Comments on Allocation

[getoutearly]

Allright, please throw stones at my proposed allocation below.  A little background; 45 yrs old, DW, kids 8, 11.  Planning on ER at 50 (if I can make it that long).  Should have enough to do it at that time.  Have been using a FA.  He gives me FA on my whole portfolio, while only managing ~35% of it (so it brings the overall FA fee down as a %-age.  ok, so I'm rationalizing here...).  Also, just realized a lot of the funds the FA had me in were Front End loaded, which is the icing on the cake for me to go it alone. 

After a lot of research and reading the last several months, I have been formulating my own plan to manage the portfolio. 

1) what do you think of the allocation
2) Any problems with the Asset class allocation between taxable and tax deferred?
3) Recommendations on brokerage / mutual fund company to use (currently have ~50% of total assets with Fidelity in 401K.  That's one option for consolidating the rest of the assets.  The other 2 I have been considering are Schwab and Vanguard.
One question I have is, if I am using mostly Vanguard funds, is there any disadvantage / extra cost to Schwab / Fidelity vs Vanguard for holding the Vanguard funds?

Hopefully this table will insert here:
Thanks

 

[sgeeeee]

This looks like a well diversified portfolio. It is far more detailed than what I try to do but I think it includes all the asset allocation classes the academics talk about including.

Do you rebalance it? when? or based on what criteria? There are a lot of items to consider reshuffling during a rebalance exercise. Or do you only rebalance if the major categories (like equities, bonds, cash) diverge from target? It doesn't seem to me like it would necessarily be possible to keep the tax-deferred and taxable balances at target -- especially during withdrawal phase.

 

[Spanky]

Looks good. A little light on the international equity side (or heavy on the US equity) - 3 to 1 ratio. My equity portion is 60% US and 40% international. A small percentage, say 4%, in commodities may provide further diversification.

Good luck to ER in 5 years - I am targeting the same.

 

[ESRBob]

Getout,
Nothing major to critique that hasn't been said already (I too like more international equity) but wondered if you might not want more of your high expected growth funds in tax deferred accounts as they tend to throw off capgains. For instance, I keep my emerging markets equities there, and wish I had my commodities funds there, too. (I notice you have Precious metals but no oil/gas/commodities?)

2nd point: since the short term corporate money is not only ballast in a portfolio but some sort of source of funds not unlike cash, I would feel better if I could get access to it for emergencies or other investing projects (for instance a private equity opportunity, or buying into commercial real estate.) Locked up in your 401k seems odd -- yes it generates interest, but something like a commodities fund that threw off huge dividends or that needed to be rebalanced or an international small could generate higher tax liabilities on you than your slow-and-steady interest earnings in a short term bond fund or even your tbonds.

These suggestions are probably more applicable once you are already ERd than now, since you are in a higher bracket now and have cash coming in from your salary, but is something at least to think about for anyone already ERd or for you in a few years.

 

[kevink]

Looks like a very well-thought out allocation to me. Based on my recent experience, it will indeed behoove you to be careful about whose funds you have where. Companies like the ones you mention typically charge transasction fees to buy and sell their competitor's funds. Case in point: I had all our assets at Vanguard until recently but switched everything to Schwab in order to gain access to some funds Vanguard doesn't have, and all my Vanguard funds are subject to transaction fees now.

If you're a committed do-it-yourselfer and don't have a preference between the 3 excellent firms you mentioned I'd tilt towards Vanguard because they're structurally committed to lowest possible costs. Do read ESR Bob's book though - it may convince you, as it did me, that the hassles of gaining access to DFA funds are worth it.

 

[getoutearly]

Thanks all for the comments thus far. 

Let me see if I can fill in some of the gaps, and get some clarification:

SG:
As far as rebalancing, I have not set this up yet, but I was intending to do so (how often?  I've noticed a few posts lately on that subject, so I'll have to research it). 

I'm not concerned with keeping the balances on target between tax deferred and taxable; that is only a restriction when trying to come up with an allocation now, while working with the actual split I have currently between taxable and tax deferred accounts. 

Spanky and ESR:
I was wondering about being light on the international side also.  I really would like to get as much uncorrelation in the portfolio as possible.  I'll take another look at that. 

On the Commodities issue, do you have a recommendation on a fund that does not require huges amounts of money to invest?  I could only find funds that required commercial-sized amounts.  I did some managed futures a couple years back;  lost my shorts but did realize my mistakes were in the methodology / not in the asset-type itself. 

ESR, interesting what you are saying about the bonds; keeping them in the taxable acct.  I was hoping to do laddered bonds; not bond funds.  I was thinking the income generated would present too much of a tax problem, but I think I see what you are saying.  I might want to buy some income property in a few years, so you're right, I may need some more liquid assets to tap (without leaving it in cash)

Question for you:  Are you saying have ALL of my bond allocation in taxable?  If I wanted to keep 28% in bonds, that would be ALL of my taxable funds (28% of my total investment portfolio is in taxable accts).  Just a coincidence that the 2 %-ages are the same.  Could help to simplify my allocation between taxable and tax deferred also (bonds in taxable, everything else in tax deferred).  Interesting...

KevinK:
Thanks for the info on Vanguard vs Schwab.  What do you mean by DFA (Dimensional Fund Advisor? what is that?).  I presume that if I were to move everything lumpsum to Schwab, into Vanguard funds, that I would pay a transaction fee ($75/fund?).  Then if I started regular additions to the funds, there would not be a fee (I could basically just set up an automatic payment or wire money each month / quarter?  Or am I wrong there?  [Can you tell I have been using a FA for too long??]

