Author Topic: Starting my Investments for Financial Independence - critique needed  (Read 5215 times)

sublime9528

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Hi all,

I wanted to get some feedback on my plan for putting myself on the road to financial independence.  Here's where I stand:

I'm 26, and soon to be engaged to my girlfriend, who is 27.  I'm a 3rd year medical student and she's a 1st year resident.  Her salary is $52k for the next 4-5 years, after which it will go up into the mid-$200k or so.  I'll start earning an income in 2 years, and will likely be earning between $250k-$350k in the next 5-6 years. 

My current assets are:
1) I have gold & silver coins inherited from my grandfather, valued anywhere between 10k and 15k, depending on the price of the metals and the numismatic value of the coins. 
2) I was just gifted $23,000 in stocks to do with as I please that my grandmother, invested in my name when I was a child. 

My plan at the moment is the following:
1) Keep the gold coins, at the very least until I can have them assessed for their numismatic value.  Likely I will hold on to them for the long haul, since I believe that some gold is good for a diversified portfolio.  Obviously, at this point, these coins are a disproportionately huge percentage of my assets, but as my assets grow that % will decrease. 

2) The $23,000 is all Exxon stock.  My plan is to invest that money in the following funds:
$10,000 in the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
$3,000 in Vanguard Equity Income Fund Investor Shares (VEIPX)
$3,000 in Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX)
$3,000 in Vanguard Extended Market Index Fund Investor Shares (VEXMX)
$3,000 in Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
$1,000 in Vanguard Target Retirement 2050 Fund (VFIFX)

My thinking is that the Total Market Index and the Bonds represent the relatively conservative side of this investment, while the other three funds range from moderately risky to quite risky.  I'm allocating such a high portion of my portfolio to stocks, and some aggressive ones at that, given my age and the fact that I'm planning on having these investments for many years.  I also have the coins as a backup/hedge.  As I save money over the next few years, I'll steadily invest in these and other funds to round out and more fully diversify my portfolio.  I'm a bit iffy on the Target 2050 fund, since it seems a bit redundant, but on the other hand it does cover some investments that the other funds don't. 

Since none of this plan is set in stone, feel free to rip it to shreds if you think it stinks.  My goal is to get the ball rolling and get to a place where, even if I don't want to retire early, I can have the option of working as much or as little as I choose to.  Thanks in advance for the advice. 

Another Reader

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #1 on: July 21, 2014, 09:11:46 PM »
I'm going to be the contrarian here.  If you have zero income, you may be able to sell the stock without paying capital gains tax.  Before you do that, take a look at how it has performed since the purchase, which was probably 20 years ago.  If someone gave me $23k of Exxon stock, I would tuck it away and collect or reinvest the dividends for many years to come.

If you insist on selling Exxon, just put the proceeds in the total market fund.  The rest of your portfolio will come with time and income. 

GGNoob

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #2 on: July 21, 2014, 09:11:47 PM »
I think that's too many funds. Just do Total US Stock Market Index Fund Admiral Shares, Total International Stock Market Index Fund Admiral Shares, and if you feel the need for bonds, Total US Bond Market Index Fund Investor Shares. That would be $10k, $10k, and $3k respectively to total your $23k.

If you have an earned income that allows you to contribute to a Roth IRA (or once you start earning one), it would be a good idea to do that now before your income is too high.


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milesdividendmd

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #3 on: July 21, 2014, 10:40:20 PM »
I agree with not selling the Exxon stock unless you are sure you are not subject to capital gains. If you have no income, then go for it. Diversification is always smart.

But what is your thinking on your fund choices ?

Why a target retirement date fund?

Why an equity income fund?  Dividend stocks are trading at a premium now. (Better to invest in a straight value fund I would think.

 Why an extended market fund?

This collection of funds just seems pretty random. But maybe it reflects an unarticulated philosophy of yours ?

If not then just put it all in VTSAX and then read some books to develop you're own strategy. Then reallocate.

The most important thing in the coming years is to practice not panicking when the shit hits the fan.




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« Reply #4 on: July 21, 2014, 11:55:05 PM »
Quote
I'm 26, and soon to be engaged to my girlfriend, who is 27.  I'm a 3rd year medical student and she's a 1st year resident.  Her salary is $52k for the next 4-5 years, after which it will go up into the mid-$200k or so.  I'll start earning an income in 2 years, and will likely be earning between $250k-$350k in the next 5-6 years.
 

wow, you are in an excellent position. 2 * 250k salaries.  DINK.

You are asking the wrong question.   Your investments are fine. 

The real decision for you is how much to save. 

If you live extravagantly on 150k per year, and save only 50% of your 300k post-tax income, you can retire 17 years after you start working.

