Diversifying internationally - any balanced exUS Vanguard funds?

[ladybinary]

Hi folks,

I'm 33, childfree, Bay Area, most likely planning to rent for life because I prefer car-free apartment living in walkable areas. I'm living significantly below my means to save for retirement, and starting to get concerned that, without owning property, I'm risking a lot to the market by investing most of my life's savings.

I want to make sure I'm well diversified and have a good chunk in low risk international funds; I'm not sure I am willing to risk my future on the long term stability of US treasury bonds or the long term value of the US dollar. But, while I'm aware of intl stock funds like VTIAX, I can't find a Vanguard fund that focuses on international markets while balancing stock and bonds. Do I need two separate funds for this? I'm trying to keep my portfolio as simple as possible.

For reference, I currently have the majority of my taxable portfolio in Vanguard STAR Fund (VGSTX) which honestly has a pretty great "one fund" style balance of domestic and intl stocks and bonds. I'm very happy with the performance, but it has a pretty high expense ratio of 0.30 so I've been trying to gradually get out of it by not reinvesting dividends. I'm annoyed at the tax hit I get every year from cap gains from that fund as well. But, if that does turn out to be the best bang for my simplistic buck after all, 0.30 isn't terrible compared to other managed balanced funds.

I started putting money in a tax managed balanced fund VTMFX and money market VUSXX, but both are entirely domestic, and I'd prefer more international exposure. I'm looking at maybe VTWAX, since that one at least has lower risk than VTIAX, but I'd prefer even lower risk. I'm hoping to keep things as simple as possible and only buy one more fund if I can, preferably admiral shares. Bonus points for foreign tax credit.

General portfolio advice welcome, especially if there's an alternative to property ownership that isn't the stock market. I've heard of annuities but don't know much about them and it sounds hella complicated to figure out what kind I want. I could do CDs maybe. Time scale is quite long, but I want to keep enough liquid in case I lose my job and can't get work for a year or more. The tech job market sucks right now.

Taxable retirement: work 401k $230k and personal backdoor Roth $75k, both in Vanguard Target Retirement 2055 (currently set pretty high risk); I contribute the max to both every year, no matching unfortunately. We can probably leave these be.

Current taxable portfolio:
- VGSTX 307k
- VTMFX 73k
- VUSXX 15k
Plus a high yield savings account (about 4% yield through Ally Bank) that I keep around 15-20k but will probably start growing in case of job loss.

Thanks in advance!

[retired@50]

I'm not aware of a single fund that holds international stocks and international bonds.

You might need two funds.
For international stocks, consider VTMGX or the ETF version VEA if you prefer an ETF.
You could also use VTIAX / VXUS - but VTMGX is probably a bit more tax efficient.
The difference between these two is the emerging markets component of VTIAX. This tends to reduce tax efficiency.

For international bonds - which are probably best held in your tax-deferred account (if possible) consider VTABX / BNDX.

You're too young for annuities - unless you're replacing a bond fund in your tax-deferred account with a MYGA.

Regards,

[steve r]

I'm not aware of a single fund that holds international stocks and international bonds.

You might need two funds.
For international stocks, consider VTMGX or the ETF version VEA if you prefer an ETF.
You could also use VTIAX / VXUS - but VTMGX is probably a bit more tax efficient.
The difference between these two is the emerging markets component of VTIAX. This tends to reduce tax efficiency.

For international bonds - which are probably best held in your tax-deferred account (if possible) consider VTABX / BNDX.

You're too young for annuities - unless you're replacing a bond fund in your tax-deferred account with a MYGA.

Regards,

THIS.

One idea if is to bump down your Target Date fund, say ten years +/-, not be so aggressive there (as you state you are). That will add international and domestic bonds. Then in your taxable own only stocks (a US index fund and an international fund) and not bonds including the bonds in the balanced index fund. Do some math to figure out how much bonds you have now and just move them to tax deferred.

Perhaps go a smidge lighter on bonds and perhaps a smidge more in typical cash (money market) balances in taxable. (But that is a matter of taste -- as you seem to want some safety.)

[nisiprius]

Balanced ex-US, funds, not that I'm aware of.

But do take note of the LifeStrategy funds, which are approximations to balanced global funds.

LifeStrategy Growth, Moderate Growth, Conservative Growth, and Income are, overall, 80/20, 60/40, 40/60, and 20/80 respectively. And within each fund, the stock holding is 60% US, 40% exUS, while the bond holding is 70% US, 30% exUS.

[Beensabu]

VTMGX really does meet your stated criteria. Currency diversification and tax efficiency without the additional risk of emerging markets. It's a totally reasonable place to direct new taxable contributions or VGTSX dividends.

Vanguard doesn't have an unhedged international bond fund anyway (need unhedged for currency diversification).

The suggestion to hold more bonds in your 401k (by moving to a closer target date fund) in order to avoid holding more fixed income (even if it's tax-managed) in taxable is also a good one.

[ladybinary]

Many thanks for the advice folks! I see the issue - bonds are only tax-efficient if they're local, so taxable accounts should mostly hold US bonds.

I'm buying some VTMGX to diversity my taxable stock holdings, and will probably just park some more cash in VTMFX and/or the money market account. Moving up the retirement date account would be a good idea but alas I have no control over my 401k, and there isn't much money in the Roth, so it doesn't seem worth the effort.

[arcticpineapplecorp.]

