Portfolio review

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mjshah
Posts: 3
Joined: Wed Jun 13, 2018 10:30 pm

Portfolio review

Post by mjshah » Wed Jun 13, 2018 11:16 pm

Hello all,

I think I've found a gem of a resource for all my retirement/investment related questions. This is my first post here, but I'm hoping to get regular. Thanks for all the help to community members!


I'm 31.

My portfolio as of now -

401k ~38k (T Rowe 2050 27k, Company stock - 11k) @6%. Employer match 33% on 6%
Company stock - 42k (15% discount on employee stock purchase program)
Individual stocks ~4k
Cash ~20k
No debt as of now. But planning to buy a home soon (1-2 years)

Total - ~104k

I know I'm heavily concentrated on my company stock, and want to diversify. I invested heavily in it initially because 15% off, but the stock is not doing as good as I had hoped. It was a risk I wanted to take early on, but I don't think it's paying off that well? Planning to sell the vested shares and invest in a robo advisor - wealthfront/betterment

Questions -
- Where to diversify?
- Should I switch to a different fund other than T Rowe? It's fees are 0.74%. If yes, where? Will there be any fees/taxes to move to a different fund?
- Should I continue with 15% to company stock and sell after 2 years when they're vested? The shares are credited to the account every quarter. Or lower it and put that money into a different taxable account (Robo advisor)
- I do not contribute to roth IRA. Should lower the contribution to company stock/401k and start IRA?
- Want to retire with at least 2M in assets, and it doesn't look like I'm on track. What changes can I make to get there?
- Any other general advice regarding my portfolio, on where can I improve?

ExitStageLeft
Posts: 919
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio review

Post by ExitStageLeft » Thu Jun 14, 2018 8:05 am

Welcome to the forum! Congratulations on your path to financial independence. There's a lot of information to take in, so you should probably Start Here.

Your T Rowe Price fund is on the expensive side, but it may be among your better choices. If you list the funds you have available, or at least those with lower expense ratios we then could offer some suggestions.

Your company stock purchases may still turn out to have been a good decision as long as it doesn't lose value precipitously. You got it at a 15% discount. If you can turn around and sell it right away that would net you 11.7% increase in what you paid, which would get taxed as a short term capital gain the same rate as your income. If you have to hold it to vest, if you hold long enough to qualify for long term capital gains then the increase in value will be taxed at your LTCG rate, which is probably 15%. Still, for best diversification you should divest of the company stock on a regular schedule.

You of course should be contributing to an IRA in addition to your 401k contributions. Prodigious savings is the quickest route to financial independence, and you optimize that by maximizing your tax-advantaged savings. Read up on that in the wiki page on Prioritizing Investments.

With most of your savings in tax-advantaged accounts (401k, IRA, HSA) you don't need a robo adviser. The Boglehead Philosophy recommends you put your assets in indexed mutual funds with broad diversification and low annual expenses. It doesn't involve chasing yield with the latest tactics dreamt up by financial analysts. It's a buy and hold strategy that ensures you will make the most of the markets you invest in.

Jack FFR1846
Posts: 7799
Joined: Tue Dec 31, 2013 7:05 am

Re: Portfolio review

Post by Jack FFR1846 » Thu Jun 14, 2018 8:20 am

As an example, I get an even better deal on ESPP and on the day the stock vests, it is immediately sold even though the company has been a rising star (not a new company, but well managed, conservative and making the right moves). I have zero interest in taking single stock risks. If this were my portfolio, I'd be selling all the stock right now and if there's a loss, putting that in my taxes in April.

I'm a hard core 3 fund portfolio guy.
Bogle: Smart Beta is stupid

mjshah
Posts: 3
Joined: Wed Jun 13, 2018 10:30 pm

Re: Portfolio review

Post by mjshah » Thu Jun 14, 2018 10:16 pm

ExitStageLeft wrote:
Thu Jun 14, 2018 8:05 am
Welcome to the forum! Congratulations on your path to financial independence. There's a lot of information to take in, so you should probably Start Here.
Thank you, ExitStageLeft. I do read about investments a little every day and am learning now as I learnt the importance of investing.
Your T Rowe Price fund is on the expensive side, but it may be among your better choices. If you list the funds you have available, or at least those with lower expense ratios we then could offer some suggestions.
I've heard T Rowe is a good fund, but as the portfolio grows, a substantial amount will start going into the fees. See below the available options provided by 401k account. My question is here is if I move from T Rowe to any other fund, are there any fees that I should know of? I would appreciate if you could suggest a breakdown among the funds available?

