Portfolio review

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Topic Author
Aggieland
Posts: 7
Joined: Fri Aug 21, 2020 11:55 am

Portfolio review

Post by Aggieland »

I greatly appreciate the feedback on our portfolio and any suggestions we can consider. Thank you!!


Emergency funds: 6month expenses. $50k.

Debt: 
-Home loan-$135K. 3%. 9 yrs remaining.
-Cars-$36k. 3 years remaining. 3%.

Tax Filing Status: Married filing jointly.

Tax Rate: 32% tax bracket( Fed), 0% state.

State of Residence: TX

Age: 37(His), 37 (Her)

Desired Asset allocation: 100% stocks until age 50.


Approximate size of portfolio: $1.24M in Stocks, $150K in cash

Current retirement assets

Taxable
11% cash.
20% VTI/VTSAX-Vanguard Total Stock Market ETF (0.04%)

His 401k
26% Vanguard Sp500 fund(0.02%)
2% Vanguard SP400 mid cap(0.05%)
2% Vanguard Spsmall cap(0.05%)
Company match: Yes.
All new contributions 100% in Sp500.

His Roth IRA :2.5% VTI (0.03%)

His 'Hsaccount: 3% VTI(0.03%)

Her Roth IRA: 2.5% VTI(0.03%)

Her 401k:
-8.1% Vanguard admiral SP500 fund(0.77%)
-5.3% Vanguard admiral SP400 midcap fund(0.8%).
All new contributions 100% in Sp500. Starting this year did not max out the 19K contribution, given the high ER of funds. New contributions are $6k/year. No employer match.

529 plan: 13.2% Vanguard Total Stock Market Portfolio (0.12%). 2 kids(7 & 8)

----------------------------------------------------------------------------------------------------------
Contributions

New annual Contributions
$19k his 401k ($12k employer contributions)
$6k her 401k ($0 employer contributions)
$6K his Back door Roth IRA
$6K her Back door Roth IRA
$7K his Health Savings account
Targeting $120K/year taxable.


Questions:
1. 100% of the stocks in index funds. No bonds. At what point should I consider bonds in the portfolio? Current plan is to be 100% VTI/VOO type fund until age 50.

2. Is there anything I can do from a tax efficiency standpoint?

3. DW 401k ER are high. The lowest ER fund is 0.77%. Even the fixed income funds are 0.8% ER. Thinking of not contributing beyond say $6K and invest the rest in taxable. Any inputs appreciated.

4. 529 plan: Have no plans to contribute additional funds. At times, it feels like 529 funding was a mistake and should have left the money in taxable account for flexibility. Should we stick with the 529. The complex rules and laws around these plans is the reason for second guessing. Can parents transfer ownership to kids without taxes?
Last edited by Aggieland on Tue Jul 20, 2021 1:20 pm, edited 1 time in total.
wetgear
Posts: 370
Joined: Thu Apr 06, 2017 10:14 am

Re: Portfolio review

Post by wetgear »

1) This is highly personal and hard to give advice for. It has to do with your ability, need, and willingness to take risk. Your portfolio is large relative to your age so you don't need to take a lot of risk but you have the ability to. So it's all about your willingness which is the most personal of the 3. I'd say anywhere between 0 & 40% of your portfolio in bonds is reasonable for your situation. Maybe have a goal of being 10-20% in bonds by age 40 is a good goal if you do want to taper off the risk a bit. Another alternative to reduce risk is to attack your debt a bit, its a guaranteed 3% return which is better than most bonds are paying today.

2) Looks pretty good but I'd max the contributions to DW 401k despite the high fees (more on this later). Another minor adjustment would to be to use a different total market fund in your Roth IRAs and HSA. The only reason for this is convenience of tax loss harvesting and avoiding wash sales. You could still TLH without making this adjustment but you have to keep an eye on all the accounts instead of just taxable when doing this.

3) Those fees are high but the tax savings probably helps more. DW's company may also improve the plan or she may leave the company. This is all to say the fees could be temporary but lost 401k space is gone forever. If the fees were another 50% higher I'd be less inclined to go this route.

4) I don't know much about 529 plans but my understanding is that they vary state to state. Maybe look at I-Bonds as they can be tax free under certain circumstances for educational purposes. They could double as your emergency fund for today (rates are better than anything else available currently) and if they don't get used then repurpose them for college expenses.
User avatar
Wiggums
Posts: 4105
Joined: Thu Jan 31, 2019 8:02 am

Re: Portfolio review

Post by Wiggums »

MFJ - you are in the 22% tax bracket.

