Portfolio help and guidance for newbie 38yo

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Topic Author
jump4joy
Posts: 8
Joined: Sat May 15, 2021 1:17 pm

Portfolio help and guidance for newbie 38yo

Post by jump4joy »

Hi Everyone! I am generally new to investing with a bit of a late start and slow knowledge-building. I’m trying to get the hang of it. I appreciate any advice and insight.

Background: Recently, I have had some more time and mental space to consider my retirement accounts. Prior to this, I was helping pay off $500K of debt (car, credit cards, hefty school loans for myself and family members). This was completed in 2020 and has lifted a huge burden. I have read some of the Bogleheads’ books and blogs. I’d like to improve things and believe I can make some changes for the better. Of note, I’ll be transitioning out of my current job and will likely have a 6 month gap before future employment.

Emergency funds: at least 1 year of expenses in Capital One 360 Money Market Account
(I had some unexpected health issues along the way and have been caring for parents, also will be helpful for potential gap in employment)

Debt: None

Tax Filing Status: Single

Marginal Tax Rate: 35% Federal, 9.85% State

State of Residence: Minnesota (Planning on moving to Pennsylvania in approx. 6 months)

Age: 38.75 yo

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 20% of stocks (open to suggestions)
Considering possible REIT allocation: 10% of stocks (open to suggestions)

Current total portfolio: low six-figures (around $200k)

Taxable
None for now

401k at Charles Schwab
-78% American Century Retirement Date 2045 Trust Class L, can’t find ticker symbol- searching the internet brings up American Century One Choice 2045 Portfolio which is different, (0.32% net exp ratio)
-Company match: 3% (50% up to the first 6% of your eligible compensation). The above amount includes all contributions for 2021 & max for this year. It is inclusive of company match and accounts for the percentage that I have vested thus far.

Roth 401k at Charles Schwab
-12% American Century Retirement Date 2045 Trust Class L, same as above regarding ticker symbol, (0.32% net exp ratio)

Roth IRA at Vanguard
10% Vanguard Federal Money Market Fund (VMFXX) (0.11%)


Contributions
New annual Contributions
$19,500 in 401k- pending future employment
$6,000 in Roth IRA if able to max out 401k


Available funds
Funds available in 401k and Roth 401k at Charles Schwab
BlackRock Equity Index Fund (WBRERX) (0.03%)
Fidelity Mid Cap Index Fund (FSMDX) (0.025%)
Fidelity Small Cap Index Fund (FSSNX) (0.025%)
Janus Henderson Triton Fund Class T (JATTX) (0.91%)
Victory Integrity Small-Cap Value Fund Class Y (VSVIX) (1.11%)
DFA Emerging Markets Portfolio Institutional Class (DFEMX) (gross 0.45%, net 0.35%)
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) (0.07%)
American Funds EuroPacific Growth Fund Class R-5E (RERHX) (0.61%)
BlackRock US Debt Index Fund R (WBRURX) (0.05%)
PGIM Total Return Bond Fund Class Z (PDBZX) (gross 0.52%, net 0.49%)
MetLife Stable Value Solutions Fund-Fee Class L (0.99%)
American Century Retirement Date 2025 Trust Class L (0.32%)
American Century Retirement Date 2030 Trust Class L (032%)
American Century Retirement Date 2035 Trust Class L (0.32%)
American Century Retirement Date 2040 Trust Class L (0.32%)
American Century Retirement Date 2050 Trust Class L (0.32%)
American Century Retirement Date 2055 Trust Class L (0.32%)
American Century Retirement Date 2060 Trust Class L (0.32%)
American Century Income Retirement Trust Class L (0.32%)

*My 401k plan allows me to create a subaccount and open up a personal choice retirement account (PCRA). Then I could push my 401k money into this account (not a taxable event) and I would have access to other mutual funds, ETFs, and stocks, including Schwab’s own index funds which are currently not available to me. With that said, only some mutual funds would be no load/transaction fees. I would need to double-check to confirm fees.
-I’m not sure if I can do this with the Roth 401k money. I would imagine so, but I also don’t have to move all of it to a PCRA.


Funds available in Roth IRA at Vanguard
I imagine that almost all of Vanguard’s options would be available to me as long as they are open and I meet the minimum amounts required. FYI-I don’t know the fee structure yet, so I would need to look into this.


Questions:
It seems that I am paying more than I should in fees for the target date fund in my 401k at Charles Schwab. I would also like some further control. For Roth IRA money at Vanguard, I didn’t have a chance to explore options and move the money- I was just eager to open the account and fund it.

1. Should I be moving things around before I leave this current job? I’m not sure what the future holds as far as the next job and offerings for employer-based retirement accounts. I didn’t necessarily want to waste more time than I already have.

