Please Help me with Revamping my Portfolio!

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Topic Author
sonowwhat?
Posts: 43
Joined: Sat Jan 02, 2010 10:39 am

Please Help me with Revamping my Portfolio!

Post by sonowwhat? »

Happy New Year everyone. I have recently fired my broker with UBS and have moved all my assets to a self directed Fidelity account. I am a Boglehead wanna be and am almost finished with the "Investors Manifesto". In the meantime, I need to sort through the mess I have made over the years with UBS. I am not sure if this forum is the appropriate place as I have quite a bit of reallocating to do but I hope some of you would be willing to take the time and help me get started. I have enough Capital Loss Carryfowards to reallocate the majority of my portfolio without too many current tax consequences.

So, in Laura’s format (our close to it) here you go:

Background

Employment Status: Retired since Dec 2007

Age:46

Married w/ 3 Children: Ages 16, 13, 12

Home (Paid for)

Income: Only source of income is from investments

Withdrawal Rate Needed as % of Investment Portfolio (Excluding Real Estate) in Today's dollars:
For the Next 10 Years = 3% (Need to fund kids education)
Thereafter estimate 2% rate

Other: Capital Loss Carry forward available (approx 10%) of portfolio value

Investment Expertise: Novice but I do have a CPA license and MBA in taxation so some finance background

Max % of Equity I can handle without selling in panic markets = 37.5% (P.S. Where do you think those NOLs came from?)

International - Unsure but maybe middle of the road at 30%

Emergency funds = Yes

Debt: No debt or mortgage

Tax Filing Status: Married filing Jointly w/ 3 dependent children

Tax Rate:
Federal Taxes: Effective (Tax/AGI)- 15%; Marginal (Tax/Taxable Income)- 25%
State Taxes: Effective 4%; Marginal6%

No prefereence on subcategory breakdowns

Current portfolio size = X,XXX,XXX (7 Figures)

Investment other than Stocks and Bonds (Real Estate approx 10% of S&B Portfolio)


Summary of Investments:
Cash & Equivalents 39% (Includes CDs that are maturing in the next several weeks)
Equites 27%
Bonds 34%



Taxable

Bond Funds (32.97%)
5.13% LOOMIS SAYLES INVST GRADE BOND CL A (LIGRX) 0.80%
4.83% FRANKLIN GEORGIA TAX FREE INCOME A (FTGAX) 0.69%
4.75% BLACKROCK GNMA PORT CLASS A (BGPAX) 1.09%
4.73% OLD MUTUAL DWIGHT SHORT TERM FXD INC A (OIRAX) 0.95%
3.79% LOOMIS SAYLES GLOBAL BOND RETAIL (LSGLX) 1.00%
2.41% ISHARES BARCLAYS TREAS INFLATION PROTECTED SECS FD (TIP) 0.20%
2.01% WELLS FARGO ULTRA SHRT TRM MUNI CL A (SMAVX) 0.68%
1.37% PUTNAM PREMIER INC TR SH BEN INT (PPT) 0.88%
1.35% EATON VANCE LTD DURATION INCOME FD (EVV) 1.09%
1.34% WESTERN ASSET MANAGED HIGH INCOME FD INC COM (MHY) 0.96%
1.22% NUVEEN PREM INCOME MUN FD INC (NPI) 1.16%
0.03% LOOMIS SAYLES GLOBAL BOND RETAIL (LSGLX) 1.00%

Cash & Equivalents (38.57%)
27.77% WFCU 13 month CDs 3.98% Maturing 1/31/2010
10.80% Cash (Excludes 12 Month Emergency Fund)

Equity Funds (21.99%)
3.28% S & P 500 DEPOSITORY RECEIPT (SPY) 0.09%
3.24% DIAMONDS TRUST SER I (DIA) 0.17%
2.39% ISHARES TR MSCI EAFE INDEX FD (EFA) 0.35%
1.33% CALAMOS GROWTH CLASS A (CVGRX) 1.32%
1.26% ISHARES TR RUSSELL MIDCAP INDEX FD (IWR) 0.20%
1.26% MUTUAL SERIES MUTUAL SHARES CLASS A (TESIX) 1.08%
1.23% ISHARES TR RUSSELL 2000 INDEX FD (IWM) 0.20%
1.13% BLACKROCK GLOBAL ALLOCATION CL A (MDLOX) 1.22%
1.04% FIRST EAGLE GLOBAL CLASS A (SGENX) 1.14%
0.64% ISHARES TR MSCI EMERGING MKTS INDEX FD (EEM)0.72%
0.64% COHEN & STEERS REALTY SHARES (CSRSX) 1.00%
0.62% IVY GLOBAL NATURAL RESOURCES CLASS A (IGNAX) 1.40%
0.61% ROYCE MICROCAP INVESTMENT CLASS (RYOTX) 1.69%
0.61% OPPENHEIMER DEV MARKETS FD CLASS A (ODMAX) 1.43%
0.60% ALLIANCEBER SMALL MID CAP VALUE CL A (ABASX) 1.15%
0.54% THORNBURG INTL VALUE CL A (TGVAX) 1.36%
0.53% FIRST EAGLE OVERSEAS CLASS A (SGOVX) 1.15%
0.51% MUTUAL SERIES GLOBAL DISCOVERY CLASS A (TEDIX) 1.30%
0.51% GATEWAY FUND CL A (GATEX) 0.94%
0.02% COHEN & STEERS REALTY SHARES (CSRSX) 1.00%

Equity Stocks (1.25%)
0.43% MERCK & CO INC NEW COM (MRK)
0.34% INTEL CORP (INTC)
0.33% AT&T INC COM (T)
0.15% DISNEY WALT CO DEL (DIS)

Options (-.12%)
-0.02% CALL (NQ ) INTEL CORP JAN 20 (100 SHS) (-NQAD)
-0.02% CALL (DIS) DISNEY WALT CO DEL JAN 28 (100 SHS) (-DISAV)
-0.04% CALL (MZR) MERCK & CO INC APR 35 (100 SHS) (-MZRDG)
-0.04% CALL (T AT&T INC JAN 25 (100 SHS) (-TAE)

HIS IRA

Bond Funds (.97%)


