Author Topic: Zero investments. How to invest savings and earnings?  (Read 7407 times)

brightfuture

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Zero investments. How to invest savings and earnings?
« on: August 04, 2015, 09:13:35 AM »
I'm 29, single, earn $76k/yr gross, spend under $20k/yr, saved $85k in a savings account. I realized I have been growing really anxious with all the money in the bank that's doing almost nothing. I live in US with H1B resident alien status, looking to attain green card several years into the future. My employer has 401k but I haven't been contributing any money in it.

All I've read suggests me to max out 401k, keep 6 months of expenses in savings, and move the rest of the savings to 3 fund vanguard portfolio. What should I be doing? I'd appreciate your thoughts.

forummm

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Re: Zero investments. How to invest savings and earnings?
« Reply #1 on: August 04, 2015, 09:24:58 AM »
All I've read suggests me to max out 401k, keep 6 months of expenses in savings, and move the rest of the savings to 3 fund vanguard portfolio. What should I be doing? I'd appreciate your thoughts.

Do you qualify for an IRA? That would be the next step. Otherwise I think you've got a good plan.

Financial.Velociraptor

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Re: Zero investments. How to invest savings and earnings?
« Reply #2 on: August 04, 2015, 09:37:04 AM »
Your savings rate is excellent.  I think you already have the right advice and right plan.  Expect to see you reporting you are FIRE within 10 years!

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #3 on: August 04, 2015, 09:49:30 AM »
Do you qualify for an IRA? That would be the next step. Otherwise I think you've got a good plan.

Thanks, forummm! I just read about IRA qualifications. I can contribute to IRA but the contributions are not tax deductible. Do you recommend me to max out IRA with my savings before investing in 3 fund portfolio?

For the 401k, my employer allows both traditional and roth contributions. I was planning to contribute all  in traditional due to tax investments. What are your thoughts on this?

Jack

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Re: Zero investments. How to invest savings and earnings?
« Reply #4 on: August 04, 2015, 11:21:36 AM »
Do you recommend me to max out IRA with my savings before investing in 3 fund portfolio?

Your IRA (and your 401K) is part of your 3 fund portfolio. The three funds are investment types: domestic stocks, international stocks, and bonds. Your 401K, IRA, and taxable account are account types. You buy some of each investment within each account.

For example, assume you had $40K per year to invest and wanted a 50/30/20 3-fund asset allocation. You might allocate that as follows:

401K account ($18,000 total):
  • $9000 in VTI (Vanguard total [US] stock market ETF)
  • $5400 in VXUS (Vanguard total international stock ETF)
  • $3600 in BND (Vanguard total bond market ETF)

IRA account ($5,500 total):
  • $2750 in VTI
  • $1650 in VXUS
  • $1100 in BND

taxable account ($16,500 total):
  • $8250 in VTI
  • $4950 in VXUS
  • $3300 in BND

Note that you might vary the investment type allocation between the different account types according to the principles of tax-efficient fund placement (e.g. by putting all the BND in your 401K, and increasing the VTI and VXUS percentages in the other two accounts to compensate), but the total amount of each fund invested, summed across accounts, should still add up to the correct percentage according to your desired asset allocation.

forummm

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Re: Zero investments. How to invest savings and earnings?
« Reply #5 on: August 04, 2015, 11:43:21 AM »
Do you qualify for an IRA? That would be the next step. Otherwise I think you've got a good plan.

Thanks, forummm! I just read about IRA qualifications. I can contribute to IRA but the contributions are not tax deductible. Do you recommend me to max out IRA with my savings before investing in 3 fund portfolio?

For the 401k, my employer allows both traditional and roth contributions. I was planning to contribute all  in traditional due to tax investments. What are your thoughts on this?

I would go with a Roth IRA (since you make too much for a deductible traditional) but traditional 401k (for the tax benefits).

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #6 on: August 04, 2015, 01:11:06 PM »
Jack, Thank you for a very clear example. I meant to say taxable account instead of 3 fund portfolio in the sentence you quoted me.

