Building a Boglehead Portfolio

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Topic Author
characterfour
Posts: 5
Joined: Sun Nov 20, 2022 11:45 am

Building a Boglehead Portfolio

Post by characterfour »

Hello everyone. I'm a first-time poster who is changing my portfolio to use the Boglehead principles. Before this year, I worked at a startup, with a modest salary and non-liquid equity (assume this equity is worth $0 in the current market). This year, I switched to big tech, which has changed things considerably.

Emergency Funds:
- 2 months of expenses in a checking account.

Debt: No debt at this time.

Tax Filing: Single
Tax Rate: 40% Combined
State of Residence: California
Age: 30
Desired Asset Allocation: 75% Stocks, 25% Bonds
Desired International Allocation: I'm not sure

Work
- Compensation is $375K
- Company provides a 401K with $5K match
- Company offers a mega backdoor Roth IRA

Contributions
- $25.5K into 401K
- $175K in taxable accounts

The $175K is based on expected post-tax savings.

Portfolio: $180K

Taxable
- $8.5K VTI
- $2K VXUS
- $15K 3 Month T-Bills
- $16K Cash

401K
- $38K FSKAX (Fidelity Total Market Index Fund)
- $9K VINIX (Vanguard S&P500 Fund)
- $20K 3 Month T-Bills
- $14K Cash
- $6.5K FNBXX (Fidelity Government MM Fund)

Roth IRA
- $31K T-Bills
- $9K Cash

I-bonds
- $10K

Considerations
- I am expecting to purchase a home in the next 5 years, with a $350K gift from my parents.
- No children at this time, but I do want to have kids before my late 30's.
- Compensation will grow 10% YoY for the next 3 years, with a $500K cap.

Questions
- How much should I contribute to the mega backdoor IRA? My first intuition was to max out the backdoor IRA, but I've read that tax-free investments are more important for those who wish to retire earlier.
- I am feeling wary about the market given that the unemployment and slowdown in consumer spending lags behind interest rate hikes. How can I get to my desired asset allocation without buying too quickly? Is a strategy of DCAing while holding excess cash in t-bills reasonable?
- How should I think about allocating savings for retirement vs. medium-term adjustments in my life (buying a home, having children)?
wetgear
Posts: 734
Joined: Thu Apr 06, 2017 10:14 am

Re: Building a Boglehead Portfolio

Post by wetgear »

characterfour wrote: Sun Nov 20, 2022 12:51 pm Hello everyone. I'm a first-time poster who is changing my portfolio to use the Boglehead principles. Before this year, I worked at a startup, with a modest salary and non-liquid equity (assume this equity is worth $0 in the current market). This year, I switched to big tech, which has changed things considerably.

Emergency Funds:
- 2 months of expenses in a checking account.

Debt: No debt at this time.

Tax Filing: Single
Tax Rate: 40% Combined
State of Residence: California
Age: 30
Desired Asset Allocation: 75% Stocks, 25% Bonds
Desired International Allocation: I'm not sure

Work
- Compensation is $375K
- Company provides a 401K with $5K match
- Company offers a mega backdoor Roth IRA

Contributions
- $25.5K into 401K
- $175K in taxable accounts

The $175K is based on expected post-tax savings.

Portfolio: $180K

Taxable
- $8.5K VTI
- $2K VXUS
- $15K 3 Month T-Bills
- $16K Cash

401K
- $38K FSKAX (Fidelity Total Market Index Fund)
- $9K VINIX (Vanguard S&P500 Fund)
- $20K 3 Month T-Bills
- $14K Cash
- $6.5K FNBXX (Fidelity Government MM Fund)

Roth IRA
- $31K T-Bills
- $9K Cash

I-bonds
- $10K

Considerations
- I am expecting to purchase a home in the next 5 years, with a $350K gift from my parents.
- No children at this time, but I do want to have kids before my late 30's.
- Compensation will grow 10% YoY for the next 3 years, with a $500K cap.

Questions
- How much should I contribute to the mega backdoor IRA?
- I am feeling wary about the market given that the unemployment and slowdown in consumer spending lags behind interest rate hikes. How can I get to my desired asset allocation without buying too quickly? Is a strategy of DCAing while holding excess cash in t-bills reasonable?
- How should I think about allocating savings for retirement vs. medium-term adjustments in my life (buying a home, having children)?
1) You should max out the MegaBackdoor Roth every year. Your income easily supports this and you’ll never get the space back once the year has passed.

2) There is always reason to be wary and uncertain of the market. You need to accept this and pick a AA you can stick with in good times and bad. That might be 75/25 and it might not be but this is the single dial to us when thinking about this risk. The market will likely tank multiple times during your investment career but it’s nearly impossible to predict reliably so just keep adding money and know that it’s very likely that will be worth more on a long enough time scale (which you have). More money is lost fearing the market falling than it does in actual falls.

3) Save as much as you can early on for retirement so it has as long as possible to compound. As you get closer to those medium term goals then start saving for them. You should be able to quickly build up cash for those with your salary while still maxing your tax advantaged space each year. With such a generous gift from your parents you also don’t need to save as much for the house so more reason to save for retirement aggressively today and for as long as you can manage.

Other thoughts:

I’d build up that emergency fund to at least 6 months.
Get your Roth invested in 100% stock.
Same with your taxable account.
VINIX -> FSKAX They are redundant but FSKAX is a little more diversified.
401k: Cash, T Bills, MM -> a low cost total bond. Hold all your bonds in this account.
Topic Author
characterfour
Posts: 5
Joined: Sun Nov 20, 2022 11:45 am

Re: Building a Boglehead Portfolio

Post by characterfour »

Thank you for sharing, I found your points informative and actionable.

