Portfolio review: help me with Asset Location

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Raspberry-503
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Joined: Sat Oct 03, 2020 6:42 am

Portfolio review: help me with Asset Location

Post by Raspberry-503 »

Hello, I was working with Facet Wealth, and they helped me consolidate some accounts and were a good forcing function to get me to do things I'd been avoiding like setting up a trust. In the process, I did a lot of reading and learning (a lot from this forum and wiki) and saw both the good and the limitations of working with Facet. In particular, I don't think they did a very good job at practicing Asset Location (https://www.bogleheads.org/wiki/Tax-eff ... _placement), so this is a portfolio review particularly in seeking advice with regard to Asset Location.

The other thing that I may or may not tackle at the same time is the Value Tilt. I haven't wrapped my head around it and whether "now that I'm in I should stay in" or just go total stock market and ignore the tilt.

Here it goes...

Emergency funds:
---------------
$30K in I-bonds ($10K not accessible yet) and $75K in HYSA. This covers 6-month regular budget (more if cutting unessential), but it also covers the 2 years of tuition left for my kid in college. The college freezes the tuition in your freshman year, so while the HYSA doesn't cover inflation, the tuition is not increasing with inflation either. I use a 529 plan as a conduit to get my CO state tax discount, but no growth in the 529.


Debt:
-----
$80K left on the mortgage (3.5%, 8 years left). I'm too close to paid off to make it worth refinancing (I tried), and not in a rush to pay it off since it comparatively goes down with inflation.

Tax Filing Status:
------------------
Married Filing Jointly - Wife if part-time and has no benefits e.g. 401(k)

Tax Rate:
---------
22% Federal (towards the top of the bracket, in fact, will be in 24% for 2021 only due to capital gains from getting out of an expensive index fund)
4.6% State (Colorado)

State of Residence: Colorado

Age: 52, Wife 49 - wanting to retire around 62, 10 years from now

Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: 30% of stocks (because that's what the Vanguard Listryle Moderate Growth Fund, VSMGX, did when I first set things up, not married to it). Just like the Vanguard fund I also have Int'l bonds

I am not marking the ERs in the list below, they are all very low ETFs, etc...

Total portfolio
---------------
around $1.8M


Taxable (31.5% of the total)
---------------------------
0% CASH (really whatever Interest/dividends accumulated since I last rebalanced, I add $1500 monthly and then invest into whatever assets are lagging at the time)
3.7% VANGUARD BD INDEX FDS TOTAL BND MRKT (BND)
2.5% VANGUARD CHARLOTTE TOTAL INTL BD INDEX FD ETF (BNDX)
2.9% ISHARES RUSSELL 2000 VALUE ETF (IWN)
6.2% ISHARES NATIONAL MUNI BOND ETF (MUB)
4.6% VANGUARD TAX-MANAGED INTL FD FTSE DEV MKT ETF (VEA)
2.0% VANGUARD MID-CAP VALUE INDEX FUND (VOE)
4.8% VANGUARD IDX FUND (VTI)
3.0% VANGUARD INDEX FDS VANGUARD VALUE ETF FORMERLY VANGUARD INDEX TR (VTV)
1.8% VANGUARD INTL EQUITY INDEX FDS FTSE EMR MKT ETF (VWO)



His Rollover IRA (47.5% of total investable portfolio)
------------------------------------------------------
0% CASH (some residual stuff like dividends/interest, re-invested once monthly in lagging assets)
7.6% VANGUARD BD INDEX FDS TOTAL BND MRKT (BND)
7.6% VANGUARD CHARLOTTE TOTAL INTL BD INDEX FD ETF (BNDX)
4.3% ISHARES RUSSELL 2000 VALUE ETF (IWN)
3.6% ISHARES IBOXX $ INVESTMENT GRADE CORPORATE BOND ETF (LQD)
7.0% VANGUARD TAX-MANAGED INTL FD FTSE DEV MKT ETF (VEA)
3.0% VANGUARD MID-CAP VALUE INDEX FUND (VOE)
7.5% VANGUARD IDX FUND (VTI)
4.4% VANGUARD INDEX FDS VANGUARD VALUE ETF FORMERLY VANGUARD INDEX TR (VTV)
2.6% VANGUARD INTL EQUITY INDEX FDS FTSE EMR MKT ETF (VWO)


