Portfolio Advice

[DermRes]

Hi all,

Looking for general advice on portfolio construction. Current situation: soon-to-grad resident, was able to get by with minimal educational loans (~$75,000), but little/rounding error in terms of retirement savings at this point (~$5,000 in my current residency 401k, plan to convert this to a Roth upon graduating). Bigger shovel to come next year, with a $420,000 starting salary with potential to produce more. Plan to save $110,000 of that for retirement purposes (~26%), will luckily be living in a state without income tax as well. Anticipate in most years will hit the 35% or 39.6% federal tax bracket.

Tax-deferred space:

My 401k ($27,000 with employer match added in)

Wife's 401k ($19,200 with employer match added in)

$6,650 HSA (employer contributes $1,500 free)

$11,000 Backdoor Roth's for myself and my wife

Total tax-deferred space: $63,850

Taxable account (plan to open at Vanguard):Total to taxable account: $46,150

 

Employer has a pretty solid line-up of Vanguard funds available in 401k, so here is my tentative initial investing plan:

85% stocks

42.5% Vanguard Institutional (0.04% ER)

10% Vanguard Mid Cap (0.08%)

10% Vanguard Small Cap (0.08%)

15% Vanguard Total International Stock (0.12%)

7.5% Vanguard REIT Index (0.26%)

15% bonds

15% Vanguard High-Yield Tax Exempt (0.20%, down to 0.12% once >$50k here)

 

Would plan on putting the Bonds in taxable (thus the tax exempt fund), the REIT's in Roth's, and then fill up 401ks/Roth's with stocks. The leftover stocks that "don't fit" will have to go in taxable as well.

 

This is my first crack at coming up with a portfolio, none of it is "real" until August/September, so now is the time to tap into your collective wisdom and get any words of wisdom you all have. Can't wait to hear your thoughts because I am sure there are things I am missing/overlooking!

 

Thanks in advance - this website and community are incredible resources!

 

 

 

[Hatton]

Congrats on completing your residency and landing a great job. I have a couple of suggestions. 1. High yield bonds or junk bonds will behave similar to stocks as will your reits. I would agree with muni bonds in the taxable space. I personally use the vanguard intermediate muni bond fund. Reits and junk bonds are fine but understand they will react like stocks in a bad decline.  You want bonds for diversity and protection in a bad market not for income at your age. I also own VNQ. I think it is a unique asset class.  2. Since you like to slice and dice with vanguard you should look at small cap value (vsiax).  This sector has higher returns so you want to achieve a small value tilt at some point.

[PTM]

I am in similar situation as you, only 3 yrs out of residency and started with a similar slice and dice portfolio concept.  I have gravitated towards the simplicity of fewer funds and asset classes even in my short investing career.  My thoughts:

1.  seriously consider skipping International.  main rationale is that major US companies (ie large cap space) have your built in Int'l exposure already

2.  DEFINTELY change your bond allocation, as Hatton said.  That fund behaves much more like a stock.  Instead take Hatton's advice, I'm in the same fund as s/he is.

3.  Consider simplicity.  How much more "alpha" are you really getting by building in mid cap and small cap?  It adds headaches when it comes time to rebalance.  I ended up just doing VTSAX, which has my mid cap (and international) exposure built in.  I am still doing some small cap but considering letting that go next time we have a downturn and TLH it into VTSAX.

4.  I too hold VNQ in my Roth.  Don't think its a bad idea, and would definitely hold it there if you are holding it at all.

In the end, you'll be fine.  Just make the plan and stick to it.  If you veer from the plan (like I did) make sure its for a valid reason like simplifying, reducing taxes, and not just chasing alpha!

 

[Gas_Doc]

PTM wrote:

1.  seriously consider skipping International.  main rationale is that major US companies (ie large cap space) have your built in Int’l exposure already

2.  DEFINTELY change your bond allocation, as Hatton said.  That fund behaves much more like a stock.  Instead take Hatton’s advice, I’m in the same fund as s/he is.

Click to expand...

I totally disagree with point #1. The rationale doesn't make any sense. First, he's acting like there aren't companies worth investing in that aren't American. Second, the applied rationale could be used to say that by not investing in an international fund, you would be missing out on American purchases of international products. By sticking strictly to US funds, you'd be missing out on profitable companies like Toyota, Samsung Nestle, and Royal Dutch Shell. Plus, International funds don't perfectly correlate with US funds.

