Portfolio Review for newbie

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Topic Author
retirap
Posts: 22
Joined: Mon Jan 06, 2020 1:44 am

Portfolio Review for newbie

Post by retirap » Fri Jan 10, 2020 6:41 am

Hello, everyone, this is a reformated post for asking to review my portfolio, thanks for the great minds in the forum for your valuable help and advice. Right now I dont have any thoughts on when to retire. But hopefully to learn more about how to invest, especially understanding and predicting the market, so that I can maintain my assets in the possible coming economic turndown?

Emergency funds: Plan to allocate 6 months of expenses (not part of your asset allocation)

Debt: ~360K Mortgage @ ~3.6%.

Tax Filing Status: Single

Tax Rate: 25% Federal, 0% State

State of Residence: WA

Age: 30

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 20% of stocks

I have a total portfolio of low six-figures. and below is my current retirement assets.

Current retirement assets

Taxable
20.9% cash for investing
22% MSFT stock (ESPP Fidelity)
23.8% MSFT stock (Chase)

401k @ Fidelity
33.3% BTC LP IDX 2050 N, (expense ratio not sure), this fund has 18.6% domestic stocks and 14.7% international stocks

No IRA account yet.
_______________________________________________________________

Contributions

New annual Contributions
$19500 his 401k (the company will match 50%)
$6k IRA/Roth IRA
maximum HSA ~$5k?

Questions:
1. The investment rule says: "a. Put the most tax-inefficient funds in your tax-deferred and tax-free accounts. b.Use only tax-efficient funds in taxable accounts." So does it mean that I should sell most of the stocks in my taxable accounts and purchase funds? and buy stocks in 401k?
2. About the my desired 80% stock allocation, I think I need to diversify it more, like index funds, gold, and use a small portion say, 5-10% to invest in high return/risk stocks?
3. Someone in the forum mentioned bonds return can be as high as 4%? I checked the data it's only around 1-2 %?, and the tax rate is 25%?
4. What is an HYSA? is it the same as a CD? but I think CD has a very high tax rate, like 30%

If you need any info/clarification, let me know.
Thank you again!!

HomeStretch
Posts: 3427
Joined: Thu Dec 27, 2018 3:06 pm

Re: Portfolio Review for newbie

Post by HomeStretch » Fri Jan 10, 2020 8:35 am

Welcome!

1. Tax-efficient fund placement depends on your personal tax situation. For you, that likely means holding your 20% bond allocation in your 401k, reducing cash and holding tax-efficient equity funds in your Taxable account and, if you start one, 100% equity in your Roth IRA for highest expected growth, tax free. BH wiki page about Tax-Efficient Fund Placement;
https://www.bogleheads.org/wiki/Tax-eff ... _placement

2. I agree with you about diversifying. Rather than buyIng gold and high return/risk stock as you suggested, consider reducing your Taxable holding % in MSFT (single employer stock) to 5-10% and purchase diversified US and International total stock market funds, such as Vanguard’s VTSAX and VTIAX.

4. HYSA is an acronym for High-Yield Savings Account at a bank or credit union. HYSA is not the same as a CD. Where are you holding your 21% cash and what is the rate?

Other comments:
1. Use $12k of your cash to contribute to a Roth IRA, if eligible, for tax years 2019 and 2020 ($6k for each year). Roth accounts grow tax free.
2. If you invest some or all of your Taxable account cash, you will need to add bonds to maintain your desired 20% allocation. Your current 401k fund is almost 100% equity. See if your 401k has any good bond choices.
3. With the 2018 TCJA, there currently isn’t a 25% Federal marginal tax rate. Your rate is likely 22% or maybe 24%.
Last edited by HomeStretch on Fri Jan 10, 2020 8:52 am, edited 1 time in total.

pkcrafter
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Re: Portfolio Review for newbie

Post by pkcrafter » Fri Jan 10, 2020 8:37 am

retirap wrote:
Fri Jan 10, 2020 6:41 am
Hello, everyone, this is a reformated post for asking to review my portfolio, thanks for the great minds in the forum for your valuable help and advice. Right now I dont have any thoughts on when to retire. But hopefully to learn more about how to invest, especially understanding and predicting the market, so that I can maintain my assets in the possible coming economic turndown?

Understanding the market is very different than predicting the market, in fact if you do understand the market you wouldn't be talking about predicting it. :happy

Emergency funds: Plan to allocate 6 months of expenses (not part of your asset allocation)

Good.

