Asset allocation and general investing advice

[theplumber]

Hi guys!

I've been following WCI for a couple of years now, but this is my first post on the forum.

Quick background:

I'm almost four years out of fellowship and really trying to get a good handle on managing my own investments.  I'm a physician and my wife is a stay-at-home mom.  So far, I have been able to retire 260k in school loans for both my wife and me, pay off a 17k car and pay my mortgage down to 150k at 2.875% interest.  We currently tithe 10% gross and give another 10% gross.  Our only debt is the mortgage and 26k in car loans at 0.9%.

My current portfolio is as follows:

• Cash $40,000


• Roth IRAs
  VG Emerg Market VEIEX $3,100
  VG Energy VGENX $6,500
  VG All-World Ex US VFWIX  $6,000
  VG Total Stock VTSAX  $37,100
  VG Health Care VGHCX $6,000
  VG Small Cap Value VISVX $3,100


• Profit Sharing Plan
  VG Health Care VGHCX $10,100
  VG 500 VFINX $40,300
  VG Small Cap NAESX $9,400
  Powershares NASDAQ QQQ $20,100
  VG Tot Intl Stock VGTSX $19,100


• 529s
  Home state 529 $37,000

Total: ~$237,800 + house equity

Since we just finished paying off our student loans, we are planning to start opening a taxable account. I plan to convert my mutual funds into ETFs to allow for easier tax loss harvesting, with the exception of the profit sharing plan because those options are fixed and limited. Our goal is to save enough over the next five to six years to allow us to be relatively FI and be free to do mission work and/or live internationally if we choose. I plan to start putting 17k/month in a taxable account at Vanguard. The question I have is: What do you guys recommend for ETFs and allocation?

I am quite risk tolerant and really want to maximize my returns. I’ve been trying to diversify my assets and stick with a plan, but seem to always underperform the 500 index. Also, I have a friend who is urging me to switch to a high quality dividend portfolio by diversifying among individual stocks in companies like Coca-Cola, AT&T, etc. If I am primarily concerned with maximizing my returns and consider a downturn in the market as stocks going on sale rather than a disaster, what type of portfolio would you recommend for maximum opportunity for growth over time? Sometimes it seems like I would do better with 100% VTSAX. Do bonds have any place in my portfolio?

Thanks for your help!!

[Lithium]

theplumber wrote:

Hi guys!

I’ve been following WCI for a couple of years now, but this is my first post on the forum.

Quick background:

I’m almost four years out of fellowship and really trying to get a good handle on managing my own investments.  I’m a physician and my wife is a stay-at-home mom.  So far, I have been able to retire 260k in school loans for both my wife and me, pay off a 17k car and pay my mortgage down to 150k at 2.875% interest.  We currently tithe 10% gross and give another 10% gross.  Our only debt is the mortgage and 26k in car loans at 0.9%.

My current portfolio is as follows:

• Cash $40,000


• Roth IRAs
  VG Emerg Market VEIEX $3,100
  VG Energy VGENX $6,500
  VG All-World Ex US VFWIX  $6,000
  VG Total Stock VTSAX  $37,100
  VG Health Care VGHCX $6,000
  VG Small Cap Value VISVX $3,100


• Profit Sharing Plan
  VG Health Care VGHCX $10,100
  VG 500 VFINX $40,300
  VG Small Cap NAESX $9,400
  Powershares NASDAQ QQQ $20,100
  VG Tot Intl Stock VGTSX $19,100


• 529s
  Home state 529 $37,000

Total: ~$237,800 + house equity

Since we just finished paying off our student loans, we are planning to start opening a taxable account. I plan to convert my mutual funds into ETFs to allow for easier tax loss harvesting, with the exception of the profit sharing plan because those options are fixed and limited. Our goal is to save enough over the next five to six years to allow us to be relatively FI and be free to do mission work and/or live internationally if we choose. I plan to start putting 17k/month in a taxable account at Vanguard. The question I have is: What do you guys recommend for ETFs and allocation?

