Author Topic: Optimizing the portfolio  (Read 5647 times)

Drakmon

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Optimizing the portfolio
« on: August 20, 2015, 12:22:07 PM »
My wife and I jumped on the MMM bandwagon back in January. Since then, we've cut our expenditures significantly, and have simplified our asset portfolio (got rid of non-performing assets). Now, we've got a bunch of money coming in, and I want to ensure we're doing everything we can to optimize our investment portfolio before I go and finish automating after-tax contributions.

Some context:
  • We're way outside the household income cutoffs for tax advantages from IRAs.
  • Our payroll contributions result in maxed-out 401(k)s/403(b)s by EOY.
  • We've maximized our pre-tax payroll contributions to things like transit, et al
  • We have about $7k/month dumping in directly to a savings account. The savings account has already grown past the emergency fund target, so everything going forward should be sucked up straight into an investment vehicle. I just need to figure out what type (after-tax, backdoor IRA into 401(k), et al)! :)

Investment Portfolio Details:
  • My Work 401(k): $9.4k - My calculations from January were $2k off, so I'm going to throw some more at this so it maxes out before EOY. The plan is not that great, considering they don't have any low-cost index funds, and everything is actively managed. I met with a rep for the company running the 401(k) and he agreed to ask the board running it to consider adding some market index funds to the portfolio. We'll see how that goes. This 401(k) supports reverse rollovers.

  • My Wife's 403(b): $18.8k - No complaints here. It's generally solid, but they recently updated their systems so Mint doesn't get appropriate transaction history. Pretty sure this hasn't lost $24k in value since Jan 15, but Mint sure thinks so. Blegh. This 403(b) does not support reverse roll overs.

  • My Wife's OLD 401(k): $63.9k - So, this is interesting. My wife left this employer last spring, and she wanted to hang on to the 401(k), since it has great performance (it's using a Vanguard Target Retirement fund). I'm not sure if leaving this money here is the best idea or not, or if it even really matters as long as it's performing. Should we leave this alone, or roll it over into an IRA, even though we gain no tax advantages from this?

  • Vanguard IRA: $14.4k - This is 100% in VTSAX, and is composed of rollovers from all my prior 401(k)s. The amount makes me sad, as I should have been 401(k)-ing for the last 10 years and have more than this, but oh well, at least I'm doing it now (hah! I just realized I'll have more money in this year's 401(k) than I did in the previous 10 years!). Since we gain no tax advantages from IRAs, should I just reverse roll-over this into my 401(k) and call it a day?

  • Betterment IRA: $5k - This is my wife's IRA, using some old 403(b) money, and was an experiment with Betterment. Well, it's lost nearly $200 in value in the last 8 months, versus the gains my VTSAX IRA has seen, so I think we have our answer. Not sure where to put this since my wife's 403(b) doesn't support reverse roll-overs. I'm thinking we might just need to roll this and my wife's old 401(k) into a VTSAX IRA, but I'm not sure if that's the best option or not.

  • We have no after-tax accounts! I'm thinking I should just open a VTSAX and dump money into it going forward. Unless I'm mistaken?

Thanks in advance for any ideas or advice that get dropped in this thread... I think I know what the right answers are based on research, but I'm a newbie at this and don't want to be disastrously wrong.
« Last Edit: August 20, 2015, 12:23:46 PM by Drakmon »

GGNoob

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Re: Optimizing the portfolio
« Reply #1 on: August 20, 2015, 02:53:30 PM »
You seem to be basing your investment decisions on performance.

First, you need to create an Investment Policy Statement (IPS). The biggest thing in here will be your desired asset allocation. Then, you need to choose low cost index funds for your investment accounts that allow you to achieve your desired asset allocation. See this page for information about the 3-fund portfolio.

Comparing your Betterment IRA to VTSAX is way off. A 100% stock portfolio at Betterment is 46% US stocks and 54% international. You cannot compare that to 100% total US stock market. But what you can compare is the 0.05% expense ratio with VTSAX at Vanguard to your 0.35% advisor fee (actually this is probably $3 per month since it doesn't sound like you are actively contributing to it) on top of the ETF expense ratios at Betterment.

My advice would be to consolidate IRAs and old accounts at Vanguard and treat your entire portfolio as one when looking at your asset allocation.

