Evaluate my 'folio?

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navydavey

Dryer sheet aficionado
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Sep 11, 2012
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Greetings,

26 yr old military guy here. Recently moved from American Funds to Vanguard for the low costs. My American Funds investments were set up by an investment advisor and I tried my best to mirror them when I moved to Vanguard. I haven't been very impressed with my performance over the past 6 months and wondered if anyone could offer illumination.

Non-retirement
Van. Total Stock Market (VTSAX) - $14,500 (15% of investments)
Van. Intl. Explorer Fund (VINEX) - $2,700 (3%)
Van. Small-Cap Index (NAESX) - $3,000 (3%)
Van. Long-Term Bond (VBLTX) - $6,700 (7%)
Van. Inflation-Protected Securities (VIPSX) - $6,000 (6%)
Total: $32,900

Retirement
Van. Target Retirement 2045 (VTIVX) - $47,000 (49%)
Thrift Savings Plan (Govt 401k) - $16,700 (17%)
Total: $63,700

Stocks - 77%
Bonds - 23%

Cash
Savings Account - $21,500
Checking - $1,000
Total: $22,500

Debt
Car (2.25%) - $17,000
Loan (0.5%) - $12,000
Total: $29,000

Assets: $119,000
Net Worth: $90,000


I can elaborate allocations if need be.

Thanks in advance for any help!
 
At a top level, I think your AA is pretty good. (A rule of thumb I have heard is that your stock AA should be about 110 minus your age). Depending on how aggressive you want to be with your investments, you could put a little more into stocks. I'd recommend a short term bond fund instead of the long term bond fund, at least until rates go up. And not sure if I would recommend the inflation-protected securities fund at your young age.

But really, a lot depends on your tolerance for volatility.
 
I realize your debt interest rates are low, but don't let your debt levels get out of control. Try to get out of debt if you can and learn to pay cash. Interest rates won't always be so low.


Sent from my iPhone using Early Retirement Forum
 
6 months? I'm a Navy vet myself (22 years) but investing is a decades long thing, not 6 months or even 5 years. Your portfolio seems fine but it will take time. The first decade, things don't look all that great. The second decade it looks like things are starting to gel. Its the 3rd and 4th decade where the portfolio takes off.

Patience grasshopper, patience. . .
 
Way too much bonds for your age IMO. I would restructure so overall AA is similar to Vanguard 2045 fund - essentially 90/10 stocks/bonds and use the TSP for the fixed income component.

Actually, even 100% stocks would not be bad since you are so young, but a smidgen of fixed income adds a bit of stability.

Slow and steady wins the race.
 
pb4uski said:
Way too much bonds for your age IMO. I would restructure so overall AA is similar to Vanguard 2045 fund - essentially 90/10 stocks/bonds and use the TSP for the fixed income component.

Actually, even 100% stocks would not be bad since you are so young, but a smidgen of fixed income adds a bit of stability.
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Agree 100% with this, and I'll add to it...

Based on what you have where you have it, you're not maxing your TSP every year which is a mistake IMO. Even if you can't reach the $18,000 limit, IMO your savings should be focused there first: 1) lowest ERs anywhere; 2) enough funds to do what you're already doing with that overly-complex mix of Vanguard Funds; 3) reduced tax burden now ($18,000 into TSP is $18,000 deducted from your MAGI).; 4) more in now means more to use with the G fund for your fixed income portion as your portfolio grows.

To simulate your present AA using the TSP funds available, I would:

- Either dump everything into 2040 or 2050 target fund inside TSP, or;
- Allocate your stocks and bonds as desired, then put 60% of your stock allocation in C, 10% in S and 30% in I; use the G fund for your bond allocation.

Now, that's just what I would do, but the stock allocation sets up a 70/30 domestic/international split, and inside that domestic split you're roughly simulating VTSAX (Total Stock Market).

I'd simplify your VG by putting most or all of it into a mix of VTSAX and Vanguard Total International at whatever allocation you like (I do 70/30) or use the target fund of your choosing.

I'd continue to transfer money or direct TSP allocations into G fund until your overall Stock/Bond allocation is where you want it to be. I'm 37 and use 85/15 which I intend to stick with for a loooong time (with military pension coming in ~5 years). I was 100% stock at your age, but to each his own!

