advice sought on setting up portfolio

[johnk]

I have signed up for the temporary services of a fee-based adviser with USAA. Now I'm torn between going w/her recommendation of 12 funds (some USAA some non-USAA) which would be held in a USAA brokerage, or just go to Vanguard and perhaps use their financial plan if they waive their fee. Or Fidelity, or T Rowe. Is the notion that I'll be better off an adviser (even with USAA's minimalist approach) a false one. I am someone who doesn't like to be active in picking allocations, funds or even re-balancing.

Haven't gotten a detailed plan for my taxable acct yet but my adviser has recommended for my retirement portion the following (the folks over at Bogleheads.org don't like it for a number of reasons, too many funds, cost structure and tax inefficiency)...

Traditional IRA

50% ishares russell small cap (IWM)
35% USAA intermed bond (USIBX) (0.65)
15% Dodge and Cox stock (DODGX) (0.52)

Roth

25% Vanguard Int'l Growth (VWIGX) (0.51)
25% Vanguard short-term invest grade bond (VFSTX) (0.21)
50% Dodge and Cox stock (DODGX) (0.52)

403b

50% Fidelity US small cap stock (FSLCX) (0.94)
50% Fidelity Int'l small cap stock (FSCOX) (1.25)

 

[jIMOh]

I think you have too much detail and do not see the forest through the trees.

The first advice you should get is what is the targeted asset allocation, expressed as:

% stock
% bond

For example, my asset allocation is 97% stock and 3% bond. I am slowly rebalancing to a targeted allocation of 90% stock and 10% bond over a 5 year period. I am 35 yo and plan to retire in 18-38 years.

Then the allocations above should be broken down into sub classes

% domestic stock
% foreign stock
% bond
% cash

I am
72% domestic stock
25% foreign stock
3% bonds
0% cash

Then each of the above can be broken down:

domestic stock:
large cap
mid cap
small cap

(for me 42%-15%-15%)

international stock
large cap
small cap
emerging markets

(for me 15%-5%-5%)

bonds:
domestic-government
domestic-corporate
domestic- high yield
foreign-government
foreign-corporate
foreign- high yield/emerging markets
real estate

I have one bond fund which invests in all the above (it is a fund of funds for bonds).


Then you need to decide which of above asset classes go into which accounts:

Roth IRA- put the funds you expect to have best returns in your Roth- generally the aggressive growth types.
403b/traditional IRA- this is where to keep cash and bonds, and other funds which are cash based.

Based on what I see, the advice for the Roth is mis guided because the bond fund is in the Roth. Put the small cap funds in the Roth instead, for example. Roth withdraws are tax free- you want the Roth balance as high as possible when withdrawing.

I personally like keeping as many accounts with one custodian as possible, I use T Rowe Price and select managed funds. Most of this board will suggest index funds and swear by Vanguard. Most important thing is to make a good decision and stick with it.

 

[johnk]

Hi jMoh,

Thanks. My planner (again, unsure about her advice) says she recommends (based on lots of input I gave her... among other things that I'm 43 and if all goes well should receive a pension) a 70-30 retirement side mix of stocks to bonds and a 50-50 taxable acct mix.

Should I not go with this planner then, in your opinion? I like the idea of one custodian and am looking at Vanguard, Fidelity or T Rowe. T Rowe seems to have possibly the most generous advisory services.

Here's more on the asset allocation recommended. Planner claims it's designed to return 8% annualized. Am I just as likely to gain that with a T Rowe or Vanguard cookie cutter plan?

For my IRAs which are ca. 1/4 of my assets her plan says this...

30% corp high qual bond
30% large cap stock
20% small cap stock
15% int'l stock
5% high yield bond

The for 403b (ca. 15% of assets)...

50% us small cap
50% int'l small cap

For remaining assets, taxable...

50% short term muni bonds
20% large cap stock
15% small cap stock
7% int'l stock
5% high yield bond
3% em mrkts

Thanks again. John.

 

[johnk]

Excuse me jIMOh, got your screen name wrong. John.

 

[jIMOh]

Hi jMoh,

Thanks. My planner (again, unsure about her advice) says she recommends (based on lots of input I gave her... among other things that I'm 43 and if all goes well should receive a pension) a 70-30 retirement side mix of stocks to bonds and a 50-50 taxable acct mix.

