August 2006 Retirement Portfolio / Cash Snapshot

Here is another snapshot of my retirement portfolio as of market close 8/3. I haven’t bought or sold any funds since my last update. I hope to use this data later to better track my overall investment returns.

Retirement Portfolio
Fund $ %
IVV – iShares S&P 500 Index ETF $9,766 15%
VIVAX – V [Large-Cap] Value Index $12,342 19%
VISVX – V. Small-Cap Value Index $12,303 19%
VGSIX – V. REIT Index $7,690 12%
VTRIX – V. International Value $6,950 11%
VEIEX – V. Emerging Markets Stock Index $6,355 10%
VFICX – V. Int-Term Investment-Grade Bond $7,307 11%
BRSIX – Bridgeway Ultra-Small Market $1,881 3%
Cash – Unreinvested Dividends $60 -
Total $64,654

July Fund Transactions
None.
Liquid Available Cash $30,000 (est.)

Thoughts
(For some reason, these numbers seem off. I’ll have to double-check them tomorrow.)

Right now the tentative plan is still to sell my IVV S&P 500 ETF shares which are currently in a taxable account. I’ll take the capital loss and then use that money to open up a Self-Employed 401k at Fidelity and buy $10,000 of either the Fidelity Spartan 500 Index Fund (FSMKX) or Fidelity Spartan Total Market Index Fund (FSTMX).

That way, I can get a tax break and the $10,000 can grow in a tax-deferred account. That will made a total of $18,000 put away for retirement in 2006 ($4,000 Roth IRA x 2 + $10,000 here), not even counting my wife’s 401k contributions. So I’m most likely not to add any more, although I will re-examine my asset allocation later on.

Comments

  1. It seems that you somewhat have a slice and dice portfolio with weighing heavily on value. With a true slice and dice portfolio you should have small cap growth, yet the 3% of BRSIX is considered Small Blend, thus you really aren’t carrying much small cap growth.

    I also would personally add EAFE fund to your international allocation. I can see you are a big leaner towards value, but in my opinion you are neglecting favored growth companies mostly in your international asset allocation. I’m not sure if you are familiar with Merriman, but take a look at his vanguard portfolio http://www.fundadvice.com/feht.....0006a.html
    You can see that Merriman doesn’t include REIT, which I like your asset allocation that includes REIT better and as you can see he thinks a portfolio should be 50/50 with domestic and international. Regardless of your choice in your asset allocation, I like his choices for international. Very similar to yours, except you are missing EAFE, which in my opinion I believe you should add.

    I was actually suprised not to see TIPS in your fixed-income AA, especially after seeing that you’ve read some really good books like All about asset allocation. There aren’t many good books out there that focus on fixed-income, but a few months ago I read The Only Guide to a Winning Bond Strategy You’ll Ever Need by Larry E. Swedroe, which isn’t a bad book. Being that your fixed-income is only around 10% now I supposed the equity portion is more critical and at this point having only one fund I can understand.

    I really do like your asset allocation though of including 10% for REIT and even at your age going with 10% in fixed-income I believe is a wiser choice than 100% equity.

    Thanks for posting your portfolio, hope some of my comments help or at least make you consider other choices.

  2. Have you ever tried using Morningstar to track your portfolio? It has many useful free features. You have to enter all the information about what you own, but it has many useful tools like showing overlapping stocks in different mutual funds. It also shows percentages of industries as well as asset class. Some features require a premium membership, but you can get a free trial of that.

  3. I am wondering if VFICX is already in a tax-deferred account? If not, this might be an opportunity to shift VFICX into the tax-deferred account. You can still harvest the tax loss by swapping IVV for VTSMX for example.

  4. You do think growth funds suck, right?

  5. Thanks for the comments, as with everything here it’s a work in progress.

    I’m trying to do slice and dice, yet at the same time minimize extra expenses like low-balance fees.

    Everything except IVV is currently in tax-deferred accounts.

    Historically, value has beat growth, so I have a value tilt, yes. “Suck” is such a strong word :)

  6. I’m not sure if you relieze, but even with slicing and dicing equally such as many portfolio like the coffeehouse, you are already leaning towards value. Larry swedroe’s portfolio does slicing and dicing but leans a little too much with value in my opinion. A good example is the S&P500 is large cap blend and then you have Large-Cap Value, thus even if you split these two 50/50 for large cap it’s already leaning towards value enough in my opinion. I honestly do like slicing and dicing over the TSM in a tax deffered account, but I prefer slicing and dicing the domestic a little more even with equally parts of the 4 asset groups (large cap growth, large cap value, small cap growth, and small cap value). Even splitting these funds even you are already leaning towards value. You are correct to say that value has historically beat growth, but it’s time specific. Bogle has made comments on those that leaning towards value too heavily you may pay a price and he’s given historical data to back up his beliefs. Then again he believes you should only have at most 20% international, which I don’t totally agree.

