Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

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Topic Author
ablemechanic
Posts: 5
Joined: Sat Apr 27, 2024 5:33 am

Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by ablemechanic »

Greetings, 

I'm seeking advice and feedback on my current retirement planning trajectory.

My spouse and I are both federal employees and will qualify for pension and lifetime federal health care at age 50, but neither of us plan to retire at 50.  Right now, we will likely work until 57-60.   We both make $140k - $155k, which varies year to year based on travel and other compensation variables.  We are currently deployed overseas, where our housing costs are covered, and we generally have a lower cost of living. 

Emergency funds:  Yes, 6+ months

Debt: Mortgage 1) $560k @ 2.875% (currently a rental property); Mortgage 2) (condo rental) $40k @ 2.75%; no other debts

Tax Filing Status:  Married Filing Jointly

Tax Rate: 24% Federal, 7% State

State of Residence: Virginia

Age: 45 (him); 41 (her)

Desired Asset allocation: 100% stocks (I think -- but open to others' critiques on this)
Desired International allocation: 20% of stocks

Portfolio Value:  approx $1.5 million

Current retirement assets

Taxable
N/A - see questions below

His TSP - $825k
28% - C Fund
13% - S Fund
13% - I Fund

His Roth IRA at Vanguard - $159k
7% VITAX
4% VGSLX

Her TSP - $416k
14% - C Fund
8% - S Fund
5% - I Fund

Her Roth IRA at Vanguard - $44k
3% VTWAX

Contributions

New annual Contributions (100% designated as Roth contributions)
$23k his TSP, not including 5% match
$7k his Roth IRA
$23k her TSP, not including 5% match$7k her Roth IRA
$15-$20k cash for long-term expenses (new car, home renovation, home repairs, etc.)

Questions:

1.  I just did a mid-career checkup with a financial advisor, who considered our retirement needs, wants, and wishes and modeled them in MoneyGuidePro.  At this stage in our careers, she suggested a 100% equity portfolio based on our ages and the fact that we will both have very good federal pensions.  Sound advice?  I am risk tolerant and can accept volatility.  I am likely 10-15 years from retirement, and I would likely add some bond holdings (15-20%) once I near / have reached retirement.  This bond holding would increase as we get older. 

2.  What changes would you make to this portfolio?

3.  I'm considering selling the condo rental property, which would net between $475-500k.  What would you do with this money? I have no desire to purchase another property and don't have immediate need for the cash.  The aforementioned advisor suggested a taxable portfolio invested in stocks (2/3 US; 1/3 international).  Would a total stock market index be a good option?  I'm half tempted to drop it into several CDs earning 5%+ for the time being.

4.  We have approximately $170k in cash.  Should we consider putting some of this in a taxable account given our relative job security and solid health insurance?  We would still maintain a reserve ($50k?) for unexpected expenses like home repairs.  If yes, what allocation should we use?  Or just keep it in several CDs?
BattyNatty
Posts: 56
Joined: Sat Feb 20, 2021 12:25 pm

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by BattyNatty »

ablemechanic wrote: Tue Jul 09, 2024 2:19 pm My spouse and I are both federal employees and will qualify for pension and lifetime federal health care at age 50, but neither of us plan to retire at 50. Right now, we will likely work until 57-60.
Do you mean your positions allow you to retire with immediate annuities starting at age 50? If so, can you say more about why you wouldn’t just retire then (or become a contractor to get both pension and salary)?
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William Million
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Location: A Deep Mountain

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by William Million »

Thanks to both of you for service as federal employees.

I believe you guys are at the age when you should be increasing fixed income each year. For many of us, 100% stocks are great until early-40s, then some fixed income makes sense. Some people count pensions as fixed income, but I personally would not use them as part of the asset allocation.

On the rental property, it really only makes sense if you have positive cashflow.

You don't say anything about kids, so assume college expenses for offspring are not an issue.

If you have no intention of returning to VA, you might consider taking the legal steps to become residents of a state with no income taxes. However, you'll have to do so carefully as VA sometimes tries to prevent its residents from getting out of taxes, even those who do not live there and have no intent on returning.