Should I not go with this planner then, in your opinion? I like the idea of one custodian and am looking at Vanguard, Fidelity or T Rowe. T Rowe seems to have possibly the most generous advisory services.

Here's more on the asset allocation recommended. Planner claims it's designed to return 8% annualized. Am I just as likely to gain that with a T Rowe or Vanguard cookie cutter plan?

For my IRAs which are ca. 1/4 of my assets her plan says this...

30% corp high qual bond
30% large cap stock
20% small cap stock
15% int'l stock
5% high yield bond

The for 403b (ca. 15% of assets)...

50% us small cap
50% int'l small cap

For remaining assets, taxable...

50% short term muni bonds
20% large cap stock
15% small cap stock
7% int'l stock
5% high yield bond
3% em mrkts

Thanks again. John.

You hit on some key points:

1) 8% return expected
2) 70-30 asset allocation
3) taxable/tax deferred mix

You could have the same advice returned from online calculators. I am a T Rowe Price customer and my advice would be to go to their web site and take their quizzes on the following:

Go to investment guidance and tools link
Go to investment planning link (read this)

then continue on to the tools and calculators link
choose the online investment strategy planner- this will take you through a risk tolerance quiz. It should articulate risk tolerance as %stocks/% bonds.

Try it, see if the result looks the same as the advisor provided.

If you post the results, I will tell you about my T Rowe funds, what I own, and how they are allocated.

 

[johnk]

Hi jIMOh,

I did as you suggested. The results of step 5 of the Online Investm. Strategy Planner are...

Step 5

Implementing Strategy 4 with T. Rowe Price Funds

Stocks

30% Blue Chip Growth
20% Equity Income
13% Extended Equity Market Index
12% Spectrum International

Bonds

25% Spectrum Income*

Step 4

Strategy 4:
75% Stocks, 25% Bonds

This growth and income strategy may appeal to the more aggressive investor who is willing to assume relatively high risk for potentially greater returns. To be comfortable with this strategy, you should have a longer time frame for your goal and be able to resist overreacting to inevitable setbacks in the stock market.

Average Annual Returns,
1956 – 2005
10.2%
Best Year (1958) 34.4%
Worst Year (1974) -20.0%
Number of Down Years 12
Average Loss in Down Years -9.9%
Growth of $10,000 Over 10 years $23,190
Over 20 years $84,107

Thanks for this jIMOh, hope to hear from you if you have more advice and on what you'd like to share with me, John.

 

[CitricAcid]

Just me as I am a more DIY kind of guy, but I wouldn't go with the planner, it seems that, as jIMOh pointed out, some of the tax allocations are not ideal. At your age, for that expected return, a 70-30 mix would seem reasonable, and how you break it down is also as important. With TRP, Vanguard or Fidelity, it is just as easy to maintain your asset allocation without having to pay higher fees.

 

[DblDoc]

I would concur with both jIMOh and CitricAcid. Based on the advice you received I would look elsewhere. There are too many flaws in it.

A couple of other thoughts. Is your pension an iron clad gaurantee? If not I would plan accordingly. I would also highly recommend considering your portfolio as one, not split into 2 and then follow jIMOh advice on asset location.

DD

 

[FIREd]

I am someone who doesn't like to be active in picking allocations, funds or even re-balancing.

You seem to be an ideal candidate of one of those target retirement fund (available at Vanguard, Fidelity and T Rowe Price). Just pick the date of your retirement and they will do all that for you for a very, very small fee. It's hands off and a lot cheaper than paying a FA to do it for you.

 

[johnk]

portfolio advice

Hi again folks,

I had posted earlier on USAA vs. Vanguard...

My USAA planner (via e-mail) was taken aback by my suggestion I'd like a more tax-efficient selection of funds for my taxable account. She asks, "Are you looking for tax exempt bond fund suggestions, suggestions for funds that do not produce a lot of capital gains and interest or suggestions for tax managed funds? (and continues) I think you are referring to the amount of capital gains a particular fund pays out at the end of the year."

