Where am I going?

[SeekingFI]

Hello,

I've been a lurker on the board for a few weeks now. Very impressed with the financial sophistication of most of you. Now, I'm prepared to do something I've never done before - post my financial details on a public forum in hopes of getting some feedback on whether I'm on the right track or, if I'm beyond hope.

Background: 39, single, no kids, no plans for kids. Work in IT for large corporation and have watched staff in US dwindle while support center in India grows. Feel like I survived the biggest carnage and am optimistic to get another 4-5 years out of current job (but there are no guarantees, right?) If I last another 4-5 years in current job, I will be debt free including no mortgage. I don't hate my job but it is not a passion for me, either.

Until a couple of years ago, I never had much of a plan or road map for my goals. Just living day to day, week to week....then started wondering "is this all there is?" Read Your Money or Your Life which opened my eyes to new possibilities. That, plus the outsourcing craze prompted me to take steps to improve my financial footing. So, I downsized my mortgage, sold some land and reduced my debt load by $170k.

Current situation: base salary 65k - contribute 10% to 401k (employer 100% match up to 3%) - 15% to stock ESPP

CC debt - $7k - transferred balance to 0% interest card until Aug '06
Car - $11.6k (2 more years @ $484/mo - 5.9%)
Mortgage - $124k ($1000/mo - 6.25%)

401k - $66k
Traditional IRA - $4k
Taxable Account - $16k
Money Market - $4k
CD Ladder - $9k
House equity - $34k (based on 20% down payment and payments made - haven't appraised for current mkt value)

Currently, the 15% going into ESPP gets cashed out of the stock quarterly (we get 10% discount off market price - the plan is to cash out immediately each quarter) and rolled into money market. By end of December, I'll have enough to pay off CC debt but will keep it in money market until July 06 and then pay CC off before the 0% interest ends.

Once the CC payoff has been funded (end of Dec), I plan to use the quarterly ESPP proceeds to pay extra towards the mortgage. Then, once the car has been paid off, I will roll that payment towards the mortgage payment. By doing both of these steps, I estimate it will take 4.5 years (from Jan 06) to pay off mortgage.

Does that seem like a reasonable plan? Should I consider a home equity LOC to pay off car sooner (perhaps a better rate plus deductible)? I'd like to be debt-free by the time I'm 45 and I think that will give me the freedom to do what I want from a career perspective (don't think I'll have enough nest egg for ER by then, though).

If anyone has time to comment on my portfolio mix, I'd appreciate it. Here are my holdings:

401k (limited by employer offerings):
-Vanguard Value Index Inst - 16.57%
-Fidelity Growth - 15.59%
-Royce Low Priced - 14.76%
-Artisan Mid-Cap Inv - 14.61%
-Fidelity Contrafund - 13.87%
-Oakmark EQ & Inc I - 12.37%
-ING International Value I - 10.52%
-Fidelity Overseas - 1.71%

Taxable Account (mix of ETF's and Mutual Funds)
- Bank of America - 15%
- iShares Australia (EWA) - 9%
- iShares Emerging Market (EEM) - 9%
- Select Sector SPDR - Energy (XLE) - 9%
- Select Sector SPDR - Utilities (XLU) - 8%
- Dodge & Cox Stock Fund(DODGX) - 20%
- Oakmark Eq & Inc I (OAKBX) - 15%
- TW Galileo Inc Val I (TGVOX) - 15%

Traditional IRA
- iShares Australia (EWA) - 25%
- iShares Russell 2000 Valu (IWN) - 37%
- Street Tracks Wilshire REIT (RWR) - 38%

All of the ETF and mutual funds in the taxable account and IRA account have been excellent performers and most pay dividends.

Is this mix diversified enough? Am I missing anything? I've heard a lot mentioned about Wellesley. Should I have strategy to get into that?

Thanks for any feedback! My apologies for such a long post...

 

[vic]

I would pay the car off because the mortgage interest is tax-deductible and the car loan is not.

I don't know what your house is appraised at, but there is a limit to how much you can borrow against it. Not sure whether it is a national limit, but TX is 80% loan -to-value for home equity loan and 50% LTV for a home equity line of credit. We just got one through Wells Fargo. No apps fee or any other fees, worked well for us since we will only keep it for about a year.

Can you increase your 401K contributions or add a Roth? After you pay off the house in your estimated 4.5 years, you will still need a much bigger nest egg than what you currently have to say farewell to the cube farm.

