Review my portfolio: $1m saved, but no bonds (age 33)

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Jmo13151
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Review my portfolio: $1m saved, but no bonds (age 33)

Post by Jmo13151 »

Emergency funds:
Yes. 6 months cash (currently transitioning to i-bonds).

Debt:
Mortgage: $450k at 2.25%, 15 year. Home value $800k (current equity $350k).
No other debt.

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 0% State

Age: 33

Desired Asset allocation: unsure.

Portfolio Size:
$1.1M
My allocation is very similar across my different accounts, so I'm just going to define that allocation once, and call it "My Recipe". It consists of:
45% VTI Vanguard Total US market Index
10% VO Vanguard mid-cap index
30% VEA Vanguard developed markets index
15% VWO Vanguard emerging markets index

Current assets

Taxable
Value: $180k
Allocation: 100% "my recipe" (defined above)
i-bonds: $40,000 (just started in late 2021)


His and Her 401k Combined
Value: $700k (60% pre-tax, 40% Roth)
Allocation: 100% "my recipe" (defined above)
Our average employer match is 9%. We now contribute 100% to Roth, but previously contributed to traditional.

Roth IRA (combined)
Value: $190k
Allocation: 90% "my recipe", 10% VNQ Vanguard REIT Index

College Savings
529 savings plan, value: $40,000
Allocation: 57/36/7 (total US / total international / REIT)
Two very young children.

Contributions

New annual Contributions
We both max 401k Roth and receive average of 9% employer match.
We both max IRA (Roth) each year using backdoor Roth.
Started an HSA this year, and will max it.

Income and Goals
Dual-career couple. MCOL area. Pre-tax household income approx $300k. We are both relatively early in our careers, and expect income to continue to grow modestly.
At present, we have no desire to retire early or for one spouse to stay home. Longer term, we plan to put our children through college, possibly own a vacation home, and retire comfortably (wealthy?).

Questions

1. How would you tweak our stock allocations? Is the mid-cap out of place? How about the REIT in the IRA?

2. Are we crazy to not have any bonds in our retirement funds? Can we wait for interest rates to rise before adding that "balance"? With two good incomes and no plans to retire for 25-30 years, we are pretty comfortable with the risk. If market mayhem hits, we are comfortable riding it out and/or scaling back our plans (no second home, etc). That said, we need bonds at some point... When?

3. Are i-bonds a reasonable place to start building bond exposure? If nothing else, they can serve as our emergency fund after 1 year. I'm not sure I would call them retirement funds though, because it would be tempting to pull that cash out when inflation falls, if the interest rate is very low.

4. What to do with our extra monthly cash flow? More i-bonds? Brokerage account? Pay down the mortgage?

Thank you in advance for your help!

Update 1:
See details in my response below, but in summary:
- 100% is because our employers contribute 9% to traditional, we'll have a sizeable non-tax-sheltered protfolio raising our incomes, and I expect tax rates to go up in the future on high net worth people.
- Mortgage is 15 year because of the fact that we planned to pay it off early regardless, so I figured why pay extra interest. We will "re-cast" to lower our monthly payment after we make a substantial early payment (so that if someone lost a job, we could still afford the payment). Based on everyone's replies, and my risk tolerance, I think we'll pay it down early, as we get a guaranteed 2.25% tax-free return. We have enough market exposure already that we don't need to use a loan as leverage.
Last edited by Jmo13151 on Thu Jan 13, 2022 7:26 pm, edited 1 time in total.
pizzy
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by pizzy »

What made you decide to go all Roth for retirement contributions?
Late 30's | 90% VT | 10% Cash
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eye.surgeon
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by eye.surgeon »

IMO it's reasonable to be 100% equities at your age and investment horizon, assuming your risk tolerance allows it without panic selling in a bear market. I like using ibonds as part of an EF and they of course also count as bond holdings. I consider your equity holdings to be reasonable although not purely a boglehead portfolio as you are slicing and dicing a bit. I would plan to slowly introduce an increasing bond holding as you approach 15-20 years from retirement. Congratulations on achieving this at 33.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett
quantAndHold
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by quantAndHold »

You’re doing fine. At 33, you don’t need bonds, as long as you have an emergency fund, and you’re comfortable enough with your allocation that you aren’t going to start dumping stocks when the market drops. Revisit when you’re 40 or so.

I also question putting everything in Roth with your income. Most people have lower income, and hence lower marginal tax rate, in retirement. So a traditional 401k is usually a better idea. Pay the tax later.

