Personal Investments • Re: Seeking Feedback on Our Portfolio Mix

Age: 57
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plan to work for another 10-15 years
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1. Our portfolio mix has historically been 100% equities, but we are reevaluating whether fixed income should be a component and seek feedback.

I think even without the proceeds from the sale of the business, it sounds like you have the risk-tolerance to be 100/0 for another 5-10 years, and then perhaps 5y out from retirement start scaling back. It might be that your portfolio is so large that you can stay 100/0 forever (e.g., if you only need to draw <3% to meet expenses, given other retirement income sources).

What is promoting this re-evaluation of whether or not you should change your AA to add some bonds?

Absent the answer to that question I'd suggest reading the Wiki article for Assessing Risk Tolerance, take the Vanguard Investor Questionnaire, then tailor the asset allocation (AA) that was recommended by the quiz based on your knowledge of your personal risk tolerance having read the Wiki article.

If that's still 100/0 (tailored quiz result), then I wouldn't change anything.

We believe that a 100% stock portfolio is the right asset allocation for us since: 1) the return on the US stock market has outperformed the bond market (and believe that will continue), 2) we will not be reliant on these investments for another 10+ years, 3) we will continue to invest in the portfolio, and 3) when we do eventually rely on our portfolio investment income, the portfolio's size at that time should provide sufficient income to offset our annual expenses. We also will be entitled to SSA benefits.

The bottom line is that: we don't believe that foregoing upside appreciation to avoid volatility (risk) makes sense for us. We'd love to get your feedback. Thanks in advance!

Comparing the returns of stocks vs bonds is going to lead to potentially bad conclusions. It's clear that the long-term average return of stocks > bonds > cash.

From 1928-2017 (NYU Data Set)
Stocks (S&p-500): 11.5% ± 19.5%
Bonds (10y T-Notes): 5.2% ± 7.7%
Cash (3mo T-Bills): 3.4% ± 3.0%

So why would anyone ever choose bonds or cash? It's because stocks and bond are uncorrelated and when added together the result is greater than the sum of the parts--there's an improvement to risk-adjusted return above the dotted line in the chart below. 100/0 is still the highest expected return, so if you're comfortable with that it's fine, but don't misunderstand how adding bonds is better than stocks alone or bonds alone (which would be on the dotted line, not above it).

a. For a long time-frame (>10 years) AAs below 20% stock are dominated (red dots) by another AA with similar risk but higher reward (blue dots).
b. The dotted line represents a hypothetical linear risk-reward from 100% stocks down to 100% bonds; the historical risk-reward curve has an improvement for risk-adjusted return due to the lack of correlation between stocks & bonds.

Tax Rate: 20% Federal, 3% NJ
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Current annual gross pre-tax income exceeds >$400,000

I'm going to guess that 20% is your effective tax rate rather than your marginal tax rate, which is what matters when considering Tax-Efficient Fund Placement. $400K AGI probably puts you in the 32% Fed bracket (maybe 24% if your itemized deductions are much bigger than the standard MFJ deduction). Your Taxable account is 100% stocks, so already in adherence with tax-efficient placement.

Retirement Portfolio:
Taxable
72.20% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
17.53% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%)

His IRA at Fidelity
2.22% Fidelity 500 Index Fund (FXAIX) (0.015%)
0.88% Fidelity Select Software & IT Services Portfolio (FSCSX) (0.69%)

His 401k at Nationwide
0.46% GMO Resources Fund Class III (GRMSX) (0.71%)
0.95% American Century Ultra Fund Class C (TWCUX) (1.64%)
0.96% Fidelity Advisor Growth Opportunities Fund Class A (FAGAX) (0.91%)

His 401k at Vanguard
1.83% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

Her Traditional IRA at Vanguard
2.98% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

a) You have potential Wash Sales concerns with VTSAX in Taxable but also in tax-advantaged accounts (highlighted in purple). You can fix that by choosing VFIAX (S&P-500) or any US large-cap index that is not the same as the index VTSAX uses in His 401k and Her Trad IRA.
b) As @rkhusky said, you have some pretty high-cost fund choices in the 401k with Nationwide (highlighted in red). Just look for lower cost funds (there might not be any if you have a "bad" 401k plan, but usually there's a few low-cost index or Target Date funds even in bad plans).
c) No Roth IRAs? Her Trad IRA would trigger pro rata rules when attempting a Backdoor Roth Contribution and there was no "Her 401k/403b/457" listed so presumably she's stuck with this Trad IRA (no 401k to take a "rollover in"). It might still be worth running the numbers (or consulting with your CPA) to see if it's worth the pro rata tax nuisance to get some assets into Roth IRA via backdoor contributions sooner than conversions later after you retire (when the cost of conversions would be higher).

Statistics: Posted by bonesly — Sun Jan 12, 2025 4:07 pm

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