AA Recalibrated Boglehead Style - Please Review and Comment

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Shaoya
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AA Recalibrated Boglehead Style - Please Review and Comment

Post by Shaoya » Mon Sep 07, 2009 11:21 pm

After percolating on much-appreciated Boglehead advice, I’m ready to shift out of pricier VG active funds, especially in our taxable accounts, to more tax-efficient fare.

My new AA takes a few of retiredjg & YDNAL’s suggestions. [Thank you both as well Lauren, Frank, Taylor, and SamLJ!]

In the context of our financial/life situation (right below), please review our proposed AA (given right after our current AA), and let me know what you think. [Specific questions at end.]

Investment & Finance Goals

Short & Medium
Using up to $3,000 (in today’s dollars) annually for 15 years. From this “annual activities fund,” we would like to be able to draw from our taxable funds for discrete, one time, relatively expensive “extras” like family vacations, home improvements, or child activity/school tuition.

Long (18-23years)
College for two kids, probably. A 529 Savings Plan has been started for Kid #1 - $400 added/month.
(not included in money below), but we imagine that we’ll need to add to this with monies from the taxable accounts.

Longer (30 years+)
We would like to consider retirement at 60-65.

Emergency Fund – $21K in VG Prime Money Market, 4-5 months living expenses (not included below ).

Debt
Mortgage –30 year fixed at 4.75% (refi’d May 2009)
Credit card – none
Student – 1.6% fixed @ $130 a month.
Car – none

Tax Filing Status
Married Filing Jointly – 15% Fed in 2008 (probably the same bracket in 2009?); 9% Oregon(2008)

Age
Hers – 33
His – 36
Son (DOB:5-7-0Cool

Stable jobs (even now, I think….I hope?) in local/state government with an annual income of ~$100K, but we don’t realistically expect this to increase dramatically (2-3 fold relative to inflation) later in our careers. Intend to stay in our current house/city indefinitely (“…’til they cart me out in a box!”)

Desired AA
Overall: 72/25/3 Stock/Bond/Cash
Stocks: 76/24 Domestic/Foreign


Current Investments ~100%

Taxable

12.0% Vanguard PRIMECAP Fund (VPMCX) (0.50)
15.4% Vanguard Windsor II (VWNFX) (0.39%)

1.4% Vanguard GNMA (VFIIX) (0.23%)
2.1% Vanguard Total Bond Mkt Index Inv (VBMFX) (0.22%)

5.90% Vanguard Explorer Fund Investor (VEXPX) (0.51%)
6.10% Vanguard Small-Cap Index (NAESX) (0.23%)
2.3% Vanguard Strategic Equity (VSEQX) (0.32%)

7.20% Vanguard Health Care Fund Inv (VGHCX) (0.33%)

15.10% Vanguard Total Int'l Stock Index (VGTSX) (0.34%)
1.2% Vanguard Global Equity (VHGEX) (0.58%)

Tax-advantaged

IRA
11.70% Vanguard Inflation-Protect Sec (VIPSX) (0.25%)

Roths (on track to max contributions in 2009)

1.9% (hers) Vanguard Total Stock Mkt Idx (VTSMX) (0.18%)
1.3% (his) Vanguard Total Stock Mkt Idx (VTSMX) (0.18%)

1.3% Vanguard Mid-Cap Growth (VMGRX) (0.61)
5.8% Vanguard Windsor II (VWNFX) (0.39%)
2.2% Vanguard 500 Index (VFINX) (0.18%)

457 Accounts (no employer match!)

2.5% The Growth Fund of America - Class R-4 (RGAEX) (0.69%) [Hers]

0.8% Short Term Fixed Option (0.11%) [His]
SSgA Government Short-Term Fund – money market.

0.9% Intermediate Bond Option (0.09%) [His]
Blended performance of the following:
BGI Debt Index
Fidelity Broad Market Duration (?)
Wellington Capital Core Bond Plus (?)