Rather than just drop the proceeds from the condo into a CD, you should decide on your asset allocation and follow an equity/fixed income mix based on that strategy. A CD could be part of your fixed income.

Finally, you might consider making use of the Roth rather than traditional TSP. With 2 pensions and 2 social security checks, plus investment income, you guys might find yourselves in a higher bracket in retirement than you are now.
Topic Author
ablemechanic
Posts: 5
Joined: Sat Apr 27, 2024 5:33 am

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by ablemechanic »

BattyNatty wrote: Tue Jul 09, 2024 2:25 pm
ablemechanic wrote: Tue Jul 09, 2024 2:19 pm My spouse and I are both federal employees and will qualify for pension and lifetime federal health care at age 50, but neither of us plan to retire at 50. Right now, we will likely work until 57-60.
Do you mean your positions allow you to retire with immediate annuities starting at age 50? If so, can you say more about why you wouldn’t just retire then (or become a contractor to get both pension and salary)?

In short, we both like our jobs a lot, and we are at a particular level in which we have significant opportunities to contribute. Plus, we really enjoy the overseas lifestyle and adventure, which we couldn't guarantee as contractors.
trueblueky
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Joined: Tue May 27, 2014 3:50 pm

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by trueblueky »

Your pensions will be much better if you arrange your final tour to be in the states. Untaxed housing allowance is great, but it doesn't help your high-3.
stan1
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Joined: Mon Oct 08, 2007 4:35 pm

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by stan1 »

ablemechanic wrote: Tue Jul 09, 2024 2:19 pm 1.  I just did a mid-career checkup with a financial advisor, who considered our retirement needs, wants, and wishes and modeled them in MoneyGuidePro.  At this stage in our careers, she suggested a 100% equity portfolio based on our ages and the fact that we will both have very good federal pensions.  Sound advice?  I am risk tolerant and can accept volatility.  I am likely 10-15 years from retirement, and I would likely add some bond holdings (15-20%) once I near / have reached retirement.  This bond holding would increase as we get older. 
No one knows if she's right or wrong, we can't predict the future. That said given your pensions and many years until retirement going 100% equities would not be unusual advice in 2024. It's not what some Bogleheads would do, but others do just that. It's really your personal decision you have to make. And you can d0 80/20 if you don't want to do 100/0.
bonesly
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Location: WA

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by bonesly »

ablemechanic wrote: Tue Jul 09, 2024 2:19 pm 1.  I just did a mid-career checkup with a financial advisor, who considered our retirement needs, wants, and wishes and modeled them in MoneyGuidePro.  At this stage in our careers, she suggested a 100% equity portfolio based on our ages and the fact that we will both have very good federal pensions.  Sound advice?  I am risk tolerant and can accept volatility.  I am likely 10-15 years from retirement, and I would likely add some bond holdings (15-20%) once I near / have reached retirement.  This bond holding would increase as we get older. 
It's sound advice if you look at the present value (PV) of the pension income as a bond in your portfolio (see valuing an annuity at Journal of Accountancy). Federal pensions have a very low risk of reducing benefits or having an outright default, while those risks are higher for state, city, and corporate pensions. Your advisor might have used PV of the pension based on its very low risk (or it's just standard assumption in her FA shop).

I prefer to simply look at my projected expenses - pension - SocSec and that's the amount the portfolio has to provide. I would set an AA and contribution rate to achieve that goal and not include the other income sources as a phantom bond; the AA would be set based on my risk tolerance, which technically was 100/0 right up until age 55, but that's me. For you, I'd recommend you take the Vanguard Investor Questionnaire and see if it recommends 100/0, if you do NOT want to count the pension as a phantom bond (that you have no control over).
ablemechanic wrote: Tue Jul 09, 2024 2:19 pm 2.  What changes would you make to this portfolio?
4% VGSLX is a real-estate tilt. I probably wouldn't bother unless you can bring this to 10% of the overall portfolio and give it a chance to "move the needle." Slices/tilts <10% of total portfolio tend to just add clutter without having a real opportunity to impact performance in any meaningful way. I'd swap this into VTSAX (Total US Stock Market).