Many thanks for the advice folks! I see the issue - bonds are only tax-efficient if they're local, so taxable accounts should mostly hold US bonds.

taxable accounts probably shouldn't hold any bonds unless you really have run out of room everywhere else (other retirement accounts). In that case depending on your tax bracket, munis in taxable could make sense (if you're in a high tax bracket, you'd have to do a tax equivalent yield calculation to know for sure).

[ladybinary]

Yes, I max out both my 401k and my roth IRA every year, and the yearly limits on those don't even get close to what the calculators say I should need in retirement (I'm not confident in social security still existing when I'm retirement age). I still have significantly more in taxable than retirement accounts. (Originally I was saving up for a down payment on a house, but in the Bay Area it's far cheaper to rent the same amount of house than it is to buy, so I'm just keeping everything in taxable that I would otherwise spend on homeownership.) So I consider this money retirement savings as well; and to keep the risk lower, some of it is in VTMFX which is partially tax managed muni bonds.

[SantaClaraSurfer]

Some of what you've written, esp. about taxes and risk, points up to me that, more than any individual investment decision or tactic, you might benefit from thinking about the big picture and your long term goals and then making a comprehensive financial plan.

When you write that you "don't even get close to the what the calculators say that you need to save for retirement" or "I'm not confident in social security still existing" or "I'm annoyed at the tax hit I get every year" or "I want to keep enough liquid in case I lose my job...the tech job market sucks right now"...these are all concerns that people address via selecting an appropriate AA, doing a personalized portfolio construction focused on your long term life goals, and then creating an Investing Policy Statement to keep you on track to get there.

(You might want to check out Ben Carlson of A Wealth of Common Sense blog on these topics.)

Personally, given what you've shared, I'd say you're probably going to have to get more comfortable with holding some fixed income in taxable (ie. likely more than your peers who own houses and don't rent) and with tax smart (versus tax avoidant) investing.

My wife and I rent in the Bay Area. We also hold I Bonds, EE Bonds and multiple forms of Muni Bonds and Muni Money Funds, as well as US Treasuries, as part of our tax smart strategy.

We also track all of our qualified dividends and interest in all our taxable accounts and make quarterly payments to the IRS to account for what we'll owe. It's pretty easy to do and, once set up in a spreadsheet, this process flips the script on the taxes owed in our taxable accounts. ie. I'm always looking at what we earn in dividends and interest after taxes...this is the money our portfolio generates that we use to reinvest and grow our portfolio.

Finally, if you're using the same Vanguard 401(k) calculator that my wife uses to get the "what you'll need in retirement number"...I can only say that when we run the numbers ourselves we're doing much better than that particular calculator indicates. I don't have access to it, but it sounds like it's making the calculation based on maintaining one's current income versus coming up with a targeted goal for our planned needed income in retirement. In my experience, those can be two very different numbers.

[ladybinary]

Sounds like you're very hands-on, which is great! Probably more than I'm willing to be though; I just don't have the mental bandwidth.

What is an AA? Some kind of financial advisor? I've tried googling around for a financial advisor but the ones I see from Vanguard would start at $1400 per year for me ($30 per 10k) which seems a bit excessive. I don't know how to find/select one otherwise. I'd love to have someone just handle this for me, select the funds, do the tax loss harvesting etc, but I have to assume the benefit wouldn't add up to more than the cost. Bogleheads standard philosophy of holding just a few low-cost funds seems to fall in line with that assumption. I'd love to be wrong though because it would be really nice to not have to spend my mental energy on this.

I have no familiarity with what you're mentioning in most of the rest of your post (E/EE bonds, Investing Policy Statement, etc). I've tried a few different retirement calculators but honestly have no idea how to plan for what income I'll need during retirement. I just assume it'll be pretty high since I won't own a home and will presumably have skyrocketing medical expenses (plus in-home care or assisted living in later years, since I'm childfree and won't have family to handle that).

[CommitmentDevice]

You have a sizable net worth, a high salary, and you're young. You've got decent investment knowledge and you're humble enough to own what you don't know. I believe that you'd continue improving your investment decision making with more investment education. There is more "juice in the lemon," so to speak, making it worth another squeeze. Read everything on the Bogleheads wiki. Read one or two Bogleheads books. Read a few other personal finance and investing books. It'll pay off.

[retired@50]

...
What is an AA?
...
Investing Policy Statement, etc).

See the wiki. AA is asset allocation.
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Investm ... _statement

Regards,

[Gaston]

Vanguard doesn't have an unhedged international bond fund anyway (need unhedged for currency diversification).

You make an interesting point here. I've always followed the rule of thumb to hedge currency in international bonds, but not in international stocks. Without hedging, so the argument goes, international bonds become more volatile, something an investor should avoid in their "safe harbor" investments.

Your view is to take the currency risk in international bonds, as well as in international stocks? Which bond ETF do you use for unhedged exposure to international bonds?

[Beensabu]

Your view is to take the currency risk in international bonds, as well as in international stocks? Which bond ETF do you use for unhedged exposure to international bonds?

No, that's not my view. My international bonds are currency hedged. I have plenty of exUS stocks (in mutual funds) that aren't, so that's fine for me.

I was just pointing out that Vanguard doesn't have any unhedged international bond funds, so if currency diversification is the OP's goal, they won't be able to accomplish that with Vanguard's bond funds. Therefore, exUS stocks is good enough and the focus should be on how much they want in exUS stocks to keep them within their desired risk range.

[Gaston]

No, that's not my view. My international bonds are currency hedged. I have plenty of exUS stocks (in mutual funds) that aren't, so that's fine for me.

Thank you for clarifying.