Financial Open House - Help me reconstruct Portfolio

[trixs]

Hello Everyone,

I want to put a sanity check on my current direction. As I have no one, in the real world, to talk finances with I result to posting here and consulting with everyones vast experience. I have become disillusioned with my current portfolio and planning on setting up an indexed portfolio. My main goal is to become financially independent as soon as possible.

To create the correct asset allocation model I think a little bio is required.

Age: 26 Years old as of July
Occupation: Military - E5 - 6 year mark in December and have recently re-enlisted.
Income: I bring home $3100 a month (hates taxes and SS!!) with a pay raise expected in January of about $300 a month. I also will receive $5000 every January for the next 5 years. I will use this to continue funding my Roth.

My current Taxable portfolio is as follows:

Taxable Total: $85,541.13 Symbol Description Quantity Price Most Recent Value BAC BANK OF AMERICA CORP 221.703 $52.07 $11,544.08 C CITIGROUP INC 164.191 $47.87 $7,859.82 FRE FREDDIE MAC 134.09 $60.63 $8,129.88 KFT KRAFT FOODS INC CL A 34.505 $33.85 $1,167.99 MO ALTRIA GROUP INC 104.252 $70.06 $7,303.90 PFE PFIZER INC 323.177 $25.26 $8,163.45 STI SUNTRUST BANKS INC 97.646 $74.95 $7,318.57 T AT&T INC COM 196.191 $42.29 $8,296.92 USB US BANCORP DEL COM NEW 256.016 $32.88 $8,417.81 WAG WALGREEN COMPANY 50 $38.82 $1,941.00 WFC WELLS FARGO & CO NEW 221.045 $36.04 $7,966.46 WM WASHINGTON MUTUAL INC 209.115 $35.20 $7,360.85
I also have $13,087 in my Roth which is invested in SDY.

As everyone can tell this portfolio is very heavy financial which have not done so well as of late. I had been following a dividend based strategy of buying large dividend paying companies which resulted in heavy financials. During my last fiscal year (25 Mar 06 - 25 Mar 07) the portfolio returned 18.68% which was enough to beat the market. This year so far is a completely different story. The portfolio is currently down .83% from 26-Mar-07 while the S&P 500 is up 9.17%! I thought I could easily deal with this type of index lagging but I really despise it. It is probably a good thing I came to realize this at this stage rather than down the road.


So now it is time to construct a new preliminary portfolio. Here is what I have in mind for the taxable portion of the account:

Domestic Stocks (USA) - 45%
International Stocks - 25%
Bonds - 20%
Reits - 5%
Commodity Index - 5%
Maybe a 5% play/fun section

I will further break down these as follows:

Domestic Stocks - 25% Large Cap Value, 25% S&P 500, 15% Mid Cap Value Index, 10% Mid Cap Index, 15% Small Cap Value Index, 10% Small Cap Index

International Stocks - 33% Pacific Index, 33% Europe Index, 33% Developing markets

Bonds - Either 100% Lehman US Aggregate Bond Index or a portion into that index and some international bonds.

Does anyone think it is worth holding the Value Index funds in a taxable portfolio. These index funds tend to have a +-20% turn over which will result in more taxes than a simple total market fund.

Currently all of my accounts are at Fidelity which does seem to charge a little more for index mutual funds than Vanguard does. I am considering either opening an account with Vanguard and using there mutual funds or using various ETFs to construct my new portfolio. The average ETF seems to be about 10 basis points cheaper than the mutual funds but have the typical $10 trading charge. As I will continue investing monthly I am not sure which way to go on this.

I could probably go on but this post is long enough and I canask more questions later!

-trixs

 

[bssc]

Well, you seem to have a good idea what you want and where you are going. Yes, you have a lot of financials which are not doing too well because of the subprime mess but that is temporary.

I would say that on one hand that you understand the need for diversification. On the other hand, it sounds like you haven't been around to experience the cyclical nature of the market. I hold a lot of same stocks that you do and expect them to do well over the long run. I remember holding a lot of energy stocks three years ago that were doing nothing, what a difference a couple of years make.