0.54% BLACKROCK GNMA PORT CLASS A (BGPAX) 1.09%
0.43% LOOMIS SAYLES INVST GRADE BOND CL A (LIGRX) 0.80%

Equity Funds (3.98%)
0.70% ALLIANCEBER SMALL MID CAP VALUE CL A (ABASX) 1.15%
0.51% MUTUAL SERIES MUTUAL SHARES CLASS A (TESIX) 1.08%
0.48% THORNBURG INTL VALUE CL A (TGVAX) 1.36%
0.46% CALAMOS GROWTH CLASS A (CVGRX) 1.32%
0.44% PUTNAM INTERNATIONAL EQUITY CL A (POVSX) 1.42%
0.38% FIRST EAGLE GLOBAL CLASS A (SGENX) 1.14%
0.38% BLACKROCK GLOBAL ALLOCATION CL A (MDLOX) 1.22%
0.29% OPPENHEIMER DEV MARKETS FD CLASS A (ODMAX) 1.43%
0.26% IVY GLOBAL NATURAL RESOURCES CLASS A (IGNAX) 1.40%
0.08% FIDELITY FOUR-IN-ONE INDEX (FFNOX) 0.20%

HER IRA

Equity Funds (.39%)

0.39% FIRST EAGLE GLOBAL CLASS C (FESGX) 1.89%

100.00% Total Portfolio


Questions:

1) I just need a new boglehead approach portfolio and need to know what to sell and what to buy.
2) Should I convert IRAs to Roths and put taxable higher yield stuff in there?
3) Really nervous about throwing a bunch of money in bonds now. What kinda of duration or maturity should I throw new money to right now (afraid of a bond bubble)


Thanks Guys!
retiredjg
Posts: 44348
Joined: Thu Jan 10, 2008 12:56 pm

Post by retiredjg »

sonowhat, welcome to the forum! This should be a very interesting discussion.

So, how much are you willing to change? I'll give it a stab to get things started. What to sell? Almost everything.

I know you said 37.5% stocks, but to make things easier, I'm going to go for 38% equity, with 11% in international (30% of equities).

Taxable 94.78%
27% Total Stock Market (both Vanguard and Fidelity have cheap ones)
11% FTSE All World Except US VFWIX if held at Vanguard
(or 8% Spartan International + 3% Emerging Markets if held at Fidelity)
56.48% bonds - see below

His IRA 4.95%
4.95% TIPS Fund

Her IRA .39%
.39% TIPS Fund
1) I just need a new boglehead approach portfolio and need to know what to sell and what to buy.
See above. Many variations possible, but this is where a Boglehead approach starts. Yes, I know it is only a handful of funds, but that's all you need.
2) Should I convert IRAs to Roths and put taxable higher yield stuff in there?
You could convert the IRAs to Roths if you want. I suspect it will be 6's in the long run (unless you see your tax bracket going down in the future in which case, do not convert to Roth now). About putting higher yield stuff there, probably not. That might apply to someone who does not have a 95% taxable portfolio. It does not apply to you.
3) Really nervous about throwing a bunch of money in bonds now. What kinda of duration or maturity should I throw new money to right now (afraid of a bond bubble)
I did not calculate your present stock to bond ratio. Do you know what it is?

You can either worry about "throwing money at bonds" or worry about your cash not making any money while you are waiting for just the right time to buy bonds. Buy stuff when you need it. If it happens to be at an extra nice price, buy extra. But I do not believe you gain anything by trying to wait till things look better. Something always looks good and something always looks bad. Each will go up and each will go down from where you bought them. Again, buy stuff when you need it.

As for the type of bonds to buy, most people seem to avoid long term bonds. Other than that, it seems to be pretty much personal preference.

Ordinarily, we do not suggest taxable bonds in a taxable location unless the marginal tax-bracket is 15% or less. However, if you are actually using the earnings from the bonds, I'm not sure this applies. In other words, if you are using the earnings, I'm not sure that holding taxable bonds in taxable is tax-inefficient. This is a question I hope will be discussed throughly as I am always wondering about it.

One type of bond to look at - I Bonds. They are inflation protected, tax-deferred, and there are no taxes under certain circumstances if the proceeds are used for education (3 kids going to college!) I do not know if that would apply to you, but it is worth looking at. Please see I Savings Bonds on the Bogleheads Wiki.

Another thing to find out about - Individual TIPS. TIPS funds are not best held in a taxable location. I do not know if that applies to individual TIPS. I'm also not sure it applies if you are using the earnings and hope some people have some insight on that.

Of course, what I suggested above does not include a "spending bucket" of cash/equivalents. Some people believe that should be 6 months to a year. Some people think it should be up to 5 years. I'm in the first camp - I think large cash buckets just dilute your fixed assets. But there are many who would argue the other side.

You could get a free financial plan from Vanguard if you are interested in moving your funds there. I don't know if Fido offers that or not. If you decide to use an advisor (not suggesting you should) check out the Garrett Network or www.napfa.org for a fee only advisor - someone you would pay on a one time basis for help in setting up a plan.
retiredjg
Posts: 44348
Joined: Thu Jan 10, 2008 12:56 pm

Post by retiredjg »

P.S. I have NO IDEA what to do with your options - I don't know how they work at all.

Second, have a real good look at the expense ratios you are paying. You only have a couple of decent ones - they are literally eating up your earnings.

Edit to add Bogleheads Investment Philosophy on the Bogleheads Wiki. Costs matter.
Last edited by retiredjg on Tue Jan 05, 2010 4:52 pm, edited 1 time in total.
Chip
Posts: 3396
Joined: Wed Feb 21, 2007 4:57 am

Post by Chip »

Hi there, and welcome.

The active funds that you own are probably throwing off lots of taxable distributions each year. I wouldn't be surprised to see you drop into the 15% federal bracket with some tax efficient fund choices.

3.28% S & P 500 DEPOSITORY RECEIPT (SPY) 0.09%
2.39% ISHARES TR MSCI EAFE INDEX FD (EFA) 0.35%
1.26% ISHARES TR RUSSELL MIDCAP INDEX FD (IWR) 0.20%
1.23% ISHARES TR RUSSELL 2000 INDEX FD (IWM) 0.20%

These are the only ones worth keeping. And I would probably sell everything if you can indeed do it at no tax cost.

