Vanguard Advisor's Portfolio Proposal

[Goldenmom]

Here's the investment plan our advisor at Vanguard is suggesting.


What changes do you suggest?


Does international bond fund really add value or could it be eliminated? Why do we need it?


We will be managing our portfolio ourselves after the advisor helps us set it up.


STOCKS – 50 %
Vanguard Total U.S Stock Market Index Fund Admiral Shares - VTSAX
Vanguard Total International Stock Index Fund Admiral Shares – VTIAX

BONDS – 50%
Vanguard Total U.S. Bond Market Index Fund Admiral Shares - VBTLX
Vanguard Short-Term Investment-Grade Fund Admiral Shares - VFSTX
Vanguard Intermediate Term Investment-Grade Fund Admiral Shares - VFICX
Vanguard Total International Bond Index Fund Admiral Shares – VTABX

PORTFOLIO PERCENTAGES
U.S. large-cap stock - 20%
U.S. mid/small-cap stock - 9%
International stock - 20%
U.S. short-term bond - 14%
U.S. intermediate-term bond - 18%
U.S. long-term bond - 4%
International bond - 15%
U.S. short term reserves - Vanguard Prime Money Market Fund - 0%


Thanks for your knowledge and experience,
Goldenmom

 

[Masquernom]

What percentage to each mutual fund within the stock and bond allocations?

 

[pb4uski]

That proposed AA is broadly similar to the AA of their Target Retirement 2015 fund and is also broadly similar to my AA (except I target 60/40 rather than 50/50):

Allocation to underlying funds as of 09/30/2015
Ranking by Percentage	Fund	Percentage
1	Vanguard Total Bond Market II Index Fund Investor Shares*	30.0%
2	Vanguard Total Stock Market Index Fund Investor Shares	29.3%
3	Vanguard Total International Stock Index Fund Investor Shares	19.4%
4	Vanguard Total International Bond Index Fund Investor Shares	12.8%
5	Vanguard Short-Term Inflation-Protected Securities Index Fund Investor Shares	8.5%
Total	—	100.0%

Unless you have money in both taxable and tax-deferred accounts and need to use separate asset class funds for tax efficiency, perhaps the balanced 2015 fund will be better if you want an overall 50/50 AA. I use individual asset class funds since I structure my portfolio for tax efficiency.

On the international bond, there are different views as to whether or not it is needed or helpful, but I do target 20% of my fixed income in international bonds.

 

[Midpack]

If you've established 50:50 as the asset allocation that best suits your risk tolerance/personal situation, and you're comfortable managing the portfolio yourself - there is nothing wrong with the suggested portfolio. It's a standard, widely held diversified/low expense/passive indexed asset allocation, any change would fall in the realm of personal preference. There are no absolute "right answers."

 

[photoguy]

Goldenmom -- in a prior thread you asked about making a Swedroe style portfolio with tilts to value, small, and international funds. The vanguard advisor portfolio is significantly different from this. Why the change? If you believe in the benefits of value/size/int diversification, the vanguard advisor portfolio won't give you much exposure to that.

For simple portfolios that are easy to manage, I would look at this page: https://www.bogleheads.org/wiki/Lazy_portfolios and I would consider all of them except the permanent portfolio.

FYI It's hard to recommend a portfolio without knowing about a persons investing goals, timeframe, risk tolerance, interest in investing, ability to self-manage, ability to stay the course, etc. So look at any advice here critically and realize it may not apply to your situation.

Regarding the vanguard advisor suggestions, I would drop all of the different bond funds and stick with VBTLX (US total bond fund) or CDs (for simplicity). I would definitely drop the international bond fund and put that into either VBTLX or increase the allocation to international equities. That would leave you with 3 funds: US total stock, Int total Stock, and US total bond.

I do believe in the benefits of diversifying according to size, value and internationally. So if I was willing to tolerate a more complicated portfolio (which I do personally), I would diversify by adding funds such as US small value (VISVX or VBR), international small (VSS), and international value (iShares EFV).

