Portfolio questions

[LovesLife]

Hi Everyone:

I have been working on implementing a brand new portfolio. I have been doing a lot of reading and trying different combinations. I need to toss this out and get some feedback or I will be spinning my wheels forever. I am asking everyone to please take a look at this proposed portfolio. I would very much appreciate your comments.

Here is some background information. I am 43 and DH is 51. I am retired and he is still working some. His gross is < 65K and has a lot of deductions (SB). He plans on retiring in 2-3 years. We own our home and cars. No debt. We have no pensions. Both DD college funds intact. I inherited money from my parents 2 years ago and it is sitting mostly in cash. I tried a FP early on and got burned. Made a few dumb moves that will take some time to get out of .

88% is in taxable accounts and 12% in tax- sheltered. All is sitting in cash. My 401's were in terrible funds and I wanted to move everything to VG. Here goes.

Wellington (VWENX) 12.5%
TM Small Cap (VTMSX) 6.25%
SM Cap Value (VISVX) 6.25%
TM International (VTMGX) 10%
International Value (VTRIX) 10%
Emerging Market (VEIEX) 5%
Reit (VGSIX) 5%
TM Intermediate bond (VWIEX) 20%
Am Century Foreign bond (BEGBX) 10%
Cash 15%

I have looked at other possiblities besides Wellington such as TSM, 500 Index, TM capital appreciation. I know that Wellington should go in a tax sheltered but there is no room (not much room for anything really). I plan on using about a 3.5 or less SWR. The foreign bond and reit will be the first on the list in the tax-sheltered.

Please let me know what you think. Thank you.

LovesLife

[unclemick]

Who are you? - ie, ala POGO - are you a slice and dicer, avid reader of Bernstein and enjoy putzing with correlations, multiple asset classes and rebalancing. Or do you just want to retire and take out 'that good old 4%.

1. Read Bernstein's first book(before Four Pillars) and tweak up the portfolio you have proposed based on your asset correlation data and expected returns.

2. Buy one of the Vanguard Target Retirement Series out of the can - with a 3% current yield or better.

3. Nowadays(actually owned it in the 80's and early 90's) a managed value Vanguard Wellesley is tough to beat

We have mostly Vanguard Lifestrategy - taxable and in IRA

Putzer's are individual dividend stocks, REIT Index, High Yield Corporate, and Small Cap. Value Index. All Vanguard except for the stocks.

More variations on the theme are a bond/CD ladder of some sort plus a 'varible take out portfolio of some sort.'

So what's your thinking?

One fund - or slice and dice? Psych element here is that many feel they need to have some hands on the throttle and don't trust 'auto-pilot.'

In our case - ER worked best by doing absolutely nothing while just standing there. At twelfth year in ER thinking of switching to Target Retirement and doing even less.

Individual stocks(15%) take care of the need to putz for me.
The SO has always ignored financial stuff(except for saving) and ignores investing.

[MRGALT2U]

Hello loveslife. Surprisingly, I have no disagreement with your
situation. I own no stocks, but in the end, I think investing
(like life) is mostly a big crap shoot. I try not to do anything
stupid, Beyond that, it's just a big gamble.

JG

[LovesLife]

Quote:

Originally Posted by unclemick2 Who are you? - ie, ala POGO - are you a slice and dicer, avid reader of Bernstein and enjoy putzing with correlations, multiple asset classes and rebalancing.

Unclemic,

Thanks for responding. I would have to say I am leaning towards the above. I want to try this approach if it looks good on paper. Part of this portfolio came from ESRBob and I did some PM with him on it. I am looking to get the lowest SD with the best return I can. I need about a 7% return (of course more would certainly be welcome) to keep it going. I would like to use dividends and cap gains for my income. I will have new money coming in for 5 years or so for rebalancing.

I have not read Bernstein's earlier book but I will check it out. I have read 4 Pillars, though. Thanks for the tip. And thanks for the reply.

LovesLife

[LovesLife]

JG,

I couldn't agree more. Life is a crap shoot and you have to deal with what you get. But I am hoping I can reduce my odds of it going south with the right combination of assets.

