Porfolio review: 6.5M & scared to spend?

[tac55]

Hi all,

This forum is amazing; thank you for all the help over the years!

Why am I posting?

I am getting my financial house in better order and need some advice.

What am I cleaning up financially?

• I've been using Betterment for 55% of my portfolio, but I am going to move to Vanguard ETFs as there is no reason to keep paying their management fee of 0.25%.

• I put ~20% of my portfolio with an advisor five years ago. I did it because I had followed them for 8 years, and they had a Buffet value-driven approach that I liked. And I liked the idea of them thinking about what they were doing every day. But the fees were high (1.25%), and after 5 years, I realized they were underperforming the market given those fees. I've ended that relationship. My yearly R.O.I. was ~4.6%.

• I have a small amount in crypto, ~2% of my portfolio, and I am getting rid of that as I can't find any value in crypto beyond it serving as an investment in the global grey market.

• I have ~20% of my portfolio in direct stock picks that I've let grow over the last 10 years. I am debating dumping those entirely or trimming those back to ~5% of my portfolio. I am in tech, and when I had a business exit 10 years ago, I put ~7.5% of my money in companies I used and believed in. I enjoyed doing that, but it has since grown without any rebalancing.

My background:

I am a long-time entrepreneur with a few exits under my belt.

I am semi-retired and working on a passion project that I love. I don't expect the passion project to earn much money. My hope is that in 2 to 3 years, it can pay me around $3,000 to $4,000 a month of income (while giving me something fun to do). But there is a chance it might not ever make enough to pay me anything.

My wife has been a stay-at-home mom but is now looking for what is next now that our daughter started school.

What else?

• Tax filing status: Married filing jointly w/ 1 kid.

• Ages: Early 40s

• Location: American living in Portugal (moved in 2021 - dual citizens).

• USA Tax Rate: No state taxes & federal super low as we don't have any income (apart from dividends and capital gains)

• Portugal Tax Rate: None, as under NHS status.

Debt, real estate, & income:

• Debt: None

• Income: Currently, only the income from dividends and capital gains from investments

• Home: Renting an apartment.

• Real estate: We own a vacation apartment in the EU and rent it out when we are not using it.

Portfolio $6.5M Total (USD):

• Taxable: $6.2M (96%)

• Non-Taxable: $300k (4%).

The portfolio is being adjusted to be...

• 70% Total US Stocks (VTI)

• 20% Total Non-USA Stocks (VXUS)

• 10% Some type of Bond ETF (not sure which) - The idea is that if the market crashes, we can live for 5+ years off just the bonds while it recovers.

Further contributions?

• No additional contributions are planned unless one of my angel investments I made pays off (IPO/acquisition). I don't count on any gains here. It is fun to invest in people doing cool things. Realistically I can expect ~$200k at some point from the ones that are doing well.

Expenses & what money means to me...

We are currently living on $96,000 a year net. That is a little tight, and we would like to increase that to $120,000 a year net.

We are looking to move to a big city in another part of Europe in the next 18 months. That is going to cost ~5x more in rent (or we might buy a place).

My wife and I love to travel and eat good food. No big vices beyond that.

Cash: ~300k currently.

~$120k of that cash is set aside for funding the new passion project I am working on. I am hoping to break even on costs in 2024. But, if I don't, I would love to be able to add another ~$120k in 2025. The project is currently covering ~35% of its monthly costs.

I would love to be able to put $120k a year into new projects if I could afford it.


Questions

What bond ETF would you recommend?

The idea is that if the market crashes, we can live for 5+ years off, just the bonds, until it recovers. Would you go BND? Or VGIT? Why would you pick that one? Would you be looking to move from something if the Fed decreases interest rates dramatically over the next 2 years?

We want to buy a house/apartment at some point. Can we afford a $1.1 million dollar house?

The type of place we want in the expensive new city will likely cost $1.1 million. That would come out of our taxable portfolio and reduce that to ~$5.4 million. Can we afford that?

If you were in my position, would you increase international exposure from 20% to 30%?

I am aware of the USA versus international argument, so just curious on what you personally would do in this situation .

• My wife would like us to take $150k net out a year (she spends more than me). Can we afford that? It makes me nervous...

What am I not considering that I should? What should I read up on that I need to think about?

[goldentrio]

Run a simulation based on a 2% - 3% withdrawal rate and play with the asset allocations, stocks vs bonds. This will give you a good idea on what AA you can be comfortable with. https://ficalc.app/ or https://www.portfoliovisualizer.com/mon ... simulation

I personally would not sell those individual stocks if they have large gains. If you a incur large federal tax bill you will be forced to sell more of your portfolio to cover it. Why not leave them alone? Other than adjusting for risk tolerance, sometimes the best thing to do is nothing at all.

For the house, it sounds like you are considering buying it in cash? Is there an option to finance it? That's a pretty big withdrawal all at once and could have a big impact on federal taxes. Will the property produce any cashflow? Why not just keep renting?

[Parkinglotracer]

Congrats on your success to date. You have substantial amount of savings. As you have figured out paying someone else a % of your portfolio is going to make someone else a substantial amount of money and not help you beat the market. If you get market returns over the next few decades consider that continued great success.

