Vanguard Advisor Recommendations -- thoughts?

[BarbWire]

My portfolio is in serious need of rebalancing/shuffling following inheritances, real estate sales, naive AA choices by me years ago, market growth, etc. I'm a Flagship Vanguard member, so I had one of their advisors work up a plan.

I'm 59 and living off investments. I keep 2-3 years of cash on hand --topped up each year by dividends etc -- and don't count it in my asset allocation plan. My assets are 54% in taxable funds, and 46% in retirement funds. I have to draw some RMDs from inherited IRAs, but they are small.

He suggested:

1. Gross asset allocation: 60% stocks, 40% bonds.
2. Of the 60% stocks, hold 60% in domestic stocks, and 40% in international.
3. Of the 40% bonds, hold 70% in total bond fund, and 30% in total international bond fund.

Breaking down the stock recommendations further:

1. Hold all the international stock in the Total International Stock Index
2. Hold the 60% domestic stock as: Total stock index 30%, growth stock index 30%, extended stock index 20%, Value index 20%

This gives an overall portfolio composition of:

• Total Stock Market: 11%
• Growth Stock: 11%
• Extended Mkt: 7%
• Value Index: 7%
• Total Int'l Stock: 24%
• Total Bond: 28%
• Total Int'l Bond: 12%

The international stock portion seems very large when I think of it as 40% of my stock holdings, but maybe as 24% of total is isn't bad.

My instinct is to decrease international to 25% of the stock holdings, and increase domestic to 75%.


Thoughts?

 

[eytonxav]

FWIW, I limit international to a range of 20-30% of my equity holdings and that includes an emerging market component.

 

[pb4uski]

That overall AA is quite similar to the Vanguard Target Retirement 2020 and 2025 funds. Vanguard typically has 40% of equities in international and 30% of bonds in international, so what he recommends is consistent with what Vanguard typically suggests.

I dial down the international to 30% for equities and 20% for bonds for my portfolio.

I'm not keen on the 4 domestic equity funds as it tilts your equities towards small/mid cap and towards growth. I just go with Total Stock and keep it simple.

Did he suggest that your bonds go into your tax-deferred and put your equities in taxable? That is what I do and it has worked out well taxwise since QDI and LTCG are tax preferenced and I get the foreign tax credit.

 

[friar1610]

That overall AA is quite similar to the Vanguard Target Retirement 2020 and 2025 funds. Vanguard typically has 40% of equities in international and 30% of bonds in international, so what he recommends is consistent with what Vanguard typically suggests.

I dial down the international to 30% for equities and 20% for bonds for my portfolio.

I'm not keen on the 4 domestic equity funds as it tilts your equities towards small/mid cap and towards growth. I just go with Total Stock and keep it simple.

Did he suggest that your bonds go into your tax-deferred and put your equities in taxable? That is what I do and it has worked out well taxwise since QDI and LTCG are tax preferenced and I get the foreign tax credit.

I spend a fair bit of time on the Bogleheads web site. As you (the OP) may be aware, that is a site that is very Vanguard-focused and is centered around the investing philosophy of John Bogle, the founder of Vanguard. There are many, many discussions there about asset allocation and the "right" amount of international exposure to have. Generally it seems that Vanguard's default AA recommendations are that international should be 40% of the total equity slice and domestic should be 60%. This gets close to approximately total worldwide equity market weights which are about 50-50 domestic and international. VG further recommends that international bonds be 30% of the bond slice. Virtually all of their balanced funds contain this mix regardless of what the overall AA is. So it appears the OP got the default recommendation within the context of an overall 60-40 AA.

In my non-expert opinion:
- the overall 60-40 AA seems reasonable for you based on the information you've provided.
- 40% international is quite high and I personally don't buy into VG's default recommendation there. I keep myself at 20%-25% and could see going as high as 30% but that's it. (John Bogle himself doesn't really see a need for international but if an investor wants to have it, he recommends about 20%.) Other experts recommend going market weight with international, so that's a personal decision.
- there is no real advantage to owning international bond funds. There is a lot of discussion on this on the Bogleheads web site and opinions are all over the place, but I personally have yet to grasp the advantage of them. So I only have a teeny amount in a balanced fund I hold since they are an essential part of that fund. The overwhelming majority of my bonds are in the Total Bond Market Index fund.
- pb4uski has it right above by recommending just the Total Stock Market fund for equity holdings. If you have a particular reason for wanting to tilt toward small, value or something else, that's fine. But I wouldn't do it (and don't) just because VG recommends it. I don't think their recommendation would particularly hurt; I just don't see the benefit to it.

As one of the most respected posters on Bogleheads says, "there are many roads to Dublin" so there are a wide variety of mixes that would probably serve you equally well. Over the years I've opted for more simplification which means fewer funds rather than more. But at some point the discussions/arguments about the "perfect" mix boil down to a financial version of "how many angels can dance on the head of a pin?"

 

[pb4uski]

While I know the general skepticism about international bonds, the Vanguard Total International Bond fund has outperformed Total Bond for 1 year and 3 years. Even for 5 years, International Bond is close to the accumulated value of Total Bond despite Total Bond having a 2 year head start. I know, I know.... past results are not necessarily indicative of future performance... but so far it has performed well.

