Portfolio Review - Preparing to FIRE after Windfall

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

Hello Boglehead friends! Long time listener, first time caller :-) Looking for opinions and discussion around how to best build out my brand new $2m taxable portfolio.

Age:38

Goal: To retire in 2 years (age ~40) and enjoy my family, friends, and children while they’re still young. I may consider working again in the future but plan on taking my 40s off.

Emergency funds: $100k

Debt: None

Annual Income: ~$230k until early retirement

Annual Expenses: $68,000 (All Inclusive - includes estimated ACA costs and vacations). Currently considering a SWR of 3% (72k)

Tax Filing Status:Head of Household

Tax Rate: 24% Federal, ~5% State (reduced at FIRE)

Current Asset Allocation:
401k: ~$400k in Vanguard Target 2045 (VTIVX)
Taxable: Windfall of ~$2,000,000 (post-tax) -> Dry Powder sitting in VMMXX

Portfolio Goals: Buy and Hold, Rebalance Annually, minimize expenses, maximize tax efficiency, diversify risk

Desired Allocation:
70% Equities / 30% Fixed Income
53% US / 47% International

Fund (Ticker) - Taxable Acct?: Desired AA%
Total US (VTI/VTSAX) - Taxable: 25%
Small Value US (VBR/VSIAX) - Taxable: 7.5%
US REIT (VNQ/VGSLX) - Tax Deferred: 5%
Total International (VXUS/VTIAX) - Taxable: 25%
Small International (VSS) - Taxable: 7.5%
Bond Index (VTEAX in Taxable, VBLTX in 401k) - Both: 25%
Short Term TIPS - Tax Deferred: 5%

Asset Allocation Notes: I understand that many here may push me towards simplicity - a traditional 3 or 4 fund portfolio. I respect that approach and continue to wrestle with this, but I am in the unique situation of fully funding this brand new taxable portfolio with a windfall. My intentions are not to maximize performance (one can’t predict the future), my intentions are to maximize diversification. Certainly curious as to everyone’s opinion here - how can I best diversify my risks? I am not afraid of having a few additional funds - I know myself well, and once I lock in my AA I WILL stay the course.

International Rationale: Vanguard Economic Outlook White Paper (https://advisors.vanguard.com/iwe/pdf/ISGVEMO.pdf) + desire to maximize diversification

Small Value Rationale: Fama/French, Factor based investing concepts, and I do struggle with market-weighting of US stocks when US large cap 'appears' to be the most overvalued of the key index funds - (however I know one can't predict the future)

Small International Rationale: Honestly this one i'm struggling with the most - I wanted to create balance/symmetry in my diversification - If I don't add a tilt here, it would mean I own more Honda than I do GM, i figured if i'm going to have a US small value tilt I should mirror said tilt for International. Unfortunately it seems like getting a low expense Intl. Small Value fund is somewhat elusive....

TIPS / Bonds Rationale: Also struggling with this - Due to today's low yields I view my bonds as only a ballast and additional risk diversification. Struggling with balance between TIPS and bonds, and also with what bond fund/duration (i go back and forth re: LTT)

Additional Note: I have read the windfall wiki page and additional books on a windfall. I have been sitting on the windfall while doing my due diligence through this forum, Bogleheads podcasts, and many books by Bogleheads favorites including JL Collins, Ferri, Larimore, Merriman, and Swedroe

Additional Note #2: I will absolutely be acquiring significantly more dry powder over the coming 2 years until retirement, but for sake of simplicity lets assume that doesn't come into play - I want to focus this review on building out my initial portfolio.

Thank you so much in advance to all! I really do appreciate all feedback and am looking forward to an active discussion! -MosDefAnon
-
theorist
Posts: 855
Joined: Sat Sep 28, 2019 11:39 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by theorist »

MosDefAnon wrote: Mon Feb 08, 2021 12:14 pm Hello Boglehead friends! Long time listener, first time caller :-) Looking for opinions and discussion around how to best build out my brand new $2m taxable portfolio.

Age:38

Goal: To retire in 2 years (age ~40) and enjoy my family, friends, and children while they’re still young. I may consider working again in the future but plan on taking my 40s off.

Emergency funds: $100k

Debt: None

Annual Income: ~$230k until early retirement

Annual Expenses: $68,000 (All Inclusive - includes estimated ACA costs and vacations). Currently considering a SWR of 3% (72k)

Tax Filing Status:Head of Household

Tax Rate: 24% Federal, ~5% State (reduced at FIRE)

Current Asset Allocation:
401k: ~$400k in Vanguard Target 2045 (VTIVX)
Taxable: Windfall of ~$2,000,000 (post-tax) -> Dry Powder sitting in VMMXX

Portfolio Goals: Buy and Hold, Rebalance Annually, minimize expenses, maximize tax efficiency, diversify risk

Desired Allocation:
70% Equities / 30% Fixed Income
53% US / 47% International

Fund (Ticker) - Taxable Acct?: Desired AA%
Total US (VTI/VTSAX) - Taxable: 25%
Small Value US (VBR/VSIAX) - Taxable: 7.5%
US REIT (VNQ/VGSLX) - Tax Deferred: 5%
Total International (VXUS/VTIAX) - Taxable: 25%
Small International (VSS) - Taxable: 7.5%
Bond Index (VTEAX in Taxable, VBLTX in 401k) - Both: 25%
Short Term TIPS - Tax Deferred: 5%

Asset Allocation Notes: I understand that many here may push me towards simplicity - a traditional 3 or 4 fund portfolio. I respect that approach and continue to wrestle with this, but I am in the unique situation of fully funding this brand new taxable portfolio with a windfall. My intentions are not to maximize performance (one can’t predict the future), my intentions are to maximize diversification. Certainly curious as to everyone’s opinion here - how can I best diversify my risks? I am not afraid of having a few additional funds - I know myself well, and once I lock in my AA I WILL stay the course.