Vicky

 

[preben]

Hi!
The portfolio is heavy with equity but as long as you are OK with that then fine. I would myself reduce the number of funds to your favorite funds and to make room for other asset classes. I would also look at adding a BIT of bonds at least after debt paid of. Both US bonds (AGG) and international bonds (GIM) and in addition I would want to inclide some commodities (PCRIX and VGPMX comes to mind).

 

[wildcat]

Too many holdings for my blood...if I had that many I would expect to get paid like a mutual fund manager

 

[Jack_Key]

All of the ETF and mutual funds in the taxable account and IRA account have been excellent performers and most pay dividends.

Is this mix diversified enough?  Am I missing anything?  I've heard a lot mentioned about Wellesley.  Should I have strategy to get into that?

Thanks for any feedback!  My apologies for such a long post...

Hello,

I think you should consider using asset allocation strategies. (See for instance my humble article on that:
http://retireat37.blogspot.com/2005/05/asset-allocation.html and the much better http://www.investopedia.com/articles/04/031704.asp).

I personnaly use four asset classes:

- real estate (ETF of REIT funds, iShares)
- stocks (ETFs and individual stocks, I don't invest in managed funds, which have in my opinion MER that are too high to outperform index funds)
- bonds
- commodities

The ratio you should use depends on your age (the younger, the more you can invest in stocks) and your risk tolerance.

I think the best thing to do is to decide what is your allocation strategy and then, rebalance from time to time. Thus, you'll buy stocks when your stocks will have been down and other asset classes when you stocks will have rocketed: doing that will help you buy at the bottom of the market for a given class.

Given your age and tolerance to risk, I would suggest something like I do: 8% commodities, 17% real estate, 17% bonds and the remaining 58% in stocks.

To diversify, I think it is better to diversy among asset classes (stocks vs bonds vs real estate) than diversifying inside the same asset class. If I were you, I would simplify my portfolio and regroup all stock-related funds into two or three low fee index ETFs (such as iShares). I would then invest most (say 70%) of your stock portfolio for instance in a broad S&P500 index fund and the rest into diversified international stock indexes.

Other suggestions:

- Bonds, real estate should all go into non taxable accounts, since they generate taxable income
- By keeping your portfolio simple, it will be easier to track it and rebalance when needed
- Keep in mind that they is a difference between asset allocation strategies (you choose how you allocate your investments and rebalance whenever an asset class moved say 5% from target) and tactical asset allocation, where you try to time the market to favor one asset class at a given time, for instance, if you feel the stock market is currently too high). Personnaly, I use both an asset allocation strategy and tactical asset allocation: my asset allocation strategy is my long-term goal while I may from time to time try to time the market and ignore in the short term my allocation targets.

Hope this help,

Jack
(http://retireat37.blogspot.com)

 

[Bookm]

Greetings SeekingFI. My thoughts are similar with a few others here in that perhaps consolidation would be a good move. You do have a diversified bunch of holdings tho, for the most part (ben touched on some omissions). I see you hold a few of the same investments in different accounts - The Oakmark fund and EWA. There's also overlap with some asset classes. Based on your posts and the amounts you have in each account, large-cap value (LCV ) and LCG have at least two funds each, as does the small and mid-cap subclasses. Large cap growth seems to have the heaviest tilt, at approx. $19,443, or about 23% of your portfolio. 

I'd prolly just have RWR in the IRA, since you have EWA elsewhere and plenty of small and mid-cap holdings elsewhere (Royce, Artisan, TWC and IWN). Also Fido Contra and Fido Growth are both LCG funds, I'd pick one and 86 the other. The two value funds would be a tough call, I'd have to stay put there (RE: VIVIX and DODGX). You're off at a nice pace at this point of your life, IMHO. Congrats and HTH!

Bookm

 

[SeekingFI]

Thank you for all the feedback!

Vicky, yes, the plan is to increase the 401k giving by the full amount of merit increase I receive in my review later this summer - last year I used the merit increase to pay down debt faster. I already know my review score but am waiting for the powers that be to make them official and establish the rewards levels. Actually, instead of raising the 401k giving, it might be better to establish a Roth?

As for the house, there's at least 25% equity based on a 2-year old appraisal. I'm sure a LOC can be established that would cover the car. I think I'll try to get this going in the next couple of weeks.