In short, you've got a lot of funds that are doing similar things. The American Funds folks no doubt sold you a bunch of different stuff because that's part of how they make money. No need for that level of complexity, IMO.

I own two funds at VG (VTSAX and Vanguard Total Int'l (Adm shares) among three accounts (two IRAs and taxable). I have TSP focusing on G fund for my 15% bond allocation with the rest split as I described the stock portion above.

Seems complex to read it, but in the end I own a total of two funds and then what's inside TSP. (Note: I have relatively small allocations of another fund and another stock that I won't sell for tax reasons at this point. You should consider weighing paying any taxes now vs. the benefits of reduced fees and simplification for the next 30+ years.)

That's my $0.35...
 
Dash: I took the debt because it was cheap. I could have paid cash for the car but opted not to because of the low interest rate. As soon as I pay off my .5% loan I'm going to commit that payment to the car and I'll be debt free in about a year and a half.

dtbach: I understand that investing is a long term event. I say "6 months" because that's the entirety of my time with Vanguard.

pb4uski/nash031: I was actually surprised to hear that you think I'm too heavy in bonds. I've generally heard 100 minus your age as a rule of thumb which puts me light on bonds.

nash031: I'm kind of hesitant to commit to the TSP. As I understand it, if I don't do a full 20 year career then I won't be able to get to the money until 59 1/2 or whatever that number is these days. I'm just nervous to potentially tie up all my retirement money until that age if the goal is to retire sooner. I've been using the ROTH option but may change that this year as I'll probably push further into the 25% bracket. I'll look into simplifying. Would certainly make things a little easier. Thanks for the 35 cents!
 
navydavey said:
pb4uski/nash031: I was actually surprised to hear that you think I'm too heavy in bonds. I've generally heard 100 minus your age as a rule of thumb which puts me light on bonds.

nash031: I'm kind of hesitant to commit to the TSP. As I understand it, if I don't do a full 20 year career then I won't be able to get to the money until 59 1/2 or whatever that number is these days. I'm just nervous to potentially tie up all my retirement money until that age if the goal is to retire sooner. I've been using the ROTH option but may change that this year as I'll probably push further into the 25% bracket. I'll look into simplifying. Would certainly make things a little easier. Thanks for the 35 cents!
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You can roll your TSP into an IRA if you so choose. I wouldn't forgo the benefits of the TSP by doing so, but... If you do roll into an IRA after separation, you can access the funds using a 72t (SEPP) withdrawal plan before 59 1/2. In any event, in order to retire before 59 1/2 you'll likely need sizable taxable funds, but that by no means means you should forgo IRAs and TSP. You're just burning money every year by doing so, especially in a Roth IRA where you can let money grow for the next 33 years tax free. That's huge.

I personally have a Roth IRA and traditional TSP. That allows me flexibility in the future when it comes withdrawal time. The Roth is 100% stocks, which I expect to grow more rapidly than the TSP, thus the Roth tax benefit will be more valuable than if I used it for TSP and fixed income. You can certainly go 100% stock in TSP for the same benefit, but as you mentioned you're giving away an $18,000 deduction at a time when you're earning quite a bit in favor of reducing your tax burden later, when many people are in a lower tax bracket. JMO, and YMMV of course.

I'd really encourage you to consider using tax-advantaged retirement accounts (IRA and TSP) to their fullest extent, regardless of which you go traditional and which you go Roth.

As to your bonds, there are a few things that go into that:

1) what's your investment horizon? When do you need the money? If you're using it in the next few years, yeah, have some bonds or even cash. If you're not planning to retire until you're 50 or older, you shouldn't care about the short term gyrations of stocks and should focus on the long term growth. By allocating 25% to bonds at your age, you're giving up an awful lot of growth in order to preserve capital in the short term that you don't (presumably) intend to use.

2) If you're going to stay in the military for 20, you already have a fixed income. For me, an equivalent annuity will be ~$2.4 million dollars in order to pay what the pension will starting in five years. That money is fixed and barring the apocalypse or serious political upheaval, it's not going anywhere. Many (including me) will tell you that that further reduces your need for a big fixed income portfolio, hence why I am 85/15 even though I may be just five years from using my money.