I don’t see much difference between vgit and bnd. Vgit’s duration is just a little shorter and is all in us treasuries vs bnd has corporate bonds too. I don’t think it matters. I like to do a ladder of 1-5 year treasuries and each year have a rung mature for spending or investing or rebalancing; I don’t predict interest rates and you will be fine with a ladder whether they go up or down. If the rates went down I’d put my fixed income Asset allocation in the same place.

https://personal.vanguard.com/us/funds/ ... tingFrom=6

I’d say you can afford a 1.1M house. If not more important than the cost of the house is, what will your annual spending be if you buy that house?

I don’t think whether you have 20% or 30% allocation to international stocks will make a big difference. With 30% of VTI concentrated in the top 10 tech stocks that you and me and everyone owns on the side, I’d go for more diversification and hold a higher portion in the international etf. And I would trim my holdings in those tech stocks that we love (apple, meta, nvda, google, Amazon, etc) if you are like me.

You are a more successful investor / business man than I am. I have an mba but not the business experience you likely have. Since you have been so successful, do you need to take so much risk with a 90% equity asset allocation (AA)? Or do you like many just feel it is prudent to be mainly in equities and that bonds are for people way more conservative than you are? You could have a 50-50 AA and with interest rates at 5% make a guaranteed 150K+ (more than you spend a year). And still have 3M in equities in the market. I’d say you can afford NOT to take the risks you took in the past and still live the life you want for the next 30-40 years.

Congrats on your success to date and good luck in your future projects!

[Watty]

We want to buy a house/apartment at some point. Can we afford a $1.1 million dollar house?

The type of place we want in the expensive new city will likely cost $1.1 million. That would come out of our taxable portfolio and reduce that to ~$5.4 million. Can we afford that?

What would your expenses be with a paid off house, including taxes, insurance, maintenance, etc.?

You mentioned current expenses of $96k and wanting to spend $120k so those numbers will likely be a lot less if you do not have rent or a mortgage payment.

Not that I would recommend it but if you have $5.4 million and you put it into US CDs that pay 5% that would give you $270K a year. Even broad index funds which pay a 2% dividend would pay $108K a year. There are lots of details but you should be fine with any of the options you mentioned if you are even halfway reasonable with your investing.

What am I not considering that I should?

Your expenses will be different as your kid goes through college and when they move out and live on their own.

You also need to be concerned about exchange rate changes. For stocks that does not matter a lot since if you are just buying shares of a stock index fund the fact that your brokerage statement is printed in Euros or Dollars does not really matter. For bonds this matters lot more and I would mainly invest in bonds that are denominated in the currency that you are likely to eventually spend them in.

In your post you mentioned international exposure but it was not clear what you meant by that since for someone living in Europe a US investment would in an international investment.

What should I read up on that I need to think about?

One thing to add to your list is to have good estate planning since the estate laws may be very different in the country you are living in than in the US so that you would want to avoid any surprises. This can be especially tricky with things like US retirement accounts. Even though you are relatively young there is a non-zero chance that an unexpected accident or illness could kill you next month so you really need to have this paperwork in order. In addition to a will you should also have things like power of attorney documents and medical directives which will work for you.

If only one of you is a duel citizen then that could also impact the ability of the other spouse or the kid to stay in a country if something happens to them.

You mentioned having a house that you rent out but you did not say how much that was worth or how much rental income you get from it.

[tac55]

Run a simulation based on a 2% - 3% withdrawal rate and play with the asset allocations, stocks vs bonds. This will give you a good idea on what AA you can be comfortable with. https://ficalc.app/ or https://www.portfoliovisualizer.com/mon ... simulation

Will do, thank you and checking those links out!

I personally would not sell those individual stocks if they have large gains. If you a incur large federal tax bill you will be forced to sell more of your portfolio to cover it. Why not leave them alone? Other than adjusting for risk tolerance, sometimes the best thing to do is nothing at all.

Wouldn't you worry that they are now 20% to 25% of your portfolio?

My worry is just that they have grown so much, and I haven't rebalanced. Capital gains would hurt, but how do you decide between that hit versus having 20% to 25% of my net worth in single stock picks...

For the house, it sounds like you are considering buying it in cash? Is there an option to finance it? That's a pretty big withdrawal all at once and could have a big impact on federal taxes. Will the property produce any cashflow? Why not just keep renting?

Ya, in cash. We might be able to get a 3% mortgage; if I can do that, I will, as that would be amazing .

We are not sure we can rent in this new city since we are foreigners (and it has almost no rentals available anyway). We've talked to a lot of families who tried to rent, and couldn't. Most had to go to a different city.

[tac55]

I’d say you can afford a 1.1M house. If not more important than the cost of the house is, what will your annual spending be if you buy that house?

Yeah, that is a good point. I owned a house in the U.S.A. a while back and didn't realize what a huge cost a house was (especially property taxes and maintenance).

I am hoping we get an apartment and spend less than $1.1m. The E.U. usually has you pay the bulk of your taxes with the purchase price, and property taxes seem to be much lower year-to-year. And with an apartment, the month-to-month costs are not bad, and I don't have to worry about many things. I think it would cost ~$750 to $1,250 a month in taxes, insurance, and building fees. That fits in well with our budget.

