Author Topic: Fund/starting out advice  (Read 6379 times)

Stache In Training

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Fund/starting out advice
« on: August 04, 2013, 11:42:50 PM »
Hello Fellow Mustachians,

I have been a big fan of the MMM blog for quite some time now.  However this is my first foray into actually posting on the forum, so I apologize for my newbie-ness  (and that I'm probably going to write a small book).  When I first started reading the MMM blog, it was like a veil was lifted, and I could see for the first time!  I had always been frugal, and weary of the super-consumerism lifestyle (and luckily so is my wife), but this finally gave me a goal: Financial Independence! Something that hadn't even occurred to me before.   I was hoping for some advice on investing, so that hopefully you guys will think of something I've overlooked.  (FYI:  Wife and I are both 27, and are OK with riding some volatility in the markets.  So looking for long-term advice.)

My wife and I (well I'm the one doing it) are in the process of rolling over our Roths from a typical, high fee, mutual fund company, to Vanguard; in order to take advantage of the index fund amazingness.  For our roths, I was planning to put us into a target-date fund (with auto contributions, obviously) for simplicity sake.  From reading this forum, I know some of you don't like the target-date funds for lack of control, or that they get too conservative too fast. (To counter that, I was planning on choosing the "wrong" target date, that of a younger person, for at least one of us.  Therefore it stays aggressive longer.)  However I just wanted to not have to worry about re-allocating every year for our Roths.  I may be able to swayed, but I feel that taking into account what I have to say below (the fact that I will be doing other investing as well), and the convenience they offer just makes the best sense for me.

After Roths (and our 401k's, obviously), as we're being more and more frugal, we are ending up with a nice problem to have.  Too much money sitting in a low-interest rate savings account.  So we want to invest what's over our emergency fund.  That's where I really need the advice: Where to start, and where to go? 

I see in an early post from MMM (http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-supposed-to-do-with-all-this-money/), to put the rest in a dividend yielding index fund, such as VFINX (I'd aim for the admiral version, VFIAX).  Makes sense, although it does seem odd to me to put everything in one index fund.  So my thought is, why not take it a step further?  Invest in the High-Dividend Yield fund (VHDYX), or dividend growth (VDIGX)?  I guess they have higher fees, but if they have higher dividends couldn't that off-set it?  Or invest in a few of them, in order to get over my apprehension of everything in just one fund (maybe that apprehension is unwarranted?).  So the hope/goal is to keep investing into dividend yielding funds, DRIP, and then eventually live off of dividend payouts, as my form of FI.

So currently my thought was to start with VFINX, make admiral in that, and then start "diversifying" with other funds, such as VHDYX or VDIGX, or the total stock market VTSAX (though I am investing in that via the roth).  I was maybe going to include an REIT index (VGSLX) for the cashflow too, but I think due to tax implications maybe add that last, or once my tax bracket drops in FI.  Although the one nice thing about taxes is, they only occur when you're making money.

Thoughts?  For someone who is young and eventually wants to live off of dividend checks: Spread out over a few different dividend funds, or stick to the s&p solely? Correct in delaying REIT?

Again, sorry for writing a book.  Thanks, in advance!

Stache In Training

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Re: Fund/starting out advice
« Reply #1 on: August 05, 2013, 12:22:53 PM »
I'll simplify the above for easier reading.

Looking for advice in taxed accounts.  My wife and I are 27, and wanting to put our savings into dividend yielding funds, in order to eventually live off of the dividend yield.
I see in http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-supposed-to-do-with-all-this-money/, to use the s&p index fund, VFINX.  However, I feel a little apprehensive putting everything in one fund.  So why not take it a step further, and also invest in the High-Dividend Yield fund (VHDYX), or dividend growth (VDIGX)?  I assume why not would be because of the higher fees, but would the higher dividend yield off-set that? Or is it OK to only do the s&p index?  Or are there some other funds I have missed?