2. Assuming #1 is a yes, I was hoping to create a 3-fund portfolio +/- REITs across my retirement accounts. How should I go about doing this without creating overlap? And what should I choose at each institution?
-I had initially considered trying to “create” the 3-fund portfolio with the indexes that are available to me at Charles Schwab (large cap, small cap, mid cap, etc.), but this would definitely be complex and more challenging to maintain. If this is the best option, I’m happy to figure it out with some guidance, but would lean towards something simpler.
-Another thought was to move the 401k money (after confirming minimal to no fees) to a PCRA account and then implementing the 3-fund portfolio (SWTSX, SWISX, SWAGX), but then I wasn’t sure what to do with the money in the Roth 401k or Roth IRA accounts.

3. Should I place bond funds in tax-free accounts (Roth IRA or Roth 401k) for tax efficiency as opposed to 401k?

4. With respect to bonds, should I be also looking into TIPS or would this be covered by a bond fund?

5. I know that REITs are not part of the 3-fund portfolio, but I had been reading they could be helpful for diversification. If I did pursue this, what REIT would be good to choose and at what institution? Would a 10% stock allocation be reasonable? For tax efficiency, it seems this would be best placed in Roth IRA or Roth 401k account. Is this correct?

6. I’m thinking I’ll figure this out when I go to do it, but I was wondering how you insert fragments of responses from other posters into your own replies.

Thank you for your help and generosity.
Exchme
Posts: 1335
Joined: Sun Sep 06, 2020 3:00 pm

Re: Portfolio help and guidance for newbie 38yo

Post by Exchme »

You are doing well. A few random thoughts:

Your Roth's should be for stocks only, that's where you want your growth. Buy the broadest index fund available to you. Maintain your portfolio balance by putting more bonds in your tax deferred. Of the choices on the list, perhaps the BlackRock Equity Index for stocks and the BlackRock US Debt Index for bonds.

While that 0.3% extra cost for the retirement date funds doesn't sound like much, it does add up over a lifetime. Also, depending on your risk tolerance, these funds tend to hold more bonds sooner than you might want. If you are going to do it yourself, you do have to pay attention and rebalance when markets change and when you get within 10-15 years of retirement, start adding 2-3% bonds/year.

I've never owned REIT's they always sounded like they were designed for the promoter and management company to do well first. Real estate has had the same run up in value as stocks and bonds, due to low interest rates and a growing economy, so will be vulnerable to a lot of the same downside risks without the diversification since you will own a few specific properties vs a whole basket of companies.
User avatar
retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Portfolio help and guidance for newbie 38yo

Post by retired@50 »

jump4joy wrote: Sun Jun 13, 2021 10:58 pm I appreciate any advice and insight.


Questions:
It seems that I am paying more than I should in fees for the target date fund in my 401k at Charles Schwab. I would also like some further control. For Roth IRA money at Vanguard, I didn’t have a chance to explore options and move the money- I was just eager to open the account and fund it.

1. Should I be moving things around before I leave this current job? I’m not sure what the future holds as far as the next job and offerings for employer-based retirement accounts. I didn’t necessarily want to waste more time than I already have.

2. Assuming #1 is a yes, I was hoping to create a 3-fund portfolio +/- REITs across my retirement accounts. How should I go about doing this without creating overlap? And what should I choose at each institution?
-I had initially considered trying to “create” the 3-fund portfolio with the indexes that are available to me at Charles Schwab (large cap, small cap, mid cap, etc.), but this would definitely be complex and more challenging to maintain. If this is the best option, I’m happy to figure it out with some guidance, but would lean towards something simpler.
-Another thought was to move the 401k money (after confirming minimal to no fees) to a PCRA account and then implementing the 3-fund portfolio (SWTSX, SWISX, SWAGX), but then I wasn’t sure what to do with the money in the Roth 401k or Roth IRA accounts.

3. Should I place bond funds in tax-free accounts (Roth IRA or Roth 401k) for tax efficiency as opposed to 401k?

4. With respect to bonds, should I be also looking into TIPS or would this be covered by a bond fund?

5. I know that REITs are not part of the 3-fund portfolio, but I had been reading they could be helpful for diversification. If I did pursue this, what REIT would be good to choose and at what institution? Would a 10% stock allocation be reasonable? For tax efficiency, it seems this would be best placed in Roth IRA or Roth 401k account. Is this correct?

6. I’m thinking I’ll figure this out when I go to do it, but I was wondering how you insert fragments of responses from other posters into your own replies.

Thank you for your help and generosity.
Welcome to the forum. :happy
After reading your post a few thoughts come to mind.

1. In the 401k plan I'd use these 3 funds.
BlackRock Equity Index Fund (WBRERX) (0.03%) <- Consider this fund your US Stock exposure. Put 64% here.
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) (0.07%) <- Consider this fund your international stock. Put 16% here.
BlackRock US Debt Index Fund R (WBRURX) (0.05%) <- This is your bond fund. Put 20% here.

You can screw around for days trying to pick the precise mixture of Large, Mid, Small, etc. but it's not worth your time. This account will shrink in importance as you get older and start contributing to other 401k accounts. Also, don't worry that you won't have emerging markets (EM) exposure in the Vanguard Developed Markets international fund. You can make up for that later, in another account.

If you have the flexibility to direct traditional 401k investments separately from Roth 401k investments, then put the US Debt Index fund in the traditional 401k portion of the account, and hold all stock funds in the Roth portion.

