Author Topic: Changing funds to match advice from Mr. Collins book  (Read 2646 times)

Southpaw77

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Changing funds to match advice from Mr. Collins book
« on: December 16, 2016, 10:50:55 AM »
Hello everyone,

My question pertains to getting out of the funds I'm in now with vanguard and going to the single fund approach advocated by Mr. Collins.  I like the simplicity of the approach and the low fees.   All of my funds right now are in various index funds such as vanguard 500, growth, mid cap and small cap.  With expense ratios ranging from .22% to .05%
My question is, what are the drawbacks to making such a move.  I'm concerned with the effect it may have on my overall returns.  I've read that it's not good to jump in and out of funds.  Why is that so?Also, do you generally incur fees moving from an index fund to an index fund?  Thanks again and I hope I provided sufficient information in order to answer the question. 

seattlecyclone

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Re: Changing funds to match advice from Mr. Collins book
« Reply #1 on: December 16, 2016, 11:29:30 AM »
What kind of account are these funds in? If it's an IRA or other retirement account, there's no real drawback to switching. You don't want to be trading back and forth between funds frequently, but a one-time switch to an asset allocation that suits you better is perfectly all right.

If the funds are in a taxable account, you'll likely owe some capital gains taxes when you switch. Given that the funds you already have aren't bad by any means, you might decide to leave what you have invested as is and simply invest new money in the single-fund approach going forward. You'll have to see how much the tax would be and decide whether it's worth paying that one-time fee to simplify your holdings a bit.

Southpaw77

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Re: Changing funds to match advice from Mr. Collins book
« Reply #2 on: December 17, 2016, 11:24:01 AM »
Yes there all in 401ks, IRAs and 529 plans.  This is not the first time I changed my approach. I switched to this approach about a year ago, which loosely follows Ramsey recommendation.  I now know his area of expertise is not investing 😀 Anyway, I'm starting to see how much psychology plays a role in this. For example, being hesitant to move out of my position into VTSAX when the markets are at record highs.  I know you shouldn't try to time the market.  Also, I hope I'll  actually have as much intestinal fortitude as I think I do to deal with the inevitable crash that is coming.  These are all things I can only handle myself but the reduced returns and fees are things that I want to avoid.  Thanks again for the input. 

letired

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Re: Changing funds to match advice from Mr. Collins book
« Reply #3 on: December 17, 2016, 12:13:11 PM »
As someone who has a million different accounts floating around with various investments in each one, I appreciate that how it can be difficult to get everything on the right page. Since most of my accounts contain relatively small sums and none of them have anything that is a 'bad' investment, I've mostly just let them sit. The exception is an old 401k that charged 12.50 every quarter. I rolled that into an IRA asap. I'll probably end up consolidating a few retirement accounts in either a rollover IRA or my current 401k (I have an S&P500 index fund with a low expense ratio). For my taxable investments, I'm mostly letting it sit unless I need it for something (Ie I cashed out a bunch for a house downpayment).

I'm currently in the process of refining my investment strategy by writing an Investment Policy Statement. This is a) forcing me to articulate what I want to do with everything and b) go slowly. I'm at least 10 years out from retirement, and have (hopefully) over half a century during which I will be invested in the stock market. There's no rush!

Radagast

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Re: Changing funds to match advice from Mr. Collins book
« Reply #4 on: December 17, 2016, 02:01:14 PM »
Hello everyone,

My question pertains to getting out of the funds I'm in now with vanguard and going to the single fund approach advocated by Mr. Collins.  I like the simplicity of the approach and the low fees.   All of my funds right now are in various index funds such as vanguard 500, growth, mid cap and small cap.  With expense ratios ranging from .22% to .05%
My question is, what are the drawbacks to making such a move.  I'm concerned with the effect it may have on my overall returns.  I've read that it's not good to jump in and out of funds.  Why is that so?Also, do you generally incur fees moving from an index fund to an index fund?  Thanks again and I hope I provided sufficient information in order to answer the question.
I think there's nothing wrong with your current approach. Do whatever makes it easiest to stay the course, which might include simplifying to just a couple funds. As always, I think you should consider including an international fund. What funds exactly are you using right now and in what percentages?

Financial.Velociraptor

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Re: Changing funds to match advice from Mr. Collins book
« Reply #5 on: December 17, 2016, 02:14:54 PM »
...Also, I hope I'll  actually have as much intestinal fortitude as I think I do to deal with the inevitable crash that is coming...

Recommend you don't discount the value of a bond allocation.  I know it is normally a drag on total portfolio returns but I consider that cost 'sleep at night insurance'.

