Author Topic: Feedback on my portfolio and pre-fire questions  (Read 864 times)

duyen

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Feedback on my portfolio and pre-fire questions
« on: June 28, 2020, 05:41:38 PM »
Family Situation: Age: 40, Wife 38 years and 2 kids in elementary. Current networth 1.2m. Plan to retire in 4-7 years anytime. Each year I work can add 140k to investments and all of them I plan to add to the tech ETF below

Portfolio:

401k and Roth IRA: ~250k: All in stocks (AAPL, MSFT, FB, TSLA, SHOP)
Taxed accounts: ~900k (QQQ: 420k, BLV: 385k, AMZN: 70k, GOOG: 20k)
Cash: 16k
Cars: 32k

Overall allocation: Tech ETFs (35%), Bonds (32%), Stocks (28.3%), Cash: 1.3%, Cars: 2.6%

Questions:

1) Before I retire, I believe I need to take some steps. Do these look good or any missing:
    a) hold 2 years worth of cash
    b) start a 529 plan and save some there for college (I plan to pay both kids college fully)
    c) If the market crashes anytime in next four years, I will move the bonds to VTSAX and be 100% stocks
2) I know my portfolio is tech heavy; I feel the returns are great and will continue that way for a while. Am I taking too much risk not holding VTSAX instead?
3) I recently sold and bought in my after tax accounts; so when I retire in say 4 years and try to take money out I might have very less taxes and may fall into medicaid zone. Is there a way to avoid this? Which states should I move to for better medicaid support
4) I currently rent. When do you suggest to buy a home? Mortgage in retirement may not be a good thing?

MDM

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Re: Feedback on my portfolio and pre-fire questions
« Reply #1 on: June 28, 2020, 07:34:46 PM »
1a) 2 years seems high, but what fraction of your investable net worth will this be?  If under 5% it won't matter much.
1b) If your retirement is assured, then a 529 plan is probably fine.
1c) Define crash.  Beforehand.   In writing.
2) No way to know except with hindsight.
3) Don't know about state-specifics, but you can increase income by doing traditional to Roth conversions.
4) That is a matter of personal preference.

Good luck!

Laura33

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Re: Feedback on my portfolio and pre-fire questions
« Reply #2 on: June 29, 2020, 06:40:11 AM »
So it's hard to give specific advice without more details about your future plans.  For ex., you may want to start a Roth pipeline, but the timing of that depends on your tax rates at various times and your other potential sources of income (e.g., your large taxable balance gives you lots of flexibility as to when to incur income).

But let me address the tech sector thing:  yes, you are massively overweighted.  Right now, you have the game won:  you have over $1M in assets, and you clearly have a high-paying job that is allowing you to save huge amounts of money every year.  You do not need jacked-up returns to be able to FIRE in 4-7 years; all you need is standard market returns and reasonable expenses.  You could FIRE today if you wanted to live a low-key life in a LCOL area.

The biggest risk to your future plans right now is you:  if you chase returns and overweight a sector that then craps out, you will have outsize losses that require playing a lot of catch-up.  Do you also work in the tech sector?  I'm guessing?  Then you could also have the joy of losing your job on top of it all -- and with $16K cash, you're likely to have to sell low just to pay the bills. 

You're old enough to remember the tech crash in 2000, although you probably weren't working in the area at the time.  Take it from someone who got to live through the bloodletting first-hand:  everything crashed at once.  The tech sector crashed, and my DH's plant shut down* (I was pregnant at the time, btw, for some super-extra fun).  The market crashed, so if we had needed cash, we'd have taken a huge hit.  And the real estate market crashed because all the plants were shutting down, and there were no jobs to support those prices, and far more people leaving town and/or downsizing than there were people moving in.  No, I'm not saying that will happen again.  But that's the kind of thing that can totally derail your plans, simply because you're over-leveraged in the area that runs into a huge downturn.  So why risk that if you don't need the extra portfolio boost to reach your goals?

Also:  there is a huge difference between individual bonds and bond funds.  Bond funds can and do lose value when the shit hits the fan.  If you are looking at your bonds as the "safe" part of your portfolio, you want individual bonds, because then you can choose to hold them until maturity and obtain the interest you expected (whereas a bond fund will have to sell -- and sell low -- if its holders withdraw at a bad time).

Finally, if you have a HSA at work, max that puppy out and then pay for your medical expenses out of pocket to the extent you can.  That is a fantastic retirement asset if you can afford to let it grow. 

*Added note: he was not employed by a dotcom that was trying to spin eyeballs into gold.  He made actual chips for actual devices, which we thought was safe.  But apparently when your biggest customer gets hammered, shit flows downhill.

duyen

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Re: Feedback on my portfolio and pre-fire questions
« Reply #3 on: June 29, 2020, 10:19:17 PM »
1a) 2 years seems high, but what fraction of your investable net worth will this be?  If under 5% it won't matter much.
1b) If your retirement is assured, then a 529 plan is probably fine.
1c) Define crash.  Beforehand.   In writing.
2) No way to know except with hindsight.
3) Don't know about state-specifics, but you can increase income by doing traditional to Roth conversions.
4) That is a matter of personal preference.