    There’s been 10 year periods that growth has done much better than value, if you take a look even in the late 1990′s growth was were it was at and value wasn’t looking so hot, then it reversed. We could have another 10 year period again that growth does better and therefore I wouldn’t bet the farm on value, but leaning slightly towards value I do agree with you that it should outperform growth in the long term.

    As you probably know small has historically outperformed large, but at the sametime I wouldn’t lean completely towards small-cap value even if historically it’s done better than say large growth.

    There’s no such thing as a perfect portfolio and I admire you for posting your portfolio. Without even making one single change to your portfolio I do believe you will out perform the majority of investors.

  7. Don Marek says:

    What?!?! No commodity funds!?!?

    What are you thinking?

  8. Anonymous says:

    Small cap growth is the worst performing of all the major asset classes — with added volitility. You risk more and get less. There is little reason to put this asset class into any portfolio.

    A fair amount of large cap growth (such as that represented in the S&P 500 index) is good for those crazy times when the entire market becomes overvalued. You get to keep those rewards by shifting those gains into value when you periodically rebalance. Over the long haul, however, growth can’t hold a candle to value, and younger investors would do well to overweight value significantly.

  9. i still think you are overlapping too much in your choices. Additionally, there is no real reason to hold a bond fund. Being so young, you should take slighlty more risk because the bond fund will grow much more slower over time than stocks. Moreover, I still beleive you need to weight more of your portfolio to overseas companies and put less emphasis on asset class.

  10. Anonymous says:

    So, you’re going to reduce your non-retirement savings by $10,000? Have you decided to put buying a house on hold for longer?

  11. Still plan on buying in a year, just balancing between goals of house and early retirement. I already had this money on stocks earmarked for retirement, but now I actually have a way to defer taxes on it.

  12. Have you run the numbers on the transaction you’re proposing? E.g. Selling an equity in your taxable account to buy something similar in your non-taxable one?

    I ask, because the tax savings might not be worth the loss you’re taking, particularly with capital gains taxes so low (15% at most).

    In essence, even with the tax savings you still lose money, right? Say you lose $2k and you’re in the 28% tax bracket, you save $560 on taxes and are still out $1,440.00, plus you paid trading commissions.

    So, when you buy the new equity you need your new purchase to appreciate enough to cover the previous loss + the trading costs and the pricing is not likely to be 1:1 so you might lose some there as well.

    In essence, you’re just adding to your cost basis as you need appreciation past your original purchase price to truly earn a profit.

    At the end of the day, paying taxes on a gain always nets you more than taking a deduction on a loss, you might want to wait.

    However, since this is a solo 401k and the contribution amount is pretty high, is there a way you can just transfer the securities in the non-taxable one to the 401k? In essence, deposit equities instead of cash? That way you don’t have to bother with adding costs via buying and selling.

    -Mark

  13. Jonathan says:

    Thanks for the comment, but I’m not sure what you mean. Obviously, a loss is a loss, nothing I can do about that. If losses are saved at marginal rate, and gains are taxed at marginal rate, everything except transaction costs should wash out.

    If I had long term gains rate of 15% I would *really* want to sell at a loss to arbitrage the difference – save 25% on losses, only pay 15% on gains. (Of course, that’s why there are wash sale rules.) So why wouldn’t I want to sell at a loss?

    I think that your main point is the trading costs make this all not worth it. This is a good point – but in my case on one side I have free trades with Scottrade, and on the other side I am buying a no-transaction-fee fund. The only concern I have is maybe the bid/ask spread on IVV if I buy/sell on the same day.

    Of course, the overwhelming reason I’m doing this is I get the tax break on the $10,000 401k contribution and the future tax deferrals. I think that benefit trumps any of the above concerns. My loss is currently only about $200 right now, nothing crazy. :)

    Oh, I’m pretty sure I can’t contribute securities directly to 401k.

  14. J,
    I think the transaction only make sense if you move the 10k PLUS your tax savings into the 401k, otherwise you lose out.

    If you move the 10k, you’re converting from being taxed at LTCG to being taxed as income. Most likely, your income tax rate at retirement will be hire than the LTCG rate, i.e. you lose. If you move your 10k PLUS your theoretical tax savings of $2800 (ie 12800), then you’ll come out ahead, even at a 28% tax rate at retirement.

