Portfolio Review

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JFin2
Posts: 3
Joined: Thu Sep 03, 2020 9:00 pm

Portfolio Review

Post by JFin2 »

Hi,

I learn a lot from this website, so here I am again asking for advice for my current protfolio (again).

* Me and spouse work in silicon valley (high COL)
* We have one primary goal: Be financially independent (FI, most likely will continue working to keep ourselves busy beyond that).
* We have a fairly large cash portion built over the past year due to the uncertainity in the tech world (layoffs) as emergency fund.

Emergency funds: Typically we keep six months of expenses (in high yield savings account), but recently we have saved up 1.5-2 year of expenses (10% of portfolio) in these accounts.

Debt: Home mortgage 2.625% 30y fixed

Tax Filing Status: Married Filing Jointly

Tax Rate: 37% Federal Bracket, 11.3% State

State of Residence: CA

Age: 35 & 32

Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: 30% of stocks

Total (Investment + retirement + cash) is around $2.4M

Current retirement assets (1.2M)
Taxable (65%)
10% cash (Planning to keep around 3-4%)
40% fund name (VTIAX, VTSAX) Total market & Total International Market
15% in company stock (usually sell all new stock vests).

401k + Rollover IRA (~$700K)
30% fund name (FSKAX, 0.015%, FSPSX 0.035) (expense ratio) Total Market & Total International Market
Company match? Yes.

Contributions
* Both spouse and I are maxing out our 401K + employer match
* I also max out our after tax 401K which I rollover to Roth 401K (and Roth IRA via mega backdoor)/
* After expenses, we invest most of it in vanguard total market (~70%) + and total international (30%)

Expenses
* Primary expense is the mortagage. Due to high COL, our PITI is around ~$7k
* Other yearly expenses are roughly around ~50k.

Income
* Household income is around $800-850K (stock income varies).
* Property (primary) has appreciated around ~36% since purchase ( < 5 years).

We used some retirement calculator a few years ago, and the numbers indicated that if we continue investing ~$300k for the next 15 years, we could hit FI in ~15 years. But nobody knows about the future, plus we cannot trust the bay area tech industry (as we've already seen this past year). We are open to downsizing our mortgage in the future (move further away from work), maybe closer to FI.

Questions
* We're planning on having a kid soon, and we are re-evaluating if we should change our investment strategy in any way?
* I want to boost my passive income generation, should I change anything as opposed to my current passive investment approach?


Appreciate all insights. Thanks!
DIYtrixie
Posts: 384
Joined: Sun Sep 13, 2020 12:11 pm

Re: Portfolio Review

Post by DIYtrixie »

Looks good overall. Make sure you’ve got adequate insurance.
JFin2 wrote: Sat Jun 03, 2023 8:22 pm * I want to boost my passive income generation
Why? It’ll likely raise your taxes.
Nate7out
Posts: 410
Joined: Wed Jan 16, 2008 1:06 pm

Re: Portfolio Review

Post by Nate7out »

JFin2 wrote: Sat Jun 03, 2023 8:22 pm
* We have one primary goal: Be financially independent

...
Total (Investment + retirement + cash) is around $2.4M

Current retirement assets (1.2M)
...

Expenses
* Primary expense is the mortagage. Due to high COL, our PITI is around ~$7k
* Other yearly expenses are roughly around ~50k.


We used some retirement calculator a few years ago, and the numbers indicated that if we continue investing ~$300k for the next 15 years, we could hit FI in ~15 years.
First, you state your main goal is to be FI, but you aren't counting $1.2MM (50%) towards that goal. Why?

I question your FI calculator results. Your expenses aren't that high, $134k x 25 = $3.35MM. 15 years at $300k per year is $4.5MM just in contributions alone.
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dratkinson
Posts: 6116
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Portfolio Review

Post by dratkinson »

JFin2 wrote: Sat Jun 03, 2023 8:22 pm Tax Rate: 37% Federal Bracket, 11.3% State
State of Residence: CA

Questions
* I want to boost my passive income generation, should I change anything as opposed to my current passive investment approach?

