Sell Part of VFIAX and Re-diversify

[lincolngreen119]

Hi all,

22 year old investor here with a question.

I currently have about 42k invested in VFIAX - 10K for my Roth IRA and the remaining as a regular investment.

Should I diversify my portfolio?

I don't plan on touching any of the money for 6-7 years, so is it best to go "all-in" for VFIAX?

Or, might it be best to invest 10% of my position in a bond/international index fund?

Or possibly any other type of fund?

[Joet]

in the list of "problems", this isnt much of one. Normally investors should have a certain allocation to bonds to permit re-balancing, reduce volatility, and operate closer to the efficient frontier. Maybe 10-25% in your case is prudent imo. Perhaps utilize your Roth space for this, assuming you have more control there/access to funds with lower fees.

Re-balance with 'new funds', is the easiest way to fly. Start investing 50/50 [equities/bonds] until you get closer to your desired AA, then adjust as needed to stay there

[GreenGuava]

Do you have a 401(k), or are these two accounts all you have?

How much of this is for retirement and how much is for some other use?  You may want to treat the two as different if some is for retirement and some isn't.

How many capital gains do you have in the taxable, and what kind are they (short or long term)?

At the very least, I'd look into using the total market instead of the S&P 500 for your domestic stock portion, especially now that the expense ratios are the same.

I'm a big believer in the three fund portfolio and in having at least some bonds - 10% is fine.  There isn't a significant benefit to being 100% stocks versus 90% stocks 10% bonds, but there's much more volatility.

If you're going to grab some international stocks, do so in taxable, if you intend to treat all of your retirement funds as one big portfolio.  I like 30% of my stocks to be in international, although admittedly it's more that I started by seeing that's what Vanguard's target date funds did, and didn't find a good reason to change that allocation.

I'd also suggest turning off re-investment of dividends in taxable if you're going to wait for it to become long-term capital gains and then sell.  Use the dividends to buy into the fund(s) you're going to transfer into anyway (which you might start with future contributions).  Within the Roth IRA, you can go directly to your desired asset allocation.

[lincolngreen119]

No 401(k) - I currently teach English abroad, and will then pursue a freelance/entrepreneurial career to live location independent.

For now, the Roth IRA is for retirement. I figure if I continue to put the maximum in, I'll have more than enough money by time retirement comes around.

The remaining is simply for near(er)-future use (within the next 5-20 years) - as an initial investment into my own business(es) (5-10 years), down payment on a house (6-7 years), future family costs (10-20 years).

Capital gains for taxable are around $1,400 since February. I'm within the 15% income tax bracket right now, so if I were to pull any out within the next 9 months, I'd be taxed on gains by 15%.

What Vanguard fund represents the total market instead of the S&P 500?

I have about 6k in cash right now, and was thinking of putting 3K in international stocks and 3K in bonds. Good idea? Doing so will bring my percentages to 83 Domestic Stock/8.5 IS/8.5 B.

[Joet]

Vti

[GreenGuava]

For now, the Roth IRA is for retirement. I figure if I continue to put the maximum in, I'll have more than enough money by time retirement comes around.

Okay.  I suggest, then, treating the Roth as your retirement account and the other investments as separate.  You could put your Roth into a target date fund until you reach about $15-20k, at which point you can separate it out into the underlying funds to take advantage of Admiral shares.  This will take care of re-balancing and holding international stocks for you.  If you have a desired asset allocation, use the target date fund that matches that;  otherwise pick the one that most corresponds to your chosen date of retirement (or 60, if that date is before).

The remaining is simply for near(er)-future use (within the next 5-20 years) - as an initial investment into my own business(es) (5-10 years), down payment on a house (6-7 years), future family costs (10-20 years).

Capital gains for taxable are around $1,400 since February. I'm within the 15% income tax bracket right now, so if I were to pull any out within the next 9 months, I'd be taxed on gains by 15%.

Okay, first suggestion:  stop re-investing the dividends (we'll end up putting those elsewhere;  for now, have them sent to your bank so they aren't re-invested).  When that reaches long-term gains, sell it and invest the proceeds in a total market index - that's VTSAX (or VTI if you want to deal with ETFs - I suggest not bothering with them).  There isn't a huge difference in effect between the two - they're well correlated, but the total is more diversified.

What Vanguard fund represents the total market instead of the S&P 500?

I have about 6k in cash right now, and was thinking of putting 3K in international stocks and 3K in bonds. Good idea? Doing so will bring my percentages to 83 Domestic Stock/8.5 IS/8.5 B.

Well, let's look before we use it:  what sort of asset allocation do you want in taxable?  Some of those goals are suitable for using stocks, but others are near term.  Do you want to separate them?  Future family expenses are fine to have a large stock allocation;  money you want in 5-7 years isn't.  We'll determine some reasonable stock/bond proportion and go with that.  I will suggest having some stocks in international here, too:  it's even nicer in taxable, as you get some tax credit for the foreign taxes paid by it (but no such credit when held in an IRA).

[JasonK]

I'd suggest you diversify a bit, but don't be in any major rush. 

Some people recommend three Vanguard funds (see blog by JL Collins).  Others recommend 10 (see Gone Fishin' Portfolio book).  I personally am in 5 (US REIT, Global REIT, Total Bonds, Total US, and Total Intl).

