Author Topic: Tell me which Vanguard 401k options to choose!  (Read 2071 times)

haflander

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Tell me which Vanguard 401k options to choose!
« on: August 02, 2017, 09:39:33 AM »
Thanks in advance. I'm taking a new job and just got all of the fun 401k info. I'm very new to Mustachianism but one of my biggest takeaways thus far is to carefully analyze everything with #s; don't just do the easy, emotional, or popular thing. That being said, I still don't know anything about investing other than what I've learned here in past monthish about expense ratios, index funds, and Vanguard as the best. If you want to learn a little background about myself and/or the job change for some reason check out my other post here:
https://forum.mrmoneymustache.com/ask-a-mustachian/who-works-from-home-career-advice/

I want to start out picking the right 401k funds instead of having to change later. I'm starting with saving 13%, but plan to increase this to 15, 20, etc as I start implementing Mustachian principles until I reach the 18,000 limit or whatever the limit is at that time.

Below I've listed my Vanguard options as well as their #s. I'm guessing a lot of you know about these specific funds and hold bookoo bucks in them yourselves. I think if I was doing this a year ago, I would have just picked the 2060 target fund; so obviously I'm a young guy :) My first impression about FIRE is that I don't care much about ER (could change), but I DO care about FI. That being said, let's just assume my FIRE date is waaaaay in the future. If I was picking these myself without your help, I'd probably do 50/50 VFIAX/VMVAX after looking at the below #s. I've listed 5 year data instead of 10 year, because half of them have an inception date of 2011/2012, after the recession. There are also several non-Vanguard options with worse returns and expense ratios, such as Lord Abbett, BlackRock, American Funds, DFA US (multiple options for each).

What do you think? Which Vanguard below would you choose? 100% in one? Or split it across multiple as a way to diversify? At what point does a high expense ratio justify higher returns? For example, is the math for or against the high return of VSEQX after adding in the higher expense ratio? Or is it just really as simple as choose the lowest ratio? Thanks!

Fund                                                            Ticker    1YR     3YR     5YR     Expense Ratio
Target Retirement 2060                                VTTSX   14.99   6.53     9.96    .16
500 Index                                                    VFIAX    17.87  10.44  13.63    .04
US Growth                                                  VWUAX   16.40  11.22  13.40    .32
Mid-Cap Value Index                                    VMVAX   18.78   9.39   14.57    .07
Strategic Equity                                           VSEQX   22.38   9.87   15.29    .18
Mid Cap Growth Index                                  VMGMX  15.98   9.28   11.81    .07

kwarden13

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Re: Tell me which Vanguard 401k options to choose!
« Reply #1 on: August 02, 2017, 10:11:50 AM »
I would split it up between the ones with an expense ratio less than .1%

StudentEngineer

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Re: Tell me which Vanguard 401k options to choose!
« Reply #2 on: August 02, 2017, 10:17:30 AM »
With those options I'd probably just do all of it in VFIAX since that mimics VTSAX pretty closely and the expense ratio is rock-bottom.  Depending on your overall strategy however, your taxable investments could be different.  I know for myself I'm shooting for somewhere around 50/50 VTSAX and blue-chip dividend stocks, so I would then invest more heavily in blue-chip stocks in my taxable account.

Glad to hear you're new to mustachianism! Its awesome to see you're starting it young, imagine the position you'll be 10,15,20 years or more down the line now that you're paying attention to your financial well-being!  Have you read all of MMM's blog articles?
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haflander

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Re: Tell me which Vanguard 401k options to choose!
« Reply #3 on: August 02, 2017, 10:34:46 AM »
Glad to hear you're new to mustachianism! Its awesome to see you're starting it young, imagine the position you'll be 10,15,20 years or more down the line now that you're paying attention to your financial well-being!  Have you read all of MMM's blog articles?

I came upon it randomly, read a lot of the articles, and just started in the forum (this is post 2). My plan is to start the new work from home job later this month. Then, I'll have time to read every single thing from day 1 chronologically. Maybe I'll also start a journal here at the same time to document goals and track changes and savings. I'm young as a 20-something, but still old enough to have done some dumb things that seriously affect FI.

Pros: credit card virgin, work from home, about zero net worth
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Mustache ride

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Re: Tell me which Vanguard 401k options to choose!
« Reply #4 on: August 02, 2017, 10:44:52 AM »
I would recommend VFIAX as well.

