Need advice on new Portfolio Asset Class allocation

[macrocide]

Hi all,

My first post on the MMM forums!  We have recently decided to leave Ameriprise and move our money to Vanguard.  During the process I learned a ton about the financial markets and feel like I have taken control of my financial freedom instead of letting someone else overcharge us and make all of the decisions.

I am going to post % allocations below that we are considering on a hypothetical $1,000,000 portfolio for simplicity.  Can you help give advice on some of the selections.  Much of this money is currently invested, hence the odd % numbers which are exact.)   We are of the ages 40/45, self employed and consider ourselves semi-retired.

Overall thoughts/caveats/additional info:
1. Bond market sucks right now, so we are going to go with 0% bonds.... is this crazy?  In place of that we are going to add VYM (high dividend large-cap) + high conservative lending club A loans + large cash reserve + gold.  What else can we do for the conservative portion of the portfolio in the current interest rate climate?  We will probably move to 15-20% bonds over the next few years with VBTLX.

2. 50% of our cash reserves are earmarked for taxes/accounting bills.  Should we put even more aside? There may be less income next year from our business.

3. We already own VTI and will be buying VTSAX.  Also having both the ETF and mutual fund allows us to sell one if we need it and buy the other to avoid buying restrictions.

4. The 4 individual stocks we picked have perfomed well but also could be volatile... should we roll them in to the VTSAX?

5. The IWM we already own, but would consider moving to VTSAX or VYM to save a bit of management fees.

6. any thoughts on REITS?

7. Any benefit to adding in a small cap, mid cap or S&P 500 index to all of this, or is that just over-complicating things?


Asset Class - Fund Name - Symbol: % invested
US Stocks   - Vanguard Total Stock Market Index Fund Admiral Shares - VTSAX:  34.3643%
US Stocks - Vanguard Total Stock Market ETF - VTI: 3.5273%
US Stocks - Individual stocks (WAG, SNY, AL, ACN): 4.5279%      
US Stocks - Vanguard High Dividend Yield ETF - VYM: 6.7583%
US Stocks - iShares Russell 2000 Index Fund - IWM: 1.8970%
US Stocks SUBTOTAL    (51.0747%)

Gold- iShares Gold Trust - IAU: 3.7505%
International Stocks - Vanguard Total International Stock Index Fund Admiral Shares - VTIAX: 20%   
REIT - Vanguard REIT Index Fund Admiral Shares - VGSLX: 15%
Peer-to-Peer - Lending Club   : 5.0401%
Conservative P2P - Lending Club (highly conservative investments): 0.5727%
Cash - Cash reserves: 4.5819%

Thanks a lot for any allocation help you guys can provide!

M & J

[Frankies Girl]

I am not an expert (just started getting my ducks in a row the last year), but to me, it seems like you're over-complicating things by having so many different holdings. One of the things I've learned is that low cost index funds are the best and easiest way to go, and you can offset the inflation and deflation dangers by holding a total bond index fund and a total REIT index fund along with the lion's share in the total stock market index fund as your workhorse earner.

I have seen arguments for and against holding gold funds... but everything I've personally seen so far is that it is a speculative proposition that nervous people tend to feel necessary. I'm not nervous about investing or believe that the government is going to collapse or anything... so I don't own any of those (and sold the shares I inherited).

I've got my own AA set to (roughly) the same as JL Collins' setup, but as I am with Fidelity, I am using the low cost Spartan index funds (they are the Vanguard equivalents and track within 0.01% of the expense ratio of Vanguard). But mine is closer to a 75% stock/11% bond/11% REIT/3% cash mix of the same funds he has.

http://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/

And so the bond market isn't doing as well... that means it's on sale right now. I've got a 2% profit so far on it and it's not a majority of my overall portfolio, but it is already in place as a deflation hedge.

But again, not an expert; not even close. :)

[chasesfish]

Vanguard Wellington Fund.

If you're moving "all" your money and assuming that equals more than $50,000, you can get active management for 0.17% and they fluctuate around 65% stocks, 35% bonds. 

