50 and rethinking my portfolio

[steady saver]

Hi,
I am 50, married with two sons (college and high school) and planning to retire in 2017. I have a Fidelity account through my spouse's work which houses our 401K and an individual account for my hobby of stock picking. In looking at this individual portfolio, I'm embarrassed to say that it is cash heavy and company stock heavy (due to a stock option redeemed). I will have about $325K to work with (I'll keep the other roughly 100K in my chosen stocks) and I've decided to just buy index fund ETF's through it. Here is what I'm looking at:
Vanguard Total Market Index Fund (VTI), Vanguard Total Bond Market Index Fund (BND), Vanguard REIT (VNQ), and Vanguard Small Cap Growth (VBK).

I know I need to look at the overall picture, but I am feeling like I really need to park this money now. I'd like to buy it in the same percentages that I'll eventually do for my entire portfolio. Am I making sense here?, ha. That is, what percentage would you suggest that I allocate to each of these funds and are there any that you would suggest me not even buying? I've never owned bonds before but I figure I need to get my feet wet with those. We recently went to a financial planner who is familiar with the company's benefits, etc. simply to get a big picture idea of where we are at and if early retirement in 4 years really is realistic and it is, whew! Of course he wants to manage our funds but I am insistent on doing it myself. We've been steady savers for the past 25 years and have made some sound financial decisions. (House is paid off, no other debt) Right now I am just wanting to do something constructive with this money and then I'll go from there.
Thanks for any and all suggestions.

 

[Midpack]

Welcome aboard. There's nothing wrong with any of your fund/ETF choices IMO. Other than the REIT (5-10% of total), the others are legitimate core holdings IMO (30% each, or 50% TSM & 20% each TBM & SCG). As for allocations, you might want to Google "lazy portfolios" for some solid mainstream suggestions. Here's some pictures of several...

 

[Animorph]

I would insert a big chunk of world stock market ex U.S.. I know Vanguard has that, just too lazy to look it up. Notice that it's in all the portfolios that Midpack kindly listed.

 

[heeyy_joe]

Whatever you decide to do, I would recommend you do it over the course of a year to two years in roughly equal amounts, perhaps quarterly.

 

[RunningBum]

Hi and welcome, steady saver!

I wouldn't look at that account by itself. I would figure out an allocation strategy of stocks/bonds/REITs, and within stocks what allocation you want of domestic vs. international, and small/mid/large cap, and apply that across all of your accounts, not just this taxable account.

As far as stocks/bonds, many people subtract their age from some number, and invest that amount in equities. 100 would be less risk tolerant, 120 is more risk tolerant. At age 50, using 110 as your number, you'd invest 60% in stocks (I'd include REITs here too), and 40% in bonds. Every year or two you'd reallocate as needed to keep it in balance with that formula, meaning 59/41 next year, 55/45 in 5 years, etc. I know it can be hard to go from 100% stocks to 60%, or even 75% if you went with 125 (which I used before I FIRE'd) but if you're asking for advice, that's mine.

Many people put their bonds in retirement accounts, so that the income it generates is in tax deferred. Think about whether that makes sense for you. Part of that depends on whether you have a good bond option in your 401Ks.

REITs can get complicated at tax time so putting them in a tax deferred account simplifies things too, though that may not be an option unless you have an IRA with (virtually) unlimited options.

If you invest in VTI and VBK, you will be overweight in small caps because VTI includes small caps, but this may be offset by your other investments.

You may want some international exposure if you don't have any elsewhere. Vanguard has a total international index ETF (VTUS).

I used to keep a good amount in individual stocks, but I found that the stock index funds were easily beating my returns, so over the last few years I sold off stocks and went mostly with the VG total and total international funds for my stock allocation, and the VG Total Bond fund for bonds.

Good luck!

 

[steady saver]

allocation suggestions

Welcome aboard. There's nothing wrong with any of your fund/ETF choices IMO. Other than the REIT (5-10% of total), the others are legitimate core holdings IMO (30% each, or 50% TSM & 20% each TBM & SCG). As for allocations, you might want to Google "lazy portfolios" for some solid mainstream suggestions. Here's some pictures of several...

Thanks Midpack. I've just been dragging my feet but your suggestions are helpful. I've seen some of the lazy portfolios and they're what got me started thinking about indexing. I had been thinking of 40% TSM, 20% TBM, 10% REIT, and 30% SCG. It's just hard for me to start putting money in bond funds. I need to get past that. But maybe I need to skip the REIT and put 30% in TBM. Then I'd have a 70/30 stock/bond split.

It might take me a bit to learn how to post a response correctly...

 

[RunningBum]

You must've erased the /QUOTE that was in square brackets at the end of midpack's text.

 

[steady saver]

RunningBum, I know you are correct in my needing to look at my whole portfolio. I just don't have time right now and it drives me crazy to let that keep me from doing something with the money other than watching it sit there day after day! But yes, I will look at my 401K options and check the bond options there. I have a great plan with lots of options so surely there's something in there that would work. You're making me rethink REITS right now.
Your comments about the tax implications is helpful. And yes, I'm a bit weighted in large cap stocks so that's one reason I picked the SCG as well. I honestly didn't realize that the TSM (VTI) had lots of small cap in it. I looked at VTUS but the returns just didn't seem as good to me for the risk. I must be missing something. I was going to look for another one and likely limit my exposure to 10%. And yes, I think over time I will give up the individual stocks. My college aged son just sold all of his and bought index funds!