Thanks, in advance!

worms

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Re: Fund/starting out advice
« Reply #2 on: August 05, 2013, 11:22:58 PM »
We all have different, but equally valid, attitudes to risk. You are concerned about the "all my eggs in one basket" aspect of using a single fund. 

Fair enough.

I would be equally concerned about having all my eggs being held by a single fund manager, no matter how good their track record to-date is.  I have a few old holdings in managed funds, but most is held as shares in carefully chosen companies, across different sectors, mainly in good dividend stocks. That suits my attitude to risk but would not suit others, so you need to do what suits you best.

Of course, starting out, if you only have one egg, it can only be in one basket!

Stache In Training

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Re: Fund/starting out advice
« Reply #3 on: August 06, 2013, 10:09:50 AM »
Worms,
Thanks for your perspective and experience.  I don't really want to pick individual stocks, or at least definitely not to start out (maybe later with some "fun" money).   I know the track record for people doing that is usually bad.  Which is why I wanted to go the index fund route, as there's no fund manager (technically) to worry about, and does diversify across a bunch of different stocks in various markets.

Yeah, I think starting out it will have to be all in one basket, but just wondering if anyone had any ideas of where to go next, or if I should start not in one basket, as I think I can manage to not be all in one.

Also, there will obviously be other investments here and there, like my house, peer-to-peer lending, etc., so not everything in one basket per se, but this will be the majority.

GreenGuava

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Re: Fund/starting out advice
« Reply #4 on: August 06, 2013, 10:19:46 AM »
My wife and I (well I'm the one doing it) are in the process of rolling over our Roths from a typical, high fee, mutual fund company, to Vanguard; in order to take advantage of the index fund amazingness.  For our roths, I was planning to put us into a target-date fund (with auto contributions, obviously) for simplicity sake.  From reading this forum, I know some of you don't like the target-date funds for lack of control, or that they get too conservative too fast. (To counter that, I was planning on choosing the "wrong" target date, that of a younger person, for at least one of us.  Therefore it stays aggressive longer.)  However I just wanted to not have to worry about re-allocating every year for our Roths.  I may be able to swayed, but I feel that taking into account what I have to say below (the fact that I will be doing other investing as well), and the convenience they offer just makes the best sense for me.

Decision one is whether or not you want to treat taxable and tax-advantaged accounts as separate portfolios.  If you treat them as separate, the target date funds are great, unless your 401(k)s have terrible choices (and you need to make use of the least bad funds).  It isn't unheard of for folks with a FI goal to make their tax-advantaged accounts the "post-60" money and use taxable just to bridge the gap.

That having been said, you can get more tax efficiency if you treat all of your investments (perhaps not including any Real Estate) as one large portfolio, and allocate your desired assets among accounts for best tax efficiency.  For what it's worth, this is what I'm doing, but I have no problem with people doing the other one.

Either way, the first step is to decide if you have one big portfolio or multiple smaller ones.  The second step is to decide what asset allocation you want in each.

After Roths (and our 401k's, obviously), as we're being more and more frugal, we are ending up with a nice problem to have.  Too much money sitting in a low-interest rate savings account.  So we want to invest what's over our emergency fund.  That's where I really need the advice: Where to start, and where to go?

Glad to see you aren't disregarding your tax-advantaged accounts.


I see in an early post from MMM (http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-supposed-to-do-with-all-this-money/), to put the rest in a dividend yielding index fund, such as VFINX (I'd aim for the admiral version, VFIAX).  Makes sense, although it does seem odd to me to put everything in one index fund.  So my thought is, why not take it a step further?  Invest in the High-Dividend Yield fund (VHDYX), or dividend growth (VDIGX)?  I guess they have higher fees, but if they have higher dividends couldn't that off-set it?  Or invest in a few of them, in order to get over my apprehension of everything in just one fund (maybe that apprehension is unwarranted?).  So the hope/goal is to keep investing into dividend yielding funds, DRIP, and then eventually live off of dividend payouts, as my form of FI.

