International Stock Index Fund Investor Shares Fund (VGTSX), so it might be worth a shot to reallocate some money into that fund. I'll also look more into intermediate term treasuries - that Portfolio Visualizer was interesting.

dbr, you're right, it's better to pay the costs sooner rather than later (especially when I'm currently in a lower bracket). If I decide to move any cash into bonds or intermediate term treasuries, I'll move much less than I planned, especially since I'm going to need most of that cash within a couple of years.

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