Portfolio advice - allocating for the first time

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Frank Grimes
Posts: 188
Joined: Tue Mar 07, 2017 10:54 am

Portfolio advice - allocating for the first time

Post by Frank Grimes »

Hello all, first time poster here. I found this site a few months ago and I’m glad to have found this resource of live below your means/millionaire next door types and have learned a great deal from the philosophies in the wiki and the collective wisdom of the posters here.

I’ve realized our portfolio is lacking structure in a big way, but I’ve come up with some steps below to remediate this and design a portfolio that is low cost, tax efficient and reflective of our risk tolerance at this stage in our lives. If you have a couple minutes, please critique away! Apologies for the formatting on the tables, I was unable to get that to work as clearly on here as it was in Word.

Emergency funds: About $55k in online savings earning 1.1%. And about 10k or so in the checking account, I don’t mind having a little extra in here to cover monthly mortgage and credit card autopays or anything unexpected and not worry about overdrafting.
Debt: $360k mortgage at 3.25%, 30 yr
Taxes: MFJ; 33% fed tax bracket, 5.75% state
State of residence: NC
Current ages: Me 33, spouse 31. 2 kids, age 2 and age 4 months
Desired allocations: 60% domestic equity, 20% international equity, 20% bonds

Overall investable portfolio size excluding emergency funds: About $815k

Summary of portfolio holdings:

Online savings: 100k cash – this is separate from the emergency funds noted above. Recently sold our previous house so this has been in savings until we decide where it goes

Taxable brokerage account – about 160k

Description /Symbol /Category /Expense Ratio /Percent of total portfolio
APPLE INC /AAPL /Stock /n/a /0.63%
AT & T INC /T /Stock /n/a /0.31%
CHESAPEAKE ENERGY CORP /CHK /Stock /n/a /0.05%
KINDER MORGAN INC DEL / KMI /Stock /n/a /0.14%
CONSUMR STPLE SCTOR ETF /XLP /Domestic index /0.14 /1.39%
FIRST TR MRNSTR DIV ETF /FDL /Domestic index /0.45 /0.56%
ISHARES CORE S&P 500 ETF /IVV /Domestic index /0.07 /5.66%
ISHARES CORE S&P MID ETF /IJH /Domestic index /0.12 /3.54%
ISHARES RUSSELL 2000 ETF /IWM /Domestic index /0.2 /2.84%
UTILITIES SECTOR SPD ETF /XLU /Domestic index /0.14 /1.01%
VANECK VCTRS GLBL ALTETF /GEX /Domestic index /0.62 /0.11%
VANGUARD CON DISCR ETF /VCR /Domestic index /0.1 /0.79%
VANGUARD DVD APPREC ETF /VIG /Domestic index /0.09 /1.15%
VANGUARD INDUSTRIALS ETF /VIS /Domestic index /0.1 /0.40%
VANGUARD MATERIALS ETF /VAW /Domestic index /0.1 /1.05%

Spouse Roth IRA – about 60k

Description /Symbol /Category /Expense Ratio /Percent of total portfolio
AXA Annuity /Variable Annuity /Whatever /6.16%
VANGUARD TOTAL INTL ETF /VXUS /International index /0.11 /1.27%

My Roth IRA – about 40k

Description /Symbol /Category /Expense Ratio /Percent of total portfolio
AXA Annuity /Variable Annuity /Whatever /3.57%
VANGUARD TOTAL INTL ETF /VXUS /International index /0.11 /1.25%

My old employer’s 401k – still accessible and can still make investment changes. These were pretax contributions – about 80k. Note: the starred out symbol gives away my old employer, it was letters indicating the company name. But it's a vanguard fund.


