Suggestions for asset allocation

[BarkyardBQ]

Two 30 year olds recently married, working on our future AA and would love some feed back from your experience to start us off right. We want to semi-retire in 10 years, planning to work part-time makes us feel our risk tolerance is high because we will live off the PT jobs while our portfolio just grows until we decide to fully retire.

Currently between Vanguard and 401k:
77.53% US Equity
12.24% International
7.75% Alternative
1.46% Bonds

We aren't too concerned with bonds yet. We like the idea of REITs and Utilities for some added growth and stability, but we are trying to determine the best AA for diversification and growth. Below I've listed our options for our overall AA. The lazy portfolio is for comparison, as we have no problem managing our portfolio across all accounts we can look at our overall portfolio and AA in a more thought out manner. Bogleheads suggests if we are going to do bonds and REITS they should go into tax-advantaged accounts. So our REITS and if we do bonds should go into the 457s while the taxable account takes on the total market and international funds, weighted appropriately to our AA. We might have to mix some total market funds into our 457 plans to get the most out of our tax-advantaged accounts. We would be able to max out both 457 plans, minus my contributions to 401k that offers a 7% match.

Best options in my 401k are:
VIEIX
VINIX
VPMAX
VTSNX
This 401k is for a part time job, so contribution levels are maxed at 40% of pay providing about 15-18% of total tax-deferred yearly contributions.

Wife's 457 options:
Vanguard Developed Markets Index Fund - Admiral Shares
Vanguard Small-Cap Index Fund - Signal Shares
Vanguard Mid-Cap Index Fund - Signal Shares
Vanguard Institutional Index Fund – Institutional Shares
Vanguard Total Bond Market Index – Institutional Shares

My 457 options with Fidelity:
SPTN 500 INDEX ADV
SPTN TOT MKT IDX ADV
SPTN EXT MKT IDX ADV
SPTN MID CAP IDX ADV
SPTN SM CAP IDX ADV
SPTN EM MKTS IDX ADV
SPTN GLB XUS IDX ADV
SPTN INTL INDEX ADV
SPTN REAL ES IDX ADV
Bonds:
SPTN INFL PR IDX ADV
SPTN INT TR IDX ADV
SPTN LT TR IDX ADV
SPTN ST TR IDX ADV
SPTN US BOND IDX ADV


Lazy

symbol	description	ETF	AA	expense ratio	expenses
VTSAX	Total Stock Market Index Fund Admiral Shares	VTI	85%	0.05	0.0425
VTIAX	Total International Stock Index Fund Admiral Shares	VXUS	15%	0.14	0.0210
				total cost	0.032%

Weighted

symbol	description	ETF	AA	expense ratio	expenses
VTSAX	Total Stock Market Index Fund Admiral Shares	VTI	55%	0.05	0.0425
VIMAX	Mid-Cap Index Fund Admiral Shares	VO	20%	0.09	0.0180
VSMAX	Small-Cap Index Fund Admiral Shares	VBR	10%	0.09	0.0090
VTIAX	Total International Stock Index Fund Admiral Shares	VXUS	15%	0.14	0.0210
				total cost	0.019%

Weighted 2

symbol	description	ETF	AA	expense ratio	expenses
VTSAX	Total Stock Market Index Fund Admiral Shares	VTI	50%	0.05	0.0425
VIMAX	Mid-Cap Index Fund Admiral Shares	VO	15%	0.09	0.0180
VSMAX	Small-Cap Index Fund Admiral Shares	VBR	10%	0.09	0.0090
VTIAX	Total International Stock Index Fund Admiral Shares	VXUS	15%	0.14	0.0210
VGSLX	REIT Index Fund	VNQ	5%	0.10	0.0050
VUIAX	Utilities Index	VPU	5%	0.14	0.0070
				total cost	0.013%

Are we on the right track and can you offer any suggestions?

Thanks

[GGNoob]

My first question is, why only 15% for international? That is your decision, but its low compared to what most people have. I'm at 70% US and 30% international because that's what Vanguard's advice is and it seems to be the sweet spot for the best risk adjusted return (http://www.rickferri.com/blog/investments/foreign-stocks-for-the-long-run/).

