(Re)balancing (photo credit)
A year ago, I was evaluating moving our portfolio to 100% equities. Posterity will appreciate it.
A lot has changed since then, so I wanted to share an update.
Year-End House Cleaning
While reviewing our taxes in December 2015, I executed a good number of trades:
- Sold all of our individual stocks. We now have only index funds.
- Moved all International Equities from VEU to VXUS
- VXUS = VEU + International small-cap
- Rebalanced our US / International Stock allocation
- Reduced Bond & REIT holdings / Increased equities
- Harvested Capital Gains for long term tax minimization
- Rebalanced portfolio to target asset allocation
- Reduced total portfolio expense ratio
GCC Asset Allocation
As of last night (March 20th, 2016) this is how our portfolio appears on the Personal Capital Portfolio Allocation page.
US Stocks: 71% (82% VTI / VTSAX, 13% S&P500, 5% Small-cap )
International Stocks: 20% (93% VXUS, 7% VWO)
US Bonds: 4% (67% MUB, 33% IEI)
Alternatives (REITs): 4% (100% VNQ)
Cash: <1% (We keep only 3 months cash on hand.)
The Cash shown here is held by the individual ETFs and in our brokerage account. Most of our cash is held in our Capital One 360 savings account, but the total is less than 1%.
Not shown in this chart are some legacy I-bonds and a private seller-financed mortgage contract, which are less than 5% of total assets. When included, total weight of US Bonds is ~8% and total stock is ~87%.
As soon as I can off-load these assets in a tax-friendly way, the proceeds will be added to the stock pile. (haha)
Real Estate
A lot of people keep a portion of their net worth in Real Estate, either in a home they live in or rental properties.
We have no Real Estate other than a token amount of REITs. We are Renters for Life.
US vs International
When looking only at equities, 78% is invested in US stocks and 22% invested Internationally.
This is lower than a true market weighting, as US Equities at present comprise ~50% of total global market capitalization. Someday I will write a post about why we aren’t globally weighted, and that post will include phrases such as fees, currency risk, rule of law, shareholder rights, demographics, and immigration.
In the mean time, I like that our portfolio sits at roughly the historical sweet spot balancing volatility and total return.
Taxable / Traditional / Roth / HSA
While working and accumulating, we favored Traditional (pre-tax) IRAs over Roth (post-tax.) Savings above and beyond the legal contribution limit to 401ks and IRAs were saved in a brokerage account.
By prioritizing in this way, we minimized taxes / maximized savings while working. Now we are building a 30+ year long Roth IRA conversion ladder, which will minimize taxes in retirement.
Our assets are spread between these 3 account types:
Brokerage (taxable): 74%
Traditional (pre-tax): 23%
Roth (post-tax): 3%
HSA (pre/post-tax): <1%
We hold mostly stocks in the Brokerage account, to take advantage of the 0% tax rate on Qualified Dividends and Long Term Capital Gains. International stocks are primarily held in the brokerage account, to allow use of the Foreign Tax Credit.
We hold REITs and Bonds in the Traditional accounts, which defers any taxes on these assets until withdrawal. Held in a brokerage account, dividends and interest from these assets would be taxed unfavorably as normal income.
Finally in the Roth account we hold equities, including some small-cap stocks, with the goal of having the greatest growth in accounts that are tax-free forever.
Dividend Income
Selling all of our individual stocks and purchasing more index funds will result in a reduction in both qualified and unqualified dividends.
While this will impact our cash flow somewhat, dividends paid in March 2016 are still 13% higher than we received in March 2013. (Total dividends in 2015 were 30% higher than 2013.)
The reduction in nonqualified dividends is welcome, since they are taxed as regular income unlike qualified dividends which are taxed at 0%. Lower nonqualified dividend income will make it easier to do Roth IRA conversions at low/zero tax.
Portfolio Expense Ratio
ETFs and Mutual Funds have management fees paid by the fund on an ongoing basis. This is usually expressed as a percentage called an expense ratio.
Low fees are key to long term portfolio growth. Great funds like Vanguard’s VTI / VTSAX currently charge 0.05% annually. Terrible funds (like those used in many 401k plans) charge 1.0% or more, 20x+ higher.
I used Personal Capital’s 401k Fee Analyzer as a quick check, and thanks to choosing low cost Vanguard funds, our portfolio expense ratio is an incredibly low 0.06%. (Even lower than last year’s 0.08%.)
Trading fees are also a real expense. I executed several trades this year, which increased our total load to ~0.0636%.
The reduction in total portfolio expense ratio was largely a result of:
- Replacing bond fund (TIP, 0.2%) & REIT (VNQ, 0.12%) with VTI (0.05%)
- Taking advantage of new trust funds in my old employer’s 401k
- S&P500 Trust Fund e/r = 0.0113%
- Russell 2000 (small-cap) Trust e/r = 0.0304%
I am evaluating if I can roll some of my Traditional IRA back into the 401k to take further advantage of these low fees.
Reward Points
Not a true asset class, I still think of the points from airline & hotel customer loyalty and credit card rewards programs as part of our total assets. We can spend them instead of cash for flights and hotels, as we intend to do during our trip to Europe.
Per the valuation guide from The Points Guy, the combination of our hotel points and airline miles is worth more than $13.5k.
Final Thoughts
I reduced total fees, eliminated individual stocks (increased diversification), reduced nonqualified dividend income for better tax management, and put the portfolio back to the target asset allocation. Mission accomplished. (See last year for comparison.)
It feels good to have the portfolio rebalanced and tidy once again.
I don’t plan to touch the portfolio again until tax prep in December, which means I will completely ignore stock prices until then.
If you like the asset allocation and fee analyzer tools, they are available for Free from Personal Capital. If you use their services via this link, we may receive a small fee.