International Rationale: Vanguard Economic Outlook White Paper (https://advisors.vanguard.com/iwe/pdf/ISGVEMO.pdf) + desire to maximize diversification

Small Value Rationale: Fama/French, Factor based investing concepts, and I do struggle with market-weighting of US stocks when US large cap 'appears' to be the most overvalued of the key index funds - (however I know one can't predict the future)

Small International Rationale: Honestly this one i'm struggling with the most - I wanted to create balance/symmetry in my diversification - If I don't add a tilt here, it would mean I own more Honda than I do GM, i figured if i'm going to have a US small value tilt I should mirror said tilt for International. Unfortunately it seems like getting a low expense Intl. Small Value fund is somewhat elusive....

TIPS / Bonds Rationale: Also struggling with this - Due to today's low yields I view my bonds as only a ballast and additional risk diversification. Struggling with balance between TIPS and bonds, and also with what bond fund/duration (i go back and forth re: LTT)

Additional Note: I have read the windfall wiki page and additional books on a windfall. I have been sitting on the windfall while doing my due diligence through this forum, Bogleheads podcasts, and many books by Bogleheads favorites including JL Collins, Ferri, Larimore, Merriman, and Swedroe

Additional Note #2: I will absolutely be acquiring significantly more dry powder over the coming 2 years until retirement, but for sake of simplicity lets assume that doesn't come into play - I want to focus this review on building out my initial portfolio.

Thank you so much in advance to all! I really do appreciate all feedback and am looking forward to an active discussion! -MosDefAnon
-
Congratulations on your windfall!

Your diversified portfolio looks very sensible to me. 70/30 stock bond split for a retiree at 40 seems reasonable, in that it leaves room for future growth but has a nod to the need for significant volatility dampening. The small tilt and heavy international allocation (by heavy, I really just mean about market cap but maybe a bit over...) seems very much within reason.

However I worry about the following. With 72k annual spending at 3% withdrawal rate, you are dead on what your current portfolio can support. Suppose there is a bear market and a 50% drop in equities. That takes your portfolio down to about 1.56 million. The resulting 3% withdrawal rate falls to about 47k per year, which falls well short of projected lifestyle expenses.

Can you stomach this possibility? If not, what is your backup plan for a bear market in the near future followed by a very slow recovery?

If you can hop back into your job at 200k+ per year, no worry. Not all jobs are so easily recovered, of course.

Good luck!
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

Thank you so much for your response! I was getting nervous that my post was going to hit page 3 with hundreds of views and 0 replies :mrgreen:
theorist wrote: Mon Feb 08, 2021 8:24 pm Suppose there is a bear market and a 50% drop in equities. That takes your portfolio down to about 1.56 million. The resulting 3% withdrawal rate falls to about 47k per year, which falls well short of projected lifestyle expenses.

Can you stomach this possibility? If not, what is your backup plan for a bear market in the near future followed by a very slow recovery?
In event of a 50% drop in equities (or more), i am considering the following:
  • Most importantly I would not sell my equities
  • Our 68k expenses includes luxury items and vacations that we would be willing to reduce if necessary - we could reduce luxuries and live within a $45k budget if necessary
  • I have researched reverse equity glidepath strategies but haven't figured out how to reconcile this against typical AA rebalancing - perhaps I slowly burn down my bonds until I hit some minimum bond limit and then do the last bullet...
  • Although my last choice, I would be willing to return the workforce (although not at my previously salary/responsibility levels - too much stress and too many working hours), or my wife (who is currently raising the kiddos) is also willing to go get a job and let me have a shot at the stay-at-home responsibilities -> we would see this as an opportunity to snag more equities at a significant discount.
Thoughts? I really appreciate getting asked questions and getting feedback like this! (and hope more good bogleheads are willing to join the convo to help me!)
Longdog
Posts: 1566
Joined: Sun Feb 09, 2014 6:56 pm
Location: Philadelphia

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by Longdog »

Your portfolio looks quite reasonable, but don’t think that more funds necessarily means more diversification. Supplementing total market with small cap value makes the domestic part of the portfolio more concentrated in small cap stocks, since they are already included in total market. That’s totally fine, if that’s your intention, but it’s not more diversified.
Steve
mikejuss
Posts: 661
Joined: Tue Jun 23, 2020 1:36 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by mikejuss »

1.) To be very clear, the $2 million you have in your brokerage account has already been taxed?

2.) How large is your family (ie, do you have a wife and kids to support)?

3.) When you say you'll be accumulating more dry powder before you retire, do you mean from a windfall or from your regular income?
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

Longdog wrote: Mon Feb 08, 2021 9:05 pm Your portfolio looks quite reasonable, but don’t think that more funds necessarily means more diversification. Supplementing total market with small cap value makes the domestic part of the portfolio more concentrated in small cap stocks, since they are already included in total market. That’s totally fine, if that’s your intention, but it’s not more diversified.
Thanks - My intention is to diversify my risk as much as possible, are there other less correlated equities that I should be considering? I'd be willing to sacrifice some level of returns for a better chance that one of my assets performs better than the rest of the portfolio during a bear market. Am I searching for a mythical unicorn?

