I recently received an email from a reader asking for some thoughts from the ESI Money community.
Here is her note:
My husband and I are 32 years old, and currently both have employer and individual retirement accounts. I have based my asset allocation largely from this article back in 2008 (ancient history!).
We currently have $130K in our combined Vanguard accounts (including my employer account), and the breakdown is as follows:
- Vanguard Total International Stock (VGTSX) – 34% of balance
- Vanguard Total Stock Market (VTSMX) – 67% of balance
About 50% is in Roths, and 50% in traditional (pre-tax) accounts.
Separately, my husband’s 401K has about $145K in it, broken down as follows:
- Vanguard Institutional Index Fund Institutional Plus (same as S&P 500) – 83% of balance (Roth)
- Target date retirement account – tracking to year 2050 – 17% of balance (Pre-tax)
Here are my questions…
- I recently received a computer generated “retirement review” from Vanguard that suggested my investments are too aggressive and I need to move more (or any…) into bonds. I have been figuring since we are 25+ years from retirement that there is no need… but all of the standard guidelines out there seem to say to put at least 10% into bonds. Thoughts?
- Right now, our overall portfolio (all combined) is about 67% in Roths, and 33% in pre-tax accounts. Is that an appropriate mix? While our incomes will likely grow to some extent over the next 10-15 years, I do not anticipate HUGE gains in our income (e.g., we are both prioritizing family time over aggressive career growth right now – we’ll see if that changes in a few years). But who knows what will happen with tax rates in the next few decades. We are in the top 5-10% for household income in the U.S. currently.
I’ll give her some thoughts and then allow you to chime in.
My additions:
- Wow, that’s the same article I’ve used to invest all these years! What a coincidence!!! 馃槈
- I have always been heavier in stocks than bonds — waaaaay heavier than what the “guidelines” would say I should be. Has it hurt me? Not sure, I’ve never gone back and run the numbers. I’d say you should take a look at what they are suggesting for an asset allocation but ultimately you need to use the mix that works right for you. I was always more comfortable with a higher stock percentage, so that’s how I invested.
- There have been suggestions that you don’t need international stock funds since large US companies have much of their business overseas and that covers you internationally. So if I had to do it all over again I may (not sure I would or wouldn’t at this point) eliminate international stock index funds from my portfolio.
- As far as Roths versus pre-tax accounts, it depends on what your long-term goals are. I always knew I wanted to retire early (just not this early) and if I had to do it all over again I would have put more into Roths than I did (which was none.) Roths came along well into my investing life, so I never jumped on board. You, on the other hand, have plenty of time to take advantage of them. If it was me, I think I’d contribute the max to my 401k first (getting the entire match for sure) then work to plow an equal or greater amount into a Roth. 50/50 split sounds about right for what I’d shoot for, especially with early retirement in mind.
So, that’s my take. What advice do you have for her?
photo credit: reynermedia Numbers And Finance via photopin (license)
Jon @ Be Net Worthy says
I agree with your advice ESI and have also had a limited bond allocation in my portfolio. My only additional thought would be to consider a REIT fund if you want some additional diversification but don’t want to increase your bond holdings. I have the Vanguard REIT Index fund (VGSLX) at about 10% of my portfolio and have been very happy with its performance over the years.
MichaelG says
ESI can you please elaborate on why you would put more in a Roth IRA if early retirement is the goal? Is this because withdrawals can begin at 59 1/2 without penalty? Or am I missing something about how to make withdrawals from a Roth IRA at an age of <59 1/2?
ESI says
I would put more into a Roth versus just a regular IRA as it would give me more options tax-wise when I decided to withdraw the money. Think of it as tax diversification.
One issue I’m going to have to deal with in retirement (not for some time, but when I’m older) is withdrawing and paying associated taxes. The Roth would take out those tax issues.
Ray says
If I am not mistaken, you can take your contributions out of a Roth IRA at any time (but not the gains). So depending on how much you have contributed, you may be able to start withdrawals early in a sustainable way.
DIY$ says
Well done! My bond allocation used to be more in line with what would be recommended by Vanguard and other similar companies but I have since moved to a near 100% stock allocation and plan to stay that way even into and through retirement (with a large emergency fund of cash not considered as part of the investment portfolio).
I like to read and what helped me a lot was the book ‘Simple Wealth, Inevitable Wealth’ by Nick Murray. I definitely recommend picking up a copy.
Ross says
I’ve always advised that people should invest as much into stocks as they’re comfortable. Over the long run, stocks have performed better than bonds. If you’re comfortable with the risk, you don’t truly need “safe” money in your retirement accounts until you are approaching your actual retirement date. If you have savings set aside for emergencies, let your portfolio work as hard as possible for you for as long as possible. 10 years out you should definitely start allocating more to fixed income, and 5-years out you should be getting close to “set” for retirement needs, but there really isn’t a great reason to invest much (and certainly not heavily) in bonds in your 30’s or 40’s provided you are comfortable with that kind of risk. A 100% stock portfolios will absolutely be much more volatile, but, if you’re comfortable with the risk, history would suggest that over 30-40 years you’ll have substantially more if you ignore bonds.