You are super organized and buttoned up with your portfolio. Impressive! You’re inspiring me to become more of a number cruncher than I am ;)
I performed something similar in 2015. I spent 2015 divesting from my individual stocks I had accumulated over the years in my brokerage account. Right now I have one individual stock which I’ll divest from sometime in 2016. I’ve come to terms that I’m completely happy being an index only investor.
My asset allocation is weighted a little internationally heavier according to my PC account. 67% US equities, 25% international equities, and 8% alternatives/cash. I struggle with if I want to be 70/30 US/international or 75/25 or 80/20. In the big scheme of things, it won’t move the needle too much.
A difference of 5% +/- in US/International is unlikely to have a big long term impact. That kind of change can happen in a day.
Index only investing is great. I have zero reason to spend time/energy paying attention to stocks, or even the market.
You wrote: “Index only investing is great. I have zero reason to spend time/energy paying attention to stocks, or even the market.” WOW, I am stocks only and don’t know how to do index. If I want to try Index, how to do it?
Hi Sherri, perhaps start with reading The Simple Path to Wealth. With a couple hours of reading you’ll be able to answer these questions and then some.
I have been read since 2015. Seems S & p 500 is good. But what’s the symbol of S & P 500 to start ? (Seems there are different when I type in S & P 500.) Thanks and have a wonderful day where ever you are.
Vol is the symbol of the Vanguard fund. They have a few other large cap funds to choose from.
Damm spell check! Symbol is voo
Hi Go Curry Cracker! Absolutely love the work you do, and the information is super helpful. I am very familiar with Jim Collin’s position – what are some reasons you have more diversification than just simply 100% VTI (VTSAX) as he proposes? If I am in the wealth building stages (i.e. retirement is 10 years away), should I just do 100% VTI, and then once retired, figure it out then?
See these posts:
The 2019 GCC Asset Allocation
US vs International Investing
Jeremy, thanks for your articles. I am 54 and my wife is 42. Our allocation includes ~20% in our home (real estate), 70% US stock index , 8% US bond index and 2% cash. In 2.5 years, we plan to retire. At that point, we will have ~30% in our home (paid off), 60% stocks and <5% bonds with a small amount of emergency cash. I am not sure how to account for a lifetime annuity that I expect to begin collecting. It will pay ~40% of our initial living expenses, will last until my death and persist at a lower value until my wife's death, but it will not adjust for inflation. If I took it as a one time pay out, it would be worth ~15% of our assets. I tend to look at this asset and at Social Security as balancing the risk of equities in my portfolio. I wonder if you have any thoughts on annuities and SS in asset allocation? Thanks, Aperture.
SS and annuities are a way to have someone else takes on volatility risk for you.
I just think of that income as a way to reduce total withdrawal rate. At low withdrawal rates, you can choose to be more aggressive or less aggressive, whichever suits your personality and estate goals.
Thanks for this post. We keep thinking that we should take the plunge and do what you’ve done: Put (almost) everything in index funds. We have both VTSAX (through Vanguard) and VIIIX (through 401k) and love the low fees, but we also have a chunk of American funds (Balanced and Growth Funds) through another brokerage account–long before we discovered Vanguard and index funds–and we’ve been struggling over what the best course would be.
Everyone tells us that we should just sell those and move everything to Vanguard, but (would you believe?) we’re too chicken to face our broker… We’ll need to stiffen our spines and make the move. Unless someone out there thinks these funds are great and that we should hold on to them…?
Thanks to you–and Jim Collins in another post–for continuing to remind us to do the smart (and not the lazy) thing.
There are plenty of people who think those funds are great, that doesn’t mean you should hold onto them. Research the tax costs of selling and if it’s not much, get rid of ’em.
I don’t know if anyone thinks American funds are great or even ok. American funds must have low administration fees for company plans because every time a friend or.relative has mentioned American funds offers their 401k, I have been appalled at their expense ratios and management fees. I had a friend who had a finacial advisor cousin who hooked him up with some “you need a finacial advisor to get access to these awesome fund.” They turned out to be be American Funds with expense ratios of 1.5%
If you don’t know anyone who likes American Funds, you’ve been spending too much time at Bogleheads. :D
I bet the executives at American Funds think they are great.
A way to avoid the broker conflict is to have Vanguard initiate the transfer
https://investor.vanguard.com/account-transfer/how-to-transfer-money
I just did exactly this: liquidated my American Funds into a money market (still within a ROTH IRA) and did a Vanguard-initiated transfer to move everything to Vanguard. I did have to call American Funds to handle the liquidation because for some reason it wasn’t letting me do it online, but I was able to move everything over without ever talking to the broker who originally set me up with American Funds. Very easy to do as long as you have access to your AF account numbers, etc.
Note that I decided to liquidate at American Funds and then move over the money market cash to avoid further fees—AF did it for free, but if I’d transferred the AF invested funds to Vanguard, I would have had to pay a fee to Vanguard to liquidate from AF funds and move into their funds. (Perhaps there may also be tax considerations for some people in doing this, but since I’m keeping it all within a ROTH this seemed to be the best way to go for me.)
I don’t have a lot of money I’m working with at this point, but just using an online calculator to see how much the higher expense ratio at AF would cost me over the years made it a no-brainer to me to move everything to Vanguard.
Nicely done!
What do you like better about vxus vs veu ?
Same fee. Seem to have same return. Vey has greater trading volume.
What about tax implications from selling individual stocks? That’s what keeps me from selling the portfolio of individual stocks that I have.
Zero tax on long-term capital gains if you are in the 15% federal income tax bracket.
