Lopsided Growth in Taxable - Updated with Portfolio Details

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Topic Author
freeform0
Posts: 12
Joined: Sun Jan 12, 2014 1:58 pm

Lopsided Growth in Taxable - Updated with Portfolio Details

Post by freeform0 »

Edit 2 - Added detail about funds available in employer plans

==
Hi Fellow Bogleheads,

Over the last few years, the growth in my taxable account has outpaced Roth and 401k accounts by quite a bit. My taxable is all VTSAX; Roth is mostly VTIAX; and 401k is a mix of index funds & bonds. With the growth of VTSAX exceeding VTIAX over the years, my taxable account has ballooned in comparison to the Roth.

Is this a problem that ought to be addressed? For example, should I seek to rebalance fund placement as I make new purchases into each account? My intuition says yes, but maybe I'm overthinking it.

Happy to share more info if needed to provide an answer. Thanks in advance for your insights!

==
Emergency funds: One year of expenses (Half in cash; half in iBonds)

Debt: No debt. Renting home with no intention to buy in the foreseeable future.

Tax Filing Status: Single

Tax Rate: 32% Federal, 9.3% State

State of Residence: California

Age: 39

Desired Asset allocation: 90% stocks / 10% bonds. <---There's work to do to get to my desired bond allocation.

Desired International allocation: 30% of stocks

Hint as to the size of your current total portfolio: High six figures

Current retirement assets

Taxable at Vanguard
38% VTSAX

401k at T Rowe Price (Employer Plan) (Company match of 4.5%)
12% Large Cap Stock Fund (No ticker symbol available) (0.01%)
7% International Stock Fund (No ticker symbol available) (0.29%)
4% Mid Cap Stock Fund (No ticker symbol available) (0.03%)
3% Emerging Markets Stock Fund (No ticker symbol available) (0.73%)
5% Intermediate Term Bond Fund (No ticker symbol available) (0.12%)
0% Self Directed Brokerage Account (Employer offers option to invest 50% of balance in Charles Shwab self-directed account. I don’t currently take advantage of this, but have considered it.)

Roth IRA at Vanguard
7% VTSAX
20% VTIAX

HSA at Fidelity
3% FSKAX

HSA at Payflex (Employer Plan)
1% Cash (Available to invest)

Other assets
These accounts are for my brother's children, who live in MA. Not included in above retirement assets.

529 at Fidelity for Niece (age 3)
$5500 MA FIDELITY 500 INDEX (MAFSMKX94) (0.11%)

529 at Fidelity for Nephew (age 7)
$11,850 NH TOTAL MARKET INDEX (NHFSTMX97) (0.11%)
$2,00 NH INTERNATIONAL INDEX (NHXINT906) (0.15%)

Contributions

New annual Contributions
$57K to 401k (Pre-tax, plus employer contribution of 4.5% and after-tax contributions for mega-backdoor Roth)
$6K Roth IRA
$3.5K HSA
$25K taxable (for retirement, not short term goals)

Available funds

Funds available in 401(k)
Self Directed Brokerage Account at Charles Schwab - Plan offers option to invest 50% of balance in Charles Shwab self-directed account.
Emerging Markets Stock Fund (No ticker symbol available) (0.73%)
Global REIT Fund (No ticker symbol available) (0.29%)
International Stock Fund (No ticker symbol available) (0.29%)
Large Cap Growth Stock Fund (No ticker symbol available) (0.19%)
Large Cap Stock Fund (No ticker symbol available) (0.01%)
Large Cap Value Stock Fund (No ticker symbol available) (0.22%)
Mid Cap Stock Fund (No ticker symbol available) (0.03%)
Small Cap Stock Fund (No ticker symbol available) (0.38%)
High Yield Bond Fund (No ticker symbol available) (0.41%)
Intermediate Term Bond Fund (No ticker symbol available) (0.12%)
Target Date Fund 2045 (No ticker symbol available) (0.07%)

