Help with portfolio allocations

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Topic Author
gray037
Posts: 5
Joined: Wed May 05, 2021 1:22 pm

Help with portfolio allocations

Post by gray037 »

Hi everyone. I am new to the world of investing. This week, after trying to educate myself on what/where to invest, I officially started saving for retirement. I had nothing before, but I did have over $50K in a checking account. As of today, my work 401k contributions have been set at 25% to max out at $19500 per year, not including my employer's 3% match. Yesterday, I took $12K from my checking and opened a Roth IRA with Vangard by slipping in just in time to put $6K for 2020 and $6K for 2021. My plan moving forward is to always contribute max to 401K per year and at the beginning of each year, deposit the $6K for the Roth (if I should be spreading this out through the year instead, please let me know.)

The main question and reason for this post is what should I start my allocations? I'm 38, make $77500 per year plus 10% bonus possibility and my only debt outside of living expenses ($1900 for everything) is an SUV I just bought and owe $19800 @ 2.41%. I'm in the middle of reading the Boglehead's Guide to Investing and I'm torn between 100% stock and 80/20 stock-bonds. I do have an emergency fund of about $45K.

Please guide me on where I should set these allocations.
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retired@50
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Re: Help with portfolio allocations

Post by retired@50 »

gray037 wrote: Wed May 05, 2021 1:41 pm Please guide me on where I should set these allocations.
Welcome to the forum. :happy

Maybe doing some reading about asset allocation would be helpful.
Link: https://www.bogleheads.org/wiki/Asset_allocation

There isn't a single answer for everyone or everyone at a particular age, it depends on things you feel are relevant, like your tolerance for stock market risk, etc. Some people get nervous about market news or a stock market decline and sell at a low point (typically a mistake), so you'll want to select a mixture that allows you to be comfortable now matter how things go. This is sometimes called the Sleep Well At Night factor. SWAN.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
lakpr
Posts: 11517
Joined: Fri Mar 18, 2011 9:59 am

Re: Help with portfolio allocations

Post by lakpr »

gray037,

Welcome to the forum.

1. Good that you resolved to max out your 401k contributions and your Roth IRA. These are the two basic steps you must take to secure your retirement, if nothing else.

2. Regarding investments: for a 38 year old, presumably retiring at the age of 63 or 65, that is a 25 year timespan. Or, consider the current allocation of the Target Retirement 2045 fund as your starting point. Currently Vanguard Target Retirement Date 2045 fund invests in 54% US equities, 36% International Equities and 10% bonds (Source: Morningstar VTIVX portfolio).

You can either choose the target retirement fund in your 401k if one is available, or create your own 3-fund portfolio with 54% to an S&P 500 Index fund, 36% to International Equities Index fund, and 10% to a bond fund.

[ Edited to add: coincidentally, this is the half-way compromise between the 100% stocks and 80:20 mix you are conflicted about :) ]

3. Roth IRA. Roth accounts should be explicitly invested in only equities. The deal with the Roth is that all future growth is tax free. You want to maximize all that tax-free growth. In other words, you should invest Roth in only those asset classes that you reasonably believe will provide you the maximum growth.

Some people believe that asset class is US stocks; some believe it is "small cap value"; some believe it is "emerging markets", some in Bitcoin and some in TSLA. Whatever. If you believe it is going to provide you outsize growth, it goes into Roth IRA.

By any stretch of imagination, bonds are not that asset class. Stated differently, never bonds in Roth.

4. Car loans are not tax-deductible. With a $77k + bonus salary, assuming you are filing taxes as SINGLE, puts you in 22% marginal tax bracket. So that 2.41% interest rate you are paying on the car, is really the equivalent of 2.41% / (1 - 22%) = 3.09% before tax rate. I computed this before-tax rate to compare, on an apples-to-apples basis, yields from CDs that are taxable by the government and the implicit yield you will get by paying down the car loan.

Paying down the car loan is exactly the equivalent of investing in a CD that yields 3%.

If a bank offers you 3% fixed interest rate CD for the next 3 years, but the maximum you can invest is only $20k ... would you be tempted to take that offer? How much you would invest?

If you answer that yes you will -- pay down your car loan by the amount you would invest.
If you answer that no, I will take my chances in the stock market -- invest in the stock market.
You can choose BOTH the alternatives too ... you don't have to invest entire $20k. May be split half and half. Pay down the car loan by $10k and use remainder $10k to invest in stocks (VTI is an excellent ETF to buy, it represents the entire US stock market).
Horton
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Re: Help with portfolio allocations

Post by Horton »

Congrats on getting started! I’d recommend you start by looking into target date funds. They’re a great place to start. Even seasoned Bogleheads, like myself, use them.
80% global equities (faith-based tilt) + 20% TIPS (LDI)
iluvjackbogle
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Joined: Mon Jun 08, 2020 4:15 pm

Re: Help with portfolio allocations

Post by iluvjackbogle »

[G]ray037, good day and welcome.