You’ll likely pay 0% or 15% tax only the gain. (Rate is higher only if your taxable income is very high – 400K IIRC.) If you’re otherwise in the 15% marginal bracket, fill it up with capital gains at 0%. You don’t have to sell it all at once if the tax bite is too much.
Another alternative if you make donations to charity is to donate the appreciated stock. You’ll get the tax write-off for the donate just as if it were cash, but won’t owe any capital gains. I know Fidelity and Vanguard both have donor advised charity funds to facilitate those donations. I’m sure other brokerages do also.
If you decide to move your assets to Vanguard, you can move the entire account without selling funds or stocks. I did that with my both accounts: brokerage and Traditional IRA and moved them in their entirety to Vanguard. Then you can buy and sell stocks/funds at Vanguard when it’s convenient to you! You will have to place a request on Vanguard site for that kind of transfer.
Gotta love the ERs in the 401(k)! I’ve never heard of such a thing. I’ve got the vast majority of my portfolio (http://bit.ly/1q064tK) in Vanguard Admiral and Institutional (401(k)) funds and have a weighted average ER of 0.082%. Not as good as yours, but I’ll take it, given the average investor is paying something north of 1%, and high as 2% or 3% in total fees.
8.2 bps is great! Very nice.
Your allocation looks almost identical to mine (near-100% equities, 80/20 U.S./int’l, and even similar stray I-bond and reward point holdings). I look forward to your article on U.S. overweighting. Bogle has been catching a lot of flak for advocating U.S. tilting rather than tracking total global market capitalization, but the critics don’t seem to realize there is no intellectual inconsistency in taking an active investing approach in the selection of geographic stock markets while taking a passive investing approach in the selection of stocks within the selected markets.
I always thought you were really smart. Now I know it for sure! ;)
One thing in favor of Bogle’s argument is that GDP growth is not the same as market cap growth, and doesn’t necessarily imply shareholder return.
Why 13% in S&P 500, and where is your 5% small cap? Are you primarily growth tilted since you are largely VTSAX? Many thanks.
Reading between the lines, I’m guessing that 13% S&P 500 and 5% small cap are the two low cost trust funds Jeremy mentioned were available in his 401k.
Yes, exactly. Those are the trusts in my 401k.
We are equity tilted.
First of all, I admire both of you to take an early retirement in 30’s. I am currently working on my early retirement and expect to retire in 2019.
I understand why you moved your assets into securities (stocks and index funds). I feel the same way.
I own real estate properties and securities but am not a true fan of the real estate investment because of the tax issue. The real estate income is taxed as ordinary income and increases the threshold of the tax free investment – long-term capital gains and qualified dividends. The standard deduction and personal exemptions for 2 persons are limited to $20,700 this year. I want to use this amount to convert IRA to Roth IRA every year after I retire (When I have no ordinary income). Keeping too much money in tax-deferred accounts will eventually give us huge headaches because we plan to live off on dividends. We may lose the tax free capital gains once we receive Social Security and withdraw money from the tax deferred accounts. So I will convert my money in IRA to Roth IRA as much as I can after I retire in 2019. This smart move will reduce my tax liabilities in the future.
Real Estate has great tax treatment though, via depreciation, deductions, and 1039 exchange.
Depending on whether you are on Medicare or the ACA for health coverage in 2019, be careful with reductions in ACA subsidies when doing Roth IRA conversions. If on Medicare, this won’t matter. You’ll also get an increase in the Standard Deduction at Age 65.
Jeremy, I’m curious why you haven’t gone into some real estate rental investing yourself. Any particular reasons you don’t do it?
I’m lazy and stocks offer great return opportunities.
We have submitted offers on multi-unit properties, but were never able to agree on a price.
Hi Jeremy,
Any chance you could share a screenshot drilled down one-level further in Personal Capital on US Stocks to share some insights on the style and market-cap breakdown?
Thanks for sharing what you’ve been up to from an asset allocation perspective after last year’s 100% equities analysis.
Hi Joe. It looks virtually identical to the style box for the total market, as it is dominated by VTI / VTSAX
What % of the 82% invested in vti /vtsix is in vti?
Good job keeping your fees so low GCC! I generally shoot for .07%, so you’ve got me beat!
Thanks for sharing this. Your allocations look very much like ours, with the exception of cash. Right now, cash is 4-5% of our portfolio, and we’re debating going higher, to about two to two-and-a-half years of living expenses once we’re retired, to hedge against market dips. (We don’t want to be forced to sell shares when they’re tanking.) I have read some retirees keep three to four years of cash on hand, which seems like overkill to us, and misses out on too many potential market gains, but I am not sure I can get my head around keeping only a few months of cash on hand! Welcome thoughts anyone has!
We’re thinking about doing the same thing, so we’d also be curious to hear what others think.
Currently, we hold at least 6 months emergency cash, but we plan to make that 2+ years by the time we retire. Jim Collins or Can I Retire Yet (?) presented some research that showed bear markets, on average, recovered within 3 years. That’s the reason why we’re thinking about keeping 2+ years’ worth in cash–as you say, “to hedge against market dips.” We’d rather be able to invest a bit extra during market dips rather than fear that digging too much into our investments during the first years of retirement would diminish our holdings enough not to be able to recover from.
Any thoughts?
The 4% Rule is based on the worst economic periods in history. The only way the portfolio wouldn’t recover, is if something worse than the great depression or 70s oil embargo / high inflation were to come along.
I discuss this some in my post on cash flow management.
Some thoughts:
– You will have income. VTSAX currently pays ~2%. If you are following the 4% Rule, 50% of your annual expenses are covered just from that. So having 4-5% in cash is already 2 – 2 1/2 years of spending. If you also hold other assets, odds are your yield is even higher.