 

Like other's have said, I'd use your bond allocation to protect from the swings of stocks. Stick with a total bond market fund like VBTLX. If you feel strongly about a high-yield bond fund, consider doing 10% total bond and 5% high-yield bond.

[PhysicianOnFIRE]

Is the 42.5% Vanguard Institutional an S&P 500 or Total Stock Market index?  They track very similarly, but obviously TSM will give you some exposure to small and mid-caps.

I like some international exposure for diversification and the lower P/E ratio.  They look discounted compared to US stocks. Yes, John Bogle says you can do without, but most Bogleheads like to have some.  Personally, I have 10% of my portfolio in international Developed markets, and 10% in Emerging Markets.

I prefer bonds in the tax deferred 401(k).  Tax-free bond funds often have lower returns than the taxable bond funds. Living in a no-state-income-tax state, tax-free bonds are less advantageous to you than they would be to someone in California or Hawaii.  Also, the bond funds will likely be the slower growing class over the long-term, and if I'm going to have stunted growth anywhere, it might as well be in the bucket that will require RMDs.

You've got a good plan, and the small details aren't all that important.  Far more important will be your savings rate and sticking to the plan. You could easily pay off all your loans and put away $110k this year.  In future years, you should be able to live well and put away $185k or more.  That's a great situation for a new grad, congrats!

-PoF

[PTM]

@Gas_Doc: disagree all you want but I said he should CONSIDER it.  Jack Bogle certainly has.  So have plenty of others

best advice really is to read WCI's 150 portfolio article!

[DermRes]

Thanks for all the feedback everyone, good things to think about already.

 

PoF - yes, plan is to pay off the student loans AND save $110k towards retirement AND start to save up an emergency fund/downpayment/car fund on the side as well. The 42.5% Vanguard Institutional is the S&P 500 Index one, not TSM unfortunately.

 

Reading more into the High-Yield Bond fund, yes, I think now I'm eyeing a fund more like VWITX (Vanguard Intermediate-Term Tax-Exempt).

Also, I am ALL for simplicity over a "slice-and-dice", so here is a new shot at that....

 

New Proposal with Adjustments:

85% stocks

62.5% Vanguard Institutional (0.04% ER)

 

15% Vanguard Total International Stock (0.12%)

7.5% Vanguard REIT Index (0.26%)

15% bonds

15% Vanguard Intermediate Term Tax Exempt (0.20%, down to 0.12% once >$50k here)

 

Questions for you all at this stage:

1) The appeal of using a tax exempt bond fund in my taxable account is that then I don't have to worry about TLH on that chunk of my portfolio at all. Also, since I will spend most of my earning years in the 39.6% Federal income tax bracket and have no state income tax, whatever it earns will be completely tax free. BUT, my question is, would it be better in the long run to allocate even more to stocks? (see #3 below) I'm young with a 30+ year investing horizon in front of me, and understand that when stocks tank it is time to buy more and not panic and sell (thanks, WCI).

 

2) To PoF in particular, could you elaborate more on why you would place bonds in the 401k? I have access to the Vanguard Total Bond Market Index through my 401k, but after reading https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/ I found his argument very convincing to place bonds in a taxable account.

 

3) Anyone think it is unreasonable to push stocks to 90%/bonds to 10%?

 

Again, thanks all.

 

 

[PhysicianOnFIRE]

DermRes wrote:

Thanks for all the feedback everyone, good things to think about already.

 

PoF – yes, plan is to pay off the student loans AND save $110k towards retirement AND start to save up an emergency fund/downpayment/car fund on the side as well. The 42.5% Vanguard Institutional is the S&P 500 Index one, not TSM unfortunately.

 

Reading more into the High-Yield Bond fund, yes, I think now I’m eyeing a fund more like VWITX (Vanguard Intermediate-Term Tax-Exempt).

Also, I am ALL for simplicity over a “slice-and-dice”, so here is a new shot at that….