Your target for int'l is 20% of stocks and since you're AA is 100/0, you're holding:
13% - I Fund (His TSP)
7% VITAX (His Roth IRA)
5% - I Fund
3% VTWAX x 0.4 = 1.2%
for a total of 26.2%, so you're a little heavy on int'l. Easily fixed by swapping VTIAX (His Roth IRA) into VTSAX.
ablemechanic wrote: Tue Jul 09, 2024 2:19 pm 3.  I'm considering selling the condo rental property, which would net between $475-500k.  What would you do with this money? I have no desire to purchase another property and don't have immediate need for the cash.  The aforementioned advisor suggested a taxable portfolio invested in stocks (2/3 US; 1/3 international).  Would a total stock market index be a good option?  I'm half tempted to drop it into several CDs earning 5%+ for the time being.
"For the time being" I'd drop it in Vanguard Treasury Money Market Fund (VUSXX) in a Vanguard Brokerage Account (regular Taxable) since that's earning 5.29% and wont' tie up your money like CDs would and it's mostly free of VA state taxes. The advisor is likely on track to suggest stocks in Taxable which adheres to your AA and also Tax-Efficient Fund Placement. I'm not sure on the split of 67% US and 33% Int'l given your desire for 20% of all stocks in Int'l. A current value of $1,500K would be $1,200K in US and $300K in Int'l. Adding another $500K for $2,000K total would be $1,600K US and $400K Int'l, so a 75/25 split, for the new money not 67/33. That assumes you fix your current imbalance in His Roth IRA as noted in #2 above.
ablemechanic wrote: Tue Jul 09, 2024 2:19 pm 4.  We have approximately $170k in cash.  Should we consider putting some of this in a taxable account given our relative job security and solid health insurance?  We would still maintain a reserve ($50k?) for unexpected expenses like home repairs.  If yes, what allocation should we use?  Or just keep it in several CDs?
I was a civil servant for the US Navy for 37 years and the specter of Reduction in Force (RIF) came up more than a few times. During the Great Financial Crisis (I think it was around that time), approval was given to Navy HR to furlough all employees on scattered rotations for 6 weeks (ended up being 6 non-consecutive days that we could pick). Your jobs are very secure, but they are not risk-free, so you should still keep 6-18 months of expenses in cash. Home repairs/upgrade & new cars should be a separate pot of money from the Emergency Fund at least in a tracking spreadsheet (my EF is in a MMF while my repair/car fund is in a 60/40 Balanced Index fund). If the EF and repair/car fund are both on track you can deploy the rest into stocks (along with the proceeds from the condo sale).
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
andy08
Posts: 13
Joined: Fri Apr 08, 2022 7:46 am

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by andy08 »

Hi:
We are also tandem federal employees living overseas. Yes, the free housing with additional pay adjustments for being overseas does help in increasing savings. Not to forget the free schooling.

Overall, you have done well for yourself.

1. Do you really need your financial advisor? We are 94% equity and 6% fixed income. 100% equity is too much exposure. I would recommend increasing fixed income exposure gradually so you are at your target by retirement. E.g. if you want to retire by 60 (15 more years for you) and your AA target for fixed income is 30%, I would start increasing it by 2% per year with 2% investment this year. Best option is G fund in TSP rather than F as recommended in Bogleheads guide to retirement. Note that the 2% is 2% of portfolio and not 2% of TSP.

2. Changes overall to portfolio:
- Have an emergency fund. The amount in reserves can vary by type of profession. I would recommend 3 months of pay as emergency funds even for dual feds
- VITAX and VGSLX: I stick to 3 fund portfolio so either total stock or SP 500
- I would recommended selling the condo and investing in taxable account. Put say 50% in one go in total stock and the other 50% you can invest over few months in SP 500. Why the split? For tax loss harvesting if the market crashes.
Fishing50
Posts: 687
Joined: Tue Sep 27, 2016 1:18 am

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by Fishing50 »

As long as you enjoy the work, keep working.
High savings rate & early pension gives you the awesome opportunity for early retirement if works begins to be a burden.
I’m retired military, living back in a previous rental property my career moved me away from. Plenty of projects & hobbies to keep me busy.