– You can adjust your spending. If the market craps the bed, instead of vacationing in Paris for 3 months, spend 3 months in Thailand. Both are equally awesome places.
– Selling isn’t that big of a deal. If the market drops 50%, and you need to sell shares to cover some of your spending, you are only selling single digit percentages of the portfolio. Worse than a market decline is rapid inflation, and cash hurts you twice.
Good food for thought. Thank you! It’s easy for risk-averse people (guilty!) to think that a cash cushion is some magical balm, but there’s plenty of downside worth considering.
Great overview post on your asset allocation and overall strategy.
One question – why MUB and IEI instead of BND? Expenses on the first 2 are 2.5-4x higher than the latter. I know bonds are only 4% of your overall portfolio so I’m kind of picking nits here but just curious on your choice of bond funds.
I’ve been thinking about allocating something to bonds at some point but a novice when it comes to picking a fund (which means BND might be the fund for me at 0.06% expense ratio).
It’s a trade off. MUB has tax free income. BND has higher yield and lower fees than IEF. But BND also has some credit risk due to exposure to corporate debt. IEF has only government 7-10 year bonds.
Legacy stuff, before I moved everything to Vanguard. I think at the time (2006-2007?) Vanguard didn’t have ETFs or maybe I had some free ishares trades.
In a tax-deferred account, I would hold BND.
In a taxable account, I would probably hold VTEB.
Broad based equity index funds (https://en.wikipedia.org/wiki/Index_fund) are very cost effective efficient method of exploiting the efficient-market hypothesis (https://en.wikipedia.org/wiki/Efficient-market_hypothesis). Passive efficient effective investing. My model portfolio is 70% large cap equities mainly USA index funds, 5% preferred stocks in large USA banks and 25% cash due to my current age.
Equities for the last decade and for the foreseeable future will significantly outperform bonds on a risk adjusted return basis. This is simply because modern western economies have reached maturity and have solid modest positive growth with permanently contained inflation as the increased usage of intelligent automated machines has permanently reduced the inflationary wage pressures. Corporations are flush with cheap capital typically choosing capital investments that increase productivity by reducing the need for human labor. Investors reward and encourage this behavior. So the bond market may never be an attractive place period for small investors.
Got yield ? Preferred stocks in the highest quality companies seem to be the
only viable inflation adjusted return. A favorite of Benjamin Graham. Wells Fargo preferred stocks are decent example.
Slowly rebalancing and reducing international index exposure as large cap USA multinationals are a more efficient less risky means of capturing international economic activity. The unquestioned role of the USD as the worlds reserve currency is a big factor is this play.
25% cash is there just to buy when the market dips and sell when the market rises. If I where younger it would be 10%.
So over the last 3 decades the markets and global economy has slowly changed and people need to adjust their investing habits accordingly. Things change and the old investing playbook of holding bonds and a substantial amount of foreign equity exposure apply to a much lesser extent.
Eff
Preferred stocks do NOT protect against inflation. Their payout is fixed. They are more like a bond or an innuity.
According to M* X-ray I’m at about:
32% US
33% non-US
26% bonds
6% cash
3% other
My bond/cash allocations are too high right now, they’ll adjust downward after I rollover my company 401k (which is all American Funds at average expense ratio of 0.47) to a Vanguard IRA. I’m not sure I agree about over-weighting US so much. I very much doubt the US will be even 50% of the global market cap in 20 years.
You’re not sure you agree, or you don’t agree? ;)
When I write a post about US/International it should be a fun discussion.
Looking forward to the post. Your take is always interesting…
http://earlyretirementnow.com/2016/03/23/asset-allocation-32016/
By asset class
Allocation Fees
0.1% 0.00% Cash
25.2% 0.00% Home Equity
9.5% 1.00% Private Equity (Real Estate)
0.9% 0.50% Muni Bonds
37.0% 0.05% S&P500 Index
7.2% 0.06% US Total Stock Market
0.3% 0.00% US Small-Medium Stock Index
1.6% 0.00% ACWI ex US
18.2% 0.20% Options Trading
100.0% 0.16% All
By Account Type
Allocation Fees
63.8% 0.22% Taxable
11.4% 0.00% 401k
6.7% 0.11% Deferred Comp
2.2% 0.05% IRA (post tax)
12.9% 0.05% IRA (rollover)
1.8% 0.05% Roth
0.6% 0.12% 529 account
0.6% 0.14% Health Sav Account
100.0% 0.16% All
Notes:
•We started investing new money in private equity real estate funds. We also shifted money to an option trading strategy that benefits from sideways moving markets.
•We max out our 401k contributions, but taxable accounts grow much more because most of our savings come from bonus money, which is after-tax.
•Home equity is Zillow estimate less 7% for selling cost less mortgage
•Private equity is two investments in multifamily housing funds, projected rental yield ~8%, plus some modest capital gains
•Funds in the 401k are all no fee, apparently subsidized by the employer. Nice!
•Deferred Compensation is bonuses from prior years (already vested) that we voluntarily deferred
•Options trading: I will write some additional detail in a later post, but for right now, this is mostly exposure to US large cap equities
Hey Jeremy,
I see that you have the referral link to the Cap One 360 account here. How has that been for you internationally, particularly in terms of ATM’s? We’re looking for a good international friendly checking account with no ATM fees, and I don’t see on their site about any fees outside the U.S. What has your experience been like with it?
Thanks,
Jeremy
I’ve never withdrawn cash from the 360 account at an ATM. We just use it to store cash and transfer funds to our Fidelity account for withdrawals, since Fidelity reimburses all ATM fees.
