Author Topic: Setting up a lazy portfolio  (Read 9521 times)

destron

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Setting up a lazy portfolio
« on: March 25, 2013, 10:22:31 AM »
Since I have tackled many of my financial goals in the last 6 months, I am now working toward getting my portfolio straightened out. I have been looking at using the "core four" philosophy (with a lower bond ratio since I am currently accumulating money). The idea is you set your stock / bond ratio and then, of the stocks, you have 60% domestic, 30% international and 10% REIT. This is a variation on the three fund lazy portfolio. Here is my target ratio:

Domestic stock   VTSMX / VTSAX     48.0%
Mixed bonds   VBMFX / VBTLX     20.0%
Euro stock   VEURX / VEUSX  9.6%
Pacific stock   VPACX / VPADX     9.6%
REIT                   VGSIX / VGSLX   8.0%
Emerging Mkt   VEIEX / VEMAX     4.8%


Is anyone else using this strategy? Any thoughts?

My situation is a bit of a mess because I have my money in 3 different accounts -- a Schwab 457k (the other option is much, much worse), a Vanguard Roth IRA and a Vanguard Brokerage account. The difficulty arises because I cannot simply get the Vanguard funds I want in the Schwab account without paying transaction fees, eating into my precious capital. So, I am picking similar Schwab index funds and then, once in a great while, making a large purchase to the slightly superior Vanguard funds to minimize fees. I plan on rebalancing with new purchases (unless it gets too far out of sync at which point I will sell a winner to repurchase a loser).

Here are links to the topics on bogleheads:

http://www.bogleheads.org/wiki/Lazy_Portfolios#Core_four_portfolios
http://www.bogleheads.org/forum/viewtopic.php?t=10413

Another Reader

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Re: Setting up a lazy portfolio
« Reply #1 on: March 25, 2013, 10:32:24 AM »
I buy large blocks of T Rowe Price funds in an inherited IRA and just pay the fee at Schwab.  Ir's not like I am going to sell them next week.  I like the customer service and website.  I also buy Vanguard index ETF's and right now I have a negotiated commission waiver.  I already deal with too many financial service companies for the other accounts.  This account needs correctly calculated RMD's and I get excellent customer service from Schwab.

Good customer service is often worth the price, especially when it is fairly nominal.

the fixer

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Re: Setting up a lazy portfolio
« Reply #2 on: March 25, 2013, 10:48:47 AM »
Is there any reason why you don't just use a single international index instead of breaking it up into continents? It would be easier to manage that way. I've only been investing for 1.5 years but I quickly discovered how much of a headache it is to keep everything in balance. I was especially inspired by Mike Piper at obliviousinvestor.com who has switched all his retirement accounts to just one balanced fund because it's so much easier. I'm not quite in favor of that approach for tax efficiency reasons, but I like moving in that general direction and I accept that I'm basically paying myself to be a money manager by not using the one-fund strategy.

Aside from that, can you hold only the lowest cost funds in the Schwab account, the international in your brokerage account then the small holdings in the Roth IRA? This would be tax efficient, you wouldn't have to find analogous Vanguard/Schwab funds for every asset class, and rebalances would be relatively easy if you can hold a small amount of all holdings in the Roth. I do something similar: I hold US stock only in my high-cost 401(k), VTIAX in my taxable account, a little of everything in my retirement accounts, and some excess US stock in taxable. The only thing I do that's super-weird is I use tax-exempt muni bonds in my taxable account for most of my bond allocation, because they do double duty as part of my emergency fund.

destron

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Re: Setting up a lazy portfolio
« Reply #3 on: March 25, 2013, 10:54:37 AM »
I buy large blocks of T Rowe Price funds in an inherited IRA and just pay the fee at Schwab.  Ir's not like I am going to sell them next week.

I guess this is what it comes down to... it doesn't really matter where I park my money in the short term, it is the long term that matters.

destron

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Re: Setting up a lazy portfolio
« Reply #4 on: March 25, 2013, 10:57:56 AM »
Is there any reason why you don't just use a single international index instead of breaking it up into continents? It would be easier to manage that way. I've only been investing for 1.5 years but I quickly discovered how much of a headache it is to keep everything in balance.

