Portfolio Review and Empower Question

[Drums & Real Estate]

Emergency funds: 3 months of expenses in a HYSA

Debt: Mortgage of $142k at 3.75%

Tax Filing Status: Single (divorced)

Tax Rate: 12% Federal, 0% State

State of Residence: FL

Age: 45

Desired Asset allocation: 55% US stocks (w/10% in Small-Cap) / 30% Int stocks (w/10% in Emerging Markets) / 7% bonds/cash / 7% REITs / 1% Crypto (I know...)

Total portfolio: $135k

Current retirement assets:

Taxable at Fidelity
2.3% cash (prepayment for next year's HSA contribution)
0.8% Vanguard Total Stock Market ETF (VTI) (0.03%)
0.8% Ethereum (ETH) (2.1% effective expense ratio - 1% to buy, 1% to sell)

403b at TIAA (NO Company match)
38.6% Vanguard Index Trust Total Stock Market Index Fund (VITSX) (0.03%)
19.3% Vanguard Total International Stock Market Index Fund (VTSNX) (0.08%)
3.2% Vanguard Equity Income Fund Adm Shares (VEIRX) (0.18%)
5.8% Vanguard Total Bond Market Index Fund (VBTLX) (0.05%)

Roth IRA at Vanguard
3.6% Invesco QQQ Trust, Series 1 (QQQ) (0.20%)
4.8% Vanguard Small Cap Value ETF (VBR) (0.07%)
6.8% Vanguard FTSE Emerging Markets ETF (VWO) (0.08%)
3.6% Vanguard Real Estate ETF (VNQ) (0.12%)

Trad IRA at Vanguard
3.8% Vanguard Small-Cap Growth ETF (VBK) (0.07%)
2.9% Vanguard Growth ETF (VUG) (0.04%)

HSA at Fidelity
3.7% Fidelity Total Stock Market Index Fund (FZROX) (0%)

2024 Annual Contributions
$2500 403b (no employer matching contributions)
$7000 Roth IRA
$0 Trad IRA
$4150 HSA
$2400 Taxable

Some (possibly) relevant info::
- I am a mix of 60% W2 and 40% 1099 income, which makes maxing out my 403b impossible (for now).
- I am a year ahead in my HSA contributions (made max lump contribution in Jan), so as I save for next year’s contributions, I’m holding that money in a MMF (SPAXX). That moves my bond/cash allocation from 7% to between 9-10% of my total investment portfolio as the year progresses.
- I use Empower to track my asset allocations. They very recently changed their criteria for defining Value-Core-Growth. This change significantly altered the "look" of my tilt towards Growth (specifically Large-Cap where I WAS 7% Value, 8% Core, 23% Growth, I am NOW 10% V, 19% C, 10% G). I very much like the way that looks now, BUT... this change has made what I thought would take a few years of Value investing happen virtually overnight. Is it real???

My current thoughts for future investments:
1.) In an attempt to catch up on retirement investments, I choose to be more aggressive in my current stock/bond allocation. I started with 6% bonds at age 44 and will maintain that allocation until age 50. I will then increase my bond allocation the following way: age 50-55=10% | 55-60=15% | 60-65=20%
2a.) I will use my Roth IRA to contribute to Emerging Markets, REITs, and Small-Cap Value, and/or Growth as needed to maintain my desired asset allocation.
2b.) Any bond or international equity adjustments will need to be made through rebalancing in my 403(b). I will do this in January, AFTER I’ve made my 2025 HSA contribution.
3.) My 2025 HSA contributions will be $4300 into FZROX.
4.) 2026 Roth Conversion: When I convert my VUG shares to my Roth IRA, I will sell my QQQ and buy more VUG to simplify my portfolio. The lower expense ratio and diversification of VUG aligns more with my overall long term investment strategies. Still unsure about keeping VBK or selling it and buying more VBR.
5.) I have fairly significant equity in my current home. I plan to sell my home in 2029 and downsize. I will invest a minimum of $50k of that profit into a taxable account (in VTI) and let it grow for 15 years until I retire at 65 (2044). That investment will provide my income for 3-4 years so that I can retire without touching my tax advantaged retirement accounts, allowing them to grow even more. My downsized home will be paid off ASAP, but by 2044 at the absolute latest.

Questions:
1. Is Empower's new metric accurate? I REALLY like the way my portfolio weighting looks now, but it's so very different from just a few weeks ago...

2. Are there other changes, errors in my thought process, or other factors I should be considering?

Thanks in advance for educating me!!!

[bonesly]

Emergency funds: 3 months of expenses in a HYSA

Common recommendation is 6-18 months, so this seems a little low. If your job has an incredibly low risk of layoff/unexpected termination, then this might be adequate.

