Best way to add in international?

[Katsmeow]

Following up on a previous thread, we are setting aside part of our portfolio in cash and short term funds in order to fund some high expenses during the next 3 years. To do this, we will be selling and living off of during 2014 our taxable portfolio which was where we had our international equities.

So, for the remaining portfolio - that is the tax deferred portfolio that is not being set aside I want to find the best way to add in international.

Our desired portfolio asset allocation is 55/45. Once I sell of the taxable portfolio we will be just a little over that in the resulting portfolio.

Before I sell off the VTIAX in the taxable account I want to rebalance what will be left in the resulting tax deferred portfolio (i.e. our now total portfolio minus what we set aside), including ending up with about 15% of our equities in international. I am uncertain how to best do this given the available options.

What we have in the resulting portfolio (again, this does not occur what we are setting aside):

DH's IRA

Wellesley - VWIAX - ER-.18 - 14.9% of Portfolio
Vanguard High-Yield Corporate - VWEHX - ER .14 - 6.4%
Vanguard Short-Term Investment Grade - VFSUX - ER .16 - 10.6%
Vanguard Extended Market - VEXAX - ER .14 - 14.5%

PenFed 5Yr CD 0 - 14.4% (this is in process, we are selling our Total Bond Market and putting it in the PenFed 5 year 3% CD)

My 401k

Dreyfus S&P 500 - PEOPX - ER .51 - 39.2%

Our preference is to draw from DH's IRA before drawing from my 401k. He will be hitting 70 several years before I do. DH is 66 now.

My 401k doesn't have great choices in it. I prefer to keep it as a 401k for a few years.

There are a couple of International choices in it, but I don't like the ER on them. There is also a stable value fund and a Strategic income fund, if I wanted to put some of our fixed income in my 401k.

Relevant choices in my 401k:

FA INTL DISCOVERY T FTADX ER 1.59
OPPHMR DEV MKTS N ODVNX ER 1.56
FA STABLE VALUE ER 0.91 - current yield is .84%
FA High Income FHITX ER 1.05
FA Strat Income FSIAX ER 0.98

Comments on the funds we have and how I feel about changing them:

Wellesley - This has done very well for us and I prefer to keep it in the portfolio. That said, I wouldn't be averse to selling 20 or 30% of it to achieve the other goals that I have. On the other hand, I'm fine with keeping it as well.

Vanguard High-Yield - I am fairly neutral about this. I would ideally like to keep it at about 5% of the total portfolio. That said, now that there is an International Bond fund I've thought about selling part of this and putting it in the international bond fund.

Vanguard Short-Term Investment Grade - I don't particularly want to change this except to a minor amount. Again, I've thought about putting something in the international bond fund. But, if it was better to put some of 401k into the Strategic Income Fund (for example) then I could that and then I could sell from here to buy the Vanguard International Fund in the IRA.

Vanguard Extended Market - I have this to try to help to approximate the Total Stock Market fund given that my 401k is in an S&P 500 fund (with no choice for any other index fund). This is the obvious place where I could sell about half of this to buy international. But, not sure whether to do this or to keep it given that I have so much in the S&P 500 fund in my 401k. But one option is just to keep my 401k as is and sell part of this to buy the International Fund.

PenFed CD - This is in progress at the moment - Plan to keep this in PenFed CD replacing the Total Bond Fund.

Dreyfus S&P 500 Fund - The only index fund in my 401k and it has lowest ER. I have considered the possibility of putting some of this in the Strategic Income Fund and then taking part of my fixed income at Vanguard and putting it in the Vanguard total international. The strategic income fund has an ER of .98 which is one of the lower options in my 401k. Alternatively, I could sell some of the S&P 500 fund and buy FTADX or ODVNX (or both) but they have ERs of 1.59 and 1.56 respectively so that isn't appealing to me.

The basic question comes down to whether I keep all the S&P 500 fund and sell some of VEXAX in DH's IRA to buy international or whether I move some of the S&P 500 fund to fixed income so I can buy international in DH's IRA without selling VEXAX or whether I just buy international in my 401k.