2. In the Vanguard Roth IRA, I'd suggest using the Total Stock Market Fund (VTSAX) and the Total International Stock Index Fund (VTIAX). Incidentally, the Vanguard total international fund does contain emerging markets exposure, so you're covered there.

In answer to question #3. No. Bonds don't belong in Roth accounts unless you don't have room in a traditional tax-deferred 401k or IRA.
In answer to question #4. No. Skip the TIPS until you're 60 or so.
In answer to question #5. REITs are stocks, which are part of the Vanguard total stock market fund, so you're covered. If you want additional REIT exposure, above the normal amount, then you could consider using the Vanguard REIT index fund VGSLX.

Finally, click the quotation mark, when creating a reply to another poster. You don't have to quote the entire passage, you can delete the irrelevant parts.

ETA: Since you're a high earner, and in a high tax bracket, you should really read the wiki page on tax-efficient fund placement. It will help you put the right funds in the right accounts so you don't have to re-arrange the furniture later.
Link: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
jump4joy
Posts: 8
Joined: Sat May 15, 2021 1:17 pm

Re: Portfolio help and guidance for newbie 38yo

Post by jump4joy »

Exchme wrote: Mon Jun 14, 2021 8:03 am
Your Roth's should be for stocks only, that's where you want your growth. Buy the broadest index fund available to you. Maintain your portfolio balance by putting more bonds in your tax deferred. Of the choices on the list, perhaps the BlackRock Equity Index for stocks and the BlackRock US Debt Index for bonds.

While that 0.3% extra cost for the retirement date funds doesn't sound like much, it does add up over a lifetime. Also, depending on your risk tolerance, these funds tend to hold more bonds sooner than you might want. If you are going to do it yourself, you do have to pay attention and rebalance when markets change and when you get within 10-15 years of retirement, start adding 2-3% bonds/year.

I've never owned REIT's they always sounded like they were designed for the promoter and management company to do well first. Real estate has had the same run up in value as stocks and bonds, due to low interest rates and a growing economy, so will be vulnerable to a lot of the same downside risks without the diversification since you will own a few specific properties vs a whole basket of companies.
Thank you! Ok, I am just going to type out my thoughts here to work through what you're explaining to me to make sure I understand correctly. Stocks should go into Roth accounts because they provide more growth than bonds. And even though total market or large cap index funds are more tax efficient than bond funds, the growth of the index funds outweighs the tax efficiency aspect of bond funds. Do I have it right?

What you wrote reflects what I was thinking about regarding costs for the retirement date fund in more concrete terms. So I'm looking forward to doing this myself and will pay attention.

Appreciate your insight on REITs.
Topic Author
jump4joy
Posts: 8
Joined: Sat May 15, 2021 1:17 pm

Re: Portfolio help and guidance for newbie 38yo

Post by jump4joy »

retired@50 wrote: Mon Jun 14, 2021 9:26 am
Welcome to the forum. :happy
After reading your post a few thoughts come to mind.

1. In the 401k plan I'd use these 3 funds.
BlackRock Equity Index Fund (WBRERX) (0.03%) <- Consider this fund your US Stock exposure. Put 64% here.
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) (0.07%) <- Consider this fund your international stock. Put 16% here.
BlackRock US Debt Index Fund R (WBRURX) (0.05%) <- This is your bond fund. Put 20% here.

You can screw around for days trying to pick the precise mixture of Large, Mid, Small, etc. but it's not worth your time. This account will shrink in importance as you get older and start contributing to other 401k accounts. Also, don't worry that you won't have emerging markets (EM) exposure in the Vanguard Developed Markets international fund. You can make up for that later, in another account.

If you have the flexibility to direct traditional 401k investments separately from Roth 401k investments, then put the US Debt Index fund in the traditional 401k portion of the account, and hold all stock funds in the Roth portion.

2. In the Vanguard Roth IRA, I'd suggest using the Total Stock Market Fund (VTSAX) and the Total International Stock Index Fund (VTIAX). Incidentally, the Vanguard total international fund does contain emerging markets exposure, so you're covered there.

In answer to question #3. No. Bonds don't belong in Roth accounts unless you don't have room in a traditional tax-deferred 401k or IRA.
In answer to question #4. No. Skip the TIPS until you're 60 or so.
In answer to question #5. REITs are stocks, which are part of the Vanguard total stock market fund, so you're covered. If you want additional REIT exposure, above the normal amount, then you could consider using the Vanguard REIT index fund VGSLX.

Finally, click the quotation mark, when creating a reply to another poster. You don't have to quote the entire passage, you can delete the irrelevant parts.

ETA: Since you're a high earner, and in a high tax bracket, you should really read the wiki page on tax-efficient fund placement. It will help you put the right funds in the right accounts so you don't have to re-arrange the furniture later.
Link: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
Thank you for the welcome and your thoughts. I am so happy to have joined this forum! Better late than never. :D

1. I appreciate your direction for funds. This is simpler than the cocktail I had been envisioning.
Good to know that I won't be missing out with not having emerging markets exposure. Did you suggest not having EM because of expense ratio, simplicity, or something else?
I will look into whether or not I can direct 401k vs. Roth 401k investments.

