Author Topic: Help with Fund Choices  (Read 4548 times)

AlwaysLearningToSave

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Help with Fund Choices
« on: April 06, 2016, 06:48:08 AM »
My 401(k) plan offers the following investment choices, along with my current investment elections.  My current election choices are the result of me telling the financial adviser associated with the plan that I want the bulk of my assets to be in the Vanguard 500 fund and then blindly following his advice as to the rest of the choices.  I don't know enough to know whether this is a good breakdown given the choices available and would like input from the MMM forum experts.  What I do know is that the other funds available are actively managed funds with significantly higher expense ratios than the Vanguard 500 fund.

Investment Name                                     Investment ID       Current Election %
Alger Spectra - Z                                          ASPZX                                 ER: 0.93%     
American Century One Choice 2020 - Inv   ARBVX
American Century One Choice 2025 - Inv   ARWIX
American Century One Choice 2030 - Inv   ARCVX
American Century One Choice 2035 - Inv   ARYIX
American Century One Choice 2040 - Inv   ARDVX
American Century One Choice 2045 - Inv   AROIX
American Century One Choice 2050 - Inv   ARFVX
American Century One Choice 2055 - Inv   AREVX
American Century One Choice Ret - Inv           ARTOX
American Funds EuroPacific Growth - R6           RERGX                       20%  ER: 0.49%
American Income Fund of America - R-6           RIDGX                                 ER: 0.28%
Baron Small Cap - Instl                                   BSFIX                         5%   ER: 1.04%
BlackRock Equity Dividend - Instl                   MADVX                                ER: 0.70%
Federated Total Return Govt Bond - Instl           FTRGX                                 ER: 0.31%
FFTW Income Plus A Net 50                           QEUXQ                                ER: 0.50%
Fidelity Contrafund                                           FCNTX                                  ER: 0.64%
Ivy Mid Cap Growth - I                                   IYMIX                         5%    ER: 0.99%
John Hancock Discipl Value Mid Cap - I           JVMIX                        5%    ER: 0.87%
Lord Abbett Short Duration Income - I           LLDYX                        5%     ER: 1.05%
Oppenheimer Developing Markets - Y              ODVYX                       10%    ER: 1.05%
PIMCO Investment Grade Corp Bond - Instl   PIGIX                                    ER: 0.50%
PIMCO Real Return - Instl                           PRRIX                                   ER: 0.45%
T. Rowe Price Small-Cap Value                    PRSVX                        5%     ER: 0.96%
Vanguard 500 Index - Admiral                    VFIAX                         45%    ER: 0.05%

Assumptions

I am in my late 20s with lots of time ahead of me.  Thus I am comfortable with an aggressive allocation.

Assume that this plan currently represents my entire portfolio.  I have other IRAs but this plan represents the significant majority of our investments while we are still paying down student debt. 

Also assume that as of January 1, 2017, student debt will be paid off and we will be able to pour money into Vanguard IRAs.  Thus, in the future it may be possible to move toward an overall portfolio balance where this 401(k) plan holds only the Vanguard 500 fund while other funds are held in the IRAs. 

Specific Questions

Are my current investment elections okay? 
If not, what should I change it to now?
What should I aim for when I am able to use funds outside this 401(k) plan to balance my portfolio?
What are some good resources to read so that I can understand why you recommend the choices you recommend?

Thanks for the help and input!

Edited to Include Expense Ratios.
« Last Edit: April 07, 2016, 06:55:40 AM by AlwaysLearningToSave »

GrOW

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Re: Help with Fund Choices
« Reply #1 on: April 06, 2016, 07:43:39 AM »
Could you add a fees column and/or note which funds are index funds? The vanguard fund may be the only index fund but I am not sure on just a quick glance.

A couple quick thoughts:

A lot of fund choices there. Many with small percentages. You likely are not gaining as much diversification as you think for the added complexity. You may find that 2-3 funds meet your risk profile.

Bond allocation is light. May fit your risk profile though. Also it's hard to tell if some of the funds have some bond holdings. Check out Morningstar's portfolio X-ray feature for a free easy way to analyze your whole portfolio. If still 5%, it fits in my comment above. Think about reducing complexity.

How do you feel about your international funds? If you are a big believer in foreign markets and their potential, great. But if you are doing it just to have some foreign exposure since you read it can be "a good idea" or "it helps with overall diversification", check out this great post by jlcollins and it may help you further reduce your portfolio complexity - http://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/

forummm

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Re: Help with Fund Choices
« Reply #2 on: April 06, 2016, 08:55:15 AM »
Your advisor put you in that based on your desire to be in the VG 500? And you're 20s?