Idea. You could put muni bond funds in taxable account. Why?
--Safer than stocks. Recall stock dividends are ~2%.
--Munis are available that produce more dividends than stocks, and higher after-tax income due to effect of tax code.
--Dividends don't add to AGI, so don't push you toward higher tax bracket. Okay, not your current problem, but maybe one day.


I've read it recommended that one option is to use a LT CA muni fund (>5yrs duration) paired with a limited-term muni fund (<2yrs duration). Why? A 50/50 pairing should give IT duration (~5yrs)---reported to be on the sweet spot of reward/risk yield curve---with most of your dividends triple tax-exempt: fed, state, city.

Compute a muni's TEY** (taxable-equivalent yield) to compare to taxable alternatives: taxable bond SEC yield, bank APY.
--National muni fund TEY = SEC yield/(1 -fed tax bracket)
--Single-state muni fund TEY = SEC yield/(1 -fed tax bracket -state tax bracket)*

* Assumes you don't deduct mortgage interest on fed tax return. If you do, it's a slightly different formula, but don't immediately find it ...so left as student exercise.

** The TEY is a first-look at determining muni goodness, but it misses all of the other effects embedded in the tax code. To see those you'll need to create sample tax returns.

Recommended CA muni candidates for Vanguard client.
--VMLTX (limited-term national) TEY = 3.12%/(1-.37) = 4.95%. See: https://investor.vanguard.com/investmen ... file/vmltx
--VCITX (LT CA) TEY = 3.43%/(1-.37-.113) = 6.63%. See: https://investor.vanguard.com/investmen ... file/vcitx

I've read it recommend that we should allocate no more that 50% of muni funds to single-state fund. Why? Reduces single-state default risk; think of financial impact should "the big one" hit CA.


Other options:
--VBTLX* (IT total bond market index fund) SEC yield = 4.13%. See: https://investor.vanguard.com/investmen ... file/vbtlx
--VCAIX (IT CA): https://investor.vanguard.com/investmen ... file/vcaix
--VWSLX (ST national): https://investor.vanguard.com/investmen ... file/vwstx
--VWITX (IT national): https://investor.vanguard.com/investmen ... file/vwstx
--VWLTX (LT national): https://investor.vanguard.com/investmen ... file/vwltx
--VTEB** (IT index national): https://investor.vanguard.com/investmen ... ofile/vteb

* VBTLX (TBM) is recommended bond fund of 3fund portfolio. I compare all muni candidates to it. If I can't get more after-tax income with only slightly more risk, then I use TBM.

If you go the muni route, an IT* muni is recommended (* same sweet spot); but you might want to reach for more yield. Recall Swedroe may have recommended requiring 20-basis point more yield for each additional year of duration; don't recall whether that was before/after tax code effect. Read his book.

** VTEB, ETF of VTEAX, is more easily portable/managed from another fund family ...if Vanguard annoys you too much.

Student exercise. Compute the TEY for each muni candidate.

I've read others BHs using muni ETFs from other fund families. Can search forum for them.

We are currently in an inverted-yield environment so the yields of shorter duration investments are artificially high. Don't be surprised if their yields drop within a few years; you'll get a TLH opportunity.

Recommended public library book. (I've added BH referral code to Amazon link.)
The Only Guide to a Winning Bond Strategy You'll Every Need, Swedroe: https://www.amazon.com/s?k=the+only+gui ... ads.org-20
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
Outer Marker
Posts: 4382
Joined: Sun Mar 08, 2009 8:01 am

Re: Portfolio Review

Post by Outer Marker »

A few observations-

1. You want to be 100% equities, but have 2 years worth of expenses in emergency funds. Personally, I think all portfolios should have some allocation to fixed income. Noted economist Benjamin Graham recommends between 75/25 and 25/75 as a reasonable upper and lower bound on fixed income. I'd count your EF as part of your fixed income allocation and seek to maintain an 80/20 AA going forward.

2. 30% internatoinal is a bit on the high side, but not unreasonable. 20% is more the general consensus around here, but a personal choice. I keep 20% becasue its good for me in theory -- but glad it was not more than that.
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