Please help rebalancing my Portfolio

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Topic Author
nevernotpresent
Posts: 18
Joined: Sat Jul 31, 2021 6:31 pm

Please help rebalancing my Portfolio

Post by nevernotpresent »

First of all, I am very grateful to BogleHeads and the “Man himself” for slapping some sense into me. Even though it took so many years for me to learn such simple yet profound wisdom, I'm happy to be here.

With that said, the summary of my question is:

1. I have about 56% of my portfolio in savings/cash and would like to invest it boringly with most tax efficiency.
2. Bond and Intl. Equity is preferable to be in tax-sheltered accounts as I am in the 32-35% tax bracket and rather not deal with taxable events in my taxable account.
3. I’m ok with bond funds like VTEAX in my Taxable account.
4. I’m thinking about having VTSAX in my Taxable as well, so the capital gains are minimal now and I can make withdrawals after retirement when I’m in a lower tax bracket.

Emergency funds: Emergency Funds have been allocated separately and not part of this calculation.

Debt: No debt

Tax Filing Status: Single,

Tax Rate: 32-35% Federal, 9.30% State

State of Residence:CA

Age:40

Desired Asset allocation: 60% stocks / 40% bonds (which is my comfort zone and nicely matches with Jack’s recommendation)
Desired International allocation: 30% of stocks

Total portfolio: 750k

Current retirement assets

Taxable
56% - 420k cash/savings
(for investing – not including emergency funds)
Planning on moving these funds to Vanguard.
2.26% - 17k worth in individually picked stocks.(I am not married to these picks, bought them with 18k on an emotional spree. Down 1k due to some Chinese tech stocks)

His 401k
40.9% - 307k - Vanguard Target Retirement 2045 Trust Plus
Breakdown of the fund
3.5% Intl. bond
7.5% US bond
34.5% Intl. Equity
54.5% US Equity

His Roth IRA at Fidelity

0.8% - 6k in Cash, not allocated to any funds yet.
Will add another 5k after-tax in the next month or two for this year.

Contributions
New annual Contributions
$19.5k(my contributions) + 13k(employer contributions) his 401k (also specify any employer matching contributions)
$11k his IRA/Roth IRA backdoor
$60k savings (for retirement, not short term goals)

Available funds

Funds available in his 401(k)
Name/Inception Date Asset Class Category Gross Expense Ratio**
DODGE & COX STOCK (DODGX)01/04/1965   Stock Investments Large Cap 0.52%
FID 500 INDEX (FXAIX)   Stock Investments Large Cap 0.02%
TRP BLUE CHIP GR T2 09/30/2009   Stock Investments Large Cap 0.45%
FID MID CAP IDX (FSMDX) 09/08/2011   Stock Investments Mid-Cap 0.03%
FID SM CAP IDX (FSSNX) 09/08/2011   Stock Investments Small Cap 0.03%
FID GLB EX US IDX (FSGGX) 09/08/2011   Stock Investments International 0.06%
MFS INTL DIVRSN R6 (MDIZX) 09/30/2004   Stock Investments International 0.77%
VANGUARD TARGET 2015 06/28/2007   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET 2020 06/22/2007   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET 2025 06/28/2007   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET 2030 06/28/2007   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET 2035 06/28/2007   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET 2040 06/28/2007   Blended Fund Investments* N/A 0.06%
 VANGUARD TARGET 2045 06/28/2007   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET 2050 06/28/2007   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET 2055 08/31/2010   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET 2060 03/23/2012   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET 2065 07/24/2017   Blended Fund Investments* N/A 0.06%
VANGUARD TARGET INC 06/22/2007   Blended Fund Investments* N/A 0.06%
STANDISH INCOME FUND 12/28/2018   Bond Investments Stable Value 0.27%
FID US BOND IDX (FXNAX) 03/08/1990   Bond Investments Income 0.03%
METWEST TOT RTN BD P (MWTSX) 03/31/1997   Bond Investments Income 0.38%

Questions:
    How do I rebalance my portfolio with minimal, capital gains in my taxable account and rebalancing every year?
    User avatar
    retired@50
    Posts: 12835
    Joined: Tue Oct 01, 2019 2:36 pm
    Location: Living in the U.S.A.

    Re: Please help rebalancing my Portfolio

    Post by retired@50 »

    nevernotpresent wrote: Sat Jul 31, 2021 8:33 pm First of all, I am very grateful to BogleHeads and the “Man himself” for slapping some sense into me. Even though it took so many years for me to learn such simple yet profound wisdom, I'm happy to be here.


