Question:
My father is approaching retirement and is moving towards a simplified portfolio strategy. Money he needs in the next 10 years is in liquid assets/laddered bonds. For money he does not need in the next 10 years, his plan is to place all his retirement account money (IRAs, etc.) in the Vanguard Total Stock Market Index Fund (VTSAX), and to place all is non-retirement account money in the equivalent Vanguard ETF (VTI). His “invested” portfolio—not needed for 10-15 years—amounts to approximately $1.2 million. Is there a risk in placing this much money in a single ETF and a single mutual fund versus placing the same money in an equivalent basket of individual stocks?
Answer:
Typically, yes. Using a single mutual fund does not always provide good diversification; however, this particular ETF and mutual fund represent the total stock market—nearly 3,300 stocks, of which, 75% are Large Cap with the rest, Small and Mid. The funds are also allocated pretty well across the sectors with 17% in technology, 12.5% in industrials, 12% in financials, and so on. Vanguard funds are also very low cost.
We suggest that you diversify to add more growth and concentrate more on higher quality issues and not own the total market. You could keep either VTSAX or VTI as 50% of your portfolio, but this holding is all domestic. You have no international exposure. We find this fund very passive, so when the market rallies, you could miss the growth in the market.
Question:
With the challenges PepsiCo (NYSE: PEP) is facing, is this an investment you want to hold or sell. And if you sell, what stock would you buy to replace it, like Coca-Cola (NYSE: KO)?
Answer:
We would not sell Pepsi. While Coca-Cola has performed well in the past few years, its long-term performance is less than stellar. While Pepsi has lagged Coke in the general market, we feel it is a good stock to own, with its emerging markets exposure. It is no secret consumption of goods is growing in international and emerging markets. We expect this to continue as people begin to eat higher quality foods, which Pepsi has in its Frito-Lay unit.
Pepsi pays a 3.5% dividend that we feel will grow significantly in the next three to five years. With Pepsi, each segment is worth about $90 a share among Quaker Oats, Tropicana, Aquafina, Frito-Lay, etc. The company has had trouble recently with its North America unit, but we feel they will step up their marketing and refine some of the marketing on key products.
Question:
I am a long time listener and I have been reading about the President’s budget proposal. I have a few questions. The President plans to let the Bush tax cuts expire, which pushes taxes back up to 39.6% for high-income earners. Also, he proposed taxing dividends for those earning over $250,000, as regular income at the new high 39.6% rate. I know that my dividend-paying stocks have performed very well in the flat market, but what effect would these new taxes have on dividend-paying stocks? Should we switch them from a taxable account to a tax deferred account?
Answer:
We’ve always maintained we prefer to hold dividend paying stocks in a tax deferred account. However with close to a 15% dividend rate in the last eight years, it has been difficult to do that. We do not suggest selling your dividend stocks in a taxable account, possibly raising taxable gains, just to buy the stocks in a tax deferred account. We do suggest, however, that you grow your dividend paying stocks in your tax deferred account with new purchases.
We do not think this budget will pass. Our concern is for after the election. Taxes will likely increase. We can see an increase in base tax rates, but to tax capital gains and dividends at 30%, would be detrimental to capital formation. In our opinion this would not make sense as it would likely discourage investment and economic growth.
Disclosures:
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