Taxable at Fidelity
2.3% cash (prepayment for next year's HSA contribution)
0.8% Vanguard Total Stock Market ETF (VTI) (0.03%)
0.8% Ethereum (ETH) (2.1% effective expense ratio - 1% to buy, 1% to sell)

403b at TIAA (NO Company match)
38.6% Vanguard Index Trust Total Stock Market Index Fund (VITSX) (0.03%)
19.3% Vanguard Total International Stock Market Index Fund (VTSNX) (0.08%)
3.2% Vanguard Equity Income Fund Adm Shares (VEIRX) (0.18%)
5.8% Vanguard Total Bond Market Index Fund (VBTLX) (0.05%)

Roth IRA at Vanguard
3.6% Invesco QQQ Trust, Series 1 (QQQ) (0.20%)
4.8% Vanguard Small Cap Value ETF (VBR) (0.07%)
6.8% Vanguard FTSE Emerging Markets ETF (VWO) (0.08%)
3.6% Vanguard Real Estate ETF (VNQ) (0.12%)

Trad IRA at Vanguard
3.8% Vanguard Small-Cap Growth ETF (VBK) (0.07%)
2.9% Vanguard Growth ETF (VUG) (0.04%)

HSA at Fidelity
3.7% Fidelity Total Stock Market Index Fund (FZROX) (0%)

I'd probably reallocate the funds in red into the appropriate Total US Stock, Total Int'l Stock, or Total US Bond index. The large-value tilt in orange is probably ok, but all the other tilts are adding clutter (your hope that they will outperform isn't well founded, except for small vs large and value vs growth). Your slice-and-dice AA approach seems to have the intent of "catching up" after a late start and/or the financial cost of divorce, but your AA has the least impact on the growth of your current $145K compared to how much you contribute and for how many years you make those contributions.



Subsequently, you should just keep it simple like a 3-Fund Portfolio (maybe 4 if you add TIPS) and focus on contributing as much as you can for as long as you can to reach your financial goal(s).

1. Is Empower's new metric accurate? I REALLY like the way my portfolio weighting looks now, but it's so very different from just a few weeks ago...

I would check the weighting against Morningstar's style-box, but that will require some work (you'd need to evaluate the style-box of each fund in relative weighting to your overall portfolio). Personally, I wouldn't bother as I'd be focused on simplifying by using a 3-Fund portfolio, so you don't need to worry about the weighting among value, core, and growth; large, mid, and small -- you just own everything in market-cap weighting.

2. Are there other changes, errors in my thought process, or other factors I should be considering?

I really think your slice-and-diced/tilts will not be very fruitful and are just adding complexity to your portfolio.

Why Bother with Tilts (RE, Tech, HC, SCV)?

First of all, there’s recency bias often driving these tilt decisions. Uninformed people naturally think that just by looking at what’s performed well recently will continue to perform well in the future. There’s a warning required by law on pretty much every prospectus that “past performance is no guarantee of future results.” That warning is there to dispel that “natural thinking,” but people tend to believe they know better than the markets. Take a look at how the “top performers” in the S&P-500 have changed over 50 years and tell me that back in 1950 you could have predicted the top-10 companies that are now dominating the S&P-500.

The reasoning I’ve heard for Real Estate is that the underlying rental income is a steady dividends that those focused on income find desirable. However, Real Estate Investment Trusts (RETIs) behave like stock more than bonds, so for that added risk (standard deviation), you’d have been better off with a bond fund (or ladder) if you really wanted steady income and your risk-tolerance demanded lower volatility than stocks. Individual real estate properties come with high-effort management overhead (property taxes, repairs, bad tenants or long vacancies) and is similar to the risk of owning individual stocks compared to a broad-based index of 500+ companies; it might be fine for someone who’s career was in home construction and/or repair and wants to continue that job in retirement with their multiple rental properties.

The reasoning behind the Technology tilt is that those in favor of this tilt think it is the way of the future and of course will do better than all other sectors going forward. The problem is that everyone else already knows this so there is no advance-knowledge premium to exploit; the new wave of tech is already priced into this sector.

The reasoning I've heard for Health Care is based on an aging population of boomers that will need more and more services and products from this sector. The problem is that everyone else already knows this so there is no advance-knowledge premium to exploit; the aging boomer populace is already priced into this sector.