Hi,
I am a early retirement couple also. I currently also have a Fidelity card, but cannot use it in Mexico via ATM (where we live now) since it is only good domestically. What Fidelity card are you using at international ATMS? Thanks for your reply. Currently my portfolio is being managed by an FA but I am thinking about taking it over during this year. Lots of analysis up front to confirm this is the right decision. Thanks for all of your help on this.
Hi Cathy,
There are a few banks that reimburse AMT fees outside US. I use 2 accounts (State Farm Bank and Charles Schwab Checking) when I travel abroad. In fact, I used them in Mexico before (Banamex, Santander, Banorte, HSBC and Scotiabank). ATM fees were reimbursed every time. But I had an issue with Bancomer 4 or 5 years ago and haven’t withdrawn money at Bancomer since then.
I don’t prefer financial advisers to manage my money because they don’t fully understand my situation and tend to exploit. Their purpose is to earn their money first but not your money. When they don’t perform, they still charge you. I am not sure if you pay your FA by commission or 1 or 2% fee though. They usually cannot beat the S&P 500 index and charge fees. Simply, it is better to put money in the index funds.
We’ve used our Fidelity bank card all through Mexico.
https://www.fidelity.com/cash-management/atm-debit-card
Great, thanks for responding. We’ll look into Fidelity then instead.
Schwab offers .3 APY Savings and the no fee ATM and international checking with no minimum balance. You’d need at least $50k in your capital one account to get their max .2apy. So it actually doesn’t make sense to recommend them at all I think.
Oh, and I forgot to comment on the article. I like your approach and followed a similar one through the year. I divested from my individual stocks as well, transferring everything to index funds once I realized their value on my time. I no longer pay any attention to market volatility, nor do I have to do any company analysis, which is a huge time saver!
I did not know of the miles value tool, which I just used to realize that I have over $20,000 worth of miles. Considering that we’re planning on flying B-Class to China for what the tool says is about $2000, but the airline would charge $5.5K for, I think the valuations may vary. None-the-less, that was awesome to realize! Thanks for pointing it out!
I keep learning so much from your experience and writing. Keep it up, as it’s helping us FIRE in two years, heading to either coastal Spain or Thailand. You’re showing us the way.
Thank you!
Jeremy
Upgrading to biz or 1st class flights seems to increase exponentially in $ but linearly in miles, so you can get more “value” from the points/miles that way. You just have to trade that off against flying in economy more often.
Hanging out in Spain and/or Thailand will be an awesome start. Even better when you aren’t worried about individual stocks.
That’s definitely better organized than me. I thought I roughly had a good plan but because I plan to move abroad soon I’ll need to revisit my portfolio, and overweight a bit on the country of destination (Japan). This could mean increased fees depending on how I play it
Asset allocation can be like trimming one’s sails to the wind. The wind blowing from the US Federal Reserve Bank, in the form of quantitative easing, has been an ill wind for US bank deposit interest rates and a fair wind driving investors in/to US shares. The Reserve bank of Australia did not engage in quantitative easing; the local interest to share yield differential is not so pronounced. My allocation is to all government guaranteed bank deposits.
Simplicity is the way to go. Other hand, I love to read earning and financial reports. I “geek out” on all the numbers. I do own a few dividend paying stocks and the rest in index funds. Maybe I am still young and a sucker, only time will tell :).
I agree with the 100% in equities based on your previous article. I think the biggest risk to that strategy is human behavior. I know that historically there have been many periods where that was promoted and again the risk was withdrawing funds during major downturns and locking in the losses. I am practically 100% equities and consider other assets such as my small business, house and property as my safe haven. I was shocked when reading one of the Jack Bogle books and the suggestion of such high bond holdings. I have two questions:
1. If I would have bonds(solely to reduce my anxiety when I initially retire) how do you feel about keeping them in a taxable account. The returns are so low that being taxed on them as normal income still seems to be less then the losses of equity returns at 15%. This is more academic because I’m going to try to follow your gameplan almost exactly as far as paying no taxes.
2. The second question is something that you throughly discussed in your post about 100% equities. The risk of slightly greater returns vs piece of mind. I believe you implied that the extra risk you were taking was not to make more but to leave more behind. Do you think it’s worth it for everyone to be 100% equity.
3. Quick third question. What is the historical difference in rate of return at different percentages of stock/bond ratio and domestic/international ratios. Maybe now that The MafFIintist has free time he can generate a program to show that. Or is there something.
Thanks again for all the great posts. You’re an inspiration to me and all your followers.
PS San Miguel is incredible! I will live there someday. Best 10 peso street tacos ever!
You can play with all of this on cfiresim.com. Or google your questions, graphs and data exist. There is a link in this post to the US/International return.
Portfolio longevity is roughly the same at 80/90/100% equities, as shown in the graphs on the 100% equities article. If you don’t sleep well with volatility, no need for 100%.
I also now agree that houses are a really bad investments(at least in my area)! Wish I would have been a follower a couple years ago. I almost have my wife convinced of it too! I wanted to post this statement just to be clear after saying it was part of my safe haven. It’s a slowly draining cesspool that will eventually lead to a muddy hole of equity. Very bad investment!! Even at a 15 yr 3.1% rate.
Another great article Jeremy. Question for you. I FIRE’d in Feb. of 2015 after being laid off. I’m struggling with my taxes. My AGI is going to be around $90k for 2015 so I can’t take a tax deduction for my IRA contribution. I only contributed $4k to my 401k since I was laid off in Feb. I did have an HSA for 10 months in 2015 and haven’t contributed to it yet. Would you recommend that I max out my HSA contribution to lower my tax burden for 2015? I’m not even sure I can since I only had an HSA plan for 10 months out of the year??
KInd of feel like I’m getting screwed due to being laid off in terms of tax shelters (401k, HSA, IRA). Any other advice regarding my tax situation would be greatly appreciated. Thanks for your help.
