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  • Need help with asset allocation

    I am hoping to get some quick input on asset allocation in my retirement accounts.  Honestly I have never taken this matter seriously enough, but now that I have all of my other financial and life planning ducks in a row, and amounts in the accounts are becoming more significant, I need to give this some thought.  And if I am off base even asking or what am I doing seems like a mess and you guys feel that I really need to sit down with someone to go over things for a one time fee, let me know.

    Basics about me: 39, married, essentially no debt besides the mortgage (will finish paying off loans very soon), employed with a 457 plan, accumulating pension from the State as well, self-employed and maxing out a solo 401k plan (started that only about two years ago, so current amounts in 457 and 401k are about the same), going forward will continue to max out all options, doing a backdoor Roth, 529 plans, wife now not working but will likely go back to part-time self-employment to put in something into her solo 401k plan as well.  Emergency savings in an online savings account with 1% interest.  At this time I have no bonds at all in my portfolio - something I have questioned and am not sure, considering having a tax exempt bond fund in my after tax savings account.

    My 457 plan:  I basically picked what I thought was most reasonable (and lowest fees out of what's available through the NYS deferred comp plan), see below for breakdown, I don't think there is much that needs to be fixed there, again based on available funds which are limited.  All of these are very low cost funds with what appears to be decent historical performance.





















































    Asset Class * / Fund % of Balance
     International Stocks   15.12%
    International Equity Fund - Index Portfolio
    Fact Sheet
      15.12%
     Small Cap Stocks   20.13%
    NYSDCB Russell 2500 Index Unitized Account
    Fact Sheet
      20.13%
     Mid Cap Stocks   20.08%
    Vanguard(R) Strategic Equity Fund - Investor Shares
    Prospectus   |   Fact Sheet
      20.08%
     Large Cap Stocks   29.90%
    NYSDCB Equity Index Unitized Account
    Fact Sheet
      14.85%
    Vanguard(R) PRIMECAP Fund - Admiral(TM) Shares
    Prospectus   |   Fact Sheet
      15.05%
     Balanced   14.77%
    Vanguard(R) Wellington(TM) Fund - Admiral(TM) Shares
    Prospectus   |   Fact Sheet
      14.77%

     

    My solo 401 (all at Vanguard):  about 2/3 of it is VTSMX total stock market fund, the rest split between VHDYX high div yield fund and VGSIX REIT

    A post-tax account (also at Vanguard):  a mix of VTSAX (admiral shares), VGSLX (REIT), VMVAX (mid cap), VSIAX (small cap)

    Roth: all VFIAX (500 index fund admiral shares)

    Bottom line:  to me all of this looks "messy" but I am also not sure if there is anything "wrong" with it; all low cost funds and have done quite well since I've started as compared to market averages.  Do I need to fix anything here?

    Thank you!

  • #2
    And please let me know if any other information about my situation would be helpful here!

    Comment


    • #3
      Other will be much more detailed, but three thoughts:

      1. Your are doing great imo, keep it up.

      2. Consider flipping from VFIAX to VFSAX in your Roth.  Not a huge stylistic difference but would be one let fund in the overall portfolio/asset allocation to track.

      3. The high yield fund VHDYX in your 401k.  IMO your age is at an inflection point as to if to hold bonds at all, so I understand holding an aggressive bond portfolio.  I would consider either a. moving out of bonds entirely for a couple years or b. moving into say VBTLX (Vanguard Total Bond Index Admiral).  IMO the spread between high yield and government/investment grade corporate yields is poor.  Essentially, your not getting paid sufficiently to take the added credit risk associated with this type of bond portfolio.  Making 6% with a possibility of getting zero principal is not as appealing to me as getting 2.5% - 3% with a much high probability of getting principal repaid; YMMV.

