Portfolio Review: high tech

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Topic Author
porfolio0001
Posts: 2
Joined: Sun Dec 01, 2019 2:51 pm

Portfolio Review: high tech

Post by porfolio0001 » Sun Dec 01, 2019 3:00 pm

I would really appreciate the advice. Here is the info.

Emergency funds: 90K
Debt: Mortgage ~1M remaining at 3.625%

Tax Filing Status: Married Filing Jointly
Tax Rate: 28.6% Federal, 9% State
State of Residence: CA
Age: 41

Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: 5% or less of stocks

Taxable: 3M
401K: 500K

Current assets

Taxable:
40% High tech company stock (his employer)
30% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
15% Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) (0.09%)
10% Vanguard California Long-Term Tax-Exempt Fund Admiral Shares (VCLAX) (0.09%)
3% Vanguard Total Stock Market ETF (VTI) (0.03%)
2% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%)

401k
41% Vanguard Institutional 500 Index Trust
27% Vanguard Target Retirement 2045 Trust Select
14% Vanguard Institutional Total Bond Market Index Trust
8% Vanguard Developed Markets Index Fund Institutional Plus Shares (VDIPX) (0.04%)
4% Vanguard Wellesley Income Fund Admiral Shares (VWIAX) (0.16%)
4% Vanguard Institutional Extended Market Index Trust
2% Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX) (0.14%)

Contributions

New annual Contributions to 401K: 19K + 9K match, plan to contribute 27K via after-tax 401K to Roth
Vanguard Institutional 500 Index Trust 60%
Vanguard Institutional Total Bond Market Index Trust 20%
Vanguard Institutional Extended Market Index Trust 10%
Vanguard Developed Markets Index Fund Institutional Plus Shares (VDIPX) 8%
Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX) 2%

Available funds

Funds available in his 401(k)
Vanguard Target Retirement 20xx Trust Select
Vanguard Developed Markets Index Fund Institutional Plus Shares VDIPX (0.04%)
Vanguard Emerging Markets Index Fund Institutional Plus Shares VEMRX (0.08%)
Vanguard Institutional 500 Index Trust
Vanguard Institutional Extended Market Index Trust
Vanguard Institutional Total Bond Market Index Trust
Vanguard Total International Bond Index Fund Institutional Shares (VTIFX) (0.04%)

Questions:
1. Looking for recommendation on how to rebalance
2. Looking for recommendations for new contributions in both taxable and non-taxable

BernardShakey
Posts: 31
Joined: Tue Jun 25, 2019 10:52 pm

Re: Portfolio Review: high tech

Post by BernardShakey » Mon Dec 02, 2019 12:12 am

I could not sleep well with 40% ($1.2M) of that taxable account in a single stock (his company stock). It's probably done very well but I'd suggest moving some of that money into more diversified stock holdings, index funds, etc. That said, you've done very well :happy

retired@50
Posts: 628
Joined: Tue Oct 01, 2019 2:36 pm

Re: Portfolio Review: high tech

Post by retired@50 » Mon Dec 02, 2019 12:57 am

You seem to be using both VTSAX and VTI in your taxable account... These are the Admiral and ETF share class of the same fund. I'm wondering why? It's not really a big deal, but I'd say it's a bit out of the ordinary.

With regard to re-balancing, I'd also suggest reducing the single stock holding. If you have any significant capital gains, there will be taxes to pay, which isn't very fun, but neither is losing a bundle because you were trying to avoid paying taxes. It seems a lot of tech workers who use this forum have significant holdings in the company stock where they are employed. This is a bad idea, no matter how great a company seems, they can always fall on hard times in the future. Do you want that to affect you personally?

Otherwise, I think the way you're distributing your contributions to the 401k plan is fine, it appears you've got both domestic and international stocks covered and some bonds. As your portfolio grows, you may want to add more bonds toward your 50s and older. Mainly this depends on how high your expenses are expected to be in retirement. If a withdrawal rate of 3% will cover your expenses, then adding bonds will help to reduce future volatility.

Regards,

HawkeyePierce
Posts: 729
Joined: Tue Mar 05, 2019 10:29 pm
Location: Colorado

Re: Portfolio Review: high tech

Post by HawkeyePierce » Mon Dec 02, 2019 2:01 am

Is the 40% that’s in employer stock all vested shares or are you counting unvested shares in that as well?

HEDGEFUNDIE
Posts: 3645
Joined: Sun Oct 22, 2017 2:06 pm

Re: Portfolio Review: high tech

Post by HEDGEFUNDIE » Mon Dec 02, 2019 2:03 am

Mortgage seems high. With $3M in taxable you should be able to get a seriously below market rate with a relationship mortgage.