Southpaw77

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Re: Changing funds to match advice from Mr. Collins book
« Reply #6 on: December 17, 2016, 08:46:07 PM »
I hold hold all index funds with the exception of one international fund in my 401K.  Otherwise, the allocation is vanguard 500 index, growth, mid cap and small cap index funds. Spread equally across the four groups.  I recall in the book he said you obtain international exposure with VTSAX based on the global economy and also get a benefit from not dealing with foreign currency issues.  I'm not quite sure I understand that but I believe that's what he said.  Again, seems very simple and clean.  The bond issue is interesting as well.  I'm possibly 25 years from retirement.. If I decide to go that long. So I guess I'm more in a wealth accumulation stage, which he recommends all stock mutual funds.  Interestingly it was pointed out that portfolios with some bond funds in them actually outperformed the all stock portfolios in the long run.  One problem is that it increases my work (I'm a little lazy at times) 😀 because I would have to rebalance each year, which I haven't been good at so far. Also, interest rates where they are make me a bit weary about bonds.  Decisions, decisions. 

Radagast

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Re: Changing funds to match advice from Mr. Collins book
« Reply #7 on: December 18, 2016, 12:44:04 PM »
I don't see anything wrong with what you are doing now, but I agree that VTSAX could basically replace all of those funds and be virtually identical so you may as well do that. Here is a graph of Vanguard growth, S&P500, total US stock, and international stock ETF's. You can see the US versions are pretty similar but the international one is very different. I would say it is not correct that the US is similar enough to international that it is not necessary to own both. If you want bonds intermediate to long term US treasuries are likely to provide the most diversification benefit for a small amount. A balanced fund will also work but might result in more taxes if not sheltered.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=12%2F17%2F2016&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=VEU&allocation1_1=100&symbol2=VTI&allocation2_2=100&symbol3=VUG&allocation3_3=100

Southpaw77

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Re: Changing funds to match advice from Mr. Collins book
« Reply #8 on: December 19, 2016, 06:56:56 PM »
I don't see anything wrong with what you are doing now, but I agree that VTSAX could basically replace all of those funds and be virtually identical so you may as well do that. Here is a graph of Vanguard growth, S&P500, total US stock, and international stock ETF's. You can see the US versions are pretty similar but the international one is very different. I would say it is not correct that the US is similar enough to international that it is not necessary to own both. If you want bonds intermediate to long term US treasuries are likely to provide the most diversification benefit for a small amount. A balanced fund will also work but might result in more taxes if not sheltered.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=12%2F17%2F2016&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&a
nnualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=VEU&allocation1_1=100&symbol2=VTI&allocation2_2=100&symbol3=VUG&allocation3_3=100

Thanks Radagast.  I'm leaning toward 90% stock 10% bond.  I'll have to find the discipline to rebalance 😀  Also, definitely a good point to hold an international fund.  So, thinking VTSAX & Int. Fund in the 90% VBTLX FOR THE 10% What percentage should that international exposure be? 5% of the 90? Thanks again for all the advice.

Radagast

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Re: Changing funds to match advice from Mr. Collins book
« Reply #9 on: December 19, 2016, 07:35:13 PM »
I don't see anything wrong with what you are doing now, but I agree that VTSAX could basically replace all of those funds and be virtually identical so you may as well do that. Here is a graph of Vanguard growth, S&P500, total US stock, and international stock ETF's. You can see the US versions are pretty similar but the international one is very different. I would say it is not correct that the US is similar enough to international that it is not necessary to own both. If you want bonds intermediate to long term US treasuries are likely to provide the most diversification benefit for a small amount. A balanced fund will also work but might result in more taxes if not sheltered.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=12%2F17%2F2016&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&a
nnualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=VEU&allocation1_1=100&symbol2=VTI&allocation2_2=100&symbol3=VUG&allocation3_3=100

Thanks Radagast.  I'm leaning toward 90% stock 10% bond.  I'll have to find the discipline to rebalance 😀  Also, definitely a good point to hold an international fund.  So, thinking VTSAX & Int. Fund in the 90% VBTLX FOR THE 10% What percentage should that international exposure be? 5% of the 90? Thanks again for all the advice.
We are now getting into trivial highly debated parts.

My strong opinion is that you should have not more than 50% in the US stock market to guard against deep risks. That would give you a 50/40/10 portfolio. This mostly goes for retirees though, it does not matter much until you are more than halfway to retirement. For now it doesn't matter much. My opinion is still that 30%-50% of the 90% should be international. David Swensen suggested that once you have more than 30% of the total invested internationally "currency diversification" becomes "currency risk" so a constant 30% of the total in international may be right.