I don’t think whether you have 20% or 30% allocation to international stocks will make a big difference. With 30% of VTI concentrated in the top 10 tech stocks that you and me and everyone owns on the side, I’d go for more diversification and hold a higher portion in the international etf. And I would trim my holdings in those tech stocks that we love (apple, meta, nvda, google, Amazon, etc) if you are like me.

Yep, that is my exact situation, noted, and thank you. That is exactly what I am struggling to decide... I think I might get rid of the individual stock holdings beyond 2 or 3 lesser-known companies that I believe in.

You are a more successful investor/business man than I am. I have an mba but not the business experience you likely have. Since you have been so successful, do you need to take so much risk with a 90% equity asset allocation (AA)? Or do you like many just feel it is prudent to be mainly in equities and that bonds are for people way more conservative than you are? You could have a 50-50 AA and with interest rates at 5% make a guaranteed 150K+ (more than you spend a year). And still have 3M in equities in the market. I’d say you can afford NOT to take the risks you took in the past and still live the life you want for the next 30-40 years.

Lots of luck helps

Yeah, my thinking is that I would prefer the higher returns as I feel confident I can handle the higher volatility/risk (2008 and 2020 went well, although it might feel different now). Specifically, I would love to grow the portfolio to the point where I can also have ~$120k a year to put into new passion projects. I've got a lot of ideas on fun things I want to build. And psychologically, it feels like leaving money on the table. I'd rather take a little more risk so I can use that money for something good/fun (maybe that is weird).

If the market loses 50%, and I am down 40% in total (assuming 90% equities). I still have a good 4 to 5 years of bonds I can live off while that recovers. And if it doesn't, I still have a ton of money (and own some property).

You rock; your post was super helpful! I like the bond ladder idea and adding that to my notes

[tac55]

What would your expenses be with a paid off house, including taxes, insurance, maintenance, etc.?

You mentioned current expenses of $96k and wanting to spend $120k so those numbers will likely be a lot less if you do not have rent or a mortgage payment.

Currently, we spend ~$600 on rent for a 3-bedroom apartment in a low COL location (and timing with COVID-19 as it was a buyers market).

So when we move to a big city that will go way up. If we buy, apartment expenses maybe $700 to $1250 a month (I don't think we would buy a house, but maybe up to $1500 if so). With our current budget, we would need another $1000 a month probably to do that comfortably. So from $8k a month to $9k a month. And we would like to go to $10k soon, just to give us a bit more discretionary income in general.

You also need to be concerned about exchange rate changes. For stocks that does not matter a lot since if you are just buying shares of a stock index fund the fact that your brokerage statement is printed in Euros or Dollars does not really matter. For bonds this matters lot more and I would mainly invest in bonds that are denominated in the currency that you are likely to eventually spend them in.

In your post you mentioned international exposure but it was not clear what you meant by that since for someone living in Europe a US investment would in an international investment.

Ah, interesting point on the exchange rate. I hadn't thought of that. Thinking and thank you for that

(On the bonds side we might be moving to a place where the bond dividends are taxed at only 15% if they are in the USA, versus 30% in the EU. I'll have to see how the math affects that as well... )

On the international exposure, I meant everything but the USA (VXUS). All my investing is in the USA since we are dual citizens and the USA taxes globally (and they make it nearly impossible to invest in the EU).

One thing to add to your list is to have good estate planning since the estate laws may be very different in the country you are living in than in the US so that you would want to avoid any surprises. This can be especially tricky with things like US retirement accounts. Even though you are relatively young there is a non-zero chance that an unexpected accident or illness could kill you next month so you really need to have this paperwork in order. In addition to a will you should also have things like power of attorney documents and medical directives which will work for you.

If only one of you is a duel citizen then that could also impact the ability of the other spouse or the kid to stay in a country if something happens to them.

Good point and added it to my list! Everything is in revocable trusts with a lawyer in the USA (along with medical stuff there), but we haven't done anything in the EU yet beyond a basic search to understand our options if something happens. I'll double-check this!

We are all dual citizens, but all born in the USA, so no worries there.

You mentioned having a house that you rent out but you did not say how much that was worth or how much rental income you get from it.

Yep, it is an apartment I clear about 750 to 1,200 euros a month via vacation rentals. I don't really count that, as I'd like to get new windows for that place and figure that is going to take up several years worth of income.

Thank you

[Parkinglotracer]

I’d say you can afford a 1.1M house. If not more important than the cost of the house is, what will your annual spending be if you buy that house?

Yeah, that is a good point. I owned a house in the U.S.A. a while back and didn't realize what a huge cost a house was (especially property taxes and maintenance).

I am hoping we get an apartment and spend less than $1.1m. The E.U. usually has you pay the bulk of your taxes with the purchase price, and property taxes seem to be much lower year-to-year. And with an apartment, the month-to-month costs are not bad, and I don't have to worry about many things. I think it would cost ~$750 to $1,250 a month in taxes, insurance, and building fees. That fits in well with our budget.

I don’t think whether you have 20% or 30% allocation to international stocks will make a big difference. With 30% of VTI concentrated in the top 10 tech stocks that you and me and everyone owns on the side, I’d go for more diversification and hold a higher portion in the international etf. And I would trim my holdings in those tech stocks that we love (apple, meta, nvda, google, Amazon, etc) if you are like me.