Debt: ~360K Mortgage @ ~3.6%.

Tax Filing Status: Single

Tax Rate: 25% Federal, 0% State

State of Residence: WA

Age: 30

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 20% of stocks

AA is OK for your age.

I have a total portfolio of low six-figures. and below is my current retirement assets.

Current retirement assets

Taxable
20.9% cash for investing
22% MSFT stock (ESPP Fidelity)
23.8% MSFT stock (Chase)

Bogleheads won't recommend that much in a single stock. We would say limit a single stock to less than 10% of equity.

401k @ Fidelity
33.3% BTC LP IDX 2050 N, (expense ratio not sure), this fund has 18.6% domestic stocks and 14.7% international stocks

The Blackrock 2050 fund has over 90% stock.

There appears to be two Black Rock 2050 funds, LIPIX and STLFX. Which one do you have?

No IRA account yet.
_______________________________________________________________

Contributions

New annual Contributions
$19500 his 401k (the company will match 50%)
$6k IRA/Roth IRA

Is the 6k divided into both an IRA and Roth IRA - 3k each?
maximum HSA ~$5k?

Your saving rate is very good.

Questions:
1. The investment rule says: "a. Put the most tax-inefficient funds in your tax-deferred and tax-free accounts. b.Use only tax-efficient funds in taxable accounts." So does it mean that I should sell most of the stocks in my taxable accounts and purchase funds? and buy stocks in 401k?

I'd recommend you don't buy individual stocks, just funds.

Paul


When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

sjt
Posts: 303
Joined: Fri May 26, 2017 3:03 pm
Location: NC

Re: Portfolio Review for newbie

Post by sjt » Fri Jan 10, 2020 8:49 am

A couple notes:

-You're doing great learning about this stuff
-You have a lot still to learn
-There is no 25% tax bracket
-You need to understand the fees you are being charged in your 401k, and whether there are other funds available with lower fees.
-There might be a monthly / annual fee in addition to the fund fee. You need to understand what that is (even if you can't do anything about it)
-You're not going to be able to "predict the market" - many have tried, few have succeeded, and very few have succeeded consistently over long periods of time. Dump money into low fee funds and enjoy the "average" return of index funds.
-You have a lot of MSFT stock in taxable.
-Learn the difference between short term capital gains (normally taxed as income) and long term capital gains (normally taxed at a lower rate) - This will help explain your tax questions for Questions 3 and 4 (hint: the tax rates will depend on your income tax rate)
-Read the Wiki here
-Read a PDF called "If You Can" by William J. Bernstein (available on the interwebs)

-Stick around BH and continue to learn :)
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

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Wiggums
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Re: Portfolio Review for newbie

Post by Wiggums » Fri Jan 10, 2020 8:53 am

You are doing great, by the way...

You need to diversify as you have 48% in your employer stock. If you are getting the shares at a discount, you should sell them when allowed and take the discount as profit. I’d consider reducing your MSFT to 5-10% and buy Vanguard’s VTSAX and VTIAX.

snailderby
Posts: 654
Joined: Thu Jul 26, 2018 11:30 am

Re: Portfolio Review for newbie

Post by snailderby » Fri Jan 10, 2020 8:59 am

+1 to the comments above.

a. Use index funds instead of single stocks for greater diversification.

b. It's hard to predict the market. See https://www.bogleheads.org/wiki/Taylor_ ... ing_quotes.

c. It's hard to know before the fact what stocks or funds will have "high returns."

d. The 2020 contribution HSA limit for individual coverage is $3,550. This is assuming you are enrolled in a high deductible health plan and are otherwise eligible to contribute to an HSA.

Topic Author
retirap
Posts: 22
Joined: Mon Jan 06, 2020 1:44 am

Re: Portfolio Review for newbie

Post by retirap » Tue Jan 14, 2020 5:37 am

Thanks very much for giving this feedback!
pkcrafter wrote:
Fri Jan 10, 2020 8:37 am
Understanding the market is very different than predicting the market, in fact if you do understand the market you wouldn't be talking about predicting it. :happy
Yeah, I totally agree. Timing the markets, expecting to get short-term is quite risky. But I have a friend doing a lot of speculations, e.g buying gold based on the recent Iran crisis. Her statement is that taking the risk is a relative term and such risk might be reduced if u become more experienced in understanding and predicting the market... It sounds totally different than a BH, but her return is pretty good as far as I know.
pkcrafter wrote:
Fri Jan 10, 2020 8:37 am
AA is OK for your age.
Can I allocate less bond, say 15% since bond return is becoming lower and lower recently?
Also, 3 fund portfolio suggests purchase bond funds, but its return is 0% or even negative at year 2018, should I purchase the bonds directly?
pkcrafter wrote:
Fri Jan 10, 2020 8:37 am
Bogleheads won't recommend that much in a single stock. We would say limit a single stock to less than 10% of equity.