Here's one idea for a "total market" approach, using mostly open end funds:

Taxable:

30% VTI or VTSAX (Vanguard Total Market Index)
10% VEU or VFWIX (Vanguard All World ex-US Fund)
25% VMLUX Vanguard Limited Term Tax Exempt Fund
30% VWIUX Vanguard Intermediate Term Tax Exempt Fund

IRAs:

05% VIPSX Vanguard TIPS fund

This gives you fairly short maturities on some of your bonds, since you're worried about rising rates. If your projected tax bracket is low enough, you might want to replace some of the VWIUX with the TIPS fund to get more of a balance between nominal and inflation protected bonds.

If you want to add a small/value tilt, replace 10% (or whatever you want) of the VTSAX with VISVX (or VBR, the ETF version).

There are many other good approaches. This is just one.

Note: I see retiredjg types faster than I do! Similar plans, though.
retiredjg
Posts: 44348
Joined: Thu Jan 10, 2008 12:56 pm

Post by retiredjg »

Chip wrote:Note: I see retiredjg types faster than I do! Similar plans, though.
Yes, very similar. I like both of your ideas!
The active funds that you own are probably throwing off lots of taxable distributions each year. I wouldn't be surprised to see you drop into the 15% federal bracket with some tax efficient fund choices.
This is a really good point and possibly the most important thing this poster will learn here. Glad you thought of it!
User avatar
fishnskiguy
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Joined: Tue Feb 27, 2007 1:27 pm
Location: Sedona, AZ

Post by fishnskiguy »

With a CPA and an MBA in taxation you probably already know this, but if you are going to end up in or near the 15% tax bracket, municipal bonds probably don't make sense.

Otherwise Chip and retiredjg have made good suggestions.

Chris
Trident D-5 SLBM- "When you care enough to send the very best."
retiredjg
Posts: 44348
Joined: Thu Jan 10, 2008 12:56 pm

Post by retiredjg »

1) I'm wondering if the munis are needed put them in the 15% tax bracket....where the munis are not needed.

2) I also wonder if more stocks would be better - sell the stocks to live on, but some of the capital gains would be offset by carry over losses and the rest would be taxed at only 15%. Could a higher stock/bond ratio actually result in a lower tax bracket?

3) Also, I'm still wanting to know about putting taxable bonds in taxable if you are going to live off the earnings. I'm not sure at all that munis are the right thing for this situation.

Like I said earlier, this will be a very interesting discussion.
zotty
Posts: 841
Joined: Tue Sep 15, 2009 5:18 pm
Location: DFW, Texas

Post by zotty »

retiredjg wrote:1) I'm wondering if the munis are needed put them in the 15% tax bracket....where the munis are not needed.
Hi retiredjg, I fought this battle until you helped with my portfolio (thanks!)

Rate Of Return-muni / (1 - Tax Rate) = rate of return taxable bond

If I earn 2% in a muni and am in the 15% tax bracket,
.02/(1 - .15) = 2.3%. Given the same credit quality, duration, taxable bonds make sense above 2.3. If your choice for taxable bonds is less than 2.3%, munis are better, all other things equal.

For reference, this wiki provides the formula: http://en.wikipedia.org/wiki/Municipal_bond
livesoft
Posts: 76583
Joined: Thu Mar 01, 2007 8:00 pm

Post by livesoft »

With 3 teenagers, one should consider if 529 plans make sense as a tax-sheltered place for your bonds. One can pre-load those plans with 5-years of contributions ($65K from you, $65K from your spouse or $130K combined).

Such large amounts may not be wise because college doesn't cost that much and you may not want to make such a commitment, but a lesser amount would be useful. One could select something like the Vanguard Income option in the Ohio plan.
tibbitts
Posts: 13879
Joined: Tue Feb 27, 2007 6:50 pm

Post by tibbitts »

1) I just need a new boglehead approach portfolio and need to know what to sell and what to buy.
2) Should I convert IRAs to Roths and put taxable higher yield stuff in there?
3) Really nervous about throwing a bunch of money in bonds now. What kinda of duration or maturity should I throw new money to right now (afraid of a bond bubble)
1. You don't really need much help with this because taxes aren't an issue. Just figure out approximately what asset class each fund you have is and pick an equivalent VG fund. Which specific VG funds to pick is really a trivial consideration. One suggestion I have is to minimize time out of the market, so you'll have to figure out how to accomplish that. I don't know anything about options, so if I owned them, I'd probably get rid of them as soon as I could (assuming they had any value at the moment.) It's important to understand that you can't exactly duplicate what you have at VG (the mutual fund company - I'm assuming you aren't interested in the brokerage), so you have to accept some compromises, like maybe maybe having a little more international equity but no international bonds.

2. It's nothing but a bet on future tax rates. I read your post as being in the 25% marginal bracket and if that's so there's no way I'd touch a roth. At less than 15% marginal, it would probably make sense. At 15% it's a tossup.

3. Everybody is really nervous about throwing money at anything right now. But I don't really understand the point because you're just moving to the same allocation. Personally I would pick short-duration corporate and high-yield, but that's just a personal guess/bet. For your CDs and cash, I wouldn't put that money at VG, especially right now. Just take your pick of treasury bonds or CDs or a bank savings account for the part you won't need for a while, and accept that you won't get much interest in the current environment. You have a large enough amount of money that you probably don't need to take more risk.

Paul
Guido
Posts: 111
Joined: Mon Dec 28, 2009 10:06 am

Post by Guido »

I must tell you you have really way too much going on here. Why not start over by going 40% Total Stock Market Index, 40% Total Bond Index and 20% International Index. Your bond money should be in tax sheltered
accounts.

After you've got things streamlined you can add things around the edges like International bond funds, Tips, Emerging Markets, and Reitts

You have obviously been a prolific saver or had a high paying job. You are still very young so don't go too conservative.

Vanguard can pretty much take care of all my recommendations except for the International Bond fund which TRPrice can help you with.