The reasoning I've heard for Small Cap Value is more based on credible research by Fama & French on the 3-Factor Model suggesting value outperforms growth and small outperforms large. However if that were 100% reliable, then nobody would invest in massive growth companies which have dominated the stock market for the last decade (Facebook, Apple, Amazon, Nvidia, Google, etc.) and small-value companies would be at the top of the leaderboard most, if not all, of the time, but that's not been the case, thus my caution to "keep it simple". The FINRA-required warning of “past performance is no guarantee of future results” seems to also apply to seemingly credible conclusions in research papers from PhDs in finance/economics.

In Bogle's Common Sense on Mutual Funds he cites "The Carhart Study" (pp. 211-212, Ch. 9 On Selecting Superior Funds) with reference to "common factors in stock returns [value vs. growth, large cap vs. small cap, high beta vs. low beta] and investment expenses almost completely explain persistence in equity returns." That sounds very much like the Fama French research leading to SCV tilts being recommended & pursued, but Bogle went on to say "Relying on past records to select funds that will provide superior performance in the future is a challenging task." (my emphasis on superior & future) which was based on later discussions with Carhart and Malkiel (of "Random Walk" fame). I translate that as "sure, smart PhDs can fit the past data to a model that explains almost all the variance, but how well does the model hold up when new data is overlaid on the existing model fit (i.e., future data that the model was not trained on)?" Turns out that since 1999 when the Fama-French paper was published the result has been "not that great."

[invest4]

You already get some solid advice from Bonesly.

Some reinforcement and additional comments:

Emergency Funds: suggest no less than 6 months.


Portfolio:

* You want / need a simple, diversified portfolio that matches your risk tolerance and will endure for the long term (easy to manage and avoid behavioral mistakes).

* Do not underestimate the value of simplicity in your portfolio. All of this tilting is simply guessing and hoping you will receive positive returns in excess of what the market will provide...often based upon backtesting which is the past...not the future. You need very few investments to have a solid portfolio"

* Total US Stocks (VTI)

* Total Intl Stocks (VXUS) If you want Intl

* Bonds /Fixed Income (BND for example). I also happen to also invest in Intl Bonds (BNDX)...but many say it is not needed. YMMV.

Furthermore, any small investments are not impactful and are simply clutter...including Crypto. Avoid and simplify your financial life...easier to understand, manage, and you will be happier.


Annual Contributions: I never had any interest in taxable as long as there was tax advantaged space still available.


Annual Expenses:

* What are they? Best guesstimate.

* How much income do you want / need when no longer working? Best guesstimate.

* When do you think you don't want to work anymore...65 yes?



Your thoughts on future investments:

* Being more aggressive is not the way to think about "catching up". You can just as easily find yourself losing your money faster. What is important is that your investments and their allocation matches your risk tolerance and focus on things like reducing expenses and increasing savings to help you "catch up".


* Roth: All stocks. As mentioned earlier, you only need something like VTI (Total US Stocks)...I would ditch the others you highlighted...not needed.


* Home Equity: Can you elaborate more on your house. How much do you owe, what is your mortgage and % interest rate, etc? Having some cash makes sense. However, I see that more as something to you keep in reserve so you can help insulate yourself from sequence of returns risk for example...versus using it so you don't have to touch your accounts during the first few years of your retirement.


Questions:

* Empower: if you simplify your portfolio, you don't need to be bothered as much with such metrics. I use a spreadsheet and Morningstar to track everything.

* As already mentioned...simplify and avoid guessing and hoping with tilts, etc. You simply don't need it to get where you want to be. How do I know? Been there, done that...before I found this wonderful forum and learned better.


Best wishes.

[Drums & Real Estate]

I'd probably reallocate the funds in red into the appropriate Total US Stock, Total Int'l Stock, or Total US Bond index. The large-value tilt in orange is probably ok, but all the other tilts are adding clutter (your hope that they will outperform isn't well founded, except for small vs large and value vs growth). Your slice-and-dice AA approach seems to have the intent of "catching up" after a late start and/or the financial cost of divorce, but your AA has the least impact on the growth of your current $145K compared to how much you contribute and for how many years you make those contributions.

Subsequently, you should just keep it simple like a 3-Fund Portfolio (maybe 4 if you add TIPS) and focus on contributing as much as you can for as long as you can to reach your financial goal(s).

Portfolio:

* You want / need a simple, diversified portfolio that matches your risk tolerance and will endure for the long term (easy to manage and avoid behavioral mistakes).
* Do not underestimate the value of simplicity in your portfolio. All of this tilting is simply guessing and hoping you will receive positive returns in excess of what the market will provide...often based upon backtesting which is the past...not the future. You need very few investments to have a solid portfolio. Furthermore, any small investments are not impactful and are simply clutter...including Crypto. Avoid and simplify your financial life...easier to understand, manage, and you will be happier.

bonesly and invest4,

Thank you both for your insights. They have been invaluable in helping me clarify what I've been moving towards for a while.