      Comment


      • #4
        Thank you!

        re 1) I could have been doing better, started a bit late, but thanks to WCI have been doing all the right things the past 4-5 years (minus being in a high cost of living area), so I am happy with the progress.

        re 2) you mean flip to VTSAX, right?  Good idea.

        re 3)  Ok I hear you re considering bonds, but why do you mention VHDYX specifically?  I don't remember why I picked it, I am sure someone mentioned it so it was sort of random-ish.

        re bonds overall:  I dunno... my theory is that even if there is a crash at some point, in all likelihood over the next say 20 years before I am going to start to draw on these funds, there is going to be an upturn and THEN I will rebalance into a more conservative portfolio.  And psychologically I am not not sure how having say 1/3 in bonds will make things any "better" if there is a crash.  I am willing to reconsider though.  If I do bonds, I assume have all bonds in an aftertax account, correct?

        Comment


        • #5
          I guess my main question here is whether I am not exposing myself to something that I should be, the bonds issue aside.

          Looking to be pretty aggressive; my philosophy on that is that my plan is to have the house paid off for retirement and even if all else fails I will have a pension that can support a modest living and can always move to a lower cost of living area.  Would certainly change things to much more conservative when I approach retirement.

          Comment


          • #6
            You are very heavy stocks, which is fine if you are a long way from retirement and want to be aggressive given your pension as a backstop if the market goes south.

            You could potentially consider some bonds, say 10%, or perhaps some real estate in the form of REITS to get into broader asset allocation.

            The question to ask yourself is how will you feel if there is a 50% drop in the value of your investments with an uncertain time frame for things going back up.  If you are ok with that, then your current asset allocation is fine.

            Comment


            • #7
              Thanks.  I do have REITs - about 10% of the total portfolio - would you do a bit more?

              re bonds and crash:  this is how I see it - say someone (early in their investing) has a 300k portfolio and it crashes 50%; ok you are down 150k.  Now say you have 1/3 in bonds and there is that same crash, so then you are "only" down 100K - does that psychologically make things really better?  I am not so sure.  A crash is a crash and as long as you are years away from retirement I think it's best to just not look at the numbers and tell yourself that this is a great time to buy more at a discounted rate.

              Disclaimer: I have not experienced a crash yet and maybe I am very very wrong!

              (and I do agree I should probably have SOME bonds, sort of just because)

              Comment


              • #8
                I did not notice the REIT investment in your allocation, but 10% sounds quite reasonable for a bit of diversification.

                I am a couple of decades past you and I have only 20% bonds in my securities portfolio.  And I do not own any REITs.  However, I have a lot of cash flowing investment real estate which produces passive income.  So my asset allocation is more aggressive than I would otherwise be without the cash flowing real estate.  My situation of having another income stream sounds somewhat analogous to you planning on pension income.  Being on the more aggressive side with your asset allocation sounds like it makes sense for you.

                Comment


                • #9
                  Thanks.  Makes sense!  Maybe I will dabble in real estate at some point, but I think I would only be up for it when I am a) a little bored with what I do and b) have extra money to invest after paying off primary residence.  Also not sure if I am to having the hassle factor.  But sure it sounds like a great way to create some passive income down the line.

                  Comment


                  • #10
                    What percentage of bonds to have in your portfolio is a continuing debate.  I've followed the John Bogle advice for the most part with some Rick Ferri thrown in.  As WCI says though if you have a plan at all you are doing better than most people.

                     

                    Having been through two major market crashes I would say it's easier to say you will stick to your financial plan during a crash than to actually do so.  Psychologically it's tough to see money you've worked hard for suddenly disappear, and that's why many people sell into the bottom of the market.  Having bonds does provide a cushioning effect and there are studies that show you really don't give up much growth with a balanced portfolio.

                    Comment


                    • #11
                      I am definitely considering adding some bonds, honestly just haven't given this too much thought.  So if I do that, am I correct in thinking that they should go into a taxable account and the best choice for me would be my state tax exempt fund?  https://personal.vanguard.com/us/funds/snapshot?FundId=0076&FundIntExt=INT

                      Comment


                      • #12




                        I am definitely considering adding some bonds, honestly just haven’t given this too much thought.  So if I do that, am I correct in thinking that they should go into a taxable account and the best choice for me would be my state tax exempt fund?  https://personal.vanguard.com/us/funds/snapshot?FundId=0076&FundIntExt=INT
                        Click to expand...