I'd recommend you don't buy individual stocks, just funds.


I understand diversify brings down the risks significantly, but I do have good confidence in MSFT, I think most total market index is largely affected by
these large-cap tech companies, so the diff isn't that big?
So if being more aggressive, is it okay to do 50/50 for index fund/single good stock allocation out of the domestic stock?

pkcrafter wrote:
Fri Jan 10, 2020 8:37 am
The Blackrock 2050 fund has over 90% stock.
There appears to be two Black Rock 2050 funds, LIPIX and STLFX. Which one do you have?

The full name of this fund is BlackRock LifePath® Index 2050 Fund N (ER 0.06%), so I believe it should be LIPIX?
However, its price ($16 by google) is different from what I see in my account.

pkcrafter wrote:
Fri Jan 10, 2020 8:37 am
Is the 6k divided into both an IRA and Roth IRA - 3k each?

Not sure what is the best allocation between traditional/roth IRA, 50/50?, and what for traditional/roth 401k?

Topic Author
retirap
Posts: 22
Joined: Mon Jan 06, 2020 1:44 am

Re: Portfolio Review for newbie

Post by retirap » Tue Jan 14, 2020 5:49 am

sjt wrote:
Fri Jan 10, 2020 8:49 am
-You're doing great learning about this stuff
-You have a lot still to learn
Thank you and that's true!
sjt wrote:
Fri Jan 10, 2020 8:49 am
-There is no 25% tax bracket
Yeah, I think it should be 24% or maybe 32%
sjt wrote:
Fri Jan 10, 2020 8:49 am
-You're not going to be able to "predict the market" - many have tried, few have succeeded, and very few have succeeded consistently over long periods of time. Dump money into low fee funds and enjoy the "average" return of index funds.
Yeah, I totally agree. Timing the markets, expecting to get short-term is quite risky. But I have a friend doing a lot of speculations, e.g buying gold based on the recent Iran crisis. Her statement is that taking the risk is a relative term and such risk might be reduced if u become more experienced in understanding and predicting the market... It sounds totally different than a BH, but her return is pretty good as far as I know.

Also, would it be helpful to dynamically change ur AA given different economic stage? like less bond AA @ low rate and inflation phase?
sjt wrote:
Fri Jan 10, 2020 8:49 am
-Learn the difference between short term capital gains (normally taxed as income) and long term capital gains (normally taxed at a lower rate) - This will help explain your tax questions for Questions 3 and 4 (hint: the tax rates will depend on your income tax rate)
It is suggested to hold bond (tax inefficient) in tax-advantaged accounts, but considering its low return and small percentile, is it ok to put it into taxable account and let the tax-advantaged accounts holding stocks/funds get higher returns and compounding faster?

Topic Author
retirap
Posts: 22
Joined: Mon Jan 06, 2020 1:44 am

Re: Portfolio Review for newbie

Post by retirap » Tue Jan 14, 2020 5:54 am

Wiggums wrote:
Fri Jan 10, 2020 8:53 am
You are doing great, by the way...
Thank you!
Wiggums wrote:
Fri Jan 10, 2020 8:53 am
You need to diversify as you have 48% in your employer stock. If you are getting the shares at a discount, you should sell them when allowed and take the discount as profit. I’d consider reducing your MSFT to 5-10% and buy Vanguard’s VTSAX and VTIAX.
Yeah, I am getting them with a discount, but selling them right away will be counted as short-term gain and taxed as income, so I am thinking of selling some shares vested more than one year.
Also, I found that the BHs at this forum usually suggests holding Vanguards funds, is this sort of advertisement? I am not sure of domestic stock/bond index products, but I think at least for the international one, Schwab's counterpart is slightly better?

Finally, is there any suggestions on deciding what is the best allocation between traditonal/roth 401k, and also for traditional/roth IRA, both 50/50?