 

New Proposal with Adjustments:

85% stocks

62.5% Vanguard Institutional (0.04% ER)

 

15% Vanguard Total International Stock (0.12%)

7.5% Vanguard REIT Index (0.26%)

15% bonds

15% Vanguard Intermediate Term Tax Exempt (0.20%, down to 0.12% once >$50k here)

 

Questions for you all at this stage:

1) The appeal of using a tax exempt bond fund in my taxable account is that then I don’t have to worry about TLH on that chunk of my portfolio at all. Also, since I will spend most of my earning years in the 39.6% Federal income tax bracket and have no state income tax, whatever it earns will be completely tax free. BUT, my question is, would it be better in the long run to allocate even more to stocks? (see #3 below) I’m young with a 30+ year investing horizon in front of me, and understand that when stocks tank it is time to buy more and not panic and sell (thanks, WCI).

 

2) To PoF in particular, could you elaborate more on why you would place bonds in the 401k? I have access to the Vanguard Total Bond Market Index through my 401k, but after reading https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/ I found his argument very convincing to place bonds in a taxable account.

 

3) Anyone think it is unreasonable to push stocks to 90%/bonds to 10%?

 

Again, thanks all.

 

 

Click to expand...

I like the Bogleheads tax efficiency page on the Wiki.  To quote:

"Municipal bond funds have a hidden cost; while their interest incomes are not subject to federal tax, they usually earn less than corporate or treasury bond funds of comparable risk. (The risk may be of a different type; intermediate-term municipal bonds have more credit risk than long-term treasury bonds, but less interest-rate risk, and thus may have a similar after-tax yield.) There are special rules regarding the taxation of Social Security benefits - municipal bond interest in a taxable account may result in additional Social Security benefits being taxable. ^{[note 4]} "

WCI's comparison (at least what I read, but I have not read extensively on it) is between bonds in Roth and bonds in taxable.  My bond money goes in neither.  I put it in the 401(k), and I use the Vanguard Total Bond fund, because it is available at Institutional ER in my 401(k). I might go with Intermediate if it were easily available.  When I [early] retire, I'll likely  be transferring the 401(k) to a Vanguard IRA, and then I can choose the bond fund I want at that point.  I'm not saying WCI is wrong; it's just not where I choose to put my bond fund dollars, and I'll admit he has clearly researched it more than I have.

To me, the benefit of bond funds in the 401(k) are threefold.  1. Likely lower long-term returns.  Might as well be in an account that the government is going to tax the heaviest. 2. Likely lower long-term returns.  Keeping the bond fund in the tax deferred space will likely keep my RMD's lower. 3. No need to accept lower returns and less diversification by having to be invested in the tax-free versions, as opposed to total bond or intermediate bond fund.

Oh, and yes, you can absolutely be 90 /10.  That's what I do.  It all depends on risk tolerance, but it appears you've got a long horizon, and a great savings rate, so why not be aggressive.  Johanna is likely to chime in next and tell you not to waste any portion of your portfolio on those crummy bond funds.  

Best,

-PoF

 

[DermRes]

Anybody with major criticisms of this uber-simple portfolio?

1) Fill all Roth's and 401k space with Vanguard S&P 500 Index Fund.

2) Open taxable account at Betterment, set this to 90% stock, 10% bonds and be done with it all.

Extremely low-cost (sure, there is an extra 0.15-0.25% fee for Betterment, but they will TLH and rebalance much more efficiently than I ever will!).

Could all be set-up to happen automatically. If a few years down the line after more researching/reading/financial CME I decide to want to become a "full DYI-er", then I can move the taxable account over to Vanguard.

 

“Our life is frittered away by detail. Simplify, simplify.”
― Henry David Thoreau

[Zaphod]

PhysicianOnFIRE wrote:

DermRes wrote:

Thanks for all the feedback everyone, good things to think about already.

 

PoF – yes, plan is to pay off the student loans AND save $110k towards retirement AND start to save up an emergency fund/downpayment/car fund on the side as well. The 42.5% Vanguard Institutional is the S&P 500 Index one, not TSM unfortunately.

 

Reading more into the High-Yield Bond fund, yes, I think now I’m eyeing a fund more like VWITX (Vanguard Intermediate-Term Tax-Exempt).

Also, I am ALL for simplicity over a “slice-and-dice”, so here is a new shot at that….