                        Yes, if you want bonds and if you want to put them in taxable, then your state's municipal bond fund is probably a good move, esp if your state has income tax and gives you a state rebate for purchasing its munis.

                        Comment


                        • #13
                          DMFA, 1) IF I do decide to get some bonds, SHOULD they be in taxable as opposed to tax deferred? (I just want a one liner on this one, I understand that this is an arguable point and I am honestly not savvy enough to understand nuances. 2) if I do NOT have bonds, does it matter what is in taxable vs tax deferred?

                          I am in NY, so yes high state taxes, and I am in a high tax bracket.  Don't know about a rebate for munis - how do I find that out?  What does this rebate look like?

                          Anything "else" I am missing in the allocation?  (I dunno, I was expecting answers like "you need more international diversification" or something like that)

                          Comment


                          • #14




                            DMFA, 1) IF I do decide to get some bonds, SHOULD they be in taxable as opposed to tax deferred? (I just want a one liner on this one, I understand that this is an arguable point and I am honestly not savvy enough to understand nuances. 2) if I do NOT have bonds, does it matter what is in taxable vs tax deferred?

                            I am in NY, so yes high state taxes, and I am in a high tax bracket.  Don’t know about a rebate for munis – how do I find that out?  What does this rebate look like?

                            Anything “else” I am missing in the allocation?  (I dunno, I was expecting answers like “you need more international diversification” or something like that)
                            Click to expand...


                            I personally like munis in taxable, esp for NY (interest income is NYC, NY state, and federal income-tax exempt).  The income in them is generally going to be less than equities, and since they're tax-free anyway, you're minimizing your tax bill by limiting your higher-earning holdings exposure to taxes by putting them in the tax-free (Roth) and tax-deferred accounts.

                            So, yes, in *my* opinion, munis in taxable is a good choice for your bond allocation.  Others may think differently and that is fine, but there's my stated reason behind it.

                            I personally like between a third and half my portions to be international, including bonds.  So I personally am 55% US equity, 35% int'l equity, 5% US bond, 5% int'l bond.  I do not feel particularly strongly about this (or nearly any) allocation ratio between US/int'l, large/mid/small, sectors, developed/emerging, corp/gov't, short/interm/long term, investment grade/junk rating, etc.  If you know what the class entails vis-a-vis risks/benefits, and you think there is a role for it to fill for your portfolio, go for it.  And you can probably make just as strong an argument against any choice I make as well, and that's also fine.

                            International diversification among low-cost passive index funds can be difficult because there are very few options for int'l med/small, esp emerging market small, emerging market bonds, etc.  Most int'l diversification comes along the lines of splitting developed (EAFE) and emerging markets. Most total int'l funds are primarily large-cap and average about 5:1 or 85/15 developed to emerging (VTIAX and FTIPX are both 80% large and 16% emerging).  No one knows the Colonel's secret blend of herbs and spices, and no one has the crystal ball...so pick and stick with a mix.

                            ...if you're asking these kinds of questions - which is totally fine to do - then I would opt for simplicity.  My slicing/dicing is not necessarily superior to (and may be inferior to) someone else's three-fund portfolio of total US stock, total int'l stock, and US bond, and I'd just pick whatever's closest to that.

                            Comment


                            • #15
                              Slav, you are right this is almost all arguable.  One thing that is not arguable is that if you get municipal bonds (which is what the NY fund you link to is) you should put them in a taxable account.

                              I'm not aware of a rebate per se but many states will not tax you on the interest you collect from muni bonds in their state.  Since munis are not federally taxed it's a nice bennie if your state doesn't tax them either.  I live in Iowa and they tax you even on the Iowa munis, so it doesn't make any sense for me to hold an Iowa fund.

                              I have seen plenty of people say you should hold non-muni bonds in your tax-free account, and I've seen people say the opposite.

                              This is just my opinion but I would be leery of having all my bonds be from the same state after seeing what has happened to Puerto Rico bonds.  I generally use something like a Vanguard Total Bond Fund which is diversified.  Other people just use US Treasury bonds.  There are tons of ways to approach this.

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