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Starting my investing journey – asking for advice

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  • Avatar eardoctor 
    Participant
    Status: Resident
    Posts: 16
    Joined: 05/22/2019
    Earnest refinancing bonus

    Hi all,

     

    Thanks to this community and the excellent publications by Dr. Dahle, I have been educating myself on investing for retirement over the past year. I recently designed my own asset allocation as it follows. I am in early 30s, married, soon finishing residency, and starting a two year fellowship. My wife is working a full time job in a nonmedical field. I know there is no single best asset allocation and each portfolio has to be designed according to the risk tolerance and investment horizon of each investor but your feedback would be appreciated.

     

    US stock large cap fund 30%

    US stock mid/small cap fund 20%

    US REIT fund 20% (I like real estate a lot and it looks like REITs have outperformed many total market or large cap funds at least in the previous 5-10 years)

    International total stock fund 20%

    US total bond fund 10%

     

    A couple notes before you beat down on me. Since I am starting new with small incremental investments, I cannot invest in many of the Vanguard funds (min $1000-$3000 in most good passive funds). My university’s retirement plans are managed at Fidelity and it looks like Fidelity has started a bunch of zero ER (expense ratio) zero minimum funds. I have these questions:

     

    1. What is the group’s thought on starting investing with Fidelity with their zero everything passive index funds? And if these funds keep these features in long term, is there a point in transferring one’s portfolio to Vanguard down the line to pay ER there?

    2. Is it ok replicate the above asset allocation within each account and rebalance periodically within each account rather than across multiple accounts (Roth IRA, 403b, etc.)? The reason I ask is that I initially plan to fully fund my Roth IRA and then plan to contribute to a roth 403b but not sure if I will have enough money to do so. The other reason is rebalancing across multiple accounts at Vanguard requires a large portfolio to meet each fund’s minimum investment requirement and I am only beginning to invest.

    3. Should I split my 10% bonds between a total bond fund and TIPS fund or leave it as is? It looks to me that total bond funds outperform TIPS so what is the point of having a separate TIPS allocation?

     

    I appreciate everyone’s feedback in advance!

     

    Thanks!

    #221049 Reply
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1146
    Joined: 02/15/2016

    1. I think most people are indifferent over Fidelity’s zero funds versus their other funds that cost 1.5 bp. Differences in small ERs that low is inconsequential. No significant difference between these or Vanguard, so probably no need to switch between the two unless you want better tax efficiency of an ETF in a taxable account at Vanguard.

    2. Yes, this is fine. But once you add in taxable account, you’ll want to choose tax efficient funds there. Additionally, some argue to put bonds in 403b and equities in Roth accounts due to differences of returns/taxation, but this is really taking a more aggressive allocation since Roth/post-tax $$$ is worth more than pre-tax $$$.

    3. Either/or is fine. Total bonds don’t always outperform TIPS. TIPS are probably the most conservate/safest investment out there. Other bond funds may or may not outperform.

    #221056 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 959
    Joined: 02/11/2019

    You are focusing too much on past returns of these funds.  Remember “The performance data shown represent past performance, which is not a guarantee of future results.

    I also think you are making things overly complicated too early.

    If you are going to be investing less the 100K stick with 1-3 funds.  You can do a target date fund.  This is the most simple and is pretty close to what you want.

    It would be reasonable to just do VTSAX + or – international and or bonds as separate funds so you can get closer to the AA you want.

    You have the rest of your investing career to make it more complicated.

    Right now it is all about your savings rate.  An extra percent or 2 does not make much difference in the beginning.

    Welcome to the Forum.

    “Never let your sense of morals prevent you from doing what is right.”

    #221057 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
    Posts: 1516
    Joined: 01/08/2016

    You’ve gotten great advice already.

    I agree that you can start with one or two funds and I wouldn’t try to replicate the portfolio in each account. Manage the portfolio as one. I built a spreadsheet to help you with that (found here).