But the important thing is that you have done quite well for a 26 year old (I hit 48 the day before your birthday). If you put in 20 year, you probably won't need a second job when you retire from the service.

 

[trixs]

Yes, you have a lot of financials which are not doing too well because of the subprime mess but that is temporary.

Yea, but if something worse was to happen I could see myself selling out. I have come to realize I really hate not following the market.

On that note I am planning on holding the stocks until March. This will allow everything to be long term gains/losses and hopefully financials will come back somewhat in that time.

What do you think of holding Reits, Value Funds, ect in a taxable account? I really want to keep Non-Taxable and Taxable separate as I cant rebalance between the two.

 

[bssc]

I don't have any funds in my brokerage accounts, only in my 401(k)s. I have a SP500 index fund and an international index fund plus some company stock there.

On the other hand, you are talking to someone who is buying homebuilders stocks, precisely because they are getting killed.

 

[Ed_The_Gypsy]

Nice work, kid! It took me a lot longer to wake up to index funds. And to save. You are about 10 years ahead of me when I figured it out.

I don't like bonds in a taxable portfolio at all. Bonds reduce volatility but the returns are lower. Lately.

If you want a stable place to park money for contingencies, use a money market fund. Use it to feed CDs if you want to park it a while longer. CDs won't lose principle. Bonds will. Eventually, in the far future when you start to cash out, you may want to put, say, 5 years worth of dividends back into a cash account to smooth out the ups and downs of the market.

If you are thinking of bonds as an investment vehicle as opposed to a savings or safety fund, in the accumulation phase where you are, I would replace the bonds with value indexes. (NOTE: I have a high tolerance for volatility, which has paid off for me. Your mileage may vary.) There must be a value fund somewhere that has low turnover. Check Vanguard. (As everything I have is tax-sheltered, I haven't studied turnover--but I don't like it either.)

The only commodity that I invest in is energy through Vanguard's energy index fund. The way I see it, we can live without gold and cement and pork bellies for a while, but everybody needs energy and it is beginning to become dear.

Vital point: Expect your paper value to decline for long periods. Remember that patience will be rewarded and those who panic and pull out will (probably) miss the next turnaround. The S&P has been down for as long as ten years (Great Depression). With the mix of international and domestic that you have, you may be "under water" only 5 or 6 years. You don't actually lose money until you sell, so don't sell. Remember that you will still have an income stream from dividends which is more stable than valuation (Net Asset Value). When the market is down, you can buy that income stream more cheaply.

Next order of business: Stay alive.

Cheers,

Gypsy

formerly E-5 Gypsy.

 

[Ed_The_Gypsy]

trixs,

You seem to have a lot of holdings for a relatively small portfolio and are projecting a smaller but still populous list of funds to replace it.

You may want to consider a Scot Burns-type approach with very few funds. A simple fund portfolio can take you a long way. It is also a lot simpler to keep track of and do the taxes on.

Consider the following Vanguard funds:
Total Stock Market (VTSMX)
1/5/10 yrs: 16.8%/16.3%/6.8%
Total International Stock Market (VGTSX)
1/5/10 yrs: 30.1%/25.4%/8.5%

50/50 in those two would give you a lot of performance and a lot of safety. Scot would suggest another equal amount in a bond fund (the Margarita Portfolio), but not to my taste--yet.

For a little more action, for the US side, equal parts of VTSMX and
Value Index Fund (VIVAX)
1/5/10 yrs: 15%/18.5%/7.6%

For the international side, equal parts of VGTSX and
Emerging Markets Index (VEIEX)
1/5/10 yrs: 56.6%/38%/12.4%

Set it and forget it. Rebalance every 2 to 5 years.

Still, an adrenaline junkie like UncleMick puts 5-10% into a fun account to play with. Leave the serious $$ in the 2-4 funds above on automatic pilot.

Cheers

 

[Buckeye]

If you haven't already, I would highly recommend you read The Four Pillars of Investing, one of the books often mentioned on this website. Sounds like you are trying to time the market which may not serve you well over the long term.