2. For Vanguard Roth IRA, do you have any recommended breakdowns for Total Stock Market Fund (VTSAX) and Total International Stock Index Fund (VTIAX)?

3. I did look at the tax-efficient fund placement link as well as some other sources, but seemed to have missed something. Maybe it's the idea that bond funds should go into tax-deferred accounts if "good fund choices are available." I also may have focused too much on the tax efficiency ranking.
Can you see if my understanding is correct here- stocks should go into Roth accounts because they provide more growth than bonds. And even though total market or large cap index funds are more tax efficient than bond funds, the growth of the index funds outweighs the tax efficiency aspect of bond funds. Do I have it right?

4. Will be skipping the TIPS.

5. Do you think additional exposure to REITs would be good? I understand this is personal preference. And I suppose the 3-fund portfolio philosophy would say this is not necessary.

6. Thanks for the help with the reply posts.

I will go back to the tax-efficient fund placement and reread. That way I can leave the furniture where it is for the most part. :happy

I appreciate your help!
User avatar
retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Portfolio help and guidance for newbie 38yo

Post by retired@50 »

jump4joy wrote: Mon Jun 14, 2021 11:14 am
retired@50 wrote: Mon Jun 14, 2021 9:26 am
Welcome to the forum. :happy
After reading your post a few thoughts come to mind.

1. In the 401k plan I'd use these 3 funds.
BlackRock Equity Index Fund (WBRERX) (0.03%) <- Consider this fund your US Stock exposure. Put 64% here.
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) (0.07%) <- Consider this fund your international stock. Put 16% here.
BlackRock US Debt Index Fund R (WBRURX) (0.05%) <- This is your bond fund. Put 20% here.

You can screw around for days trying to pick the precise mixture of Large, Mid, Small, etc. but it's not worth your time. This account will shrink in importance as you get older and start contributing to other 401k accounts. Also, don't worry that you won't have emerging markets (EM) exposure in the Vanguard Developed Markets international fund. You can make up for that later, in another account.

If you have the flexibility to direct traditional 401k investments separately from Roth 401k investments, then put the US Debt Index fund in the traditional 401k portion of the account, and hold all stock funds in the Roth portion.

2. In the Vanguard Roth IRA, I'd suggest using the Total Stock Market Fund (VTSAX) and the Total International Stock Index Fund (VTIAX). Incidentally, the Vanguard total international fund does contain emerging markets exposure, so you're covered there.

In answer to question #3. No. Bonds don't belong in Roth accounts unless you don't have room in a traditional tax-deferred 401k or IRA.
In answer to question #4. No. Skip the TIPS until you're 60 or so.
In answer to question #5. REITs are stocks, which are part of the Vanguard total stock market fund, so you're covered. If you want additional REIT exposure, above the normal amount, then you could consider using the Vanguard REIT index fund VGSLX.

Finally, click the quotation mark, when creating a reply to another poster. You don't have to quote the entire passage, you can delete the irrelevant parts.

ETA: Since you're a high earner, and in a high tax bracket, you should really read the wiki page on tax-efficient fund placement. It will help you put the right funds in the right accounts so you don't have to re-arrange the furniture later.
Link: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
Thank you for the welcome and your thoughts. I am so happy to have joined this forum! Better late than never. :D

1. I appreciate your direction for funds. This is simpler than the cocktail I had been envisioning.
Good to know that I won't be missing out with not having emerging markets exposure. Did you suggest not having EM because of expense ratio, simplicity, or something else?
I will look into whether or not I can direct 401k vs. Roth 401k investments.

2. For Vanguard Roth IRA, do you have any recommended breakdowns for Total Stock Market Fund (VTSAX) and Total International Stock Index Fund (VTIAX)?

3. I did look at the tax-efficient fund placement link as well as some other sources, but seemed to have missed something. Maybe it's the idea that bond funds should go into tax-deferred accounts if "good fund choices are available." I also may have focused too much on the tax efficiency ranking.
Can you see if my understanding is correct here- stocks should go into Roth accounts because they provide more growth than bonds. And even though total market or large cap index funds are more tax efficient than bond funds, the growth of the index funds outweighs the tax efficiency aspect of bond funds. Do I have it right?

4. Will be skipping the TIPS.

5. Do you think additional exposure to REITs would be good? I understand this is personal preference. And I suppose the 3-fund portfolio philosophy would say this is not necessary.

6. Thanks for the help with the reply posts.

I will go back to the tax-efficient fund placement and reread. That way I can leave the furniture where it is for the most part. :happy

I appreciate your help!
I'll take your follow up questions in order.
1. The DFA Emerging Markets fund is probably a fine fund, but with an ER of .35% it's a bit pricey for my taste. Further, since this old 401k account only holds $180k, the EM investment would amount to about $7k if you hold EM at 25% of your International which is about current market weight. In the long scheme of things, a $7k investment in this particular fund isn't likely to move your portfolio much. Consider that you'll be worth millions by the time retirement rolls around, so I really don't see this particular $7k as instrumental to your success as an investor. If you insist on "making up" for this tiny deficiency in your current investment landscape, then you could use the Vanguard Emerging Markets Index fund inside your Roth IRA. Same exposure with a lower expense ratio.

