Author Topic: before I make the switch from 70/20/10 to an all in target date fund...opinions  (Read 4062 times)

Late_Bloomer

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Age: 45
  • Location: Texas
  • Counting every penny.
Hello. Still new around here and have  been debating on an allocation switch, but before I do, I'd like to get opinions on what I have now and what I am thinking of changing.

My decisions, up til now, have been based off a 14 year time frame before I retire. Currently maxing a tsp and 401k each at 18,000 per year. At the moment, and for the past few months, I've had a 70/20/10 (all stock) large cap/mid,small cap/international portfolio. My object with this allocation has been for the most optimal growth I could achieve in a 14 year span, with the goal of reallocating into an 80/20 bond/stock portfolio upon retirement. I'm coming late to investing at age 41 but have calculated I can build enough wealth to sustain my lifestyle with 14 years of investing with my current savings rate.

I have the option in both the tsp and 401k to go all in on a life cycle (target date) option. Meaning, a predetermined allocation among stocks/bonds/fi that would be aggressive at first and tailor off as the years go by until it ends into a conservative bond/fi/stock option that would hold steady from retirement into the future.

From the tsp perspective, this seems like a good option. Looking at pie graphs for it's 2030 target date fund (I would be retiring in 2029) it starts out at about what I have now with 80% stocks, however, my current allocation is 100% stocks. I can't compare the 401k because they don't have the same handy comparison tools the tsp has, but from it's written description, it seems to be similar in it's starting point.

The benefit to these target date funds is A) you are all in and paying only one expense fee, vs paying an individual fee for each stock option as my current allocation. B) it re balances itself and adjusts it's percentages from aggressive to conservative as time goes on, vs me having to re balance it myself and adjusting how aggressive I want to be as time goes on. I am all about the "keep it simple stupid" mindset but am asking for opinions on target date funds vs individual maintenance of what I'm doing now to get more insight on what you believe is a more sound option.

I currently believe the target date option seems to be the best for the "set it and forget it" convenience, but is it relative to an aggressive attempt at growth as my 80/20/10 stock option? I do not have fears of volatility and market fluxuations, it's just I don't know enough about it to be confident I'm making the best choice for my allocation.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10993
  • Location: Just south of Canada
    • Here's how you can support science today:
Quote
The benefit to these target date funds is A) you are all in and paying only one expense fee, vs paying an individual fee for each stock option as my current allocation. B) it re balances itself and adjusts it's percentages from aggressive to conservative as time goes on, vs me having to re balance it myself and adjusting how aggressive I want to be as time goes on. I am all about the "keep it simple stupid" mindset but am asking for opinions on target date funds vs individual maintenance of what I'm doing now to get more insight on what you believe is a more sound option.

If the total amount you will pay in fees will be lower utilizing their target date funds (especially if the difference is >>0.1%) I think that would be a compelling reason to switch. It will change your asset allocation somewhat, which is the only negative, but those target date funds typically are fairly diverse.  However, if the fee is based on a percentage of assets, it doesn't matter if you have five funds with a 0.3% fee or a single fund with the same fee.  Make sure you know which you are dealing with here.

Once you leave your job you can roll over your 401(k) into your own IRA account and decide which fund(s) you want to invest them in... for example one of Vanguard's target date funds or a few different index funds. Don't forget, you don't necessarily have to stop at $18k in your 401(k).

branman42

  • 5 O'Clock Shadow
  • *
  • Posts: 36
Don't forget, you don't necessarily have to stop at $18k in your 401(k).
Why Not?

nereo

  • Senior Mustachian
  • ********
  • Posts: 10993
  • Location: Just south of Canada
    • Here's how you can support science today:
Don't forget, you don't necessarily have to stop at $18k in your 401(k).
Why Not?
Because you can contribute more.  It's just not tax-deferred up front.
Why would you want to contribute more if it doesn't reduce that year's tax burden?  Read this for a good explanation.

Late_Bloomer

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Age: 45
  • Location: Texas
  • Counting every penny.
Quote
However, if the fee is based on a percentage of assets, it doesn't matter if you have five funds with a 0.3% fee or a single fund with the same fee.  Make sure you know which you are dealing with here.

I honestly have no idea if they are based this way. For example, they are all listed with the same description, just different %. The target date fund is 0.87, however I'm currently paying 3 different fees for the stock split. 0.31, 0.31, and 1.06. This is how the 401k is charged.
« Last Edit: September 21, 2015, 09:40:33 PM by Barrett73 »

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2223
  • Location: EastCoast
Quote
However, if the fee is based on a percentage of assets, it doesn't matter if you have five funds with a 0.3% fee or a single fund with the same fee.  Make sure you know which you are dealing with here.

