"The Investors Manifesto" and a few questions

[Sowhatdoidonow]

I am currently reading the Investors Manifesto (new book by William Bernstein in preparation for joining the passive low expense world of investing (i.e. I fired my broker). It is a great introduction to this approach but in putting together my portfolio I have a few questions I hope some of you could answer:

1) In terms of stock/bond allocation percentages Bernstein noted that the most common rule of thumb is that a bond allocation would be the same as an investors age. One would then adjust this up or down from 0% to 20% depending on ones risk tolerance. He also talks elsewhere about how a retired person has "no human capital left" and thus cannot buy more equities when stock prices fall. My question is when one retires early, should the early age and lack of human capital effect ones equity/bond allocation and if so how and why?

2) If the majority of your investments are in taxable accounts and you are early retired therefore no other current income, at what size would your portfolio need to be such that you would shift some or all of bonds toward tax free instruments (e.g. municipals)? How do you figure how much? Is there a guideline?

3) He really stresses that Vanguard is the way to go but if you stay away from the "marketed" high cost funds of Fidelity you could do OK there. Well I transferred everything to Fidelity in the last few months from UBS and would like to make it work there if I can. My question is if there is a way to cross reference funds between Fidelity and Vanguard? Also, does it costs me more to buy Vanguard funds through a Fidelity account. If I buy enough, do they waive purchase fees There just seems like so much information about Vanguard on this forum and the boglehead forum that I wonder if I am going to be at an information or fund availability disadvantage.

Any help on any one of the above questions would be greatly appreciated.

 

[FUEGO]

Check out FundAdvice.com - Suggested Portfolios for some model portfolios. They have a model portfolio specifically for Fidelity. They also have an exchange traded fund model portfolio that you can implement or mix/match with the fidelity specific portfolio. And a vanguard portfolio. You can probably see the parallels between the different model portfolios at each fund company to get an idea how to structure your portfolio. Vanguard also offers a lot of ETFs that you can buy at Fidelity.

The Fidelity Model Portfolio has a number of high expense funds in it, so you may want to replace those with low expense ratio alternatives that are from Vanguard via ETF's. Is there a reason you don't want to invest part of your portfolio directly with Vanguard? I have Fidelity and Vanguard and it works out well - Fidelity for trading ETF's, and Vanguard for direct purchase of VG mutual funds.

 

[Sowhatdoidonow]

I really am just trying to simplify. Sometimes I feel like the less bank and brokerage accounts I have, the easier it is to see the forest for the trees. Mainly just for simplicity and to get one consolidated view.

 

[brewer12345]

If you are happy with Fido there is no obvious reason to switch. I like Schwab and can access just about every registered investment product under the sun through them.

On the human capital question, its not quite that simple for an early retiree. In the commode really hits the windmill, most can go back to work. So I would take his advice with a grain of salt.

 

[MasterBlaster]

There is some science and some art to the "best" allocation. When someone says an allocation is "best" then they mean based on a particular historical model. It goes without saying that your mileage may vary.

Nonetheless here is one (of Bernstein's) models for retirements of different durations based on a stock-bond portfolio. note that the longer you expect to be in retirement then the more you should (based on the model) allocate to stocks.

 

[walkinwood]

There is some science and some art to the "best" allocation. When someone says an allocation is "best" then they mean based on a particular historical model.

Nonetheless here is one (of Bernstein's) models for retirements of different durations based on a stock-bond portfolio. note that the longer you expect to be in retirement then the more you should (based on the model) allocate to stocks.

What SWR is being used? Thanks for sharing.

 

[LOL!]

First, investing is not a religion so you should not follow a single prophet who you hope will lead you to the promised land. You must read/experience things from many people's respective and arrive at your own conclusions. I know you are doing just that by asking your questions. Nevertheless, we tend to give more weight to something that is published by a card-carrying Guru. Thus, I recommend that you read some additional books such as those by Larry Swedroe, Rick Ferri, and others. These are in the same vein as Bernstein.

To your questions:

1. Stock:bond ratio is such a personal thing that is arrived at by living with your portfolio through some bear markets. Bull markets are easy to live through, so I would discount them when thinking about your asset allocation. Think about the recent recession and how you felt losing money. If you have too high a stock percentage, then losses may knock you out. OTOH, if you have too low a stock percentage, you may not have long-term staying power over inflation. I would recommend you read Jim C. Otar's book on all this. Download it off the internet. But there is absolutely no substitution for real world personal experience. If you want Vanguard funds, then you need an account at WellsFargo or Vanguard because Fidelity will charge you too much for them. If you want ETFs, then WellsFargo is free and Fidelity will charge you and Vanguard will charge you even more.