You've done well except you need to ditch your broker.
Topic Author
sonowwhat?
Posts: 43
Joined: Sat Jan 02, 2010 10:39 am

Post by sonowwhat? »

With 3 teenagers, one should consider if 529 plans make sense as a tax-sheltered place for your bonds. One can pre-load those plans with 5-years of contributions ($65K from you, $65K from your spouse or $130K combined).

Such large amounts may not be wise because college doesn't cost that much and you may not want to make such a commitment, but a lesser amount would be useful. One could select something like the Vanguard Income option in the Ohio plan.

Wow, I think in three hours I have received more "good" investment advice than I have in the past three years. As for 529 plans, I have them just plumb forgot about them when I put this thing together. I have been contrbuting to them for about 10 years now. They are the Georgia 529 I think with TIAA-CREF. I would say that if I had included them they would have represented about and additional 3% of total portfolio or about what you suggested.
Topic Author
sonowwhat?
Posts: 43
Joined: Sat Jan 02, 2010 10:39 am

Post by sonowwhat? »

retiredjg wrote:
So, how much are you willing to change? I'll give it a stab to get things started. What to sell? Almost everything.
100% if that is what makes sense!

Curoious why several of you recommended TIPS in the IRAs. Is it because that in addition to paying tax annually on the interest you receive, you'll also have to pay tax each year on any increases to the principal, even though you won't receive the inflation-adjusted principal until the bond matures?


retiredjg wrote:
1) I'm wondering if the munis are needed put them in the 15% tax bracket....where the munis are not needed.

Not sure what you mean by this???


retiredjg wrote:
You could get a free financial plan from Vanguard if you are interested in moving your funds there. I don't know if Fido offers that or not. If you decide to use an advisor (not suggesting you should) check out the Garrett Network or napfa for a fee only advisor - someone you would pay on a one time basis for help in setting up a plan.
Ouch, I did a search in Atlanta and some of the results were my ex-brokers. How can I find a boglehead advisor on this site?

retiredjg wrote:
2) I also wonder if more stocks would be better - sell the stocks to live on, but some of the capital gains would be offset by carry over losses and the rest would be taxed at only 15%. Could a higher stock/bond ratio actually result in a lower tax bracket?
I just checked and I do have enough capital losses both long and short term to pretty much sell everything without any immediate tax consequences. Afterwards I will have carry forward capital losses equal to about 5.3% of the value of my portfolio. Certainly another piece of the puzzle when choosing my ratio of stocks/bonds.
The problem I have is sleep. Last fall I panicked and so I am trying to set my ratio to avoid selling in a severe downturn. I do believe though that part of my panic was the fact that I had a very limited knowledge of investing or even my own portfolio and therefore the "unknown" might have been driving most of my panic attitude

tibbitts wrote:
2. It's nothing but a bet on future tax rates. I read your post as being in the 25% marginal bracket and if that's so there's no way I'd touch a roth. At less than 15% marginal, it would probably make sense. At 15% it's a tossup.

Are you concerned about the conversion being taxed? Would my carry forward losses shelter that?


tibbitts wrote
3. Everybody is really nervous about throwing money at anything right now. But I don't really understand the point because you're just moving to the same allocation. Personally I would pick short-duration corporate and high-yield, but that's just a personal guess/bet. For your CDs and cash, I wouldn't put that money at VG, especially right now. Just take your pick of treasury bonds or CDs or a bank savings account for the part you won't need for a while, and accept that you won't get much interest in the current environment. You have a large enough amount of money that you probably don't need to take more risk.
Glad to hear you say this. The CDs that are maturing in a few weeks earned 4% for a 13 month term. I can't touch that now but I can get 3% for a 3 year term. These maturing CDs represent a large chunk (30%) of my portfolio and to throw them into bonds right now is a little scary. I will be upping my equities from 27% to 38%. For some reason I am not nearly concerned upping the equities as I am the bonds right now. At least with the equity's you've got an upside. Curious if others reading this thread would concur.
Chip
Posts: 3396
Joined: Wed Feb 21, 2007 4:57 am

Post by Chip »

retiredjg wrote:1) I'm wondering if the munis are needed put them in the 15% tax bracket....where the munis are not needed.

2) I also wonder if more stocks would be better - sell the stocks to live on, but some of the capital gains would be offset by carry over losses and the rest would be taxed at only 15%. Could a higher stock/bond ratio actually result in a lower tax bracket?

3) Also, I'm still wanting to know about putting taxable bonds in taxable if you are going to live off the earnings. I'm not sure at all that munis are the right thing for this situation.
1. Likely there is some sort of "balance point" where the OP will have some taxable bonds and some tax-exempt. That point depends on interest rates and tax rates, as zotty has shown. Since we don't know whether the OP has 1M or 9M, it's hard to estimate where that point is.

2. Yes, a higher stock/bond ratio would almost certainly reduce taxes. But the OP has chosen their allocation based on what appears to an experienced-based ability to take risk.

3. Makes no difference. Do the calculation that zotty described but do it on a pro-forma basis. IOW, after making all the suggested portfolio changes. I suspect if the portfolio is in the 1-3M range, with 3 kids, the OP will be in the 15% bracket and will be able to have some taxable bonds in taxable accounts.
Another thing to find out about - Individual TIPS. TIPS funds are not best held in a taxable location. I do not know if that applies to individual TIPS.
It's really the other way around, but even then it's not a terrible burden. TIPS funds distribute the "phantom income" so one isn't taxed on money that isn't received, as is the case with individual TIPS. But I've been taxed throughout my life on money I haven't received: one easy example is FICA tax. That portion of a paycheck is taxed by the Feds and states, but it is never received. I suggest that anyone who thinks individual TIPS in taxable are viable for them NOT to dismiss them without examining all of the facts. One is that isn't mentioned enough here is that they are state tax free.
Chip
Posts: 3396
Joined: Wed Feb 21, 2007 4:57 am

Post by Chip »

Equity Stocks (1.25%)
0.43% MERCK & CO INC NEW COM (MRK)
0.34% INTEL CORP (INTC)
0.33% AT&T INC COM (T)
0.15% DISNEY WALT CO DEL (DIS)

Options (-.12%)
-0.02% CALL (NQ ) INTEL CORP JAN 20 (100 SHS) (-NQAD)
-0.02% CALL (DIS) DISNEY WALT CO DEL JAN 28 (100 SHS) (-DISAV)
-0.04% CALL (MZR) MERCK & CO INC APR 35 (100 SHS) (-MZRDG)
-0.04% CALL (T AT&T INC JAN 25 (100 SHS) (-TAE)

The broker is executing a commission-enhancing, er, covered call strategy.

