Portfolio advice and analysis

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letsinvest
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Portfolio advice and analysis

Post by letsinvest » Mon Jan 02, 2012 1:05 am

Emergency funds = 4 months of expenses
Debt: Mortgage $500K with 3.5% interest rate
Tax Filing Status: Married filing Jointly
Tax Rate: 28% Federal, no state tax
Age: 35

Desired Asset allocation: (stocks/bonds) 70/30
Desired Intl allocation: 15-20% of stocks

Current portfolio (size of the portfolio: 5 figures)

Taxable
60% cash (for investing – do not include emergency funds)

His 401k : company match 3%
Vanguard Extended Market Index Fund Institutional Shares (VIEIX, 0.12%) 2%
Vanguard FTSE All-World ex-US Index Fund Institutional Shares (VFWSX, 0.15%) 2%
Vanguard Target Retirement 2030 Fund (VTHRX,0.18%) 20%
Vanguard Target Retirement 2040 Fund (VFORX, 0.19%) 2%
Vanguard Target Retirement 2045 Fund (VTIVX, 0.19%) 2%
Vanguard Target Retirement 2050 Fund (VFIFX, 0.19%) 2%
Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX, 0.07%) 10%


Questions:
1) With my current portfolio and my desired asset allocation, I have come up with these portfolios (see below). But, I am unable to decide the suitable portfolio among them for us. The risk/returns of all these three portfolios are approximately same by using Simba’s spreadsheet .
2) Do I need to balance my 401k, if so what mix do you suggest?
3) Which are the tax efficient Vanguard funds suitable for taxable investment account?
4) Can I use same fund type for me and my spouse's investment account to keep things simple?
5) What would be the best way to calculate the approximate risk and return of a given portfolio?


Portfolio 1
25% : VIGRX/VUG (Large Cap)
20% : VMVIX/VOE (Mid-Cap Value - )
20% : VISVX/VBR (Small-Cap Value)
10% : VGTSX/VXUS (Total International Stock)
10% : VEIEX/VWO (Emerging Markets)
15% : VBTIX (Total Bond)

Portfolio 2
06% : VIVAX (Large Cap Value)
12% : VISVX (Small Cap Value)
06% : VGSIX (REIT)
18% : VEIEX (Emerging Mkt)
12% : VTRIX (Intl.Value)
06% : VGTSX (Total Intl)
40% : VBMFX (Total Bond)

Portfolio 3
25% : VLACX (Large-Cap)
13% : VMVIX (Mid-Cap Value)
12% : VISVX (Small-Cap Value)
10% : VFWIX (Total International Stock)
10% : VFSVX (Emerging Markets)
30% : VBMFX (Total Bond)

Thanks all for your help.

Bob's not my name
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Re: Portfolio advice and analysis

Post by Bob's not my name » Mon Jan 02, 2012 5:54 am

Let's get your tax situation clear first. I don't understand why you have so much in taxable.

-- Is your spouse not covered by an employer plan?
-- No IRAs?
-- Are you maxing your 401k with $17,000 of annual employee contributions?
-- To be in the 28% bracket with a mortgage that big your gross income has to be at least about $190,000, more if you have kids. Is that right? Are you subject to AMT? If you provide your gross income and number of dependents I can help with figuring out your eligibility for direct Roth IRA and spousal TIRA contributions.

letsinvest
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Re: Portfolio advice and analysis

Post by letsinvest » Mon Jan 02, 2012 11:06 pm

-- Let's get your tax situation clear first. I don't understand why you have so much in taxable.
>> I quite don't understand how it's taxable, since all of my current investments are in 401K

-- Is your spouse not covered by an employer plan?
>>That's right my spouse is not covered, currently a student.

-- No IRAs?
>> Thinking of starting one this year for my spouse and ROTH IRA for me.

-- Are you maxing your 401k with $17,000 of annual employee contributions?
>> Yes I am.

-- To be in the 28% bracket with a mortgage that big your gross income has to be at least about $190,000, more if you have kids. Is that right? Are you subject to AMT? If you provide your gross income and number of dependents I can help with figuring out your eligibility for direct Roth IRA and spousal TIRA contributions.
>> Total household gross income in 100K. No AMT, no kids, no dependents.

Bob's not my name
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Re: Portfolio advice and analysis

Post by Bob's not my name » Tue Jan 03, 2012 4:07 am

letsinvest wrote:Taxable
60% cash (for investing – do not include emergency funds)
3) Which are the tax efficient Vanguard funds suitable for taxable investment account?
I wrote:I don't understand why you have so much in taxable.
letsinvest wrote:I quite don't understand how it's taxable, since all of my current investments are in 401K
:?:

Bob's not my name
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Re: Portfolio advice and analysis

Post by Bob's not my name » Tue Jan 03, 2012 4:25 am

letsinvest wrote:Debt: Mortgage $500K with 3.5% interest rate
Tax Filing Status: Married filing Jointly
Tax Rate: 28% Federal, no state tax
letsinvest wrote:Total household gross income is 100K.
You're in the 15% bracket and you have no state tax. That's a very low bracket. It's important to know your bracket, because it influences investing decisions. Here's my guess at your tax return numbers. Check this against your 1040 (the part in color doesn't appear on your 1040).