    Tax efficiency matters more and more as you have a larger portfolio. REITS should be in a tax-advantaged account. Foreign should be in taxable. You’ll probably have US stocks in most or all accounts. Start with that.

    Cheers, welcome to the forum, and congrats on having a sound plan so early in your career!
    -PoF

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #221083 Reply
    Liked by eardoctor
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 400
    Joined: 06/12/2017

    You may want to consider different funds to implement your strategy in your taxable account, so you don’t run into wash-sale issues when you do tax-loss harvesting.

    In addition, using I’d consider achieving your target allocation across your entire portfolio, rather than inside each account. This will allow you to use asset location to maximize returns. For instance:

    • Place riskiest asset classes (mid-cap, small-cap, and real estate) inside your Roth IRAs to take advantage of higher tax-free growth potential and rely upon the longer holding period which is likely for a Roth.
    • Place your least tax-efficient asset class (taxable bonds) inside your tax-deferred retirement accounts.
    • place your most tax-efficient asset classes inside your taxable account.

    After all, asset location can be just as important as asset allocation.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    http://www.fswealthadvisors.com | (717) 496-0900

    #221109 Reply
    Liked by eardoctor
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 3168
    Joined: 01/14/2017
    US REIT fund 20% (I like real estate a lot and it looks like REITs have outperformed many total market or large cap funds at least in the previous 5-10 years)

    Click to expand…

    Please don’t do this.  As you make more money your taxable account will likely surpass your retirement accounts (if you’re saving appropriately).  Then your retirement accounts will be dominated by REITs, leaving little flexibility for things like bonds to go in retirement plans.  20% is the largest allocation for REITs.  Your logic of liking real estate a lot and recent outperformance is not a logical basis for going so heavy into this category.  I also recommend starting simple with a three fund portfolio and getting more complex if you really think you need to after a few years of reading more and getting the hang of it.

    #221157 Reply
    Avatar LIFO 
    Participant
    Status: Physician
    Posts: 129
    Joined: 01/27/2018

    Contrarian opinion: Educate yourself and then invest however you see fit.  If you make your own decisions you will constantly evaluate what works and what doesn’t work.  You will learn the market and the ups and downs and your own fallibility.  Sure you may lose a few percent returns here and there against the benchmark indexes.  Mistakes will be made.  But, if you look at the math, savings matters way more than returns in the early stages of investing.  Then when you’re sitting on a 7 figure portfolio, you can ride out the bumps with conviction.  Something I think many investors undervalue.

    #221164 Reply
    Liked by eardoctor
    Avatar MaxPower 
    Participant
    Status: Physician
    Posts: 289
    Joined: 02/22/2016

    You’ve already got a lot of great answers above, but I would just add a few points/questions.

    Like @lifo said, you’re the one who has to live with the results, for good or bad, of whatever asset allocation you have. So you should choose one that makes sense to you, and then make sure you stick with it. The worst thing you can do is chase returns, or buy the funds that have performed well recently since there is no guarantee they will continue to outperform going forward.

    About your real estate allocation, do you have a good reason for wanting to put 20% of your money into real estate, aside from it outperforming some other asset classes recently? If so, then 20% may be fine for you. For some, myself included, that would be a little too high, but again this is your portfolio so if you have a good reason for it, then go for it.

    I also have a slight small-/mid-cap tilt in my portfolio, so I can’t criticize you there :).

    I would also advise against having the same asset allocation within each of your different plans. This is particularly true when you start investing in a taxable account, as bond funds and REIT funds are poor options due to tax consequences. Learn more about what low cost options you have in your plans—often that drives the bus more than about anything. Welcome!

    #221167 Reply
    Liked by artemis, eardoctor
    Avatar eardoctor 
    Participant
    Status: Resident
    Posts: 16
    Joined: 05/22/2019

    1. I think most people are indifferent over Fidelity’s zero funds versus their other funds that cost 1.5 bp. Differences in small ERs that low is inconsequential. No significant difference between these or Vanguard, so probably no need to switch between the two unless you want better tax efficiency of an ETF in a taxable account at Vanguard.

