Further non-equity diversification wanted, but in what?

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Shaoya
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Further non-equity diversification wanted, but in what?

Post by Shaoya » Thu Feb 25, 2010 11:07 pm

In looking at our AA (below), I’d like to diversify our non-equity stake further, but not sure how to do it relatively quickly.

Asset Allocation

Current
Overall: 78/22 Stock/Bond
Current Stocks: 76/24 Domestic/Foreign

Desired
75/22/3 in REITs, GNMA, Muni's, what?

Questions:

1) How can we diversify relatively quickly i.e not dollar-cost averaging, but moving lump sums? As you can see below, we don’t have options to get into REIT’s, muni’s, etc. in our 457 plans.

2) Does it make sense to move our EF, which is in VG MM, into Vanguard High-Yield Tax-Exempt (VWAHX) (0.20) or some other vehicle that’s: a) higher yielding than VG MM and b) would simultaneously increase our diversification away from equities?

I got to thinking about the need for an EF after reading a great thread by Redtail with Livesoft, Taylor L. and others, which discusses both the rationale for an EF and where to hold it http://www.bogleheads.org/forum/viewtop ... highlight=

Here’s our financial snapshot.

Emergency Fund – $26K in VG Prime Money Market

Debt
Mortgage –30 year fixed at 4.75% (refi’d May 2009)
Credit card debt – none
Student – 1.6% fixed @ $130 a month.
Car – no debt

Tax Filing Status

Married Filing Jointly – 25% Fed in 2009 (possibly near 15% in 2010 because of 5-6 months unpaid parental leave in 2010?); 9% Oregon (2009)
Age
Hers – 34
His – 37
Son (DOB: May 2008); Daughter (DOB:~ June 2010)

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, relative to inflation, later in our careers. Intend to stay in our current house/city indefinitely.

Annual Contributions

a) 457 Plans (no employer match!)
Hers (ING - http://www6.ingretirementplans.com/Spon ... index.html) - $4800 to Vanguard Total Bond Market Index Fund – Institutional (VBTIX) (0.08%)
His (https://osgp.ingplans.com/csinfo/fundin ... cec8ad6ba7) - $4800 Intermediate Bond Option (comprised of three funds below) (0.09%)
BGI Debt Index
Fidelity Broad Market Duration
Wellington Capital Core Bond Plus

b) $10,000 to Roth IRA’s

Investment Portfolio
[Note almost all of the monies for the taxable were inherited.]

% of Portfolio Taxable
32.9% Vanguard Total Stock Mkt Idx - Admiral (VTSAX) (0.09%)
9.9% Vanguard Total Stock Mkt Idx (VTSMX) (0.18%)
7.8% Vanguard PRIMECAP (VPMCX) (0.50)
14.9% Total Int'l Stock Index (VGTSX) (0.34%)


Tax-advantaged

IRA
11.6% Vanguard Inflation-Protect Sec (VIPSX) (0.25%)

Roth IRA
3.5% Vanguard FTSE All-World Except US (VFWIX) (0.40%)
1.9% Vanguard Short-term Bond Index (VBISX) (0.22%)
6.1% Windsor II (VWNFX) (0.39%)
2.9% Vanguard Total Stock Mkt Idx (VTSMX) (0.18%)

Her 457
6.1% Vanguard Total Bond Market– Inst(VBTIX) (0.08%)

His 457
2.4% Intermediate Bond Option (see above) (0.09%)
100.0%

Thank you very much for your assistance!

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tetractys
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Post by tetractys » Thu Feb 25, 2010 11:18 pm

Congratulations on your kids, here and soon to come!

If you want to diversify away from equities, up your bond allocation but be careful with high yield (which carries some equity like risk). -- Tet
RESISTANCE IS FRUITFUL

pkcrafter
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Post by pkcrafter » Fri Feb 26, 2010 10:13 am

Looks like almost all bond funds are intermediate term. The only thing you can do in regard to the non-equity allocation is diversify within bonds. REITS are stocks. You could add commodities, but I would not recommend it. The easiest thing you can do is in the Roth. Sell total market and replace with short term bond index. Don't worry about getting any more complex than that. Of course, if you are worried about diversifying more to protect against market movement, the best way is to get the AA down to about 65% stock. You are currently aggressive considering age, but to an extreme.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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stratton
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Post by stratton » Fri Feb 26, 2010 6:13 pm

TIPS.

Paul

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Shaoya
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Post by Shaoya » Fri Feb 26, 2010 11:02 pm

pkcrafter wrote:Of course, if you are worried about diversifying more to protect against market movement, the best way is to get the AA down to about 65% stock. You are currently aggressive considering age, but to an extreme.
Yes, I'd consider decreasing stock to ~25-30%, but how can I do that quickly i.e not D.C.A via 457 plans over 6-12 months? I don't think I want to exchange equities for bonds in my taxable, right?

Advice on some mechanisms would be greatly appreciated. Thanks!

Paul, as posted, we have 11.6% TIPS in our IRA (which I will convert to a Roth in 2010)

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tarnation
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Post by tarnation » Fri Feb 26, 2010 11:45 pm

Looks like you don't have any (even market weight) international small cap, e.g. Vanguard little FTSE (VSS). Have you considered it?
Image

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LH
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Post by LH » Sat Feb 27, 2010 9:17 am

tarnation wrote:Looks like you don't have any (even market weight) international small cap, e.g. Vanguard little FTSE (VSS). Have you considered it?
Ah sweet. I did not know that fund existed. Is that small only with no value tilt?