I think your “recipe” is fine. I would fill your taxable account with the foreign part of that, and put the US stocks in the retirement accounts. You pay foreign taxes no matter whether the stocks are in tax advantaged accounts or not. If you’re investing in a taxable account, you can take a credit on your income taxes for the foreign tax paid. If you’re in a tax advantaged account, you can’t.
Yes, I’m really that pedantic.
mike_in_ny
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by mike_in_ny »

1) The mid-cap is fine. However, I'll predict that eventually you will decide to go entirely TSM for
simplicity--the small percent of mid won't move the needle much.

2) I think that being 100% equities is very reasonable considering age, the dual careers and higher NW.
My logic was the same until our mortgage was paid off.

3) No opinion on I Ibonds.

4) Brokerage account. This gives you incredible flexibility.

You're doing really well. While you aren't interested (today) in early retirement, I always recommend
people plan to be ABLE to retire in their early fifties. The reality is that things change. Kids grow,
parents get older, companies go through tough times/restructuring, etc. You are on the right trajectory
and will appreciate the flexibility that you buy yourself now.

That said, make sure you live today, too. Kids will remember your family vacations, not how much
money you socked away into TSM.

Congratulations on being off to such a great start.
000
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by 000 »

I would say in my opinion it is unwise for most individual investors to ever be 100% stocks. The risk of either needing money sooner than anticipated or a decades long equity drought is just too high.

However one might hold stock diversifiers with a long duration given the expected investment horizon, such as long term TIPS or bonds. One could also consider precious metals and other alts if one believes in such things.
Marseille07
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by Marseille07 »

Personally I like paying down the mortgage but opinions are mixed on this.
vtsnowdin
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by vtsnowdin »

Marseille07 wrote: Thu Jan 13, 2022 1:59 am Personally I like paying down the mortgage but opinions are mixed on this.
Yes they are.
With seven percent inflation a 2.25 fixed mortgage is akin to a bond fund paying 4.75%. That assumes of course that their incomes will be adjusted up at least enough to keep up with inflation but at their income levels that is pretty likely.
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Wiggums
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by Wiggums »

pizzy wrote: Wed Jan 12, 2022 11:45 pm What made you decide to go all Roth for retirement contributions?
+1
With your income, i’d defer the tax.
Investors need to be better informed about the costs they pay. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”
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grogu
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by grogu »

000 wrote: Thu Jan 13, 2022 12:13 am I would say in my opinion it is unwise for most individual investors to ever be 100% stocks. The risk of either needing money sooner than anticipated or a decades long equity drought is just too high.
And for a counter-point, in my opinion it is unwise for most investors under 40 to ever NOT be 100% stocks, assuming they have a separate emergency fund (which the OP does).

How many "decades-long" equity droughts have their been? The OP likely isn't going to touch this money for 30 years (he doesn't want to retire early, but even if he does, it's still 20 years). 99% of the time stocks are going to come out way ahead over that time period, and the odds are probably even higher in the current awful bond environment. The risk of having a significant drag on your portfolio with a substantial bond holding is just too high.
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Watty
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by Watty »

Jmo13151 wrote: Wed Jan 12, 2022 11:36 pm Mortgage: $450k at 2.25%, 15 year......

2. Are we crazy to not have any bonds in our retirement funds?
Not only do you not only not have any bonds but while it is not exact your mortgage is in many ways like a negative bond. There are lots of threads on "mortgage as a negative bond" that you can look up.

Looking at it that way your asset allocation is about 182% stocks and -82% bonds.

(1,000,000-450,000=550,000
1,000,000/550,000= 182% stocks
-450,000/550,000= -82% bonds)

Again that is not exact but you may be a lot more agressive than you realize.

Investing the money and earning a higher return is also a lot harder than it sounds because you have sequence of returns risk since you have a mortgage payment that you need to pay each month. Here is a very simplistic example of that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
Jmo13151 wrote: Wed Jan 12, 2022 11:36 pm 3. Are i-bonds a reasonable place to start building bond exposure?
i-bonds might name sense for your emergency fund or maybe college savings but I am not as excited about them as some people are at least while the fixed portion of the rates are so low. The problem is that you can only own them in taxable accounts so you if you buy an i-bond now you could own it for 30 years and pay taxes on the inflation adjustment when they mature then pay taxes on that. You are guaranteed to loose purchasing power after taxes.

