Advice for 2nd year Roth IRA contribution / rebalancing / general amateur-ness

[Miss Growing Green]

We finally delved into opening ROTH IRAs last year.  I'm sure I could have implemented a better strategy, but I took the approach of using a 30-day free trial of MorningStar Premium and creating a portfolio of mutual funds that was high rated (4 and 5 stars) and performed well.
I then did a "real life" purchase of those funds with $5,000 for myself and $5,000 for my husband (the max allowed for 2012).

The portfolio performed really well last year with over 25% returns.

We are planning to keep these long-term (i.e. 35-40 more years; I'm currently 29) and ride out any market fluctuations (hopefully).  I prefer an aggressive/high-risk strategy and our allocation reflects that.

My question is... what do I do with our two $5,500 contributions this year?  Buy more of the exact same allocation?  Buy other stuff?
Should I rebalance my current holdings?  I'm feeling a bit overwhelmed here, but my initial intuition is to just buy the exact same allocation I did last year.

When I think about rebalancing, I usually think about keeping your allocation between stocks and bonds at a certain target.  Does the same principal hold true for mutual funds that each have their own allocation of stocks and bonds?  Do you want to keep them at a certain target %?

I originally invested in 5 funds, allocating the funds as such: 25%, 25%, 25%, 12.5%, 12.5%.  The current allocation is: 25%, 27%, 25%, 12.4%, 10.5%... so, not much deviation, which makes me think rebalancing isn't going to be worth it at this point.

I also have around $11k in an employer-sponsored 401k that is getting around 20% returns (over the 4 years I've had it).  It's a 85% stocks and 15% bonds.  Should I leave it as-is or roll it over into my Roth (or something?).  For some reason I get charged a $10/month fee for the 401k.

These are all through Fidelity, btw.

Sorry for my lack of knowledge; I hope I'll still be a candidate for advice ;)

[Eric]

The portfolio performed really well last year with over 18% returns.

You're missing some context here.  18% does sound really good, until you compare that to the S&P 500, which went up about 32% in 2013.  (I believe that includes dividends, I think it was 29% without).  Unless you were pretty heavy in bonds, and your "aggressive/high risk" classification makes me think you're not, I'm not sure your funds performed as well as you think they did.

[Frankies Girl]

I agree with Eric; 18% isn't that great for last year.

If your account(s) are with Fidelity, you'd do better to look at the Spartan series of index funds as they have the lowest expense ratios and they have funds that match up to Vanguard's index funds.

And I'd call ASAP and find out what that $10/month charge was actually for. According to the site, there's no annual fee. https://www.fidelity.com/why-fidelity/pricing-fees.

You can't move or roll an active 401K. Also, don't put too much weight into Morningstar's rating system as it has been stated as flawed from my reading.

The basic tenets of investing (as far as MMM, Bogleheads and JL Collins and others that are popular around these parts) is to go with simple, low-cost index funds - usually Vanguard's index funds, but it is possible to replicate with other financial houses like Fidelity and T Rowe Price. You don't need a bunch of different funds, just need to understand how the market generally works, what your risk level is/asset allocation and mostly just set it up and let it alone.

If you haven't already, read Jim Collins' stock series:
http://jlcollinsnh.com/stock-series/

For more info on index fund investing, check out Bogleheads:
http://www.bogleheads.org/wiki/Main_Page

Since you said you were going aggressive and you're looking at a time horizon of 30+ years, I'd suggest simplifying your Roths into  one fund: FSTVX (Fidelity's Spartan total market index, which is the mirror of Vanguard's VTSAX).

You can see some other equivalent funds Vanguard/Fidelity here:
http://www.bogleheads.org/wiki/Fidelity

[Miss Growing Green]

I'm sorry, I think I calculated my returns incorrectly for last year.  We invested the $10k in April, so when I originally looked at my returns I accidentally spread it out over 12 months, when it should have been 8.5.  Which means my returns were closer to 25%, but still below the S&P I suppose.