Wildcat, yep - that's a lot of funds. I like diversity among funds but, as Ben and Jack pointed out, there may not be enough diversity among asset classes. Last September, I did quite a bit of research on ETF's and chose ones based on performance, low fees. Once I chose them, there's not much else to manage - just keeping an eye on them to make sure they are stable in the market.

Jack, thanks for all the info. I will study the suggestions and see how I can adapt to my situation. In terms of regrouping into fewer ETF's, here's an example of the performance I've seen since September. Have I reached a point of "getting out" or is it better to continue holding? I don't want to do a lot of turning over due to having to pay the broker fee (Ameritrade) each time.

G/L since September:
- iShares Australia (EWA) +31%
- iShares Emerging Market (EEM) +28%
- Select Sector SPDR - Energy (XLE) +38%
- Select Sector SPDR - Utilities (XLU) +23%

G/L past 2 years:
- Bank of America +51%
- Dodge & Cox Stock Fund(DODGX) +22%
- Oakmark Eq & Inc I (OAKBX) +14%
- TW Galileo Inc Val I (TGVOX) +13%

I'm pretty pleased with the performance of these holdings (especially compared to the ones in the 401k where I can only pick from those offered by the employer) and find it difficult to sell/change. All of the above pay dividends, too. The mutual funds dividends roll back into more shares, the Bank of America ends up as cash in my account.

Thanks again for the feedback. I'll read those links...and will probably have more questions.

 

[SeekingFI]

Bookm, thanks, those are great observations! When I was considering Jack's response, the overlapping of Oakmark and EWA came to mind as possible changes. Especially the EWA in my IRA account - I bought it after it had such growth in my other account but, it is actually down a little since I bought it in the second account.

Speaking of the IRA - should I consider converting that account to a Roth or is it better to leave it in the current nontaxable status?

Again, thanks for your suggestions. I will give them careful consideration.

 

[Jack_Key]

Thank you for all the feedback!


Jack, thanks for all the info.  I will study the suggestions and see how I can adapt to my situation.  In terms of regrouping into fewer ETF's, here's an example of the performance I've seen since September.  Have I reached a point of "getting out" or is it better to continue holding?  I don't want to do a lot of turning over due to having to pay the broker fee (Ameritrade) each time.

Hello,

I don't want to give you advices about your portfolio composition - you seemed to have been very successful so far.

My suggestion of regrouping is to help you track your portfolio. With so many funds/ETFs, I suppose it is quite difficult for you to tell, for instance, what is your exposition to energy stocks? What is it to small cap growth stocks? International? By having fewer funds, it might be easier for you to know exactly where you are investing. Also, you seem to be concerned about turning over and fees (and I think you are right: I favor ETFs or index funds to actively managed funds since the 2%-3% fees is likely to take a large part of your profits), having fewer funds in the future will decrease your rebalancing cost (for instance, suppose you want to keep your actual portfolio mix ratios and you have $10k to invest, you'll have to break that amount down into many ETFs and funds, thus higher fees).

Warren Buffet said in a letter to shareholders:

"Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals." By doing dollar-cost averaging into index funds, Buffet says you are both diversifying assets (thank to the indexes) but also market timing (you buy at highs and lows, the result is the average of the year).

So, unless you are serious about investing and know a lot about the market and plan to be an active investor , I think a wise plan is to do asset allocation + index funds (or ETFs) + dollar-cost averaging.

For my part, I do mostly that, but from time to time, I will go away of this plan, when I think that some markets have been too high - for instance, I think the real estate market and energy trusts are somewhat due for a correction, but his is my humble opinion. Best of luck to you.

Jack
http://retireat37.blogspot.com

 

[Bruce]

I am going to answer your question in a little different way than everyone else 8):

5 years is a long time in the IT field, especially if you work for a large company. There are a couple of things that you need to do:

(1) Make sure you can keep upgrading your skills. Not sure what you are doing in IT, but most development and support is going off shore. However this has opened new opportunities for Business and Systems analysts to work back in the USA gathering and documenting requirements and working with the developers and support personnel off-shore. Make sure you have a career path to an IT position that will still exist in 5 years (remember one of your largest investments is your educational and career experience; most people don’t list this as an asset on their personal balance sheets but it is probably your most important asset!!!!)

(2) Make sure you have enough liquid assets to pay your bills for at least 6 months if not more. A good rule of thumb is that it will take you 1 month for every $10,000 salary to find a job (to replace 65K would take 6 ½ months); although I think in the current environment it may be a little longer!