If I was in your situation I would take a hard look at paying off the mortgage before investing a lot in taxable accounts. One thing you could do is look at making a large mortgage prepayment and having your lender "recast your mortgage" (google this). They are not required to do this but they usually will for a couple of hundred dollar fee or even for free. The way this works is that if you pay your mortgage down by a third(or whatever makes sense) then your required mortgage payment will be reduced by the same percentage. This is different than just making a large prepayment without a recast since that only shortens the length of your loan.
zeeke42
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by zeeke42 »

I went through a similar review around the same age (I'm 39 now), and concluded it was worth adding a 10% bond allocation, for the ability to rebalance in a downturn. I moved some funds from bonds to stocks during the sharp covid downturn in March of 2020, which obviously worked out rather well.
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grogu
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by grogu »

zeeke42 wrote: Thu Jan 13, 2022 10:34 am I went through a similar review around the same age (I'm 39 now), and concluded it was worth adding a 10% bond allocation, for the ability to rebalance in a downturn. I moved some funds from bonds to stocks during the sharp covid downturn in March of 2020, which obviously worked out rather well.
I respect that strategy. However, playing devil’s advocate again, how much did you lose out by keeping that 10% in bonds for the ~6 years before you successfully deployed it? (That is more of a rhetorical question than one directed specifically at you.) My point being, you can hold bonds for a long time waiting to strike, only to find out that if you had just held 100% stock the entire time, you’d be ahead. In other words, you’re market timing.

For money that I’m not going to touch for 10-20+ years, I’m going to keep it all in stocks. The only reason I could envision holding bonds is if you really believed there was a chance that bonds could actually outperform stocks during that long period and you wanted to hedge.
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by invest4 »

Jmo13151 wrote: Wed Jan 12, 2022 11:36 pm 1. How would you tweak our stock allocations? Is the mid-cap out of place? How about the REIT in the IRA?
I would simply encourage you to consider whether or not your "recipe" delivers sufficient returns over a more simple setup (VTI / VXUS for example). I had some similar approaches at your age...and eventually decided it was not. YMMV.
Jmo13151 wrote: Wed Jan 12, 2022 11:36 pm 2. Are we crazy to not have any bonds in our retirement funds? Can we wait for interest rates to rise before adding that "balance"? With two good incomes and no plans to retire for 25-30 years, we are pretty comfortable with the risk. If market mayhem hits, we are comfortable riding it out and/or scaling back our plans (no second home, etc). That said, we need bonds at some point... When?
I think 100% is perfectly fine at your age. As mentioned by others, you just need to be readily able to weather a storm. During the Great Financial Crisis I had a 50% reduction on paper and it didn't bother me at all. However, my portfolio was quite a bit less then (~300k) and like you, had a long time horizon (was in my 30s at that time with a young family). Most importantly, I also did not lose my job (single income family). I suspect I may have felt very differently if that were not the case. Just something tot think about.

For myself, I started an allocation to bonds in my later 40s. Opinions will vary, but I would offer the typical advice on the forum would be 40s/50s.
Jmo13151 wrote: Wed Jan 12, 2022 11:36 pm 3. Are i-bonds a reasonable place to start building bond exposure? If nothing else, they can serve as our emergency fund after 1 year. I'm not sure I would call them retirement funds though, because it would be tempting to pull that cash out when inflation falls, if the interest rate is very low.
I don't invest in i-bonds. I didn't know about them until the last couple of years and it would take quite some time to make them a reasonable portion of my portfolio. I have also become very fond of simplicity in my portfolio and as this investment does not move the needle...not so interested. In essence, simply not worth it to me for my situation. As you have already seen...many others have strong feelings the other way.
Jmo13151 wrote: Wed Jan 12, 2022 11:36 pm 4. What to do with our extra monthly cash flow? More i-bonds? Brokerage account? Pay down the mortgage?
* Mortgage: You are already putting plenty of money toward the mortgage imho. For myself, I am very happy to have refinanced into a 30 year mortgage @2.625 as an inflation hedge and provide me with options including leverage for further investment in my portfolio. As of now, I still think I will want to payoff my mortgage at some point closer / in retirement. However, I appreciate the current setup and depending on how things shake out, I could also see that I simply pay it on schedule until its gone.

* Mega Backdoor Roth available? If so, I would fill that up pronto.

Otherwise, taxable brokerage account would be the play.

