Portfolio review - Does recommended bond type vary with net worth?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
bayareaBH
Posts: 5
Joined: Fri Jun 04, 2021 3:12 pm

Portfolio review - Does recommended bond type vary with net worth?

Post by bayareaBH »

Hi all,

First of all, thank you to all the wise folks here who share their knowledge - much appreciated. I have been reading up on BH and lurking for some time now on the forum as a guest.

A little about my household's situation:
My husband and I are in our early/mid 30s and live in VHCOL. Over the last two years, we had some incredible good fortune with a startup and two big equity events. Essentially, we've hit our number, and a 2.5% WR would cover our annual expenses, even if LTCG end up being taxed as ordinary income in the future (although would be a little tighter and we might need to work PT). We both are still working for now as we adjust to this new picture while we figure out what exactly we want to do. Our families are in CA and we have no desire to move for lower taxes. We are very bought in to the overall BH philosophy and I've put almost half our assets into stock over the last 12 months. We have paid all the taxes on the equity and paid off our house, so now we have a clear picture of the total assets. I'm trying to figure out how we want to structure our bond allocation, and if it should be any different than a Total Bond Market fund/ETF due to our net worth. If we don't need the underlying principal and could live off a 2.5% return, does that change which funds would be recommended? I think a good plan would be to "retire" in the sense of not working for large corporation in next couple years, and move to something less stressful and maybe part-time. Same for DH. I work in biotech and see everyday how quickly your life can change with a diagnosis, so it feels like we should take advantage of the ultimate gift of not having to spend 50 hours a week at a job that you feel meh about.

The details:
EF: Fully funded (2 years)
Debt: None
Tax status: MFJ
Tax Rate: 32% / 9.3% (our incomes have gone up significantly in the last two years that we also had the big equity events so I'm not 100% sure but I think this is pretty accurate for our expected job compensation)
State: CA
Age: her - 32, him - 36
Desired AA: 65%/35%; intl at 35% of stocks
Total Portfolio: ~$8M, not including house (~$3.3M value, paid off)

Taxable - 88% of portfolio
41% Cash / Vanguard Settlement Fund
24% Vanguard Total Stock ETF (VTI) (0.03%)
13% Vanguard Total International Stock ETF (VXUS) (0.08%)
5% Vanguard Total Bond Market ETF (BND) (0.04%)
3% Vanguard Limited Term Tax Exempt Admiral Share MF (VMLUX) (0.09%)
2% Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares (VCADX) (0.09%)

Her 401K - 5%
5% - Blackrock US Large Cap Equity - (0.01%)

Her Taxable (from before marriage, will combine with joint at some point) - 4%
~1% Vanguard Total Stock ETF (VTI) (0.03%)
~1% Vanguard 500 Index Fund ETF (VOO) (0.03)
~1% Vanguard Total International Stock ETF (VXUS) (0.08%)
~1% Vanguard Total Bond Market ETF (BND) (0.04%)

His 401K - 3%
3% Target Date 2050 Fund - (0.35%)

We both also have an IRA that we have funded the last two years, but it's like $12K in each and theyre a rounding error at this point. HSA is not an option.

Note: We still have ~60% of our original equity in the startup, but it's not liquid (previous events were secondaries) and I don't want to count on it since it's not up to us whether we can sell at this point. There is no IPO planned in the short-medium term from what I know.

Future contributions for at least next 2-3 years:
Her 401K: $57K using mega backdoor / after tax 401K (~$22K of it from employer)
His 401K: $20K
Her IRA: $6K
His IRA: $6K
Joint taxable: ~$60K + any bonus/RSU sales (have ranged from 40-70K post tax)

Her income: $220K base / $40K cash bonus / $90K RSUs - the stock vests 25%/year over 4 years
His income: $150K base

Key Questions:
  • What do you think of the following bond allocation: 60% BND / 20% US Muni / 20% CA Muni? Is this straying too far from BH? I had an initial consultation with a Vanguard PAS person and they recommended state and federal muni bonds.
  • Should we use all our tax advantaged space for bonds? It's ~13% currently, but would go down over time assuming equities outpace bonds, so we'd still need a large bond holding in the taxable. I also think it's fair to assume our income will go down as we move into other jobs.
  • Are there other bond / bond funds I should be looking into, given the goal of a modest return?
Thank you in advance for any help - we can't really talk about this with most people in our lives, so it's helpful to be able to share here.
Last edited by bayareaBH on Wed Jun 09, 2021 4:24 pm, edited 1 time in total.
abc132
Posts: 572
Joined: Thu Oct 18, 2018 1:11 am

Re: Portfolio review - Does needed bond type vary with net worth?

Post by abc132 »

Yes, having a higher net worth makes the tax management aspect much more important.

I would want a CA tax specialist helping my decisions (which I am not).
User avatar
Cyclesafe
Posts: 1392
Joined: Wed Dec 31, 2014 1:03 pm

Re: Portfolio review - Does recommended bond type vary with net worth?

