Target allocation review

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Topic Author
Kams1231
Posts: 30
Joined: Sun Aug 09, 2020 6:36 pm
Location: San Francisco Bay Area

Target allocation review

Post by Kams1231 »

Hi All:

I have not been very structured in my investment planning having relied on a financial advisor for the last couple of years. I have now started my own planning and am nervous about making a mistake. I have already established my 401k with feedback from members here and have now chalked out an overall target allocation. Once I have received your feedback on the allocation, I will research the funds.

Thank you all in advance

Emergency funds: I have 6+ months of emergency funds and put more in periodically until I reach 1 year funds.

Debt: Mortgage (15 year at 2.875% started this year)

Tax Filing Status: Single

Tax Rate: 35% Federal,9.3% State

State of Residence: CA

Age: 48 (Plan to retire around 67)

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 15 - 20% of stocks

I have high 6 figure in my retirement portfolio.
I max out my company 401K and also add $12K to a post-tax 401k. Comapny matches up to $10K. In addition, I max out my HSA, fund a non-deductible IRA with $6K. I max out my company ESPP which I sell immediately and invest some and put some in my emergency fund. I also sell my RSUs immediately upon vesting and invest that. I am also planning to contribute $1K to VTI (Vanguard Total Stock Market Index ETF ) monthly in my taxable account.

Current retirement assets

401k
75% Fidelity Total Stock market Index (FSKAX) (expense ratio=0.015%)
15% Fidelity International Index (FSPSX) (expense ratio=0.035%)
10% Fidelity Interim Bond Index (FUAMX) (expense ratio=0.030%)
Company match? 10K


Planned allocation for taxable account, other Rollover IRA & non-deductible IRA

20% US Large Cap Growth
10% US Large Cap Blend
18% US Large Cap Value

8% US Mid Cap Growth
8% US Mid Cap Value

2% US Small Cap Growth
2% US Small Cap Value

2% US REIT

15% International Developed Market
5% Emerging Markets

6% Total Bond Market
4% Treasury


Questions:
1. What are people's feedback on the above allocation?

2. For small and mid-cap, would assigning 4% and 16% in blend be the same as splitting them as above? What is the recommended approach?

3. Keep REIT? If not - where to put this?

4. Emerging markets? Keep ? If not - where should I put it?
Katietsu
Posts: 3872
Joined: Sun Sep 22, 2013 1:48 am

Re: Target allocation review

Post by Katietsu »

I am not going to get into a full analysis of your plan right now. But a few things struck me.
-What are your plans for the non deductible IRA? Can you roll the current traditional IRA into your 401k to make way for a Roth conversion?
-Do you plan on having 12 funds in your non 401k accounts or did you present the breakdown that will result from using 3 or 4 funds? I do not think you need 12 funds to get the allocation you want.
-The 2% in REIT is not enough to make a difference. Go bigger or drop it would be the conventional advice. Though, I will admit the I have a few legacy small fund allocations that I have not yet persuaded myself to get rid of.
-Congratulations on a great income in a job that you feel you can keep doing until 67. You have a lot of room with those set of circumstances. I will caution that you might feel differently in a decade. And life may decide for you that you will not be able to maintain your income until full retirement age. Your net worth relative to income in the 35% tax bracket seems low. Have you charted out a path that lets you retire at 60 at an acceptable standard of living even if less than in your optimal world?
absolute zero
Posts: 408
Joined: Thu Dec 29, 2016 4:59 pm

Re: Target allocation review

Post by absolute zero »

Drop REITs. Anything less than 5% of your portfolio is pretty pointless to hold - just won't make much of a difference.

In taxable and IRA's - 20% Large Growth / 10% Large Blend / 18% Large Value can be simplified to just 50% Large Blend (e.g. S&P500 fund).15% developed market and 5% emerging market can be simplified to just 20% total international.

