Author Topic: Asset allocation, 100% stocks? Vanguard Institutional Funds? Uninvested Cash  (Read 3098 times)

YoungStache

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Hey guys, I'm looking for some input on my financial situation. I'm 26, plan on reaching the FIRE point at age 30, but without necessarily quitting my job if I still enjoy working in the future.

Currently, in my taxable account, I have 105K in VTSAX. In my pre-tax rollover IRA from my former employer, I have 67K uninvested. And I have a roth IRA with 23K in VTSAX. I also have 140K cash from my recent home sale.

I am planning to rollover my untouched rollover IRA into my new employer's 401K plan, which is actually through Vanguard. They have Vanguard Institutional Total Bond Market Trust at 0.02 expense ratio and Vanguard Institutional Total Stock Market Index Trust at 0.01 expense ratio. And for international: TIDDX, and VWILX. Which funds would you guys recommend? And how does the index trust differ from the admiral shares? How would you invest in this situation?

Should I keep going with 100% stocks in all my accounts? Or add in some bonds? Or bonds only in taxable account and strictly stocks in pre-tax/retirement accounts? What about international? Would you try any of the other Vanguard funds available in the retirement plan?

Also, would you lump-sum invest the cash, and also with the market being very close to an all-time high? How much dividends does VTIAX pay? Also open to other investment ideas...
« Last Edit: October 21, 2016, 09:47:28 AM by YoungStache »

Jack

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I don't understand why the 401k plan would offer both VITSX and VITPX -- they look exactly the same except for two basis points of expenses. Weird.

Anyway, I'd go 100% VITPX in your 401k. Put VTIAX (Vanguard international index) and VTSAX in your taxable accounts and IRA in proportions to achieve your desired asset allocation when summed across all accounts. (I can't tell you what that should be because I haven't decided for myself yet.) The VTIAX should fill up your taxable first and overflow into the IRA if it doesn't fit (or the VTSAX should fill up the IRA first and then overflow into the taxable -- again, depending on asset allocation relative to the account balances).

IMO, you don't need bonds -- I'm 6 years older than you and I don't hold any.

Lump-summing the cash is higher return/higher risk than dollar-cost-averaging it (statistically, you're more likely to come out ahead with lump-sum).

YoungStache

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I don't understand why the 401k plan would offer both VITSX and VITPX -- they look exactly the same except for two basis points of expenses. Weird.

Anyway, I'd go 100% VITPX in your 401k. Put VTIAX (Vanguard international index) and VTSAX in your taxable accounts and IRA in proportions to achieve your desired asset allocation when summed across all accounts. (I can't tell you what that should be because I haven't decided for myself yet.) The VTIAX should fill up your taxable first and overflow into the IRA if it doesn't fit (or the VTSAX should fill up the IRA first and then overflow into the taxable -- again, depending on asset allocation relative to the account balances).

IMO, you don't need bonds -- I'm 6 years older than you and I don't hold any.

Lump-summing the cash is higher return/higher risk than dollar-cost-averaging it (statistically, you're more likely to come out ahead with lump-sum).

I edited my post, I looked on my actual vanguard account and there is no VITPX or VITSX. They have the trust versions of the stock and bond indexes and some target retirement funds and 2 international funds, which I edited in my post above. Also, what is your rationale for 100% stocks in 401K and not in the IRA?

Jack

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I edited my post, I looked on my actual vanguard account and there is no VITPX or VITSX. They have the trust versions of the stock and bond indexes and some target retirement funds and 2 international funds, which I edited in my post above. Also, what is your rationale for 100% stocks in 401K and not in the IRA?

Okay, go with 100% "Vanguard Institutional Total Stock Market Index Trust" in the 401k then. It's 0.01% better than VITPX anyway...

As far as the rationale for my recommendation goes, the idea here is to first pick an overall asset allocation, then buy those funds in the account types where they fit best.

For you, the overall asset allocation you said you were considering, and that I agreed was a good choice, is 100% stocks. But within the category of stocks, you still have to decide "which ones?" US vs. non-US, large cap vs. mid cap vs. small cap, "growth" vs. "value," etc. The simplest choice is to say "I'll just buy everything," so your asset allocation should be all world stocks, weighted by market capitalization. You could accomplish that by buying a single fund, such as this one. Otherwise, you can make decisions such overweighting US stocks compared to the world market cap (which may or may not be a good idea -- see that other thread again -- but which Americans commonly do), "tilting" towards small or value stocks, or all sorts of other complicated things.

But for now, we'll keep it simple: world market-cap weighting. The trouble is, the single fund listed above isn't a choice in all of your accounts (at least not in your 401k). Therefore, you have to do at least a little slice-and-dice to get other funds containing segments of the market to add up to it, in this case, by combining a US total-market index fund (e.g. VTSAX) with a world-except-US total market index fund (e.g. VTIAX) -- we'll assume a 50/50 ratio for now. So, still keeping it as simple as possible, in each account you could buy 50% VTSAX (or similar) and 50% VTIAX (or similar).

