Author Topic: Need to diversify, adding Bonds and Intl Stock Funds  (Read 4754 times)

Threshkin

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Need to diversify, adding Bonds and Intl Stock Funds
« on: April 26, 2015, 11:17:17 AM »
We recently sold a rental property and freed up some (taxable) cash for investment purposes.  After reviewing my portfolio allocation I would like to increase my Bond and International Stock holdings.  What Vanguard funds do you recommend?  If I split  the money between two funds I can put low 6 figures into each fund.

For International the following two funds look good:
  • VT - Total World
  • VGK - FTSE Europe

I am much less familiar with bond investing but the following two funds caught my attention:
  • VGLT - Long Term Government Bond
  • BLV - Long Term Bond

forummm

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #1 on: April 26, 2015, 11:23:27 AM »
For international I would recommend VTIAX instead of Total World because you can hold VTSAX and VTIAX and it becomes Total World but with a lower expense ratio. If you want to have exactly the US/Intl ratio of Total World, you would have to do a little rebalancing on occasion. But I think 50/50 VTSAX/VTIAX is close enough.

For bonds, Total Bond VBTLX and Intermediate Bond VBILX are good ones.

GGNoob

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #2 on: April 26, 2015, 02:31:22 PM »
What does the rest of your portfolio look like?

Since this will be in a taxable account, you may consider a tax-exempt fund.

Also, if you are currently working and have retirement accounts you are not maxing out, it could be a good idea to use this money for normal living expenses while directing more of your paycheck into a 401k/457/403b.

Indexer

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #3 on: April 26, 2015, 07:19:48 PM »
For the international I will second VTIAX. 

For the bonds I would say something more diversified, probably VBTLX.

The returns lately aren't as good as the long term bonds you are looking at, but ignore that. 

Long term bonds had a great 2014 because interest rates went down.  If/when interest rates go up long term bonds are going to get hit hard.  Long term bonds are highly sensitive to interest rates.  For an example VGLT was down 12.4% in 2013.  That was because in 2013 people 'thought' interest rates might rise.  It has a duration of 17 years which means if interest rates go up 1% it will probably drop 17%.  VBTLX is a lot more diversified with long, intermediate, and short term bonds.  Its also normally going to be a better hedge against stocks.


For location.  Stock index funds are highly tax efficient.  Especially Vanguard index funds and index ETFs.  So they are great for taxable accounts.  Bonds... even in an index fund, are not tax efficient.  You pay ordinary income on the interest payments.  So keep the bond portion of your portfolio in a tax deferred account like a 401k or IRA.

Threshkin

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #4 on: April 27, 2015, 03:59:43 PM »
Thanks for all the great advice.  I am rethinking the bonds, since an interest rate increase is more likely than not, IMO.

Indexer - Your comment of the tax implications is exactly the type of advice i was looking for.  I will consider moving some of my IRA/401K money into bonds instead.  (I have always heard that tax-exempt/tax-deferred money should be in more aggressive investments.  I will need to re-think that.)

Logan - Good advice on considering the entire portfolio.  I have been maxing my 401K/IRAs since the first day they were available to me so i am in pretty good shape there.  But your advice is spot on for most folks. 

forummm - I will determinately check out VTIAX on the international side.  I am overweight in US equities right now and want to focus on strictly ex-US funds.


kpd905

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #5 on: April 27, 2015, 06:27:09 PM »
Can you put your bonds in the 401k instead?  Bonds are pretty inefficient to hold in a taxable account.

Threshkin

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #6 on: April 27, 2015, 06:37:11 PM »
Can you put your bonds in the 401k instead?  Bonds are pretty inefficient to hold in a taxable account.

Yes, I can.  I know the 401k offers a variety of bond funds.......But the more I think about it I am nervous about bonds in general.  Interest rates are more likely to rise this year than not.

Eric

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #7 on: April 27, 2015, 06:39:29 PM »
Can you put your bonds in the 401k instead?  Bonds are pretty inefficient to hold in a taxable account.

Yes, I can.  I know the 401k offers a variety of bond funds.......But the more I think about it I am nervous about bonds in general.  Interest rates are more likely to rise this year than not.

That's what everyone said last year and the year before too.  Pick your AA and stick with it.  Don't try to time the market.

Threshkin

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #8 on: April 27, 2015, 08:08:35 PM »
Can you put your bonds in the 401k instead?  Bonds are pretty inefficient to hold in a taxable account.

Yes, I can.  I know the 401k offers a variety of bond funds.......But the more I think about it I am nervous about bonds in general.  Interest rates are more likely to rise this year than not.

That's what everyone said last year and the year before too.  Pick your AA and stick with it.  Don't try to time the market.

Too true!  Maybe I should just stick with my current allocation, roughly 90% stocks and stock funds, 5% bond funds, and 5% cash.

forummm

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #9 on: April 28, 2015, 07:30:03 AM »
I expect interest rates to rise later this year, but to rise very slowly. I think stocks will respond more to the interest rate increases than bonds will.

Wolf359

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Re: Need to diversify, adding Bonds and Intl Stock Funds
« Reply #10 on: April 28, 2015, 10:01:40 AM »
Indexer - Your comment of the tax implications is exactly the type of advice i was looking for.  I will consider moving some of my IRA/401K money into bonds instead.  (I have always heard that tax-exempt/tax-deferred money should be in more aggressive investments.  I will need to re-think that.)

Having some bonds in your IRA/401K lets you rebalance on that side (without taking capital gains hits.)

If you're maxing out your 401K, you might be able to grow your tax-advantaged space by contributing to an IRA.  If you are avoiding IRAs because you're beyond the income limits and they're no longer deductible, they're still worth it if you use them for bonds/REITs only.  The reason people don't contribute to non-deductible IRAs is that income from them is taxed at ordinary rates.  However, bond income is taxed at ordinary rates as well.  If you dedicate a non-deductible IRA to expand your bond space, it can make sense.

Again, this is only if you're maxing out all your other deductible options first.  Contributing to a non-deductible IRA should be done last. YMMV.