New Investor - Introduction

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BlueDreamer
Posts: 3
Joined: Thu Oct 12, 2017 11:16 am

New Investor - Introduction

Post by BlueDreamer » Thu Oct 12, 2017 1:41 pm

Hello All,

I recently decided to take a good hard look at my investments and how I can maximize my financial opportunities. I currently only have a 401k and a checking account. I would like to open a Roth IRA and a brokerage account through Schwab in the next couple weeks and put my money to work instead of stacking it in my checking account. The below details are my proposed allocations, nothing is set in stone other than my 401k.

Emergency funds: $35k in a rewards checking account earning 2.27% APY (only up to $35k). Just opened this account to replace my regular checking account, seems like a no-brainer. This is about 18-24mo of living expenses. I plan on keeping this account at the $35k mark and putting everything I have left into the brokerage account monthly.
Debt: Used car loan with $8,300 remaining. 2.24% APR. Will be paid off 12/19.
Tax Filing Status: Single
Tax Rate: 25% Federal, 6.27% State
State of Residence: WI
Age: 26
Desired Asset allocation: 94% stocks / 6% bonds in 401k and Roth IRA, 60/40 in taxable to save for a house in 5-10 years.
Desired International allocation: 33% of stocks

Total portfolio by end of 2017:
Cash: $35k
401k: $80k
Roth IRA: $5.5k
Brokerage: $5-10k

New annual Contributions
$36k 401k (including match)
$5.5k Roth IRA
$10-12k taxable (for house down payment)

PROPOSED assets

401k, 100% match
63% Schwab S%P 500 Index (SWPPX) (.03)
31% Vanguard Total Intl Stock Index Admiral (VTIAX) (.11)
6% Vanguard Total Bond Market Index Adm (VBTLX) (.05)

Roth IRA

63% Schwab Total Stock Market Index (SWTSX) (.03)
31% Schwab International Index (SWISX) (.06)
6% Schwab US Aggregate Bond Index (SWAGX) (.04)

Taxable
40% Schwab Total Stock Market Index (SWTSX) (.03)
20% Schwab International Index (SWISX) (.06)
40% Schwab US Aggregate Bond Index (SWAGX) (.04)

Questions:
Mainly I'd like to make sure my strategy with the taxable account isn't too far out of line. I can put that money in a MMA and earn 1.5% interest but I am ok with taking on some extra risk due to my emergency fund/checking account being well funded. Is this a bad idea? Should I be more conservative based on the 5-10yr horizon?

I think my 401k/Roth AA and fund choices are pretty standard around here, but if anyone has thoughts on those please feel free to share.

Thanks for any advice!

EHEngineer
Posts: 536
Joined: Sat Feb 28, 2015 4:35 pm

Re: New Investor - Introduction

Post by EHEngineer » Thu Oct 12, 2017 5:26 pm

Hi BlueDreamer,
Welcome to Bogleheads.

You have a good grasp on your finances and a good plan. I have only a couple minor comments.
You have two different goals with two different allocations and it's a little confusing to put them both in one post.
1) Retirement funds, and
2) Home downpayment funds

You have clearly done your homework and found the "how to ask portfolio questions" thread. Good work there. But you made one small error, normally when we specify asset percentages, we specify by percent of portfolio, not percent of account. Relatedly, "portfolio" means only those funds directed toward a goal. So in your case you have a Retriement portfolio, and a home downpayment portfolio. This is basically irrelevant for you as you are allocating each account exactly at your overall desired allocation. And that's a good thing because it effectively achieves a tax-adjusted allocation. But for clarity of thought I would update your post.

Probably the biggest concern I have is a 60/40 allocation for your home downpayment fund. That's a bit risky for my taste. If 5 years is a real possibility I would have no more than 20% stock, and the rest in CDs. IF the market keeps going up you will hate me for that advice, but I prefer that to, "whoops, I lost 30% of my home downpayment fund in 5 years". YMMV.

Nice work overall.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

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patrick013
Posts: 1790
Joined: Mon Jul 13, 2015 7:49 pm

Re: New Investor - Introduction

Post by patrick013 » Thu Oct 12, 2017 5:37 pm

Tax-efficient Fund Placement

I would use the above wiki info for fund placement.
age in bonds, buy-and-hold, 10 year business cycle

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ruralavalon
Posts: 11305
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: New Investor - Introduction

Post by ruralavalon » Fri Oct 13, 2017 10:07 am

Welcome to the forum :) .

In my opinion a 60/40 asset allocation for your house down payment money, 5-10 years away, is reasonable.

I suggest that you consider having your Roth IRA and taxable account at Vanguard, so you can use the more diversified Vanguard Total International Stock Index Fund. Schwab International Index Fund covers only larger companies, only in developed markets excluding Canada. The Schwab fund omits emerging markets, Canada, and small company stocks. Vanguard Total International Stock Index Fund covers both larger and smaller companies, in both emerging and developed markets, including Canada.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

BlueDreamer
Posts: 3
Joined: Thu Oct 12, 2017 11:16 am

Re: New Investor - Introduction

Post by BlueDreamer » Thu Oct 19, 2017 8:10 am

EHEngineer wrote:
Thu Oct 12, 2017 5:26 pm
Hi BlueDreamer,
Welcome to Bogleheads.

