Stocks to Three-Fund Portfolio

[refi]

TL DR.

1. Three-fund portfolio or stock picking?
2. When I FIRE, how do i get cashflow? Dividends? Sell shares?

-----------------------------------------

So I have $1m in equities, half in my 401k and half in my personal account.

For my 401k, I've chosen a mix of their mutual fund offerings, so that's spread me across various sectors giving me diversity.

As for my personal account, I've have a mix of some ETFs, but mostly am single stock picking. I have IVV/VTI which makes up about 75k and QQQ about 31k. The rest of stocks are some of the usual tech suspects: AMZN, APPL, MSFT, GOOG, FB and some fintech and bank stocks.

So over the past year, I've looked at how i've faired single stock picking vs. just buying the S&P funds, basically about even. So at this point, I was wondering if it makes sense to sell off my individual stocks and move all into ETFs for ease/ basic three-fund portfolio.

I guess a couple questions:

1) I will have to pay cap gains around $60k on my current stocks, mostly ltcg. would it be worthwhile? Seems like I pay this off eventually, probably wouldn't matter either way.

2) Should I just slowly shed some of these stocks? Some of these stocks don't have dividends, so I don't actually realize money until i sell. Thinking in ETFs and FIRE, I get more of a dividends which I can count on for spend during RE.

Apologies, this was rambling, but any help would be appreciated.

 

[joeea]

1. Three-fund portfolio or stock picking?

That depends on your goals.

If you need a home run to meet your goals, then try stock picking. Maybe you'll get lucky. Probably not.

If you can achieve your goals with a lot of singles, a lot of walks, an occasional double, and a bunt or two, then use the three-fund portfolio. Less luck will be required.

 

[Aerides]

As for my personal account, I've have a mix of some ETFs, but mostly am single stock picking. I have IVV/VTI which makes up about 75k and QQQ about 31k. The rest of stocks are some of the usual tech suspects: AMZN, APPL, MSFT, GOOG, FB and some fintech and bank stocks.

So over the past year, I've looked at how i've faired single stock picking vs. just buying the S&P funds, basically about even.

A year is nothing. Gives you absolutely no info to compare at all. As you know, with a heavy tech stock load, you're extremely vulnerable to another tech bust ala 2000. Even the past several years, given it's mostly been a bull, is hard to judge for a long term goal.

Personally I'd be looking to sell and move to index funds, more IVV and equivalents with Vanguard/Fido. You don't have to sell all at once, but if you're watching them closely, you might as well try to market time a little bit and get out on their "good" days.

As far as where does cash come from when you retire, yes, simply put, you sell stuff, rebalance as needed, or have dividends, all personal preference.

 

[SumDay]

I shared this yesterday in this thread (which may also have other posts that could answer your question): http://www.early-retirement.org/forums/f28/how-do-you-withdraw-96910.html#post2209119

"I was struggling with this last year when we were actually giving notice to retire. These two articles helped me with the minutia of the whole process. They do go into Asset Allocation more than you probably care for, but there are some good nuggets in both. After 6+ months, I will say that I made it much more complicated than it actually is.

https://www.theretirementmanifesto.com/our-retirement-investment-drawdown-strategy/

https://www.theretirementmanifesto.com/how-to-build-a-retirement-paycheck/
Good luck!"

Also, this article was very helpful to me: https://www.morningstar.com/articles/762379/retirement-bucket-portfolios-for-vanguard-investor.html

 

[38Chevy454]

That depends on your goals.

If you need a home run to meet your goals, then try stock picking. Maybe you'll get lucky. Probably not.

If you can achieve your goals with a lot of singles, a lot of walks, an occasional double, and a bunt or two, then use the three-fund portfolio. Less luck will be required.

My thoughts exactly. Stick with index funds and be happy to basically match market returns. Adjust your AA to be inline with your risk tolerance.

 

[ziggy29]

There can be two goals for retirement investing, and they are not the same:

(1) Investing for maximum growth;
(2) Investing for portfolio survivability.

On average, investing per (1) will normally result in higher portfolio values over time, and probably in almost all situations over decades.... but may also increase the risk of failure (running out of money before running out of life). If that risk is more than you want to endure, AND if you can still meet your withdrawal needs by ratcheting back a little with index funds and ETFs in an appropriate allocation, then option (2) might be a better choice.