Funds available in employer sponsored HSA
Vanguard Small-Cap Index Fund Admiral (VSMAX) (0.05%)
Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX) (0.08%)
Vanguard 500 Index Fund Admiral Shares (VFIAX) (0.04%)
Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX) (0.14%)
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) (0.07%)
Vanguard LifeStrategy Moderate Growth Fund (VSMGX)(0.13%)
Vanguard LifeStrategy Conservative Growth Fund (VSCGX) (0.12%)
Schwab Fundamental US Large Company Index Fund SFLNX (0.25%)
Last edited by freeform0 on Sun Oct 18, 2020 8:14 am, edited 3 times in total.
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Misenplace
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Re: Lopsided Growth in Taxable

Post by Misenplace »

Hi freeform,
Short answer- Yes.

What is your desired asset allocation? As your taxable account with total US equities has boomed, you are likely much higher in equities than you should be. Thus, your overall risk has increased. Over the past few years, I have dropped more and more equities from my tax advantaged accounts, and predict that eventually the 401k's and IRAs will be completely bond funds, while my taxable and ROTHs will be completely equities.
Also, see the Wiki: Asset Allocation
Tax efficient fund placement
You will get more useful information if you use the template "Asking Portfolio Questions".
Topic Author
freeform0
Posts: 12
Joined: Sun Jan 12, 2014 1:58 pm

Re: Lopsided Growth in Taxable

Post by freeform0 »

Thanks Misenplace. You are right in anticipating that I'm higher than equities than I would like. I've been thinking of using my 401k to increase my bond allocation to where it should be.

I edited the above post to provide a bit more context about my goals and where my portfolio stands now. Any suggestions you can offer would be much appreciated.

:sharebeer
aristotelian
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Re: Lopsided Growth in Taxable

Post by aristotelian »

I would be hesitant to further increase international in your Roth. If international underperformance continues that would be a huge waste of Roth space. Do you have an international stock option in your 401k? I would suggest using international and bonds in your 401k to balance out US stock in taxable. If bonds and international continue to underperform, it's not so bad because they are in the least tax efficient account. If US stocks underperform, at least you have protection.
nix4me
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Re: Lopsided Growth in Taxable

Post by nix4me »

One way to address it is to stop investing in low performing assets like international and bonds.
Topic Author
freeform0
Posts: 12
Joined: Sun Jan 12, 2014 1:58 pm

Re: Lopsided Growth in Taxable

Post by freeform0 »

aristotelian wrote: Sat Oct 17, 2020 3:02 pm I would be hesitant to further increase international in your Roth. If international underperformance continues that would be a huge waste of Roth space. Do you have an international stock option in your 401k? I would suggest using international and bonds in your 401k to balance out US stock in taxable. If bonds and international continue to underperform, it's not so bad because they are in the least tax efficient account. If US stocks underperform, at least you have protection.
Thanks so much, aristotelian - this is great advice. My employer plan has an international stock fund - I added details to my original post. The plan also offers a self directed brokerage option via Charles Schwab. I've considered using the self directed option for my bond and international allocations. I need to do a bit more research to determine if it's worth the trouble and what additional fees would be involved.

As a side note, I ended up with almost all VTIAX in my Roth a few years back when I used Vanguard PAS to clean up my holdings. At the time, I had several individual stocks in my account, and PAS was great for a quick clean up and getting out of individual stocks. What I didn't realize at the time, however, was that they concentrated International in my Roth account and Total Market in taxable. I didn't think much of it at the time, but hindsight is 20/20. I'm no longer using PAS, and since then, all my new purchases in the Roth have been Total Market. I like your suggestion of correcting the imbalance further by moving more international in my 401k. Thanks again for your help.
Outer Marker
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Re: Lopsided Growth in Taxable

Post by Outer Marker »

aristotelian wrote: Sat Oct 17, 2020 3:02 pm I would be hesitant to further increase international in your Roth. If international underperformance continues that would be a huge waste of Roth space. Do you have an international stock option in your 401k? I would suggest using international and bonds in your 401k to balance out US stock in taxable. If bonds and international continue to underperform, it's not so bad because they are in the least tax efficient account. If US stocks underperform, at least you have protection.
On the other hand, if International reverts to the mean and outperforms domestic, Roth is a great place to have it. Having either TSM or TISM in Roth is fine; just don't place bonds in Roth space.