ABF LG CAP VAL INST (AADEX)
07/17/1987
Stock Investments Large Cap 0.6% No additional fees apply.
AM CENTURY ULTRA I (TWUIX)
11/02/1981
Stock Investments Large Cap 0.78% No additional fees apply.
FID 500 INDEX INST (FXSIX)
02/17/1988
Stock Investments Large Cap 0.03% No additional fees apply.
FID EXT MKT IDX PR (FSEVX)
11/05/1997
Stock Investments Mid-Cap 0.07% No additional fees apply.
AM CENT SM CAP VAL
05/31/2012
Stock Investments Small Cap 0.85% No additional fees apply.
VANG SM CAP IDX ADM (VSMAX)
10/03/1960
Stock Investments Small Cap 0.05% No additional fees apply.
FID INTL SM CAP OPP (FSCOX)
08/02/2005
Stock Investments International 1.13% No additional fees apply.
TRP OVERSEAS STOCK I (TROIX)
12/29/2006
Stock Investments International 0.67% Short term trading fees of 2% for fee eligible shares held less than 90 days.
TRP RETIREMENT 2005 (TRRFX)
02/27/2004
Blended Fund Investments* N/A 0.58% No additional fees apply.
TRP RETIREMENT 2010 (TRRAX)
09/30/2002
Blended Fund Investments* N/A 0.57% No additional fees apply.
TRP RETIREMENT 2015 (TRRGX)
02/27/2004
Blended Fund Investments* N/A 0.59% No additional fees apply.
TRP RETIREMENT 2020 (TRRBX)
09/30/2002
Blended Fund Investments* N/A 0.63% No additional fees apply.
TRP RETIREMENT 2025 (TRRHX)
02/27/2004
Blended Fund Investments* N/A 0.67% No additional fees apply.
TRP RETIREMENT 2030 (TRRCX)
09/30/2002
Blended Fund Investments* N/A 0.69% No additional fees apply.
TRP RETIREMENT 2035 (TRRJX)
02/27/2004
Blended Fund Investments* N/A 0.72% No additional fees apply.
TRP RETIREMENT 2040 (TRRDX)
09/30/2002
Blended Fund Investments* N/A 0.74% No additional fees apply.
TRP RETIREMENT 2045 (TRRKX)
05/31/2005
Blended Fund Investments* N/A 0.74% No additional fees apply.
Investments you currently own TRP RETIREMENT 2050 (TRRMX)
12/29/2006
Blended Fund Investments* N/A 0.74% No additional fees apply.
TRP RETIREMENT 2055 (TRRNX)
12/29/2006
Blended Fund Investments* N/A 0.74% No additional fees apply.
TRP RETIREMENT 2060 (TRRLX)
06/23/2014
Blended Fund Investments* N/A 0.74% No additional fees apply.
Bond Investments Stable Value 0.3275% No additional fees apply.
AM CENT GOVT BOND R5 (ABTIX)
05/16/1980
Bond Investments Income 0.27% No additional fees apply.
WA CORE BOND I (WATFX)
09/04/1990
Bond Investments Income 0.56% No additional fees apply.
Your company stock purchases may still turn out to have been a good decision as long as it doesn't lose value precipitously. You got it at a 15% discount. If you can turn around and sell it right away that would net you 11.7% increase in what you paid, which would get taxed as a short term capital gain the same rate as your income. If you have to hold it to vest, if you hold long enough to qualify for long term capital gains then the increase in value will be taxed at your LTCG rate, which is probably 15%. Still, for best diversification you should divest of the company stock on a regular schedule.
Agreed, it's probably not as bad since it hasn't lost value, but it just isn't doing as well as I had hoped. It's quite stable. There is a hold on the stocks for a year after which I can sell, but I've generally held it for 2 years+ to qualify for LTCG.
You of course should be contributing to an IRA in addition to your 401k contributions. Prodigious savings is the quickest route to financial independence, and you optimize that by maximizing your tax-advantaged savings. Read up on that in the wiki page on Prioritizing Investments.
The reason I am only contributing 6% to 401k and no other IRA is because I may move countries in the next few years and not come back to the USA (It may or may not happen), and I wanted to have access to the money if needed. But you're correct, a tax advantaged IRA is a good option especially if the returns grow substantially. I do see an IRA option in my 401k account. How is that different from a separate IRA say with vanguard? (My 401k is with fidelity.) And do you recommend one over the other?
With most of your savings in tax-advantaged accounts (401k, IRA, HSA) you don't need a robo adviser. The Boglehead Philosophy recommends you put your assets in indexed mutual funds with broad diversification and low annual expenses. It doesn't involve chasing yield with the latest tactics dreamt up by financial analysts. It's a buy and hold strategy that ensures you will make the most of the markets you invest in.
TBH, I'm yet to fully understand the Boglehead philosophy, but I will definitely read up on it. My strategy was to invest aggressively and take risks with investments until I was 30 since I have a bigger risk appetite while I'm still single. I started working late - 2012 and investing even later so I thought maybe I could catch up and then diversify later on after I cross 100k if that makes sense?