Drakmon

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Re: Optimizing the portfolio
« Reply #2 on: August 20, 2015, 03:31:39 PM »
Thanks for the reply!

You seem to be basing your investment decisions on performance.

We're trying to hit an average of 5% growth, minimum (ideally, 7%+), across the combined portfolio, while minimizing fund expenses, in order to reach our $2.5MM goal in 10-12 years. Is there a different way to think about it?

Quote
First, you need to create an Investment Policy Statement (IPS). The biggest thing in here will be your desired asset allocation.

This is where I have problems... I have no idea where to start as far as asset allocation. I'd love for someone to tell me what my asset allocation should be, and then I'll match that. :) Right now I'm just putting basically 100% into domestic stocks, since their 10-year growth rate matches or exceeds our target of +5%, whereas bonds don't grow at nearly that rate.

Why would I choose an asset class that doesn't perform well? Wouldn't the mixed growth rate of my entire portfolio be below-target then? Is that how I could work backwards to figure out my asset allocation, by figuring out my desired %-growth and then mixing and matching 10-year historical growth until I find a mix that meets/exceeds my target growth?

I'm just spitballing here. Thoughts?

Quote
My advice would be to consolidate IRAs and old accounts at Vanguard and treat your entire portfolio as one when looking at your asset allocation.

I should always consolidate old 401(k)s into IRAs, correct? Unless there's another option I should use instead?

ioseftavi

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Re: Optimizing the portfolio
« Reply #3 on: August 20, 2015, 03:35:32 PM »
You seem to be basing your investment decisions on performance.

First, you need to create an Investment Policy Statement (IPS). The biggest thing in here will be your desired asset allocation. Then, you need to choose low cost index funds for your investment accounts that allow you to achieve your desired asset allocation. See this page for information about the 3-fund portfolio.

Comparing your Betterment IRA to VTSAX is way off. A 100% stock portfolio at Betterment is 46% US stocks and 54% international. You cannot compare that to 100% total US stock market. But what you can compare is the 0.05% expense ratio with VTSAX at Vanguard to your 0.35% advisor fee (actually this is probably $3 per month since it doesn't sound like you are actively contributing to it) on top of the ETF expense ratios at Betterment.

My advice would be to consolidate IRAs and old accounts at Vanguard and treat your entire portfolio as one when looking at your asset allocation.

I agree with all this, for the most part. 

You're obviously starting to get the basics, Drakmon, but I think there are clearer ways to grasp your situation.  I would begin by first thinking of all your retirement assets - meaning every dollar you have in a tax-advantaged account - as one large bucket.  Even if they're in different funds / brokerages / accounts (roth / 401(k) / IRAs), they're effectively all for the same goal, and should be invested similarly.

Secondly, as GGnoob mentioned, I think you're overweighting performance (particularly YTD or trailing 12 month performance).  First focus on nailing your asset allocation - figure out how much exposure you want to stocks, across all your retirement accounts, and then figure out what you need in each account to get that exposure.  You can do this with all in one funds (like the Vanguard LifeStrategy or TargetRetirement fund NYCWife is currently using), or you can do this with a mix of funds (like VTSAX and others).  Figure out asset allocation and tax efficiency first, and then let the performance numbers fall where they may.  The market is gonna do what it's gonna do - you just want to make sure that you two get your fair share of returns.  You do this by making sure you're invested in a low-cost, prudent, diversified, tax-efficient way, with an asset allocation that makes sense.

Third, I'd suggest using Betterment for taxable accounts (if you are going to use them at all - they are the subject of serious debate on these forums...).  The most compelling reason to use Betterment, IMO (and my wife and I are using them quite a bit), is for tax loss harvesting and the ability to set-it-and-forget-it on large, recurring deposits once you've run out of tax-deferred accounts to contribute to.  The fact that you're using Betterment for an old IRA that you're not adding to means you're missing out on these benefits.  As far as performance - again, what GGnoob said.  It's apples to oranges between the accounts you mentioned.

If you and NYCwife are up for it, I'm happy to show you how Lentils and I have setup our accounts, which are roughly similar to what you and your wife have going on (some old, some currently being added to, some hers, some mine, some joint, etc).  Drop me a PM if you wanna talk privately or meetup sometime.

ioseftavi

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Re: Optimizing the portfolio
« Reply #4 on: August 20, 2015, 03:43:28 PM »
This is where I have problems... I have no idea where to start as far as asset allocation. I'd love for someone to tell me what my asset allocation should be, and then I'll match that. :) Right now I'm just putting basically 100% into domestic stocks, since their 10-year growth rate matches or exceeds our target of +5%, whereas bonds don't grow at nearly that rate.