Yep, that is my exact situation, noted, and thank you. That is exactly what I am struggling to decide... I think I might get rid of the individual stock holdings beyond 2 or 3 lesser-known companies that I believe in.

You are a more successful investor/business man than I am. I have an mba but not the business experience you likely have. Since you have been so successful, do you need to take so much risk with a 90% equity asset allocation (AA)? Or do you like many just feel it is prudent to be mainly in equities and that bonds are for people way more conservative than you are? You could have a 50-50 AA and with interest rates at 5% make a guaranteed 150K+ (more than you spend a year). And still have 3M in equities in the market. I’d say you can afford NOT to take the risks you took in the past and still live the life you want for the next 30-40 years.

Lots of luck helps

Yeah, my thinking is that I would prefer the higher returns as I feel confident I can handle the higher volatility/risk (2008 and 2020 went well, although it might feel different now). Specifically, I would love to grow the portfolio to the point where I can also have ~$120k a year to put into new passion projects. I've got a lot of ideas on fun things I want to build. And psychologically, it feels like leaving money on the table. I'd rather take a little more risk so I can use that money for something good/fun (maybe that is weird).

If the market loses 50%, and I am down 40% in total (assuming 90% equities). I still have a good 4 to 5 years of bonds I can live off while that recovers. And if it doesn't, I still have a ton of money (and own some property).

You rock; your post was super helpful! I like the bond ladder idea and adding that to my notes

Thanks. A business school teacher told me to “minimize my maximum regret” and “what got you there might not keep you there”. Anyway that means to me if I got a little lucky with a lot of hard work and made a bundle take some risk off the table. I know most personalities that risk and make a bundle can’t do that. There is great boglehead thread of a guy who made a bundle on Tesla and after some serious gains and losses he took some risk off the table last time I checked at the encouragement of some here. Taylor’s families story going thru the depression is a maximum regret story. People losing businesses and family members considering suicide. Hard to even imagine. My old boss used to say “a person who has just eaten, can’t imagine what’s it’s like to be hungry.” It’s hard to imagine half or 3/4 of one’s investments going south. We place our bets and take our chances!

[nyclon]

Hi all,

This forum is amazing; thank you for all the help over the years!

Why am I posting?

I am getting my financial house in better order and need some advice.

What am I cleaning up financially?

• I've been using Betterment for 55% of my portfolio, but I am going to move to Vanguard ETFs as there is no reason to keep paying their management fee of 0.25%.

• I put ~20% of my portfolio with an advisor five years ago. I did it because I had followed them for 8 years, and they had a Buffet value-driven approach that I liked. And I liked the idea of them thinking about what they were doing every day. But the fees were high (1.25%), and after 5 years, I realized they were underperforming the market given those fees. I've ended that relationship. My yearly R.O.I. was ~4.6%.

• I have a small amount in crypto, ~2% of my portfolio, and I am getting rid of that as I can't find any value in crypto beyond it serving as an investment in the global grey market.

• I have ~20% of my portfolio in direct stock picks that I've let grow over the last 10 years. I am debating dumping those entirely or trimming those back to ~5% of my portfolio. I am in tech, and when I had a business exit 10 years ago, I put ~7.5% of my money in companies I used and believed in. I enjoyed doing that, but it has since grown without any rebalancing.

My background:

I am a long-time entrepreneur with a few exits under my belt.

I am semi-retired and working on a passion project that I love. I don't expect the passion project to earn much money. My hope is that in 2 to 3 years, it can pay me around $3,000 to $4,000 a month of income (while giving me something fun to do). But there is a chance it might not ever make enough to pay me anything.

My wife has been a stay-at-home mom but is now looking for what is next now that our daughter started school.

What else?

• Tax filing status: Married filing jointly w/ 1 kid.

• Ages: Early 40s

• Location: American living in Portugal (moved in 2021 - dual citizens).

• USA Tax Rate: No state taxes & federal super low as we don't have any income (apart from dividends and capital gains)

• Portugal Tax Rate: None, as under NHS status.

Debt, real estate, & income:

• Debt: None

• Income: Currently, only the income from dividends and capital gains from investments

• Home: Renting an apartment.

• Real estate: We own a vacation apartment in the EU and rent it out when we are not using it.

Portfolio $6.5M Total (USD):

• Taxable: $6.2M (96%)

• Non-Taxable: $300k (4%).

The portfolio is being adjusted to be...

• 70% Total US Stocks (VTI)

• 20% Total Non-USA Stocks (VXUS)

• 10% Some type of Bond ETF (not sure which) - The idea is that if the market crashes, we can live for 5+ years off just the bonds while it recovers.

Further contributions?

• No additional contributions are planned unless one of my angel investments I made pays off (IPO/acquisition). I don't count on any gains here. It is fun to invest in people doing cool things. Realistically I can expect ~$200k at some point from the ones that are doing well.

Expenses & what money means to me...

We are currently living on $96,000 a year net. That is a little tight, and we would like to increase that to $120,000 a year net.

