Painful Asset Allocation - Set Me Straight

[target2019]

ShadesOn Portfolio

docs.google.com

You need a plan that lists the actions to take. I'm not an adviser, but would begin fleshing out a master spreadsheet to help with the trades.

Some decisions are very simple and easy to carry out. For example, in your 401(k) you can rebalance 100% to a Target Fund or something simple in your fund selection. Then direct 100% future contributions to the Target Fund.

Other decisions require more thought. For example, in your brokerage you can evaluate the positions and probably eliminate capital gains. But more thinking and understanding is required, for sure.

So, take one account at a time, look at all of the suggestions in the thread, and list the steps to take.

I don't mean to suggest my spreadsheet is a complete solution, but you should start trying to understand fund categories and how asset allocation can be set and followed. Since you have 15 years to go (anticipated), there is time.

What investing book(s) have you read?

 

[ShadesOn]

Error on your first post - FXNAX is the Fidelity US Bond Index Fund. FRLPX is the Fidelity Freedom Fund 2050.

In my opinion, I would sell FXNAX. After you get a handle on your stock/fixed allocation, you may want to swap some of your Target Date funds to a Total Stock Index fund and/or SP500 Index fund.

Thanks for catching that! I tried to change it to eliminate further confusion, but can't seem to edit the post. Based on the feedback I think I will sell the target date (in brokerage acct) and move to total stock.

 

[Al18]

Not a good idea, unless it’s a small holding because you need to pay long term capital gains tax on all sales from a brokerage account.

There is no tax due on funds you move in an IRA, Roth IRA, 401K or Roth 401K.

 

[OldShooter]

Not a good idea, unless it’s a small holding because you need to pay long term capital gains tax on all sales from a brokerage account.

The target date fund holding is about 1.2% of the total portfolio, so how much tax will be due? Starbucks money.

OP actually has four tiny positions in his taxable account. IMO all should be liquidated and the tiny tax consequences ignored. As I said above I am not in favor of a 5% lower limit on the size of a single position; I think the limit should be much bigger, but in interest of weeding the garden ditching these tiny positions seems to me to be a no-brainer.

 

[OldShooter]

... I think I will sell the target date (in brokerage acct) and move to total stock.

OP, let me try to make a subtle point: As you weed the garden, selling the things you want to sell on the way to simplification, just think of the proceeds as money. Fungible money. The source of the money becomes irrelevant as soon as the trade settles. So when you get done selling, you will simply have a pot of money to be invested, together with what you still hold, according to your chosen, now-simple, strategy. Thinking in terms of what positions you sold to create the pot is irrelevant to your strategy.

And ... take it slow. There is no rush here and plenty of time for thinking. If you rush into some purchases that turn out to be mistakes you will remember it forever. If you patiently plan like a chess game and get the right result you will quickly forget the few weeks (or months!) it took you to plan the winning game.

 

[Route246]

Agree with most of what has been said, however, what is your risk tolerance? In general, if it is high then you lean towards equities and if it is low you lean towards fixed income. I'm 67 and will retire next year and have FI but my risk tolerance is very high because our FI many times exceeds our needs. We can lose 75% and still be FI, albeit we wouldn't be very happy about that. If your risk tolerance is low then stick to treasuries until the rate drops too much, then you need to seek alternatives, again, based on your risk tolerance. Most recently, we have been selling off our minor holdings and concentrating on SPY and VFIAX (500 index ETF/funds). Corrections can be painful but the risk tolerance is there.

Instead of 500 funds the whole world funds are also a good place to land.

 

[ShadesOn]

OP, let me try to make a subtle point: As you weed the garden, selling the things you want to sell on the way to simplification, just think of the proceeds as money. Fungible money. The source of the money becomes irrelevant as soon as the trade settles. So when you get done selling, you will simply have a pot of money to be invested, together with what you still hold, according to your chosen, now-simple, strategy. Thinking in terms of what positions you sold to create the pot is irrelevant to your strategy.