Additionally:

* 100% Roth...like others I don't quite understand the reasoning for the this. I would definitely have a good amount / all still in tax-deferred.
Jmo13151 wrote: Wed Jan 12, 2022 11:36 pm At present, we have no desire to retire early or for one spouse to stay home. Longer term, we plan to put our children through college, possibly own a vacation home, and retire comfortably (wealthy?).
After I married, both of us were working and everything humming along. When we were awaiting our first baby, my wife told me she would continue to work if she needed to, but had always wanted to be a full-time Mom. I had grown up with both parents working and she had grown up with her Mom staying at home. It had never really crossed MY mind that we would could potentially have only one income! Financially, we thought we could do it with the expected trade-offs and we agreed that we would give it a try. Thankfully, our income grew over the years and were able to keep up with our growing family, now complete with 4 kids. I count this decision as probably the most positive / life changing we have ever made...for everyone involved.

You mentioned that there is currently no desire for either of you to stay home. Of course, that is perfectly fine and the most common (only 2.4% of parents stay home...up from 1.5% before COVID). If there is any interest at some point, give it some serious consideration...doesn't even have to be full time. I would offer it may provide more joy and satisfaction in life than you realize...vs a fatter portfolio (you are doing fantastic) or more "things".

Best wishes.
Marseille07
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by Marseille07 »

vtsnowdin wrote: Thu Jan 13, 2022 3:58 am Yes they are.
With seven percent inflation a 2.25 fixed mortgage is akin to a bond fund paying 4.75%. That assumes of course that their incomes will be adjusted up at least enough to keep up with inflation but at their income levels that is pretty likely.
I am not sure if I agree with the math.

I get that holding cash is -7% due to inflation. However, holding a mortgage is -2.25% - at the end of the day, you're still paying. I don't think we should spin it like +4.75%, which sounds like you have a positive coupon rate when you don't.
vtsnowdin
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by vtsnowdin »

Marseille07 wrote: Thu Jan 13, 2022 1:16 pm
vtsnowdin wrote: Thu Jan 13, 2022 3:58 am Yes they are.
With seven percent inflation a 2.25 fixed mortgage is akin to a bond fund paying 4.75%. That assumes of course that their incomes will be adjusted up at least enough to keep up with inflation but at their income levels that is pretty likely.
I am not sure if I agree with the math.

I get that holding cash is -7% due to inflation. However, holding a mortgage is -2.25% - at the end of the day, you're still paying. I don't think we should spin it like +4.75%, which sounds like you have a positive coupon rate when you don't.
Yes but I think I have understated the case as home prices tend to keep up or even exceed inflation and that would apply to the portion not yet paid for on top of the dollars needed to make the payments becoming easier to come by. My math is just an approximation only to show that inflationary times make holding fixed interest rate debt is worth holding. We may soon get inflation between eight and twelve percent and the higher it does in fact go the better holding fixed rate debt will be.
cbs2002
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by cbs2002 »

1) I don't see the point in holding mid-cap index in addition to Total. International is personal preference. I would probably do 80/20 Total US/Total international if I wanted international exposure. You are a candidate for a 1-fund portfolio - just hold Total US and enjoy the ride!

2) I would not have any bonds at your age. I have about 80/20 now and hope to retire or seriously dial back my work in the next ten years. When you do decide to buy bonds, remember that interest rate rises have an impact on the bond price in the short term. If you are holding bond funds longer than the average term of the bonds in the fund, the total return will come back before you sell. There's a great post somewhere here explaining this. And remember bonds are there to smooth out bumps from sequence of equity returns, not because you think they will outperform equities.

3) Yes, they keep up with inflation, but no more. That's a fine thing to do with some of your money.

4) First stop is max traditional 401K, not Roth. Then HSA if you can, then Roth and taxable. Reduce taxable income as much as possible. I would not pay down that fabulously cheap mortgage - you are already ahead by having a 15-year. I'd build up a taxable account with as little tax exposure as possible. your future self will thank you when you want to cut your W2 income or buy another property.
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Jmo13151
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by Jmo13151 »

pizzy wrote: Wed Jan 12, 2022 11:45 pm What made you decide to go all Roth for retirement contributions?
quantAndHold wrote: Thu Jan 13, 2022 12:04 am I also question putting everything in Roth with your income.
cbs2002 wrote: Thu Jan 13, 2022 2:51 pm First stop is max traditional 401K, not Roth. Then HSA if you can, then Roth and taxable. Reduce taxable income as much as possible.
This is a fun topic! I started 100% Roth when I was younger and in a lower tax bracket. I am overdue to run some projections in a spreadsheet to predict taxable income in retirement. That said, here are my pro-Roth factors:

1) Our employers contribute an average of 9% to our 401k's annually, so that will continue to grow our "traditional" 401k bucket, especially as our incomes grow. (side note: neither employer allows mega-backdoor)

2) Assuming that you are maxing the 401k limit, a Roth technically allows for more assets to be shelteted than a traditional. This is because the dollar limit is the same for both, but $20,500 after-tax is a larger "amount" than $20,500 pre-tax. However, as a counter-point, this effect can be partially offset by assuming one invests the tax savings from the traditional 401k and lets it grow in a taxable account.