Could you explain why bonds would go into 401k accounts, while stocks would be in Roth IRA & taxable accounts? Some of this sounds logical to me - bonds / MM dividends are taxed more frequently while stocks compound faster so taxing on a higher amount is good. I wonder if there are other considerations too.
Last edited by characterfour on Sun Nov 20, 2022 2:29 pm, edited 1 time in total.
Triple digit golfer
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Joined: Mon May 18, 2009 5:57 pm

Re: Building a Boglehead Portfolio

Post by Triple digit golfer »

characterfour wrote: Sun Nov 20, 2022 1:57 pm Thanks you for sharing, I found your points informative and actionable.

Could you explain why bonds would go into 401k accounts, while stocks would be in Roth IRA & taxable accounts? Some of this sounds logical to me - bonds / MM dividends are taxed more frequently while stocks compound faster so taxing on a higher amount is good. I wonder if there are other considerations too.
Because bond income is taxed at ordinary income rates while stock income (dividends) is taxed at favorable rates. Give this a read. https://www.bogleheads.org/wiki/Tax-eff ... _placement
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Taylor Larimore
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Location: Miami FL

Re: Building a Boglehead Portfolio

Post by Taylor Larimore »

characterfour wrote: Sun Nov 20, 2022 12:51 pm Hello everyone. I'm a first-time poster who is changing my portfolio to use the Boglehead principles. Before this year, I worked at a startup, with a modest salary and non-liquid equity (assume this equity is worth $0 in the current market). This year, I switched to big tech, which has changed things considerably.

Emergency Funds:
- 2 months of expenses in a checking account.

Debt: No debt at this time.

Tax Filing: Single
Tax Rate: 40% Combined
State of Residence: California
Age: 30
Desired Asset Allocation: 75% Stocks, 25% Bonds
Desired International Allocation: I'm not sure

Work
- Compensation is $375K
- Company provides a 401K with $5K match
- Company offers a mega backdoor Roth IRA

Contributions
- $25.5K into 401K
- $175K in taxable accounts

The $175K is based on expected post-tax savings.

Portfolio: $180K

Taxable
- $8.5K VTI
- $2K VXUS
- $15K 3 Month T-Bills
- $16K Cash

401K
- $38K FSKAX (Fidelity Total Market Index Fund)
- $9K VINIX (Vanguard S&P500 Fund)
- $20K 3 Month T-Bills
- $14K Cash
- $6.5K FNBXX (Fidelity Government MM Fund)

Roth IRA
- $31K T-Bills
- $9K Cash

I-bonds
- $10K

Considerations
- I am expecting to purchase a home in the next 5 years, with a $350K gift from my parents.
- No children at this time, but I do want to have kids before my late 30's.
- Compensation will grow 10% YoY for the next 3 years, with a $500K cap.

Questions
- How much should I contribute to the mega backdoor IRA? My first intuition was to max out the backdoor IRA, but I've read that tax-free investments are more important for those who wish to retire earlier.
- I am feeling wary about the market given that the unemployment and slowdown in consumer spending lags behind interest rate hikes. How can I get to my desired asset allocation without buying too quickly? Is a strategy of DCAing while holding excess cash in t-bills reasonable?
- How should I think about allocating savings for retirement vs. medium-term adjustments in my life (buying a home, having children)?
characterfour:

Welcome to the Bogleheads Forum!

Time prevents me from answering each of your questions. Nevertheless, I'll make one suggestion: The Three-Fund Portfolio.

Read my "Simplicity" link below.

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk."

"Simplicity is the master key to financial success." -- Jack Bogle
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enad
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Re: Building a Boglehead Portfolio

Post by enad »

Another possibility and one that Jack Bogle mentioned often is his 2-Fund portfolio (S&P500 or Total US Stock Market / Total Bond Market), which you can read about in this thread
What Goes Up Must come down -- David Clayton-Thomas (1968), BST
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Duckie
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Re: Building a Boglehead Portfolio

Post by Duckie »

characterfour wrote: Sun Nov 20, 2022 1:57 pm Could you explain why bonds would go into 401k accounts, while stocks would be in Roth IRA & taxable accounts?
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free.

Plus, as already mentioned, bond fund dividends are taxed at ordinary rates (your marginal tax rate) while many stock fund dividends are taxed at lower qualified rates. That makes most bonds much less suitable for a taxable account.
JasonHutt
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Re: Building a Boglehead Portfolio

Post by JasonHutt »

Four, addition to the great advice you've gotten here, I'd suggest you reduce your bond proportion (I totally agree with moving bonds into total bond fund). Here's why. You're young, and you come from a startup. Now you're getting big bucks. Plus, you're not crouching in fear from this caraaaaazy year. That tells me that you probably have a high risk tolerance. You're also single, which means that, as of today, there are certain risks you do not have to account for.
Topic Author
characterfour
Posts: 5
Joined: Sun Nov 20, 2022 11:45 am

Re: Building a Boglehead Portfolio

Post by characterfour »

Thank you all for making suggestions about creating a portfolio. After reading the links, I think it would be simplest for me to adopt Jack Bogle's 2-Fund approach.
Topic Author
characterfour
Posts: 5
Joined: Sun Nov 20, 2022 11:45 am

Re: Building a Boglehead Portfolio

Post by characterfour »

JasonHutt, would it make sense to buy the total bond fund now given that the Fed will be continuing to increase interest rates? I do like getting 4.0 to 4.5% interest with t-bills (which is higher than VBTLX's historical return) without any risk of principal loss.
Last edited by characterfour on Sun Nov 20, 2022 7:45 pm, edited 2 times in total.
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enad
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Re: Building a Boglehead Portfolio