0.2% Stock Index Option (0.035%) [His]
Tracks BGI Russell 3000 Index

Total 100% (~$300K)

Annual Contributions

457 Plans (no employer match!)
$4800 The Growth Fund of America - Class R-4 (RGAEX) (100%)
$4800 split between Short Term Fixed Option (40%), Intermediate Bond Option (40%), & Stock Index Option (20%)

$10,000 to Roth IRA’s (His & Hers)

Proposed Investments


Taxable

37.8% Vanguard Total Stock Mkt Idx (VTSMX) (0.18%)
15.1% Vanguard Total Int'l Stock Index (VGTSX) (0.34%)
7.2% Vanguard Health Care Fund (VGHCX) (0.33%)

Annual Activities Fund (see “Short/Medium Goal“ above)
3.4% Vanguard Short-Term Investment-Grade Bonds (VFSIX) (0.09%)
1.7% Certificate of Deposit (CD) (Bank ???)
1.7% Vanguard Total Stock Mkt Idx (VTSMX) (0.18%)
1.7% Vanguard Prime Money Market (VMMXX) (0.28%)

Tax-Advantaged


Roth IRA

7.7% Vanguard Total Stock Mkt Idx (VTSMX) (0.18%)
2.7% Vanguard Interm-Term Investment-Grade (VFICX) (0.26%)
2.0% Vanguard FTSE All-World Except US (VFWIX) (0.40%)

IRA
11.7 % Vanguard Inflation-Protect Sec (VIPSX) (0.25%)

Her 457
5.2 % Vanguard Total Bond Market IndeX – Admiral(VBMFX) (0.10%)

His 457
1.9 % Intermediate Bond Option (0.09%)

Total 100%

Questions on New AA

• Are there particular taxable funds (like Small-Cap Index NAESX) that you’d keep or another method I should tilt?
• What would you do differently?
• Is a CD a good idea to diversify funding accessed over 15 years? If so, which CD would you currently recommend?
• Is my desired 72/25/3 Stock/Bond/Cash asset allocation appropriate for our life situation?


Thank you, in advance, for your assistance. - Shaoya

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Taz
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Post by Taz » Tue Sep 08, 2009 7:23 am

Shayoa- It looks like you cleaned things up a bit. I looked a some of your previous posts and would offer my thoughts on one thing that jumped out to me (although Laura, retiredjg & YDNAL offered advice that you seemed to partially incorporate).

You stated that part of your current taxable accounts had been set up as part of an inheritance, but I didn't see whether you had significant gains in the funds - particularly the VG Health Care Fund (VGHCX). It is not tax efficent and ought to go into your Roth rather than Total Stock Market IF you are dead set on keeping it (the others did not include it in their recommendations).

As you are not maxing out your 457s, you can play move the money by:
- Selling VGHCX and use the money to live on (if you do have LT gains, then it should be taxed at 15%)
- Exchanging TSM in your Roth for VGHCX (or don't bother if you want to move to index funds)
- Increasing your 457 contributions (reduces taxable wage income)
- Since you will be buying more fixed income in your 457s, you don't need the small bit of Vanguard Interm-Term Investment-Grade (VFICX) in your Roths

Be careful of timing if you do in fact have losses in VGHCX to avoid wash sale if you exchange for VGHCX in the Roth.

Will let the more knowledge play with the numbers and respond to specifics on your questions.

Cheers - Taz
The destination matters.

livesoft
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Post by livesoft » Tue Sep 08, 2009 8:24 am

What caught my eye was the Vanguard Health Care fund. I owned this fund for many years and had admiral shares. It is not tax efficient. I sold it for a realized capital loss. Part of the reason I had a loss was that I was reinvesting distributions every year, so my cost basis went up. I had been paying taxes on those distributions every year as well. It was a real drag.

So after professing to shift out of pricier active funds and to get into more tax-efficient fare, what is VGHCX still doing in your proposed portfolio?

