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  • Beginner portfolio advice

    I'm new here and only started seriously reading about and creating a portfolio the past week. I'm hoping to get some advice and feedback on whether I'm understanding things correctly and if this is a reasonable plan. Thanks in advance!
    Overall I have 3 accounts - Roth IRA, 401k, and a taxable account. I plan to open an account with Vanguard for the taxable account and Roth IRA.
    If it matters, I am 35 and hoping to be financially independent early (around age 55).
    I was planning on an Asset Allocation of 75% stocks and 25% bonds:
    43% Total Stock Market Index - (VTSAX)
    25% International Stock Index - (VTIAX)
    7% REIT Index - (VGSLX)
    25% Bond Index - (VBTLX)

    I was thinking of allocating the money to something similar to this. Let's say I have about $500k total.
    Roth IRA (12% of total portfolio - $60k):
    7% REIT - $35k
    5% Bond index - $25k

    401k (23% of total portfolio - $115k):
    20% Bond - $100k
    3% Total Stock Market Index - $15k

    Taxable account (65% of total portfolio - $325k):
    40% Total Stock Market Index - $200k
    25% International Stock Index - $125

    Does this make sense?

    Moving forward, I will be putting most of my monthly extra income into the taxable account - let's say about $10k/month into the taxable and $1500/month into 401k. I would keep this 75/25 balance by making all the 401k additions into bonds and adding a bond index in the taxable account?

    Also my 401k investments are limited.  The lowest expense ratio bond investment is NATIONWIDE BOND INDEX FUND - GBIAX at 0.68.  There is also an S&P500 index fund BLACKROCK S&P 500 INDEX INSTL - BSPIX at 0.11.  Does this affect how much bonds to put in my 401k?


  • #2
    Pretty decent plan.  IMO that's quite a bit of bonds for being 35 - but if you want that added bit of stability for your overall investing plan at the expense of less exposure to higher-earning equities, that's OK.  If you're planning on quitting in 20 years (2037), just for reference, the average target date 2035 funds have 15% bonds and 2040 have 10%, so if you're planning on retiring then, their fund managers would seem think 25% bonds is high.  Either way, depends on your specific plans/goals.  Purely my opinion.  WCI and PoF (who seems like your kind of guy) would say you need a "personal investing statement," basically solidly outlining exactly what you want your money overall, and specifically your portfolio, to do for you over time and how you want it done.

    As for where to put each allocation, esp vis-a-vis your 401k options, it's generally best to choose the "least bad" option therein, or use a DIY brokerage option (you may not know if your plan may allow for one).

    • BSPIX is not a bad 500 fund, twice the ER of VFIAX for instance, and 500 funds can reasonably fit p much anywhere as far as taxable, tax-deferred, and tax-free since they're high-earning with low turnover and dividends.

    • GBIAX, imo, I could do without, despite active management it's bottom-quarter in its category at 1/5/10 years, nowhere close to being worth 0.67%. Contrast that to VBTLX at 1/11th the cost, basically dead-on average in its category with r² = 0.99 (exactly mirrors the index).  The prevailing attitude is that hitting the index is "good enough" - which imo it clearly is, since many actively-managed funds tend not to be able to do it

    • What mid/small-caps are available in the 401k to round out the large-caps of the 500 fund?  Usual blend for TSM funds (e.g. VTSAX) is about 70/20/10, while BSPIX and other 500 funds are usually 86/14/0, so a 4:1 ratio of 500 to an "extended market" fund such as VEXAX (5/45/50) will basically mirror TSM.  You can further weight large or mid/small if you like.  If you don't have a small-cap fund in your 401k, then use a small-cap fund elsewhere like VSMAX or VTMSX (esp the latter if in taxable).

    If your bond options are lousy, you can consider doing tax-exempt municipal bonds (e.g. VTEAX) in your taxable, or if you're moved by WCI's "bonds go in taxable" post from a few years ago, you can do that (less earnings from bonds = less lost to taxes anyway, but with "phantom tax" when the fund turns over bonds).  Note that for that tax exemption, many muni funds grow less than total bond index funds.

    The only really good place for REIT funds is in Roth due to their tax inefficiency and high earnings; bonds can go in Roth, too, but then you're missing out on having large untaxed gains from equities like stocks and REITs.  This isn't congruent with your particular situation since you want 25% bonds, don't have a lot of Roth space, and your tax-deferred seems to have lousy bond options.

    Basically, if you want the bonds badly enough, you're probably better off eating the lousy ER and keeping it in the tax-deferred fund than missing out on Roth space for higher-earning equities.  Otherwise, if you can fit some into the Roth and the rest in munis in your taxable, I'd consider that.


    • #3
      Thanks for the quick reply!  I will read it in more detail a little still at work now.  But figured I'd add a list of my 401k investment choices.  I put the expense ratio to the left.  Is there anything good here??  All the expense ratios look high.


