Asset Allocation Question

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Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

Asset Allocation Question

Post by buyza »

I am a somewhat new investor and buying up mutual funds I have tried to build a portfolio. I have tried reading a lot and figuring out how to diversify, but there is so much disagreement it seems. Using a bit of info from each reading I made up I tweaked my portfolio. I am 20 years old and have had a few mutual funds for a long time that were started by my parents. I now own a couple more. I used morningstar Xray to break down my portfolio and would love to know if I am doing any good or what should I change if anything.

Information: 19.43% (one of the 3 sectors morningstar breaks up stocks in)
software: 1.89%
hardware: 6.54%
Media: 5.58%
Telecom: 5.41

Service: 43.97%
Healthcare: 15.59%
Consumer Services: 5.44%
Business Services: 5.11%
Financial Services: 17.83%

Manufacturing: 36.60%
Consumer Goods: 4.93%
Industrial Materials: 14.03%
Energy: 16.14%
Utilities: 1.50%


The country break up is:

USA And Canada: 65.21%
Europe: 9.41%
Japan: 6.62%
Latin America: 3.58%
Asia And Australia: 5.84%
Other (which consists of eastern europe, some africa, some middle east, and a bit of russia): 9.34%

Aggressive growth is rated at 10%
Speculative Growth 6.16%
Slow Growth: 10.30%
Classic Growth: 32.65%

plus a few other 2-3% categories which I am unfamiliar with.

I would love some advice. Anything anyone can tell me would be great. Thanks in advance.

-buyza
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

Your Portfolio

Post by Laura »

buyza,

You have listed lots of statistics about your portfolio that are not relevant but did not include the two most important pieces of information...your desired asset allocation and your current holdings.

Have you settled on an investment plan yet? If not, you should focus here since studies have shown that more than 90% of your return will come from your asset allocation.

Next, you need to post your current portfolio like this:

taxable
xx% fund a (ticker symbol) (expense ratio)

roth
xx% fund b (ticker symbol) (expense ratio)

401k
xx% fund c (ticker symbol) (expense ratio)

Total of entire portfolio is 100%. Do not include your emergency funds in this allocation.

Once we have this information we can provide you with some informed comments.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

Asset Allocation Question

Post by buyza »

Here are my stock tickers and the amounts I have within them. I also own lots of paper bonds acquired at banks, and about 75k cash, 100k real estate

TREMX 15k
PRMSX 2.5k
TRAMX 2.5k
PRNEX 15k
PRMTX 7.5k
VPACX 9.7k
VGHCX 10k
vfifx 15k
trrdx 15k
sfvbx 16k
sagbx 16k
fnicx 6k
rymcx 6k
prlax 2.5k
User avatar
White Coat Investor
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Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Asset Allocation Question

Post by White Coat Investor »

buyza wrote:Here are my stock tickers
Do you have some unusual ability to remember what ticker=what fund? We don't :)

If you post the names of the funds you are more likely to get replies. Most of us would like to help out, but won't take the time to look up that many ticker symbols.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

Wrong Format

Post by Laura »

buyza,

Please help us help you by posting your portfolio like this:

taxable
xx% fund a (ticker symbol) (expense ratio)

roth
xx% fund b (ticker symbol) (expense ratio)

401k
xx% fund c (ticker symbol) (expense ratio)

Total of entire portfolio is 100%.

Like emergdoc says, we do not have ticker symbols memorized and will usually not take the time to look them up. Please post the fund name (ticker symbol) (expense ratio) like shown above. The amount you have in each investment isn't as important as the percentages.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

reply

Post by buyza »

No problem. Am working on that now :) Sorry for being somewhat hard to help :) Just new to asset allocation and what not.

I have a Roth IRA but am unsure what the holdings are, its managed by citibank. I also dont have a 401k. And don't own any real tax accounts, so how should I handle that?
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

No problems

Post by Laura »

buyza,

Don't worry if you don't have all of these different types of accounts. I posted them as an example to encourage you to think broadly. You need to look at your Roth and find out what you have. Another option would be to go immediately to the Vanguard website and arrange to move that money over to Vanguard. You can do this online today and the money should be there in a few weeks. It is very easy to monitor your investments on the Vanguard website and I am absolutely sure the cost will be significantly lower than what you are paying now.

Where are the funds held that you listed in your first post? If you don't know what you have in your Roth, don't have a 401k, and don't have a taxable account then I am confused about where you have the other funds. Is it in an IRA?

Do you have access to a 401k through your work?

Sorry to keep asking so many questions but these are all very important for your future and worth looking into if you don't know the answer right off the top of your hat. Research is a pain but it can also be very enlightening.

Good luck.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

reply

Post by buyza »

No I don't mind the questions at all. I GREATLY appreciate the help and know its hard to help someone who isn't as versed as you so it requires you to work harder, so I really appreciate it.

I hold my funds with vanguard, T Rowe Price, and legg mason.

I was thinking about moving my IRA to vanguard.

I guess my accounts are regular taxable accounts, I just bought them outright from vanguard/t rowe price.

I am a full time student, so no 401k option. I sold my own business a few years ago, so no new income really except for investments (and the cash I put in CDs and earn interest on).