His 401(k) (17% of total investable portfolio)
----------------------------------------------
About 5% of the balance is in the Roth portion of the 401(k) unfortunately the 401(k) company does not let you easily separate the two (can't rebalance the Roth and non-Roth separately)
401(k) has a 0.10% yearly administration fee
2.8% iShares S&P500 Index (WFSPX)
1.6% Fidelity Large Cap Value Index (FLCOX)
1.1% Vanguard Mid Cap Index (VIMAX)
1.6% Fidelity Small Cap Value Index (FISVX)
2.6% Vanguard Developed Markets Index (VTMGX)
1.0% Vanguard Emerging Markets Index (VEMAX)
6.4% Vanguard Intermediate Term Gov’t Fixed Income (VBILX)


Her Rollover IRA (2.1% of total investable portfolio)
-----------------------------------------------------
0% CASH (some residual stuff like dividends/interest, re-invested once monthly in lagging assets)
0.3% VANGUARD BD INDEX FDS TOTAL BND MRKT (BND)
0.3% VANGUARD CHARLOTTE TOTAL INTL BD INDEX FD ETF (BNDX)
0.2% ISHARES RUSSELL 2000 VALUE ETF (IWN)
0.2% ISHARES IBOXX $ INVESTMENT GRADE CORPORATE BOND ETF (LQD)
0.3% VANGUARD TAX-MANAGED INTL FD FTSE DEV MKT ETF (VEA)
0.1% VANGUARD MID-CAP VALUE INDEX FUND (VOE)
0.3% VANGUARD IDX FUND (VTI)
0.2% VANGUARD INDEX FDS VANGUARD VALUE ETF FORMERLY VANGUARD INDEX TR (VTV)
0.1% VANGUARD INTL EQUITY INDEX FDS FTSE EMR MKT ETF (VWO)


HSA (1.5% of total investable portfolio)
----------------------------------------
0% CASH
1.5% Vanguard LifeStrategy Moderate Growth Fund (VSMGX)


His Roth IRA (0.42% of total investable portfolio)
--------------------------------------------------
0% CASH
0.1% VANGUARD TAX-MANAGED INTL FD FTSE DEV MKT ETF (VEA)
0.3% VANGUARD IDX FUND (VTI)


New annual Contributions
--------------------------
$26,000 (will increase to 27,000 next year) his 401k, 2% match (1/2% for the first 4%) - as of 2021 all contributions made to Roth 401(k)
$0 to his IRA/Roth IRA will not qualify in 2021 due to large one-time capital gains in 2021, but will likely just miss qualifying in future years
$0 her IRA/Roth IRA - likely can't either due to join income exceeding the limit
$18000 taxable (for retirement, not short term goals) in monthly $1500 increments
$7200 HSA will increase to $7300 in 2022 and will put in catchup when I qualify in a few years


Questions:
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1. Currently every account is set for the 60/40 AA with Value tilt and Int'l mix. I posted on another thread about practicing Asset Location (tax-efficient location) and while it was reassuring it wasn't a huge deal I wouldn't mind squeezing more efficiency out of the system.
Also, my current 401(k) contributions go 100% to the Roth 401(k) component of the account, but I can't rebalance the Roth and Traditional parts of the account separately, even though I would like the Roth portion to be mostly equities.
Since today the Roth component is small (5% of the account), I am thinking I should do a one-time rebalance where I set all current assets to be 100% fixed-income (even though that means a bit of Roth), and instruct all future contributions (to the Roth) to be equities. That would more or less lock my current and future contributions in the 401(k), at least until I leave that job (hopefully not till I retire in 10 years)
But I can then balance the overall portfolio by going all stock in brokerage and playing within the trad/rollover IRA to balance the overall portfolio.


2. I want to set things up for tax-loss harvesting (TLH). I control trades in the rollover and brokerage investments so I can make sure I don't repurchase a fund I sold for TLH purposes, but I can't control easily what my 401(k) and HSA automated investments of contribution and dividends will do.
For example, if I sell VEA in my taxable account, my 401(k) may buy VTMGX within 30 days, and they are essentially the same fund/index. Does that automated 401(k) purchase in another account cause a wash sale? If so I need to set the 401(k) Roth contributions to something that will not "interfere" with my taxable.
What if I used a 2060+ target fund like VANGUARD TARGET RETIREMENT 2060 INV (VTTSX), since it's far in the future its glide path would have a minimal amount of fixed-income in its glide path until I quit that job, and since it's a blended/managed fund it would not interfere with an index fund.
If for some reason 401(k) trades don't interfere with regular taxable trades, then I would likely pick something simple like SHARES S&P 500 INDEX K (WFSPX)


3. I expect to get back in the high 22% tax bracket next year, does holding muni-bonds in taxable make sense? I think I don't need bonds there, which would help me stay in the 22% tax bracket by not generating yearly income. What's the worse that could happen? the market crashes and I need cash at the same time: this means I sell stock low in the brokerage and register a loss, but as long as I rebalance in the IRA by selling fixed income to buy a TLH-friendly equivalent to what I sold in brokerage I'm OK. So I only get in trouble if I need so much cash that I exceed the content of the brokerage.
So for now, sell the bund funds BND, BNDX, and MUB to buy an equivalent amount of total market (VTI+VEA+VWO) with or without keeping the value tilt. If I have diversification for at least representation of the US, and Intl market, I can TLH if one or the other takes a tumble.