If I'm paying any expense ratio for a mutual fund, I like active management.

I personally own Wellington in every account I can get it in, then own individual stocks in a taxable account.  My opinion is I'm already paying a "management fee" in all those manager's salaries at the companies, I don't want to layer another fee on top of that for some of the blue chip companies.  I can also avoid dying businesses sitting in the S&P 500 (think GM in 2007)

 

[alanwbaker]

1. Bond market sucks right now, so we are going to go with 0% bonds.... is this crazy? 

3. We already own VTI and will be buying VTSAX.  Also having both the ETF and mutual fund allows us to sell one if we need it and buy the other to avoid buying restrictions.

4. The 4 individual stocks we picked have perfomed well but also could be volatile... should we roll them in to the VTSAX?

5. The IWM we already own, but would consider moving to VTSAX or VYM to save a bit of management fees.

Macrocide, congratulations on taking control of your future--you are on the right track.  Dial your web browser over to the Bogleheads forum and you'll find high quality information from knowledgeable people.  http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy

I agree with Frankies Girl that the investment choices are overly complex.  See the Bogleheads philosopy point 9.

All investors need a calibrated amount of "shock absorber".  Large cap stocks and gold are not shock absorbers.  See the Bogleheads philosopy point 3. 
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[macrocide]

Thanks for the feedback so far everyone.

I have been reading bogleheads a bunch and love it.

The main reason my list is so complex is that I already own some of these investments (4 stocks, VTI, VWM, Gold, Lending club, etc...)  The ones I am adding are the recommended "simple" ones VTSAX, etc...   I am also selling out of probably 40!!!! different mutual funds that I am currently in and most likely facing a lot of capital gains tax.  Talk about "simplifying"!  I may do some this year and some after the 1st to soften the blow. 

If you look at my portfolio from a simple perspective it really is just:
71% stocks, 15% reit, 5.5% peer-to-peer lending, 3.75% gold and the rest cash.

Does anyone else have any opinions on bonds and reits in the current market.  I think bonds are going to go haywire until the FED easing is finished, so I am not entirely sure they are "cheap" right now.  I think that buying into them may just lock you into more panic selling due to possible interest rate hikes.

I'll definitely re-read the bogle heads post and thanks everyone so far!

M + J

[RobertBirnie]

Asset Class - Fund Name - Symbol: % invested
US Stocks   - Vanguard Total Stock Market Index Fund Admiral Shares - VTSAX:  34.3643%
US Stocks - Vanguard Total Stock Market ETF - VTI: 3.5273%
US Stocks - Individual stocks (WAG, SNY, AL, ACN): 4.5279%      
US Stocks - Vanguard High Dividend Yield ETF - VYM: 6.7583%
US Stocks - iShares Russell 2000 Index Fund - IWM: 1.8970%
US Stocks SUBTOTAL    (51.0747%)

Gold- iShares Gold Trust - IAU: 3.7505%
International Stocks - Vanguard Total International Stock Index Fund Admiral Shares - VTIAX: 20%   
REIT - Vanguard REIT Index Fund Admiral Shares - VGSLX: 15%
Peer-to-Peer - Lending Club   : 5.0401%
Conservative P2P - Lending Club (highly conservative investments): 0.5727%
Cash - Cash reserves: 4.5819%

I would keep with your simplifying. From what you're saying this is a huge simplification already. I would probably drop the Gold and solidify your ETFs into fewer holdings. Russell 2000 is about a duplicate of the VTSAX so its a good drop as well.

I might add an Emerging market fund, although i don't know what % VTIAX is in emerging markets...

I'd also add a bond fund up to about 5%. The bond fund isn't so much to make money on itself especially with the haywire bond market. Its just something that is roughly reversely correlated to the stock market, decreasing the volatility of the portfolio on a whole and also serves as reallocation fodder if stocks drop. Look into a corporate bond fund (LQD maybe).

Another consideration for your LendingClub, Bonds, and any REITs is if those accounts are not tax-advantaged I'd be tempted to either drop them or slowly reallocate them into tax-free accounts. Most of their earnings are in dividends, so tax-advanteged accounts are the way to go. If they are in taxable accounts, check out MUB for a bond fund.

