Roth Re-Allocation

[Jeb-NY]

I probably will need a complete rebalance by the end of the year but I have to start sometime. Been RE for a few months now, but living on salary continuation. Not happy with my Roth account and have been thinking about getting out of the current funds and going with a few ETFs.

Currently Roth has about $45K plus another 5K coming in for 2006.

Right now $8K is in a Money Market Fund waiting for me to decide what to do (been there for a year, can't rush this). The rest in a tech sector fund that hasn't done much since the bubble broke.

My overall allocations across taxable (~25%) and deferred (~75%) is very roughly:

40% - Large Cap
20% - International (including about 5% in a hot S American fund)
20% - Bonds/and such (mostly from balanced Mutual Funds)
05% - Cash Money Markets and CDs
08% - Small Cap
04% - Tech and Health Care
03% - Mid Cap

Seems like I should add some more small and mid cap but open to suggestions. I thought this was going to be easy till I looked at how many ETFs there was to pick from. Then throw in Value, Blended or Growth. The taxable funds and the Roth money is mostly in TDWaterhouse.

Any suggestions?

By the end of the year I will need to rebalance the whole think as I roll most of the 75% deferred money into new accounts when I go off salary continuation and fly on my own. Leaning towards Vanguard, (maybe Fidelity since we have some money there already) but haven't decided what yet.

Longer term help is also welcome but I will probably ask again towards Fall unless I decide to rebalance sooner. I do have about $40K of company stock to move soon, it isn't doing much either.

Jeb

 

[Jeb-NY]

Well I guess I either didn't explain my problem well or no one has an opinion (that's hard to believe). Guess I'll see what the TD Waterhouse advisor suggests.

Jeb

 

[LOL!]

It seems like you know what you need/want to do: add small and mid caps. So buy MDY, IWN, PZI. What's so hard about that? You can use your large cap holdings to fund these purchases.


Full disclosure: I own MDY and IWM in this arena, as well as some international small/mip cap funds.

 

[Nords]

Well I guess I either didn't explain my problem well or no one has an opinion (that's hard to believe).  Guess I'll see what the TD Waterhouse advisor suggests.

Nothing personal, Jeb, but whenever I see a long thread on "what's my asset allocation" that doesn't happen to include a fund that I know something about, I'm out of my league. I think that I know something about investing in general, but I don't know enough about individual mutual funds/ETFs and their specific issues to feel comfortable recommending anything other than a cheap index.

I enjoy the discussions about efficient frontier, EMH, asset allocation, and all the other theory. But when we get into the nitty-gritty about whether international small-cap value should be 10% or 15% of a portfolio, my eyeballs glaze over. And heck, you didn't even get into the "fun stuff" of commodities or REITs or emerging markets. Then when posters start coming forward with specific recommendations, the thread fragments as the whole crowd turns to each other and the conversations all start with "Yeah, but..."

I think that there are at least twice as many ways to allocate portfolios as there are investors. At least half of those ways are valid and will achieve what the investor is looking for. So as a result of my opinions, when this type of question is asked I usually edge to the back of the crowd hoping that someone else knows how to do CPR.

Did you watch TH overhaul his retirement portfolio? There was about a week's worth of discussion on the board, and then he did it. No debate over when to do so. No agonizing over the ultimate asset allocation or whether there was something better than good enough. No concern over whether a specific fund should be 3.4% or 3.6%. Most of the discussion was on the mechanics of completing the paperwork and making sure that the right tax issues were addressed.

You seem to know where you want to go. You know how to get there. You're working with two eminently suitable fund companies. There are a lot fewer ETFs than there are mutual funds, so when you know how much you want in "value" or "small-cap" then you can purchase the appropriately-named ETF with the lowest expense ratio and get on with your life.

It can be much more detailed & difficult than that, but I don't think the results will be much different.

If you're the kind of person who enjoys an in-depth discussion of specific funds and the decimal points of asset allocation, your questions will probably be debated much more thoroughly over at Raddr's board (http://www.raddr-pages.com/forums/) or M*'s boards (like Hands On or Fidelity Family or Vanguard Diehards).

But I have to admit that they can't offer sidebars about kayaks or food-carrying pets...

 

[Jeb-NY]

I guess I was looking for opinions on:

Holding ETFs in a Roth.

Value versus Growth in a Roth when I have started my early retirement phase.

Specific ETF suggestions that might meet my allocation needs.

Jim...

 

[cute fuzzy bunny]

Did you watch TH overhaul his retirement portfolio? There was about a week's worth of discussion on the board, and then he did it.

And then I did it again about 9 months later, but I didnt tell anyone...

Jeb - the problem I'm having is that you seem to be approaching this from the top down and I dont have enough information to even hazard a helpful hint.