Saying that, I would NOT sell your taxable investments to 'rebalance'.  Best option has already been mentioned.  Put future contributions into the new fund(s), whether that is new investments or dividends. 

Second best option is to move your Roth IRA investment into new fund(s) as it will be a non-taxable event.

But not a bad problem to have.  Stick with Vanguard, you're on the right path!!  And figure out your target allocation and stick to it.  Guaranteed the new funds you start putting money into will start losing money, and you'll be tempted to stop!  Seems to always happen that way.  Stick with the plan though.

[Mr Mark]

I'd suggest you diversify a bit, but don't be in any major rush. 

Some people recommend three Vanguard funds (see blog by JL Collins).  Others recommend 10 (see Gone Fishin' Portfolio book).  I personally am in 5 (US REIT, Global REIT, Total Bonds, Total US, and Total Intl).

Saying that, I would NOT sell your taxable investments to 'rebalance'.  Best option has already been mentioned.  Put future contributions into the new fund(s), whether that is new investments or dividends. 

Second best option is to move your Roth IRA investment into new fund(s) as it will be a non-taxable event.

But not a bad problem to have.  Stick with Vanguard, you're on the right path!!  And figure out your target allocation and stick to it.  Guaranteed the new funds you start putting money into will start losing money, and you'll be tempted to stop!  Seems to always happen that way.  Stick with the plan though.

+1

It seems a lot of people have difficulty with this. AA investing is very easy in theory, but very hard in practice. Investing "luck" is not the key to FIRE, saving a big stash is. But because we are human, market timing is very tempting.

If you like it so much, dedicate 5% of savings to a speculation account, but don't reallocate to this category! And accept you will probably lower your rate of return.

[lincolngreen119]

Okay.  I suggest, then, treating the Roth as your retirement account and the other investments as separate.  You could put your Roth into a target date fund until you reach about $15-20k, at which point you can separate it out into the underlying funds to take advantage of Admiral shares.  This will take care of re-balancing and holding international stocks for you.  If you have a desired asset allocation, use the target date fund that matches that;  otherwise pick the one that most corresponds to your chosen date of retirement (or 60, if that date is before).

How do I put my Roth into a target date fund? Sorry if this is quite obvious - I'm fairly new to all this information!

Okay, first suggestion:  stop re-investing the dividends (we'll end up putting those elsewhere;  for now, have them sent to your bank so they aren't re-invested).  When that reaches long-term gains, sell it and invest the proceeds in a total market index - that's VTSAX (or VTI if you want to deal with ETFs - I suggest not bothering with them).  There isn't a huge difference in effect between the two - they're well correlated, but the total is more diversified.

Okay. Dividends are now being sent to my bank. When will I know my dividends have reached long-term gains? One year after receiving the dividend?

Well, let's look before we use it:  what sort of asset allocation do you want in taxable?  Some of those goals are suitable for using stocks, but others are near term.  Do you want to separate them?  Future family expenses are fine to have a large stock allocation;  money you want in 5-7 years isn't.  We'll determine some reasonable stock/bond proportion and go with that.  I will suggest having some stocks in international here, too:  it's even nicer in taxable, as you get some tax credit for the foreign taxes paid by it (but no such credit when held in an IRA).

Taxable asset allocation is the big question.

I think it's wise to separate them. Possibly half of my current assets for near term (5-7 years) and the other half for future family expenses. What's a wise reasonable stock/bond proportion for both? 50/50 for 5-7 years (stock-bond) and 80/20 for future family expenses?

JasonK and Mr Mark: Thanks for the advice. It's really tempting to re-sell my taxable investments since the stock market is so high now, but part of being a wise long-term investor is tempering both the highs and lows.

[the fixer]

How do I put my Roth into a target date fund? Sorry if this is quite obvious - I'm fairly new to all this information!

Assuming you have a Vanguard account, find the fund's symbol on Vanguard's research section, then in your account details for the Roth click the "Exchange" link. Sell what you have in the Roth and use it to buy a new fund with the symbol you looked up earlier.

Okay. Dividends are now being sent to my bank. When will I know my dividends have reached long-term gains? One year after receiving the dividend?

This is the beauty of not reinvesting dividends! Dividends aren't long-term or short-term. But if every little dividend buys back into its fund, all those "lots" of shares they turn into have to be tracked individually with term and cost basis, and they can accidentally trigger wash sales.

There are qualified vs. unqualified dividends and that still applies when they aren't reinvested, but if you're a buy-and-hold investor and you don't buy things like bonds and REITs in a taxable account the distinction is not important.

Taxable asset allocation is the big question.

I think it's wise to separate them. Possibly half of my current assets for near term (5-7 years) and the other half for future family expenses. What's a wise reasonable stock/bond proportion for both? 50/50 for 5-7 years (stock-bond) and 80/20 for future family expenses?

The last thing you need to determine about your near-term assets is how big of a disaster would it be if they lost value? For instance, if it's for a big world cruise that you want to take 5 years from now, if the market tanked would you be okay with putting off the trip until your assets recover? Or is it for a child's college tuition and "can't" be postponed? Savings for flexible expenses can be heavily weighted in stocks, which seems to be how most people approach early retirement BTW. But most mainstream financial advice assumes you NEED those expenses when you say you do.