Now, another possible opportunity to screw around with my AA : )

Considering both international SV and international REITs when they become more developed. Dont think I would move just with small.

I think I am going to start keeping a list of AA changes and date made, I wonder what the average boglehead slice and dicer will move through in a 20 year period? Buy and hold indeed : P

http://finance.yahoo.com/q/pr?s=VSS

Looking at the morningstar style box, its a medium blend, not even "small" by morningstar criteria.

pkcrafter
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Post by pkcrafter » Sat Feb 27, 2010 10:45 am

Shaoya, just wanted to confirm your desired AA. In your first post you said you want 75/22/3. I'm assuming this is 75% stock. In your last post you said you're considering 25-30% stock.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Shaoya
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Post by Shaoya » Sat Feb 27, 2010 4:57 pm

pkcrafter wrote: Shaoya, just wanted to confirm your desired AA. In your first post you said you want 75/22/3. I'm assuming this is 75% stock. In your last post you said you're considering 25-30% stock
Paul, sorry, I bungled it; I meant increasing bonds to ~25-30%. For the record, currently we're 78/22, Stock/Bond. I now feel this AA split is probably too aggressive (ages 37 & 34), and I want to act now.

Earlier, I talked about diversifying further into stock/bond/something else. The monies for more bonds & "something else" would come from taxable equities, I think. I want to - relatively quickly - lower the equity portion and increase the bond and/or whatever other asset classes would be prudent. How can I do this? Does it make sense to bring in VG tax-exempt bonds into our taxable side to counterweight the equities?

[If this helps, our 2009 taxes are done - we're in the 15% bracket (and 9% OR), we have enough long-term capital loss carry-over to last 6-8 years.]

Let me know if other info would be helpful.

Thank you for your help!

pkcrafter
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Post by pkcrafter » Sun Feb 28, 2010 11:19 am

There are other ways to move the AA without selling in taxable. But since you have losses, you might consider it.

You and wife both have 457 plans? How much could you change AA by adding $33,000 to bonds in the 457s this year? Or how about adding 10k to 2010 Roth now if you haven't already funded 2010. Use cash from EF to fund it with st-bond index. Then the Roth could temporarily double as part of the EF. Another way would be to modify the current Roth. Switch TSM and and a portion of Win II to bonds. Any of these ideas would get your aa down to where you want it.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

YDNAL
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Re: Further non-equity diversification wanted, but in what?

Post by YDNAL » Sun Feb 28, 2010 11:53 am

Shaoya wrote:Annual Contributions

a) 457 Plans (no employer match!)
Hers (ING - http://www6.ingretirementplans.com/Spon ... index.html) - $4800 to Vanguard Total Bond Market Index Fund – Institutional (VBTIX) (0.08%)
His (https://osgp.ingplans.com/csinfo/fundin ... cec8ad6ba7) - $4800 Intermediate Bond Option (comprised of three funds below) (0.09%)
BGI Debt Index
Fidelity Broad Market Duration
Wellington Capital Core Bond Plus

b) $10,000 to Roth IRA’s
Shaoya wrote:Paul, sorry, I bungled it; I meant increasing bonds to ~25-30%. For the record, currently we're 78/22, Stock/Bond. I now feel this AA split is probably too aggressive (ages 37 & 34), and I want to act now.

1) If you chose 25% Bonds and 5/25 Bands to rebalance, the sucker can go to 20% or 30% - so 22% is just fine.
2) If you chose 30% Bonds, the range is 25% to 35% - so 22% is not such a big deal and very close to staying within a 25% Band.
3) Use new money to adjust.

% of Portfolio Taxable
32.9% Vanguard Total Stock Mkt Idx - Admiral (VTSAX) (0.09%)
9.9% Vanguard Total Stock Mkt Idx (VTSMX) (0.18%) <- why can't you add to Admiral?
7.8% Vanguard PRIMECAP (VPMCX) (0.50) <- Large Growth in Taxable?
14.9% Total Int'l Stock Index (VGTSX) (0.34%)

Tax-advantaged
IRA
11.6% Vanguard Inflation-Protect Sec (VIPSX) (0.25%)

Roth IRA
3.5% Vanguard FTSE All-World Except US (VFWIX) (0.40%)
1.9% Vanguard Short-term Bond Index (VBISX) (0.22%)
6.1% Windsor II (VWNFX) (0.39%)
2.9% Vanguard Total Stock Mkt Idx (VTSMX) (0.18%)
$10,000 to VBISX, if too much, put some elsewhere

Her 457
6.1% Vanguard Total Bond Market– Inst(VBTIX) (0.08%)
$4,800 to VBTIX

His 457
2.4% Intermediate Bond Option (see above) (0.09%)
$4,800 to Bond Option
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Shaoya
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Re: Further non-equity diversification wanted, but in what?

Post by Shaoya » Mon Mar 01, 2010 11:29 am

YDNAL wrote:
1) If you chose 25% Bonds and 5/25 Bands to rebalance, the sucker can go to 20% or 30% - so 22% is just fine.
2) If you chose 30% Bonds, the range is 25% to 35% - so 22% is not such a big deal and very close to staying within a 25% Band.
Thank you...I don't really understand what this means. Please explain.

Thanks - Shaoya

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