How old are you? Whats the roth going to be used for and when (ie, how many years until you use it)? Whats your tolerance for risk? Saying "I have this...what should I have" is a hard question to answer without a lot of other info.

What problem are you trying to solve?

 

[Jeb-NY]

How old are you? Whats the roth going to be used for and when (ie, how many years until you use it)? Whats your tolerance for risk? Saying "I have this...what should I have" is a hard question to answer without a lot of other info.

What problem are you trying to solve?

57, retired. No plans on what to use the Roth for other than a buffer in years we need to spend more money and I don't want to be in a higher tax bracket. I plan to move more money into the Roth as rollovers in years I can do it with out to much of a tax hit, to reduce 401K minimum withdrawal. No plans on when we will need the money probably not for 10 years or so. I guess I'm in the middle of the road as far as risk. I road out the tech dip and continued buying until I had as much as I wanted in those funds. I have switched to buying more bond like investments the last few years as I was approaching ER. I tend to rebalance by shifting where I put new money rather than sell. I know this will have to change as I have less new money to invest. I'm trying to treat the Roth money as part of the total but figure since it is protected from taxes that is probably where the high flyers should be. Which is why I bought the tech fund.

The problem I'm trying to solve is poor performing Roth investments. It is currently in an under performing tech fund (not just the dip but against peers) and money market. My wife's Roth is in a Healthcare sector fund and we are happy with that.

Jeb

 

[cute fuzzy bunny]

What are your investment choices? Pretty much anything?

Sounds like you're looking at your investment vehicles as individual 'performers'. That means you probably need some diversification within each. I might modify the statement that roths are for high flyers...only if they're tax inefficient necessarily. Your tech fund for example, if it doesnt throw off a lot of capital gains (and it might) or a lot of dividends (and it probably doesnt), then you may not be buying much by holding that in a roth. Bond funds, funds that throw off lots of unqualified dividends, commodities, high turnover funds, and holdings you're going to exchange for others frequently make good roth holdings.

Single fund performance problems can either be solved by looking at the investment portfolio as a whole, and waiting for that particular asset class to catch up. If you just hate the fund, exchange it for a few others.

I'm a lot further away from tapping my IRA or roth than you are, but until recently I held reits, health care, small cap value and emerging market funds in my IRA and vanguards asset allocation in my roth. I traded all those run-up funds in the IRA for a single fund - target retirement 2045. Set it and forget it.

Hope this made sense, I'm slugging down a first cup of coffee and I have a 25lb cat trying to lay on my keyboard...

 

[LovesLife]

I'm a lot further away from tapping my IRA or roth than you are, but until recently I held reits, health care, small cap value and emerging market funds in my IRA and vanguards asset allocation in my roth. I traded all those run-up funds in the IRA for a single fund - target retirement 2045. Set it and forget it.

CFB,
I know this is off topic, but would you mind sharing what your new AA is? Thank you.

LL

 

[cute fuzzy bunny]

Sure, and its EASY!

Amounts are of total portfolio...

IRA

20% Total stock market
5% Small cap value index

Roth
<1% Asset Allocation Fund

Taxable
40% Target retirement 2045
25% Windsor II
8% High Yield Corporate

About 1-2% in cash, mostly in the prime money market fund.

Wifes Roth <1% in total stock market 2045
Wifes 403b ~1% split into about 8 funds...this is my slice and dice testosterone and jelly donuts fool around play space where I can do little harm.

I think this is appropriate for a couple of 44 year olds where one still works enough to pay the bills, we have a 10+ year horizon before my wife retires, a 1 year old and the costs that he entails, and college coming up in ~16 years.

This is in contrast to my primary holdings being high dividend paying large cap value stocks last year when my wife was out of work on maternity leave and we needed more income, and to my holdings when I was a single ER about 3 years ago of mostly half wellesley and half wellington in the taxable, and reits/small cap value/emerging market/healthcare in my IRA.

Only other change i'll probably make between now and 2030-something is to possibly get rid of the high yield corporate. I'm just not being compensated for the additional risk it entails, but I dont think the risk is that huge.

 

[LovesLife]

Thanks for sharing.

LL

 

[cute fuzzy bunny]

Wait 'til you get my bill.

 

[Nords]

I guess I was looking for opinions on:

Thoughtful analysis may be difficult to extract here, but boy do we have opinions!

Holding ETFs in a Roth.

Well, they're typically very tax efficient so putting them in a Roth is like belt & suspenders. Taxes are low on dividend ETFs but income from bond ETFs is easier to shelter in a Roth.

It's probably better to focus on how an ETF's ER & turnover compares to an index or an actively-managed mutual fund.