I am an IT professional with 21 years of experience in operations, application development, technical support, systems programming and project management; I have an associates degree in Business Administration; A Bachelor’s degree in Computer Science and a MBA. I was laid-off in January (which I did not see coming) and I am still looking for a full time position. Luckily with my varied IT background I have been able to offer IT consulting services to a local company and this has allowed me to build up my cash reserve while still looking for a full-time position. It is a very tough and demanding environment right now in the Rhode Island area; I have been getting interviews but no offers yet. My biggest mistake was not planning ahead for the possibility of being laid-off; I have always been a conscientious worker and everything I have done in the IT field has come to me easily and I have always been able to excel at it. But in the current environment that is not enough! (Personal Plug: And if anyone knows of any open IT positions in the Southern New England area send me an e-mail!!!)

 

[maddythebeagle]

Hey guy. Did I miss that you havent been investing in a roth ira? If not, you should. I am 32 and have been investing in index funds since I started working in my 457k (like a 401k).

On the home equity loan. I would consider fees. It might be just better to pay down your car loan as much as you can and get it off of your books. I think that tapping your equity should be avoided since it sounds like you want to pay it off sooner. By keeping out of it, you are less tempted to use it. Just my thoughts.

 

[SeekingFI]

Thanks for the additional comments Jack and Bruce and Maddy.

Good points Bruce about the IT industry. The offshoring is what prompted me to make the changes in the last couple of years to downsize my mortgage and reduce debt. My company is part of this trend too and I've seen the staff in the US reduced by 50%. The situation has stabilized and I'm optimistic the worst is behind us. But, there are no guarantees. Still, the moves I've made and my current financial situation has helped reduced my level of stress and I will weather whatever happens.

Jack, it is difficult to track the portfolio since I have different accounts at different institutions and there's such a variety in each account. I have consolidated the Fido Growth fund after the suggestion was made and shifted part of it into a bond fund and spread the rest among the other funds in the 401k. I plan to make some additional changes to the IRA and non-taxable accounts to sell some funds that are duplicated in other accounts.

BTW, I checked out the links you provided to your writings. Very informative! I have them bookmarked. Thanks!

I've also decided against using a heloc to pay off the car loan. The rate on the heloc is in the same range as the car loan so I'll just keep paying the car loan for the next couple of years. I have my plan to get the CC paid off and then, once it is paid off, will use the funds from that to go towards extra mortgage payments and other investments. I'm also going to start tracking my expenses to see if I can find ways to cut them down to have more money going to debt reduction/savings.

Maddy, yes I do need to get a roth IRA open. This is on my list of things to get done this year. That list keeps growing.

 

[SLC Tortfeasor]

You asked:

Actually, instead of raising the 401k giving, it might be better to establish a Roth? 

I've looked into this for my own financial planning.  You're ten years older than me, so your mileage may vary, but I think that the conclusions I reached for my own purposes would probably apply to your situation as well.

At any rate, I read a great Wall Street Journal article about the issue, and based on everything I've read and heard, I've come to the strong conclusion that generally it makes the most sense to first, fund your 401k up to the amount necessary to get the maximum company match, and then, max out a Roth IRA. 

At the moment I can't recall what the next highest investment priorities would be for me, because I haven't even gotten to the point of maxing out my Roth yet.

Of course, in addition to this stuff, it makes sense to have available some non-tax advantaged investments that you could liquidate if need be for emergencies, or so that you could pounce on some great investment opportunity that unexpectedly happened along.  But if I were you, I would definitely put no more than 3% of your salary into your 401k until you've maxed out your Roth IRA.

 

[KB]

You are correct about the first two steps with the 401K, then Roth. The third is to go back to your 401K and max the contributions.

 

[maddythebeagle]

"You are correct about the first two steps with the 401K, then Roth. The third is to go back to your 401K and max the contributions."

I dont plan to nec. max out my tax deferred accounts. I plan to max out only enough right now to keep me out of the 25% tax bracket. When you take this money out, you will have to pay ORDINARY INCOME TAX.

My home loan isnt huge and is getting to the point that I may only itemize every 2 years.

Otherwise taxable accounts have capital gains tax (when you sell) and dividend tax, which are lower than ordinary income tax (and probably will stay that way in my opinion)

 

[SLC Tortfeasor]

Although, depending on how much you withdraw from your 401k in retirement, your tax rate will probably be much lower then than it is now.