$100,000 gross
- $3,000 pre-tax health and dental insurance and FSA contributions (guess)
- $17,000 401k contributions

----------------------------------
$80,000 AGI
- $7,600 personal exemptions
- $21,400 itemized deductions (guess, based on $17,500 of annual mortgage interest)
----------------------------------
$51,000 taxable income

That puts you in the 15% bracket with $20,000 of headroom before the 25% bracket and $90,000 of headroom before the 28% bracket. Why did you think you were in the 28% bracket? Is $100k a typo? I can't reconcile it with a mortgage that big and a maxed 401k.

With $80,000 AGI you are both fully eligible for direct Roth IRAs or deductible TIRAs. Given your very low tax bracket and no state tax, I recommend Roth IRAs. You still have plenty of time to contribute to 2011 IRAs.
Last edited by Bob's not my name on Wed Jan 04, 2012 4:57 am, edited 1 time in total.

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Duckie
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Re: Portfolio advice and analysis

Post by Duckie » Tue Jan 03, 2012 5:51 pm

letsinvest, you want an allocation of 70% stocks, 30% bonds, with 15-20% of stocks in international. That breaks down to roughly 55% US stocks, 15% international stocks, 30% bonds. Here is a proposed retirement portfolio:

Taxable at Vanguard -- 60%
15% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.26%)
45% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%)

His 401k -- 40%
30% (VBTIX) Vanguard Total Bond Market Index Fund Institutional Shares (0.07%)
10% <--- This needs to be either a total stock market fund or a 500 index fund. Do you have them here? What are your 401k options?

His Roth IRA at Vanguard -- 0%

Her Roth IRA at Vanguard -- 0%

* The IRAs can be opened and funded before mid-April for the 2011 contributions. If you want to overweight small caps or reits, put them there, otherwise use TSM.
* I am assuming you have at least $20K to meet the $3K minimum for TISM. If not, you could overweight it for awhile.
* I put TISM in taxable so you can take advantage of the Foreign Tax Credit.
* List all your 401k options with ticker symbols and expense ratios if possible.

Your Questions:

1) With my current portfolio and my desired asset allocation, I have come up with these portfolios (see below). But, I am unable to decide the suitable portfolio among them for us. The risk/returns of all these three portfolios are approximately same by using Simba’s spreadsheet.
-- I don't like any of your possible portfolios. They're not only unnecessarily complicated, they serious overweight some classes and seriously underweight others. See above for my suggestions.

2) Do I need to balance my 401k, if so what mix do you suggest?
-- Yes, you need to rebalance. You have four different TR funds. You're all over the place. See above for suggestions.

3) Which are the tax efficient Vanguard funds suitable for taxable investment account?
-- The best are Total Stock Market (TSM) and Total International Stock Market (TISM). See Principles of Tax-Efficient Fund Placement.

4) Can I use same fund type for me and my spouse's investment account to keep things simple?
-- When you write "investment account" are you referring to the taxable account, which I assume is joint? If so, see above.

5) What would be the best way to calculate the approximate risk and return of a given portfolio?
-- I don't know. I used to use RiskGrades, but that site's gone now.

Something to think about.

letsinvest
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Re: Portfolio advice and analysis

Post by letsinvest » Tue Jan 03, 2012 11:52 pm

Bob's not my name wrote: Why did you think you were in the 28% bracket? Is $100k a typo? I can't reconcile it with a mortgage that big and a maxed 401k.
You are right, there was a mistake. Sorry for confusion.

100K is the NET income and gross is 150K.
Hence,
150000 (AGI)
-17000(401K contributions)
-7600 (Personal exemptions)
-25400 (Itemized deduction)
--------------------------------
100K (net taxable income)

Bob's not my name
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Re: Portfolio advice and analysis

Post by Bob's not my name » Wed Jan 04, 2012 4:56 am

letsinvest wrote:100K is the NET income and gross is 150K.
Hence,
150000 (AGI)
-17000(401K contributions)
-7600 (Personal exemptions)
-25400 (Itemized deduction)
--------------------------------
100000 (net taxable income)
You're getting there, but your labels aren't exactly right :)

150,000 (gross income, not adjusted gross income)
-17,000(401K contributions) <-- no pre-tax health and dental?
---------------------------------
133,000 AGI
-7,600 (Personal exemptions)
-25,400 (Itemized deduction)
--------------------------------
100,000 (net taxable income) <-- middle of the 25% bracket ... but:

Your AGI may put you in some phaseouts. For example, you are fully phased out of the Lifetime Learning Credit, but you may be in the phaseout for the Education and fees deduction. This is a harsh phaseout: if your AGI breaks $130,000 you lose a $2,000 deduction, and if it breaks $160,000 you lose the other $2,000 deduction. These deductions are each worth $500 in tax savings, so if you go $100 over a threshold that costs you $500 in taxes. Welcome to the 525% tax bracket. Try to get the full $1,000: maybe you're already there with pre-tax health insurance premiums. If not, consider a deductible spousal TIRA rather than a Roth IRA for your wife; she is eligible if she's not covered by an employer plan at any time in the tax year and your AGI is under $169,000 (2011) or $173,000 (2012). Note that you can still do a 2011 TIRA for her, and a 2012 if she will not be covered by an employer plan at any time in 2012. Caveat: I've never used the Education deduction, so research it for yourself by reading Pub 970 with your 1040 in hand.