3) As our incomes grow (and once our mortgage is paid off) I expect us to have a sizeable non-sheltered portfolio. This will raise our taxable income during retirement due to dividends and occasional capital gains. We may also have significant inheritances in the future that would further increase the size of this portfolio. We're not counting on it, but it's probable.

4) I'll do my best to keep this point non-political... Based on fiscal factors (debt/GDP ratio) and social factors (income inequality and growing demand for govt-funded healthcare and higher education), I anticipate taxes needing to rise in the future. As someone in the top 5% of income and wealth, I would not be surprised if these taxes impact me. I would rather pay my taxes when the country is growing debt than when the country is trying to pay it down. So, as a hedge against unknown future tax rates, I feel pretty comfortable paying 24% federal income tax now. (Though someone else made a great counterpoint: anything is possible in the future, and if indeed taxes have to rise substantially, it's also possible that an extra tax could be levied on Roth's as well.)

5) I currently live in a state with no income tax, but I probably won't be here long-term.

mike_in_ny wrote: Thu Jan 13, 2022 12:08 am That said, make sure you live today, too. Kids will remember your family vacations, not how much
money you socked away into TSM.
Good insights Mike, thanks. I appreciate your wisdom on the topic of unplanned career and life changes (and being prepared). The comment on vacations hits home. My best memories (or perhaps "strongest memories" is a better phrase, lol) from my childhood are from piling the family in the station wagon to go out west and sleep in tents, or to go to the cabin in the summer. My wife's idea of family vacation may be a littler higher dollar, but we'll make sure to take time for the family.
Watty wrote: Thu Jan 13, 2022 9:27 am Not only do you not only not have any bonds but while it is not exact your mortgage is in many ways like a negative bond.
Thanks for sharing this perspective. I will research it more. In my gut, I always felt there was irony in the fact that the "common" advice is to "leverage your mortgage into the market", even though few would recommend taking a personal loan to buy stocks, even at 2-3% interest. My wife is also inclined to pay the mortgage early to achieve "debt-free", so that will probably happen regardless of my vote, lol. We have so much equity exposure, that I think putting some money into a "sure thing" won't hurt. You also make a good point on the tax on i-bonds, which I frankly forgot about, and the fact that paying down the mortgage is a 2.25% ROI tax-free.

Thanks to everyone who replied. I read them all, even if I didn't reply to you directly.
000
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by 000 »

grogu wrote: Thu Jan 13, 2022 8:46 am And for a counter-point, in my opinion it is unwise for most investors under 40 to ever NOT be 100% stocks, assuming they have a separate emergency fund (which the OP does).
Then they're not 100% stocks. Bonds are also more suitable for a long term expected investment horizon than cash.
How many "decades-long" equity droughts have their been?
Many around the world. But it doesn't actually matter because we have to invest based on circumstances (valuation, etc) today.
99% of the time stocks are going to come out way ahead over that time period
How did you compute the 99% figure?
and the odds are probably even higher in the current awful bond environment.
How did you compute the odds? And how do you figure that low bond yields make equities more attractive? Is the risk of equities underperforming bonds somehow less when bond yields are low, i.e. a free lunch?
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steve r
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by steve r »

I very much like the 15 year mortgage. Risk tolerance declines (for most) with age, but your will have a house mortgage free before 50 :!: Better still, around the time your kids (might) go to college.

I have no problem with a high stock allocation given the cash (iBonds) position you have and given that your house will be paid for at a reasonably young age.

Many in your situation will be tempted to go for more. Often by refinance for 30 years or whatever. Others by picking stocks or using margin. In your case, I might be concerned about you being tempted by emerging markets. (I would not advise being overweight EM more than you are -- in fact my preference is market weight which is closer to 10 percent -- see my signature). I believe that as long as you ignore such temptations, you will be fine. Yes, a touch aggressive, but not wildly and over time it will become less so automatically.
“The closer you come to holding the entire market portfolio (all traded securities) the higher your expected return for the risk you take.” William F. Sharpe | VT, BND, TIAA RE and chill.
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grogu
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by grogu »

000 wrote: Thu Jan 13, 2022 4:09 pm
grogu wrote: Thu Jan 13, 2022 8:46 am And for a counter-point, in my opinion it is unwise for most investors under 40 to ever NOT be 100% stocks, assuming they have a separate emergency fund (which the OP does).
Then they're not 100% stocks. Bonds are also more suitable for a long term expected investment horizon than cash.

