CASE STUDY: Young adult needs your help choosing retirement investments

[bigskyrookie]

I am looking for some investing guidance and feedback. I am a new participant in two workplace retirement accounts. One is my Deferred Compensation Roth 403b plan and the other is my Pension Defined Contribution account. I am in my mid-twenties and therefore I am looking for investments for the long haul. I am hoping to get feedback on my allocation and fund selections. I desire an asset allocation as follows:

40%-45% International Stock

45%-50% U.S. Stock

5%-15% Bonds

Currently I contribute 300 dollars a month to my Roth 403b plan and roughly 300 dollars a month to my pension (including employers contribution. Below I have laid out my current investments for each plan followed by the fund options for each account.  Please share with me your thoughts on my choices. Thank you!
 
My Deferred Compensation ROTH 403b choices:
                                                                                              Expense Ratio
Dodge & Cox International Stock     30%    DODFX                    .64
Oppenheimer Developing Markets Y 15%    ODVYX                    1.07
Vanguard Small Cap Growth Index  20%    VISGX                     .24
Calvert Equity Portfolio A               10%     CSIEX                     1.23
Fidelity Contrafund                        15%     FCNTX                     .67
PIMCO Total Return Admin             10%     PTRAX                     .71

Options under the plan:

                   
T. Rowe Price Retirement  Fund (Target date funds 2005- 2055)             .76
T. Rowe Price Retirement Income Fund                          TRRIX              .57
American Funds New Perspective R4   International   RNPEX                  .80
Artisan International Inv   International                         ARTIX            1.20
Dodge & Cox International Stock   International          DODFX               .64
Franklin Mutual Global Discovery Z   International      MDISX                .98
Oppenheimer Developing Markets Y   International    ODVYX                1.07
Vanguard Small Cap Growth Index   Small Cap              VISGX             .24
Vanguard Small Cap Index Fund - Admiral   Small Cap   VSMAX            .09
MFS Mid Cap Value R5   Mid Cap                                      MVCKX         .89
Victory Munder Mid-Cap Core Growth A   Mid Cap    MGOAX                 1.38
Neuberger Berman Genesis Fund - Trust   Mid Cap   NBGEX                 1.11
Calvert Equity Portfolio A   Large Cap                           CSIEX             1.23
Fidelity Contrafund   Large Cap                                     FCNTX             .67
Vanguard Equity-Income Adm   Large Cap                VEIRX                  .21
Vanguard Institutional Index I   Large Cap               VINIX                   .04
Vanguard Balanced Index Fund - Inst'l   Balanced   VBAIX                    .08
Neuberger Berman High Income Bond Inv   Bond   NHINX                    .84
PIMCO Total Return Admin   Bond                            PTRAX                 .71


My Pension Defined Contribution choices:

MFS Mid Cap Value R5               10%            MVCKX                   .89
American Funds New Perspective A      20%   ANWPX                  .80
Oakmark International  I            20%           OAKIX                    .98
Prudential Total Return Bond Q         8%     PTRQX                      .46
Vanguard Small Cap Index Fund- Admiral    15%   VSMAX           .09
Alger Capital Appreciation Z          15%     ACAZX                       .93
Vanguard Balanced Index Fund – Inst’l      12%   VBAIX              .08

Options under the plan:


T. Rowe Price Retirement  Fund (Target date funds 2005- 2055)         .67
T. Rowe Price Retirement Income Fund   Asset Allocation   TRRIX        .57
American Funds New Perspective A   International      ANWPX             .79
Oakmark International I                   International      OAKIX              .98
Oppenheimer Developing Markets Y   International     ODVYX            1.07
Vanguard Total Intl Stock Index Inv   International     VGTSX             .22
Target Small Capitalization Value T   Small Cap           TASVX            .68
Vanguard Small Cap Growth Index   Small Cap           VISGX             .24
Vanguard Small Cap Index Fund - Admiral   Small Cap   VSMAX         .09
MFS Mid Cap Value R5   Mid Cap                                MVCKX           .89
Victory Munder Mid-Cap Core Growth A   Mid Cap       MGOAX           1.38
Alger Capital Appreciation Z   Large Cap                    ACAZX            .93
BlackRock Equity Index - Collective F   Large Cap                             .04
JPMorgan US Equity R5   Large Cap                           JUSRX            .56
Vanguard Equity-Income Adm   Large Cap                  VEIRX            .21
Vanguard Balanced Index Fund - Inst'l     Balanced     VBAIX            .08
Prudential Total Return Bond Q   Bond                       PTRQX            .46