    2. Yes, this is fine. But once you add in taxable account, you’ll want to choose tax efficient funds there. Additionally, some argue to put bonds in 403b and equities in Roth accounts due to differences of returns/taxation, but this is really taking a more aggressive allocation since Roth/post-tax $$$ is worth more than pre-tax $$$.

    3. Either/or is fine. Total bonds don’t always outperform TIPS. TIPS are probably the most conservate/safest investment out there. Other bond funds may or may not outperform.

    Click to expand…

    Thanks for the advice. My thought process was/is to keep this asset allocation within my Roth IRA and keep maxing Roth IRA contributions every year while in residency/fellowship. Once attending salary kicks in, I was thinking of converting to an asset allocation across multiple accounts as suggested (bonds in 403b, stock and REITs in Roth, and tax efficient investments in taxable account). Fidelity advisors are telling me there is no fee or expense to selling out the the funds and move asset classes between accounts or even transferring my entire portfolio to Vanguard down the line.

    #221168 Reply
    Avatar eardoctor 
    Participant
    Status: Resident
    Posts: 16
    Joined: 05/22/2019

    You are focusing too much on past returns of these funds.  Remember “The performance data shown represent past performance, which is not a guarantee of future results.

    I also think you are making things overly complicated too early.

    If you are going to be investing less the 100K stick with 1-3 funds.  You can do a target date fund.  This is the most simple and is pretty close to what you want.

    It would be reasonable to just do VTSAX + or – international and or bonds as separate funds so you can get closer to the AA you want.

    You have the rest of your investing career to make it more complicated.

    Right now it is all about your savings rate.  An extra percent or 2 does not make much difference in the beginning.

    Welcome to the Forum.

    Click to expand…

    Points well taken. The reason I came up with that asset allocation is that I read studies from Vanguard and other sources that breaking down a total stock market fund into smaller sub-classes (large, mid, and small) allows for slightly better performance while maintaining the same risk level. But overall, I agree with keeping things simple. Thanks again!

    #221169 Reply
    Avatar eardoctor 
    Participant
    Status: Resident
    Posts: 16
    Joined: 05/22/2019

    You’ve gotten great advice already.

    I agree that you can start with one or two funds and I wouldn’t try to replicate the portfolio in each account. Manage the portfolio as one. I built a spreadsheet to help you with that (found here).

    Tax efficiency matters more and more as you have a larger portfolio. REITS should be in a tax-advantaged account. Foreign should be in taxable. You’ll probably have US stocks in most or all accounts. Start with that.

    Cheers, welcome to the forum, and congrats on having a sound plan so early in your career!
    -PoF

    Click to expand…

    Thanks! I have subscribed to your emails and received the spreadsheet. I will use it for sure. Given that there appears to be no fees to buying or selling the Fidelity passive index funds, is there a harm in keeping that asset allocation within the Roth IRA and then gradually move the asset classes into various accounts as you advised (e.g. international stock into a taxable account) down the line?

    #221171 Reply
    Avatar eardoctor 
    Participant
    Status: Resident
    Posts: 16
    Joined: 05/22/2019

    You may want to consider different funds to implement your strategy in your taxable account, so you don’t run into wash-sale issues when you do tax-loss harvesting.

    In addition, using I’d consider achieving your target allocation across your entire portfolio, rather than inside each account. This will allow you to use asset location to maximize returns. For instance:

    • Place riskiest asset classes (mid-cap, small-cap, and real estate) inside your Roth IRAs to take advantage of higher tax-free growth potential and rely upon the longer holding period which is likely for a Roth.
    • Place your least tax-efficient asset class (taxable bonds) inside your tax-deferred retirement accounts.
    • place your most tax-efficient asset classes inside your taxable account.

    After all, asset location can be just as important as asset allocation.