I would not buy the calls back, as they are all relatively short term and the commissions are probably outrageous. Nor would I sell the 100 shares each of the underlying stock that the calls are covered by. You don't want to be short a naked call.

The quotes for all of those stocks are above the strikes that you have listed. So I expect those shares will be called away if the prices hold up. I think your best choice is to not do anything until the options expire, then transfer the remaining underlying stock in kind to your new broker and sell it there. You could sell at UBS, but you'll pay through the nose.

BTW, if your broker has discretionary trading authority, revoke that IN WRITING, right now. Certified mail, return receipt is a good idea.
retiredjg
Posts: 44348
Joined: Thu Jan 10, 2008 12:56 pm

Post by retiredjg »

sonowwhat? wrote:Curoious why several of you recommended TIPS in the IRAs. Is it because that in addition to paying tax annually on the interest you receive, you'll also have to pay tax each year on any increases to the principal, even though you won't receive the inflation-adjusted principal until the bond matures?
The reason I suggested it is much simpler. The way I see your situation, your enemies are going to be inflation, taxes, and costs. I recommended using your little bit of bond space for the TIPS fund (not individual bonds) to counter inflation. It's not much, but what the heck, it's something. I put it in the IRA space because holding a TIPS fund in taxable just gives you something else to pay taxes on. I didn't mention a specific fund above, but I would recommend Vanguard's VIPSX (ER .25%) over Fido's FINPX (ER .45%) because the costs are lower.

And while we are talking about it, I suppose you could use the 3% of your assets that are in the 529 plans to invest in a TIPS fund too. Ordinarily, most of us would suggest you keep 529 plans and retirement plans separate (on paper, if not in practice) because they have different time horizons. Since you are no longer in accumulation phase, I don't see any point in that. I think TIAA-CREF has a TIPS fund available if you want to go that route.

Individual TIPS are an entirely different thing. I don't use them and can't help you with that at all.
retiredjg wrote:1) I'm wondering if the munis are needed put them in the 15% tax bracket....where the munis are not needed.

Not sure what you mean by this???
I was mulling over in my own mind the conundrum of which bonds to chose. If you use munis, you have less taxable income. That could get you into the lower 15% marginal tax bracket. But in the 15% tax bracket, you might get more return from using taxable bonds instead of munis. I'm sure there is a balance somewhere, but I don't know how to find it.

Since it it tax time, now is a real good time to figure out what Chip was saying earlier about whether getting rid of all the investments with all the taxable distributions would drop you squarely into the 15% tax bracket. That would be a huge improvement in my opinion.
Ouch, I did a search in Atlanta and some of the results were my ex-brokers. How can I find a boglehead advisor on this site?
Hmmmm. When you call (some company other than where you were) for an appointment, specify that you are interested in an advisor who specializes in portfolios that contain only/mostly low cost index funds?

Did you check out the Garrett Network in addition to the website I included? They are separate although I'm sure some folks are on both lists. I'm not suggesting that you have to have an advisor at all. Just if you have an advisor, it should be someone who is not allowed to sell you a product, just services. This eliminates a conflict of interests.
retiredjg wrote:2) I also wonder if more stocks would be better - sell the stocks to live on, but some of the capital gains would be offset by carry over losses and the rest would be taxed at only 15%. Could a higher stock/bond ratio actually result in a lower tax bracket?
I just checked and I do have enough capital losses both long and short term to pretty much sell everything without any immediate tax consequences. Afterwards I will have carry forward capital losses equal to about 5.3% of the value of my portfolio. Certainly another piece of the puzzle when choosing my ratio of stocks/bonds.
This is good info. The point I was trying to make was something different though.

Again, I was mulling over in my own mind this thing on taxes. Long term capital gains are taxed less than ordinary dividends (as I'm sure you well know). I was wondering if you biased your income from your portfolio more toward LTCG and less toward ordinary dividends from bonds, if that could help lower your marginal tax bracket to the 15% mark. In retrospect, I had it wrong. The taxable income would be the same regardless if the income came from LTCG or ordinary dividends. But the amount of tax paid would be less if more of your income came from LTCG. The only way I could figure to do this is to raise your stock/bond ratio so that you'd have plenty of stocks to sell - thus my wondering if raising your stock/bond ratio might be smart. I sure hope that circular thinking paragraph didn't confuse things further.
The problem I have is sleep. Last fall I panicked and so I am trying to set my ratio to avoid selling in a severe downturn. I do believe though that part of my panic was the fact that I had a very limited knowledge of investing or even my own portfolio and therefore the "unknown" might have been driving most of my panic attitude
I think this is a very good possibility. It is possible that education and experience is the key to the courage to stay the course in hard times. Has someone mentioned our book listyet? One book not yet on this list is the Bogleheads' Guide to Retirement which has only been out a couple of months.

I'd suggest you start out at just the level you mentioned - about 40% stocks. As you get more experience, you might move up to 50%. You might not. I don't believe I'd go much less than 40% stock since you are so young. You need stocks to keep that portfolio going for many years.

I'm very curious about your number of 37.5% Would you be willing to share how you came up with that number?
retiredjg
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Post by retiredjg »

Glad to hear you say this. The CDs that are maturing in a few weeks earned 4% for a 13 month term. I can't touch that now but I can get 3% for a 3 year term. These maturing CDs represent a large chunk (30%) of my portfolio and to throw them into bonds right now is a little scary. I will be upping my equities from 27% to 38%. For some reason I am not nearly concerned upping the equities as I am the bonds right now. At least with the equity's you've got an upside. Curious if others reading this thread would concur.
I think using a chunk of CDs instead of bonds would be fine. I know that earlier I encouraged buying bonds instead of letting the money sit in cash, but I was thinking "money market" type of cash rather than CDs.
retiredjg
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Post by retiredjg »

Quote:
Another thing to find out about - Individual TIPS. TIPS funds are not best held in a taxable location. I do not know if that applies to individual TIPS.


