Help with my Moms portfolio

[InvestingMom]

Hi all,
This is the second time I am asking for help with my mother's portfolio. I chose to start a new thread since the last one was over a month ago and I did not get a very good response (as Laura pointed out it may have been because I used tickers only). Also, my questions have evolved.

I would appreciate general advice on the suggested portfolio below.

Additionally, I have specific questions as follows:
1)I hate bonds! I hate tips. I would take stock any day. Back to reality...I am leaning towards doing what Merriman advises in fund adice which is

• Vanguard Intermediate Term US Treasuries (VFITX)
  Vanguard Short Term Treasuries(VFISX)
  Vanguard Inflation Protected Securities (VIPSX)

2) You will see below 2.6% allocated to small cap international. Any suggestions on vanguard funds (or other funds) to use for this...perhaps with a tilt towards value?
3) You will see some "legacy" funds listed (any nonvanguard fund is a fund that I have not sold yet and am thinking of keeping, either because it has a back load fee or actually looks like a good fund.) My question is should I actually bother keeping these. I would really like to simplify. See specific comments I have made below next to these funds.
Here is some background:

• Mom has a trust fund with Northern in which she has no say in the invesments. She also has an IRA and a small taxable account. I would describe her total portfolio as small to modest and in the low 6 figures.
  She owns her condo with some debt but payments are manageable.
  She is in the 15% tax bracket.
  She recieves Social Security and is taking distributions of 5% of her total investments out

My asset allocation plan on a combined basis (including the Northern Funds and her IRA, Taxable account and REIT):

• 60/40 Equities/bonds (more on that below)
  Of the Equities 70% in US and 30% in Foreign
  Both the US and Foreign will then be split 50/50 into Largo Co and Small Co
  Each category is weighted toward 30%value.
  Figures below do not include cash in Money Mkt fund of about 6% of her total portfolio or 2 years of her cash needs.

Here is her portfolio:
Northern Trust She cannot touch these. Perhaps this is too much information, but thought I would list in case it helps.

• 0.8% NOEMX Intl Emerging
  12.5% NOFIX Fixed Income
  1.2% NGREX Global Real Estate
  3.4% NOGEX Growth Equity
  3.4% NHFIX Hi yield Fixed
  2.9% NOIGX Intl growth
  3.1% NOLVX Large Cap Value
  0.5% NMIEX Intl equity
  0.7% NMMCX Mid cap
  0.5% NMMSX small cap
  CASH
  
  29.0% Subtotal

Vanguard (Taxable)

• VMMXX Vanguard Prime MMK
  4.4% VFINX Vanguard 500
  2.6% NAESX Vanguard Small Cap Index
  7.0% Subtotal

Vanguard IRA

• VMMXX Vanguard Prime MMKt
  2.6% VFINX Vanguard 500 Index
  1.3% NAESX Vanguard Small Cap Index
  3.6% VIVAX Vanguard Large Cap Value Index
  4.4% VISVX Vanguard Small Cap Value Index
  
  2.6% VDMIX Developed Markets Index or
  0.0% VTRIX International Value Fund-(these both appear to be concentrated in value and so I could use some advice in which one to go with.)
  
  1.3% VEIEX Vanguard Emerging Markets Stock Index
  
  2.6% Small Cap Int'L ?? (I am looking for help in choosing a fund or two to fill this gap.)
  
  2.7% DODFX Dodge & Cox Internatl Stock Fund (This is one fund I definitely want to keep.)
  0.6% CWGCX American Funds Capital World G/IC (This fund and the one following appear to be pretty good funds. They also fill some gaps in the international allocation.)
  2.3% SCWFX American Small Cap World Class F
  3.8% IGBAX ING Global Real Estate CL B (Back load fee of 6% ramping down 1% a year. Should we just bite the bullet and sell this? The problem is she has a REIT ...see below...that she will take an even bigger hit on if we redeem it and so perhaps we should sell this one? I would prefer to decrease her REIT allocation)
  2.8% KSCVX Keeley Small Cap Value FD Inc (This looks like a good fund.)
  3.8% RIMSX Ranier Small Mid Cap (Again this looks like a good fund but concentrated in growth. Perhaps because it is closed to new investors I feel relunctant to sell.)
  
