Asset Allocation Help

[Anselm24]

Hi,


I am looking for a little help diversifying my investments. I am 27yo and I plan to retire early (be financially independant) e.g. 40-45. I currently have the following investments:


124k in AAPL
50k in MoneyMarketSA @2.68%
5.3k in ALVR
24k in SSMVX via 401k

Vanguard Traditional IRA

18k short term reserves (haven't decide what to put it in yet)
Vanguard GNMA Fund Investor Shares 3.2k
Vanguard 500 Index Fund Investor Shares 6.3k
Vanguard Mid-Cap Index Fund Investor Shares 17.6k

I currently have no debt and about another 4k in my savings account. I have pretty much been winging it although I do know a bit about investment in individual stocks. Can someone explain to me the value of a Roth vs a Traditional IRA (is it just the whole I hope I am in a lower tax bracket when disbursements are made thing)? I don't really understand where to start as far as managing the tax aspects of investments as one nears retirement. Also, if you had the option would you simply manage your own investments or go the mutual fund route? I am risk tolerant as I am young and have quite a few years left till retirement. Thanks for any assistance you can provide and I can provide more details as necessary.

[Broken Arrow]

Welcome Anselm24.

124k in AAPL alone stopped me in my tracks and I highly recommend to sell it!

Or at least slim it down considerably.

It's way too much stock into a single company, and not just a single company, but a tech company, and not just a tech company, but Apple of all tech companies....

Apple is a great company to be sure, but their core business relies on innovation and ultra-secrecy in their product lines. (Apple even got ThinkSecret to shut down, it's that bad.) That's both an advantage and a disadvantage depending on where you stand, but unless you the kind of guy who reads near real-time feeds for MacWorlds and have a good pulse on consumer technology fads... I don't recommend this stock at all.

That said, I must qualify that I am also not above buying Apple. Their potential "next wave" is going 3rd party apps for iPhone... and I envision higher resolution iPhones and iTouches as well. The technology exists for it, but it hasn't been implemented yet.... Oh, and I also believe that they will be unlocked!

But even though it's got room to grow, I don't think it's going to be gang-buster like the introduction of the iPod or iPhone. So, that's my "prediction".

But the reality is still that you're way over-weight into a single company, and unless you know something even ThinkSecret don't know (if so, please DO share it with us!) then I'd go ahead and diversify that holding.

[noppenbd]

Definitely need some more info:

-2007/2008 AGI
-2007/2008 taxable income
-monthly spending/saving
-current contributions to retirement accounts
-availability of 401k at employer
-housing situation (rent/own), amts owed if any


Are the stocks/money market in taxable accounts?

[Scanner]

My formula:

$0-15K 1 sector fund/ETF
15K-50K 2 sector fund/ETF
50-100K 3 sector fund/ETF
100-500K 4 sector fund/ETF with 5-10% in speculation (a must!)
500K+ 5 funds/ETF's with speculation and some bonds

You are in the 4 category so I would trim down all of your assets to 4 categories/funds

It looks like you have about 200K in assets.

I would sell off Apple to a position of around 20K left.

Then, with the rest of the 180K, I'd deploy it equally across international, domestic large cap, commodity, and small caps.

So. . .I'd like your portfolio like this:

45K Large Cap
45K Small Cap
45K Commodity (pick one you are bullish on or go for a broad index)
45K International
20K Apple stock or other speculative investment

Prepare for capital gains tax on your sell of Apple. . .that being said, I agree. . .it's time to "take a profit" on that stock and reduce your exposure.

[Anselm24]

Thanks for the advice. As far as the additional info requested



-2007/2008 AGI

232,000 (numbers are approximate)

-2007/2008 taxable income

152,000
-monthly spending/saving

I have no housing expense and I currently spend about 700 per month in insurance related costs and food.

I save about $12000 in the average month

-current contributions to retirement accounts

IRA maxed
401k maxed

-availability of 401k at employer
available

-housing situation (rent/own), amts owed if any
I do not own a home and I am provided housing by my employer so I do not have any

Are the stocks/money market in taxable accounts? Yes I have aboput 140k in a taxable brokerage account.


As far as my exposure to APPL. Well I bet big on this one about a year and a half ago and my cost basis is below 100 per share. I am loath to sell it as nothing has changed fundamentally with the company (macro economy yes). I agree that growth can not continue indefinitely at the current rate but I believe that APPL is positioning itself well to capitalize on the emerging market for wireless devices that offer the functionality of a pc. I have already rode out large fluctuations in stock price to the tune of near 50% decline while everyone screams that the market is going down in flames and that this stock in particular will be trading at 2003 levels. Would you have told me to sell this 3 months ago? What stocks offer a better investment value and why?