It's really the other way around, but even then it's not a terrible burden. TIPS funds distribute the "phantom income" so one isn't taxed on money that isn't received, as is the case with individual TIPS. But I've been taxed throughout my life on money I haven't received: one easy example is FICA tax. That portion of a paycheck is taxed by the Feds and states, but it is never received. I suggest that anyone who thinks individual TIPS in taxable are viable for them NOT to dismiss them without examining all of the facts. One is that isn't mentioned enough here is that they are state tax free.
Chip, I'm not following what you mean.

I was saying that TIPS funds should be in tax-advantaged. Do you mean TIPS funds can be in taxable?

Can you back up and explain how individual TIPS are taxed if held in taxable? Can individual TIPS be held in tax-advantaged? I know nothing about individual TIPS but it seems like this thread is a good place to discuss it (if the discussion does not become a hijack).
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sonowwhat?
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Post by sonowwhat? »

OK, so after mulling it over reading tons of post and your replies, here is what I am thinking in terms of a restructured portfolio:

Image

If I go with this structure, the allocations both before and after between asset types will be as follows:

Image

The Cash/MM is essentially a 1 1/2 years of emergency funds.

This represents a 100% selloff of my current investments. I am more interested in the asset buckets and locations then the individual funds/etfs at this point.

Let me know what you think.
retiredjg
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Post by retiredjg »

The REIT funds may be a problem.

Ordinarily REIT should not go in a taxable account. I do not know if this is different due to the fact that you are de-cumulating. It is possible you should forgo the REIT as they are going to pay out big distributions. REIT laws require the payout.

However, at a 1% allocation, it may not matter. Just know that generally we recommend that a slice less than 5% is non-contributing and a pain in the rear.

Something to consider. The Admiral shares version of total stock market mutual funds has the same ER as VTI, so there is no reason to use the ETF (which requires you to use Vanguard Brokerage Service rather than Vanguard Mutual Funds.)

If you hold only VG mutual funds at Vanguard, there are no transaction fees or annual fees (if you get electronic service rather than mail). If you hold ETFs at Vanguard Brokerage Service, there are transaction fees each time you buy and sell. If you use ETFs, you might want to hold them somewhere you get free trades (Wells Fargo PMA account).
retiredjg
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Post by retiredjg »

PS, If you are seriously considering VG, you should ask for their free portfolio advice. It is likely to be similar to what you see here. Might be some different. I'm sure it would be educational.
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sonowwhat?
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Post by sonowwhat? »

Thanks for REIT insite, let me think about that one. For now I wanted to answer your earlier question:
I think this is a very good possibility. It is possible that education and experience is the key to the courage to stay the course in hard times. Has someone mentioned our book list yet? One book not yet on this list is the Bogleheads' Guide to Retirement which has only been out a couple of months.

I'd suggest you start out at just the level you mentioned - about 40% stocks. As you get more experience, you might move up to 50%. You might not. I don't believe I'd go much less than 40% stock since you are so young. You need stocks to keep that portfolio going for many years.

I'm very curious about your number of 37.5% Would you be willing to share how you came up with that number?
Theorectical Stocks Caluclation
54% Bond Allocation - Age Rule
-15% Risk Tolerance Adjustment (Low to Very Low)
+5% Early Retirement adjustment(see note A below)
________________________________

44% Theorectical Stock
38% Willing today
-6% Difference: Sleep and Education Factor (see note B)

Note A: most ER folks could go back to work if needed, so that makes it feasible to take slightly more risk by having more equities. Just as important is the longer timeframe of the retirement--a larger % in equities increases the likelihood that the portfolio wil stay ahead of inflation for the extra decades, and the average "greater span before I'll spend the cash" makes it safer to hold a larger % of equities.

Note B: Based on the experience of the fall of 2008 I had a rough time with a 42% allocation at the time and sold down to as low as 27% before it was all over. Kept thinking about Armageddon I guess. Again I think a lot of this was having not gone through it before and secondly my lack of knowledge of my own broker driven portfolio and history. I think I could get to this theorectical stock % given some time, say over the next year or two as learn more and feel more "in control" of my investing and financial destiny.
Chip
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Post by Chip »

retiredjg wrote:I was saying that TIPS funds should be in tax-advantaged. Do you mean TIPS funds can be in taxable?

Can you back up and explain how individual TIPS are taxed if held in taxable? Can individual TIPS be held in tax-advantaged?
Though I did a poor job of it, what I was trying to say is that once the decision is made to put TIPS in a taxable account, TIPS funds are easier to buy and manage than individual TIPS. Tax reporting and basis tracking for individual issues is more difficult than for a fund.

As you know, the return from TIPS consists of two parts. The first is the coupon interest, which is the coupon rate multiplied by the inflation adjusted principal at the time of the payment. Though since the payments are semi-annual, it's coupon rate/2 * adjusted principal. You actually get paid this money by the Treasury. The second part of the return is the inflation adjustment to the bond principal. If the CPI is 3% in a year, the bond principal increases by 3%. That 3% is also taxable to you in that year, even though it isn't paid to you until the bond matures or you sell it. This is the "phantom income" that's often mentioned here.

Basic tax reporting isn't too bad. You get a 1099-INT for the coupon interest and a 1099-OID for the inflation adjustment to principal. Your cost basis in the bond increases by the amount of OID that you report each year. That prevents you from paying tax again on that amount when the bond matures or is sold. It's sort of like the way reinvested dividends increase your cost basis. You have to track this basis yourself. Tax reporting can get a lot more complex in the years that you buy and sell, and if there is significant deflation in any year.

TIPS funds make it simpler. They pay out the inflation adjustments to you along with the coupon interest. It's all reported on 1099-INT and basis adjustments are seldom required.
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Post by Chip »

sonowwhat,

I was rereading the thread and realized I missed the sentence in your original post where you'd moved everything to Fidelity. Sorry about that. So that changes some of my earlier advice.