I did that because the total international indexes tend to be much heavier in European stocks and I would prefer to have it broken up a little bit more evenly. Ultimately, though, I don't believe it will make a huge impact on my overall portfolio. I have set up a spreadsheet to help me calculate what I need to add to get the correct ratios.


Aside from that, can you hold only the lowest cost funds in the Schwab account, the international in your brokerage account then the small holdings in the Roth IRA? This would be tax efficient, you wouldn't have to find analogous Vanguard/Schwab funds for every asset class, and rebalances would be relatively easy if you can hold a small amount of all holdings in the Roth. I do something similar: I hold US stock only in my high-cost 401(k), VTIAX in my taxable account, a little of everything in my retirement accounts, and some excess US stock in taxable. The only thing I do that's super-weird is I use tax-exempt muni bonds in my taxable account for most of my bond allocation, because they do double duty as part of my emergency fund.

Can you please explain why holding the international funds in the brokerage account is tax efficient? Is it because they are taxed differently?

the fixer

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Re: Setting up a lazy portfolio
« Reply #5 on: March 25, 2013, 11:18:30 AM »
Can you please explain why holding the international funds in the brokerage account is tax efficient? Is it because they are taxed differently?
Dividends from foreign sources qualify for the foreign tax credit. You had taxes withheld on foreign-earned dividends before you received them even if they are within a US retirement account. But if you hold those funds in a taxable account, you can claim at least some of those taxes paid as a credit on your federal taxes. Essentially, tax-free dividends. You would still owe capital gains if/when you sell, of course, but for a buy-and-hold Mustachian this shouldn't be a big deal.

destron

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Re: Setting up a lazy portfolio
« Reply #6 on: March 25, 2013, 12:26:54 PM »
Can you please explain why holding the international funds in the brokerage account is tax efficient? Is it because they are taxed differently?
Dividends from foreign sources qualify for the foreign tax credit. You had taxes withheld on foreign-earned dividends before you received them even if they are within a US retirement account. But if you hold those funds in a taxable account, you can claim at least some of those taxes paid as a credit on your federal taxes. Essentially, tax-free dividends. You would still owe capital gains if/when you sell, of course, but for a buy-and-hold Mustachian this shouldn't be a big deal.

Ahhh, okay. I had heard something along those lines but I did not quite understand. I have also heard that it depends on what fund you are talking about, because, if it is a 'fund of funds', then that rule doesn't apply and you are taxed normally.

the fixer

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Re: Setting up a lazy portfolio
« Reply #7 on: March 25, 2013, 01:40:02 PM »
I have also heard that it depends on what fund you are talking about, because, if it is a 'fund of funds', then that rule doesn't apply and you are taxed normally.
That's correct. Originally VGTSX and VTIAX were funds of funds, composed of the different world market Vanguard funds in various weightings, so they did not qualify for the credit. But Vanguard has since reorganized them so they directly hold the individual companies and they do qualify (I can definitively say this because my 1099-DIV showed a foreign tax withheld amount for my VTIAX dividends). Your euro and pacific Vanguard funds should be similarly structured; you can make sure by checking their holdings in Vanguard's research section.

FWIW this greatly confused me last year when I was trying to set it up, and I made a couple mistake buys because of conflicting and outdated information. It's not surprising that a lot of people don't know about this since it seems kind of obscure.

Last piece of advice on holdings in a taxable account, in case you don't know this: don't automatically reinvest dividends. It's easier to keep track of cost basis by making fewer, larger buys instead of lots of little buys that come from reinvested dividends every quarter. It's also easy to accidentally trigger a wash sale because of a reinvested dividend when you try to tax loss harvest (I made this mistake last year). So have dividends go to a checking/savings account and roll them back into regular contributions that you should be making anyway.

destron

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Re: Setting up a lazy portfolio
« Reply #8 on: March 25, 2013, 02:49:29 PM »
Last piece of advice on holdings in a taxable account, in case you don't know this: don't automatically reinvest dividends. It's easier to keep track of cost basis by making fewer, larger buys instead of lots of little buys that come from reinvested dividends every quarter. It's also easy to accidentally trigger a wash sale because of a reinvested dividend when you try to tax loss harvest (I made this mistake last year). So have dividends go to a checking/savings account and roll them back into regular contributions that you should be making anyway.

Thanks for the advice!

I was JUST reading about tax loss harvesting a couple of days ago, that is a really good tip.