LovesLife

[yakers]

LovesLife,

Sounds like a very nice asset allocation. If YOU like it I wouldn't change a thing. Its more complicated, a slice & dice, system than I would most like for myself. But if you have enough in each fund to avoid the minimum fees then this is a very nice system.
When my wife retires next year I am going to recommend only two funds, the Asset allocation fund (VAAPX) for her Roth and a Vanguard Target Retirement, just to keep things simple.
But our overall plan includes my pension, a paid off house, some ibonds, some DRIP stocks and my own IRAs so I'm not as simple as I would like but not inclined to change at this time as the various financial bits I hold do add some diversity.

[uncledrz]

Loveslife
I do not claim to be an investment expert, Unclemick2 and Yakers have made good comments and I agree with them.
Personally, I like a little more exposure to US large cap stocks, because they are IMHO more stable, able to operate both in the US and abroad and generate dividends. If you are comfortable with your allocation, I don't disagree with it as long as you have a written plan and will stay with it.
JG is right, none of us know the future.
Uncledrz

[MRGALT2U]

Quote:

Originally Posted by unclemick2 Who are you? - ie, ala POGO - are you a slice and dicer,

WARNING WARNING!!!! This is a very old joke.

Guy works in a pickle factory. He confesses to his wife that he has been
having a strong compulsion to insert his penis in the pickle slicer.
His wife is quite concerned. Time goes by, but before she can get him into therapy she gets a phone call from her husband from work.
"Honey, I did it!" says he. "My God, are you okay?"
"Yes, but we both got fired!"

JG

[cute fuzzy bunny]

Oog.

Lets see...you shouldnt worry about wellington in the taxable account; just take the dividends and gains as part of your SWR. You're paying taxes on those anyhow.

A little heavy on the foreign bonds; most stuff I've seen says 5% although a lot of people like them a lot more than domestic bonds these days.

Intermediate bonds instead of short term? You're getting a hunk of intermediates with wellington, you might want to keep your total portfolio bond durations shorter. Also, a lot of cd's and specialty money markets are paying almost as good as shorts without the NAV volatility. Might be a good idea to keep your domestic bond money in those for now until the fed stops jerking the rates up and the yield curve unflattens...then intermediates might make more sense.

A little light on the REIT but at these prices, I dont blame ya.

Thats about all I see.

[LovesLife]

Yakers, Uncledrz,

I do like the content of this portfolio on paper. I think it covers all the basis pretty well but I am unsure of the percentages between the US and International exposure. I am comfortable with the 50% stocks to 50% bond ratio. The amount of the overall proposed portfolio, coupled with our lifestyle, suggests that there is not a lot of reason to take on substancial risk. I would like to include more Wellington in the mix and readjust the International down maybe 5%. It would then be necessary to readjust on the bond side as well. I want to take my income from the dividends and capital gains so beefing up the Wellington would increase the income. It would be great if the cap on dividends/cap gains would stay at 15%.

Even though my husband is still working for a couple more years I don't want to design a portfolio based on his extra income. I want to think long term with a buy and hold strategy.

Unclemic,

What did you mean by a 'varible take out portfolio of some sort'?

Thanks for your replies. I really appreciate being able to discuss these issues here.

LovesLife

[ats5g]

Hi LovesLife,

Couple Questions:

You indicated in the original post that you'd be using "TM Intermediate bond (VWIEX)". Which fund is this? Do you mean Vanguard's intermediate term tax exempt fund [VWITX]? Would you benefit more from muni bonds or fully taxable bonds? If munis, then the fully taxable bonds with Wellington don't seem to fit too well into your tax status. You can certainly use large value stocks through a variety of Vanguard funds, you don't necessarily have to use Wellington.

Usually, when people use balanced funds like Wellington, Wellsley, Balanced Index, etc., they use them for the majority of their portfolio, and then add small amounts of others - like Reits, SV, etc. Wellington in such a small amount just seems like it'd make your life a little more confusing. But, each to his/her own.

