Help with 401K, please

[ashem]

I just checked my husband's 401K last week and was disappointed to see it has only earned between 1-2% the last couple of years.
I pay much closer attention to my own vanguard IRA, Roth IRA, and index funds, but my husband's company is with Fidelity and I've never really understood the investment options. SO, we were foolish and let Fidelity make the decisions based on my husband's age (47).

I changed his future investment elections the day I discovered the problem, but have yet to exchange his current investments.
Question #1 - should I change them immediately, or wait a week or two and see if prices go down?
Question #2 - Any advice on the investment allocations I plan on making?

Currently
38% bonds
23% in Large Cap Value
11.54% Small Cap Index
6% M&N overseas
6% Intl Index
6% Large Cap Core Growth
5% DFA EMRG MKT CORE EQ
3% S&P 500

Planned changes
15% Bond Index
10% Diversified Bond
5% Large Cap Value
10% S&P 500
25% Large Cap Core Growth
12% Small Cap Index
13% Small Cap Blend
5% DFA Emrg Mkt Core
5% Intl Index

[Frugal_NYC]

What is your desired split of US Stock/Intl/Bonds?  Also, post the expense ratios of each

Your proposal looks a little too confusing, I just do a split between Total Us/International/Bonds in mine

[ashem]

Thanks for your response.

I think I want 60% domestic stocks, 15% international, 25% bonds, but I'm very open to advice.

I researched it a little more and here are the expense ratios, options, and 1 year average returns.

Asset Allocation Funds
Aggressive Fund (intl)   expense ratio: .4294%     1 yr avg return 3.94%
Conservative Fund         .3586%                            2.72%
Growth Fund                 .3866%                            3.61%
Moderate Fund              .3539%                            3.22%

Core options
Aggressive Growth EQ    .4345%                          13.34%
Large Cap Value Fund     .424%                           N/A
Large Cap Core Growth   .3586%                         15.98%
S&P 500                        .0507%                          11.82%
Small Cap Index            .7009%                          11.75%
DFA EMRG MKT CORE EQ .61%                             -.49%
INTL Index                      .11%                            -.48%
M&N Overseas                 .75%                           -7.05%
PYR SEL GLB PL CLS G     .87%                          +7.46%
Capital Preservation Bond   .0616%                     2.03%
Diversified Bond               .2707%                      2.37%

     

[johnny847]

Returns are useless.

Before we can really answer your question, we need to know your desired asset allocation.

Whatever it is, I would recommend you only use these funds:
S&P 500 - has a 0.0507% expense ratio, which is essentially the same as Vanguard's.
INTL Index - if you want international funds, go with this. Vanguard's total international fund actually has an expense ratio of 0.14%, so this fund does a bit better.
Diversified Bond - expense ratio of 0.2707% is a little bit higher than Vanguard's but that's okay.

But, not only do we need to know your desired asset allocation, to make good recommendations we'd also need to know how your 401k and IRAs are invested. You should treat all of your accounts as one big bucket. You don't have to hold your desired asset allocation in each account, you just need your asset allocation across all of your accounts to meet your desired one. For example, you might decide to have all of your husband's 401k invested in the international index for its slightly better expense ratio.

And make sure to check if your 401k admin tacks on an extra fee to all these funds.

Question #1 - should I change them immediately, or wait a week or two and see if prices go down?

Trying to time the market is a fool's errand. If you want to change up your fund allocation (which I highly recommend you do - your funds are all over the place), then just do it. Don't worry about what the market might do, because you honestly can't predict it

Question #2 - Any advice on the investment allocations I plan on making?

See above.

[ashem]

Good information, thanks. No extra fee with his 401K.

My vanguard IRA ($82,200) is 15% bonds, 65% domestic, 20% international. My ROTH IRA ($10,700) is 100% domestic.
His 401K ($269,000) is 38% bonds, 44% domestic, 18% international.
I have less money in my IRA than my husband, because I stopped contributing for a number of years when I was a SAHM.
However, my IRA has been growing so much more quickly than my husband's 401K over the past couple of years.
He started his at age 30 and I started mine at 22, so that could account for some of it.
Still, I was surprised my returns were around 15% and his were 1.87%

You've given me a lot to think about, thank you. I really hadn't even looked at the expense ratios before.
Considering how much I love saving money, I really need to read up more on investing.
I find it all a little overwhelming.

[johnny847]

Good information, thanks. No extra fee with his 401K.

My vanguard IRA ($82,200) is 15% bonds, 65% domestic, 20% international. My ROTH IRA ($10,700) is 100% domestic.
His 401K ($269,000) is 38% bonds, 44% domestic, 18% international.
I have less money in my IRA than my husband, because I stopped contributing for a number of years when I was a SAHM.
However, my IRA has been growing so much more quickly than my husband's 401K over the past couple of years.
He started his at age 30 and I started mine at 22, so that could account for some of it.
Still, I was surprised my returns were around 15% and his were 1.87%

You've given me a lot to think about, thank you. I really hadn't even looked at the expense ratios before.
Considering how much I love saving money, I really need to read up more on investing.
I find it all a little overwhelming.

