I've had a number of requests to discuss my own asset allocation, as if there is something magical about it. A true internet sleuth would have found it already, as it has been posted before, but it wasn't on this site and its been a long time. I considered titling this post “Why My Portfolio Sucks” and then criticizing my portfolio just like I do many of the other static asset allocation portfolios I discuss here, but I think looking at how the portfolio has evolved, as well as the ways in which it may evolve in the future would be more instructive. (Besides, it'll get plenty of criticism in the next post, not to mention the comments section.) Like with Genesis, let's start with….
In the beginning….there was a broke intern. He knew investing was important and wanted to retire someday so he took a residency-mate's recommendation and went to see a financial planner. Like any good financial planner, he helped the broke intern get some disability insurance and like any bad planner, he then proceeded to try to sell him some whole life insurance, or at least some expensive term insurance that could later be converted to whole life and suggested some solid high-expense loaded mutual funds for his Roth IRA. Thus my portfolio was born in the Spring of 2004:
- 100% Stock
- 100% Large Cap Growth
- 50% American Funds AMCAP C Fund (Expense ratio 1.52%) A popular large cap Growth Fund
- 50% Calamos Growth C Fund (Expense ratio 2.01%) Another popular large cap Growth Fund
Yep, that's what the highly trained financial adviser recommended. That's some real diversification there eh? So I went back for my meeting a year later and we added a fund to the portfolio, Fidelity Advisor Small Cap C Fund, with an ER of 2.06%. Now my portfolio was:
- 100% Stock
- 75% Large Cap Growth
- 25% Small Cap Growth
That's a little better I suppose, but with an average expense approaching 2%, it was a recipe for long-term investment failure. Later that Spring I was on a vacation, and picked up Eric Tyson's Mutual Funds for Dummies. I couldn't wait to get home and see what kind of funds I was invested in. What a disappointment to realize I was paying ridiculously high ERs. I was pissed! I started reading everything I could about investing. By June, I was making a few tentative steps on my own. I realized my portfolio had no international holdings, so my first investment on my very own was into the Vanguard Total International Stock Index Fund. I requested another meeting with the advisor, fired him, and rolled my Roth IRA (after paying substantial transfer fees) over to Vanguard. By August, I had this asset allocation:
- 100% Stock
- 50% Total US Stock Market
- 50% Total International Stock Market
This is all a four figure amount, of course. But I had reduced my investment expenses by 90% and had far better diversification. I continued to learn and read, both about medicine (I was going into my final year of residency) and about personal finance and investing. I was never a financial bonehead, but there were clearly large gaps in my knowledge. I was heavily influenced by the writings of Bill Bernstein, Rick Ferri, Larry Swedroe, and John Bogle. I eventually stumbled onto the Morningstar Vanguard Diehards forum in late 2005 (and later followed it to the independent Bogleheads forum.) At some point in 2006, I first formulated an investment policy statement. I don't actually have the original one my wife and I wrote up, but I've got one that's 5 years old that was only slightly modified from the original. Here is the asset allocation it prescribes:
- 75% Stock
- 50% US Stock
- Total US Stock Market 17.5%
- Extended Market 10%
- Microcaps 5%
- Large Value 5%
- Small Value 5%
- REITs 7.5%
- 25% International Stock
- Developed Markets 20%
- Emerging Markets 5%
- 25% Bonds
- Nominal Bonds (G Fund) 12.5%
- TIPS 12.5%
Two things stand out at me as I look at this portfolio. It was obviously heavily influenced by the investment choices available to me in my 401K, the TSP, specifically the S fund (extended markets) and the G fund. I also wrote a caveat into the written investing plan that if reasonably priced investments that allow for international small and value tilting become available, they would be added later. In April 2009, Vanguard came out with an international small fund for what I felt was a fair price, so I modified the asset allocation a bit to add that fund. I rode this portfolio all the way down through my first bear market in 2008-2009, and all the way back up in the bull market since then. Despite being tempted many times, I haven't made any other changes to the allocation. It currently looks like this:
- 75% Stock
- 50% US Stock
- Total US Stock Market 17.5%
- Extended Market 10%
- Microcaps 5%
- Large Value 5%
- Small Value 5%
- REITs 7.5%
- 25% International Stock
- Developed Markets 15%
- Small International 5%
- Emerging Markets 5%
- 25% Bonds
- Nominal Bonds (G Fund) 12.5%
- TIPS 12.5%
For each of these categories, I can point to an author who influenced the portfolio to look like it currently does. I know there are going to be a ton of questions about this portfolio, so my next post will answer the most common ones.