I am quite risk tolerant and really want to maximize my returns. I’ve been trying to diversify my assets and stick with a plan, but seem to always underperform the 500 index. Also, I have a friend who is urging me to switch to a high quality dividend portfolio by diversifying among individual stocks in companies like Coca-Cola, AT&T, etc. If I am primarily concerned with maximizing my returns and consider a downturn in the market as stocks going on sale rather than a disaster, what type of portfolio would you recommend for maximum opportunity for growth over time? Sometimes it seems like I would do better with 100% VTSAX. Do bonds have any place in my portfolio?

Thanks for your help!!

Click to expand...

Congrats on paying off so much debt and getting well on your way to financial independence.

- To answer your primary question, I don't know enough about you (specifically your age) to recommend a specific asset allocation.  More than likely, you don't really know your true risk tolerance until you've gone through a bear market.  For that reason, bonds have a role for most investors at your stage in your investing career.

- Before opening a taxable account, I'd ensure you're contributing to all the tax-advantaged space available.  I'm assuming that the profit-sharing plan replaces a 401(k) (not being familiar with how profit sharing plans work).  You've set up the Roth IRAs.  Do you have access to HSA's?  Or even 457(b)'s?

- I and most other Bogleheaded minded investors would advise against buying individual stocks, and also the sector-specific funds in which you've invested some of your money.  They entail uncompensated risk.

- Most portfolios have underperformed a 100% S&P 500 portfolio the last 4 years.  On the one hand, that's because it's an excellent, diverse holding.  But the other reason is that US large caps have been the best performing passive investment since 2012.  See the attached chart.  The S&P 500 has been the best performer, and the total stock index (of which large caps make up the vast majority of holdings) is right behind it, and ahead of bonds, small/mid caps and international funds.  The point is that the performance of the past 4 years has little bearing on the next decade or more, and "performance chasing" will likely set you up to buy higher and sell lower -  the opposite of what you want.  So while you probably want a lot of VTSAX or the S&P 500 in your portfolio, try not to let its recent success influence how much you allocate to it.

- If you maintain a strict asset allocation that is appropriately diversified but still geared for growth, it will force you to buy assets that have dropped the most (are "on sale") to maintain the same allocation.  So the important thing is to figure out the right allocation.  The first questions to answer are how much us equity, international equity, and bonds you want in your portfolio, and then decide if you want to slice and dice from there.

[TheGipper]

+1 to Lithium's excellent advice.

Don't worry about taxable account until your maxing out PSP (53k), backdoor Roth IRA, HSA, and using any available defined benefit/cash balance plan on top of PSP.

You may also want to increase and frontload your 529s prior to taxable account investing.

If you invest with Vanguard, there is no reason to switch from mutual funds to ETFs for the purposes of tax loss harvesting.

Most importantly, don't put any stock into short term performance. S&P 500 and large cap growth funds have done well last several years, but this does NOT mean they are superior to your current portfolio. A big part of investing is sticking to your plan. Good luck.

[theplumber]

Lithium,

Thanks for your quick response!  As far as age, I'm in my late 30's.  My profit-sharing plan is getting converted to a 401k, that I'm trying to move to a different brokerage with the permission of the trustees, so that I will have a broader selection of ETFs to invest.  I'm currently maxing it at ~52k/yr, doing back door Roths at 11k/yr and looking into switching my no-deductible health insurance to high-deductible with HSA.  I'm still reticent to add much of a bond component to my plan as long as I am working unless it will likely increase my long-term returns through re-balancing in addition to reducing volatility.  I know that they have their place as a different asset class that is relatively poorly correlated with equities...  What do you think of REITs?

Most portfolios that I've seen people post that are considered "aggressive" seem to be around 10/90 bonds/stocks with the 90% stocks split 80/20 domestic/international.  I admit that I do find myself falling into the performance chasing, but I recently added the VG energy fund in an attempt to do just the opposite...

[theplumber]

TheGipper,

My group does not currently have a defined benefit plan.  I'm wondering if it might be worth talking to my partners about starting one in addition to the 401k.   I've currently been doing monthly contributions to my 529 plans to the limit of the state tax deduction for each of my kids from both me and my wife.  I haven't funded them beyond that...  What is the benefit of front loading?