I am still working on tickers as we speak. Just writing a 25 page history paper at the same time, so its coming along a little slow :)

thanks again!

-matt
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

funds

Post by buyza »

T Rowe Price Int:Em Euro - 15k - mostly eastern europe and some middle east/africa. 1.25% expense ratio.

T Rowe Price Int:EM St - 2.5k - emerging markets of latin america, asia, europe, and middle east. 1.25% expense ratio.

T Rowe Price New Era - 15k - natural gas/industrials (exxon, dutch, cooper etc). .66% expense ratio.

T Rowe Price Media/Tele - 7.5k - media/telecom - .87% expense ratio.

Vanguard Pac Stock;Inv - 10k - asia, mostly japan. .27% ratio.

Vanguard Hlth Care;Inv - 10k - healthcare - .25% ratio

Vanguard Chester Fds TGT RET2050 FD - 15k - holds a wide range.

T Rowe Price Ret:2040 - 15k - wide range as well

Legg Mason Ptrns Fundam Value CL B - 16k - common stocks/stock equivalents (news corp, jp morgan, bank of america are some of top holdings). 1.95% expense ratio.

Legg Mason Ptnrs Aggress Grw CL B - 17k - aggressive growth (tyco, lehman bros, anadarko petro, unitedhealth group, weatherford int are top 5 holdings). 1.95% expense ratio.

I want to maybe dump these funds and my other legg mason since expense ratios are high. I just am pissed because they have redemption fees. These funds were picked out for my when I Was 14 and first invested money. I have gotten roughly 11% return yearly on each which isn't too bad I guess, but still could have done better if I knew about vanguard or t rowe price then.

Fidelity Adv Nw Ins;C - large growth - 6k - (google, berkshire, apple, HPq) 1.83% ratio.

Royce Fd:Micr-Cp;Cons - 6k - small blend - 2.42% expense ratio (sad, I know :( )

T Rowe Price Int:Lat - 2.5k - large growth in latin america. 1.24% expense ratio.

Also was thinking of getting TRAMX which is the new t rowe africa/middle east fund. Was going to get 2.5k in that one.

Using morningstar xray I also saw that like 70% of my stocks were large cap (16% value, 21% core, 33% growth), 20% mid cap (3 value, 5 core, 12 growth), and 9% small (1 value, 3 core, 5 growth).

Hope that helps!

If you need more info just ask :)

Thank you so much again!
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

More Homework

Post by Laura »

buyza,

You seem to be collecting funds rather than developing an investment plan. At this point I urge you to take a little time to do some reading and educate yourself before adding any more funds to your collection. To help you get started let me recommend some easy to read books. The Bogleheads’ Guide to Investing is one of the best. I also loved The Coffeehouse Investor. Rick Ferri also has a terrific online book you can start as soon as you finish your history paper :) Serious Money and Vanguard can help you Create an Investment Plan.

All of this reading will help you settle on an investment plan that includes your desired asset allocation (split between stocks and bonds). Studies have shown that more than 90% of your return will be as a result of your asset allocation so you should spend time focused here. Your asset allocation should balance your NEED to take risk with your ABILITY to withstand the ups and downs of the market. Here is a table offered by Larry Swedroe based on the 1970s bear market showing the amount of decline for various stock/bond allocations:

Max Equity - Exposure Max loss
20%...............5%
30%..............10%
40%..............15%
50%..............20%
60%..............25%
70%..............30%
80%..............35%
90%..............40%
100%.............50%

Only after you have settled on an asset allocation plan should you turn toward fund selection since the funds you select should fit into your plan. Right now it appears you don't have a plan but instead have tried to pick funds based on past performance.

The only predictor of future success is low cost. Looking at your current holdings they are very high cost funds and they are held in taxable accounts. Do you have any earned income this year that would allow you to put some money into a Roth so you can have tax free growth? If you do, this would be a smart thing to do. You can contribute $4k into a Roth in 2007.

When building a portfolio you need to focus on low costs, tax efficiency, and diversification. Taylor Larimore posted this list on tax efficiency that helped me.

4-Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..
2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-
3. Put what's left into your taxable account.
4. Try to use only tax-efficient funds in taxable accounts.

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):
Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Balanced Funds
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds

You can have a terrific portfolio using only a few funds. For example, you would be better off with a portfolio like this:

Total Stock Market
FTSE World ex/US (developed and emerging markets)

Roth
Bonds

Please do the reading and take time to work through an asset allocation. Once you do my suggestion for this simple, low cost, broadly diversified portfolio (with far fewer funds than you currently have) will make much more sense.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
DFielder
Posts: 165
Joined: Sun Sep 02, 2007 12:47 am

Post by DFielder »

You're eventually going to want to probably even out your value/growth allocation, as you're very heavily growth-tilted right now. After you read those books Laura suggested, that stuff will make much more sense. Good call on getting rid of those funds with high ERs, though - that's the one drag factor on a portfolio performance that you can really control.
- Daniel
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

Post by buyza »

Yes I have been capping my Roth every year for the last 4 years.