Why would I choose an asset class that doesn't perform well? Wouldn't the mixed growth rate of my entire portfolio be below-target then? Is that how I could work backwards to figure out my asset allocation, by figuring out my desired %-growth and then mixing and matching 10-year historical growth until I find a mix that meets/exceeds my target growth?

I'm just spitballing here. Thoughts?

WHOA DUDE NO, DO NOT DO THIS.  NO DRAKMON PLZ. 

Seriously, this is a longer conversation.  I wrote a bit about this in another thread here: http://forum.mrmoneymustache.com/ask-a-mustachian/using-savings-to-start-zeroing-debts/msg762800/#msg762800

TL:DR; You cannot use 1, 5, or 10 year trailing info to extrapolate into the 30+ year future.  You are best off using a very long-term historical average for the asset class in question, and understanding that even that number is likely to be imperfect.


GGNoob

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Re: Optimizing the portfolio
« Reply #5 on: August 20, 2015, 04:37:05 PM »
Why would I choose an asset class that doesn't perform well? Wouldn't the mixed growth rate of my entire portfolio be below-target then? Is that how I could work backwards to figure out my asset allocation, by figuring out my desired %-growth and then mixing and matching 10-year historical growth until I find a mix that meets/exceeds my target growth?

Nobody knows what direction the stocks are going to go tomorrow, so that's why we diversify our investments.

Third, I'd suggest using Betterment for taxable accounts (if you are going to use them at all - they are the subject of serious debate on these forums...).  The most compelling reason to use Betterment, IMO (and my wife and I are using them quite a bit), is for tax loss harvesting and the ability to set-it-and-forget-it on large, recurring deposits once you've run out of tax-deferred accounts to contribute to.  The fact that you're using Betterment for an old IRA that you're not adding to means you're missing out on these benefits.  As far as performance - again, what GGnoob said.  It's apples to oranges between the accounts you mentioned.

I'm actually a fan of Betterment myself and usually recommend new investors head there versus Vanguard (easier to use and they can get some guidance for their different goals). I even just got a free Betterment t-shirt in the mail a couple of days ago. That must have been due to all of my referrals! The biggest problem here is that the OP has an old IRA sitting in Betterment with less than $10,000 in it, so he's probably paying $3 a month in fees and is not taking advantage of the taxable account benefits.

If you really want some help, I'd suggest posting a list of the available funds for your 401k and your wife's 403b. Try to include name, symbol, and expense ratio. Then we can help you choose some good funds and suggest an allocation of your accounts.

Also, your wife's old 401k should be rolled into an IRA. You are most likely paying some other kind of fees for that 401k that might be eating into the returns. Plus, it's good to consolidate old accounts for easier management.

Runge

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Re: Optimizing the portfolio
« Reply #6 on: August 20, 2015, 04:58:08 PM »
OP, feel free to take this questionnaire in regards to asset allocation:
https://personal.vanguard.com/us/FundsInvQuestionnaire

Also, see the attached papers for some good reading. These will help answer your asset allocation percentage question as well as provide a better understanding of portfolio structure.

KittyCat

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Re: Optimizing the portfolio
« Reply #7 on: August 20, 2015, 05:22:05 PM »
Third, I'd suggest using Betterment for taxable accounts (if you are going to use them at all - they are the subject of serious debate on these forums...).  The most compelling reason to use Betterment, IMO (and my wife and I are using them quite a bit), is for tax loss harvesting and the ability to set-it-and-forget-it on large, recurring deposits once you've run out of tax-deferred accounts to contribute to.  The fact that you're using Betterment for an old IRA that you're not adding to means you're missing out on these benefits.  As far as performance - again, what GGnoob said.  It's apples to oranges between the accounts you mentioned.
I'm still deciding between Vanguard and WiseBanyan for taxable accounts since WiseBanyan has free tax loss harvesting now.

Drakmon

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Re: Optimizing the portfolio
« Reply #8 on: August 20, 2015, 05:42:32 PM »
WHOA DUDE NO, DO NOT DO THIS.  NO DRAKMON PLZ. 