If you live like a middle-class consumer on 100k per year, and save only 66% of your 300k post-tax income, you can retire 10.5 years after you start working.

If you live like a normal person on 60k per year, and save only 80% of your 300k post-tax income, you can retire 5.5 years after you start working.

If you live like a frugal person on 30k per year, and save only 90% of your 300k post-tax income, you can retire 3 years after you start working.

sublime9528

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #5 on: July 22, 2014, 05:29:56 AM »
Re: capital gains tax, from the research I did, I don't believe I'll need to pay any since I'm not earning any income as a full time student.  But that is something I'll definitely double check.  Assuming, however, that I needed to pay a small amount (for some reason that is still unknown to me), I would think that that would be an acceptable price to pay for diversifying my investment.  Yes? No?

Regarding the fund choices, my thinking was the following:
The Total Stock Marker Index is definitely the core holding in the portfolio, and would probably be the fund that I'd funnel most of my future money into.  The equity income fund is still a relatively conservative investment, all things considered, and could help with my capital accumulation.  The extended market fund is more aggressive still, and my thinking is that this fund will shine when small and mid-cap companies experience lots of growth (which may be a while down the line at this point). 

I'm still not sold on the target fund date, so I may just put that extra $1,000 into the total market index.  Ultimately, I chose these funds because they are a mix of moderately conservative to moderately aggressive and would, I think, be good for the long haul.  One of my working assumptions here is that I will not panic when the shit hits the fan, and that I'll keep these investments for 30+ years.  I suppose there are other aggressive funds I could have chosen instead of the extended fund, like the healthcare sector or energy sector fund, but those seemed a bit much for me at this point. 

Basically, as good as the total market index fund is, I wanted a bit more diversification.  My ideal portfolio (as I imagine it now) for the next few years looks something like this:
Foreign Stocks 15%
Gold/Precious Metals (including collectible coins) 5%
Bonds 15%
Domestic Stocks 65%, with a 15%-70%-15% mix of very conservative, middle of the road, and fairly aggressive funds. 

I also agree that the most important thing is discipline during bad markets, and leaning to save most of my income, once I'm actually earning money. 

mak1277

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #6 on: July 22, 2014, 07:50:04 AM »
Basically, as good as the total market index fund is, I wanted a bit more diversification.  My ideal portfolio (as I imagine it now) for the next few years looks something like this:
Foreign Stocks 15%
Gold/Precious Metals (including collectible coins) 5%
Bonds 15%
Domestic Stocks 65%, with a 15%-70%-15% mix of very conservative, middle of the road, and fairly aggressive funds. 


I mean, you can't really be MORE diversified than VTSAX can you?  What you're really saying is that you don't like how VTSAX is weighted between large/mid/small caps and growth vs. conservative holdings.  So if that's your play, why buy VTSAX at all....just choose funds that fit your target allocation within US Equities.

milesdividendmd

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #7 on: July 22, 2014, 09:15:27 AM »

Re: capital gains tax, from the research I did, I don't believe I'll need to pay any since I'm not earning any income as a full time student.  But that is something I'll definitely double check.  Assuming, however, that I needed to pay a small amount (for some reason that is still unknown to me), I would think that that would be an acceptable price to pay for diversifying my investment.  Yes? No?

Regarding the fund choices, my thinking was the following:
The Total Stock Marker Index is definitely the core holding in the portfolio, and would probably be the fund that I'd funnel most of my future money into.  The equity income fund is still a relatively conservative investment, all things considered, and could help with my capital accumulation.  The extended market fund is more aggressive still, and my thinking is that this fund will shine when small and mid-cap companies experience lots of growth (which may be a while down the line at this point). 

I'm still not sold on the target fund date, so I may just put that extra $1,000 into the total market index.  Ultimately, I chose these funds because they are a mix of moderately conservative to moderately aggressive and would, I think, be good for the long haul.  One of my working assumptions here is that I will not panic when the shit hits the fan, and that I'll keep these investments for 30+ years.  I suppose there are other aggressive funds I could have chosen instead of the extended fund, like the healthcare sector or energy sector fund, but those seemed a bit much for me at this point. 

Basically, as good as the total market index fund is, I wanted a bit more diversification.  My ideal portfolio (as I imagine it now) for the next few years looks something like this:
Foreign Stocks 15%
Gold/Precious Metals (including collectible coins) 5%
Bonds 15%
Domestic Stocks 65%, with a 15%-70%-15% mix of very conservative, middle of the road, and fairly aggressive funds. 

I also agree that the most important thing is discipline during bad markets, and leaning to save most of my income, once I'm actually earning money.