 

New Proposal with Adjustments:

85% stocks

62.5% Vanguard Institutional (0.04% ER)

 

15% Vanguard Total International Stock (0.12%)

7.5% Vanguard REIT Index (0.26%)

15% bonds

15% Vanguard Intermediate Term Tax Exempt (0.20%, down to 0.12% once >$50k here)

 

Questions for you all at this stage:

1) The appeal of using a tax exempt bond fund in my taxable account is that then I don’t have to worry about TLH on that chunk of my portfolio at all. Also, since I will spend most of my earning years in the 39.6% Federal income tax bracket and have no state income tax, whatever it earns will be completely tax free. BUT, my question is, would it be better in the long run to allocate even more to stocks? (see #3 below) I’m young with a 30+ year investing horizon in front of me, and understand that when stocks tank it is time to buy more and not panic and sell (thanks, WCI).

 

2) To PoF in particular, could you elaborate more on why you would place bonds in the 401k? I have access to the Vanguard Total Bond Market Index through my 401k, but after reading https://www.whitecoatinvestor.com/asset-location-bonds-go-in-taxable/ I found his argument very convincing to place bonds in a taxable account.

 

3) Anyone think it is unreasonable to push stocks to 90%/bonds to 10%?

 

Again, thanks all.

 

 

Click to expand…

I like the Bogleheads tax efficiency page on the Wiki.  To quote:

“Municipal bond funds have a hidden cost; while their interest incomes are not subject to federal tax, they usually earn less than corporate or treasury bond funds of comparable risk. (The risk may be of a different type; intermediate-term municipal bonds have more credit risk than long-term treasury bonds, but less interest-rate risk, and thus may have a similar after-tax yield.) There are special rules regarding the taxation of Social Security benefits – municipal bond interest in a taxable account may result in additional Social Security benefits being taxable. ^{[note 4]} ”

WCI’s comparison (at least what I read, but I have not read extensively on it) is between bonds in Roth and bonds in taxable.  My bond money goes in neither.  I put it in the 401(k), and I use the Vanguard Total Bond fund, because it is available at Institutional ER in my 401(k). I might go with Intermediate if it were easily available.  When I [early] retire, I’ll likely  be transferring the 401(k) to a Vanguard IRA, and then I can choose the bond fund I want at that point.  I’m not saying WCI is wrong; it’s just not where I choose to put my bond fund dollars, and I’ll admit he has clearly researched it more than I have.

To me, the benefit of bond funds in the 401(k) are threefold.  1. Likely lower long-term returns.  Might as well be in an account that the government is going to tax the heaviest. 2. Likely lower long-term returns.  Keeping the bond fund in the tax deferred space will likely keep my RMD’s lower. 3. No need to accept lower returns and less diversification by having to be invested in the tax-free versions, as opposed to total bond or intermediate bond fund.

Oh, and yes, you can absolutely be 90 /10.  That’s what I do.  It all depends on risk tolerance, but it appears you’ve got a long horizon, and a great savings rate, so why not be aggressive.  Johanna is likely to chime in next and tell you not to waste any portion of your portfolio on those crummy bond funds.  

Best,

-PoF

 

Click to expand...

Frankly the boglehead wiki page makes no sense on municipal bonds. Where is the "hidden" risk? They most certainly DO NOT have similar default risk, and their after tax yields arent even close after considering the default risk differential and to put forth an assertion on a wiki without any numbers or disclaimers saying, "it depends on your marginal rate" etc...is very sloppy. Municipal bonds, even the funds are low beta compared to corporate, their tax adjusted yield is actually far higher than it should be on a risk adjusted basis, ie, highly rated municipal bonds have default rates only rivaled by US treasuries. Interest rate risk is real for all bonds and duration dependent so that is basically the same across your choices anyway and wouldnt be a reason to choose x class vs. y class of bond.

Further, even when Munis default the average collection is 67c/dollar so not bad anyway. There is a lot of info out there on this stuff. Your main issue in the muni bond space are spreads if purchasing individuals and liquidity when buying funds as they arent as heavily traded so you may have to put trades on in advance of when you need the money for sure. For example, I have several GTC orders out on some of my muni funds and have about 50% sold so far, even though many of the funds spent considerable time at my limits not all of them sold without moving the price (tax bill).