I have a GIF that really captures you in that moment: https://framesdata.files.wordpress.com/2015/07/ezgif-com-resize.gif

So, reading these replies helped me realize something. I've been thinking myself a semi-sophisticated investor ever since I started actually paying attention to expense ratios and "long term" returns. I use numbers for decision-making! I'm special too! Look at me, Ma', I'm buyin' stocks!

This is all, in reality, me not knowing what I don't know. I've kind of been operating off the principle of "put money in magic box, magic box makes money (or it doesn't)". Kind of the "Heisenberg Uncertainty Principle"-approach to investing.

I am dangerous to myself and to others, and I should be put down like the rabid dog I am! Oh wait, we're talking about investing money. I'm Drakmon, and I'm investment-illiterate.

If you and NYCwife are up for it, I'm happy to show you how Lentils and I have setup our accounts, which are roughly similar to what you and your wife have going on (some old, some currently being added to, some hers, some mine, some joint, etc).  Drop me a PM if you wanna talk privately or meetup sometime.

That would be awesome. We could use some more experienced brains, since we really haven't been "investing" for real up to this point. I'll shoot you a message. Thanks!

I wrote a bit about this in another thread here: http://forum.mrmoneymustache.com/ask-a-mustachian/using-savings-to-start-zeroing-debts/msg762800/#msg762800

SUPER HELPFUL THREAD ALERT. Seriously, that was really helpful to read, especially in regards to considering tax benefits in calculating/understanding investment return over time.

If you really want some help, I'd suggest posting a list of the available funds for your 401k and your wife's 403b. Try to include name, symbol, and expense ratio. Then we can help you choose some good funds and suggest an allocation of your accounts.

Also, your wife's old 401k should be rolled into an IRA. You are most likely paying some other kind of fees for that 401k that might be eating into the returns. Plus, it's good to consolidate old accounts for easier management.

I'll do that. I need to peruse the prospectuses and get them google-doc'ed so this thread doesn't become a table-jam.

We'll work on rolling it into an IRA. I guess it makes sense to do so once we have our asset allocation worked out, so it isn't just 100% VTSAX (our current "strategy").

OP, feel free to take this questionnaire in regards to asset allocation:
https://personal.vanguard.com/us/FundsInvQuestionnaire

Also, see the attached papers for some good reading. These will help answer your asset allocation percentage question as well as provide a better understanding of portfolio structure.

Checking all that out now. Man, those questions are brutal. I'm not sure I could honestly say I wouldn't panic a bit if the market lost 31%, even though my brain knows that it's only a temporary correction.

Vanguard suggests 70/30, but I'm guessing I should do more research before I actually make a decision on this.

ioseftavi

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Re: Optimizing the portfolio
« Reply #9 on: August 21, 2015, 08:00:10 AM »
So, reading these replies helped me realize something. I've been thinking myself a semi-sophisticated investor ever since I started actually paying attention to expense ratios and "long term" returns. I use numbers for decision-making! I'm special too! Look at me, Ma', I'm buyin' stocks!

This is all, in reality, me not knowing what I don't know. I've kind of been operating off the principle of "put money in magic box, magic box makes money (or it doesn't)". Kind of the "Heisenberg Uncertainty Principle"-approach to investing.

I am dangerous to myself and to others, and I should be put down like the rabid dog I am! Oh wait, we're talking about investing money. I'm Drakmon, and I'm investment-illiterate.

True story: you're actually not investment illiterate.  Paying attention to long-term returns and expense ratios is actually - all things considered - not a woefully ignorant way to invest!  Those are two pretty important factors.

However, I think you've realized - it's not optimal.  Here's an example: what if you chose your stock / bond mix (aka Asset Allocation) based on the ten year period that began in Nov 2000 and concluded in Nov of 2010?  (I pick this period because it's as far back as I can quickly get 10 year data from Google Finance, and I'm too lazy to go to the bloomberg terminal right now)  This period starts a bit after the dot com peak, and ends a bit after the financial crisis nadir.  You'd draw the following conclusions:
  • Vanguard's S&P 500 index is a terrible investment (began the period at ~120, ended the period at ~108, for a 10 year loss of almost 14%).
  • Vanguard Total Stock Market Index is also a terrible investment (began the period at ~30, ended the period at ~29 or so, for a 10 year loss of -3%).
  • Vanguard Long Term Bond Index is the most wonderful thing ever (began the period at ~10, ended the period at ~13 or so, for a 10 year gain of 26%)
If you can't immediately tell, these are not sound conclusions.  But if an investor went off 10 year trailing returns in the year 2009 or even 2010, he might decide that the ideal allocation was 100% to Vanguard's Long-Term Bond Index, with 0% in equities.  They would then proceed to make basically no money for the next 5 years (ZERO PERCENT INTEREST RATES, TROLOLOLOL), while every single type of stock fund on the planet made quite a bit of money.

