Author Topic: Thoughts on two-fund portfolio?  (Read 1553 times)

Jacobi

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Thoughts on two-fund portfolio?
« on: January 22, 2019, 12:20:43 PM »
I'm 27 years old and am trying to settle on an asset allocation that is dead simple and that I can stick to in the medium term. I have paid off my debts and have about $34k with Vanguard. Here's what I have right now -- I'm envisioning my investments in two "buckets."

1. Roth IRA holding Target Retirement 2055: $27k and contributing $500/month. I consider this my "old man security" fund. If the only saving I do is make this contribution until age 60, I would probably still have enough to retire on given my simple lifestyle tendencies and the long time horizon for growth. And this will become a more conservative AA automatically when I'm old.

2. Taxable account with VTSAX: $7k and starting to contribute about $2000/month. I consider this the "early retirement" fund, which I'm willing to take more risks on because I don't "have" to stop working at some particular age, but would like to have options. I'm wondering what you all think of having this all in stocks, given a time horizon of 10-15 years from now. Is going all VTSAX the best way to give myself the most opportunity for growth over that time period, statistically? Should I consider something like an 80/20 allocation instead? The other fund I've considered is VASGX (LifeStrategy Growth, which contains bonds and international).

Thanks in advance for your input!

jps

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Re: Thoughts on two-fund portfolio?
« Reply #1 on: January 22, 2019, 04:59:58 PM »
Hey Jacobi,

Others will probably have lots to say, but I want to contribute a piece of advice to read JLCollins' Stock Series. Currently has 34 entries (and counting?), but I just read through it a few weeks ago and it lays a great foundation for investing advice. JLCollins' whole shpiel is called "the simple path to wealth", so if you are interested in an asset allocation that is "dead simple", his is the strategy for you.

Andy R

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Re: Thoughts on two-fund portfolio?
« Reply #2 on: January 22, 2019, 07:34:06 PM »
Hey Jacobi,

Others will probably have lots to say, but I want to contribute a piece of advice to read JLCollins' Stock Series. Currently has 34 entries (and counting?), but I just read through it a few weeks ago and it lays a great foundation for investing advice. JLCollins' whole shpiel is called "the simple path to wealth", so if you are interested in an asset allocation that is "dead simple", his is the strategy for you.

I also give out the JLCollins link to newbies. It is a great site, and if the OP has not read it, they really should. It's fantastic.

But - there are criticisms of his informatino. Overall, the concepts are excellent and well explained, but just because there is a lot of great stuff, does not mean he is some sort of god who should be followed without question.

Vanguard papers have shown that a 30% allocation to international has given the same long term return with lower risk. Diversification is the only free lunch in investing. JLCollins somehow thinks you should "buy the whole market" but has decided the market is his own country and not the whole world. Sure, many will show that in the last 10 years international has lagged the US, but if recency bias is your thing then you should pick the best recently preforming asset class instead of VTSAX too.

Extremely few people can psychologically tolerate seeing say a million dollar portfolio that has taken 15 years of sacrifice halve steadily over a year or two and not know when it will stop bleeding or if it going to take 10-20 years ro recover, and they will often freak out and sell some or all when it is down. It is human nature to have loss aversion.

His site has great info, but don't just blindly do what he says. Learn the concepts and apply them yourself.

Target Retirement funds are fantastic. It is also a "simple path" with one fund, but they are more diversified and they do all the work for you. Just make sure the fund picked is based on required AA and not just on age.

Telecaster

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Re: Thoughts on two-fund portfolio?
« Reply #3 on: January 22, 2019, 08:10:35 PM »

Vanguard papers have shown that a 30% allocation to international has given the same long term return with lower risk. Diversification is the only free lunch in investing. JLCollins somehow thinks you should "buy the whole market" but has decided the market is his own country and not the whole world. Sure, many will show that in the last 10 years international has lagged the US, but if recency bias is your thing then you should pick the best recently preforming asset class instead of VTSAX too.

And VTSAX is mostly a large cap strategy.  Stir in some mid-caps and you will improve returns as well.

But that's all window dressing.  The OP's strategy as outlined will work really well.  At age 27, he has plenty of time to think about different strategies and what he is trying to achieve personally.   He's right in the zone of where he needs to be.  Everything else is just tweaking around the edges. 

Radagast

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Re: Thoughts on two-fund portfolio?
« Reply #4 on: January 22, 2019, 08:15:40 PM »
I would say the placement is about the opposite of what would be preferably best, all things being equal. Invest the retirement account in the forthcoming Total World Stock Index Admiral Shares and don't both with bonds that will drag you back for the next decades. Then, use a stock fund and a bond fund as needed in your taxable space. The bond fund can double as emergency fund. The only downside is taxes on bond funds, so choose carefully. In a high tax state a treasury bond only fund might make sense. Or if your taxes are high period then maybe a municipal bond fund is better. If no to both, a total bond fund might be fine.

Jacobi

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Re: Thoughts on two-fund portfolio?
« Reply #5 on: January 22, 2019, 09:44:34 PM »
I would say the placement is about the opposite of what would be preferably best, all things being equal. Invest the retirement account in the forthcoming Total World Stock Index Admiral Shares and don't both with bonds that will drag you back for the next decades. Then, use a stock fund and a bond fund as needed in your taxable space. The bond fund can double as emergency fund. The only downside is taxes on bond funds, so choose carefully. In a high tax state a treasury bond only fund might make sense. Or if your taxes are high period then maybe a municipal bond fund is better. If no to both, a total bond fund might be fine.