I read through the wikipedia article you linked and learnt a lot. My employer's 401k don't offer vangaurd funds. These are the offered funds:

Invesco Stable Value Retirement Fund - Class CL4 (ISVGT) (0.70)
JPMorgan Government Bond Fund - Class A   (OGGAX) (0.75)
Lord Abbett Income Fund - Class A   (LAGVX) (0.78)
AB High Income Fund - Class A   (AGDAX) (0.89)
Ivy High Income Fund - Class Y   (WHIYX) (0.93)   
PIMCO Real Return Fund - Class A   (PRTNX) (0.85)
American Funds 2010 Target Date Retirement Fund - Class R3   (RCATX) (1.03)
American Funds 2015 Target Date Retirement Fund - Class R3   (RCJTX) (1.03)   
American Funds 2020 Target Date Retirement Fund - Class R3   (RCCTX) (1.05)
American Funds 2025 Target Date Retirement Fund - Class R3   (RCDTX) (1.07)   
American Funds 2030 Target Date Retirement Fund - Class R3   (RCETX) (1.09)   
American Funds 2035 Target Date Retirement Fund - Class R3   (RCFTX) (1.10)   
American Funds 2040 Target Date Retirement Fund - Class R3   (RCKTX) (1.10)   
American Funds 2045 Target Date Retirement Fund - Class R3   (RCHTX) (1.11)   
American Funds 2050 Target Date Retirement Fund - Class R3   (RCITX) (1.11)
American Funds 2055 Target Date Retirement Fund - Class R3   (RCMTX) (1.16)
American Funds American Balanced Fund - Class R3   (RLBCX) (0.94)
First Eagle Global Fund - Class A   (SGENX) (1.11)
Invesco Diversified Dividend Fund - Class A   (LCEAX) (0.84)
John Hancock Disciplined Value Fund - Class R2   (JDVPX) (1.22)
BlackRock S&P 500 Index Fund - Institutional Class   (JDVPX)(BSPIX) (0.11)
Franklin Rising Dividends Fund - Class A   (FRDPX) (0.97)
MFS Massachusetts Investors Growth Stock Fund - Class A   (MIGFX) (0.74)   
Columbia Mid Cap Index Fund - Class A   (NTIAX) (0.45)
Eaton Vance Atlanta Capital SMID Cap Fund - Class A   (EAASX) (1.23)
JPMorgan Small Cap Value Fund - Class A   (PSOAX) (1.33)
Columbia Small Cap Index Fund - Class A   (NMSAX) (0.45)
Janus Triton Fund - Class A   (JGMAX) (1.15)
Lazard International Strategic Equity Portfolio - Open Class   (LISOX) (1.09)
MFS International Value Fund - Class A   (MGIAX) (1.07)
Oppenheimer International Growth Fund - Class A   (OIGAX) (1.14)
Virtus Emerging Markets Opportunities Fund - Class A   (HEMZX) (1.56)
Deutsche Real Estate Securities Fund - Class A (RRRAX) (0.96)
PIMCO CommodityRealReturn Strategy Fund - Class A (PCRAX) (1.19)

From these, I was planning to pick 2045 TD which has 80/20 mix . And, at vangaurd site for taxable account, I was planning to pick admiral share equivalents of VTI/VXUS/BND at 50/30/20 mix (like in your example). This allocation is easier to do but I see that it won't be tax efficient.

Do you have recommendation for tax efficient funds from the list above that I can use instead of 2045 TD and balance my portfolio in other accounts to get the right mix?
« Last Edit: August 04, 2015, 01:57:59 PM by brightfuture »

Brilliantine

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Re: Zero investments. How to invest savings and earnings?
« Reply #7 on: August 04, 2015, 01:26:08 PM »
So why did you refrain from contributing to a 401k until now? What made you change your mind?

BarkyardBQ

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Re: Zero investments. How to invest savings and earnings?
« Reply #8 on: August 04, 2015, 01:41:12 PM »

BlackRock S&P 500 Index Fund - Institutional Class   (JDVPX) (0.11)


Put it on Black! Use Vanguard IRA/Taxable to sort out the rest of your Asset Allocation.

edit: The ticker you provided is for the John Handcock fund. For BlockRock 500 BSPIX
« Last Edit: August 04, 2015, 01:44:00 PM by zdravé »

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #9 on: August 04, 2015, 01:46:57 PM »
I guess I was stupid. My visa status is H1B, so I was thinking if I have to leave the country, I would lose more in penalty to retrieve 401k investments. Its only recently when I wanted to invest my savings I read and learnt that I'm losing much more in tax savings that even if I have to retrieve 401k investment early, I'll come out ahead. Also, I learnt that after I leave the country, my US income would be 0 putting me in lower tax bracket for retrieval.

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #10 on: August 04, 2015, 02:04:01 PM »

BlackRock S&P 500 Index Fund - Institutional Class   (JDVPX) (0.11)


Put it on Black! Use Vanguard IRA/Taxable to sort out the rest of your Asset Allocation.

edit: The ticker you provided is for the John Handcock fund. For BlockRock 500 BSPIX

Updated the ticker in the original post. Thanks for pointing out. In order to allocate tax-efficiently, shouldn't I consider bonds rich funds for 401k. What is the reasoning behind your BlackRock suggestion?