I'm still researching buying actual bonds.  I've never done it.  have always just bought bond funds.  But, it seems like the interest risk could make them the riskiest part of the portfolio.  It really pisses me off when my bond holdings lose money.  I have this perception that that is why you keep bonds in a portfolio; because they are safe...

Presume I can buy TIPS direct (or through Vaguard / Schwab etc), and Treasuries ditto? 

 

[ESRBob]

ESRBob question for you: Are you saying have ALL of my bond allocation in taxable? If I wanted to keep 28% in bonds, that would be ALL of my taxable funds (28% of my total investment portfolio is in taxable accts). Just a coincidence that the 2 %-ages are the same. Could help to simplify my allocation between taxable and tax deferred also (bonds in taxable, everything else in tax deferred). Interesting...

Not all the bonds in the taxable part of your portfolio, but enough so you do have access to the funds for emergencies, a few years of annual portfolio balancing, some commercial real estate investing or something else illiquid but safe/profitable/uncorrelated to stocks and bonds.

As for the commodities funds -- there are a few good ones and despite their published numbers you can buy them in smaller amounts -- PCRIX is one, QRAAX another. The latter I believe has more oil and has done better in the last year, but has higher annual fees.

 

[Spanky]

As for the commodities funds -- there are a few good ones and despite their published numbers you can buy them in smaller amounts -- PCRIX is one, QRAAX another. The latter I believe has more oil and has done better in the last year, but has higher annual fees.

Vanguard brokerage account requires a minimum investment of $25K for PCRIX. PIMCO does offer other classes, i.e., PCRDX that you can purchase in smaller amount. You may also consider DBC, a commodity ETF, that tracks 6 major commodities.

 

[73ss454]

Looks like a very well-thought out allocation to me. Based on my recent experience, it will indeed behoove you to be careful about whose funds you have where. Companies like the ones you mention typically charge transasction fees to buy and sell their competitor's funds. Case in point: I had all our assets at Vanguard until recently but switched everything to Schwab in order to gain access to some funds Vanguard doesn't have, and all my Vanguard funds are subject to transaction fees now.

If you're a committed do-it-yourselfer and don't have a preference between the 3 excellent firms you mentioned I'd tilt towards Vanguard because they're structurally committed to lowest possible costs. Do read ESR Bob's book though - it may convince you, as it did me, that the hassles of gaining access to DFA funds are worth it.

Are you saying that Vanguard is charging fees on your funds because you purchased another vendors funds?

 

[73ss454]

Vanguard brokerage account requires a minimum investment of $25K for PCRIX. PIMCO does offer other classes, i.e., PCRDX that you can purchase in smaller amount. You may also consider DBC, a commodity ETF, that tracks 6 major commodities.

PCRIX ER is .74 if you use PCRDX the ER is 1.24

 

[kevink]

Just clarifying a couple of unclear things from my earlier post:

The issue for me in moving Vanguard funds to Schwab is that now anytime I buy or sell Schwab will charge transaction fees on the Vanguard funds. I haven't exhaustively researched the policies of all the big players out there but the normal course of businesss seems to be to have a selection of competitor's funds available on a no-transaction-fee (NTF) basis, but usually not the ones you want to buy!

As to the other question: DFA is indeed Dimensional Fund Advsiors. They may be the one mutual fund company who has better funds overall than Vanguard, but you can't access their funds except through an advisor and there are other restrictions (no trading in and out, FA-imposed account minimums, etc.). But for certain categories (small caps, value, international, emerging market) they seem to be much better than any other fund family, based on historical returns.

Overall, I love simplicity and am a great believer in Vanguard's approach and funds, but thought you might want to check out ESR Bob's book (he also has an excellent simplified portfolio of all Vanguard funds in there) in your decison-making process.

Sorry for being unclear earlier.

 

[getoutearly]

Excellent feedback all. Will take a look at the suggestions and continue tweaking the asset allocation. I need to check out ESR's book...

 

[rmark]

Here what I suggest to friends -

Portfolio 1/3 each u.s. stock, international stock, real estate funds + pension and Soc. Sec.

Or 1/4 each u.s. stock, international stock, real estate, u.s. medium bond funds + Soc. Sec

using total market index funds from Vanguard, or Tiaa-Cref in our 403b plan.

I prefer to lump, not slice and dice.

 

[getoutearly]

Here what I suggest to friends -

Portfolio 1/3 each u.s. stock, international stock, real estate funds + pension and Soc. Sec.

Or 1/4 each u.s. stock, international stock, real estate, u.s. medium bond funds + Soc. Sec

using total market index funds from Vanguard, or Tiaa-Cref in our 403b plan.

I prefer to lump, not slice and dice.

Thanks Mark. 

In your first suggestion, you don't include any bonds.  Presume you are considering the Pension and Soc Sec to tbe the equivalent.  Actually, about a third of my Tax Deferred funds are in a defined benefits pension (able to take lump sum and growing a LOT over next 4-5 yrs), so I am treating it the same.  I did not even include Soc Sec in my portfolio calcs however.

Maybe I could back off even further on my bond allocation...

On the 2nd suggestion, any reason for medium term bonds?  And you don't think there is much interest rate risk in the med term bond fund?  (Versus short term fund, or medium term individual bonds)  I am a complete novice as far as owning individual bonds. 

What's your thinking on the total market vs slice and dice?  Easier to manage, and no rebalancing?  Not enough extra value in it? I start out trying to simplify, and then by the time I work in all the extra twists to get the supposed last nickel of returns, it ends up getting more complicated.  Was thinking that as long as I'm basically setting up an allocation and leaving it, except for some rebalancing, it would not be too hard to manage.