Investing is actually not that hard. There's some upfront reading to do, but once you do it and understand how investing actually works, it's boring. I mean, it's got to be one of the most boring things on the planet. Just set up autoinvestments (like 401k deductions or autowithdrawals from your bank to Vanguard) and you're done.

A good primer is http://jlcollinsnh.com/stock-series/

[ashem]

I'll read up.

So with all of retirement accounts, we are at 33% bonds, 48% domestic, and 18% international. Is that super conservative, or about right for our ages? I'm 40, he's 47. Don't plan on touching the money until 59.

Thanks for all your advice.

[ReadySetMillionaire]

Does your husband have access to Fidelity's Spartan (index) funds? Only one Spartan fund was listed in my 401k booklet, but when I logged into the Fidelity website, I had access to the Spartan Total Stock Market Fund, Spartan International Fund, and a very low expense bond fund.

These funds have very low expense ratios--even lower than Vanguard's.

Total Stock Market: https://fundresearch.fidelity.com/mutual-funds/summary/315911404
International: https://fundresearch.fidelity.com/mutual-funds/summary/315911602

And I don't quite remember my bond fund.

As for your asset allocation, I believe Jack Bogle stated that the average investor should have his bonds equal his age in years. So your husband is 47, 47% bonds. However, if you want to be more aggressive, you can subtract 10 and have 37% bonds.

This has been a tremendous book for me (http://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365) and I highly recommend it. It is both approachable and thorough and has really helped me grasp the tough questions.

[johnny847]

I'll read up.

So with all of retirement accounts, we are at 33% bonds, 48% domestic, and 18% international. Is that super conservative, or about right for our ages? I'm 40, he's 47. Don't plan on touching the money until 59.

Thanks for all your advice.

Only you and your husband can truly make that judgement - it really depends on your risk tolerance.

If you really want a rule of thumb - age in bonds is on metric people use, so by this metric, you're aggressive. But you really can't give a one size fits all answer to this question.

I started off with 110 - age = % in bonds, because the age in bonds metric started many years ago and people are living longer. And then I thought well maybe I'll consider switching to 100/0 stocks/bonds, but only after the next market crash.
Then I said screw it, I'm a pretty rational guy, I'll just go 100/0 now.
Only time will tell if that was a wise decision.

In the end, I don't think anybody can really know their risk tolerance until they have had sufficient skin in the game during a market crash (and I feel weird saying this, as I have not faced this yet).

There's a bit better guidance on how much of stocks to hold as international. Vanguard's whitepaper on the matter says hold somewhere between 20-40% of your stock allocation as international stocks.
But then again, John Bogle, founder of Vanguard, says don't hold international.
There isn't too much agreement on this topic either. Honestly, you'll be fine with whatever international allocation you choose (though I probably wouldn't allocate more than world market cap - it's about 50/50 US/rest of the world right now).

[DrF]

If it were me, I would re-allocate 100% into the S&P500 fund. I'd also have 100% of all future contributions to that fund.

You have ~12 years until your husband reaches 59. How much are you saving annually? Based on your posts, you have ~$361,000. How much will you need to retire?

How much in Social Security will you get (husband)? Add that in to your calculations.

It's good you are thinking of all your assets together. But bonds should be held to reduce volatility, not increase returns. You should also rebalance on a ~yearly basis. Pick an asset allocation and then make sure that every year you have the same allocation (e.g. 80% stock, 20% bond).

You may get more answers in the investing section of MMM.

[Jack]

By my calculation, if you want your overall asset allocation to be "60% domestic stocks, 15% international, 25% bonds" then you should rebalance his to as follows:

• domestic 56.88%
• international 14.07%
• bonds 29.05%

I suggest keeping it simple: just pick one good, cheap index fund for each asset category, and don't worry too much about tilting (large cap vs. small cap or growth vs. value). A total stock market fund isn't going to perform all that differently from an S&P 500 fund anyway (especially if the total market index has an expense ratio 10X higher than the S&P 500 one!).

By the way, do you have any debt (e.g. a mortgage)? In some sense, debt can be considered a "negative bond," and there's (IMO) little point in buying bond funds when you can get a better return with less risk by just paying down your debt.

If you have debt, I agree with DrFunk's suggestion to go 100% S&P 500 (or at least, X% S&P 500 and [100 - X]% INTL index).

[ashem]

Thanks for all the great advice. ReadySetMillionaire, I will definitely check out that book.
My husband's Fidelity account doesn't have Spartan as an option.

I'm definitely leaning towards having less invested in bonds. It seems the combination of bonds and high fees are eating away at his returns. I can't believe I wasn't paying closer attention to the expense ratios.

We do have a mortgage, and it's our only debt. $342,000 at 3.5%. Our house is worth $450,000.
Not a big house - 1500 square feet for the 4 of us, just in a very desirable, walkable neighborhood with awesome schools.
We only have 1 (old) car because we can walk to school and to my job and hubby can walk to the train.