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Watty
Posts: 17606
Joined: Wed Oct 10, 2007 3:55 pm

Re: Portfolio Review: high tech

Post by Watty » Mon Dec 02, 2019 6:10 am

porfolio0001 wrote:
Sun Dec 01, 2019 3:00 pm
Debt: Mortgage ~1M remaining at 3.625%
......
40% High tech company stock (his employer)
Having about a third of your net worth in that stock is a huge problem because;
1) Your mutual funds likely also own that stock so you have even more exposure to it.
2) He likely has future compensation that will be paid in that stock.
3) His future non-stock compensation is tied to that company.

Another factor is that by having a mortage you are using leverage you are being a lot more aggressive than you may realize. This is because while it is not exact in many ways having a mortage it like having a negative bond that you can subtract out of your bond asset allocation.

For example with your $3.5 million portfolio with a 75/25 asset allocation you have;
1) Stocks $3.5 million x .75= $2.625 million
2) Bonds $3.5 million x .25=$875K

but if you subtract out the million dollar mortage from your bond holdings in effect you have;
1) Stocks $2.625 million.
2) Bonds $875k- $1 million= - $125K

so with an effective $2.5 million portfolio you have an asset allocation of 105% stocks and -5% bonds.

That is likely a lot more aggressive than you want especially since having so much in one companies stock is also so aggressive. You are 41 now which is on the cusp of being middle age and you are in high tech which can be brutal for older employees especially in a recession. Even if you are able to work until you are 65 you may very well decide to retire early so you could be something like 10 years(or less) from retirement.

It is time to be less aggressive.

Unless you can have some way to get a huge tax savings by holding on to the company stock for a bit longer I would sell it ASAP. The taxes on that will likely be significant but you will be paying those sooner or later so it is just a matter of when you will be paying them not if you will be paying them. The federal tax rates are scheduled to go back up to the old tax rates in 2026 so if you hold on to the stock for too long it is possible that you could actually pay higher taxes if you sell them after 2026.

You do need to know the tax impact before you sell it since you may save you a bit by selling some now and some in January to split the taxes between 2019 and 2020.

I would take a hard look at paying down your mortage or paying it off completely. That would be like getting a tax free risk free 3.625% return which is not bad in your tax bracket.

You did not mention how many years are left on the mortage but judging by the interest rate I would guess that it is pretty close to 30 years which would mean that the mortage would not be paid off until you are around 71.
porfolio0001 wrote:
Sun Dec 01, 2019 3:00 pm
Taxable:
40% High tech company stock (his employer)
30% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
15% Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) (0.09%)
10% Vanguard California Long-Term Tax-Exempt Fund Admiral Shares (VCLAX) (0.09%)

3% Vanguard Total Stock Market ETF (VTI) (0.03%)
2% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%)
Even though they are tax exempt funds it likely makes sense to own your bonds in normal bond funds in your 401k where the taxes are not an issue. Usually people will not buy the bonds in their taxable account until they have run out of space for bonds in their tax advantaged accounts.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

Topic Author
porfolio0001
Posts: 2
Joined: Sun Dec 01, 2019 2:51 pm

Re: Portfolio Review: high tech

Post by porfolio0001 » Tue Dec 03, 2019 2:03 am

I really appreciate your recommendations! It is super helpful. Here are some answers and additional questions.

1. Agreed the 40% in a single stock is too high. Also, agreed that the same stock is also present in the index funds, e.g. top 5 holdings in VTSAX (13.5%) are all high tech. Also, I do get most of my compensation in this stock. What would you reduce it to? 10-15%?

2. Related to this, I think I will have ~200K per year in RSU that I can sell to invest in a taxable account. Should I follow stock/bond split contribution, e.g. between VTSAX and VWIUX/VCLAX?

3. Mortgage.
I thought that investing in a tax-exempt fund (like VCLAX), which historically gave 4.56 return will give more return that paying off mortgage at 3.625%. Even if a bond results in 0.5% tax (not sure that is the actual tax for VWIUX/VCLAX), it still seems to give higher return than paying off mortgage. Please correct if I am wrong. However, it does get pretty close and paying off mortgage is risk-free.

It is a very interesting point on looking at the mortgage as a negative bond. It sounds like I should either increase the bond allocation, or pay down the mortgage, or both.

I will look into a relationship mortgage. I still have 25 years on it, although we are considering buying a new house and selling the current one.