Before I make the trades, I wanted to share what I think my portfolio will look like and see if you (or anyone else) had any additional thoughts.

Big Picture AA of 80/20

45% VTI (or VITSX/FZROX, depending on account)
10% VYM (for the Value tilt and lower expense ratio compared to VEIRX)
25% VTSNX (or VXUS, depending on account)
20% VBTLX (in a 403b)

I know I don't "need" VYM but the additional value tilt it provides does make me feel better and I believe I can stick with it long term. I'm looking to make this exchange my last one for a very long time.

More questions:
1.) I tend to gravitate towards a 90/10 AA (with 20 years until retirement) but given how richly valued the equities markets are right now, maybe 80/20 is a better move??? I haven't been in the game long enough to have any significant losses, so while my logic tells me I have a higher potential for rewards at 90/10, and that I have lots of time to recover, I haven't had the emotional pain of losing 30-50% of my portfolio. Is the standard deviation at 20% Bonds worth the drag on growth it causes? Am I missing something else?

2.) If I did go with 90/10, is +5% to VTI and +5% to VXUS the logical move? Or +2.5% VYM and +2.5% VTI with +5% VXUS? Or a 1/3 each? Or am I just overthinking all this again???

Thanks again!

[bonesly]

Before I make the trades, I wanted to share what I think my portfolio will look like and see if you (or anyone else) had any additional thoughts.

Big Picture AA of 80/20

45% VTI (or VITSX/FZROX, depending on account)
10% VYM (for the Value tilt and lower expense ratio compared to VEIRX)
25% VTSNX (or VXUS, depending on account)
20% VBTLX (in a 403b)

I know I don't "need" VYM but the additional value tilt it provides does make me feel better and I believe I can stick with it long term. I'm looking to make this exchange my last one for a very long time.

I think if I was going to retain a tilt, then it would be Vanguard Small Cap Value ETF (VBR) per the Fama-French research paper, rather than Vanguard High Dividend Yield Index (YVM) (which is large-value rather than small-value). However, you've limited your gamble to 10% (I'm pretty sure that was one of Mr. Bogle's "if you must" thresholds), so if you really think large-value will be better than small-value, despite the PhD research (which hasn't predicted forward very well since it was published), then that's ok.

1.) I tend to gravitate towards a 90/10 AA (with 20 years until retirement) but given how richly valued the equities markets are right now, maybe 80/20 is a better move??? I haven't been in the game long enough to have any significant losses, so while my logic tells me I have a higher potential for rewards at 90/10, and that I have lots of time to recover, I haven't had the emotional pain of losing 30-50% of my portfolio. Is the standard deviation at 20% Bonds worth the drag on growth it causes? Am I missing something else?

You can look at fundamental indicators like 500-Indxe Price-Earnings Ratio (P/E) and technical indicators like Relative Strength Index (RSI) or Moving Average Convergence-Divergence (MACD) (see BigCharts), but unless your last name is Buffet, it's not likely that you (nor the vast majority of individual investors) can accurately assess that equities are overpriced or underpriced, although there are many books, articles, and subscription newsletters that will tell you that they can give you accurate indicators for forecasting the future price movement of equities, none of them are dumb enough to promise that, and the convincing ones will make you believe they know and will share that knowledge for a fee which is guaranteed to help their bottom line but no such guarantee for the "knowledge" you paid for actually having future value.

If you're nervous about a market crash of (let's say) -50%, then 90/10 is going to have a -45% drop while 80/20 is going to have a -40% drop. Are those actually different enough (to you) to improve your "Sleep Well at Night" (SWAN) factor? Because that's the reason to change your AA, not because equities are over/under priced (which is essentially market timing and the Boglehead Philosophy is to never try to time the market).

2.) If I did go with 90/10, is +5% to VTI and +5% to VXUS the logical move? Or +2.5% VYM and +2.5% VTI with +5% VXUS? Or a 1/3 each? Or am I just overthinking all this again???

I would shift to try and maintain your 90/10 AA, given a specific int'l exposure of about 35% of total stocks (so your target is 58.5% US Stock, 31.5% Int'l Stock, and 10% bonds). Given those targets, that tells me where to add/subtract to VTI (US) and VXUS (Int'l). If YVM would be >15% of total portfolio then I'd throw that into the mix, but it's probably a small enough slice that it wont' be off by more than ±5%, so just leave it as is and only tweak VTI and VXUS.

35% is in your opening post (30% Int'l / (30% Int'l + 55% US) = 35% Int'l as % of stocks), so that's why I used that int'l exposure value.