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Old 02-22-2008, 09:36 AM   #21
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Originally Posted by JoeDreaming View Post
But if my taxable account is for my immediate needs, is it good to have all equities there? I'm hoping to retire soon at the young age of 47 or 48, and won't have a pension income until 55, so the taxable account is where my income would be coming from. Doesn't that need bonds/fixed for stability?
I think it is a big mistake to divide your money up in buckets because money is money. Money in your left pocket is the same as money in your right pocket is the same as money in your back pocket. You can easily move money around as I will show how below. You should consider your portfolio as all one big bucket of money and put assets in the most tax-efficient places. That means bonds/fixed go in your tax-advantaged accounts. Even your emergency fund can go in a tax-advantaged account. And tax-efficient equity index funds go in your taxable account.

Here's how it might work. Say you need $50K for living expenses in 2009, but have only a total market index (TMI) fund in your taxable account and no bonds there because all your bonds are in your IRA. You can sell some of your TMI fund in your taxable account every few months to pay for your expenses. In your IRA you sell bonds and buy the TMI fund. From the outside, it looks like you sold bonds in your IRA to pay for expenses because you still have the same total amount of the TMI fund. You have just moved shares from taxable to the IRA. There are several advantages to this:

1. If TMI fund has gone up, you pay Long Term capital gains taxes and not ordinary income taxes.
2. If TMI fund has gone down, you get a tax deduction for the loss on your income taxes and do not pay cap gains taxes nor income taxes on the sale. You might worry that "I sold low and lost money" but that cannot be true because you turned around in the IRA and bought it back for the same price. There are some nuances about replacement shares and wash sales which are easily avoided.
3. If TMI fund has been flat, then you have very little cap gains or losses and your taxes are probably zilch.

With all this you still have bonds for stability and reducing volatility and smoothing your returns, but you have exequisite control on your taxes.

See also https://institutional.vanguard.com/i...P_TotalRet.pdf

Anyways, you gotta think outside the box.
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Old 02-22-2008, 09:44 AM   #22
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I know what you mean, but here's the situation: I'd been at the same job for 25 years. For the first 20 years or so, all company matching contributions to the 401k were in company stock. It was a great stock and was doing incredibly. And since it was free money, I took a chance in leaving it alone. Then bad things happened, and the stock was suddenly worth about 1/3 of it's former value. At this point, the company let us take matching contributions in something other than company stock, so I made that change, but was still hoping my existing stock would go up a bit in value again. I think there is a good chance that company will be bought out soon, and I'm hoping that gives the stock a little boost again. I guess that qualifies as the sin of market timing, but I'll take the risk a little bit longer on this. (And it pays good dividends).
IMO, it doesn't matter. By having so much in 1 stock you are taking risks you're not compensated for, or risks that can be diversified away. For example, you mention that the stock pays good dividends. You can probably achieve a similar goal of high/good dividends by using a high dividend fund/etf or LV value fund and greatly reduce the individual firm risk.

Of course, you can always turn the question of "Should I keep holding this one stock as 21% of my portfolio?" around and ask "Would I put 21% of my portfolio in it now if I didn't own it?"


- Alec
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Old 02-22-2008, 10:33 AM   #23
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RE OP having company stock that has lost value:

We were in a similar situation with company stock, maybe 30% of 401K. The company was involved in a takeover but as the buyer and their stock never recovered. We just decided to bite the bullet and move chunks out into the index funds available over about six months. It hurt but we were able to recover that way, vs. some who are still waiting. Hard choice--but even if it did recover now we would be even (it ain't gonna recover, though--maybe yours is in a more promising industry).
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Old 02-22-2008, 10:42 AM   #24
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I think it is a big mistake to divide your money up in buckets because money is money. Money in your left pocket is the same as money in your right pocket is the same as money in your back pocket. You can easily move money around as I will show how below. You should consider your portfolio as all one big bucket of money and put assets in the most tax-efficient places. That means bonds/fixed go in your tax-advantaged accounts. Even your emergency fund can go in a tax-advantaged account. And tax-efficient equity index funds go in your taxable account.