How would I handle getting out of my Citi IRA and moving the funds too vanguard? I don't even know what my IRA holds, it just shows up on my banking site as the actual dollar amount.

I am trying to build a portfolio that is high risk high return. I can financially withstand the ups and downs in return for a possible great gain. Especially because of my age.

I have held my funds for a while, so have enjoyed a lot of the recent great returns, but take into account fees as well. I stuck with vanguard and T Rowe just because I have always had good experience with them financially, as well as with customer service and what not.

I do take into account past performance though, not because I think it will guarantee a better performance later on but my logic is this:

I want to invest into said sector and/or cap.

Fund A had a 10% return this year
Fund B had a 15% return this year

I assume based off my logic that if fund B did better than fund A, it is reasonable to assume the manager of fund B possibly knows the field better, therefore it would be wiser to go with him based on his past performance of knowing how to play the sector.

I will try and do those readings asap.

How should I also factor in my large cash holdings, bank bonds (my grandparents gave me about 10-15k in US savings bonds a long time ago), and the equity I have in my home

These fall backs are another reason why I believe going high risk high return now is more logical. I have read a few beginner books, and they recommend being as aggressive as possible at a younger age.

Thanks again for all the help!

-matt
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

Being Aggressive

Post by Laura »

Matt,

Being aggressive at a young age is fine but you should do it with a plan. Remember that risk and return are related so in a particular sector if a fund is out performing another fund usually that simply means that one manager is taking on more risk. This logic can be costly when the market turns down as many people recently found out when their "safe" investments with high return turned out to be holding some risky assets.

None of us can predict which sector of the market will do well in the future. The only thing we know is that it will change over time. Take a look at the Callan Table to see what I mean. What you want to do is diversify broadly so you have holdings in each of the boxes (this doesn't mean a separate fund to cover each box). Keep your costs low so you benefit from the return rather than having it go to the fund company and focus on tax efficiency.

On your roth at Citibank I would just go to the Vanguard website and complete the rollover application online. They can take care of it for you. While you are working toward your desired asset allocation just put the money in the prime money market fund temporarily. Once you settle on the rest of the portfolio you can switch this at no cost into the fund of your choice.

TRP is a good company but their funds are more expensive than Vanguard. Since you are young, in a low tax bracket as a student, and trying to get your portfolio cleaned up and structured for the long term I recommend just selling all of your other non-Vanguard taxable holdings and putting the money in a taxable prime money market account at Vanguard temporarily. You can go ahead and do this now so the money is in place when you are ready to reallocate.

On the bank bonds (or are these US savings bonds) you should see if they are still paying anything. Also, you don't want bonds in a taxable account because you end up paying tax on the income you don't need. You should seriously consider selling these bonds since you will want to hold bonds in your tax advantaged account. If these are US savings bonds then they are tax deferred but again see what the yield is on the bonds. If you can do significantly better on an after-tax basis then you will want to sell them.

The equity you have in your home is part of your net worth but shouldn't be part of your investment plan. You cannot rebalance this into something else not can you really use it. Again, it is an asset and increases your net worth but don't worry about it for investing purposes.

Enjoy the readings.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
InvestingMom
Posts: 503
Joined: Mon Aug 20, 2007 2:45 pm

Reference Library

Post by InvestingMom »

Wow I just discovered the reference library (Perhaps I am a bit slow).
Anyway, there is an Asset Allocation topic which might also help you in understanding the previous advice on starting with a good asset allocation plan.
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

reply

Post by buyza »

interesting, I never considered that into my logic. Thanks for the insight.

So I should dump my funds, and just reallocate everything into a few vanguard funds in your opinion?

Im confused, is a taxable account anything that isn't in my Roth and/or called "tax deferred"?

Lastly, with fees, if I own two funds that each have a .25% expense ratio, is that not the same as having 1 fund with .25% expense ratio but twice the investment? Or am I missing other fees? Aren't all vanguard and TRP no load/redemption funds?

Thanks again,
Matt
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

Re: Reference Library

Post by buyza »

InvestingMom wrote:Wow I just discovered the reference library (Perhaps I am a bit slow).
Anyway, there is an Asset Allocation topic which might also help you in understanding the previous advice on starting with a good asset allocation plan.
Mind providing a link? I did a quick look around, but did not see it.
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

Info

Post by Laura »

buyza,

Here is a link to the library http://www.diehards.org/forum/viewforum.php?f=4.

I suggested dumping all your non-Vanguard accounts. The two funds with the .25 expense ratio are both Vanguard accounts. You can leave those alone for now. Even though funds are no load and no redemption you will pay tax on any gains you have in these accounts. That cost will be offset by the savings you will see from investing in funds with lower expense ratios and funds that are more tax efficient (you will lower your future tax bill). As a student you presumably have a lower income than normal now so your tax rates are very low. You can use that to reorganize your portfolio for the long term.

There are different types of accounts:

taxable - you pay income tax on the money you earn in order to invest the money in a taxable account. In addition, you pay taxes on any income or capital gains as you go along.

tax free (roth) - you pay income tax on the money you earn in order to invest in the Roth but all future growth is tax free. When you withdraw the money you do not pay tax.

tax deferred (IRA/401k/403b) - you contribute to these account types before paying income tax and the money grows tax free. When you withdraw the money you pay tax on everything at your normal income tax rate.