If this were the good ol' days i'd be totally happy being more heavily weighted towards bonds, knowing i'd be still yielding 4% or even better. Unfortunately we live in the present and therefore without a sizable equity allocation I don't see a way to make my portfolio persist for 50 years :(

It seems like I need at least a 3% 'real' (inflation adjusted) return over the long haul if I am building a plan on 3% SWR.
Maintaining my portfolio for 50 years > Growing my portfolio. Do you have any recommendations to maintain a healthy expected return while mitigating additional risks?
Last edited by MosDefAnon on Mon Feb 08, 2021 9:57 pm, edited 4 times in total.
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

mikejuss wrote: Mon Feb 08, 2021 9:34 pm 1.) To be very clear, the $2 million you have in your brokerage account has already been taxed?
Yes.
2.) How large is your family (ie, do you have a wife and kids to support)?
Wife and 2 children
3.) When you say you'll be accumulating more dry powder before you retire, do you mean from a windfall or from your regular income?
Both - i'd estimate over the next 2 years between income savings and addtl windfall I will have an additional ~$400k post-tax. Some of this may be used for a reasonable upgrade from our first house.
mikejuss
Posts: 661
Joined: Tue Jun 23, 2020 1:36 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by mikejuss »

MosDefAnon wrote: Mon Feb 08, 2021 9:43 pm
mikejuss wrote: Mon Feb 08, 2021 9:34 pm 1.) To be very clear, the $2 million you have in your brokerage account has already been taxed?
Yes.
2.) How large is your family (ie, do you have a wife and kids to support)?
Wife and 2 children
3.) When you say you'll be accumulating more dry powder before you retire, do you mean from a windfall or from your regular income?
Both - i'd estimate over the next 2 years between income savings and addtl windfall I will have an additional ~$400k post-tax. Some of this may be used for a reasonable upgrade from our first house.
Thanks for this info.

Now, is the $72,000 you say you need each year to support your family inclusive of health care and college costs? Will your wife continue to work? Roughly speaking, what is your house (which I assume is fully paid off) worth?
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

mikejuss wrote: Mon Feb 08, 2021 9:47 pm
Thanks for this info.

Now, is the $72,000 you say you need each year to support your family inclusive of health care and college costs? Will your wife continue to work?
  • As a part of my windfall I have funded reasonable 529s for both children, which should pay for full tuition for an in-state university.
  • My estimated $68k annual expenses include estimates for monthly ACA payments and a reasonable estimate of medical expenses to date (which have been low, and i recognize life happens fast and this could change - but that's also why I want to maintain a sizable Emergency Savings Acct.)
  • My wife is currently a homemaker. No income from her until/unless she choses to go make some fun money or the market crashes and we need supplemental income.
  • House is worth ~$350k in MCOL, and fully paid off prior to my windfall.
mikejuss
Posts: 661
Joined: Tue Jun 23, 2020 1:36 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by mikejuss »

MosDefAnon wrote: Mon Feb 08, 2021 9:54 pm
mikejuss wrote: Mon Feb 08, 2021 9:47 pm
Thanks for this info.

Now, is the $72,000 you say you need each year to support your family inclusive of health care and college costs? Will your wife continue to work?
  • As a part of my windfall I have funded reasonable 529s for both children, which should pay for full tuition for an in-state university.
  • My estimated $68k annual expenses include estimates for monthly ACA payments and a reasonable estimate of medical expenses to date (which have been low, and i recognize life happens fast and this could change - but that's also why I want to maintain a sizable Emergency Savings Acct.)
  • My wife is currently a homemaker. No income from her until/unless she choses to go make some fun money or the market crashes and we need supplemental income.
Well, I do worry that you're drawing down the absolute maximum of what is recommended given your savings, but I guess you've thought this through, and it seems like a not unreasonable decision. Do you have the kind of skills that would enable you to rejoin the workforce--even if at a lower level--after a long time away?

As for how you invest in your brokerage account, my recommendation is not to overthink it: just buy VTSAX, VTIAX, and VBTLX at your desired asset allocation and enjoy your family. I too used to own REITs, small-cap equities, etc., and they made no difference when it came to returns. You're diversifying your risk plenty by holding index funds in the first place.

Enjoy! :beer

P. S.: Do you have a Roth IRA? If not, you really should start one and fully fund it every year.
Patrick584
Posts: 60
Joined: Wed Sep 06, 2017 8:38 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by Patrick584 »

Longdog wrote: Mon Feb 08, 2021 9:05 pm Your portfolio looks quite reasonable, but don’t think that more funds necessarily means more diversification. Supplementing total market with small cap value makes the domestic part of the portfolio more concentrated in small cap stocks, since they are already included in total market. That’s totally fine, if that’s your intention, but it’s not more diversified.
This is an interesting definition for equity diversification. By this definition, owning 100% Amazon would be more diversity than owning 10% each of small cap stocks because Amazon is closer to representing the entire market. Diversification to me is having many assets that have low or negative correlation. Indexing is considered diversified, but that doesn’t mean overweighting is less diversified.
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

mikejuss wrote: Mon Feb 08, 2021 10:01 pm Well, I do worry that you're drawing down the absolute maximum of what is recommended given your savings, but I guess you've thought this through, and it seems like a not unreasonable decision.

As for how you invest in your brokerage account, my recommendation is not to overthink it: just buy VTSAX, VTIAX, and VBTLX at your desired asset allocation and enjoy your family. I too used to own REITs, small-cap equities, etc., and they made no difference when it came to returns. You're diversifying your risk plenty by holding index funds in the first place.