[Jags4186]

So you have two great choices. VINIX for your US Stock and VGTSX for your international. I would try and find a bond fund in a Roth IRA...fees here are high. You are super lucky to have access to vanguard institutional shares.   Remember your asset allocation should spread your entire portfolio. There's nothing wrong with holding all your US stocks in 1 account and all your international stocks in a different account.

[Jags4186]

Also forgot to mention stay away from these high fee funds. For example your invested in Oppenheimer Developing Markets...is it going to outperform VGSTX?  Maybe, maybe not. But one thing for sure is that it needs to beat it by .85% every year to equal its performance.

[Spondulix]

+1 all of Jags4186's comments. Well stated.

[MDM]

No way to know if your asset allocation will be optimal going forward.  Actually we know it won't - but neither will anyone else's balanced allocation.  Only way to know "the" best is with hindsight.  What you have is certainly well defensible.

As Jags4186 and act01 have indicated, you should have a good reason for picking anything other than the lowest fee funds that fit your desired asset allocation.  See below for your fund choices sorted by expense ratio.

Good luck!


Options under the plan:
Vanguard Institutional Index I   Large Cap               VINIX                   .04
Vanguard Balanced Index Fund - Inst'l   Balanced   VBAIX                    .08
Vanguard Small Cap Index Fund - Admiral   Small Cap   VSMAX            .09
Vanguard Equity-Income Adm   Large Cap                VEIRX                  .21
Vanguard Small Cap Growth Index   Small Cap              VISGX             .24
T. Rowe Price Retirement Income Fund                          TRRIX              .57
Dodge & Cox International Stock   International          DODFX               .64
Fidelity Contrafund   Large Cap                                     FCNTX             .67
PIMCO Total Return Admin   Bond                            PTRAX                 .71
T. Rowe Price Retirement  Fund (Target date funds 2005- 2055)             .76
American Funds New Perspective R4   International   RNPEX                  .80
Neuberger Berman High Income Bond Inv   Bond   NHINX                    .84
MFS Mid Cap Value R5   Mid Cap                                      MVCKX         .89
Franklin Mutual Global Discovery Z   International      MDISX                .98
Oppenheimer Developing Markets Y   International    ODVYX                1.07
Neuberger Berman Genesis Fund - Trust   Mid Cap   NBGEX                 1.11
Artisan International Inv   International                         ARTIX            1.20
Calvert Equity Portfolio A   Large Cap                           CSIEX             1.23
Victory Munder Mid-Cap Core Growth A   Mid Cap    MGOAX                 1.38


Options under the plan:
BlackRock Equity Index - Collective F   Large Cap                             .04
Vanguard Balanced Index Fund - Inst'l     Balanced     VBAIX            .08
Vanguard Small Cap Index Fund - Admiral   Small Cap   VSMAX         .09
Vanguard Equity-Income Adm   Large Cap                  VEIRX            .21
Vanguard Total Intl Stock Index Inv   International     VGTSX             .22
Vanguard Small Cap Growth Index   Small Cap           VISGX             .24
Prudential Total Return Bond Q   Bond                       PTRQX            .46
JPMorgan US Equity R5   Large Cap                           JUSRX            .56
T. Rowe Price Retirement Income Fund   Asset Allocation   TRRIX        .57
T. Rowe Price Retirement  Fund (Target date funds 2005- 2055)         .67
Target Small Capitalization Value T   Small Cap           TASVX            .68
American Funds New Perspective A   International      ANWPX             .79
MFS Mid Cap Value R5   Mid Cap                                MVCKX           .89
Alger Capital Appreciation Z   Large Cap                    ACAZX            .93
Oakmark International I                   International      OAKIX              .98
Oppenheimer Developing Markets Y   International     ODVYX            1.07
Victory Munder Mid-Cap Core Growth A   Mid Cap       MGOAX           1.38

[bigskyrookie]

Thank you all for the helpful advice. I am curious if anyone would ever recommend a fund with a higher expense ratios for particular reasons like the turnover or the sectors in wich the funds holdings are in, the top companies, etc? 