Hope this helps.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

reply

Post by buyza »

How much into consideration should I take the morningstar rating of a fund?

I think I will take your advise and dump most my non-vanguards. I plan on keeping the retirement TRP, but definitely want to rid myself of the legg mason, fidely, and royce ones with very high expense ratios.

Also I was doing some reading on kiplinger and they recommended a portfolio setup for someone in my position:

Selected American Shares (SLASX) 20% Large-cap value

Marsico 21st Century (MXXIX) 15% Large-cap growth

Bridgeway Aggressive Investors 2 (BRAIX) 15% All-cap growth

Excelsior Value & Restructuring (UMBIX) 15% Large-cap value

FBR Small Cap (FBRVX) 5% Small-cap growth

Dodge & Cox International Stock (DODFX) 25% International

T. Rowe Price Emerging Markets (PRMSX) 5% International (emerging)


So should I try mimicking a similar set up but with vanguard? Similar as in the breakup of international, large cap, small cap etc.
Topic Author
buyza
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Joined: Fri Sep 14, 2007 10:16 pm

reply

Post by buyza »

already started reading some of the stuff you told me to read earlier, as well as reading the library stuff, and I noticed the 4 fund portfolio.

THE 4-FUND PORTFOLIO:

A Money-Market Fund
Total Stock Market Fund
Total International Fund
Total Bond Market Fund

Seems to make a lot of sense based off what I read, but how would you break it up % wise exactly?

I think I am going to read everything and take a few weeks to look into different portfolio break up options to see what fits me best, but any advise you can give me on the ones I mention would be awesome.

Thanks again, I really do greatly appreciate all the help.

My law school tuition thanks you as well! =p
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

Careful with Reading

Post by Laura »

buyza,

I think it is great that you are starting to read but be careful as you go along. Sadly there is a lot of "financial porn" out there. Remember that magazines need to sell advertising so they always have articles about the top ... This could be the top funds, top portfolio, etc. If you look at the list of top funds you will find them clustered in the "hot sector". The Callan Table graphically demonstrates that different sectors go in and out of favor. Your portfolio should be diversified so you can benefit regardless of the hot sector.

Turning to M* ratings I think they are useless. They rate in good part based on past performance. That is similar to trying to drive forward while looking in the rear view mirror of your car. I don't know about you but for me that guarantees a crash. The best indicator of future out-performance is low cost. Vanguard is the overall leader in this regard.

Turning to the 4 fund portfolio it makes a huge amount of success. Percentages would vary depending on your personal need and ability to take risk. Some people will hold 10% in bonds and 90% in the equity funds. Others will use exactly the same four funds but hold 60% in bonds and only 40% in equities. The beauty of a well constructed portfolio is that your funds shouldn't change at all as you age. Just direct new contributions toward the more conservative holdings like bonds.

Starting from these basic market funds is probably a good choice. Some people will then want to tilt toward small or value or even international but by doing that they are betting against the market. They could turn out to be right but they are also just as likely to be wrong. No one can predict what will happen over the next 30 years. You might enjoy reading Investing in Total Markets.

Investing is not a hard science and that makes it frustrating since there is no "one perfect portfolio" that will guarantee you the highest return. What you need to do is settle on something then stick with it. Once you do that turn your attention to your savings rate and keeping your living expenses low. If you develop a low cost, tax efficient, broadly diversified portfolio you are almost guaranteed long term success.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

reply

Post by buyza »

The more I read about the 4 fund portfolio the more I like. I saw on the vanguard site they offer a financial plan setup with an annual checkup for only 250 dollars if you invest over 100k (which is what I plan on doing). I figure it would be worth to see what they have to offer since 250 dollars is pennies in what could be differences of tens or even hundreds of thousands.

I figure that way I can get good advice about how to be properly diversified while being tax friendly.

I already was messing with instant Xray and saw that I will save about 900 a year in fees by ditching my legg mason and other non-vanguard funds. This makes up for the 1200 or so I will eat from the end load (god I wish I was smarter at 15 and knew to research fees and such).

Yah I understand your view on the kiplinger, I try and take every piece of advice when it comes to investing with a grain of salt for that very reason. There is no exact science to guarantee anything, only opinions. You can easily find two very successful traders with vast experience that completely disagree on the economy and how to invest in it.

In your opinion though, do you think the 250 is worth spending on the planning? Do you or anyone you know have any experience with this? I was very happy to read that "you'll review your plan with a Vanguard financial planner, who receives no incentives to recommend any investment"

-matt

P.S just out of curiosity, how long have you been trading, and are you a professional (work at a firm, broker, financial analyst, etc) at all?
Laura
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Joined: Mon Feb 19, 2007 7:40 pm

More...

Post by Laura »

buyza,

Spending $250 for a second opinion isn't a bad idea. The Vanguard planners are good but the results tend to be somewhat cookie cutter. To be honest, you can do just as well yourself by reading a few good books but you might feel more comfortable with their help.