 

[DrRoy]

I agree with the responses so far that 40% of your equities in int'l is too high. I personally have held practically no int'l for several years and am better off for it. I would suggest that you dial back to 10-20%. I also have no int'l bonds. With interest rates so low, you could lose all the return with an unfavorable move in foreign currency exchange rates, and that is a risk I would rather avoid.

 

[pb4uski]

....I also have no int'l bonds. With interest rates so low, you could lose all the return with an unfavorable move in foreign currency exchange rates, and that is a risk I would rather avoid.

The international bond fund that Vanguard recommends is hedges its fx risk, so that would not be a concern.

.... The fund employs currency hedging strategies to protect against uncertainty in future exchange rates, so investment returns are expected to reflect the underlying performance of international bonds. ....

 

[trirod]

I follow Vanguard's recommendation of 40% of equities in international. Of course over the last few years, international has underperformed, but I'm in this for the long term. A lot of people will take the position that US companies trade internationally so you get your international exposure that way. Well a lot of Japanese companies trade internationally (Toyota, Sony etc.) and that didn't help their stock market during the lost decade. So I see international exposure as a nice diversifier.

 

[LOL!]

I think the advisor's advice is fine especially now that US equities have gone up and foreign equities have dropped.

More important is probably what you did not reveal: What is your current portfolio and how do you get to the new portfolio with minimal tax consequences? Presumably asset location advice was given as well.

I wouldn't have any cash myself or let me say I don't have any cash myself even though I am retired. I am happy to sell assets to pay my expenses as needed.

 

[BarbWire]

Did he suggest that your bonds go into your tax-deferred and put your equities in taxable? That is what I do and it has worked out well taxwise since QDI and LTCG are tax preferenced and I get the foreign tax credit.

He didn't suggest it -- I told him that was one of my objectives for tax-efficiency. He didn't argue. I inherited a bunch of Wellington and Wellesley in a taxable fund, with cost basis reset on 12/22/2015, and I want to get rid of it while the cap gains are still pretty small. (In fact, I want to do all my rebalancing in 2016 and take the tax hit. Then in 2017 I can qualify for an ACA subsidy.)

Thanks to all for confirming that the VG rep just gave me the standard Vanguard formula. I find it encouraging that my learning curve -- nurtured by many of you here over the years -- has led me to question the blanket recommendations, especially the international stock component. Thank you.

I've read quite a bit about "lazy" portfolios, and definitely want to keep the number of funds small. In taxable accounts I already hold Total Stock, Total Int'l Stock and Growth Index (all as ETFs to manage cap gains), as well as a smattering of Extended Market, XOM, CVX, REIT Index and MMM (all early learning experiments) I'm not going to touch those; just let 'em grow.

So, I think I will sell the taxable Wellington and Wellesley, and simply buy Total Stock and Total Int'l Stock in quantities to keep Int'l at about 20% of my equities. I will steer clear of the Value Index Fund; no need to add that to the mix -- and certainly no reason to buy it before I understand how it fits into a portfolio.

In my non-taxable accounts, I will predominately use Total Bond, maybe a smattering of Total International Bond, and then a bit of Wellesley to bring up the overall equity component to where it needs to be. (Why Wellesley? Because that's what Dad invested in ....)

Thanks!

 

[Focus]

He suggested:
[*]Hold the 60% domestic stock as: Total stock index 30%, growth stock index 30%, extended stock index 20%, Value index 20%
[/LIST]

I also don't understand why the advisor didn't suggest you do 60% Total Stock Market Index Fund. Wouldn't that actually be the Vanguard default?

 

[Midpack]

Thanks to all for confirming that the VG rep just gave me the standard Vanguard formula.

In my experience, they never stray from their 'standard formula.' Their have been subtle changes in their 'standard formula' over the years (e.g. Int'l Bonds) based on the AA recommendations I've gotten from VG over the past 11 years, but all customers get the same recommendations.

Of course we all have our personal biases such as whether to hold any Int'l Bonds, domestic vs int'l equity (2:1 here) or various tilts (small and value here) - nothing wrong with that. VG isn't militant about converting customers to their standard formula, it's just just their base recommendation.

I don't understand why they'd recommend a 30% slice of a growth fund and a 20% slice of a value fund, offsetting tilts?

 

[pb4uski]

A guess. Those narrower funds probably have slightly higher investment management fees than the broader funds. I hope I'm wrong, is that would be a big disappointment.

 

[donheff]

Like some of the others I use VG Total Stock instead of a slice and dice and a smaller international allocation on both stocks and bonds. I don't really have good reasons for the smaller foreign allocation it just makes me more comfortable.

 

[BarbWire]

I don't understand why they'd recommend a 30% slice of a growth fund and a 20% slice of a value fund, offsetting tilts?

My guess is that I already own some growth (about 4%) which I plan to hold -- no reason to sell it (It was an early, learning curve purchase.). So he must think I like it, and cranked up its percentage and put in value to offset? Who knows.

I'll keep the growth, and use Total Stock and Total Int'l Stock for new purchases. And Total Bond and perhaps a small bit of Total Int'l Bond. KISS.

The question is when to sell the Wellington and Wellesley -- should I wait until after the dividends are paid in mid-December? Other than the tax paid on dividends, is there any to sell and replace with Total Stock/Intl Stock prior to mid-December?

Or should I sell in, say, four weekly batches to dollar-cost out? I've never sold large chunks of assets before!