529 -what’s not to like about tax free with VTSAX option? Just don’t overfund and it must be used for education, or passed down to another child. Otherwise you pay a 10% penalty plus fed and state taxes. Unless you wanted to use the money for things in addition to education. We had a UTMA account and didn’t know anyone with a 529 back then. In our case, the market returns have been great. The bad news is that our kids owe taxes. That is the tradeoff you are considering.
Topic Author
Aggieland
Posts: 7
Joined: Fri Aug 21, 2020 11:55 am

Re: Portfolio review

Post by Aggieland »

Thank you for the comments. Tax bracket is 32%( updated)
User avatar
retired@50
Posts: 6289
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Portfolio review

Post by retired@50 »

Aggieland wrote: Tue Jul 20, 2021 12:24 pm ...
Emergency funds: 6month expenses. $50k.
...
Debt: 
-Home loan-$135K. 3%. 9 yrs remaining.
-Cars-$36k. 3 years remaining. 3%.
...
Approximate size of portfolio: $1.24M in Stocks, $150K in cash

Current retirement assets

Taxable
11% cash.
...
I'm puzzled by your large cash position (18 months of expenses) yet you're carrying 3% debt on the cars and the house.

What sort of interest are you earning on the $150K of cash?

I would imagine that it's much lower than the 3% you're paying on the debt.

The message here is to pay off the cars, and maybe the house unless you're getting a mortgage interest deduction.

Regards,
This is one person's opinion. Nothing more.
WyomingFIRE
Posts: 163
Joined: Wed Sep 12, 2018 10:44 am

Re: Portfolio review

Post by WyomingFIRE »

Aggieland wrote: Tue Jul 20, 2021 12:24 pm
Questions:
1. 100% of the stocks in index funds. No bonds. At what point should I consider bonds in the portfolio? Current plan is to be 100% VTI/VOO type fund until age 50.
To begin, you are doing wonderfully well. I wish I had had the wisdom to be asking questions such as yours when I was in my 30's, more than 20 years ago now.

I will bite on the question above. We were effectively 100% equity broad-market ETFs until age 50. Folks here will reference data and studies, all valid, that demonstrate that even folks as young as you should hold some bonds. I don't disagree with that analysis. I just always wanted to have max equity in play for the longest possible moment in my career and also on the assumption that things could go wrong for us economically in my 50's (layoffs, health issues, what have you). So we were 100% equities until age 50, at which point we started to tap the brakes. I am now 57, and we are roughly 65/30/5. Between age 50 and 57, we linearly went from 100/0/0 to 65/30/5. We are now about 1-3 years out from retirement. In the next year or two, we will likely drop down to 60/35/5. I don't envision going lower than that in retirement; we have sufficient bond fund holdings to last more than a decade.

I view 100% equity as akin to owning versus renting one's home. Again, you will get different views here on that topic. We just always wanted to be owners of our home, in the same way we always wanted to own equity funds. Our views on these matters are as much philosophical as financial. There are no right or wrong answers; it is all deeply personal, with some financial analysis dispersed on top.

We also are fairly risk tolerant. We have never sold in a down market. Weirdly perhaps, down markets don't frighten me.

Tl;dr: Setting one's AA is deeply personal and dependent upon a wealth of factors, including risk tolerance, age, anticipated retirement date, and need for one's portfolio to deliver expected returns. In my completely anecdotal and humble view, being 100% equities until age 50 is completely acceptable. And that approach has served us wonderfully well.

YMMV, keep up the good work, and good luck.
Topic Author
Aggieland
Posts: 7
Joined: Fri Aug 21, 2020 11:55 am

Re: Portfolio review

Post by Aggieland »

Thank you for the feedback. The cash position is one of the areas I need to improve. I get into market timing mode to catch the dip. Learning to improve this aspect.
———————
retired@50 wrote: Tue Jul 20, 2021 7:23 pm
Aggieland wrote: Tue Jul 20, 2021 12:24 pm ...
Emergency funds: 6month expenses. $50k.
...
Debt: 
-Home loan-$135K. 3%. 9 yrs remaining.
-Cars-$36k. 3 years remaining. 3%.
...
Approximate size of portfolio: $1.24M in Stocks, $150K in cash

Current retirement assets

Taxable
11% cash.
...
I'm puzzled by your large cash position (18 months of expenses) yet you're carrying 3% debt on the cars and the house.

What sort of interest are you earning on the $150K of cash?

I would imagine that it's much lower than the 3% you're paying on the debt.

The message here is to pay off the cars, and maybe the house unless you're getting a mortgage interest deduction.

Regards,
Topic Author
Aggieland
Posts: 7
Joined: Fri Aug 21, 2020 11:55 am

Re: Portfolio review

Post by Aggieland »

Thanks for sharing your views. This forum had great influence in reshaping my investment behaviors.

My thoughts are similar. During 2020 crash, i did not sell any positions but bought funds. Using that as one gauge for tolerance.