On the options: since you're at the gold commission level at Fidelity it won't kill you to close the MRK call out early. As I read it, the cost will be $8/trade for a buy-to-close transaction on an out of the money option. Obviously you should let the others expire as it's only a couple of weeks from now.

You'll want to move your bond fund money to Vanguard. Vanguard has the lowest cost bond funds, hands down. You can buy the Investor shares at Fidelity, but the fee is $75. And you can't buy the admiral share class at all (they save you around 10 basis points in expenses vs. investor shares depending on the fund).

It's reasonable to keep part of your money at Vanguard and part at Fidelity or another broker, but it does add some complexity. If you move everything to Vanguard I'd recommend that it all be in mutual funds instead of ETFs. If you have ETFs you'll have to have a Vanguard Brokerage Services account. I'm not a fan of VBS based on my experiences there a few years ago. Though many here are quite satisfied with it.

I agree with retiredjg about avoiding that small amount of REITs. If you want a diversifier I would add a significant chunk of a small cap value fund, like I mentioned earlier.
retiredjg
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Post by retiredjg »

Chip, thanks for the info and the refresher on how TIPS work.
Chip wrote:...what I was trying to say is that once the decision is made to put TIPS in a taxable account, TIPS funds are easier to buy and manage than individual TIPS.
So, assuming that a bunch of bonds need to go into taxable (as in this case), how would a person decide which to put there first? Would TIPS be the first to go? Last to go? Some of each? Does it matter?
retiredjg
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Post by retiredjg »

If you want a diversifier I would add a significant chunk of a small cap value fund, like I mentioned earlier.
I like this idea. Small cap value is not so tax-inefficient that it must not be put in taxable. Too many double negatives there - It's ok to put SCV in taxable although it is not as tax-efficient as some other things. Please see Principles of Tax-Efficient Fund Placement on the Bogleheads Wiki.

I also like the idea of tax-managed small cap VTMSX (.19% ER).

Another idea is FTSE All World Except US Small Cap VFSVX. The international suggested before does not contain small caps. This fund "completes" it. If you decide to hold this fund you'll need to overweight it as the market weight would have you holding a 1% slice.

Good things about FTSE Small - in an earlier thread, it was pointed out that FTSE small has less correlation to TSM than SCV - might be a better "diversifier".

Bad things - the ER is high (although not real high for the type of fund it is) and there is a small purchase fee and redemption fee. The purchase fee goes into the fund and is for everyone's good. The redemption fee discourages frequent trading.

One other thing - this fund was expected to be tax-efficient, but in its first year, it paid out a chunk. As I understand it, that should not happen every year - it was a first year thing. This is not something I understand well and I may have oversimplified it.

I'm thinking your approach could be this - move to a portfolio like you have in the chart above (minus the REITs). Sit on it a year to see if that alone drops you into the 15% marginal tax bracket. If so, if you have any extra room for income, add in one of the diversifiers like small cap value.

Please see Bogleheads Investment Philosophy on the Bogleheads Wiki - see near the bottom the research by Fama and French for why people like SCV.
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Post by dbr »

One thing I can think of about bond locations is that Treasuries are state tax exempt, whether bond or fund, while certain other bonds are not state tax exempt. State treatment of some classes of bonds, such as federal agency bonds, may be more complex. All of this, of course, is dependent on state.

I suppose it would also make sense that lower yielding bonds are more tax efficient than higher yielding bonds in a taxable account.

I can't think of a likely game one would play with capital gains tax rates as virtually all of the return on bonds is fully taxable interest whether returned as payout or increment to principal (TIPS bond).

I don't know if one would opt for more volatile bond funds in taxable on grounds that tax loss harvesting opportunities would be greater. Bonds are not typically a source of TLH opportunities.

It is certainly possible that location decisions in this context could be driven by investment cost decisions as either the taxable or the tax preferred account might offer lower ER's, transaction fees, purchase fees, etc. for any particular bond class.

One consideration is that as of now Treasury Direct does not admit IRA accounts. That could have an effect on location decisions. A related consideration is the option to create tax deferred space in taxable by investing in I Bonds. Having made that choice, other bond decisions could be different.

Maybe someone can think of something we might be missing here.
retiredjg
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Post by retiredjg »

dbr wrote:One consideration is that as of now Treasury Direct does not admit IRA accounts.
Oh. Does that mean that individual TIPS can't be held in IRA? Or are they available on the secondary market - which might mean they could go into IRA?

This whole idea of TIPS in taxable, which could apply to this poster, is so new to me. I'm sure it has been discussed, but I did not follow it.
Chip
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Post by Chip »

retiredjg wrote:So, assuming that a bunch of bonds need to go into taxable (as in this case), how would a person decide which to put there first? Would TIPS be the first to go? Last to go? Some of each? Does it matter?
Good question. Opinions will vary. :D

I think one has to look at relative after tax rates, then decide how important default risk, term risk and inflation risk are to them personally. Because those are the tradeoffs that you're making when you choose one fund over another.

Like the OP, I retired early. Inflation protection is important to me because of the lengthy time horizon so I have 90%+ of my fixed income in TIPS. But I won't buy them at any price and have occasionally market timed them. But I have them all in tax deferred accounts.

With the OP's situation, I'd first decide which types of funds I would be willing to own. I'd base this on philosophy. For example, some here won't own corporate bonds no matter what the price. Others won't touch a single state muni fund. After making this decision, get the current yields and durations of the acceptable funds and compare on an after tax basis. And try to decide how much one is willing to pay for inflation protection.

I was looking at after tax yields (using TFB's calculator and 15% Fed, 6% GA) this morning on the funds we're discussing in this thread. VWIUX is 2.9% with a duration of 5.8 years while VMLUX is 1.4%/2.5 years. Personally I'd trade 3.3 years of duration risk for 1.5% of yield. VAIPX is more difficult, because one has to assume an inflation rate. If you pick 2%, that puts its AT yield at 2.4%. At 3% inflation the AT yield goes to 3.3%. But the VAIPX duration is higher than than the other two (but don't ask me what it is :roll: ). So the current tradeoff is giving up some yield (vs. VWIUX) and lengthening duration for the inflation protection of TIPS. And giving up even more yield if in the 25% bracket.