Post by Cyclesafe »

At a Cali rate of 9.3%, Cali and national muni's of equivalent duration have nearly identical TEY's. The former most appeal to those who pay even higher Cali rates. BH's rule of thumb is no more than half fixed should be muni's and only half of that single state. I tend to think that this is a bit arbitrary and would suggest that your proximity to an AGI of $400k (and higher threatened taxes) should determine whether you breach 50% with muni's. I have TLH'ed between Cali and national several times.

It is never too soon to start planning your exit from working and inflation should be your biggest concern. Don't think that your $3.3M house is worth $3.3M; think that your $8M investment portfolio now only buys 2.42 houses. How many houses could you buy a year or two ago?
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)
Topic Author
bayareaBH
Posts: 5
Joined: Fri Jun 04, 2021 3:12 pm

Re: Portfolio review - Does recommended bond type vary with net worth?

Post by bayareaBH »

Cyclesafe wrote: Wed Jun 09, 2021 5:00 pm At a Cali rate of 9.3%, Cali and national muni's of equivalent duration have nearly identical TEY's. The former most appeal to those who pay even higher Cali rates. BH's rule of thumb is no more than half fixed should be muni's and only half of that single state. I tend to think that this is a bit arbitrary and would suggest that your proximity to an AGI of $400k (and higher threatened taxes) should determine whether you breach 50% with muni's. I have TLH'ed between Cali and national several times.
Thank you, that is a helpful way of thinking about the "breakeven" between CA / US. How do you think about correlated risk? Ie, our house is in CA, our jobs are in CA, and a decent chunk of investment might be in CA muni. If something really bad were to happen to the state (fires become worse, drought is permanent, tech economy tanks etc) and it becomes a less desirable place to live, that would theoretically depress all of the above. If the TEY are the same at similar duration, I think I might put most of the muni allocation in the US.
Cyclesafe wrote: Wed Jun 09, 2021 5:00 pm It is never too soon to start planning your exit from working and inflation should be your biggest concern. Don't think that your $3.3M house is worth $3.3M; think that your $8M investment portfolio now only buys 2.42 houses. How many houses could you buy a year or two ago?
I do worry about inflation generally and with our long investment horizon, that's why I want to go 65% stocks. However I'm not sure the 2.42 houses thing resonates. Bay area real estate has always been ridiculous - we live in a ~2000 sq ft house that could use some (cosmetic) updates. It would sell for probably $500K in any other suburban part of the country that wasn't on the coast.
User avatar
Cyclesafe
Posts: 1392
Joined: Wed Dec 31, 2014 1:03 pm

Re: Portfolio review - Does recommended bond type vary with net worth?

Post by Cyclesafe »

bayareaBH wrote: Wed Jun 09, 2021 5:28 pm
Cyclesafe wrote: Wed Jun 09, 2021 5:00 pm At a Cali rate of 9.3%, Cali and national muni's of equivalent duration have nearly identical TEY's. The former most appeal to those who pay even higher Cali rates. BH's rule of thumb is no more than half fixed should be muni's and only half of that single state. I tend to think that this is a bit arbitrary and would suggest that your proximity to an AGI of $400k (and higher threatened taxes) should determine whether you breach 50% with muni's. I have TLH'ed between Cali and national several times.
Thank you, that is a helpful way of thinking about the "breakeven" between CA / US. How do you think about correlated risk? Ie, our house is in CA, our jobs are in CA, and a decent chunk of investment might be in CA muni. If something really bad were to happen to the state (fires become worse, drought is permanent, tech economy tanks etc) and it becomes a less desirable place to live, that would theoretically depress all of the above. If the TEY are the same at similar duration, I think I might put most of the muni allocation in the US.

I'm not worried about the parade of Cali horribles, but if the SALT cap comes off you'll be happier with national muni's.
Cyclesafe wrote: Wed Jun 09, 2021 5:00 pm It is never too soon to start planning your exit from working and inflation should be your biggest concern. Don't think that your $3.3M house is worth $3.3M; think that your $8M investment portfolio now only buys 2.42 houses. How many houses could you buy a year or two ago?
I do worry about inflation generally and with our long investment horizon, that's why I want to go 65% stocks. However I'm not sure the 2.42 houses thing resonates. Bay area real estate has always been ridiculous - we live in a ~2000 sq ft house that could use some (cosmetic) updates. It would sell for probably $500K in any other suburban part of the country that wasn't on the coast.

My guess is that bay area real estate has gotten quite a bit more ridiculous this year. My point is that we must recalibrate what our assets are likely to buy in the future. Even a 1/2% increase in inflation has a dramatic impact over a lifespan of 60 or 70 years. Great grandma couldn't understand why we kids weren't over the moon over the quarter she gave us for our birthdays.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)
Post Reply