It's not clear to me, is there a reason you're trying to dice your portfolio into multiple components? To me it would be like disassembling a bicycle and storing it in pieces throughout your garage and house. Sure you can do it, but it's kind of pointless and a bit of a pain. Just keep the bike in one piece and store it in the garage.

If you have a desire to tilt to certain factors/sectors/etc then it can make sense to break a portfolio into smaller pieces, but in your case you're essentially adding the complexity of lots of funds without actually adding any sort of meaningful tilt away from a market portfolio (with the exception of your tilt towards US stocks and away from international).
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Taylor Larimore
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Location: Miami FL

The Three-Fund Portfolio

Post by Taylor Larimore »

Kams1231:

This is a portfolio I think you should consider. Read the many benefits and recommendations here:

The Three-Fund Portfolio

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk." -- "The odds of outpacing an all-market index fund are, well, terrible."
"Simplicity is the master key to financial success." -- Jack Bogle
Topic Author
Kams1231
Posts: 30
Joined: Sun Aug 09, 2020 6:36 pm
Location: San Francisco Bay Area

Re: The Three-Fund Portfolio

Post by Kams1231 »

Taylor Larimore wrote: Tue Sep 15, 2020 12:03 pm Kams1231:

This is a portfolio I think you should consider. Read the many benefits and recommendations here:

The Three-Fund Portfolio

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk." -- "The odds of outpacing an all-market index fund are, well, terrible."
Thank you so much Taylor! It is your book Bogleheads guide to investing that got me interested in investing. I do have a 3 fund portfolio in my 401k. Getting that in my taxable account may be a challenge from tax perspective of selling other existing investments. I will consider it on my other retirement accounts for sure - some investments being under water is posing a challenge to sell.
Topic Author
Kams1231
Posts: 30
Joined: Sun Aug 09, 2020 6:36 pm
Location: San Francisco Bay Area

Re: Target allocation review

Post by Kams1231 »

absolute zero wrote: Tue Sep 15, 2020 12:01 pm Drop REITs. Anything less than 5% of your portfolio is pretty pointless to hold - just won't make much of a difference.

In taxable and IRA's - 20% Large Growth / 10% Large Blend / 18% Large Value can be simplified to just 50% Large Blend (e.g. S&P500 fund).15% developed market and 5% emerging market can be simplified to just 20% total international.

It's not clear to me, is there a reason you're trying to dice your portfolio into multiple components? To me it would be like disassembling a bicycle and storing it in pieces throughout your garage and house. Sure you can do it, but it's kind of pointless and a bit of a pain. Just keep the bike in one piece and store it in the garage.

If you have a desire to tilt to certain factors/sectors/etc then it can make sense to break a portfolio into smaller pieces, but in your case you're essentially adding the complexity of lots of funds without actually adding any sort of meaningful tilt away from a market portfolio (with the exception of your tilt towards US stocks and away from international).
Thank you for your feedback. I did not think of it from your bicycle analogy and also had read this article. https://www.marketwatch.com/story/the-t ... C-hD62ly4I. So I had thought that it may not be a bad idea.
Topic Author
Kams1231
Posts: 30
Joined: Sun Aug 09, 2020 6:36 pm
Location: San Francisco Bay Area

Re: Target allocation review

Post by Kams1231 »

Katietsu wrote: Tue Sep 15, 2020 11:45 am I am not going to get into a full analysis of your plan right now. But a few things struck me.
-What are your plans for the non deductible IRA? Can you roll the current traditional IRA into your 401k to make way for a Roth conversion?
I had talked to my CPA and he advised me not to roll it into my 401k. In all likelihood, I will have a lower tax rate at retirement
and hence not doing a backdoor conversion now

