Portfolio advice

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moonlit
Posts: 2
Joined: Sun Jan 23, 2022 2:08 pm

Portfolio advice

Post by moonlit »

Hello Bogleheads,

I am a late starter who is finally feeling a bit more comfortable in the last year or two about my financial knowledge, thanks in no small part to this community. I think it will help to ask for some advice here as I’m sure there is still a lot for me to understand.

I’ve made mistakes in the past, like using a mostly random financial advisor and ended up with losses after a few years in a taxable investment account. For several years, I did not really understand the details of 401(k) plans beyond the fact that I should be saving something for retirement and attempting to get a full company match. Also, for many years, most of my savings went directly to a savings account.

Age: near 38
Filing status: Single
Federal tax bracket: 24%
State (temporary): TX
Debt: none
Desired AA: 70/30 stocks/bonds (still debating this), 60/40 domestic/foreign stock

Portfolio: $380 200

401(k): $177 000 (46.55%)
Fund: Vanguard Target Retirement 2050 Trust Select
ER 0.045%
Turnover 4.82%
Recordkeeping Fee $27.00 per year deducted quarterly
54/34/9 domestic stock/foreign stock/bonds
60/40 pre-tax/roth
Cash accounts: $130 000 (34.19%) (includes emergency funds, potential home down payment, potential car purchase)
Treasury IBonds: $20 000 (5.26%) (recently invested, available early 2023)
Taxable investment account: $53 200 (13.99%)
SWISX - Schwab International Index (2.85%)
SWTSX - Schwab Total Stock Market Index (6.21%)
SWAGX - Schwab US Aggregate Bond Index (0.76%)

Older investments that I’m reconsidering:
TRBCX - T.Rowe Price Blue Chip Growth (3.31%)
VB - Vanguard Small Cap ETF (0.32%)
SPYD - SPDR S&P 500 High Dividend ETF IV (0.32%)
SCHF - Schwab International Equity ETF (0.12%)
SCHA - Schwab US Small Cap ETF (0.10%)

I have what I believe is a great 401(k) plan currently (and for the last 6 years), with a 6% match and an additional 1.5% end of year contribution, regardless of my investment in the plan. This is the first year that I will hopefully have it maxed out to the federal yearly limit. I’ve contributed to a 401(k) plan since age 26, but initially they were fairly small amounts in the 4-8% range (including employer match). Moreover, the plans and salaries at previous jobs were more mediocre. Major contributions have been in the last 5 years. Overall though, I feel like the 401(k) side of things is the one place where I'm mostly doing ok.

At some point this year, I will probably get a 5-10% raise and I also plan to start searching for a higher paying job in a HCOLA. With a change to all remote work, last year I relocated to a state with no income tax where I have a family place to stay, making rent expenses minimal. I would not want to stay here long term though. The main goal was to increase savings for at least a year.

I have always rented, never purchased a home (though I did look for some time but decided against it) and last year sold my car and have been doing car sharing instead. In retrospect, given current car prices, that was not the right move. I will look to purchase a car at some point this year, but it’s not urgent.

I would also like to relocate to another state with a much higher cost of living, plus income tax and capital gains tax, but I would only do this if I can make a successful job change with the respective cost of living adjustment. I have a decent idea about the kind of home I would like to buy upon moving, but a 20% down payment is beyond my current savings, considering emergency funds, closing costs and car purchase. Looking at potential condo/townhouse prices, they are above 5x my current income, so I could not make any moves before securing a higher income. However, a NerdWallet affordability calculator does suggest I could in theory get a loan at the top of the “affordable” range with a DTI of 36%, which is somewhat surprising.

Questions:
1) If I do get a raise in the next couple of months, does it make sense to open an IRA and start investing there? I have not considered it previously since my 401(k) plan seems quite good and I had never maxed it out before.

2) I had invested roth/pre-tax at roughly 50/50 but based on some reading I have decided that it makes more sense to do all pre-tax going forward, given my tax bracket and hopefully lower expenses at retirement. Does this make sense?