Post by enad »

characterfour wrote: Sun Nov 20, 2022 7:31 pm JasonHutt, would it make sense to buy the total bond fund now given that the Fed will be continuing to increase interest rates? I do like getting 4.0 to 4.5% interest risk-free, which is higher than VBTLX's historical return.
The NAV for VBTLX was $11.31 on Dec 3, 2021 and is currently $9.13. During that 52-week time-frame the NAV is down $2.18 (23.88%). If the Fed's raise interest rates, the NAV could continue falling. If this is not okay, perhaps leaving the money in the settlement account for now may be another alternative, or dollar cost averaging your way into the Total Bond Market Fund
What Goes Up Must come down -- David Clayton-Thomas (1968), BST
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enad
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Re: Building a Boglehead Portfolio

Post by enad »

In his book The Successful Investor Today (14 Simple Truths You Must Know When You Invest) by Larry E Swedroe, Truth 14: There is No One Right Portfolio, but there is One That Is Right for You.

The Location Decision
, Larry writes:

"Let’s now turn to the final asset allocation issue, the location of the asset class in either the taxable or tax‐deferred/nontaxable account. The issue is relatively straightforward. The easiest account to deal with is a Roth account. Withdrawals from such an account are tax exempt. Therefore, we should generally place within that account the asset class with the highest expected return – small value. If no small value is being held, then, in order, the choices should be: large value, emerging markets, real estate, small cap, and finally large cap. Reverse the order for Traditional/Rollover IRA’s.

In taxable accounts we want to place the most tax‐efficient equity asset classes. This is basically a large‐cap fund (like an S&P 500 Index fund), a total stock market fund, or any tax managed fund. The least tax‐efficient asset classes (value, real estate, small cap and taxable fixed income) should be placed in tax-deferred accounts. If there is not any room inside of a tax‐deferred account, and there is no tax‐managed alternative available, then an exchange‐traded fund can be used to gain exposure to the desired asset class (due to their operating structure, exchange‐traded funds are highly like to prove more tax efficient than their non tax‐managed mutual fund counterparts).

One other point on asset location; foreign stock holdings often entail taxes being withheld at the source. Investors can then claim a foreign tax credit that can be used as a credit against U.S. taxes due on a distribution. However, this credit
does no good if the asset is not in a taxable account. Thus if there is a choice between holding similar U.S. and international asset classes in a taxable or tax-deferred account, the international asset should be held in the taxable account. While not a major issue (the impact is likely to be less than fifty basis points per annum), every penny saved is a penny earned."
What Goes Up Must come down -- David Clayton-Thomas (1968), BST
Triple digit golfer
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Re: Building a Boglehead Portfolio

Post by Triple digit golfer »

enad wrote: Sun Nov 20, 2022 7:38 pm
characterfour wrote: Sun Nov 20, 2022 7:31 pm JasonHutt, would it make sense to buy the total bond fund now given that the Fed will be continuing to increase interest rates? I do like getting 4.0 to 4.5% interest risk-free, which is higher than VBTLX's historical return.
The NAV for VBTLX was $11.31 on Dec 3, 2021 and is currently $9.13. During that 52-week time-frame the NAV is down $2.18 (23.88%). If the Fed's raise interest rates, the NAV could continue falling. If this is not okay, perhaps leaving the money in the settlement account for now may be another alternative, or dollar cost averaging your way into the Total Bond Market Fund
Your numbers are wrong.

NAV is $9.45 now, a 16.45% NAV decline but the total return is higher.

Even at $9.13, though, the decline in NAV would be 19.27%, not 23.88%.
Topic Author
characterfour
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Joined: Sun Nov 20, 2022 11:45 am

Re: Building a Boglehead Portfolio

Post by characterfour »

enad wrote: Sun Nov 20, 2022 7:47 pm In his book The Successful Investor Today (14 Simple Truths You Must Know When You Invest) by Larry E Swedroe, Truth 14: There is No One Right Portfolio, but there is One That Is Right for You.

The Location Decision
, Larry writes:

"Let’s now turn to the final asset allocation issue, the location of the asset class in either the taxable or tax‐deferred/nontaxable account. The issue is relatively straightforward. The easiest account to deal with is a Roth account. Withdrawals from such an account are tax exempt. Therefore, we should generally place within that account the asset class with the highest expected return – small value. If no small value is being held, then, in order, the choices should be: large value, emerging markets, real estate, small cap, and finally large cap. Reverse the order for Traditional/Rollover IRA’s.

In taxable accounts we want to place the most tax‐efficient equity asset classes. This is basically a large‐cap fund (like an S&P 500 Index fund), a total stock market fund, or any tax managed fund. The least tax‐efficient asset classes (value, real estate, small cap and taxable fixed income) should be placed in tax-deferred accounts. If there is not any room inside of a tax‐deferred account, and there is no tax‐managed alternative available, then an exchange‐traded fund can be used to gain exposure to the desired asset class (due to their operating structure, exchange‐traded funds are highly like to prove more tax efficient than their non tax‐managed mutual fund counterparts).

