Author Topic: Critique my AA/IPS if you dont mind  (Read 3768 times)

Joet

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Critique my AA/IPS if you dont mind
« on: May 21, 2013, 03:33:53 PM »
Was just curious what others thought of my current plan?
Background is I'm an indexer, and kinda risk-averse. If risk averse is defined as age-10-or-so-in-fixed-income/bonds I guess

His 401k: [JP Morgan]
~80% Target 2055 Blackrock fund of indexes (~55% US indexes, ~25% Foreign indexes, ~10% US REIT, ~10% bonds/cash/other) 0.04% ER or so
~20% Blackrock Debt-T fund [US total bond index fund, mid-duration, models after Barclays US Agg bond index] 0.06% ER
I have [2] funds here to make re-balancing easier. It turns out this is the bulk of our fixed income holdings, also.

Her 401k: [Fidelity]
~90% Fidelity FSTMX [total market index], 0.1% ER
~10% Fidelity FTBFX [total bond index, intermed] 0.45% ER [I am trying to minimize the bond exposure here, this is the best available in her 401k, gives us something to rebalance if/when TSHTF, I figure 10% is the minimum to take advantage of that]

His Roth: [Fidelity]
33% FSSVX [fidelity small cap/value index], 0.16% ER
67% FSITX [fidelity total bond index, intermed] 0.1% ER

Her Roth: [Fidelity]
100% FSITX [fidelity total bond index, intermed] 0.1% ER

Taxable: [Fidelity]
~50% FSGDX [fidelity foreign index] 0.18% ER
~25% Ibonds [paper and electronic]
~25% EE-bonds [woot, 3.56% APY when held for 20]

Emergency Fund: [various]
12 months expenses in MM/HY checking/laddered CDs
Housing:
We share joint ~50/50 ownership of a '20s craftsman with Provident bank , and have a nice 3.375-30 loan

Ignoring the emergency fund: Global breakdown is roughly 70% equities[50% US, 20% foreign]/30% fixed income/bonds give or take a percent or two. I rebalance once per year, and make minor tweaks for new contributions if this varies from my AA too much [my definition, more than 2% off, I'll tweak contributions slightly]

Things I'm considering:
Moving some funds in taxable and my Roth to Lending club, for up to ~25% of my fixed income/bond allocation [so 7.5% of portfolio]. Nuts?
Making a small tilt to REIT [too late?]
I already have a small/value tilt as you see in his Roth above
Otherwise this is basically a couch potatoE/3-fund portfolio. I have greatly trimmed down the # of funds in play over the years.

For my 401k I have a self-directed brokerage option but the more I look at that target 2055 index fund the more I like it. If anything I'd tweak it slightly more foreign but whatever. I dont use the self-directed brokerage option because once a year I do an in-service withdrawl of after-tax 401k contributions for direct rollover to a Roth I have @ Fidelity. If I use the self-directed brokerage option for say Vanguard index funds, I'd have to liquidate everything and transfer it back over to the 'normal' 401k side to complete the in-service withdrawl and then go back to the self directed brokerage. Every year. I did this once and the experience was terrifying [out of the market during many up days, I'm sure I would have loved it if the market was down]. That's my reasoning there, anyways.

aj_yooper

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Re: Critique my AA/IPS if you dont mind
« Reply #1 on: May 21, 2013, 05:42:37 PM »
I noticed you have 50% bonds in the Fidelity taxable account.  Have you thought of doing equity indexes which do not throw off dividends there instead so you can avoid taxes and tuck the income generators into a tax-free account?  Similarly, having 12 months' expenses in cash instruments is awesome, but, again, I think I would try and avoid taxes on as much money as possible.  Depending on the size of the stash, I would consider putting a chunk, say a half, on the mortgage so you can save 3.375% on that money for the duration of your mortgage term.  Or, alternately, use tax-free bonds for much of your 12 month stash.  On her accounts, I presume the 401k and the Roth overall totals balance out to her preferred asset allocation plan.  Does she anticipate a taxable account in the future?  If so, my advice would be to use similar non-dividend equity indexes there too.

On your overall asset allocation of 70% equity/30% fixed income, I think some in REITS would be good; you could do them with your regular contributions each month and build up to your desired AA level.  You already own some.  I am less risk averse so I have about 10% in REITs in tax free accounts.  In the bond funds, I like the shorter term bonds due to eventual interest rate increases (but not in the near future).  If you do Lending Club, I would only do it in a tax-free account, not in a taxable account. 

Joet

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Re: Critique my AA/IPS if you dont mind
« Reply #2 on: May 21, 2013, 05:49:04 PM »
I DO have bonds in the taxable account, but they are savings bonds :), series I and EE
so they are state tax-free and all income is deferred more or less indefinitely. Part of my "safety net" aka defalation and inflation protection. I wasnt planning on redeeming either for another 18+ years when my W2 income is zero so hopefully the tax situation is ok there.

we treat everything as one giant stash/che

Ive considered prepaying the mortgage but we're effectively paying ~2.5% or so and we already have >60% equity in the place (zillow+trulia+local comps suggest ~$950-1.05m valuation). I am concerned that I have TOO MUCH of my networth wrapped up into the place as it is. I thought the housing market cratered?