Here's how it might work. Say you need $50K for living expenses in 2009, but have only a total market index (TMI) fund in your taxable account and no bonds there because all your bonds are in your IRA. You can sell some of your TMI fund in your taxable account every few months to pay for your expenses. In your IRA you sell bonds and buy the TMI fund. From the outside, it looks like you sold bonds in your IRA to pay for expenses because you still have the same total amount of the TMI fund. You have just moved shares from taxable to the IRA. There are several advantages to this:

1. If TMI fund has gone up, you pay Long Term capital gains taxes and not ordinary income taxes.
2. If TMI fund has gone down, you get a tax deduction for the loss on your income taxes and do not pay cap gains taxes nor income taxes on the sale. You might worry that "I sold low and lost money" but that cannot be true because you turned around in the IRA and bought it back for the same price. There are some nuances about replacement shares and wash sales which are easily avoided.
3. If TMI fund has been flat, then you have very little cap gains or losses and your taxes are probably zilch.

With all this you still have bonds for stability and reducing volatility and smoothing your returns, but you have exequisite control on your taxes.

See also https://institutional.vanguard.com/i...P_TotalRet.pdf

Anyways, you gotta think outside the box.
What an interesting post! I really enjoyed reading the Vanguard pdf, too, and learned from it. I believe I had read it before, but for some reason saw it in a new and different light this morning. The discussions in the Vanguard article about taxation of dividends vs. capital gains, and the best order for withdrawal, really clarify and reinforce the points you are making above.
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Old 02-22-2008, 02:41 PM   #25
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LOL - Thanks for that great explanation of how to allocate and withdraw funds. I never would have figured that out on my own. I revised my possible portfolio, thinking of it as one big bucket. Using Vanguard's investor questionnaire for AA, it's telling me I should have 50% stock / 50% bonds but that seems a little too conservative for me so I'm shooting for 60% stocks.

Alec and Bestwifeever - you're probably right about that one big holding in company stock. I revised my possible portfolio to assume I'm getting rid of that stock, but I may do that in stages.

My latest plan:

Fidelity IRA, $537k total:
  1. 31.34% FBIDX Fidelity US Bond
  2. 12.29% FDGRX Fidelity Growth Company
  3. 11.27% FFNOX Fidelity 4-in-1 Idx
  4. 5.64% FRESX Fidelity Real Estate Investment Portfolio
taxable: Vanguard, $350k total:
  1. 7.89% VGTSX Vanguard Total International Stock
  2. 5.64% VNJTX Vanguard NJ Long-term Tax Exempt
  3. 9.36% VTSMX Vanguard Total Stock Mkt Idx
  4. 11.27% VTMSX Vanguard Tax Managed Small Cap
  5. 3.38% VGENX Vanguard Energy Fund Investor Shares
  6. 2.82% cash - VMMX money mkt + bank CDs
results in:
  • 10.78% cash
  • 45.42% U.S. Stocks
  • 12.82% Foreign Stock
  • 30.07% Bonds
  • 0.92% Other
stock style box thingy:
15 19 23
4 9 9
8 8 6

I assume that the VNJTX in my taxable account is okay?
I also greatly reduced the amount I have in cash (money mkt + CDs).

Any comments on this allocation?
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Old 02-22-2008, 02:55 PM   #26
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You are getting there, but I still do not think it's the best way to go.

There is no reason to have VNJTX whatsoever because you have more room for fixed income in your Fidelity IRA. The Fidelity 4-in-1 index fund has stocks and bonds, so you do not want it in taxable, but you also have enough money to buy the individual index funds yourself. The 4-in-1 overlaps the FBIDX as well. Thus, there is no reason to even own it. The Fidelity Growth fund is weird. It's not an index fund and there is no reason to own it as well. It distorts your 9-box style grid to overweight large cap growth.

Anyways, if you go back to one of my previous posts and answer the E%, F%, I%, B%, S%, etc, then one can easily fill out the funds to own and where.
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Old 02-22-2008, 05:31 PM   #27
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...There is no reason to have VNJTX whatsoever because you have more room for fixed income in your Fidelity IRA.
Since it's tax-exempt, it seemed like a good thing to have. Is it better to have a regular bond fund in an IRA than to have a tax-exempt bond fund in one's taxable account?

