Portfolio Thoughts

[MrFlish]

Hello, I'm preparing to transfer my 401 upon retirement this year, to an IRA. One of the portfolio options I'm considering is shown below. I wanted to get some feedback and thoughts from the community.

Assumptions:
Portfolio initial balance ~1.3mm
Objective is biased towards captial preservation while allowing an opportunity for growth.
AA is 50/50, rebalanced annually
Investment window is 20-30 years
Annual withdrawal rate would be in the 3-5% range over that period.
Will have a fixed pension that will provide ~30% of the annual budget
SSN will provide ~25% of annual budget

VFIAX: Vanguard 500 Index 10%
VIMAX:Vanguard Mid-Cap Index 20%
VSMAX:Vanguard Sm-Cap Index 20%
VBTLX:Vanguard Total Bond Mkt. Index 50%

Thanks in advance...

 

[COcheesehead]

Your equity portion isn't reflective of the total market. The current market is about 75% big cap, 22% mid and 3% small, roughly. Your allocation is in the more volatile, though potentially great return over long periods, side of the equation. If you are ok with that, then go with it.

 

[travelover]

One reason to keep money in a 401(k) is if it has a decent stable interest fund. These pay more than short term bonds and don't have the interest rate risk.

Other than that your simple portfolio looks good to me.

 

[MrFlish]

Great points...I'll have to look at those ideas in a bit more detail.

 

[W2R]

Hello, I'm preparing to transfer my 401 upon retirement this year, to an IRA. One of the portfolio options I'm considering is shown below. I wanted to get some feedback and thoughts from the community.

Assumptions:
Portfolio initial balance ~1.3mm
Objective is biased towards captial preservation while allowing an opportunity for growth.
AA is 50/50, rebalanced annually
Investment window is 20-30 years
Annual withdrawal rate would be in the 3-5% range over that period.
Will have a fixed pension that will provide ~30% of the annual budget
SSN will provide ~25% of annual budget

VFIAX: Vanguard 500 Index 10%
VIMAX:Vanguard Mid-Cap Index 20%
VSMAX:Vanguard Sm-Cap Index 20%
VBTLX:Vanguard Total Bond Mkt. Index 50%

Thanks in advance...

Looks pretty good to me. If I was constructing this type of portfolio, I'd look at this one (suggested part of the way down on this webpage from the Bogleheads site). It doesn't break things down from a small cap and mid cap perspective, but it does have an international fund. I like your percentages for a retiree, so with similar percentages that portfolio might look something like this:

VBTLX: Vanguard Total Bond Mkt Index 50%
VTSAX: Vanguard Total Stock Mkt Index 35%
VTIAX: Vanguard Total International Stock Index 15%

 

[exnavynuke]

My primary remark would be that a portfolio with 20% in small caps and 20% in mid-cap stocks wouldn't generally be something I'd classify as "biased towards capital preservation". To put the risk level in perspective, Vanguard's 2050 target date fund (designed for people in their early 30's currently) has less than 25% of its allocation in mid-cap and small-cap stocks combined.

 

[target2019]

You can simplify this even more by using extended market in place of two funds.
VWIAX 30%, VEXAX 20%, VBTLX 50%.

 

[MrFlish]

You can simplify this even more by using extended market in place of two funds.
VWIAX 30%, VEXAX 20%, VBTLX 50%.

Will have to look at those suggestion further...thanks

 

[MrFlish]

Looks pretty good to me. If I was constructing this type of portfolio, I'd look at this one (suggested part of the way down on this webpage from the Bogleheads site). It doesn't break things down from a small cap and mid cap perspective, but it does have an international fund. I like your percentages for a retiree, so with similar percentages that portfolio might look something like this:

VBTLX: Vanguard Total Bond Mkt Index 50%
VTSAX: Vanguard Total Stock Mkt Index 35%
VTIAX: Vanguard Total International Stock Index 15%

Thanks for the insight...I'm not why but I'm still a bit wary of the international sector. I can't even give a good reason why other than " my gut" but the VTSAX is interesting for sure.

 

[COcheesehead]

Thanks for the insight...I'm not why but I'm still a bit wary of the international sector. I can't even give a good reason why other than " my gut" but the VTSAX is interesting for sure.

International has been a laggard for a while, but this year it has started out like a rocket. If you believe in reversion to the mean, international might do well for sometime.

 

[MrFlish]

International has been a laggard for a while, but this year it has started out like a rocket. If you believe in reversion to the mean, international might do well for sometime.

Yes...RTM might be one of those laws that applies to everything...matter of fact it may be why I feel like I'm 10 again!!! Retirement causes life reversion...

I may have to suck it up and dip my toes into that international pool sooner than later but it'll be with some broadly diversified index for sure.

Thanks again for all the insight.

 

[ejman]

You can simplify this even more by using extended market in place of two funds.
VWIAX 30%, VEXAX 20%, VBTLX 50%.

Wouldn't this result in bonds being overweight since VWIAX is 60% bonds?

 

[Huston55]

One reason to keep money in a 401(k) is if it has a decent stable interest fund. These pay more than short term bonds and don't have the interest rate risk.

Other than that your simple portfolio looks good to me.

I think there are potentially two other reasons.

1. You want to take distributions after age 55 & before age 59.5.

2. I think rolling your 401k into a traditional IRA will affect the taxes of future TIRA/RothIRA conversions. (Need someone more familiar with this to comment.)

 

[target2019]

Wouldn't this result in bonds being overweight since VWIAX is 60% bonds?

My bad.

S&P 500 VFIAX

 

[MrFlish]

My bad.