Interesting -- I was thinking it'd be better to have the bonds and international stock in the IRA for tax reasons?

Radagast

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Re: Thoughts on two-fund portfolio?
« Reply #6 on: January 22, 2019, 10:07:22 PM »
I would say the placement is about the opposite of what would be preferably best, all things being equal. Invest the retirement account in the forthcoming Total World Stock Index Admiral Shares and don't both with bonds that will drag you back for the next decades. Then, use a stock fund and a bond fund as needed in your taxable space. The bond fund can double as emergency fund. The only downside is taxes on bond funds, so choose carefully. In a high tax state a treasury bond only fund might make sense. Or if your taxes are high period then maybe a municipal bond fund is better. If no to both, a total bond fund might be fine.

Interesting -- I was thinking it'd be better to have the bonds and international stock in the IRA for tax reasons?
Conventionally international stocks are in taxable space to receive the foreign tax credit although this isnít a big issue at all. You are correct that bonds conventionally go in an IRA to avoid taxes on dividends, but note that for Roth IRA you conventionally go with stocks because they grow the most and you will not pay taxes on money taken out (after it has grown a lot). IRAs are are tax deferred meaning that taxes will rise with growth. Also a target date fund that is not intended for use for 30-40 years begs the question: if you donít need the money for 33 years why bother with bonds? If they are there as a tax sheltered emergency fund then maybe they should be a separate allocation. But then, the tax code does make this weird.

Telecaster

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Re: Thoughts on two-fund portfolio?
« Reply #7 on: January 22, 2019, 11:18:56 PM »

Conventionally international stocks are in taxable space to receive the foreign tax credit although this isnít a big issue at all. You are correct that bonds conventionally go in an IRA to avoid taxes on dividends, but note that for Roth IRA you conventionally go with stocks because they grow the most and you will not pay taxes on money taken out (after it has grown a lot). IRAs are are tax deferred meaning that taxes will rise with growth. Also a target date fund that is not intended for use for 30-40 years begs the question: if you donít need the money for 33 years why bother with bonds? If they are there as a tax sheltered emergency fund then maybe they should be a separate allocation. But then, the tax code does make this weird.

No disagreement on any of your points.  Just to point out the OP wanted steady, predictable growth in his Roth.  That sounds like efficient frontier type investing with a mix of stocks and bonds, and the Target Retirement fund seems to meet his stated goal of being able to retire at specific age.

Then he wants to swing for the fences in the taxable account by going with 100% stocks.  VTSAX seems to meet that goal too.

Part of the plan was he wanted to keep it simple.  It does that, so that goal is met as well.   So, as a first plan, not too bad. 

The plan can certainly be optimized.  And presumably there will be a 401(k) in the future which will change things.  And there is the traditional vs. Roth question, and adding in bond funds like you suggest, backdoor Roths, diversification with international, on and on.

But at first blush, the plan works.








MustacheAndaHalf

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Re: Thoughts on two-fund portfolio?
« Reply #8 on: January 27, 2019, 01:26:07 AM »
And VTSAX is mostly a large cap strategy.  Stir in some mid-caps and you will improve returns as well.
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is the total stock market - it's not a "large cap strategy".  As large caps outperform small caps, the market holds more assets in large caps.  But any weight other than VTSAX is a tilt away from market weights.

I think the approach of VTSAX + target date fund has merit.  If OP was willing to have 3 funds, they could split up bonds, international equities, and VTSAX into 3 parts.  But with just 2 funds, VTSAX in taxable makes sense.

VTSAX puts out 1.9% in dividends, while VTIAX has 2.9% in dividends.  I found that the foreign tax credit is typically offset by the tax owed on the additional yield.  I view it as more time spent on taxes without a benefit.  But either one is better than bonds in taxable - which is a reason to avoid a target date fund in taxable.

If you plan to use money in 10-15 years, you need to start shifting from 100% stocks to a mixture of stocks and bonds.  Since bonds are not efficient in taxable, you might look at tax-exempt bonds when that time comes.


Jacobi

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Re: Thoughts on two-fund portfolio?
« Reply #9 on: January 27, 2019, 02:37:55 AM »
Thanks. Does nobody use Vanguard Total Bond Market or similar in taxable accounts?

Telecaster

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Re: Thoughts on two-fund portfolio?
« Reply #10 on: January 27, 2019, 11:33:11 AM »
And VTSAX is mostly a large cap strategy.  Stir in some mid-caps and you will improve returns as well.
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is the total stock market - it's not a "large cap strategy".  As large caps outperform small caps, the market holds more assets in large caps.  But any weight other than VTSAX is a tilt away from market weights.

I said "mostly" a large cap strategy.  VTSAX is composed of over 3,600 stocks.  By weight,  VTSAX itself is about 76% large caps, 18% mid-cap, and 6% small cap and just the ten largest stocks compose about 19% of VTSAX.  Mostly large caps, in other words. Nothing wrong with that, of course.  But as Andy R points out there are valid reasons to consider diversification.