So you can't use trailing returns (even for a ten year period), because recent returns will sometimes defy what over the long term, must be true: stocks will return more than bonds, bonds will return more than cash.  The riskier the asset class, the more it must return, on average.

The reason that stocks are the best long-term investment over the long term is not because, over the past hundred years, they 'just so happened' to do the best out of the 3 major asset classes (stocks / bonds / cash).  That is putting the cart before the horse.  The reason that stocks did the best over the past hundred years, and will continue to do so on into the future, is because stocks are the riskiest asset class.  This has to do with business structure, and the inherent differences between stocks, bonds, and cash.

Every time there is a recession or a flight to quality / safety (Black Monday, Japanese property bubble, Asian Financial Crisis, Russian debt crisis, dot-com bubble, US Financial crisis, etc etc etc) equity investors will, without warning, lose quite a bit of money.  We don't know when it'll happen.  We don't know how long it'll last.  But it will happen, it will hurt, and there's not a goddamn thing passive equity investors can do to prevent it.  This is the price we pay for higher returns over the long-term: some years, we will endure gut-wrenching losses.

If you and NYCwife are up for it, I'm happy to show you how Lentils and I have setup our accounts, which are roughly similar to what you and your wife have going on (some old, some currently being added to, some hers, some mine, some joint, etc).  Drop me a PM if you wanna talk privately or meetup sometime.

That would be awesome. We could use some more experienced brains, since we really haven't been "investing" for real up to this point. I'll shoot you a message. Thanks!

You've been investing for real for years.  You're just looking to get even more informed and systematic about it!

Also:
I'll do that. I need to peruse the prospectuses and get them google-doc'ed so this thread doesn't become a table-jam.

Sweet lord no.  Prospectuses are incredibly dense and packed with legalese.  Once you understand the basics of asset allocation, you can read the webpage summary of a fund and probably understand in about 5 minutes if it's something you want / need in your portfolio.

Also also:
...Man, those questions are brutal. I'm not sure I could honestly say I wouldn't panic a bit if the market lost 31%, even though my brain knows that it's only a temporary correction. Vanguard suggests 70/30, but I'm guessing I should do more research before I actually make a decision on this...

Your asset allocation is the most important part of your portfolio, because it will determine - more than anything else - your long-term performance.  Here's a scholarly, boring piece from Morningstar, if I didn't already convince you.  It is worth getting this question right, and finding an AA you can live with over the long-term!
« Last Edit: August 21, 2015, 08:05:05 AM by ioseftavi »

Drakmon

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Re: Optimizing the portfolio
« Reply #10 on: August 21, 2015, 01:35:37 PM »
Thanks!

Asset Allocation
I've done a lot of reading and research in the last 24 hours, and I'm leaning towards either a 70/30 or 80/20 split, with a heavier emphasis on domestic stocks ('MURICA!). Can I go 75/25? Is that a thing? I like even quarters.

401(k)
Here's the details of where I have all my 401(k) money now. Everything from this provider is actively managed, so this is the lowest expense I can get away with, tracking most closely with the S&P 500 index (at least, according to them): https://www.voyaretirementplans.com/fundonepagerscolor/487.pdf

They also have small-cap/mid-cap/international/bond fund options. The one above is large cap. I'm not sure it really makes a difference, as long as my overall portfolio allocation works out?

Old 401(k)
My wife (NYCWife) really really wants to stay with her old 401(k) since it's performing so well, instead of moving it into an IRA. It's only costing her $12/quarter in fees (thanks, Vanguard), and has a good asset mix already, so I'm not left with a really good argument against sticking with it. Here's the details of the fund it uses: https://personal.vanguard.com/us/funds/snapshot?FundId=0696&FundIntExt=INT

Betterment/Vanguard
I already have both a Betterment account and a Vanguard account open. I'm a little fuzzy on the advantages of "tax loss harvesting", but I do know that Vanguard provides better account transaction history to Mint. Since we use Mint heavily to see how our finances are doing, I'm inclined to stick with Vanguard.