S&P 500 VFIAX

VFIAX was the benchmark I used when I ran the analysis over at Portfolio Visualizer. The run results on the portfolio turned out pretty interesting. The analysis was intended to see how the funds would've reacted to a pretty volatile period of time and if they would have remained within my goal of preservation. I also wanted to see what the dampening effect of the bond fund would have had as I changed AA.

I'm still learning about investment fundamental as have likely gotten smart enough to get myself in hot water pretty easily. Thankfully, the community is providing me with some great info and helping me develop better critical thinking when it comes to investing.

 

[NW-Bound]

Yes...RTM might be one of those laws that applies to everything...matter of fact it may be why I feel like I'm 10 again!!! Retirement causes life reversion...

It's not retirement but growing old that causes life reversion.

One wore a diaper after he was born and could not walk, and it happened again when near death.

So, a retiree needs to enjoy the time he has before that unavoidable reversion.

 

[MrFlish]

It's not retirement but growing old that causes life reversion.

One wore a diaper after he was born and could not walk, and it happened again when near death.

So, a retiree needs to enjoy the time he has before that unavoidable reversion.

Amen...

 

[pb4uski]

I don't like the AA in the original post... it is way too tilted towards small/mid cap.

Why not keep it simple and go with a target date retirement fund? The Vanguard target date retirement funds are a combination of broad based Vanguard funds... and are what Vanguard recommends for retirees retiring at certain quinquennial years....for example, the 2015 fund is 45/55 and consists of:

Allocation to underlying funds as of 12/31/2016
Ranking by Percentage	Fund	Percentage
1	Vanguard Total Bond Market II Index Fund Investor Shares*	31.5%
2	Vanguard Total Stock Market Index Fund Investor Shares	27.0%
3	Vanguard Total International Stock Index Fund Investor Shares	18.3%
4	Vanguard Total International Bond Index Fund Investor Shares	13.3%
5	Vanguard Short-Term Inflation-Protected Securities Index Fund Investor Shares	9.9%
Total	—	100.0%

If you want more equities you could instead go with the 2020 fund, which is 57/43.... this keeps it simple... and cheap... the ER of both funds is 0.14%.

If tax efficiency is not a big factor and you are new to fund selection then the target date retirement funds or a balanced fund is another alternative to be considered.

 

[travelover]

...........Why not keep it simple and go with a target date retirement fund?............... .

One disadvantage of a Target Fund is that if the stock market takes a major dump, you can't just sell bonds to live on while you wait for the recovery.

 

[Lsbcal]

One disadvantage of a Target Fund is that if the stock market takes a major dump, you can't just sell bonds to live on while you wait for the recovery.

Excellent point.

In 2008-2009 our AA changed because of the crash going from 55/45 to more like 45/55. So selling bonds for spending was the easy way to move towards rebalancing. Not that this is the only way to rebalance.

 

[pb4uski]

One disadvantage of a Target Fund is that if the stock market takes a major dump, you can't just sell bonds to live on while you wait for the recovery.

True, but that amounts to changing your AA...I think the fund managers would essentially be doing that for you as they keep the fund within its target AA range they would sell the bond fund and buy the stock funds.

There is a flip side too... it might avoid you from panicking and selling equities and never getting back in as many people did during the great recession.

But if that is a concern one can obtain more control by just buying the requisite funds in the requisite percentages and rebalance yourself.

 

[Huston55]

I don't like the AA in the original post... it is way too tilted towards small/mid cap.

Why not keep it simple and go with a target date retirement fund? The Vanguard target date retirement funds are a combination of broad based Vanguard funds... and are what Vanguard recommends for retirees retiring at certain quinquennial years....for example, the 2015 fund is 45/55 and consists of:

Allocation to underlying funds as of 12/31/2016
Ranking by Percentage	Fund	Percentage
1	Vanguard Total Bond Market II Index Fund Investor Shares*	31.5%
2	Vanguard Total Stock Market Index Fund Investor Shares	27.0%
3	Vanguard Total International Stock Index Fund Investor Shares	18.3%
4	Vanguard Total International Bond Index Fund Investor Shares	13.3%
5	Vanguard Short-Term Inflation-Protected Securities Index Fund Investor Shares	9.9%
Total	—	100.0%

If you want more equities you could instead go with the 2020 fund, which is 57/43.... this keeps it simple... and cheap... the ER of both funds is 0.14%.

If tax efficiency is not a big factor and you are new to fund selection then the target date retirement funds or a balanced fund is another alternative to be considered.

So, does this mean 0.14% on top of the ERs of the underlying funds or, 0.14% TOTAL ER?

 

[pb4uski]

0.14% total and is the weighted average ER of the underlying funds.

Annual Fund Operating Expenses

(Expenses that you pay each year as a percentage of the value of your investment)

Management Fees None

12b-1 Distribution Fee None

Other Expenses None

Acquired Fund Fees and Expenses 0.13%

Total Annual Fund Operating Expenses 0.13%

For some reason, the webpage says 0.14% but the prospectus says 0.13%.

 

[MrFlish]

One disadvantage of a Target Fund is that if the stock market takes a major dump, you can't just sell bonds to live on while you wait for the recovery.

Good point and I agree with this line of thinking. I don't want our investments to be a full time job but I do want to have a bit more control in terms of rebalancing or adjusting our AA as we get a bit older.

 

[NW-Bound]

The OP's AA is very heavy in mid and small caps. He should look at past data to see if he could stomach the volatility in past market meltdowns. Maybe he has always had the same AA, and is used to it.