Enjoy! :beer
Thank you sir! Yeah I worry about this a lot. I feel very exposed to SORR (Sequence of Returns Risk). I do ask myself often if I am making a mistake by not letting my portfolio continue to grow in my 40s by maintaining my high-earnings, but I recognize that if I do not prioritize my family, I might lose out on what's most important - my kids are only young once and I have a wife that loves to hang out with me! And if I don't prioritize my wife, I could always lose 50% of everything :mrgreen: We're in a good place but my current job takes everything out of me and I have promised for years that once the windfall was achieved I would at the very least slow wayyyy down.
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

Patrick584 wrote: Mon Feb 08, 2021 10:10 pm
Longdog wrote: Mon Feb 08, 2021 9:05 pm Your portfolio looks quite reasonable, but don’t think that more funds necessarily means more diversification. Supplementing total market with small cap value makes the domestic part of the portfolio more concentrated in small cap stocks, since they are already included in total market. That’s totally fine, if that’s your intention, but it’s not more diversified.
This is an interesting definition for equity diversification. By this definition, owning 100% Amazon would be more diversity than owning 10% each of small cap stocks because Amazon is closer to representing the entire market. Diversification to me is having many assets that have low or negative correlation. Indexing is considered diversified, but that doesn’t mean overweighting is less diversified.
thanks Patrick - I don't think he was saying the small value tilt i'm considering is 'less diversified', but it seems like the consensus is my tilt doesn't diversify unique risks (due to high correlation). Can you give me some ideas of additional assets or index funds I should consider that have low or negative correlation?
Last edited by MosDefAnon on Mon Feb 08, 2021 10:18 pm, edited 1 time in total.
mikejuss
Posts: 661
Joined: Tue Jun 23, 2020 1:36 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by mikejuss »

MosDefAnon wrote: Mon Feb 08, 2021 10:12 pm
mikejuss wrote: Mon Feb 08, 2021 10:01 pm Well, I do worry that you're drawing down the absolute maximum of what is recommended given your savings, but I guess you've thought this through, and it seems like a not unreasonable decision.

As for how you invest in your brokerage account, my recommendation is not to overthink it: just buy VTSAX, VTIAX, and VBTLX at your desired asset allocation and enjoy your family. I too used to own REITs, small-cap equities, etc., and they made no difference when it came to returns. You're diversifying your risk plenty by holding index funds in the first place.

Enjoy! :beer
Thank you sir! Yeah I worry about this a lot. I feel very exposed to SORR (Sequence of Returns Risk). I do ask myself often if I am making a mistake by not letting my portfolio continue to grow in my 40s by maintaining my high-earnings, but I recognize that if I do not prioritize my family, I might lose out on what's most important - my kids are only young once and I have a wife that loves to hang out with me! And if I don't prioritize my wife, I could always lose 50% of everything :mrgreen: We're in a good place but my current job takes everything out of me and I have promised for years that once the windfall was achieved I would at the very least slow wayyyy down.
That's all very reasonable. One goes around only once.

Perhaps after some time off you can look for a part-time or a remote gig that provides health insurance and a 401(k), and not sweat your total compensation anymore.
Fran K
Posts: 95
Joined: Sat Dec 26, 2020 7:50 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by Fran K »

Congratulations. I am in a very similar situation at 37 with a similar portfolio. It looks like you've done a lot of good research and you have already received some good feedback on the fact that some of your chosen funds already cover some of the areas that you're trying to diversify to so you may be able to simplify if you would like.

One thing I found out about on these forums is I bonds, I started buying them this year as an alternative to cash that makes more money.

With current PE ratios being so high have you considered more of an allocation to bonds to mitigate against a large drop? If that drop comes it would also give you a chance to buy into that dip. High stock prices right now have made me a little nervous about stepping away from work with a pretty long time horizon in front of me. Historical returns on a 60/40 or 70/30 portfolio are not much lower than an 80/20.
You make more money selling advice than following it. -Steve Forbes
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

Fran K wrote: Mon Feb 08, 2021 10:18 pm Congratulations. I am in a very similar situation at 37 with a similar portfolio. It looks like you've done a lot of good research and you have already received some good feedback on the fact that some of your chosen funds already cover some of the areas that you're trying to diversify to so you may be able to simplify if you would like.

One thing I found out about on these forums is I bonds, I started buying them this year as an alternative to cash that makes more money.

With current PE ratios being so high have you considered more of an allocation to bonds to mitigate against a large drop? If that drop comes it would also give you a chance to buy into that dip. High stock prices right now have made me a little nervous about stepping away from work with a pretty long time horizon in front of me. Historical returns on a 60/40 or 70/30 portfolio are not much lower than an 80/20.
Regarding I-Bonds, they look fine but I only have 2 years of planned earning left before I FIRE, so at max i'd have $20k in yet another asset to manage (and I know i'm already pushing boglehead 'limits' at 7 funds)

Yes, I absolutely have and am still considering going to 60/40. I am naturally risk-averse, and I know this Bull Market has been going on for a long time - and our dear friend Jack Bogle taught me a lot about 'reversion to the mean'.

You're asking me the right question - because ultimately that is the genesis of why I am contemplating 7 funds in my portfolio, not 3. Large Cap US feels overvalued, but international and small value stocks maybe not so much. I don't know if I am kidding myself to think that my international and value tilts protect me from a significant downturn.

If bonds still produced reasonable yields and VTSAX wasn't coming off of an incredible bull run, I would have locked into a 3-fund portfolio concept and never looked back....
Fran K
Posts: 95
Joined: Sat Dec 26, 2020 7:50 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by Fran K »

MosDefAnon wrote: Mon Feb 08, 2021 10:30 pm
Fran K wrote: Mon Feb 08, 2021 10:18 pm Congratulations. I am in a very similar situation at 37 with a similar portfolio. It looks like you've done a lot of good research and you have already received some good feedback on the fact that some of your chosen funds already cover some of the areas that you're trying to diversify to so you may be able to simplify if you would like.

