Large portfolio -- Grateful for your advice

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windfall900
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Large portfolio -- Grateful for your advice

Post by windfall900 » Tue Dec 04, 2012 10:27 pm

After much helpful discussion on my old portfolio thread and others, I have updated my portfolio proposal and would love any feedback you have.

Portfolio size: High 8 figures
Emergency cash: No. The allocation below is 100% of my portfolio. Living expenses are paid for via muni bond income as well as via my job salary (I plan to keep working).
Debt: $1.1M 5/1 ARM mortgage at 2.6%
Tax Filing Status: Single
Tax Rate: 35% Federal, 13.3% State
State of Residence: California
Age: 29
Tax-advantaged space: Roth 401K, Roth IRA, 529, Flexible Spending Account (all fully maxed out, but only about 0.5% of the portfolio)

Proposal:

45% Vanguard Total Stock Institutional (VITSX) 0.05%
15% Vanguard Tax-Managed International Institutional (VTMNX) 0.08%
15% Vanguard Emerging Markets Institutional Shares (VEMIX) 0.13%
10% Vanguard Variable Annuity High Yield Bond 0.59%
15% Vanguard Interim California Muni Tax-Exempt Admiral (VCADX) 0.12%

Overall expense ratio: 0.13%

I also own two real estate properties that come to about 5% of my overall portfolio and are not included in the above. This is why I ultimately decided not to hold REITs separately despite some threads I started recently. (Note that I do not fully 'own' these properties since I hold the $1.1M mortgage mentioned above, although I may pay that off.)

I plan to purchase these funds toward the end of this month, after distributions have been paid, in lump sum investments rather than DCA.

Per everyone's great advice in the other thread, I am also going to contribute a significant amount to a donor-advised fund upfront and have negotiated an expense ratio of 0.18% with Fidelity for the initial amount I am currently considering. I plan to do this at the end of the month when there is hopefully more clarity on 2013 tax policy, since if marginal tax rates increase and the charitable deduction is not capped, it may be better to make this contribution in 2013. (A fairly large portion of the IPO proceeds will be delivered in 2013, so a tax deduction would still be useful next year.)

Depending on the amount I contribute to the DAF and how much I have left over for taxable account, I may be bumped down to Admiral rather than Institutional share classes for some funds above, but my allocation will not otherwise change. I also plan to explore a private charitable foundation next year but it was too stressful to try to figure all that out this month and the negotiated Fidelity rate seemed pretty good.
Last edited by windfall900 on Tue Dec 04, 2012 10:54 pm, edited 6 times in total.

windfall900
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Re: Grateful for your advice

Post by windfall900 » Tue Dec 04, 2012 10:30 pm

One immediate question I have that came to me while typing the above. As mentioned, I plan to live off a portion of my monthly bond income. Does it make more sense to generate this portion of the bond income from a taxable (and presumably higher-yielding) bond fund than from the tax-exempt muni bond fund, since I won't be reinvesting the income anyway? Or is it still optimal to generate it from tax-exempt muni bonds?

The bulk of my bond holdings would still be muni bonds, but I could splinter off a taxable chunk to throw off my living wages if that's optimal.

Thank you.

windfall900
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Re: Grateful for your advice

Post by windfall900 » Tue Dec 04, 2012 10:54 pm

Intuitively, it seems like I'd still want to generate the living wages from muni bonds. After all, the whole reason I hold muni in the first place is because its aftertax yield is expected to be higher than the aftertax yield of other bonds in taxable, right? So, who cares what you're actually doing with the yield after it's distributed?

The only reason I ask is because I encountered another thread where someone suggested that holding bonds in taxable was fine if you're not planning to reinvest the dividends anyway. Could someone explain that logic to me if it's correct?

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Watty
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Re: Large portfolio -- Grateful for your advice

Post by Watty » Wed Dec 05, 2012 12:08 am

As far as living off of your bonds, either munies or taxable, an alternative would be to just sell a little bit of stock holdings each year. Since a very low percentage of that would be capital gains that wouldn't generate a lot of taxes.

If bonds otherwise fit into your portfolios for your desired asset allocation that is a good reason to get them but that doesn't mean that you should target living off of them.
Tax Rate: 35% Federal, 13.3% State
State of Residence: California
How long to you plan on staying in California?

If you will be moving to a lower tax area in the foreseeable future that might make a difference.

windfall900
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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Wed Dec 05, 2012 12:16 am

Watty wrote:As far as living off of your bonds, either munies or taxable, an alternative would be to just sell a little bit of stock holdings each year. Since a very low percentage of that would be capital gains that wouldn't generate a lot of taxes.

If bonds otherwise fit into your portfolios for your desired asset allocation that is a good reason to get them but that doesn't mean that you should target living off of them.
They do fit into my allocation so I'm happy to hold them, I'm just not sure if it's better to generate the living wages from taxable or tax-exempt bonds.
How long to you plan on staying in California?

If you will be moving to a lower tax area in the foreseeable future that might make a difference.
Hopefully forever :-)

chrisj
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Re: Large portfolio -- Grateful for your advice

Post by chrisj » Wed Dec 05, 2012 12:58 am

Given your high tax rate, it seems unlikely taxable bonds will provide more income.

Here's how I would look at it. Obviously these funds are not equal and each carries different risk, but looking at the after tax income is relevant for this discussion.