Topic Author
retirap
Posts: 22
Joined: Mon Jan 06, 2020 1:44 am

Re: Portfolio Review for newbie

Post by retirap » Tue Jan 14, 2020 5:55 am

snailderby wrote:
Fri Jan 10, 2020 8:59 am
+1 to the comments above.

a. Use index funds instead of single stocks for greater diversification.

b. It's hard to predict the market. See https://www.bogleheads.org/wiki/Taylor_ ... ing_quotes.
Thanks very much and the link is really helpful!

Topic Author
retirap
Posts: 22
Joined: Mon Jan 06, 2020 1:44 am

Re: Portfolio Review for newbie

Post by retirap » Tue Jan 14, 2020 6:03 am

HomeStretch wrote:
Fri Jan 10, 2020 8:35 am
Welcome!

1. Tax-efficient fund placement depends on your personal tax situation. For you, that likely means holding your 20% bond allocation in your 401k, reducing cash and holding tax-efficient equity funds in your Taxable account and, if you start one, 100% equity in your Roth IRA for highest expected growth, tax free. BH wiki page about Tax-Efficient Fund Placement;
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Other comments:
2. If you invest some or all of your Taxable account cash, you will need to add bonds to maintain your desired 20% allocation. Your current 401k fund is almost 100% equity. See if your 401k has any good bond choices.
Thank you for the comments and link.
It is suggested to hold bond (tax inefficient) in tax-advantaged accounts, but considering its low return and small percentile, is it ok to put it into taxable account and let the tax-advantaged accounts holding stocks/funds get higher returns and compounding faster?

HomeStretch wrote:
Fri Jan 10, 2020 8:35 am
4. HYSA is an acronym for High-Yield Savings Account at a bank or credit union. HYSA is not the same as a CD. Where are you holding your 21% cash and what is the rate?
They are just in a checking account..
BTW, what is the best place to hold the emergency fund? CD's tax rate (32%) is really high..
HomeStretch wrote:
Fri Jan 10, 2020 8:35 am
1. Use $12k of your cash to contribute to a Roth IRA, if eligible, for tax years 2019 and 2020 ($6k for each year). Roth accounts grow tax free.
Can I still fund 2019's roth IRA right now?
Do you think it is necessary to do AA for traditional and Roth IRA? and how about 401k?

HomeStretch
Posts: 3427
Joined: Thu Dec 27, 2018 3:06 pm

Re: Portfolio Review for newbie

Post by HomeStretch » Tue Jan 14, 2020 7:38 am

1. Of course you can hold your bonds in Taxable if you want even if less tax efficient. If your marginal tax rate is 32% (+3.8% net investment income tax), you might consider munis which are federal tax exempt.

2. Safe and liquid places to hold an emergency fund (EF) are a high yield savings/checking account, no penalty CD or a brokerage money market fund. IMO it’s preferable to earn the EF income and pay taxes than to leave it in a checking account if it pays no or low interest. Some people have posted about using I-Bonds as a second tier in their emergency fund as taxes can be deferred until maturity/redemption. Here is a link to the BH wiki page about an EF:
https://www.bogleheads.org/wiki/Emergency_fund

3. If eligible, you can make a direct Roth IRA contribution for 2019 until 4/15/20. At 32%, your income would be too high to make a direct contribution. You can do a two-step method called the backdoor Roth to get money into a Roth IRA. Here is a link to the BH wiki page about it:
https://www.bogleheads.org/wiki/Backdoor_Roth

Topic Author
retirap
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Re: Portfolio Review for newbie

Post by retirap » Wed Jan 15, 2020 1:18 am

Thanks for commenting!
HomeStretch wrote:
Tue Jan 14, 2020 7:38 am
2. Safe and liquid places to hold an emergency fund (EF) are a high yield savings/checking account, no penalty CD or a brokerage money market fund. IMO it’s preferable to earn the EF income and pay taxes than to leave it in a checking account if it pays no or low interest. Some people have posted about using I-Bonds as a second tier in their emergency fund as taxes can be deferred until maturity/redemption. Here is a link to the BH wiki page about an EF:
https://www.bogleheads.org/wiki/Emergency_fund
When using a money market fund as the carrier, will the gain be considered as capital gain so that a low tax rate will be applied (15%) as long as u hold the funds long enough?
HomeStretch wrote:
Tue Jan 14, 2020 7:38 am
3. If eligible, you can make a direct Roth IRA contribution for 2019 until 4/15/20. At 32%, your income would be too high to make a direct contribution. You can do a two-step method called the backdoor Roth to get money into a Roth IRA. Here is a link to the BH wiki page about it:
https://www.bogleheads.org/wiki/Backdoor_Roth
If I contribute 6k (this is after-tax money) to my traditional IRA, then rollover this 6k to a Roth IRA, can I deduct this 6k when filing my 2019 tax return? like this? https://www.investopedia.com/ask/answer ... return.asp