    Available funds

    Funds available in his 401(k)
    Name/Inception Date Asset Class Category Gross Expense Ratio**
    DODGE & COX STOCK (DODGX)01/04/1965   Stock Investments Large Cap 0.52%
    FID 500 INDEX (FXAIX)   Stock Investments Large Cap 0.02%
    TRP BLUE CHIP GR T2 09/30/2009   Stock Investments Large Cap 0.45%
    FID MID CAP IDX (FSMDX) 09/08/2011   Stock Investments Mid-Cap 0.03%
    FID SM CAP IDX (FSSNX) 09/08/2011   Stock Investments Small Cap 0.03%

    FID GLB EX US IDX (FSGGX) 09/08/2011   Stock Investments International 0.06%
    MFS INTL DIVRSN R6 (MDIZX) 09/30/2004   Stock Investments International 0.77%
    VANGUARD TARGET 2015 06/28/2007   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET 2020 06/22/2007   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET 2025 06/28/2007   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET 2030 06/28/2007   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET 2035 06/28/2007   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET 2040 06/28/2007   Blended Fund Investments* N/A 0.06%
     VANGUARD TARGET 2045 06/28/2007   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET 2050 06/28/2007   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET 2055 08/31/2010   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET 2060 03/23/2012   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET 2065 07/24/2017   Blended Fund Investments* N/A 0.06%
    VANGUARD TARGET INC 06/22/2007   Blended Fund Investments* N/A 0.06%
    STANDISH INCOME FUND 12/28/2018   Bond Investments Stable Value 0.27%
    FID US BOND IDX (FXNAX) 03/08/1990   Bond Investments Income 0.03%
    METWEST TOT RTN BD P (MWTSX) 03/31/1997   Bond Investments Income 0.38%

    Questions:
      How do I rebalance my portfolio with minimal, capital gains in my taxable account and rebalancing every year?
      Welcome to the forum. :happy
      After reading your post a few thoughts come to mind.

      Given the breakdown of your accounts, and your stated desire for a 60% stock / 40% bond portfolio, it would probably be wise to invest your entire 401k in the Fidelity US BOND Index (FXNAX). Since this account represents just about 40% of your assets.
      A 401k account is a good tax-efficient place to hold bond funds for most investors, and especially for high earners like yourself.

      With the taxable account, I'd suggest you hold Vanguard US Stock and International Stock mutual funds or ETFs. VTSAX for US and VTIAX for International. VTI / VXUS if you prefer the ETF share class. Both the mutual fund and the ETF share class are tax efficient at Vanguard so you can take your pick. I'd also suggest dumping the entire individual stock allocation into your favored mixture of US/International stock index funds.

      If / when the time comes that you need to add stock index funds to the 401k plan, then just use the Fidelity S&P 500 Index fund (FXAIX) and the Fidelity GLOBAL EX US INDEX (FSGGX) funds. You can toss in a bit of the Fidelity Small Cap Index (FSSNX) if you feel the need.

      If / when the time comes to add municipal bonds to the taxable account, the VTEAX fund you mentioned would be fine. Although, as a high earning CA resident you could also consider using the Vanguard CA Intermediate and CA Long Term municipal bond funds. VCAIX and/or VCITX. Income from these state-specific funds would also be exempt from CA state income taxes.

      I'd suggest using something like FSKAX inside the Roth IRA. Low-expense total US stock market index fund. Bonds typically don't belong in a Roth account (if at all possible).

      As far as re-balancing goes, investors still in the accumulation phase (such as you) can usually just add new money to the under-weighted asset class as needed. If a large sale needs to occur for some reason, try to isolate those kind of transactions to the 401k account since they won't have a tax impact.

      Regards,
      If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
      User avatar
      MahoningValley
      Posts: 189
      Joined: Sat Dec 01, 2007 11:38 am
      Location: South Florida

      Re: Please help rebalancing my Portfolio

      Post by MahoningValley »

      retired@50 wrote: Sat Jul 31, 2021 11:21 pm See above

      Everything he said is the way to go. Just do it; you won't regret it.
      Topic Author
      nevernotpresent
      Posts: 18
      Joined: Sat Jul 31, 2021 6:31 pm

      Re: Please help rebalancing my Portfolio

      Post by nevernotpresent »

      Hi retired@50

      Thanks for taking time to provide a thoughtful, simple and detailed answer. Also, I hope to achieve the goal in your username :D