What will happen to your income when your wife finishes school, and when will that be? That would also affect these decisions.

letsinvest
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Re: Portfolio advice and analysis

Post by letsinvest » Wed Jan 04, 2012 11:03 pm

Bob's not my name wrote:
150,000 (gross income, not adjusted gross income)
-17,000(401K contributions) <-- no pre-tax health and dental?
No, health and dental covered by the company.
Bob's not my name wrote: Your AGI may put you in some phaseouts. For example, you are fully phased out of the Lifetime Learning Credit, but you may be in the phaseout for the Education and fees deduction. This is a harsh phaseout: if your AGI breaks $130,000 you lose a $2,000 deduction, and if it breaks $160,000 you lose the other $2,000 deduction. These deductions are each worth $500 in tax savings, so if you go $100 over a threshold that costs you $500 in taxes. Welcome to the 525% tax bracket. Try to get the full $1,000: maybe you're already there with pre-tax health insurance premiums. If not, consider a deductible spousal TIRA rather than a Roth IRA for your wife; she is eligible if she's not covered by an employer plan at any time in the tax year and your AGI is under $169,000 (2011) or $173,000 (2012). Note that you can still do a 2011 TIRA for her, and a 2012 if she will not be covered by an employer plan at any time in 2012. Caveat: I've never used the Education deduction, so research it for yourself by reading Pub 970 with your 1040 in hand.

What will happen to your income when your wife finishes school, and when will that be? That would also affect these decisions.
My wife is sponsored by the school, so we cant get education deduction. My wife plans to finish her school by the end of 2012, so another year without employer IRA.

We will surely think about TIRA for her and Roth IRA for myself. For this, I would need your suggestions on the investment strategies.

Bob's not my name
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Re: Portfolio advice and analysis

Post by Bob's not my name » Thu Jan 05, 2012 4:18 am

If you're not in any phaseouts then your bracket is the straight 25%. A deductible spousal TIRA may make sense in that bracket. However, the reason I asked about your income after she graduates is if your combined gross income will go over $210,000, you may be ineligible for direct Roth IRA contributions in the future. That's not a big deal, because you can then do back door Roths. However, an existing pre-tax TIRA would complicate a back door Roth for your wife. You can read about back door Roths on the wiki if you're not familiar with them.

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Re: Portfolio advice and analysis

Post by Bob's not my name » Thu Jan 05, 2012 6:17 am

letsinvest wrote:I would need your suggestions on the investment strategies.
Duckie's advice is good.

YDNAL
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Re: Portfolio advice and analysis

Post by YDNAL » Thu Jan 05, 2012 9:26 am

letsinvest wrote:Emergency funds = 4 months of expenses
Debt: Mortgage $500K with 3.5% interest rate
Tax Filing Status: Married filing Jointly
Tax Rate: 28% Federal, no state tax
Age: 35

Desired Asset allocation: (stocks/bonds) 70/30
Desired Intl allocation: 15-20% of stocks

Current portfolio (size of the portfolio: 5 figures)
letsinvest,

A 5-fig portfolio ($10,000 - $99,999) is not a lot of money in the BIG picture. A $500K mortgage is actually a BIG mortgage. This sucker costs about $18K annually in interest (pre-tax deduction).

What is your plan for this debt?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

letsinvest
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Re: Portfolio advice and analysis

Post by letsinvest » Sun Jan 08, 2012 6:43 pm

Duckie wrote:letsinvest, you want an allocation of 70% stocks, 30% bonds, with 15-20% of stocks in international. That breaks down to roughly 55% US stocks, 15% international stocks, 30% bonds. Here is a proposed retirement portfolio:
I came up with 15-20% international stocks, based on my readings. I am not sure if this needs to be 15-20% though. I would appreciate your thoughts on this. Further, I used various funds to make sure I am diversifying my investments. I imagine that having too many funds can complicate the portfolio.
Duckie wrote: Taxable at Vanguard -- 60%
15% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.26%)
45% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%)
Could you explain me what is your reason for choosing VGTXS over the following since all the below funds has better returns (Approximately 3% more) than VGTSX and has the same risk (risk 5).
(VINEX) Vanguard Internatl Explorer Fund (0.39%)
(VEIEX) Vanguard Emerging Mkts Stk Idx Inv (0.35%)
(VHGEX) Vanguard Global Equity Fund (0.44%)
(VTRIX) Vanguard International Value Fund (0.39)
Duckie wrote: His 401k -- 40%
30% (VBTIX) Vanguard Total Bond Market Index Fund Institutional Shares (0.07%)
10% <--- This needs to be either a total stock market fund or a 500 index fund. Do you have them here? What are your 401k options?
Here are list of 401K options