The funds I invested in last year are:
EGINX   Invesco European   12.50%
HFMDX   Hennessey Cornerstone Midcap   25%
JATTX   Janus Triton Fund   25%
MAPIX   Matthews Asia Dividend   12.50%
PIXDX   PIMCO Fundamental Index Plus 25%

Thanks, I'll check out the FSTVX

[Frankies Girl]

I'm sorry, I think I calculated my returns incorrectly for last year.  We invested the $10k in April, so when I originally looked at my returns I accidentally spread it out over 12 months, when it should have been 8.5.  Which means my returns were closer to 25%, but still below the S&P I suppose.

The funds I invested in last year are:
EGINX   Invesco European   12.50%
HFMDX   Hennessey Cornerstone Midcap   25%
JATTX   Janus Triton Fund   25%
MAPIX   Matthews Asia Dividend   12.50%
PIXDX   PIMCO Fundamental Index Plus 25%

Thanks, I'll check out the FSTVX

I just did a quick google on those funds and they all are HIGH expense ratios - lowest one was .93% and they mostly were in the 1.40% range - that's a big ouch! For comparison, the FSTVX has an expense ratio of 0.06%... so lots of your investments are getting eaten up by high fees.

[beltim]

Frankies Girl has some good suggestions on fees, alternatives to mutual funds, and places to do some reading.

However, I disagree with both Frankies Girl and Eric that your returns were necessarily bad.  If one of your 25% allocations were in emerging markets, for examples (definitely an aggressive allocation), well, those were down last year.  Many bond funds fell too, some significantly depending on the type. 

[dfrei]

This sounds like a Dave Ramsey-type investment style, which isn't exactly optimal, but isn't horrible either. The most important things you can do are save a lot of money and optimize taxes, and then this allocation stuff comes after that in order of importance. I'm not any sort of guru, but here are a few things I have learned.

First, when you get some spare time on your hands to do some reading, the best sources for answers to these questions that I have read so far are Common Sense on Mutual Funds by John Bogle and The Four Pillars of Investing by William Bernstein. Also, anything jlcollinsnh says on the topic would be helpful in figuring out a game plan. As Bogle discusses, don't put too much trust in the Morningstar fund ratings, because they don't necessarily correlate to high future returns.

Second, buying more mutual funds isn't going to get you the additional diversification or higher returns that you are looking for unless they are invested in different asset classes. You likely have a lot of overlap among funds in the underlying assets when you buy a lot of different stock funds. For example, several of the funds you own probably hold Microsoft stock as the underlying asset, so buying different funds that all hold Microsoft stock isn't going to be fundamentally any different than just putting more money in the same fund. (The only difference would be the way different managers trade stocks in the funds if you are going with actively managed funds. But index funds are more likely than actively managed funds to make you more money after you take fees into account. See the Bogle book.)

Third, while on the topic of fee, head over to Vanguard and compare the expense ratio to what you are currently paying at Fidelity. If you are paying more than 0.20% of your assets in expenses, then you are paying Fidelity too much to invest your money and should considering moving to Vanguard. Bogle also talks a lot about this in his book.

Bogle recommends keeping it simple, and in that vein I personally have the following allocation for stock holdings: 80% VTSAX (Total Stock Market Index [VTSMX for less than $10k balance]) and 20% VTIAX (Total International Index [VGTSX for less than $10k balance]). You don't even need to get this fancy though. You could put everything in VTSAX/VTSMX and be fine.

I know MMM has also said on his site and in some interviews that he doesn't hold any bonds because they have negative returns after taking inflation into account, and I tend to agree. I use LendingClub as an investment with bond-type behavior, but this an untried investment class and is a lot riskier than traditional bonds are. LendingClub does offer both Roth and Traditional IRA investing options, although they ding you with a $100 fee up front if your initial IRA investment is less than $5k.

[beltim]

That's an interesting collection of funds.  A Europe fund, an Asia fund, two Midcap/smallcap domestic funds, and the fundamental index (which appears to be a weird, highly leveraged fund that invests in bonds and derivatives).  Definitely aggressive, and one where I'd expect little correlation to the S&P 500. 