What’s extended market?
TSM minus S&P 500. It’s basically midcaps.
How much time do you spend managing this portfolio? The implementation counts up to 11 funds to me. How do you actually maintain this allocation when some funds are available in some accounts (IRA, 401(k), TSP, etc.) and not in others?
Can you post Vanguard funds that would meet your AA? 🙂 Thx
What is your approximate age, retirement age goal, and which asset classes are in which type of accounts that you have (taxable, roth, 401k, etc) so that we can all get a better idea of where you are at?
I’d assume from that portfolio that you’re 32-35 with a retirement goal of 60-65
Do you limit yourself to all the retirement vehicles or do you have investments in taxable accounts that you also count as part of your allocation. That would be really useful to us because we are currently maxing out husband/wife retirement and traditional IRA vehicles.
Leigh-
I spend very little time maintaining the portfolio. Probably two hours at the end of the year, maybe 10 minutes once a month. Maybe a couple more hours a year if I want to see how I’m doing midway through the year or if I’m worried I might need to rebalance. Wednesday’s and Friday’s articles will answer your other questions.
Lovemachine- See Wednesday’s and Friday’s articles. There is no equivalent Vanguard fund for microcaps or the G fund.
Z- I’m in my mid-thirties and plan to be able to retire in my early 50s with $2-3M. See Wednesday’s and Friday’s posts for more details on what is where.
Esha- I don’t save enough to max out all the vehicles available to me this year so I have no need for a taxable account at this time. I can put $10K into backdoor Roths, $50K into a 401K, $15K into a defined benefit plan, and $6200 into an HSA. I’ll be lucky to pull that off. I’ve had a significant taxable account in the past (when I didn’t have so many retirement accounts available to me), but used it to make charitable contributions over the course of a couple of years. If you’ve maxed out available accounts, you should start using a taxable account, placing the most tax-efficient assets there first, while keeping tax-inefficient assets like TIPS and other bonds, and REITs preferentially into the tax-protected accounts.
Can you explain the defined benefit plan and HSA: is anyone capapble of contributing to these vehicles? and what are the advantages/disadvantages?
A defined benefit plan is offered through your employer. If you are self-employed as a contractor, there are “solo defined benefit plans” through several companies (I believe Schwab is one of them.) Anyone can use an HSA if they have a qualifying health insurance plan. Basically you just need a high deductible health insurance plan and you’re eligible to use it.
white coat investor,
Do you plan to keep the same asset allocation till you reach your final goal ?
Or do you plan to change your allocation as you get to say 50% or 75% of goal ?
No. I’ll get less aggressive as I get closer. I haven’t planned that far ahead yet. I’ll probably be at least 60/40 at some time in my 50s, and maybe even 40/60 if I clearly have less need to take risk.
Why no I bonds?
What is G fund?
There’s a post scheduled for next week all about the G Fund. It’s available only in the TSP.
Nothing wrong with I bonds. I just chose to use TIPS for my inflation protected bonds. At times, and in some ways, I bonds are better. Right now, neither is very attractive. Of course, bonds in general don’t seem very attractive. Of course, they didn’t last year either, and look at the return they got.
I bonds or muni funds may be beneficial once the bond allocation exceeds the amount of tax ad space; which could be a common issues for MDs
Agreed, but that point is a long way off for me. I don’t have ANYTHING in taxable right now.
@WCI
If the tax rate goes up over time isn’t it somewhat imprudent not to be tax diversified as well?
I take advantage of tax advantaged accounts as well, but I’d say if there were any flaw in your plan it’s that you are taking too much of an advantage of tax advantaged accounts.
It’s somewhat difficult for me to imagine tax rates being lower in 20 years than they are now.
I’ve been guilty of what you’re doing with deferring a large % of taxes… and now i’m trying to rectify that by having a decent size taxable fund.
So i’ve got my Roth IRA and taxable account as the “already taxed money” and then the 401K as tax deferred.. but i’m limited to just the 17K .. i don’t have the 50K option like you do.