I like US Treasury bond funds. They have tended to stand up better in a crisis. Lots of people will point out that total bond has better yields and will thus be better in the long term. That will be true six years out of seven, until stocks crash. Total bond has a large number of corporate bonds in it which tend to go down at the same time as stocks because investors fear credit downgrades or bankruptcies. At the same time prices on "riskless" treasury bonds have tended to go up. The entire period of better returns from total bond goes to nothing in this one year because treasuries will often be the only asset going up. This has tended to make them better for a small rebalanced amount.


Kaspian

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Re: Changing funds to match advice from Mr. Collins book
« Reply #10 on: December 28, 2016, 12:02:03 PM »
I hold hold all index funds with the exception of one international fund in my 401K.  Otherwise, the allocation is vanguard 500 index, growth, mid cap and small cap index funds. Spread equally across the four groups.
....
I'm possibly 25 years from retirement.
....
Decisions, decisions.

If it's pretty much all decent index funds as it is, my advice would be to just let it simmer.  (Depending on how much money we're talking about?)  Make 100% sure, and think carefully about it, that the move isn't to alleviate a little investing boredom by adding the excitement of something new.  Proven time and time again, the less "decisions, decisions" you make regarding a portfolio the greater its chance of success.

Especially at year end, I know the feeling--my very skin is itching to move things around, rebalance, maybe get my hand on a "better" index fund for my bonds.  It's the need to do *something* we all have to supress.  Just letting it be feels completely unnatural.   That said, if you do go ahead with a major (second!) change after just 12 months, this time write it down that you WILL NOT EVER tinker again for years and years and years--on the pain of being hot iron branded and having your bones broken on the wheel.
« Last Edit: December 28, 2016, 12:04:57 PM by Kaspian »

NoStacheOhio

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Re: Changing funds to match advice from Mr. Collins book
« Reply #11 on: December 28, 2016, 12:16:57 PM »
Yes there all in 401ks, IRAs and 529 plans.  This is not the first time I changed my approach. I switched to this approach about a year ago, which loosely follows Ramsey recommendation.  I now know his area of expertise is not investing 😀 Anyway, I'm starting to see how much psychology plays a role in this. For example, being hesitant to move out of my position into VTSAX when the markets are at record highs.  I know you shouldn't try to time the market.  Also, I hope I'll  actually have as much intestinal fortitude as I think I do to deal with the inevitable crash that is coming.  These are all things I can only handle myself but the reduced returns and fees are things that I want to avoid.  Thanks again for the input.

Current valuations are largely irrelevant when you're talking about going from a mix of U.S. equity index funds into one broad U.S. equity index fund. Your cost basis will change, but who cares? You aren't paying taxes on the gains or anything.

markpst

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Re: Changing funds to match advice from Mr. Collins book
« Reply #12 on: December 29, 2016, 12:26:25 PM »
I think there is some value in holding small (and possibly mid) cap index funds. I don't think many people realize how VTSAX (Total Market Fund) is weighted towards the big stocks. It is cap-weighted, which means since Apple's capitalization value is 2.45% of the total market, it is that percentage of VTSAX. The top 10 stocks alone make up 15.4% of VTSAX.

Note: Apple makes up 3.12% of the Vanguard 500 fund.

I am still a fan of VTSAX. I am just also a fan of small cap. Some would argue the returns are close enough just holding VTSAX that the lower fee is worth the difference. I would rather put some of my money in small cap and pay 0.08% (Admiral shares) instead of 0.05%.

I haven't figured everything out myself yet, still working out the international %, etc. I enjoy the conversation here.

Paul der Krake

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Re: Changing funds to match advice from Mr. Collins book
« Reply #13 on: December 29, 2016, 12:51:12 PM »
Regarding funds in taxable accounts: unless it's a large balance you will have opportunities to sell them in a tax efficient-ish way.

Maybe one year the market drops and you want to harvest 3k worth of losses. Or maybe you need to need to sell some funds anyway for a downpayment or college tuition. Or maybe you find yourself in the 15% bracket one year for one reason or another.

But as others have pointed out, it's not like the funds you mentioned are horrible, so take your time until a good opportunity to sell shows up.

Real example from personal experience: I had purchased about worth highly tax inefficient funds in 2012, early in my investing career when I was a young lass who didn't know shit about tax efficiency. In 2015, I married a low earning spouse. When doing a dry run of our projected 1040 in December, I realized that by filing jointly, we would be under the 15% bracket by a couple thousands, where long-term capital gains are taxed at 0% (praise Congress). I sold about 10k worth of suboptimal investments right around Christmas, in time to harvest a couple thousands worth of capital gains for free, and we ultimately squeaked under the threshold by like $50. Score!

I still have about $20k worth of investments that I would like to part with, but am in no rush to do so. Most likely they will be on the chopping block either for a home downpayment, at the first major market downturn, or in our first year of retirement.

The moral of the story is to keep abreast of the intricacies of the tax code and keep your eyes open.