Those little percentages for expense ratios are sneaky. 1.2% doesn't sound like much but when you start adding that up year after year it really makes a huge difference in the value of your portfolio at retirement. Go ahead and eat the load and put it behind you. Right now you are early enough in life that you can consider this a fairly inexpensive lesson learned. Some people don't "see the light" until they are in their 50s, 60s, or even later. You still have many years of investing ahead of you and low costs will make all the difference.

As to your question about how long I have been trading the answer is...I have never traded. I am a buy and hold investor. Your real question is how long I have been investing and the answer is about 20 years. I also started early (thank goodness). I am not a financial professional and as many of the long time posters here on this forum know I work for the federal government.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
buyza
Posts: 417
Joined: Fri Sep 14, 2007 10:16 pm

reply

Post by buyza »

Cookie cutter is fine, as long as it is a more sound portfolio :)

I am reading books, but going to school full time (actually 12 units is full time, i take 18) is keeping me a little slow. I finish about 1 book every 2 weeks. Not too bad, but I figure by the time I figure it out myself, I could have already saved the 250 and then some in fees. Not too mention I still probably wouldn't be as good.

I more want their expertise on my Roth and on taxes. I figure whatever they give me I can tweak later on once I learn more and get some experience.

Yah I am very aware of those horrible percentage points. Compound/accumulative interest is what got me start a Roth in the first place. I hate to eat the redemption fee, but its more than worth it.

I am early enough as you said where I will easily survive. Starting a 6 digit portfolio now should make for a nice retirement.
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springwater
Posts: 268
Joined: Sun Mar 11, 2007 2:28 am

Post by springwater »

Also, consider taxes. I assume a great portion of your portfolio is taxable since your parents started very young investing for you.

Capital Gains taxes for those in the 15% tax bracket is currently 5%. They are going down to 0% next year for those in the 15% tax bracket which should be you as a student.

I would try to sell as much of those crappy funds you are in next year when capital gains tax rates are 0%. They are also 0% in 2009 and 2010 as long as congress doesn't mess around with the rates.

But remember, congress made some changes to the kiddie-tax on UGTMA accounts this past year that may be applicable to you, especially concerning students dependent on their parents. This makes the kiddie-tax applicable till age 24.
Topic Author
buyza
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Post by buyza »

Well only like 30k of my stocks are from my parents, 15k of it being profit. The rest is what I bought myself, and my gains on most my stocks are short since I haven't owned them very long. I don't even own all the funds I mentioned, a few I was just planning to buy, but now won't. I will eat the 5% tax on my legg mason funds, so maybe I should wait to sell those till next year? That way redemption fee will be 1% lower, and the 1% extra in expenses will be greatly outweighed by tax/redemption savings.

I am doubting I can transfer the money directly from the other accounts to vanguard and not pay taxes until I actually cash it out to my bank account.

Also, can you use write offs, such as donations to cut the amount of taxes you pay on capital gains as with other taxes or no? I have lots of write offs I can use if so, but if not, just going to let another family member claim them.
Topic Author
buyza
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Joined: Fri Sep 14, 2007 10:16 pm

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Post by buyza »

Also, I was thinking, would it make logical sense to just fully invest in my vanguard target retirement fund?

It holds:

Vanguard Total Stock Mkt Idx 71.51%
Vanguard European Stock Index 10.56%
Vanguard Total Bond Market Index 10.06%
Vanguard Pacific Stock Index 4.76%
Vanguard Emerging Mkts Stock Idx 2.79%

Seems like it pretty much fits the 4 stock portfolio with the exception of international index which I could purchase myself.

My other retirement fund is the trowe price which holds:

T. Rowe Price Growth Stock 27.60
T. Rowe Price Value 22.34
T. Rowe Price Equity Index 500 11.73
T. Rowe Price Mid-Cap Growth 5.63
T. Rowe Price New Income 4.87
T. Rowe Price International Stock 4.79
T. Rowe Price Overseas Stock 4.59
T. Rowe Price Intl Gr & Inc 4.41
T. Rowe Price Mid-Cap Value 4.07
T. Rowe Price High-Yield 3.39

I was reading a few articles recommending I hold both because of their different strategies, is that something to consider as well? I figure with two funds its all consolidated and easy to check up on, and it auto reallocates as I get older. If not, and I stick to just the vanguard and possibly 1 other fund, my expenses will be very low and little management required.
Laura
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TR funds

Post by Laura »

matt,

Since most of your investments are in taxable you do not want to use TR funds. Tax efficiency is critical and the TR funds hold bonds which are not suitable for taxable accounts. Once you have multiple different types of accounts (taxable, Roth, etc) it is usually best to break up your portfolio with funds that hold individual asset classes. Remember that while your tax rate may be low right now it will go up in the future. Changing to a different fund in your taxable account costs money so it is very important to get it right from the beginning and right means low cost and tax efficiency.

That said, the TR funds basically use the 4-Fund portfolio structure. You can have the same allocation but broken out across different accounts. For example, you could do something like this:

taxable
Total Stock Market
FTSE World Ex/US
Money Market - emergency fund

Roth
Total Bond Market

This puts tax efficient equities in your taxable account and tax inefficient bonds in your tax advantaged account.