      0.98 - AMERICAN GROWTH FD OF AMER R3 Core RGACX $42.81
      1.16 - BLACKROCK HL SC OPP A Core SHSAX $45.48
      0.11 - BLACKROCK S&P 500 INDEX INSTL Core BSPIX $271.12
      1.39 - GOLDMAN SACHS SMALL CAP VAL A Core GSSMX $55.81
      1.28 - INVESCO ENERGY FUND A Core IENAX $28.02
      1.25 - INVESCO REAL ESTATE FUND A Core IARAX $20.99
      1.22 - IVY SCIENCE Core WSTYX $55.29
      0.72 - MASS. INVESTORS TRUST Core MITTX $28.60
      0.90 - MFS VALUE FUND CL A Core MEIAX $36.40
      1.22 - PRINCIPAL MIDCAP FUND A Core PEMGX $22.60
      0.40 - BLACKROCK INTERN INDEX A Non-Core MDIIX $11.87
      0.31 - STATE STREET RUSSELL SML CAP D Non-Core FYKQT $18.73
      1.68 - WELLS FARGO ASIA PACIFIC FD A Non-Core WFAAX $11.88

      0.81 - JANUS FLEXIBLE BOND FD CL A Core JDFAX $10.28
      0.93 - PIONEER BOND FUND Core PIOBX $9.62




      • #4
        I don't have too much to add to the excellent reply above, but if you don't have any good bond options in your 401k (and 0.68% is way too high an ER for a bond fund IMO) and you are in a high tax bracket, I would just get tax-exempt bond funds in your taxable account.  Here's a good one at Vanguard:

        If I were you, I would do something like this.  Considering that none of your other 401k options are as good as what you can get in your Roth IRA or taxable account and you can still make your portfolio without them, I wouldn't use them.


        7% REIT

        5% Extended Market


        23% BSPIX


        25% Total International

        25% Tax-Exempt Bond

        15% Total Stock Market (could change maybe break this up a small amount of extended market and a large amount of total stock market.  As DMFA mentioned, TSM = 4:1 ratio of BSPIX and extended market).




        • #5
          Solid plan, and of course, good advice from respondents.

          All I have to add is to avoid holding anything "substantially identical" to Total Stock Market and Total International in your non-taxable accounts. It makes avoiding wash sales really easy if you want to (and you will want to) do some tax loss harvesting.

          S&P 500 is a decent substitute for TSM. It's missing small caps of course, but tracks very closely to TSM. Correlation is something like 0.98 or 0.99.





          • #6
            How could I leave out VWIUX...only 5% below A, average weighted coupon 4.6%, good intermediate term (two-thirds between 7 and 20 years), consistently in the top third among intermediate muni funds, dirt cheap...great choice for taxable accounts if you've got $50,000 to put into it (VWITX isn't bad for 0.19% if you don't).  Munis had a bad year in 2016 (esp Q4) so try not to fall into a gambler's fallacy with some of the recent returns.


            • #7
              Wow, thanks for all the great advice!  Glad to know I'm on the right track.  I'll have to take some time to look into all this and followup.


              • #8
                I'm a newbie here too (I've been around for the last couple of months or so). Your plan is perfectly acceptable from everything I've been reading. I personally dont plan on using so much international exposure because I like what John Bogle says about international (basically that its unnecessary because so much of the US economy is intimately intertwined with international markets already, but that 10-20% exposure wont hurt). So I only have 10% international stocks and 10% international bonds.
                Otherwise it seems like the key is to just stick to a plan. That seems to be more important than anything else. No one knows which portfolio will perform best over the next 30 years, but it is very clear that trying to time the market or make frequent changes is a guaranteed way to underperform. At least that's the underlying message I've been hearing so far.


                • #9

                  what John Bogle says about international (basically that its unnecessary because so much of the US economy is intimately intertwined with international markets already, but that 10-20% exposure wont hurt
                  Click to expand...

                  That's a common argument made over on Bogleheads and elsewhere. I personally don't buy it. Yes, int'l developed markets have been becoming more highly correlated with the US market, but EM and int'l small are not. Sometimes int'l does well when US does not and vice versa--that's diversification and one of the only free lunches out there. I'm sure some Japanese investors held similar thoughts and invested 0% internationally (i.e. 100% in Japan) back in the 1980s. I bet those folks wish they had diversified away single country risk, eh?


                  • #10
                    I would echo DMFA about the high level of bonds at such a young age. Just realize at that level, and possibly thinking about early retirement you are severely handicapping your terminal wealth and increasing your chances of failure, aka running out of money. Try starting smaller and building into an allocation over time that fits the end stage better. Its obviously your decision and life, but things to think about.

                    Its all too common to start investing too risk averse, then move to too risky after you realize this to only get burned and be super risk averse all over again.

                    All those funds look terrible ER wise, is there a brokerage option that would allow you to buy Schwab, Vanguard or Fidelity funds?


                    • #11
                      Thanks for all the input!  I've been a bit busy with call so haven't been able to research things more.  I really like the advice about keeping somewhat different funds for tax loss harvesting purposes.

                      I had the 25% bond ratio based on the advice on this site from WCI where he quoted Benjamin Graham saying "you should never have more than 75% of your portfolio in stocks, nor less than 25% of the portfolio in stocks."

                      My understanding of bonds is pretty limited and I still have much more to learn about it.  I would definitely be willing to do a lower percentage of bonds.  From my limited understanding, interest rates are at an all time low now and will only go up, which would further decrease the bond yield?  I also did notice the Vanguard 2045 fund only had 15% bonds.  So maybe 15-20% bonds?  I am in NY - how would a Vanguard NY Municipal Bond fund like VNYTX compare to the other bond options above?

                      My 401k is with Merrill Lynch and they have an option with a self-directed brokerage - I couldn't find too many details about it.  Will have to look into this more.


                      • #12
                        Going with the New York fund sounds like a solid choice.  It is cheap and will save you a substantial amount of state income taxes.  But you may be able to get a very cheap taxable bond fund/etf in your self-directed brokerage.

                        I don't think there is anything wrong with having 25% bonds.  It seems like insanity now that we're seven years in to a bull market.  If the market were to drop 30%+ in the next year I'm sure more than a few people would suggest you be more careful.  Your allocation is your age - 10 in bonds; by most objective standards that is slightly on the aggressive side. If you are just starting out, you don't want to overestimate your risk tolerance.

                        Definitely figure out the details of the self-directed brokerage.  It is likely the best deal in your 401k.