 

[nun]

"Couch lovers" might well say there are a few too many funds here (particularly the bonds) and that there is a simpler way to do things. But the Vanguard proposal is so much better than the plans we often see from IFAs who go fund crazy. It seems sensible and manageable.

 

[Markola]

It would be much simpler, cheaper and close-enough, in my book, to by one Vanguard Life Strategy Conservative or Moderate Growth Fund, which are made up of similar index funds. You might at least explore Vanguard's various balanced fund options and ask your advisor to explain why a single fund solution that would not require rebalancing would be vastly less advantageous than your above complex plan. Tax diversification might be one reason but I'd keep things simple in the tax-advantaged accounts, personally.


Sent from my iPad using Early Retirement Forum

 

[Animorph]

It's a solid portfolio. Just personal preference if you want to change anything. Kind of complex on the bond side for my tastes, but I don't have bonds in my AA.

 

[samclem]

Goldenmom,
Welcome back, it's good to hear about your progress.
In my opinion, the proposed portfolio is a >big< improvement over the one you had initially described from another CFP. The new one is very low cost and has a lot of diversity. You'll save a lot in fund fees, advisory fees, and if history is any guide you'll get good returns while experiencing reduced volatility. It's very similar to the way I've set up the portfolio for my MIL.
So, what follows is some food for thought, NOT any criticism of the portfolio.
1) You have to ask yourself if you really will take the time every year to rebalance the portfolio back to these allocations. It's not hard to do, but it does have to be done (to keep your volatility at the level you desire) and it will sometimes require buying more stocks when every newscast is screaming about gloom and doom on Wall Street. If this is something you'd rather not bother with, then you could get virtually identical investment results, with no significant difference in fund costs, by choosing an appropriate Target Date Retirement Fund.
2) Similarly, if you are paying Vanguard for advice right now, you'll probably want to save money as soon as possible by doing the rebalancing yourself. Paring down the number of funds might help in this regard.
3) Intl Bonds: Whether you have them or not is not a big deal. I personally wouldn't make any special effort to include them, but if they were a small part of an otherwise good Target Date fund,etc, then I'd probably accept them. As you may know, the international bonds typically have slightly higher annual expenses (about .10% more--not a lot, but not zero) and I don't know that their diversification value is significant. In my >personal opinion<, there are political factors in the intl bonds market that reduce the "efficiency" and the accuracy of pricing signals in that market, so I'm just not as eager as some US investors to include them in my holdings. Vanguard didn't typically include Intl Bonds into their target date funds, etc, until fairly recently (2013). Again, reasonable people can disagree on this point.
4) Again, not a criticism, but something to consider: as you know from reading Larry Swedrow's work, many researchers have found that small stocks and value stocks have, over time, produced higher risk-adjusted returns than the stock market as a whole. For retirees, I think value stocks have particular advantages (because they tend to have higher dividends than the market as a whole, and this is a relatively steady stream of returns that is useful in a portfolio that must support consistent withdrawals immediately). So, if this were my portfolio, I might choose a value "tilt" by reducing the VTSAX (Vgd Total US STock Market) by a measured amount (e.g. maybe reduce it from 30% of total holdings to 20%) and add that allocation to a fund like Vanguard Value Index (Admiral version: VVIAX). If, as discussed above, you decide to simplify the whole management of your assets by going with a Target Date fund, you could obviously still use the Vgd Value Index (VVIAX) to attain this "value tilt" just by holding 10% of this fund in addition to the Target Date fund, and rebalancing every year.

As you realize, the "perfect" portfolio is discernible only in retrospect. Congratulations on your moves so far!

 

[Goldenmom]

What percentage to each mutual fund within the stock and bond allocations?

The percentages I listed below the stock and bond funds in my original post are what the VG advisor listed on his proposal.

It was confusing because 3 securities we brought forward from Ameriprise are included under his asset classes along with the VG funds and the percentages include them.

I sold all but one of them on Friday. The only security we still hold from our old portfolio is PIMCO Total Return which he has listed under U.S. short-term bond, U.S. intermediate-term bond, and U.S. long-term bond on his proposal.