Jack

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Re: Zero investments. How to invest savings and earnings?
« Reply #11 on: August 04, 2015, 02:21:14 PM »
(list of funds offered in 401K)

Do you have recommendation for tax efficient funds from the list above

No, because the tax efficiency of stuff in your 401K is irrelevant.  Well, that's not quite true: in fact, if some of the stuff you want to invest in is tax-inefficient, you want to specifically pick those for your 401K. Even then, it's not that you want to invest in things that are tax-inefficient; it's that you want to keep tax-inefficient things away from your taxable account.

The asset class and expense ratio are much more important considerations.  To that end...


BlackRock S&P 500 Index Fund - Institutional Class   (JDVPX) (0.11)


Put it on Black! Use Vanguard IRA/Taxable to sort out the rest of your Asset Allocation.

edit: The ticker you provided is for the John Handcock fund. For BlockRock 500 BSPIX

...I concur. Even though that fund is an S&P 500 fund instead of a total stock market fund, they're similar enough asset classes that it can substitute.  And since everything else has a much higher expense ratio, it's probably the best choice.

If you wanted to tilt your portfolio then using BSPIX along with Columbia Mid Cap Index Fund - Class A   (NTIAX) (0.45) and Columbia Small Cap Index Fund - Class A   (NMSAX) (0.45) might also be a reasonable choice (since 0.45% expense ratios aren't too terrible), but you don't so don't worry about it.

With those choices in the 401K, I might do something like the following (again, assuming $40K/year to invest; adjust to the actual amount accordingly):

401K:
  • $18000 BSPIX

Vanguard IRA:
  • $5500 BND

Vanguard taxable:
  • $12000 VXUS
  • $2000 VTI
  • $2500 BND

Note that Vanguard (and others, of course) also offer "tax-managed" funds. My situation is such that I'm not yet maxing my tax-advantaged accounts so I haven't learned about that sort of thing yet, but you may want to look into it.

Updated the ticker in the original post. Thanks for pointing out. In order to allocate tax-efficiently, shouldn't I consider bonds rich funds for 401k. What is the reasoning behind your BlackRock suggestion?

Ideally, yes you should put a bond fund in your 401K. Unfortunately, your 401K only offers ones that suck (0.75% expense ratio for government bonds?! WTF!). Hence my suggestion to buy the bonds in your IRA instead.

Blackrock is suggested because it's close enough to the right asset class (as I explained above) and its expense ratio is about 5-10 times cheaper than all the other choices.

Brilliantine

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Re: Zero investments. How to invest savings and earnings?
« Reply #12 on: August 04, 2015, 03:03:32 PM »
This is off topic, but...

If you're here on an H-1B, is it fair to assume that you are a technology worker?

Being single, are you open to moving? If so, you should look into getting a job that pays more. If you are a computer software developer, or something similar, the median salaries are much higher than $76k/year.

Unless, of course, your employer has already started the DoL Perm certification process for you, or maybe is even further into the green card process that somehow makes you stay with your current employer.
« Last Edit: August 04, 2015, 04:04:17 PM by Brilliantine »

zinethstache

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Re: Zero investments. How to invest savings and earnings?
« Reply #13 on: August 04, 2015, 03:18:13 PM »
I did not see it stated already, but most of your funds are very expensive. IMO shoot for .10 or less for fees.

I only have a 401k and have only in recent years become educated to the fees and when I did a review I could not believe my choices. What was I thinking!

So start your accounts off right, choosing only low cost fees so years later you won't be dismayed that you've been paying over 1% ack!

I am fortunate to have a .07 bond fund available to me so I could get my target balance without going outside my 401k. I am 60/20/20 and in the 60 I have a blend fund a growth fund and my employers stock, these were super inexpensive, .0205, .07 and .0105.

I am paying only .065 total.

I like the poster that said go Blackrock in your 401k and use the others to fill the other allocations.


brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #14 on: August 04, 2015, 05:37:15 PM »

Being single, are you open to moving? If so, you should look into getting a job that pays more. If you are a computer software developer, or something similar, the median salaries are much higher than $76k/year.


I appreciate the suggestion. I expect to earn more in the future.  I love my current job so I stayed as long as I have.

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #15 on: August 05, 2015, 03:51:32 PM »
I am paying only .065 total.

Wow! Good for you.

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #16 on: August 05, 2015, 03:58:37 PM »
Ideally, yes you should put a bond fund in your 401K. Unfortunately, your 401K only offers ones that suck (0.75% expense ratio for government bonds?! WTF!). Hence my suggestion to buy the bonds in your IRA instead.

