Help with asset allocation and location

[Ds2660]

Hello All,

Looking for input/opinions on my asset allocation and then location, as well as what the best way to implement the changes.

I decided on a 75/25 stock ratio as I am a young investor and don't want to overestimate my risk tolerance, divided as below:

International (25%)

VFWAX (Intl-US)-20%

VEMAX (Em Markets)-5%

US (50%)

VTSAX (Total US)/VFIAX (S&P)-25%

VSIAX (Small Cap Value)-10%

VMVAX (Mid Cap Value)-5%

VGSLX (REIT)-10%

Bonds (25%)

VWITX (Intermediate Term Muni)

 

Right now, I have my Roth, my wife's Roth, and a taxable account, each containing about 1/3 of my invested money.  They are all invested in the Vanguard S&P right now, but going forward, I will be investing in the Total US fund.  Those 2 funds will ideally comprise 25% of my total portfolio.  I will also have a 401k starting in 2017, however my contribution (18k) will be a lump sum toward the end of the year from an upcoming bonus, and the employer contribution (36k) will be a lump sum next March.

 

I'm not sure what the best (ie most tax efficient) way to make these changes is.  The value index funds and Reit will be in a Roth, so no problem there.  It makes the most sense to me to have my bond allocation in munis in the taxable account, but I'd rather not realize the capital gains from the s&p fund in the taxable account now.  Also, not sure where the best place for the international index is.  Probably minor issues but interested to hear what others think.  My thought on the bonds is my options are to: 1. Be patient, and just preferentially contribute new money to the munis in taxable until they reach their desired percentage. 2. Realize the capital gains (as minimally as possible) and buy the right amount of bonds. or 3. Buy bonds in Roth or in upcoming 401k contribution (not munis of course), and plan to exchange them for equities once I have the cash to buy them in the taxable account.  1 and 2 seem most reasonable to me.

Thanks for the input!

[Lithium]

It seems like you have the most important "rules" correct, which are to not put REITs in taxable and either use tax-free bonds in taxable or buy taxable bonds in your 401k.

Other questions to consider:

1.  What are your 401k options?  Especially with bonds?

2.  What is your state tax?  Because you will likely pay state tax on municipal bonds (unless you buy one for your state).  This is one of the main reasons I avoid them.

3.  Are you going to be doing TLH'ing?  All other things being equal, I try to put the classes that are most amenable to this in taxable.  EM in the long run is the most volatile of your asset classes, besides maybe REITs.

 

 

[PhysicianOnFIRE]

I like your choices and setup. You could go lower on bonds, but if you're unsure how you'll respond to a bear market, I can't argue with 25%.

My entire bond allocation is in the Vanguard Total Bond Fund in my 401(k). There's nothing wrong with munis in taxable, but I prefer to have bonds in a tax deferred account.

Why? Non-muni bonds are not tax efficient. Bonds have an expected lower long-term return, so they might as well be in the account which I will be paying full income tax on and required to take RMDs from (if I haven't converted all to Roth by then).

Best,

-PoF

[Ds2660]

1.  Bond options in 401k are Templeton Global Bond (ER .56) FBNRX, Metropolitan West Total Return Bond (ER .44) MWTIX, Ridgeworth Seix High Income I (ER .79) STHTX (junk bond fund), DFA Inflation protected securities (ER .12) DIPSX.  Think the DFA is the only one I would invest in.  Stock options are good with the same vanguard funds I have as options.

2.  State tax is 4.25%.  I don't know of a state bond fund, or at least don't have access to it.  Would have to buy individual bonds, and am not planning on doing that.

3.  I would like to TLH.  Putting EM in my taxable seems like a good idea for foreign tax credit and TLH, no?

Thanks for the reply.  Where do you think the best place for international is for me?  The international options in my 401k have fairly high ER (.5-.94) compared to vanguard.  I'll be making partner in 1.5 years, and that will drastically increase my income, so I will likely have 50-100k for my taxable account (after filling Roth, 401k, defined contribution plan, HSA) at that time.

[DMFA]

Ds2660 wrote:

1.  Bond options in 401k are Templeton Global Bond (ER .56) FBNRX, Metropolitan West Total Return Bond (ER .44) MWTIX, Ridgeworth Seix High Income I (ER .79) STHTX (junk bond fund), DFA Inflation protected securities (ER .12) DIPSX.  Think the DFA is the only one I would invest in.  Stock options are good with the same vanguard funds I have as options.

2.  State tax is 4.25%.  I don’t know of a state bond fund, or at least don’t have access to it.  Would have to buy individual bonds, and am not planning on doing that.

3.  I would like to TLH.  Putting EM in my taxable seems like a good idea for foreign tax credit and TLH, no?

Thanks for the reply.  Where do you think the best place for international is for me?  The international options in my 401k have fairly high ER (.5-.94) compared to vanguard.  I’ll be making partner in 1.5 years, and that will drastically increase my income, so I will likely have 50-100k for my taxable account (after filling Roth, 401k, defined contribution plan, HSA) at that time.

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The DFA fund is TIPS.  They don't tend to earn well and are best for preservation of capital without interest-rate risk.  If you *do* want TIPS, though, then DIPSX is solid.  I made a similar post on another thread tonight about one of Metro West's similar funds.  MWTIX, despite being an active fund, has a very good mix of bonds, high credit quality, a lower fee than most active bond funds, and return in 6%ile and 3%ile over 5 and 10 years respectively (with the same fund managers).  IMO the add'l 0.4% in fees and keeping it in the 401(k) (not even accounting for better returns) is a better deal than putting VBTLX in Roth or going munis in taxable.  If you don't want to use any active funds whatsoever, then you should consider using municipal bonds in your taxable account, probably VWITX (or VWIUX if you've got $50k).

Are there not municipal bonds in every state?  You might not find a full bond *fund* in each state, but you can still buy the individual bonds, which some may reasonably argue is superior.  There are AAA-rated 5% long-term munis in Texas, which doesn't have have state income tax.

You could do EM in taxable.  You should get that foreign tax credit and could TLH it with other int'l funds other than plain EM as long as they're not substantially identical.

[Lithium]

Overall sounds like a good plan.  If stock options are the best available in your 401k, then I agree it makes sense to invest in those and go with the muni fund unless you want some TIPS.

I think international is fine to put in taxable.  Once you have the big things right (bonds and REITs) it doesn't make too much difference.  Many like to stress that it is better to put international in taxable to take advantage of the foreign tax credit, but in reality this is only a small factor that improves tax efficiency, while annual dividend volume and QDI ratios tend to be much bigger factors.  These can vary far and wide between different funds within and among asset classes, so there are no hard and fast rules that are easily generalized.  As a result Vanguard's international funds aren't all that tax efficient (I prefer Schwab and ishares ETF's).  VFWAX has a QDI ratio of 0.76, which is okay but not that great.  The total stock market fund and mid-cap value fund have QDI ratios of about 0.93.  The small-value fund is about 0.75.

Basically, of the funds you have, I think Muni Bonds, EM, Large Cap, and Mid Cap Value are best suited for the taxable account, then SCV and International are basically a wash, followed last by REITs.  Though if you want to put international in taxable instead of domestic it doesn't matter very much.