And ... take it slow. There is no rush here and plenty of time for thinking. If you rush into some purchases that turn out to be mistakes you will remember it forever. If you patiently plan like a chess game and get the right result you will quickly forget the few weeks (or months!) it took you to plan the winning game.

Great advice that I will absolutely follow.

 

[ShadesOn]

ShadesOn Portfolio

docs.google.com

You need a plan that lists the actions to take. I'm not an adviser, but would begin fleshing out a master spreadsheet to help with the trades.

Some decisions are very simple and easy to carry out. For example, in your 401(k) you can rebalance 100% to a Target Fund or something simple in your fund selection. Then direct 100% future contributions to the Target Fund.

Other decisions require more thought. For example, in your brokerage you can evaluate the positions and probably eliminate capital gains. But more thinking and understanding is required, for sure.

So, take one account at a time, look at all of the suggestions in the thread, and list the steps to take.

I don't mean to suggest my spreadsheet is a complete solution, but you should start trying to understand fund categories and how asset allocation can be set and followed. Since you have 15 years to go (anticipated), there is time.

What investing book(s) have you read?

I'm at a loss of words, thank you for taking the time to put that together. I'm somewhat of a visual learner and that helps bring clarity to how I can start to transition my portfolio.

As for investing books, not very many. Lots of Millionaire Next Door genre. I will say that I have spent countless hours listening to personal finance podcasts such as The Money Guy Show and have learned quite a bit from them.

Do you have some suggestions?

 

[target2019]

I'm at a loss of words, thank you for taking the time to put that together. I'm somewhat of a visual learner and that helps bring clarity to how I can start to transition my portfolio.

As for investing books, not very many. Lots of Millionaire Next Door genre. I will say that I have spent countless hours listening to personal finance podcasts such as The Money Guy Show and have learned quite a bit from them.

Do you have some suggestions?

I understand the visual learner characteristic. There is the present on the left, and future on the right. You have to figure out the middle. You can describe that in many, many words, but you don't have to.

One of the earliest books I started with was the 2007 eidition of:

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books, Big Profits) Hardcover – Illustrated, October 16, 2017

There may be something simpler, but I can't think of a better book right now.

Bernstein is another favorite. This isn't a book, but a well-written paper to get started. https://www.etf.com/docs/IfYouCan.pdf

 

[targatom2019]

here is my suggestion for a basic 3 fund portfolio:

Roth: Total US market or S&P 500

401K or T-IRA: total us bond or US treasury

Brokerage: Total US market( or S&P500), total International


I would not add bonds until age 50, keep it simple and very tax efficient.

 

[dknighd]

#1 You are doing great! You have a lot of money.
#2 I think target date funds are great for a beginner, and maybe great for a retiree, but not so great for somebody in the middle. You are in the middle. Target date funds tend to add more expense, and almost never tax efficient. But they are convenient.
#3 you have a lot of money (82% of 43% if I read it correctly) in MM. That might be too much.

I'd ditch the target date funds, maybe reconsider them when you are old and lazy.

 

[ShadesOn]

#1 You are doing great! You have a lot of money.
#2 I think target date funds are great for a beginner, and maybe great for a retiree, but not so great for somebody in the middle. You are in the middle. Target date funds tend to add more expense, and almost never tax efficient. But they are convenient.
#3 you have a lot of money (82% of 43% if I read it correctly) in MM. That might be too much.

I'd ditch the target date funds, maybe reconsider them when you are old and lazy.

Thanks for the suggestions. Already lazy and feeling old kdnighd! I'm sold on the idea of eliminating the target date funds and will start this process soon. I know our cash position is not healthy in regards to future growth potential, and I'm ready to change that. It's painful to reflect on the missed opportunity over the last 4-5 years.

 

[target2019]

The #1 attraction for a Target fund is simplicity. Not much for the investor to do.

But there is a cost for that convenience to consider.

The feature I dislike is the allocation across U.S., Int'l, U.S. Bond and Int'l Bond. Vanguard Mutual Fund Profile | Vanguard

I don't think OP has a set asset allocation yet.