One other point on asset location; foreign stock holdings often entail taxes being withheld at the source. Investors can then claim a foreign tax credit that can be used as a credit against U.S. taxes due on a distribution. However, this credit
does no good if the asset is not in a taxable account. Thus if there is a choice between holding similar U.S. and international asset classes in a taxable or tax-deferred account, the international asset should be held in the taxable account. While not a major issue (the impact is likely to be less than fifty basis points per annum), every penny saved is a penny earned."
Thank you for sharing that section! I've started reading this book and have found the section on taxes particularly enlightening:

"Taxes cut returns by 57.5%. Each dollar invested in the period of 1963 - 1962 would have grown to $21.89 in a tax-deferred account, and only $9.87 for a high-bracket investor."
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enad
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Re: Building a Boglehead Portfolio

Post by enad »

Triple digit golfer wrote: Sun Nov 20, 2022 9:06 pm
enad wrote: Sun Nov 20, 2022 7:38 pm
characterfour wrote: Sun Nov 20, 2022 7:31 pm JasonHutt, would it make sense to buy the total bond fund now given that the Fed will be continuing to increase interest rates? I do like getting 4.0 to 4.5% interest risk-free, which is higher than VBTLX's historical return.
The NAV for VBTLX was $11.31 on Dec 3, 2021 and is currently $9.13. During that 52-week time-frame the NAV is down $2.18 (23.88%). If the Fed's raise interest rates, the NAV could continue falling. If this is not okay, perhaps leaving the money in the settlement account for now may be another alternative, or dollar cost averaging your way into the Total Bond Market Fund
Your numbers are wrong.

NAV is $9.45 now, a 16.45% NAV decline but the total return is higher.

Even at $9.13, though, the decline in NAV would be 19.27%, not 23.88%.
Correction, Vanguard's numbers are wrong (I took my numbers directly off of Vanguard's website and did not double check them at the time I wrote my comment.) Either way, down is down and if the NAV has gone done at a time the Fed has been raising interest rates and if they are still planning to raise interest rates, then do you think the NAV will continue to go down? Or do you think this time will be different? If you think the NAV will continue to go down, then a settlement account is a great alternative until the dust settles
What Goes Up Must come down -- David Clayton-Thomas (1968), BST
Triple digit golfer
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Re: Building a Boglehead Portfolio

Post by Triple digit golfer »

enad wrote: Mon Nov 21, 2022 8:08 am
Triple digit golfer wrote: Sun Nov 20, 2022 9:06 pm
enad wrote: Sun Nov 20, 2022 7:38 pm
characterfour wrote: Sun Nov 20, 2022 7:31 pm JasonHutt, would it make sense to buy the total bond fund now given that the Fed will be continuing to increase interest rates? I do like getting 4.0 to 4.5% interest risk-free, which is higher than VBTLX's historical return.
The NAV for VBTLX was $11.31 on Dec 3, 2021 and is currently $9.13. During that 52-week time-frame the NAV is down $2.18 (23.88%). If the Fed's raise interest rates, the NAV could continue falling. If this is not okay, perhaps leaving the money in the settlement account for now may be another alternative, or dollar cost averaging your way into the Total Bond Market Fund
Your numbers are wrong.

NAV is $9.45 now, a 16.45% NAV decline but the total return is higher.

Even at $9.13, though, the decline in NAV would be 19.27%, not 23.88%.
Correction, Vanguard's numbers are wrong (I took my numbers directly off of Vanguard's website and did not double check them at the time I wrote my comment.) Either way, down is down and if the NAV has gone done at a time the Fed has been raising interest rates and if they are still planning to raise interest rates, then do you think the NAV will continue to go down? Or do you think this time will be different? If you think the NAV will continue to go down, then a settlement account is a great alternative until the dust settles
I didn't make an opinion on the future. I generally try not to predict the future and generally don't think I can tell when dust will settle, but since you ask, I'll oblige.

We don't know if the Fed will raise interest rates. Additionally, whatever they're "planning" is known to all market participants, people much smarter than us. Do you think that very knowledgeable institutional investors holding bond funds are just content with more NAV declines? Or do you think that information is already priced in and the NAV will only decline if rates increase faster or more than already anticipated by the market?
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enad
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Re: Building a Boglehead Portfolio

Post by enad »

Triple digit golfer wrote: Mon Nov 21, 2022 9:17 am I didn't make an opinion on the future. I generally try not to predict the future and generally don't think I can tell when dust will settle, but since you ask, I'll oblige.

We don't know if the Fed will raise interest rates. Additionally, whatever they're "planning" is known to all market participants, people much smarter than us. Do you think that very knowledgeable institutional investors holding bond funds are just content with more NAV declines? Or do you think that information is already priced in and the NAV will only decline if rates increase faster or more than already anticipated by the market?
I think it was Jason Zweig who said it best: I don't know, and I don't care.
What Goes Up Must come down -- David Clayton-Thomas (1968), BST
Triple digit golfer
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Re: Building a Boglehead Portfolio

Post by Triple digit golfer »

enad wrote: Mon Nov 21, 2022 9:26 am
Triple digit golfer wrote: Mon Nov 21, 2022 9:17 am I didn't make an opinion on the future. I generally try not to predict the future and generally don't think I can tell when dust will settle, but since you ask, I'll oblige.

We don't know if the Fed will raise interest rates. Additionally, whatever they're "planning" is known to all market participants, people much smarter than us. Do you think that very knowledgeable institutional investors holding bond funds are just content with more NAV declines? Or do you think that information is already priced in and the NAV will only decline if rates increase faster or more than already anticipated by the market?
I think it was Jason Zweig who said it best: I don't know, and I don't care.
That about sums it up for me. I figure with a diversified portfolio, consistent investments and time, things will work out.

I believe you are retired and thus likely much older than I am (37) so your perspective is likely much different. In 20+ years I will likely have more cash and shorter term bonds. I haven't thought much about it.
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Taylor Larimore
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Re: Building a Boglehead Portfolio

Post by Taylor Larimore »

enad wrote: Mon Nov 21, 2022 9:26 am
Triple digit golfer wrote: Mon Nov 21, 2022 9:17 am I didn't make an opinion on the future. I generally try not to predict the future and generally don't think I can tell when dust will settle, but since you ask, I'll oblige.