mjshah
Posts: 3
Joined: Wed Jun 13, 2018 10:30 pm

Re: Portfolio review

Post by mjshah » Thu Jun 14, 2018 10:22 pm

Jack FFR1846 wrote:
Thu Jun 14, 2018 8:20 am
As an example, I get an even better deal on ESPP and on the day the stock vests, it is immediately sold even though the company has been a rising star (not a new company, but well managed, conservative and making the right moves). I have zero interest in taking single stock risks. If this were my portfolio, I'd be selling all the stock right now and if there's a loss, putting that in my taxes in April.

I'm a hard core 3 fund portfolio guy.
@Jack, thank you for your reply. See my reasoning above for heavy investments in company stock.

I'm still new in this field and learning; Is 3 fund portfolio an investment strategy that's proven to be better than say one fund or more than 3? What's the rationale behind it?

If I were to diversify to a 3 fund strategy, what would be your top 3 picks from the ones available above?

ExitStageLeft
Posts: 919
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio review

Post by ExitStageLeft » Fri Jun 15, 2018 2:56 pm

Wow, you have some really nice options available!

I'm going to walk through the process I would go through were I in your shoes, given the key fundamental aspects of the Bogleheads® investment philosophy.

Since you are investing in your 401k, you clearly understand the first two point: Develop a workable plan and invest early and often. We'll come back to Risk in a moment, the focus of your original post and the essence of the three-fund portfolio is diversification. The three fund portfolio does that through investing in three distinct markets: US equities, US bonds, and international equities. Diversification is maximized within each of these markets by choosing funds that have the broadest focus, the total market funds.

Designing a three-fund portfolio is easy in concept. The first step is to decide on the appropriate portion of your allocation that should be in fixed income assets such as bonds, CDs or cash. This portion is generally referred together as "bonds" but can be a blend of holdings. You've no doubt read the conventional wisdom that one should have their age in years as the percentage of bonds in their portfolio, which suggests that a portfolio of 70% stocks and 30% bonds is appropriate.

What your actual bond allocation should be depends on your wiilingness, ability and need to take risks with your assets. In general if you want to be rewarded with higher returns you will have to accept a higher risk that you will instead lose a portion of your assets. There's a large portion of the investing community that recommends (age-10) in bonds, so perhaps an 80/20 allocation is more appropriate. That's a decision that you should reach after assessing your risk tolerance. Your TRP 2050 fund has about 15% in fixed-income, so let's settle on that for now.

The next step is to decide upon the appropriate allocation of your stock assets to invest in international funds. I don't have the link readily at hand, but there is a Vanguard web page that shows that you can reach nearly maximum diversification by having 30% of your stocks allocation be in international equities. You would get about two-thirds that degree of diversification with 20% of your stocks in international. If we split the difference, that means 25% of stocks should be international funds. Doing that math, that means the overall allocation of an 80/20 porfolio should be 64% total US stocks, 21% total international stocks, and 15% total US bonds.

I'll jump now to the point in the philosophy statement about keeping costs low. The expense ratio that you see in every one of your fund offerings will, over time, dramatically effect how much you end up saving in retirement. The Boglehead solution is to use indexed funds that have very low expense ratios. These are represented in nost portfolios with indexed funds from Vanguard, Fidelity, or Schwab. There are other quality indexed funds available but these three companies consistely offer index funds with low expense ratios.

If building a portfolio from scratch, I would opt for 64% Vanguard Total Stock Market (VTSAX), 21% Vanguard Total International Stock (VTIAX), and 15% Vanguard Total Bonds (VBTLX). The equivalent funds from Fidelity would be FSTVS, FTIPX, and FSITX. The problem you face is that your 401k offers none of these funds. You can get about the same

You can build a respectable three-fund portfolio with 64% Fidelity S&P 500 (FXSIX), 21% TRP Overseas (TROIX), and 15% Govt Bonds (ABTIX). This would give you a portfolio expense ratio of 0.23%, which is more than three times lower than currently getting with TRP 2050 fund.

