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Help with my first passively managed portfolio

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  • Help with my first passively managed portfolio

    I have about $40K dollars to invest that will mostly be in a solo 401k at Charles Schwab by next month. I am a 30 year old physician. Due to the my small pot of money, there was only one vanguard fund I could invest in with Admiral. The expense ratios (ER) in the Schwab accounts seem to be lower than the Vanguard Investor. Can some of you look at the portfolio I have made up and see if this is reasonable and what suggestions you may have?

    • 60% Equities

      • 30% US Stock Market

        • Vanguard Total Stock Market Index Fund Admiral Shares

          • VTSAX

          • ER 0.04%

          • $10,000 minimum, $1 for more

          • $12,000

      • 15% Small US Stocks

        • Schwab Small Cap Index Fund

          • SWSSX

          • ER 0.05%

          • $1000 minimum, $1000 for more

          • $6000

      • 15% International Stocks

        • Schwab International Index Fund

          • SWISX

          • ER 0.06%

          • $1000 minimum, $1000 for more

          • $6000

      • 5% Small international Stocks

        • Vanguard International FTSE Small Cap ETF

          • VSS

          • ER 0.13%

          • no minimum

          • $2000

    • 10% REITs

      • 10% REITs

        • Vanguard REIT ETF

          • VNQ

          • ER 0.12%

          • no minimum

          • $4000

    • 25% Bonds

      • 10% TIPS

        • Schwab Treasury Inflation Protected Security TIPS

          • SWRSX

          • ER 0.05%

          • $1000 minimum, $1000 for more

          • $4000

      • 15% Total US Bond Market

        • Vanguard Total Bond Market Index Fund Investor Shares

          • VBMFX

          • ER 0.25%

          • $3000 minimum, $1 for more

          • $6000

  • #2
    What do you want your portfolio to do? How do you want it to do that?

    That's a lot of bonds, esp a lot of TIPS. That's a high weighting of small caps, too - VTSAX is 70/20/10, which basically gives you just over a third in small, more than 3x of "usual." If you want those things, that's fine.

    So figure out exactly what you want your portfolio to do, and then you can go from there. People call this an "investing policy statement."

    What other accounts do you have available beyond just an individual 401(k)? I imagine you probably have an IRA as well?


    • #3
      I think your allocation is fine.  If I had to pick a few nits, here's where I'd start:

      Equities:  You have small caps at ~1/3 of your total equities.  Not necessarily a bad thing, especially to take high risk on the equity side if you're carrying 25% bonds.  But then I noticed that you have "small" international at 1/4 of your total international allocation.  I put "small" in quotes because VSS is more of an international mid cap than small fund.  So your US equities are tilted smaller than your international equities.  If I were you, I would just see if you can explain why you've done that.

      Schwab's international fund is great and low cost, but this is going to leave you significantly underweight in emerging markets, which it basically doesn't have.  If EM is something you want exposure to, buy Vanguard Total International (VXUS) or buy EM separately (SCHE, VWO).

      Noticed you are buying the ETF seemingly to save on ER in a few cases (VNQ, VSS) but not with the total bond market fund.  You can get a cheap ETF through Schwab (SCHZ) or Vanguard (BND).  Some suggest not to buy them due to liquidity issues.  SWAGX is the MF at Schwab, but it is pretty new.

      I wouldn't pay to purchase Vanguard's REIT at Schwab, when they have one (SCHH) that is probably just as good and has an ER of 0.07%.


      • #4
        I was trying to go by either the 75/25 rule or the 100 minus your age (which would put me at 70/30). I also wanted to tilt to be slightly more aggressive in my early years. I had an IRA but its was all rolled into thei solo 401K this year so that I can back door to a Roth IRA this year. Also, opening HSA this year.


        • #5
          Both of those rules end up being very under-aggressive for someone who can hold through market troughs and who has decades before needing to withdraw the money. That's more advantageous in equities. Higher bonds later in life (closer to retirement) are often done to mitigate sequence of return risk due to generally lower volatility, and fixed-income holdings (like bonds) are useful for generating income without selling securities.

          TIPS, on the other hand, are basically what the name implies: they're mostly just for keeping up with inflation. With that particular fund SWRSX, average coupon is 0.88%, so you'll beat inflation by about a percent. That's suboptimal when you have decades to grow/recover. Now, if you're retired and have lots of fixed-income securities whose value doesn't increase with inflation, your risk is much higher, and TIPS become more advantageous to the portfolio as a whole. Do you kind of see what I'm going with asking questions like "what do you want, and what do you want it to do?"

          That being said, most young people decades from retirement who will buy-and-hold don't have much to gain from bonds while dampening their equity returns. Many heavier-bond advocates are from a time when bonds had higher real inflation-adjusted gains.

          Good call on Roth and HSA.

          Again, your bond allocation is not necessarily wrong. Ideally, you will eventually have a reason that is beyond "well, I followed X rule-of-thumb," and that's fine. I think you'll learn a lot from receiving many different yet not necessarily incorrect opinions from this board. There's a general trend of low- or zero-bond portfolios along the younger posters here, so you might get that prevailing feedback.


          • #6
            You're too young to have any bonds. This is 40k of what will eventually be a much larger, multi-million dollar portfolio one day. This is 40k. That is smaller than either of your equity or bond allocations in the future. Its a huge over complication to worry about splitting it up now. Just put it in an extended market fund, start to worry about your bond allocation when you've neared your equity fill (figure out a rough estimate of retirement number as a guide) and are closer to retirement.


            • #7
              Since you'll be with Schwab, there's no reason to use Vanguard funds. There are transaction costs/commissions associated with buying Vanguard funds at Schwab. I would switch out your Vanguard funds for the following Schwab options:

              Total Stock Market: SWTSX (ER = 0.03%) or SCHB (ER = 0.03%)

              Small Cap International: SCHC (ER = 0.12%)

              REIT: SCHH (ER = 0.07%)

              Total Bond: SWAGX (ER = 0.04%) or SCHZ, (ER = 0.04%).



              • #8
                Agree with alot of folks here, you are too young to worry about bonds within your asset allocation.  I would also look to keep your allocation very simple.  You will have an income to invest over the long term, so though 40K is a lot of money, hopefully it will be a fraction of your total retirement in the relatively near future.  My suggested allocation:

                Total Stock (50%)- VTSAX or SWTSX

                Total International (40%)- VTIAX or SWISX

                REIT (10%)- VNQ or SCHH