As for inheritance issues, you asset allocation and financial goals are very unlikely to be the same as your benefactor's. There is no reason to hang on to any investments that you inherit simply because you inherited them. Sometimes they fit your AA and goals; sometimes they don't. Do not keep holding them for emotional reasons. And by the same token do not give the same emotional baggage to your heirs when the time comes.

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Taylor Larimore
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Post by Taylor Larimore » Tue Sep 08, 2009 11:29 am

Hi Shaoya:

I agree with livesoft that Vanguard's Health Care Fund does not belong in a taxable account. If it has a loss, sell it now. If you must, buy it back in a tax-deferred account after 30 days.

I also think it is probably a mistake to hold these securities in a (separate) taxable account:
Annual Activities Fund (see “Short/Medium Goal“ above)
3.4% Vanguard Short-Term Investment-Grade Bonds (VFSIX) (0.09%)
1.7% Certificate of Deposit (CD) (Bank ???)
1.7% Vanguard Total Stock Mkt Idx (VTSMX) (0.18%)
1.7% Vanguard Prime Money Market (VMMXX) (0.28%
)

You should significantly simplify your portfolio and increase after-tax-return by holding only the total stock market and total international funds in your taxable account. This will lower your costs and taxes, and increase compounding by an equal amount.

When you need money for your "short/medium" goals, simply sell the necessary shares from your taxable account or Roths. This money will be all or mostly tax-free.
"Simplicity is the master key to financial success." -- Jack Bogle

YDNAL
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Re: AA Recalibrated Boglehead Style - Please Review and Comm

Post by YDNAL » Tue Sep 08, 2009 12:22 pm

Shaoya wrote:After percolating on much-appreciated Boglehead advice, I’m ready to shift out of pricier VG active funds, especially in our taxable accounts, to more tax-efficient fare.
Shaoya,

The 'pie' looks more appetizing. :wink:

You kept Healthcare (VGHCX) and I feel it is inappropriate for me to question the motive. I do, however, question the location.
-- Put VGHCX in Roth - in place of VTSMX - and increase % to VTSMX in Taxable.

Additionally, I question the inclusion of 8.5% for annual activities money as part of your long-term portfolio.
-- Keep the annual activities fund in either VFSTX or VMMXX or split between the two. These monies are not part of a long-term portfolio and should be excluded from the overall %s.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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sergeant
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Post by sergeant » Tue Sep 08, 2009 2:42 pm

Do not hold Healthcare in taxable. Livesoft is spot on in his comments.
You look pretty good otherwise. Some will suggest a tilt towards value but that is up to you.

Your savings rate is good, expenses are in check, you are diversified, and have a plan. Congratulations!
Lincoln 3 EOW!

retiredjg
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Post by retiredjg » Thu Sep 10, 2009 10:59 am

Shaoya, welcome back. Much improvement in your new idea!

Before we get to your portfolio, your tax brackets don't match up. It seems unlikely to me that you are in the 15% federal bracket and in the 9% Oregon bracket. Please check line 43 on your Form 1040 and compare it to this chart to get your correct federal tax bracket. http://taxes.about.com/b/2008/10/21/200 ... ounced.htm .You need to know this for a lot of reasons, but right now, you need it to determine if you should hold taxable or tax-exempt bonds in our taxable account. (But more on that later.)

As others have said, either dump the Health Care or move it to a tax-advantaged location. It will increase your income taxes if held in taxable.

As others have also mentioned, it is not very tax-efficient to hold the bonds and CD and PMM in your taxable account. As I recall, you are trying to keep this money segregated, so there is a natural desire to do this, even if it is not particularly tax-efficient. There are a couple of alternatives to "fix" this.

One is to hold these investments in a tax-advantaged location even though you really know it is not for retirement, but for Disneyland. This idea is explained more fully in the Wiki. Please see Placing Cash Needs in a Tax-Advantaged Account on the Bogleheads Wiki.