Description /Symbol /Category /Expense Ratio /Percent of total portfolio
AMERICAN EUROPACIFIC GROWTH R6 /RERGX /International fund /0.49 /0.54%
BLACKROCK FEDFUND INSTL CL /AZBGP /Money market/stable value /0.21 /0.48%
DODGE & COX INTERNATIONAL ST /DODFX /International fund /0.64 /1.03%
VANGUARD EE BENEFIT INDEX FD /V**** /Domestic index /0.02 /4.09%
VANGUARD EXPLORER FUND /VEXRX /Domestic index /0.35 /1.02%
VANGUARD REIT INDEX FD CL INST /VGSNX /Domestic index /0.1 /0.99%
VANGUARD TOTAL BOND MKT INDEX /VBMPX /Bond index /0.04 /2.02%

My current employer’s 401k – mostly after tax contributions but recently switched to pretax – about 80k

Description /Symbol /Category /Expense Ratio /Percent of total portfolio
LIFEPATH INDEX 2045 FUND O /LNJTT /Target date fund /0.09 /9.72%

Other relevant fund choices in the current job 401k (rather than list all of the available choices, I’ll stick with listing only the ones that are worth considering IMO if we don’t already own it. But let me know if this will help and I can add them)

Description /Expense Ratio /Symbol
Vanguard extended market index /0.05 /VEMPX small and mid cap
Vanguard institutional index /0.02 /VIIIX large cap
Vanguard international index /0.07 /VTPSX international
Vanguard total bond mkt index /0.04 /VBMPX bond

Spouse’s 401k – mostly after tax contributions, will soon switch to pretax – about 280k. Note: spouse's site does not give the ticker symbols. Also I starred out the employer on the ESOP fund.

Description /Symbol /Category /Expense Ratio /Percent of total portfolio
SSGA S&P 500 INDEX FUND CLASS K /Domestic index /0.01 /13.94%
STATE STREET S&P MID CAP INDEX FUND CLASS C /Domestic index /0.05 /8.52%
STATE STREET RUSSELL SMALL CAP INDEX FUND CLASS S /Domestic index /0.05 /5.09%
STATE STREET INTERNATIONAL INDEX FUND CLASS C /International index /0.09 /5.27%
**** ESOP FUND /Stock fund /0 /1.67%

Other relevant fund choices in the spouse 401k (rather than list all of the available choices, I’ll stick with listing only the ones that are worth considering IMO if we don’t already own it. But let me know if this will help and I can add them)


Description /Expense Ratio
State Street US Bond Index Fund Class K /0.04

HSA (Note: we are no longer on a HDHP so we’re not currently making contributions to this. Obviously if we get back on these plans in the future we’ll prioritize this above taxable contributions) – about 15k. Note: no ticker symbols available here either

Description /Symbol /Category /Expense Ratio /Percent of total portfolio
Large cap index fund /Domestic index /0.25 /1.79%



Planned recurring contributions:

Max $18k into each of our 401ks, then backdoor roth $5,500 for each, then $14k per year into each kid’s Vanguard 529 (Nevada, since no NC tax benefit). Whatever’s left goes into taxable.


Other information:

Included in the investments outlined above, we have about 80k combined in an AXA variable annuity (our Roth accounts were rolled into these vehicles). This was a bad idea. We were previously exploring moving our investments to a financial advisor. We decided to not roll our entire portfolios to his firm, but not before rolling our old Roths into one of these albatrosses. Worse, it happened just last year like two months before I found out this site existed. Unfortunately the surrender fees are still pretty high since we’re under a year, so I’ll probably take my medicine until year 5 when the surrender fee is 0. In the meantime, we opened new Roths and bought real investments with our 2016 and 2017 contributions.

Additionally we have been funding 529s for our kids since their birth. Kid 1 has about $60k and kid 2 has about $14k. We’re obviously far away from college costs, but I’ll probably continue to contribute to both until we get to about $100k for each kid, which after compounding will easily cover the top state schools or take a big chunk out of private schools, and maybe have some left over for grad schools or grandkids.

Questions:

For those of you keeping score at home, our current allocations are approximately 10% international, 2% bonds and the rest is domestic equity of some sort.

Obviously our current allocations are nowhere near the desired and our current holdings are tilting all over the place. Below I’ve outlined below the moves I intend to make to get us on target.