An HSA is never a bad idea. Turbotax should be able to figure out your max contribution (usually prorated)
Nice post!
Agree with overweight on US stocks. International stocks seem cheap right now, looking at PE ratios but there’s also little growth abroad. They are cheap for a reason. So it’s best to stick with US stocks.
We are still in the accumulation phase and try to avoid bonds just like you. Yields for bonds are just too poor, pretty much zero real yield for US Govt bonds (7-10 years as in iShared IEF), Slightly positive for corporate bonds. But instead of being all in stocks we use some private equity real estate (managed by professionals, so no work for us) to generate stable income in an equity like investment. Much higher yield than equities, or even REITs. Also use option writing strategy to generate income even in sideways moving market.
Once in retirement being 100% stocks seems petty brave. Though simulations with past returns seem to prove you right.
Our numbers:
http://earlyretirementnow.com/2016/03/23/asset-allocation-32016/
Great article! Still learning here about investments. As long as I maintain my bracket between 0 – 15%, no tax to pay. I live in NJ, so I will pay state tax on the capital gains but none in federal? Thank you!
No Federal tax to pay on Qualified Dividends and Long Term Capital Gains. Google those terms for exact definition. State taxes still apply.
Dividends are paid after corporate tax. In Australia the dividend recipient receives a tax credit equal to the tax paid on the dividends by the corporation.
Maybe a dumb question, but moving away from individual stock into index, what is the cash flow source going to be, with dividends eliminated ? is it just withdrawals from the portfolio ? Also with you being analytical, and a move in index, do you ponder what if we are where Japan was in I guess late 80’s ? Here is an interesting 30 secs visual https://twitter.com/SJosephBurns/status/713911015671533573
Index funds pay dividends.
It isn’t possible to answer a Japan economy question in a comment, but the US is not Japan. (But if you don’t want the US to become Japan, please vote for someone who doesn’t want to shut down immigration.)
…can I ask how you came up with ur allocation model? I’m assuing you didn’t just throw some random numbers together.
I was looking for a Lazy Portfolio, but have my own views on International allocation and don’t see a good reason to hold bonds.
I know your instituting the roth conversion ladder method, but I was surprised to see over 70% of your assets seem to already be out of the traditional IRA and into a brokerage. You’ve mentioned you both maxed out 401K’s for years, so I’m wondering, how have you been able to convert SO much of your IRA into brokerage already. Or am I misunderstanding something?
A Roth IRA conversion moves funds from a Traditional IRA to a Roth IRA, not to a brokerage account.
Winnie never worked in the US, so no 401k for her.
Hey Jeremy, what tool do you use for asset allocation model? It appears quite varied from sites to sites.
Is it worth selling VTSAX when it’s at all times high to harvest gains and buy it back at a lower price or should I just leave it alone and make it work its magic for years and only sell when rebalancing portfolio? What do you think?
Thank you in advance!
Cap gain harvesting means selling something and buying it (or something substantially similar) again at the same price. The only thing that changes is you increase your basis. Any price higher than what you paid is a good time to harvest gains if you do it with zero tax.
I generally ignore the market entirely until I’m ready to do taxes in December.
Hi Jeremy and Winnie,
Just wondering if you switch your asset allocation from growth assets (stocks, property, infrastructure) to defensive assets (cash, bonds) during anticipated prolonged bear market i.e. GFC 2008 or do you just go along with the roller coaster?
I’m based in Australia, and in my Super (equivalent to 401K), i can switch asset allocation without incurring any fees i.e. switch, buy/sell spread, so I’m quite keen to protect my retirement savings from prolonged bear market.
However, switching asset allocation in Vanguard would require more consideration as there is a buy/sell spread fee which is about $500 to buy and sell for every $100k switched.
I understand that rebalancing is usually done yearly to make sure that your investment strategy is met, in a relatively stable market. But in a potential crises? And if so, how do you anticipate these crises? What tools do you use to monitor the market?
Sorry, meant to reply to this, but it showed up as a separate entry, see below.
“What tools do you use to monitor the market?”: ASX:STW price/book=1.78 etc = why pay more than something is tangibly worth. Easier to predict climate change.
I don’t monitor the market. At all.
“Wall Street indexes have predicted 9 of the last 5 recessions.”
Thanks for all your comments. it’s a relief cos i had ruminating over a question (prolonged bear market) that no one really has the answer to.
I do agree with earlyretirementnow.com that if regular funds are still being deposited to dollar cost average and to increase the total funds, then yeah, sure, no worries.
I wonder if anyone has retired using the 4% SWR for more than 10 years and lived through a GFC and still on track without needing to return to work.
Also, now that you’re officially retired, why such aggressive asset allocation? If portfolio longevity is roughly the same at 80/90/100% equities like you mentioned, why not 80% equities to smooth out the ride?
The acronym GFC is interesting. Global Financial Crisis. We’ve had a lot of them in history… the Great Depression, two World Wars, the oil embargo and high inflation of the 70s, the 2008 meltdown… Except for that last one, these periods of calamity are precisely how the 4% rule came to be. During all of these periods, spending 4% was just fine. That is why it is called the 4% rule and not the 5% rule. Even 2008 is turning out just fine.
As for our own portfolio, the smoothness of the ride isn’t important to me. While longevity is similar with 80/90/100% equities, the terminal value is vastly different.
Noted. Also, just wondering what’s your strategy (and why) on rebalancing frequency?
1) Annually (end of the year like everyone else, or midyear, birthdate)
2) Allocation threshold that exceeds 5% (or 25% if it’s a small holding) https://www.vanguard.com/pdf/icrpr.pdf
3) Or quarterly like this columnist suggested http://www.marketwatch.com/story/the-right-way-to-rebalance-your-portfolio-2014-02-18?