2. The recommended breakdown would be the 80% US / 20% International that you said you were seeking. There are arguments for and against International stock market exposure, anywhere from 0% to 50%, but I'm holding 20% (just like you). If the fund minimums ($3,000) get in the way of achieving your desired asset allocation initially, then just adjust next year, after having made another Roth IRA contribution.

3. The way I look at the advice "Bonds belong in tax-deferred" is as follows. Roth space is rare, usually about 1/4 of what most investors have access to when you think about $19,500 to 401k and $6,000 to Roth IRA, then the Roth account is about 23% of the total. Also, since Roth space has the great advantage of never being taxed again (assuming US Congress agrees), you'd naturally want this account to grow as large as possible. That means using stock index funds because they have a higher assumed growth rate than bond funds. Could be wrong, but probably not.

Further, the 401k tax-deferred space, which is "less rare" WILL be taxed upon withdrawal. Since bonds or bond index funds throw off interest that would be taxed as ordinary income if they were held in a taxable account they are considered tax-inefficient. By forcing all your inefficient bond funds into the tax-deferred account, you can take better advantage of the favorable tax situation that stock index fund dividends get in a taxable account. Long term capital gains income tax rates apply to both qualified dividends and long term capital gains that come about when you sell.

Finally, this will sound counter-intuitive, but to help control the overall growth of your tax-deferred accounts and avoid high RMDs when you're in your 70s, using bond funds will act like throwing a blanket over the growth of the account. Sounds weird, but you don't really want $5 million in your 401k cause you'll get creamed on taxes when making required minimum withdrawals later in life.

5. REITs are somewhat volatile (and priced quite high right now), so if you're going to go there, I'd use a dollar cost averaging approach ** IF ** I were to do it. I don't personally hold a REIT index fund.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
tashnewbie
Posts: 4284
Joined: Thu Apr 23, 2020 12:44 pm

Re: Portfolio help and guidance for newbie 38yo

Post by tashnewbie »

Great advice from retired@50.

I just want to point out a couple overarching themes to keep in mind for the future:

1. Don't use Roth 401k in the future (unless it's part of the Mega Backdoor Roth; see wiki for more information on that). Use traditional 401k. In your tax bracket and with your current tax-deferred balance, traditional 401k is probably going to be a better deal for you. You'll save a lot on taxes now, and you'll probably be in a lower tax bracket when you retire and start withdrawing the money. See the traditional vs. Roth wiki for more information.

2. Look at all your accounts as one big portfolio. You want your AA to be 80/20 stocks:bonds, with 20% int'l stocks (so 64/16/20). Stick all of your bonds in traditional 401k (if possible). I'd probably favor international stock in the 401k too. Put US stock everywhere.

3. Invest the money in your Roth IRA instead of leaving it in cash. Invest per your desired AA. I'd probably just go with VTSAX for now to keep things simple. If you ever run out of space in your 401k for international stock, then put some in the Roth IRA with something like VTIAX.

4. Don't move the old 401k into an IRA. Given your income, you can't make direct contributions to a Roth IRA. You have to use the backdoor Roth (see wiki for details). And having pretax non-Roth IRAs complicates the backdoor method. Once you get a new job, review the new workplace retirement plan's (if one is provided) options to determine if it'd be better to leave the old 401k where it is or transfer into the new plan (assuming incoming transfers are allowed).

5. Your ability to max the Roth IRA contribution for 2021 shouldn't be dependent on whether you're able to max the 401k. You should be able to easily do both.

6. Given your high income and lack of debt or children, you should be able to save more than the $19.5k into 401k and $6k into Roth IRA each year. After maxing those options, start putting money into a taxable account. I'd use a broad market US fund that's different than the one you use in your Roth IRA (in case you want to set yourself up to be able to easily tax loss harvest in the future). Perhaps something like the Vanguard 500 index fund (VFIAX or VOO if you're investing somewhere other than Vanguard). Your net worth will grow dramatically over the next decade. Good luck!
Topic Author
jump4joy
Posts: 8
Joined: Sat May 15, 2021 1:17 pm

Re: Portfolio help and guidance for newbie 38yo

Post by jump4joy »

retired@50 wrote: Mon Jun 14, 2021 9:26 am
I'll take your follow up questions in order.
1. The DFA Emerging Markets fund is probably a fine fund, but with an ER of .35% it's a bit pricey for my taste. Further, since this old 401k account only holds $180k, the EM investment would amount to about $7k if you hold EM at 25% of your International which is about current market weight. In the long scheme of things, a $7k investment in this particular fund isn't likely to move your portfolio much. Consider that you'll be worth millions by the time retirement rolls around, so I really don't see this particular $7k as instrumental to your success as an investor. If you insist on "making up" for this tiny deficiency in your current investment landscape, then you could use the Vanguard Emerging Markets Index fund inside your Roth IRA. Same exposure with a lower expense ratio.