StudentEngineer

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Re: Tell me which Vanguard 401k options to choose!
« Reply #5 on: August 02, 2017, 12:12:32 PM »
Glad to hear you're new to mustachianism! Its awesome to see you're starting it young, imagine the position you'll be 10,15,20 years or more down the line now that you're paying attention to your financial well-being!  Have you read all of MMM's blog articles?

I came upon it randomly, read a lot of the articles, and just started in the forum (this is post 2). My plan is to start the new work from home job later this month. Then, I'll have time to read every single thing from day 1 chronologically. Maybe I'll also start a journal here at the same time to document goals and track changes and savings. I'm young as a 20-something, but still old enough to have done some dumb things that seriously affect FI.

Pros: credit card virgin, work from home, about zero net worth
Cons: stupid truck loan, eat out way too much

Definitely start a journal! It'll help keep you accountable, give you helpful feedback from others and give you someplace to look back on in a few years to see how far you've come.  I'd love to follow your journey.
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haflander

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Re: Tell me which Vanguard 401k options to choose!
« Reply #6 on: August 02, 2017, 12:33:54 PM »
Definitely start a journal! It'll help keep you accountable, give you helpful feedback from others and give you someplace to look back on in a few years to see how far you've come.  I'd love to follow your journey.

I'm convinced! Look for it later this month or early September, depends on how demanding the new job is. Also taking a big vacation (planned and paid for before discovering MMM) in the middle of September that could disrupt things. Now I'm kinda viewing the vacay as one last hurrah of consumerism and the old life. However, it's one of those "life experience" things that old people say they wish they would have done. And it's cheap and nothing is/will be paid for on credit. I want to be on the ground running by my bday in October, or at least start to journal and track stuff before then.

StudentEngineer

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Re: Tell me which Vanguard 401k options to choose!
« Reply #7 on: August 02, 2017, 03:35:42 PM »
Awesome!  It doesn't need to be perfect either, you can just take a stab at it whenever you've got 20 free minutes.
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MDM

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Re: Tell me which Vanguard 401k options to choose!
« Reply #8 on: August 02, 2017, 09:45:18 PM »
I think if I was doing this a year ago, I would have just picked the 2060 target fund.
Often, initial impressions are the most accurate.

At your age, VTTSX is a perfectly reasonably one-stop-shopping solution you could "set and forget" for the next 10 years or so.  After 10 years you could take another look.

It would be difficult to defend any combination of the funds you have listed as being "wrong."

seattlecyclone

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Re: Tell me which Vanguard 401k options to choose!
« Reply #9 on: August 03, 2017, 03:01:40 PM »
Putting 100% in the target date fund is a very reasonable choice. The expense ratio is a bit higher than some of the individual funds, but you get a diversified four-fund portfolio that's poised for long-term growth by holding mostly stocks for the next couple of decades.

As you learn more about investing, you may decide that Vanguard's portfolio has a different stock/bond US/international split than you're comfortable with, so you may wish to roll your own. That's great! When you get to that point, your 401(k) has a very good S&P 500 fund that should make up the bulk of your US stock allocation. However for the other asset classes you may need to invest through another account with access to Admiral versions of those other funds because your 401(k) doesn't provide them to you.
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kenaces

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Re: Tell me which Vanguard 401k options to choose!
« Reply #10 on: August 03, 2017, 03:13:56 PM »
+1 for the target date fund

If you used some mix of the other funds you would keep your ER low but at the cost of having all your eggs in one basket(US equities)

haflander

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Re: Tell me which Vanguard 401k options to choose!
« Reply #11 on: August 03, 2017, 03:36:24 PM »
However for the other asset classes you may need to invest through another account with access to Admiral versions of those other funds because your 401(k) doesn't provide them to you.

Most of the ones I listed ARE Admiral class, but I didn't mention that previously. The target date and strategic equity options are not Admirals. If I understand you correctly, that still doesn't change your advice over which I should choose now.

MDM

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Re: Tell me which Vanguard 401k options to choose!
« Reply #12 on: August 03, 2017, 03:41:16 PM »
The target date and strategic equity options are not Admirals. If I understand you correctly, that still doesn't change your advice over which I should choose now.
Calculate the actual cost difference to you over the next ten year for the target date vs. any of the others.

Decide if that amount is worthwhile to you for the auto-rebalanced asset allocation, or not.