3) I had saved for several years for a down payment in a low yield savings account (a mistake in retrospect). I am still not at a comfortable level to cover emergency + 20% down payment + closing costs + car purchase. Does it make sense to keep saving cash instead of funding an IRA? I am also considering opening a high yield savings account, even though the yields are very low these days. One more option I’ve considered is to open a Bank of America account to try to reach Platinum Honors level and a potential mortgage rate discount in the future.

4) In my taxable account, I have some older investments that in retrospect I would not have made today, particularly TRBCX. I have a 38% gain here and I’m currently in a state with no capital gains tax. I’ve considered cashing this out to help with a future home down payment, especially given its expense ratio of 0.68. Should I leave this alone, sell or reinvest? A similar question applies to SPYD and VB, though those are much smaller amounts and with low expense ratios. I’ve held all these positions for several years.

5) My current total bond allocation is around 10%, although I have a relatively large cash portion currently. In a Schwab questionnaire, my profile tends to be more moderate with a 70/30 stocks/bond mix. Any suggestions on what changes to make as it relates to bonds or am I being too conservative? Perhaps opening an IRA for keeping bonds outside of a taxable account makes sense here as well.
Outer Marker
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Joined: Sun Mar 08, 2009 8:01 am

Re: Portfolio advice

Post by Outer Marker »

1. You have a lot of moving parts as to future job, income, living location, etc. I would preserve cash and not make any major investment moves until things settle down and your path becomes more certain.

2. 70/30 AA sounds reasonable - but how did you settle on 40% of equities in international? Nearly all of the diversification benefits are achived by holding 20% of equities in international, and international has tended to under-perform U.S. equities. Consider dialing that back.

3. I would adjust your AA from 90/10 to 70/30 gradually by directing new contributions to fixed income. Preferably Stable Value if you have that option in your 401K.

4. In your tax bracket, its hard to say whether pre-tax or Roth would be better. If you're able to do it, max out pre-tax in 401K and contribute to a Roth IRA if you can.

5. Don't over-buy on house or car. If you're looking at a HCOLA like NYC, SFO or LAX, consider Uber or public transit to buying a car, particularly at today's prices.
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Alto Astral
Posts: 970
Joined: Thu Oct 08, 2009 10:47 am

Re: Portfolio advice

Post by Alto Astral »

moonlit wrote: Sun Jan 23, 2022 3:00 pm Questions:
1) If I do get a raise in the next couple of months, does it make sense to open an IRA and start investing there? I have not considered it previously since my 401(k) plan seems quite good and I had never maxed it out before.
Absolutely!
moonlit wrote: Sun Jan 23, 2022 3:00 pm 2) I had invested roth/pre-tax at roughly 50/50 but based on some reading I have decided that it makes more sense to do all pre-tax going forward, given my tax bracket and hopefully lower expenses at retirement. Does this make sense?
Yes, max out the pre-tax 401k first.
moonlit wrote: Sun Jan 23, 2022 3:00 pm 3) I had saved for several years for a down payment in a low yield savings account (a mistake in retrospect). I am still not at a comfortable level to cover emergency + 20% down payment + closing costs + car purchase. Does it make sense to keep saving cash instead of funding an IRA? I am also considering opening a high yield savings account, even though the yields are very low these days. One more option I’ve considered is to open a Bank of America account to try to reach Platinum Honors level and a potential mortgage rate discount in the future.
High yield savings account is fine. You can still keep funding a Roth IRA in a money market fund ($6k / year). You can always take out the contributions.
moonlit wrote: Sun Jan 23, 2022 3:00 pm 4) In my taxable account, I have some older investments that in retrospect I would not have made today, particularly TRBCX. I have a 38% gain here and I’m currently in a state with no capital gains tax. I’ve considered cashing this out to help with a future home down payment, especially given its expense ratio of 0.68. Should I leave this alone, sell or reinvest? A similar question applies to SPYD and VB, though those are much smaller amounts and with low expense ratios. I’ve held all these positions for several years.
It's a good idea to sell if you need the cash in 12 months. I did something similar. I sold ~$100K in Total Stock Index fund late last year, in part to get a downpayment in place. The expense ration is high. If not keep the proceeds in cash, I would pick a Total Stock Market Fund
moonlit wrote: Sun Jan 23, 2022 3:00 pm 5) My current total bond allocation is around 10%, although I have a relatively large cash portion currently. In a Schwab questionnaire, my profile tends to be more moderate with a 70/30 stocks/bond mix. Any suggestions on what changes to make as it relates to bonds or am I being too conservative? Perhaps opening an IRA for keeping bonds outside of a taxable account makes sense here as well.
Yes, increase the bond portion to 30%. Past studies have shown minimal gains going above 70% in equities over the long term.
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Topic Author
moonlit
Posts: 2
Joined: Sun Jan 23, 2022 2:08 pm