Tax Free Federal & CA
Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares (VCADX): 1.53% SEC (1.53% after tax)
Vanguard California Long-Term Tax-Exempt Fund Admiral Shares (VCLAX): 2.15% SEC (2.15% after tax)

Tax Free Federal, Taxable CA @ 13.3%
Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX): 1.51% SEC (1.31% after tax)
Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX): 2.05% SEC (1.78% after tax)

Taxable Federal @ 35%, Taxable CA @ 13.3%
Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX): 1.61% SEC (.77% after tax)

chrisj
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Re: Large portfolio -- Grateful for your advice

Post by chrisj » Wed Dec 05, 2012 1:06 am

Oh another quick thought - Make sure you are considering what role bonds are playing in your portfolio. Don't add risk (for example by buying High Yield bonds) if the bonds are meant to provide stability.

In other words, decide what type of bond you want in your portfolio, and THEN choose the most tax efficient type. Not necessarily the other way around.

windfall900
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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Wed Dec 05, 2012 1:08 am

chrisj wrote:Oh another quick thought - Make sure you are considering what role bonds are playing in your portfolio. Don't add risk (for example by buying High Yield bonds) if the bonds are meant to provide stability.

In other words, decide what type of bond you want in your portfolio, and THEN choose the most tax efficient type. Not necessarily the other way around.
Thanks for the feedback. I definitely consider the High-Yield Bonds to be part of my equity allocation rather than my bonds. This means that my 'stability' allocation is only 15% -- which may be another problem in itself, of course, but it's at least not accidental.

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Re: Large portfolio -- Grateful for your advice

Post by Easy Rhino » Wed Dec 05, 2012 2:06 am

Oh, you could have just added a post to the old thread, but I guess I'll respond here.

I'd like to reiterate my push for savings bonds.

EE will give you 3.5%, fed tax deferred until redemption in 20 years, and state tax free.
I-bonds despite being 0% real, are yielding around 2% annual due to inflatoin adjustments. Also tax-derred and state tax free. This compares okay with muni's and are going to have better credit ratings than california munis.

Yes, it's a drop in the bucket. But if you do $10k each this year and next... that's a BIGGER drop in the bucket! :wink:

I'm not liking the high yield bond funds at all right now. Very tax-inefficient, very low premiums over investment grade bonds, very susceptible to equity like risk, and currently a hot investment due to everyone searching for yield (call it a "yield bubble", I guess). Even in any sort of tax-advantaged structure, I still don't like them.

Next year, consider making your 401k contributions to traditional instead of roth. Yes, it reduces the 'effective size' of the contributions, since taxes will still come off the back end. But since your tax bracket will be maxed out next year, there's an extremely good chance that your bracket will be lower in retirement.

I suppose it would be too much to ask your employe to restructure your 401k so they make contributions so your aggregate max is $50k a year, would it?

windfall900
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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Wed Dec 05, 2012 2:47 am

Easy Rhino wrote:EE will give you 3.5%, fed tax deferred until redemption in 20 years, and state tax free.
Dumb question time... Is that 3.5% guaranteed annually for 20 years? If so, that does sound quite good...
Easy Rhino wrote:I'm not liking the high yield bond funds at all right now. Very tax-inefficient, very low premiums over investment grade bonds, very susceptible to equity like risk, and currently a hot investment due to everyone searching for yield (call it a "yield bubble", I guess). Even in any sort of tax-advantaged structure, I still don't like them.
Thanks for the feedback, it is certainly meaningful to me. I note that you say you don't like them right now. If this is a portfolio for many decades, might it still make sense to hold them? Or do you dislike them as an asset class overall?
Easy Rhino wrote:Next year, consider making your 401k contributions to traditional instead of roth. Yes, it reduces the 'effective size' of the contributions, since taxes will still come off the back end. But since your tax bracket will be maxed out next year, there's an extremely good chance that your bracket will be lower in retirement.
Hmm, my assumption has been that I will be in the maximum bracket for life due to the size of the portfolio. Even the yield on Total Stock right now pushes me into the top bracket.
Easy Rhino wrote:I suppose it would be too much to ask your employe to restructure your 401k so they make contributions so your aggregate max is $50k a year, would it?
My employer is unfortunately inflexible on 401k changes, whether matches or aftertax contributions.

windfall900
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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Wed Dec 05, 2012 1:11 pm

chrisj wrote:Given your high tax rate, it seems unlikely taxable bonds will provide more income.

Here's how I would look at it. Obviously these funds are not equal and each carries different risk, but looking at the after tax income is relevant for this discussion.

Tax Free Federal & CA
Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares (VCADX): 1.53% SEC (1.53% after tax)
Vanguard California Long-Term Tax-Exempt Fund Admiral Shares (VCLAX): 2.15% SEC (2.15% after tax)

Tax Free Federal, Taxable CA @ 13.3%
Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX): 1.51% SEC (1.31% after tax)
Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX): 2.05% SEC (1.78% after tax)

Taxable Federal @ 35%, Taxable CA @ 13.3%
Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX): 1.61% SEC (.77% after tax)
Is this an argument in your eyes to use long-term bonds, or perhaps a mixture of long-term and intermediate? This board seems to recommend intermediate only, but I'm not sure why, and it seems to go against the inclination to diversify.

