Painful Asset Allocation - Set Me Straight

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ShadesOn

Dryer sheet wannabe
Joined
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It has become painfully obvious that our current asset allocation is a mess due to naively selecting random funds (many redundant in structure) and making poor investment decisions throughout the years. I have been reluctant to ask for help, but if we are to hit our ER target date, then its time to get our portfolio structured in a way that will be more tax efficient and conducive to early retirement.

Any advice on steps to take to simplify our AA based on what we have available to us will be greatly appreciated!

Stats:
Age: 39
Target Retirement Age: 54
Current Liquid and Invested Assets: $1.2M
Currently max out 401K (last 3 out of 4 years I received distributions due to our plan being "top heavy")
Currently max out HSA.
Available funds to invest monthly - $5,000+ after 401K and HSA contributions

Notes:
* An unusually high amount in HYSA and Money Market due to the good interest rates.​
** I have historically chased high dividend paying funds and target funds in my brokerage account, but now understand that they are not tax efficient.​
*** We will start contributing to Traditional IRA this year since we cannot perform backdoor ROTH due to the rollover IRA.​
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Current Asset Allocation

Employer 401K - 7.2% of portfolio
  • FXNAX Fidelity Freedom Index 2050 Premier - 4%
  • FSSNX Fidelity Large Cap Value Index - 14.7%
  • FSMDX Fidelity Mid Cap Index - 15.2%
  • FLCOX Fidelity Small Cap Index - 20.71%
  • FRLPX Fidelity US Bond Index - 45.31%
Brokerage - 43.1% of portfolio
  • VMFXX - Money Market - 82.3% (currently dollar cost averaging at $4,000 monthly into the vanguard funds below)
  • VDADX - Vanguard Dividend Appreciation Index Admiral - 2.8%
  • VIGAX - Vanguard Growth Index Admiral - 2.8%
  • VTIVX - Target Retirement 2045 - 2.8%
  • VTSAX - Total Stock Market - 2.8%
  • Single Stocks - 6.5%
Rollover IRA - 9.4% of portfolio
  • VFIFX - Target Retirement 2050 - 100%
Roth IRA - 7.5% of portfolio
  • Money Market - 12%
  • VLXVX - Target Retirement 2065 - 32%
  • VSEQX - Strategic Equity Investor - 23%
  • Stocks - 33%
HSA - 4.7% of portfolio
  • Money Market - 32.3%
  • FFIJX - Target Retirement 2065 - 14.3%
  • FFOPX - Target Retirement 2050 - 13.2%
  • FITLX - Sustainability Index - 4.5%
  • FMDE - Enhanced Mid Cap ETF - 4.5%
  • FSKAX - Total Market Index - 1.9% (Just started a few months ago)
  • Stocks - 29.3%
CD - 6.3% of portfolio

HYSA - 21.8% of portfolio
 
Why not consult a qualified fiduciary Financial Advisor to assist you with this important task? Pay them a fee vs an ongoing AUM charge and maybe you will even get access to funds and portfolios that aren’t available as a retail investor.
 
I would get rid of the target funds and maintain your own AA over the accounts.

Consolidate to VTSAX and FSKAX (or ETF equivalents) for equities. Your choice if you want to hold international.

For FI, you can stick with a total bond fund or build your own bond ladder.

A good start is Three-fund portfolio - Bogleheads.

Based on your current investments, I’d struggle to know your exact AA. Simplifying by major asset classes and owning those directly makes it a lot easier to track. You should be able to create a simple spreadsheet for modeling.

Overall you’re doing well. It shouldn’t be too hard to get better visibility and control of your investments.
 
Luvtoride said:
Why not consult a qualified fiduciary Financial Advisor to assist you with this important task? Pay them a fee vs an ongoing AUM charge and maybe you will even get access to funds and portfolios that aren’t available as a retail investor.
Click to expand...
Or first, just listen to the advice from people here. I suspect that will be simple enough that OP will have little problem getting things simplified and more tax efficient on their own.

I don't have time right now to make specific suggestions, but it sounds like OP already gets the basics - keep the retirement funds and (to the extent possible, within a selected AA) fixed income in the tax-deferred accounts.
 
Luvtoride said:
Why not consult a qualified fiduciary Financial Advisor to assist you with this important task? Pay them a fee vs an ongoing AUM charge and maybe you will even get access to funds and portfolios that aren’t available as a retail investor.
Click to expand...
+1

Another option is to simply use Vanguard's (or Fidelity's) advisory services. Vanguard has something called "Vanguard Personal Advisor Select" for clients who have at least $500K invested with them. Looks like it would cost about $300 per $100K, but you could just pay that once to get set up initially and then basically "let it ride" in perpetuity.