Her comment on Vanguard: "My experience with Vanguard funds is that they are great for all the reasons you have been told, i.e.. low cost, easy to maintain, easy to manage a portfolio comprised of just Vanguard funds in a bull market. My previous clients have not been that enamored with them during bear markets because they are set up to provide MARKET RATE RETURNS (good and bad)."

I plan to educate myself by reading, starting with Tyson's MFs for Dummies. In the meantime, am kind of eager to go forward. I have my taxable investments with Northwestern in Russel Life Points Growth (mostly). Planner recommends leaving those for a while but that's market timing, isn't it? She is willing to put toether an asset allocation across taxable and retirement using exclusively Vanguard funds and if I move to Vanguard in a timely manner I can make use of their complimentary plan... and of course post here for comments (if I should be so fortunate).

Age: 43

Desired Allocation: 65 - 35 to 60 40 (stocks bonds)

Taxable 65%:

65% invested in RALAX (er 1.3 or thereabouts)

403b 15%:

7.5% us small cap value
7.5% int't small cap value

Traditional IRA 10%:

10% cash

Roth IRA 20%:

20% cash

The reason the IRAs are in cash is that I have transfered them from Northwestern.

The vaguely detailed plan I posted here last week did not get good reviews here or elsewhere.

My gut tells me to just continue with my total move to Vanguard but I want to be invested within a reasonable time and I'm uncertain whether to wait for more advice from my USAA planner, a Vanguard plan, or just invest retirement in one of the TRs... leaving what to do with taxable remaining.

I would appreciate any comments, guidance you folks would be willing to provide me at this point. John.

 

[jIMOh]

Stocks
30% Blue Chip Growth
20% Equity Income
13% Extended Equity Market Index
12% Spectrum International

Bonds
25% Spectrum Income*


75% Stocks, 25% Bonds

first yuou took my advice and did considerable work on your part. If you are willing to spend 10 hours per year doing this, then you can do it yourself, no advisor needed.

Some FYI-
I own equity income (PRFDX) this is a SOLID fund.
I own Spectrum income. The fund is 15% equity and 85% cash/bonds. The allocation for this will be higher than 75-25 because the bond fund suggested holds equities.

I would be higher than 12% international. I do not own spectrum international, but I do own TRIGX and PRIDX (international growth and income and international discovery) both of which are part of the spectrum international fund.

I would question the use of extended market index in this case, and also question the percentage. I have 30% going to mid and small caps, and T Rowe has some solid funds in this space (New Horizons, Small Cap Value, diversified mid cap growth, diversified small cap growth). I also own Mid cap Growth, but that is closed to new investors.



I agree 75/25 is aggressive. I would also agree it is on moderate side of aggressive scale based on 2 key factors:

1) 25% bonds makes this moderate
2) 2 of the funds (equity income and spectrum income) are moderate based on where they are and sectors they invest in. Equity Income, IMO, is the most conservative 100% equity fund out there.

 

[johnk]

thanks...

Hi jIMOh,

Yes, that quoted portion was right from T Rowe Price's output of their portfolio tool that I filled out, based on your suggestion.

My planner has recommended TRP "Large Cap" Growth (this is just from her narrative so far so I don't know exactly which fund) and TRP Emerging Markets. She says they're top of class. But I see the ER is high-ish. She also recommended Royce Family small European company (a new fund). Her recommendations just have gotten such good reviews by many here or over at Bogleheads.

I think I'm a little stuck with some past poor decisions and lack of educating myself and in a big hurry to do "the best" thing I can come up with. I'm intrigued by David Swensen's interviews and commentaries and of course he's very frequently quoted. He pretty openly recommends a portfolio of Vanguard funds (at least he did on NPR). But, well, there's the question of allocating his "lazy" portfolio across my taxable, 403b, trad. IRA and Roth IRA. Some people have suggested I'm a good candidate for Vanguard's target retirement (at least in retirement portions). I'm only in 25% tax bracket and will remain so for the foreseeable future. I'm not close to taxable accts bumping me to the next bracket.

Do you take much advantage of T Rowe Price's advisory services to customers, or are you completely DIY? Much appreciated, John.

