Another try at getting Portfolio Advice

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vk8216
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Joined: Wed May 18, 2016 12:19 pm

Another try at getting Portfolio Advice

Postby vk8216 » Fri Jan 06, 2017 1:17 pm

Hi Everyone,

Happy New Year! I have been reading this forum for over a year now and it has been incredibly helpful. I am very grateful for all of the advice that I have read and now I would like your advice on our overall financial picture.

Emergency funds: 1-2 months in checking account

Debt: Mortgage (approx. $850,000 at 3.375%), Cars (approx. $40,000 at 0%), Student Loans (approx. $40,000 at 1%)

Tax Filing Status: Married Filing Jointly, 2 dependents

Tax Rate: 38% Federal,9% State and Local

State of Residence: Maryland

Age: 35/36

Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: Open to suggestions

Current retirement assets

Taxable at Merrill Lynch (approx. $1,100,000)
(1% advisor fee + 0.25% weighted average expense ratio)

4% (SKYY) FIRST TRUST CLOUD COMPUTING ETF
1% (EFAV) ISHARES EDGE MSCI MIN VOL EAFE ETF
1% (EEMV) ISHARES EDGE MSCI MIN VOL EMERGING MARKETS ETF
5% (IGV) ISHARES TF S&P GSSI SOFTWARE
4% (XLB) MATERIALS SELECT SECTOR SPDR FUND
1% (PIE) POWERSHARES DWA ERMG MK
5% (XLE) SECTOR SPDR ENERGY
9% (XLI) SECTOR SPDR INDUSTRIAL
3% (KBE) SPDR KBW BANK ETF
5% (XHE) SPDR S&P HEALTH CARE EQUIPMENT ETF
3% (KIE) SPDR S&P INSURANCE ETF
15% (VCR) VANGUARD CONSUMER DISCRETIONARY ETF
14% (VDC) VANGUARD CONSUMER STAPLES ETF
5% (VFH) VANGUARD FINANCIALS ETF
4% (VIS) VANGUARD INDUSTRIAL ETF
15% (VGT) VANGUARD INFORMATION TECH ETF
6% (VPU) VANGUARD UTILITIES ETF

Her 401k (approx. $232,000)
100% (VINIX) Vanguard Institutional Index I

His 401k (approx. $250,000)
80% stocks/20% bonds

His Roth IRA at Merrill Lynch (approx. $75,000)
Invested the same as the taxable account with same fees as taxable account

Her Roth IRA at Merrill Lynch (approx. $28,000)
Invested the same as the taxable account with same fees as taxable account

529 Accounts at Vanguard
Child 1: $107,000 (100% invested in VSMPX-Vanguard Total Stock Market Index Fund Institutional Plus Shares)
Child 2: $100,000 (100% invested in VSMPX-Vanguard Total Stock Market Index Fund Institutional Plus Shares)

Questions:
1. Should we transfer our taxable and Roth IRA accounts at Merrill Lynch to Vanguard? Or just invest all of our new contributions at Vanguard? I am completely on board with the 3 fund portfolio concept and now believe that financial advisors are not a good use of money (now that I read this forum). My concern is that we have approximately $250,000 in capital gains and we would incur 25.8% in capital gains taxes. I understand that we can transfer custodianship of our accounts without incurring capital gains but if I move the money to Vanguard, it makes sense to me to sell my current investments and invest in a simple 3 fund portfolio. I have not been able to calculate whether the savings in costs long term makes up for the taxes we would incur at a higher rate and the loss of growth that we would have on that approx. $65,000 that we would pay in taxes.

2. We have approx. $400,000 in equity in our house. We have decided to invest in our house (approx. 2.7% guaranteed return after adjusting for the mortgage tax deduction) instead of bonds because we want financial freedom if we want to make a career change and I do not have a lot of confidence in the bond market right now. Our families think we are crazy for not having some of our investments in a bond fund. Would you increase our asset allocation to include more bonds or keep putting money into our house?

Thank you so much in advance. We appreciate it.
Last edited by vk8216 on Wed Jan 11, 2017 10:53 am, edited 1 time in total.

123
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Re: Leaving Merrill and Portfolio help please :)

Postby 123 » Fri Jan 06, 2017 1:54 pm

Since you're all ETF's you can easily move them "in-kind" to brokerage anywhere. Keep what you've got in taxable and just let it ride if you want and avoid any tax issues for now. Just call Vanguard.

You won't miss the broker at all. I'm surprised he didn't get you invested (at least partially) in something that was propriety so you couldn't leave easily (like a non-traded REIT etc).

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BL
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Re: Leaving Merrill and Portfolio help please :)

Postby BL » Fri Jan 06, 2017 3:02 pm

First, plan to get away from those advisor fees.
Also print out cost basis or unrealized gains in taxable acount, in case that gets lost in the move.

You can move to Merrill Edge, Fidelity, or Vanguard, etc. Don't let an advisor get hold of it, unless you want PAS at Vanguard.

Places other than Vanguard may give you bonuses and/or free selling.