 

[Koolau]

Thanks, Luvtoride, I did meet with a couple financial advisors, but left feeling like they did not understand our goals. It's entirely possible that I just need to visit with a few more to find a good fit.

I decided to post here since there was likely to be a lot of first hand experience and a like minded approach by the majority of members.

Yeah, just because they have good technical credentials doesn't mean they are qualified to put themselves in your place and see what you wish to accomplish.

I think you made the right move by interviewing in advance. Best luck going forward.

 

[retire48in2018]

My advice

1 - put your rollover into employer 401k - so you can continue back door Roths - assuming you want to and employer funds are acceptable

2 - simplify. I retired at 51. Had at most 4 funds. Be selective. I would put low turnover total market index funds in brokerage accounts- in my opinion.

In tax protected - if you want actively managed, higher turnover. We don’t keep bonds in our AA. As we came closer to our target - our “conservatism” was to move towards only index funds.

Money market/cash / in my opinion - I’d get to about 2-3 years of expenses (counting future dividend streams from brokerage account) as my hedge against a down market and SOR mitigation. Also to balance risk of no bonds.

AA is personal finance. There are some here who are very actively managing, some who set up multi stage ladders of bonds/cd/treasury, some who look at stocks, etc. it is personal finance with risk as its center.

For us - retiring at 51, we went for 90% equity (mutual funds - 2 or 3) and 10% money market (in last 3-4 years, before was just emergency fund). We wanted tax mitigation- so we maxed 401k, back door Roth & brokerage as we got to no debt and that was our plan. 401k - our contribution was Roth, employer was traditional. Bonuses, etc were all brokerage

 

[Closet_Gamer]

One approach I used to simplify over the years was to put a single target date fund in my 401K and manage the balance of the assets in brokerage/IRAs myself.

Most of the "action" of managing was not in my 401K due to the spread of accounts between DW and I. This required more effort to keep the AA straight across the accounts. I occasionally peeked to ensure what Fidelity was doing in the target date fund was sensible and would annually check the AA of the whole combined portfolio, but this made it easier.

This also served to diversify decision making. About 75% of my assets are not in the 401K. Having Fidelity manage the other 25% provided some planning/execution diversity in case I screwed up.

 

[ShadesOn]

Thanks to everyone for the replies. I've listed some immediate actions to take along with some deferred timeline based action items.

This month:

Brokerage/HYSA

• Transfer all but 6 months expenses from HYSA to brokerage. Done.
• Stop all auto contributions in brokerage to funds that will likely be sold. Done.
• Brokerage - sell VTSAX (if moving to VTI), VTIVX Target fund, and VIGAX. Tax burden should be under $2,000 since the holding are not that significant.
• Buy VTI or VTSAX and VTIAX.
• Start auto investment at a rate to deplete money market account within 6 months.

401k

• Sell funds FXNAX, FSSNX, FSMDX, FLCOX, and contribute to FXAIX or FSKAX.
• Keep FRLPX - 5%

ROTH IRA

• Sell VLXVX and VSEQX and contribute all to VTI or VTSAX.

HSA

• Sell all FFIJX, FFOPX, FITLX, FMDE and buy FXAIX

Deferred Items

• Determine what to do with rollover 401k
• Revisit remaining brokerage account holdings and clean up as needed.
• Striving for three fund portfolio. Total stock market (VTI or VTSAX), Total International (VTIAX or VXUS) and Total Bond (FRLPX).

Questions:
Does it makes sense to have some mix of total stock and S&P500 specific? I guess that would make it a four fund portfolio.

I've received more recommendations for VTI over VTSAX. Does it matter which one I go with?

 

[OldShooter]

<snip>

Questions:
Does it makes sense to have some mix of total stock and S&P500 specific? I guess that would make it a four fund portfolio.

I've received more recommendations for VTI over VTSAX. Does it matter which one I go with?