I'd say 100% VG 500 in the 401k and forget about it until you are close to FIRE. If you want intl or bonds you can put those in your taxable or IRA.

Trip

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Re: Help with Fund Choices
« Reply #3 on: April 06, 2016, 09:13:35 AM »
Your advisor put you in that based on your desire to be in the VG 500? And you're 20s?

I'd say 100% VG 500 in the 401k and forget about it until you are close to FIRE. If you want intl or bonds you can put those in your taxable or IRA.

I'd have to agree with this. I prefer to keep things simple and diversified. This single fund can do both. This is exactly what I'm doing with my 401K. My IRA is in VTSAX instead.

MustacheAndaHalf

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Re: Help with Fund Choices
« Reply #4 on: April 06, 2016, 10:19:36 AM »
" Thus I am comfortable with an aggressive allocation."

You're over-complicating it.  A conservative portfolio has more bonds than an aggressive portfolio.  So if you want to be aggressive, show it in your bond allocation rather than the equity funds you select.

I'm also worried you're picking by past performance, and picking aggressive past performance.  That won't help.  Past performance doesn't the future performance - the SEC makes every fund prospectus say as much.  Actually, the best way to predict the best funds is with the expense ratio: how much the fund takes of your money each year, just to keep running.

One of the problems with active funds is that their costs tend to be larger than their performance.  They beat an index by 0.1%, but then charge you 0.6%, so ultimately they lose by 0.5% to just holding an index (just an example - not for a specific fund).

forummm

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Re: Help with Fund Choices
« Reply #5 on: April 06, 2016, 10:56:55 AM »
I'm also worried you're picking by past performance, and picking aggressive past performance.  That won't help.  Past performance doesn't the future performance - the SEC makes every fund prospectus say as much.  Actually, the best way to predict the best funds is with the expense ratio: how much the fund takes of your money each year, just to keep running.

One of the problems with active funds is that their costs tend to be larger than their performance.  They beat an index by 0.1%, but then charge you 0.6%, so ultimately they lose by 0.5% to just holding an index (just an example - not for a specific fund).

Hence part of why going VG 500 is the best. It has the lowest cost of any fund in the industry.

AlwaysLearningToSave

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Re: Help with Fund Choices
« Reply #6 on: April 06, 2016, 01:00:44 PM »
Thanks for the responses so far.  I'm seeing that I just need to do some more in-depth reading to determine how comfortable I am with foregoing international stocks. 

@GrOW:  I'll add expenses when I have time available to do so.

A conservative portfolio has more bonds than an aggressive portfolio.  So if you want to be aggressive, show it in your bond allocation rather than the equity funds you select.

I agree.  This is why I only have 5% bonds. 

I'm also worried you're my financial advisor is picking by past performance, and picking aggressive past performance. 

One of the problems with active funds is that their costs tend to be larger than their performance.

I agree.  These are the concerns that led me to start this thread.   

I'd say 100% VG 500 in the 401k and forget about it until you are close to FIRE. If you want intl or bonds you can put those in your taxable or IRA.

Bond allocation is light. May fit your risk profile though. Also it's hard to tell if some of the funds have some bond holdings. Check out Morningstar's portfolio X-ray feature for a free easy way to analyze your whole portfolio. If still 5%, it fits in my comment above. Think about reducing complexity.


I agree with reducing complexity.  I will use the Morningstar tool, but my understanding based on the short descriptions of the funds is that I have 95% equities, 5% bonds in this plan.

I'm not sure whether I'm comfortable going 100% stocks, though perhaps it would be best to be 100% stocks in this plan and hold a small percentage of bonds elsewhere. 

Anybody have recommendations for reading on choosing 100% stocks versus including a small bond allocation?  I'm sure I want the vast majority in equities but I'm not sure I'm comfortable with holding no bonds whatsoever.  I haven't learned enough to know whether my being uncomfortable without bonds is rational. 

Also-- I would be more comfortable going all in on the Vanguard fund if it were VTSAX.  If I were to go 100% Vanguard 500, wouldn't I be missing out on a significant portion of the US stock market?  If so, does that matter? 

Again, thanks for the input.  I'm completely on board with the Boglehead index fund philosophy but I don't know enough to attempt to implement it when my choices are constrained by my employer's plan. 