I'd ditch the small allocation to Emerging Markets, which is a dubious separate asset class and an expensive fund among your 401K choices. 3% is not enough to make a real difference anyway.

And, for what its worth, Total Bond is up nearly 7% YTD which I'd hardly call underperformance.
tashnewbie
Posts: 801
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Re: Lopsided Growth in Taxable - Updated with Portfolio Details

Post by tashnewbie »

I’d probably get rid of emerging markets and the mid cap funds in the 401k and use proceeds to buy more of large cap and bond funds.

Maybe do an even split of VTSAX and VTIAX in the Roth IRA? Then use the 401k to round out the desired international allocation (perhaps use the brokerage link to get access to an international fund that includes both developed and emerging markets, if you really want the EM exposure; I’d probably only use the link if there were no or very low extra costs).
Topic Author
freeform0
Posts: 12
Joined: Sun Jan 12, 2014 1:58 pm

Re: Lopsided Growth in Taxable

Post by freeform0 »

Outer Marker wrote: Sun Oct 18, 2020 9:46 am I'd ditch the small allocation to Emerging Markets, which is a dubious separate asset class and an expensive fund among your 401K choices. 3% is not enough to make a real difference anyway.
tashnewbie wrote: Sun Oct 18, 2020 10:18 am I’d probably get rid of emerging markets and the mid cap funds in the 401k and use proceeds to buy more of large cap and bond funds.
Thanks Outer Marker and tashnewbie for calling this out. Putting this on my to-do list for today.

Outer Marker wrote: Sun Oct 18, 2020 9:46 am
aristotelian wrote: Sat Oct 17, 2020 3:02 pm I would be hesitant to further increase international in your Roth. If international underperformance continues that would be a huge waste of Roth space. Do you have an international stock option in your 401k? I would suggest using international and bonds in your 401k to balance out US stock in taxable. If bonds and international continue to underperform, it's not so bad because they are in the least tax efficient account. If US stocks underperform, at least you have protection.
On the other hand, if International reverts to the mean and outperforms domestic, Roth is a great place to have it. Having either TSM or TISM in Roth is fine; just don't place bonds in Roth space.
tashnewbie wrote: Sun Oct 18, 2020 10:18 am Maybe do an even split of VTSAX and VTIAX in the Roth IRA? Then use the 401k to round out the desired international allocation (perhaps use the brokerage link to get access to an international fund that includes both developed and emerging markets, if you really want the EM exposure; I’d probably only use the link if there were no or very low extra costs).
Outer Market, Good point on the possibility of international reverting to the mean. I've considered this, and I know that I need to keep in perspective that I'm unlikely to touch these funds for at least another 20 years. A lot is going to happen between now and then.

Tashnewbie, I like the idea of an even split. Right now, International accounts for 75% of my Roth. Getting this down to half would be an improvement. I'd even consider going a bit further, reducing International to 30% of the Roth, which would be in line with my overall desired international allocation. I still have plenty of space in the 401k for my bond allocation, plus whatever international I want to shift there. Your point on the brokerage link is well taken--thanks for weighing in on that as well.

Thanks to you both for the valuable insights. Much appreciated!
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Misenplace
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Re: Lopsided Growth in Taxable - Updated with Portfolio Details

Post by Misenplace »

Your Large Cap Stock Index fund in your company 401k will pretty much track VTSAX, so for simplicity I would just use that and the Intermediate Bond.
If you want to replicate VTSAX using Mid and Small cap, see the Wiki: Approximating total stock market
You can also start buying total international in your taxable.