 

[kgtest]

I have essentially a 3 fund portfolio with an exception. I allocate up to 20% of my portfolio for individual equities (currently AAPL, MMM and CASY with a small portion in employee stock).
My three funds are VBK, VOT and VUG. I came to this conclusion after years of analysis paraylsis and a sting at trying to both 1. time the market (which I actually successfully did but blood pressure was high for a while) and 2. trying to beat the market by individually picking equities.
It seems, over time, just taking option 3 which is the 3 fund diversified portfolio covering a majority of the S/P and a small 20% allocation to cure the "gambling" itch of individual equities.



Ooooh, one exception...I own one sector ETF, VHT. It's included in my 20% gambling. I have essentially been able to beat the market the past 5 of the 6 years and year 7 I am barely beating it... This was never my intention, but a welcomed surprise. Will this strategy hold up in a bear...I have no idea, but that is the plan...risk averse first!

 

[OldShooter]

A couple of relevant quotations from William Bernstein:

On investing for retirement: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

“Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine.”

 

[triangle]

You have enough saved that it would be worthwhile to sit down with a certified financial planner, that looks at your age, goals, income needs, etc, to help recommend a strategy to fit your needs.

But to your direct question I think it is okay to slowly sell stocks and reinvest in funds if you don't have any clear strategy for managing individual stocks and creating your own balanced stock portfolio. I may not think it is prudent to overweight FAANG, new financials, and old financials; but if you have some other sectors represented to balance those holdings then you may approximate the index anyway.

 

[pb4uski]

1. Three-fund portfolio or stock picking?
2. When I FIRE, how do i get cashflow? Dividends? Sell shares?

.....1) I will have to pay cap gains around $60k on my current stocks, mostly ltcg. would it be worthwhile? Seems like I pay this off eventually, probably wouldn't matter either way.

2) Should I just slowly shed some of these stocks? Some of these stocks don't have dividends, so I don't actually realize money until i sell. Thinking in ETFs and FIRE, I get more of a dividends which I can count on for spend during RE. .....

Index funds/three-fund portfolio. Cash flow via total return... interest and dividends as they come.... rest through sale proceeds. Don't worry about "income"... you can spend appreciation by selling shares and if on those occasional bad years you have to access "principal" it isn't the end of the world. Don't sweat the small stuff.

If you are currently in the 12% tax bracket or expect to be in the 12% tax bracket in ER, you can take advantage of 0% LTCG.

What is your overall AA target? For tax efficiency, hold bonds/fixed income in tax-deferred, international equities in taxable (otherwise foreign tax credit is wasted) and domestic equities in taxable or tax-free.

 

[OldShooter]

... I may not think it is prudent to overweight FAANG, new financials, and old financials; but if you have some other sectors represented to balance those holdings then you may approximate the index anyway.

True, but remember that to diversify away individual stock and sector risk takes owning a lot of carefully-picked stocks, like 50-100. Holding only a few individual stocks is risky and selecting enough to be diversified is pretty difficult for the average retail investor. The answer, of course, is something like VT. Four or five thousand stocks is a pretty diversified portfolio.

I'll refer the OP back to the second Bernstein quotation in post #8.

 

[copyright1997reloaded]

I have essentially a 3 fund portfolio with an exception. I allocate up to 20% of my portfolio for individual equities (currently AAPL, MMM and CASY with a small portion in employee stock).
My three funds are VBK, VOT and VUG. I came to this conclusion after years of analysis paraylsis and a sting at trying to both 1. time the market (which I actually successfully did but blood pressure was high for a while) and 2. trying to beat the market by individually picking equities.
It seems, over time, just taking option 3 which is the 3 fund diversified portfolio covering a majority of the S/P and a small 20% allocation to cure the "gambling" itch of individual equities.



Ooooh, one exception...I own one sector ETF, VHT. It's included in my 20% gambling. I have essentially been able to beat the market the past 5 of the 6 years and year 7 I am barely beating it... This was never my intention, but a welcomed surprise. Will this strategy hold up in a bear...I have no idea, but that is the plan...risk averse first!

I just went back to re-read this post. VBK - Small Cap GROWTH, VOT - Mid cap GROWTH, VUG - Vanguard GROWTH. Is having all growth and no value done on purpose?

 

[kgtest]

I just went back to re-read this post. VBK - Small Cap GROWTH, VOT - Mid cap GROWTH, VUG - Vanguard GROWTH. Is having all growth and no value done on purpose?