  3.9% VBMFX Total Bond
  4.1% LSGLX Loomis Sayles Global Bond Retail (I will probably swap this for a vanguard fund, but would appreciate any comments.)
  16.5% Unidentified (Help, see question above regarding what to do with bonds.)
  58.9% Subtotal

• 5.2% Wells Capital Reit II (not publicly traded. I would love to dump this but she will take a 9% hit decreasing 1% per year. I cannot decide if I should dump this or the ING Global real estate reit above. My preference is to get rid of this one and take the hit now and get it over with?)

As for her 60/40 equity/bond asset allocation plan...yes I realize the equities are high for a 72 year old. After advice from Ken and Laura I went back to mom and showed her the various tables of what her potential losses could be. She held steady. She is a bit stubborn, but you have to realize that she was at over 80% equities prior to my taking over. She is also going through the emotional impact of my taking over as well. Lastly, she is completely of sound mind so I have to let this be her decision, at least for now. Luckily she has kids to back her up in case it really gets bad. She wont decrease her 5% either...again luckily she has kids to help if she runs out.

I sure hope you have not fallen asleep by now.

[Pangloss]

Hi InvestingMom,

In general I like your allocation plan. Your domestic/foreign split and your large/small splits are quite similar to my own, but I've chosen not to go after the growth/value slice and dice as much as you. Of the 30% of my portfolio that is domestic large cap, I have 20% in value and 10% in growth. But back to your mom's portfolio. Personally, I would get rid of everything except the 9% back load fund and start fresh.

Then, depending on the capital gains, I would swap the Small Cap Index in taxable for more S&P500 Index (or Large Cap Index), but if the gains are high, I would leave the Vanguard taxable account alone. For the foreign holdings, I would buy FTSE-all world index and give it a value tilt with the Dodge & Cox fund. I would not try to slice and dice the international holdings on the basis of capitalization size.

I would try for something like this on the stock side:
20% Large Cap Index or S&P500 Index (taxable)
10% Large Cap Value Index (IRA)
20% Small Cap Index (IRA)
10% Small Cap Value Index (IRA)
20% FTSE all-world ex-US Index (taxable)
10% Dodge & Cox Int'l (IRA)
10% REIT Index (IRA) [or maybe add to large cap allocation]

For bonds I like:
50% Short Term Index (IRA)
25% Long Term Index (IRA)
25% TIPS (IRA)

Of course this portfolio doesn't take into account the Northern Trust, but that holding appears to have enough asset classes that you could think of it as a separate portfolio. I think what I've listed above is reasonable, but it still has a lot of funds, you could lose the value tilts and simplify somewhat. You could also buy mostly Total Stock Market index and tilt it using the Small Cap Value Index Fund.

I'm partial to 33.33% S&P500 Index, 33.33% Extended Market Index, 33.33% FTSE all world ex-US. It still has a small-mid cap tilt, but it's still a very simple portfolio.

Having said all that, a lot of your mom's funds have had great returns over the past 5 years. Of course they are somewhat expensive to own, but it looks like the fees have probably been worth it in this case. She's quite fortunate in that regard.

[alexander]

"She is a bit stubborn, but you have to realize that she was at over 80% equities prior to my taking over. She is also going through the emotional impact of my taking over as well."

Are you really truly sure you want to "take over"? Big potential for problems if she ends up resenting you for doing so, or if one of your suggestions ends up not working out.

As for your plan, sorry to say this, but in my opinion it's a poor one that will be difficult to maintain going forward. Too many funds that don't directly relate to the asset allocation you'd like. Furthermore, the slice/dice allocation you're using may be too much complexity for you and/or your mom to handle at this point. There is increased risk in departing from a market portfolio and a poorly executed slice-and-dice means you may be more likely to underperform.