Code: Select all

Fund Name	Fund Symbol	Expense Ratio
Dodge & Cox International Stock 	DODFX	0.65%
DFA US Small Cap Value I 	DFSVX	0.52%
PIMCO Total Return Instl 	PTTRX	0.46%
TIAA-CREF Social Choice Eq Instl 	TISCX	0.20%
Vanguard Brokerage Option Fund 	—	
Vanguard Explorer Fund Investor 	VEXPX	0.49%
Vanguard Extended Mkt Index Inst 	VIEIX	0.12%
Vanguard FTSE All-World ex-US Ist	VFWSX	0.15%
Vanguard Inflation-Protect Sec Inv 	VIPSX	0.22%
Vanguard Inst Index Fund Inst 	VINIX	0.04%
Vanguard Morgan Growth Fund Inv 	VMRGX	0.44%
Vanguard Prime Money Mkt Fund 	VMMXX	0.20%
Vanguard Retirement Savings Trust 	—	0.31%
Vanguard Target Retirement Income 	VTINX	0.17%
Vanguard Target Retirement 2005 	VTOVX	0.17%
Vanguard Target Retirement 2010 	VTENX	0.17%
Vanguard Target Retirement 2015 	VTXVX	0.16%
Vanguard Target Retirement 2020 	VTWNX	0.17%
Vanguard Target Retirement 2025 	VTTVX	0.18%
Vanguard Target Retirement 2030 	VTHRX	0.18%
Vanguard Target Retirement 2035 	VTTHX	0.19%
Vanguard Target Retirement 2040 	VFORX	0.19%
Vanguard Target Retirement 2045 	VTIVX	0.19%
Vanguard Target Retirement 2050 	VFIFX	0.19%
Vanguard Target Retirement 2055 	VFFVX	0.19%
Vanguard Total Bond Mkt Index Inst 	VBTIX	0.07%
Vanguard Wellington Fund Inv 	VWELX	0.30%
Vanguard Windsor II Fund Inv 	VWNFX	0.35%

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Duckie
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Re: Portfolio advice and analysis

Post by Duckie » Sun Jan 08, 2012 7:30 pm

letsinvest wrote:I came up with 15-20% international stocks, based on my readings. I am not sure if this needs to be 15-20% though. I would appreciate your thoughts on this. Further, I used various funds to make sure I am diversifying my investments. I imagine that having too many funds can complicate the portfolio.
Anywhere from 20%-40% of stocks in international is considered suitable by most people on this forum, but you don't have to go by what we say. Figure out what works best for you.
Could you explain me what is your reason for choosing VGTXS over the following since all the below funds has better returns (Approximately 3% more) than VGTSX and has the same risk (risk 5).
I chose TISM because it's the best total international index fund on the market. It has everything (Europe, Far East, emerging markets, Canada, large and small caps). It's a one-stop-shop. You can't exactly compare the other funds to TISM because they have different tilts, so they will have different returns. Sometimes they will do better, sometimes they won't. They also cost a little more.

For the 10% in His 401k I recommend four parts (8%) (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.04%) to one part (2%) (VIEIX) Vanguard Extended Market Index Institutional Shares (0.12%). This roughly replicates TSM.

Bob's not my name
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Re: Portfolio advice and analysis

Post by Bob's not my name » Sun Jan 08, 2012 7:38 pm

Wow. Awesome 401k.

letsinvest
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Re: Portfolio advice and analysis

Post by letsinvest » Fri Jan 20, 2012 12:50 am

YDNAL wrote: A 5-fig portfolio ($10,000 - $99,999) is not a lot of money in the BIG picture. A $500K mortgage is actually a BIG mortgage. This sucker costs about $18K annually in interest (pre-tax deduction).

What is your plan for this debt?
Sorry for delayed reply, got a bit busy with job-related travels.
You are right that a 5-figure portfolio is not sufficient. I started following Bogleheads only after buying a house (used to think that house is an investment) and realized that buying a house was wrong decision. Hence, I havent paid down much and dont intend to live in this house for more than five years. I hope to allocate some of the investments toward buying future home.

letsinvest
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Re: Portfolio advice and analysis

Post by letsinvest » Sat Jan 28, 2012 6:53 pm

Bob's not my name wrote:If you're not in any phaseouts then your bracket is the straight 25%. A deductible spousal TIRA may make sense in that bracket. However, the reason I asked about your income after she graduates is if your combined gross income will go over $210,000, you may be ineligible for direct Roth IRA contributions in the future. That's not a big deal, because you can then do back door Roths. However, an existing pre-tax TIRA would complicate a back door Roth for your wife. You can read about back door Roths on the wiki if you're not familiar with them.
Thanks for your reply. I was reading about the back door Roths and other retirement options in the wiki. When my wife gets a job and our GI exceeds 210K, but if her employer provides a 401K, then we don't have to worry about non-deductible TIRA, right?
I am a bit confused about how non-deductible TIRA is taxed, when you plan to use a back door Roth. In a hypothetical example, if I have 100K in TIRA, 200K in 401K and 50K in my non-deductible TIRA, then when I decide to do a back door Roth, how it works (Transaction, Tax etc.)?

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Duckie
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Re: Portfolio advice and analysis

Post by Duckie » Sat Jan 28, 2012 8:09 pm

letsinvest wrote:I am a bit confused about how non-deductible TIRA is taxed, when you plan to use a back door Roth. In a hypothetical example, if I have 100K in TIRA, 200K in 401K and 50K in my non-deductible TIRA, then when I decide to do a back door Roth, how it works (Transaction, Tax etc.)?
If you do a backdoor Roth, the 401k is not an issue, but the IRAs are. In your example, you have $150K in non-Roth IRAs with (let's say) $30K being non-deductible contributions as of the end of 2012. (You don't have non-deductible IRAs, just IRAs with non-deductible contributions.) Your basis is $30K or 20%. If you made a $5K non-deductible contribution for 2012 and immediately converted it you would pay taxes on 80% or $4K for 2012. Look at IRS Form 8606 and play with the numbers.