 

[bUU]

OPPHMR DEV MKTS N ODVNX ER 1.56

Without commenting on the actual question you posed, let me say that I've decided to invest in ODVNX. Not heavily, but while I'm holding international positions in several other funds, I'm not adding to any of them (except through reinvestment), while I am adding to my international allocation on an ongoing basis in ODVNX, in my 401k.

Yes it is expensive. Very expensive. But it has great returns (albeit not recently), and I can get it load-waived.

I do prefer to keep international equity investments in taxable account, though. I don't like index funds for international though - I don't think the market is efficient enough for index funds to do their special magic. I've been splitting money between two fund companies for international, Artisan and Wasatch, FWIW.

 

[MooreBonds]

while I am adding to my international allocation on an ongoing basis in ODVNX, in my 401k.

I do prefer to keep international equity investments in taxable account, though. I don't like index funds for international though - I don't think the market is efficient enough for index funds to do their special magic. I've been splitting money between two fund companies for international, Artisan and Wasatch, FWIW.

[/QUOTE]

Ah, yes. Inside a 401k, it's all different, IMO.

The way I look at my 401k (which I recently rolled over to a SEP IRA when I left my previous employer), I can either have 1% ER on a domestic index fund, or 1.5% ER on an international fund. Since all international funds have higher expense ratios than domestic, and since - as you point out, and to which I agree - I am ok with holding actively managed funds as well as a few indexes for Int'l, because the space is so big and I want exposure to ALL of it, I'd rather pay maybe .6%-.7% ER more for an int'l in my 401k than pay 0.8% more for a domestic index fund.

I do have many country-specific ETFs that give me exposure to each country, as well as index funds for emerging/small cap/mid cap/etc in different regions, but also like a few managed funds for add'l exposure to ones that can't all fit in the country-specific or Emerging/Int'l index funds.

 

[Katsmeow]

When we had taxable investment funds we did feel it was optimal to hold our Vanguard Total International in our taxable funds. But for reasons explained in another thread (which I don't need to reiterate here) we won't have those taxable funds any more. Therefore I want to add in international in our tax deferred funds. The question is which is the best way to do it given our options.

 

[Gotadimple]

The basic question comes down to whether I keep all the S&P 500 fund and sell some of VEXAX in DH's IRA to buy international or whether I move some of the S&P 500 fund to fixed income so I can buy international in DH's IRA without selling VEXAX or whether I just buy international in my 401k.

I read you want to fund international by selling S&P 500. So you are changing your asset allocation, is that correct?

If the answer is yes, then the decisions depend on what is available to you. I prefer to keep it simple and have followed an allocation model suggested by Rick Ferri in All About Asset Allocation. I won't suggest specific funds, but I am partial to index funds, and am finding that international ETFs have lower expense ratios and do all the other things that mutual funds do.

At a minimum you will want a global stock fund/etf, and perhaps a small investment in emerging market bond fund/etf. Vanguard ETFs do mirror their mutual funds so you can get a sense of performance by looking their mutual funds.

If you want further diversification, you can place a portion of your international equity investment in Emerging Markets and another portion in Pacific Rim markets. So my allocation looks like:

10% of equities in international etfs: 5% in global markets, 3% in Pacific Rim, and 2% in Emerging Europe. 3% of bonds in Emerging Market bonds. Interest rate risk, currency risk, and sensitivity to US markets are why I don't have more invested in International.

-- Rita

 

[Katsmeow]

I read you want to fund international by selling S&P 500. So you are changing your asset allocation, is that correct?

Not exactly.

I am not changing my asset allocation. My asset allocation has been 55/45 with about 15% of equities in international through VTIAX (which I've been happy with). However, I am setting aside a part of my portfolio into cash/near cash to cover some high expenses over the next 3 years. The best way for me to do that is to sell my taxable portfolio and put those funds into cash/near cash to cover those high expenses. My international funds are in that taxable portfolio. So - when I sell those taxable funds, my resulting investment portfolio no longer has any international.