Quarterly is way too anal retentive and too much work. And your birthday is for relaxing and drinking wine, not obsessing over your portfolio.
The most important thing is just have a plan and stick to it. I do everything in December when I’m preparing our taxes.
“dollar cost average”: suggest you try that beforehand in a spreadsheet – likely you will notice it does not make much difference unless there is a very savage rout lasting a long time and you have the money to invest during that time.Living w-w-way below your means and / or business is more effective at delivering capital for non-inheritors.
I don’t need a spreadsheet. I see the tax lots of the shares I bought near the bottom in 2001/2 and especially 2009.
Also as I said: DCA works well in the accumulation phase. During the retirement phase it works against you. In fact, I’m always the first one to point out to be cautious about the strict and literal application of the 4% rule, remember?
“the bottom in 2001/2 and especially 2009” would made a substantial difference to a portfolio if a substantial portion of investment was concentrated then. The usual definition of “dollar cost averaging” is regular investment of a constant ‘dollar’ amount. I think you may mean ‘average cost’.
Bonds have lower mean returns, so you have opportunity costs not just while accumulating but also in retirement between now and the start of the next downturn. So, there is a case for 100% equities even while retired.
True, if the next crisis is around the corner, the more bonds you have the smoother the ride. But I agree with GCC: you can’t forecast the crisis. If anybody around here could he/she wouldn’t be retiring as millionaire but billionaire.
One caution: The worst performance for retirement portfolios came in 1966 with flat returns for many years and then four recessions (1970, 73-75, 80, 81-82). A 2008 style drawdown was pretty harmless for early retirees due to the swift recovery (but probably still scary while living through it)
I wonder what Jeremy would say to that. Here’s my 5 cents: It’s hard to anticipate a “prolonged bear market” with any certainty. More likely than not you’d pull money at the wrong time: at the bottom of the August 2015 correction or the early 2016 correction, right before the market recovers again. On top of that, paying 0.50% t-cost seems quite excessive.
While still working and saving it’s easy to go through the GFC: simply keep saving and make dollar cost averaging do its magic. It’s a little bit more nerve-racking once retired already, though
Hi,
How are you able to hold Mutual Funds under the latest FATCA ruling on Non US residents? From my understanding non US residents cannot hold US mutual Funds? Thanks! I live in Mexico and just moved into a similar asset classification via Vanguard. Now I am concerned.
We don’t have any Mutual Funds (except in the 401k.) Only ETFs, which anybody can buy/sell/trade.
‘Many [USA] expats are surprised to learn that rules barring the sale of most U.S. registered mutual funds to non-residents are decades old.’
‘While U.S. mutual funds may no longer be available for Americans abroad, Exchange Traded Funds (ETFs) are generally not restricted for sale to non-U.S. residents. A well designed ETF portfolio provides equal or superior diversification than traditional mutual funds.’
Tangling with USA tax law is too much trouble for me to bother with any product which incorporates USA securities of any kind.
Gracias Amigo!
Hi
I’m still new to investing and finance so I get confused easily. I’m mostly just focused on saving as much as I can at this time and reading and learning as I go along. Right now I am still working and making not great pay but enough to invest in a traditional IRA (VTSAX) to the max amount. I want to invest my remaining savings in VTSAX as well but not sure whether I should do it through a Roth or a taxable account? I was thinking a Roth but not sure I understand all of the implications and this post made me think twice about it. My other option is putting some of my extra savings in my husbands traditional IRA but we keep our money fairly separate so I’m not sure how that would work. any thoughts? thanks so much!!
I just found another post you wrote on Roths where you talk specifically about this so I’m finding more information regarding this question. Thank you! thank you! for all the information on these subjects that you provide!
The determining factor should be the marginal rate you pay / would pay on the IRA funds. Since you make “not great pay” that suggests your marginal tax rate is low.
If the marginal rate is 0% or 10%, Roth IRA is probably the right choice. If it is 25%, Traditional is better.
As a married couple, your marginal rate is determined by your combined income. You are in this together.
As a newbie to investing and finance, maybe also take a look at JL Collins’ new book.
Out tax rate is 15%. So a taxable account beyond our traditional IRA’s (if our traditional accounts were to the max amount) wouldn’t be a good option? Roth is better? I am considering his book. I read his stock series and a more in depth book on finance certainly would help me understand the subject more clearly. Thank you!
Scratch that… Sorry, for some reason I thought I could invest in a Roth after I made the max contribution to my traditional IRA, but it finally clicked that the max contribution is for all IRA’s. So a taxable account is the only option once we are at max contribution.
Hello,
I seen on your website the index fund that you invest in. I was wondering whats your take on a dividend index fund
Like vdadx or vdigx for passive income or retirement
Seen your fb msg thankyou
Is there any advantages investing in the Vanguard ETFs instead of the same mutual funds (i.e, VTI vs. VTSAX)? Or do you recommend doing one over the other?
For Vanguard, they are functionally equivalent.
There are minor pros/cons, but I would say use whichever is most convenient.
I use the ETFs because Fidelity is our brokerage, and I get charged $75 to buy/sell a mutual fund but only ~$8 to buy/sell the ETF.
Thanks for the quick response…..Can I poke a little more into your situation and ask why you use fidelity as a brokerage over vanguard? If you used vanguard the purchases would be free, Also brings me to another questions, you are obviously not buying every week and using a dollar cost averaging method? So…how often are you buying?
So just an FYI – I’ve probably read 10 or so articles on betterment/wealthfront/etc.and was literally going to switch to betterment this week before I read this post. Now I am happy and sad at the same time because I have to thoroughly rethink my decision once again.