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Re: Portfolio advice and analysis

Post by letsinvest » Sat Jan 28, 2012 9:32 pm

Duckie wrote: I chose TISM because it's the best total international index fund on the market. It has everything (Europe, Far East, emerging markets, Canada, large and small caps). It's a one-stop-shop. You can't exactly compare the other funds to TISM because they have different tilts, so they will have different returns. Sometimes they will do better, sometimes they won't. They also cost a little more.
If I understand this correctly, while choosing any fund, I should choose a mix rather than looking at return/risk. I am still trying to understand how to evaluate any given fund.

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Re: Portfolio advice and analysis

Post by Kevin M » Sun Jan 29, 2012 2:06 am

letsinvest wrote:
Duckie wrote: I chose TISM because it's the best total international index fund on the market. It has everything (Europe, Far East, emerging markets, Canada, large and small caps). It's a one-stop-shop. You can't exactly compare the other funds to TISM because they have different tilts, so they will have different returns. Sometimes they will do better, sometimes they won't. They also cost a little more.
If I understand this correctly, while choosing any fund, I should choose a mix rather than looking at return/risk. I am still trying to understand how to evaluate any given fund.
Have you read this: http://www.bogleheads.org/wiki/Three-fund_portfolio? You can get answers to most of your basic questions by reading the wiki.

Most of us do not evaluate funds based on past returns. Expected returns and risk are related.

Total market (US and international) stock funds are a good starting point for the stock portion of your portfolio. Many people also use Total Bond for the fixed income part. Many people just stick with something along the lines of a 3 fund portfolio (Total US, Total International, Total Bond), while others "tilt" by adding a small-cap value fund or other funds to "overweight" certain segments of the market. This is all covered fairly extensively in the wiki.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

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Re: Portfolio advice and analysis

Post by dbr » Sun Jan 29, 2012 9:57 am

letsinvest wrote:
Duckie wrote: I chose TISM because it's the best total international index fund on the market. It has everything (Europe, Far East, emerging markets, Canada, large and small caps). It's a one-stop-shop. You can't exactly compare the other funds to TISM because they have different tilts, so they will have different returns. Sometimes they will do better, sometimes they won't. They also cost a little more.
If I understand this correctly, while choosing any fund, I should choose a mix rather than looking at return/risk. I am still trying to understand how to evaluate any given fund.
I don't think one "evaluates" funds as if deciding which components for a stereo system are the best or which smart phone to buy. One builds portfolios based on fundamental properties such as the desired asset allocation, correct location for lowest tax cost, and selecting cost effective and tax efficient funds. What funds those are is already well known, or, at least there is a large enough selection of such funds one would not normally have to figure that out on one's own. I will grant people can be faced with some conundrums in bad 401K plans, but people here can help a lot with that.

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Re: Portfolio advice and analysis

Post by letsinvest » Mon Feb 06, 2012 10:58 pm

Kevin M wrote: Most of us do not evaluate funds based on past returns. Expected returns and risk are related.

Total market (US and international) stock funds are a good starting point for the stock portion of your portfolio. Many people also use Total Bond for the fixed income part. Many people just stick with something along the lines of a 3 fund portfolio (Total US, Total International, Total Bond), while others "tilt" by adding a small-cap value fund or other funds to "overweight" certain segments of the market. This is all covered fairly extensively in the wiki.

Kevin
Thanks Kevin, I have been reading many articles on wiki and they are very helpful. I too think that for a beginner the "lazy portfolio" could be a better option and I will start that soon.
I am still trying to understand how to evaluate the funds. You say that most people do not evaluate funds based on past returns, then what criteria are used for evaluation? It would be really helpful to understand this in the long run.

letsinvest
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Re: Portfolio advice and analysis

Post by letsinvest » Mon Feb 06, 2012 11:11 pm

dbr wrote:
I don't think one "evaluates" funds as if deciding which components for a stereo system are the best or which smart phone to buy. One builds portfolios based on fundamental properties such as the desired asset allocation, correct location for lowest tax cost, and selecting cost effective and tax efficient funds. What funds those are is already well known, or, at least there is a large enough selection of such funds one would not normally have to figure that out on one's own. I will grant people can be faced with some conundrums in bad 401K plans, but people here can help a lot with that.
Thanks dbr, you imply that one should not evaluate funds based on the stocks (components) and it is also suggested in this post that most people do not evaluate funds based on returns/risk. I do understand that funds are chosen based on desired asset allocation and tax strategies, but when you have so many fund options, how to evaluate those funds? For example, there are four funds for international stock investment (desired allocation is 20%) I can choose from, but I am not sure about the criteria to evaluate these:
(VINEX) Vanguard Internatl Explorer Fund (0.39%)
(VEIEX) Vanguard Emerging Mkts Stk Idx Inv (0.35%)
(VHGEX) Vanguard Global Equity Fund (0.44%)
(VTRIX) Vanguard International Value Fund (0.39)

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Re: Portfolio advice and analysis

Post by Kevin M » Mon Feb 06, 2012 11:16 pm

letsinvest wrote:You say that most people do not evaluate funds based on past returns, then what criteria are used for evaluation? It would be really helpful to understand this in the long run.
Cost is a big factor; it has been shown to be more predictive (than past performance) of future performance. Expense Ratio (ER) is a big part of cost. Turnover also affects cost. Of course very few if any of us would use a fund that charges a sales fee or "load" (this doesn't include the fees that Vanguard charges for a few of its funds; these fees go to shareholders, not to a sales person).

Index funds generally are preferable to actively managed funds, since the research shows that few active managers beat an appropriate index in the long term, and if they do, it may be just luck. You want an index fund that does a good job of tracking its index, and there are debates about which indexes make the most sense, but you'll probably be fine if you use a Vanguard index fund.

