Author Topic: Relative newbie looking for feedback to optimize asset allocation  (Read 3127 times)

El Gringo

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Hi everyone. I'm 26 years old, and in the past 6 months I've been trying to learn as much as I can about investment. I'd love some feedback on my portfolio, as I still feel like I have very little grasp on how to wisely allocate. Being a young investor who is open to risk, I'm interested in putting some of my allocation towards bumpier markets like emerging markets or small caps.

Since I started my first job 2.5 years ago, I've been putting 6% of my salary into my 401k to max out my employers 1:1 match of up to 6%.  In January I opened an IRA with Vanguard and maxed it out for 2012. Here's a breakdown of my portfolio. I'm particularly trying to figure out my 401k allocation. I've kept the same allocation since I selected it 2.5 years, back when I knew next to nothing about investing. I'm a little frustrated that my options in my 401k have such high expense ratios compared to the ETFs I have in my Vanguard IRA, but I guess this is a common gripe about 401k's and there's not much I can do about that. The only fund offered by my employer that is under 1% expense ratio is an S&P500 at 0.83%. Otherwise, most funds in the plan are between 1.25 and 2%

In my 401k have one aggressive balanced fund (70%), one moderate balanced fund (5%) one large cap fund (5%), one mid cap fund (5%), one small cap fund (5%), one foreign fund (5%), and one world fund (5%). Do I have too many funds in my 401k? I wanted to diversify, but would it be better to simplify? Am I too conservative? Personal Capital tells me that I have too much large cap stock and not enough small cap, and a little too much in bonds. I'd love to hear people's feedback/advice:

This is a more detailed what I have in my 401k account:
-American Century Strategic Allocation Aggressive: Makes up 49.83% of my overall portfolio (including my IRA) with a 1.79% expense ratio. It's a balanced aggressive fund that leads towards large growth stock. It has 57% US stock, 20% non-US stock, and 19% bonds. I allocated a large percentage to it back when I picked it because it said aggressive, and I knew that as a young investor I wanted to be aggressive. With 19% in bonds though, I now feel like that's not too aggressive....

-American Century Strategic Allocation Moderate: Makes up roughly 3.5% of my overall portfolio with a 1.66% expense ratio. It's 48% US stock, 15% non-US stock, and 30% bond. I'm thinking of getting rid of this and putting it into a small cap fund. It's too conservative in my opinion...

-MFS Val A: this is a large cap value fund that makes up 3.85% of my portfolio with an expense ratio of 1.39%

-Calvert SRI MidCap Growth: makes up roughly 3.7% of my portfolio with an expense ratio of 1.75%

-American Century Small Cap Value: makes up 3.7% of my portfolio with an expense ratio of 1.99%

-MFS International New Discovery: a foreign small/mid cap growth fund that makes up 3.65% of my portfolio and an expense ratio of 1.82%

-American Funds Capital World Growth: a world growth fund that makes up 3.65% of my portfolio with a 1.28% expense ratio.

In my IRA, I have:

-a Vanguard S&P 500 Index ETF that makes up roughly 17.4% of my portfolio (0.05% expense ratio)
-a Vanguard Small Cap ETF that makes up 3.4 % of my portfolio (0.10% expense ratio)
-a Vanguard FTSE Emerging Markets ETF that makes up a little over 3% of my portfolio (0.18% expense ratio)
-a Vanguard FTSE All World ex-US Small Cap ETF that makes up almost 4% of my portfolio (0.25% expense ratio)

GreenGuava

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Re: Relative newbie looking for feedback to optimize asset allocation
« Reply #1 on: May 19, 2013, 02:09:05 PM »
I'm a little frustrated that my options in my 401k have such high expense ratios compared to the ETFs I have in my Vanguard IRA, but I guess this is a common gripe about 401k's and there's not much I can do about that.

Check out this article on suggestions to try to improve your 401(k).  Do you know if any co-workers share your concerns? 

The only fund offered by my employer that is under 1% expense ratio is an S&P500 at 0.83%. Otherwise, most funds in the plan are between 1.25 and 2%

Then what we should be doing is setting up your IRA to account for the poor fund choices in your 401(k).  What are the approximate balances?

My suggestion is going to be to put 100% of your 401(k) into this fund, and we'll put bonds, international stocks, and small caps into your IRA (is it Roth or traditional/rollover?) to make up for this.

Do I have too many funds in my 401k?

Probably.  More importantly, you probably have too many bad funds.



I wanted to diversify

Diversification in investments is achieved by the underlying investments held, not by how they're held.  You probably have a ton of overlap in what stocks the mutual funds you're holding actually own.

, but would it be better to simplify? Am I too conservative? Personal Capital tells me that I have too much large cap stock and not enough small cap, and a little too much in bonds. I'd love to hear people's feedback/advice:

My 401(k) fund assessment says I have too much bonds.  It's wrong because it's short-sighted.  All of my bonds are in my 401(k) (but my 401(k) is far from being only bonds), because that's the bulk of the good fund choices in it - and, again, I'm using my IRA and taxable to make up for the poor funds there.

First things first, let's decide what you want to hold.  If your 401(k) and IRA were one, and you could put the money into whatever types of investments you want, what percentage of it would be in bonds?  Of the stocks, what fraction would be domestic (U.S.) and which would not be? 
(I'll suggest holding off dabbling in other things for the time being)

This is a more detailed what I have in my 401k account:
-American Century Strategic Allocation Aggressive: Makes up 49.83% of my overall portfolio (including my IRA) with a 1.79% expense ratio. It's a balanced aggressive fund that leads towards large growth stock. It has 57% US stock, 20% non-US stock, and 19% bonds. I allocated a large percentage to it back when I picked it because it said aggressive, and I knew that as a young investor I wanted to be aggressive. With 19% in bonds though, I now feel like that's not too aggressive....