We don't know if the Fed will raise interest rates. Additionally, whatever they're "planning" is known to all market participants, people much smarter than us. Do you think that very knowledgeable institutional investors holding bond funds are just content with more NAV declines? Or do you think that information is already priced in and the NAV will only decline if rates increase faster or more than already anticipated by the market?
I think it was Jason Zweig who said it best: I don't know, and I don't care.
Bogleheads:

This is a link to the wonderful article by Jason Zweig: . "I Don't Know and I Don't Care":

https://jasonzweig.com/i-dont-know-and-i-dont-care/

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Put money in a stock market index fund and you balance it out with some bonds, depending on age and so on, and don’t look at it for 50 years. But when you retire, open the envelope. Be sure a doctor is nearby to revive you. You’ll go into a dead faint; you won’t believe there’s that much money in the world.”


"Simplicity is the master key to financial success." -- Jack Bogle
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Harry Livermore
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Re: Building a Boglehead Portfolio

Post by Harry Livermore »

What caught my attention: cash. At your age, I would put all cash currently in the retirement accounts to work tomorrow. I'm not sure what purpose it's currently serving (I say that as a guy who likes cash) As others have pointed out, "I have no idea what the market will do". Your new contributions will dwarf any "timing errors" in deploying the cash NOW.
You can consider the Treasuries, I-bonds, and cash in your taxable account part of your EF if you wish (in addition to your checking account) keeping in mind that selling any of the bonds in an emergency might mean some loss (personally I want my EF to be cash or MM, and understand and accept the loss of purchasing power and opportunity cost that comes with holding cash)
As others have said, move the investment choices to align with tax efficiency: bonds in the tax deferred, very efficient total market and MM/ cash in taxable, and whatever long-term (total market or tilt if you wish) in the Roth.
You've stated your desired AA is 75/25, but what is it now? I'm not going to total up your list and divide :) As far as "moving into it", just invest as per your AA at all times. If you are worried by the "news" and "experts", ratchet down your equities allocation until you have a smile, and sleep well.
Your future is very bright.
Cheers
international001
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Re: Building a Boglehead Portfolio

Post by international001 »

Duckie wrote: Sun Nov 20, 2022 6:23 pm
characterfour wrote: Sun Nov 20, 2022 1:57 pm Could you explain why bonds would go into 401k accounts, while stocks would be in Roth IRA & taxable accounts?
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free.

Plus, as already mentioned, bond fund dividends are taxed at ordinary rates (your marginal tax rate) while many stock fund dividends are taxed at lower qualified rates. That makes most bonds much less suitable for a taxable account.
Huh?

What is the difference if you have $1 of pre-tax money between 401k or Roth?
international001
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Re: Building a Boglehead Portfolio

Post by international001 »

Triple digit golfer wrote: Sun Nov 20, 2022 2:01 pm
characterfour wrote: Sun Nov 20, 2022 1:57 pm Thanks you for sharing, I found your points informative and actionable.

Could you explain why bonds would go into 401k accounts, while stocks would be in Roth IRA & taxable accounts? Some of this sounds logical to me - bonds / MM dividends are taxed more frequently while stocks compound faster so taxing on a higher amount is good. I wonder if there are other considerations too.
Because bond income is taxed at ordinary income rates while stock income (dividends) is taxed at favorable rates. Give this a read. https://www.bogleheads.org/wiki/Tax-eff ... _placement
It's not 100% clear (check other threads on the subject)
Having stocks on tax-sheltered accounts would help you to have eventually a bigger tax-sheltered portion of your portfolio.
Also, if you plan to spend part of your taxable before retirement, using bonds in taxable will give you a lower risk.
Triple digit golfer
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Re: Building a Boglehead Portfolio

Post by Triple digit golfer »

international001 wrote: Tue Nov 22, 2022 8:32 am
Triple digit golfer wrote: Sun Nov 20, 2022 2:01 pm
characterfour wrote: Sun Nov 20, 2022 1:57 pm Thanks you for sharing, I found your points informative and actionable.

Could you explain why bonds would go into 401k accounts, while stocks would be in Roth IRA & taxable accounts? Some of this sounds logical to me - bonds / MM dividends are taxed more frequently while stocks compound faster so taxing on a higher amount is good. I wonder if there are other considerations too.
Because bond income is taxed at ordinary income rates while stock income (dividends) is taxed at favorable rates. Give this a read. https://www.bogleheads.org/wiki/Tax-eff ... _placement
It's not 100% clear (check other threads on the subject)
Having stocks on tax-sheltered accounts would help you to have eventually a bigger tax-sheltered portion of your portfolio.
Also, if you plan to spend part of your taxable before retirement, using bonds in taxable will give you a lower risk.
Stocks in tax-sheltered accounts means bonds (less tax-efficient) in taxable accounts. That sort of negates your first point.
If you plan to spend part of taxable before retirement, why couldn't one simply rebalance within retirement accounts?
JasonHutt
Posts: 165
Joined: Wed Oct 26, 2022 1:47 pm

Re: Building a Boglehead Portfolio

Post by JasonHutt »

characterfour wrote: Sun Nov 20, 2022 7:31 pm JasonHutt, would it make sense to buy the total bond fund now given that the Fed will be continuing to increase interest rates? I do like getting 4.0 to 4.5% interest with t-bills (which is higher than VBTLX's historical return) without any risk of principal loss.
Four, I have little special knowledge to share about bonds or bond funds, except to say that Swensen, in Unconventional Success, recommends avoiding corporate bonds (which are included in total bond market fund). What I was trying to convey was that you seem to have a bond/cash bloat. Regarding retirement accounts, only equities will grow enough over time to be suitable for a distant retirement objective. I also think that trying to time bond markets is a mistake. If you want to avoid the possibility that you could have done better waiting, add to your bond fund over a period of months (say 6). I know that for equities immediate investment is generally recommended for a better result on average, but at least in the case of equities, dividing up one's contributions does decrease the likelihood of getting a bad outcome. I would think the same would apply to bonds.