Yes. Although admittedly my smallcaps VBK have been getting slaughtered during the recent selloffs. I was in value before growth but decided to just swing for the fences. My ER time horizon is 13 to 18 years. I wont be able to stack enough in our taxable accounts until then.

I thoyght AAPL and FB were now value stocks. Thats what the analysts were yapping past few weeks and I know VUG holds some FB which I dont like. I am.averaging ober 27% returns annually over the past 6 years. I admit I bought AAPL around 96 and just keep reinvesting dividends. Havent bought since it dropped that low.

 

[kgtest]

I just realized the mobile app by default does not show my signature which basically gives my recipe and exact context into why I am doing what I am doing. I own investment real estate and have 2 trusts with sizable multi million dollar balances I am set to partially inherit as I am executor of one and co executor of the other. I also have mt own trust that is well on its way to 2 comma. Sooo I can literally afford to take almost infinate risk.. Also earn well into the six figure range at the prime of my career. Again not bragging just providing some context as to why a non FIRE accumulator might choose to go full growth. You will notice when I post in the ytd with my 100% equities I am usually one of the top of not the top performers. Again not bragging just a result of my asset allocation and current market conditions YMMV. Godspeed

 

[copyright1997reloaded]

I just realized the mobile app by default does not show my signature which basically gives my recipe and exact context into why I am doing what I am doing. I own investment real estate and have 2 trusts with sizable multi million dollar balances I am set to partially inherit as I am executor of one and co executor of the other. I also have mt own trust that is well on its way to 2 comma. Sooo I can literally afford to take almost infinate risk.. Also earn well into the six figure range at the prime of my career. Again not bragging just providing some context as to why a non FIRE accumulator might choose to go full growth. You will notice when I post in the ytd with my 100% equities I am usually one of the top of not the top performers. Again not bragging just a result of my asset allocation and current market conditions YMMV. Godspeed

Thanks, it makes more sense now with additional context. I have sometime 'argued' in threads where folks take the line of going all cash/fixed because they 'have enough' that another way of thinking of it is that if you truly have enough in safe (from value decline) instruments that the rest could be invested all in equities. This is because even a major downturn or complete loss of that portion of their net worth is irrelevant because of the cash/fixed/pension portion, so you may as well let it ride (so to speak).

I must admit that I would have trouble getting myself to do your portfolio, and am OK with somewhat lessor returns that are a result of a more conservative position (I'm about 63% equities at the moment). This is even with the fact that I could lose all of the equities, i.e. mark them to zero and remain FI (assuming my pension, social security, and fixed/cash portion remains).

As an aside, my largest single stock position is AAPL with a basis of $1.40, second is Edwards LifeSciences (EW) w/basis around $54, and third Analog Devices (ADI) at $0.66. So I've been 'lucky' (at least that is what the index over all crowd would say) to have had some great long term holdings that I've ridden.

 

[refi]

Index funds/three-fund portfolio. Cash flow via total return... interest and dividends as they come.... rest through sale proceeds. Don't worry about "income"... you can spend appreciation by selling shares and if on those occasional bad years you have to access "principal" it isn't the end of the world. Don't sweat the small stuff.

If you are currently in the 12% tax bracket or expect to be in the 12% tax bracket in ER, you can take advantage of 0% LTCG.

What is your overall AA target? For tax efficiency, hold bonds/fixed income in tax-deferred, international equities in taxable (otherwise foreign tax credit is wasted) and domestic equities in taxable or tax-free.

Unfortunately, bracket is higher, so couldn't take advantage, but good to know.

I spoke to a bit of my asset allocation here, but it's roughly RE/Equities/Cash = 50/40/10

Looking at the responses, I'm more like the 20% guy who wants to stock pick to meet a small gambling itch, but still maintain ease. Overall, thinking a split up non-RE into: FZROX+IVV (55%) / FZILX (10%) / FXNAX+Hi-Yield Savings (15%) /Pick Stocks (20%).

To some of the other items, I've talked to some financial advisors, and they, for the most part haven't been so helpful, I've been just pushed their management products (at 1%) and life insurance. Though, could be helpful to re-balance.

Thanks for responses.

 

[target2019]

TL DR.

1. Three-fund portfolio or stock picking?
2. When I FIRE, how do i get cashflow? Dividends? Sell shares?

-----------------------------------------

So I have $1m in equities, half in my 401k and half in my personal account.

