Vanguard Plan

[Lancelot]

Well, the nice folks at Vanguard just presented a gratis Financial Plan for old Lance.

In a nutshell, my current allocation is 70% stocks (Total Market Index, Healthcare, Emerging Markets, European Index, Pacific Index, Small Cap Index, Energy Fund, Utilities Index Vipers ETF and individual stocks Berkshire B, Carnival Cruise Lines, Cisco, Microsoft. I have a 20% bond allocation holding Total Bond Index, GNMA, TIPS and Short Term Corporate. All of my mutual funds are Vanguard products. A 10% cash reserve in Money Markets and some laddered Cds.

My Vanguard advisor recommended selling all individual stocks and sector funds, save Carnival and Energy Fund, reducing my stock/sector allocation from 25% to 7%. I am guessing that less volatility is the reason for that change, but I have not yet had the telephone conference to hear the explanation. Vanguard also suggested that I consolidate Emerging Markets, European Index and Pacific Index in Total International Stock Market Index, increasing that allocation from 12% to 13%.

He also advises consolidating all fixed income investments in to Vanguard’s Total Bond Fund. In the questionnaire, I indicated that I liked to keep about three years living expenses in cash, so 6% was set aside as a short term reserve.

My proposed allocation is 65% equities; 34% bonds and 6% cash as follows:

Total Stock Market 19%
Total Int Index 13
Windsor II 8
Morgan Growth 8
Small Cap Index 2 (no change)
Extend Market 4
Energy 4 (no change)
Carnival 2 (no change)

Total Bond Indx 34

Cash 6
Excluding my cash reserve, the proposed allocation is about 65% equities and 35% bonds.

Or they said I could plunk it all down in Life Strategy, Moderate Growth.

I am not selling Berkshire, I feel they it is already diversified. If BRK dropped moderately, I would add to my position.

Performance/volatility wise, there is not much difference in my current and proposed allocations. My average total return would virtually stay the same 9.5% to 9.4%; worst year volatility improved a bit from -18.4 to -17% (1974 both years.) Years with a loss remains unchanged at 11 out of 46.

I am pondering the changes and I would appreciate any feed the board would care to offer.

Thanks!

 

[ijuba]

Lancelot, Their recommendations to you are similar to what I received from them. I spoke with them last week for about an hour and feel that their advice was very similar to what I had come up with through many areas of input.

They're recommending a 60/40 equity to bond ratio ( I am 50) which is about where I felt I wanted to be +/-.
Very similar fund selection as well. The only area that I will give some additional analysis time to was in their recommendation of Windsor II and Morgan - both are actively managed and I had previously focused on a range of comparable index funds funds.

They also recommended that I hold on to 2 outside mutual funds that I would be taxed on upon liquidation and, once my tax rate comes down to 15% next year with an even lower capgains rate, begin to shift those over to VG. They currently have too high a level of expenses, yet their returns have been good relative to their sector.

Overall I was pleased with the process and their recommendations. They also offer to do a modified process every year at re-balancing time

 

[LOL!]

Thanks for the report. I have not requested a Vanguard plan because I know what the answer will be from posts like yours and many others on this message board.

It is pretty clear that Vanguard believes you (i.e. everyone) should "own the market" and not weight any particular sector more than any other sector. They make this policy statement pretty clearly in their PortfolioWatch(TM) tool on their website repeatedly.

Now after seeing WindsorII and MorganGrowth over and over in the plans presented to us on this forum, I wonder if they are placed in portfolios more for psychology than for anything else. If value has a heyday, then WindsorII will beat the equity indexes. If growth becomes ascendent, then MorganGrowth will be nice. Clients will see at least one fund "is beating the market average", so they will think "I'm doing great!"

 

[Spanky]

Here is a simplified one:

Total Stock Market Fund 40
Total International Fund 20
Total Bond Market Fund 34
Money-Market Fund 6

 

[TromboneAl]

I agree that simpler is better.

 

[Lancelot]

Thanks for the input and comments. I need to research Windsor II, Morgan Growth and Extended Market a bit more, but for the time being I have decided against selling Healthcare. Health is a huge issue, not only in the USA but throughout the world. The party could continue a bit longer me thinks.

I am considering increasing my International position, over time, to about 20% of my total portfolio. One reason is my ongoing concerns about US deficits and trade imbalances; the other reason is that travel has opened my eyes to the huge appetite the world’s consumers have for material possessions. Produce it and it will be consumed, IMHO.