2. The recommended breakdown would be the 80% US / 20% International that you said you were seeking. There are arguments for and against International stock market exposure, anywhere from 0% to 50%, but I'm holding 20% (just like you). If the fund minimums ($3,000) get in the way of achieving your desired asset allocation initially, then just adjust next year, after having made another Roth IRA contribution.

3. The way I look at the advice "Bonds belong in tax-deferred" is as follows. Roth space is rare, usually about 1/4 of what most investors have access to when you think about $19,500 to 401k and $6,000 to Roth IRA, then the Roth account is about 23% of the total. Also, since Roth space has the great advantage of never being taxed again (assuming US Congress agrees), you'd naturally want this account to grow as large as possible. That means using stock index funds because they have a higher assumed growth rate than bond funds. Could be wrong, but probably not.

Further, the 401k tax-deferred space, which is "less rare" WILL be taxed upon withdrawal. Since bonds or bond index funds throw off interest that would be taxed as ordinary income if they were held in a taxable account they are considered tax-inefficient. By forcing all your inefficient bond funds into the tax-deferred account, you can take better advantage of the favorable tax situation that stock index fund dividends get in a taxable account. Long term capital gains income tax rates apply to both qualified dividends and long term capital gains that come about when you sell.

Finally, this will sound counter-intuitive, but to help control the overall growth of your tax-deferred accounts and avoid high RMDs when you're in your 70s, using bond funds will act like throwing a blanket over the growth of the account. Sounds weird, but you don't really want $5 million in your 401k cause you'll get creamed on taxes when making required minimum withdrawals later in life.

5. REITs are somewhat volatile (and priced quite high right now), so if you're going to go there, I'd use a dollar cost averaging approach ** IF ** I were to do it. I don't personally hold a REIT index fund.

Regards,
Thank you so much. Your explanations are incredibly helpful!

1. Regarding EM, I was curious about your thought process. I saw that the ER was on the high side and thought this may be the driving reason to not include, but your analysis of the long-term plan helped me see the bigger picture. I don’t feel the need to make up for this.

2. Yes, I did want 20% international stock (LOL), but I didn’t know if the percentages would be different based on the entire portfolio as opposed to just looking at Roth IRA. It seems you already factored that in. :idea: :happy

3. Thanks for writing out your thoughts out on the "Bonds belong in tax-deferred" advice. I did not consider the flip end of this whole process when I’m actually in retirement. I looked up RMDs and how this gets figured out. Yikes! I see what you mean about not wanting a lot in your traditional 401k for taxes. This makes a whole lot more sense now about using bonds to control the growth.

5. I will pass on REITs at this time given cost and that they are part of the Vanguard Total Stock Market Fund. Also Exchme indicated this would not increase diversification, but I’d still be taking on the risks.

New Question: I know there is variation on this, but how often do you check on your portfolio/rebalance?

Cheers!
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retired@50
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Re: Portfolio help and guidance for newbie 38yo

Post by retired@50 »

jump4joy wrote: Tue Jun 15, 2021 12:39 pm New Question: I know there is variation on this, but how often do you check on your portfolio/rebalance?

Cheers!
My typical recommendation for re-balancing is annually, or when the market swings wildly, which can throw your asset allocation out of balance by more than 5%.

Checking on this quarterly is probably sufficient. If the market has a dramatic move, you won't miss it because it will be on every news channel and in every newspaper.

In your case, at a desired allocation of 80% stock and 20% bonds, you'd keep the bonds somewhere between 15% and 25%, which would imply the stock amount would be between 75% and 85%.

Since you're still contributing with every paycheck, some investors in this situation will alter their contributions periodically to throw more money at what ever asset is "low". My preference was always to just use a transaction inside my 401k account to get things right, right away. Since transactions inside the 401k don't have tax consequences, it's an easy way to get back on track in a hurry.

See wiki link for more discussion and detail on the topic.
https://www.bogleheads.org/wiki/Rebalancing

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
jump4joy
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Re: Portfolio help and guidance for newbie 38yo

Post by jump4joy »

tashnewbie wrote: Mon Jun 14, 2021 1:58 pm Great advice from retired@50.

I just want to point out a couple overarching themes to keep in mind for the future:

1. Don't use Roth 401k in the future (unless it's part of the Mega Backdoor Roth; see wiki for more information on that). Use traditional 401k. In your tax bracket and with your current tax-deferred balance, traditional 401k is probably going to be a better deal for you. You'll save a lot on taxes now, and you'll probably be in a lower tax bracket when you retire and start withdrawing the money. See the traditional vs. Roth wiki for more information.

2. Look at all your accounts as one big portfolio. You want your AA to be 80/20 stocks:bonds, with 20% int'l stocks (so 64/16/20). Stick all of your bonds in traditional 401k (if possible). I'd probably favor international stock in the 401k too. Put US stock everywhere.