I'd recommend you start with the total $ amount outside of the trust, forget about what your mom currently holds, and design a simple allocation from scratch without a slice-and-dice attempt using 4-6 funds. Once you have that, you can decide if making it more complex is something you want to do.

One potential starting point, assuming that the taxable account is receiving distributions from the IRA and she's spending regularly from it.

Taxable:
A% in VG Prime (~12 months of expenses)
B% in VG Short-term bond (the rest)

IRA:
C% in VG TIPS
D% in VG Total Stock Market
E% in VG Total Intl Stock Market
F% in VG REIT Index.

[x36900]

...but I tend to agree with previous responses that you are, without reason, making this more complex than need be.

You appear to have two particular issues that should be addressed. The first is two REIT funds that have back-loads/fees. You said that that the fund that has a 9% back-load makes up 5.2% of her portfolio, and that the fund that has a 6% back-load makes up 3.8% of her portfolio.

Well, 9% of a 5.2% chunk of the port. is slightly less than one-half of one-percent (actually, 0.468%). It's not very much in terms of the whole portfolio; if you decide to dump it, she still has 99.532% of her portfolio left.

And, 6% of a 3.8% piece of her portfolio is only 0.228% of the port. If you were to sell both, you'd still have 99.304% of the portfolio left. I'm not advocating a sale necessarily, just pointing out the facts.

The second issue looks like a plea for help on bonds/bond funds. The three Vanguard funds you wrote about are all solid. However, I think that you can do about as well with Vanguard's Short-Term Bond Index (VBISX), and Intermediate-Term Bond Index (VBIIX). They tend to hold a heck of a lot of Treasury bills, notes, and bonds too and are for all practical purposes just as "safe" as the Treasury funds.

One issue that may not have caught your attention, though, is this: the inflation protected securities fund should be thought of as an intermediate term fund also. So, I would advise you to think about forgetting the intermediate term bond fund, and just stick with two bond funds -- the inflation protected securities fund (VIPSX), and the short-term fund that you like best.

Other than that, I think you can stick to two stock funds, the Total Stock Market fund (VTSMX) and the FTSE world ex-U.S. fund (ETF version; it's ticker is VEU).

Those two equity funds, and two bond funds should make a fine core portfolio. If you want to tilt to small cap or value with another fund or two funds, feel free.

Hope that gives you some help.

Best of luck!
Brian

[Trev H]

.
To keep it as simple as possible, considering both Taxable and IRA accounts...

Taxable (most simple)

Total Stock Market Index
FTSE X-US

IRA

Value Index
Small Value Index
VGSIX US REIT
VTRIX (International Value)
DLS (Intl Small Value).
You could slice the REIT into US and International (below a good link for reading up on some of the choices).

http://altruistfa.com/foreignREITs.htm

Then for Bonds use InterTerm Treasury and TIPS.

You could complicate the Taxable Account side a bit more and accomplish more S&D (but still remain very tax efficient) by using something like this there...

Tax Managed Cap Appreciation (US Large)
Tax Managed Small Cap
Tax Managed International (Intl Developed)
Emerging Mkts Index

All of the above are Blend... which gets you plenty of exposure to Growth.
Then in the IRA/Tax Qualified area... you pick up the Value Tilts, REITs and Treasury/TIPS.

Trev H

[Laura]

InvestingMom,

If I understand it correctly your mother has a portfolio like this:

29% trust
7% taxable
64% IRA

You have proposed a very complex portfolio with many tiny positions. If one of these small holdings has an extraordinarily good year and even returns 100% you are going to see almost no difference in your bottom line. 100% growth of a 1.2% holding is nothing. In other words, you gain complexity without any other real benefits. You should try to keep to a minimum of 5% in any particular holding, if possible.

