Advice on new Vanguard fund (s) for me....

[Aiming_4_55]

Hi -

Just looking for some feedback before I add to the Vanguard fund options in my taxable account. TIRA and Roth are/will be fully funded for the year.

I added a rental property in late 2010 and have been reinvesting the positive cashflow into overall improvements since closing. After monthly operating expense, I'll cashflow $1200 - 1800 per month and thinking of shifting this from my standard asset allocation (Vanguard passive funds, i.e. Target 2035 w/ small tilt of Small Cap & REIT, so 90 stocks/10 bonds).

I hope to reach FI in 6 - 8 years, with SER or ER when it feels right.

Thinking my allocation is fine, but a tad on the high side for stocks. So, I'm thinking this may be an attempt to lower stock holdings, so considering ...

a. 100% psst Wellesley
b. 50% psst Wellesley and 50% psst Wellington
c. 33% Wellesley, 33% Wellington, 34% Vanguard High Div. Yield Index fund
d. Stick with current asset allocation
e. Place in MM for down payment on next rental (possible, but it has to be a deal as landlording is a part time job)

Open to suggestions and ideas.... Thanks in advance.

[DblDoc]

Quote:

Thinking my allocation is fine, but a tad on the high side for stocks. So, I'm thinking this may be an attempt to lower stock holdings, so considering ...

Why not just go with a target fund that is more conservative - like 2030, 2025, 2020. Just pick the one that has what you feel is a comfortable allocation to stocks.

DD

[jebmke]

It looks like all of these options would have you in a tax inefficient portfolio with some bonds in taxable and stocks in tax-deferred. I'd look at your overall portfolio and pick funds that fill up your deferred space with bonds and then everything else in taxable (or fill up taxable with equity and then everything else in deferred).

I agree that 90/10 is a pretty high allocation to equity with only 6-8 years to go.

[Midpack]

Quote:

Originally Posted by jebmke It looks like all of these options would have you in a tax inefficient portfolio with some bonds in taxable and stocks in tax-deferred. I'd look at your overall portfolio and pick funds that fill up your deferred space with bonds and then everything else in taxable (or fill up taxable with equity and then everything else in deferred). I agree that 90/10 is a pretty high allocation to equity with only 6-8 years to go.

Good recommendation IMO, here's a reference that's been posted before...

[Aiming_4_55]

DblDoc – Thanks for the suggestion on other target funds. I’ll look at them again, but when I first bought, I made the mistake on thinking full retirement age (silly me) and just continued monthly deposits.

Jebmke – Thanks for the reminder on taxes. Most of my funds are in TIRA and Roth with about 35% in taxable. Of that 35%, half is in Target 2035 and the balance in VTSAX, so not much bonds in my Taxable account.

Midpack – Thanks for the chart, I was looking for that late yesterday night, but got distracted chatting with my brother in a different time zone.

90/10 AA seems a tad high, but would it be offset by my rentals not factored in to the 90/10. My rentals would account for another 40% of my net worth toward retirement fund. This does not account for my primary residence.

[Webzter]

Quote:

Originally Posted by DblDoc Why not just go with a target fund that is more conservative - like 2030, 2025, 2020. Just pick the one that has what you feel is a comfortable allocation to stocks. DD

I'd worry about the tax efficiency of one of those TR funds in a taxable.

OP, like jebmke, I'd consider my whole AA bucket and start to buy bonds and psst wellesly in the TIRA and tax-friendlies in the taxable.

[DblDoc]

Quote:

Originally Posted by Webzter I'd worry about the tax efficiency of one of those TR funds in a taxable. OP, like jebmke, I'd consider my whole AA bucket and start to buy bonds and psst wellesly in the TIRA and tax-friendlies in the taxable.

I missed that part

DD

[Aiming_4_55]

This might give a better idea how the $$ is spread in my life. So from a net worth point of view without primary residence, my breakdown is:

taxable, tira/roth, rentals
25%, 46%, 29%

With primary residence, the breakdown is:

PR, taxable, tira/roth, rentals
18%, 21%, 38%, 24%

Assuming 6 - 8 years to FI, but probably working 10 more to be sure we have enough, with rentals, is the 90/10 AA in tax/tira/roth accounts too high still?

Thanks for your feedback.

[LOL!]

If you don't want to pay more taxes than you need to, then you have got to read and understand this: Principles of Tax-Efficient Fund Placement - Bogleheads

Basically, two funds are most suitable for your taxable account:
Vanguard Total Stock Market Index
Vanguard Total International Stock Market Index

Adjust your funds in your tax-advantaged accounts to get the asset allocation you want when you put either or both of these funds in taxable.

[Aiming_4_55]

Webzter, DD, LOL - Thanks for the feedback. I'll read the link later tonight (watching the kids while DW takes her Dad to a DR's appt).