 

[jIMOh]

I do utilize some of TRP extra services. Investors with more than 100k with TRP get some special considerations:

1) Free access to Morningstar tools, including x-ray.
2) Consultation on fund selection/ Asset allocation analysis
3) first notice of fund openings/ new offerings

I do agree the emerging markets fund at T Rowe is quite good.

I would stop looking to 3-5 different sources for advice and make a decision-

do it yourself- yes or no
if yes, then the advisors advice does not matter anymore
if yes, then what asset allocation?
once you have asset allocation, which fund family?
once you decide the fund family, pick the funds

If you try to pick the funds first, without the first few steps done right, it will be like sprinkling salt on a sparrows tail.

 

[johnk]

thanks... more...

Thanks. Sounds like you really like T Rowe but think Vanguard is a reasonable option.

You're right about multiple sources. One thing though, I poster over at Bogleheads says I should maintain bonds exclusively in retirement accts while my "adivsor" has me with a 70-30 stock bond mix in retirement and 50-50 in taxable. What gives? John.

 

[LOL!]

The bogleheads are right. You should really follow their advice. It reads like you don't trust them and trust your USAA girl more. She will cost you in taxes. You should not have bonds in taxable if you have enough room for them in your tax-advantaged accounts.

To JimOH: TRP gives everyone free access to M* tools. You don't even need to have an account at TRP to get this free access and you certainly don't need $100K in assets at TRP.

 

[johnk]

Hi LOL,

No, I've lost faith in the USAA person. Had too much to begin with. I realize I'm getting good advice from Bogleheads. Just that all seems daunting especially in these times. John.

 

[johnk]

Hi jIMOh,

Thanks. What in your opinion should I do. I'm so torn. I know this is my decision. I already have filled out the paperwork to transfer my IRAs to Vanguard, but when to move taxable, I don't know. Consensus here and on Bogleheads is folks don't like the USAA planner's choices. I am a bit like the deer looking in the headlights. Who should I rely on to recommend an asset allocation, TRW, VG... USAA... folks here, Bogleheads? What would you do? Thanks, John.

 

[LOL!]

Hi jIMOh,

Thanks. What in your opinion should I do. I'm so torn. I know this is my decision. I already have filled out the paperwork to transfer my IRAs to Vanguard, but when to move taxable, I don't know. Consensus here and on Bogleheads is folks don't like the USAA planner's choices. I am a bit like the deer looking in the headlights. Who should I rely on to recommend an asset allocation, TRW, VG... USAA... folks here, Bogleheads? What would you do? Thanks, John.

Hmmm, too afraid to make your own decisions? Is that because you want someone to blame when things don't turn out the way you expect?

I suggest you go read The Four Pillars of Investing ... then read it again. Then find your advisor by looking in the mirror. Even if you don't do this yourself, you are gonna need to learn enough to know if your chosen advisor is doing a decent job or not. As you can see, there are many opinions on the subject and you will have to make up your own mind. Can you do it?

 

[rgarling]

Hi jIMOh,

Thanks. What in your opinion should I do. I'm so torn. I know this is my decision. I already have filled out the paperwork to transfer my IRAs to Vanguard, but when to move taxable, I don't know. Consensus here and on Bogleheads is folks don't like the USAA planner's choices. I am a bit like the deer looking in the headlights. Who should I rely on to recommend an asset allocation, TRW, VG... USAA... folks here, Bogleheads? What would you do? Thanks, John.

I'm not jIMOh, but he has given you good advice. You can also rely on the Boglehead forum for excellent advice. The tricky thing about moving your taxable account is that you probably will end up selling and you must consider the TAX implications of doing that. Vanguard Total Stock Market in a taxable account usually works fine.

 

[johnk]

Thanks LOL,

I suggest you go read The Four Pillars of Investing ... then read it again. Then find your advisor by looking in the mirror. Even if you don't do this yourself, you are gonna need to learn enough to know if your chosen advisor is doing a decent job or not.

This looks like a great book... and he's one who is often mentioned in the context of various lazy portfolios, if I'm not mistaken. I'm intrigued by those and David Swensen's has seemed the most appealing to me... slightly less complicated and maybe easier on rebalancing than Bernstein's. Have you read Unconventional Success?

John.