Your mother says wants a 60/40 asset allocation with 30% of her equity in international. Building around the trust that is basically 80/20 equity/bonds plus cash, I think you could structure a portfolio like this:

taxable
7% Total Stock Market

trust
19.3% bonds/cash
4.2% Intl Equity
1.2% real estate
4.3% US equity

IRA
20% Vanguard Inflation Protected Securities
14% Total Intl Stock Market (includes developed and emerging markets)
5% Vanguard REIT (get out of the other real estate investments)
5% small cap value index (if you want a value tilt)
20% Total Stock Market

To be honest I don't think you even need the REIT or small cap value index funds but I included them since you seem to like to slice and dice. If you can do without these then add those funds to the Total Stock Market. Remember that the TSM fund does include small cap value and REIT holdings already so these two funds are to overweight the market holdings in these areas.

This portfolio would be significantly less expense, more tax efficient, and still broadly diversified. I also think it would be easier for your mother to track her investments.

There are many ways to set this up. Good luck with your choices.

Laura

[InvestingMom]

I only have a few minutes to look at this today so I wanted to say Thank You very much for your responses so far. I feel like a broken record, but I am very grateful that there are so many people willing to help.

I would like to spend some time thinking about many of the recommendations and ask some follow up questions in a day or two so I hope you will continue to comment.

Couple of quick comments for anyone new reading this since I may have not made myself clear in my original post which I was trying ha ha to make short.

My preference is to slice and dice to the extent that this helps me weight the portfolio towards value. I can easily handle a few more funds to accomplish this. I am glad that most of the posters so far have commented on the amount of funds as I think I needed the push to get rid of most of the non-vanguard funds. That being said I can easily handle a dozen or so funds, assuming most are index funds.

Incidentally, when I took over investing for my mom a couple of months ago she was in over 30 funds. I have already sold 20plus. Also, my mom is completely fine with me doing the investing now. She was shocked when I suggested it at first, but after she thought about it and after I showed her how much her broker was ripping her off, she was glad to have me involved. I did not mean to imply that she is resisting my efforts.

Thanks again to all who have posted.

[x36900]

...since you asked for some.

I certainly don't want to disuade you from your chosen course of action, BUT you may find it difficult trying to slice & dice your way to every desired mutual fund class.

I ran a query on Morningstar's "premium" (allegedly) fund screener, and came up with only 38 funds that are index or enhanced-index, open to new investors, available through Vanguard as NTF, no-load, expense ratio 0.5% or less, minimum purchase less than or equal to $10,000.

Of that 38, 29 funds are Vanguard funds. That's great, but guess how many are Foreign Large Cap Value, or Foreign Small/Mid. Value? Answer: zero.

Oh, well. They may come into being in the future.

Best of luck,
Brian

[x36900]

...In case you are interested, that final query I ran gave me the following results (alphabetical, in terms of mutual fund category; all funds are Vanguard unless further detail provided):

Europe Stock -- 1 fund;
Foreign LC Blend -- 3 funds;
Intermediate Term Bond -- 3 funds, of which 2 are Vanguard;
Japan Stock -- 1 fund (Vanguard's "Pacific" Stock Index);
LC Blend -- 13 funds, of which 8 are Vanguard;
LC Growth -- 1 fund;
LC Value -- 1 fund;
Long Term Bond -- 1 fund;
MC Blend -- 3 funds, of which 2 are Vanguard;
MC Growth -- 1 fund;
MC Value -- 1 fund;
Moderate Allocation -- 1 fund;
Short Term Bond -- 1 fund;
SC Blend -- 4 funds, of which 2 are Vanguard;
SC Growth -- 1 fund;
SC Value -- 1 fund;
Specialty REIT -- 1 fund.

Best regards,
Brian

[InvestingMom]

All,
Consistently I am hearing that I should do the following:

• Get rid of most if not all of the non-vanguard funds (Thanks, I think I needed a push to go for it. As I mentioned in a subsequent post, I started with over 30 funds and have sold most of them. These last "legacy" funds were ones I was having a hard time selling. But with your help I will go for it.)
  
  Consider the Northern Trust separately (I agree that I can review this annually and just by eye balling it I can weight mom's other accounts accordingly and this is probably not necessary at all. My excel spreadsheet was getting out of control anyway.
  