1. In the taxable account when I am able, sell KMI and CHK. Once I can sell KMI and CHK, sell FDL. Probably sell GEX. Use proceeds to buy VXUS (Vanguard Total International Stock ETF, 0.11% ER) in taxable.

We’ve had the ETFs and stocks in the taxable account for several years and almost all of them have decent long term capital gains. Since most of them have pretty good ERs (except FDL and GEX), I’m not in a rush to sell any of these for purposes of adjusting our overall allocation % because they will create unnecessary long term capital gains tax. Same with the individual stocks, I plan to keep these except for CHK and KMI which combined have a LT capital loss of ~2500. However, due to both my and my spouse’s employers’ trading account restrictions, we’re unable to sell individual stocks until they have cleared certain restricted lists (long story). So once we’re able, we’ll sell these and at the same time sell FDL which has an equivalent offsetting LT capital gain. GEX has a small LT capital loss and a mediocre ER, but I may keep this as a gamble because it holds a lot of Tesla. Nah, I’ll probably sell it.

2. Adjust my 401k allocations to 30% domestic large cap, 25% domestic mid and small cap, 25% international and 20% bond from the fund choices listed above. Adjust spouse 401k allocation to 25% domestic large cap, 15% domestic midcap, 15% domestic small cap, 25% international and 20% bond from the fund choices listed above. Adjust my old 401k allocation to 40% large cap domestic, 60% bond.

The current 401k allocations are clearly too stock heavy and are not the most effective usage of tax deferred space. The target date fund in my 401k is fine, but it’s like 100% stock right now and I think I need the control from the proposal above to give me extra bond allocation to hit our overall portfolio allocation percentage goals.

I recognize that bond funds are best placed in tax-deferred accounts, but my feeling is that I don’t want to get overly conservative in these accounts just to true up our current stock heaviness in the taxable account. I’d rather our current employer 401ks more or less mirror our overall allocation goals since contributions will be automatically invested to our preferred allocations. I still have my 401k from my old employer and intend to keep it rather than rolling it to an IRA. The investment choices there are excellent for a 401k. Also it is comprised of pre-tax contributions and I don’t want to roll to a traditional IRA because this would prevent us from doing backdoor Roths. Since there will be no more contributions to this, I’ll just treat it like a traditional IRA and increase the bond allocation way up via the above proposal.

3. Spend the 100k cash in taxable account as 50k VXUS (Vanguard Total International Stock ETF, 0.11% ER) and 50k VTEB (Vanguard Tax-Exempt Bond ETF, 0.09% ER)

We still need more bonds and more international. That cash needs to go in taxable, nowhere else to put it. So I’ll buy VXUS and VTEB and by splitting it 50/50 that will get our overall portfolio percentages in line with the overall goal of 20% bonds and 30% international. Tax exempt bonds will at least keep us from paying ordinary income rates (high) on the interest they spin off.

If I execute the above, we will be at 21% bond, 20% international equity and 59% domestic equity. So future contributions to roth and taxable can be relatively easily broken down to keep our overall percentages in line. Also, future purchases of equities in taxable will likely be VTI (Vanguard Total Stock Market, 0.04%)

Any thoughts/suggestions? Where did I screw up and/or what am I not thinking about?
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Portfolio advice - allocating for the first time

Post by PFInterest »

that was long but the only thing ill mention is you dont need every account to be a mirror. its OK to fill 401k with fixed income, and leave most of stock in taxable. anything else inefficient goes in rIRA. pick the best funds in each account and build around it that way.
Topic Author
Frank Grimes
Posts: 188
Joined: Tue Mar 07, 2017 10:54 am

Re: Portfolio advice - allocating for the first time

Post by Frank Grimes »

Makes sense, thanks for your response. My thought process with my setup is that it'll be easier to "set it and forget it" if the regular frequent contributions from the 401k are already going towards my target allocations.

I suppose it comes down to choosing between the bond options in our 401ks (good options) or the tax exempt bond fund in taxable (also a good option).
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