The only reason I was thinking of switching to an ETF in my tax sheltered accounts is so that my funds don't automatically reinvest the dividend and result in a wash sale when I tax loss harvest in my taxable brokerage account.  I'm trying to figure out how to best reinvest my dividends while still allowing effective tax loss harvesting.  I've not dealt with a taxable account thus far.  I'm spending this coming week trying to hammer out my long term plan so that I can set it in motion and stick with it...

One dumb way that I counter the urge to fiddle with my investments is that I have ~1.5k still in a Fidelity Roth that I have invested in Exxon, Costco, ADM and a couple other individual stocks.  I use that account to play with if I start feeling the desire to research and mess with individual stocks, while sticking to the plan with all of my "real" assets.

[Zaphod]

Agree that chasing performance from the last couple years is a poor prognosticator for returns 30 years from now. I dont think there is anything wrong with a small (and yours are) allocation to certain sectors you may want to be over weight for any reason. However, regarding all the various cap wt growth/value etc...usually there is tremendous overlap and its plain redundant. Just buy the IWM (russell 2000) and be done with it. Ive attached a sector and asset quilt so you can see how these jump around and whats done well over the longer term. JP Morgan investor book is absolutely excellent if you want some all around data.

Yes you should probably have some bond allocation, especially since its highly unlikely you'll be rewarded with the risk premia you would deserve to require an all equity portfolio. Historically, high volatility assets do not deliver the premia expected or what should be required to hold them, and low volatility assets deliver higher returns than should be justified (that is US bonds have outperformed stocks for the last 5 years, which makes no sense given the differences in risk). Theres a lot of nuance and behavioral factors as to why that is, but its true. Your goal should be the highest risk adjusted returns possible, this will limit your sequence of returns risk, which is super important in your last 10 years working and first 5-10 drawing down. A lower volatility portfolio will provide a more sustainable and predictable withdrawal rate.

In reality we should find the perfect portfolio based on risk adjusted returns, and depending on the overall return whether or not it meets our goals, lever it up until it does so. This is in a very cliff not non nuanced description of risk parity. Basically, everyone over estimates their risk profile and misunderstands risk adjusted returns.

[theplumber]

What do you guys think of this portfolio idea?

 

Equities
VTI 40%
VXUS 20%
VDE 5% for now...  If energy recovers, I'll move it into VTI
VTWO 5%

Bonds
VTEB 5%
BND 15%

REIT
VNQ 10%

I could keep the REIT and BND in tax sheltered accounts and re-balance my taxable account with contributions and dividends.

[Zaphod]

Im not familiar with all of those funds, though I have VTI/VNQ and have VDE on a watchlist, nothing wrong with buying things near multi year lows. Emerging markets are also very low PE right now. I also have VHT the healthcare etf, it should be an obvious tilt for obvious reasons and think its a great sector.

Just focus on your overall stock:bonds mix, then start hasing it up however you like. In the end stocks are stocks and mostly correlated with each other unless you get very specialized.

[Lithium]

theplumber wrote:

What do you guys think of this portfolio idea?

 

Equities
VTI 40%
VXUS 20%
VDE 5% for now…  If energy recovers, I’ll move it into VTI
VTWO 5%

Bonds
VTEB 5%
BND 15%

REIT
VNQ 10%

I could keep the REIT and BND in tax sheltered accounts and re-balance my taxable account with contributions and dividends.

Click to expand...

That seems like a pretty solid allocation.  Though I'm curious why you chose VTWO, instead of VB?  Is it cheaper to purchase in your particular plan, or do you prefer it over VB because of size and/or other metrics?

I have 10% REITs (SCHH + VNQ) in my portfolio as well.  But I try to keep my portfolio 10% overall REITs, which means I don't need nearly as much of the REIT ETFs since many of the others I hold (such as VB) have more than 10% REITs.  Overall if I could have done things differently I would just keep ETFs at the market weight rather than add the extra complexity, but I have maintained about $60,000 of REIT ETFs in my portfolio so as not to deviate from the portfolio I decided on a few years ago.