3) What's your tolerance for market risk and volatility? Would you be likely to sell off in the event of a market decline? If so, bonds can help temper your losses in those times and be a good hedge against selling low. I personally do not worry about it, so I have a pretty high tolerance for volatility and market risk, thus I have what some would call a relatively high stock allocation for my age, and sticking with it.

Beware of "rules of thumb" as they rarely apply to any individual. Consider your circumstances. A great book to read, IMO, is The Intelligent Investor by Ben Graham, particularly the first ten chapters or so that talk about asset classes, allocations, and what's important.

Another $0.12 for you...
 
Nash,

As I understand it, you're invested as such:

Roth IRA (100% stock VTSAX/VTIAX)
Traditional TSP (G fund to account for 15% of investments + leftover stock)
Taxable (100% stock VTSAX/VTIAX)

So if you are invested as such, then you plan to live on a combination of military pension and taxable account withdrawals until 59 1/2?

Just trying to get a big picture idea of where you're headed to understand how you're getting there.
 
navydavey said:
....pb4uski/nash031: I was actually surprised to hear that you think I'm too heavy in bonds. I've generally heard 100 minus your age as a rule of thumb which puts me light on bonds.....
Click to expand...

I can see that rule of thumb later in life, but not for someone in their mid 20s. Take your AA cue from the AA of target date funds rather than some silly rule of thumb. Until you get into your 40s I think 90-100% equities is the way to go. I was 100% equities well into my 40s and then put new money into fixed income as I got nearer to retirement.

I'm 59 and am still 60/40 and have no plans to change....
 
navydavey said:
Nash,

As I understand it, you're invested as such:

Roth IRA (100% stock VTSAX/VTIAX)
Traditional TSP (G fund to account for 15% of investments + leftover stock)
Taxable (100% stock VTSAX/VTIAX)

So if you are invested as such, then you plan to live on a combination of military pension and taxable account withdrawals until 59 1/2?

Just trying to get a big picture idea of where you're headed to understand how you're getting there.
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That's pretty much exactly right, one minor tweak because my wife has a fixed retirement fund that also has some bonds, but that's about 95% correct. If needed, I can fall back onto a 72t withdrawal from IRAs, but shouldn't need to.
 
Would you be able to edify the thought process behind using a Roth IRA and TSP simultaneously? It seems to me that you're opting to pay taxes now AND later rather than maximizing the benefit of one or the other.
 
navydavey said:
Would you be able to edify the thought process behind using a Roth IRA and TSP simultaneously? It seems to me that you're opting to pay taxes now AND later rather than maximizing the benefit of one or the other.
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One thought I had reading through the posts of your interesting topic is that one should consider the tax bracket now. For example, if you are in the 15% bracket, some would say the Roth is best. You'd pay something like 10% tax now, and see your fortune grow for many years, and not pay taxes when you get to the 50% bracket in 2050. Some of that was in jest, but you get the point.

I didn't always follow that advice. For example, when my kids were in their teens and making money, I could wipe out most Fed tax they paid, and get it all back for them by throwing a few $ into their IRAs.

I've also thought about your allocation. I think you're being too conservative. That will certainly help when the bear gets here, but in a very good year for large stocks, you're tempering some of the gain with bonds.

The BIG question is what kind of investor are you? Only you can say. From that answer you can dial up an allocation. Or maybe you have...
 
pb4uski said:
For a 26 year old? That is one of the silliest things I have ever heard.
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Agree. 10% overall in cash in all accounts makes sense. That would include checking, saving, emergency.

But it might be that a 10% allocation to something fixed would be ok for an average 26-year old.
 
I guess I think of it a bit differently for someone that age. I think of it as 6-12 months of net pay in savings as an emergency fund (if desired) as all the cash that is needed.

To be honest, I didn't even carry that much cash when I was under 40 and was fully invested but I had stable and secure jobs. My credit cards would have been a temporary emergency fund and then I woudl have liquidated investments to pay off the credit cards.
 
navydavey said:
Would you be able to edify the thought process behind using a Roth IRA and TSP simultaneously? It seems to me that you're opting to pay taxes now AND later rather than maximizing the benefit of one or the other.
Click to expand...