-Do you plan on having 12 funds in your non 401k accounts or did you present the breakdown that will result from using 3 or 4 funds? I do not think you need 12 funds to get the allocation you want.
Not necessary 12 funds but that distribution.
-The 2% in REIT is not enough to make a difference. Go bigger or drop it would be the conventional advice. Though, I will admit the I have a few legacy small fund allocations that I have not yet persuaded myself to get rid of.
Yes - thank you - I am convinced to get rid of REIT now
-Congratulations on a great income in a job that you feel you can keep doing until 67. You have a lot of room with those set of circumstances. I will caution that you might feel differently in a decade. And life may decide for you that you will not be able to maintain your income until full retirement age. Your net worth relative to income in the 35% tax bracket seems low. Have you charted out a path that lets you retire at 60 at an acceptable standard of living even if less than in your optimal world?
Yes - your point is well noted. As I had stated in my original post, I am not proud of the way I have managed money. I can only move forward with what I have. So far all retirement tools point at me being on target for retirement at 60. If all goes well as planned, I will retire at 67 - may be not earning at the same level but I have a graduate degree in a specialized field which I hope will keep on rewarding me.
absolute zero
Posts: 408
Joined: Thu Dec 29, 2016 4:59 pm

Re: Target allocation review

Post by absolute zero »

Kams1231 wrote: Tue Sep 15, 2020 11:14 pm
absolute zero wrote: Tue Sep 15, 2020 12:01 pm Drop REITs. Anything less than 5% of your portfolio is pretty pointless to hold - just won't make much of a difference.

In taxable and IRA's - 20% Large Growth / 10% Large Blend / 18% Large Value can be simplified to just 50% Large Blend (e.g. S&P500 fund).15% developed market and 5% emerging market can be simplified to just 20% total international.

It's not clear to me, is there a reason you're trying to dice your portfolio into multiple components? To me it would be like disassembling a bicycle and storing it in pieces throughout your garage and house. Sure you can do it, but it's kind of pointless and a bit of a pain. Just keep the bike in one piece and store it in the garage.

If you have a desire to tilt to certain factors/sectors/etc then it can make sense to break a portfolio into smaller pieces, but in your case you're essentially adding the complexity of lots of funds without actually adding any sort of meaningful tilt away from a market portfolio (with the exception of your tilt towards US stocks and away from international).
Thank you for your feedback. I did not think of it from your bicycle analogy and also had read this article. https://www.marketwatch.com/story/the-t ... C-hD62ly4I. So I had thought that it may not be a bad idea.
That article is somewhat puzzling. The author alludes to the diversification benefits of a small value tilt, but then recommends equal weighting LCV/LCG/SCV/SCG. This effectively neutralizes any value tilt, and all that your left with is a small cap tilt. The same could be achieved with only 2 funds - a total stock market fund and a small cap fund.

Consider the chart below - a 50/50 combo of large cap value and large cap growth will produce essentially the exact same results as a total stock market portfolio.

https://www.portfoliovisualizer.com/ba ... ion3_2=100
Topic Author
Kams1231
Posts: 30
Joined: Sun Aug 09, 2020 6:36 pm
Location: San Francisco Bay Area

Re: Target allocation review

Post by Kams1231 »

absolute zero wrote: Wed Sep 16, 2020 7:24 am
Kams1231 wrote: Tue Sep 15, 2020 11:14 pm
absolute zero wrote: Tue Sep 15, 2020 12:01 pm Drop REITs. Anything less than 5% of your portfolio is pretty pointless to hold - just won't make much of a difference.

In taxable and IRA's - 20% Large Growth / 10% Large Blend / 18% Large Value can be simplified to just 50% Large Blend (e.g. S&P500 fund).15% developed market and 5% emerging market can be simplified to just 20% total international.

It's not clear to me, is there a reason you're trying to dice your portfolio into multiple components? To me it would be like disassembling a bicycle and storing it in pieces throughout your garage and house. Sure you can do it, but it's kind of pointless and a bit of a pain. Just keep the bike in one piece and store it in the garage.