Animorph, I remember looking at the world international fund too. Can't remember why I didn't pursue that.

Heevy_joe thanks for your thoughts. I think I want to get that particular money out of cash right now. But still, it's good to look at all options.

 

[steady saver]

I want to thank you each for your responses. I'll let you know what I end up deciding to do. In the meantime, I need to figure out how to use the response options better!

 

[David1961]

As far as stocks/bonds, many people subtract their age from some number, and invest that amount in equities. 100 would be less risk tolerant, 120 is more risk tolerant. At age 50, using 110 as your number, you'd invest 60% in stocks (I'd include REITs here too), and 40% in bonds. Every year or two you'd reallocate as needed to keep it in balance with that formula, meaning 59/41 next year, 55/45 in 5 years, etc. I know it can be hard to go from 100% stocks to 60%, or even 75% if you went with 125 (which I used before I FIRE'd) but if you're asking for advice, that's mine.


Good luck!

+1

 

[seraphim]

Similar boat:

Vtsax 52%
VTIAX 8%
VBTLX 40%

Having a large amount of funds coming available for inclusion in the VG portfolio in a couple of months, (upon retirement) so currently playing with a test portfolioUsing Morningstars tools which includes VGs mid and small cap funds (about 5% total portfolio each) and VGs REIT fund. Would also mix up the bonds with the intermediate bond fund, and would like to get into VWEAX, (though it's currently closed) in addition to the total bond fund.

Still want to maintain a 60 stock / 40 bond allocation into retirement. See no reason for ETFs, personally.

 

[steady saver]

Seraphim, I was going the ETF route b/c I wanted the Vanguard index funds but am buying them through my Fidelity account so it's cheaper that way.

Retirement in a couple of months? Congratulations!

 

[gauss]

I did something similar recently after concluding that I have basically achieved FI.

The way I solved the problem was to just go into one of the Vanguard Target Retirment funds with a representative retirement date. It didn't feel so much different than having a traditional equity fund.

The big advantage that I see is the automatic re-balancing that will occur without my intervention. Less likely for any emotions to get into the way of prudent re-balancing.

I am moving equal parts of my portfolio into these funds (and similar ones in the 401k(s)) over a one year period.

-gauss

 

[seraphim]

Seraphim, I was going the ETF route b/c I wanted the Vanguard index funds but am buying them through my Fidelity account so it's cheaper that way.

Ah... thanks for the explanation.

 

[seraphim]

gauss

I'm avoiding the combined funds and retirement funds because I like choosing when and where to take my distibutions from. I guess I like a little bit of interaction with the funds, and watching what each type of fund does is kind of interesting.

 

[steady saver]

Gauss I haven't looked closely at the Targeted Retirement Funds yet, though I've perused them. Seraphim, that is a good point about distributions. I guess I need to investigate all of that a bit more closely.

 

[Midpack]

Gauss I haven't looked closely at the Targeted Retirement Funds yet, though I've perused them.

Nothing wrong with Target Funds as long as you keep your reply to Seraphim in mind.

BTW, why no International Equity exposure? Just asking...

Seraphim, that is a good point about distributions. I guess I need to investigate all of that a bit more closely.

You probably know all this, but just in case Principles of Tax-Efficient Fund Placement - Bogleheads

 

[steady saver]

Thanks for the article link, midpack. That will be helpful.
As for the international, my son says the same thing. I've looked at VTIAX but I guess international still makes me nervous. I just keep seeing it as a higher risk for not much more reward. What am I missing?

 

[Midpack]

Thanks for the article link, midpack. That will be helpful.
As for the international, my son says the same thing. I've looked at VTIAX but I guess international still makes me nervous. I just keep seeing it as a higher risk for not much more reward. What am I missing?

Most lazy portfolio recommendations include international equity as a core holding. But you have to do what makes you comfortable, so I won't attempt to convince you with my views, here are some of the common arguments for and against Domestic/International - Bogleheads, apologies if you already know all this.

 

[Katsmeow]

I've looked at VTIAX but I guess international still makes me nervous. I just keep seeing it as a higher risk for not much more reward. What am I missing?

International made me nervous as well. However, I realized when I thought about out that the US is not the world. So, there could be things that happened that negatively affected US stocks that didn't have as big an impact in other countries. Stocks could be down in the US, but not down as much in other countries. So, from that standpoint, buying international lowers risk rather than increasing it.

 

[obgyn65]

Please could you explain your rationale for doing so? Just curious.

Whatever you decide to do, I would recommend you do it over the course of a year to two years in roughly equal amounts, perhaps quarterly.

 

[racy]

.... You're making me rethink REITS right now. ....

Here's where I monitor Lazy Portfolios. Note that half of them are using REITs.
Invest Simple with Lazy Portfolios - MarketWatch.com

 

[jerome len]

You've had a lot of great input.....and, your plan is good. I would only add.....look at Vanguard Mid Cap index fund........it's slightly outperformed total stock and you don't have that much mid cap in your total stock index fund.....not more than 5% of the total. And, I'd keep the Reit.....pays healthy dividends, RE as a whole is in recovery and long term, you should do well......again, 5 to 10% of your investment.

I would average in over the next year or so.....remember "sell in May and go away"....doesn't mean we'll see a drop this year but averaging eliminates the big ivestment followed by the big drop......happended to me once...never again. And, you should have Vanguard do a financial analysis for you....on their portion and, maybe, they would do it on the whole account. I think you have enough that it would be free.....check with them. Good Luck!