I checked ERs with my 401k provider. Some are higher than what I mentioned earlier. For ex, JPMorgan Government Bond Fund - Class A's Gross ER is 1.12% !!! Fortunately, Black rock is offered at the same 0.11%.

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #17 on: August 06, 2015, 10:32:56 AM »

If you wanted to tilt your portfolio then using BSPIX along with Columbia Mid Cap Index Fund - Class A   (NTIAX) (0.45) and Columbia Small Cap Index Fund - Class A   (NMSAX) (0.45) might also be a reasonable choice (since 0.45% expense ratios aren't too terrible), but you don't so don't worry about it.


Would you recommend tilting to Columbia Mid Cap Index Fund - Class A  (NTIAX) (0.46net 0.67gross <- slightly higher figures given by 401k provider) and Columbia Small Cap Index Fund - Class A  (NMSAX) (0.50net 0.50gross) along with BSPIX (0.11)? At what percentages?
« Last Edit: August 06, 2015, 10:53:49 AM by brightfuture »

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #18 on: August 06, 2015, 02:52:54 PM »
Bumping (If bumping is against the forum policy, please let me know so I know not to do it again)

----------------------------------------------------------------------------------------------------------------------------

I've decided to follow Jack's and zdrave's suggestion to invest my 401k in BlackRock S&P 500 Index Fund - Institutional Class   (BSPIX) (0.11).

I'm wondering that in addition to BSPIX, should I invest a small percentage of my 401k in  Columbia Mid Cap Index Fund - Class A   (NTIAX) (0.46) & Columbia Small Cap Index Fund - Class A   (NMSAX) (0.50) in order to reflect a total stock index. Considering the ERs on these funds, would it be good strategy? I appreciate your opinions.

Jack

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Re: Zero investments. How to invest savings and earnings?
« Reply #19 on: August 07, 2015, 11:00:02 AM »
I've decided to follow Jack's and zdrave's suggestion to invest my 401k in BlackRock S&P 500 Index Fund - Institutional Class   (BSPIX) (0.11).

I'm wondering that in addition to BSPIX, should I invest a small percentage of my 401k in  Columbia Mid Cap Index Fund - Class A   (NTIAX) (0.46) & Columbia Small Cap Index Fund - Class A   (NMSAX) (0.50) in order to reflect a total stock index. Considering the ERs on these funds, would it be good strategy? I appreciate your opinions.

It's six of one, half a dozen of the other. If you choose to add the mid and small cap funds, you're saying you think mid and small caps will grow more than large caps, by at least a ~0.5% margin (i.e., the difference in expense ratios). Not having a crystal ball, I have no idea whether that's the case or not.

If you want to do that, I'd suggest cap-weighting the percentages to replicate a total market fund (again, unless you had a particular conviction that smaller companies would outperform and wanted to "tilt"). According to jlcollinsnh (who has an excellent series of articles which you should read in their entirety), if you want to replicate the total market your percentages would look like this:

  • ~81% Large cap (an S&P 500 fund)
  • ~6% Mid cap
  • ~13% Small cap

(Or at least, that was the proportion in May 2013 when the article was written.)

If we go back to the earlier example we can see another option: instead of buying the mid and small caps in your 401K, you could minimize the expense ratio by buying the asset classes that are expensive in your 401K in a different account instead (as much as possible):

401K:
  • $18000 $16200 BSPIX
  • $1200 NTIAX
  • $600 NMSAX

Vanguard IRA:
  • $5500 BND

Vanguard taxable:
  • $12000 VXUS
  • $2000 VTI
  • $2000 VB (Vanguard Small-Cap ETF)
  • $2500 BND

Of course, the composition of a small-cap index will change more frequently than the S&P 500, possibly generating more taxable events. Somebody else will have to explain the implications of that, and whether it's a significant consideration or not (it probably isn't).

Finally, the other lazy option is that if you're not planning to stay in the same job for a very long time, you could consider just leaving it in the S&P 500 fund for now, then rolling it over to an IRA with a total-market allocation whenever you change jobs.

The bottom line, though, is I'm honestly not sure whether I'd even bother -- a total market allocation is fine, and a S&P 500 allocation is fine too.

One last thing: everything I've said in this thread was predicated on your statement that you wanted to use a 3-fund portfolio (which, of course, is increasingly inaccurate if you're buying separate small- and mid-cap funds...). At 29, you may not want as high a bond allocation as I've listed in the above examples. (For comparison purposes, I'm 31 and own zero bonds because I have debt and would just pay that down instead, if I were inclined to invest in "bond-like" things.) Just something for you to think about. There's no single "correct" asset allocation; whatever you like (within reason -- don't put all your money in derivatives, gold and commodities futures!) and works for you, is what you should do.