Value versus Growth in a Roth when I have started my early retirement phase.

Growth has historically underperformed value. The value premium has been the subject of research controversy but it's pretty darn persistent, whereas growth had one heckuva reversion to the mean this millenium. I favor value for its record but you may do equally well with growth.

Specific ETF suggestions that might meet my allocation needs.

I think there are at least two ETFs from iShares (Barclays) and Powershares for every asset in your portfolio. Almost every one of them has a lower ER than an actively-managed mutual fund, and may even have a lower ER than some Vanguard funds.

Browse through the offerings at ETFConnect.com or iShares.com. Compare their long-term performance records and decide what volatility/return factors are important to you. Pick the ones with the holdings & ERs that you like, and start buying.

 

[Jeb-NY]

Well, they're typically very tax efficient so putting them in a Roth is like belt & suspenders. Taxes are low on dividend ETFs but income from bond ETFs is easier to shelter in a Roth.

I had reallized or thought about the fact that ETFs were already tax efficient, may have to do some more thinking.

Thanks all for giving me some more to think about, guess it wasn't as easy a question as I thought.

Jeb

 

[ESRBob]

Sure, and its EASY!

Amounts are of total portfolio...

IRA

20% Total stock market
5% Small cap value index

Roth
<1% Asset Allocation Fund

Taxable
40% Target retirement 2045
25% Windsor II
8% High Yield Corporate

About 1-2% in cash, mostly in the prime money market fund.

Wifes Roth <1% in total stock market 2045
Wifes 403b ~1% split into about 8 funds...this is my slice and dice testosterone and jelly donuts fool around play space where I can do little harm.

TH,
Can't wait for 26 years of discussion on dumping those high yields!

Seriously -- my back-of-the-envelope says you are now 90% equities, 10% FI. Did I miss something? I know your wife has income now-- have you done some sort of Net Present Value of that and considered it a replacement for a non-trivial amount of Fixed Income? This is quite a change from an old Wellesley hound. Or are you just incredibly bullish on equities?

I just remember the gut-wrenching drops in equities in 87 and 2000-2002 and don't want to walk that road again.

Genuinely curious about your thought process on this one.

 

[Nords]

I just remember the gut-wrenching drops in equities in 87 and 2000-2002 and don't want to walk that road again.

Maybe he has that steady income stream and can pay the bills without selling in a down market. Volatility is only bad when you have to sell.

Actually that should be "downward volatility". No one complains about gut-wrenching rises in equities!

 

[cute fuzzy bunny]

Well actually the target retirement 2045 has some bonds in it, and the whole mess has some foreign holdings buried within. Without logging into vanguard and looking cuz I dont feel like it right now, I think we're roughly 80-82% equities, unless you count those corporates as equities because they move like them sometimes. I felt like it. 79% stocks, 13.5% bonds. 8.5% of the equities are in foreign stocks. If you count the paid off house as a "reverse bond", then the bond holdings are a fair bit higher.

We have no debt whatsoever, could live really, really nicely on just a portion of her income and dang well on the income and the dividends chucked off by the portfolio. Plus we're contributing the full 15k to her 403b and 8k total to our roths.

Should we hit a chuckhole in the market...we wouldnt do anything different except for investing at better price points on the 403b and roth. We just dont need the money. That 'no debt' thing is a huge lever. That our healthcare gets covered by the wifes part time job also is a huge lever.

Our horizon is 10+ years before she quits, although she says she doesnt want to ever stop working, just pare back from her current ~10-12 days a month to 5-6. 17 years before we have to look at paying for college. 20+ before formal retirement age arrives and the wife definitely thinks about quitting. Pretty much long enough to take a long equity position.

The target retirement funds will auto adjust us into more bonds over the next ~40 years until we're mostly out of the market. I'll always want more equities than the "usual 100-your age" because vanguard funds tend to be a little conservative and I believe holding equities for long time periods to be a better hedge against inflation than anything else.

Three years ago, single and childless with a fixed lump of money, no income, and able to live well off the dividends thrown off by a great fund like Wellesley...that made good sense. Wellesley pays 4% and historically the price appreciation has beaten the average inflation rate. Its a nice set-and-forget ER fund for a lot of people.

WITH an income stream, a wife, a little man running around the house, AND the quarter mil we got from my wifes home sale that I worked on all last summer...I guess we COULD have kept on with the Wellesley plan only with more money in it and extra income, but since we have the chance to shoot for the moon...i'm taking it.

I've long contended that the 'no debt/no mortgage' thing, as part of your TOTAL financial plan and not as some calculation in a fishbowl, means that you can do nothing different, go far more conservative cuz you dont need the money, or get far more aggressive because you can take the volatility. I dont know why you'd do nothing different given the opportunity presented to do so with impugnity. I just went from the 'very conservative' to 'very aggressive' model.