We are looking to move to a big city in another part of Europe in the next 18 months. That is going to cost ~5x more in rent (or we might buy a place).

My wife and I love to travel and eat good food. No big vices beyond that.

Cash: ~300k currently.

~$120k of that cash is set aside for funding the new passion project I am working on. I am hoping to break even on costs in 2024. But, if I don't, I would love to be able to add another ~$120k in 2025. The project is currently covering ~35% of its monthly costs.

I would love to be able to put $120k a year into new projects if I could afford it.


Questions

What bond ETF would you recommend?

The idea is that if the market crashes, we can live for 5+ years off, just the bonds, until it recovers. Would you go BND? Or VGIT? Why would you pick that one? Would you be looking to move from something if the Fed decreases interest rates dramatically over the next 2 years?

We want to buy a house/apartment at some point. Can we afford a $1.1 million dollar house?

The type of place we want in the expensive new city will likely cost $1.1 million. That would come out of our taxable portfolio and reduce that to ~$5.4 million. Can we afford that?

If you were in my position, would you increase international exposure from 20% to 30%?

I am aware of the USA versus international argument, so just curious on what you personally would do in this situation .

• My wife would like us to take $150k net out a year (she spends more than me). Can we afford that? It makes me nervous...

What am I not considering that I should? What should I read up on that I need to think about?

Try running numbers with VFIUX for your bonds (intermediate treasuries - both nominal and tips, actively managed for 10bps) which yields 4.36% right now (with a 3.6% cash distribution yield) and global market cap stocks (VT equivalent - so 60% VTI / 40% VXUS) which yields 2% right now.

For example, if you go 70/30 stock/bond with that, it’ll provide $163,000 of dividends and interest. Tax on that will be very low for you.

That happens to be a 2.5% pre-tax yield. A 2.5-3% withdrawal rate with your “long” retirement period is ideal.

Personally I’d skip purchasing real estate and rent. You withdrawal rate requirements may become too tight if you allocate that much cash away from the portfolio into an illiquid asset that requires negative cash flow. $1.1M would take out $26k from the $163k I mentioned.

The money you have in startups is, as you know, governed by the power law rule. So it’s better to ignore those assets realistically until they’re not zero.

30% of 6.5M = 2M. I know you want to go more aggressive but imagine a scenario where you actually had to spend down the 5 years of bonds as you mention. What a terrible environment that would be, and then you’d be left spending down stocks, presumably at low valuations - is that something you’d want? You may have to go back to work in that case. 2M will let you sleep at night, and, this example portfolio throws off enough cash where you don’t need to sell.

You took risk when you need to - you don’t need to right now by way of not allocating enough to fixed income and sleeping well while you work on passion projects.

Read the four pillars by Bernstein. You’ll enjoy it and find some direction.

[goldentrio]

Wouldn't you worry that they are now 20% to 25% of your portfolio?

If the companies were still solid and I believed in them I would not worry.

[mdigital]

Dish on the equity holdings. That piqued my interest. Why would you leave the investments now that made your fortunes?

[tac55]

Try running numbers with VFIUX for your bonds (intermediate treasuries - both nominal and tips, actively managed for 10bps) which yields 4.36% right now (with a 3.6% cash distribution yield) and global market cap stocks (VT equivalent - so 60% VTI / 40% VXUS) which yields 2% right now.

For example, if you go 70/30 stock/bond with that, it’ll provide $163,000 of dividends and interest. Tax on that will be very low for you.

That happens to be a 2.5% pre-tax yield. A 2.5-3% withdrawal rate with your “long” retirement period is ideal.

Personally I’d skip purchasing real estate and rent. You withdrawal rate requirements may become too tight if you allocate that much cash away from the portfolio into an illiquid asset that requires negative cash flow. $1.1M would take out $26k from the $163k I mentioned.

The money you have in startups is, as you know, governed by the power law rule. So it’s better to ignore those assets realistically until they’re not zero.

30% of 6.5M = 2M. I know you want to go more aggressive but imagine a scenario where you actually had to spend down the 5 years of bonds as you mention. What a terrible environment that would be, and then you’d be left spending down stocks, presumably at low valuations - is that something you’d want? You may have to go back to work in that case. 2M will let you sleep at night, and, this example portfolio throws off enough cash where you don’t need to sell.

You took risk when you need to - you don’t need to right now by way of not allocating enough to fixed income and sleeping well while you work on passion projects.

Read the four pillars by Bernstein. You’ll enjoy it and find some direction.

Thank you, that is a good point, and I am going to go play with this. And I am going to look broader at a higher bond ratio and less risk/volatility, given the good comments on this thread in general.

(I would love to continue to rent, but with one of the cities we would like to live in, that isn't an option. That is the main reason we are considering buying something).

[tac55]

Wouldn't you worry that they are now 20% to 25% of your portfolio?

If the companies were still solid and I believed in them I would not worry.

Ah sorry, I didn't explain well. Of those companies, 70% are big tech (that I bought when they are smaller). So I already own a ton with VTI. That is my debate. As I am basically holding an outside share ratio in big tech with direct holdings that also are heavily in VTI.

A good 30% are up-and-coming tech companies I do plan to keep and let run because I like them (and its a small % of my overall equity).