I paid something like $1,500 about 12 years ago to a fee-only financial advisor to get my investing house in order. He did an in-depth review of my entire situation and provided specific guidance on how to restructure my AA using (primarily) low-cost, broad-market Vanguard index funds. It was easily the best $1,500 I ever spent (on anything 'personal finance' related).
 
You can achieve a decent reduction in quantity of funds, without much loss of diversification, by combining all of the sub 5% holdings into some other holding.
 
Luvtoride said:
Why not consult a qualified fiduciary Financial Advisor to assist you with this important task? Pay them a fee vs an ongoing AUM charge and maybe you will even get access to funds and portfolios that aren’t available as a retail investor.
Click to expand...
Thanks, Luvtoride, I did meet with a couple financial advisors, but left feeling like they did not understand our goals. It's entirely possible that I just need to visit with a few more to find a good fit.

I decided to post here since there was likely to be a lot of first hand experience and a like minded approach by the majority of members.
 
The good news is you've recognized the need to simplify.

Pick a lazy portfolio and work towards it. You can trade in your IRA accounts with no tax impact so no financial reason to hesitate, but you'll want to be aware of the tax impact of trades in your taxable accounts - might want to do it over a period of time like a couple years. I would reduce to 1 holding in your 401k, Roth and HSA and 1-2 holdings in your Rollover IRA.

IMO you should not hold any (fund) position of less than 5% of your total portfolio. Less than that and it has a trivial impact on overall return, so not worth owning. You have a bunch of holdings that are way too small % to be worth holding - needless complexity that serves no meaningful purpose.

Lazy portfolios - Bogleheads

www.bogleheads.org www.bogleheads.org
Screenshot 2024-06-30 at 12.28.35 PM.png
 
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Yes, three fund portfolio. The good news is that most of the money is in tax-sheltered accounts, so selling all the odds and ends to buy your chosen one or two equity funds will not have tax consequences. You can ditch the tiny 2.8% positions in your taxable account without pain, too.

In our case, 90-95% of our equities are in VTWAX, VG's Total World Stock Index Fund. Very simple, just holds all the stocks in the world. You can't get more diversified than that. ROW as underperformed the US recently but that will change again. If you like that much simplicity, you can buy the fund in a Fido account. I don't think Fido has a similar fund.

And ... congrats on your portfolio size vs age. You are doing very well, though as you have figured out, the garden has gotten a bit choked with weeds. You'll be pleased at how it looks when you finish weeding!
 
SevenUp said:
A Non-deductible traditional IRA is usually not a good option. If only one of you has money in non-Roth IRAs, the other may use the Backdoor Roth without issue.

As for reducing the number of funds, consider something like the suggestions in the Three-fund portfolio wiki article.
Click to expand...
Ah, not sure why I didn't realize this. We both have Roth IRA's, but the rollover 401k only affects me, correct? So I can still contribute or do a backdoor Roth into her account.
 
OldShooter said:
Yes, three fund portfolio. The good news is that most of the money is in tax-sheltered accounts, so selling all the odds and ends to buy your chosen one or two equity funds will not have tax consequences. You can ditch the tiny 2.8% positions in your taxable account without pain, too.

In our case, 90-95% of our equities are in VTWAX, VG's Total World Stock Index Fund. Very simple, just holds all the stocks in the world. You can't get more diversified than that. ROW as underperformed the US recently but that will change again. If you like that much simplicity, you can buy the fund in a Fido account. I don't think Fido has a similar fund.

And ... congrats on your portfolio size vs age. You are doing very well, though as you have figured out, the garden has gotten a bit choked with weeds. You'll be pleased at how it looks when you finish weeding!
Click to expand...
Thanks for the replay and words of encouragement! I was feeling pretty good about everything until recently reading about tax inefficiencies and how making uneducated decisions now can disrupt distributions/withdrawals later. Will digest everyone's advise here and make some changes in short order.

Would you suggest ditching the target fund in the brokerage account and moving to VTWAX or VTSAX? It has more funds and will likely cost me a little in taxes, but that would be the better move long term?
 
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When I look at all the funds in your holdings, I’m reminded of a conversation I had with my Financial Advisor (no longer have an FA). I asked him how having all the funds he recommended was any different than owning one fund (etf) that is a total market fund. He didn’t really have an answer. It’s especially obvious in your 401K where you have a large, med and small cap fund. Kind of sounds like the total market, doesn’t it.

Currently, I have all my finances in cash (money market or CD’s) and a total U.S. market fund. I’m conservative (more than you should be) and hold 35-40% in equities and the rest in cash earning around 5%. Simple. You might feel like owning some bonds. The most important number you need to figure out is your Equity percentage. Think about something like 60% or greater. At your age I wish I’d have been closer to 80%, but it’s a very personal number.
 