4. The HSA is going to remain a small component of the overall portfolio, it is currently in a 60/40 balanced US/Int fund. I have few inexpensive choices, but I could go all S&P500 index fund, but again, would it create wash sale preventing TLH if it automatically invests TLH/Dividends in an SP500 index fund

5. Value tilt: This was brought in by the Financial Advisor, and I can't decide if it's worth it or if it was just a way to make it look more complicated to keep my business, past performance seems to say it may be worth it a to gain a slight edge?

6. My 401(k) offers STANDARD STABLE ASSET CL II a stable value fund currently returning around 2.5%. Historically bonds have returned more than that, even though they are not right now. Just like stock I don't want to market time going between stable value and bonds right? that would be an alternative to Vanguard Intermediate Term Gov’t Fixed Income (VBILX)

Putting it all together, is this new allocation correct:
--------------------------------------------------------

401(k): 17% Vanguard Intermediate Term Gov’t Fixed Income (VBILX), I don't have a total bond market option
Taxable: 31% Total US and Total Intl Stock Market (say VTI and VXUS) or do the value tilt here for more TLH options
Trad IRA: 50% rebalance overall portfolio here for the proper mix of fixed income (23%= 40% AA -17% in 401(k)) and equities (27% = 60% AA - 31+% in the other accounts, especially taxable). Total Bond market and Intl (e.g. BND and BNDX) to complement US-only in 401(k), and various mix, with or without tilt in equities.
HSA and Roth IRA: 2% leave as is.

Roth 401(k) contribution would go to VANGUARD TARGET RETIREMENT 2060 INV (VTTSX) that wouldn't interfere with TLH and would be mostly equities in the Roth 401(k)

I also plan to continue buying I-Bonds every year and consider them part of the fixed-income part of my portfolio, oven 10 years I would have 2-3 years of retirement income protected from market movement. Too conservative?
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Raspberry-503
Posts: 954
Joined: Sat Oct 03, 2020 6:42 am

Re: Portfolio review: help me with Asset Location

Post by Raspberry-503 »

At Facet's advice, in February 2021, I bit the bullet and liquidated my PEOPX account. It's an SP500 index fund I purchased years ago and was "stuck" with and had high ER and the yearly distributions were just killing me, and I needed to diversify anyway.
The sale of PEOPX generated about $100K in long-term capital gain, so about $15K in additional taxes for this year.

I was hoping to Tax Loss Harvest in the brokerage to offset some of that $100K capital gains, but given the stock market this year, most of my equity funds are up, bonds are down but since they don't swing as hard, not much of a harvest. On the other hand, if I follow the plan I outlined above, I would sell the bonds in the brokerage and buy something equivalent in the 401(k) or IRA, and reap a small harvest:

selling MUB (muni bonds ETF) would net me about $900 in losses
selling BNDX (total Int'l bonds ETF) would net me $750 in losses
selling BND (total US bond ETF) would net me $1200 in losses

VWO (Emerging markets ETF) is down from Feb so selling some of those shares would also net me about a $2500 loss

So we're looking at a whopping $5000-$5500 harvested losses when all is said on done, or around an $800 reduction on my taxes. Not much, but if the plan outlined in the previous post is sound, might as well get the added bonus right?

As far as TLH partners I think I would do:
Buy IEMG for VWO
Buy AGG for BND and BNDX - yes, that's going to slightly alter my int'l bond exposure, but I'm not religious about int'l bonds (the 3 funds portfolio ignores them altogether)
Also buy AGG for MUB, I think it doesn't make sense for me to be in munis, even though nobody answered the question in the previous post.