Her allocations are a little tweaked to the equity side compared to mine which are a little tweaked to the bond side. I figure thats fair. Worst case we divorce tomorrow and split everything anyways I guess. heh. This is mainly because her 401k offers only ONE good index fund [FSTMX] so she's dumping at it. My portfolio is tweaked to compensate. My theory here is treat everything as one giant portfolio, it's easier to optimize it this way vs trying to have mini-portfolios in every account. At least thats what they screamed at me over at bogleheads, and I think it makes sense. I've also taken their advice in our largest single accounts (401ks) to have a small bond allocation to permit rebalancing.

Thanks for the advice on the REITs, I think that makes sense. Just gradually dip into it. Bogleheads suggest a 5% minimum for all portfolio tweaks so backing out my 401k-reit exposure means I'd have to put about another 25k into it to hit that number. Might as well start now, heh!
« Last Edit: May 21, 2013, 06:00:46 PM by Joet »

aj_yooper

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Re: Critique my AA/IPS if you dont mind
« Reply #3 on: May 21, 2013, 06:46:26 PM »
I don't have any series I or EE bonds so my bad; they are federally taxed, but as you say, only when you cash them. 

I prefer to have only the capital gains tax which is currently at 15% for incomes under $400K so I put the dividend/interest builders in tax-free accounts.  The 2013 income tax tables show:  10% on taxable income from $0 to $8,925, plus 15% on taxable income over $8,925 to $36,250, plus 25% on taxable income over $36,250 to $87,850, plus 28% on taxable income over $87,850 to $183,250...  So when you and yours are FI, you may be in a 25-28% marginal tax rate.

Regarding the mortgage, moving up on the amortization schedule saves a ton of interest, yearly and long-term, and decreases your leveraged position (more savings) in your home, which decreases your leveraged risk.  I share your desire not to have too much house, as it is an expense,mostly.  We are thinking about downsizing ourselves.

Thanks for sharing your plan. 


Mr Mark

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Re: Critique my AA/IPS if you dont mind
« Reply #4 on: May 22, 2013, 11:52:17 AM »
I also agree your cash seems very high. Too high for me. I have about 2 months income, scattered all over various accounts, almost as a working float, and even that seems high.

I would not repay the mortgage. Take the 30 yr fixed if you intend to keep the loan.

10 % reits too. Like the advise on the tax efficiency. I recall there was a much longer thread on the tax optimisation question wrt U.S. tax law and it's complexity for best aa.

Zaga

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Re: Critique my AA/IPS if you dont mind
« Reply #5 on: May 22, 2013, 01:29:53 PM »
Agree with considering you and your wife's portfolios as one.  I really have no idea which of us has more bonds or stocks as I do the calculations all together.

Also, age minus 10 in bonds is fairly aggressive according to Boglehead's, but I think it's just fine.

aj_yooper

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Re: Critique my AA/IPS if you dont mind
« Reply #6 on: May 24, 2013, 06:13:30 AM »
You have put a lot of thought into your plan and the moving parts seem like cost efficient funds.  I share your AA thinking.  Regarding your taxable account: I would not move funds there, but would make changes when I add funds to it.  Otherwise, there are capital gains (losses) to worry about.  In the Roth, any change is fair game.  I would put the Lending Club in a non-taxable account; again, interest and taxes.  In your taxable, does that fund allow you to have the foreign investment credit?  I know that (Bernstein, The Intelligent Asset Allocator) the Vanguard fund of funds does not.

I was wrong on the Ibonds and EEs; you will be paying only the federal tax on the accumulated interest and you can plan so you won't move up a tax bracket by how much you redeem-sweet.  You will be paying higher than the 15% capital gains tax, though.  You mentioned 18 years out.  Is your mortgage timed to be done in that same time frame? I still like the idea of prepaying mortgage as it saves so much interest, but piles of cash work too.

On the REITs, why would you need to change in your 401k?  Since you already have some exposure there, couldn't you just add money to REITS with new contributions? 

« Last Edit: May 24, 2013, 10:22:01 AM by aj_yooper »

Joet

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Re: Critique my AA/IPS if you dont mind
« Reply #7 on: May 24, 2013, 12:19:29 PM »
That makes sense. Perhaps I should re-characterize my ibonds as 'emergency fund' as they serve that purpose too :)

On the REIT side with my 401k contributions and the % my 401k is it will never exceed ~4% of the total portfolio given that its only 10% within the 401k itself.

Good point re: long term cap gains, I often forget about that tremendous advantage. Even if congress bumps it up again will probably still be lower than marginal income taxation I bet.

The fidelity foreign fund does post a foreign tax credit eery year (still), who knows what the future holds though.

I sorta grudgingly like the idea of lending club in taxable in spite of the tax drag. Perhaps I should think about that more clearly and invest in plain old equities instead. That's probably great advice. Let me excel out some assumptions there :)

Also I should point out I am scared of 'losing' Roth space to a lending club mishap such as a lawsuit, regulation problem, or other swindle scenarios unfortunately. I feel somewhat safer risking taxable space there. Ugh
« Last Edit: May 24, 2013, 12:25:11 PM by Joet »

aj_yooper

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Re: Critique my AA/IPS if you dont mind
« Reply #8 on: May 26, 2013, 10:17:56 AM »
FYI.  Irastache posted this link regarding Lending Club:  http://www.longtermreturns.com/2012/07/peer-to-peer-lending.html