Sell anything at a loss, maybe those funds under 5%, if not too much gains; sell gains up to loss. I wouldn't sell everything at your tax rate. Be sure to not re-invest distributions; rather have them available to buy into 3-fund portfolio.

Maybe use Morningstar to figure out what you have so you can plan your 3-fund portfolio to complement/complete the missing elements. Vanguard's Total stock market and total International are very tax-efficient for taxable. Muni bonds if you don't have room for more in tax-advantaged accounts.

Try Vanguard again on a non-Monday and hopefully you have better luck. You may have to wait as they seem especially busy these days. Have a statement or screen in front of you so you know exactly what you have to transfer with account numbers, etc. I have no experience in the brokerage part of V, but expect that would work just fine. I would give them an idea of the $ amount of Vanguard funds/ETFs you expect to transfer as larger amounts could help. I don't think the ones you don't plan to switch to V would count for much that way. I think 6 figures ($XXX,XXX) should be great. They would pull from the accounts at ML. You may have to fill out some paperwork or get on a 3-way phone conversation with ML.

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Earl Lemongrab
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Re: Leaving Merrill and Portfolio help please :)

Postby Earl Lemongrab » Fri Jan 06, 2017 3:39 pm

With that much and all in ETFs, I would look at custodians that would give you a nice bonus and potentially cover any transfer-out fees.

The Final, Definitive Thread on Brokerage Transfer Bonuses
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vk8216
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Re: Leaving Merrill and Portfolio help please :)

Postby vk8216 » Fri Jan 06, 2017 3:53 pm

Thank you all for weighing in on transferring the account. The information is very helpful.

Punta Cana DR
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Location: Alpharetta, Georgia

Re: Leaving Merrill and Portfolio help please :)

Postby Punta Cana DR » Fri Jan 06, 2017 3:56 pm

I just transferred all my funds to Fidelity from another brokerage firm and it was very easy.

I set up an account at Fidelity and selected transfer assets option, which provided a web form to complete and attach a copy of my taxable and non taxable account numbers and related statements. They made it happen and My ETF's, Mutual Funds and Stocks transferred in kind. Very impressed with Fidelity.

In addition, Fidelity has a large list of no commission Fidelity/Blackrock ETF selections. ITOT is a total US stock market ETF with 0.3% ER.

vk8216
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Re: Another try at getting Portfolio Advice

Postby vk8216 » Wed Jan 11, 2017 10:54 am

I thought I would edit this post in hopes of getting a few more responses to my portfolio questions. Thank you again.

abonder
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Re: Another try at getting Portfolio Advice

Postby abonder » Wed Jan 11, 2017 11:09 am

In regards to the 100% equities asset allocation - only you can decide if that works for you. There are plenty of people who incorporate other factors (pension, rentals, annuities, etc) to rationalize an aggressive asset allocation. Based on historical returns, you should come out ahead with a higher equity allocation if you don't fall into any behavioral pitfalls or get forced to sell at an inopportune time (job loss, unexpected expenses, etc). There are plenty of 100 Percent equities folks on this board who fully understand the risks/benefits...but there are also those who think they know but probably don't. Based on your income/impressive savings, it probably doesn't matter what you do as you're likely to be very successful regardless. People here are generally debt averse so many will endorse extra payments to the mortgage.

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BL
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Re: Another try at getting Portfolio Advice

Postby BL » Wed Jan 11, 2017 11:17 am

vk8216 wrote:I thought I would edit this post in hopes of getting a few more responses to my portfolio questions. Thank you again.

What did you change? What exactly are you hoping to get responses on?

Fidelity has good index funds, so as long as you stay with that you would be fine. If they pay you so you can get selling costs taken care of that is great. Roths don't have any tax concerns. The important thing is getting away from your advisor and his/her costs, unless he is giving you other great value. Then work toward adding to 3-fund portfolio as you can. Be sure all dividends are not re-invested, so you don't keep increasing unwanted etfs.

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Peter Foley
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Re: Another try at getting Portfolio Advice

Postby Peter Foley » Wed Jan 11, 2017 11:22 am

BL wrote:

Sell anything at a loss, maybe those funds under 5%, if not too much gains; sell gains up to loss. I wouldn't sell everything at your tax rate. Be sure to not re-invest distributions; rather have them available to buy into 3-fund portfolio.


I second this recommendation. To add a little more detail, I would start by selling the ETFs that are only 1% of your portfolio. Then look at Bank and Insurance ETFs - the next smallest - with the thought in mind do you really want to emphasize these sectors. Positions of less than 5% aren't large enough to boost a portfolio's return nor are they large enough to provide additional diversification.

I would definitely recommend that you have at least 10% -20% in bonds. You want to have some powder dry in case there is a large market downturn. I too would advise moving to Vanguard. Fidelity and Schwab are not bad options either.

vk8216
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Re: Another try at getting Portfolio Advice

Postby vk8216 » Wed Jan 11, 2017 11:34 am

Thank you all for your responses. I was hoping to get some thoughts on whether saving the advisor fee (1% per year) was worth incurring the capital gains taxes now vs. leaving that money invested with my advisor and not paying the taxes.

