Asset Allocation for the long term

[OriolesFan89]

Mustachians,

Income: Upper end of 25% tax bracket

Current expenses: Nothing too crazy, I'm single and spend ~$35k/year

Assets: 10k in cash
160k in taxable investments with Vanguard (mostly Vanguard [VG] index funds)
50k in Roth 401k with Schwab (50% large cap index, 50% small cap index)
60k in Roth IRA with Vanguard (VG 2055 fund)
25k in stocks (throwing darts, as I call it)

Liabilities: 250k mortgage with 28 years left and 3.625% interest

New poster here... although I can't grow a mustache, (I'm 25 so maybe there is still hope...?) I feel like I have a pretty good handle on this whole investing thing. I am single with ~300k in investments, a 250k mortgage (3.625%) with two roommates helping pay for that and no other debt. My dad taught me to invest young and gave me a great head start on this. No, I don't make oodles of money but I am in the 25% tax bracket, not far from the 28%. In 2014, I've socked away $40k.

I know that many of you probably detest the idea of someone in the 25% tax bracket using a Roth 401k but I'm not into the whole spending only ~30k per year thing forever. When retired, I'd never want to think twice about flying to Tokyo and buying $500 dinners, sorry! Having $4M in 2014 dollars and spending $100k/year is more up my alley.

Since I now have more than a few pennies and a few accounts to balance, I figured 2015 would be a good year to get my act together on rebalancing. I realize that rebalancing with certain market tilts isn't necessarily going to make me more money but hey, I'm handy with a spreadsheet and am not intimidated by the task of rebalancing on a monthly or quarterly basis. I already built a spreadsheet that will do this for me with excel's solver optimization tool which takes into account tax efficiencies between my different accounts. Dorky, I know! US index funds in Roth accounts, international funds in taxable accounts, etc.

For starters, I'm thinking 10% bonds, probably intermediate term. This might be 0% but let's not worry about that now. Ignoring bonds and ~25k for throwing darts at stocks, here's what I was thinking for Vanguard stock index funds which will be rebalanced on a monthly basis:
20% US Large Cap (VFIAX)
15% US Large Cap Value (VVIAX)
20% US Mid/Small Cap (VEXAX)
10% US Small Cap Value (VSIAX)
12.5% International Developed (VTMGX)
12.5% International Emerging ( VEMAX)
10% International Small (VFSVX)

Thoughts on those allocations? Admiral shares where applicable, of course! The Roth accounts would have all of the US funds with the spillover from US Mid/Small Index going into my taxable account. Taxable accounts would be primarily the international funds.

[GGNoob]

I know that many of you probably detest the idea of someone in the 25% tax bracket using a Roth 401k but I'm not into the whole spending only ~30k per year thing forever. When retired, I'd never want to think twice about flying to Tokyo and buying $500 dinners, sorry! Having $4M in 2014 dollars and spending $100k/year is more up my alley.

I'm certainly with you on this one. When my wife and I retire, we will be in the high 15% or 25% tax bracket. But remember this...if you are in the 25% tax bracket now and contribute to a tax deferred account, you save 25% on taxes now. But when you withdraw later, even if in the 25% tax bracket, you'll only pay 25% on a portion of your income, not all of it. So your overall tax rate might be 10-15%, still saving you money.

[GGNoob]

For starters, I'm thinking 10% bonds, probably intermediate term. This might be 0% but let's not worry about that now. Ignoring bonds and ~25k for throwing darts at stocks, here's what I was thinking for Vanguard stock index funds which will be rebalanced on a monthly basis:
20% US Large Cap (VFIAX)
15% US Large Cap Value (VVIAX)
20% US Mid/Small Cap (VEXAX)
10% US Small Cap Value (VSIAX)
12.5% International Developed (VTMGX)
12.5% International Emerging ( VEMAX)
10% International Small (VFSVX)

Thoughts on those allocations? Admiral shares where applicable, of course! The Roth accounts would have all of the US funds with the spillover from US Mid/Small Index going into my taxable account. Taxable accounts would be primarily the international funds.

I don't see any issues with the portfolio. Remember you can always use ETFs, if needed, to get lower fees. Some would prefer not to slice and dice the portfolio that much. But that's completely up to you! I prefer my easy to maintain 4 fund portfolio. But my portfolio is rather small and I may add more funds as it grows.

Try to rebalance with new deposits. Doing that should make it pretty easy to maintain your preferred allocation without selling anything.

[sabertooth3]

For starters, I'm thinking 10% bonds, probably intermediate term. This might be 0% but let's not worry about that now. Ignoring bonds and ~25k for throwing darts at stocks, here's what I was thinking for Vanguard stock index funds which will be rebalanced on a monthly basis:
20% US Large Cap (VFIAX)
15% US Large Cap Value (VVIAX)
20% US Mid/Small Cap (VEXAX)
10% US Small Cap Value (VSIAX)
12.5% International Developed (VTMGX)
12.5% International Emerging ( VEMAX)
10% International Small (VFSVX)

I'm wondering why you wouldn't just go with VTSAX, at least with the US-based funds. The expense ratio of that fund is 0.07%; averaging the US funds you named gives you a 0.0825% expense ratio, and with the international funds added, it goes up to 0.13%. That's almost double what your fees would be if you switched into VTSAX!

