Questions RE Asset Allocation

[Keim]

Have just read The Bogleheads Guide to Investing, and am looking at restructuring my portfolio.

I am currently 38 years old, with a before tax household income in the upper mid 5 figures. 2 kids. No debt.

Lower to mid six figures invested. Currently have money invested in IRA's for self and wife, and 20% of portfolio in taxable investments. Heavily weighted towards healthcare (Recent gov't changes concern me. But the aging of our population seems to make this a good bet imho).

With my time-frame, I don't mind having a fairly risky portfolio.

I'd like to use an index strategy, as the book discusses.

I am looking at moving towards this portfolio over the course of the next year:
Vanguard Total Stock Market Index Fund-40%
Vanguard Int'l Value-30%
Vanguard REIT Index Fund-10%
Vanguard Int. Bond Fund-5%
Vanguard Healthcare Fund-15%

My questions:
1. What are peoples thoughts on this for an index portfolio?
2. When laying out an index fund portfolio should I:
a. Look at the entire portfolio (spouse and my IRA's, taxable and retirement)?
b. Set-up individual portfolios for both spouse and I?
c. Set-up separate portfolios for retirement and taxable accounts?

Thank you for sharing your thoughts with me.

 

[LOL!]

Things have changed a little bit since that book was written. Vanguard has changed their index funds so that it offers ETFs plus lower minimums for Admiral share class, plus some indexes are changed. Notably the Vanguard Total Int'l Stock Market Index will include Canada, emerging markets, and all-caps in the future and not just large caps.

So with that prelude, a typical Boglehead portfolio of total stock market weights would look like a Vanguard Target Retirement fund with just 3 funds. See also: Three-fund portfolio - Bogleheads . That is not what you have proposed.

Another classic portfolio would be one tilted to small-cap and value equities. Such a portfolio might start with the 3-fund portfolio, then add a US small-cap value index fund and a foreign small-cap index fund. Your proposed portfolio is not this either.

Whatever you do, do not put Vanguard Int'l Value into your taxable account. This actively-managed fund will cost you a lot in taxes. Also do not put a REIT fund in taxable. The same goes for the Healthcare fund.

I think the HealthCare sector bet is misplaced. There are plenty of healthcare stocks in the total market indexes, so you get them anyways. With regulation of the industry, they haven't really made any money in a while and won't in the future and there is no reason to overweight them. (Full disclosure: every major pharmaceutical company is a client of my company.)

I would suggest a simplified portfolio of 4 equity funds and whatever you want in bonds. The equity funds: VTI, VBR, VEU, VSS in equal amounts. Add VNQ and EWX if you want to be riskier.

Answer to your question 2: You and your spouse have a SINGLE combined portfolio. You want a SINGLE asset allocation using the best funds available in each of your retirement accounts at the lowest expense ratio. You want to set up LOCATION of assets to reduce the taxes. Example: All bonds in tax-advantaged. If you must have a taxable account, then Int'l index funds preferred in taxable over other funds. Actively-managed fund (if you must have them) in tax-advantaged.

You should use the resources at www.bogleheads.org for more help.

 

[Keim]

Thanks for the detailed answer, LOL.

"I would suggest a simplified portfolio of 4 equity funds and whatever you want in bonds. The equity funds: VTI, VBR, VEU, VSS in equal amounts. Add VNQ and EWX if you want to be riskier."

It seems you lean towards ETFs. What advantages do you see to these? Is it the ability to trade them more like a stock? Cheaper? Or is there something I am missing?

 

[LOL!]

You don't need to use ETFs. I used the ticker symbols of the ETFs since it reduced my typing.

Pros and cons of ETFs: Bogleheads :: View topic - Where is the big advantage in ETFs?

 

[Keim]

Very interesting reading, LOL! I can see I will be investigating the Boglehead WIKI quite a bit in the next few weeks.

Your input is exactly the type I was hoping to get with my initial posting. This type of sharing is what makes this forum great and keeps me coming back. Thanks!

 

[Keim]

Thanks, again, LOL!. I've ordered prospectuses on your suggested funds.

Will be curious to see what others say.

 

[LOL!]

There is an asset allocation tutorial that may be helpful, but it has a lot of dated (probably stale) links:
http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324-2.html#post578722

 

[Midpack]

I am looking at moving towards this portfolio over the course of the next year:
Vanguard Total Stock Market Index Fund-40%
Vanguard Int'l Value-30%
Vanguard REIT Index Fund-10%
Vanguard Int. Bond Fund-5%
Vanguard Healthcare Fund-15%

My questions:
1. What are peoples thoughts on this for an index portfolio?
It's a viable asset allocation, although some of the choices aren't mainstream (but you must have your reasons).
- No harm in it, but not sure what the 5% in bonds is meant to accomplish. Such a small position in that asset class won't have much of an effect on your overall results - I take it you're wading in slowly, nothing wrong with that. When I was young I was 100% stock. When I added bonds to my portfolio, I started at 15-20%, but that's just me - there is no "right" answer.
- 15% is a pretty large sector bet for an indexer, health care or any other sector. But I have 4% in the VGENX which is probably just as unusual.
- Again, there is nothing wrong with your AA or choices, just some thoughts.
2. When laying out an index fund portfolio should I:
a. Look at the entire portfolio (spouse and my IRA's, taxable and retirement)? Absolutely, to do otherwise just adds unnecessary complexity.
b. Set-up individual portfolios for both spouse and I? That's between you and your spouse, not so much an investment question.
c. Set-up separate portfolios for retirement and taxable accounts? No, but look at the tax efficiency of each holding. Fill your deferred/sheltered accounts with the least tax efficient investments (bonds most likely your least efficient), and most tax efficient in taxable.

 

[Keim]

Thanks, Midpack. Some good food for thought. Am considering moving the % down on healthcare. And you are exactly correct about bonds-just getting my feet wet. At 38 I feel I should have some, but want to understand them better before taking a larger position.

Can't really say I have any strong reasons for not being mainstream in my choices. I'm just generally averse to being mainstream in life. Its worked well for me in life! Is anyone on this board truly mainstream?

My questions:
1. What are peoples thoughts on this for an index portfolio?
It's a viable asset allocation, although some of the choices aren't mainstream (but you must have your reasons).
- No harm in it, but not sure what the 5% in bonds is meant to accomplish. Such a small position in that asset class won't have much of an effect on your overall results - I take it you're wading in slowly, nothing wrong with that. When I was young I was 100% stock. When I added bonds to my portfolio, I started at 15-20%, but that's just me - there is no "right" answer.
- 15% is a pretty large sector bet for an indexer, health care or any other sector. But I have 4% in the VGENX which is probably just as unusual.
- Again, there is nothing wrong with your AA or choices, just some thoughts.
2. When laying out an index fund portfolio should I:
a. Look at the entire portfolio (spouse and my IRA's, taxable and retirement)? Absolutely, to do otherwise just adds unnecessary complexity.
b. Set-up individual portfolios for both spouse and I? That's between you and your spouse, not so much an investment question.
c. Set-up separate portfolios for retirement and taxable accounts? No, but look at the tax efficiency of each holding. Fill your deferred/sheltered accounts with the least tax efficient investments (bonds most likely your least efficient), and most tax efficient in taxable.

 

[pb4uski]

Couple suggestions for you. The Vanguard website has some good materials on asset allocation and once you are a shareholder a tool called Portfolio Watch that assesses your portfolio compared to an asset allocation based on your age, risk appetite, etc. Also, they offer a financial planning service that you may find useful and is often free if they are getting a big chunk of money.