One thing I found out about on these forums is I bonds, I started buying them this year as an alternative to cash that makes more money.

With current PE ratios being so high have you considered more of an allocation to bonds to mitigate against a large drop? If that drop comes it would also give you a chance to buy into that dip. High stock prices right now have made me a little nervous about stepping away from work with a pretty long time horizon in front of me. Historical returns on a 60/40 or 70/30 portfolio are not much lower than an 80/20.
Regarding I-Bonds, they look fine but I only have 2 years of planned earning left before I FIRE, so at max i'd have $20k in yet another asset to manage (and I know i'm already pushing boglehead 'limits' at 7 funds)

Yes, I absolutely have and am still considering going to 60/40. I am naturally risk-averse, and I know this Bull Market has been going on for a long time - and our dear friend Jack Bogle taught me a lot about 'reversion to the mean'.

You're asking me the right question - because ultimately that is the genesis of why I am contemplating 7 funds in my portfolio, not 3. Large Cap US feels overvalued, but international and small value stocks maybe not so much. I don't know if I am kidding myself to think that my international and value tilts protect me from a significant downturn.

If bonds still produced reasonable yields and VTSAX wasn't coming off of an incredible bull run, I would have locked into a 3-fund portfolio concept and never looked back....
It all makes sense. I've been through very similar thought processes and don't disagree with your conclusions. I also have a stay-at-home wife and kids but am planning to continue working for longer than you hoping that stress levels are lower in my new situation and I will be modeling good things for my kids when they are in my stage of life as it is rare to have the opportunity we do to RE, so that's a difference.

I ended up going with a more conservative asset allocation thinking that the risk of significantly negative equity returns outweighed the opportunity cost of putting more into bonds. One data point that was interesting to me was the difference in SWR when CAPE > 30. https://earlyretirementnow.com/2018/08/ ... s-part-28/ Again, I don't disagree with your conclusions just interested in bouncing ideas back and forth with someone in a similar situation.
You make more money selling advice than following it. -Steve Forbes
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

Fran K wrote: Mon Feb 08, 2021 10:48 pm It all makes sense. I've been through very similar thought processes and don't disagree with your conclusions. I also have a stay-at-home wife and kids but am planning to continue working for longer than you hoping that stress levels are lower in my new situation and I will be modeling good things for my kids when they are in my stage of life as it is rare to have the opportunity we do to RE, so that's a difference.

I ended up going with a more conservative asset allocation thinking that the risk of significantly negative equity returns outweighed the opportunity cost of putting more into bonds. One data point that was interesting to me was the difference in SWR when CAPE > 30. https://earlyretirementnow.com/2018/08/ ... s-part-28/ Again, I don't disagree with your conclusions just interested in bouncing ideas back and forth with someone in a similar situation.
Absolutely - thanks for the link! A little light bedtime reading. :D
marcopolo
Posts: 4244
Joined: Sat Dec 03, 2016 10:22 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by marcopolo »

Congratulations on the windfall.

Your plan seem pretty sound. Your investment choices are reasonable.

The one thing I would ask is if the expense estimate is accurate. I am generally very supportive of early retirement plans, as we only get one ride, might as well enjoy it.

The only reason I ask is because of your income and savings prior to getting the windfall. You have an income of $230k, so probably reasonably high income for a number of years. You had a portfolio of $400k prior to the windfall. Given the recent market runs, and your level of income, I would have expected a bigger nest egg. Either you had other expenses that are going away (college debt?), high income is a new thing, or your expenses are actually more than you realize. The first two are no problem, the last one can maybe affect your plan.

The other factor to consider regarding expenses is what do you plan to do with your early retirement? Do you plan to live like you do now. What will you do with the additional free time? Some of those things might get expensive. We retired at age 51, and our expense in retirement are significantly higher than prior to retirement (setting aside Covid) due us taking advantage of our additional new found free time (more travel, and other activities), and freedom to live anywhere we choose without considering job availability, or quality of schools, etc. (we moved to Hawaii).

What will your plan entail? make sure you budget for that and enjoy your retirement!

Best of luck to you.
Once in a while you get shown the light, in the strangest of places if you look at it right.
young-ish
Posts: 50
Joined: Fri Apr 15, 2016 12:10 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by young-ish »

I feel very exposed to SORR (Sequence of Returns Risk). I do ask myself often if I am making a mistake by not letting my portfolio continue to grow in my 40s by maintaining my high-earnings, but I recognize that if I do not prioritize my family, I might lose out on what's most important - my kids are only young once and I have a wife that loves to hang out with me!
It sounds like you've read the Pfau/Kitces research on rising equity glidepath to mitigate SORR. As Michael Kitces says "Shelter in the Bond Tent" for the ~5 years before & after you quit. I feel comfortable with a 30-40% equity allocation during this critical decade.

Great to hear you prioritizing your family! Congratulations on FIRE!
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

marcopolo wrote: Tue Feb 09, 2021 1:13 am Congratulations on the windfall.

Your plan seem pretty sound. Your investment choices are reasonable.

The one thing I would ask is if the expense estimate is accurate. I am generally very supportive of early retirement plans, as we only get one ride, might as well enjoy it.

The only reason I ask is because of your income and savings prior to getting the windfall. You have an income of $230k, so probably reasonably high income for a number of years. You had a portfolio of $400k prior to the windfall. Given the recent market runs, and your level of income, I would have expected a bigger nest egg. Either you had other expenses that are going away (college debt?), high income is a new thing, or your expenses are actually more than you realize. The first two are no problem, the last one can maybe affect your plan.