I guess what I would say is that if you want to tilt your portfolio more aggressively, then go with the academic evidence that excess returns historically have come from 4 factors:

Small size
Value
Momentum
And
Quality

So at vanguard that would mean mixing in a small cap value fund in addition to VTI.

(You could also argue that the vanguard high dividend yield fund captured the quality factor. ). http://news.morningstar.com/articlenet/article.aspx?id=650780

And if you want to diversify, then the obvious choice is to mix in an international fund.

If these factors are not ringing bells for you, then I would really recommend reading some investment books.

Anything by swedroe, Bernstein, or ferri is a good place go start.

Until you do, there is no harm in just putting all your funds in a total stock market fund.

If you don't, you are probably just adding cost and complexity for nothing.



sublime9528

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #8 on: July 22, 2014, 10:11:56 AM »
milesdividendmd -
Maybe I'm missing something in what you're saying, but from my perspective, I've already got the small cap covered since the Extended Market fund is made up of small and mid cap stocks.  I chose it over the exclusively small cap because it doesn't look quite as volatile due to its mid-cap mix.  I've also got an international fund (in this case my emerging markets fund).  So, assuming I nix the Target fund, that leaves me with the Total Market fund, the bond fund, the extended market fun (small and mid cap), the emerging markets fund (my international holdings), and the Equity Income fund.  The Equity fund seems to be one of the big question marks.  Assuming I dropped that, the other funds I mentioned would seem to fit the bill of what you described.  Yes?  Or am I still missing something?  Sorry if I seem thick skulled about this, just making sure I get straight what you're saying. 

Also I'm working my way through Bernstein's Investor's Manifesto now.  It's good stuff.  Most of my reading has thus far been online resources though (trying not to get sucked into buying a ton of financial books.  As a bibliophile I could easily bankrupt myself on that alone). 

GGNoob

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #9 on: July 22, 2014, 10:34:33 AM »
For international stocks, you should really do the Total International Stock Index Admiral Shares (VTIAX) or a mix of Developed Market Index Admiral Shares (VTMGX) and Emerging Markets Stock Index Admiral Shares (VEMAX). The Total International is 18% emerging markets, but then you also get access to developed markets, all in one fund.

You are in the position to buy two Admiral Shares funds (which are cheaper), so in my opinion, you should really purchase Total Stock Market Index Admiral Shares and Total International Stock Index Admiral Shares and go with a 50/50 split. Especially since you are just getting into investing, I think you are looking into this a lot more than you need to.

Maybe since you are looking into buying so many funds, you could just buy ETFs instead? You get the same expense ratio as the Admiral Shares funds. Trading Vanguard ETFs is free at Vanguard, so you don't have to worry about paying commission.

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #10 on: July 22, 2014, 10:48:57 AM »
I think that you are making great decisions. A few thoughts:

1. I am not sure whether you will have earned income this year (or if you will be married to an income-earner by the end of the year). But if you have any way to contribute to a Roth IRA, I would make this your top priority. Even if you have to pay capital gains on your Exxon stock to do this, since all of your future earnings on this will not be taxed.

2. I would not recommend the Equity Income Fund (VEIPX) in a taxable account, because you would be required to pay taxes on dividends. If you are looking for value exposure, VIVAX might be a better option. It would also bring your expense ratio down from .3% to .24%.

3. If you are looking for simplicity, you could also cut out both the Equity Income and the Extended Market funds, and just put all of this in a Total Stock Market Index. The holdings would be similar anyway, and it would bring your expense ratios down even further. (But you wouldn't get the value tilt that you are going for).

4. And as you mentioned in your original post, your Target Retirement Fund does seem redundant. You probably picked it because it gives you exposure to an International Stock Index Fund. But if I were you, I would just buy the International Index (VGTSX) if that's what you want. This will make it much easier to track your asset allocation. Also keep in mind that an International Index will track some of the same stocks as an Emerging Markets Index.

surfhb

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #11 on: July 22, 2014, 11:43:23 AM »
Your plan is fine but I'd sell the Chevron....but that's just me and keep your retirement in a 2 or 3 fund diversified bundle.   Simple is better IMO

Like someone said the ONLY REAL issue here is what kind of financial life you both are happy with and to save accordingly.    If you could both feel living like a normal 9-5 couple who make 60k each with a decent house in a good area sounds appealing, then you both could stop working in 10 years or so!