Of course, if we did go with Betterment, we could literally put both our IRAs and all our after-tax in there, and just go down to three providers for data. Also, joint account. HMMMM...

EDIT: Argh, Betterment won't allow for join accounts if you have an IRA. Well, it makes sense, because reasons, but still... argh.
« Last Edit: August 21, 2015, 01:39:02 PM by Drakmon »

BarkyardBQ

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Re: Optimizing the portfolio
« Reply #11 on: August 21, 2015, 02:27:08 PM »
Your Voya plan doesn't offer index funds?


The Fees on the old 401k, may be $12/quarter for the funds, but they are probably pulling our record/custodial fees for the account too, which you will not have at Vanguard...

We have all our IRAs and our Brokerage account with Vanguard...

Your IRA's cannot be joint, but the taxable brokerage account can be. We do this at Vanguard...
« Last Edit: August 21, 2015, 02:29:59 PM by BackyarBQ »

ioseftavi

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Re: Optimizing the portfolio
« Reply #12 on: August 21, 2015, 02:30:17 PM »
Asset Allocation
I've done a lot of reading and research in the last 24 hours, and I'm leaning towards either a 70/30 or 80/20 split, with a heavier emphasis on domestic stocks ('MURICA!). Can I go 75/25? Is that a thing? I like even quarters.

You can go with any number your heart desires. 

You also can do any mix of US (large, mid, small) and international (established, emerging, frontier) that you like.  Those categories I wrote in parentheses are "sub-asset classes", meaning they are the different slices you can use to make up your overall asset classes (stocks / bonds / cash). 

Your sub-asset class mix, overall, is not nearly as important as your asset allocation (stocks / bonds / cash), though it does make a bit of a difference.  Historically, smaller stocks and less established markets are riskier, and they will return more over time.  They will also, correspondingly, lose more in bad years.  Emerging / frontier markets lost between 40-60% in the last recession.  However, average annual returns (over the long haul) of 9-15% in this category are completely common, so you do get a heck of a lot of mileage out of the additional risk - if you can live with it.
401(k)
Here's the details of where I have all my 401(k) money now. Everything from this provider is actively managed, so this is the lowest expense I can get away with, tracking most closely with the S&P 500 index (at least, according to them): https://www.voyaretirementplans.com/fundonepagerscolor/487.pdf

They also have small-cap/mid-cap/international/bond fund options. The one above is large cap. I'm not sure it really makes a difference, as long as my overall portfolio allocation works out?

See my above re: allocation vs. sub-allocation.  It does make a difference, it just makes much less of a difference.  Once you nail your high level asset allocation, your time is usually better spent focusing on expenses / tax efficiency (as opposed to sub-allocation).

The fund you picked (Growth Fund of America) isn't an awful pick compared to the 80/20 allocation you mentioned, but so you know, this fund is quite a bit more aggressive.  It's got an overall mix of about 92%+ equity, with 79% of the fund in US stocks and another 13% in foreign.  The 0.98% expense ratio is bad compared to index funds, but actually pretty ok compared to plenty of other actively managed funds.  I would just suggest you make sure you're OK with 90%+ equity (and no bonds - the non-equity portion of that fund is in cash).  We can talk more about this IRL and I'll show you what I look at when I'm cobbling together a P/F in an account with limited choices, such as your 401(k).

Old 401(k)
My wife (NYCWife) really really wants to stay with her old 401(k) since it's performing so well, instead of moving it into an IRA. It's only costing her $12/quarter in fees (thanks, Vanguard), and has a good asset mix already, so I'm not left with a really good argument against sticking with it. Here's the details of the fund it uses: https://personal.vanguard.com/us/funds/snapshot?FundId=0696&FundIntExt=INT

That's a lifecycle fund, AKA a "set it and forget it" fund, or "age based" fund.  The 2040 in the name means that this is for someone who's planning to retire around 2040.  The fund starts off with an aggressive mix (it's currently 90% equity / 10% bonds, as shown here) and it gets more conservative as you get older / closer to retirement.  Typically about 10 years before the target date (2040), the fund starts adding more bonds and moving out of stocks, usually levelling out at 40-60% equities as you near retirement.  It then keeps this mix indefinitely once you pass the target date (i.e., it assumes you retired "around" the year 2040, and that retirees are ok with 40-60% equities.