comptalk

Re: Large portfolio -- Grateful for your advice

Post by comptalk » Thu Dec 06, 2012 8:13 am

Started off similar to you a few years ago. Granted, no IPO, but sale of a few high profile web sites. I still work, but also like to see that income growing as tax free as possible. Majority of that income is tax free in actual municipal bonds as well as Unit Investment Trusts (tax free). I have about a third in taxable income. These securities were all purchased in the 2006 - 2010 time frame at below par rates for the bonds, it may be tough to get now at par at below. Where I deviate from the boglehead forum is the use of one of the three large investment banks such as Morgan Stanley, Goldman Sachs or JP Morgan. Reason being, you would have access to first and secondary markets for said bonds. You can still purchase tax free tobacco bonds from the Inland empire (California) paying a near 6% tax free coupon. They fluctuate during the market day, however, the coupon is secure. This money is need to be invested wisely. You do not want to turn into another John McAfee who also managed his own money... A 100 million dollar NET worth brought down to basically nothing...

Also, I STRONGLY STRONGLY STRONGLY recommend separating your assets from yourself. California is a community property state. If you ever decide to marry or live with a person for an extended number of years, they could lay some interest in said net worth. Move all to a LLC managed by a trustee (all three investment houses offer this, or use a lawyer and CPA), and you will be fine. Do not make a mistake on this. Money changes the way people look and view you. Most would not dream of ever seeing a windfall like this. People will be coming out of the woodwork trying to look for help from you. Keep everything on the d/l. Tell no one about your new found wealth. Have everything setup professionally by a estate/elder law lawyer and CPA to help minimize tax liability and loss of net worth to any outside influence. Be it be a failed marriage, accident, or personal liability, you would be protected against all (can't protect against fraud).

I hope you hed my advice and strongly weigh everything correctly and logically. As for the rest, enjoy the guaranteed income! You and your future family (I.E. children) will be well off for the rest of their lives. Congratulate yourself in changing your future family tree for the best.

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Re: Large portfolio -- Grateful for your advice

Post by abuss368 » Thu Dec 06, 2012 10:46 am

Hi Windfall900,

I accidentially edited my post and lost everything. First, congrats are in order for your success. Now that you may have "won the game", I would consider the protection of these assets first and the gorwth aspect second.

Regardless of the portfolio size, I would expect only a handful of low costs, diversified funds are needed. Everything I have ever read about wealth from any reliable source always seem to note the same thing: Wealth is created by Stock, Bonds, Real Estate, and Cash. All other investments are just an extension of these Core 4 (i.e. Rick Ferri's Portfolio) assets.

Now then, I only like a few funds to accomplish this (i.e. ignoring cash reserves for a moment):

1) Total Stock Market Index
2) Total International Market Index
3) Total Bond Market Index (tax advantage accounts only - IRA, 401k, etc.)
4) Intermediate Term Tax Exempt Bond Fund (taxable accounts)
5) Inflation Protected Bond Fund - tax advantage or maybe also taxable or both in your case considering the high state tax rate as these bonds are taxed at the federal level and not the state or local level
6) REIT Real Estate Index Fund (i.e. I am not yet sold on the Vanguard Global/International REIT Real Estate Fund due to the high costs and that it appears to be restrictive - international sector fund with a high allocation to asia).

That is really the only funds one "needs".

Now then, one thing I am always surprised at and constantly sctraching my head is the subject of REITs and Real Estate. REITs are a pass through investment (i.e. same as an S Corp, LLC, etc.) where the REIT does not pay real estate taxes, but passes through the higher untaxed "dividend" to the investor. The "dividend" has three components: a) 50% + - of the "dividend" is taxed at the investors ordinary income rate, b) 25% + - of the "dividend" is sometimes a capital gain distribution taxed at the preferred 15% capital gains rate (no difference here in terms of the nominal rate and a qualified dividend tax rate of 15%) and c) 25% + - of the "dividend" is a "return of capital" that is not taxed, but rather lowers your "cost basis" in your investment. Two things about the "return of capital" is that a) unless your "cost basis" goes below $0 due to the "return of capital" there is no tax, however, if it ever dipped below zero (and Vanguard calculates cost basis information) this amount would be taxed at preferred capital gains rates of 15%, again, same as the current qualified dividend rate of 15% and b) if the shares are never sold, the continued decrease of the "cost basis" would result of a "step up in basis" at death, meaning in plain english, your "return of capital" would never be taxed to you or heirs.

Burton malkiel, a long time Vanguard board member, and awesome investor, wrote many years ago a chapter in his book Random Walk Down Wall Street of the many tax benefits of REITs in taxable accounts. Now, President Bush enacted the 2001 and 2003 tax law changes that created "qualified dividends" which may have changed the game a little. Who know what will happen to the laws in 3 weeks.

The puzzle for me is I have many High Net Worth clients have have REITs and direct Real Estate holdings. The direct Real Estate holdings are investments for many years and decades, meaning any Federal Depreciation Benefit and Mortgage Interest deductions are long gone. Very profitable Real Estate holdings that throw off a lot of cash flow that the investors are easily living off of. All that cash flow is taxed at Oridinary Income tax (i.e. highest rates). They are in a great position. Does anyone think for one second, I am going to look a client in the eye at tell them they should be selling the REITs and direct Real Estate holdings because they are paying tax on it, ordinary income tax rates, not sheltered in a tax advantage account, blah blah blah? I could say that, but somehow I think they would not be a client much longer. When I point this on the forum, I have yet to receive one credible and acceptable response.