Congrats!   I should have listened to my mother who wanted me to go to med school :)
« Last Edit: July 22, 2014, 11:48:15 AM by surfhb »

milesdividendmd

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #12 on: July 22, 2014, 11:54:36 AM »
milesdividendmd -
Maybe I'm missing something in what you're saying, but from my perspective, I've already got the small cap covered since the Extended Market fund is made up of small and mid cap stocks.  I chose it over the exclusively small cap because it doesn't look quite as volatile due to its mid-cap mix.  I've also got an international fund (in this case my emerging markets fund).  So, assuming I nix the Target fund, that leaves me with the Total Market fund, the bond fund, the extended market fun (small and mid cap), the emerging markets fund (my international holdings), and the Equity Income fund.  The Equity fund seems to be one of the big question marks.  Assuming I dropped that, the other funds I mentioned would seem to fit the bill of what you described.  Yes?  Or am I still missing something?  Sorry if I seem thick skulled about this, just making sure I get straight what you're saying. 

Also I'm working my way through Bernstein's Investor's Manifesto now.  It's good stuff.  Most of my reading has thus far been online resources though (trying not to get sucked into buying a ton of financial books.  As a bibliophile I could easily bankrupt myself on that alone).

My point is that if you want to tilt, then you should tilt.  A single small cap value fund tilts you towards the size and value factors, so it gives you much more bang for your buck and it simplifies things.  Along with the decreased volatility, the extended market fund gives you less exposure to the factors you are pursuing.

Emerging markets are great.  If I were a market timer I would go all in on EM right about now.  But they are also very volatile upwards and downwards so if you are going to buy and hold, they probably shouldn't make up more than 1/2 of your international holdings or 10 % of your portfolio.

If you end up mixing value and growth**, and large mid and small, you are better off keeping it simple and just buying the total market IMO.  Each new fund should be added for a specific purpose.

I don't think you are being hard headed.  Keep on reading!  Libraries are your friend.

***Although value and momentum,??? now we're talking!

sublime9528

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #13 on: July 22, 2014, 06:10:33 PM »
The small-cap vs. extended market issue is interesting.  It looks like the extended market has better returns than the small cap generally, which is why I was attracted to it.  I'll mull that one over. 

Another problem I'm having is which bond funds to select.  To be honest, even after reading about them for the n-th time they're still confusing in terms of which duration to get.  Right now I'm torn between just getting the total bond index fund and leaving it at that, or going with something like the Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX), which seem like they'd fare a bit better in the coming years.  I also don't have any accounts that give me tax benefits yet (that'll have to wait for 2 more years), which makes the Tax Exempt fund look better. 

milesdividendmd

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #14 on: July 22, 2014, 06:26:12 PM »
As much as I am a vocal proponent of holding a fixed percentage of bonds in your portfolio, at this prenatal stage in your career, and given your lack of tax free space, I would just skip the bonds altogether.  Think of your gold as a diversifier.

(I-bonds are also an option to look into.)

In terms of duration, short to mid term duration is the sweet spot for most portfolios, though long term is reasonable for high equity portfolios (above 90%) as it will increase return, and not effect the volatility of the portfolio in the setting of such a high equity percentage (and volatility.)

sublime9528

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #15 on: July 23, 2014, 05:42:13 AM »
Interesting... 
So maybe a simpler portfolio for my purposes would look something like this:

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX): $10,000
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX): $10,000
Vanguard Limited-Term Tax-Exempt Fund Investor Shares (VMLTX): $3,000

I'm still a bit iffy about not having any bonds in my portfolio, but this tax exempt one looks decent.  Then later on I could add specific emerging market funds, small cap funds, etc. once I have enough to put in for the Admiral Shares of those.  I've been reading more about the 3-fund portfolios and the lazy portfolios, and this seems like a stock-heavy version of those. 

EDIT:  Also, this lets me wait until I have tax advantaged accounts before I start investing in funds with high dividends and other taxable stuff.
« Last Edit: July 23, 2014, 05:58:53 AM by sublime9528 »

milesdividendmd

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #16 on: July 23, 2014, 12:08:03 PM »
Looks good, but why give up yield for a tax exempt fund?  Aren't you income-less and subject to no taxes on dividends, capital gains and interest?

And at that low percentage of bonds, you should lose no efficiency, (and gain yield) by going long term on your bond fund.

see here

http://www.efficientfrontier.com/ef/997/maturity.htm

and

http://www.efficientfrontier.com/ef/997/maturity.htm

Scandium

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Re: Starting my Investments for Financial Independence - critique needed
« Reply #17 on: July 23, 2014, 01:27:33 PM »
I don't really see much reason for you to have any bonds at this stage, and especially not with just $3k. But that's just IMO. I'd wait till you have a 401k or similar and add bonds there.

And VTSAX does have 18% mid cap and 9% small cap, so you do get a decent exposure to them. I would (and in fact I do) just do a simple approach of just domestic/international stocks in some split; 50/50, 60/40 or so. Maybe small cap will continue to outperform? Maybe emerging markets? Who knows. But I decided that for me the potential is not worth the extra hassle and cost of many extra funds.