Good luck!

Thanks for your reply. I chose 2 years based on recession periods. Plan to use cash instead of investments during this time. Would you suggest a lower period would be fine? Two years' expenses would be 220k which will be ~10%

Crash Definition: Anytime market falls atleast 20% from its peak, I will start moving the bonds to stocks. Will wait for further down to 25% when I will convert all bonds. If that doesn't happen and market goes up then will move them at 15%. Thanks for asking this question

duyen

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Re: Feedback on my portfolio and pre-fire questions
« Reply #4 on: June 29, 2020, 10:26:40 PM »
But let me address the tech sector thing:  yes, you are massively overweighted. ...

The biggest risk to your future plans right now is you:  if you chase returns and overweight a sector that then craps out, you will have outsize losses that require playing a lot of catch-up.

You're old enough to remember the tech crash in 2000.... So why risk that if you don't need the extra portfolio boost to reach your goals?

I am also worried about sitting on tech sector during all 50 years of my retirement. But in the near future of 5-10 years, I am not very worried. This will help me grow my investments quickly. In the worst case they don't grow as much, I am okay with working a few extra years. It is not like my money will go to zero. Most likely though this investment will give me a solid networth. May be future investments (140k per year) it will be better to put in VTSAX instead of QQQ

RWD

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Re: Feedback on my portfolio and pre-fire questions
« Reply #5 on: June 30, 2020, 08:00:57 AM »
I would be very uncomfortable with such a high percentage in individual stocks.

duyen

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Re: Feedback on my portfolio and pre-fire questions
« Reply #6 on: June 30, 2020, 02:19:59 PM »
I would be very uncomfortable with such a high percentage in individual stocks.

Right, that's why I have them mostly in 401k and roth IRA. That allows me to sell any number of times without incurring taxes (or deferring them)

The only downside is if a company goes down due to fundamentals I might be tempted to sell and might incur losses. If it was an index fund I know it will come back up. These are all top companies that I chose so risk is less. I could put in QQQ instead of individual stocks but backtesting tells me I would make 50% yearly returns with these individual stocks instead of 18% that QQQ gives. Seems worth taking that risk for 30% of my portfolio. My future money won't go into stocks though, it will all be into ETFs (either QQQ or VTSAX)

RWD

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Re: Feedback on my portfolio and pre-fire questions
« Reply #7 on: June 30, 2020, 02:43:47 PM »
I would be very uncomfortable with such a high percentage in individual stocks.

Right, that's why I have them mostly in 401k and roth IRA. That allows me to sell any number of times without incurring taxes (or deferring them)

That does little to nothing for the concentration risk.

ysette9

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Re: Feedback on my portfolio and pre-fire questions
« Reply #8 on: June 30, 2020, 03:21:27 PM »
I donít think the worst case is that your tech stocks donít grow very much. I think the worst case is they get a 40-50% haircut and drag your portfolio down with them. Or one of them go up in smoke and leave you with stock worth nothing. I think they look like solid companies, but so did Enron once upon a time.

As we got closer to FIRE we employed the bond tent/reverse equity glide path idea to reduce volatility in our portfolio. The idea is that when you are so close to the finish line your risk tolerance goes down because you have more to lose. I cared more about being able to stop working this making a few more percentage points on my investments, so we increased our bonds. In your case you are taking a lot of risk and being so concentrated and in individual stocks, it is an uncompensated risk. I believe the standard explanation is that the market will give you a risk premium for risk you canít diversify away (stock over bonds), but not for something that can be diversified away (individual stocks). You can certainly continue to be lucky, and I hope for your case you are. But just recognize that it would be that: luck. Something totally out of your control.

duyen

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Re: Feedback on my portfolio and pre-fire questions
« Reply #9 on: July 01, 2020, 11:14:46 AM »
I donít think the worst case is that your tech stocks donít grow very much. I think the worst case is they get a 40-50% haircut and drag your portfolio down with them. Or one of them go up in smoke and leave you with stock worth nothing. I think they look like solid companies, but so did Enron once upon a time.

As we got closer to FIRE we employed the bond tent/reverse equity glide path idea to reduce volatility in our portfolio. The idea is that when you are so close to the finish line your risk tolerance goes down because you have more to lose. I cared more about being able to stop working this making a few more percentage points on my investments, so we increased our bonds. In your case you are taking a lot of risk and being so concentrated and in individual stocks, it is an uncompensated risk. I believe the standard explanation is that the market will give you a risk premium for risk you canít diversify away (stock over bonds), but not for something that can be diversified away (individual stocks). You can certainly continue to be lucky, and I hope for your case you are. But just recognize that it would be that: luck. Something totally out of your control.