 

[kumquat]

I am considering either opening an account with Vanguard and using there mutual funds or using various ETFs to construct my new portfolio. The average ETF seems to be about 10 basis points cheaper than the mutual funds but have the typical $10 trading charge. As I will continue investing monthly I am not sure which way to go on this.


-trixs

It depends a lot on how much you intend to invest each month. Twelve $10 charges is $120 per year. To get $120 from 10 basis point how large does your portfolio have to be? From the rest of your post I'm sure you can do the math.

BTW, with 85K saved at 26 and (I'm guessing) a military pension sometime in the future, you are well on your way. Keep up the LYBM ways and the above won't matter.

 

[trixs]

If you haven't already, I would highly recommend you read The Four Pillars of Investing, one of the books often mentioned on this website. Sounds like you are trying to time the market which may not serve you well over the long term.

I actually have that book sitting in front of me at this very moment lol - how odd. I think Bernstein's prior book is a little better tho.

The Four Pillars of Investing is actually why I am curious about owning Value funds in taxable accounts.

 

[trixs]

You may want to consider a Scot Burns-type approach with very few funds. A simple fund portfolio can take you a long way. It is also a lot simpler to keep track of and do the taxes on.

That is the real question. Do I go something like 33% total stock market, 33% international and 33% bonds or something a little more complex like post above. In all honesty only 3 funds seems a little boring but l guess simple is often times better.

 

[travelover]

......... In all honesty only 3 funds seems a little boring but l guess simple is often times better.

Set aside a little play money and use it to burn off the excess investing testosterone.

 

[RetireeRobert]

Hello Everyone,

My current Taxable portfolio is as follows:

As everyone can tell this portfolio is very heavy financial which have not done so well as of late.

So now it is time to construct a new preliminary portfolio. Here is what I have in mind for the taxable portion of the account:

Domestic Stocks (USA) - 45%
International Stocks - 25%
Bonds - 20%
Reits - 5%
Commodity Index - 5%
Maybe a 5% play/fun section

I will further break down these as follows:

Domestic Stocks - 25% Large Cap Value, 25% S&P 500, 15% Mid Cap Value Index, 10% Mid Cap Index, 15% Small Cap Value Index, 10% Small Cap Index

International Stocks - 33% Pacific Index, 33% Europe Index, 33% Developing markets

Bonds - Either 100% Lehman US Aggregate Bond Index or a portion into that index and some international bonds.
-trixs

I agree it is wise to restructure. Very heavy now in financial as you say. Your proposed allocation of domestic/intnl/bonds/reits/commodity looks reasonable.

But your suballocation within those categories is making things way too complicated.

I think you can likely accomplish as much in "domestic" with ONE domestic index fund (or ETF), as you would with your proposed mix of six funds. Six just in domestic is way too much.

Likewise in international stocks, you can find a good int'l fund (or ETF) to give you nearly all of what you want with your proposed three int'l funds.

Keep it simple. It just makes life so much easier, both now, as well as you proceed, and into the far future.

As to staying with mutual funds, or going the ETF route, your ongoing monthly investments "may" favor the funds. If you have enough critical mass, ETF's at $10 a trade "may" be viable, because as you mention they could have lower internal expenses then funds--enough to offset the transaction fees.

For sure, the fewer ETF's you deal with lessens the trading costs. With one domestic instead of six, with one int'l instead of three, you cut your transaction fees tremendously.

You also mention Vanguard vs Fidelity. It may be worth it to go to Vanguard---it is likely they have the products to satisfy your proposed asset allocation. I would suggest you see if you can do all you want with your portfolio with Vanguard products, then make the change as much at once as you can. Then stay there. I have a large block of my assets with Vanguard and have been completely satisfied with service, product availability, and especially costs.

I am sure you will reach the FIRE point as long as you stay on course for the next 15 to 20 years.

 

[trixs]

I agree it is wise to restructure. Very heavy now in financial as you say. Your proposed allocation of domestic/intnl/bonds/reits/commodity looks reasonable.

What is the consensus on rebuilding portfolio now verse waiting until next March to completely rebuild. I find the only reason my mind keeps saying to wait is I hate to see the last 6 months go to waste.. 'Hope' that financials will do well and bring my portfolio back to the mean with the rest of the market seems to be the only reason.

