Fresh Start---- AA for a newlywed couple

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Topic Author
yehudimenuhin
Posts: 35
Joined: Tue Jun 26, 2007 11:47 am

Fresh Start---- AA for a newlywed couple

Post by yehudimenuhin »

We're getting married in a few months and want to get started off right. As you'll see, our investements are a hodgepodge.

Professional couple. He's 35. She's 30. No kids yet.

Tax rate: He today=28%. She today=25%. Joint (both employed) 28%. Joint (his salary during kiddie era) 25%.

*Have emergency fund and down payment fund established. No CC debt.
*Have about $50k in private variable student loan, now at 8.25%
*Currently renting at a very favorable rate.
*Frugal style of life, paid cars, budgeting already, etc..
*His current portfolio is a mess, ready to reboot the whole thing.
*We plan on liquidating the taxable account and putting most of it against the loans. There are no net capital gains in that account.
*Holding lots of cash in retirement accounts -mainly out of paralysis.

Investement Objective
Aggressive growth with aim toward retirement at/near 60
Flexibility for her to work part time during child years.
Buying a house soon.
Maxing out 401(k) and Roth opportunities.
Saving in addition to retirement, but could probably put that into the loans.

Risk Tolerance
High. Looking at 20-25% Bond allocation. Our inclination is to eke out a higher return with a bit of risk (which is easily less riskthan we've had).

Current Setup (which we're ready to re-furbish )
His E*Trade Brokerage
Junk Stock/Funds 21%

Her ESPP Brokerage
Employer Stock 4%

His Ameriprise SEP-IRA
Cash 2%
GGOCX 8%
MEICX 5%
SADAX 5%
SPY 5%
SSTHX 5%

His E*Trade SEP-IRA
BRK.B 3%
Cash 10%
MSFT 2%

His E*Trade Roth
Cash 2%

His Current 401(k)
Cash 6%

Her Old 401(k)
VTTVX 5%

Her Current 401(k)
DODBX 14%

Her Roth IRA
Cash 3%


Our Current Thinking:
Cash out most of the brokerage account, keeping about 7% max
Applying that money toward loan/down-payment

Aiming for a setup of
  • *Total Market 40%
    *Small Value 5%
    *International 25%
    *Bond 25%
    *REIT 5%
Our options are pretty open.
I can roll my IRAs to Vanguard, and our 401(k)s have the Fidelity Brokeragelink option, which, I understand, allow us to invest in the universe of funds.

Trying to spread that across our various accounts gives us this

Proposed portfolio:
Taxable
Her Company Stock - 1%
Total Stock Market - VTSMX 6%

Her Current 401(k)
Total Stock Market - VTSMX 5%
TIPS - VIPSX 12%

Her Old 401(k)
Int Bond - VFITX 7%

Her Roth
REIT - VGSIX 4%

His 401(k)
Int Bond - VFITX 6%
Total Stock Market - VTSMX 1%

His Roth
REIT - VGSIX 1%
Small Value - VISVX 2%

His SEP-IRA (into one account)
Small Value - VISVX 3%
Int'l Blend - VGTSX 25%
Total Stock Market - VTSMX 27%

Questions:
In general, how does this look? Is there a way to tweak it toward higher expected gain?

I don't like that we have amount assigned in such small percentages. Many of those will be below $10k. So, I could probably safely add to the 2007 Roth to put all the REIT in one acct. Good idea?

She is concerned (non-specifically) about the market risk posed by China. Is there an agreed upon hedge against some post-American economy?

Thanks a ton. Let me know if I need to explain / provide more.
alexander
Posts: 221
Joined: Sun Jun 10, 2007 8:32 pm

Post by alexander »

Your allocation makes sense given your stated objectives. Paying off the 8.25% student loan interest certainly makes sense as you'll earn less than that in a bond fund -- and your tax rate looks like you'll likely lose the tax deduction on interest.

As for mechanism, your SEP-IRAs have 55% of your investment assets. Consider allocating all the smaller accounts (like his/her roth and old 401s) to a single asset class like bonds that are 25% of your portfolio. Likewise, current 401s could hold the 25% international component. Then, put the small fry like SV and REITS into your SEP-IRA along with the leftover bonds and international. When it comes time to rebalance, you can do it entirely within the SEP. Of course, if you keep maxxing 401s, you may have to revisit that in the future.