I am looking to sell PIMCO, too, when it's trending up.

 

[Goldenmom]

Thanks, photoguy for the suggestions.

Yes, I'm still very interested in a Swedroe small value tilt. The VG proposal was based on the advisor's initial analysis and is preliminary.

I will discuss your suggestions during our phone appointment on Monday and see how we can change things up.

 

[Whisper66]

If you've established 50:50 as the asset allocation that best suits your risk tolerance/personal situation, and you're comfortable managing the portfolio yourself - there is nothing wrong with the suggested portfolio. It's a standard, widely held diversified/low expense/passive indexed asset allocation, any change would fall in the realm of personal preference. There are no absolute "right answers."

+1

 

[growing_older]

This is a fine portfolio, but why all the overlapping bond funds. I'd be a lot more comfortable with the simplicity of:

STOCKS – 50 %
Vanguard Total U.S Stock Market Index Fund Admiral Shares - VTSAX
Vanguard Total International Stock Index Fund Admiral Shares – VTIAX

BONDS – 50%
Vanguard Total U.S. Bond Market Index Fund Admiral Shares - VBTLX

I don't see the need for international bonds. I don't see the need for tilting bond maturities.

 

[eta2020]

Looks like fine proposal to me if you want 50/50 stocks/bonds.

Not much to talk about.....

 

[Goldenmom]

Thanks to all for your feedback on the portfolio proposal, especially the bond portion.

The VG advisor who is just helping us set up the portfolio indicated that we would draw from the short-term bond fund for RMDs and living expenses, but is there a reason I cannot simply draw from Total Bond Market and eliminate the short-term bond fund?

Do any of you own the Ultra short bond fund?

I wanted to get the forum's response to the preliminary portfolio proposal. Now that I have had a number of responses, I will tell you that my husband and I are not at all comfortable with a 50/50 AA. We would like to keep up with inflation, but mainly we do not want to lose principal and be worse off. We fear the market, and bonds aren't yielding much.

What are the safest places for the bulk of our savings where we don't have to worry about a loss of value during down or flat markets and poor bond performance?

Thanks guys.

 

[pb4uski]

Your bigger worry should be inflation... not the stock market.....the stock market goes up and down but over reasonable periods of time goes up..... that is why it is only 50% of the total (60% in my case).

Forget Ultra-short bond fund and its pathetic 0.66% yield... go with an online savings account for your cash allocation... mine is 0.95% yield, FDIC insured and no interest rate risk.

 

[samclem]

Your bigger worry should be inflation... not the stock market.....the stock market goes up and down but over reasonable periods of time goes up..... that is why it is only 50% of the total (60% in my case).

Forget Ultra-short bond fund and its pathetic 0.66% yield... go with an online savings account for your cash allocation... mine is 0.95% yield, FDIC insured and no interest rate risk.

+1

We would like to keep up with inflation, but mainly we do not want to lose principal and be worse off. We fear the market, and bonds aren't yielding much.

What are the safest places for the bulk of our savings where we don't have to worry about a loss of value during down or flat markets and poor bond performance? .

Stock prices go up and they go down. But daily, monthly, and annual variations mean nothing. Why would you be materially "worse off" if stock prices go down for a day, or a month, or a year... Or several? No one knows what the future will be like, but we know that for over a hundred years the US stock market has never stayed down for more than 9 years. The average recovery time is just 2 years. The 1929 crash? Recovered in about 4 years. This is if we include dividends, etc. More at the link below.
NYT: 25 Years to Bounce Back? Nope, Try 4 1/2 Years.
http://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html?_r=1

And that's why you have some bonds, "cash", etc. When stock go down, these assets support your withdrawals until stocks go back up. Moreover, rebalancing every year allows you to purchase stocks at low prices, so you are in a better position as their prices recover.