I’m not an advocate of a large emergency fund, I recommend getting the money invested as mentioned previously in the thread with tax efficiency of total market & total international equity funds. Change of station requires cash availability, but there’s ways to finance things or reduce monthly savings when needed to raise cash balances. Our current car was purchased at 0% APR credit card convenience checks. Make plans for cash needs, get monthly money invested.

We’ve been taking taxable dividends in cash for years, mostly we spend them now, sometimes they are combined with regular monthly taxable investments to reduce tax lots. Vanguard mutual fund dividends can be automatically transferred into your credit union checking account…ETF shares don’t work that way. https://earlyretirementnow.com/2021/05 ... l-useless/


1.  I like your advisor. 100% equity can make sense, but some bonds make sense too. You could add 10%-20% G Fund as bonds / cash holding. If you have a large outlay from taxable investments during a down market, you could transfer an equal amount from G Fund to C & S Fund to maintain your target allocation.

2.  I used to have sector bets, but the stock indexes are overweight tech now…so we’re indexers. Set allocation goals for sector bets, and have an exit strategy. When they over achieve, take the profit.

3.  Sell the condo if you don’t want to be a landlord…reduce the stress, and focus on your primary occupation. Invest the money, tax efficiently in VTSAX & VTIAX.
#1 Priority for tax efficiency, taxable in equities. Earn dividends taxed at 15%, instead of interest taxed at ordinary income rates (24% for you).
#2 Slower growing assets in tax deferred, TSP. G Fund is uniquely awesome paying intermediate treasury rate with no risk of loss.

4. Again I like your advisor, but he missed your target allocation of international. Get the $170k in cash invested tax efficiently within your target allocation US and International. I recommend lump sum, then tax loss harvest. There’s numerous threads on the forum about both topics.

Psychological, your probably not really ready for 100% asset allocation. Set your new asset allocation as a minimum, condo sale proceeds in G Fund. We’re 80%, because the 20% bonds is substantial enough to sleep well at night.
Retired Military Officer. 80% equites / 20% bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. Gone Fishing At 52yrs old!
Tundrama
Posts: 300
Joined: Thu Mar 11, 2021 9:26 am

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by Tundrama »

ablemechanic wrote: Tue Jul 09, 2024 2:19 pm Greetings, 

I'm seeking advice and feedback on my current retirement planning trajectory.

My spouse and I are both federal employees and will qualify for pension and lifetime federal health care at age 50, but neither of us plan to retire at 50.  Right now, we will likely work until 57-60.   We both make $140k - $155k, which varies year to year based on travel and other compensation variables.  We are currently deployed overseas, where our housing costs are covered, and we generally have a lower cost of living. 

Emergency funds:  Yes, 6+ months

Debt: Mortgage 1) $560k @ 2.875% (currently a rental property); Mortgage 2) (condo rental) $40k @ 2.75%; no other debts

Tax Filing Status:  Married Filing Jointly

Tax Rate: 24% Federal, 7% State

State of Residence: Virginia

Age: 45 (him); 41 (her)

Desired Asset allocation: 100% stocks (I think -- but open to others' critiques on this)
Desired International allocation: 20% of stocks

Portfolio Value:  approx $1.5 million

Current retirement assets

Taxable
N/A - see questions below

His TSP - $825k
28% - C Fund
13% - S Fund
13% - I Fund

His Roth IRA at Vanguard - $159k
7% VITAX
4% VGSLX

Her TSP - $416k
14% - C Fund
8% - S Fund
5% - I Fund

Her Roth IRA at Vanguard - $44k
3% VTWAX

Contributions

New annual Contributions (100% designated as Roth contributions)
$23k his TSP, not including 5% match
$7k his Roth IRA
$23k her TSP, not including 5% match$7k her Roth IRA
$15-$20k cash for long-term expenses (new car, home renovation, home repairs, etc.)

