Follow-up Help with Vanguard Financial Plan

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Shaoya
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Follow-up Help with Vanguard Financial Plan

Post by Shaoya » Mon Mar 12, 2012 5:14 pm

In November 2011, I had a very helpful experience with Vanguard by having them assess my portfolio & financial goals and then send me a ~30 page Financial Plan (which was then followed up with a 45 min. telephone discussion with one of their CFP's).

It was gratifying to have him tell me that my portfolio arrangement/financial situation looked really good which, no doubt, is largely due to Boglehead advice I've received! {Thank you!}

He made a couple of suggestions that I'd like to run by you all:

1) He suggested we shift our TIPS (VIPSX) into our Total Bond Market fund (VBTLX) because the net real return is low (currently true, I suppose, given low inflation) and that the “market expectation of inflation is already built in to VBTLX.” What do you think? Should I dump VIPSX into VBTLX?

2) He advised that we start put 50% of our monthly college fund contribution into VTSAX in our taxable account based on the possibility that one of our kids may not seek post-high school education (and the uses of 529 money is not super broad). Is this prudent for our situation?

Separate from our VG Financial Plan, questions I have:

3) Is our equity/bond AA (65%-35%) optimal for our ages and financial situation?

4) I'm wondering if I should allocate a small portion (<5%) of our tax-advantaged investments into dividend-paying equities? If so, which Vanguard fund?

Our portfolio and other helpful info is below:

Thank you! - Shaoya
**********************************************************************************************
Debt
Mortgage –30 year fixed at 3.87% (refi’d Nov 2010)
Credit card debt – none
Student – 1.6% fixed @ $130 a month.
Car – no debt
Emergency Fund – 6-9 months living expenses (not included below)

Tax Filing Status
Married Filing Jointly – 15% Fed in 2011; 9% Oregon (2011)
Age
Hers – 36
His – 39
Son (b. 2008), Daughter (b. 2010)

Stable jobs in local/state government with an annual income of ~$115K. Expect this to increase incrementally (not dramatically) relative to inflation later in our careers. Intend to stay in our current house/city indefinitely.

Monthly investment allocation of $2232 from salaries is currently distributed across five accounts in these proportions:

Pre-tax Please note: neither 457 has employer-match, even after being vested.
457b Plans:

1. $500 to Vanguard Institutional Index Fund – Institutional (VIIIX) (0.04%)
2. $500 to Large Company Value Stock Option (0.39%) [blend of BGI Russell 1000 Value Index, Dodge & Cox Stock, MFS Value, LSV Value Equity]

Post-tax
3. $400 to Child #1's 529 with two funds: US Equity Index (0.44%); International Equity Index (0.67%)
4. $416 to Her Roth IRA - Windsor II Inv. (VWNFX) (0.39%) [To max Roth out.]
5. $416 to His Roth IRA - Total Stock Mkt Idx Inv (VTSMX) (0.18%) [To max Roth out.]


Portfolio with Asset % as of 3-9-12
(VG = Vanguard; value ~$300k)

Current AA
Equities - 65%
Bonds - 35%


Taxable Investments


24.9% VG Total Stock Mkt Idx - Admiral (VTSAX) (0.09%)
18.8 % VG Total Int'l Stock Index (VGTSX) (0.34%)

Tax-advantaged


Roth IRA
11.3% VG Inflation-Protect Sec (VIPSX) (0.22%)
7.6% VG Total Bond Market – Admiral (VBTLX) (0.22%)
3.2% VG Short-Term Bond Market (VFSTX) (0.24%)
8.3% VG Windsor II Inv. (VWNFX) (0.39%)
3.6% VG Total Stock Mkt Idx - Admiral (VTSAX) (0.09%)
2.4% VG FTSE All-World Except US (VFWIX) (0.40%)

Her 457 (City of Portland Deferred Compensation - ING)
9.2% VG Total Bond Market Index Fund – Institutional Shares (VBTIX) (0.07%)
0.1 VG Institutional Index Fund – Institutional (VIIIX) (0.04%)

His 457 ( Oregon Growth Savings Plan)
3.1% Intermediate Bond Option (0.09%)
2.8% Large Company Value Stock Option (0.395%)

529 Funds (Oregon College Savings Plan) for two kids, Classes of 2030 & 2032)
2.1% International Equity Index Portfolio
2.6% US Equity Index Portfolio

~100.0%
Last edited by Shaoya on Mon Mar 12, 2012 5:40 pm, edited 1 time in total.

livesoft
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Re: Follow-up Help with Vanguard Financial Plan

Post by livesoft » Mon Mar 12, 2012 5:31 pm

Shaoya wrote:1) He suggested we shift our TIPS (VIPSX) into our Total Bond Market fund (VBTLX) because the net real return is low (currently true, I suppose, given low inflation) and that the “market expectation of inflation is already built in to VBTLX.” What do you think? Should I dump VIPSX into VBTLX? That's what I would do, but who can predict the future?