Note to self:
- focus more on tax friendly in my taxable account, especially new contributions
- split up Target fund in taxable, reduce Bond holding
- split up Target fund in TIRA/Roth to focus more on bonds.
- small cap and REIT currently in TIRA & ROTH

[Aiming_4_55]

How have others consider rentals in AA? Yes/No? If so, how?

[Webzter]

Quote:

Originally Posted by Aiming_4_55 How have others consider rentals in AA? Yes/No? If so, how?

I think I'd consider a discounted portion of rent as a REIT. (rent - vacancy - repair fund - prop management = REIT income)

Quote:

Originally Posted by Aiming_4_55 Assuming 6 - 8 years to FI, but probably working 10 more to be sure we have enough, with rentals, is the 90/10 AA in tax/tira/roth accounts too high still?

It's not about what we consider too high, it's about what your risk tolerance is. Any advice on how we think 90/10 is too high is purely a reflection of our risk tolerance.

Consider this.... you retire June 1929 with a 90/10 AA... how do you feel in January 1930? Or, maybe you don't care about the worst case scenario. Still... it can take a long, long time for stocks to bounce back when bad stuff happens.

Now, on the other hand, it really comes down to your living expenses and your comfort level. If your rental income covers 50, 70, 90% of your worst-case, baseline expenses, then you might want to be more aggressive. If it doesn't, you may decide you want to be a bit safer. Bottom line, what kind of loss can you stomach and still sleep at night?

Edit: I sort of grossly simplified that example. Here's another reason to consider that 90/10 is too high.... suppose you were 90/10 with a target retirement date of 1936. You'd likely be so wiped out by the crash that you'd put off retirement.

[Aiming_4_55]

Webzter - Thanks for the additional reply. I've always thought of myself as a conservative investor, maybe an inexperienced market timer.

For example, after starting my first job, I bought Fido Magellan in TIRA and CD ladder with my taxable $$ not stocks. But invested in real estate young on foreclosures. I resided in a foreclosure, repaired, then rented to friends or family to learn landlording & repairs.

Fast forward 10 - 15 years, with the recent downturn in the market and real estate, I found my tolerance to be high... buy and cost average down on Target & Index funds and increased my real estate holdings by buying a short sale. Passively looking for another.

Yes, my TIRA and Roth took a 45% hit, but has recovered. I added more to my kid's 529 and was rewarded.

Yes, if another downturn hit, I would not retire or sell real estate and I would stop looking at my balances. Now, I would probably look for opportunity to rebalance and tax harvest

As for basic expenses, net new and old rental incomes covers about 50% of my daily expenses. In 6 years, I project it'll cover about 75% of the expenses.

For my conservative side, planning SER or ER with rental income, solid stock/bond balance, and worse case scenario no small pension of 10k @ 55 or 14k @ 62, and no estimated SSN of 22k me and 11k DW at 67. In a perfect world, the multiple streams of income will allow for a nice lifestyle beginning earlier that I personally ever imagined.

[jebmke]

Quote:

Originally Posted by Webzter I think I'd consider a discounted portion of rent as a REIT. (rent - vacancy - repair fund - prop management = REIT income)

I would too. Since REITS are generally lumped with stocks, they would be part of the 90%. This make sense. In an economic downturn (when stocks go down), rents go down and vacancy rates go up - usually.

[Webzter]

I was thinking about this a little more as I was out turning a garden bed in the rain...

One major point / benefit of owning multiple asset classes is volatility smoothing. Foreign stocks might do better when domestic stock is down, bonds might do better when stocks do worse (and visa versa). Domestic REITs, especially lately, have a high correlation to the S&P. However, your rental might not... and it's really worth thinking about.

For example, if you own a REIT ETF that has national exposure to commercial real estate, that likely has a high correlation to your domestic stock holdings. That is, stocks do well, then business is booming and your REIT is doing well, as jebmke points out.

But, suppose you own a multi-tenant or single-family in a college town where housing has historically been an issue. In that case, especially if you cater to students or faculty, your correlation is highly tied to the fate of the university but is likely largely divorced from your REIT/domestic stock exposure.

If I owned (again) a rental in a college town (again) then one way I might approach that is to assume that completely fills my bond allocation in my taxable account and then adjust exposure on my tax-deferred accordingly.

And, personally, I'm pretty volatility/risk tolerant. We were at 95%/5% stock bond with 25% of that foreign stock. However, if I were 6 years from retirement, I think I'd look at 60% or 70% stock with that percentage based on how sure I was of the rental income. In other words, for my personal planning, I'd likely count on it as bond income if it were a "sure bet" and as part of my stocks if it weren't.

[Aiming_4_55]

Personally, I haven't viewed my rentals as stocks or bonds. If I had to select one, I would select bonds.

I've been fairly lucky with good tenants and low turnover. My recent purchase of a triplex had one month rent loss in 2010. For 2011, I expect rent loss of 2 months. I build 2 months rent loss per year per unit or property, so (knock on wood), I've been extremely lucky over the last 15 years or so.

Rents have been flat or modest increase per year based on expenses.