The other factor to consider regarding expenses is what do you plan to do with your early retirement? Do you plan to live like you do now. What will you do with the additional free time? Some of those things might get expensive. We retired at age 51, and our expense in retirement are significantly higher than prior to retirement (setting aside Covid) due us taking advantage of our additional new found free time (more travel, and other activities), and freedom to live anywhere we choose without considering job availability, or quality of schools, etc. (we moved to Hawaii).

What will your plan entail? make sure you budget for that and enjoy your retirement!

Best of luck to you.
Thank you. An Astute observation regarding my portfolio pre-windfall. 5 years ago, my income was half of what it is now and I only had $50k in emergency savings, and $200k of a mortgage. 5 years ago was a turning point - since then, we have both gradually reduced expenses (we ate out 5x a week, etc), paid our house off in it's entirety (debt free), and were able to save $150k while maxing out our 401k - Net worth went from ~300k to ~950k in the past 5 years, leading up to the windfall. I track my budget closely and my $68k is a conservative estimate i'm not worried that I can live into.

Yes, we plan on continuing to live debt-free in our MCOL area (great schools, and deep roots w many family and friends) - Our favorite activities and hobbies are currently local and inexpensive, and our group of friends and family are not high earners/spenders which keep us out of trouble. We do LOVE vacations, but plan on enjoying nature/camping and staying with in-laws who live near the beach. We do love a cruise (pre-covid) and trips to Disney (pre-covid) but I have set money aside for a couple vacations a year (and i'm an avid deal-hunter) - I also have a ludicrous amount of airline and hotel points from work travel that should last us at least a few years.

Hawaii sounds nice though....maybe working a few more years wouldn't be so bad :mrgreen:
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

young-ish wrote: Tue Feb 09, 2021 1:37 am
It sounds like you've read the Pfau/Kitces research on rising equity glidepath to mitigate SORR. As Michael Kitces says "Shelter in the Bond Tent" for the ~5 years before & after you quit. I feel comfortable with a 30-40% equity allocation during this critical decade.

Great to hear you prioritizing your family! Congratulations on FIRE!
I've read the Kitces article (and now the ERN article as reccomended by Fran) as well as numerous Bogleheads threads debating the merits (or lack of merits) - I am truly torn when it comes to this topic.
Marseille07
Posts: 3510
Joined: Fri Nov 06, 2020 1:41 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by Marseille07 »

MosDefAnon wrote: Tue Feb 09, 2021 1:47 am
young-ish wrote: Tue Feb 09, 2021 1:37 am
It sounds like you've read the Pfau/Kitces research on rising equity glidepath to mitigate SORR. As Michael Kitces says "Shelter in the Bond Tent" for the ~5 years before & after you quit. I feel comfortable with a 30-40% equity allocation during this critical decade.

Great to hear you prioritizing your family! Congratulations on FIRE!
I've read the Kitces article (and now the ERN article as reccomended by Fran) as well as numerous Bogleheads threads debating the merits (or lack of merits) - I am truly torn when it comes to this topic.
I'm doing it currently. I like it, nothing sucks more than losing your nest egg right before pulling the trigger.
marcopolo
Posts: 4244
Joined: Sat Dec 03, 2016 10:22 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by marcopolo »

MosDefAnon wrote: Tue Feb 09, 2021 1:45 am
marcopolo wrote: Tue Feb 09, 2021 1:13 am Congratulations on the windfall.

Your plan seem pretty sound. Your investment choices are reasonable.

The one thing I would ask is if the expense estimate is accurate. I am generally very supportive of early retirement plans, as we only get one ride, might as well enjoy it.

The only reason I ask is because of your income and savings prior to getting the windfall. You have an income of $230k, so probably reasonably high income for a number of years. You had a portfolio of $400k prior to the windfall. Given the recent market runs, and your level of income, I would have expected a bigger nest egg. Either you had other expenses that are going away (college debt?), high income is a new thing, or your expenses are actually more than you realize. The first two are no problem, the last one can maybe affect your plan.

The other factor to consider regarding expenses is what do you plan to do with your early retirement? Do you plan to live like you do now. What will you do with the additional free time? Some of those things might get expensive. We retired at age 51, and our expense in retirement are significantly higher than prior to retirement (setting aside Covid) due us taking advantage of our additional new found free time (more travel, and other activities), and freedom to live anywhere we choose without considering job availability, or quality of schools, etc. (we moved to Hawaii).

What will your plan entail? make sure you budget for that and enjoy your retirement!

Best of luck to you.
Thank you. An Astute observation regarding my portfolio pre-windfall. 5 years ago, my income was half of what it is now and I only had $50k in emergency savings, and $200k of a mortgage. 5 years ago was a turning point - since then, we have both gradually reduced expenses (we ate out 5x a week, etc), paid our house off in it's entirety (debt free), and were able to save $150k while maxing out our 401k - Net worth went from ~300k to ~950k in the past 5 years, leading up to the windfall. I track my budget closely and my $68k is a conservative estimate i'm not worried that I can live into.

Yes, we plan on continuing to live debt-free in our MCOL area (great schools, and deep roots w many family and friends) - Our favorite activities and hobbies are currently local and inexpensive, and our group of friends and family are not high earners/spenders which keep us out of trouble. We do LOVE vacations, but plan on enjoying nature/camping and staying with in-laws who live near the beach. We do love a cruise (pre-covid) and trips to Disney (pre-covid) but I have set money aside for a couple vacations a year (and i'm an avid deal-hunter) - I also have a ludicrous amount of airline and hotel points from work travel that should last us at least a few years.