Questions:

1.  I just did a mid-career checkup with a financial advisor, who considered our retirement needs, wants, and wishes and modeled them in MoneyGuidePro.  At this stage in our careers, she suggested a 100% equity portfolio based on our ages and the fact that we will both have very good federal pensions.  Sound advice?  I am risk tolerant and can accept volatility.  I am likely 10-15 years from retirement, and I would likely add some bond holdings (15-20%) once I near / have reached retirement.  This bond holding would increase as we get older. 

2.  What changes would you make to this portfolio?

3.  I'm considering selling the condo rental property, which would net between $475-500k.  What would you do with this money? I have no desire to purchase another property and don't have immediate need for the cash.  The aforementioned advisor suggested a taxable portfolio invested in stocks (2/3 US; 1/3 international).  Would a total stock market index be a good option?  I'm half tempted to drop it into several CDs earning 5%+ for the time being.

4.  We have approximately $170k in cash.  Should we consider putting some of this in a taxable account given our relative job security and solid health insurance?  We would still maintain a reserve ($50k?) for unexpected expenses like home repairs.  If yes, what allocation should we use?  Or just keep it in several CDs?
…age 57 retirement? I smell a law dog. Me too.

I’ll make one comment and this coming from a 33 year Fed LEO.

Your ‘C’ fund percent is way to low. If you are risk tolerant then you should be a minimum of 80% percent and I’d do 100%.

I still do 100% C fund five years post retirement. When people ask me if that’s too risky, I simply laugh and say, “risk…I went to work every day and should be dead ten times over.” This little game of index investing is a joke for me on That scale. Good luck!
Radio_Wave
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Joined: Wed Aug 23, 2023 1:42 pm

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by Radio_Wave »

Tundrama wrote: Wed Jul 10, 2024 9:39 am …age 57 retirement? I smell a law dog. Me too.

I’ll make one comment and this coming from a 33 year Fed LEO.

Your ‘C’ fund percent is way to low. If you are risk tolerant then you should be a minimum of 80% percent and I’d do 100%.

I still do 100% C fund five years post retirement. When people ask me if that’s too risky, I simply laugh and say, “risk…I went to work every day and should be dead ten times over.” This little game of index investing is a joke for me on That scale. Good luck!
Another former fed here, now retired.

Like you, I was, and still am, risk tolerant, so I concur with Tundrama. I enrolled in TSP in 1990, and for most of the time since, I was 100% in the C Fund. It paid off handsomely, to say the least. Only recently did I change my allocation to include the S, I and F Funds, although the C Fund is the largest component.

I must point out that the post-2008 bull market helped greatly, as did riding out the COVID crash and rebound while continuing to make maximum contributions with employer matching. So, luck and patience played a role -- for me!

With that said, I would recommend, as other have, to consider bonds within your allocation. You could do this over time. For example, pick a target stock-to-bond ratio for your retirement, then each year shift a few percent of your TSP allocation to the F Fund.

As for the rental property, unless you're really jazzed about being a landlord (it seems not) and don't mind the hassles that go along with it (you didn't say), consider selling it at your first convenience (now or next year), pay the taxes and invest the proceeds into a tax-efficient portfolio along with the $170K.

Anyhow, my suggestions are quibbles. Of course, make informed choices you're comfortable with. If you make no changes, you'll likely do just fine.
Topic Author
ablemechanic
Posts: 5
Joined: Sat Apr 27, 2024 5:33 am

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by ablemechanic »

Thank you to everyone who provided feedback on my portfolio. To follow up on a few issues:

**I do intend to start adding bonds to the portfolio and may accelerate my timeline for that decision. There was conflicting recommendations on whether to use the G fund or F fund. Is there a consensus view?

**I've also decided to sell the rental condo and will invest the net proceeds into a taxable account with a TBD index fund allocation.

A few follow up questions, if folks have the time to weigh in:

**Several people recommended 100% C fund. For the people in 100% C fund (vice some combination of C, S, and I funds), why the exclusion of S and I funds? What do other feds do?
bonesly wrote: Tue Jul 09, 2024 9:13 pm 4% VGSLX is a real-estate tilt. I probably wouldn't bother unless you can bring this to 10% of the overall portfolio and give it a chance to "move the needle." Slices/tilts <10% of total portfolio tend to just add clutter without having a real opportunity to impact performance in any meaningful way. I'd swap this into VTSAX (Total US Stock Market).
**I see quite a few portfolios with small slices of real estate or other sector tilt. Is the above guideline of no less than 10% a Boglehead consensus?