Second, in the age we live in with regards to accelerated depreciation, fixed assets, equipment, etc. are being depreciated completly in one year due to IRC Section 179 and IRC Section 168k - meaning there is no where near the "depreciation" benefit over the long term as there was years ago. I really think the game has changed somewhat.

Third, with clients that have very substantial REIT and direct Real Estate holdings, and most all the wealthy clients do, there is a trend that they allocate a very material and large percentage of their wealth to Real Estate oriented investments. As much to Real Estate holdings and investments as they do to other securities. My point is, an all to common recommendation of 5% or so of equity holdings to REITs or Real Estate does not move the needle much or impact the portfolio up or down.

I noted on your other post, with the link above, that one member recommended direct Real Estate holdings. At your level of wealth, I am guessing you would buy the property outright with no mortgage, and consdering the age we live in of accelerated depreciation, you would probably incur great cash flow at ordinary rates very quickly. Me? I would much rather invest in REITs, even at your tax rate.

Finally, if I was a all taxable account investor, I will borrow a quote from some of the FInancial Advisors in a neighbor firm "Just make money - taxes are one part of the equation, but no where near the only part. They are important, but should not wag the dog per se." Or as Warren Buffett noted on CNBC a couple of months ago "If you are paying taxes, you made money - come on folks. I would rather make money and pay taxes than lose money."

While past results are no indication of the future, when I look back at the Vanguard site and compare the REIT Index Fund to the TSM Fund, the REIT fund is heads and tails above TSM over evey period after tax. I realize this pains a lot of folks to admit that.

You will already be a lot better off with taxes than most investors by following the basic Vanguard principles: no active funds, low turnover, tax exempt bonds, buy and hold, etc.

In addition, on paper, many folks love to say equities here and bonds there. Great, but tax laws change every single year. So every year or few years as the tax laws change, you are going to suddenly sell securites, incurring taxes, to reposition based on the tax laws in effect at that time?

We all have to find what makes us sleep at night (Warren Buffet), but for me, I would rather diversified with a multi asset class approach than less asset classes due to taxes, and only taxes.

My two cents only....
Last edited by abuss368 on Thu Dec 06, 2012 3:03 pm, edited 2 times in total.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

windfall900
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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Thu Dec 06, 2012 11:57 am

abuss368 wrote:Edit.
What does this mean?

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abuss368
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Re: Large portfolio -- Grateful for your advice

Post by abuss368 » Thu Dec 06, 2012 3:04 pm

Hi Windfall900,

I accidentially edited my post and lost everything. First, congrats are in order for your success. Now that you may have "won the game", I would consider the protection of these assets first and the growth aspect second.

Regardless of the portfolio size, I would expect only a handful of low costs, diversified funds are needed. Everything I have ever read about wealth from any reliable source always seem to note the same thing: Wealth is created by Stock, Bonds, Real Estate, and Cash. All other investments are just an extension of these Core 4 (i.e. Rick Ferri's Portfolio) assets.

Now then, I only like a few funds to accomplish this (i.e. ignoring cash reserves for a moment):

1) Total Stock Market Index
2) Total International Market Index
3) Total Bond Market Index (tax advantage accounts only - IRA, 401k, etc.)
4) Intermediate Term Tax Exempt Bond Fund (taxable accounts)
5) Inflation Protected Bond Fund - tax advantage or maybe also taxable or both in your case considering the high state tax rate as these bonds are taxed at the federal level and not the state or local level
6) REIT Real Estate Index Fund (i.e. I am not yet sold on the Vanguard Global/International REIT Real Estate Fund due to the high costs and that it appears to be restrictive - international sector fund with a high allocation to asia).

That is really the only funds one "needs".

Now then, one thing I am always surprised at and constantly sctraching my head is the subject of REITs and Real Estate. REITs are a pass through investment (i.e. same as an S Corp, LLC, etc.) where the REIT does not pay real estate taxes, but passes through the higher untaxed "dividend" to the investor. The "dividend" has three components: a) 50% + - of the "dividend" is taxed at the investors ordinary income rate, b) 25% + - of the "dividend" is sometimes a capital gain distribution taxed at the preferred 15% capital gains rate (no difference here in terms of the nominal rate and a qualified dividend tax rate of 15%) and c) 25% + - of the "dividend" is a "return of capital" that is not taxed, but rather lowers your "cost basis" in your investment. Two things about the "return of capital" is that a) unless your "cost basis" goes below $0 due to the "return of capital" there is no tax, however, if it ever dipped below zero (and Vanguard calculates cost basis information) this amount would be taxed at preferred capital gains rates of 15%, again, same as the current qualified dividend rate of 15% and b) if the shares are never sold, the continued decrease of the "cost basis" would result of a "step up in basis" at death, meaning in plain english, your "return of capital" would never be taxed to you or heirs.

Burton malkiel, a long time Vanguard board member, and awesome investor, wrote many years ago a chapter in his book Random Walk Down Wall Street of the many tax benefits of REITs in taxable accounts. Now, President Bush enacted the 2001 and 2003 tax law changes that created "qualified dividends" which may have changed the game a little. Who know what will happen to the laws in 3 weeks.