You have a good grasp on your finances and a good plan. I have only a couple minor comments.
You have two different goals with two different allocations and it's a little confusing to put them both in one post.
1) Retirement funds, and
2) Home downpayment funds

You have clearly done your homework and found the "how to ask portfolio questions" thread. Good work there. But you made one small error, normally when we specify asset percentages, we specify by percent of portfolio, not percent of account. Relatedly, "portfolio" means only those funds directed toward a goal. So in your case you have a Retriement portfolio, and a home downpayment portfolio. This is basically irrelevant for you as you are allocating each account exactly at your overall desired allocation. And that's a good thing because it effectively achieves a tax-adjusted allocation. But for clarity of thought I would update your post.

Probably the biggest concern I have is a 60/40 allocation for your home downpayment fund. That's a bit risky for my taste. If 5 years is a real possibility I would have no more than 20% stock, and the rest in CDs. IF the market keeps going up you will hate me for that advice, but I prefer that to, "whoops, I lost 30% of my home downpayment fund in 5 years". YMMV.

Nice work overall.
Thanks for your insight! After speaking with some trusted friends in the industry, I've been strongly considering flipping the allocation on the house fund to 40/60 based on the current market environment and my short time horizon. CD rates are low right now and I'd like to have an account I can add to every month. My checking account pays about the same as a good CD so it's not a very enticing proposition at this point for those reasons.
ruralavalon wrote:
Fri Oct 13, 2017 10:07 am
Welcome to the forum :) .

In my opinion a 60/40 asset allocation for your house down payment money, 5-10 years away, is reasonable.

I suggest that you consider having your Roth IRA and taxable account at Vanguard, so you can use the more diversified Vanguard Total International Stock Index Fund. Schwab International Index Fund covers only larger companies, only in developed markets excluding Canada. The Schwab fund omits emerging markets, Canada, and small company stocks. Vanguard Total International Stock Index Fund covers both larger and smaller companies, in both emerging and developed markets, including Canada.
Thanks for pointing out the differences between those funds, I was not aware they were meaningfully different. I chose Schwab for two reasons. First, my 401k is through them and I felt it would be easier to have everything in one place. Second, I currently don't have enough to invest in VG's Admiral funds so the expense ratios at Schwab are a bit better for the time being. I will need to consider the fact that the funds are not quite as similar as I thought.

Once change I've made in my mental roadmap since my original post is viewing the $35k @ 2.27% in my checking account as part of my house savings portfolio. I'd like to treat this money as part of my bond allocation and with that in mind, the first $23k I invest in the taxable account will be split between US/International stocks to achieve a 40/60 AA. Does anyone see any flaws in this approach?

BlueDreamer
Posts: 3
Joined: Thu Oct 12, 2017 11:16 am

Re: New Investor - Introduction

Post by BlueDreamer » Thu Oct 19, 2017 11:04 am

One more question. These are the low cost funds available in my 401k:

Schwab S&P 500 Index
Vanguard Mid-Cap Index Fund
Vanguard Small-Cap Index Fund
Vanguard Total Bond Market Index Fund
Vanguard Total International Stock Index Fund

Should I add VG Small and/or Midcap funds to supplement my domestic equity since I don't have access to a total stock market index? I was originally planning on using a 3-fund split between S&P/International/Bonds.

EHEngineer
Posts: 536
Joined: Sat Feb 28, 2015 4:35 pm

Re: New Investor - Introduction

Post by EHEngineer » Thu Oct 19, 2017 11:10 am

BlueDreamer wrote:
Thu Oct 19, 2017 11:04 am
Should I add VG Small and/or Midcap funds to supplement my domestic equity since I don't have access to a total stock market index? I was originally planning on using a 3-fund split between S&P/International/Bonds.
Some people do that. In my opinion it's not worth the effort. I use TSM and SP500 funds interchangeably.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

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ruralavalon
Posts: 11305
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: New Investor - Introduction

Post by ruralavalon » Thu Oct 19, 2017 12:42 pm

EHEngineer wrote:
Thu Oct 19, 2017 11:10 am
BlueDreamer wrote:
Thu Oct 19, 2017 11:04 am
Should I add VG Small and/or Midcap funds to supplement my domestic equity since I don't have access to a total stock market index? I was originally planning on using a 3-fund split between S&P/International/Bonds.
Some people do that. In my opinion it's not worth the effort. I use TSM and SP500 funds interchangeably.
Those are my thoughts as well.

My 401k had only a S&P 500 index fund, which I used by itself for domestic stocks. The S&P 500 index covers 81% of the domestic stock market. In the 25 years since the creation of the first total stock market index fund the performance of the two types of fund has been almost identical.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

JBTX
Posts: 1266
Joined: Wed Jul 26, 2017 12:46 pm

Re: New Investor - Introduction

Post by JBTX » Thu Oct 19, 2017 1:09 pm

Seems like you have a great strategy. I really have nothing to add!

I agree with RA above on international (and I actually didn’t know that).

I also think 60/40 is fine for an intangible nonspecific buy a home strategy in 5 to 10 years, especially given you are young and single. If you think it is closer to 5 then 40/60 may make more sense. That is a really a judgement call. If you said I’m 30 and me and my wife want to buy a house within 5 years I’d say a combination of online savings accounts, money markets CDs or ibonds.

Be prepared that that high rate on your savings account will probably be lowered 6-18 months down the road.

As to small cap I agree S&P fund and total market will have close to same return and behavior. On the flip
Side you can make an argument for a little bit of small cap tilt at your age if that is what you want to do.

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