Here's a quote from the blessed Jack Bogle:

"Simplicity is the master key to financial success. When there are multiple solutions to a problem, choose the simplest one."

Mr. Bogle recommended, as a starting point, to have your age as a percentage in bonds, the rest in stocks.

I've stuck with this for decades, give or take a few percentage points, for my total portfolio, while reinvesting all distributions. The risk/reward tradeoff has been highly favorable.

My stock holdings are in a dirt-cheap total US index.

My bond holdings comprise a mix of mutual funds and individual bonds.

I re-balance occasionally, using dollar cost averaging.

I don't feel the need for foreign stocks. The largest US businesses get a sizable chunk of revenue from abroad. The index is capitalization-weighted. Large-cap predominates.

May you find your path to financial Nirvana.
Topic Author
gray037
Posts: 5
Joined: Wed May 05, 2021 1:22 pm

Re: Help with portfolio allocations

Post by gray037 »

Thanks for the replies everyone.

I'm 38 but have no plans for an early retirement, only a goal of FU money as fast as I can make it. That leaves me with at least 25+years of investing unless something unforeseen happens. I've been trying to read and educate myself, but there is so much to absorb. Just trying to get off to a proper start.

Would it make sense to go 100% equities, since I don't have a lot of money in these accounts, and eventually allocate to an 80/20 split in the 401k?

I'll take the advice on the Roth and not add any bonds to it.
Topic Author
gray037
Posts: 5
Joined: Wed May 05, 2021 1:22 pm

Re: Help with portfolio allocations

Post by gray037 »

lakpr wrote: Wed May 05, 2021 3:27 pm gray037,

Welcome to the forum.

1. Good that you resolved to max out your 401k contributions and your Roth IRA. These are the two basic steps you must take to secure your retirement, if nothing else.

2. Regarding investments: for a 38 year old, presumably retiring at the age of 63 or 65, that is a 25 year timespan. Or, consider the current allocation of the Target Retirement 2045 fund as your starting point. Currently Vanguard Target Retirement Date 2045 fund invests in 54% US equities, 36% International Equities and 10% bonds (Source: Morningstar VTIVX portfolio).

You can either choose the target retirement fund in your 401k if one is available, or create your own 3-fund portfolio with 54% to an S&P 500 Index fund, 36% to International Equities Index fund, and 10% to a bond fund.

[ Edited to add: coincidentally, this is the half-way compromise between the 100% stocks and 80:20 mix you are conflicted about :) ]

3. Roth IRA. Roth accounts should be explicitly invested in only equities. The deal with the Roth is that all future growth is tax free. You want to maximize all that tax-free growth. In other words, you should invest Roth in only those asset classes that you reasonably believe will provide you the maximum growth.

Some people believe that asset class is US stocks; some believe it is "small cap value"; some believe it is "emerging markets", some in Bitcoin and some in TSLA. Whatever. If you believe it is going to provide you outsize growth, it goes into Roth IRA.

By any stretch of imagination, bonds are not that asset class. Stated differently, never bonds in Roth.

4. Car loans are not tax-deductible. With a $77k + bonus salary, assuming you are filing taxes as SINGLE, puts you in 22% marginal tax bracket. So that 2.41% interest rate you are paying on the car, is really the equivalent of 2.41% / (1 - 22%) = 3.09% before tax rate. I computed this before-tax rate to compare, on an apples-to-apples basis, yields from CDs that are taxable by the government and the implicit yield you will get by paying down the car loan.

Paying down the car loan is exactly the equivalent of investing in a CD that yields 3%.

If a bank offers you 3% fixed interest rate CD for the next 3 years, but the maximum you can invest is only $20k ... would you be tempted to take that offer? How much you would invest?

If you answer that yes you will -- pay down your car loan by the amount you would invest.
If you answer that no, I will take my chances in the stock market -- invest in the stock market.
You can choose BOTH the alternatives too ... you don't have to invest entire $20k. May be split half and half. Pay down the car loan by $10k and use remainder $10k to invest in stocks (VTI is an excellent ETF to buy, it represents the entire US stock market).
Thanks for the detailed post. I have a 2 year plan to pay off the car loan. I'm still allowing myself about $1k per month after taxes and expenses paid to use for whatever I want. I live pretty simple so anything I don't spend will be split between increasing the emergency fund and a taxable account that I'll use to invest more.
iluvjackbogle
Posts: 6
Joined: Mon Jun 08, 2020 4:15 pm

100% Equities?