Personally I'm a subscriber of the jcollinsnh simple philosophy. But obviously, do whatever fits for you and what you feel comfortable with. http://jlcollinsnh.com/2012/05/09/stocks-part-v-keeping-it-simple-considerations-and-tools/

[OriolesFan89]

Logan - Thanks for the reply! I'm not against your slice and dice scheme. It is a touch simpler than what I proposed. I definitely plan on rebalancing with additions. I know many would advise against it but I prefer to make deposits to Vanguard once I have a few thousand over my $10k cash safety net rather than an auto monthly deposit.

Sabertooth - Yes, double but it is still only $50 per $100,000 each year. I guess I'm subscribing to the belief that smaller cap stocks and value stocks will beat the overall market in the long run. A gamble, yes.

I realize that the Roth money I won't need to pay taxes on but at the same time, the future is uncertain. I think having half Roth and half taxable is appropriate. When I brought up the issue to my dad (a wise and wealthy investor himself), he mentioned that we only have a finite amount of money we can put into Roth accounts in our lifetimes. The pot for taxable accounts is infinite.

[Druid]

I am not an expert at portfolios but most people here would advise against value stocks. I have heard a convincing argument towards having small cap international funds in value funds(maybe same logic for small cap domestic?), but other than that most people here usually don't choose value for mid/large cap domestic. That being said my intuition tells me that the value funds won't affect your returns that much, because of the index nature of them. Some people hear might cringe at your 25k game of throwing darts..

As a 32 year old who is starting over career wise I am jealous of your portfolio at your age. I don't blame you for wanting to wait until you have 4 million in your portfolio before early retirement. Your current profile will almost get you half way there by age 55 without any further investment assuming 6 percent returns.

I would still invest in a traditional IRA even with your future lavish spending, because the government will be effectively contributing 25% to the fund in the form of loss taxes. You investing $5,500 before taxes is the same as investing $4,125 after tax, and that means because of the governments generosity you are effectively getting a 33% return on your $4,125 investment in your first year. The potential appreciation of the government portion is also a bonus! The next time the market crashes you can do a Roth conversion and only pay income tax on the "temporary" undervalued portion of your conversion. When the market appreciates your overall return will be greater than if you invested in the Roth straight away. This "market timing" in my opinion is relatively safe since your money will not be out of the market very long.

Also if you are feeling generous you can attach that excel spreadsheet to a post! I am a nerdy wannabe tax accountant :)

[hodedofome]

Just because a fund says Value on it, doesn't mean its a good implementation. Most value funds hold hundreds or even thousands of stocks. However, only 50 or less may be a great value at any one time. This diversification lowers the returns.

As well, they usually weight the stocks by market cap. This most likely forces you to buy more of the stocks that are the most expensive in the fund and less of the cheapest, which is counterintuitive.

This is why most factor based funds suck. The idea is good but the implementation sucks. Run a value fund like the Magic Formula and you'll get a totally different result.

[Druid]

I don't believe I used hear instead of here :(

[KC1983]

Logan - Thanks for the reply! I'm not against your slice and dice scheme. It is a touch simpler than what I proposed. I definitely plan on rebalancing with additions. I know many would advise against it but I prefer to make deposits to Vanguard once I have a few thousand over my $10k cash safety net rather than an auto monthly deposit.

Sabertooth - Yes, double but it is still only $50 per $100,000 each year. I guess I'm subscribing to the belief that smaller cap stocks and value stocks will beat the overall market in the long run. A gamble, yes.

I realize that the Roth money I won't need to pay taxes on but at the same time, the future is uncertain. I think having half Roth and half taxable is appropriate. When I brought up the issue to my dad (a wise and wealthy investor himself), he mentioned that we only have a finite amount of money we can put into Roth accounts in our lifetimes. The pot for taxable accounts is infinite.

I agree with Sabertooth. I think you're over-complicating this, and that you have tremendous overlap among these funds. This is what some people refer to as the illusion of diversification. Also, from the research I've seen, it is only over the short run that small cap or value beats the overall market. Over the long run they all tend to converge. I know in the past I tried to guess which sector would be most successful, and somehow (like most people) I kept guessing wrong and under-performing the whole market. Now that I've settled down and stopped trying to be so smart, I've blown past my FI goal line with much less second guessing.

Also, I think Logan T is wrong about ETFs having lower fees. You're talking about using Vanguard, and last I checked Vanguard makes sure that the fees are the same between analogous index funds and ETFs.

[Radagast]

Here is the track record of your portfolio, with a couple of substitutions to extend it back to 2008. The others are correct that the US portions don't seem to change it substantially from the US total market index, and thus might be a waste of expense ratios. The international additions have underperformed recently, but that will change in the future. The international parts are more expensive, but are also exactly the parts I would keep.

[GGNoob]

Vanguard ETFs and admiral shares mutual funds have the same fees. But if the OP couldn't get admiral shares funds, then the ETF would be cheaper. That's all I meant by that.


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