The second idea is to hold this Disneyland money in a small amount of stocks + tax-exempt bonds + a little money market in your taxable account. This is similar to what you have proposed, but the bonds are tax-exempt. The tax-exempt bonds will reduce the federal taxes you pay, but you lose a little in the amount of return you earn. If you are really in the 15% tax bracket, though, taxable bonds are likely to be a better idea than tax-exempt bonds. A bond calculator (Morningstar site under "tools") could help you decide.

Either way, I agree with Ydnal that this 8.5% for annual activities should not be included in the calculations for your retirement portfolio. That throws off your AA from what you really want for your retirement portfolio.
Are there particular taxable funds (like Small-Cap Index NAESX) that you’d keep or another method I should tilt?

You could put small cap index or small cap value index in your taxable without too much damage. Neither is considered "the best" option, but each is an acceptable option if you want to tilt, but don't have room in tax-advantaged. Please see Principles of Tax-Efficient Fund Placement on the Bogleheads Wiki. I would certainly use one of those in taxable before the Health Care fund.
Is a CD a good idea to diversify funding accessed over 15 years? If so, which CD would you currently recommend?
A CD is just a different kind of cash. If wishes were horses and if a 9% CD 12 year CD could be bought this week, that would be a great way to make sure some of your money makes it the full 15 years. With interest rates so low right now, I'd be looking more to high yield savings or short term bonds. It will very likely be different sometime in the next 15 years though, so don't rule out CDs entirely.
Is my desired 72/25/3 Stock/Bond/Cash asset allocation appropriate for our life situation?
It is probably fine if it includes the Disneyland money. For very long term goals like retirement, you don't really need cash (unless you just want some sitting around in the next downturn to buy cheap stock with).

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Shaoya
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Post by Shaoya » Thu Sep 10, 2009 11:25 am

Thank you all for your help.

I hear you loud & clear - VG Health Care (VGHCX) is out of place here. [Truth to tell, it's continued presence in taxable was pure emotion; I didn't want to take a (relatively slight) loss as I bought it in the first place. I can't blame others.] It's outta here! (and into VTSMX).

I'd appreciate more commentary on the idea of Vanguard ShortTerm
Investment Grade Bonds (VFSIX) (0.09%) as a source of "activity fund" monies.

I figure its presence, along side Vanguard Prime Money Market (VMMXX) (0.28%), gives some growth potential, and helps counterbalance the stock portion of the portfolio.

Does the "no-bonds-in-taxable accounts" tenet apply to relatively small portions of short-term bonds like VFSIX in taxable even though we're in (and probably will be in the future) lower tax brackets?

Finally, does anybody have ideas on my last two questions:
• Is a CD a good idea to diversify funding accessed over 15 years? If so, which CD would you currently recommend?
• Is my desired 72/25/3 Stock/Bond/Cash asset allocation appropriate for our life situation?
Again, your help is appreciated - Shaoya

retiredjg
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Post by retiredjg » Thu Sep 10, 2009 12:00 pm

Shaoya wrote:It's outta here! (and into VTSMX).
Good choice. Hard to do, but the more you can exclude emotions from investing, the better.
I'd appreciate more commentary on the idea of Vanguard ShortTerm Investment Grade Bonds (VFSIX) (0.09%) as a source of "activity fund" monies.
I have no comment on this fund although it seems fine. Right now, I'm trying out the Limited Term Tax-Exempt Fund as an alternative to money market. I suspect they are very similar.
Does the "no-bonds-in-taxable accounts" tenet apply to relatively small portions of short-term bonds like VFSIX in taxable even though we're in (and probably will be in the future) lower tax brackets?
Around here, it is considered best not to hold any bonds in taxable for long term portfolios (if you have space in tax-advantaged). The exception to this is when you have a pot of money (outside your retirement portfolio) that is going to be used in 5 to 10 years - in that case, you might want to use bonds just to make more money than cash. The 5 - 10 years gives the bonds time to recover if they lose value as they did in 2008. For goals greater than 10 years, you can even bring in some stocks.