The puzzle for me is I have many High Net Worth clients have have REITs and direct Real Estate holdings. The direct Real Estate holdings are investments for many years and decades, meaning any Federal Depreciation Benefit and Mortgage Interest deductions are long gone. Very profitable Real Estate holdings that throw off a lot of cash flow that the investors are easily living off of. All that cash flow is taxed at Ordinary Income tax (i.e. highest rates). They are in a great position. Does anyone think for one second, I am going to look a client in the eye at tell them they should be selling the REITs and direct Real Estate holdings because they are paying tax on it, ordinary income tax rates, not sheltered in a tax advantage account, blah blah blah? I could say that, but somehow I think they would not be a client much longer. When I point this on the forum, I have yet to receive one credible and acceptable response.

Second, in the age we live in with regards to accelerated depreciation, fixed assets, equipment, etc. are being depreciated completly in one year due to IRC Section 179 and IRC Section 168k - meaning there is no where near the "depreciation" benefit over the long term as there was years ago. I really think the game has changed somewhat.

Third, with clients that have very substantial REIT and direct Real Estate holdings, and most all the wealthy clients do, there is a trend that they allocate a very material and large percentage of their wealth to Real Estate oriented investments. As much to Real Estate holdings and investments as they do to other securities. My point is, an all to common recommendation of 5% or so of equity holdings to REITs or Real Estate does not move the needle much or impact the portfolio up or down.

I noted on your other post, with the link above, that one member recommended direct Real Estate holdings. At your level of wealth, I am guessing you would buy the property outright with no mortgage, and consdering the age we live in of accelerated depreciation, you would probably incur great cash flow at ordinary rates very quickly. Me? I would much rather invest in REITs, even at your tax rate.

Finally, if I was a all taxable account investor, I will borrow a quote from some of the FInancial Advisors in a neighbor firm "Just make money - taxes are one part of the equation, but no where near the only part. They are important, but should not wag the dog per se." Or as Warren Buffett noted on CNBC a couple of months ago "If you are paying taxes, you made money - come on folks. I would rather make money and pay taxes than lose money."

While past results are no indication of the future, when I look back at the Vanguard site and compare the REIT Index Fund to the TSM Fund, the REIT fund is heads and tails above TSM over evey period after tax. I realize this pains a lot of folks to admit that.

You will already be a lot better off with taxes than most investors by following the basic Vanguard principles: no active funds, low turnover, tax exempt bonds, buy and hold, etc.

In addition, on paper, many folks love to say equities here and bonds there. Great, but tax laws change every single year. So every year or few years as the tax laws change, you are going to suddenly sell securites, incurring taxes, to reposition based on the tax laws in effect at that time?

We all have to find what makes us sleep at night (Warren Buffet), but for me, I would rather diversified with a multi asset class approach than less asset classes due to taxes, and only taxes.

My two cents only....
Last edited by abuss368 on Thu Dec 06, 2012 3:29 pm, edited 2 times in total.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

windfall900
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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Thu Dec 06, 2012 3:11 pm

Thanks for the the detailed insight, abuss. Are there any particular changes you would recommend for the portfolio proposal above? It sounds like you're saying that it may not be worth holding just 5% in real estate, and that to the extent that I do hold real estate, I should hold REITs rather than physical property. Any other changes you would make?

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Re: Large portfolio -- Grateful for your advice

Post by abuss368 » Thu Dec 06, 2012 3:22 pm

It comes down to what do you want and what will let you sleep at night.

I would swap out the two international funds for one simple Total International Index fund with the foreign tax credit.

I would pass on the variable annuity for the high yield junk bonds. I would avoid the state specific (California) fund and go with the Intermediate Term Tax Exempt fund. This fund contains thousands of bonds with national diversification.

Regarding real estate / REITs, all I am saying is educate yourself first and consider all information before considering or eliminating an asset class.

Inflation Protected Bond Fund - I am on the fence here. In some respects you would get protection not from inflation but rather unexpected inflation. Your state tax rate is high, so you would get a benefit of having a bond fund that you would not owe state and local taxes (only federal).
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

retiredjg
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Re: Large portfolio -- Grateful for your advice

Post by retiredjg » Thu Dec 06, 2012 4:10 pm

Just a couple of comments.
Tax-advantaged space: Roth 401K, Roth IRA, 529, Flexible Spending Account (all fully maxed out, but only about 0.5% of the portfolio)
You are the last person on the planet who should be using Roth 401k. However, since all this is less than 5% of your portfolio, it probably does not matter much.... :D But you could save yourself a little something in taxes by using deductible contributions instead of Roth contributions.
Proposal:

45% Vanguard Total Stock Institutional (VITSX) 0.05%
15% Vanguard Tax-Managed International Institutional (VTMNX) 0.08%
15% Vanguard Emerging Markets Institutional Shares (VEMIX) 0.13%
10% Vanguard Variable Annuity High Yield Bond 0.59%
15% Vanguard Interim California Muni Tax-Exempt Admiral (VCADX) 0.12%
I've got a little bit of problem here. But nothing earth-shattering.

1) Tax-managed international and emerging markets - I would not bother using these two; as I said in your other thread, this is missing international small caps; I'd just use Vanguard's Total International Index that contains everything. It's tax-efficient (although possibly somewhat less so) and contains the entire market.

One thing to consider is that the emerging markets list does change. When a country moves from emerging status to developed statua, the funds generally need to sell and rebuy - a source of taxable gains and tax-inefficiency during the transition. Over time, holding everything in one fund might be more tax-efficient because that buying and selling does not have to happen when something moves from emerging status to developed status.