S&P 500 is not a total market fund, but the S&P dominates the total market and the two are highly correlated. So as a practical matter IMO they are the same. That said, I see no reason to buy an S&P 500 fund when I can be more "pure" and buy the whole market. I don't remember if you have taxable gains in S&P 500 funds but if you do I would definitely not sell just to achieve purity.

Re VTI vx VTSAX that is really a choice between two cloaks, conventional mutual fund vs ETF. Underneath the cloaks they are the same. The short version for you is it probably doesn't matter much. Personally, I prefer conventional funds but the reasons are picky and out of scope for this thread.

Re your international decisions, here is a paper from VG that may help: Why invest internationally? | Vanguard

From a quick look, your plans and actions look pretty sensible. I can't quite discern the grand plan, though, as some of your planned purchases are of funds that you (apparently) do not plan to have in your eventual three-fund portfolio.

 

[ShadesOn]

I don't remember if you have taxable gains in S&P 500 funds but if you do I would definitely not sell just to achieve purity.


I can't quite discern the grand plan, though, as some of your planned purchases are of funds that you (apparently) do not plan to have in your eventual three-fund portfolio.

The taxable gains on the VTSAX are marginal ($2,000) since I just started investing in that fund a few months ago.

My apologies, I'm sure my plan isn't exactly clear, as I am still uncertain of what the final fund mix looks like. I planned to take your prior advice and dollar cost average into the brokerage funds to see how I feel about asset allocation, which I'd like to see at 80/20. The grand plan is getting to a 3 or 4 fund portfolio with total market, international and bond exposure comprised of the following in each account:

VTSAX Total Market and VTIAX international in Vanguard brokerage
VTSAX Total Market in Vanguard Roth IRA
FSKAX Total Market (foregoing the S&P 500) in Fidelity HSA
FSKAX Total Market and FRLPX Total Bond in employer 401k

You are correct in your earlier post, there is no rush. This is just where my thoughts are at the moment.

 

[pb4uski]

... I've received more recommendations for VTI over VTSAX. Does it matter which one I go with?

They are essentially the same underlying investments... VTI is an exchange-traded fund or ETF and VTSAX is a mutual fund. I would go with VTI... the world is shifting from mutual funds to ETFs so you'll be ahead of the game.

 

[tulak]

I would skip the S&P 500 funds/etfs and buy Total US: VTI, VTSAX, or FSKAX. My preference is VTI.

Keep it simple.

 

[orbops]

Personally at your age, I would consider changing your 401K contribution to a Roth 401K, and any company match will be automatically put into the pre-tax 401K. If you can contribute for 20 years before you turn 59.5, that Roth 401K will become your primary means of controlling which tax bracket you want to be in until you start taking social security. (I'm speaking from my strategy since I'm 57 and retired at 50.) You're at an age where you don't need to be so conservative with the money market accounts.

With the 5K/month that you can invest, I would simply put it into an S&P 500 ETF and let it ride until you retire. Trying to beat the S&P 500 is really a pipe dream that we all hope to achieve, but long term can never beat.

 

[WhenIsItTime]

Have confidence you are making great progress. Don't let trying to be perfect distract from the the long-term goal. Just piling on. Your portfolio looks just like something an FA would put in place. Many funds with curious names that very likely aren't accomplishing anything special. Take the time you'd spend finding an FA and read about Bogleheads 3 fund portfolio and related historical data. Don't sweat the tail (taxes), wagging the dog (accumulating $$$) too much.

 

[engineernerd]

It has become painfully obvious that our current asset allocation is a mess due to naively selecting random funds (many redundant in structure) and making poor investment decisions throughout the years. I have been reluctant to ask for help, but if we are to hit our ER target date, then its time to get our portfolio structured in a way that will be more tax efficient and conducive to early retirement.

Any advice on steps to take to simplify our AA based on what we have available to us will be greatly appreciated!