LMH says
Agreed! I also think of paying down my mortgage as a type of alternative bond investment (low/no-risk return). I added Universal Life Policies for my husband and I this year (most are bad but there are good ones out there that can give you some tax advantages if you’re already maxing out all your other tax-advantaged savings options i.e. 401K, Roth IRA’s, HSA’s) – the policies have a minimum guaranteed minimum return rate. The fees are higher but if its a long-term investment the tax benefit should outweigh that and since everything else I’m invested in is super low-cost index funds I feel like its okay.
AMar says
I’m 31 and my wife is 29. We both contribute equally between our Roth IRA and 401K . In addition we invest in real estate which has been the largest factor in contributing to our 7 figure net worth that we just hit this year. Just to give you an idea, we probably contributed equal $ amounts to both real estate and our retirement accounts and our equity in those investments are currently split about 80/20. Massive growth for us in RE over the last 7 years.
Coopersmith says
Bonds is one income investment vehicle for security so they say. However if interest rates rise bond yields fall. Plus there are so many different types of bonds out there it gets confusing. I look at my bond portion of my portfolio as income producing or lower volatility. This can be dividend paying stock, preferred shares, REITS which are all stocks. These stocks all have funds or ETF that focus on these markets you can invest in so you don鈥檛 have to invest in individual stocks if you don鈥檛 want to. Vanguard has a Dividend appreciation fund which is closed to new investors but it also has an ETF with a similar philosophy. Warning in that some of these have higher fees associated over above a total stock or total bond.
I also agree that you need to be invested where you feel comfortable.
Coopersmith says
I also forgot to mention that man of the SP500 stocks are global so don’t look at international funds unless you want more risk for more reward.
Stocks like GE, GM, Apple, Google, Amazon, McDonalds, P&G, Colgate Palmolive etc. are all global stocks with international presence.
chiamo says
Original poster here:
Thanks, all! Sounds like I should “keep on keeping on” for the most part. I’d be interested in a deeper dive into the international vs. just S&P diversification idea… so will try to read up on that a bit.
Dan P says
One benefit that I often see missed from international stocks is the currency diversification. I’m a Canadian so I鈥檓 a little more aware of the need for currency diversification because i get paid in crappy snow-pesos that now buy 75% of what they used to buy only 3 years ago.
The fact that US companies are global and earn profits overseas is not really the same as owning stocks that are based internationally. BASF has 25B Euros worth of property plant and equipment – most of which is in Germany. Dow has 18B USD worth of PPE most of which is in the US. Both are global chemical companies earning profits all over the world but the difference is in the currency that their assets are priced in (which you own as a tiny shareholder) and that their profits are reported in. Sometimes earning USD is better (right now) sometimes earning Euros is better (early 2000s). It does add an element of risk because it may under-perform. Currency is where a major diversification benefit comes from.
I think a lot of people are a little slanted towards US stocks because they have trounced every other stock market in the world over the last decade. That is not always the case and recent strong performance is not a good reason to change asset allocation. It is interesting to note that International, Emerging and US markets have performed very similarly over long periods but perform very differently over shorter periods. Ben Carlson has a great blog post on this topic I would highly recommend before you make any changes to your asset allocation.
http://awealthofcommonsense.com/2016/12/diversification-is-no-fun/
RetireSoon says
JLCollins …
http://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
Mustard Seed Money says
Like another commenter said I used my mortgage as my “bond” diversification in order to plow as much into the stock market while also getting the “guarantee” rate of return from my mortgage.
Now that my mortgage is all paid off I keep on plowing money into the market knowing that even if it drops by 50% that I’d still be comfortable.
At the end of the day, personal finance is personal. What helps one person sleeps at night keeps another up.
Good luck on financial journey!!!
HM says
I’ve found Paul Merriman’s Ultimate Buy and Hold Portfolio article several years ago and find it to be pretty good thought fodder. I don’t follow his advice word for word but I think it’s a decent way to think about things.
http://www.marketwatch.com/story/the-ultimate-buy-and-hold-portfolio-2016-02-18
HM says
I revisited this after I posted and I’d love to hear thoughts from the crowd. I just pulled a ton of my investments to buy a house here in Palo Alto. It will be interesting to see if this is maybe a great idea or maybe a terrible idea. The math works out to make it make sense, but only in my model.
Ray says
Re international stocks and the idea that most large US companies are international and obviate the need to invest in international companies or funds – how do you think the US tax code interacts with this idea? That is, since most US companies are loathe to “repatriate” overseas income due to the tax implications, does that counteract the “international-ness” of the US companies?
Dano says
The poster does have bounds in the portfolio. The target date fund allocates 10% to bounds.
A;ways look at the portfolio as one portfolio not a his and hers