Have you considered ETF's for the Large value and small value rather than the funds. I'd bet the ETF's would be more tax efficient. Although, this would require you to open a brokerage account and incur purchasing costs, which may be more complicated that you want.

Also, I'm curious as to why no TIPS.

- Alec

[preben]

Alec has a good point as to the use of Wellington (and bonds) but no matter what you have a great portfolio put together already - and all the minor "tweaks" we come up with will probably not make much of a difference on return or volatility. Cheers!

[LovesLife]

Alec and Ben,

I am considering increasing the Wellington. Originally, after reviewing ESRBob's portfolio addressed earlier, I wanted to include a higher percentage of Wellington but got scared off because of the tax potential. But really, I guess, as long as they are considered qualified dividends and are taxed at 15% then that is acceptable. I realize that could change, though. I do have a question: the yield on the fund lists a 2.9% yield. This is just for the bond portion? Or does this include both cap gains and interest?

I didn't consider TIPS mainly because I don't know enough about them. At this point, with my limited knowledge and experience, I am just looking at funds rather than individual bonds. I do realize that I can get TIPS in a VG index but I really don't know enough about them. I am trying to use T/E whenever possible to take the potential sting out of the tax portion. Isn't the 15% tax bracket for married couples around 60K AGI or something like that?

I really do need to get a handle on the potential income that the portfolio could generate. I have looked at the dividend calculator on VG's site for some clarity but with trying so many different senarios it's kind of hard.

Thank you all for your responses. It has really helped me to think this thing through. Please keep responding.

LovesLife

[LovesLife]

Kate,

I agree with you on choosing Wellington over TSM, etc. They made me uncomfortable too. I want the steady eddies, the proven stablizers. It would be a little easier if I had more to put in tax-sheltered accounts. As long as my DH keeps working, I can add to a ROTH each year but the 4-5K amounts are small in comparison to the taxable portion.

How did you feel when you finally made your decision? Were you relieved or did you find yourself second guessing?

Did you lump sum it in or DCA or a combination of the two?

I am drawing a blank. What does EM stand for?

Thanks for your comments. It is nice to hear that someone else is still in the learning stage.

LovesLife

[ats5g]

LovesLife,

IIRC, usually the yields on the balanced funds are the distributions from both the stock and bond portions of the fund.

Sometimes avoiding paying taxes on bonds by using tax exempt bonds is not better than paying taxes on the bonds. It depends on your tax bracket and the relative yields of the two bond/bond funds. Here is a Taxable/Tax-Free Yield Equivalent Calculator.

So, for example, if I live in Maryland, make $60,000, and filed jointly, my federal tax rate is 25%, my state tax rate is 4.75%, and my total effective tax rate is 28.563%. Let's say Vanguard's intermediate investment grade fund is yielding 4.90%. The intermediate tax exempt bond fund would need to yield at least 3.50% to make the tax exempt fund more attractive for me. If the muni bond fund was yielding less than 3.50%, I'd go with the taxable investment grade bond fund. See how it works? You can still pay taxes on the fully taxable bond fund and get a higher after tax return if you're in a low tax bracket.

For more info on TIPS, see What You Should Know About U.S. Inflation Protected Securities, as well as Understanding and Using Inflation Bonds.

Re Wellington: Wellington is nothing more than a mutual fund that is 60% large value and 40% bonds/cash. If you compare the returns and standard deviation of Wellington to appropriate benchmarks, you'll find that Wellington is nothing special. For example, a more appropriate benchmark would be 60% Russell 1000 value index and 40% Lehman Bros. Aggregate Bond Index. You should not be comparing Wellington to the S&P 500 or TSM. The main difference in steadiness is the fact that Wellington is around 40% bonds. I'm pretty sure the M* Diehards' main opposition to Wellington in a taxable account is because of tax efficiency.

You can certainly replicate Wellington without using the fund. This is especially helpful in taxable accounts if you want to use muni bonds instead of Wellington's fully taxable bonds. All you need is a large value fund/index/ETF to make up 60% of the fund, and an intermediate term-investment grade bond fund to make up the other 40%. Or you can substitute an intermediate term muni bond fund if munis make more sense for you.