3. Thank you for the pointer to tax-efficient fund placement. According to the idea, do I understand correctly, that I would need to substantially increase bonds in 401k? Maybe even to 100% bonds in 401k as an extreme scenario? I was considering 401k as a separate account and wanted to keep taxable and 401k each balanced independently to avoid re-balancing 401k when I make changes to a taxable account.

5. I’ve purchased VTI at one point, but then decided to contribute to VTSAX instead. I think I can transfer VTI to VTSAX to make it cleaner.

6. 40% shares are all vested.

HomeStretch
Posts: 2894
Joined: Thu Dec 27, 2018 3:06 pm

Re: Portfolio Review: high tech

Post by HomeStretch » Tue Dec 03, 2019 6:33 am

Agree with advice from other posters.

Before contributing to a Taxable account, make any Roth contributions that you are able to. Roth accounts grow tax free whereas income from a Taxable account is generally taxed each year.

1. Backdoor Roth IRAs for you and spouse. For 2019, you can each contribute $6k. Link to BH wiki page:
https://www.bogleheads.org/wiki/Backdoor_Roth

2. Does your 401k plan allow after-tax (non Roth) contributions that can be converted to Roth 401k (via in-plan Roth rollover) or to Roth IRA (via in-service distribution)? Aka as the “mega Backdoor”. 2019 limit is $56k. Link to BH wiki page:
https://www.bogleheads.org/wiki/After-tax_401(k)

User avatar
Watty
Posts: 17606
Joined: Wed Oct 10, 2007 3:55 pm

Re: Portfolio Review: high tech

Post by Watty » Tue Dec 03, 2019 8:57 am

porfolio0001 wrote:
Tue Dec 03, 2019 2:03 am
1. Agreed the 40% in a single stock is too high. Also, agreed that the same stock is also present in the index funds, e.g. top 5 holdings in VTSAX (13.5%) are all high tech. Also, I do get most of my compensation in this stock. What would you reduce it to? 10-15%?
Ideally it would be 0% especially since you are getting paid with stock in both future RSUs and unvested RSUs you cannot sell so you will still have a lot of exposure to it. There can be tax reasons to hold some for a year to get better tax treatment but I am up to date with the rules on that.

If you are planning to move to a state with no income tax in the near future it might also make sense to hold it until after you move to avoid the state taxes on the sale.
porfolio0001 wrote:
Tue Dec 03, 2019 2:03 am
2. Related to this, I think I will have ~200K per year in RSU that I can sell to invest in a taxable account. Should I follow stock/bond split contribution, e.g. between VTSAX and VWIUX/VCLAX?


You look at all your accounts combined and try to keep your target asset allocation. It is a good idea to write out an Investment Policy Statement(IPS) that will set out your plan. There is a wiki on this and if you search the boards you will find lots of posts where people have posted their IPS for suggestions.

https://www.bogleheads.org/wiki/Investm ... _statement
porfolio0001 wrote:
Tue Dec 03, 2019 2:03 am
3. Mortgage.
I thought that investing in a tax-exempt fund (like VCLAX), which historically gave 4.56 return will give more return that paying off mortgage at 3.625%. Even if a bond results in 0.5% tax (not sure that is the actual tax for VWIUX/VCLAX), it still seems to give higher return than paying off mortgage. Please correct if I am wrong. However, it does get pretty close and paying off mortgage is risk-free.
Bonds have done really well in the past 20+ years because interest rates and inflation were dropping so the past return is misleading and will not happen again because interest rates are so low. It was not that long ago that you could get 5% in a money market account. The current yield on it is 1.79%. It is a lot more complicated since you really want to own some bonds but in effect you are borrowing money at 3.625% to lend it out at 1.79%.
porfolio0001 wrote:
Tue Dec 03, 2019 2:03 am
I still have 25 years on it, although we are considering buying a new house and selling the current one.
If you were sure that you will be selling the house then that would make paying the mortage off more attractive since that would be like getting a tax free short term CD at 3.625%.
porfolio0001 wrote:
Tue Dec 03, 2019 2:03 am
3. Thank you for the pointer to tax-efficient fund placement. According to the idea, do I understand correctly, that I would need to substantially increase bonds in 401k? Maybe even to 100% bonds in 401k as an extreme scenario? I was considering 401k as a separate account and wanted to keep taxable and 401k each balanced independently to avoid re-balancing 401k when I make changes to a taxable account.
You look at all the accounts combined.

100% bonds in the 401k can be fine.

In the taxable account you can set the mutual funds to not automatically reinvest the dividends. That and you new savings can be directed to whichever asset class that needs more money to be rebalance so you would likely not need to sell any investments to rebalance.

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