One question: I last bought VWO on 10/1/2021, so I need to wait till 11/1 to sell and buy IEMG then I can sell IEMG back into VWO on 12/1.
IEMG has distributions in June and Dec 16, and VWO in Sept and Dec 22. so I don't need to worry about distribution dates as long as rebuy by Dec 15?
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Raspberry-503
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Joined: Sat Oct 03, 2020 6:42 am

Re: Portfolio review: help me with Asset Location

Post by Raspberry-503 »

I've been reading so much about value tilt my head hurts figuring out if it's worth it. I think for simplicity's sake I am going to simplify the total portfolio to this:

39% Vanguard Total Stock Market ETF (VTI)
15% Vanguard FTSE Developed Markets ETF (VEA)
6% Vanguard FTSE Emerging Markets ETF (VWO)
28% Vanguard Intermediate-Term Bond ETF (BIV)
12%Vanguard Total International Bond ETF (BNDX)

I could do VXUS instead of VEA+VWO, as far as I can tell it's about the same thing, but I like the idea of being able to TLH one or the other, and the ER is slightly lower

My 401(k) doesn't have a true total market fund, so I'll just use the SP500 index fund instead in the Roth portion of the 401(k)
chem6022
Posts: 94
Joined: Sat May 11, 2019 9:19 pm

Re: Portfolio review: help me with Asset Location

Post by chem6022 »

Raspberry-503 wrote: Mon Oct 25, 2021 5:09 pm Questions:
...
39% Vanguard Total Stock Market ETF (VTI)
15% Vanguard FTSE Developed Markets ETF (VEA)
6% Vanguard FTSE Emerging Markets ETF (VWO)
28% Vanguard Intermediate-Term Bond ETF (BIV)
12%Vanguard Total International Bond ETF (BNDX)

I could do VXUS instead of VEA+VWO, as far as I can tell it's about the same thing, but I like the idea of being able to TLH one or the other, and the ER is slightly lower

My 401(k) doesn't have a true total market fund, so I'll just use the SP500 index fund instead in the Roth portion of the 401(k)
Answers
1. My first priority would be to simply your portfolio over all else. Along the way you have the right ideas for asset location, so you can work on that as well while simplifying. Mainly start with bonds in tax-deferred first and equities in Roth first, but see the wiki about tax efficient placement for more.
2. I value simplicity over TLH at this point, as that seems a little far out on the tax tail wagging the portfolio dog for me.
3. You have plenty of room in your 401k and IRAs for bonds, so no need to put any in taxable. I actually don't think taxable is a terrible place for bond at current low interest rates, but it's more conventional to place them in tax-deferred.
5. I have a small value tilt, but it is by far the hardest part of my portfolio to stick with since it underperforms the majority of the time with only smaller bursts of outperformance. I would skip it unless you have Herculean conviction around factors and the ability to still harness them.
6. Having no stable value access myself, I would certainly consider how it might fit into my plans if I had one. I might still not use but it is worth checking these things for fixed income in today's negative real yield environment.

I used VXUS instead and more and more I even us VT, did I mention simplicity? Otherwise that looks like a great direction to head. Keep in mind you can change everything except taxable pretty easily. Cheers!
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Raspberry-503
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Re: Portfolio review: help me with Asset Location

Post by Raspberry-503 »

I keep track of my AA and other things in a spreadsheet I've been building over time, I recently added a tab that will make it easier for me to enter everything as a percentage of portfolio:

Image

It's a variation of a subset of my main page that uses amounts and gives me more detailed statistics for where to invest fresh money (measure % off target and has logic to let me know if anything hits the 5/25 rebalance trigger).

The reason I have several ETFs under each asset class is that I list TLH partners, and while it's mostly clean today, I did quite a bit of TLH last year and had to keep track of multiple funds/purchase dates. I could consolidate ITOT into VTI in the IRA today, but I generally avoid unnecessary churn, even though it may be tax-free, I want to avoid any possible fees/spread.

As I'm now approaching the 4-8 years from retirement, I'm also moving some of my bond allocation to TIPS with the intent of having 30% of US bonds in TIPs. I'm doing this by investing in TIPs in my 401(k) rather than selling/reallocating, so it'll grow slowly over the next few years.

I'm currently slightly overweight on VEA (Int'l Developed) but have not hit my rebalance thresholds, my guess is it will correct over time as I invest fresh money elsewhere rather than through selling.
Since the Rollover IRAs are the only place I can invest in Intl's bonds (BNDX) and there is no influx of money to those outside of dividends, I may have to sell something there to buy more BNDX when it hits the rebalance threshold (it's currently 16% below target, I will rebalance when/if it hits 25% below). It's all tax-free anyway, so I could do it now, but it's good training to stick to a plan

I talked to my employer again and they confirmed I can't rebalance the Roth and non-Roth portions of my 410(k) separately, so I can't swap those bond funds in the Roth for stocks funds.
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Raspberry-503
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Re: Portfolio review: help me with Asset Location

Post by Raspberry-503 »

The ER is reported by the Stock function of Excel but my 401(k) charges extra fees in the form of additional ER/% of invested funds, some funds like VWO and VEA are held in multiple accounts including the 401(k), and I've been too lazy to fix that in the formulas because it doesn;t make a ton of difference
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