Post by iluvjackbogle »

If an investor had bought into the broad US market shortly before the crash of 1929, she would have been restored to original value, inflation adjusted, in 4 1/2 years (source: Hulbert Financial Digest).

There was a deflationary spiral following 1929.

This restoration assumes automatic dividend reinvestment. When prices take a nauseating dive, dividends buy cheaper shares, dragging down basis. Reinvestment is a terrific stabilizer.

Can you hold on, in times of upheaval? Then you may not need a bond ballast.

I learned to stay the course by 'taking a bath' a couple of times.

Be cautious about making investment decisions based on the past. I'm mainly pointing this out for the sake of discussion.
rhubarbpie
Posts: 82
Joined: Mon May 03, 2021 9:18 am

Re: Help with portfolio allocations

Post by rhubarbpie »

You've got a great plan - rate of saving is the key for the first years of investing, even more so since you're 38 (not that that's old, it's just not 25 so you don't get quite as many years of compounding). I personally don't think 100% equities is crazy in your situation, especially if you've got an emergency fund as well.

If you're trying to decide what to invest in in your 401k, you can post your fund choices and expense ratios here and get some guidance. If you've got a decent target date fund with low expenses it's hard to go wrong with that, or a total stock market or S&P 500 index fund for now until you've got a bit more $ built up and feel like diversifying into multiple funds.

A couple more resources, aside from the Bogleheads wiki, which is great: William Bernstein's book If You Can is available online for free, and is a great template for how to start saving and investing. Ramit Sethi's I Will Teach You to Be Rich (ignore the spammy title) is great for non-investing financial stuff, like budgeting, avoiding credit card debt, etc.
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ruralavalon
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Re: Help with portfolio allocations

Post by ruralavalon »

Welcome to the forum :) .

It's great to see that you will make the maximum annual employee contribution to your employer's 401k plan, and also the maximum annual contribution to a Roth IRA.

Your savings rate (33% of base salary) is excellent in my opinion. When just starting the most important investing decision you can make is to establish a high rate of contributions. "Savings rate is the most important retirement savings decision, not only because of the math but because of the way it drives your financial mindset and habits. The basic raw stock/bond risk decision comes second. And the finer details--index or active, factors or total market, alts or no alts--are a distant third." Forum discussion on Jonathan Clements’ article "Show me the Money".


gray037 wrote: Wed May 05, 2021 1:41 pm Hi everyone. I am new to the world of investing. This week, after trying to educate myself on what/where to invest, I officially started saving for retirement. I had nothing before, but I did have over $50K in a checking account. As of today, my work 401k contributions have been set at 25% to max out at $19500 per year, not including my employer's 3% match. Yesterday, I took $12K from my checking and opened a Roth IRA with Vangard by slipping in just in time to put $6K for 2020 and $6K for 2021. My plan moving forward is to always contribute max to 401K per year and at the beginning of each year, deposit the $6K for the Roth (if I should be spreading this out through the year instead, please let me know.)

Going forward I suggest that extra cash beyond what is needed for your emergency fund be used to pay off the car loan, rather than save up to contribute the entire $6k to the Roth IRA the start of next year. Instead next year contribute $500 per month to the Roth IRA throughout the year.


gray037 wrote: Wed May 05, 2021 1:41 pmThe main question and reason for this post is what should I start my allocations? I'm 38, make $77500 per year plus 10% bonus possibility and my only debt outside of living expenses ($1900 for everything) is an SUV I just bought and owe $19800 @ 2.41%. I'm in the middle of reading the Boglehead's Guide to Investing and I'm torn between 100% stock and 80/20 stock-bonds. I do have an emergency fund of about $45K.

Please guide me on where I should set these allocations.
At age 38 I suggest about 20% in bonds or other fixed income investments (like CDs, savings accounts, Stable Value Fund, money market fund). This is expected to substantially reduce portfolio volatility (risk), with only a relatively modest decrease in portfolio return. Graph, "An Efficient Frontier: the power of diversification". Please see:
1) Wiki article Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk";
2) Wiki article, "Asset allocation";
3) Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio";
4) Morningstar (4/8/2020), "What's the Best Diversifier for Stocks?"
5) White Coat Investor (9/23/2016), "In Defense of Bonds"; and
6) Ben Carlson (8/2/2020), "Why Would Anyone Own Bonds Right Now?"

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities", available as an archived pdf. Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). The diversification benefit has varied over time. (You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box, upper right, this page).

That works out to about 20% bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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