There is no wrong answer, except in hindsight. ;)

seattlecyclone

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Re: Tell me which Vanguard 401k options to choose!
« Reply #13 on: August 03, 2017, 03:55:18 PM »
However for the other asset classes you may need to invest through another account with access to Admiral versions of those other funds because your 401(k) doesn't provide them to you.

Most of the ones I listed ARE Admiral class, but I didn't mention that previously. The target date and strategic equity options are not Admirals. If I understand you correctly, that still doesn't change your advice over which I should choose now.

Yes, I know many of the other funds are Admiral class. There are two main reasons why a person would choose to buy individual funds instead of a target date fund:
1) You want a different asset allocation than the target date fund, or
2) You want the same asset allocation, but lower costs.

For reason (1), there are tons of asset allocations you might choose instead. Unfortunately your 401(k) plan doesn't seem to have any index options outside the target date fund except for various sub-categories of US stocks. If you generally agree with the target date fund's allocations except you just want more US stocks, you're all set! Buy the target date fund and some more US stocks on top of that. If you want more of anything else, you'll be forced to either hold those other assets outside your 401(k) or buy whatever high-fee non-index option is available within your 401(k).

For reason (2), the lack of non-US stock choices in your 401(k) limits you here as well. You could save money on the US stock part of your portfolio by switching to VFIAX, but you'd be forced to look elsewhere for the other asset classes to make your overall cost be lower than the target date fund.
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irie

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Re: Tell me which Vanguard 401k options to choose!
« Reply #14 on: August 03, 2017, 05:02:25 PM »
Wow that target date fund expense is high. I just logged into Vanguard and the expense ratio for target 2050 is 0.06%.

You sure that is the right value? I thought they all were much lower.

MDM

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Re: Tell me which Vanguard 401k options to choose!
« Reply #15 on: August 03, 2017, 05:10:29 PM »
...logged into Vanguard and the expense ratio for target 2050 is 0.06%.

0.06%, or 0.16%?

seattlecyclone

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Re: Tell me which Vanguard 401k options to choose!
« Reply #16 on: August 03, 2017, 05:39:52 PM »
The investor class shares are all in the 0.16% range. Some really big employer plans have access to lower-cost versions.
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haflander

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Re: Tell me which Vanguard 401k options to choose!
« Reply #17 on: August 03, 2017, 06:21:31 PM »
The investor class shares are all in the 0.16% range. Some really big employer plans have access to lower-cost versions.

+1. I looked again under my employer plan and they range from .14% (target 2020) to .16% (target 2060). Maybe you're seeing lower rates on the same fund because you're looking in your personal account? Or as SC said, maybe your employer is really big and therefore has lower fees. My new place is mid-sized, maybe 100-200 employees.

irie

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Re: Tell me which Vanguard 401k options to choose!
« Reply #18 on: August 04, 2017, 03:51:26 AM »
Ok I see. The investor class thing went over my head and is still over my head haha. My company has about 15k employees so maybe the get a good deal.

@MDM, it's 0.06%.

MDM

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Re: Tell me which Vanguard 401k options to choose!
« Reply #19 on: August 04, 2017, 11:39:10 AM »
Ok I see. The investor class thing went over my head and is still over my head haha. My company has about 15k employees so maybe the get a good deal.

@MDM, it's 0.06%.
Nice, that is even better than Vanguard's published rate of 0.09% for the institutional class (for investments >$100 million) in the 2050 target date fund.

When you mentioned going to the Vanguard site, was that Vanguard's site for general investors, or a site hosted at Vanguard for your specific 401k plan?

seattlecyclone

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Re: Tell me which Vanguard 401k options to choose!
« Reply #20 on: August 04, 2017, 07:04:17 PM »
My multinational conglomerate employer has the "Trust Select" class of the target date funds, with a 0.05% expense ratio for each (example). I'm not sure there's a page advertising these on the public Vanguard site, since the target audience would be a few hundred 401(k) administrators and not the general public. I had to log into my 401(k) first to get the link.
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MDM

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Re: Tell me which Vanguard 401k options to choose!
« Reply #21 on: August 04, 2017, 07:32:34 PM »
Even better!

Now we have 0.16%, 0.09%, 0.06%, 0.05%...do I hear 0.04%?  Going once, .....