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JDCarpenter
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Re: Another try at getting Portfolio Advice

Postby JDCarpenter » Wed Jan 11, 2017 11:54 am

vk8216 wrote:Thank you all for your responses. I was hoping to get some thoughts on whether saving the advisor fee (1% per year) was worth incurring the capital gains taxes now vs. leaving that money invested with my advisor and not paying the taxes.


It isn't an either/or proposition. You can leave the advisor and not sell the funds. As suggested above, choose your new investment home (FIDO/ML Edge/Schwab/Vanguard), open an account, and initiate the transfer "In Kind" from the new firm.

Once you have the funds elsewhere, no advisor fee--and then you determine out the most tax efficient way to sell some of the funds and coordinate the remainder with your new portfolio approach.
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Earl Lemongrab
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Re: Another try at getting Portfolio Advice

Postby Earl Lemongrab » Wed Jan 11, 2017 12:20 pm

Your portfolio is almost all ETFs, so you can hold those anywhere. Move, get a bonus, get free trades, decide what you want to keep and what to get rid of then.
This week's fortune cookie: "You will enjoy doing something spontaneous this weekend." Apparently that meant working on a dead PC, but I didn't enjoy that much.

dspencer
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Re: Another try at getting Portfolio Advice

Postby dspencer » Wed Jan 11, 2017 12:37 pm

I would definitely get away from the advisor. As others have said you shouldn't have to incur gains if you transfer in-kind.

There's plenty of articles stating that you should invest in the stock market rather than pay off your mortgage because the returns are higher. I understand the argument for potentially higher returns using the leverage for investing, but that also adds risk. It seems that if average long term return was the only relevant criteria you should never buy bonds either. The tax deduction does sway things a little though.

Personally, I paid off my mortgage and haven't regretted it. Maybe I'm irrationally adverse to debt. I also enjoy the simplicity of just owning my house outright. I also paid off my wife's student loans for the same reason. The amount was relatively small for us and I like having one less mental entanglement and monthly obligation.

livesoft
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Re: Another try at getting Portfolio Advice

Postby livesoft » Wed Jan 11, 2017 12:45 pm

In your situation, I would stop paying the advisor fee today. I would use Merrill Edge with its free commissions. I would get all the perks from Bank of America for having such a large account. That is, I would get rid of all fees and have them pay me to have my money with them.

Then I would take my time working out what I wanted to do. Some things:

1. Sell all positions that have a loss. This does not mean sell every share of a ticker symbol because some shares will have a loss and some will not. There should be absolutely no commissions to do any of this selling.

2. I would not have an asset allocation of 100% equities. Work on that and come back with what you decided to do.

3. Implement a way of tracking your portfolio and understanding what the XIRR() performance is, what the unrealized gains/losses are, what the taxes might be, what are qualified dividends, what are non-qualified dividends, etc. I use MS Money manually. What are you going to use?

4. Then come back with more questions.
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CyclingDuo
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Re: Another try at getting Portfolio Advice

Postby CyclingDuo » Wed Jan 11, 2017 1:05 pm

livesoft wrote:In your situation, I would stop paying the advisor fee today. I would use Merrill Edge with its free commissions. I would get all the perks from Bank of America for having such a large account. That is, I would get rid of all fees and have them pay me to have my money with them.

2. I would not have an asset allocation of 100% equities. Work on that and come back with what you decided to do.


Good advice on the 1% AUM fee!

While one is on the subject of overall portfolio evaluation and the 100% in equities, any thoughts on how to evaluate the Social Security component of the OP's overall household balance sheet? Not trying to stir the pot, just asking a legitimate question.

https://www.kitces.com/blog/valuing-soc ... nce-sheet/
http://www.morningstar.com/cover/videoc ... ?id=702029

John "Jack" Bogle's thoughts on SS in this interview as well...

http://www.fool.com/investing/general/2 ... tions.aspx

abonder
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Re: Another try at getting Portfolio Advice

Postby abonder » Wed Jan 11, 2017 1:12 pm

I think you've gotten really good advice from some experienced members of the community. It seems like you've created a mental model that is incorrect. You don't have to necessarily sell all your positions to leave your advisor. Those are two separate steps. If you decided that the advice from your advisor isn't worth the 1% plus, then you move your funds in-kind to the provider who best fits your needs. Then you take a multiyear approach to selling old positions and investing into your new, desired allocation. As livesoft and others have noted, you can sell everything that has losses and use those to offset gains. And then you reassess each year, harvest losses/gains accordingly, all the while contributing new money to your desired funds/allocations. In relatively short time you will have migrated away from you advisor fees into a low-cost, simple allocation and everything will be on autopilot save for the gradual unraveling of your old portfolio. And you have a forum full of motivated and insightful peers to support you and answer questions along the way. You could argue it's almost fun!

livesoft
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Re: Another try at getting Portfolio Advice

Postby livesoft » Wed Jan 11, 2017 1:13 pm

I wouldn't bring SS into the discussion for investors who have 35 years to go before they even have a hint of getting SS benefits.
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