This is a semantic debate that appears frequently. I am talking about the OP's retirement account(s) (401k, IRAs), which I recommend be 100% stocks. Separate and in addition to that, I'd recommend a high-yield savings and/or Ibonds for emergency funds. If you want to say I'm cheating since the overall portfolio (retirement accounts + savings/ibonds) is 95/5 or 90/10, fine. I'm also fine with putting that 5-10% in bonds instead of cash.

I'm not as good with the quote feature as you are, but to address your other points:

"How many "decades-long" equity droughts have their been?
Many around the world. But it doesn't actually matter because we have to invest based on circumstances (valuation, etc) today."

In major markets? I'm not aware of any but I am willing to accept a small number exist. Japan was down from about 1990-2009, so that's certainly significant (though not literally "decades"). But if you had been buying all-along you were fine (and had some great returns from 2009-now, even though the Nikkei still isn't at an all-time high).

"99% of the time stocks are going to come out way ahead over that time period
How did you compute the 99% figure?"

I took a little poetic license, but I don't think I'm too far off. Consider this: https://www.thebalance.com/stocks-vs-bo ... ata-416861 Look at the second chart ("Stocks vs. Bonds 10-Year Rolling Average of Annual Returns"). I see only a few 10-year periods where bonds won (and in each case, stocks crushed them over the ensuing few years). Whatever the actual number, I think it's pretty indisputable that stocks generally outperform bonds over the long-term.

"and the odds are probably even higher in the current awful bond environment.
How did you compute the odds? And how do you figure that low bond yields make equities more attractive? Is the risk of equities underperforming bonds somehow less when bond yields are low, i.e. a free lunch?"

I just think this is a particularly bad time to invest in bonds. Not so much a free lunch for equities (and many argue they're overvalued), but a very expensive lunch for bonds. If I could expect a 4-5% return on bonds I might change my tune, but in my mind they have a negative expected return right now. No data to support what I say, so take it with an appropriate grain of salt (although I don't think I'm going out too far on a limb here).
000
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by 000 »

Corporate bonds outperformed stocks during 19th century US and some other periods / geographies.

If asset classes are priced for their risk (and it's possible this is not true), then the risk adjusted expected return of stocks should be same as bonds. This means if bonds have a low yield, the expected return of stocks should be lower too and there should be a higher chance of a negative return from stocks.

The 30 yr TIPS has a negative real yield right now.

Outperforming intermediate term bonds is one thing, but longer term bonds have given stocks more competition.

Food for thought.
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Jmo13151
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by Jmo13151 »

000 wrote: Thu Jan 13, 2022 6:44 pm Corporate bonds outperformed stocks during 19th century US and some other periods / geographies.

If asset classes are priced for their risk (and it's possible this is not true), then the risk adjusted expected return of stocks should be same as bonds. This means if bonds have a low yield, the expected return of stocks should be lower too and there should be a higher chance of a negative return from stocks.

The 30 yr TIPS has a negative real yield right now.

Outperforming intermediate term bonds is one thing, but longer term bonds have given stocks more competition.

Food for thought.
Interesting perspective. I agree with it, to an extent. I've been doing research lately on the correlation between Shiller's 10 year P/E (CAPE) and subsequent stock returns. It seems the conclusion is that a high P/E typically does signal lower subsequent stock returns, on something like a 10 year horizon, but it's not a precise enough indicator to be used to "time" the market. In other words, high P/E does indicate slower future returns, but it doesn't tell you how much slower, nor does it tell you if or when a downturn will occur, thus not being useful for timing. However, I think there is utility in using P/E 10 to set expectations when making trade-offs between stocks and bonds, or stocks and early mortgage payments.

I think it's logical that low interest easy-money policy incentivizes investment in stocks, raising prices. The poor returns on bonds have also encouraged more investors to move towards stocks. Some people point to the past 100 years and say, "US equity will return 7% inflation-adjusted returns in the long run", but I don't think they're seeing the whole picture if they overlook the context of interest rates and valuations at the time. I hear their argument as, "50 Cent got shot 9 times and lived. So if he gets shot again, surely he'll live."