Here's my target AA for reference:
35% VTI (Total US Stock Market)
35% VXF (US Extended Market)
15% VXUS (Total International Stock Market)
15% VSS (All-World Ex-US Small-Cap)

Your Weighted portfolio is similar to mine with the small/mid cap tilt. But I've actually been leaning towards adding REITs and more exposure to emerging markets myself. So I actually like your Weighted 2 the best, however, I'm not sure I get the point of the Utilities Index. I'd probably replace that with international small cap or emerging markets.

It sounds like you'll have no issue rebalancing and you know to keep your more tax efficient funds in your taxable account. You also have access to cheap funds, which is always a plus.

Do you have any specific questions? It sounds like you guys are on the right track and the bonus of having two 457 accounts will really make early retirement easy!

[surfhb]

I think you have a pretty good grasp of things but one thing that stands out is in your first and second options.   You have your total market fund but then overlap in small and mid caps.   


If you're %100 in equities then a single total market fund is all you need.

I do throw in some international too but with the global economy as it is, adding international is not the end all to a good AA. 

Have have 3 funds:  total market, total international and total bonds spread out 60/20/20.   

[GGNoob]

You have your total market fund but then overlap in small and mid caps.   

I do the same to tilt more towards small and mid cap. Basically since small and mid cap funds cost more, it makes sense to get some use out of the total stock market funds exposure to small and mid cap funds for its low price (versus using an S&P 500 fund and raising the allocation to small/mid cap funds).

[BarkyardBQ]

I've been reading about international and have read Vanguards argument for the 20 or 30%. I guess my hesitation and 15% is because we are looking for 10 year max potential and I feel the returns on US Equity will better, vs holding foreign for longer terms. I've also thought about splitting the difference and going 25% International with 20% Total Intl and 5% Emerging Markets.

My thinking for utilities is that they provide stable and consistent growth and supplement REITs, however, the dividends might not be tax efficient? I could definitely be ok without utilities and moving that to a higher allocation on REITs if my thinking is wrong.

I guess one of my biggest questions is if we max out our tax-advantaged accounts, we'd be splitting our portfolio pretty much down the middle between tax-advantaged and taxable. I'm not sure if I'd want to do a Roth Conversion Ladder (or if the option will still be available in 10 years with laws), so if we want more growth from our taxable account, and more stability/diversification from our 457s, should we focus our taxable account on Total Market and Mid/Small-Cap and our tax-advantaged accounts toward International, Emerging and REITs and eventually some bonds?

Otherwise, I think we just want some confirmation that we're starting correctly so we don't have to do some major rethinking and rebalancing in the future.

---

I like the Small/Mid-Cap tilt, just cause they have more potential for growth. VFIAX/VOO has a .05% Expense Ratio, and I have a scenario with VOO, VO, VBR, but stacking Small & Mid onto VTI lowers the expense ratio of the portfolio just a smidge.

[BarkyardBQ]

http://www.rickferri.com/blog/investments/foreign-stocks-for-the-long-run/

Logan, this has been the most convincing information I've read. Over a long period this makes totally sense, but any thoughts on short term or possibly adding/more foreign markets later*?

I know I can't time the market.

[GGNoob]

This like shows qualified dividends for 2013 from all of the Vanguard funds and ETF's. If I understand correctly, QDI is taxed as long-term capital gains, not short term. This chart shows the Utilities ETF as 100% QDI, so that would make it more tax efficient than the total stock market.

https://advisors.vanguard.com/VGApp/iip/site/advisor/investments/taxcenter/yearendfigures

http://www.rickferri.com/blog/investments/foreign-stocks-for-the-long-run/

Logan, this has been the most convincing information I've read. Over a long period this makes totally sense, but any thoughts on short term or possibly adding/more foreign markets later*?

I know I can't time the market.

I thought it was pretty convincing as well. I think by assuming US markets will do better than foreign in the short term, you would be market timing. But I'm no expert and everyone needs to have an AA that they feel comfortable with. So if 15% is comfortable for you, then thats all that matters.