You can't go wrong by starting with Vanguard Total Stock Market Index and Vanguard Total International Stock Index for the stock portion. Many people use Total Bond Index for the bond portion, but one of the other Vanguard short or intermediate term bond funds would work as well.

For a simple all-in-one fund appropriate for tax-advantaged accounts, the Vanguard Target Retirement and Vanguard LifeStrategy funds are good choices.

Kevin
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Re: Portfolio advice and analysis

Post by Kevin M » Mon Feb 06, 2012 11:21 pm

letsinvest wrote:... but when you have so many fund options, how to evaluate those funds? For example, there are four funds for international stock investment (desired allocation is 20%) I can choose from, but I am not sure about the criteria to evaluate these:
(VINEX) Vanguard Internatl Explorer Fund (0.39%)
(VEIEX) Vanguard Emerging Mkts Stk Idx Inv (0.35%)
(VHGEX) Vanguard Global Equity Fund (0.44%)
(VTRIX) Vanguard International Value Fund (0.39)
Hmmm, in your first post, you said you have this fund in your 401k: Vanguard FTSE All-World ex-US Index Fund Institutional Shares (VFWSX, 0.15%) 2%. You don't include that in your list. This fund is the one I would use for international, instead of the others you list. Why, because it includes most (but not all) of the international market, and it's a low-cost index fund. Note that the ER is lower than any of the others you listed.

The other funds are either actively managed, or don't include enough of the total international market to be a good core international fund.

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Re: Portfolio advice and analysis

Post by Kevin M » Tue Feb 07, 2012 2:37 am

I was a little rushed in my last reply, so I want to expand on it a bit, and try and address your question about selecting the appropriate funds a little more thoroughly.

You say you're interested in a "lazy" 3-fund portfolio, which is a fine way to start (and maybe continue forever). This means you want to come as close as possible to something like this:

- Total US Stock Market
- Total International Stock Market
- Total US Bond market

So you want to find the best available fund for each of these asset classes. By best I mean the lowest-cost index fund that most fully captures the target market, e.g., US stocks. Ideally you want a fund that holds all the stocks in that market in proportion to market weight, or at least does a good job of sampling the stocks so it tracks an index that includes all the stocks. The Vanguard funds I've mentioned do that.

If you don't have access to these specific Vanguard funds, then you look for something that comes as close as possible. Using your international funds as an example, the Vanguard FTSE All-World ex-US Index Fund (mentioned in your original post) is very close the the Vanguard Total International Stock Index fund; it just doesn't have the smaller-cap stocks, but those stocks don't have a big impact, so it's still good.

By contrast, the Emerging Markets Index fund only includes emerging markets, which represent only about 25% of total international; obviously not a good choice if you're using one fund for international. Similarly, the International Value fund focuses on a particular slice of the international market--stocks classified as "value stocks", so again, you're not getting the entire international market; also this fund and the other two you list are actively managed. Note that they have higher expense ratios than the one I'm recommending.

If those 4 funds were really your only choices (which doesn't make sense based on your original post), then we would look for the one with the broadest international market coverage. I believe International Explorer is more small cap, so maybe the Global Equity fund would do, but you'd have to read the info on the Vanguard site to learn more about it.

So, you really do need to have a basic understanding of the "components" of the fund to ensure that they adequately represent the asset class you're targeting. If you have access to all of the Vanguard funds, it's easy, since they're so well known by forum members. If not, then we can help you figure out what to look for, like I'm trying to do here.

Does this get more at what you're looking for?

Kevin
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Re: Portfolio advice and analysis

Post by letsinvest » Sun Feb 12, 2012 2:54 pm

Kevin M wrote: Does this get more at what you're looking for?
Thanks Kevin for your detailed explanation, it was very helpful. So, when evaluating funds, one should look for the low cost funds that are not actively managed and the "components" of the funds should broadly represent that particular asset class.

I dont intend to go for a lazy portfolio, but after reading wiki, it seems like a good option too. Further, I do have access to most vanguard funds, so I think it should be easy to pick the funds. Right now, I am working on the portfolio as per the suggestions I have received so far and may have more questions soon....

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Re: Portfolio advice and analysis

Post by Kevin M » Sun Feb 12, 2012 8:40 pm

I think you've got it. Keep us posted on your progress :sharebeer
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Re: Portfolio advice and analysis

Post by letsinvest » Sun Apr 01, 2012 10:03 pm

Thanks to all your suggestions. I have started monthly allocation to my portfolio.
Here is my current portfolio:

Large cap (VINIX) 25%
Mid cap (VMVAX) 12.50%
small cap (VSIAX) 12.50%
Total international (VFWAX) 10%
Emerging market (VEMAX) 10%
Bonds (VBTLX) 30%

But I am planning on selling my ESPP, funds, etc. that would generate ~160K (in taxable account) in hand to invest. I was wondering if you have any suggestions on investing this amount. I was thinking maybe I should invest in bonds and wait until next bear market comes. If you think this is a good strategy, can you please suggest the bond funds to invest in or any other investment strategy?

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Re: Portfolio advice and analysis

Post by Kevin M » Mon Apr 02, 2012 2:57 am

Using full fund names would help so we don't have to look them up.

vinix (S&P 500) makes up 80% of total US market. You are heavily under-weighting large cap by only having vinix make up half of your US allocation. Fine as long as you understand what you are doing (adding risk for higher expected returns).