[alanwbaker]

The main reason my list is so complex is that I already own some of these investments (4 stocks, VTI, VWM, Gold, Lending club, etc...)  The ones I am adding are the recommended "simple" ones VTSAX, etc...   I am also selling out of probably 40!!!! different mutual funds that I am currently in and most likely facing a lot of capital gains tax.  Talk about "simplifying"!  I may do some this year and some after the 1st to soften the blow.

You are moving in the right direction, Macrocide--keep going.  Consolidating your investments in one house (Vanguard in your case) will help because you can exchange funds (rather than selling and buying), thereby avoiding capital gains taxes.  This is also a plus for funds over ETF's.

Throw those 40 funds into a spreadsheet and calculate the capital gain or loss for each.  If you are lucky (unlucky?) you can offset some of the gains with some of the losses and schedule your sales accordingly.

About those bonds...  Bonds are not about making money--that's what equities are for.  You hold bonds as a shock absorber for when the stock market drops.  If you hold no bonds you either have a very high tolerance for risk (a 50% drop in the market wouldn't upset your plan) or you believe that the market will continue to rise indefinitely.

There's been a lot of press about what a terrible year it's been for bonds, so let's do the math. http://quotes.morningstar.com/fund/f?t=VBTLX&region=USA shows that the mid-year drop in bonds was about 4%--the worst drop since the nineties.  Since then bonds have rebounded so they are now off about 2% for the year.  The point is that a terrible drop in the bond market is about 4%.  If your asset allocation was 25% bonds that would be a 1% hit to your portfolio (or .5% year-to-date).  So that's the downside risk to owning bonds--not too bad, really.

Now let's consider a big hit to stocks--50% just a few years ago.  If you held no bonds, your hypothetical portfolio would be down $500,000.  If you held 25% bonds, your equities would be down only $375,000 AND your bonds would have continued to plod upward about 3% per year ($22,500).  So the 25% bond allocation would have left your portfolio with $647,500 instead of $500,000--a pretty good shock absorber, considering the small downside risk.

[macrocide]

Robert and Alan, thanks for your comments!

Robert,
I really like your idea of using bonds as re-allocation fodder for a massive stock market drop.  It totally fits with my style, as I hate keeping cash on hand, but always wish I had some when things go bad so I can buy more stocks on the cheap.  I could totally "justify" the bonds quite easily this way and they would also soften the blow when that big drop happens.  Of course trying to re-balance way ahead of another drop would be a priority.  The Total International has at least 5% emerging markets, and I am happy with that amount for now.  My tax advantaged accounts will be totally full, so I will think about your advice on the rest of the investments.

Alan,
I didn't know about the exchange option without tax consequences.  That's really cool and will certainly come in handy.  Regarding your bond statements, I get what you are saying and it makes a bit more sense now.  I guess I am mostly worried about getting into a bond index that has a bunch of baggage from all the recent sell offs.  I assume it is built into the price, but not sure.  Anyways, I have decided to start with at least 5% in bonds and put all new retirement savings directly into bonds and probably slowly convert some of the equities as we get older and rely on the income and shock absorbing more.

Thanks again everyone for your very thoughtful answers.

M + J

[Nords]

  It totally fits with my style, as I hate keeping cash on hand, but always wish I had some when things go bad so I can buy more stocks on the cheap.  I could totally "justify" the bonds quite easily this way and they would also soften the blow when that big drop happens. 

Another option is to eschew bonds in favor of CDs. 

We ladder 3-5 year CDs for our living expenses, although the total is only two years' expenses.  It's a pain to build the ladder (in between recessions) but when the market crashes and we "need" to buy more equities (or at least not sell any of them), we can cash in the CDs with only a small early-redemption penalty.  The penalty is usually insignificant when compared to the later equity gains.

Buffett's grandfather used to advocate keeping $1000 cash in a safe-deposit box.  His 1935 example would require over $17,000 today, but of course that was before Mastercard and cash advances...