WyomingFIRE wrote: Tue Jul 20, 2021 7:53 pm
Aggieland wrote: Tue Jul 20, 2021 12:24 pm
Questions:
1. 100% of the stocks in index funds. No bonds. At what point should I consider bonds in the portfolio? Current plan is to be 100% VTI/VOO type fund until age 50.
To begin, you are doing wonderfully well. I wish I had had the wisdom to be asking questions such as yours when I was in my 30's, more than 20 years ago now.

I will bite on the question above. We were effectively 100% equity broad-market ETFs until age 50. Folks here will reference data and studies, all valid, that demonstrate that even folks as young as you should hold some bonds. I don't disagree with that analysis. I just always wanted to have max equity in play for the longest possible moment in my career and also on the assumption that things could go wrong for us economically in my 50's (layoffs, health issues, what have you). So we were 100% equities until age 50, at which point we started to tap the brakes. I am now 57, and we are roughly 65/30/5. Between age 50 and 57, we linearly went from 100/0/0 to 65/30/5. We are now about 1-3 years out from retirement. In the next year or two, we will likely drop down to 60/35/5. I don't envision going lower than that in retirement; we have sufficient bond fund holdings to last more than a decade.

I view 100% equity as akin to owning versus renting one's home. Again, you will get different views here on that topic. We just always wanted to be owners of our home, in the same way we always wanted to own equity funds. Our views on these matters are as much philosophical as financial. There are no right or wrong answers; it is all deeply personal, with some financial analysis dispersed on top.

We also are fairly risk tolerant. We have never sold in a down market. Weirdly perhaps, down markets don't frighten me.

Tl;dr: Setting one's AA is deeply personal and dependent upon a wealth of factors, including risk tolerance, age, anticipated retirement date, and need for one's portfolio to deliver expected returns. In my completely anecdotal and humble view, being 100% equities until age 50 is completely acceptable. And that approach has served us wonderfully well.

YMMV, keep up the good work, and good luck.
User avatar
retired@50
Posts: 6289
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Portfolio review

Post by retired@50 »

Aggieland wrote: Tue Jul 20, 2021 8:36 pm Thank you for the feedback. The cash position is one of the areas I need to improve. I get into market timing mode to catch the dip. Learning to improve this aspect.
See this post (linked below). It contains a link to a podcast by Benjamin Felix who de-constructs the "Buying the Dip" narrative.

If you don't listen, I'll leap to his conclusion. It rarely works to an investor's benefit.

See link: viewtopic.php?p=6086445#p6086445

Regards,
This is one person's opinion. Nothing more.
ShowMeTheER
Posts: 466
Joined: Mon May 24, 2010 9:12 am

Re: Portfolio review

Post by ShowMeTheER »

I think you’re doing great. 529s are heavily funded but it’s a high class problem to have.

One thing that stands out IMO is… you are in 32% bracket and have plenty of savings and plenty more to come… max the 401k.

You have some cash held but also note no bonds. I think this a reasonable trade off and wouldn’t dwell on it too much.
lakpr
Posts: 8003
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio review

Post by lakpr »

+1 to the recommendation from retired@50, to pay off the car loan.

That car loan interest is deceptive, it is not 3% that you are paying, but 4.4%. The interest paid on car loans is not tax-deductible, so you are paying after-tax interest on those car loans. In your 32% tax bracket, that's equivalent to 3% / (1 - 32%) = 4.4%. You need to earn at least that much in your investments, just to break even.

If someone were to offer a CD 4.4% for 3 years, the only caveats being this is a non-renewable offer, max you can invest is only $36k. Would you take that offer or no? [ Edited to add: paying off car loan might also allow you, should you so desire, to drop collision and/or comprehensive insurance, and also GAP insurance if you have it now; so the potential payoff can be higher than 4.4% ]

Right now, if it were me, I would *JUMP* at that offer. Not even I bonds are yielding 4.4%, intermediate term bond funds are yielding a pittance at 1.3%, and Bankrate shows 3-year CDs at 0.75% max; so that offer looks glitteringly attractive.

Now in your post you did say you think you have a high risk tolerance and are a 100% equities guy, so your personal decision might be different. Just realize that you are, in effect, borrowing at 4.4% from the auto loan lender to invest in the stock market.

Same argument goes for the $135k 3% home loan. The interest being paid on that home loan is pittance, surely not going to vault your itemized deductions over the standard deduction limit, so that is ALSO after-tax interest you are paying. Get rid of it too, as soon as you can.
Last edited by lakpr on Wed Jul 21, 2021 8:39 am, edited 1 time in total.
tashnewbie
Posts: 1697
Joined: Thu Apr 23, 2020 12:44 pm

Re: Portfolio review

Post by tashnewbie »

You're doing very well.