2) He advised that we start put 50% of our monthly college fund contribution into VTSAX in our taxable account based on the possibility that one of our kids may not seek post-high school education (and the uses of 529 money is not super broad). Is this prudent for our situation? I would not contribute to any 529 plans since you do not appear to be putting $17,000 into your retirement plan even though you are putting $10,000 into your Roths.

Separate from our VG Financial Plan, questions I have:

3) Is our equity/bond AA (65%-35%) optimal for our ages and financial situation? Who knows? You are asking us to predict the future.

4) I'm wondering if I should allocate a small portion (<5%) of our tax-advantaged investments into dividend-paying equities? If so, which Vanguard fund? No. You already are using dividend-paying equities with what you have, so no need to have a special fund for that.
Generally folks who have access to a 457 also have access to a 403(b) or 401(a) or something like that. I would be using those before I used taxable and before I used 529 plans.
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Shaoya
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Re: Follow-up Help with Vanguard Financial Plan

Post by Shaoya » Wed Mar 14, 2012 10:54 pm

Thank you, Livesoft, I'll consider what you've advised. Additional feedback on my questions would be greatly appreciated? Thank you!

Please note: neither of us has any employer match in our 457's. [This wasn't stated in my original post.]

Mortgasm
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Re: Follow-up Help with Vanguard Financial Plan

Post by Mortgasm » Wed Mar 14, 2012 11:14 pm

I agree with Livesoft. A few more points:

1) yes the market expectation is build into VBTLX. VIPSX adds an insurance component to pay you if inflation turns out to be worst than what the market expects. Right now, that insurance is essentially free (in 10-year treasuries vs. 10 year TIPS) so its a good deal. Either way, the CFP's point isn't really relevant to TIPS. I think he misunderstands their purpose. However, at your young age, I don't think you'll go wrong either way. personally, I would leave it in VIPSX.

2) 35/65 is in the range of normal for your age - certainly not overly aggressive or conservative. I was more aggressive at your age and then bonds did better for the last decade. Shrug. Who knows what will happen next. It really depends so much on factors like 1) what are you saving for? 2) how well will you sleep at night? 3) What will future contributions be?

3) I wouldn't specifically target dividend stocks myself. They've had a run-up lately - lots of attention to them because bonds are yeilding so little. But they are still stocks.

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Dale_G
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Re: Follow-up Help with Vanguard Financial Plan

Post by Dale_G » Wed Mar 14, 2012 11:49 pm

Shaoya, your earning power over the next 20 years or so provides a lot more inflation protection than a small allocation to TIPS.

The "insurance" cost of TIPS has been negligible thus far, but that may not be the case going forward. The odds are that the Total Bond Market fund will provide greater returns than the TIPS fund over the next 20-25 years with little or no additional risk.

Dale
Volatility is my friend

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momar
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Re: Follow-up Help with Vanguard Financial Plan

Post by momar » Thu Mar 15, 2012 12:46 am

Dale_G wrote:Shaoya, your earning power over the next 20 years or so provides a lot more inflation protection than a small allocation to TIPS.

The "insurance" cost of TIPS has been negligible thus far, but that may not be the case going forward. The odds are that the Total Bond Market fund will provide greater returns than the TIPS fund over the next 20-25 years with little or no additional risk.

Dale
Why are those the odds?
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep

letsgobobby
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Re: Follow-up Help with Vanguard Financial Plan

Post by letsgobobby » Thu Mar 15, 2012 2:21 am

AA is reasonable for your age.

Agree with livesoft: given your 24% tax bracket, maximize pretax 403 and 457 space before taxable. Also agree that TIPs are relatively unattractive now, but that's simply an opinion.

Order of savings:

403
457
Roth IRA
529
Taxable

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Kevin M
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Re: Follow-up Help with Vanguard Financial Plan

Post by Kevin M » Thu Mar 15, 2012 6:05 am

Shaoya wrote: 1) He suggested we shift our TIPS (VIPSX) into our Total Bond Market fund (VBTLX) because the net real return is low (currently true, I suppose, given low inflation) and that the “market expectation of inflation is already built in to VBTLX.” What do you think? Should I dump VIPSX into VBTLX?
I would move it into INOVA 6-year CD at 2.50% with one-time rate bump option and 6 months of interest early withdrawal penalty. Higher yield and lower risk than TBM.
Shaoya wrote: 2) He advised that we start put 50% of our monthly college fund contribution into VTSAX in our taxable account based on the possibility that one of our kids may not seek post-high school education (and the uses of 529 money is not super broad). Is this prudent for our situation?
I would max out retirement savings before contributing to a 529.
Shaoya wrote: 3) Is our equity/bond AA (65%-35%) optimal for our ages and financial situation?
Seems reasonable.
4) I'm wondering if I should allocate a small portion (<5%) of our tax-advantaged investments into dividend-paying equities? If so, which Vanguard fund?
I would not.