My personal view on it was this:

- I chose a Roth IRA along with Traditional TSP because the IRA was only going to get me a $5500 deduction, but TSP would get me $18,000, which would help me stay in a lower bracket longer.
- For the past few years, I've been in "non-deductible contribution land" in terms of income, meaning that there's literally no reason for me to have a traditional IRA. I no longer qualify for the tax deferral in that type of account, but I do qualify for one for TSP.
- Roth IRA has wide open options, so I could be as aggressive as I wanted and earn as much tax free growth. TSP is limited (in the end I can do most everything I want in there, but that wasn't the case back when I picked traditional.)
- In retirement, there are distribution requirements for certain types of accounts, and obvious taxes are treated differently. By having both types, I have the ability to manipulate my income as desired in order to minimize taxes. With a pension, I'm always going to be a little bit higher in tax bracket than some ER folks who can draw everything out in one year, and then sit around and pay nothing for others. At least by having a nice Roth and Traditional balance, I can balance withdrawals to ease my tax burden as needed.

Our TSP/403(b) contributions amounting to $35,000 kept us in the 25% bracket this year, saving us a few thousand in taxes.

Hope that helps. Obviously no one can tell you what to do, but I've been very happy with my split. Some would tell you to go Roth/Roth in both and there's some validity to that if you plan on being uber-rich.
 
pb4uski said:
I guess I think of it a bit differently for someone that age. I think of it as 6-12 months of net pay in savings as an emergency fund (if desired) as all the cash that is needed.
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Agree with this. With a Roth IRA, you can always fall back on your contributions if required. With a stable job like the military (for the most part), this is what we do right now. Keep a couple thousand in cash, but know we've got quite a bit more in an account we could use in a major emergency.

10% cash at 26 seems like quite an anchor to me.
 
I tend to agree, 10% max in bonds at your age. You have a lot for years to let it ride mostly up and sometimes down the stock market volatility path. Just buy and hold, don't panic and sell on the dips.

My bigger suggestion is to max out your savings now. Whether the $18K pre-tax and the $6K IRA, or other savings tools. Just save as much as you can so you can let it grow and compound as long as possible.

Overall, great start you have being only 26, Keep up the good work and with added savings you will be on your way to a nice retirement.
 
38Chevy454 said:
Overall, great start you have being only 26, Keep up the good work and with added savings you will be on your way to a nice retirement.
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Thought about this after my last round of posts in this thread... totally agree. While I'm giving a bunch of feedback, OP is off to a great start, better than I had saved at 26. A few tweaks and maximizing tax-advantaged retirement accounts would blow the roof off this thing as far as getting to ER, IMO.
 
I was spoiled on my 401K with my company picking up Fidelity's management fees. After they "retired" everyone over 55 in 2008, we had to move all those funds to a IRA Rollover--with us picking up the fees.

And with Fidelity management fees at .75%, a $100,000 mutual fund costs me $750 per year (average) whether the fund pays off or not. A few of Fidelity's mutuals have performed up to par, and many have not.

If I was young today, I'd be looking for a mixture of ETF's with expenses @ .15% to .25% instead of my mutual portfolio. Over 30 years' savings, the difference could be quite substantial in just fees alone.
 
Bamaman said:
If I was young today, I'd be looking for a mixture of ETF's with expenses @ .15% to .25% instead of my mutual portfolio. Over 30 years' savings, the difference could be quite substantial in just fees alone.
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Inside TSP, he's got access to an S&P500 fund (C), a Russell 2000 fund (S), a (non-emerging market) "total" international fund (I), a Barclay's Index Corporate Bond fund (F), and a government-issued treasury that's "guaranteed" to match or beat inflation year over year that you can't get anywhere else (G)... all for the low, low price of less than 3 basis points per year. Vanguard Admiral shares don't even beat that!
 
navydavey said:
pb4uski/nash031: I was actually surprised to hear that you think I'm too heavy in bonds. I've generally heard 100 minus your age as a rule of thumb which puts me light on bonds.
Click to expand...
Most of the people who write that advice don't understand military compensation.

Right now you have a very high likelihood of continued employment. If you do get "laid off" by the military, it'll be with plenty of warning and at least six months to build up a cash stash. As long as you expect to be able to incur another obligation then you can count on a steady paycheck and a more aggressive asset allocation.