VMVAX is mid-cap value, VSIAX is small-cap value. They are not that much different in median market caps. Plot 10-year growth on morningstar and I think you will see that they perform very similarly. I think all you need is VSIAX, not both.

With either of the above, you are tilting to small-cap value (not just small cap). Again, fine as long as you understand that you are taking on more risk for higher expected (not guaranteed) return.

VFWAX is All World ex US. It already has market weight of emerging markets (about 25%). So you do not need VEMAX unless you want to heavily tilt to emerging markets. Again, do you realize you are doing this?

Your US/Foreign split is 50/20 which if pretty close to 70/30, and this is pretty standard (used in VG target retirement funds), so it is fine.

It generally is better to hold stocks in taxable and bonds in tax-advantaged. Not sure from this post what is where. Also investing in stocks in taxable gives you the most flexibility in fund selection.

For fixed income now, I prefer INOVA 5-year CD, PenFed 7-year CD, or Ally 5-year CD to bond funds (better in IRA if possible, but I hold some in taxable too). If you want better tax efficiency and hold bonds in taxable, consider tax-exempt bond funds; shorter duration for less interest rate risk, intermediate for higher yield and more risk.

Kevin
letsinvest wrote:Thanks to all your suggestions. I have started monthly allocation to my portfolio.
Here is my current portfolio:

Large cap (VINIX) 25%
Mid cap (VMVAX) 12.50%
small cap (VSIAX) 12.50%
Total international (VFWAX) 10%
Emerging market (VEMAX) 10%
Bonds (VBTLX) 30%

But I am planning on selling my ESPP, funds, etc. that would generate ~160K (in taxable account) in hand to invest. I was wondering if you have any suggestions on investing this amount. I was thinking maybe I should invest in bonds and wait until next bear market comes. If you think this is a good strategy, can you please suggest the bond funds to invest in or any other investment strategy?
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Re: Portfolio advice and analysis

Post by letsinvest » Mon Apr 02, 2012 9:17 pm

Kevin M wrote: vinix (S&P 500) makes up 80% of total US market. You are heavily under-weighting large cap by only having vinix make up half of your US allocation. Fine as long as you understand what you are doing (adding risk for higher expected returns).
Can you give me an example wherein I can cover 100% of the total US market and also how can I determine (tools or something else) if a given fund covers 100% US market? Any other parameter I should consider while deciding on the fund?
Kevin M wrote: VMVAX is mid-cap value, VSIAX is small-cap value. They are not that much different in median market caps. Plot 10-year growth on morningstar and I think you will see that they perform very similarly. I think all you need is VSIAX, not both.
Make sense.
Kevin M wrote: VFWAX is All World ex US. It already has market weight of emerging markets (about 25%). So you do not need VEMAX unless you want to heavily tilt to emerging markets. Again, do you realize you are doing this?
I did not realize this. I definitely dont want to tilt to emerging market. Probably, I will remove VEMAX and increase VFWAX to 20%
Kevin M wrote: For fixed income now, I prefer INOVA 5-year CD, PenFed 7-year CD, or Ally 5-year CD to bond funds (better in IRA if possible, but I hold some in taxable too). If you want better tax efficiency and hold bonds in taxable, consider tax-exempt bond funds; shorter duration for less interest rate risk, intermediate for higher yield and more risk.
If I go with CD, I will be stuck. I would like to have flexibility to access money during bear market. So I guess short/intermediate duration, tax exempt bond funds could be a good idea, any recommendations for such bond funds?

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Re: Portfolio advice and analysis

Post by Kevin M » Tue Apr 03, 2012 1:51 am

letsinvest wrote: Can you give me an example wherein I can cover 100% of the total US market and also how can I determine (tools or something else) if a given fund covers 100% US market? Any other parameter I should consider while deciding on the fund?
About 80% S&P 500 plus 20% of an "extended market" fund = Total US. Extended market is mid caps and small caps. However, if you just put 20% of US allocation in a small-cap fund (or a mid-cap fund) you will come close enough because they are so similar. Unless you want to tilt to value, just use small cap, not small value. If you want a bit of tilt to value, go ahead and put 20% of US allocation in small value.

You can using Morningstar x-ray tool to see style box breakdown of any fund or combination of funds. You can play around to try and get as close as you want to total US (or whatever), but perfect match is not necessary to get close enough.
letsinvest wrote:If I go with CD, I will be stuck. I would like to have flexibility to access money during bear market. So I guess short/intermediate duration, tax exempt bond funds could be a good idea, any recommendations for such bond funds?
You are not stuck. You can do an early withdrawal and transfer back to another IRA (or another taxable account). With INOVA, as long as you hold for six months you will not lose money, and there is no fee to transfer out. With Ally Bank you don't lose anything if you hold 60 days. With PenFed you get all principal back if withdraw early any time.

All of Vanguard's tax-exempt funds are fine. If you are in high tax state, see if they have state-specific fund (I use the CA intermediate and long-term funds). Otherwise just use one of their national TE funds. They have short-term, limited-term, intermediate-term, and long-term. Note that the long-term TE funds are not that much longer-term than the intermediate-term. Look at duration to guage this.

There's a non-Vanguard muni fund that some Bogleheads are using because it owns higher quality bonds; can't remember the name. I'm fine with Vanguard; I own them all.

You are making good progress in understanding.