[jIM_Ohio]

Thanks for the advice. As far as the additional info requested



-2007/2008 AGI

232,000 (numbers are approximate)

-2007/2008 taxable income

152,000
-monthly spending/saving

I have no housing expense and I currently spend about 700 per month in insurance related costs and food.

I save about $12000 in the average month

-current contributions to retirement accounts

IRA maxed
401k maxed

-availability of 401k at employer
available

-housing situation (rent/own), amts owed if any
I do not own a home and I am provided housing by my employer so I do not have any

Are the stocks/money market in taxable accounts? Yes I have aboput 140k in a taxable brokerage account.


As far as my exposure to APPL. Well I bet big on this one about a year and a half ago and my cost basis is below 100 per share. I am loath to sell it as nothing has changed fundamentally with the company (macro economy yes). I agree that growth can not continue indefinitely at the current rate but I believe that APPL is positioning itself well to capitalize on the emerging market for wireless devices that offer the functionality of a pc. I have already rode out large fluctuations in stock price to the tune of near 50% decline while everyone screams that the market is going down in flames and that this stock in particular will be trading at 2003 levels. Would you have told me to sell this 3 months ago? What stocks offer a better investment value and why?

I would not worry about the taxable investments now. You save 12k per MONTH? Did I read that right? In one year you could allocate 144k, which would trump the current stocks you own shortly.

Here is what I would do:
1) Set aside 3 months expenses in cash. Keep this in current money market account.
2) Set aside another 3-9 months cash in a moderate investment (better than cash return of 4%, but less risk and volatility from the stock market which moves +/- 5% in a day.
3) come up with an asset allocation and risk profile. Express this as a percent stocks and a percent bonds. 100% stocks would be around a 9% annual return. 80% stocks-20% bonds would be around a 7-8% annual return. 60-40 would be around a 6-7% annual return. 20-80 to 40-60 would be between a 4-6% annual return.

I would then look at #3 and see where the accounts you have fit things. If you express an 80-20 portfolio as:

35% large cap domestic stocks
10% mid cap domestic stocks
10% small cap domestic stocks
15% large cap foreign stocks
10% small cap foreign stocks
10% US bonds
5% international bonds
5% high yield bonds

then the next step is to allocate these asset classes to accounts. Because we are talking about 144k invested per year, tax planning is CRUCIAL to this allocation.

For example:
5% high yield might actually be municipal bonds which are tax free.
35% large cap domestic might be an index fund in a taxable account which is tax efficient.
5% international bonds and 10% US bonds might be in 401k because you have good choices. Mid and small cap might be in taxable accounts because you found another index or two, or managed fund or two you like. You use the international equities in an IRA account because they are tax inefficient but have funds you like.

The key is decide the percentages FIRST, pick the accounts and funds SECOND. A fund might be appropriate for an IRA, but not be appropriate for someone in a taxable account (in such a high tax bracket).

Plan accordingly. Post more info (risk tolerance, goals, timeline to retire, income needs in retirement) and maybe I can be more specific.

[noppenbd]

With your income, taxes are taking a huge bite, as Jim said. I would consider meeting with a fee-only financial planner (such as from the Garrett network).

Short of that, I would second what Jim, Scanner, and BA have said. Following on to what Jim was saying about account/asset allocation. You should hold mostly fixed-income funds/securities (like bond funds, REIT funds) in your tax-sheltered accounts (since your current tax bracket is so high it behooves you to pay taxes later when income is presumably lower). Keep tax-efficient investments in your taxable accounts (muni bonds, stocks, stock ETFs).

Consider establishing a housing fund, in case your current arrangement ends. Maybe put equivalent area rent/mortgage in a separate taxable savings.

As far as the AAPL stock, I think most on this website would not recommend playing the market with such a large single stock in your portfolio (regardless of how "good" the stock is). A small (5-10%) portion of your portfolio could be allocated for these kinds of plays but in the long term it is way too risky to have so many eggs in one basket. For instance, imagine what an anti-trust suit could do to Apple's near monopoly on Ipod/Itunes. I'm sure others could come up with other equally damaging scenarios. Could Apple double in the next 2 years? Yes. Would that change my recommendation? No.