Shaoya wrote: 8.3% VG Windsor II Inv. (VWNFX) (0.39%)
Why?
Shaoya wrote: 2.4% VG FTSE All-World Except US (VFWIX) (0.40%)
I would use Vanguard Total International instead. Includes everything that VFWIX has, plus some small cap international.

Kevin
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nisiprius
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Re: Follow-up Help with Vanguard Financial Plan

Post by nisiprius » Thu Mar 15, 2012 6:35 am

In your situation, I would leave my VIPSX alone, for these reasons.

1) I feel that the default action should always be to do nothing--"Don't just do something, stand there"--unless you can articulate a convincing reason, convincing to yourself, as to why doing nothing is clearly a mistake that's big enough that you need to fix it.

2) Do you have any written record of why you have the VIPSX in the first place? It's not a bad idea to write these things down. If not, see if you can remember why you have it. Then decide what, if anything, has changed that would lead to your changing your decision.

3) "Inflation expectation is already built into Total Bond" is not a very convincing reason to make a change. First of all, inflation expectation is always built into everything, so if inflation expectation were always correct, there wouldn't be any reason to take any inflation-related investment actions. TIPS are relevant to the case when inflation turns out to be different from what the market expects. Nobody is very accurate at predicting the future, including the market. But here's the most important thing: it was always true that the market expectation for inflation was built into VBLTX. That hasn't changed. So, again, what were your reasons for buying VIPSX rather than trusting the market to make an accurate inflation prediction... and why aren't those reasons still valid?

4) The argument that "the net real return is currently low" is not very convincing. The net real return is currently low for all conservative investments. TIPS aren't special in that regard. The only thing special about them is that you know accurately what the (low) real return on them is, whereas for nominal bonds you need to make a (low) guess. In general, "Someone else thinks the future for this investment doesn't look good right now" is not a compelling reason to do something.

Did you notice that the rep is actually using market efficiency in two contradictory ways? His reason for saying you don't need VIPSX is that the market price for VBLTX includes a correct prediction of inflation. But his reason for switching is that the market is wrong about the current value of VIPSX, and does not include a valid judgement of the value of inflation protection.

By the way, if you were entirely in Total Bond and a rep was urging you to put some into VIPSX I'd be suggesting leaving it in total bond. What I'm saying is that you can't stay the course unless you stay the course, and I think it's good to develop the habit of not doing stuff.
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Shaoya
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Re: Follow-up Help with Vanguard Financial Plan

Post by Shaoya » Thu Mar 15, 2012 9:41 am

letsgobobby wrote:
Agree with livesoft: given your 24% tax bracket,
Actually, we're in the 15% Fed, 9% Oregon tax brackets for 2011 (and probably for the near future). Does that change anything? Thank you all for your input....

letsgobobby
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Re: Follow-up Help with Vanguard Financial Plan

Post by letsgobobby » Thu Mar 15, 2012 12:45 pm

Shaoya wrote:
letsgobobby wrote:
Agree with livesoft: given your 24% tax bracket,
Actually, we're in the 15% Fed, 9% Oregon tax brackets for 2011 (and probably for the near future). Does that change anything? Thank you all for your input....
Doesn't 15+9 =24?

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Shaoya
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Re: Follow-up Help with Vanguard Financial Plan

Post by Shaoya » Thu Mar 15, 2012 12:52 pm

Errrrr...yes. Fingers typed before brain processed. Excuse me while I use savings from my lower Vanguard ER's to buy myself a hole....

letsgobobby
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Re: Follow-up Help with Vanguard Financial Plan

Post by letsgobobby » Thu Mar 15, 2012 1:56 pm

No worries, thought I might have made an error. Living in Vancouver, I'm pretty familiar with those punitive OR taxes!

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Shaoya
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Re: Follow-up Help with Vanguard Financial Plan

Post by Shaoya » Fri Mar 16, 2012 8:44 am

nisiprius wrote:
1) I feel that the default action should always be to do nothing--"Don't just do something, stand there"--unless you can articulate a convincing reason, convincing to yourself, as to why doing nothing is clearly a mistake that's big enough that you need to fix it.

2) Do you have any written record of why you have the VIPSX in the first place? It's not a bad idea to write these things down. If not, see if you can remember why you have it. Then decide what, if anything, has changed that would lead to your changing your decision.
Thank you all for your input.

Nisi, you've raised two really good - and basic - points, which are not raised nearly enough, I think. No, I didn't keep a written record for why I have the VIPSX. It was some vague, poorly understood rationale for avoiding the effects of inflation in my bond allocation. But I'll start doing that, and if I feel the urge to move my financial checkers around the board again, consult my written down thinking.

Take care - Shaoya

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