Kevin
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Re: Portfolio advice and analysis

Post by letsinvest » Tue Apr 03, 2012 8:53 pm

Thanks Kevin.

Let me give you my current investment scenario which may help you give me more better suggestion/advice.
Total funds: $300K

Tax-exempt account (401k): $75K now in Bonds + portion of my monthly paycheck (17K annually)
Bonds - (VBTLX) - 25%

Other Bond funds in my 401K plan where I can invest if you think these funds are better than my current invested bond fund.
VIPSX - Vanguard Inflation-Protected Securities Fund Investor Shares
PTTRX - PIMCO Total Return Instl

Taxable account: (I will be allocating money that I can’t put in tax-exempt account)
$225K is in individual stocks, which I am planning to sell now and invest in mutual funds. This is a bulk of money and I was thinking of waiting until the next bear market to invest in. I am considering CDs (as you suggested) or bonds to invest this amount until then. In addition I am investing portion of my wife’s paycheck regularly (12K Annually) to the below mutual funds.
Large cap - (VINIX) - 30%
Small cap - (VSIAX) - 20%
Total international - (VFWAX) - 20%
Bonds - (VWITX) - 5%

The above portfolio has been modified based on your suggestions. I am still not sure about the bond fund (VWITX). Thoughts?

Do you have any comments on the above portfolio and my investing strategy?

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Re: Portfolio advice and analysis

Post by Kevin M » Wed Apr 04, 2012 4:52 am

First, you did not mention IRAs. What about maxing IRA contributions? This should come before taxable, although it won't make a big dent in your taxable account.
letsinvest wrote: Tax-exempt account (401k): $75K now in Bonds + portion of my monthly paycheck (17K annually)
Bonds - (VBTLX) - 25%
Total Bond Market is a standard choice for many Bogleheads. I personally prefer investment grade, but I am in the minority. TBM is fine.
letsinvest wrote: Other Bond funds in my 401K plan where I can invest if you think these funds are better than my current invested bond fund.
VIPSX - Vanguard Inflation-Protected Securities Fund Investor Shares
PTTRX - PIMCO Total Return Instl
Many Bogleheads like to own some TIPS (VIPSX), some as much as 50% of fixed income. At current low rates, I am not very interested in them, but that's just me. Most only use PIMCO Total Return if they don't have access to something like TBM, which you do.
letsinvest wrote: Taxable account: (I will be allocating money that I can’t put in tax-exempt account)
$225K is in individual stocks, which I am planning to sell now and invest in mutual funds. This is a bulk of money and I was thinking of waiting until the next bear market to invest in. I am considering CDs (as you suggested) or bonds to invest this amount until then.
Finance theory suggests that the most rational thing to do is establish your desired AA now. What if the next bear market occurs after a big bull market, so the low is actually higher than today's levels? By selling stocks now and holding CDs or cash, you are trying to time the market. Will you sell all of your stock funds next time the market reaches some particular level? A fundamental tenet of Boglehead investing is to not try and time the market.

If you are uncomfortable moving all money from individual stocks (which are more risky anyway) into stock funds, then perhaps your target stock allocation is too high. Consider lowering your allocation to stocks, then investing whatever that allocation is into stock funds now.
letsinvest wrote: In addition I am investing portion of my wife’s paycheck regularly (12K Annually) to the below mutual funds.
Large cap - (VINIX) - 30%
Small cap - (VSIAX) - 20%
Total international - (VFWAX) - 20%
Bonds - (VWITX) - 5%
Is this in taxable or tax advantaged (e.g., 401k). Sorry for not re-reading above to see if this has been clarified. Since you mention a tax-exempt bond fund, I assume taxable.

If taxable, then What about I Bonds for the bond part? You could put up to $20K/year in I Bonds ($10K each for you and wife), and $10K more if you have a living trust.

If taxable, then why not just Total Stock Market for US allocation? Add some small or small-value if you want to tilt, but only if you understand risk/return tradeoff of doing so.

The percentages don't add up to 100% if you include the $225K in stocks, unless I'm misunderstanding the percentages you list toward the end, which I understand to be just funds for your wife's contributions.

You should look at entire portfolio, and express percentages relative to entire portfolio. See suggested format for asking portfolio questions in the link in my signature line below. That would help clarify.

For example, if you want 70% in stocks, then the percentages in stocks across all accounts should add up to 70%, and percentages in fixed income across all accounts should add up to 30%. Ditto for sub-asset classes, like international stocks.

Just start with simple portfolio of Total Stock, Total International, and fixed income (TBM, I Bonds, TE bond funds, CDs, depending on tax-advantaged or taxable account). Say you want TI to be 30% of stocks, so AA is:

TSM: 70% x 70% = 49% (call it 50%)
TI: 30% x 70% = 21% (call it 20%)
Fixed income: 30%

This is across all accounts!!!

If I understand, you have at least 75% in taxable (225K/300K), so you can fit all stocks (70%) in taxable. Use TBM in 401k, for 25% fixed income, then put the other 5% in I Bonds.
letsinvest wrote: The above portfolio has been modified based on your suggestions. I am still not sure about the bond fund (VWITX). Thoughts?
If taxable account, it's OK, but I think I Bonds make more sense in taxable. If tax-advantaged, then holding a tax-exempt bond fund does not make sense. Post in suggested format to clarify (you started off this way in OP, but have drifted so that it's now more confusing).

Kevin
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