2. Whether to use munis or tax-exempt bonds in a portfolio is easy: If you do not have enough space in tax-sheltered for your bond allocation, then you must put bonds in taxable. Next decide based on your taxes whether tax-exempt or taxable bonds give you a higher after-tax return for the same risk level. You basically just run tax return scenarios in TurboTax to figure this out. Sure you could use some online estimators, but you need to know the details. Become adept at TT because it will help you make decisions that save you real money.

3. I have accounts at Fidelity, Vanguard, WellsFargo and a few other places. Each has specific advantages. If I had to pick only one vendor, I would pick WellsFargo PMA relation. I must use Fidelity because my 401(k) is there. It's OK, but nothing special. Others at this forum like Fidelity more than I do and others like Schwab more than everybody else. Just because you picked Fidelity 3 months ago does not mean they are the best for you. You will need to get some more opinions which are easily found by searching this forum.

 

[MasterBlaster]

What SWR is being used? Thanks for sharing.

I can't recall the details exactly. It may be the 4% SWR increased for inflation without ever going broke model.

You can find it (somewhere) at this link:

Efficient Frontier

 

[samclem]

You've got some good questions. Here's my two cents.:

He also talks elsewhere about how a retired person has "no human capital left" and thus cannot buy more equities when stock prices fall. My question is when one retires early, should the early age and lack of human capital effect ones equity/bond allocation and if so how and why?

As Brewer notes, most ER folks could go back to work if needed, so that makes it feasible to take slightly more risk by having more equities. Just as important is the longer timeframe of the retirement--a larger % in equities increases the likelihood that the portfolio wil stay ahead of inflation for the extra decades, and the average "greater span before I'll spend the cash" makes it safer to hold a larger % of equities.

2) If the majority of your investments are in taxable accounts and you are early retired therefore no other current income, at what size would your portfolio need to be such that you would shift some or all of bonds toward tax free instruments (e.g. municipals)? How do you figure how much? Is there a guideline?

As you know, tax-free bonds have lower returns than taxable bonds of the same risk. Here's a calculator you can use to get comparable rates for each based on your taxable income and state of residence. I don't know of a rule-of-thumb, but I don't think many folks in the 15% federal tax bracket and in "regular" state tax situation are buying many municipal bonds.
It might be good to see if there's a way to get your $$ out of taxable accounts and into tax-favored accounts. That opens up a lot more investment opportunities with much higher returns than muni bonds.

3) He really stresses that Vanguard is the way to go but if you stay away from the "marketed" high cost funds of Fidelity you could do OK there.

Fidelity does have low-cost funds (their Spartan funds are especially cheap, often less expensive than Vanguard). And the customer service and handholding at Fidelity is better than Vanguard. But Vanguard has a wider variety of low-cost funds and a corporate structure that makes every customer a partial owner of the company, and a corporate culture based on low investment costs. It is possible for you to accomplsh your goals by staying with FIDO, but if you see thst you will want to buy primarily Vanguard MFs and if you still want to see everything on one statement, you might want to consider biting the bullet right now and switching. If most of your funds are in taxable accounts it will be costly to sell positions later (after they've accumulated cap gains) if you decide you want to leave the Fidelity funds and buy into Vanguard funds.

Fidelity is a fine company (I've got $$ there and with VGD), but if I had to choose just one for all my accounts, I'd go with VGD.

 

[clifp]

A general comment about this forum. As a group we do a terrific job in helping people avoid doing stupid things (of course they have to listen to us instead of some investment guy/annuity/salesman broker....). We also do a great of steering people to how to become better investor/money manager. For example if you had asked should I fire my UBS we would have absolutely (congrats BTW) In a nutshell we get the big stuff right.

What can be confusing is when you ask the group for fine tuning. A classic example is what is the right asset allocation. You can easily get 6 or 7 opinion and the suggested stock percentage will probably vary by 25%. (For the most part you will see 30-80% equities recommendations matching Berstein). It doesn't hurt to ask but to be surprised if you see pretty wide range of opinions.

You'll see a similar thing with brokerages. WellsPrime, Fidelity, Vanguard, and Schwab all are fine choices (I have accounts with 3). Yes there is some definite benefits for having everything in one place, better service and it easier to see the forest as you say. However, the difference in cost for most investors is between the four is typical hundreds of dollars to $1,000 not a trivial amount of money but not something with make or break your retirement. On the hand the difference between having a $1 million in crappy broker sold managed mutual funds with an expense ratio of 1.5% and the no load/index or ETF route with expense in the .25% range is $12,500/year. That is real money and can easily make or break a retirement.