This could probably be it's own separate thread, and maybe I'll start one in the future.
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by KlangFool »

OP,

1) 60% of 700K = 420K in the pre-tax 401K. 4% withdrawal of 420K at retirement = 16.8K of taxable income. Standard deduction = 24K. Total taxes paid = 0%

You choose to pay 24% taxes now instead of 0% or 10% at retirement.

2) What is your annual savings? Let's assume that it is 55K. 1.1 million = 20 years of your annual savings. Do you plan to work for another 20 years? If you lose 50%, it is 10 years of your annual savings. It would be very painful.

3) What is your annual expense? Assuming that it is 110K per year. 1.1m = 10 years of expense. With your current saving rate, you could reach 25X easily without needing the return of 100% stock.

https://investor.vanguard.com/investor- ... allocation

4) Historically, the average annual return of 100/0 (10.3%) versus 70/30 (9.4%) is less than 1% per year. You are taking unnecessary risk of 100% stock with minimal extra return that you do not need. I wish you the best of luck!

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Jmo13151
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by Jmo13151 »

KlangFool wrote: Thu Jan 13, 2022 7:53 pm 1) 60% of 700K = 420K in the pre-tax 401K. 4% withdrawal of 420K at retirement = 16.8K of taxable income. Standard deduction = 24K. Total taxes paid = 0%
I appreciate the insight. However, I calculate it as follows. Let me know your thoughts:
From age 33 to 60. Income begins at 300k and grows by 1% per year (inflation-adjusted). Employer matches 9%. Investment growth is 3% (inflation-adjusted). Initial traditional 401k balance is $420k.
Running spreadsheet math with those parameters gives a final balance (traditional 401k) of $2,178,000 (in 2021 dollars). 4% of that is $87,000. That puts us in the 22% bracket, even with no additional investment income from our brokerage account.

Now, our employers could change their match policies, or our investment returns could underperform, or life circumstances could change (single earner), etc. Those factors could drop us down into a lower bracket. However, our middle-of-the-road projection (what I call "nominal") expects us to be in at least a 22% bracket. So I think my strategy is fairly reasonable, given my other factors (currently in a zero income tax state, expect a sizeable non-tax-sheltered portfolio, and I personally expect income tax rates to climb).

On the topic of bonds, I think you are correct, I probably should have a small allocation of bonds, which I should increase over time. The penalty in terms of average returns is pretty mild relative to the reduction in volatility.

EDIT:
What do you think of this for a strategy: Given my sizeable and growing traditional 401k balance, I focus on Roth for now, and when we break into the next tax bracket (32% @ 330k), I reevaluate, and maybe switch more to traditional.

Also, I realize I forgot to take the standard deduction of $25k, so that would knock my bracket down in my example. So yes, I tend to agree, it wouldn't hurt to increase my traditional allocation. I'll have to update my spreadsheet to determine by how much. And I probably won't do it until I move out of this zero income tax state, in a few years.
KlangFool
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by KlangFool »

Jmo13151 wrote: Thu Jan 13, 2022 10:41 pm
KlangFool wrote: Thu Jan 13, 2022 7:53 pm 1) 60% of 700K = 420K in the pre-tax 401K. 4% withdrawal of 420K at retirement = 16.8K of taxable income. Standard deduction = 24K. Total taxes paid = 0%
I appreciate the insight. However, I calculate it as follows. Let me know your thoughts:
From age 33 to 60. Income begins at 300k and grows by 1% per year (inflation-adjusted). Employer matches 9%. Investment growth is 3% (inflation-adjusted). Initial traditional 401k balance is $420k.
Running spreadsheet math with those parameters gives a final balance (traditional 401k) of $2,178,000 (in 2021 dollars). 4% of that is $87,000. That puts us in the 22% bracket, even with no additional investment income from our brokerage account.
Jmo13151,

You missed something very important in your calculation.

How much money do you have besides this pre-tax 401K? And, why would you work until 60 years with that kind of money?

1) Out of the 1.1 million, only 420K is pre-tax.

2) You would contribute a fair amount of money to Roth and taxable account too.

So, if your trad 401K is 2.2m at 60 years, your total portfolio would be at least 6 millions or more. Why would you work until 60 years old?

<< Also, I realize I forgot to take the standard deduction of $25k, so that would knock my bracket down in my example. So yes, I tend to agree, it wouldn't hurt to increase my traditional allocation. I'll have to update my spreadsheet to determine by how much. And I probably won't do it until I move out of this zero income tax state, in a few years.>>

Why? Do you think paying 0%/10% instead of 22%/24% is not a good deal?