What you are seeing is the difference in a "slice and dice" approach with the different asset classes broken out into individual funds (value, growth, small, large, etc) and the Total Market Approach. There are followers of both camps on this forum. When just starting out I think the Total Market approach is the best way to start and especially when you have more taxable money since many of the sub-asset class categories are not tax efficient unless held in a total market fund. In the future, if you want to start overweighting specific asset classes you can do this in your Roth or other tax advantaged account by adding REIT, small cap value, etc. For now I think you would do best with the 4-fund portfolio approach.

Laura

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Target2019
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Re: reply

Post by Target2019 »

buyza wrote:I more want their expertise on my Roth and on taxes. I figure whatever they give me I can tweak later on once I learn more and get some experience.
In the quote above you are referring to VG. They will not give you advice about your personal tax situation. Any tax advice will be very general, and it will be what you can read on the VG web site.

You are younger, and I understand why you would want to make all of the discussed changes ASAP, and simply get it out of the way for awhile.

As you have seen, some of the moves you are considering can be delayed, and thereby save you some money. Others can be taken care of immediately, and save you some money.

Finally, you are a full-time student. Your tax situation should be considered along with that of your parents.

You've received a lot of great advice. Just take your time and consider the sequence of moves to make, and how they will affect everyone concerned.
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buyza
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Post by buyza »

Thanks, that makes a lot of sense.

Should I commit my entire Roth to the bond fund? Or should I only do a portion, and use the rest for other funds? I have roughly 20k in my Roth ATM and plan to invest another 150k or so. I'm assuming it wouldn't be logical to own the TR fund in my IRA.

I was thinking like 100k total stock market, 50k FTSE, and my Roth of 20k for bonds.

I have roughly another 75-100k sitting in a 5% moneymarket in my local bank, is it worth moving to VG MM?

I know I am young and have time, I guess I just want to get it right ASAP since I understand even 1 bad year or misused year could effect my portfolio by millions when you factor in the beauty of compound interest.

I am currently reading some of the other material you linked earlier, Laura. I am as I said before more and more agreeing with the 4 fund/your recommendations. Is there any other specifics you recommend though? And how would I play it as the years go by? That is the one thing I don't seem to find addressed in most these books/articles.

Thanks again so much.

-matt
Laura
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How to do this

Post by Laura »

Matt,

It is hard for me to give you specific advice about what to hold in your Roth without knowing the percentage in each account in your current portfolio. You have a Roth and some taxable money but it isn't clear how much. We don't need to know the exact dollar amount but percentages would help. If you could post your portfolio like this I can try to answer the question about what to put where.

xx% taxable

xx% roth

You should also keep some of your cash in the form of cash for emergencies and other upcoming expenses. Will you need a car in a few years? How about a home purchase? Furniture and dishes for the home? You can see what I mean. You might not need it now but in another 1-2 years you might. For money you need in less than 5 years you are best with a money market account or a high-yield savings account. Do not include this cash in the percentages listed above.

Remember that the most important part of this discussion is your asset allocation. You need to settle on the percentage that makes you comfortable. You have a lot of assets for someone your age so think through this carefully. How would you feel if you suddenly lost $100,000? If that would cause you to change something in your portfolio then you probably have taken on too much risk and should be more conservative.

You also need to figure out your tax rate which could be your parent's rate. If your roth isn't large enough to hold your entire allocation of bonds you need to determine whether a tax exempt bond fund or a taxable bond fund (both held in the taxable account) give you a higher after-tax return. Actually, the same applies for the money you need to keep in cash. There are tax exempt money market funds available. The Finance Buff Taxable-Equivalent Yield Calculator or the Morningstar Taxable-Equivalent Yield Calculator can help you with this decision. Remember, it is what you keep that is important.

On the question of your bank vs Vanguard for your cash I personally like Vanguard since I can easily transfer the money back to my bank account quickly. It keeps my balance with Vanguard higher so I can qualify for higher levels of service faster.

In terms of long term investing it is strange but if you do this right it should be boring. In fact, once you settle on your asset allocation and your funds you shouldn't ever need to change a thing except to rebalance back to your desired allocation every year or two. Your portfolio should probably become more conservative over time but it is a very slow transition that can be accomplished by directing new contributions where you need them. The funds you select today should be the same funds you hold in 50 years. Remember, these are broad market index funds so you don't need to worry about the manager changing or firms moving in and out of the indexes.

Focus your energy on earning money and adding it to your low cost, tax efficient, broadly diversified portfolio and you will do well.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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buyza
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reply

Post by buyza »

I am in the lowest tax bracket at the moment.

My potfolio not including emergency cash and other non-liquid assets is:

15% roth

85% taxable

Yes I think losing 100k which is like 70% of my portfolio might be a little devastating =)

No real expenses to worry about either. I own my car outright, no debt, have scholarships for school at the moment, and probably spend less than 1000 a month.
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springwater
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Post by springwater »

I have roughly another 75-100k sitting in a 5% moneymarket in my local bank, is it worth moving to VG MM?
My question is why so much cash? Are you going to need this money in the next few years for grad school or a down payment on a house?