T-Bills look relatively good now vs. Total Bond Market because they have such a short duration (making them resistant to increased interest rates), but this will not (and cannot) last.
nhs76
Posts: 71
Joined: Wed Jun 09, 2021 11:36 pm

Re: Building a Boglehead Portfolio

Post by nhs76 »

enad wrote: Sun Nov 20, 2022 7:47 pm In his book The Successful Investor Today (14 Simple Truths You Must Know When You Invest) by Larry E Swedroe, Truth 14: There is No One Right Portfolio, but there is One That Is Right for You.

The Location Decision
, Larry writes:
. . .
One other point on asset location; foreign stock holdings often entail taxes being withheld at the source. Investors can then claim a foreign tax credit that can be used as a credit against U.S. taxes due on a distribution. However, this credit
does no good if the asset is not in a taxable account. Thus if there is a choice between holding similar U.S. and international asset classes in a taxable or tax-deferred account, the international asset should be held in the taxable account. While not a major issue (the impact is likely to be less than fifty basis points per annum), every penny saved is a penny earned."[/i]
Uncertain about this - I've placed foreign stock (FZILX) within my Roth IRA because (1) the dividend yield is higher than total market (VTI), and (2) I'm managing taxable income for the next couple of years while I have health insurance from the ACA Marketplace. Is my dividend yield concern typically outweighed by the foreign stock tax credit?
international001
Posts: 2478
Joined: Thu Feb 15, 2018 7:31 pm

Re: Building a Boglehead Portfolio

Post by international001 »

Triple digit golfer wrote: Tue Nov 22, 2022 11:14 am
international001 wrote: Tue Nov 22, 2022 8:32 am
Triple digit golfer wrote: Sun Nov 20, 2022 2:01 pm
characterfour wrote: Sun Nov 20, 2022 1:57 pm Thanks you for sharing, I found your points informative and actionable.

Could you explain why bonds would go into 401k accounts, while stocks would be in Roth IRA & taxable accounts? Some of this sounds logical to me - bonds / MM dividends are taxed more frequently while stocks compound faster so taxing on a higher amount is good. I wonder if there are other considerations too.
Because bond income is taxed at ordinary income rates while stock income (dividends) is taxed at favorable rates. Give this a read. https://www.bogleheads.org/wiki/Tax-eff ... _placement
It's not 100% clear (check other threads on the subject)
Having stocks on tax-sheltered accounts would help you to have eventually a bigger tax-sheltered portion of your portfolio.
Also, if you plan to spend part of your taxable before retirement, using bonds in taxable will give you a lower risk.
Stocks in tax-sheltered accounts means bonds (less tax-efficient) in taxable accounts. That sort of negates your first point.
If you plan to spend part of taxable before retirement, why couldn't one simply rebalance within retirement accounts?
Stocks grow higher, so tax-sheltered becomes bigger in proportion
Imagine you have 2 stocks with the same tax treatment. Stock A return is 1%. Stock B return is 100%. Which one would you put in tax-sheltered account?
international001
Posts: 2478
Joined: Thu Feb 15, 2018 7:31 pm

Re: Building a Boglehead Portfolio

Post by international001 »

nhs76 wrote: Tue Nov 22, 2022 1:12 pm
enad wrote: Sun Nov 20, 2022 7:47 pm In his book The Successful Investor Today (14 Simple Truths You Must Know When You Invest) by Larry E Swedroe, Truth 14: There is No One Right Portfolio, but there is One That Is Right for You.

The Location Decision
, Larry writes:
. . .
One other point on asset location; foreign stock holdings often entail taxes being withheld at the source. Investors can then claim a foreign tax credit that can be used as a credit against U.S. taxes due on a distribution. However, this credit
does no good if the asset is not in a taxable account. Thus if there is a choice between holding similar U.S. and international asset classes in a taxable or tax-deferred account, the international asset should be held in the taxable account. While not a major issue (the impact is likely to be less than fifty basis points per annum), every penny saved is a penny earned."[/i]
Uncertain about this - I've placed foreign stock (FZILX) within my Roth IRA because (1) the dividend yield is higher than total market (VTI), and (2) I'm managing taxable income for the next couple of years while I have health insurance from the ACA Marketplace. Is my dividend yield concern typically outweighed by the foreign stock tax credit?
Yes.. tax efficiency of US funds is better. So you have to take this into account
Triple digit golfer
Posts: 9823
Joined: Mon May 18, 2009 5:57 pm

Re: Building a Boglehead Portfolio

Post by Triple digit golfer »

international001 wrote: Tue Nov 22, 2022 6:24 pm
Triple digit golfer wrote: Tue Nov 22, 2022 11:14 am
international001 wrote: Tue Nov 22, 2022 8:32 am
Triple digit golfer wrote: Sun Nov 20, 2022 2:01 pm
characterfour wrote: Sun Nov 20, 2022 1:57 pm Thanks you for sharing, I found your points informative and actionable.