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The Fidelity 4-in-1 index fund has stocks and bonds, so you do not want it in taxable, but you also have enough money to buy the individual index funds yourself. The 4-in-1 overlaps the FBIDX as well. Thus, there is no reason to even own it.
The FFNOX Fidelity 4-in-1 fund is in my IRA, so those bonds should be okay, no? Even though it overlaps the FBIDX bond fund, FFNOX looked like a really good fund to me, with a lower expense ration than the funds that go into it. Isn't that a good reason to own it?

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The Fidelity Growth fund is weird. It's not an index fund and there is no reason to own it as well. It distorts your 9-box style grid to overweight large cap growth.
I kept this one because it had been part of my 401k for years and has done well. Why do you say there's no reason to own it? I don't know what you mean!

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Anyways, if you go back to one of my previous posts and answer the E%, F%, I%, B%, S%, etc, then one can easily fill out the funds to own and where.
Will do! Obviously I have more reading to do.

LOL, I really do appreciate your comments. If I'm asking too many questions, it's only because I have a lot to learn.
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Old 02-22-2008, 05:45 PM   #28
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Since it's tax-exempt, it seemed like a good thing to have. Is it better to have a regular bond fund in an IRA than to have a tax-exempt bond fund in one's taxable account?
Yes it is better to get higher interest rate than a lower interest rate.

Quote:
The FFNOX Fidelity 4-in-1 fund is in my IRA, so those bonds should be okay, no? Even though it overlaps the FBIDX bond fund, FFNOX looked like a really good fund to me, with a lower expense ration than the funds that go into it. Isn't that a good reason to own it?
If it means that you run out of room in your tax-advantaged account for fixed income, REITs and other tax-inefficient investments, then it's bad to have it. It's better to split up tax-inefficient and tax-efficient funds into the appropriate accounts.

Quote:
I kept this one because it had been part of my 401k for years and has done well. Why do you say there's no reason to own it? I don't know what you mean!
Let me give you a specific example. The 4-in-1 has an international fund in it. By holding in the 4-in-1 in the IRA, you lose any foreign tax credit that would be available if you held the international fund n your taxable account. That's like throwing away money.
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Old 02-22-2008, 07:55 PM   #29
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LOL!
Your "money is money" post was very well written. I plan to use the same strategy, but couldn't have explained it as well.

You bring up a good point about wash sales. People (like me) may be tempted to sell in a taxable account and buy in a tax-deferred account to avoid wash-sale rules, but that doesn't work. See
Wash Sales and IRAs
for a detailed discussion.
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Old 02-22-2008, 08:14 PM   #30
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Wash-sales only apply to positions sold for a loss and not for positions sold for a gain. It is very easy to buy a different replacement fund or ETF to replace a position sold at a loss that avoids the wash sale rule. One just needs to aware of the rules.
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Old 02-25-2008, 03:39 PM   #31
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Okay, I've put a lot more thought into this, used Morningstar's Portfolio Allocator (nice tool!) to help with the fund allocations, and here's what I came up with:

Fidelity IRA:
  1. 24.00% FBIDX Fidelity US Bond
  2. 21.48% FSMKX Fidelity Spartan 500
  3. 11.13% FGMNX Fidelity Ginnie Mae
  4. 3.97% TAREX Third Avenue Real Estate Value
Vanguard taxable:
  1. 16.73% VTSMX Vanguard Total Stock Mkt Idx
  2. 13.19% VGTSX Vanguard Total International Stock
  3. 5.70% VGENX Vanguard Energy Fund Investor Shares
  4. 3.80% cash
results in:
  • 10.20% cash
  • 41.62% U.S. Stocks
  • 17.92% Foreign Stock
  • 29.41% Bonds
  • 0.85% Other
stock style box:
28 27 26
5 5 5
2 1 1

Any better? Worse? Fire away!
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Old 02-25-2008, 07:30 PM   #32
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Lots better. You have tax-efficient index funds in taxable. But don't use VGTSX, use VFWIX.