Re: Portfolio advice

Post by moonlit »

Thanks for the suggestions. I do have a lot of potential unknowns with my situation, but trying to plan things out ahead so I'm better prepared. I will look at opening an IRA with Schwab, where I already have an investment account. Since I haven't used an IRA before, how does it work with a Roth IRA if I need to take out the contributions later? Is there a specific process to be followed?

Another thought is that I could sell my taxable bond investments and keep them in the Roth IRA, outside of my taxable account. I currently have a +1.82% gain there. How would I estimate tax impact of selling my taxable portion of SWAGX? Or is this something that I've already paid for through dividend yields? It's not very clear to me. Again, this is a position that I've held for several years.

For TRBCX, I will look to sell my investment and reinvest back to the Total Market Fund or keep it in cash for some time. This would incur a 15% tax on the difference between the cost basis and market value at selling time, correct?
Outer Marker wrote: Sun Jan 23, 2022 4:31 pm 2. 70/30 AA sounds reasonable - but how did you settle on 40% of equities in international? Nearly all of the diversification benefits are achived by holding 20% of equities in international, and international has tended to under-perform U.S. equities. Consider dialing that back.
I based my domestic/international asset allocation by looking at the Vanguard Target fund in my 401(k). It is roughly 60/40. I will read up on this topic and consider going 70/30 instead.
Outer Marker wrote: Sun Jan 23, 2022 4:31 pm 5. Don't over-buy on house or car. If you're looking at a HCOLA like NYC, SFO or LAX, consider Uber or public transit to buying a car, particularly at today's prices.
I was planning on purchasing a used car for around $20k, similar to the one I had owned previously. Part of the reason is to be able to travel to nearby state parks easily, which I try to do frequently. Hopefully car prices go back to normal in a few months, but public transit for some time is certainly an option since I'm thinking of relocating to the Boston area. However, avoiding over-buying on the house seems much more difficult there, based on current savings/income. I'll reconsider all this again if/when I get a new offer.
Outer Marker
Posts: 4382
Joined: Sun Mar 08, 2009 8:01 am

Re: Portfolio advice

Post by Outer Marker »

moonlit wrote: Mon Jan 24, 2022 11:36 pm
Outer Marker wrote: Sun Jan 23, 2022 4:31 pm 2. 70/30 AA sounds reasonable - but how did you settle on 40% of equities in international? Nearly all of the diversification benefits are achived by holding 20% of equities in international, and international has tended to under-perform U.S. equities. Consider dialing that back.
I based my domestic/international asset allocation by looking at the Vanguard Target fund in my 401(k). It is roughly 60/40. I will read up on this topic and consider going 70/30 instead.
Consider the following thread on domestic/international split. viewtopic.php?t=196956

I've held 20% international for a long time and have not been rewarded for it. Jack Bogle recommended 20% as the upper bound on international equities, and considered 0% perfectly fine. I agree. Vanguard's recent heavy allocation to international (and international bonds) are reasons to avoid Vanguard all-in-one funds in my opinion.
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