Comments on Vanguard Financial Plan

[TromboneAl]

I've gotten my VG financial plan, but haven't yet discussed it with the planner.

The main changes he recommended are:

1. Eliminating Health Care fund shares

2. Moving all GNMA shares to Total Bond Index fund

3. Moving all short-term bond and money market funds to the total bond index fund.

4. Moving some shares from the total stock market fund to the Extended market Index fund.

5. Moving some shares to the Morgan Growth fund.

---------------------------

Any comments on these suggestions? Thanks!

[brewer12345]

1) Debatable. If it isn't a large % of your portfolio (over, say 5%), no big deal if you want to make the bet.
2) Probably smart
3) Probably a good idea, assuming these funds don't represent a liquidity buffer/e-fund.
4) Not likely to make a significant difference in the long run. If you'd have cap gains, a no-go.
5) What is the Morgan Growth Fund?

[TromboneAl]

Thanks for the comments, Brewer.

1) Debatable.* If it isn't a large % of your portfolio (over, say 5%), no big deal if you want to make the bet.

Yes, that's my feeling also (it's about 3%).

2) Probably smart

Why is that?

3) Probably a good idea.

Can you elaborate?* I switched to short-term last January, figuring the slightly greater return of non-short-term bonds wasn't worth the added risk.

5)* *What is the Morgan Growth Fund?

The fund invests mainly in the stocks of mid- and large-capitalization U.S. companies whose revenues and/or earnings are expected to grow faster than those of the average company in the market. The fund uses multiple investment managers.

Up to 20% of the fund’s assets may be invested in foreign securities.

[brewer12345]

Eh, I'd just as soon skip the growth fund, so long as you have adequate equity exposure through the indexes.

On the bond index vs. GNMAs and short terms, a two part answer:

1) The market-timing answer: Making the switch to short term stuff was actually quite prescient on your part. However, times have changed and rates have risen, without the longer end of the curve blowing up. The yield curve is inverted and there is a fairly high likelihood that the Fed will go too far. If that proves to be the case, the Fed will be cutting rates and long term bonds will offer cap gains plus coupons, while short term stuff will only see the yield fall.

2) The portfolio diversification answer: Medium and long term bonds are a classic diversifier to equities. When the economy is contracting, equities usually take it on the chin and interest rates fall. This means that medium and long bonds tend to offer cap gains just as the equity market is taking a beating. This is nice diversification to have.

[azanon]

1. Eliminating* Health Care fund shares

I fully agree with brewer.

2. Moving all GNMA shares to Total Bond Index fund

.... or somewhere else, maybe foreign bond if you dont have that.* I dont think GNMA's are really a necessary a component in a portfolio.

3. Moving all short-term bond and money market funds to the total bond index fund.

This was your worst advise by far.* with interest rates already at moderate levels and definitely in a pattern of rising, going short-term on bonds is a solid choice (because they are not very subject to rising rates), AND money market become more attractive because in high + rising interest rates, (long-term) bonds typically fall, and stock also historically do poor with high interest rates.* Conversely, it is relatively common knowledge that money market accounts pay more with higher rates and they also serve as a nice safety net in a high + rising interest rate scenario.

I could easily see 40% of a portfolio in nothing but Money market and Short-term bond (or more) as being a solid defensive choice right now, even for an aggressive investor.

Not sure about 4 + 5.* I dont know what your current weightings are.

[saluki9]

I agree with getting rid of the GNMA fund

I'm of the opinion that people should not hold MBS or ABS securities in their personal portfolios

1. They are often heavily optioned (not in your favor)

2. because of repayments, the maturity and duration of these bonds can vary by large amounts.


I avoid total market bond index funds because of their inclusion

[brewer12345]

Originally Posted by saluki9

I agree with getting rid of the GNMA fund

I'm of the opinion that people should not hold MBS or ABS securities in their personal portfolios

1. They are often heavily optioned (not in your favor)

2. because of repayments, the maturity and duration of these bonds can vary by large amounts.


I avoid total market bond index funds because of their inclusion

Actually, I think MBS offers an attractive addition to the total bond index. Yep, it is short convexity and options, but you get a yield offset over treasuries. If you don't own MBS/ABS, you have to own something else. More corporates? More treasuries? If rates don't move that much, GNMAs will outperform other options.

[grumpy]

Al,

Are these funds in a taxable or tax deferred account? If in a taxable account I would question the value of some of the changes vs. the tax consequences.

Grumpy

[saluki9]

Originally Posted by brewer12345

Actually, I think MBS offers an attractive addition to the total bond index. Yep, it is short convexity and options, but you get a yield offset over treasuries. If you don't own MBS/ABS, you have to own something else. More corporates? More treasuries? If rates don't move that much, GNMAs will outperform other options.

Considering the yield differential is only 16BPS in favor of the GNMA I will happily give that up in favor of the Vanguard Int Term Treasury to be free of their limitations. That being said I do hold DFIHX which does have some agency notes

In addition, of all the Vanguard funds, I would be happiest with 2.4% real yield on the TIPS fund

[Lancelot]

Why sell Healthcare?

Lance

[TromboneAl]

Thanks guys.* Almost all of this is in tax-deferred accounts.

Making the switch to short term stuff was actually quite prescient on your part.

Prescient with the help of this forum.

[TromboneAl]

GNMA and Total Bond have remarkably similar returns -- GNMA seems slightly smoother.

[cute fuzzy bunny]

Curious about the exchange of TSM for extended market, when about all I hear about is that large cap is the best value in town.

Any comments? I've got a large slug of TSM in my IRA...

[TromboneAl]

Right. Vanguard's philosophy is to own the entire market and ignore predictions, so that's what I figure is behind their recommendations.

[justin]

Originally Posted by Cute Fuzzy Bunny

Curious about the exchange of TSM for extended market, when about all I hear about is that large cap is the best value in town.

Any comments? I've got a large slug of TSM in my IRA...

TSM PE is 17.8 vs. Extended mkt PE of 24.3 as of May 31, 2006 according to VG website.

Seems like TSM is relatively attractively valued as compared to Extended Mkt.

[cute fuzzy bunny]

Thats what I was thinking, especially with the run up at the small end.

[TromboneAl]

I talked with the financial planner today. The discussion was good, and pretty much as expected.

One thing I got out of it is something I hadn't considered. He recommends a few actively managed funds in order to reduce volatility. That is, a managed fund might be less likely to move in lockstep with an index fund, and thus smooth out the changes.

[unclemick]

Hmmm - the old saw is - managed funds are able to play defense in market downdraft's whereas in index you are stuck for the ride, up and down.

Unfortunately - in aggregate - managed funds have a less than stellar track record in that regard.

But this fund is different! Right?

Be sceptical.

heh heh heh - doesn't mean there aren't exceptions - just look carefully - hint - turnover is often a clue.

[justin]

If you have to pick an actively managed fund, Vanguard is a good place to start shopping. Low expense ratios, low turnover, not too volatile.