Our savings rate was only 30% the last few years, but now that I'm back at work part-time we are aiming for 50% this year.
We just started contributing $400/month to my IRA, $400/month to my vanguard stocks, $400/month to a low interest savings account (emergency fund/vacation), and we've always put $200/month in 529s. We're putting $15,000/year in his 401K (but used to contribute less when we were on one salary), and the company contributes $7500/year as well. We might increase it to the maximum $18,000, but we're also trying to build our easily accessible $ as well. In his business, at his age and salary level, getting laid off in the next few years is a likelihood. I'd like to have a better plan for when/if that happens. Perhaps he should open a ROTH IRA instead of increasing the 401K contributions? Also, he will get social security at 62 or 67 and I will get a small pension at 60 if I start teaching full-time in the next couple of years, which is my plan.

Thanks again for all the responses!

[Jack]

We do have a mortgage, and it's our only debt. $342,000 at 3.5%. Our house is worth $450,000.
Not a big house - 1500 square feet for the 4 of us, just in a very desirable, walkable neighborhood with awesome schools.

Atlanta ITP?

Anyway, my advice is that unless you think you can find a bond with  >3.5% risk-free return, just pay down your mortgage instead. (And if you wouldn't pay down a 3.5% mortgage, then IMO that's an indication that you shouldn't have a much of a bond allocation either).

By the way, bonds do have another function beyond diversification: they're also a convenient source of funds to buy stocks on when they're "on sale" (i.e., when you have 100% stocks you can't rebalance, but if you have 95% stocks / 5% bonds then when stocks go down it causes the bond percentage to go up, so you simply rebalance and "naturally" sell high and buy low). If that's something you're interested in, then the previous paragraph doesn't apply.

[ashem]

Thanks, Jack. We live in Decatur. I think we talked about this a couple of years ago. We bought our 1922 bungalow in 2006 and lived with it for 6 years. It needed a new roof, insulation, HVAC, ductwork, etc. We wound up having all the work done in 2013, plus added a second bathroom, renovated the tiny kitchen, and added a little den off the kitchen. We also moved our front door, making the 'parlor' more of a true living room. We went from 1300 square feet to 1550 and are happy we did. The taxes are outrageous, but the schools are so wonderful we're hoping to stay put until our youngest graduates in 11 years. Where do you live?

I changed the investments yesterday to 60% S&P, 30% Diversified Bond, and 10% International Index.
I talked to my husband about what you and others said and he seems fine with changing it to more stocks.
I see your point about the bonds, absolutely. I think I'll save as much as possible in the next year and then look at paying down the mortgage.

[johnny847]

By the way, bonds do have another function beyond diversification: they're also a convenient source of funds to buy stocks on when they're "on sale" (i.e., when you have 100% stocks you can't rebalance, but if you have 95% stocks / 5% bonds then when stocks go down it causes the bond percentage to go up, so you simply rebalance and "naturally" sell high and buy low). If that's something you're interested in, then the previous paragraph doesn't apply.

Yes that's true, but bonds lag stocks when stocks aren't crashing. The point of bonds is NOT to have some "dry powder" when stocks are on sale, it is to reduce volatility/risk.
If you want to see this, try running cFIREsim with a spending plan of $0.

Starting portfolio of $1M, 30 year retirement. Reporting end values:
100% equities: average: $6.662M, median: $5.943M
95/5                  average: $6.336M, median: $5.827M
90/10                average: $6.020M, median: $5.562M


You should hold bonds to lower volatility/risk. You should not hold bonds to have some "dry powder" to use to buy low and sell high during a market crash. You're better off from a pure returns perspective to just hold 100% stocks.

Your argument would work if bonds had a similar return to stocks AND were uncorrelated. Or more ideally, perfectly anti-correlated. As in, stocks drop and bonds go up, and vice versa.

[Jack]

Thanks, Jack. We live in Oakhurst. I think we talked about this a couple of years ago. We bought our 1922 bungalow in 2006 and lived with it for 6 years. It needed a new roof, insulation, HVAC, ductwork, etc. We wound up having all the work done in 2013, plus added a second bathroom, renovated the tiny kitchen, and added a little den off the kitchen. We also moved our front door, making the 'parlor' more of a true living room. We went from 1300 square feet to 1550 and are happy we did. The taxes are outrageous, but the schools are so wonderful we're hoping to stay put until our youngest graduates in 11 years. Where do you live?

Yep, I figured it must have been either Decatur or Candler Park / Va-Hi / Morningside. I'm a little bit envious; Oakhurst is really nice.

I don't really want to say which neighborhood I'm in because it would make me too identifiable, so I'll just say that it's one of the cheaper Atlanta-in-Dekalb neighborhoods. My house is about the same size as yours, but was built in 1948 and thus has a lot less character. It was a fixer-upper (and I bought in the depths of the recession, 5 years ago), so it was cheap. I'm hopefully (finally) getting ready to renovate, which is funny because it sounds like I'm on a similar schedule as you. The schools here are getting better -- the elementary schools are already good, and I'm hoping that by the time I have middle-school or high-school age kids those schools will have become good too.

[ashem]

Well, now I'm worried that I'm too identifiable :-)

Decatur is nice, but I liked it better in 2006.