"100-age in bonds" is also advised for investors who are concerned about volatility. You have to find an asset allocation which helps you sleep at night, and you've done a good job there. You're far ahead of most other investors your age (and very far ahead of most military). But because you have a steady income then (while you're in the military) you can afford to keep a high percentage of your investment portfolio in equities. By "high" I mean 80%-100%. You should find your own comfort level in that range.

navydavey said:
nash031: I'm kind of hesitant to commit to the TSP. As I understand it, if I don't do a full 20 year career then I won't be able to get to the money until 59 1/2 or whatever that number is these days. I'm just nervous to potentially tie up all my retirement money until that age if the goal is to retire sooner. I've been using the ROTH option but may change that this year as I'll probably push further into the 25% bracket. I'll look into simplifying. Would certainly make things a little easier. Thanks for the 35 cents!
Click to expand...
Bluntly, you're missing out on the benefits of the TSP. This is a very common misconception, unfortunately, and it's part of the reason why less than half of the military's servicemembers invest in the TSP.

Tapping tax-deferred assets is easier than people realize. For example, you can withdraw your Roth IRA contributions any time with no tax and no penalty. There are other approved exceptions like a first-time home purchase and mobilizing for Reserve duty.

Tapping the TSP is a little more challenging but straightforward. You can roll over a Roth TSP to a Roth IRA and then five tax years later withdraw the amount of the rollover without taxes or penalties. You can roll a conventional TSP over to a traditional IRA and then convert that to a Roth IRA using a conversion ladder. Five tax years after each small Roth IRA conversion, you can withdraw the amount of the conversion.
Early Withdrawals From Your TSP and IRA After The Military - Military Guide
Funding The Gap: "I Need Money From My TSP!" - Military Guide

It's unlikely that you'll even "need" to tap your TSP account before age 59.5. If you're saving aggressively for early retirement then you'll not only maximize your TSP and Roth IRA contributions but save even more in taxable accounts. Before you leave the military, you'll save up funds to pay your living expenses while you explore a bridge career (and save even more in taxable accounts). If you retire from the military, your pension will cover most of your expenses and you'll begin to draw down your taxable accounts to last until age 59.5. I've been retired since age 41 in 2002 and we haven't even touched our Roth IRAs, let alone our TSP funds. It's unlikely that we'll ever touch them.
navydavey said:
Would you be able to edify the thought process behind using a Roth IRA and TSP simultaneously? It seems to me that you're opting to pay taxes now AND later rather than maximizing the benefit of one or the other.
Click to expand...
By maximizing your tax-deferred contributions, you're compounding the gains without paying taxes. (You could do the same in a taxable account if you never took dividends or cashed in capital gains, but diversification and rebalancing make that highly unlikely.) By investing in the TSP, you're getting the world's lowest expense ratios with diversified passive index funds. But you need to save more than $18K/year, so you're also using a Roth IRA.

You can choose to pay taxes now (while you're more likely to be in a lower tax bracket) by contributing to the Roth TSP as well as your Roth IRA. But if you're making more contributions of tax-free pay from a combat zone, the TSP rules still limit the Roth TSP to $18K/year and you have to contribute the rest of the CZTE funds to a conventional TSP.

If you end up with a conventional TSP account, then when you stop working for a paycheck (both military and a bridge career) you'll be in a very low income tax bracket-- possibly 0%-10%. At that point you can roll over your conventional TSP to an IRA and start the Roth IRA conversions up to the top of the 10% or 15% income tax brackets. But if your income tax bracket in the military is already in that range then it makes just as much sense to contribute to the Roth TSP.
 
Your allocation looks great to me, only like some other posters, I think you're a little heavy on bond--if you can handle the volatility.
I've you're benchmarking performance to the S&P, realize that the international and small stocks did not do well and that the bonds (TIPS) held you down (except for the Long Treasuries, that ripped).
I'd probably increase the allocation to something like 85-15 (or 85-10-5 cash), if you can stand the volatility. You've got 30 years.
Great job; you sound like my youngest who is a a couple years younger but closing in on 100k (if his stock options don't collapse). You're way ahead of me at that age; I was only starting to invest at that point.
 
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