I honestly have no idea if they are based this way. For example, they are all listed with the same description, just different %. The target date fund is 0.87, however I'm currently paying 3 different fees for the stock split. 0.31, 0.31, and 1.06. This is how the 401k is charged.

Well then it's easy. With 70/20/10 at .31/.31/1.06 you're paying a combined fee of 0.385%. Less than half the 0.87% for the target date fund. That's my experience with those as well; the fees are higher, even for the vanguard versions. Although it's not totally fair as the target date fund has bonds, which generally cost more. You're paying for convenience. You just have to decide if that's worth it to you.

Personally I prefer to control my own allocation, and who knows how they'll change it in the future. If this is in an IRA it's easy to jump out if you change your mind though.
« Last Edit: September 22, 2015, 07:41:52 AM by Scandium »

Late_Bloomer

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Age: 45
  • Location: Texas
  • Counting every penny.
I hear what you are saying Scandium. I mean, I assume I can't really go wrong with either. I just don't know if paying more for the convenience is worth it. I still have much  more research to do an overall investing. I don't quite have a handle on re balancing, which I have to do if I keep my current allocation. As well as knowing when to start drawing down the stock portion and up'ing the bond portion relative to my 14 year time frame.

When I first found MMM and decided to take charge of my investing, it seemed so easy the way he explained how to pick low cost equities and basically forget it and let it ride. However, the more I read from forum members, and outside sources, it just doesn't seem so simple. For every example of an allocation there is always that caveat of "doing it right" or risking losing your gains. I know full well that the market fluxuates. Hell, I've been at a negative loss for the past two months with my current allocation. I'm not about to sell my shares and put my money in stocks. I've researched enough to know how that isn't a good option.

For me, I feel there is more pressure to do it right because I'm coming so late in age to the game. If I was 20 again and just starting out, it makes more sense to pick an option and go with it. My 14 year time line is all I have, and it isn't much of a stretch to have investments grow so I'm constantly agitated wondering if I have chosen wisely.


nereo

  • Senior Mustachian
  • ********
  • Posts: 10993
  • Location: Just south of Canada
    • Here's how you can support science today:
I hear what you are saying Scandium. I mean, I assume I can't really go wrong with either. I just don't know if paying more for the convenience is worth it. I still have much  more research to do an overall investing. I don't quite have a handle on re balancing, which I have to do if I keep my current allocation. As well as knowing when to start drawing down the stock portion and up'ing the bond portion relative to my 14 year time frame.

Given the difference in fees, I'd keep your current strategy and learn to rebalance.  Rebalancing is really quite easy.
1) pick a frequency (annual is good, quarterly is ok too) and set definitive dates to do your rebalancing (e.g. Jan 1st)
2) Set your investment percentages.  You've already done this with 70/20/10. 
3) on the rebalancing date (#1 above) sell things that are above your threshold in step #2 and purchase whatever is below your threshold.  Done! 

It might take you 20 minutes mix. with a calculator once per year.  Beyond that, set it and forget it until the next rebalancing date.

As for how much you should have in bonds... that depends on your risk tolerance and personal goals.  Historically, the correct answer is "very little, but only if you can avoid panicking when the market tanks".  an all stock portfolio wins out against a blended portfolio something like 80% of historical periods.

BUT... you might even be over thinking things there.  Once you leave your job you can roll over your 401(k) to something even lower cost like Vanguard's blended funds or target-retirement funds, all with lower fees than you are paying now.  Betterment, Fidelity and others have similar options.  You won't have to worry about rebalancing or having the correct amount of bonds once you pick the ones you want. 

Late_Bloomer

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Age: 45
  • Location: Texas
  • Counting every penny.
I always get good information when I ask here. Thanks everyone. I feel keeping what I have is probably for the best since I have total control over how it's managed. I do have to ask though, is there a specific time of year that is better than others to do the annual re balance? I've heard Dec/Jan, however I've also heard to do it around the fiscal year date. Any further insight on that would be helpful.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2223
  • Location: EastCoast
I believe vanguard examined that and found it doesn't matter? But I can't quote chapter and verse..

nereo

  • Senior Mustachian
  • ********
  • Posts: 10993
  • Location: Just south of Canada
    • Here's how you can support science today:
I always get good information when I ask here. Thanks everyone. I feel keeping what I have is probably for the best since I have total control over how it's managed. I do have to ask though, is there a specific time of year that is better than others to do the annual re balance? I've heard Dec/Jan, however I've also heard to do it around the fiscal year date. Any further insight on that would be helpful.
can't point you to any exact data, but I believe what is more important is that you pick a date well ahead of time and then stick to that date (or at least a specific week).  That prevents you from introducing your own bias into rebalancing... for example: "oh, i haven't rebalanced in a while, but my small caps are going up like gangbusters so I think i'll wait a few more weeks to see if the rally keeps up!"