Actually, there isn't much of an advantage to 100% stocks over 80% stocks, especially if you're only using tax-advantaged accounts (or if you are treating tax-advantaged and taxable differently). 

-American Century Strategic Allocation Moderate: Makes up roughly 3.5% of my overall portfolio with a 1.66% expense ratio. It's 48% US stock, 15% non-US stock, and 30% bond. I'm thinking of getting rid of this and putting it into a small cap fund. It's too conservative in my opinion...

Wrap funds are best used when they're 100% of your investment, such as by finding one that holds the asset allocation you desire and letting that handle everything for you. 

In my IRA, I have:

-a Vanguard S&P 500 Index ETF that makes up roughly 17.4% of my portfolio (0.05% expense ratio)
-a Vanguard Small Cap ETF that makes up 3.4 % of my portfolio (0.10% expense ratio)
-a Vanguard FTSE Emerging Markets ETF that makes up a little over 3% of my portfolio (0.18% expense ratio)
-a Vanguard FTSE All World ex-US Small Cap ETF that makes up almost 4% of my portfolio (0.25% expense ratio)

Okay, you're comfortable with ETFs.  That'll help when we figure out what's going on with your total portfolio.

I see that your IRA is 27% of your portfolio, inferring that 73% is in your 401(k) (is this accurate?).  Have you maxed out your IRA for 2013?

El Gringo

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Re: Relative newbie looking for feedback to optimize asset allocation
« Reply #2 on: May 19, 2013, 09:03:23 PM »
Thanks GreenGuava! I really appreciate your help and input.

Then what we should be doing is setting up your IRA to account for the poor fund choices in your 401(k).  What are the approximate balances?

I have a little over $14,200 in my 401(k) and a little over $5,500 in my IRA.

First things first, let's decide what you want to hold.  If your 401(k) and IRA were one, and you could put the money into whatever types of investments you want, what percentage of it would be in bonds?  Of the stocks, what fraction would be domestic (U.S.) and which would not be?


I'm still trying to figure that out. I feel like I want to have as little bonds as possible right now. Being 26, I have plenty of appetite for risk and bonds are getting such low yield right now, I'm fine with as much stock as possible. Maybe leave 5% in bonds for diversification? Of the stocks, maybe 67/33 for US/international.

I see that your IRA is 27% of your portfolio, inferring that 73% is in your 401(k) (is this accurate?).  Have you maxed out your IRA for 2013?

You're exactly right about the portfolio. Well, I think it's 28% and 72% to be exact (I was rounding off in some of the percentages above).  No, I haven't maxed out my IRA for 2013 yet. For now I'm putting $50 a week into my IRA. I have a non-profit salary, live in an expensive city, have school loans, and am trying to save some money for grad school, so I'm putting $200 a month for now, and if I feel like I can put in more in particular months, then I will. I'll be traveling abroad for work for some of the summer and I'm hoping to save more money through that so that I can contribute more to my IRA.

Thanks again for your help.

GreenGuava

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Re: Relative newbie looking for feedback to optimize asset allocation
« Reply #3 on: May 20, 2013, 09:11:59 AM »
I'm still trying to figure that out. I feel like I want to have as little bonds as possible right now. Being 26, I have plenty of appetite for risk and bonds are getting such low yield right now, I'm fine with as much stock as possible. Maybe leave 5% in bonds for diversification? Of the stocks, maybe 67/33 for US/international.

Okay.  I'm  not going to be able to achieve this perfectly, due to the poor choices in your 401(k), but we'll come close (and, for now, close enough is close enough). 

Just a heads-up:  I know lots of folks who were in their 20s and investing in 100% stocks in 2006, 2007, most of 2008, all of whom thought they had a high appetite for risk.  That's an easy thought to have when stocks are doing well.  Some of them sold at the bottom and are still in cash, anticipating another big drop before they buy back in.  Unless you were invested five years ago, there's a good chance you don't really know your risk appetite yet.

In any case, I'd put 100% of the 401(k) into the S&P index - it's your only real low cost option.  Put $1000 (5% of your total portfolio) of the IRA into the Vanguard's total bond market ETF, and the rest into the total international stock market index.   If you had more room in the Roth IRA, I'd suggest some extended market (VXF.IV) to balance out the S&P (it is total market minus the S&P 500), but for now, sticking with the S&P is fine.  If you leave this job and roll it to an IRA at Vanguard (definitely suggested once your last contribution hits, given how expensive the plan is), we can re-allocate to get you closer to your desired asset allocation.

El Gringo

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Re: Relative newbie looking for feedback to optimize asset allocation
« Reply #4 on: May 22, 2013, 03:39:12 PM »
GreenGuava,

Thanks for your help and advice.  I know I haven't been tested yet, since the market's been a bull the whole time I've been in it. But I'm also aware that anybody who pulled out in in 2008 made a huge mistake. I have the mindset that, no matter how bad it gets, it makes absolutely no sense to pull out!

And yes, I definitely plan to roll my 401k into an IRA once I leave so that I can get rid of those pesky high ERs!

Thanks again,
Ryan