For my 401k, I've chosen a mix of their mutual fund offerings, so that's spread me across various sectors giving me diversity.

As for my personal account, I've have a mix of some ETFs, but mostly am single stock picking. I have IVV/VTI which makes up about 75k and QQQ about 31k. The rest of stocks are some of the usual tech suspects: AMZN, APPL, MSFT, GOOG, FB and some fintech and bank stocks.

So over the past year, I've looked at how i've faired single stock picking vs. just buying the S&P funds, basically about even. So at this point, I was wondering if it makes sense to sell off my individual stocks and move all into ETFs for ease/ basic three-fund portfolio.

I guess a couple questions:

1) I will have to pay cap gains around $60k on my current stocks, mostly ltcg. would it be worthwhile? Seems like I pay this off eventually, probably wouldn't matter either way.

2) Should I just slowly shed some of these stocks? Some of these stocks don't have dividends, so I don't actually realize money until i sell. Thinking in ETFs and FIRE, I get more of a dividends which I can count on for spend during RE.

Apologies, this was rambling, but any help would be appreciated.

Unfortunately, bracket is higher, so couldn't take advantage, but good to know.

I spoke to a bit of my asset allocation here, but it's roughly RE/Equities/Cash = 50/40/10

Looking at the responses, I'm more like the 20% guy who wants to stock pick to meet a small gambling itch, but still maintain ease. Overall, thinking a split up non-RE into: FZROX+IVV (55%) / FZILX (10%) / FXNAX+Hi-Yield Savings (15%) /Pick Stocks (20%).

To some of the other items, I've talked to some financial advisors, and they, for the most part haven't been so helpful, I've been just pushed their management products (at 1%) and life insurance. Though, could be helpful to re-balance.

Thanks for responses.

I think of the investing challenge as one of complexity. Some do well managing that (as you have), and others do not. For either camp, fewer investments to watch is usually a good thing.

If it were me (really us), I'd move in increments to the desired state, and look for one ETF or Fund that can be freely purchased in the taxable brokerage account. Periodically I would sell some portion of the stocks, with an eye on taxes to be incurred, and plop the amount into Fund or ETF X.

We have two brokerages, to make this even more fun! Our ETF X is SCHD, an S&P500 value index. Combined, the two taxable accounts are 15-20% of total invested. In each brokerage we have a tax-free muni fund or etf, about 10% of total brokerage.

If I understand your two posts, you tend to agree with much of this. The cash flow you are looking for (at 40 YOA) is worthy of more analysis, year by year. When I have more time I'll look at your other thread.

 

[targatom2019]

Right now I have over 35 individual stocks in my brokerage account with Admeritrade and just two funds with Fidelity(Fidelity Zero international index and Fidelity Zero Total market). All I can tell you is I am beginning to love my Fidelity with just two index funds vs managing 35 individual stocks. In couple more months I will liquid all 35 stocks and buy just the two funds just to keep it simple but might add a bond fund when I get older.

 

[jimnjana]

Right now I have over 35 individual stocks in my brokerage account with Admeritrade and just two funds with Fidelity(Fidelity Zero international index and Fidelity Zero Total market). All I can tell you is I am beginning to love my Fidelity with just two index funds vs managing 35 individual stocks. In couple more months I will liquid all 35 stocks and buy just the two funds just to keep it simple but might add a bond fund when I get older.

It will take me many more years, but I am heading in the same direction at the very least fidelity zero total market will become largest portfolio holding.

 

[refi]

Sorry if reviving old threads are frowned upon. After this thread and doing some analysis of my portfolio, it probably makes sense to trend with more "singles" (three-fund) vs. single stock picking. But unfortunately, almost all my individual stock holdings are in post-tax accounts, about $140k in unrealized capital gains.

My current portfolio is $600k tax advantaged and $550k post-tax. Of the $550k, $110k are in ETFs (IVV and QQQ) and rest in single stocks. Again, mostly large cap- MSFT, AMZN, AAPL, etc..

My goal is to dwindle this down to maybe 2-3 more "riskier"/gambling picks (e.g. - TSLA) and have the rest in some allocation of 70/30 in (FZROX, FZILX, FXNAX).

My main concern is how can i do this transition without taking a tax hit. Or that's inevitable? My salary for the year will be around $315k.

TLDR - What's the easiest way to sell equities in a post-tax account w/o taking a tax hit? Is this investing 101?