    Many people “assume” they are getting a good deal by putting money away into a tax deferred account but it really depends on what you are doing with the money that you saved on taxes. If you just spend it on candy then you’re net worth suffers in the long run because the gov will get their income tax either way but you bought more candy than you needed.

    Excel formulas:
    A) 10k @ 9% over 30 years taxed as income:
    =10000*1.09^30-(10000*1.09^30*0.28)

    B) 12.8k @ 9% over 30 years taxed as income:
    =12800*1.09^30-(12800*1.09^30*0.28)

    C) 10k @ 9% over 30 years taxed as LTCG:
    =10000*1.09^30-(10000*1.09^30*0.15)

    B is more than C is more than A.

    -Wes

  15. Let’s say you earn $200 on an equity sale, at the long-term capital gains rate you pay 15% or $30.00, for a net gain of $170.00.

    Now let’s say you lose $200.00 on an equity sale, you then save $56.00 on your taxes, but you still lost $144.00.

    The delta is $314.00, which is your effective loss by not leaving the stock alone and letting it appreciate to an amount equal to the loss. Meaning, it’s not a wash and if the stock will go up significantly long-term, I’d leave it alone and take the profits year down the road, instead of locking in a loss now.

    Capital GainTaxes on a net profit from an equity sale simply reduces your profit (and by a minimal amount, 15%) – whilst the tax deduction on a loss, simply reduces the loss, but you still LOST.

    Make sense?

    -Mark

  16. Sure, that makes perfect sense, but that’s not what I’m doing here…

    I’m not selling and locking in a loss, I’m keeping the same investment and just moving the location. Any “profits down the road” will still be all mine :)

  17. “Everything except IVV is currently in tax-deferred accounts.”

    Oops, I lied, BRSIX is also in a taxable account directly at Bridgeway. I always forget that.

  18. I haven’t been here in awhile, but just was glancing through the posts. Somebody wrote:
    “Small cap growth is the worst performing of all the major asset classes”

    The reason to have an asset class is not if it performs better or worse or why not just put 100% into small cap value.

    I don’t know anyway of saying this, but small will not always beat large and value will not always beat growth. Just so you are aware we’ve had 30 year peiods that large has beat small. That’s 30 years, can you afford to weigh so much towards small? Probably not, there’s been 10 year periods that bonds have outperformed stocks and there’s a lot of historical data showing growth outperforming value many 10 year periods.

    Now I see nothing wrong with leaning towards value, with that in mind I lean toward value, but that’s with splitting it up with a one blend and one value fund. Such as Large cap blend and Large cap value is already leaning. I am against leaning too far towards value.

    When I say best I’m referring to the 8 or 9 popular asset class, not including REIT, but I am including EAFE

    from 1986-2005
    In 1991 the best asset class was: small growth
    In 1993 the best asset class was: small growth
    in 2003 the best asset class was: small growth

    So these years small growth was the best in 3 years. How often was small cap value the best, 5 years. You can see value out performing growth yes, but by completing giving up on small cap growth I believe is a big mistake. Even comparing the S&P500 to small cap value: 5 years the S&P500 was the best and 5 years the russell 2000 value was the best, you just can’t neglect growth. Only about 7% of your portfolio is large cap growth and close to 28% is large cap value. For your case I hope large cap value does better than large cap growth.

    There’s a point in taking data and historical returns and trying to predict (speculate) the future. Would you predict that small will out perform large as it has historically? But yet there was a 30 year period that large did better, how can we be certain who will do better the next 10, 20 or 30 years. I understand leaning towards a direction, but then there’s flat out falling in one direction as in if value does do well you will be hurting.

    I don’t know what else to say except if you aren’t convienced that you need growth more than maybe look at other countries. How about Italy from 1975 to 1996 value stocks returned 5.45% and growth stocks returned 11.44%. Now for a disclaimer Italy was the only developed country that I’m aware of in this time frame that growth outperformed value, but if you think you are smarter than the market it’s going to byte you very very bad. If you think you know that value is going to do better than growth for your case you better hope so.

    The average difference in all of the developed countries from that period between value and growth was 5.28% difference. Value won and it won big, but not enough to bet the farm on it. Sliciing and dicing already leans a lot and there’s argument that it leans too much and that you are better off with a balanced TSM approach. That in my mind is debatable and the TSM makes much more sense in a taxable account, but leaning more than slicing and dicing just doesn’t make logical sense to me.

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