If you have a desire to tilt to certain factors/sectors/etc then it can make sense to break a portfolio into smaller pieces, but in your case you're essentially adding the complexity of lots of funds without actually adding any sort of meaningful tilt away from a market portfolio (with the exception of your tilt towards US stocks and away from international).
Thank you for your feedback. I did not think of it from your bicycle analogy and also had read this article. https://www.marketwatch.com/story/the-t ... C-hD62ly4I. So I had thought that it may not be a bad idea.
That article is somewhat puzzling. The author alludes to the diversification benefits of a small value tilt, but then recommends equal weighting LCV/LCG/SCV/SCG. This effectively neutralizes any value tilt, and all that your left with is a small cap tilt. The same could be achieved with only 2 funds - a total stock market fund and a small cap fund.

Consider the chart below - a 50/50 combo of large cap value and large cap growth will produce essentially the exact same results as a total stock market portfolio.

https://www.portfoliovisualizer.com/ba ... ion3_2=100
Yes I agree the two fund and one fund portfolio returns are 9.52% and 9.34% respectively and this hardly makes any difference with the chosen initial investment of $10K. However, I did the same exercise with your funds raising the initial investment to $1M. We still see the same percentage returns in each but the difference is now $106K in actual value. We get $106K more in the two-fund. That does seem a substantial difference in terms of absolute value even though percentage return difference is negligible.
absolute zero
Posts: 408
Joined: Thu Dec 29, 2016 4:59 pm

Re: Target allocation review

Post by absolute zero »

Kams1231 wrote: Wed Sep 16, 2020 11:34 am
absolute zero wrote: Wed Sep 16, 2020 7:24 am
Kams1231 wrote: Tue Sep 15, 2020 11:14 pm
absolute zero wrote: Tue Sep 15, 2020 12:01 pm Drop REITs. Anything less than 5% of your portfolio is pretty pointless to hold - just won't make much of a difference.

In taxable and IRA's - 20% Large Growth / 10% Large Blend / 18% Large Value can be simplified to just 50% Large Blend (e.g. S&P500 fund).15% developed market and 5% emerging market can be simplified to just 20% total international.

It's not clear to me, is there a reason you're trying to dice your portfolio into multiple components? To me it would be like disassembling a bicycle and storing it in pieces throughout your garage and house. Sure you can do it, but it's kind of pointless and a bit of a pain. Just keep the bike in one piece and store it in the garage.

If you have a desire to tilt to certain factors/sectors/etc then it can make sense to break a portfolio into smaller pieces, but in your case you're essentially adding the complexity of lots of funds without actually adding any sort of meaningful tilt away from a market portfolio (with the exception of your tilt towards US stocks and away from international).
Thank you for your feedback. I did not think of it from your bicycle analogy and also had read this article. https://www.marketwatch.com/story/the-t ... C-hD62ly4I. So I had thought that it may not be a bad idea.
That article is somewhat puzzling. The author alludes to the diversification benefits of a small value tilt, but then recommends equal weighting LCV/LCG/SCV/SCG. This effectively neutralizes any value tilt, and all that your left with is a small cap tilt. The same could be achieved with only 2 funds - a total stock market fund and a small cap fund.

Consider the chart below - a 50/50 combo of large cap value and large cap growth will produce essentially the exact same results as a total stock market portfolio.

https://www.portfoliovisualizer.com/ba ... ion3_2=100
Yes I agree the two fund and one fund portfolio returns are 9.52% and 9.34% respectively and this hardly makes any difference with the chosen initial investment of $10K. However, I did the same exercise with your funds raising the initial investment to $1M. We still see the same percentage returns in each but the difference is now $106K in actual value. We get $106K more in the two-fund. That does seem a substantial difference in terms of absolute value even though percentage return difference is negligible.
The point of my link was not to get you fixated on back-tested results; rather, it was to show you that the two strategies (50/50 LCG/LCV vs 100% total stock market) are going to produce remarkably similar results. The difference over the past 15 years could have gone either way.

Perhaps a better example below.
https://www.portfoliovisualizer.com/bac ... on3_2=95.6

In this case I'm using a Large Cap Growth Fund, Large Cap Value Fund, and Large Cap Blend Fund.