      If it is ok, I would love to know your thoughts on the following...
      • 1
      While ETFs(VTI/VXUS/ITOT/IXUS/MUB) seem to be slightly lower ER and will help me keep all my funds in one place(Fidelity), I'm concerned about buying or selling them at a price different from NAV and stressing out.
      • 2
      I read somewhere on the forum that VTIAX or any international funds show capital gains, but it is ok for people in lower tax brackets as it evens out with Foreign Tax Credits and not so great for people in higher brackets. What are your thoughts? I might be over thinking this :happy
      • 3
      Assuming my concern in #2 is valid. What do you think of the following spread:

      750k Portfolio Split
      1. Split the 307k Vanguard Retirement 2045 in 401k to
      A. US Bonds(FXNAX) - 171k
      B. Intl. Equity(FSGGX) -136k
      2. Roth 11k to FSKAX
      3. Split 420k cash
      A. 129k Tax-exempt Municipal Bond Fund
      B. 303k Total US Stock Fund

      Ongoing Contributions Split
      Assuming my ongoing contributions are....
      19.5k in 401k Employee contributions
      13k employer contributions
      11k in Roth
      50k in Taxable

      Out of 93.5k per year
      37.4k would go to Bonds (40%)
      16.8k would go to Intl. Equity (30% of Equity)
      39.3k would go to US Equity (70% of equity)

      3. Change 19.5k employee + 13k Employer pre-tax 401k contributions to
      A. Intl. Equity(FSGGX)- 52% - 16.9k
      B. US Bonds(FXNAX)- 48% - 15.6k
      4. Roth IRA 11k goes to Total US Equity(FSKAX)
      5. Tax-exempt Municipal Bonds in Taxable will get about 1.8k per month in taxable.
      6. The rest per month goes to Total Stock Market in taxable
      User avatar
      retired@50
      Posts: 12835
      Joined: Tue Oct 01, 2019 2:36 pm
      Location: Living in the U.S.A.

      Re: Please help rebalancing my Portfolio

      Post by retired@50 »

      nevernotpresent wrote: Sun Aug 01, 2021 8:56 pm Hi retired@50

      Thanks for taking time to provide a thoughtful, simple and detailed answer. Also, I hope to achieve the goal in your username :D

      If it is ok, I would love to know your thoughts on the following...
      • 1
      While ETFs(VTI/VXUS/ITOT/IXUS/MUB) seem to be slightly lower ER and will help me keep all my funds in one place(Fidelity), I'm concerned about buying or selling them at a price different from NAV and stressing out.
      • 2
      I read somewhere on the forum that VTIAX or any international funds show capital gains, but it is ok for people in lower tax brackets as it evens out with Foreign Tax Credits and not so great for people in higher brackets. What are your thoughts? I might be over thinking this :happy
      • 3
      Assuming my concern in #2 is valid. What do you think of the following spread:
      I don't have much time right now to respond but I haven't heard of VTIAX (Total International Stock Fund) throwing off capital gains distributions. This seems unlikely to me, especially since it has an ETF share class (VXUS). If you want confirmation of this, you could probably contact Vanguard and ask them. They don't show any capital gains distributions on their webpage for the fund, just quarterly dividends for the last 18 months.

      As far as ETFs go, I would worry more about using a bond ETF than a stock ETF. William Bernstein has written about this topic. There are times of market stress where a bond ETF will trade "away" from its NAV. If you happen to be trading a bond ETF in this sort of market environment, you could face this issue. I haven't heard of this issue with stock ETFs.

      I'll try to check back on this thread in a few days.

      Regards,
      If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
      Topic Author
      nevernotpresent
      Posts: 18
      Joined: Sat Jul 31, 2021 6:31 pm

      Re: Please help rebalancing my Portfolio

      Post by nevernotpresent »

      Thank you very much for the response and clearing out my misconceptions. Really appreciate you taking time out to help me out!
      Topic Author
      nevernotpresent
      Posts: 18
      Joined: Sat Jul 31, 2021 6:31 pm

      Re: Please help rebalancing my Portfolio

      Post by nevernotpresent »

      MahoningValley wrote: Sun Aug 01, 2021 7:42 pm
      retired@50 wrote: Sat Jul 31, 2021 11:21 pm See above

      Everything he said is the way to go. Just do it; you won't regret it.
      Thank you very much for the reassurance!
      User avatar
      retiredjg
      Posts: 54082
      Joined: Thu Jan 10, 2008 11:56 am

      Re: Please help rebalancing my Portfolio

      Post by retiredjg »

      How much do you like using a target fund in your 401k?