Splitting your Roth 70 US:30 International seems like a good compromise. As you essentially stated, nobody knows how the next 20 years will shake out- International may outpace US, or US may outpace International.

You may want to use either Vanguard's Portfolio Watch or something equivalent at your T Rowe Price 401k interface to plug in all your accounts and keep track of your asset allocation. If you use VG Portfolio Watch, you will need to find an ETF that tracks the same index as the non-tickered funds in your 401k (the fund prospectus should have that somewhere) and do some arithmetic to figure out how many shares of the tracking ETF to plug in. So it might be easier just to find the equivalent to Portfolio Watch at T Rowe and enter in all your non-401k accounts. I think T Rowe Price gives you access to Morningstar Portfolio tools.

Consider as your niece/nephew get closer to college switching the 529s into a target date fund so there is more certainty as to the amount available when tuition is needed. They are lucky to have such a kind and generous relative as you.
Topic Author
freeform0
Posts: 12
Joined: Sun Jan 12, 2014 1:58 pm

Re: Lopsided Growth in Taxable - Updated with Portfolio Details

Post by freeform0 »

Misenplace wrote: Sun Oct 18, 2020 1:05 pm Your Large Cap Stock Index fund in your company 401k will pretty much track VTSAX, so for simplicity I would just use that and the Intermediate Bond.
If you want to replicate VTSAX using Mid and Small cap, see the Wiki: Approximating total stock market
You can also start buying total international in your taxable.

Splitting your Roth 70 US:30 International seems like a good compromise. As you essentially stated, nobody knows how the next 20 years will shake out- International may outpace US, or US may outpace International.

You may want to use either Vanguard's Portfolio Watch or something equivalent at your T Rowe Price 401k interface to plug in all your accounts and keep track of your asset allocation. If you use VG Portfolio Watch, you will need to find an ETF that tracks the same index as the non-tickered funds in your 401k (the fund prospectus should have that somewhere) and do some arithmetic to figure out how many shares of the tracking ETF to plug in. So it might be easier just to find the equivalent to Portfolio Watch at T Rowe and enter in all your non-401k accounts. I think T Rowe Price gives you access to Morningstar Portfolio tools.

Consider as your niece/nephew get closer to college switching the 529s into a target date fund so there is more certainty as to the amount available when tuition is needed. They are lucky to have such a kind and generous relative as you.
Thanks, Misenplace. This is great advice. The best part is it will be simple to implement. :)

I like the suggestion of using the portfolio tools offered by T Rowe. Right now I use Morningstar Portfolio Manager and Vanguard Portfolio Watch, but they are a bit awkward because it's hard to track the non-tickered funds in my 401k, especially as I'm making purchases into that account. Using the T Rowe tool is worth a shot, especially if it can provide better visibility into asset allocation than I have now.

Good suggestion on the 529s--thank you for that as well. With my retirement accounts, I've stayed away from target date funds because I prefer the transparency and control of owning funds directly. With the 529s, I'm less engaged, so the target date funds are a good option.

Thanks again to all for the excellent advice. Much appreciated!
stan1
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Re: Lopsided Growth in Taxable - Updated with Portfolio Details

Post by stan1 »

I would start buying Total International in the taxable account for asset location diversification. I'd do that with new investments in taxable as well as with the dividends coming out of the Total Stock Market. I'd try to work my way out of the 0.29% international fund and 0.73% emerging market fund in your employers plan. I realize it might take a few years to do this.

Can you transfer the balance of your Payflex HSA to the Fidelity HSA?