[tac55]

Dish on the equity holdings. That piqued my interest. Why would you leave the investments now that made your fortunes?

Yeah, a bunch is big tech I bought in 2007/2008/2014 when I had some liquidity events. Google, Apple, SalesForce, and Microsoft. My reason for exiting the big ones is those are super well represented in VTI, and I'd prefer less volatility as it has grown to be a big part of the portfolio. I am still debating and looking at ratios, but it doesn't seem smart to keep it like that.

I still plan to keep the smaller amount in the 30% of direct bets that I do for fun in small companies.

[goldentrio]

Ah sorry, I didn't explain well. Of those companies, 70% are big tech (that I bought when they are smaller). So I already own a ton with VTI. That is my debate. As I am basically holding an outside share ratio in big tech with direct holdings that also are heavily in VTI.

A good 30% are up-and-coming tech companies I do plan to keep and let run because I like them (and its a small % of my overall equity).

OK, I would consult a very good CPA before making any moves with six or seven figure positions.

[desiderium]

Consider the tax consequences of exiting your larger tech holdings. Rebalancing all at once and taking a tax hit is one option. Another is to consider whether you have charitable intentions. Donating shares with the largest gains to a donor-advised fund can offload those taxes. You might accomplish your rebalance and pre-fund your charitable activity for a number of years. Finally, you could consider tilting your index investments to a small cap or value fund that holds fewer big tech holdings, so that averaged out, you are sorta replicating the total market. I don't think this would have to be very precise.

You have worked hard and been in good places at the right time. You should increase your spending. If buying your home in a new city is the right thing to do, go for it. You have enough that you can tailor your investing to fit your life, not the other way around.

[tac55]

Consider the tax consequences of exiting your larger tech holdings. Rebalancing all at once and taking a tax hit is one option. Another is to consider whether you have charitable intentions. Donating shares with the largest gains to a donor-advised fund can offload those taxes. You might accomplish your rebalance and pre-fund your charitable activity for a number of years. Finally, you could consider tilting your index investments to a small cap or value fund that holds fewer big tech holdings, so that averaged out, you are sorta replicating the total market. I don't think this would have to be very precise.

You have worked hard and been in good places at the right time. You should increase your spending. If buying your home in a new city is the right thing to do, go for it. You have enough that you can tailor your investing to fit your life, not the other way around.

thanks, good advice!

[typical.investor]

Questions

What bond ETF would you recommend?

The idea is that if the market crashes, we can live for 5+ years off, just the bonds, until it recovers. Would you go BND? Or VGIT? Why would you pick that one? Would you be looking to move from something if the Fed decreases interest rates dramatically over the next 2 years?

I don't think that's the way I'd necessarily look at it. Why wouldn't spend from dividend income and then only sell bonds to make up any difference?

Anyway, I chose nominal treasuries because the dividends off TIPS are quite variable and I want to use the income to fund expenses. Sure, future expenses will reflect inflations and nominal treasuries will lose their spending power, but that is what I have equities for. Long term I expect them to outperform inflation.

For example, if you go 70/30 stock/bond with that, it’ll provide $163,000 of dividends and interest. Tax on that will be very low for you.

That happens to be a 2.5% pre-tax yield. A 2.5-3% withdrawal rate with your “long” retirement period is ideal.

And that is higher than $120,000 desired spending.

30% of 6.5M = 2M. I know you want to go more aggressive but imagine a scenario where you actually had to spend down the 5 years of bonds as you mention. What a terrible environment that would be, and then you’d be left spending down stocks, presumably at low valuations - is that something you’d want? You may have to go back to work in that case. 2M will let you sleep at night, and, this example portfolio throws off enough cash where you don’t need to sell.

[/quote]

If portfolio income is $160k, and spending is $120k, does one really need 2M in safe assets to ride out downturns? If you do go 30%, then I'd chose TIPs as these funds are unlikely to be used so my previous point about more stable dividends from nominals has no bearing.

Even if dividends are halved, that's a $40k spend and 5 years of bonds would be $600k. (the income is based off of $2MM bonds so would be less on only $600k but you get the picture.

If the house is important (location, features, whatever), you can make it work. How important is it?

The real thing I can't answer though, is how likely are you to tap into assets to fund your business if needed? Having more in bonds might facilitate that. You'd have lower portfolio returns as a result but perhaps would be better positioned to fund a new project if an opportunity in the midst of stormy waters arose.

[nyclon]

Questions

What bond ETF would you recommend?

The idea is that if the market crashes, we can live for 5+ years off, just the bonds, until it recovers. Would you go BND? Or VGIT? Why would you pick that one? Would you be looking to move from something if the Fed decreases interest rates dramatically over the next 2 years?

I don't think that's the way I'd necessarily look at it. Why wouldn't spend from dividend income and then only sell bonds to make up any difference?

Anyway, I chose nominal treasuries because the dividends off TIPS are quite variable and I want to use the income to fund expenses. Sure, future expenses will reflect inflations and nominal treasuries will lose their spending power, but that is what I have equities for. Long term I expect them to outperform inflation.

For example, if you go 70/30 stock/bond with that, it’ll provide $163,000 of dividends and interest. Tax on that will be very low for you.