[nereo]

Thank you all for the helpful advice. I am curious if anyone would ever recommend a fund with a higher expense ratios for particular reasons like the turnover or the sectors in wich the funds holdings are in, the top companies, etc?

The questions to ask here are "what is this fund doing" and "what are the fees and preformences of similar funds"
If it is a passive index fund (one that matches a particular benchmark, like the SP500 or the Dow Jones Industrial Average) there is absolutely no reason to pay any more than the absolute minimum fees available.  If it actively picks stocks within a sector the question becomes "can the fund beat its benchmark after fees".  Very few funds can do this (around 20% after 5 years) so this is why investing in index funds with low fees is such a popular suggestion here.  It is very very hard to pick a fund that will consistently beat the benchmark after fees year after year. 

Also, certain sectors, like international funds, will have inherently higher fees than investing in the SP500, simply because there's more the fund has to do (foreign currencies, tax laws, etc).  That's why you can't find any international funds with fees under 0.4%  Even with these higher fees you still may want to include international growth funds in an AA because it gives you something that an SP500 fund won't - exposure to developing countries in foreign markets.

hope that helps more than it confuses.

[Radagast]

The biggest reason to own multiple funds is if they are fundamentally uncorrelated. For example, owning small cap US and small cap international stocks might provide opportunities to sell one when it is high, and buy the other while it is coincidentally low. This has the potential to reduce risk and slightly increase returns. Unfortunately, most stock indices are correlated.

The other reason might be to reduce the risk of the fund or company failing. Suppose Oakmark is actually a big fraud and all the money you gave them for years vanishes in a puff of the electrons that it is. You would be happier if you only part of it there.

[bigskyrookie]

Thank you everyone for your help. I am wondering what people think of the BlackRock Equity Index - Collective F  for a large cap fund?

[nereo]

Thank you everyone for your help. I am wondering what people think of the BlackRock Equity Index - Collective F  for a large cap fund?

from "the internet": The BlackRock US Equity Index seeks to replicate the return and risk characteristics of the S&P 500 Index Total Return

Basically it's an SP500 index fund with an expense ratio of 0.04%  That's about as good as it gets.  Assuming there's no additional fees to invest (e.g. a 'front-load' fund where you pay a fee up front) I think it's a very good index fund to be invested in.  but check to make sure there are no fees to buy or sell the fund.

[Agamede]

You have some nice choices here, IMO. Note that VBAIX is 60% total US stock and 40% US bond, so you can use that to get the bond allocation you want. Something like this would work:

40% Vanguard Total Intl Stock Index (VGTSX)
25% Vanguard Balanced Index Fund (VBAIX)
35% Vanguard Institutional Index (VINIX) and/or Blackrock Equity Index
=
40% International
50% US Stock
10% Bond

If you wanted to get fancy, you could use small caps to get the whole US stock market (-ish) instead of just large cap. That would look more like this:

40% Vanguard Total Intl Stock Index (VGTSX)
25% Vanguard Balanced Index Fund (VBAIX)
28% Vanguard Institutional Index (VINIX) and/or Blackrock Equity Index
7% Vanguard Small Cap Index Fund (VSMAX)

[Radagast]

It looks like VBAIX is Vanguard's self-balancing stock and bond fund, with 60% US Total Stock Market, 40% US Total Bond Market. With an 0.08 expense ratio and lack of other bond options I would make this the core of your strategy. My selections might look like this. It is simple and gives you a pretty ideal proportion of bonds and international stocks, with some small cap stocks thrown in for good measure. All with a very low expense ratio.

403b:
80% Vanguard Balanced Index Fund (VBAIX)
20% Vanguard Small Cap Index Fund (VSMAX)

Pension Plan:
50% Vanguard Balanced Index Fund (VBAIX)
50% Vanguard Total Intl Stock Index (VGTSX)

The composite works out to:
39%   US TSM
26%   Bonds
25%   International
10%   US Small

[Jeremy E.]

I would put everything in your 403b into vinix, and read jlcollinsnh's stock series for more information. Also if you want some tax advice look up a blogger named the mad fientist. I would guess that Roth is probably not the best choice for you.