I know you have a decent amount of Roth money also that’s been taxed, but it seems like the concentration is really heavy in tax deferred accounts.
I don’t know, half my portfolio will never be taxed again. That seems pretty diversified to me. I don’t see any reason to put retirement money into a non-retirement account BEFORE I’ve maxed out a retirement account. There are ways to get to that money penalty-free even before age 59 1/2.
It doesn’t matter if the tax rate is higher for someone making a doctor’s salary after my retirement. What matters is my PERSONAL tax rate. If my marginal rate is 33% now making say $200K, and in retirement I have $60K of taxable income, then my future effective tax rate ought to be lower than my current marginal tax rate, no? Remember you have to fill up all those lower brackets first. The first $11K you pull out of your IRAs is tax-free, then the next $17K is taxed at 10%, then the next $53K at 15% etc etc. So what if rates go from 10%, 15%, 25% to 12%, 17%, 27% or whatever. I’m still saving money now at my marginal rate, and spending it at my effective rate later.
@wci – i agree with you. If you have 1/2 your money in “never taxed again” then you do have really good tax diversification.
it didn’t read that way, maybe i missed some details.
Also it seems like your game plan is to retire early and then live on a much lower GROSS income than you have now.
I respect that, i’d like to do the same.
I think what i need to start doing in my retirement calculators is to change the % of current income i need to live to like 50 or 60% rather than 80-90%
At any rate.. my portfolio still needs help
currently it’s probably 60% tax deferred, 20% never taxed again, and 20% already taxed and still getting taxed every year.
i’d like to have 40/30/30
I’m not sure why you think you need 50-60% to live on. I think about it this way:
I ran the numbers once and figured I could have a pretty good retirement for about 30% of my current income. Here’s the post: https://www.whitecoatinvestor.com/percentage-of-current-income-needed-in-retirement/
Think about it.
Take out 20% for taxes
Take out 25% for retirement savings
Take out 10% for charity
Take out 15% for mortgage
Take out 3% for child-related expenses
You’re now down to 27%. Sure, add in a few travel expenses (and you’ll still owe some taxes and want to give some to charity), but you’re still nowhere near 50-60%, much less the 70-90% the rules of thumb tell you that you’ll need.
I’m still not understanding why you would prefer a taxable account to a tax-deferred account. A tax-deferred account like a 401K is a huge benefit. You can convert it to a Roth in lower-earning years (sabbatical, early retirement, part-time work etc), or even before taking SS at a lower tax rate than you’re paying now.
My goal isn’t necessarily to retire early. My goal is to be able to retire early. Big difference. Look around you. Who enjoys being a doctor the most? The guy who has to work 70 hours a week to make payments to his two ex-wives and the bank, or the guy who could retire today if he wanted to?
@wci – maybe 30-40% is right.
the math sounds good… yet all the retirement calculators have you factor in 80+%… not sure why… then again i’d like to be able to afford to “do stuff” rather than just make bills.
I don’t PREFER a taxable account, its just that i’ve exhausted all the tax-deferred/advantaged accounts, but don’t have much in a taxable account…. and i think it’s the next step in building up assets for myself.
i agree with your last statement… my father is a doc, he has managed his money well and at 62 he still works a few days a week, but could walk away this second if he wanted to.
The funny thing is that it’s like the second you don’t need the money, it’s like the money is easier to get. I think he makes as much or more on a part time basis now than he did working 5-6 days a week. He gets bigger cases now and has a higher per hour income. Gray hair definitely sells cases.
That makes sense. I agree a taxable account is a fine place to invest after maxing out retirement accounts available to you.
I’ve never seen anyone mention this, and I’m wondering if it’s because there is a flaw in the thinking ….
Let’s say you want to split 75/25 on equity/ bonds. Bonds essentially represent a fixed return investment. Won’t you do better by skipping bonds and spending that 25% on paying off student loans at 6.5% interest? My return would be guaranteed just like a bond and essentially BETTER than 6.5% interest because I’m not taxed on the earnings at the end.
The same logic would go towards paying off a mortgage before contributing to bonds, though the low mortgage rates and the write off from the mortgage interest may make this a bad bet. Don’t know the bond market well. What do you think is a good number to keep in mind for the interest gathered from your average bond investment over 30 years? I’ve always thought around 5% … ???