40-50% down for the top performing stocks on the average is practically impossible. Even if that happens the total stock market will go down too. Let's say only the top stocks I have go down, then I am looking at 40-50% down of my 30% portfolio which is like 15% down. An year or so of working. Also before they go 40-50% down they would have earned me several years of 40-50% up which will compensate for it too.

That said I definitely see the risks in holding individual stocks. My plan is to hold them till I retire and get to a good amount and then after that move to total stock market during retirement. That's the reason for holding them in tax advantaged accounts

ysette9

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Feedback on my portfolio and pre-fire questions
« Reply #10 on: July 01, 2020, 11:44:32 AM »
I think you said up above that you are planning on long term buying and holding of your top stocks. Just for fun Iím looking up what the top stocks were in some previous decades. For example, in the 1980s we see names like Circuit City, Dillardís, and Toys R Us. In the 1990s we have names like Clear Channel and Solectron and Dell. I wonder what your plan is for rotating in new best performing stocks as times change and the market adjusts?

Also, you say that those big drops arenít possible, on average, for top stocks. I think that actually is exactly the problem. With an index fund you do get the average but with individual stocks you get all the bumpiness of the ride and only get the benefit of the average if you have enough of them to start approximating the index fund. So letís hope that Amazon and Google and Apple donít become the Dell and Toys R Us of the 2030s.
« Last Edit: July 01, 2020, 11:46:39 AM by ysette9 »

Laura33

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Re: Feedback on my portfolio and pre-fire questions
« Reply #11 on: July 01, 2020, 12:24:33 PM »
I think you said up above that you are planning on long term buying and holding of your top stocks. Just for fun Iím looking up what the top stocks were in some previous decades. For example, in the 1980s we see names like Circuit City, Dillardís, and Toys R Us. In the 1990s we have names like Clear Channel and Solectron and Dell. I wonder what your plan is for rotating in new best performing stocks as times change and the market adjusts?

Also, you say that those big drops arenít possible, on average, for top stocks. I think that actually is exactly the problem. With an index fund you do get the average but with individual stocks you get all the bumpiness of the ride and only get the benefit of the average if you have enough of them to start approximating the index fund. So letís hope that Amazon and Google and Apple donít become the Dell and Toys R Us of the 2030s.

+1.  Market averages mean nothing when you are talking about individual stocks.  It is absolutely "practically impossible" for the entire market to drop 40-50% and stay there for an extended period of time -- and if it does happen, it's due to massive problems that will likely prevent everyone from retiring comfortably.  OTOH, it is not only possible but likely for individual stocks to drop all the way to 0.  In fact, in any given year, I can guarantee you that some stocks are going to become worthless as the businesses go bankrupt.  I just can't tell you which ones they'll be in any given year.  Certainly I'd never have called Hertz going into bankruptcy as of a year or even six months ago -- nor would all the people who owned Hertz stock.

This also applies to a lesser degree to individual sectors.  The NASDAQ-100 dropped over 75% in the dot-com crash of 2000 -- and big-name tech blue-chips lost 80%.  It took 15 years for the NASDAQ to return to that high valuation. 

But hey, your call.  If you're willing to ride out a big downturn by working a few more years, go forth and conquer.   

duyen

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Re: Feedback on my portfolio and pre-fire questions
« Reply #12 on: July 01, 2020, 12:28:51 PM »
I think you said up above that you are planning on long term buying and holding of your top stocks. Just for fun Iím looking up what the top stocks were in some previous decades. For example, in the 1980s we see names like Circuit City, Dillardís, and Toys R Us. In the 1990s we have names like Clear Channel and Solectron and Dell. I wonder what your plan is for rotating in new best performing stocks as times change and the market adjusts?

Also, you say that those big drops arenít possible, on average, for top stocks. I think that actually is exactly the problem. With an index fund you do get the average but with individual stocks you get all the bumpiness of the ride and only get the benefit of the average if you have enough of them to start approximating the index fund. So letís hope that Amazon and Google and Apple donít become the Dell and Toys R Us of the 2030s.

Don't think I said I will hold individual stocks forever. Probably this statement of mine was confusing. "c) If the market crashes anytime in next four years, I will move the bonds to VTSAX and be 100% stocks". By stocks I meant allocation of stock (etf) vs bond (etf).

Good point about 1980s top stocks. My plan is to keep my allocation similar to QQQ but only pick stocks in their top 25-50%. Also since these are in tax advantaged I can keep selling and buying. I firmly believe these big companies are so diversified in their business that it is hard for them to get hurt big. For example amazon is in retail, cloud, streaming etc. Also in case of losses those companies will pivot their business model as well to keep growing.

I did follow the traditional advice when I started investing in 2016 and did VTSAX instead of tech ETFs for 2 years. I ditched the plan and went QQQ and got great returns since. This time taking a bit more risk to do some individual stocks with the risk that I may need to work for 1 more year if it goes wrong.
« Last Edit: July 01, 2020, 12:30:48 PM by duyen »