Calling Vanguard ETF Experts: Critique my Portfolio

[younginvestor2013]

It’s been about 2 to 3 quarters since I got rid of my investment advisor and started managing my funds on my own. With the help of this forum and trusted/educated friends, I allocated my brokerage (non-retirement funds) and retirement funds (not held thru employer) to 8 Vanguard ETFs. I also am invested in 9 mutual funds thru my employer sponsored Roth 401K.

I am not looking to “sell” anytime soon, since all of my gains would be “short term”. However, I was just looking to gather some feedback from you vanguard experts on what you thought of my allocation/strategy. I am 24 and looking for long term growth. Am I being too aggressive? Am I well balanced across asset classes? Should I consider other ETFs (better dividends, lower exp ratios, better performance, market trends, etc)?

I should note that the majority of the funds in my brokerage account were an inherited windfall (with the exception of roughly 5%)

My allocation is as follows:

VANGUARD

Brokerage | Roth IRA
VSS 3% | 0.4%
VWO 6% | 0.8%
VUG 17% | 2.3%
VO 8% | 1.1%
VOO 8% | 1.1%
VB 9% | 1.1%
VXUS 15% | 2%
VTV 17% | 2.4%

EMPLOYER SPONSORED ROTH 401K

PCVAX 0.2%
MDFGX 0.4%
BSPIX 0.5%
CSGEX 0.2%
EAASX 0.1%
JVMSX 0.1%
MEIAX 0.3%
ODMAX 0.2%
OIGAX 0.4%

CASH 2.6%

 

[LOL!]

You asked for "Critique" so here it comes ....

1. Why are you trying to duplicate your portfolio in every account? I think you should simplify and try to have only 1 fund in the smaller accounts and use a large tax-advantaged account for all the fixed income and rebalancing.

2. I don't know what most of those ticker symbols in the 401(k) are. Perhaps you can add them. Also, I think unless one is in the 0% tax bracket or will be in the 39%+ tax bracket forever, one should NOT use a Roth 401(k).

3. Why have growth index (VUG), blend (VOO), and value (VTV) in the same portfolio? One just needs total market (VTI) and small-cap value (VBR) to get the same coverage. Also, VTI and VBR would already be overweighted in mid-caps, so no need for VO.

My preference for equities would then be VTI, VBR for US, maybe add VNQ (REIT) and VXUS, VSS for foreign. Maybe add IEMG (all-cap emerging markets) if you want to overweight EM.

4. Hopefully, one of those 401(k) funds is a bond fund?

A portfolio of ETFs might then be: VTI, VBR, VXUS, VSS, BND, VCSH.

 

[steelyman]

3. Why have growth index (VUG), blend (VOO), and value (VTV) in the same portfolio? One just needs total market (VTI) and small-cap value (VBR) to get the same coverage. Also, VTI and VBR would already be overweighted in mid-caps, so no need for VO. My preference for equities would then be VTI, VBR for US, maybe add VNQ (REIT) and VXUS, VSS for foreign. Maybe add IEMG (all-cap emerging markets) if you want to overweight EM.

This seems reasonable to me. My preference is for an "extended market index" fund which I think is the total market minus the S&P 500 to add weight (in addition to the total market) to mid- and small-caps. I think a REIT index is a good idea ever since reading A Random Walk Down Wall Street. I have a small amount of emerging markets, but no clue where that might go, that's in addition to a total int'l index.

 

[Karloff]

I'm in a similar boat and was actually thinking of asking the same question (own both VTV and VUG as well), so... I just subscribed to this post to keep an eye on the advise.

 

[younginvestor2013]

You asked for "Critique" so here it comes ....

1. Why are you trying to duplicate your portfolio in every account? I think you should simplify and try to have only 1 fund in the smaller accounts and use a large tax-advantaged account for all the fixed income and rebalancing.

2. I don't know what most of those ticker symbols in the 401(k) are. Perhaps you can add them. Also, I think unless one is in the 0% tax bracket or will be in the 39%+ tax bracket forever, one should NOT use a Roth 401(k).

3. Why have growth index (VUG), blend (VOO), and value (VTV) in the same portfolio? One just needs total market (VTI) and small-cap value (VBR) to get the same coverage. Also, VTI and VBR would already be overweighted in mid-caps, so no need for VO.

My preference for equities would then be VTI, VBR for US, maybe add VNQ (REIT) and VXUS, VSS for foreign. Maybe add IEMG (all-cap emerging markets) if you want to overweight EM.

4. Hopefully, one of those 401(k) funds is a bond fund?

A portfolio of ETFs might then be: VTI, VBR, VXUS, VSS, BND, VCSH.

Here are my responses:

1. To me it makes sense to stick to my strategy/allocation. The majority of my investments are in non-retirement accounts – however – this will change over time given my age and time span. I’m not currently contributing any material amount in a given year to my brokerage account. I max out my Roth IRA every year, and it is very easy to allocate it out to my Vanguard ETFs.

2. I think the Roth 401K makes sense to me because I want to retire early and one can withdraw all of the principal penalty free. My research has shown that this is not the case for traditional 401Ks. Additionally, I think that taxes will be much higher in the future, so the ability to pull out 36 years’ worth of contributions and compounding completely tax free is enticing.

3. To be completely honest – I don’t know. My trusted friend (who is a CFA) suggested this allocation. Perhaps I will forward your question onto him.

4. The 401K does not have a bond fund. Might I ask why you suggest a bond fund? I am 24 and can take the risk of volatility. I do, however, think I need to beef up my cash reserves, as I plan to use more than half of them to fund my Roth IRA for 2014 once I am eligible to do so.

Thanks.

 

[LOL!]

One can take principal from a Roth IRA penalty free, but I do not believe that applies to a Roth 401(k). And there are rules about withdrawing principal after a conversion, too.

Of course, you may say if I rollover the Roth 401(k) to a Roth IRA, then I can withdraw principal penalty-free. I would triple-check this Roth 401(k) withdrawal stuff.

OTOH, if you contribute to a traditional 401(k), you can put the money you save on your income taxes into a taxable account and invest very tax efficiently there in the total US stock market index fund and the total int'l stock market index fund. It is amazing how tax efficient those equity investments are ... almost as tax efficient as a Roth in many circumstances.

There is NO WAY your 401(k) does not have a bond fund. It seems you have just decided not to use it. Studies show that rebalancing over the years with equities and fixed income gives a higher performance than 100% equities. Your CFA friend should be able to explain that to you.

It is a common myth to relatively new folks on this forum that one cannot get money out of a 401(k) or IRA without penalty before age 59.5. That's a myth. One should research that more.

 

[steelyman]

One can take principal from a Roth IRA penalty free, but I do not believe that applies to a Roth 401(k). And there are rules about withdrawing principal after a conversion, too. Of course, you may say if I rollover the Roth 401(k) to a Roth IRA, then I can withdraw principal penalty-free. I would triple-check this Roth 401(k) withdrawal stuff.

This is a really fuzzy area for me. We have both traditional and Roth 403(b) options, fortunately with a wide fund selection that I'm happy with.

I rolled the traditional to a traditional IRA, but left the Roth 403(b) alone. A bonus is that it has "institutional class" shares with lower expenses.

 

[RonBoyd]

See: Diversification Through Correlation Analysis - ITA Wealth Management

“It’s not the number of assets that determines diversification, it’s the correlation among them.” – Richard Bernstein

Also this book may provide you with some useful advice:

The Affluent Investor: Financial Advice to Grow and Protect Your Wealth: Phil DeMuth, Ben Stein: 9780764165641: Amazon.com: Books