Another way to view stocks: when you own a mutual fund, you'll own shares of hundreds or thousands of companies. In all cases you'll own a little sliver of all these companies, and you'll get paid when they make money (dividends) and can sell this sliver later. Everything that company represents is partially owned by you. Now, if people agree that your sliver of Proctor and Gamble is worth $10 on Tuesday, but the market drops on Wednesday and people are suddenly fearful and will only pay you $5 for your sliver, should you panic? Why? You own exactly the same % of P&G as you owned before, they are still selling products, still employ their engineers and marketing folks, still own the same factories. Your dividend probably won't be much affected, and the long term prospects for that company remain the same--you'll eventually be able to sell you sliver for it's Tuesday value. And it is larger the same story for the thousands of companies in your portfolio. It would be different of you lost shares when the market crashes, but you don't. Instead, your stake in each company remains exactly the same from day to day, regardless of what the whackos in the market are doing.

I recommend that you spend some time experimenting with various asset allocations in the Firecalc program. You'll probably find, as I did, that this really brings home the long-term importance of stock in a portfolio. The portfolios with more stocks bounce around in value more, but generally trend up and do a good job of keeping up with inflation. The very high cash portfolios are very "safe" with little variation from year to year, just an inexorable descent to the X-axis. Portfolios with very heavy allocationsto bonds or cash have a historically poor ability to support withdrawal rates above about 2% or so. If you can get by on 1% to 2% of your portfolio every year, then maybe you don't need stocks.
Good luck.

 

[wyecrabber1]

Several months ago I had a chat with a FA from Wells Fargo ... after several meeting we came to a mutual understanding that Wells Fargo, him and I were not a good fit. I decided to ask Vanguard to pull together an investment plan. Filled out a brief questionnaire, and a 45 minute phone call. Received my proposed plan from the Vanguard advisor on Friday ... very similar to Goldenmom proposal.

Asset class Current Recommended 50% stocks / 50% Bonds
U.S. large-cap stock
Vanguard Total Stock Market Index Fund Admiral Shares 21%
U.S. mid/small-cap stock
Vanguard Total Stock Market Index Fund Admiral Shares 9%
International stock
Vanguard Total International Stock Index Fund Admiral Shares 20%
U.S. short-term bond
Vanguard Total Bond Market Index Fund Admiral Shares 14%
U.S. intermediate-term bond
Vanguard Total Bond Market Index Fund Admiral 14%
U.S. long-term bond
Vanguard Total Bond Market Index Fund Admiral Shares 7%
International bond
Vanguard Total International Bond Index Fund Admiral Shares 15%


I'm not crazy about the International bond index. I also want to add Vanguard REIT [VGSIX] and the healthcare fund [VFIAX] to the portfolio.


10% Vanguard REIT Index Fund VGSIX
15% Vanguard Health Care Fund VGHCX
25% Vanguard 500 Index Fund VFIAX
10% Vanguard Small-Cap Index NAESX

40% Vanguard Total Bond Market VBTLX


So I'm deciding if I need to have Vanguard manage the portfolio for annual fee of 0.03% or just purchase a Life Strategy Fund and add the REIT and HealthCare funds. Follow-up meeting is next week -- will post an update. Not convinced rebalancing is all that important --will rebalance when stocks/funds change is greater than 10%.

Quick snapshot of background;
DW is 65, retired four months ago receiving SS and Pension of 50,000 annually. I'm still working full-time with a retired date in 2 years, at that time I'll have SS and pension of $44,000 -- we have investments of $800K and house id paid for. Only need a SWR of less than 2% if that. Plan on moving to Jacksonville, Fla in 2-3 years, will help reduce tax bill.

 

[Animorph]

I think FIRECalc says you want to have a minimum of about 40% stocks for your best success rate when you are taking a high enough withdrawal rate that there are failures. I'd be concerned if I went lower than that.

If your withdrawal rate is 3% of the portfolio or less you could probably go with less than 40% stocks. The main drawback will be a probably lower portfolio value near the end of your retirement.

My early reading of William Bernstein said that a stock allocation of 15% actually gives you a an easier ride than 0% stocks. So there's almost no case where I'd hold less than 15%.

Alternatives to bonds might be rental housing, annuities (SPIA's or deferred, not the crazier types), "alternative investments", CD's, peer-to-peer lending, and I'm sure there are plenty of others. I'd stick to bonds or CD's or online savings accounts, whichever gives you the best return, unless you are comfortable with something else. Bonds will still look good if equities tank.