I'm too lazy to look at your portfolio and make recommendations other than to point out that you can make changes to your tax protected (IRA's, Roths) without tax consequences. That is, no issue with selling "winners" in these accounts. In your regular (taxable) brokerage account, be careful with changes that have unintended tax consequences.

My strategy in my regular (taxable) brokerage account is to minimize funds that cause taxes (when I don't want them) and to instead try to pick (mostly) individual securities which I've held for years and which *I* control when capital gains (or losses) are realized. To put this in perspective, I have 7-figures in unrealized capital gains. (Thank you Apple, Microsoft, Marriott and others.) I'm not saying you should let the tax tail wag the dog, but do be cognizant of tax consequences.
 
Your AA reminds me of Young Chuckanut and the mish-mash of mutual funds that he acquired in his younger days.

I have simplified much since then, and I doubt it has cost me much If anything in regards to my overall performance in the long run.

Simplify means Total US Market and Total International markets index funds, a bit of Vanguard Wellesley, a hold over REIT index fund, CD’s, Treasuries, and Agency bonds.
 
ShadesOn said:
Would you suggest ditching the target fund in the brokerage account and moving to VTWAX or VTSAX? It has more funds and will likely cost me a little in taxes, but that would be the better move long term?
Click to expand...

Personally, I would. It gives you better visibility into your portfolio. I set my AA based on asset class, not funds.

So you can have:
Total US Market (VTSAX, FSKAX, VTI, etc)
Total Intl Market (VTIAX, VXUS, etc)
Fixed Income/Total Bond (MM funds, BND, etc).

Then set target percentages for each asset class. Then go through your accounts and figure out where you should hold each asset class, based on tax deferred, taxable, and tax sheltered. You’ll also want to see what assets are available in each account, since you will have limited options in 401k, etc.

You should also determine tax efficient asset placement. This article can help: Tax-efficient fund placement - Bogleheads.
 
Error on your first post - FXNAX is the Fidelity US Bond Index Fund. FRLPX is the Fidelity Freedom Fund 2050.

In my opinion, I would sell FXNAX. After you get a handle on your stock/fixed allocation, you may want to swap some of your Target Date funds to a Total Stock Index fund and/or SP500 Index fund.
 
I agree with a lot that has been written. Way too many tickers.

Why not consolidate the CDs into the brokerage account as the CDs mature? You can always buy brokered CDs in your brokerage account.

Ditto with HYSA. Redéem the HYSA and move the proceeds into your brokerage account and invest in either money market funds or short term brokered CDs or US Treasury bill ladder.

End result less accounts and less is more!
 
Yeah, that's hard to look at.

With your investment time horizon there is zero need for any fixed income. Only reason to have it would be to mitigate volatility and with 15 years till withdrawal phase and assuming good health a few more decades after that it doesn't make sense. I'd go all in on VTI or if you wanted international exposure some VXUS and for small cap exposure IWM. Investing doesn't need to complicated.
 
Will your current employer allow you to transfer your rollover IRA back into the 401k, which would allow you to continue with the back door Roth? (Mine did.)

Also, why such a large allocation in the mid and small caps? At your age, I probably would not be so heavy in the bond funds in your 401k.

Yes, I agree with the plan to simplify - and overall, you are doing amazingly well.
 
ShadesOn said:
Thanks for the replay and words of encouragement! I was feeling pretty good about everything until recently reading about tax inefficiencies and how making uneducated decisions now can disrupt distributions/withdrawals later. Will digest everyone's advise here and make some changes in short order.

Would you suggest ditching the target fund in the brokerage account and moving to VTWAX or VTSAX? It has more funds and will likely cost me a little in taxes, but that would be the better move long term?
Click to expand...
I am not a fan of target funds. In small quantities they are a waste of time as they do not dominate the asset allocation. In larger quantities the bad news is that they do dominate the asset allocation, giving the holder no flexibility. In any quantity their equity tranche may well not be what the holder wants. The good news there is that there are target funds that use broad index funds, so the stock-picking aspect is eliminated. Horror story here: https://www.reuters.com/article/us-...ers-on-risky-path-to-retirement-idUSKBN1GH1SI Finally, the glide slopes chosen by target fund managers vary widely, so some work is required just to make sure you have the right one. That's probably more work that just making your own glide slope with the overall portfolio AA, which you have to do anyway.

Re taxes, at just over 1% of your portfolio the taxes are trivial. Fugetaboutit.

Re VTWAX or VTSAX, you'll need to pick a fund or two for your final portfolio strategy and move all the money from your liquidated positions, including VTIVX.

Re a 5% lower limit I am not in favor of that simply because it could still lead to a portfolio with 20 positions. IMO none of us need nor would we benefit from this needless complexity. If you want to talk limits, I might suggest something like a lower limit of 30% of total equities for any single equity fund holding. That limits you to two or three.
 
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