If you fear that handling all of this complexity is too much, you could split between three asset classes by folding the REITS and SV into TSM for a 50/25/25 split between TSM, bonds, and intl. Easier to maintain, easy to rebalance. TSM makes a great taxable holding.

Also, I noticed the ESPP. Presumably she gets a discount for buying stock in it? If so, you could max out that contribution and immediately sell the stock when it vests for a guaranteed profit. Otherwise, I'd advocate holding it for the minimum to get LT capital gains treatment. If you have sufficient capital losses, however, consider just selling it off now.
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 6:40 pm

Portfolio Structure

Post by Laura »

yehudimenuhin,

I agree that a total clean up is an excellent idea. Let me comment on some of your plans.
We plan on liquidating the taxable account and putting most of it against the loans. There are no net capital gains in that account.
Great idea since the loans are so costly. I would direct all your extra cash either toward the house downpayment (if you need it) or toward those loans. Try to knock them off as quickly as possible.

Consolidation:

Go ahead and rollover all your SEP IRA accounts to Vanguard.
Go ahead and rollover your wife's old 401k to an IRA account at Vanguard.

Consider whether converting all of this to a Roth and merging it with the her Roth and his Roth accounts would help you reduce the number of accounts. Vanguard can help you decide Should I Convert My IRA to a Roth?.

401k options

Please post the fund choices in your 401k (name, ticker symbol, and expense ratio) then do the same with your wife's current 401k plan choices. You want to blend everything together into one unified portfolio. For the Fidelity plan look at any funds labeled Spartan since these will be very lost cost index funds. You can easily avoid the brokeragelink fees by using the Spartan index funds. Also, focus on bond funds available in both 401k plans.

China

The best way to benefit from changes in the global economy (China or some other country) would be to diversify internationally through developed and emerging markets. No one can predict the future so by holding both US and international funds you benefit regardless of which economies are doing well.

Hope this helps give you some ideas. With a little more information we can discuss portfolio construction ideas in more detail.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
yehudimenuhin
Posts: 35
Joined: Tue Jun 26, 2007 11:47 am

Post by yehudimenuhin »

Thanks for the input.

I'm not very excited about our plans' funds. That's why I've latched onto the idea of the BrokerageLink account. We'll be putting the max into our 401(k), so I didn't want to be stuck with the options in these plans.

Are there any downsides to using the Brokeragelink? I imagine that even if there is a transaction fee for the Vanguard funds, we can get Fidelity Spartan with no brokerage fees, correct? Any advice in that regard is very appreciated.

For what it's worth, here's our plans' funds:


HIS:

Large Cap - ALVIZ - American Cent Lg Co Val Inv CL  - 0.84%
Large Cap - FDCAX - Fidelity Capital Appreciation Fund  - 0.87%
Large Cap - FCNTX - Fidelity Contrafund - 0.90%
Large Cap - VINIX - Vanguard Institutional Index - 0.05%
Mid Cap - BARAX - Baron Asset Fund - 1.33%
Mid Cap - FMIVX - Phoenix Mid-Cap Value A - 1.25%
Mid Cap - FSEMX - Fidelity Spartan Extended Mkt Index Inv - 0.10%
Small Cap - AVPAX - American Beacon Small Cp Val Plan - 1.09%
Small Cap - FLSCX - Fidelity Small Cap Stock - 0.96%
Small Cap - WGGFX - Winslow Green Growth - 1.45%
Intl - RNPEX - American Funds New Perspective R4 - 0.75%
Intl - FDIVX - Fidelity Diversified International - 1.01%
Bond - PTRAX - Pimco Total Return Fund Admin Class - 0.68%
Balanced - Fxxxx - Various Fidelity Freedom Target-Date - 0.80%
open - BROKERAGELINK - Brokerage link to no-load funds - n/a


HERS:

Balanced - DODBX - Dodge & Cox Balanced Fund - 0.52%
Large Value - LAFFX - Lord Abbett Affiliated Fund - Class A - 0.82%
Small Value - PSVIX - Allianz NFJ Small-Cap Value Fund - Institutional Class - 0.86%
Large Blend - FUSEX - Spartan® U.S. Equity Index Fund - Investor Class - 0.10%
Large Growth - HACAX - Harbor Capital Appreciation Fund - 1.07%
Small Growth - FSLCX - Fidelity Small Cap Stock Fund - 0.96%
Small Growth - - Duncan-Hurst Capital Management Aggressive Small Cap Growth Fund - ?
Intl - BIIEX - Brandes Institutional International Equity Fund - 1.12%
Bond - WAPIX - Western Asset Core Bond Portfolio - FI Class - 0.70%
open - BROKERAGELINK - Brokerage link to no-load funds - n/a


Not very exciting. By the way, if we use Brokeragelink, we each have to keep a minimum $500 in one of these funds.

Now that y'all see the options, I'm keen to get your recommendations. Given what our preferences are (original post), what can we do?

Thanks
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 6:40 pm

Portfolio

Post by Laura »

yehudimenuhin,

You actually have some very good 401k options. In the her 401k account you can build around the Spartan US Equity fund (S&P 500 fund) and the West Asst Bond Fund. In the his 401k account you can use the Vanguard Inst. Index (S&P 500 fund) and the Spartan Extended Market fund (S&P 500 completion index.

In your earlier post you said you wanted this asset allocation:

*Total Market 40%
*Small Value 5%
*International 25%
*Bond 25%
*REIT 5%

This is fine but it seems to imply that you think REITs are like bonds. They are not. REITS are definitely equity and should be counted as part of your stock allocation. If you want to make this 70/30 you can change these numbers slightly.

Using the funds available you could set up a portfolio like this:

taxable
7% Total Stock Market

her 401k
17% Spartan US Equity fund
0% West Asst Core bond (some new money will go here)

Her old 401k rolled into an IRA at Vanguard
7% TIPS-Treasury Inflation Protected Securities (VIPSX)

her Roth
4% Total Intl Stock Market

his 401k
7% Spartan Extended Market Index
0% Vang Inst Index (some new money will go here)

His Roth
3% Total Intl Stock Market

SEP-IRA
18% TIPS
18% Total Intl Stock Market
9% Total Stock Market
5% REIT
5% small cap value

New money:

her 401k
50% West Asst Core Bond
50% Spartan US Equity

his 401k
50% Vang Inst. Index
50% Spartan Extended Market

her Roth
100% Total Intl Stock Market

his Roth
100% Total Intl Stock Market

Use your SEP-IRA for rebalancing. As your bond fund grows in the her 401k account you can transfer bond money to the REIT and small cap value to maintain your desired asset allocation. You can also use the SEP Total Stock Market money to exchange into the asset class needing additional funds.

The new money will be added to bonds, intl, and US equity so you shouldn't need to do too much moving around.

If you convert some of your IRA accounts into Roth accounts the same method will work but you will be managing fewer accounts making portfolio management easier.

Hope this is clear.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
yehudimenuhin
Posts: 35
Joined: Tue Jun 26, 2007 11:47 am

Post by yehudimenuhin »

Wow. My appreciation to both Alexander and Laura

Laura, your comments are clear....and it's a lot to digest. We're gonna walk through this carefully, and may have some follow-up questions down the line. Thanks

BTW - We weren't thinking of the REITS as bonds. I placed it last on the list because of its low movement correlation with equities. For the sake of our target 75/25 split, however, we see it as an equity. So, your numbers are spot on. Good stuff.

Cheers.
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Zapped
Posts: 216
Joined: Wed May 30, 2007 3:00 pm
Location: Austin, TX

Re: Portfolio

Post by Zapped »

Laura wrote:Using the funds available you could set up a portfolio like this:
:
SEP-IRA
18% TIPS
18% Total Intl Stock Market
9% Total Stock Market
5% REIT
5% small cap value
:
I thought the OP had 30% in his Ameriprise SEP-IRA and 15% in his E*Trade SEP-IRA, for a combined total of 45%, not the 55% combined shown above. Maybe I'm misunderstanding or adding incorrectly, because I see alexander's first reply mentioned 55% in SEP-IRA.
- Jim in Austin, TX
Topic Author
yehudimenuhin
Posts: 35
Joined: Tue Jun 26, 2007 11:47 am

Post by yehudimenuhin »

(disregard original comment. corrected)

Thanks for spotting.