Do you see what I did? I took an arbitrary mix of those 3 funds (not totally arbitrary - they are in the same proportion as the 18/20/10 Large Value/Large Growth/Large Blend example that you gave). And then I recreated that same portfolio *exactly* using just 2 of the 3 funds. In this way, we remove an unnecessary fund from your proposal.

If you continued this process, you could take your mix of funds (LCG/LCV/LCB and MCG/MCV and SCG/SCV) and could collapse them down to 2 funds for simplicity. One of the two funds would be total stock market e.g. VTSAX. The other fund would depend upon what you want to tilt towards. Want to tilt to small value? 80% VTSAX and 20% small cap value fund would be an option. Want to tilt to large growth? 90% VTSAX and 10% large cap growth would be another option.

I think your issue is that you're looking at all these funds as entirely separate asset classes. They are not. Small vs Large and Value vs Growth are variables that define a continuous spectrum.

EDIT: Fixed link.
Bhk
Posts: 1
Joined: Fri Jul 10, 2020 10:14 am

Re: Target allocation review

Post by Bhk »

Hello-
Congratulations!. You are doing many things right, maximizing retirement and HSA accounts.

I think you will do well do write up a Investment Policy Statement, with your desired asset allocation. You have answered the 2 biggest questions of this process in deciding 90/10 between stocks/bonds as well as 15-20% allocation to international.
Within US stocks portion- You need to answer the following question to clarify in your IPS. Do you want to follow the total market index or tilt to size of value or any other tilts? It is difficult to respond to you q about small and mid cap, without understanding your goal.
Within Foreign stocks portion- You need to answer the following question to clarify in your IPS. Do you want to follow the total foreign market index or tilt to emerging market, international value etc. or any other tilts? Yes, 5% to EM is reasonable.

3rd Q is role of REIT- I think you need min of 5% as mentioned by others. I would certainly consider this as part of your overall AA and only keep it in 401k or Roth or HSA for tax reasons, certainly not in taxable account.

US Total Market Index- ??
US size tilt-? If yes, how much?
US Value tilt? If yes, how much?
Any other tilt?
Foreign Developed Index-15%
EM Index-5%
REIT-5%
Bond/Fixed income-10%

My humble opinion is answering above q will make is easier for you to find right funds to get you there, and also making a plan around your legacy investments.

Good luck!
Topic Author
Kams1231
Posts: 30
Joined: Sun Aug 09, 2020 6:36 pm
Location: San Francisco Bay Area

Re: Target allocation review

Post by Kams1231 »

Bhk wrote: Wed Sep 16, 2020 1:21 pm Hello-
Congratulations!. You are doing many things right, maximizing retirement and HSA accounts.

I think you will do well do write up a Investment Policy Statement, with your desired asset allocation. You have answered the 2 biggest questions of this process in deciding 90/10 between stocks/bonds as well as 15-20% allocation to international.
Within US stocks portion- You need to answer the following question to clarify in your IPS. Do you want to follow the total market index or tilt to size of value or any other tilts? It is difficult to respond to you q about small and mid cap, without understanding your goal.
Within Foreign stocks portion- You need to answer the following question to clarify in your IPS. Do you want to follow the total foreign market index or tilt to emerging market, international value etc. or any other tilts? Yes, 5% to EM is reasonable.

3rd Q is role of REIT- I think you need min of 5% as mentioned by others. I would certainly consider this as part of your overall AA and only keep it in 401k or Roth or HSA for tax reasons, certainly not in taxable account.

US Total Market Index- ??
US size tilt-? If yes, how much?
US Value tilt? If yes, how much?
Any other tilt?
Foreign Developed Index-15%
EM Index-5%
REIT-5%
Bond/Fixed income-10%

My humble opinion is answering above q will make is easier for you to find right funds to get you there, and also making a plan around your legacy investments.

Good luck!
Thank you for a very constructive feedback. I will work on this.
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