3. Invest the money in your Roth IRA instead of leaving it in cash. Invest per your desired AA. I'd probably just go with VTSAX for now to keep things simple. If you ever run out of space in your 401k for international stock, then put some in the Roth IRA with something like VTIAX.

4. Don't move the old 401k into an IRA. Given your income, you can't make direct contributions to a Roth IRA. You have to use the backdoor Roth (see wiki for details). And having pretax non-Roth IRAs complicates the backdoor method. Once you get a new job, review the new workplace retirement plan's (if one is provided) options to determine if it'd be better to leave the old 401k where it is or transfer into the new plan (assuming incoming transfers are allowed).

5. Your ability to max the Roth IRA contribution for 2021 shouldn't be dependent on whether you're able to max the 401k. You should be able to easily do both.

6. Given your high income and lack of debt or children, you should be able to save more than the $19.5k into 401k and $6k into Roth IRA each year. After maxing those options, start putting money into a taxable account. I'd use a broad market US fund that's different than the one you use in your Roth IRA (in case you want to set yourself up to be able to easily tax loss harvest in the future). Perhaps something like the Vanguard 500 index fund (VFIAX or VOO if you're investing somewhere other than Vanguard). Your net worth will grow dramatically over the next decade. Good luck!
Thank you so much for pointing out these themes!

1. Appreciate your insight for Roth 401k going forward. I did use the Mega Backdoor Roth to create the Roth 401k. I did this only in 2021. I couldn’t do this beforehand due to trying to get rid of the large amount of debt. I thought about not doing it, but I started my retirement accounts and investing later in life. So, I figured putting away more money now, when I can, would be best for 10-20-30 years from now.

2. I still need to look into whether or not I can direct traditional 401k vs. Roth 401k investments, but will definitely put bonds in traditional 401k if possible. I have a clear understanding of this now. Why would you favor the international stock in the traditional 401k?

3. I will get on moving the Roth IRA funds from cash now that I have a plan. Thanks for the direction.

4. Great tip about my 401k- I shall leave it where it is and revisit when the time comes.

5. I did max out both 401k and Roth IRA for 2021, then started on Mega Backdoor Roth after that. I was thinking about 2022 for “new annual contributions,” but I would definitely max out on both if I can with new employment (hoping this is the case).

6. I wasn’t planning on opening a taxable account right now, but it makes sense based on what you explained. And VOO would offer me the ability to put in small amounts while figuring out my next steps for employment.

I appreciate your guidance and good wishes. :happy

Cheers!
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retired@50
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Re: Portfolio help and guidance for newbie 38yo

Post by retired@50 »

jump4joy wrote: Tue Jun 15, 2021 12:39 pm Thank you so much. Your explanations are incredibly helpful!
Thank you.
The occasional compliment like this lets me know that I'm having a positive impact, which is one of my reasons for contributing to Bogleheads.org.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
tashnewbie
Posts: 4284
Joined: Thu Apr 23, 2020 12:44 pm

Re: Portfolio help and guidance for newbie 38yo

Post by tashnewbie »

jump4joy wrote: Tue Jun 15, 2021 1:43 pm
tashnewbie wrote: Mon Jun 14, 2021 1:58 pm Great advice from retired@50.

I just want to point out a couple overarching themes to keep in mind for the future:

1. Don't use Roth 401k in the future (unless it's part of the Mega Backdoor Roth; see wiki for more information on that). Use traditional 401k. In your tax bracket and with your current tax-deferred balance, traditional 401k is probably going to be a better deal for you. You'll save a lot on taxes now, and you'll probably be in a lower tax bracket when you retire and start withdrawing the money. See the traditional vs. Roth wiki for more information.

2. Look at all your accounts as one big portfolio. You want your AA to be 80/20 stocks:bonds, with 20% int'l stocks (so 64/16/20). Stick all of your bonds in traditional 401k (if possible). I'd probably favor international stock in the 401k too. Put US stock everywhere.

3. Invest the money in your Roth IRA instead of leaving it in cash. Invest per your desired AA. I'd probably just go with VTSAX for now to keep things simple. If you ever run out of space in your 401k for international stock, then put some in the Roth IRA with something like VTIAX.

4. Don't move the old 401k into an IRA. Given your income, you can't make direct contributions to a Roth IRA. You have to use the backdoor Roth (see wiki for details). And having pretax non-Roth IRAs complicates the backdoor method. Once you get a new job, review the new workplace retirement plan's (if one is provided) options to determine if it'd be better to leave the old 401k where it is or transfer into the new plan (assuming incoming transfers are allowed).

5. Your ability to max the Roth IRA contribution for 2021 shouldn't be dependent on whether you're able to max the 401k. You should be able to easily do both.

6. Given your high income and lack of debt or children, you should be able to save more than the $19.5k into 401k and $6k into Roth IRA each year. After maxing those options, start putting money into a taxable account. I'd use a broad market US fund that's different than the one you use in your Roth IRA (in case you want to set yourself up to be able to easily tax loss harvest in the future). Perhaps something like the Vanguard 500 index fund (VFIAX or VOO if you're investing somewhere other than Vanguard). Your net worth will grow dramatically over the next decade. Good luck!
Thank you so much for pointing out these themes!