Lentils and I use lifecycle funds extensively - they're a fine choice, provided you understand the fund, the fees are low, and the current amount of stocks they hold approximates what you want.

Betterment/Vanguard
I already have both a Betterment account and a Vanguard account open. I'm a little fuzzy on the advantages of "tax loss harvesting", but I do know that Vanguard provides better account transaction history to Mint. Since we use Mint heavily to see how our finances are doing, I'm inclined to stick with Vanguard.

Of course, if we did go with Betterment, we could literally put both our IRAs and all our after-tax in there, and just go down to three providers for data. Also, joint account. HMMMM...

EDIT: Argh, Betterment won't allow for join accounts if you have an IRA. Well, it makes sense, because reasons, but still... argh.

IRAs are Individual Retirement Accounts, so you can't normally have a joint one.  That's not unique to Betterment - pretty much all providers will say the same.  Just make sure you have your beneficiaries in order, in case something happens to one of you.

Re: Tax Loss Harvesting - this is a very real benefit, in my opinion, and probably the #1 reason that we personally use Betterment.  Basically...
1)  Betterment sells you out of investments that have lost money (either on a short or long-term basis).  Because you lost money, you now have a capital loss.
2)  Betterment almost-immediately buys a similar (but not identical) version of the investment you just sold.  This is important: if they bought the identical investment you just sold back, the IRS would THROW A YELLOW FLAG ON THE PLAY and disallow it.  So you've gotta buy something similar (because you don't wanna mess up your asset allocation too much), but not identical (yellow flag from IRS, which is called a "wash sale").
3)  This process repeats all year.
4)  Your year-end tax statement shows that you sold stuff at a loss.  Which you did!  But - AHAHAHAHA! - you managed to stay invested all year, so you don't run the risk of missing out on market upswings when you realize your capital losses.  This is helpful, because losses help you on your current year taxes and future year taxes. 

How do capital losses help on your taxes?  $3,000 of capital loss can be deducted against earned or other types of income in a given year.  And if you get more than $3,000 of capital losses, you now have a SWEET TAX ASSET.  Let's dream big and say you and NYCwife get $17,000 of long-term taxable losses in 2015.  You can deduct $3,000 of capital losses from your income in 2015.  Not too bad! 

You can then "bank" the remaining $14,000 of losses and use them up in the future.  You can either do this by using up $3,000 of capital losses each and every year until the remaining $14,000 is gone.  Alternately, in years you have capital gains, you can use your remaining $14,000 loss from 2015 (or whatever of the $14,000 loss remains) to offset those gains.  This part is important.  You and NYCWife are going to have a serious taxable portfolio, and you are going to pay serious capital gains taxes on it in some years.  You want them sweet sweet capital losses, because they will seriously reduce the tax drag on your portfolio.

OK, now that I've explained all that:  Tax-loss harvesting is only a benefit realized in taxable accounts.  Since retirement accounts aren't paying taxes as they grow, there's no point screwing around with your investments to try and tweak your taxable gains / losses each year.  So Tax loss harvesting (either by hand, or via an automated service such as Betterment) is not needed in an IRA / 401(k) / etc.  So while you might have other reasons to move your IRA to Betterment (such as convenience, which you mentioned), Tax-Loss harvesting wouldn't be one of them.
« Last Edit: August 21, 2015, 02:35:23 PM by ioseftavi »

Drakmon

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Re: Optimizing the portfolio
« Reply #13 on: August 21, 2015, 02:44:56 PM »
Your Voya plan doesn't offer index funds?

Nope. I asked them to add index funds, but it's run by a board of old-school finance guys, so they're probably more comfortable keeping on with actively-managed funds. Believe it or not, 0.98% expenses is actually on the low end of the fund options... most are >1%.

Quote
The Fees on the old 401k, may be $12/quarter for the funds, but they are probably pulling our record/custodial fees for the account too, which you will not have at Vanguard, and you can invest in the same funds.

I'll throw that in the mix this weekend when I chat further about this with NYCWife. Thanks!