You'd have to do some spreadsheet work, but since your 401K has a very low cost Target Date Fund (0.07%) you might be best served to use that and then adjust your other accounts to your desired asset allocation. Pick the target date fund that gives you the allocation you want. I do think someone with close to $1M in assets should have at least a simple spreadsheet to help rebalance. Here's the wiki entry:
https://www.bogleheads.org/wiki/Using_a ... _portfolio
Topic Author
freeform0
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Joined: Sun Jan 12, 2014 1:58 pm

Re: Lopsided Growth in Taxable - Updated with Portfolio Details

Post by freeform0 »

stan1 wrote: Mon Oct 19, 2020 8:43 am I would start buying Total International in the taxable account for asset location diversification. I'd do that with new investments in taxable as well as with the dividends coming out of the Total Stock Market. I'd try to work my way out of the 0.29% international fund and 0.73% emerging market fund in your employers plan. I realize it might take a few years to do this.
Thanks stan. I made the changes in taxable this morning so my new purchases are Total International. As that balance builds, I'll be exchanging International for Total Stock Market in my Roth to balance things out.

When you say, "it might take a few years to do it," I want to clarify--you mean asset location diversification in my Taxable and Roth, correct? For the 401k, I'm planning to get rid of the 0.73% Emerging Markets immediately and exchange that for bonds. Is there any reason not to make immediate changes in the 401k, rather than doing it gradually as I would for taxable? Just want to make sure I understand what you mean on the timeline.
stan1 wrote: Mon Oct 19, 2020 8:43 am Can you transfer the balance of your Payflex HSA to the Fidelity HSA?
Since it's my employer plan, I assumed it wasn't possible, but doesn't hurt to check. It would be nice to have all HSA funds at Fidelity rather than distributed across accounts.
stan1 wrote: Mon Oct 19, 2020 8:43 am You'd have to do some spreadsheet work, but since your 401K has a very low cost Target Date Fund (0.07%) you might be best served to use that and then adjust your other accounts to your desired asset allocation. Pick the target date fund that gives you the allocation you want. I do think someone with close to $1M in assets should have at least a simple spreadsheet to help rebalance. Here's the wiki entry:
https://www.bogleheads.org/wiki/Using_a ... _portfolio
Message received! :) You are right that I should have a better handle on rebalancing at this point. Thanks for calling that out. I will check out the wiki page you suggested.

I'll take a look at the low cost target date funds. I've avoided target date funds until now. I'm not sure I want the headache of tracking the underlying holdings and rebalancing against that. However your point on the low cost of the target date fund is well taken.

Thanks again for your insights!
stan1
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Re: Lopsided Growth in Taxable - Updated with Portfolio Details

Post by stan1 »

freeform0 wrote: Mon Oct 19, 2020 9:36 am
stan1 wrote: Mon Oct 19, 2020 8:43 am I would start buying Total International in the taxable account for asset location diversification. I'd do that with new investments in taxable as well as with the dividends coming out of the Total Stock Market. I'd try to work my way out of the 0.29% international fund and 0.73% emerging market fund in your employers plan. I realize it might take a few years to do this.
Thanks stan. I made the changes in taxable this morning so my new purchases are Total International. As that balance builds, I'll be exchanging International for Total Stock Market in my Roth to balance things out.

When you say, "it might take a few years to do it," I want to clarify--you mean asset location diversification in my Taxable and Roth, correct? For the 401k, I'm planning to get rid of the 0.73% Emerging Markets immediately and exchange that for bonds. Is there any reason not to make immediate changes in the 401k, rather than doing it gradually as I would for taxable? Just want to make sure I understand what you mean on the timeline.
stan1 wrote: Mon Oct 19, 2020 8:43 am Can you transfer the balance of your Payflex HSA to the Fidelity HSA?
Since it's my employer plan, I assumed it wasn't possible, but doesn't hurt to check. It would be nice to have all HSA funds at Fidelity rather than distributed across accounts.
Yes, since you are contributing about $25K to the taxable account per year and you have high six figures it will take a few years for the international in taxable to be a meaningful part of your portfolio. In the meantime you'd want to pick the best funds you have in your other accounts to maintain your asset allocation.

Some employer HSA plans do allow a transfer out to another HSA (you might be able to request a transfer in from your Fidelity HSA). Note there is a transfer (electronic) and a rollover which involves a paper check. Best to do the electronic transfer. HSAs work differently than 401Ks.
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