2) You are holding your entire bond allocation in the CA Muni fund. This is not the safest thing to do in my opinion. I'd do two things.
  • -increase your bond allocation to 20% instead of 15%

    -hold half in CA Muni and half in a national muni fund

Just as a general comment, I think you need to get most of this money out of your personal finances. I don't know anything about how to do that, but it just seems like a good idea. On the other hand, as long as you want to pay taxes at this rate, you are helping reduce our federal deficit and your state's financial problems! :D

Good luck to you. Your chosen charities are certainly fortunate.

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Re: Large portfolio -- Grateful for your advice

Post by abuss368 » Thu Dec 06, 2012 4:25 pm

retiredjg wrote: Just as a general comment, I think you need to get most of this money out of your personal finances. I don't know anything about how to do that, but it just seems like a good idea. On the other hand, as long as you want to pay taxes at this rate, you are helping reduce our federal deficit and your state's financial problems! :D

Good luck to you. Your chosen charities are certainly fortunate.
I too am interested in hearing some other folks weigh in on this. I had noted in my earlier post that asset protection should be #1 followed by #2 growth.

Does one consider forming an LLC and transferring the assets? If one does that, can the investor still manage the investments or must the services of an advisor or trustee be utilized?
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Re: Large portfolio -- Grateful for your advice

Post by retiredjg » Thu Dec 06, 2012 4:34 pm

There was a bit of discussion in the older thread about foundations and donor advised funds. That's about all I know.

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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Thu Dec 06, 2012 4:40 pm

retiredjg wrote:You are the last person on the planet who should be using Roth 401k.
Wait, what? Really? I thought Roth was what I was supposed to do. I will presumably be in the highest tax bracket my whole life from dividends alone, and I have a long time horizon. Don't I want the investments growing tax-free for decades rather than paying ordinary income at the end at the highest tax bracket?
2) You are holding your entire bond allocation in the CA Muni fund. This is not the safest thing to do in my opinion. I'd do two things.
  • -increase your bond allocation to 20% instead of 15%

    -hold half in CA Muni and half in a national muni fund
Where do you stand on the debate over whether or not I should hold I and EE bonds?
Just as a general comment, I think you need to get most of this money out of your personal finances. I don't know anything about how to do that, but it just seems like a good idea. On the other hand, as long as you want to pay taxes at this rate, you are helping reduce our federal deficit and your state's financial problems! :D
Hmm, what do you mean by this exactly? As in, try to shelter the money through trusts etc? Unfortunately I haven't found there to be a wide world of hidden tactics as everyone seems to expect. Mostly just the common things -- charitable deductions; optimized prepayment of taxes; etc.

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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Thu Dec 06, 2012 4:46 pm

abuss368 wrote:
retiredjg wrote: Just as a general comment, I think you need to get most of this money out of your personal finances. I don't know anything about how to do that, but it just seems like a good idea. On the other hand, as long as you want to pay taxes at this rate, you are helping reduce our federal deficit and your state's financial problems! :D

Good luck to you. Your chosen charities are certainly fortunate.
I too am interested in hearing some other folks weigh in on this. I had noted in my earlier post that asset protection should be #1 followed by #2 growth.

Does one consider forming an LLC and transferring the assets? If one does that, can the investor still manage the investments or must the services of an advisor or trustee be utilized?
I don't think it is quite so easy to escape personal income taxes... or at least, neither my CPA nor my estate attorney has recommended such a course. Are you referring to a particular strategy here? I believe the taxes would still pass through to me even if I were to establish an LLC for myself.

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Re: Large portfolio -- Grateful for your advice

Post by abuss368 » Thu Dec 06, 2012 5:05 pm

Not at all. Not from a tax planning standpoint, but rather asset protection only.

Would the LLC issue a Form K-1 and pass through all investment income, gains, and losses?

Thinking out loud for a moment. Hopefully some other Bogleheads weigh in.
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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Thu Dec 06, 2012 5:09 pm

abuss368 wrote:Not at all. Not from a tax planning standpoint, but rather asset protection only.

Would the LLC issue a Form K-1 and pass through all investment income, gains, and losses?

Thinking out loud for a moment. Hopefully some other Bogleheads weigh in.
Hmm I haven't heard anything about that. I do have umbrella insurance. Does that not achieve the same purpose?

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Re: Large portfolio -- Grateful for your advice

Post by retiredjg » Thu Dec 06, 2012 5:11 pm

windfall900 wrote:
retiredjg wrote:You are the last person on the planet who should be using Roth 401k.
Wait, what? Really? I thought Roth was what I was supposed to do. I will presumably be in the highest tax bracket my whole life from dividends alone, and I have a long time horizon. Don't I want the investments growing tax-free for decades rather than paying ordinary income at the end at the highest tax bracket?
Well, it had not occurred to me that you may always be in the highest of the highest brackets after retirement. If that's true, it probably does not matter. And in fact we are talking about such a small portion of your portfolio, I'm sure it does not matter much anyway.

But....do you really have to always be in the highest of the highest? If some of this money gets taken out of your personal finances, you could be in a low tax bracket when you stop working. You'd have to reduce dividends (something that will be taxed no matter what) and replace that type of income with return of investment (which is not taxed) and capital gains (which are usually taxed at lower rates and the timing of which you have control over).

Have you seen livesoft's thread on how to be very wealthy and pay little to no taxes? If not, I'll try to hunt it up for you.