Scandium

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Re: Zero investments. How to invest savings and earnings?
« Reply #20 on: August 07, 2015, 12:30:37 PM »
I guess I was stupid. My visa status is H1B, so I was thinking if I have to leave the country, I would lose more in penalty to retrieve 401k investments. Its only recently when I wanted to invest my savings I read and learnt that I'm losing much more in tax savings that even if I have to retrieve 401k investment early, I'll come out ahead. Also, I learnt that after I leave the country, my US income would be 0 putting me in lower tax bracket for retrieval.

Having also been on an H1B this concerned me. But I will probably stay in the US so now it's not such a big deal. However, if you plan (or think it likely) you will move back you should look into both the tax treatment of 401k withdrawals both in the US and in your home country! The US would take it's part, and if your home country tax it too (since they likely don't recognize a US tax-advantaged account) you could get quite a tax hit.

e.g. my home country tax capital gains at 27% (which is bad enough), and assuming they don't care one bit about IRAs/Roths etc (which I don't know if they do) I could then get a 10% US tax, then another 27% again. Or almost 40% gone! ouch! There is also an "estate tax" on any net worth above ~$150k which would eat 1% per year as well. Man that place sucks..
« Last Edit: August 07, 2015, 03:36:11 PM by Scandium »

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #21 on: August 11, 2015, 08:43:10 AM »
e.g. my home country tax capital gains at 27% (which is bad enough), and assuming they don't care one bit about IRAs/Roths etc (which I don't know if they do) I could then get a 10% US tax, then another 27% again. Or almost 40% gone! ouch! There is also an "estate tax" on any net worth above ~$150k which would eat 1% per year as well. Man that place sucks..
My home country waives taxes on all earnings outside the country for 3 years after returning.  This should help me plan what do I do with the investments.

brightfuture

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Re: Zero investments. How to invest savings and earnings?
« Reply #22 on: August 11, 2015, 08:51:02 AM »

Of course, the composition of a small-cap index will change more frequently than the S&P 500, possibly generating more taxable events. Somebody else will have to explain the implications of that, and whether it's a significant consideration or not (it probably isn't).

I posted my question at boggleheads forum as well. Some were suggesting to choose Vanguard Extended Market Index (VEXMX) in Roth or taxable account to complement S&P 500 (BSPIX) in 401k. And there was also a suggestion to replace Total Bond Market fund (VBMFX) with Intermediate-term national municipal bond fund (VWLTX)  in taxable account for higher Taxable-equivalent yield.

Edit: Added symbols
Edit: Fixed the incorrect Extended Market Index symbol
« Last Edit: August 11, 2015, 02:24:21 PM by brightfuture »

dcozad999

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Re: Zero investments. How to invest savings and earnings?
« Reply #23 on: August 11, 2015, 09:31:09 AM »
I'd put the entirety of the 401K in BSPIX.

If those numbers in parentheses are the expense ratios then your employer needs to seriously consider making some changes.

The expense ratios on target date funds in my 401k are around .08%.

Jack

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Re: Zero investments. How to invest savings and earnings?
« Reply #24 on: August 11, 2015, 01:42:36 PM »

Of course, the composition of a small-cap index will change more frequently than the S&P 500, possibly generating more taxable events. Somebody else will have to explain the implications of that, and whether it's a significant consideration or not (it probably isn't).

I posted my question at boggleheads forum as well. Some were suggesting to choose Vanguard Extended Market Index (VBTLX) in Roth or taxable account to complement S&P 500 (BSPIX) in 401k. And there was also a suggestion to replace Total Bond Market fund (VBMFX) with Intermediate-term national municipal bond fund (VWLTX)  in taxable account for higher Taxable-equivalent yield.

Edit: Added symbols

The extended market fund is VEXMX (or VEXAX for Admiral). Also, using that instead of the mid-cap / small-cap combo would be perfectly fine with me! The only difference is that, in the Admiral share classes, the mid/small combo has a 0.01% lower expense ratio than the extended market fund, which is negligible. (In fact, it's probably literally rounding error.) Since that fund exists, the only reason to use the mid/small combo would be if you needed to put some of it in your 401K and thus knocked the percentages out of whack.

I'm not familiar enough with bonds to opine about whether the advice about using munis instead is good, although coming from Bogleheads it probably is. I'd still do my own research before following it.