ETF Portfolio Feedback

[macav933]

After deciding to no longer pay our DFA 0.65 to manage our accounts and after
looking at the Robo offerings from Vanguard, Betterment and Schwab I am leaning toward going it alone and moving everything to Vanguard using all Index ETF Funds. The ER of this portfolio should be about 0.10. My current portfolio ER is hovering around 0.80. Thus I will sell everything and move an this all EFT portfolio.

My target AA is 77/23 (long story) My thoughts on how to allocate this at this point is below. It will be distributed among the following available accounts and their current account values. I plan on selling the holdings in the taxable account and harvesting capital gains since I am solidly in the 15% tax bracket and thus no capital gains will be triggered.
Current Available Accounts and Current Balance:
Taxable 134k
Roth 51k
Roth (Wife) 65k
IRA Rollover 509k
Conventional IRA 3K
Simple IRA (Wife) 3k

Proposed Portfolio...Your Thoughts?
Vanguard S&P 500 ETF VFIAX 40%
Vanguard Extended Markets ETF VEXAX 27%
Vanguard Total International Stock ETF VTIAX 10%
Vanguard Total Bond Market ETF VBTLX 12%
Vanguard Total International Bond ETF VTABX 11

[samclem]

Congrats on educating yourself on the options and going the DIY route.

Quote:

Originally Posted by macav933 I plan on selling the holdings in the taxable account and harvesting capital gains since I am solidly in the 15% tax bracket and thus no capital gains will be triggered.

You probably know this but just to confirm: You only get the 0% cap gains rate up to the top of the 15% tax bracket to the extent that the cap gains remain below that level. For example, in 2015 the top of the 15% bracket for MFJ is $74,900 of taxable income. If you and your wife have $50K in taxable income from your employment, then you can have $24,900 in gains from your stock sales taxed at zero% The next dollar of CG after that is taxed at 15%. If you are bumping up against the top of the 15% bracket, you might need to split the changes over a couple of years.

Quote:

Originally Posted by macav933 Proposed Portfolio...Your Thoughts?

The AA looks just fine. You'll be a bit overweighted (compared to the overall market) toward mid-sized companies, underweighted n large ones (to get a closer match to the market you'd have a 4:1 ratio between the VFIAX and VEXAX), but there's nothing particularly wrong with that, as long as you realize it (and the ramifications) going in. Now, consider which assets belong in the IRAs, which in taxable. A good guide is at Bogleheads, here.
Good luck!

[papadad111]

Good plan. You don't have to move to vanguard to do this - any broker can buy the vanguard or other series of ETF's. Many online brokers won't even charge a commission to do it!

Can do a lot with just 3 funds - read couch potato portfolio on bogle heads

Eg: VTI,VXUS,BND...

[Gotadimple]

Or look for similar index etfs with Schwab (or other brokerage). Schwab has a large number of etfs available for $0 commission. Similar index etf's using the same benchmark may have a higher ER than those at Schwab.

You are correct to compare ER among products. Just make sure your comparison is for similar benchmarks as well.

- Rita

[karluk]

One minor point: You say that you are planning on investing in Vanguard ETFs, but the ticker symbols you list are the Admiral shares of the corresponding mutual funds. Not that it should make a big difference either way, since they have similar expense ratios, but you should at least think through why you're buying one or the other. I believe that the ETFs generally have a slightly lower expense ratio, but the Admiral shares can be bought and sold without incurring any transaction costs.

As far as your asset mix, your choices may very well be better than my picks, but I personally don't like either your international stock or international bond allocations - I think you have too little in international stocks and too much in international bonds.

Your 67% to 10% split of domestic stocks vs. international stocks means that about 87% of your total equity holdings is in the U.S. market. That's a tempting allocation, since U.S. stocks have greatly outperformed international stocks in recent years. But it's way out of line with the size of the U.S. stock market compared to the rest of the world. You are making an awfully big bet that domestic stocks will continue to outperform international. I would guess the opposite - years of underperformance have left international stocks with reasonable valuations that promise competitive returns in the future.

The opposite is true of your international bonds. You have almost equal allocations to domestic and international bonds. But VTABX currently has an SEC yield of only 0.84% and duration of 7.3 years. This compares to a 2.05% yield and 5.6 year duration for VBTLX. Sure, you can use diversification to justify some international bonds in your portfolio, but in order to get this diversification you are willing to accept less than half the yield and greater interest rate risk implied by the longer duration. Why give international bonds almost the same weight as U.S. bonds when they seem to be a much worse value right now? I would either cut way back or even eliminate entirely your proposed allocation to international bonds.

[fanmail]

Quote:

Originally Posted by karluk One minor point: You say that you are planning on investing in Vanguard ETFs, but the ticker symbols you list are the Admiral shares of the corresponding mutual funds.

+1, none of those symbols are ETFs

[samclem]

Quote:

Originally Posted by karluk Not that it should make a big difference either way, since they have similar expense ratios, but you should at least think through why you're buying one or the other. [ETFs or mutual funds].

When I checked last, the ERs for Admiral shares were about the same as ETFs. I agree that it's good to have a reason for investing in one or the other--If one isn't needing to get in and out on a frequent basis, ETFs lose a lot of their advantages. With ETFs, it's important to watch the bid/ask spread--even on these big, actively-traded ETFs it's easy to pay .10% above (or below) NAV, which is two years worth of ERs. MFs are just a bit easier and simpler.