  Get rid of at least one of the REITS if not both
  
  Utilize the FTSE all-world ex-US Index
  
  Simplify by utilizing Total stock market (and of course by not value tilting)

Thanks to all of you for these suggestions.

Pangloss,
Thanks for all of your advice and particularly for your opening comment. It helps and I think you were the only one who said anything postive about my plan. Even after reading all of the comments I think that I came up with a pretty good draft plan (of course you all don't know what I started with!)

I have some questions about your following recommendations:

• Then, depending on the capital gains, I would swap the Small Cap Index in taxable for more S&P500 Index (or Large Cap Index), but if the gains are high, I would leave the Vanguard taxable account alone.
  For the foreign holdings, I would buy FTSE-all world index and give it a value tilt with the Dodge & Cox fund. I would not try to slice and dice the international holdings on the basis of capitalization size.
  20% FTSE all-world ex-US Index (taxable)

Why not small cap index in taxable account? Some of the others advised me on this as well. Since it is an index fund it should be pretty tax efficient. Dividends will be lower than vanguard 500? Balancing won't cause too much gain (or cost since she is in flagship under my umbrella). Related to this, I think you were the only one or two to recommend the FTSE all world in taxable. Just curious why this one... less dividends?
Thanks for the advice of using FTSE all world with Dodge and Cox.

Alexander,
You advice was consistent with most folks who posted so thank you as well. The only question I had was related to your statement...

Taxable:
A% in VG Prime (~12 months of expenses)
B% in VG Short-term bond (the rest)

Mom takes direct distribution from MMKT in her IRA and so I am trying to avoid any cash and bonds in the taxable accounts. Just curious about your thinking since this is contrary to most advice?

Brian (x36900),
Thanks for your advice on the REITS. I like the way you put it. I need to see the forest through the trees (or whatever the saying is) and keep focused on the entire portfolio, so your comments helped.
I like you bond recommendation as well and thanks for pointing out some more bond detail comments that will help me decide.
Lastly, I really like you idea to use the ETF for FTSE world index.

Trev,
Thanks to you as well. You also recommended the FTSE world index (as well as Emerging) in the taxable account so I would appreciate your reasoning. Thanks for the web site recommendation it has some good information.

Laura,
Thanks for keeping your eye on all of us! Your recommendations are pretty straight forward. You also helped me with seeing the forest through the trees and not bothering putting dollars where they will hardly make a difference. One question. So you are recommending 100% tips for the bonds in the IRA? I would appreciate knowing your reasoniing.

Sincerely,
IM

[InvestingMom]

Brian,
Thanks for your research. I agree that Vanguard does not have much to offer for international value.

I see that the fund Vanguard intl value (VTRIX) is described as "blend" by M*, Vanguard and charles schwab. However, when I look closer on M*, for example under the portfolio tab, it puts it in the "value" box. Hmmm?

[x36900]

categories for either Vanguard Int'l Value (VTRIX) or Vanguard Int'l Growth (VWIGX).

Both funds are considered "blend" by Morningstar. I suspect that some of the individual securities that Int'l Value was holding when "everyone" considered them value have seen their prices go up, and perhaps their P/E ratios increase, thus becoming less valuey.
On the other hand, perhaps some of the individual securities that Int'l Growth held when "everyone" considered them growth stocks haven't increased in price as dramatically, and now are less growthy.
I don't think it matters, but that's just my opinion.

Neither of those funds -- both of which I held until recently, by the way -- has an expense ratio that is as competitive as the FTSE all-World ETF.

I like that lower expense ratio, and I like that FTSE all-World gives you growth, value, and blend, in Europe, Japan, Asia ex. Japan, Latin America, Emerging Markets, and Canada too. In other words, you get everything, automatically.

Best of luck! Glad I could be of some help to you,
Brian

[Laura]

IM,

The reason I recommended 100% TIPS in the IRA is because of the bonds in the trust. I did include the trust in the overall asset allocation but there was nothing specific on the type of bonds. I am guessing that these are probably some sort of corporate bonds. Your mother lacks inflation protection so I recommended Inflation Protected Securities in the IRA.

Laura