      How do you plan to put $11k into IRA when the limit is $6k?
      tashnewbie
      Posts: 4284
      Joined: Thu Apr 23, 2020 12:44 pm

      Re: Please help rebalancing my Portfolio

      Post by tashnewbie »

      retiredjg wrote: Mon Aug 02, 2021 10:29 am How do you plan to put $11k into IRA when the limit is $6k?
      I came to say this too. The max annual limit for people <50 is $6k (additional $1k catch-up allowed for people 50+).
      Topic Author
      nevernotpresent
      Posts: 18
      Joined: Sat Jul 31, 2021 6:31 pm

      Re: Please help rebalancing my Portfolio

      Post by nevernotpresent »

      retiredjg wrote: Mon Aug 02, 2021 10:29 am How much do you like using a target fund in your 401k?

      How do you plan to put $11k into IRA when the limit is $6k?
      Haha, honestly up until last week, I didn't even know the asset allocation was for that fund. It was the default fund since I started at this job. I was a bit surprised how aggressive the allocation is(Close to 90/10). The returns have been decent. My personal return is around 12% since 2013.

      As you can see, I am a newbie. Happy to provide any further info about the plan.

      As for the Roth, you're right. I recently learnt there is a process called backdoor Roth through which we can contribute upto 38k after-tax if the employer allows it. Our employer only allows 5k.

      https://www.bogleheads.org/wiki/Mega-backdoor_Roth
      Last edited by nevernotpresent on Mon Aug 02, 2021 11:10 pm, edited 1 time in total.
      Topic Author
      nevernotpresent
      Posts: 18
      Joined: Sat Jul 31, 2021 6:31 pm

      Re: Please help rebalancing my Portfolio

      Post by nevernotpresent »

      tashnewbie wrote: Mon Aug 02, 2021 11:09 am
      retiredjg wrote: Mon Aug 02, 2021 10:29 am How do you plan to put $11k into IRA when the limit is $6k?
      I came to say this too. The max annual limit for people <50 is $6k (additional $1k catch-up allowed for people 50+).
      You're right. I recently learnt there is a process called backdoor Roth through which we can contribute upto 38k after-tax if the employer allows it. Our employer only allows 5k.

      https://www.bogleheads.org/wiki/Mega-backdoor_Roth
      User avatar
      dogagility
      Posts: 3237
      Joined: Fri Feb 24, 2017 5:41 am

      Re: Please help rebalancing my Portfolio

      Post by dogagility »

      nevernotpresent wrote: Mon Aug 02, 2021 11:05 pm
      retiredjg wrote: Mon Aug 02, 2021 10:29 am How much do you like using a target fund in your 401k?

      How do you plan to put $11k into IRA when the limit is $6k?
      Haha, honestly up until last week, I didn't even know the asset allocation was for that fund. It was the default fund since I started at this job. I was a bit surprised how aggressive the allocation is(Close to 90/10). The returns have been decent. My personal return is around 12% since 2013.

      As you can see, I am a newbie. Happy to provide any further info about the plan.

      As for the Roth, you're right. I recently learnt there is a process called backdoor Roth through which we can contribute upto 38k after-tax if the employer allows it. Our employer only allows 5k.

      https://www.bogleheads.org/wiki/Mega-backdoor_Roth
      The mega backdoor Roth is within a 401k account. The contribution limit within an IRA (Roth or otherwise) is 6K.
      Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
      Topic Author
      nevernotpresent
      Posts: 18
      Joined: Sat Jul 31, 2021 6:31 pm

      Re: Please help rebalancing my Portfolio

      Post by nevernotpresent »

      dogagility wrote: Tue Aug 03, 2021 6:01 am
      nevernotpresent wrote: Mon Aug 02, 2021 11:05 pm
      retiredjg wrote: Mon Aug 02, 2021 10:29 am How much do you like using a target fund in your 401k?

      How do you plan to put $11k into IRA when the limit is $6k?
      Haha, honestly up until last week, I didn't even know the asset allocation was for that fund. It was the default fund since I started at this job. I was a bit surprised how aggressive the allocation is(Close to 90/10). The returns have been decent. My personal return is around 12% since 2013.

      As you can see, I am a newbie. Happy to provide any further info about the plan.

      As for the Roth, you're right. I recently learnt there is a process called backdoor Roth through which we can contribute upto 38k after-tax if the employer allows it. Our employer only allows 5k.

      https://www.bogleheads.org/wiki/Mega-backdoor_Roth
      The mega backdoor Roth is within a 401k account. The contribution limit within an IRA (Roth or otherwise) is 6K.
      I confirmed with Fidelity that they can covert the After-Tax contributions(upto 5k) in my 401k to a Roth IRA. Also, the diagram in the BogleHeads wiki shows that After-Tax contributions in 401k could be moved to RothIRA outside of 401k.