Could you explain why bonds would go into 401k accounts, while stocks would be in Roth IRA & taxable accounts? Some of this sounds logical to me - bonds / MM dividends are taxed more frequently while stocks compound faster so taxing on a higher amount is good. I wonder if there are other considerations too.
Because bond income is taxed at ordinary income rates while stock income (dividends) is taxed at favorable rates. Give this a read. https://www.bogleheads.org/wiki/Tax-eff ... _placement
It's not 100% clear (check other threads on the subject)
Having stocks on tax-sheltered accounts would help you to have eventually a bigger tax-sheltered portion of your portfolio.
Also, if you plan to spend part of your taxable before retirement, using bonds in taxable will give you a lower risk.
Stocks in tax-sheltered accounts means bonds (less tax-efficient) in taxable accounts. That sort of negates your first point.
If you plan to spend part of taxable before retirement, why couldn't one simply rebalance within retirement accounts?
Stocks grow higher, so tax-sheltered becomes bigger in proportion
Imagine you have 2 stocks with the same tax treatment. Stock A return is 1%. Stock B return is 100%. Which one would you put in tax-sheltered account?
Stock A if the tax sheltered account is tax deferred.
international001
Posts: 2478
Joined: Thu Feb 15, 2018 7:31 pm

Re: Building a Boglehead Portfolio

Post by international001 »

Triple digit golfer wrote: Tue Nov 22, 2022 7:29 pm
international001 wrote: Tue Nov 22, 2022 6:24 pm
Triple digit golfer wrote: Tue Nov 22, 2022 11:14 am
international001 wrote: Tue Nov 22, 2022 8:32 am
Triple digit golfer wrote: Sun Nov 20, 2022 2:01 pm

Because bond income is taxed at ordinary income rates while stock income (dividends) is taxed at favorable rates. Give this a read. https://www.bogleheads.org/wiki/Tax-eff ... _placement
It's not 100% clear (check other threads on the subject)
Having stocks on tax-sheltered accounts would help you to have eventually a bigger tax-sheltered portion of your portfolio.
Also, if you plan to spend part of your taxable before retirement, using bonds in taxable will give you a lower risk.
Stocks in tax-sheltered accounts means bonds (less tax-efficient) in taxable accounts. That sort of negates your first point.
If you plan to spend part of taxable before retirement, why couldn't one simply rebalance within retirement accounts?
Stocks grow higher, so tax-sheltered becomes bigger in proportion
Imagine you have 2 stocks with the same tax treatment. Stock A return is 1%. Stock B return is 100%. Which one would you put in tax-sheltered account?
Stock A if the tax sheltered account is tax deferred.
Why? There is no tax advantage on doing that as I mentioned. If you get confused on what tax advantage means, imagine neither of the stocks have a dividend

IF you put B on tax-sheltered, eventually your tax-sheltered account (e.g. Roth IRA), will grow larger and when you have to use the money you'll pay fewer taxes.
Triple digit golfer
Posts: 9823
Joined: Mon May 18, 2009 5:57 pm

Re: Building a Boglehead Portfolio

Post by Triple digit golfer »

international001 wrote: Wed Nov 23, 2022 8:47 am
Triple digit golfer wrote: Tue Nov 22, 2022 7:29 pm
international001 wrote: Tue Nov 22, 2022 6:24 pm
Triple digit golfer wrote: Tue Nov 22, 2022 11:14 am
international001 wrote: Tue Nov 22, 2022 8:32 am

It's not 100% clear (check other threads on the subject)
Having stocks on tax-sheltered accounts would help you to have eventually a bigger tax-sheltered portion of your portfolio.
Also, if you plan to spend part of your taxable before retirement, using bonds in taxable will give you a lower risk.
Stocks in tax-sheltered accounts means bonds (less tax-efficient) in taxable accounts. That sort of negates your first point.
If you plan to spend part of taxable before retirement, why couldn't one simply rebalance within retirement accounts?
Stocks grow higher, so tax-sheltered becomes bigger in proportion
Imagine you have 2 stocks with the same tax treatment. Stock A return is 1%. Stock B return is 100%. Which one would you put in tax-sheltered account?
Stock A if the tax sheltered account is tax deferred.
Why? There is no tax advantage on doing that as I mentioned. If you get confused on what tax advantage means, imagine neither of the stocks have a dividend

IF you put B on tax-sheltered, eventually your tax-sheltered account (e.g. Roth IRA), will grow larger and when you have to use the money you'll pay fewer taxes.
I agree with your second point. I would do Stock B if the tax sheltered account is tax free. I said in my post that I chose Stock A if tax deferred.

You're using "tax sheltered" and it depends which type of tax sheltered account.
international001
Posts: 2478
Joined: Thu Feb 15, 2018 7:31 pm

Re: Building a Boglehead Portfolio

Post by international001 »

Triple digit golfer wrote: Wed Nov 23, 2022 1:40 pm
I agree with your second point. I would do Stock B if the tax sheltered account is tax free. I said in my post that I chose Stock A if tax deferred.

You're using "tax sheltered" and it depends which type of tax sheltered account.
Any tax-sheltered account. The point is that you want the tax-sheltered account to grow more than the taxable account. So that's a force for using stocks on tax-sheltered.

Then there is the other force to have stocks, that are more efficient than bonds, in the tax-advantage accounts

So you have two forces on opposite directions and you have to balance that (i.e. making numbers to decide).

More here: https://www.whitecoatinvestor.com/asset ... n-taxable/
Triple digit golfer
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Joined: Mon May 18, 2009 5:57 pm

Re: Building a Boglehead Portfolio

Post by Triple digit golfer »

international001 wrote: Wed Nov 23, 2022 7:11 pm
Triple digit golfer wrote: Wed Nov 23, 2022 1:40 pm
I agree with your second point. I would do Stock B if the tax sheltered account is tax free. I said in my post that I chose Stock A if tax deferred.

You're using "tax sheltered" and it depends which type of tax sheltered account.
Any tax-sheltered account. The point is that you want the tax-sheltered account to grow more than the taxable account. So that's a force for using stocks on tax-sheltered.

Then there is the other force to have stocks, that are more efficient than bonds, in the tax-advantage accounts

So you have two forces on opposite directions and you have to balance that (i.e. making numbers to decide).