Stats:
Age: 39
Target Retirement Age: 54
Current Liquid and Invested Assets: $1.2M
Currently max out 401K (last 3 out of 4 years I received distributions due to our plan being "top heavy")
Currently max out HSA.
Available funds to invest monthly - $5,000+ after 401K and HSA contributions

Notes:

* An unusually high amount in HYSA and Money Market due to the good interest rates.​

** I have historically chased high dividend paying funds and target funds in my brokerage account, but now understand that they are not tax efficient.​

*** We will start contributing to Traditional IRA this year since we cannot perform backdoor ROTH due to the rollover IRA.​

​

​

Current Asset Allocation

Employer 401K - 7.2% of portfolio

• FXNAX Fidelity Freedom Index 2050 Premier - 4%
• FSSNX Fidelity Large Cap Value Index - 14.7%
• FSMDX Fidelity Mid Cap Index - 15.2%
• FLCOX Fidelity Small Cap Index - 20.71%
• FRLPX Fidelity US Bond Index - 45.31%

Brokerage - 43.1% of portfolio

• VMFXX - Money Market - 82.3% (currently dollar cost averaging at $4,000 monthly into the vanguard funds below)
• VDADX - Vanguard Dividend Appreciation Index Admiral - 2.8%
• VIGAX - Vanguard Growth Index Admiral - 2.8%
• VTIVX - Target Retirement 2045 - 2.8%
• VTSAX - Total Stock Market - 2.8%
• Single Stocks - 6.5%

Rollover IRA - 9.4% of portfolio

• VFIFX - Target Retirement 2050 - 100%

Roth IRA - 7.5% of portfolio

• Money Market - 12%
• VLXVX - Target Retirement 2065 - 32%
• VSEQX - Strategic Equity Investor - 23%
• Stocks - 33%

HSA - 4.7% of portfolio

• Money Market - 32.3%
• FFIJX - Target Retirement 2065 - 14.3%
• FFOPX - Target Retirement 2050 - 13.2%
• FITLX - Sustainability Index - 4.5%
• FMDE - Enhanced Mid Cap ETF - 4.5%
• FSKAX - Total Market Index - 1.9% (Just started a few months ago)
• Stocks - 29.3%

CD - 6.3% of portfolio

HYSA - 21.8% of portfolio

Have you decided on your desired asset allocation between stocks and fixed-income investments? I recommend starting there, and also recommend using FIRECalc to help you make that decision.

Decide how much you want to be able to spend each year in retirement. Include in that figure the taxes you expect to have to pay in retirement, FIRECalc won’t do that for you.

Decide how long you want to be able to live without running out of money. Don’t just find out your life expectancy, also investigate your odds of living to different ages. You might want to choose an older age than the one you have a 50% chance of exceeding.

Then take those two numbers and what you know about your preretirement finances and use FIRECalc to investigate the performance of different asset allocations. FIRECalc has an option to output a graph showing how your odds of success vary with asset allocation (0% to 100% stocks).

If you play around with FIRECalc enough, you will discover that the smaller your nest egg is in comparison to your needs (withdrawal rate and length of retirement), the more heavily weighted towards stocks your optimal portfolio will be.

FIRECalc is entirely based on history, and there is of course absolutely no guarantee that the future will behave the same way as the past, but I think there is a lot of value (and enforced honesty) in knowing how well your portfolio would have performed in the known historical past.

Once you get that set, then some tax-oriented recommendations include keeping your most aggessive stock investments in your Roth IRA and possibly in your HSA (where the returns will never be taxed), keeping fixed-income investments in your tax-deferred accounts (where the eventual withdrawals will be taxed as ordinary income), and preferably stocks in your taxable accounts to the extent possible. Your portfolio does have a lot of taxable in it, which is not ideal but there may not be much you can do.

I along with a lot of others here have a strong preference for low-cost index funds. We believe there is really no value added in active management, so low costs and fees are the way to go. Also staid conservative diversified funds beat out fashionable exciting sexy investments every time.

 

[pb4uski]

The OP's situation reminds me of the old Stephen Covey saying of "Begin with the end in mind"