It is a good deal now and a good deal when you move else where too.

KlangFool
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smectym
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by smectym »

grogu wrote: Thu Jan 13, 2022 8:46 am
000 wrote: Thu Jan 13, 2022 12:13 am I would say in my opinion it is unwise for most individual investors to ever be 100% stocks. The risk of either needing money sooner than anticipated or a decades long equity drought is just too high.
And for a counter-point, in my opinion it is unwise for most investors under 40 to ever NOT be 100% stocks, assuming they have a separate emergency fund (which the OP does).

How many "decades-long" equity droughts have their been? The OP likely isn't going to touch this money for 30 years (he doesn't want to retire early, but even if he does, it's still 20 years). 99% of the time stocks are going to come out way ahead over that time period, and the odds are probably even higher in the current awful bond environment. The risk of having a significant drag on your portfolio with a substantial bond holding is just too high.
grogu, you make valid points but I still disagree.

Investor age is only one input; portfolio size is another. Once an investor has as much as $1M saved, at any age, he’s well advised to pay attention to dampening volatility and starting to think “capital preservation” alongside “growth of capital.”

Such an investor might start to think a bit more more like a money manager with fiduciary obligations (and if there are relatives or SO’s who depend on the investor, it is likely that de facto, if not de jure, fiduciary obligations already exist) and less like…a gunslinger (no pejorative implication intended).

Frankly, if a 25-year-old investor with $25,000 were pounding the table for 100% stocks, I’d likely say yes, go for it; but in OP’s case, I’d suggest beginning a gradual shift to a more balanced portfolio.
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Watty
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by Watty »

Some things to keep in mind about the Roth vs traditional retirement account choice.

1) I did not follow all the numbers but it sounded like you were slicing and dicing your savings projections to see what income taxes you might have when you retire. A more important numbers is what your expenses will be in retirement. With a paid off house and any kids out on their own it may not take nearly that much to cover your expenses when you are retired. This is especially true once you get to be in about your mid 70's and will likely slow down and not want to do things like travel a lot. With maybe $30K in Social Security you may only need something like $40K in other income income to cover your expenses if you have a paid off house. That could put you in a pretty low or even zero federal tax bracket.

2) Keep in mind that the federal tax brackets are scheduled to revert to the old tax rates in 2026 if there are not any tax law changes. That means that the 22 and 24 percent tax brackets will revert to 25 and 28 percent. You can crunch the numbers lots of ways but the biggest difference would likely be between 22 and 28 percent if you are not able to keep your retirement taxable income low. That is only a 6% difference if there are not future tax increases. To me that not enough discount to pay taxes decades before you have to a good deal. The question is not just if you can save taxes by using the Roth, but if you can save enough taxes to make it worthwhile. If you are likely to retire in a state with income taxes the Roth could look more worthwhile.

3) Some of the numbers mentioned were pretty big. If everything goes well then you will likely leave a large estate some day so the estate planning aspects of choosing a Roth or not could be more important than the details of how much you will pay in taxes either now or later.
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grogu
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Re: Review my portfolio: $1m saved, but no bonds (age 33)

Post by grogu »

smectym wrote: Thu Jan 13, 2022 11:32 pm
Investor age is only one input; portfolio size is another. Once an investor has as much as $1M saved, at any age, he’s well advised to pay attention to dampening volatility and starting to think “capital preservation” alongside “growth of capital.”
I guess volatility isn't nearly as important to me as what my portfolio balance is after 10 or 20 years. Wild swings don't bother me as long as I have a bigger balance at the end of my long-term period. Yes, I realize there's no guarantee that my balance will shoot up after one of those big dropoffs, but I like those odds better than having a near-guaranteed drag on 40% of my money if I have a significant bond allocation.

In another thread, I gave the metaphor of a race to retirement: viewtopic.php?f=1&t=367096&p=6436887#p6436887 I want to be able to hit my number as quickly as possible (within reason--I'm not suggesting putting everything into naked calls or 3x leveraged ETFs). I think all-stocks gives me the best chance to do that in the shortest time. Admittedly, an ill-timed market crash will force me to postpone my retirement by a few years, but by being 100% stocks, I should get to my number faster and have less time "exposed" to the potential of such a crash.

To be fair, the OP says he's not (now) interested in an early retirement, has maybe 30 years to go, and has a great head-start. So he can afford to be a lot more conservative with his AA if he wants by the time he hits 60-65. If he hits his number by age 45 and wants to continue working 20 more years just for the fun of it, by all means dial back the risk at that point.
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