The problem with knowing what to do in your situation is that your goals are 1, 2....15 years away. It is a little different from what we usually discuss.
Finally, does anybody have ideas on my last two questions:
I did comment on those in an edit. Not sure if you missed it or if you mean "does anyone one else have a comment?" Anyway, if you missed it, check out my post from earlier today.

P.S. I looked up Oregon tax brackets and I see it is entirely possible to be in the 15% federal bracket and the 9% state bracket. Ouch!

Lacrocious
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Post by Lacrocious » Thu Sep 10, 2009 8:17 pm

Wow! Strong comments to get out of Healthcare. Like a number of you - its emotional to keep it (as well as still having a sizable gain position - initial purchase in 1996). Can someone reiterate the reasons to not have it in taxable? Something to help get past the emotional aspect?

We could sell and only have gains of ~1,200 due to other TLH's counteracting the rest of the gain. Getting past the emotional part as it has done well for us in the past. (Pre Boggle-head stage - using Index500 and Healthcare in taxable).

Thanks
- L

retiredjg
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Post by retiredjg » Thu Sep 10, 2009 9:12 pm

Lacrocious wrote:Wow! Strong comments to get out of Healthcare. Like a number of you - its emotional to keep it (as well as still having a sizable gain position - initial purchase in 1996). Can someone reiterate the reasons to not have it in taxable? Something to help get past the emotional aspect?

We could sell and only have gains of ~1,200 due to other TLH's counteracting the rest of the gain. Getting past the emotional part as it has done well for us in the past. (Pre Boggle-head stage - using Index500 and Healthcare in taxable).

Thanks
- L
There are two thoughts here about Healthcare. One is to get out entirely -- based on the idea that sector funds, in the long run, are not helpful. Not everyone agrees with this. The problem is knowing which sector fund to own this decade.

The second idea is to get it out of the taxable location because it is not tax-efficient (meaning you pay taxes on it even though you are not taking out money and using it).

If you just must have Healthcare, hold it in an IRA.

livesoft
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Post by livesoft » Thu Sep 10, 2009 9:20 pm

Lacrocious wrote:Wow! Strong comments to get out of Healthcare. Like a number of you - its emotional to keep it (as well as still having a sizable gain position - initial purchase in 1996). Can someone reiterate the reasons to not have it in taxable? Something to help get past the emotional aspect?
If you have re-invested all those distributions since 1996, you have to figure out your cost basis. You could have a sizable gain, yet still have an unrealized loss. That was the case with me. All those years of distributions and then the costly taxes that went with them. Of course, we didn't pay the taxes out of the fund, but we paid the taxes nevertheless.

As for the emotional aspect, .... If you own a total market US and int'l funds, you already own all the stocks found in Vanguard Health Care. And don't forget what happened to this fund the last time the administration tried to reform health care.

retiredjg
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Post by retiredjg » Thu Sep 10, 2009 9:28 pm

Hey livesoft, what about a recommendation for that book you like so much? The one about emotions and investing?

livesoft
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Post by livesoft » Thu Sep 10, 2009 9:32 pm

Why Smart People Make Big Money Mistakes ... by Gilovich and Belsky.

Lacrocious
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Post by Lacrocious » Thu Sep 10, 2009 10:49 pm

Livesoft & retiredjg - Thanks! I now have the book reserved at my library - should have it tomorrow. For good or bad - I know it is partly emotional.

As for gain vs. loss - definately a gain.

Will have to think about a sale - basically - do we want to overweight Healthcare at this time. The gut tells me no, the head says it's been good to us in the past (I know, I know...the past). Will discuss with my wife.

Shaoya - Sorry to sidetrack your thread - but the questions and emphasis about Healthcare in your post and peoples responses made me ask.

- L

retiredjg
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Post by retiredjg » Fri Sep 11, 2009 8:02 am

Be sure to get the right book. There is a book with a very similar title that is not the one you want.

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