Author Topic: Question about asset allocation and fund minimums  (Read 2322 times)

xclonexclonex

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Question about asset allocation and fund minimums
« on: June 18, 2016, 05:07:40 PM »
Hello everyone,

I have a question regarding asset allocation, and I am hoping your insight into this might help me out here.

I am 33 years old. I do not have any debt. I am contributing $1000 to my 401k account per month, and I am maxing out my Roth IRA contributions.

I recently opened a taxable brokerage account at Vanguard. I am considering the following asset allocation for this account -

VTSMX - 90%
VBMFX - 10%

I am not considering international at the moment because of the poor performance.

My question is two fold.

1. Is this asset allocation a good idea? Do you see anything wrong with this? Should I still go with international funds even with the poor performance?

2. How do I split the asset allocation when there is a $3000 minimum for each fund? I am assuming I need first deposit $3000 in each and then all my subsequent contributions should be deposited according to the allocation percentage?

Thanks for your help.

FINate

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Re: Question about asset allocation and fund minimums
« Reply #1 on: June 18, 2016, 05:31:48 PM »
1) I can't comment on the proposed asset allocation without more details. What is your investment horizon (how long do you intend to hold)? How risk adverse are you? Assuming you don't intend to touch it for 10 years or more AND you are not the type to worry when the market tanks, then you're fine.

2) The amounts you're discussing are quite small. Instead of worrying about $3k here or $3k there, I think you should focus on building up $10k in VTSAX (the Admiral Shares version of VTSMX) because of the lower expenses. Then maybe worry about building up some percentage of VBMFX, though at your age not sure I would be too worried about bond funds but that's just me.

Radagast

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Re: Question about asset allocation and fund minimums
« Reply #2 on: June 18, 2016, 07:00:07 PM »
You will likely be better off maxing out the 401k, HSA, and all other tax advantages first, unless you are saving up for something in the midterm.

Bonds are more for protecting money you have rather than growing money. They are not necessary when you first start. I would work on getting the total stock market fund above the $10,000 limit for admiral shares before anything else.

Looking at trailing performance is generally a bad idea. It is better to look at forward looking measures such as price to book ratio, price to earnings ratio, and price to dividend ratio which generally look more favorable outside the US. Additionally the dollar has been on an upswing since 2012 which accounts for a lot of US stocks better performance. Personally I would start adding international shortly after I crossed admiral shares in the US stocks but that is up to you. DON'T add it in the future after it starts to show good performance, the idea is to either buy low or buy continuously, but not high.

You should consider your marginal tax rate when you get around to bonds. Perhaps you will be better off with tax advantaged bonds. Also, is the purpose of the bond fund for safety or diversification? If it is safety you are ok with TBM. If for diversification, with only 10% in bonds you may as well get as much bang for your buck as possible by going either long term index or long term government bonds.

xclonexclonex

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Re: Question about asset allocation and fund minimums
« Reply #3 on: June 19, 2016, 10:21:10 AM »
1) I can't comment on the proposed asset allocation without more details. What is your investment horizon (how long do you intend to hold)? How risk adverse are you? Assuming you don't intend to touch it for 10 years or more AND you are not the type to worry when the market tanks, then you're fine.

2) The amounts you're discussing are quite small. Instead of worrying about $3k here or $3k there, I think you should focus on building up $10k in VTSAX (the Admiral Shares version of VTSMX) because of the lower expenses. Then maybe worry about building up some percentage of VBMFX, though at your age not sure I would be too worried about bond funds but that's just me.

Thank you for your response.

> What is your investment horizon (how long do you intend to hold)?

Until retirement.

> How risk adverse are you?

I am not sure how to quantify this, but I do not believe in taking a lot of unnecessary risks, however, I am capable to sticking to a plan even when the markets go down.

I think your suggestion makes sense. I will focus on reaching $10000 so that I can convert the fund into admiral shares first.

xclonexclonex

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Re: Question about asset allocation and fund minimums
« Reply #4 on: June 19, 2016, 11:00:59 AM »
I am not maxing out my 401k because my company contributes a part of my bonus to 401k, and I do not want to go over the limit. I should probably ask my HR how they are going to handle the bonus contribution if I am already maxing out my contributions.

I don't think I am eligable for an HSA because neither me nor my wife have a high deductible health plan.

I am already maxing out my Roth IRA, so I figured it would be a good idea to start a taxable account.

> I would work on getting the total stock market fund above the $10,000 limit for admiral shares before anything else.

That sounds like an excellent idea. I am going to focus on that first.

> Also, is the purpose of the bond fund for safety or diversification?

Good question. I am not very sure...I mean I want to diversify because I hear that's a good thing, but other than that I am not entirely sure.

seattlecyclone

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Re: Question about asset allocation and fund minimums
« Reply #5 on: June 19, 2016, 11:55:31 AM »
1. Is this asset allocation a good idea? Do you see anything wrong with this? Should I still go with international funds even with the poor performance?

90% stocks/10% bonds can be a fine allocation. Stocks do tend to be pretty volatile, so if you go with this allocation you need to promise yourself not to sell all of your stocks in the next market downturn when you have "lost" a ton of money on them.

I don't think it's wise to invest 100% of your money in a single country, even one as large as the US. Performance of different asset classes varies from year to year. Check out this chart for some history:



Developed market international stocks (the "MSCI EAFE" in the chart above) outperformed the S&P 500 in four of the past ten years. Emerging market stocks outperformed the S&P 500 in five of the past ten years. Consider investing some portion of your portfolio in non-US assets.

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2. How do I split the asset allocation when there is a $3000 minimum for each fund? I am assuming I need first deposit $3000 in each and then all my subsequent contributions should be deposited according to the allocation percentage?

I'd say that given the small amount you want to have in bonds, you might as well go 100% stocks until such time as 10% of your taxable account is over this $3,000 minimum. Also you may want to consider putting all of your bonds in your retirement accounts instead of taxable because bond interest is taxed at a higher rate in a taxable account than stock dividends and capital gains.

Axecleaver

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Re: Question about asset allocation and fund minimums
« Reply #6 on: June 20, 2016, 02:54:06 PM »
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I am not maxing out my 401k because my company contributes a part of my bonus to 401k, and I do not want to go over the limit. I should probably ask my HR how they are going to handle the bonus contribution if I am already maxing out my contributions.
Those are different limits. Your contribution limit is 18k. Your company's contribution limits are split into two buckets, a match (many use safe harbor of 3% or 4%) and a profit distribution. That's where your bonus is allocated at the end of the year. The match + bonus is limited to 35k.

In terms of not investing internationally, one argument supporting that is that most of the big companies in the US are already global companies with billions in sales and assets all over the world, so you're getting international exposure with VTSAX/VTSMX, anyway. It's OK to stick with one fund until you hit the admiral limit, then you can re-evaluate.