401k Investments / Allocation

[GGNoob]

I'm trying to figure out the best long term strategy for my wife's 401k. We are 100% stocks (and plan to be for a very long time, if not forever). But because of my wife's 401k fund options, I'm torn between 100% stocks and a cheaper Vanguard Target Retirement Date fund.

Here's my current asset allocation (average ER of 0.37%):

45% - RAFGX American Funds AMCAP R6
25% - VEXAX Vanguard Extended Market Idx Adm
30% - RIGGX American Funds Intl Gr And Inc R6

I chose these funds because they line up with my asset allocation goal and after my research on Morningstar, they seemed to be the best choices of the funds available.

But, even though it would be 10% bonds and wouldn't line up with my goal, I'm considering going with 100% VTTSX Vanguard Target Retirement 2060 Fund. It's cheaper (ER of 0.18%) and the underlying investments are all index funds.

Here are the rest of the options for investments:
ATTIX   American Century LIVESTRONG Inc Instl
MBRSX   AMG Managers Essex Sm/Micro Cap Gr-Inv
CXXRX   Columbia Small Cap Index R5
FVADX   Franklin Small Cap Value Adv
DDFIX   Invesco Diversified Dividend R5
LLDYX   Lord Abbett Short Duration Income I
MWTIX   Metropolitan West Total Return Bond I
MINHX   MFS International Value R4
OIGYX   Oppenheimer International Growth Y
PIMIX   PIMCO Income Instl
PCBIX   Principal MidCap Institutional
SWIXX   Schwab Retirement Advantage Money
VFIUX   Vanguard Interm-Term Treasury Adm
VASVX   Vanguard Selected Value Inv

So my questions...

Are those the best funds to meet my goal of 70% US stocks (with a tilt towards small/mid-cap) and 30% international stocks?

Are there any funds I overlooked that I would be better off investing in?

Would I be wiser to go with the Vanguard TRD 2060 fund because of the indexing and lower fees?

Thanks in advance for looking this over.

-Logan

[Kingomri]

A couple of things right off the bat:

1. The different in performance between 100/0, 90/10, and 80/20 stock/bond splits are minimal because of the rebalancing bonus you obtain, so don't feel like being 90/10 would decrease your returns very much.
2. According to Morningstar, RAFGX and RIGGX (especially RAFGX) have a LOT of money in cash (13.12% and 4.95% respectively). This means with your current AA, you have 7.4% in cash, so you're not 100% stocks anyway. Since cash gets you no return, and inflation eats away at its value, you get negative real return on cash.

So, because of the high cash allocations in the American Funds doing nothing for you and the fee difference (costs matter!), I would recommend putting the bulk of your account into the total retirement 2060 fund VTTSX, and the remainder into the Vanguard extended market fund (VEXAX) since you have stated you want to tilt to small/mid-cap.

One possible allocation then would be:
80% VTTSX
20% VEXAX

This has an average ER of 0.16%, for an annual savings of $21.05 per year for every $10,000 you have invested.

Morningstar Instant X-Ray ( http://portfolio.morningstar.com/Rtport/Free/InstantXRayDEntry.aspx ) shows you'd have a pretty similar mid/small cap tilt to your current portfolio. American Funds tends to have a Growth Tilt (whereas Value, historically, has had a higher return and higher risk).

You'd be tilted a bit more towards US than international than you currently are. You're currently about 65%/35% US/international, whereas the allocation I have above is 75%/25%. If that doesn't bother you, I'd stick with the vanguard-only portfolio. If you really would rather have a higher international allocation, I don't think it would be a big deal to replace a bit of VTTSX with RIGGX to restore the balance, giving:
70% VTTSX
20% VEXAX
10% RIGGX

That brings your average ER down to 0.21%, so you're saving $16.75 per year per $10,000 invested over the original portfolio.

Keep in mind that the dollar amounts saved are just on the expense ratio. American Funds' funds have higher turnover, which incurs more costs that you don't see in the ER.

[GGNoob]

Thanks Kingomri for the detailed post.

I like Vanguards historical returns at this link. So it really does make me wonder if 100/0 is worth it or not.

I did notice all of the cash in the American Funds before I invested in them, so that almost kept me from doing it in the first place. Along with the fees and the turnover, the cash is one of the things thats really making me doubt the decision.

You're 80/20 VTTSX/VEXAX was something else I considered, although I didn't give it much thought yet on what the final allocation would actually be.

All of my problems would just be solved if they had total stock market (us and international) to invest in. Thanks for your response and I'll play around with some different scenarios and see how I like them.

[GGNoob]

So funny thing is that I came home from work today with a letter from my wife's 401k provider. They updated all of the funds to Vanguard index funds! I'm so excited. Starting 8/30 we can invest in the new funds. Only downside is that the only international fund is MINJX. I may skip that and find another account to invest in international stocks with. But I'll look over the funds more soon and pick a final allocation.

[Kingomri]

Glad to hear you have Vanguard funds for your wife's 401k! I'm surprised they don't have any Vanguard international funds - they've got a few of them. Your idea to invest in international using a different account makes sense - you should treat all of your investments as a single portfolio and treat the allocation accordingly. I, for example, have almost all of my IRA and my wife's IRA invested in international index funds because my 401k's international options are lackluster.

[Joel]

Why are you 100% stocks? I would recommend at least a small percentage of bonds in your portfolio... I feel that my allocation is very aggressive at bonds half my age, I couldn't imagine no bonds at all.

[GGNoob]

I'm surprised they don't have any Vanguard international funds - they've got a few of them.

I'm going to contact them and ask. It doesn't make sense if they moved all funds to Vanguard funds except for international.

Why are you 100% stocks?

That's just the allocation I am most comfortable with right now. I have plenty of time before retirement so I do not see a point for bonds. If yields go up I may certainly change my mind, otherwise I will review my plan in about 5 years.

[Scandium]

Why are you 100% stocks? I would recommend at least a small percentage of bonds in your portfolio... I feel that my allocation is very aggressive at bonds half my age, I couldn't imagine no bonds at all.

Why not?
I've been going back and forth on this, and the more I read the less I believe in having much, or any, bonds at my age (early 30s). One tip I saw was being 100% stocks until 35 years old, and for now I think I'll go with that. (this assume I will retire around 50, ~20 years from now).

I'll have to find the source, but read that 10-15% bonds cost you up to 0.5% return each year, and only provided a 4% lower drop in the last crashes (percent points, so  46% drop vs 50%). Hardly worth it to me since I have such a long horizon. There is the advantage of rebalancing into cheap stocks, but again the performance drag does not seem worth it for the potential gain in a relatively unlikely event.