EDIT -

On second review, it wasnt' a mistake. In selling off my brokerage accounts for the loans/house, I pulled money out of the total "pool". The proportion in the SEP account naturally grew by 10%.
User avatar
Zapped
Posts: 216
Joined: Wed May 30, 2007 3:00 pm
Location: Austin, TX

Post by Zapped »

yehudimenuhin wrote:On second review, it wasnt' a mistake. In selling off my brokerage accounts for the loans/house, I pulled money out of the total "pool". The proportion in the SEP account naturally grew by 10%.
That just leaves me confused about the proportions of the other assets. But the liquidation of assets for load/house explains why Laura had you with a taxable account of 7% in her plan versus 25% in your original post.

For better or worse I ran some numbers based on your original post and also on my best guess at your revised numbers. Let me know if this makes sense.

Plan #1 = For the original allocation
Image

Plan #2 = Best guess at your revised allocation
Image

One thing about plan #2 is the possible problem with minimum investment amounts in "His Roth", unless you have more assets than my made-up values.
- Jim in Austin, TX
Topic Author
yehudimenuhin
Posts: 35
Joined: Tue Jun 26, 2007 11:47 am

Post by yehudimenuhin »

Jim in Austin,

Your numbers are very close, except that "her roth" is 4% and "his roth" is 3%. Was probably a rounding error. "his roth" is above the $3k min of many funds, but below the $10k that others want. Thanks.


Laura,

I see that your suggested reallocation results in:
  • Bond (all TIPS) 25%
    International 25%
    Total Stock Market 16%
    Large Cap Index 17% (Spartan US Equity)
    Small/Medium Index 7% (Spartan Extended)
    REIT 5%
    Small Value Index 5%
With contributions going toward:
  • her 401(k)
    Bond (US total index) 50%
    Large Cap Index 50% (Spartan US Equity)
    his 401(k)
    Large Cap Index 50% (Vanguard Inst Index)
    Small/Medium Index 50% (Spartan Extended)

    Both Roths
    Total Intl Stock Mkt 100% each
*It seems like the initial allocation overweights Large Cap against Small/Medium (by 17-7 or 17-12 if you count REIT).
*And it seems like the contributions would continue the overweight (by a 2:1 ratio)

Shouldn't I strive to have the medium/small in greater proportion?
Or, does this remove the growth funds out of the mix and allow me to overweight toward small value for a bit more aggressive approach?
And if I want to overweight small value by 5%, shouldn't I have more than 5% against all that Large Cap?

Please let me know if I'm splitting hairs.
In essence, what I really need to know is how should I consider these funds as I contribute and reblance?
User avatar
Zapped
Posts: 216
Joined: Wed May 30, 2007 3:00 pm
Location: Austin, TX

Post by Zapped »

yehudimenuhin wrote:Laura,
I see that your suggested reallocation results in:
  • Bond (all TIPS) 25%
    International 25%
    Total Stock Market 16%
    Large Cap Index 17% (Spartan US Equity)
    Small/Medium Index 7% (Spartan Extended)
    REIT 5%
    Small Value Index 5%
:
Shouldn't I strive to have the medium/small in greater proportion?
Or, does this remove the growth funds out of the mix and allow me to overweight toward small value for a bit more aggressive approach?
And if I want to overweight small value by 5%, shouldn't I have more than 5% against all that Large Cap?
Her proportions of 17 large, 7 extended, 5 REIT, and 5 small-value do overweight your portfolio toward small cap. The total market is 70/20/10 L/M/S and this mix would be 53/28/20 L/M/S, with some tilting of the small-caps toward value. From Instant-Xray:

Image

Right there that's a doubling of the small-cap "bet" versus the total market.
- Jim in Austin, TX
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