Thank you very much, everyone!
Tundrama
Posts: 300
Joined: Thu Mar 11, 2021 9:26 am

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by Tundrama »

ablemechanic wrote: Sat Jul 13, 2024 7:03 am Thank you to everyone who provided feedback on my portfolio. To follow up on a few issues:

**I do intend to start adding bonds to the portfolio and may accelerate my timeline for that decision. There was conflicting recommendations on whether to use the G fund or F fund. Is there a consensus view?

**I've also decided to sell the rental condo and will invest the net proceeds into a taxable account with a TBD index fund allocation.

A few follow up questions, if folks have the time to weigh in:

**Several people recommended 100% C fund. For the people in 100% C fund (vice some combination of C, S, and I funds), why the exclusion of S and I funds? What do other feds do?
bonesly wrote: Tue Jul 09, 2024 9:13 pm 4% VGSLX is a real-estate tilt. I probably wouldn't bother unless you can bring this to 10% of the overall portfolio and give it a chance to "move the needle." Slices/tilts <10% of total portfolio tend to just add clutter without having a real opportunity to impact performance in any meaningful way. I'd swap this into VTSAX (Total US Stock Market).
**I see quite a few portfolios with small slices of real estate or other sector tilt. Is the above guideline of no less than 10% a Boglehead consensus?

Thank you very much, everyone!
…”why the exclusion of S and I funds?”

Just math for me. I’m not seeing enough upside to venture that way. I’ve sat through many, many federal retirement training sessions where they indeed, tout S and I. I truly believe there are many old fashion, historical investment mindsets that remain alive and well, yet the numbers don’t validate the recommendations these “Federal retirement experts” are telling you to do.

Simply put, and call it luck or skill or gambling…Fed wifee and I have, on a grand scale, out paced any Fed employees I’ve ever met and I know hundreds, simply riding the highs and lows of the C fund.

That said, I’m built very differently like I’ve mentioned. If we lost 50% tomorrow, We’d still sleep like a baby. How do we know this to be true? We’ve already done it.

…maybe one other advantage we have is our ability to live off the land. If all money became worthless tomorrow, I’m a hunting and fishing guru and we’d still sleep with full bellies every night. Good luck!
bonesly
Posts: 1659
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by bonesly »

ablemechanic wrote: Sat Jul 13, 2024 7:03 am
bonesly wrote: Tue Jul 09, 2024 9:13 pm 4% VGSLX is a real-estate tilt. I probably wouldn't bother unless you can bring this to 10% of the overall portfolio and give it a chance to "move the needle." Slices/tilts <10% of total portfolio tend to just add clutter without having a real opportunity to impact performance in any meaningful way. I'd swap this into VTSAX (Total US Stock Market).
**I see quite a few portfolios with small slices of real estate or other sector tilt. Is the above guideline of no less than 10% a Boglehead consensus?
I don't recall seeing a Wiki topic on this (which would constitute a Boglehead consensus), but it's pretty straightforward math.

If stock funds A and B have low correlation (don't move up and down in lock-step), then there can be a diversification benefit to holding both. Let's just say for the sake of argument that A=S&P-500 and B=Real Estate Investment Trust (REIT) and that they have low correlation (per the NYU Data Set, S&P-500 & 10y T-Notes from 1928-2017 have a correlation of 0.02 which is nowhere near +1.00, while S&P-500 and REIT have a correlation of 0.15, which is still low, but further from zero than bonds).

Let's say stocks take a -44% decline (like they did in 1931), but REIT only drops -6.6%, and bonds don't drop at all (uncorrelated). Now consider an 80/20 portfolio that has a 20%, 10%, or 5% slice in REIT as a percentage of stocks. How much of a reduction in magnitude of the decline is enough to be meaningful to you relative to the baseline?