NoStacheOhio

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Re: Help with Fund Choices
« Reply #7 on: April 06, 2016, 01:31:07 PM »
VTSAX is 80% S&P500, so yes, you're missing some of the market, but not enough to make a huge difference.

The rest of the funds aren't very good. Contrafund is one of the better active funds, but isn't going to give you drastically different returns compared to Vanguard 500.

PhysicianOnFIRE

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Re: Help with Fund Choices
« Reply #8 on: April 06, 2016, 02:38:12 PM »
You don't list the expense ratios, but I can almost guarantee most are 10 to 20 times higher than VFIAX.

I agree with simplification down to 1 to 3 funds. Small cap value might be worth keeping, and perhaps a bond fund to smooth volatility.

When you have money in other accounts, be sure to apply your asset allocation across accounts. In your case, I would go 100% VFIAX in this account, and add other assets (REIT, international, a cheaper small value fund, etcetera) in the other account(s), keeping tax efficiency in mind.

If you haven already, look into a Lazy 3-fund or 4-fund portfolio.

forummm

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Re: Help with Fund Choices
« Reply #9 on: April 06, 2016, 04:43:38 PM »
VTSAX and the S&P 500 move in almost complete unison. You're just dandy if you are in the 500.

DavidAnnArbor

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Re: Help with Fund Choices
« Reply #10 on: April 06, 2016, 07:51:31 PM »
Yes as forummm explained just invest in the Vanguard SP 500, it's your lowest expense ratio index fund for the highest diversification of any of the funds available to you in that 401K.

AlwaysLearningToSave

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Re: Help with Fund Choices
« Reply #11 on: April 07, 2016, 07:14:52 AM »
You don't list the expense ratios, but I can almost guarantee most are 10 to 20 times higher than VFIAX.

I agree with simplification down to 1 to 3 funds. Small cap value might be worth keeping, and perhaps a bond fund to smooth volatility.

When you have money in other accounts, be sure to apply your asset allocation across accounts. In your case, I would go 100% VFIAX in this account, and add other assets (REIT, international, a cheaper small value fund, etcetera) in the other account(s), keeping tax efficiency in mind.

If you haven already, look into a Lazy 3-fund or 4-fund portfolio.

I edited the original post to include expense ratios.

I think the advice to move toward this account being entirely invested in VIAFX is probably on target.  I can then use investments in other accounts to achieve an even more diversified portfolio.  I think it is probably worthwhile to have some exposure to small-cap companies but I can probably get that exposure in other accounts with access to cheaper index funds. 

I waffle some on the extent to which I want exposure to international stocks.  It seems unwise to me to put all of my eggs in the U.S. basket, but I have not yet considered the argument that owning large U.S. stocks inherently gives you sufficient exposure to international business economies.  I appreciate the link to the Jlcollins article on this subject.  Anyone have further reading to suggest on this question?

PhysicianOnFIRE

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Re: Help with Fund Choices
« Reply #12 on: April 07, 2016, 01:12:50 PM »
You don't list the expense ratios, but I can almost guarantee most are 10 to 20 times higher than VFIAX.

I agree with simplification down to 1 to 3 funds. Small cap value might be worth keeping, and perhaps a bond fund to smooth volatility.

When you have money in other accounts, be sure to apply your asset allocation across accounts. In your case, I would go 100% VFIAX in this account, and add other assets (REIT, international, a cheaper small value fund, etcetera) in the other account(s), keeping tax efficiency in mind.

If you haven already, look into a Lazy 3-fund or 4-fund portfolio.

I edited the original post to include expense ratios.

I think the advice to move toward this account being entirely invested in VIAFX is probably on target.  I can then use investments in other accounts to achieve an even more diversified portfolio.  I think it is probably worthwhile to have some exposure to small-cap companies but I can probably get that exposure in other accounts with access to cheaper index funds. 

I waffle some on the extent to which I want exposure to international stocks.  It seems unwise to me to put all of my eggs in the U.S. basket, but I have not yet considered the argument that owning large U.S. stocks inherently gives you sufficient exposure to international business economies.  I appreciate the link to the Jlcollins article on this subject.  Anyone have further reading to suggest on this question?

Thanks for the edit; the ERs are right about where I would have guessed.  You are correct to simplify, simplify, simplify.  The International question is a good one and I agree with you - why have all your eggs in one basket?  The question comes up on the Bogleheads forum not infrequently.

FWIW, the Vanguard Target Retirement and LifeStrategy funds increased the International portion of their equity exposure from 30% to 40% early last year.