SeattleCPA

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Re: Tell me which Vanguard 401k options to choose!
« Reply #22 on: August 04, 2017, 07:35:21 PM »
+1 for the target date fund

If you used some mix of the other funds you would keep your ER low but at the cost of having all your eggs in one basket(US equities)

+1
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StudentEngineer

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Re: Tell me which Vanguard 401k options to choose!
« Reply #23 on: August 11, 2017, 11:48:07 AM »
Definitely start a journal! It'll help keep you accountable, give you helpful feedback from others and give you someplace to look back on in a few years to see how far you've come.  I'd love to follow your journey.

I'm convinced! Look for it later this month or early September, depends on how demanding the new job is. Also taking a big vacation (planned and paid for before discovering MMM) in the middle of September that could disrupt things. Now I'm kinda viewing the vacay as one last hurrah of consumerism and the old life. However, it's one of those "life experience" things that old people say they wish they would have done. And it's cheap and nothing is/will be paid for on credit. I want to be on the ground running by my bday in October, or at least start to journal and track stuff before then.

Make sure to post in this thread when you've started it so we can follow along.  Looking forward to it!
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DarkandStormy

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Re: Tell me which Vanguard 401k options to choose!
« Reply #24 on: August 11, 2017, 01:36:09 PM »
Skip the target date fund.  At 26, there's no real point in putting your retirement investments in bonds right now.
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haflander

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Re: Tell me which Vanguard 401k options to choose!
« Reply #25 on: August 11, 2017, 01:45:09 PM »
Skip the target date fund.  At 26, there's no real point in putting your retirement investments in bonds right now.

I'm not saying that I love or am going to go 100% with the target fund. However, I'm going to play devil's advocate. The target fund is only comprised of 10% bonds at this time. But you're saying even that small % is a bad choice?

DarkandStormy

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Re: Tell me which Vanguard 401k options to choose!
« Reply #26 on: August 11, 2017, 02:17:59 PM »
^You mentioned RE is not all that desirable, at least compared to being FI.  So you will presumably live off of earned income - be it a normal job, side hustle or combination of both - even after you hit FI.  Your stash will continue to grow/fail with the markets but you won't be withdrawing from it for quite some time.  Over the long-term (we're talking 20-30 years) - which is when you'll finally start withdrawing from it - stocks give you a much better ROI than bonds.  Target Dates also have too much international exposure for my liking, but that's just a personal preference.

http://qvmgroup.com/invest/2013/07/30/historical-returns-for-us-stock_bond-allocations-and-choosing-your-allocation/

http://www.investorsfriend.com/time-in-the-market/

Bonds Over 10-year rolling periods bonds ranged from roughly negative 5% to positive 10% real return, with a 73-year average of positive 2%. Over 30-year rolling periods, bonds averaged a 1.4% real yield, with what looks like a low of less than negative 2% and a high of about 5%.

Stocks Over 10-year rolling periods, stocks averaged 7.4% real returns, with a range of about negative 5% to positive 20%. Over 30-year rolling periods, stocks also averaged 7.4% real returns, with a range of about positive 5% to positive 12%.

This obviously looked at a long timeline with a lot of things happening (political, economic, etc.).  The time frame also includes a mega bull run on bonds which we aren't likely to see for awhile (or ever again, maybe).  Over every 30 year annual period, stocks > bonds and over nearly every 10 year period (minus a few years in the '80s) stocks > bonds.

So unless you plan to start drawing from this stash in <10 years and certainly in <15 years, I see bonds as a waste of time.
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haflander

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Re: Tell me which Vanguard 401k options to choose!
« Reply #27 on: August 11, 2017, 02:33:31 PM »
Dark, thanks for the education! I know very little about the FIRE world in general and even less about investing, so this was a great help.

DarkandStormy

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Re: Tell me which Vanguard 401k options to choose!
« Reply #28 on: August 11, 2017, 02:35:17 PM »
^As people get closer to retirement/FIRE, they start transitioning some of their stash to bonds as they have provided more stable (albeit lower, generally) returns.  So there's less risk, less reward.
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MDM

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Re: Tell me which Vanguard 401k options to choose!
« Reply #29 on: August 11, 2017, 02:50:55 PM »
See 100% Stocks Long Term Pro/Con - Bogleheads.org for exactly what the link says.

For those in their 20s even 60/40 is somewhat defensible, so anything from 80/20 to 100/0 is certainly defensible.  Of course, once hindsight glasses are available the correct answer will become obvious.