      I'm just waiting for 5k after-tax to accumulate in 401k, so I can request them to convert them. It seems the conversion from 401k after-tax to Roth is done only once per quarter.
      User avatar
      retired@50
      Posts: 12835
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      Re: Please help rebalancing my Portfolio

      Post by retired@50 »

      nevernotpresent wrote: Mon Aug 02, 2021 10:22 am Thank you very much for the response and clearing out my misconceptions. Really appreciate you taking time out to help me out!
      Looks like you're on your way.

      Remember the backdoor Roth IRA strategy isn't the same as a mega-backdoor Roth. Know what you're doing, before you do it. :happy

      See links:
      https://www.bogleheads.org/wiki/Mega-backdoor_Roth

      https://www.bogleheads.org/wiki/After-tax_401(k)

      https://www.bogleheads.org/wiki/Backdoor_Roth

      Regards,
      If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
      Topic Author
      nevernotpresent
      Posts: 18
      Joined: Sat Jul 31, 2021 6:31 pm

      Re: Please help rebalancing my Portfolio

      Post by nevernotpresent »

      retired@50 wrote: Tue Aug 03, 2021 5:26 pm
      nevernotpresent wrote: Mon Aug 02, 2021 10:22 am Thank you very much for the response and clearing out my misconceptions. Really appreciate you taking time out to help me out!
      Looks like you're on your way.

      Remember the backdoor Roth IRA strategy isn't the same as a mega-backdoor Roth. Know what you're doing, before you do it. :happy

      See links:
      https://www.bogleheads.org/wiki/Mega-backdoor_Roth

      https://www.bogleheads.org/wiki/After-tax_401(k)

      https://www.bogleheads.org/wiki/Backdoor_Roth

      Regards,
      Thanks for correcting me. I guess I'm doing both BackdoorRoth and MegaBackDoorRoth, except the MegaBackDoorRoth isn't exactly that Mega :happy
      User avatar
      retiredjg
      Posts: 54082
      Joined: Thu Jan 10, 2008 11:56 am

      Re: Please help rebalancing my Portfolio

      Post by retiredjg »

      This is what I would do in your situation. First, set up your portfolio as shown below. This idea is 60% stock and 40% bond with 30% of the stocks (18% of the portfolio) in international.

      Taxable 58.26%
      28% Total Stock Index
      2.26% individually picked stocks (or fold into total stock)
      18% total international index
      5% California long term tax-exempt
      5% a short term national tax exempt bond fund


      His 401k 40.9%
      10.9% FID 500 INDEX (FXAIX)  0.02%
      30% FID US BOND IDX (FXNAX) 0.03%


      His Roth IRA at Fidelity .8%
      .8% Extended Market Index

      I put a slice of 500 index in the 401k for flexibility. There will come a time when you need to sell stocks to buy bonds or vice versa to rebalance. This can be done without triggering any tax in the 401k. Chances are a 5% slice would be enough if you like that better. It does not matter much how much of your 401k is in 500 index as long as it is at least 5%.

      In a downturn, sell bonds and buy stocks in the 401k. There are enough bonds in there for that to work for awhile. After that, start adjusting your taxable contributions toward more stocks until the market reverses. Then do the opposite as the market recovers. To the extent you can, keep the portfolio in the range of 60/40 (say plus or minus 5%) the entire downturn (and upswing).

      I split the tax exempt bonds into two funds. The combination of the short and long term bonds will average out to an intermediate term but more of the income will be exempt from the high CA state taxes. This gives you a better diversified bond portfolio - not too much in tax-exempt and not too much in just one state. It is not critical to have exactly equal amounts, just get close.

      I put extended market in the Roth IRA just to "complete" the 500 index, but whether you do this or not is not going to change the performance of the portfolio in any significant way.

      You would use weekly/monthly/whatever contributions to keep your international in the neighborhood of 18% of the portfolio. Just get in the ball park - being precise is not important.

      When it comes to planning your next year's contribution, just figure out how much needs to go into the 401k in order to leave a slice of the 500 index that is between 5% and 10% of the portfolio. Put the rest of the bonds into taxable. Figure out what 18% of the contributions would be and put that into taxable in international index. Fill in all the rest of the portfolio with total stock or 500 index/extended market index (if using).

      This portfolio should be very easy to maintain with a minimum of analysis when you add money.

      Since you are also using the mega backdoor, when that money rolls into Roth IRA, just put it all in extended market if you decide to use that. It is not important if the ratios are right on target or not.
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