I was actually reading this post at the same time. https://gocurrycracker.com/why-betterment-has-zero-of-our-dollars/
Hence, the reason i brought up betterment.
I only do a few trades per year, so it isn’t worth the hassle to move. Fidelity has always been good to me… 16 years and counting.
Great post! As I read through your asset mix I see VXUS for part of your international component. My wife dissolved all of her Acorn International (ACINX & ACRNX) and wants to repurchase something a bit cheaper. Are you happy with your VXUS and did you consider anything else? like VSS. Many thanks
I’m happy with VXUS in that it tracks its index with low fees.
VXUS is a superset of VSS. I wouldn’t hold VSS exclusively.
Hi, I am still learning, my wonder is vxus pay dividend 2.60% and around 52~54 a share to buy. That’s not too much of dividend, how do you make money out of it? Next: I would like to buy s and p 500, but what is the ticker for that to buy? Thanks.
Voo at Vanguard. Also -SPY . there are others and no fee depending on which broker you use.
I’m really looking forward to see your 2017 asset allocation.
(Are you planning to seel those 4% bonds to get closer to 100% equity?)
I haven’t done anything over the past year, so the holdings look the same.
Question. I was planning to switch my the International part of my portfolio to an ETF called SDIV Super World Dividend.
What’s your opinion on living off a dividend portfolio?
same question,
i own US and international individual dividend growth stocks.
I am not sure holding ETF is the same… i try to hold companies that rise dividend in a regular basis for many years.
Dividends are only one way that a company can return value to shareholders, and there is no reason to prefer it. There are also many reasons to prefer a company instead invest those dollars in future growth or to buy back shares. Canadian Couch Potato has a good series on Debunking Dividend Myths that is a fun/educational read.
There is a reason to prefer dividends: when the tax jurisdiction provides dividend imputation.
In Australia, company profits are taxed 30% and the dividends (paid from profits) have attached tax credits (for Australians).
Taken as a capital gain $1,000 earnings are taxed 30% = $700 then taxed 10% in a super (pension) fund = $630 net.
Taken as dividends $1,000 earnings are taxed 30% = $700 with $300 tax credit then the grossed amount, $700 + $300 = $1,000 taxed 15% in a super (pension) fund = $850 net.
Yes, agree, taxation can change incentives.
In the US LTCGs and qualified divs are taxed the same, often 0%. Although the dividends are taxed at the corporate level, in theory.
Foreign dividends are taxed by foreign governments, but those taxes can offset US taxes via the Foreign Tax Credit. And many of these dividends are not qualified, so taxed at the earned income rate.
For a US person, it is usually better to withdraw gains because you have full control over when they are received. So buybacks can be better than dividends, as they increase share value without creating a taxable event.
Thanks for the detailed analysis. I’m just curious why you seem to prefer VTI over VTSAX. Any particular reason?
I’d be happy with either as they are basically the same. But for some reason, my brokerage wants to charge me $75 to buy VTSAX and only $5 to buy VTI.
thanks GCC! i’m taking your advice and will slowly move my Vanguard account to be more VTSAX and VTIAX, away from REITS, individual stocks, and non-qualified dividends as i’ve had it.
the one big thing tho..is that my yearly Vanguard financial discussion…they keep telling me i should be moving toward 50/50% bonds/stocks (I’m hoping to retire & travel, as you guys are, in a couple years. I’m 52 now). My preference is more like yours…to stay more in the stocks, but well diversified (as ^ are). Just need to figure out how to bump up my qualified dividends higher.
Most traditional retirement advise uses some flavor of the formula:
% equities = 100 – Your Age
So age 50 puts you at a 50% equities / 50% bonds split. That is fine guidance for people who plan to retire at 65 with some social security and/or a small pension, with normal life expectancies and no plans to leave a legacy.
For early retirees who may plan to be retired 60+ years, more equities are required. See the charts in this post. A 50/50 portfolio doesn’t have great success for longer retirement periods.
Have you used Fidelity/Vanguard/ETrade for a SOLO 401(k)? They don’t have the MF for Vanguard, but they have the ETF (VTI). I was wondering if you or anyone else had experience with this.
I have a solo 401k at Etrade. I just buy VTI
100% all the way.
Please tell us which brokerages you use and an example of which you use for what purpose. Free ATM? Low fee? Capital one no overseas transaction fee? Is it the same idea behind shopping reward cards?
Blessings
Hunter, 5 years fi
Brokerage details
International money management
Do you think it is worth it to wait to invest the min $10k in an admiral fund like VFIAX instead of VFINX($3k min)? I have about $6k saved up but it will take me about 6 months to save the rest.
There is no reason to wait. They will automatically move you to the admiral shares once you hit the $10k minimum.
Hi! Me and my husbands are in our 30s and currently have our 401K and IRA in 100% equity (Vanguard Index funds). Do you recommend moving some of them to bonds (maybe like 10% to 20% of them) to make is more stable?
Hello, any update on that porfolio at april 2018? it would be very interesting to follow any updates and to know how often you check or modify it!
Thanks
Check out The 2018 GCC Asset Allocation.
Thx Jeremy, and i think i even read it from the newsletter :)….
Still few questions: how do you usually manage it? At Jan-march give a check/set and then you don’t look at it for 1year?
What about this next end of bull period? better further reduce equity?
I do most fiddling with it in December as part of tax management / rebalancing. Then I don’t look at it for a year. See here.
Market timing is a losing game, so I don’t think about if/when/how/where/why a bull market will start or end. Pick a target asset allocation and stick with it.
Hi Jeremy, do you have the GCC asset allocation for 2024?
Here is the latest update: GCC Asset Allocation 2024
All posts are listed here: Archives