 

[LOL!]

TLDR - What's the easiest way to sell equities in a post-tax account w/o taking a tax hit? Is this investing 101?

If there was an easy way, then all the rich and wealthy people would be doing it and there would be no income taxes paid to the IRS.

But you can:

1. Donate appreciated shares held long term to charity perhaps best through your Donor Advised Fund. Don't have a DAF? Get one. I use Fidelity's. Select the shares with the highest percentage unrealized gains (and lowest cost basis) to give to your DAF.

2. Over the past couple of decades there have been numerous tax loss harvesting opportunities that one should have used to build up a huge stockpile of carryover losses that can now be used to offset realized capital gains and thus have no net capital gains and no income from selling. If one didn't do this, then there are no time machines to help go back and do so. Sorry.

3. Give appreciated shares away to your family members in a lower tax bracket. Then have them sell and pay the taxes at a lower rate.

Do you see how you don't get to keep the money if you want to save on taxes?

Stop any and all automated dividend reinvestment if you have that going. Since stocks do not have average basis, you can use Specific Identification to sell any shares with the highest cost basis first, then spread out selling more shares each year for a few years. Owning MSFT, AAPL, AMZN is not a big deal since they are the top holdings in the Total US Stock Market index fund anyways, so they are like your IVV and maybe QQQ.

Whatever you do, try to avoid paid the extra Net Investment Income Tax of 3.8% by limiting the amounts you sell each year.

 

[Animorph]

I've been converting to a four fund portfolio for a few years now. I'm trying to stay below $250k AGI while I Roth convert at the same time. I'm also selling from taxable accounts to fund all of our retirement expenses.

I've already transitioned all of our tax advantaged accounts to the simpler portfolio, with no tax impact.

I try to minimize capital gains, but I do have substantial gains when selling in taxable accounts and it is getting worse as all the easy stuff is sold. In general, the taxable accounts are still on the old portfolio style, with gaps where I've sold assets. I can compensate a little bit by buying a little more of a similar fund in the retirement accounts. I'll probably never convert taxable accounts to the simpler portfolio, they'll just be spent over the next 10 years or so.

My Roth conversions should end after 2020, so that will give me a chance to take advantage of 0% capital gains for a few years, and no more than 15% effective CG's for any additional taxable sales. I'm not sure I'll worry about simplifying the taxable portfolio even then, but at least I won't be paying more than 15% for it.

If you really want to simplify, I'd sell only to the top of your 15% CG bracket, if that is even a possibility. Above $250k AGI the extra healthcare tax kicks in, even on CG's, so you may be out of the 15% range already. If you are close to retirement you may have better opportunities for sales then. If your retirement income is still too high and you can match your likely post-retirement CG tax rate with your current income then it's just a matter of taking the same tax hit now or later.

 

[pb4uski]

Sorry if reviving old threads are frowned upon. After this thread and doing some analysis of my portfolio, it probably makes sense to trend with more "singles" (three-fund) vs. single stock picking. But unfortunately, almost all my individual stock holdings are in post-tax accounts, about $140k in unrealized capital gains.

My current portfolio is $600k tax advantaged and $550k post-tax. Of the $550k, $110k are in ETFs (IVV and QQQ) and rest in single stocks. Again, mostly large cap- MSFT, AMZN, AAPL, etc..

My goal is to dwindle this down to maybe 2-3 more "riskier"/gambling picks (e.g. - TSLA) and have the rest in some allocation of 70/30 in (FZROX, FZILX, FXNAX).

My main concern is how can i do this transition without taking a tax hit. Or that's inevitable? My salary for the year will be around $315k.

TLDR - What's the easiest way to sell equities in a post-tax account w/o taking a tax hit? Is this investing 101?

I assume that the individual stocks in your taxable portfolio have significant long-term capital gains... if you have any positions with losses you could sell any losers and offset the losses with gains on the winners. Assuming that you use the specifica identification method, you could focus any selling on long-term purchase lots with lower appreciation.

Beyond that, it is just a matter of deciding whether it is best to just hold your nose and sell and pay any long-term capital gains tax, most likely 15% of the gain... if you will eventually sell these investments in any event all you are doing is to pay the tax now and the economic cost is the future after-tax growth on the taxes paid.

And as others have indicated, if you do charitable contributions then it would be preferable to donate appreciated shares rather than cash.... and similar for any gifts to friends or family who might have lower tax rates.