Where do you stand on the debate over whether or not I should hold I and EE bonds?
I like the concept of I Bonds. But since you can only buy such a small amount, I think it is an exercise in futility in your case (and therefore an unnecessary complexity). I don't know enough about EE bonds to have an opinion.

Just as a general comment, I think you need to get most of this money out of your personal finances. I don't know anything about how to do that, but it just seems like a good idea. On the other hand, as long as you want to pay taxes at this rate, you are helping reduce our federal deficit and your state's financial problems! :D
Hmm, what do you mean by this exactly? As in, try to shelter the money through trusts etc? Unfortunately I haven't found there to be a wide world of hidden tactics as everyone seems to expect. Mostly just the common things -- charitable deductions; optimized prepayment of taxes; etc.
What I meant is some way to keep "your" money separate from the money that will eventually go to charity. I don't know if a trust would do that. Or the donor advised funds, or a foundation, or what. Wish I could be more helpful.

If you have a favorite charity or university or whatever, you could contact them to see what types of programs (charitable remainder trust?) are offered to take some of that off your hands.

I'm kind of thinking I'd set up a foundation and unload everything I didn't need to live on comfortably. I would not want to deal with this myself. But that's just me. :D

I'm just thinking there are reasons (marriage, personal liability, etc.) to separate yourself from this money you want to protect. I would think your estate planner would be helpful in this area.

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Re: Large portfolio -- Grateful for your advice

Post by ResNullius » Thu Dec 06, 2012 6:30 pm

The minimum investment for Total Market Instituional Share is $100MM, which is more than 8 figures. Just saying.

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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Thu Dec 06, 2012 6:36 pm

ResNullius wrote:The minimum investment for Total Market Instituional Share is $100MM, which is more than 8 figures. Just saying.
That's incorrect. The minimum is $5M. You're talking about Institutional Plus.

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Re: Large portfolio -- Grateful for your advice

Post by comptalk » Thu Dec 06, 2012 8:09 pm

Dude. With all due respect to everyone on this thread, you are out of their league. This is not a 250k IRA. This is at least 10,000,000 dollars (before taxes I assume). You need to seek professional financial advice. Professional advice to legally lower your tax liability. You are already at the highest tax bracket. Why on earth would you invest in something that you will be taxed as ordinary income? REITs and these types of vehicles where you are taxed at ordinary income + state income tax is financial suicide. You will be giving nearly half your profits to state and federal governments.

At your level, you should have the majority of your income in TAX FREE VEHICLES (Munis, UITs, etc.). You need a plan of action on all this money. Didn't the company you work for provide financial advice for their newly minted millionaires? Seriously, talk to someone at one of the investment houses. If you continue to invest this way, you could, on some of your income, pay more taxes than you legally have to. Not 10% or 15%, but more like 35% - 45%. I hope you heed my warning.

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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Thu Dec 06, 2012 8:25 pm

comptalk wrote:Dude. With all due respect to everyone on this thread, you are out of their league. This is not a 250k IRA. This is at least 10,000,000 dollars (before taxes I assume). You need to seek professional financial advice. Professional advice to legally lower your tax liability. You are already at the highest tax bracket. Why on earth would you invest in something that you will be taxed as ordinary income? REITs and these types of vehicles where you are taxed at ordinary income + state income tax is financial suicide. You will be giving nearly half your profits to state and federal governments.

At your level, you should have the majority of your income in TAX FREE VEHICLES (Munis, UITs, etc.). You need a plan of action on all this money. Didn't the company you work for provide financial advice for their newly minted millionaires? Seriously, talk to someone at one of the investment houses. If you continue to invest this way, you could, on some of your income, pay more taxes than you legally have to. Not 10% or 15%, but more like 35% - 45%. I hope you heed my warning.
Where in my portfolio do you see anything substantial that is going to be taxed as ordinary income...?

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Re: Large portfolio -- Grateful for your advice

Post by grabiner » Thu Dec 06, 2012 8:48 pm

windfall900 wrote:
retiredjg wrote:You are the last person on the planet who should be using Roth 401k.
Wait, what? Really? I thought Roth was what I was supposed to do. I will presumably be in the highest tax bracket my whole life from dividends alone, and I have a long time horizon. Don't I want the investments growing tax-free for decades rather than paying ordinary income at the end at the highest tax bracket?
The normal principle is that you should prefer a traditional 401(k) to a Roth 401(k) if you expect to retire in a lower tax bracket; therefore, a traditional 401(k) is better for almost all investors in a high bracket now, because they will retire in a lower bracket.

However, you are a probable exception; your portfolio is so large that the portfolio income alone may keep you in the highest tax bracket in retirement, and in that case, the Roth 401(k) is better because you can effectively tax-defer more money. In your current tax bracket, you can contribute $17,500 to a Roth 401(k), or $17,500 to a traditional 401(k) with $7615 in tax savings. If you stay in the same tax bracket and your 401(k) grows tenfold, the $17,500 in the 401(k) will grow to $175,000, which is $98,849 after tax in a traditional 401(k), and the $7615 tax savings will not grow to $76,151 because you have paid tax on it along the way.
2) You are holding your entire bond allocation in the CA Muni fund. This is not the safest thing to do in my opinion. I'd do two things.
  • -increase your bond allocation to 20% instead of 15%

    -hold half in CA Muni and half in a national muni fund
Where do you stand on the debate over whether or not I should hold I and EE bonds?[/quote]

I bonds and EE bonds are good because they give tax-deferred interest, exempt from CA tax; however, you can only buy $10,000 per year, which doesn't do much in an 8-figure portfolio.