TAXES

Whaaaaaaat. Wow, this was a huge eye-opener. I hadn't really thought about capital gains/losses and how they work or what they would mean for our tax bill, other than the fact that we would have them and have to answer TurboTax questions about them this year and for the rest of our lives.

Honestly, what you're talking about sounds like sorcery. Since I'm pretty sure we established earlier today that you are, in fact, a unicorn, I think you're guilty of violating a few dozen laws of the natural universe just now.

That being said, I definitely want on that magical money wagon, Obi-wan.

BarkyardBQ

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Re: Optimizing the portfolio
« Reply #14 on: August 21, 2015, 02:49:12 PM »
Your Voya plan doesn't offer index funds?

Nope. I asked them to add index funds, but it's run by a board of old-school finance guys, so they're probably more comfortable keeping on with actively-managed funds. Believe it or not, 0.98% expenses is actually on the low end of the fund options... most are >1%.

What about the TD Ameritrade SDBA? Voya offers this on some plans, lets you buy commission free ETFs from TD after transferring funds. Charges a fix yearly rate instead of percentage of assets.

GGNoob

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Re: Optimizing the portfolio
« Reply #15 on: August 21, 2015, 02:56:57 PM »
Your Voya plan doesn't offer index funds?

Nope. I asked them to add index funds, but it's run by a board of old-school finance guys, so they're probably more comfortable keeping on with actively-managed funds. Believe it or not, 0.98% expenses is actually on the low end of the fund options... most are >1%.

What about the TD Ameritrade SDBA? Voya offers this on some plans, lets you buy commission free ETFs from TD after transferring funds. Charges a fix yearly rate instead of percentage of assets.

That's what I do with my work retirement plan through Voya. I think I pay $50 per year for the SDBA, but it will save me in the long run due to the much lower fees.

GGNoob

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Re: Optimizing the portfolio
« Reply #16 on: August 21, 2015, 02:58:17 PM »
Old 401(k)
My wife (NYCWife) really really wants to stay with her old 401(k) since it's performing so well, instead of moving it into an IRA. It's only costing her $12/quarter in fees (thanks, Vanguard), and has a good asset mix already, so I'm not left with a really good argument against sticking with it. Here's the details of the fund it uses: https://personal.vanguard.com/us/funds/snapshot?FundId=0696&FundIntExt=INT

So you are happy paying $12 a quarter in fees that could be avoided by moving the 401k to an IRA at Vanguard and invested in the same exact fund? They could even do an in-kind transfer and never actually sell your shares, so nothing would change.

Drakmon

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Re: Optimizing the portfolio
« Reply #17 on: August 21, 2015, 03:18:58 PM »
So you are happy paying $12 a quarter in fees that could be avoided by moving the 401k to an IRA at Vanguard and invested in the same exact fund? They could even do an in-kind transfer and never actually sell your shares, so nothing would change.

Not really happy with it, no. I hadn't thought that I could straight transfer to a Vanguard IRA. It makes perfect sense. Everyone leaves happy!

ioseftavi

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Re: Optimizing the portfolio
« Reply #18 on: August 24, 2015, 07:40:38 AM »
TAXES

Whaaaaaaat. Wow, this was a huge eye-opener. I hadn't really thought about capital gains/losses and how they work or what they would mean for our tax bill, other than the fact that we would have them and have to answer TurboTax questions about them this year and for the rest of our lives.

Honestly, what you're talking about sounds like sorcery. Since I'm pretty sure we established earlier today that you are, in fact, a unicorn, I think you're guilty of violating a few dozen laws of the natural universe just now.

That being said, I definitely want on that magical money wagon, Obi-wan.

Depending on who you ask, tax-loss harvesting can add a percent or more to your taxable account returns each year.  Various studies have been done by services (Vanguard, Fidelity, Betterment, etc) who offer tax-loss harvesting for their clients.  The general consensus is yes, it will save you money on taxes and help you keep more money.  I've heard figures ranging from an additional 0.5% per year to 1.5% per year. 

The biggest thing for us is that it reduces our tax burden during our working years, when we are fortunate enough to be earning quite a bit (and taxed quite a bit as well - same as you and NYCwife).  If we can defer taking some of our investment gains out to early retirement, we could be looking at quite a different amount of taxes due. 

Here's the obligatory Mad Fientist article.  And here's another from GoCurryCracker.