First, I don't think MMM stands by the dividend advice anymore;  very few serious investors do.  It's tempting to think of it as free money, but it isn't.  "Dividend paying stocks" is a popular stock picking theory, but it's just that - there's no evidence that it beats, in total return, the market itself.  The higher fees certainly don't get offset by the dividends - the fund's total return (including dividends) would have to beat a similar total market fund by that amount, consistently, to make up for the higher expense ratio.

A brief bit of history:  people used to buy "growth" stocks as they were accumulating money  and, in preparing for retirement, would sell and buy "high dividend" stocks.  Back in those days, though, you had to buy stocks in large batches, and these purchases had high fees;  selling also had fees, but receiving the dividend did not.  In the 21st century, we have funds with no transaction costs that can accumulate total return, and we can realize our gains (which includes paying taxes on the same) at our convenience, rather than quarterly (funds) or whenever the company feels like it (individual stocks).

Next, if you're holding domestic stocks in a taxable account, go for VTSAX.  If you can't afford Admiral shares right away, don't worry:  start with Investor shares, and when you reach the Admiral minimum, Vanguard will automatically promote you.  This is not a taxable event.

While we're at it:  decide on an asset allocation and use the best available funds to fill those assets.  Trying to go with multiple mutual funds to cover the same asset in the same account is known as "naive diversification" - you achieve real diversity in your investments by the underlying assets, not the funds.  This is doubly true if you go with actively-managed mutual funds.


So currently my thought was to start with VFINX, make admiral in that, and then start "diversifying" with other funds, such as VHDYX or VDIGX, or the total stock market VTSAX (though I am investing in that via the roth).  I was maybe going to include an REIT index (VGSLX) for the cashflow too, but I think due to tax implications maybe add that last, or once my tax bracket drops in FI.  Although the one nice thing about taxes is, they only occur when you're making money.

REITs are very tax inefficient;  if you want REITs (beyond what is in total market already), they belong in tax-advantaged accounts.

Thoughts?  For someone who is young and eventually wants to live off of dividend checks: Spread out over a few different dividend funds, or stick to the s&p solely? Correct in delaying REIT?

Again, sorry for writing a book.  Thanks, in advance!

I don't recommend living off dividend checks;  I recommend living off the total return of your investments.  You have more control over it, there's more history to know about it, and you get taxed upon realization instead of when it happens (even at the preferred dividend rate).

Another fund you're missing:  VTIAX, Vanguard's total international stock market index.  It gives you some additional real diversity in your stock allocation and, when held in taxable, gives you some tax credits that you don't get when holding it in a tax-advantaged account.

Stache In Training

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Re: Fund/starting out advice
« Reply #5 on: August 06, 2013, 11:13:29 AM »
Green Guava, great response!

I was planning on essentially thinking off them as one portfolio, even though only the taxed accounts will be touched before retirement.  Which is why I wasn't looking at starting with VTIAX and VTSAX, as they are held in the target date retirement fund.  But a good thought.  I'll have to think more into that, especially because of the tax implications of VTIAX, thanks. Maybe I need to treat them as 2 different.

I see what you mean, by showing that the history of dividend investing was so good was because that's what you could get without fees; but now that I can get redemptions without fees it is usually better to just get the growth, as that will most likely out-perform the high dividend, at a lower growth.  Makes sense, and something I hadn't put together yet (which is why I wanted others' thoughts, so thanks!). So with that in mind, maybe live frugally off of the dividends, and whenever I need more money (like a big vacation or moving), then I would sell, as I have the "post 60" accounts for later on.  Which I guess is kind of a hybrid of the two ideas. Thoughts?

So I do have a small 401k from a job I just left.  Maybe roll that over to my Roth but put that amount in a REIT index and just let it sit and drip, (while contributing to the target date) in order to get the real estate investment at a tax-advantage.  I am realizing that REIT's need in a tax advantage, so I think that might be a good use of that 401k and REIT. Thoughts?