That happens to be a 2.5% pre-tax yield. A 2.5-3% withdrawal rate with your “long” retirement period is ideal.

And that is higher than $120,000 desired spending.

30% of 6.5M = 2M. I know you want to go more aggressive but imagine a scenario where you actually had to spend down the 5 years of bonds as you mention. What a terrible environment that would be, and then you’d be left spending down stocks, presumably at low valuations - is that something you’d want? You may have to go back to work in that case. 2M will let you sleep at night, and, this example portfolio throws off enough cash where you don’t need to sell.

If portfolio income is $160k, and spending is $120k, does one really need 2M in safe assets to ride out downturns? If you do go 30%, then I'd chose TIPs as these funds are unlikely to be used so my previous point about more stable dividends from nominals has no bearing.

Even if dividends are halved, that's a $40k spend and 5 years of bonds would be $600k. (the income is based off of $2MM bonds so would be less on only $600k but you get the picture.

If the house is important (location, features, whatever), you can make it work. How important is it?

The real thing I can't answer though, is how likely are you to tap into assets to fund your business if needed? Having more in bonds might facilitate that. You'd have lower portfolio returns as a result but perhaps would be better positioned to fund a new project if an opportunity in the midst of stormy waters arose.
[/quote]

Great points. In your suggestion about putting the 30% into tips - since 73k of the 163k is from that 30% comprising nominals, would you worry about not meeting the required spending from portfolio income (as you point out tips income is unpredictable) or would you sell off assets as needed? Or would you split the 30% into tips and nominals?

Understand that OP needs to spend $120k, but putting that aside, and assuming they may need more for this question.

I think there is value to having a good chunk in fixed income for those passion projects, unknowables etc as you mention.

Where would you be on allocation if you:
Never wanted to *have* to work again
Wanted to guarantee to the best of your ability that passion projects are the most you’d ever work

[EddyB]

You also need to be concerned about exchange rate changes. For stocks that does not matter a lot since if you are just buying shares of a stock index fund the fact that your brokerage statement is printed in Euros or Dollars does not really matter. For bonds this matters lot more and I would mainly invest in bonds that are denominated in the currency that you are likely to eventually spend them in.

Easier said than done. Maybe it’s better in Portugal, but local brokers here won’t take US persons, and the availability through IBKR leaves a lot to be desired. Coupled with the absurd US tax treatment of non-dollar bonds, and one might decide to take a closer look at term accounts rather than bonds.

[typical.investor]

Great points. In your suggestion about putting the 30% into tips - since 73k of the 163k is from that 30% comprising nominals, would you worry about not meeting the required spending from portfolio income (as you point out tips income is unpredictable) or would you sell off assets as needed? Or would you split the 30% into tips and nominals?

Understand that OP needs to spend $120k, but putting that aside, and assuming they may need more for this question.

I would do an analysis with 30% international (will have more euro exposure) and perhaps bonds in euros. We can't forget currency fluctuation in all of this. I am not sure about inflation protected offerings in Europe nor of the taxation.

[anagram]

You also need to be concerned about exchange rate changes. For stocks that does not matter a lot since if you are just buying shares of a stock index fund the fact that your brokerage statement is printed in Euros or Dollars does not really matter. For bonds this matters lot more and I would mainly invest in bonds that are denominated in the currency that you are likely to eventually spend them in.

Easier said than done. Maybe it’s better in Portugal, but local brokers here won’t take US persons, and the availability through IBKR leaves a lot to be desired. Coupled with the absurd US tax treatment of non-dollar bonds, and one might decide to take a closer look at term accounts rather than bonds.

How are non-dollar bonds treated under the US tax code?

[EddyB]

You also need to be concerned about exchange rate changes. For stocks that does not matter a lot since if you are just buying shares of a stock index fund the fact that your brokerage statement is printed in Euros or Dollars does not really matter. For bonds this matters lot more and I would mainly invest in bonds that are denominated in the currency that you are likely to eventually spend them in.

Easier said than done. Maybe it’s better in Portugal, but local brokers here won’t take US persons, and the availability through IBKR leaves a lot to be desired. Coupled with the absurd US tax treatment of non-dollar bonds, and one might decide to take a closer look at term accounts rather than bonds.

How are non-dollar bonds treated under the US tax code?

Take a look at Section 988 and its regulations, but basically the US dollar gain resulting from a change in exchange rate between acquiring a foreign-currency debt instrument and disposing of it is taxed as ordinary income (although a loss is not deducted against ordinary income). Similarly for a non-USD mortgage, albeit in the opposite direction.

[vrr106]

Don't be scared to spend. Your financial house is in good order. Don't do anything drastic in reallocating, you can redirect dividends, carefully sell individual stocks to increase bond % etc. but you've pretty much won the game. Don't snatch defeat from the jaws of victory:)

[anagram]

You also need to be concerned about exchange rate changes. For stocks that does not matter a lot since if you are just buying shares of a stock index fund the fact that your brokerage statement is printed in Euros or Dollars does not really matter. For bonds this matters lot more and I would mainly invest in bonds that are denominated in the currency that you are likely to eventually spend them in.