    Click to expand…

    This is great advice and I certainly will follow these rules once I get to invest in multiple accounts. One question though is how to maintain my asset allocation with these recommendations when the contribution limits are different? For example, if I put my total bond fund in the 403b (limit $19000/year) and REIT and small/mid cap in the Roth IRA (limit $6000/year), assuming I max out contributions in each account, this will significantly increase the share of bonds in my overall portfolio. I think the answer may to add tax efficient bonds (municipals) in the taxable account. Re-balancing this also looks to add another layer of complexity. Sorry if these are stupid questions. I have not gone that far into studying rebalancing nuts and bolts.

     

    #221172 Reply
    Avatar eardoctor 
    Participant
    Status: Resident
    Posts: 16
    Joined: 05/22/2019
    US REIT fund 20% (I like real estate a lot and it looks like REITs have outperformed many total market or large cap funds at least in the previous 5-10 years) 

    Click to expand…

    Please don’t do this.  As you make more money your taxable account will likely surpass your retirement accounts (if you’re saving appropriately).  Then your retirement accounts will be dominated by REITs, leaving little flexibility for things like bonds to go in retirement plans.  20% is the largest allocation for REITs.  Your logic of liking real estate a lot and recent outperformance is not a logical basis for going so heavy into this category.  I also recommend starting simple with a three fund portfolio and getting more complex if you really think you need to after a few years of reading more and getting the hang of it.

    Click to expand…

    As you recommended, I also think my asset allocation will likely change as time goes by and I become more experienced. The main idea behind having 20% REIT allocation was to have exposure to real estate investing, which I have always been interested in, and also thinking it can potentially behave differently than other asset classes going forward and provide more diversity.

    #221174 Reply
    Avatar eardoctor 
    Participant
    Status: Resident
    Posts: 16
    Joined: 05/22/2019

    Contrarian opinion: Educate yourself and then invest however you see fit.  If you make your own decisions you will constantly evaluate what works and what doesn’t work.  You will learn the market and the ups and downs and your own fallibility.  Sure you may lose a few percent returns here and there against the benchmark indexes.  Mistakes will be made.  But, if you look at the math, savings matters way more than returns in the early stages of investing.  Then when you’re sitting on a 7 figure portfolio, you can ride out the bumps with conviction.  Something I think many investors undervalue.

    Click to expand…

    Makes sense. Thanks for the feedback.

    #221175 Reply
    Avatar eardoctor 
    Participant
    Status: Resident
    Posts: 16
    Joined: 05/22/2019

    You’ve already got a lot of great answers above, but I would just add a few points/questions.

    Like @lifo said, you’re the one who has to live with the results, for good or bad, of whatever asset allocation you have. So you should choose one that makes sense to you, and then make sure you stick with it. The worst thing you can do is chase returns, or buy the funds that have performed well recently since there is no guarantee they will continue to outperform going forward.

    About your real estate allocation, do you have a good reason for wanting to put 20% of your money into real estate, aside from it outperforming some other asset classes recently? If so, then 20% may be fine for you. For some, myself included, that would be a little too high, but again this is your portfolio so if you have a good reason for it, then go for it.

    I also have a slight small-/mid-cap tilt in my portfolio, so I can’t criticize you there :).

    I would also advise against having the same asset allocation within each of your different plans. This is particularly true when you start investing in a taxable account, as bond funds and REIT funds are poor options due to tax consequences. Learn more about what low cost options you have in your plans—often that drives the bus more than about anything. Welcome!

    Click to expand…

    Thanks for the feedback. As I also mentioned in response to ENT Doc, the main idea behind having 20% REIT allocation was to have exposure to real estate investing, which I have always been interested in, and also thinking it can potentially behave differently than other asset classes going forward and provide more diversity. Based on the feedback so far, it looks like this 20% allocation has been criticized the most so I think I will end up reducing it to about 10% going forward.

    Rebalancing across multiple accounts also seems to be a universal recommendation. I will have to read more to learn its tricks. I read an article from Vanguard on how to do this with dividends and new contributions rather selling and buying to reduce costs but right now, I am not sure how it would work in real life (given different contribution limits for Roth IRAs and 403bs).

     

    #221176 Reply

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