My main "gripe" with balanced funds in taxable accounts is that they can realize short term cap gains when rebalancing b/w stocks and bonds, which are taxed at your income tax bracket, not preferential long term cap gains tax rates. They may also realize long term cap gains as well. You can control this realization of capital gains by splitting the compenents of the balanced fund into seperate funds/ETF's [like in above paragraph]. This way you get to control when you realize the majority of the capital gains [assuming the seperate funds are tax efficient]. If you're in a very low tax bracket to begin with, this doesn't make much of a difference [I believe the TH is in this situation, though he uses Wellesley income fund]

So, you can certainly keep the steady eddieness of Wellington without using the Wellington Fund. If what you want is one fund for your portfolio, then Wellington can be good. But since you're already adding other stock and bond funds, you don't even need to add another fund - just put whatever money that was going to go into Wellington's large value stocks [e.g. 60% of Wellington] into a large value fund/ETF, and put whatever money that was going to go into Wellington's bonds [e.g. 40% of Wellington] into intermediate term investment grade bonds.

wew, that was a lot. hth.

- Alec

[preben]

Alec got most - main point being that Wellington is part stock and part bonds.
EM: emerging markets
Cheers!

[kat]

LovesLife,

I went back to edit my post and deleted it instead!

I did a combination of lump sum and DCA. I did about seven or eight lump sums over three/four months and made sure to buy on a down day. Ordinarily, I visited the NY Times website at about 3:50 in the afternoon and if it seemed like a good buying day I went to Vanguard's website and made an exchange out of my Money Market account. I did not want to pick a calendar day out of the air. (I think that works fine if you're investing a weekly salary.) I know some people take longer. After I finished, I read a helpful article about it at Bernstein's Efficient Frontier site. (I can't find the link or I'd give it to you.)

I second guess myself a lot, but less as time goes on. I had some very helpful email conversations with Larry Swedroe, author of "The Only Guide to..." As Alec did in his post, he explained why balanced funds are generally not good in a taxable account. He also said I could replicate the same thing with lower fees.

But he also said a balanced fund can make sense for someone in a low tax bracket -- the only exception. I expect to be in a low tax bracket when I stop working. I also used the calculator at Vanguard's site and decided municipal bonds don't make sense for me.

I opted for a balanced fund after that because I generally believe we are in a bear market for the long term, and I did not trust myself to make appropriate changes in my investments (if any were warranted). I decided I'd rather let the balanced fund do that -- and forget about it.

My plan is to do things the way I always do: leave it alone if I can, fix it if it's wrong. So, for example, I'll leave the balanced fund after I do my taxes if it doesn't feel right. I'm self-employed, so I have a well oiled gut when it comes to what feels right with taxes. In the meantime I'll continue reading and learning.

I opted for Wellesley over Wellington only because of the yield. But when I'm all done, my total portfolio will be 60% stocks/40% bonds, with my other investments.

Again, I'm not an expert on any of this. Just trying to be reasonable.

kate

[kat]

P.S. I went back to read today's posts at the Diehards forum and found some posts where there's a distinction made: it may be okay to have a balanced fund in your taxable account if you're going to use the income currently, not reinvest it. I'm moving in that direction, though I still have paid work.

[ats5g]

Quote:

I opted for a balanced fund after that because I generally believe we are in a bear market for the long term, and I did not trust myself to make appropriate changes in my investments (if any were warranted).* *I decided I'd rather let the balanced fund do that -- and forget about it.

Kat has an excellent point. Balanced funds reduce a person's possible meddling.

- Alec

[Dawg52]

Quote:

Originally Posted by ats5g Kat has an excellent point. Balanced funds reduce a person's possible meddling. - Alec

I agree 100%. My down fall over the years has been due to my urge to re-allocate or tweat my accounts at inappropriate times. Stick it in a balanced fund and the work is done for you. I won't hit any home runs but I don't want to derail my ER plans at this point.*