I am also pondering my reasons for holding cash. For the present, money markets and Cds compare favorably with the Total Bond Market, but cash offers no capital gains opportunities and bonds sometimes do. I suppose cash is my security blanket and I fret less when the bull (market) snorts and bellows knowing that my cash buffer partly shields me from selling shares at a loss. But then my bonds should offset my equities should they not? Just one of my idiosyncrasies. I would like to have about a 5% position in REITS, but I feel that now is not the time to get in. The folks who have been in REITs have done very well, but I missed that celebration entirely. Maybe next time.

Lance

 

[Spanky]

I am also pondering my reasons for holding cash. For the present, money markets and Cds compare favorably with the Total Bond Market

The rate is 6.0% for 7 year IRA CD at the Pentagon Federal Credit Union .

I would like to have about a 5% position in REITS, but I feel that now is not the time to get in. The folks who have been in REITs have done very well, but I missed that celebration entirely. Maybe next time.
Lance

Another way is to DCA into REIT over a couple of years.

 

[Gearhead Jim]

If I'm following their website correctly, almost anyone can find a way into one of the organizations that qualifies for for an account at the PFCU. Did I miss something there?

Also, the Pentagon FCU and Justice FCU both have good CD's mentioned here, is there any way to look up their simplified (number of stars, etc) financial rating? Neither of them seem to be on my list of CD sources.

 

[Lancelot]

Thanks for the report. I have not requested a Vanguard plan because I know what the answer will be from posts like yours and many others on this message board.

It is pretty clear that Vanguard believes you (i.e. everyone) should "own the market" and not weight any particular sector more than any other sector. They make this policy statement pretty clearly in their PortfolioWatch(TM) tool on their website repeatedly.

Now after seeing WindsorII and MorganGrowth over and over in the plans presented to us on this forum, I wonder if they are placed in portfolios more for psychology than for anything else. If value has a heyday, then WindsorII will beat the equity indexes. If growth becomes ascendent, then MorganGrowth will be nice. Clients will see at least one fund "is beating the market average", so they will think "I'm doing great!"

LOL, you were exactly right - my Vanguard adviser repeatedly stressed that my portfolio should match the overal market. No suprises during the telephone conference.

At least the guy could follow instructions; when I scheduled the call, I asked him to call me at my Bangkok number. Sure enough, at 1900 sharp my cell phone rang and a southern voice with a faint twang asked "Mr. Lance?"

At least the taxi ride was less boring...

 

[OAG]

Gearhead: Go to Save and Sound for a review of Banks and Credit Unions. It is at http://www.bankrate.com/brm/safesound/ss_home.asp.

OAG

 

[ats5g]

LOL, you were exactly right - my Vanguard adviser repeatedly stressed that my portfolio should match the overal market. No suprises during the telephone conference.

At least the guy could follow instructions; when I scheduled the call, I asked him to call me at my Bangkok number. Sure enough, at 1900 sharp my cell phone rang and a southern voice with a faint twang asked "Mr. Lance?"

At least the taxi ride was less boring...

If he kept stressing that your portfolio should match the overall market, why the heck did he include Windsor II, Morgan Growth, Small Cap Index, + Extended Market Index? Windsor II [LV] and Morgan Growth [LG] cancel each other out to simply increase your exposure to Large caps over "the market", which is then cancelled out by adding more small caps. This seems like a really confusing way to match the market, when you can just do the Total Stock Market Index fund and pay less in expenses and have less funds.

btw, if you were really going to "match the market" you'd have roughly 1/2 in US stocks and 1/2 in foreign stocks.

- Alec

 

[FinanceDude]

If he kept stressing that your portfolio should match the overall market, why the heck did he include Windsor II, Morgan Growth, Small Cap Index, + Extended Market Index? Windsor II [LV] and Morgan Growth [LG] cancel each other out to simply increase your exposure to Large caps over "the market", which is then cancelled out by adding more small caps. This seems like a really confusing way to match the market, when you can just do the Total Stock Market Index fund and pay less in expenses and have less funds.
- Alec

The simple answer is he can only suggest what the Vanguard Asset Allocation folks tell him/her to tell you............he can't stray from the corporate manual..................

 

[Gearhead Jim]

Gearhead: Go to Save and Sound for a review of Banks and Credit Unions. It is at http://www.bankrate.com/brm/safesound/ss_home.asp.

OAG

Thanks. When I didn't find their CD's listed, I figured (incorrectly) that the site wouldn't have their financial ratings either. Wrong...