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dogagility
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Re: Portfolio Review for newbie

Post by dogagility » Wed Jan 15, 2020 4:51 am

retirap wrote:
Tue Jan 14, 2020 5:37 am
pkcrafter wrote:
Fri Jan 10, 2020 8:37 am
Understanding the market is very different than predicting the market, in fact if you do understand the market you wouldn't be talking about predicting it. :happy
Yeah, I totally agree. Timing the markets, expecting to get short-term is quite risky. But I have a friend doing a lot of speculations, e.g buying gold based on the recent Iran crisis. Her statement is that taking the risk is a relative term and such risk might be reduced if u become more experienced in understanding and predicting the market... It sounds totally different than a BH, but her return is pretty good as far as I know.
Your friend sounds like many who think they can outsmart everyone else.
retirap wrote:
Tue Jan 14, 2020 5:37 am
pkcrafter wrote:
Fri Jan 10, 2020 8:37 am
AA is OK for your age.
Can I allocate less bond, say 15% since bond return is becoming lower and lower recently?
Some people at your age and adhering to the Boglehead method have a 100% allocation to equity for their retirement portfolio. I was one of them at your age. An issue with this is being able to stay the course when large declines in the market occur (see 1929 and 2008/9).

I wouldn't determine your asset allocation based upon short-term predictions.

retirap wrote:
Tue Jan 14, 2020 5:37 am
I understand diversify brings down the risks significantly, but I do have good confidence in MSFT, I think most total market index is largely affected by
these large-cap tech companies, so the diff isn't that big?
So if being more aggressive, is it okay to do 50/50 for index fund/single good stock allocation out of the domestic stock?
Do you need to take the extra risk of investing in Microsoft to reach your retirement goals? Do you want to have your income AND retirement funds tied to a single company? Many people working for GE or Enron took this view... didn't work out so well for them.

As others have suggested, a small allocation to Microsoft may be OK. I would recommend selling all of your Microsoft ESPP shares as soon as these vest and invest the proceeds in index funds.
retirap wrote:
Tue Jan 14, 2020 5:37 am
pkcrafter wrote:
Fri Jan 10, 2020 8:37 am
Is the 6k divided into both an IRA and Roth IRA - 3k each?
Not sure what is the best allocation between traditional/roth IRA, 50/50?, and what for traditional/roth 401k?
Here's a link to help you decide: https://www.bogleheads.org/wiki/Traditional_versus_Roth

In your original post, you indicated you invest in a HSA. Do you use your HSA to pay current medical bills or pay these bills out of pocket? If you have sufficient cash flow, I recommend paying these bills out of pocket and treating your HSA as a retirement account. https://www.bogleheads.org/wiki/Health_ ... e_the_plan
"The stock market is a device for transferring money from the impatient to the patient" -- Warren Buffett

HomeStretch
Posts: 3427
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Re: Portfolio Review for newbie

Post by HomeStretch » Wed Jan 15, 2020 7:59 am

retirap wrote:
Wed Jan 15, 2020 1:18 am
When using a money market fund as the carrier, will the gain be considered as capital gain so that a low tax rate will be applied (15%) as long as u hold the funds long enough?
No. Money market funds (MMF) earn non-qualified dividends that are subject to ordinary income tax rates and net investment income tax. There are no gains or losses when you sell MMFs.
If I contribute 6k (this is after-tax money) to my traditional IRA, then rollover this 6k to a Roth IRA, can I deduct this 6k when filing my 2019 tax return? like this? https://www.investopedia.com/ask/answer ... return.asp
No. With your 32% marginal tax rate, your income is too high to deduct a contribution to a traditional IRA. You can make a non-deductible tIRA contribution (step 1 of the backdoor Roth) at any income level.

For high earners, there are limited ways to defer/avoid taxes with pretax savings (for example, traditional 401k and HSA contributions). After maximizing such space, the next priority would be to save in Roth accounts (via backdoor Roth and mega Backdoor) over saving in Taxable accounts as Roth accounts grow tax free.

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