Hawaii sounds nice though....maybe working a few more years wouldn't be so bad :mrgreen:
That all makes sense. Thanks for the details.
I think you are on a good path to enjoy the next phase of life.
Best wishes for a long and happy journey.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Longdog
Posts: 1566
Joined: Sun Feb 09, 2014 6:56 pm
Location: Philadelphia

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by Longdog »

Patrick584 wrote: Mon Feb 08, 2021 10:10 pm
Longdog wrote: Mon Feb 08, 2021 9:05 pm Your portfolio looks quite reasonable, but don’t think that more funds necessarily means more diversification. Supplementing total market with small cap value makes the domestic part of the portfolio more concentrated in small cap stocks, since they are already included in total market. That’s totally fine, if that’s your intention, but it’s not more diversified.
This is an interesting definition for equity diversification. By this definition, owning 100% Amazon would be more diversity than owning 10% each of small cap stocks because Amazon is closer to representing the entire market. Diversification to me is having many assets that have low or negative correlation. Indexing is considered diversified, but that doesn’t mean overweighting is less diversified.
A 100% Amazon portfolio would be very concentrated in one stock holding. Whether that single stock is correlated with a basket of stocks representing the entire market in some way is interesting, and it might very well be that way sometimes but not others. If something bad happens to that single stock but not all others, it would lose that correlation. I'm not sure how one could view that as diversified. Of course there is a question of what is the proper weighting of stocks within an index or within a portfolio; perhaps weighting is viewed as contributing to diversification, perhaps not. Typically I believe indexes use a market weighting of each stock in the index, where the amount of each stock held in the index is proportional to the current market value of the company, relative to the aggregate market value of all companies in the index. Is that the "best" weighting? I don't know. It seems to be common. Probably good enough. All I was pointing out is that total stock market contains, ostensibly, all stocks in the market, I believe in market-weighted proportions. Adding another index to a portfolio that contains a subset of those stocks (small cap value) changes the weighting of assets in the overall portfolio from what it is in total market. If you don't see that as altering diversification, that's fine. It definitely changes the impact that small cap value stocks would have on the overall portfolio performance.
Steve
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

Longdog wrote: Tue Feb 09, 2021 8:03 am A 100% Amazon portfolio would be very concentrated in one stock holding. Whether that single stock is correlated with a basket of stocks representing the entire market in some way is interesting, and it might very well be that way sometimes but not others. If something bad happens to that single stock but not all others, it would lose that correlation. I'm not sure how one could view that as diversified. Of course there is a question of what is the proper weighting of stocks within an index or within a portfolio; perhaps weighting is viewed as contributing to diversification, perhaps not. Typically I believe indexes use a market weighting of each stock in the index, where the amount of each stock held in the index is proportional to the current market value of the company, relative to the aggregate market value of all companies in the index. Is that the "best" weighting? I don't know. It seems to be common. Probably good enough. All I was pointing out is that total stock market contains, ostensibly, all stocks in the market, I believe in market-weighted proportions. Adding another index to a portfolio that contains a subset of those stocks (small cap value) changes the weighting of assets in the overall portfolio from what it is in total market. If you don't see that as altering diversification, that's fine. It definitely changes the impact that small cap value stocks would have on the overall portfolio performance.
This makes sense. The tilt I am playing with re-weights my US cap allocation at about 52-24-24 (large/mid/small). As I mention in other parts of the thread, I am concerned about the current valuations of US large cap which is absolutely driving my desire to tilt. (VTSAX alone is weighted at 72% large/mega cap). I considered this tilt 'diversification' but I now see that is probably poor language to use.

I'm surprised nobody has brought up what is probably the most controversial part of my possible portfolio (which I am very on the fence about) - the Small International (VSS) allocation. Can anyone convince me that adding a VSS tilt just to appease my desire for balance/symmetry is a bad strategy? Another strategy I had considered is taking that 7.5% of my AA and putting it towards an Emerging Markets tilt instead, but at that point i'm just picking another unique tilt and I'm starting to feel like i'm making a bunch of unique 'bets' on what will happen in the next decade - and all I truly know is that 'nobody knows nothing'.
Patrick584
Posts: 60
Joined: Wed Sep 06, 2017 8:38 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by Patrick584 »

Longdog wrote: Tue Feb 09, 2021 8:03 am
Patrick584 wrote: Mon Feb 08, 2021 10:10 pm
Longdog wrote: Mon Feb 08, 2021 9:05 pm Your portfolio looks quite reasonable, but don’t think that more funds necessarily means more diversification. Supplementing total market with small cap value makes the domestic part of the portfolio more concentrated in small cap stocks, since they are already included in total market. That’s totally fine, if that’s your intention, but it’s not more diversified.
This is an interesting definition for equity diversification. By this definition, owning 100% Amazon would be more diversity than owning 10% each of small cap stocks because Amazon is closer to representing the entire market. Diversification to me is having many assets that have low or negative correlation. Indexing is considered diversified, but that doesn’t mean overweighting is less diversified.
A 100% Amazon portfolio would be very concentrated in one stock holding. Whether that single stock is correlated with a basket of stocks representing the entire market in some way is interesting, and it might very well be that way sometimes but not others. If something bad happens to that single stock but not all others, it would lose that correlation. I'm not sure how one could view that as diversified. Of course there is a question of what is the proper weighting of stocks within an index or within a portfolio; perhaps weighting is viewed as contributing to diversification, perhaps not. Typically I believe indexes use a market weighting of each stock in the index, where the amount of each stock held in the index is proportional to the current market value of the company, relative to the aggregate market value of all companies in the index. Is that the "best" weighting? I don't know. It seems to be common. Probably good enough. All I was pointing out is that total stock market contains, ostensibly, all stocks in the market, I believe in market-weighted proportions. Adding another index to a portfolio that contains a subset of those stocks (small cap value) changes the weighting of assets in the overall portfolio from what it is in total market. If you don't see that as altering diversification, that's fine. It definitely changes the impact that small cap value stocks would have on the overall portfolio performance.
Yes, I’ll agree that owning one stock or a few stocks has unnecessary risk. My point was that the total stock market is dominated by the large companies and owning less of these few large companies would decrease concentration in single companies. In actuality owning a modest number of stocks has comparable diversification to the whole market. The cap weighted index funds work great because they are scalable and the list of companies doesn’t impact the market itself I.E. Tesla’s impact on SandP 500.
Patrick584
Posts: 60
Joined: Wed Sep 06, 2017 8:38 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by Patrick584 »