You have to separate out regular corporate and country bonds from munis, they are different animals and their position in the portfolio and part they serve is also different, so its incorrect to just lump them together with other bonds in any way. Munis go in taxable, and once you consider your after tax/inflation adjusted return you may be shocked. Its also not difficult to find muni funds with 3-5% yields, which after tax equivalents would be 5-8%, which is pretty nice.

[Zaphod]

I dont think its unreasonable to be 90/10, but I do think you wont have some crazy outperformance to show for it and will have much more risk. This is especially true for sequence of return (last working and first few retired) and very importantly your sustainable withdrawal rate consistency (bonds increase the consistency).

Youre a young doctor, you dont NEED a 90/10 risk profile to achieve your goals, so the risk could easily be viewed as not worth it in the risk/reward equation. Risk adjusted returns, super important. You may be able to take a 30-50% draw down of your portfolio but if you do not have to why? Lots of research recently that has shown an increased exposure to risk/volatility/high beta has not been rewarded to the degree expected by your return. That should give everyone pause, if you can get a similar (or better) return with less gut aches and more predictability/swr/etc you should definitely think about it.

[PhysicianOnFIRE]

DermRes wrote:

Anybody with major criticisms of this uber-simple portfolio?

1) Fill all Roth’s and 401k space with Vanguard S&P 500 Index Fund.

2) Open taxable account at Betterment, set this to 90% stock, 10% bonds and be done with it all.

Extremely low-cost (sure, there is an extra 0.15-0.25% fee for Betterment, but they will TLH and rebalance much more efficiently than I ever will!).

Could all be set-up to happen automatically. If a few years down the line after more researching/reading/financial CME I decide to want to become a “full DYI-er”, then I can move the taxable account over to Vanguard.

 

“Our life is frittered away by detail. Simplify, simplify.”
― Henry David Thoreau

Click to expand...

You'll be >90% stock, obviously (probably >95%), but I don't see that as a problem necessarily.

I have no personal experience with Betterment, but if you're looking to set it and forget it, Betterment might be a good way to go.  Some love it, some don't. If you do decide to go with Betterment, use WCI's affiliate link to show some love.

You will get market returns and outperform many who tinker around and change their allocation frequently.

Love the Thoreau quote.

[Hatton]

I have munis in taxable accounts and BND in my SEP. I will likely retire in about a year so I plan to use the income from the munis as one income source.  I will do a series of Roth conversions over the next 10 years to lower my rmds. POF you likely cannot avoid paying tax on your SS. Your portfolio will be too large .  Derm resident I think it is great that you are looking at this ahead of time. If your primary investment is the s&p fund thru vanguard I think you need some small/mid caps  .they have a fund called extended market that is both sm and mid.   

[PhysicianOnFIRE]

hatton1 wrote:

I have munis in taxable accounts and BND in my SEP. I will likely retire in about a year so I plan to use the income from the munis as one income source.  I will do a series of Roth conversions over the next 10 years to lower my rmds. POF you likely cannot avoid paying tax on your SS. Your portfolio will be too large .  Derm resident I think it is great that you are looking at this ahead of time. If your primary investment is the s&p fund thru vanguard I think you need some small/mid caps  .they have a fund called extended market that is both sm and mid.   " />

Click to expand...

Thanks for weighing in, Hatton1. Congrats on your upcoming retirement; I didn't realize you were that close!

I am sure you are right in your assessment.  IF the current landscape doesn't change much in the next 30 years (who am I kidding?), I will begin taking SS and RMD's and SS in the same year at age 70 and will owe a boatload of taxes on both. If that's the worst of my problems, I will be a happy soul.

[Zaphod]

hatton1 wrote:

I have munis in taxable accounts and BND in my SEP. I will likely retire in about a year so I plan to use the income from the munis as one income source.  I will do a series of Roth conversions over the next 10 years to lower my rmds. POF you likely cannot avoid paying tax on your SS. Your portfolio will be too large .  Derm resident I think it is great that you are looking at this ahead of time. If your primary investment is the s&p fund thru vanguard I think you need some small/mid caps  .they have a fund called extended market that is both sm and mid.   " />

Click to expand...

I think this is my plan as well. Have quite a bit in tax free income so when I retire early I can rollover as much of my portfolio as possible into ROTHs so no RMDs, etc..its a good idea.