[PhysicianOnFIRE]

I'll give you my standard answer, which is You need an IPS.  It looks like you're well on your way, and the proposed asset allocation should be fine.  At your age and risk tolerance, anywhere in the range of 100 / 0 to 75 / 25 stock / bond ratio would be appropriate.

I don't think ETFs make tax loss harvesting any easier.  WCI actually had some issues with settlement dates affecting his tax loss harvesting attempts.  You can turn off the reinvestment of dividends / capital gains with mutual funds just as easily, and exchange directly from one mutual fund to another.

What you want to do, whether using ETF or mutual funds is set Specific ID as your cost basis in the taxable account, and turn off auto reinvestment.  I advocate carrying non-identical funds in tax deferred & Roth to avoid wash sale issues.  If you carry identical funds in taxable and elsewhere (VTI is generally considered identical to VTSAX), you may run into issues.

Great job so far, by the way.  You've gotten some very sound advice above from our friends here on WCI.

[PhysicianOnFIRE]

theplumber wrote:

Hi guys!

I’ve been following WCI for a couple of years now, but this is my first post on the forum.

Quick background:

I’m almost four years out of fellowship and really trying to get a good handle on managing my own investments.  I’m a physician and my wife is a stay-at-home mom.  So far, I have been able to retire 260k in school loans for both my wife and me, pay off a 17k car and pay my mortgage down to 150k at 2.875% interest.  We currently tithe 10% gross and give another 10% gross.  Our only debt is the mortgage and 26k in car loans at 0.9%.

My current portfolio is as follows:

• Cash $40,000


• Roth IRAs
  VG Emerg Market VEIEX $3,100
  VG Energy VGENX $6,500
  VG All-World Ex US VFWIX  $6,000
  VG Total Stock VTSAX  $37,100
  VG Health Care VGHCX $6,000
  VG Small Cap Value VISVX $3,100


• Profit Sharing Plan
  VG Health Care VGHCX $10,100
  VG 500 VFINX $40,300
  VG Small Cap NAESX $9,400
  Powershares NASDAQ QQQ $20,100
  VG Tot Intl Stock VGTSX $19,100


• 529s
  Home state 529 $37,000

Total: ~$237,800 + house equity

Since we just finished paying off our student loans, we are planning to start opening a taxable account. I plan to convert my mutual funds into ETFs to allow for easier tax loss harvesting, with the exception of the profit sharing plan because those options are fixed and limited. Our goal is to save enough over the next five to six years to allow us to be relatively FI and be free to do mission work and/or live internationally if we choose. I plan to start putting 17k/month in a taxable account at Vanguard. The question I have is: What do you guys recommend for ETFs and allocation?

I am quite risk tolerant and really want to maximize my returns. I’ve been trying to diversify my assets and stick with a plan, but seem to always underperform the 500 index. Also, I have a friend who is urging me to switch to a high quality dividend portfolio by diversifying among individual stocks in companies like Coca-Cola, AT&T, etc. If I am primarily concerned with maximizing my returns and consider a downturn in the market as stocks going on sale rather than a disaster, what type of portfolio would you recommend for maximum opportunity for growth over time? Sometimes it seems like I would do better with 100% VTSAX. Do bonds have any place in my portfolio?

Thanks for your help!!

Click to expand...

I failed to address the dividend approach. It might work very well for your friend, but having a high income, dividends are a tax drag.  You want growth and return.  Qualified dividends are taxed at your capital gains rate, which can be north of 30% depending on your taxable income and state tax.

Index funds like Total Market and S&P 500 give out only qualified dividends, currently about 2% per year.  Taxes reduce your total return by ~30% of 2% or 0.6% per year (could be as low as 15% of the dividend if taxable income <$250k and no state income tax) of the dividend.  If you have a stock with a 6% dividend, your total return is reduced 3 times as much, or 1.8% in the 30% example I gave.  I've actually thought about having some 0 dividend equity exposure in taxable.  Berkshire Hathaway stock would fit the bill and give me some diversity.