Also your 9-box style grid shows that you are overweight large cap and underweight mid and small cap. I would take the 22% in Fidelity Spartan 500 in your IRA and use it to get 22% small/mid cap index fund.
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Old 02-26-2008, 10:56 AM   #33
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Some revisions:
  • switched VGTSX to VFWIX for foreign tax credit
  • got rid of VGENX Energy, replaced with more VGSMX and VFWIX
  • switched FBIDX to FIBAX bond funds for lower ER of .1 vs .31
  • moved some cash into VIPSX Inflation Prot Secs in IRA
  • moved TAREX to FRESX Real Estate for lower ER of .82 vs 1.10
  • moved some FSMKX to FSEMX for more small/mid cap
Fidelity IRA:
  1. 23.8% Fidelity Spartan Intermediate Bond (FIBAX)
  2. 16.9% Fidelity Spartan 500 (FSMKX)
  3. 4.7% Fidelity Spartan Extended Mkt Index Inv (FSEMX)
  4. 11.0% Fidelity Ginnie Mae (FGMNX)
  5. 4.0% Fidelity Real Estate (FRESX)
  6. 2.0% Vanguard Inflation Protected Secs (VIPSX)
Vanguard taxable:
  1. 17.5% Vanguard Total Stock (VTSMX)
  2. 18.0% Vanguard FTSE All-World (VFWIX)
  3. 2.1% cash
results in:
  • 8.08% cash
  • 41.48% U.S. Stocks
  • 18.17% Foreign Stock
  • 31.49% Bonds
  • 0.77% Other (wonder what that is anyway!)
stock style box:
24 26 23
6 9 5
3 2 1

Any better / worse?
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Old 02-26-2008, 11:07 AM   #34
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Hi Joe, I see you posting at the diehards site as well. It's getting better, but you are still underweight small caps based on your style box that you posted. The total market index fund has a style box today that looks like:
22 25 26
6 7 6
4 2 2
and many people would say to overweight small cap and value (while avoiding small cap growth). So I would explore reducing FSMKX and increasing FSEMX or a small cap value ETF like VBR or even the international ETFs DLS or GWX.

But it's your decision
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Old 02-26-2008, 11:51 AM   #35
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Hi Joe, I see you posting at the diehards site as well.
Just looking for a 2nd opinion. Or is that you replying to me over there too?

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Originally Posted by LOL! View Post
It's getting better, but you are still underweight small caps based on your style box that you posted. The total market index fund has a style box today that looks like:
22 25 26
6 7 6
4 2 2
and many people would say to overweight small cap and value (while avoiding small cap growth). So I would explore reducing FSMKX and increasing FSEMX or a small cap value ETF like VBR or even the international ETFs DLS or GWX.
What percentage large cap vs small/mid cap should I be aiming for? I have been doing a lot of reading & research, but don't remember any particular guidelines on this.
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Old 02-26-2008, 11:56 AM   #36
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Originally Posted by JoeDreaming View Post
Just looking for a 2nd opinion. Or is that you replying to me over there too?

What percentage large cap vs small/mid cap should I be aiming for? I have been doing a lot of reading & research, but don't remember any particular guidelines on this.
Look at the style box for total market. That is the risk "of the market". If you overweight one style over another (large vs small) if that sector does better than the market, then you will do better than the market.

Based on age, having more in large caps is not a bad thing closer to retirement. Do not let others tell you how much risk to take.

I am 20-40 years away from retirement. 30% of my holdings are small and mid cap. I will decrease these positions as I near retirement.
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Old 02-26-2008, 02:17 PM   #37
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I think one should have at least the market weight of mid/small caps. That would be about 26-28% mid/small caps.

Some experts (Fama&French, Merriman, Bernstein, Ferri, Swedroe) actually recommend that one should have 50% mid/small cap with a tilt to small cap.

Your portfolio showed 6% in what M* calls small cap, while the market weight is 8%. So I will argue that you need 2% more small cap or even more.
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