1. Appreciate your insight for Roth 401k going forward. I did use the Mega Backdoor Roth to create the Roth 401k. I did this only in 2021. I couldn’t do this beforehand due to trying to get rid of the large amount of debt. I thought about not doing it, but I started my retirement accounts and investing later in life. So, I figured putting away more money now, when I can, would be best for 10-20-30 years from now.

2. I still need to look into whether or not I can direct traditional 401k vs. Roth 401k investments, but will definitely put bonds in traditional 401k if possible. I have a clear understanding of this now. Why would you favor the international stock in the traditional 401k?

3. I will get on moving the Roth IRA funds from cash now that I have a plan. Thanks for the direction.

4. Great tip about my 401k- I shall leave it where it is and revisit when the time comes.

5. I did max out both 401k and Roth IRA for 2021, then started on Mega Backdoor Roth after that. I was thinking about 2022 for “new annual contributions,” but I would definitely max out on both if I can with new employment (hoping this is the case).

6. I wasn’t planning on opening a taxable account right now, but it makes sense based on what you explained. And VOO would offer me the ability to put in small amounts while figuring out my next steps for employment.

I appreciate your guidance and good wishes. :happy

Cheers!
If you have access to MBDR at your future employer, I would favor that over taxable investing. See this wiki for more information: https://www.bogleheads.org/wiki/Priorit ... nvestments

It’s not wrong to put international stock index funds in any type of account. Some people are a little lukewarm on international so they hedge their “bets” a little by putting international in 401k as a first holding place, because the government will share some of the possible poor performance. There’s a forum member who posts about this frequently but I can’t think of their handle at the moment. You have a good international stock fund option in the old 401k, so I see no reason not to use it. You can also put international in your Roth IRA.
Topic Author
jump4joy
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Re: Portfolio help and guidance for newbie 38yo

Post by jump4joy »

retired@50 wrote: Tue Jun 15, 2021 1:19 pm
jump4joy wrote: Tue Jun 15, 2021 12:39 pm New Question: I know there is variation on this, but how often do you check on your portfolio/rebalance?

Cheers!
My typical recommendation for re-balancing is annually, or when the market swings wildly, which can throw your asset allocation out of balance by more than 5%.

Checking on this quarterly is probably sufficient. If the market has a dramatic move, you won't miss it because it will be on every news channel and in every newspaper.

In your case, at a desired allocation of 80% stock and 20% bonds, you'd keep the bonds somewhere between 15% and 25%, which would imply the stock amount would be between 75% and 85%.

Since you're still contributing with every paycheck, some investors in this situation will alter their contributions periodically to throw more money at what ever asset is "low". My preference was always to just use a transaction inside my 401k account to get things right, right away. Since transactions inside the 401k don't have tax consequences, it's an easy way to get back on track in a hurry.

See wiki link for more discussion and detail on the topic.
https://www.bogleheads.org/wiki/Rebalancing

Regards,
Thank you for your details with examples and the link.
retired@50 wrote: Tue Jun 15, 2021 2:15 pm
jump4joy wrote: Tue Jun 15, 2021 12:39 pm Thank you so much. Your explanations are incredibly helpful!
Thank you.
The occasional compliment like this lets me know that I'm having a positive impact, which is one of my reasons for contributing to Bogleheads.org.

Regards,
You're are very welcome. I know I'm an N of 1, but the ability to have this back and forth has been instrumental for my understanding. The links, books, and other materials are great for getting background and for reference purposes, but when you don't understand something or things don't click, those sources don't always answer your questions (despite efforts). So I appreciate you taking the time to help me connect the dots on concepts that may otherwise seem like common understanding or are basic. I believe I am on my way into the next phase of my retirement portfolio for the better! I have no doubt you are helping so many more take control of their financial future.

Cheers!
Topic Author
jump4joy
Posts: 8
Joined: Sat May 15, 2021 1:17 pm

Re: Portfolio help and guidance for newbie 38yo

Post by jump4joy »

tashnewbie wrote: Tue Jun 15, 2021 3:00 pm
If you have access to MBDR at your future employer, I would favor that over taxable investing. See this wiki for more information: https://www.bogleheads.org/wiki/Priorit ... nvestments

It’s not wrong to put international stock index funds in any type of account. Some people are a little lukewarm on international so they hedge their “bets” a little by putting international in 401k as a first holding place, because the government will share some of the possible poor performance. There’s a forum member who posts about this frequently but I can’t think of their handle at the moment. You have a good international stock fund option in the old 401k, so I see no reason not to use it. You can also put international in your Roth IRA.
Makes sense about MBDR over taxable investing.

Thanks for explaining the rationale behind putting international stocks in traditional 401k. I'm sad to say that I can't direct my 401k vs. Roth 401k investments- my plan doesn't allow for it, but at least I learned something new.

Thank you for taking the time to help me on my way. Cheers!
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