If you want to stay with this sort of portfolio, the question is: why do you want to own these types of assets?  I can come up with very good reasons for the first four, but you need to be able to come up with good reasons for yourself (and they may be very different!).

[beltim]

Second, like Frankie's Girl said already, buying more mutual funds isn't going to get you the additional diversification or higher returns that you are looking for unless they are invested in different asset classes. You likely have a lot of overlap among funds in the underlying assets when you buy a lot of different stock funds. For example, several of the funds you own probably hold Microsoft stock as the underlying asset, so buying different funds that all hold Microsoft stock isn't going to be fundamentally any different than just putting more money in the same fund.

Actually, the only two funds here that may overlap are the Hennessy Midcap and Janus Triton (and I bet neither of them hold Microsoft!). 

Miss Green, since your funds are in different asset classes (with the exception of the two I just mentioned), rebalancing in general is a good idea.  You can decide what you want your range to be, but something like 25% ± 2% might be good for you if you check once a year.  The easiest way to rebalance when you're continuing to add money is to simply figure out how much money to add to each fund to get the percentages back to your target.  In this case the percentages won't be very much different, except probably for the 12.5% fund that's at 10.5% now.

[dfrei]

Second, like Frankie's Girl said already, buying more mutual funds isn't going to get you the additional diversification or higher returns that you are looking for unless they are invested in different asset classes. You likely have a lot of overlap among funds in the underlying assets when you buy a lot of different stock funds. For example, several of the funds you own probably hold Microsoft stock as the underlying asset, so buying different funds that all hold Microsoft stock isn't going to be fundamentally any different than just putting more money in the same fund.

Actually, the only two funds here that may overlap are the Hennessy Midcap and Janus Triton (and I bet neither of them hold Microsoft!). 

Not sure how I will ever live with myself now that I have contributed to the spread misinformation on the internet! (You are right though, thanks for the correction.)

[Miss Growing Green]

I really appreciate all the responses!  I didn't want you guys to think I'd done a dump and run question... I'm just taking time to go over all the advice you gave me and I've been reading up on the Bogleheads site, as suggested.

In response to Frankie's Girl and others that commented about the expense ratios - I was under the impression that ideally you want to keep expense ratios low, but you still need to look at the overall performance of the fund.  For example, my PIXDX has an expense ratio of 1.19%, which might seem high, but when compared to the S&P 500 or the FSTVX that was recommended to me, it outperforms both by a long shot:

http://quote.morningstar.com/fund/chart.aspx?t=PIXDX&region=usa&culture=en-US

(that chart is already taking expense ratios into account)

In fact, every one of my funds, outperformed the S&P 500 and the FSTVX since the crash in ~2009.  Am I missing something here?  I get the idea behind keeping things "simple", but if the numbers don't make sense, then, does the "simple" argument still hold true?


I know five funds might seems like a lot but here's my reasoning behind them:

I wanted to "play it safe" by having the bulk of my funds in US markets, and partially because I'm more familiar with them, so 75% of my investment was allocated to the US market:

HFMDX   Hennessey Cornerstone Midcap   25%
PIXDX   PIMCO Fundamental Index Plus 25%
JATTX   Janus Triton Fund   25%

The PIXDX is a large blend, HFMDX is a mid-cap growth fund, and the JATTX is a small growth fund.  There is no overlap between the funds when you look at the top 10 holdings.  I chose the separate out the large, mid, and small, rather than just getting an "all-in-one" fund because historically, those three sectors have cyclical good and bad stretches, and I figured I could take advantage of that through rebalancing (i.e. buying more PIXDX when large is doing poorly, selling HFMDX when mid-caps do well).

I also wanted to invest in foreign funds, and allocated 25% of my investment there:
EGINX   Invesco European   12.50%
MAPIX   Matthews Asia Dividend   12.50%

I chose to split the 25% up between a European fund and an emerging Asia markets fund because I see long-term potential in both avenues.

Soo, with all that new information in mind, are there further suggestions for optimizing this strategy?  I really appreciate the insight!