Of course, your 401k doesn't have a world-except-US total market index fund either (it only has actively-managed international funds, which have higher expense ratios and performance characteristics that may stray from the index in either direction). There's no good replacement for the VTIAX half! Therefore, in your 401k you'd instead buy 100% VTSAX-equivalent and then in your other accounts you'd buy more than 50% VTIAX to compensate (so that when summed across all accounts, your overall AA is 50/50).

Finally, the other reason it's a good idea to split your asset allocation up unevenly between accounts is that the different accounts have different tax characteristics, and different asset classes have different tax efficiency. Therefore, putting the least-tax-efficient assets in the most tax-deferred accounts can save you money on taxes. That's why I suggested putting the VTIAX-equivalent in your taxable account first and then "overflowing" to the IRA if necessary: because then you might be able to claim the foreign tax credit. If you put the US stocks in taxable instead you'd lose out on that for no good reason.

Concretely, with the assumed 50/50 AA and the account balances you mentioned, you would have (currently):
Account TypeUSInternationalTotal
401k$0$0$0
Traditional IRA$67K$0$67K
Roth IRA$23K$0$23K
taxable$77.5K$167.5K$245K
Total$167.5K$167.5K$335K

Then after a year maxing your 401k ($18K) and Roth IRA ($5500) but saving nothing in taxable and assuming 0% return (note the rebalancing occurring in the taxable account):
Account TypeUSInternationalTotal
401k$18K$0$18K
Traditional IRA$67K$0$67K
Roth IRA$28.5K$0$28.5K
taxable$65.75K$179.25K$245K
Total$179.25K$179.25K$358.5K

All this is just an example and YMMV, of course.

YoungStache

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Does the tax efficiency only apply if you sell the asset? Where capital gains and stuff apply?

Classical_Liberal

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Interest and qualified dividends are taxed in the year they are paid.  Under certain income levels dividends (which are taxed as capital gains) are not taxed at all, but bond interest is taxed as income.  If you hold assets which pay interest, it is better to hold them in tax deferred accounts, as your income will likely be lower in FIRE (lower income tax rate).  Higher dividend assets can be held tax deferred for compound growth, but in a 401K/IRA you will eventually pay income taxes (not capital gains).  However, if withdrawals are managed properly in retirement you can keep your tax rate very low.  Also there are some types of bonds which pay nontaxable interest and some types of dividends that are "not qualified" and you have to pay income taxes.

Tax efficiency can get complicated the more diverse your portfolio becomes and really depends on individual situation.  If this completely disinterests you, a good accountant will be worth her weight in gold.  If it's interesting, learn up!  Here's a starting resource:

http://www.gocurrycracker.com/never-pay-taxes-again/

Congrats on being so far ahead of the game!

Rubic

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OP: I'm seriously impressed you have 335K in assets at age 26.  Way to go!

Out of curiosity, given your potential FIRE date 4 years hence, what is your
minimum target number?

DavidAnnArbor

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Here's a great thread on the 100% stocks allocation question you brought up:

http://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/

Metric Mouse

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OP: I'm seriously impressed you have 335K in assets at age 26.  Way to go!

Out of curiosity, given your potential FIRE date 4 years hence, what is your
minimum target number?

+1.  Should be easy to get to whatever number they desire, having achieved so much already! Posting to follow.

MustacheAndaHalf

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Hey guys, I'm looking for some input on my financial situation. I'm 26, plan on reaching the FIRE point at age 30, but without necessarily quitting my job if I still enjoy working in the future.
That's a little too ambiguous to provide advice.  If you plan to quit at age 30, I'd highlight two problems.  First, 100% stocks is far too high when you're relying on that money for living expenses.  And second, you're retiring in a tight window of time when the stock market could have other plans for your investments.  When a correction hits soon before you retire, you may no longer have enough.  So figure out if you will keep working past 30, as your bond allocation is determined by when you need to start living off these assets. 

Moving a previous employer's retirement account to a new employer's 401(k) plan should involve you making sure you're comfortable with the fund selections in the new plan.  You're only saving about $27/year by putting the $67k into a new 401(k) instead of using admiral shares (assumes Vanguard Total Stock Market).  if you're that sensitive to expense ratios, consider selling VTSAX and buying ITOT in one large lump, costing $7/trade (at Vanguard).  Your expense ratio on the $104k taxable will drop from 0.05% to 0.03%, saving about $20/year.  And if some of your home sale is going into the market, you could include that as well. 

You might want to think about international.  US and international tend to trade off.  While the past 10 years have certainly favored the US, it was a different story in some decades in the past.  You might be stunned to see how badly international beat US stocks from 1980-1989.  Consider 1/5th in international, in case the US doesn't dominate for the next 10 years.

But first you need to figure out if you're retiring in 4 years or not.  Someone 4 years from retirement should be in the 30-50% range for bonds, while someone not retiring for decades might hold closer to 10%.