2 & 3. For increased tax efficiency, you should definitely max her traditional 401k, despite the higher ER funds. In your high tax bracket, the tax deferral is a big benefit. In general, for people in higher tax brackets, traditional 401k is worthwhile if fund fees are no more than 1.5%. This general rule of thumb is explained in this wiki article: https://www.bogleheads.org/wiki/401(k)# ... re_choices
Even in a bad 401(k), you should contribute up to the company match. Choose the lowest-cost funds; many bad 401(k)'s have a few lower-cost funds. If you are eligible, additional contributions should usually go into a Roth or Traditional IRA. But unless your 401(k) is very bad and you expect to stay a very long time with the same employer, investing unmatched money in the 401(k) is likely to be better than taxable investing, because you can roll over your 401(k) to a low-cost IRA when you leave.

A reasonable rule-of-thumb is to consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds one and a half times your combined federal and state tax rates on qualified dividends over your working career. That is, if you pay 1.70% expenses rather than 0.20%, and you pay 15% federal tax on qualified dividends, plus 5% state tax, you should still invest in the plan unless you are reasonably certain that you will stay with the employer for more than 20 years for a net loss of 30% (actually 26% because of compounding). If you pay no state tax, you should still invest in the plan unless you are reasonably certain you will stay more than 15 years.

In general, if you only plan to use the S&P 500 funds in both 401ks, I would sell the other holdings and consolidate into the 1 fund. The negligible holdings of the other funds is just noise in your portfolio. The small amounts aren't enough to make a difference with anything, except adding clutter.

I would invest in different funds in the Roth IRAs so that you don't have issues with inadvertent wash sales, if you ever decide you want to tax loss harvest in the taxable account. You could use VOO (S&P 500 index fund) in both Roth IRAs.

I would take some of the cash and pay off your car loan this week. Paying off the mortgage wouldn't be a bad deal either. Your 3% mortgage rate is after-tax. That's 3%/(1-0.32) = 4.41% pre-tax for you. That's a great guaranteed, risk-free return in today's environment. I probably wouldn't put any extra cash towards the mortgage until you have enough to pay it off completely.

Notwithstanding whatever you decide to do with the extra cash you currently have, moving forward, as you get cash beyond your desired emergency fund, I would invest it. Set up an automated investing schedule for the taxable account. That's easier to do if you're using mutual funds instead of ETFs because you don't have to deal with fractional shares. You didn't say where your taxable account is located, but at Vanguard, mutual funds with an ETF share class are just as tax-efficient as ETFs (e.g., VTSAX/VTI, VFIAX/VOO, VLCAX/VV). Plus, you can always ask Vanguard to convert the mutual funds to the ETF share class (but not vice versa), and it's not a taxable event. Even if you decide to keep using ETFs in the taxable account, set up a set investment schedule, and just login to your account semi-regularly to make purchases with the amounts that were too small to buy whole shares (I've never used ETFs, so I'm not sure if automated trades will process with an amount that's not a whole number of shares).

These wiki articles would be good to read:

Prioritizing Investments
Tax-efficient fund placement
Jablean
Posts: 755
Joined: Sat Jun 02, 2018 2:38 pm

Re: Portfolio review

Post by Jablean »

529s - if you don't want them to grow you could always put your bond allocation in them

529s are pretty flexible - they are the QTP in this IRS doc https://www.irs.gov/pub/irs-pdf/p970.pdf
Withdrawals from education savings plan accounts can generally be used at any college or university, including sometimes at non-U.S. colleges and universities. Education savings plans can also be used to pay up to $10,000 per year per beneficiary for tuition at any public, private or religious elementary or secondary school.

Your income is probably high enough that when the kids are in college you won't qualify for either the AOTC or LLC credits and your kids were never going to qualify for grants for the same reason, don't bother with the FAFSA. So this will actually make accounting easier for you, whatever you spend on college you take out of the 529. If your kid gets a scholarship you still get to take that amount out of your 529 - you'll pay taxes but no penalty.
rhubarbpie
Posts: 32
Joined: Mon May 03, 2021 9:18 am

Re: Portfolio review

Post by rhubarbpie »

IIRC, you can change the beneficiary of a 529 to any member of your family, interpreted widely: siblings, spouse, in-laws, kids, nieces/nephews/aunts/uncles/cousins, with no tax consequences. If your kids don't use the whole of the money in it they can keep it for future grad school or whatever, or just let it grow and transfer it to their children or other relatives in the future.
Topic Author
Aggieland
Posts: 7
Joined: Fri Aug 21, 2020 11:55 am

Re: Portfolio review

Post by Aggieland »

The references and comments were helpful. Thank you.
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