Did this quote wrong, but here: " First, I don't think MMM stands by the dividend advice anymore;  very few serious investors do.  It's tempting to think of it as free money, but it isn't.  "Dividend paying stocks" is a popular stock picking theory, but it's just that - there's no evidence that it beats, in total return, the market itself.  The higher fees certainly don't get offset by the dividends - the fund's total return (including dividends) would have to beat a similar total market fund by that amount, consistently, to make up for the higher expense ratio. "
I see what you mean.  The S&P grows much more than the high dividend fund, but pays only 1% less in dividends.  Then the fees (while still much less than I was paying) are half.  Although somehow the dividend growth grew more than the s&p, but paid about the same dividends.  So there's just some math to do.  But this is the math that needs to happen. Very useful! Thanks!

GreenGuava

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Re: Fund/starting out advice
« Reply #6 on: August 07, 2013, 12:06:09 AM »
I see what you mean, by showing that the history of dividend investing was so good was because that's what you could get without fees; but now that I can get redemptions without fees it is usually better to just get the growth, as that will most likely out-perform the high dividend, at a lower growth.  Makes sense, and something I hadn't put together yet (which is why I wanted others' thoughts, so thanks!). So with that in mind, maybe live frugally off of the dividends, and whenever I need more money (like a big vacation or moving), then I would sell, as I have the "post 60" accounts for later on.  Which I guess is kind of a hybrid of the two ideas. Thoughts?

Sure.  Keep in mind that, while dividend distributions from a large, broad-market fund are pretty much always a sustainable withdraw rate, the amount is sufficiently low that you have to save longer to reach the FI point.  Of course, if that doesn't bother you - maybe you're blessed with a job you love, or can find the good money part-time - there's no issue here.

So I do have a small 401k from a job I just left.  Maybe roll that over to my Roth but put that amount in a REIT index and just let it sit and drip, (while contributing to the target date) in order to get the real estate investment at a tax-advantage.  I am realizing that REIT's need in a tax advantage, so I think that might be a good use of that 401k and REIT. Thoughts?

Yes.  Don't roll it to a Roth unless you have some desire to pay the taxes on it now.  Roll it to a traditional/rollover IRA, and invest it as you'd like.  Keep in mind that REITs are part of the total stock market index already, so buying more REIT is over-weighting that relative to the market (there's not anything inherently right or wrong with that).

For that matter, all almost all old 401(k)s should be rolled to traditional IRA assets (with the Roth components going to Roth IRAs, for obvious reasons).  The rare exceptions are when the 401(k) fees and fund choices are better than you can get in an IRA.

I see what you mean.  The S&P grows much more than the high dividend fund, but pays only 1% less in dividends.  Then the fees (while still much less than I was paying) are half.  Although somehow the dividend growth grew more than the s&p, but paid about the same dividends.  So there's just some math to do.  But this is the math that needs to happen. Very useful! Thanks!

Keep in mind that the S&P 500 isn't the total market.  It used to be a proxy for the full U.S. market, back when it was tougher to track mid- and small-cap companies.  The index funds for it are the best known by most people, and have stuck around for a while, although most investors (including Jack Bogle, who created the first S&P 500 index fund) suggest using a total market fund instead.  There isn't an issue with one or the other:  the S&P 500 is something like 80% of the total U.S. market anyway.

Right now, you're deciding for the portion of your portfolio that will account for domestic stocks;  you're choosing between three good options.  Even if you went with the one that I think is the worst of the three (the dividend-focused one(s)), you're still making a good choice.  Be most careful to find the one(s) you want for the taxable portion, though, because transitioning from one to the other is more difficult in that realm.

Stache In Training

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Re: Fund/starting out advice
« Reply #7 on: August 08, 2013, 10:40:23 AM »
Thanks Green Guava, great points!

Still got some more thinking to do, I guess.

Stache In Training

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Re: Fund/starting out advice
« Reply #8 on: August 12, 2013, 10:21:25 AM »
Sorry, going to bump this.  Hoping to get some more people's thoughts.