0% REITS: The decline is 80% x 44% = 35.2% (baseline)
5% REIT: The decline is 80% x (44% x 0.95 + 6.6% x 0.05) = 33.7%
10% REIT: The decline is 80% x (44% x 0.9 + 6.6% x 0.1) = 32.2%
20% REIT: The decline is 80% x (44% x 0.8 + 6.6% x 0.2) = 29.2%

Let's say instead of a decline, that stocks had a a bad year and only earn 5%, but REIT has a great year and earns 20% (3x what S&P-500 made). That same 80/20 portfolio with different slice sizes of REIT looks like this.

0% REITS: The gain is 80% x 5% = 4.0% (baseline)
5% REIT: The gain is 80% x (5% x 0.95 + 20% x 0.05) = 4.6%
10% REIT: The gain is 80% x (5% x 0.9 + 20% x 0.1) = 5.2%
20% REIT: The gain is 80% x (5% x 0.8 + 20% x 0.2) = 6.4%

With only a 5% slice of REIT the gain was 4.6%, which is not meaningfully different (to me) from 4.0% given the ±20% volatility surrounding stocks. Even the 10% slice is a delta of 5.2 - 4 = 1.2% which might be meaningful, but a 30y back-test is likely a better comparison to determine if a more meaningful difference exists. However, looking at worst case decline and best case gain bounds how much your slice size impacts the extremet outcomes in a given worst/best year relative to no slice at all.

Regardless of what I, or other Bogleheads, think about what is a big enough slice to "move the needle" you can do the math for gain and/or decline and determine what slice-size is meaningful to you.

Here are three other discussions on "enough to move the needle" (I'm sure there are more this is just what I found in a quick-search):
Does 5% asset allocation move the needle?
Is 10% int'l equities enough to move the needle?
"It doesn't move the needle"

What the Wiki does say is to Invest with Simplicity (minimum fund count to provide adequate diversification like a 3-Fund Portfolio). I think a 3-Fund Portfolio is fine and that you don't need tilts/slices (like RE, Gold, or Small-Cap Value) as noted HERE.
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
Fishing50
Posts: 687
Joined: Tue Sep 27, 2016 1:18 am

Re: Federal Employee Couple - Seeking Feedback on Portfolio and Asset Allocation

Post by Fishing50 »

ablemechanic wrote: Sat Jul 13, 2024 7:03 am Thank you to everyone who provided feedback on my portfolio. To follow up on a few issues:

**I do intend to start adding bonds to the portfolio and may accelerate my timeline for that decision. There was conflicting recommendations on whether to use the G fund or F fund. Is there a consensus view?


**I've also decided to sell the rental condo and will invest the net proceeds into a taxable account with a TBD index fund allocation.
There’s extensive threads in the forum on the G Fund vs F Fund. We choose G Fund for the extremely low risk and competitive intermediate term rate. 80% equities, we don’t need the interest rate exposure of F Fund.

I doubt you’ll regret a large tax efficient, taxable index fund investment. Research tax loss harvesting.

ablemechanic wrote: Sat Jul 13, 2024 7:03 am
A few follow up questions, if folks have the time to weigh in:

**Several people recommended 100% C fund. For the people in 100% C fund (vice some combination of C, S, and I funds), why the exclusion of S and I funds? What do other feds do?
In keeping with Bogle quote, we own the haystack: our portfolio mirrors the entire market. We have Small Cap exposure to have a total market exposure across all accounts. We use Morningstar X-ray Style Box to to show market exposure, and we buy C Fund or S fund as necessary to match the market. I think 75% C Fund and 25% S fund match the market.

Total Market Cap for international is high, Vanguard uses 40% international in its target retirement funds. We’ve choose 20% international which was a Bogle recommendation if one wants international exposure.

C Fund is arguably good enough, but we like total market. Total market exposure would have given you Tesla exposure before it was added to S&P 500. Once approved to join S&P 500, index fund managers needed to purchase it, and some small cap funds had to sell it. Maybe not enough to move the needle, but I appreciated exposure on both sides when articles were written about S&P 500 Fund managers paying a premium for Tesla.
Retired Military Officer. 80% equites / 20% bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. Gone Fishing At 52yrs old!
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