There are 3 main ways I can get International and still maintain my 55/45 asset allocation, two of which involves selling my S&P 500 funds. One of the options does not involving selling the S&P 500 fund:

Option 1 - Sell some of extended market in DH's IRA and buy the needed amount of International (VTIAX)

Option 2 - Sell some of the Dreyfus S&P 500 fund in my 401k and buy FTADX and/or ODVNX at a high ER (1.59 and 1.56 respectively)

Option 3 - Sell some of the Dreyfus S&P 500 fund in my 401k and buy Strategic Income Fund (FSIAX) in my 401k. Then, sell some of fixed income in the IRA (probably some of the high yield fund or VFSUX) and buy VTIAX in the IRA.

It is these choices I am undecided between. I can make a case for each of them, but I'm sure which is the best one.

 

[SVHoper]

Hi,

Just wanted to check that you did not have a low cost brokerage option in either of the 401ks... that is how I expanded choices to VG ETFs.

 

[Katsmeow]

No. There is just one 401k. That is mine which is with Fidelity. There is no brokerage option. The lowest ER is the S&P 500 fund at .51 which is what I have. The Strategic Income Fund is the best fixed option at .98. Then, the two international funds are 1.58 and 1.56.

DH has an IRA with Vanguard so has available pretty much everything. However, we are happy with VTIAX for international.

The question is about what to sell to get the VTIAX. Right now I'm probably inclined to just switch some of the Extended Market in the IRA to VTIAX. Just not sure if that is best.

 

[clifp]

Kat you have interesting puzzle with no obvious good answers.
If understand you correctly your 401K only has one almost low ER fund the S&P. Given the poor choices I think I'd move some of S&P 500 fund into the stable value fund despite its is high ER (EQ about equal to yield ). Sell the short term bond in DH 401K and buy Vanguard Total International in the 401K.

I'd also explore some other options, in particular given how lousy your 401K is perhaps you could borrow against, or simple cut the contributions to the point where you get a matching and use the additional money to fund the international in your taxable account.

You are eventually going to have to pay tax on the money from the 401K and you are close enough to retirement that benefit of compounded tax free maybe less than downside of high expenses.

 

[Animorph]

I use FIGRX, the retail version of FTADX in my portfolio. The ER is a little better at 1%, but they both look like they regularly stay above the returns of MSCI EAFE and don't stray too far from it either. I wouldn't have any problem using FTADX if that's what you have available. It's a little high above the index at the moment, so there is the possibility that it will lag a little in the short term. I wouldn't worry too much for a long term holding.


ODVNX looks like you could be buying a hot performer. They've been doing something right for the last 5 years. It's no index replacement for sure. And quite possibly due for a correction of its very own. I'd only use it if you feel greedy and don't mind watching it carefully.

 

[Katsmeow]

Kat you have interesting puzzle with no obvious good answers.
If understand you correctly your 401K only has one almost low ER fund the S&P. Given the poor choices I think I'd move some of S&P 500 fund into the stable value fund despite its is high ER (EQ about equal to yield ). Sell the short term bond in DH 401K and buy Vanguard Total International in the 401K.

I'd also explore some other options, in particular given how lousy your 401K is perhaps you could borrow against, or simple cut the contributions to the point where you get a matching and use the additional money to fund the international in your taxable account.

Yes, I don't actually contribute to the 401k any more. My employer (working very part-time) makes an annual discretionary contribution proportional to salary. It is not dependent on employees having made any contribution.

3 years ago when DH retired we got a free financial plan from Vanguard and at that time they had me put my 401k in a combination of the S&P 500 fund and the strategic income fund (ER of .98). Our overall portfolio was very different then (DH still had his own 401k with lots of limitations) and when it later changed when DH rolled over everything to his IRA, I got rid of the strategic income fund in my 401k. So one option would be to put some back into it. I just have resisted putting much into fixed income in my 401k since we don't plan to withdraw from it for a long time (will withdraw from DH's IRA first since he 6 1/2 years older than me).

I use FIGRX, the retail version of FTADX in my portfolio. The ER is a little better at 1%, but they both look like they regularly stay above the returns of MSCI EAFE and don't stray too far from it either. I wouldn't have any problem using FTADX if that's what you have available. It's a little high above the index at the moment, so there is the possibility that it will lag a little in the short term. I wouldn't worry too much for a long term holding.

Well I could have VTIAX in the IRA if I left my 401k alone and sold some of the extended market in the IRA or if I moved some of my 401k to the stable value fund or the strategic income fund (ER of .98)