 

[RetireeRobert]

What is the consensus on rebuilding portfolio now verse waiting until next March to completely rebuild. I find the only reason my mind keeps saying to wait is I hate to see the last 6 months go to waste.. 'Hope' that financials will do well and bring my portfolio back to the mean with the rest of the market seems to be the only reason.

Waiting till March means any gains you have on selling current holdings would be longterm at that point? That is only five months out. I think that is a reasonable thing to do--wait till March.

 

[terminator]

How much new money are you saving each year? Is it feasible to just re-allocate your new savings to uncovered asset classes and over the course of time meet your newly determined allocations while keeping your existing holdings as part of your domestic stock allocation?

 

[honydonk]

Dont change anything

Hi,

Well there are multiple ways to dublin and you had chosen one , that of dividend strategy. Not every strategy is always positive.

Dollar is at a low right now. lets say u make the transistion to international and US dollar rises what is your reaction.

What you have done is given a cushion to your dividend money in retirement and the power of compounding will get you there.

What you need to do is stop contributing and use the new money to completely fund your funds and within a matter of 2 years you have got to your required asset allocation. In the meantime your dividends can be used in your additional allocation rather than reinvested to get you there faster.

Financials will come back in 2 years till then buy low and keep the dividends going which will reduce your cost basis.

Its not easy as i followed the dividend strategy and last year made only 9% not good but ok , this year that account again got me 9% its not great but the remaining portfolio where i tweaked a bit is already up 18% and it will reach close to 28% by year end.

If you cant stick with your plan then you are not going to stay the course and you will always keep running between 2 poles and will have a mixed portfolio before long.

thanks

 

[brewer12345]

If you can't stand not tracking the markets, then clearly you should reshuffle.

But on a fundamental basis, banks are dirt cheap and now have a gigantic tailwind in the form of the fed cutting rates.

 

[figner]

trixs,

Looks like your current portfolio is about 85% taxable and only 15% non-taxable. Personally, I'd follow Bernstein's recommendations and not put value or bonds in taxable. Even your bond allocation alone wouldn't quite fit in your Roth. If you anticipate having more room in non-taxable accounts in the future, that might be a better time to add some of the tax-inefficient asset classes.

On the other hand, you don't say what tax bracket you're in, and I'm not familiar with how military pay is taxed; so if you expect to fall into really low tax brackets, that may matter less.

Anyway, based on your age and current savings, you're doing great!

 

[ats5g]

trixs,

I think you should reconsider using the TSP for at least your bond allocation. It's pretty hard to find high quality bond funds for 0.03%. Bonds are extremely tax inefficient, and I'm sure you can get a much higher after-tax return by placing them in the TSP. This would also free up the Roth for things like REITs, SV, etc. From your prior conversation, I realize that you want to retire early, and thus want access to your funds before 55 or 59.5. However, you can always roll the TSP into an IRA and do the whole 72T thingee. John Greaney's been doing it for years.

I'm sure others that ER's have weighed the options between contributing over the match in a 401(k) vs. a taxable account. Maybe they'll weigh in.

As far as the portfolio goes, I think a more rational way to do any value tilting is to start with the TSM and then use the small and value funds/etfs to get the value and small exposure you want. For example, a TSM fund + a SV fund/etf would be perfectly fine if you wanted to do the whole small and value tilt with two funds. Just rachet up the % of the SV fund to meet your desires. I think the advisors that use DFA funds just do the whole 4x25 thing b/c DFA doesn't have a TSM fund.

- Alec

 

[clifp]

That is the real question. Do I go something like 33% total stock market, 33% international and 33% bonds or something a little more complex like post above. In all honesty only 3 funds seems a little boring but l guess simple is often times better.

Based on your posts, I am guessing you'd be bored with a purely index approach. Now performance wise, I can't argue that you be almost certainly better off with a very simple 2-4 fund approach.

However, if the choice is increased saving because you enjoy researching and investing in individual stocks and funds vs restricting yourself to index funds, I say keep with you are doing.