With a little luck, when we're in our 60's and beyond, our long term financial survival wont be something we ever, ever cast a single thought about. Gabe goes to any schools we want to send him to early on and any he wants to go to later on. And when we pass on into that good night, he'll be in his 40's and his inheritance should allow him to become financially secure and retire early just like I did. Unless he's done it already on his own.

Shoot, and there might even be a little something from social security for both of us, and the hospital might not scuttle the pension she should be getting...

As far as the corporates...I looked and looked at them, the average credit rating it holds really isnt that bad. No recent defaults of any kind. They've actually been IMPROVING the credit worthiness of the holdings in anticipation of potential defaults. I really would like to get paid 4-5% over 'safe' rates and i'm only getting ~2%. But I like the monthly income and I dont think I'm taking on too much risk for that 2%. I'll either decide to hold onto them forever or just trade them in for more target retirement 2045...or maybe more Windsor II (Thanks Charlie!)

 

[ESRBob]

Volatility is only bad when you have to sell.

Or when you have to look at your portfolio performance and think about how far it is below where it was a year or two ago...

We've had 3 good years of rising values -- I wonder if we'll all feel so chipper about volatility when the wheel turns...

 

[cute fuzzy bunny]

Of course not. But thats part of the game. Rock might fall out of the sky and hit you in the head tomorrow.

 

[ESRBob]

TH/CFB;

When I compare the relative probabilities of market downturns and rocks falling out of the sky...

Thx for explaining your asset allocation rationale, though -- it sounds like you are choosing a relatively high equity allocation more based on your phase in life and unique circumstances than out of a market timing call, which was what I was actually wondering.

I think with your lower-than-max SWR situation, too, you have gained the flexibility to say, "as long as I am getting dividends that more than cover our needed withdrawals for decades to come, I don't care about asset values year-to-year." It is a pretty powerful position to be in for long-term asset growth.

Looks like your approach would require two conditions:
a 3% or lower annual withdrawal.
Cantaloupe-sized anatomical appendages

 

[wallygator69]

Cantaloupe-sized anatomical appendages

OH NO Mr. BILL NOOOOOOOOOOO!

 

[cute fuzzy bunny]

I'll bet if I added up the wifes income and our dividends, it might be higher than 4%.

An income stream has a very profound effect on SWR, even if it doesnt show up for a while but you're pretty sure it will. Remembering my firecalc work on when to take social security, if I presume a $1200 a month benefit starting in 20 years, I can start taking an extra grand or more every year starting right now.

No cantaloupes required, although it appears I'm carrying mine in my shirt.

Unless we're old and feeble, I can always get a job or do some sort of work. Could be something like what I did before. Could be something different. Again, without that debt weight and with the ability to almost completely control my expenses month to month, it doesnt have to be a very spectacular job to get us by.

If the wife decided to quit tomorrow, i'd probably keep the same weightings, but shift out of target retirement and back into more high dividend payers, adjust our spending a little bit, and find a reasonable cost high deductible health plan to ride until nationalized or statewide health care is implemented. We'd make it. I'd work a little here and there if needed. Its really no big deal.

As far as rocks and markets...only two things would have creamed most of us. The Depression and Stagflation. We just saw a huge bull market and a big pullback bear. Are we really due for TWO once-in-a-lifetime major financial events within one lifetime, when there have only been three significant ones in over a hundred years?

Yep, we could have a dumper. That'd suck. But with a horizon of 20+ years and maybe 40-50 years of total retirement, I cant afford to sit scared in the corner and suck on my bonds and cd's. I know that strategy fails. I know the strategy i'm on will probably win. Hmmm...probably lose or probably win...tough choice!

 

[ESRBob]

These puppies look like they've been hit a few times with sledgehammers...

 

[cute fuzzy bunny]

A little bowling at some rough alleys.

 

[Jeb-NY]

Thought I would tell you what I ended up buying in my re-allocation.

With the 2006 Roth contribution ($5000) and cashing in the tech fund that went down and then stayed there, and money market. I had in round number $27K to reinvest in something better.

I ended up buying:
Energy Select Sector Spider (XLE) - $8K
IShare Russell 2000 index (IWM) - $11K
IShare S&P MidCap 400 Index (IJH) - $8K

Hadn't planned on the Energy fund but decided to stick a little in, I hope it has some life left. This gives a boost in small and mid that I wanted even if it is a small amount.

My wife's 2006 Roth was added to her Health Sector fund. It has done well and should hopefully continue with all us boomers demanding to live forever.

Now I need to start thinking about the big pot of money that has to be indexed the end of the year when I cash out of the company plan.

Jeb