About foreign/US bonds: I probably wouldn't try to time the bond markets, but just don't see much need to diversify out of the US. On US/foreign stocks--I don't know if foreign stocks are now due to outperform US issues. There's a lot of government involvement in affecting the rules these companies play under and I'm not sure we can look around the world and say that the national environments are level enough that we can apply "efficient market" rules to equities on a worldwide basis. Some national/regional economies and regulatory schemes have companies at a significant disadvantage to others. In this case, I still think the US market offers a competitive advantage (and that does match market results for the last 60 years). But, I'll freely admit that it is just a guess. And I do have a dollop of intl equities--about 20%.

[galeno]

I'd go with 77% VT + 23% BND.


Let the world equity markets determine your USA / nom-USA equity mix. The 4 bps cost is worth it.


Non-USA domiciled bonds are NOT a good idea. They yield less. They are more expensive. Their non-USD denomination only makes your FI port more volatile WITHOUT increasing performance.

[pb4uski]

I realize that many people don't see the benefit of foreign bonds even if denominated in USD or with fx hedged. I'd be interested as to why you believe it is not a good idea.

OTOH I know that Vanguard has included international bonds as 20% of the bond allocation for their target retirement funds so they clearly believe it is the right thing to do.

[galeno]

I just gave you THREE reasons WHY non-USD denominated bonds are a bad idea for a Boglehead investor who spends USD.

Here they are again: lower yield, higher expense ratio, more volatility with LESS return.

Vanguard includes them because they do diversify (diworsify) the FI allocation and because it's "cool" to do so.

Quote:

Originally Posted by pb4uski I realize that many people don't see the benefit of foreign bonds even if denominated in USD or with fx hedged. I'd be interested as to why you believe it is not a good idea. OTOH I know that Vanguard has included international bonds as 20% of the bond allocation for their target retirement funds so they clearly believe it is the right thing to do.

[Animorph]

I used the Fidelity equivalent funds to do this for my mom's portfolio (Vanguard ETF's shown):


S&P500 VOO 25%
Total US ex-S&P500 VXF 25%
All World ex-US VEU 25%
Total US Bond BND 25%


You could also use 50% Total US Stock Market, VTI, or just use Total World Stock, VT for 75%, or a target date ETF for 100%.

[ERTX]

You want to put the bonds in international ETFs in your tax sheltered accounts and the U.S. stock ETFs in your taxable.

[GTFan]

Quote:

Originally Posted by samclem About foreign/US bonds: I probably wouldn't try to time the bond markets, but just don't see much need to diversify out of the US. On US/foreign stocks--I don't know if foreign stocks are now due to outperform US issues. There's a lot of government involvement in affecting the rules these companies play under and I'm not sure we can look around the world and say that the national environments are level enough that we can apply "efficient market" rules to equities on a worldwide basis. Some national/regional economies and regulatory schemes have companies at a significant disadvantage to others. In this case, I still think the US market offers a competitive advantage (and that does match market results for the last 60 years). But, I'll freely admit that it is just a guess. And I do have a dollop of intl equities--about 20%.

Vanguard has been recommending 20% int'l bonds for a couple of years now, and use that in their lifecycle funds. I'm a little less than that right now along with 20% equity in int'l stock funds which they also recommend as a minimum.

Going a little further, I also use 80/20 as a guideline for a mix of S&P 500 vs. small/med. cap and int'l index vs. emerging market (this is close to market weight for both categories). I've got a lot of legacy taxable investments and a 401k that predated the Vanguard Total etc. funds so that's the rule of thumb I use to create my AA.

[GTFan]

Quote:

Originally Posted by galeno Vanguard includes them because they do diversify (diworsify) the FI allocation and because it's "cool" to do so.

VTABX returned almost 9% last year vs. almost 6% for VTBLX, so yeah it's all about diversification. And their hedged approach actually reduces volatility overall when mixed with US bonds.

I'll go with Vanguard's recommendation and research. We'll see who is right over the long term.

http://www.vanguard.com/pdf/icrifi.pdf

From the paper:

Conclusion

International fixed income securities make up a
significant portion of the global investable market.
While investors in international bonds are exposed
to the risk of interest rate movements, the political
landscape, and the economies of many different
markets, we’ve shown that the primary factors
driving international bond prices are relatively
uncorrelated to the same U.S. factors, which implies
a diversification benefit. Of course, investors are also
exposed to currency movements, which have an
important role in determining the risk of international
bonds. We’ve shown that on average, the volatility
of currencies can overwhelm any diversification
benefit that international bonds may bring to a
diversified portfolio. On the other hand, with that
currency risk hedged, an allocation to international
bonds can lead to lower average portfolio volatility
over time.
To make the strategic decision to include
international bonds in a diversified portfolio, an
investor should weigh the trade-offs among several
factors: the potential to reduce portfolio volatility,
exposure to the largest global asset class, the costs
of implementation, and the investor’s own views
on the future path of the U.S. dollar. Based on our
findings, we believe that most investors should
consider adding hedged foreign bonds to their
existing diversified portfolios.