Toadandfriends
Posts: 38
Joined: Tue May 23, 2017 9:41 pm

Re: Portfolio review

Post by Toadandfriends » Fri Jun 15, 2018 6:13 pm

Hello OP,
These three are great low cost options in your plan. And, notice that they have low turnover and many holdings:
FID 500 INDEX INST (FXSIX) (US large cap index fund, 4% turnover, 508 holdings)
FID EXT MKT IDX PR (FSEVX) (US mid and small cap index fund, 11% turnover, 3092 holdings)
VANG SM CAP IDX ADM (VSMAX) (US small cap index fund, 14.5% turnover, 1440 holdings)
You could combine FXSIX and FSEVX to create a proxy for the Vanguard Total Stock Market. Or, you could use some combination of the FXSIX and the Vanguard small cap index fund if you wanted a bit of a US small cap tilt. I would be hesitant to use the TROIX fund for my international exposure if I had other options. It does have a low turnover (13%) but only has 159 holdings and a measly 4% emerging markets. If you can open an IRA (preferable) or taxable account at Vanguard or Schwab etc you could do much better for international diversification. For comparison sake- Vanguard Total International Stock has 6,259 holdings and 20% emerging markets and a lower expense ratio.
my two cents

ExitStageLeft
Posts: 919
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio review

Post by ExitStageLeft » Sat Jun 16, 2018 3:43 pm

Toadandfriends wrote:
Fri Jun 15, 2018 6:13 pm
Hello OP,
These three are great low cost options in your plan. And, notice that they have low turnover and many holdings:
FID 500 INDEX INST (FXSIX) (US large cap index fund, 4% turnover, 508 holdings)
FID EXT MKT IDX PR (FSEVX) (US mid and small cap index fund, 11% turnover, 3092 holdings)
VANG SM CAP IDX ADM (VSMAX) (US small cap index fund, 14.5% turnover, 1440 holdings)
You could combine FXSIX and FSEVX to create a proxy for the Vanguard Total Stock Market. Or, you could use some combination of the FXSIX and the Vanguard small cap index fund if you wanted a bit of a US small cap tilt. I would be hesitant to use the TROIX fund for my international exposure if I had other options. It does have a low turnover (13%) but only has 159 holdings and a measly 4% emerging markets. If you can open an IRA (preferable) or taxable account at Vanguard or Schwab etc you could do much better for international diversification. For comparison sake- Vanguard Total International Stock has 6,259 holdings and 20% emerging markets and a lower expense ratio.
my two cents
Toad makes an excellent point about building a nice three-fund portfolio, or a close approximation thereof, by opening an IRA with Vanguard, Fidelity, or Schwab and holding your international equities there. The ideal Boglehead investor is contributing the maximum in a 401k and also the maximum in an IRA or Roth IRA account. I'd recommend a Roth IRA given the information you've provided, but a traditional is valuable too.

Coming back to the three-fund concept, you can have an easy to manage portfolio with maximal diversification without taking extra risk. I mentioned VTSAX before, Vanguard's total stock market fund. It holds 3,610 stocks available in the US, weighted according to their respective market capitalization. You can replicate that almost exactly with a combination of 80% FXSIX and 20% VSMAX. here's a comparison on PortfolioVisualizer showing comparative returns since 2012.

So now your three-fund portfolio becomes a four-fund portfolio:
51.2% Fidelity 500 Index fund (FXSIX) ER = 0.03%
12.8% Vanguard Small Cap Index fund (VSMAX) ER = 0.05%
21% Vanguard Total International Stock fund (VTIAX) ER = 0.11%
15% American Century Government Bonds fund (ABTIX) ER = 0.27%

If income level allows, start a Roth IRA and buy VGTSX, which is the Vanguard Total International Investor Shares. After two years of $5,500 contribution you'll have over $10k in the account and can switch over to Admiral shares. It's the same fund, but VGTSX has an ER of 0.17% and the Admiral shares version has an ER of 0.11%.

If you want to build up a portfolio and reach $2M you'll have to ramp up the savings. If you max out your 401k and your IRA (traditional or Roth) that is $24k per year. If you do that every year for the next 25 years and the market gives decent returns (3% real) then you should be sitting on a portfolio of over $2.1M, which will be worth just over $1M in 2018 dollars.

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