What makes EE bonds good is that they are guaranteed to double in value if you hold them for 20 years, even though the current interest rate is very low. If you buy $10,000 in EE bonds and sell then in 20 years in a 35% tax bracket, you will pay $3500 federal tax on the $10,000 gain and have $16,500, which is a 2.5% after-tax rate. That is better than you can earn on long-term municipal bonds, with less risk. The downside is that you earn almost nothing (currently 0.2%) if you sell them before 20 years, but you have enough other bonds that you won't need to do that.
Wiki David Grabiner

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Re: Large portfolio -- Grateful for your advice

Post by windfall900 » Thu Dec 06, 2012 8:51 pm

grabiner wrote:What makes EE bonds good is that they are guaranteed to double in value if you hold them for 20 years, even though the current interest rate is very low. If you buy $10,000 in EE bonds and sell then in 20 years in a 35% tax bracket, you will pay $3500 federal tax on the $10,000 gain and have $16,500, which is a 2.5% after-tax rate. That is better than you can earn on long-term municipal bonds, with less risk. The downside is that you earn almost nothing (currently 0.2%) if you sell them before 20 years, but you have enough other bonds that you won't need to do that.
Isn't this really only beneficial if bond interest rates stay low for a long time, though? What if I hold intermediate munis and rates are back up to 5% in a few years?

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Re: Large portfolio -- Grateful for your advice

Post by grabiner » Thu Dec 06, 2012 9:29 pm

windfall900 wrote:
grabiner wrote:What makes EE bonds good is that they are guaranteed to double in value if you hold them for 20 years, even though the current interest rate is very low. If you buy $10,000 in EE bonds and sell then in 20 years in a 35% tax bracket, you will pay $3500 federal tax on the $10,000 gain and have $16,500, which is a 2.5% after-tax rate. That is better than you can earn on long-term municipal bonds, with less risk. The downside is that you earn almost nothing (currently 0.2%) if you sell them before 20 years, but you have enough other bonds that you won't need to do that.
Isn't this really only beneficial if bond interest rates stay low for a long time, though? What if I hold intermediate munis and rates are back up to 5% in a few years?
The EE bonds are effectively long-term bonds, so they should be compared to other long-term bonds. If you buy a $10,000 zero-coupon 20-year municipal bond with a 2.5% yield, you will have $16,500 in 20 years. If rates go up to 5% in five years, then the municipal bond will have a 5% yield, but it will only be worth $7937, which is what it takes to get $16,500 in 15 years. You could sell the EE bond and forfeit the guaranteed doubling, as it would be worth $11,041 ($10,677 after tax) and still come out ahead; if you buy municipal bonds with the $10,677, you will have much more than $16,500 in 15 years. So you have a bond with a put option; if rates rise fast enough, you can get rid of your bond at a price higher than the market value.

Now, investors don't expect this to happen; rates may rise, but long-term rates are less volatile than short-term rates, and nobody would pay $10,000 for a municipal bond that was expected to be worth $7937 in five years.
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Re: Large portfolio -- Grateful for your advice

Post by abuss368 » Thu Dec 06, 2012 11:40 pm

comptalk wrote:Dude. With all due respect to everyone on this thread, you are out of their league. This is not a 250k IRA. This is at least 10,000,000 dollars (before taxes I assume). You need to seek professional financial advice. Professional advice to legally lower your tax liability. You are already at the highest tax bracket. Why on earth would you invest in something that you will be taxed as ordinary income? REITs and these types of vehicles where you are taxed at ordinary income + state income tax is financial suicide. You will be giving nearly half your profits to state and federal governments.

At your level, you should have the majority of your income in TAX FREE VEHICLES (Munis, UITs, etc.). You need a plan of action on all this money. Didn't the company you work for provide financial advice for their newly minted millionaires? Seriously, talk to someone at one of the investment houses. If you continue to invest this way, you could, on some of your income, pay more taxes than you legally have to. Not 10% or 15%, but more like 35% - 45%. I hope you heed my warning.
Really?
Seriously?

I have read estimates that Jack Bogle is worth at least $15 - $20 million or more. We can only speculate. Why can we all watch any number of video interviews with Mr. Bogle, where he has referenced both his taxable and tax advantaged accounts numerous times, but the Vanguard way does not work for this example.

So what is not paid in ordinary income tax rates is better paid to three big brokerage homes with insane fees?

Good luck with that. Regardless of wealth levels, stay with Vanguard.
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Re: Large portfolio -- Grateful for your advice

Post by jhd » Fri Dec 07, 2012 12:56 am

comptalk wrote:You need to seek professional financial advice. Professional advice to legally lower your tax liability.
This is the most important professional advice an investor can get (or possibly tied with a good estate lawyer). I'm pretty sure the OP said he had both already, though.

Beyond that, a financial advisor might make sense for one reason or another, but as long as he has a good tax accountant, he's not going to destroy his portfolio via a lazy indexed portfolio. That's the whole point of the Boglehead philosophy, isn't it?

(Separately, if someone with a high 8-figure portfolio did want to hire an financial advisor, wouldn't they be better off going with someone like GMO than with the Morgan Stanley advisor down the street?)

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