More here: https://www.whitecoatinvestor.com/asset ... n-taxable/
That article is comparing Roth to taxable. Not a fair comparison. Between those two I would choose taxable over Roth. I would not choose taxable over tax deferred. What's the logic? The tax deferred money is eventually taxed at ordinary income rates whereas the taxable money is taxed at favorable capital gains rates. Why would I want the tax deferred account to be larger, and pay higher taxes (bond income at ordinary rates) while I build it?
international001
Posts: 2478
Joined: Thu Feb 15, 2018 7:31 pm

Re: Building a Boglehead Portfolio

Post by international001 »

??
Isn't it clear that pre-tax IRA/401k is equivalent to Roth 401k when tax bracket is the same?
For both 401k pre-tax or roth it's better to have a bigger account. Your end money is always 1-tax_bracket.
Having a bigger 401k or roth is always better than having a bigger taxable account.
Triple digit golfer
Posts: 9823
Joined: Mon May 18, 2009 5:57 pm

Re: Building a Boglehead Portfolio

Post by Triple digit golfer »

international001 wrote: Sat Nov 26, 2022 10:37 am ??
Isn't it clear that pre-tax IRA/401k is equivalent to Roth 401k when tax bracket is the same?
For both 401k pre-tax or roth it's better to have a bigger account. Your end money is always 1-tax_bracket.
Having a bigger 401k or roth is always better than having a bigger taxable account.
Absent of other considerations, I'd much rather be retired with a larger taxable account than tax deferred account.
muffins14
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Joined: Wed Oct 26, 2016 4:14 am
Location: New York

Re: Building a Boglehead Portfolio

Post by muffins14 »

international001 wrote: Sat Nov 26, 2022 10:37 am ??
Isn't it clear that pre-tax IRA/401k is equivalent to Roth 401k when tax bracket is the same?
For both 401k pre-tax or roth it's better to have a bigger account. Your end money is always 1-tax_bracket.
Having a bigger 401k or roth is always better than having a bigger taxable account.
This has to depend on your tax bracket at different times and, importantly, what it is in your withdrawal time.

If your bracket is 35% while contributing and 24% when withdrawing, and capital gains when withdrawing are 15%, you’re going to get different outcomes.

If my marginal withdrawals were taxed at 15% in taxable and 24% in tax-deferred, I’d rather be taking from taxable, right? Even better if I could withdraw up to some level with tax-deferred, then taxable, then top off my needs with tax-free Roth withdrawals.
35% VTI, 25% AVUV, 15% IXUS, 15% AVDV, 10% VWO
international001
Posts: 2478
Joined: Thu Feb 15, 2018 7:31 pm

Re: Building a Boglehead Portfolio

Post by international001 »

muffins14 wrote: Sat Nov 26, 2022 10:54 am
international001 wrote: Sat Nov 26, 2022 10:37 am ??
Isn't it clear that pre-tax IRA/401k is equivalent to Roth 401k when tax bracket is the same?
For both 401k pre-tax or roth it's better to have a bigger account. Your end money is always 1-tax_bracket.
Having a bigger 401k or roth is always better than having a bigger taxable account.
This has to depend on your tax bracket at different times and, importantly, what it is in your withdrawal time.

If your bracket is 35% while contributing and 24% when withdrawing, and capital gains when withdrawing are 15%, you’re going to get different outcomes.

If my marginal withdrawals were taxed at 15% in taxable and 24% in tax-deferred, I’d rather be taking from taxable, right? Even better if I could withdraw up to some level with tax-deferred, then taxable, then top off my needs with tax-free Roth withdrawals.
Think in Roth. It's always more beneficial than taxable. With taxable, you pay the same taxes on your wages, but later on, you'll have to pay 15% on the LTCG.
tibbitts
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Re: Building a Boglehead Portfolio

Post by tibbitts »

international001 wrote: Mon Nov 28, 2022 5:01 pm
muffins14 wrote: Sat Nov 26, 2022 10:54 am
international001 wrote: Sat Nov 26, 2022 10:37 am ??
Isn't it clear that pre-tax IRA/401k is equivalent to Roth 401k when tax bracket is the same?
For both 401k pre-tax or roth it's better to have a bigger account. Your end money is always 1-tax_bracket.
Having a bigger 401k or roth is always better than having a bigger taxable account.
This has to depend on your tax bracket at different times and, importantly, what it is in your withdrawal time.

If your bracket is 35% while contributing and 24% when withdrawing, and capital gains when withdrawing are 15%, you’re going to get different outcomes.

If my marginal withdrawals were taxed at 15% in taxable and 24% in tax-deferred, I’d rather be taking from taxable, right? Even better if I could withdraw up to some level with tax-deferred, then taxable, then top off my needs with tax-free Roth withdrawals.
Think in Roth. It's always more beneficial than taxable. With taxable, you pay the same taxes on your wages, but later on, you'll have to pay 15% on the LTCG.
But this discussion is throwing around "deferred" and Roth like it's the same thing. Obviously Roth is not "deferred." And while it's always better to end up with more in Roth, whether you'll be better off over an investing lifetime by contributing to Roth vs. something else depends on circumstances.
placeholder
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Re: Building a Boglehead Portfolio

Post by placeholder »

Triple digit golfer wrote: Sat Nov 26, 2022 10:52 am Absent of other considerations, I'd much rather be retired with a larger taxable account than tax deferred account.
But it's not really possible to have them be the same unless the savings from deferral were not invested or the money that went into taxable was somehow tax free.
hvaclorax
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Re: Building a Boglehead Portfolio

Post by hvaclorax »

I’m a retired physician. Not a finance guru like most responders. Reading your discussion only makes this subject murkier. I wonder about my aging intelligence. Is it really this complicated? Can you not agree to the extent that we laypeople have a chance to understand? Honest question, I’m not a troll or being deceitful. Thanks
HVAC
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