However, you do need low cost mutual funds for just the situation you've found yourself in your value companies and financial stocks going down in a bull market. Still, I won't be in rush to sell them. What I would do is max out your TSP contributions, sell any losers for tax losses and reinvest the proceeds in a index fund, either a total market or small cap since you have mostly large cap value. Don't add money to your individual stock portfolio until the value of your mutual funds exceeds your individual stocks.

 

[trixs]

If you can't stand not tracking the markets, then clearly you should reshuffle.

But on a fundamental basis, banks are dirt cheap and now have a gigantic tailwind in the form of the fed cutting rates.

I do agree that banks are extremely cheap and will eventually post some great returns. The reason I want to rebalance is because Ive come to realize, for better or worse, that being concentrated in a few stocks will not obtain as steady results as I broadly diversified portfolio. Currently I can stand not tracking the market but as my portfolio grows I am not so sure.

Figner,

I really don't see how the various experts say putting bonds and such in a roth is a good thing. It seems to me you would want your non taxable accounts to have the most growth simply because they are not taxable. I will have to run a few scenario's on this in the future. As for my tax situation - I have never pay much in taxes. Six months of my income this year will be tax free leaving me in the extremely poor basket according the government. Of course that doesn't include capital gains.

ats5g,

I have actually never participated in the TSP. My old justification for this was, "Cant withdraw it until I am OLD." Probably not the smartest thing but I have come to enjoy having freecash flow.

clifp,

I would be extremely bored with a 3 fund portfolio. This is precisely what led me to not indexing my portfolio a few years ago. That is the reason if I index I would probably use many more funds than is really needed - It keeps me interested!


Thanks everyone for the responses. You guys have given me much to think about while I am deployed in the near future..

 

[Gumby]

You want your real growers in your taxable accounts because when you take profits, they are in the form of capital gains, which, if long term, are taxed at a lower rate than ordinary income. Everything you take out of a tax deferred account, such as an IRA or 401k, is taxed as ordinary income, even it was the result of capital appreciation rather than dividends. By contrast, you want your dividend stocks in the tax deferred accounts so that you can pay the taxes after you retire and are presumably in a lower tax bracket.

 

[Dawg52]

clifp,

I would be extremely bored with a 3 fund portfolio. This is precisely what led me to not indexing my portfolio a few years ago. That is the reason if I index I would probably use many more funds than is really needed - It keeps me interested!

I have 5 funds that account for 90% of my portfolio. The other 10% is in individual stocks. That gives me a little hands on play and keeps me from being bored with my investments. BTW, I use this money to buy beaten down stocks like your financial's.

 

[tightasadrum]

clifp,

Funny how things play out, but I have been flirting with BUYING some financial stocks because they ARE down. But I'm glad I didn't have to ride it down this year. The yield on these are very appealing to me right now.

BTW, I like your AA plan percentages, although I might adjust the domestic/foreign stock % slightly toward foreign. The currency movement favors that at the moment I think.

 

[RetireeRobert]

I have actually never participated in the TSP. My old justification for this was, "Cant withdraw it until I am OLD." Probably not the smartest thing but I have come to enjoy having freecash flow.

clifp,

I would be extremely bored with a 3 fund portfolio. This is precisely what led me to not indexing my portfolio a few years ago. That is the reason if I index I would probably use many more funds than is really needed - It keeps me interested!

Does the TSP provide any employer match? If so, you are missing out on free money there.

As to bored with a 3 fund portfolio, that likely means you wouldn't stick with the plan, and that's not good.

I would NOT go with 10-12-15 funds just to alleviate boredom. If boredom is going to be your problem, I would construct a portfolio of perhaps 10-12 individual stocks along with maybe 1 bond fund for bond portion of allocation. That can give you adequate diversfication, as well as adequate "non-bordomness". You can spend your time choosing the stocks to spread out investment by industry, by cap size, by growth /value orientation, and by whatever other criteria suit your fancy.

10-15 funds just seems pointless, probably lots of duplication among funds (making it harder for you to know what you really have in your portfolio), they all have the extra layer of admin expense stocks don't have, and then after choosing the 10 or 15 you get bored again and start trading funds (not really the point of funds, IMHO).