Been on before and got very good advice - said I'd be back after Vanguard completed an investment plan.  Background - married, both retired.  Husband 63, wife 53.  We have pre-tax income of around $77K for the next 7-8 years from real estate rental income. For those years we would be looking for income from portfolio primarily for tax bill. 

Here's the plan they presented - I've put off phone meeting with them until next week so I can review this carefully:

*In existing portfolio Vanguard is suggesting keepiing. 

**Husband's IRA - Existing Lincoln Life Annuity - I want to get rid of this, annual expenses too high and we don't have a fee for cancelling it.  Bought it at 30K with a guaranteed death benefit of 40K, but it's just not done anything for the last 8 years.

Haven't figured our why American Funds Grth Fund is categorized both as Int'l and as U.S. Large unless Vanguard has made a mistake in classification.  Also Vanguard Total Stock Market Index Fund Admiral Shares both listed as U.S. Large stock and U.S. Mid/Small stock.

We'd excluded around $340K for 2007 tax bill to be paid in April from income & capital gains realized this year.

They indicate the above portfolio from 1926-2007 would have averaged 8.4% but with 16 of 82 years at a loss (19.5%).  Current portfolio (mostly in money market right now) would have netted 4.6% with 7 of 82 years at a loss (8.5%).  I would like to see these numbers ran included 2008 ytd and will work on that.

Would appreciate input.

Thanks!

Hi Nanna:

Thank you for returning with the Vanguard recommended plan.  I'll make a few comments for consideration:

* Overall, the plan looks very good to me.

* "Husband's IRA - Existing Lincoln Life Annuity - I want to get rid of this, annual expenses too high and we don't have a fee for cancelling it.  Bought it at 30K with a guaranteed death benefit of 40K, but it's just not done anything for the last 8 years."

If you cancel the Lincoln annuity, keep the funds in the IRA to avoid tax.  Consider replacing the Vanguard's Inflation-Protected Securities Fund for inflation protection,  bond diversification and income.

*  Consider exchanging the two relatively small American funds for Vanguard funds.  An all-Vanguard portfolio will make your investing life much easier with less paperwork, fewer and more easily understood statements, and easier tax-preparation.   Sometimes, paying the capital-gain tax early is worth it.

* The reason Vanguard  shows two different asset-classes for Total Stock Market was probably to reflect large-caps and mid/small caps in their approx. 3 to 1 ratio.  I suspect it is just one fund.

* Consider exchanging the small $2,900 American Growth Fund in the IRA for Inflation-Protection Fund.  Bonds should fill up your tax-deferred accounts..

* I would not bother with backtesting.  There are always funds and combination of funds that  beat a current portfolio.  Chasing past returns is a good way to destroy an expertly designed portfolio.

I hope these ideas are helpful in your discussions with Vanguard.

Best wishes.
Taylor

Thanks Taylor

"If you cancel the Lincoln annuity, keep the funds in the IRA to avoid tax.  Consider replacing the Vanguard's Inflation-Protected Securities Fund for inflation protection,  bond diversification and income."

Good idea about replacement - we won't mix any funds between IRA's and taxable accounts.

The plan has us split about 50/50 between the Stock Index and Bond Index - I realize these two are diversified within themselves but it still seems a bit like keeping eggs in only two baskets which concerns me.

 Do you think the Bond Fund Intermediate Term Treasury (VFIUX?) has any place in here rather than the Total Bond Market Index or some funds split into it?.  Seems historically it's performed better - even Long-Term Treasury Inv appears to have had better track record.  I know going forward can't be based on past history, but you've got to start somewhere, right?

Do you see any alternatives in the stock funds?

Again - thanks for your input

NannaT

Nanna,

 I know Vanguard's Methodology extremely well and can add a few key points to consider before your consultation. First of all, it's impossible to replicate the amount of diversification you have in the portfolio even using just three Vanguard funds (Total Stock, Total Int'l, Total Bond). The risk/return trade-off is tough to beat, especially with how low cost the investments are. The environment will change, along with investors expectations, so it's hard to understand/predict what aspect of the market will outperform/underperform, which supports the Vanguard logic of owning everything in it's proporation to the actual market. By cutting up the pie so to speak, and trying to focus in on one particular area (Vanguard Intermediate Term Treasury for example) you'll end up concentrating yourself even further than what is already represented in the Total Market approach. Furthermore, the long-term performance of any bond mutual fund will unlikely come from any amount of capital appreciation, so I wouldn't split hairs between which fund to use. Therefore, it's most important to be diversified, watch your costs, and reinvest all the monthly income back into the mutual fund (which is why it's in your tax-deferred accounts). Lastly, and most importantly. Make sure you continue with the financial planning service every year in order to obtain guidance in rebalancing the portfolio mix as well as knowning when to shift towards a more conservative portfolio. Investment guidance aside, make sure your IRAs are up to date with respect to your beneficiaries, the trust account is up to date, and you have a properly constructed will.

 You're in good hands at Vanguard. Sleep well.

I agree..

Dump the Annuity

Dump American funds.. Too Small of an Allocation to do much if any good.

and Has this Port outperformed by at least +2% more apy,  than the likes of VWELX? +7.3% apy past 10 yrs ending 07'.

then stick with it..

option? you 2 ( especially  you at 53 ) hopefully, have a long time ahead of you  and may need to be more aggressive .. with a 60/40 port and  might want to ck out WMRIX w/ $500k of that $. and there Co.has done wonders for HNW people..

Hi Nanna:

"The plan has us split about 50/50 between the Stock Index and Bond Index - I realize these two are diversified within themselves but it still seems a bit like keeping eggs in only two baskets which concerns me."

You own the eggs.  Except for low-costs, the baskets are immaterial.  Total Market Index Funds hold thousand's of diversified securities.  Additional funds only add overweighting, overlap and complexity.  Vanguard could disappear and you would still own the same number of shares in each fund's securities.  Don't be concerned. You should be very confident.  Mr. Bogle, who knows a lot more than you and I, strongly recomments Total Stock Market and Total Bond Market Index Funds.

 " Do you think the Bond Fund Intermediate Term Treasury (VFIUX?) has any place in here rather than the Total Bond Market Index or some funds split into it?.  Seems historically it's performed better - even Long-Term Treasury Inv appears to have had better track record.  I know going forward can't be based on past history,"

Bond track records can be very misleading.  For example, when interest rates are declining, shorter term bonds will nearly always have higher returns than longer-term bonds of equal quality.  When interest rates increase, it is  longer-term bonds that outperform.  In my opinion, no one can predict interest rates regularly and successfully.  TBMs advantage is its broad diversification--over 3,000  high-quality bonds of various types. That means 'safety."  TBMs biggest annual decline since inception was -2.66% in 1994 (It gained 16% in 1995)..  VFIUX is a fine bond fund, but I'd go with the Vanguard recommendation.

"Do you see any alternatives in the stock funds?"

Sure, you can structure complex portfolios of various funds that might do a little better than Total Stock Market (which outperforms 80% of all funds long-term and with less risk).  On the other hand, your personalized portfolio could easily be among the 80% that underperform.  I think you would be wise to go with the odds. 

 Total Stock Market Index Fund is Mr. Bogle's favorite stock fund.

Best wishes.
Taylor