Easier said than done. Maybe it’s better in Portugal, but local brokers here won’t take US persons, and the availability through IBKR leaves a lot to be desired. Coupled with the absurd US tax treatment of non-dollar bonds, and one might decide to take a closer look at term accounts rather than bonds.

How are non-dollar bonds treated under the US tax code?

Take a look at Section 988 and its regulations, but basically the US dollar gain resulting from a change in exchange rate between acquiring a foreign-currency debt instrument and disposing of it is taxed as ordinary income (although a loss is not deducted against ordinary income). Similarly for a non-USD mortgage, albeit in the opposite direction.

Thank you, I had forgotten about this. I followed a few links and they seem to imply that both gains and losses are allowed. Is this not the case? Section 988 would also apply to a savings account also. Is that true?

[EddyB]

You also need to be concerned about exchange rate changes. For stocks that does not matter a lot since if you are just buying shares of a stock index fund the fact that your brokerage statement is printed in Euros or Dollars does not really matter. For bonds this matters lot more and I would mainly invest in bonds that are denominated in the currency that you are likely to eventually spend them in.

Easier said than done. Maybe it’s better in Portugal, but local brokers here won’t take US persons, and the availability through IBKR leaves a lot to be desired. Coupled with the absurd US tax treatment of non-dollar bonds, and one might decide to take a closer look at term accounts rather than bonds.

How are non-dollar bonds treated under the US tax code?

Take a look at Section 988 and its regulations, but basically the US dollar gain resulting from a change in exchange rate between acquiring a foreign-currency debt instrument and disposing of it is taxed as ordinary income (although a loss is not deducted against ordinary income). Similarly for a non-USD mortgage, albeit in the opposite direction.

Thank you, I had forgotten about this. I followed a few links and they seem to imply that both gains and losses are allowed. Is this not the case? Section 988 would also apply to a savings account also. Is that true?

I think you’re right that you can deduct the loss—I had it in my mind that you could only do so for a loss that exceeded $50k, but I think that’s the threshold at which the transaction needs to be separately reported.

If you look at the regs under Section 988, I think you’ll see that bank account deposits and withdrawals are not themselves “foreign currency transactions” for that section.

[anagram]

Easier said than done. Maybe it’s better in Portugal, but local brokers here won’t take US persons, and the availability through IBKR leaves a lot to be desired. Coupled with the absurd US tax treatment of non-dollar bonds, and one might decide to take a closer look at term accounts rather than bonds.

How are non-dollar bonds treated under the US tax code?

Take a look at Section 988 and its regulations, but basically the US dollar gain resulting from a change in exchange rate between acquiring a foreign-currency debt instrument and disposing of it is taxed as ordinary income (although a loss is not deducted against ordinary income). Similarly for a non-USD mortgage, albeit in the opposite direction.

Thank you, I had forgotten about this. I followed a few links and they seem to imply that both gains and losses are allowed. Is this not the case? Section 988 would also apply to a savings account also. Is that true?

I think you’re right that you can deduct the loss—I had it in my mind that you could only do so for a loss that exceeded $50k, but I think that’s the threshold at which the transaction needs to be separately reported.

If you look at the regs under Section 988, I think you’ll see that bank account deposits and withdrawals are not themselves “foreign currency transactions” for that section.

"An advantage of Section 988 treatment is that any amount of ordinary income can be deducted as a loss, where only $3,000 in capital gains losses can be deducted." So it seems losses can be deducted.

I think you are right about bank account deposits and withdrawals. Thank goodness!

As noted above, certificates of deposit can be Section 988 transactions if denominated in a foreign currency or if value is determined by reference to that foreign currency. However, there are special rules with respect to certificates of deposit. In particular, no exchange gain or loss is recognized with respect to the following transactions:
• The deposit of nonfunctional currency in a demand or time deposit or similar instrument (including a certificate of deposit) issued by a bank or other financial institution if such instrument is denominated in such currency;
• Withdrawal of nonfunctional currency from a demand or time deposit or similar instrument issued by a bank or other financial institution if such instrument is denominated in such currency;
• Receipt of nonfunctional currency from a bank or other financial institution from which the taxpayer purchased a certificate of deposit or similar instrument denominated in such currency by reason of the maturing or other termination of such instrument; and
• The transfer of nonfunctional currency from a demand or time deposit or similar instrument issued by a bank or other financial institution to another demand or time deposit or similar instrument denominated in the same nonfunctional currency issued by a bank or other financial institution.
For these purposes, the taxpayer's basis in the units of nonfunctional currency or other property received in the transaction is the adjusted basis of the units of nonfunctional currency or other property transferred.

http://publications.ruchelaw.com/news/2 ... 101-FX.pdf

I did read the Section 998 regs but did not find a clear answer. It does appear than bonds and bond funds do fall under 998.

Hopefully this helps others but they need to check carefully about the treatment of bank accounts.

[EddyB]

"An advantage of Section 988 treatment is that any amount of ordinary income can be deducted as a loss, where only $3,000 in capital gains losses can be deducted." So it seems losses can be deducted.

While that seems right in respect of a bond, as we were discussing, keep in mind that it doesn't generalize, as one can't deduct the currency loss from a personal transaction (e.g., a mortgage on a personal residence), but would have to treat a currency gain from a personal transaction as income, if it's over $200.