As a practical matter I would target to buy as much VAIPX as I could while staying in the 15% bracket. I'd create proforma tax returns based on the current dividend yields of the equity funds, plus the muni bond yields above, assuming everything in taxable accounts was in munis. If in the 15% bracket, begin substituting VAIPX for the muni funds until the top of the 15% bracket is reached. That's the target. But I'm not crazy about TIPS yields now, so I'd probably use some variant of Larry S.'s TIPS strategy rather than buying the whole block of VAIPX right now.
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Post by retiredjg »

Well, a lot of that was above my head, Chip, but I'm getting the general idea. Thanks.

I'm going to stop asking TIPS questions now as I don't think the original poster is going that route - in taxable anyway.
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Post by Chip »

retiredjg wrote:Oh. Does that mean that individual TIPS can't be held in IRA? Or are they available on the secondary market - which might mean they could go into IRA?
Individual TIPS can be owned in both IRAs and taxable accounts IF the broker/provider of that account allows it. Treasury Direct is a way to buy & hold Treasuries directly from/with the US Treasury. But, as dbr said, they don't allow IRA accounts to be set up there. Only taxable accounts. So if you want individual TIPS in an IRA, you'll have to do it through a broker. I don't know what every broker offers, but I suspect most of them will allow both auction purchases and secondary market purchases/sales.
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sonowwhat?
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Post by sonowwhat? »

A bit of an update. Still trying to put this puzzle together whiel trying to avoid "analysis paralysis"!

Since my last posts I think the majors issues I need to get comfotable with before putting together an asset model are as follows:

1) The need for tax efficiency: I have looked carefully at my tax situation and I do not think, at least for the next several years that I will have a reason to hold tax free bonds in my taxable accounts. This is driven by several factors, primarily the fact that I get a pretty large deduction for "investment interest" from a K-1 where I am a 45% owner in a commercial property development. That coupled with the qualified dividend treatment of US stocks and all the standard exemption stuff should keep my marginal rate low enough to not justify holding tax exempts in my taxable account. Of course if I was working this would certainly be a different case.

The fear of a treasury bubble: I am really struggling with this one. I want to be a purist when it comes to passive investing but my gut will not let me in one area. I certainly cannot talk in a sophisticated manner hear in terms of yield curves etc.... BUT I just look at risk versus opportunity. It seems to me that the upside for US treasuries is nominal given the current yields and the downside is great. Is there a treasury bubble like some would argue, I just do not know but, do I really want to risk it given the limited upside? So why am I talking about treasuries in a conversation about buying into broad based passive bond funds? It's because these funds invest based on The Barclays Capital Aggregate Bond Index. This index buys bonds based on the weighting according to the market size of each bond type. The only thing excluded are Municipal bonds and Treasury Inflation-Protected Securities. As a result, the index includes a 28% stake in Treasury securities.

Now since I am going to repurchase a 100% stake into a new portfolio with potentially a 60% bond mix this would mean I am purchasing a close to 18% stake in treasuries. This just gives me a huge gut check. One hypothetical answer would be to create a bond ladder that focuses mainly on corporate bonds or to somehow find a low cost index fund that is not so heavily US Govt weighted. I don't know if any of this rambling has any merit. I would love some insight as to where my logic does not hold up or what some good alternatives are.

Thanks Sam

P.S. I took your advice and contacted Vanguard. They are sending me out a questionnaire from which they will do a plan. Thanks
retiredjg
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Post by retiredjg »

Well, I think you have to follow your gut. That will be the source of unrest and losing sleep at night if you choose to ignore it. And I don't see anything wrong with keeping a chunk of your fixed assets in CDs if you can get a decent interest rate.

I was just searching the VG funds and found a couple I was not familiar with - short term investment grade and intermediate investment grade. The short term one has some gov't bonds, but not much. The intermediate term investment grade had only a small percentage - just over 3%. This was just a real quick look, so I may have missed something, but it seems these might be worth looking at. It might be something you want.

I use this page when I want to look at VG funds. Well, can't get that to work. Just find "All Vanguard Funds" for the list.

I'm sure VG will be of some assistance. I think many of us would like to hear what they suggest if you are willing to share it.
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sonowwhat?
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Post by sonowwhat? »

Its been a while but wanted to get any final thoughts as I finalize my allocation and invest between now and Monday. I went through the Vanguard Financial Planning Process as suggested in this forum. I learned a whole lot about estate planning in that process too. Cannot say enough about the Vanguard CFP advice that is available. I have now liquidated my entire portfolio and I am awaiting settlement (3days) to be able to move cash to Vanguard. I will leave my equities at Fidelity. Here is where I am. The split in the Bond funds was driven to reduce exposure to Treasuries. I have a sizable amount of CDs coming due in late February and that will go toward the bond funds as shown, but if I can get a good rate I may roll some of it into CDs. Any final thoughts would be appreciated.

Taxable
27.2% Total Bond Market Index Fund Admiral Shares (VBTLX)
27.2% Vanguard Investment Grade (VFIDX)
32% Fidelity Spartan Total Mkt Idx Advtg (FSTVX)
8% Fidelity Spartan Intl Idx Advtg (FSIVX)

His IRA
5.3% Vanguard® Total Bond Market Index Fund Admiral Shares (VBTLX)

Her IRA
0.4% Vanguard® Total Bond Market Index Fund (VBTLX)

100% Total
retiredjg
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Post by retiredjg »

I think it is just fine with one small exception - the lack of emerging markets funds. I'm not sure I'd worry about it though. To achieve market weight, you'd need a 1.6% slice of emerging markets. Not worth the trouble in my book.

Just so you'll know, the Fidelity Spartan International is only developed markets. If you ever decide to move your equities to Vanguard, their most commonly used international funds contain both developed and emerging markets.

In case this was not discussed with the CFP, be sure the dividends for your taxable account are directed to a money market account to be used for your living expenses (rather than reinvested). You are going to pay taxes on them anyway, even if they are reinvested. So you might as well use them.

See the last paragraph on page 4. Well, actually, read the whole thing as it really applies to your situation.

https://institutional.vanguard.com/iip/ ... talRet.pdf
I have now liquidated my entire portfolio
Wow! That's quite a big change. I'm impressed.
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