Final Draft Portfolio: Both ETFs and Mutual Funds

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Ok, so here’s my final draft for my new retirement portfolio. I’ve decided to go with a portfolio based closely on my Keep It Simple Portfolio. The twist is that I’ve decided to keep all my taxable funds in exchange-traded funds (ETFs), while keeping my tax-deferred IRA funds in conventional mutual funds. Hopefully this will allow me to take advantage of the tax benefits of ETFs where they matter, while at the same time keeping the simplicity and automatic dividend reinvestments of mutual funds. First, my overall target asset allocation:

90% Stocks / 10% Bonds
(40% Large Cap / 20% Small Cap / 20% Int’l / 10% REIT / 10% Bonds)

Now here’s my plan for the real allocation to fit into our various accounts. I’ve added $2,500 from my 2005 SEP-IRA contributions as well. I am just writing percentages to avoid clutter.

Wife Roth IRA
17% Large Cap Value (VIVAX)

Roth IRA
11% International Value (VTRIX)
11% Emerging Markets (VEIEX)

Traditional IRA
20% Small Cap Value (VISVX)
11% Intermediate Term Bond (VFICX)

Joint Taxable Account
17% S&P 500 or Russell 1000 Index (IVV or IWB)

For my taxable account, I plan on taking advantage of the fact that the IRS treats capital losses differently than long-term capital gains. This strategy is outlined in my previous post How To Beat The Market?. I plan on swapping between the S&500 Index ETF, IVV, which tracks the largest 500 stocks in the U.S. in a cap-weighted index, and the Russell 1000 ETF, IWB, which tracks the 1,000 largest stocks. These two are very closely correlated with each other, yet are different enough to avoid the IRS wash sale rules. They also have very low expense ratios (0.09% and 0.15%). Additionally, this will give me a taste of investing with ETFs and see if I like it. Of course, this means I need to find a good discount broker!

Even though this will make my overall balance at Vanguard less than $50,000, this is fine because I don’t have any mutual funds with less than $5,000 in them to incur their low-balance IRA fees. With this portfolio, the overall annual expense ratio is still under 0.30%.

Feel free to poke holes in this idea if you see them. Finally, if all this has made your eyes glaze over, refer back to my No-Brainer Portfolio Option.

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  1. The benefit of taking advantage of the fact that the IRS treats capital losses differently than long-term capital gains is not scalable. It will diminish when you investment gets larger. I guess the question is when and how you will determine the benefit is not worth of the trouble.

  2. Nice portfolio. Given your young age it might be a little conservative.

    Have you read Paul Merriman’s “Live it up without Out Living Your Money”? Between that and Mark Hebner’s “12 Step Program for Active Investors”, I believe you may be able to reduce your risk and increase your potential gains.

    Your definitely on the right track.

    BTW what is your time frame for achieving your mid term goal?

    Nice web site.

  3. Not bad. I like it. See you on the beach in 20.

    Is an IRA the best place for the REIT since it is a heavy dividend producer?

  4. Why not put the small cap in your Wife’s Roth instead?; based on the current research, it’s subject to greater gorwth potential, so if that turns out to be true you’d pay less taxes in the long run….

  5. Nice portfolio. I like your conservative allocation for international markets and higher allocation for large caps. Looking back performance of last couple of year. The international equities are due for some pull back and large cap.

    How often do you plan to adjust your portfolio? How would you manage between taxable and non-taxable accounts ? Since there is limit on contribution to IRAs.

    I am assuming for IRAs you are going with Vanguard. What about ETFs ? Any brokerage you liked based on fees etc.

  6. ct – Do you mean it is not scalable in that you can only claim $3,000 in losses each year? That is probably true, $3,000 isn’t that much. But you can carryover the excess indefinitely to years when the market goes back up.

  7. I agree. a) the losses over 3k can be carried over. b) a 3k deduction is still a 3k deduction for minimal effort.


  8. I also like your international market exposure. Something I need to get a better feel for.

    I think you might be a bit overweight with your large-cap ETF’s though. You might want to diversify those out a bit more, and look at a small or mid-cap ETF to offset some of your large cap stocks.

    It will be interesting to see how much of an effect interest rates have on the large cap institutions. Borrowing money will not be as attractive at the higher interest rates, and things might slow down a bit.

    Just something to think about.

  9. Jonathan,

    What I mean a scalable investment,
    If you put down x amount of dollar, you make y% more, then you still make y% more if put down 10x amount of dollar. The strategy to exploit the capital losses differently than long-term capital gains is not scalable.

    To illustrate my point, I will expand on your example in “How to Beat the Market?” post.

    Let’s assume we are in a idea situation that you lose $3000 on year 2006. In this way, you fully deduct your loss with carrying the loss to future year. Scenario #2 is make $390 more than Scenario #1. The percentage difference between Scenario #2 and #1 is 390/a where a is the intial investment value and it has to be larger than $3000.

    You can see percentage difference decreases as your investment value increase. For a investment of $30,000, it is respective 1.3%. For a investment of $300,000, it is merely 0.13%.

    A relative small investment can make a big bang with this strategy. However, for a $10,000 investment, it means a decrease of 30% and that is hard to bear.


  10. Hey ct, thanks for replying, I think we are in agreement then. I just wanted to make sure that was what you were talking about.

    What irks me is that if we were filing single, we could claim $3,000 in losses EACH ($6,000 total). But as married folks, we can only claim $3,000 total. What’s up with that?

  11. Just curious why you picked the Small Cap Value Index (VISVX) Fund over the Small-Cap Index Fund (NAESX)?

  12. Historically, Small Cap Value stocks have had a higher average return. I wanted to have both Small Cap and Small Cap Value, but splitting them up would have incurred more low-balance fees, so I just picked Value for now.

  13. mamadancer says

    I wonder if putting tax-free muni or state bonds in your taxable account would make sense.

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