 

[mathjak107]

This is a fine portfolio, but why all the overlapping bond funds. I'd be a lot more comfortable with the simplicity of:



I don't see the need for international bonds. I don't see the need for tilting bond maturities.

while called a total bond fund agg ,bnd and vbtlx are actually missing a lot of different areas in bonds .
it has quite a few gaps , under weightings cutting yield and missing segments of the bond market .

1. it has a significant Allocation to treasuries and government securities:

it allocates more than a quarter of its holdings to U.S. Treasuries, and nearly 50% to securities issued by FNMA, GNMA, FHLMC, and other U.S. government-sponsored agencies. If investors are particularly bullish on Treasuries, it offers a significant amount of exposure. But many investors would be better served to hold a higher percentage of their fixed income portfolio in corporate bonds and other fixed income instruments with higher yields.

2. No Exposure to High Yield Bonds: it offers exposure to the total investment grade U.S. bond market, meaning that they invest primarily in debt issues that are above a certain rating (BBB- by Standard & Poor’s and Baa3 by Moody’s). Bonds rated below these cutoffs carry a higher risk of default, and as such generally offer a higher rate of return. If upgraded to investment grade status, high yield bonds can see a narrowing of their credit spread and a jump in price.

3. It has a shortage of Inflation-Protected Securities: Total bond market ETFs have limited holdings in inflation-protected securities, indicating that the real returns on these securities may be negatively impacted if we experience a significant uptick in inflation .

4. it lacks foreign fixed income bonds and muni's : . Municipal bonds, emerging market bonds, and convertible bonds are but a few of the segments missing.

 

[LOL!]

….
So I'm deciding if I need to have Vanguard manage the portfolio for annual fee of 0.03% or just purchase a Life Strategy Fund and add the REIT and HealthCare funds.
….

Maybe a typo there. Vanguard charges 0.30% and not just 0.03%.

 

[LOL!]

….
I sold all but one of them on Friday. The only security we still hold from our old portfolio is PIMCO Total Return which he has listed under U.S. short-term bond, U.S. intermediate-term bond, and U.S. long-term bond on his proposal.

I am looking to sell PIMCO, too, when it's trending up.

I do not see any reason to wait to switch from PIMCO Total Return to a Vanguard bond fund. If the Pimco fund trends up, so will the Vanguard fund. In the meantime, you will get to enjoy the higher expense ratio of the Pimco fund.

 

[Midpack]

Thanks to all for your feedback on the portfolio proposal, especially the bond portion.

The VG advisor who is just helping us set up the portfolio indicated that we would draw from the short-term bond fund for RMDs and living expenses, but is there a reason I cannot simply draw from Total Bond Market and eliminate the short-term bond fund?

Do any of you own the Ultra short bond fund?

I wanted to get the forum's response to the preliminary portfolio proposal. Now that I have had a number of responses, I will tell you that my husband and I are not at all comfortable with a 50/50 AA. We would like to keep up with inflation, but mainly we do not want to lose principal and be worse off. We fear the market, and bonds aren't yielding much.

What are the safest places for the bulk of our savings where we don't have to worry about a loss of value during down or flat markets and poor bond performance?

Thanks guys.

Not sure why Vanguard would have used a 50:50 asset allocation if you didn't agree to it.

You probably know this as you've used FIRECALC, but here are the 30 yr probabilities at several withdrawal rates (I did not pick up what your target WR is) for the full range of equity allocations.

As others have replied, the only safe assets that are unlikely to lose value are CD's or online savings.

 

[Goldenmom]

Please keep us updated on the progress of your portfolio, wyecrabber1. Yes, it is very similar to my own Vanguard proposal.

When I read portfolio report cards, they grade down for including Total Stock Mkt and 500 Index as being duplication. Just parroting what I read.

Goldenmom

 

[pb4uski]

Total Stock Market Index Fund = 65% S&P 500 Fund + 35% Extended Market Index Fund IIRC