Once you answer this question, then you can determine how much of this cash should be invested in stocks and bonds and how much in a money market.

Usually for someone your age, I would suggest a 100% equity but not a lot of 20 year olds have 6 figure portfolios like you do. In your case, up tp 20% bonds probably should be considered because of the amount of money you have. You have a big head start compared to most people and don't have the need to take on that much risk.

I think something simple like

50% Vanguard Total Market
30% Vanguard FTSE Ex-US
20% Vanguard Total Bond

and any money you forsee needing within 5 years in vanguard prime money market.

You may also consider having a global market weigh for your equities of 50/50 domestic and international as a hedge if the united states experiences serious economic decline in the next 30 years with all of our problems.
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buyza
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reply

Post by buyza »

I actually use the interest from the account to pay what bills I have.

I own a house now with no mortgage (I own a minority, my parents own a majority), so down payment is no issue, but grad school is. I was keeping this money on the sideline for that reason as well. Automatic income to cover all my bills + my just incase fund for grad school. I doubt I will get that many scholarships for law school. So once I know how much it will cost, I was going to invest the money into my portfolio.

Yah I plugged the 50/30/20 set up into xray and liked it.

What do you mean by having a "global market weigh for your equities of 50/50 domestic and international as a hedge" ? Do you just mean be 50% domestic/50% foreign in my portfolio?

If so, I noticed the the FTSE ex-US does not really cover latin america, eastern europe, asia, and africa that much, so should I then buy/keep mine (if vanguard offers them, if not I still have my TRP ones) into a fund that covers those emerging markets? I have done quite well on my latin america and eastern europe funds, but was going to sell them.

I just finished reading some more of the stuff Laura linked as well as a few other writings, and there seems to be quite a wide range of arguments concerning how much foreign stock to hold. I hear good arguments supporting all sides, ranging from 10-50% holdings.
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springwater
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Post by springwater »

What I meant was 50/50 domestic international in your equities.

So in that portfolio I suggested it would be:

40% Vanguard Total Market
40% Vanguard FTSE Ex-US
20% Vanguard Total Bond

as the bonds remain at 20% and the equities are evenly divided 50/50 between domestic and international.

If you want more emerging markets, you should consider splitting up Vanguard FTSE Ex-US into two funds:

Vanguard EuroPacific VEA (.15% expense ratio) This is the ETF version of Vanguard's Tax Managed International fund.

and Vanguard Emerging Markets VWO (.30% expense ration)

A sample portfolio for you that overweights emerging markets could be:

50% Vanguard Total Market
20% Vanguard Euro Pacific
10% Vanguard Emerging Markets
20% Vanguard Total Bond
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buyza
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reply

Post by buyza »

Would the latter set up not be:

40% Vanguard Total Market
30% Vanguard Euro Pacific
10% Vanguard Emerging Markets
20% Vanguard Total Bond

as to achieve 50/50?

And how old is the Euro Pacific? I can not find a lot of information on it. Barely any actually.

I really like both setups though. Running the numbers, I stand to save A LOT in fees/loads overtime.

Thanks again.
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DaveTH
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Post by DaveTH »

If so, I noticed the the FTSE ex-US does not really cover latin america, eastern europe, asia, and africa that much, so should I then buy/keep mine (if vanguard offers them, if not I still have my TRP ones) into a fund that covers those emerging markets? I have done quite well on my latin america and eastern europe funds, but was going to sell them.
The reason that the FTSE fund only includes small allocations to latin america, eastern Europe, etc. is because those regions represent minor significance to a market-cap weighted global market. If you want to include more, then you need to recognoze that you are taking on additional risk.
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springwater
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Post by springwater »

40% Vanguard Total Market
30% Vanguard Euro Pacific
10% Vanguard Emerging Markets
20% Vanguard Total Bond
I really like this portfolio for you. It's a great start.

Vanguard EuroPacific is the ETF version of Vanguard's Tax Managed International fund. The ETF is only a few months old but the mutual fund which it is just a separate share class of goes back many years.

https://flagship.vanguard.com/VGApp/hnw ... IntExt=INT

At any rate, a comibination of VEA and VWO is cheaper than buying VEU and also allows you to rebalance between them for tax-loss harvesting and potential rebalancing bonuses.
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DaveTH
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Post by DaveTH »

At any rate, a comibination of VEA and VWO is cheaper than buying VEU and also allows you to rebalance between them for tax-loss harvesting and potential rebalancing bonuses.
That may be true only if you ignore commissions. Besides, VEU automatically rebalances.
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springwater
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Post by springwater »

It may not be after considering commissions especially given that VEU automatically rebalances.
He may want to consider purchasing a $25,000 CD at Bank of America since he wants to keep a bunch of cash for grad school to get commission free trades.

http://www.bankofamerica.com/investing/
Laura
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ETFs

Post by Laura »

The thing with starting down the ETF path is that you are committing to paying brokerage commissions for the next 50 years. While these may be low cost now who can predict the future. In addition to paying to invest money you then get stuck paying to withdraw money. I am not so sure that it is actually significantly less expensive over the long run to use ETFs vs mutual funds. I think the cost difference is very small if you are an investor who plans to invest a smaller amount each time you get some income since you would be paying fees. Also, using a free brokerage isn't necessarily free if you get stuck leaving your money with them at lower rates.