Several years ago tilting was the rage on Bogleheads. Then scv had a period of underperformance. Now there is rarely a sustained thread on tilting.

New guy: did you hear about that hot tip

Bogleheads chorus: we stay the course

Makes for some boring browsing.
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

Patrick584 wrote: Tue Feb 09, 2021 9:01 pm Several years ago tilting was the rage on Bogleheads. Then scv had a period of underperformance. Now there is rarely a sustained thread on tilting.

New guy: did you hear about that hot tip

Bogleheads chorus: we stay the course

Makes for some boring browsing.
LMAO - you made me spit out a little coffee.

I know, this is why I hesitated posting a portfolio review (as I have read countless threads over the past months).

I wish I felt better about what to do next.....
young-ish
Posts: 50
Joined: Fri Apr 15, 2016 12:10 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by young-ish »

Marseille07 wrote: Tue Feb 09, 2021 1:49 am
MosDefAnon wrote: Tue Feb 09, 2021 1:47 am
young-ish wrote: Tue Feb 09, 2021 1:37 am
It sounds like you've read the Pfau/Kitces research on rising equity glidepath to mitigate SORR. As Michael Kitces says "Shelter in the Bond Tent" for the ~5 years before & after you quit. I feel comfortable with a 30-40% equity allocation during this critical decade.

Great to hear you prioritizing your family! Congratulations on FIRE!
I've read the Kitces article (and now the ERN article as reccomended by Fran) as well as numerous Bogleheads threads debating the merits (or lack of merits) - I am truly torn when it comes to this topic.
I'm doing it currently. I like it, nothing sucks more than losing your nest egg right before pulling the trigger.
+1

If you have saved enough than you don't need fat returns. You have the ability to own a lower risk portfolio. You can always turn up the risk dial after the first critical decade since by then you will have either "made it" or been grateful you had the lower risk portfolio in the first place.
Topic Author
MosDefAnon
Posts: 14
Joined: Mon Feb 08, 2021 9:59 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by MosDefAnon »

young-ish wrote: Sat Feb 13, 2021 1:23 am
If you have saved enough than you don't need fat returns. You have the ability to own a lower risk portfolio. You can always turn up the risk dial after the first critical decade since by then you will have either "made it" or been grateful you had the lower risk portfolio in the first place.
A big thank you to you and the others who have taken the time to respond to this thread.

I meet with my financial advisor tomorrow to ratify my IPS.

One adjustment I have from the feedback in this thread - I have increased my fixed income AA from 30% to 40%, protecting myself a little more against SORR.

This leads me to an additional question:
  • Currently I am considering splitting my Fixed Income AA (40%) between VTEAX (27.5%) in my taxable, and Short Term TIPS - VTAPX (12.5%) in my tax deferred - Is this a reasonable balance between normal bonds and TIPS? Any good recent articles on if my Bonds or TIPS should be short/medium/long term, or a blend (like VTEAX)?
young-ish
Posts: 50
Joined: Fri Apr 15, 2016 12:10 am

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by young-ish »

Treasuries are the safest form of bonds. With Muni's there is default risk. Overall I would stick with intermediate term on average for the entire portfolio. TIPS have their own risks (lookup Larry Swedroe's comments on them during the '08 crisis).

How did your meeting with you FA go?
ncbill
Posts: 1051
Joined: Sun Jul 06, 2008 4:03 pm
Location: Western NC

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by ncbill »

Shouldn't the OP be filing taxes as MFJ instead of HoHH?
jt90505
Posts: 23
Joined: Wed Nov 28, 2018 8:10 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by jt90505 »

A couple of questions/comments.
- Are you planning on contributing to kids college education costs. If so, is this factored into your plans?
- Regarding "taking my 40s off", although technically illegal it will most likely become more difficult to get a position as you age, especially after an extended period of not working.
- Does your annual budget include allowances for 'major' expenses s/a replacement cars, new roof/furnace/etc?

All the best
ponderinpndur
Posts: 8
Joined: Thu Feb 25, 2021 4:28 pm

Re: Portfolio Review - Preparing to FIRE after Windfall

Post by ponderinpndur »

young-ish wrote: Wed Feb 24, 2021 7:31 pm Treasuries are the safest form of bonds. With Muni's there is default risk. Overall I would stick with intermediate term on average for the entire portfolio. TIPS have their own risks (lookup Larry Swedroe's comments on them during the '08 crisis).

How did your meeting with you FA go?
I am wondering the same too about the FA meeting.
I am also wondering if all the 2MM windfall will be invested in one go and interested in hearing that.
Post Reply