Remember in investing that there are two components to weigh, math and behavior. For instance, mathematically, it’s often better to invest instead of pay off a low interest mortgage. But many people who understand this still pay off their mortgage because they don’t like debt.
Likewise holding bonds in a portfolio. Bonds have a lower expected return compared to riskier investments like stocks. Why hold them at all? Two reasons- first, it minimizes volatility. Lots of people can’t handle losing 50% of their portfolio every 10 years. If they hold a 50/50 portfolio they only lose 25% instead of 50%, and that may keep them from selling stocks low. Second, part of the risk of stocks is that they aren’t guaranteed to outperform bonds. Every now and then, they don’t even over very long periods of time.
Who knows what bond returns over the next 30 years will be? I hope it’ll be 5%, but buying a 30 year treasury right now will only give you a 2.87% return, which is quite a bit less.
Absolutely I’d pay off a 6.5% student loan before buying a treasury paying 2.87% (1.9% after tax). There’s a guaranteed return of 6.5% there, and most docs including me wouldn’t be able to deduct the interest on the loan anyway. Unfortunately (or fortunately, depending on how you look at it) I don’t have any loans like that. The worst one I’ve got is a 5.3% completely deductible mortgage on a rental property. So that’s about 3.6% after-tax. Should I make fewer retirement contributions (which give me a guaranteed 33% return instantly upon contributing) in order to earn 3.6% paying off that mortgage? Doesn’t seem as wise now, does it? But yea, I’d pay that mortgage down before investing in a fully taxable brokerage account.
This assumption that 30 yrs down the road marginal rates would be similar to today. Maybe there is a good chance that everyone will be paying 50%. How else will the deficit get fixed?
If you think everyone will be paying 50% 30 years down the road I suggest doing Roth conversions with all your assets now.
Can you provide the ticker symbols for your portfolio?
This post will probably answer your questions. You can look up the tickers using Google if you’re really interested.
https://www.whitecoatinvestor.com/how-i-currently-implement-my-asset-allocation/
White coat investor, first want to say wish I would have found your site in residency. As a young attending I invested in vanguard retirement fund 2050. How do u feel about these retirement funds.
Thanks eric
I think they’re great as long as you choose them by the asset allocation not by the date in the name, have all your retirement assets inside retirement accounts with access to that fund, and don’t care about a small or value tilt. A nice, simple solution with low costs that rebalances on its own.
Hi WCI,
I need some help with my portfolio as I have put investments in wrong “buckets”.
Currently my portfolio consists of:
Taxable:
Vanguard Dividend Growth 20K
Vanguard Total Bond Market 13.5K
Vanguard Total INternational Stock Index 29.5K
Vanguard Total Stock Index 39K
Roth IRA
Vanguard Dividend Growth 12.5K
Vanguard Total Bond Market 6K
Vanguard Total Stock Index 5K
403b
Vanguard Target Retirement 2045 30K
1. I plan to retire in 28 years and would like a 75/25 stock/bond portfolio. I know I need to get the bond fund out of the taxable but in order to get my desired asset allocation, would it be best to just sell the Target 2045 fund in the 403b and spend the entire 30K on a bond fund? I realize I need to put tax-inefficient investments in the tax-deferred accounts but if equities have a higher return than bonds on average, wouldn’t I miss out on all the higher compounded returns?
2. What are the tax implications of selling the Dividend Growth Fund and the Bond Fund in the Roth IRA?
Thanks.
A couple of things:
First, it doesn’t matter so much right now having bonds in taxable because of low rates. Under more “normal” conditions that error would have cost you more. Second, it’s easy to move bonds out of taxable because there are usually not much in the way of capital gains. You’ve already paid the taxes on the growth because it came as dividends. Third, your totals are still low, so your value minus your basis simply isn’t going to be much. You can probably make any change you want without much of a tax consequence.
Run the numbers both ways using “normal” expected returns and you’ll see that stocks in taxable is the way to go. Run them right now and it doesn’t matter much. I can’t really give you advice on picking funds because you haven’t yet decided on an asset allocation except for “75/25.” If that’s your only criteria you could do something as simple as $157K*.25= $39K, so $30K in total bond market in the 403B, $9K in the total bond market in the Roth, and the rest in Total World Stock Index.
The tax implications are simply that you pay capital gains taxes on the value minus the basis of each fund in the taxable account.