Just my thoughts.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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buyza
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Post by buyza »

So is there an alternative to get the same profile with mutual funds?

Also would I not want my most aggressive funds in my roth now because of potential growth?
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springwater
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Post by springwater »

Yes, you can get all those funds at vanguard.

The thing is in the amounts you will be investing in initially, etf's are probably cheaper even with $10 commissions. You will be investing lump sumds of tens of thousands of dollars. That makes the commissions trivial.

Where ETF's are not approritate unless you can get a deal like bank of america or wells fargo with free commissions is for monthly investing of a couple hundred dollars.

There mutual funds are a better choice.
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buyza
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Post by buyza »

Yes 10 is trivial once you realize that I will be doing maybe 1-2 transactions a year, I agree. Over a lifetime, it might add up to a few hundred dollars. I am guessing I probably will reassess my portfolio annually, and will only make changes as needed.

Anyone have an opinion on Millennium Bank and their premium CDs? They offer anywhere from 7-8.75% on 1-5 years if you don't touch the money until maturity. Thinking maybe to stash away some cash there. A 5 year CD for a portion of my cash, and the rest in 1 year CDs and just renew if it is not needed at the time. Possibly within my IRA?

I can almost make the same money with no risk as my current high expense mutual funds. That of course won't be true once I rollover to vanguard.
Laura
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Risk and Return

Post by Laura »

buyza,

Remember one rule when investing...risk and return are ALWAYS related. If you find someplace paying you a much higher rate than anyone else, approach with care because you are probably taking on much more risk.

Millenium Bank is not a US bank and does not have FDIC insurance so the CD is in no way risk free. Remember risk and return... If there was a safe way to get that type of guaranteed return everyone on this forum would have investments at that bank. In fact, most people would have almost all of their money there if they could get that type of risk free return.

Read through some of the comments on this thread.

http://diehards.org/forum/viewtopic.php ... enium+bank

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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buyza
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Post by buyza »

Yah it sounded too good to be true. I was going to do some homework on it, but didn't get a chance yet.

I guess I have my portfolio now though.

40% Vanguard Total Market
30% Vanguard Euro Pacific
10% Vanguard Emerging Markets
20% Vanguard Total Bond

What do you think? And what should I put in my Roth (and why)? Emerging markets because of high return possibility?

Thanks again for everything. Have learned so much here and you all have been so helpful.

Actually going to order the boglehead book, im assuming you all endorse it :)

I have been reading up a storm!
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springwater
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Post by springwater »

That portfolio is probably better than 99.9% of the crap any financial advisor would give you.

It's fully diversified.

Simple.

And last but not least cheap.

40% VTI Expense ratio (.07%)
30% VEA Expense ratio (.15%)
10% VWO Expense ratio(.30%)
20% BND Expense ratio (.11%)

The average cost for the entire portfolio is just 0.125%

The bonds are tax-inefficient and should go in your tax-sheltered account.
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buyza
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Post by buyza »

Yah especially dumping my 2% fee funds. That will save me like 2000-3000 a year.

How are bonds less tax efficient than stocks exactly? I mean even if the emergings are more efficient, if it yields 200-300% more, wouldn't it make more sense?
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springwater
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Post by springwater »

How are bonds less tax efficient than stocks exactly? I mean even if the emergings are more efficient, if it yields 200-300% more, wouldn't it make more sense?
It has to do with interest income and dividend income. Until recently, both were charged at one's marginal tax rate which can be upwards of 35%. Under current law, dividends can be "qualified" and fall under 5% or 15% tax rates but this is set to expire in 2010 and it's questionable whether these rates will stay.

Bonds don't get any qualified rates and are taxed at one's marginal rate. Since much of the returns from bonds come from income, it's best to keep them in tax sheltered accounts if you have no present need for living off of that income.
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Post by YDNAL »

How are bonds less tax efficient than stocks exactly? I mean even if the emergings are more efficient, if it yields 200-300% more, wouldn't it make more sense?
buyza,

"Yields" and market appreciation are two different animals. The 200%-300% quoted is not a yield, and you must SELL the Emerging Markets to create a taxable event. On the Bond side, you get monthly (quarterly, or whatever) distributions that are taxed at your ordinary income rates. This is why Bonds are considered tax-INefficient.

Regards,
Landy
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buyza
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Post by buyza »

Ah ok, makes sense now.

So I am going to put my portfolio in effect soon, my plan of action is too wait and see with fed meeting. If it sparks a sell off, ill buy up my portfolio holdings with my money market cash and wait to sell my other holdings until there is a bounce back (hoping there is haha). If it sparks a rally, i'll sell off all my current holdings, and wait a few days to see if there is a pull back at all.

Think thats a good plan?

Figure best way to avoid eating a bad loss on reallocation of assets. Would be quite horrific to suffer a 2% or more loss of overall portfolio during a 1 week revamp.
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