Author Topic: I could use some perspective (and courage) to make investment changes  (Read 8017 times)

bobby7

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In the same fashion as the majority of the posters on this forum, since discovering MMM I have been systematically evaluating and changing various areas of my life to fall in line with early retirement goals.I tend to want to be extremely circumspect when making a decision, but sometimes I concern myself so much with wanting to know everything first so I can make the best choice that I get frozen and donít do anything.

This post is because I feel I could use a boost of courage and some perspective from those with more experience than me. Then I hope to feel comfortable actually acting on making some changes if you all tell me Iím not crazy.

As many others Iím sure, I was introduced into saving for retirement by being referred to a friendís financial adviser. She got my husband and I started with A shares in a Roth IRA through American Funds.

Knowing what I know now, I would not have chosen that path for starting to save for retirement, but at the end of the day Iím still thankful for the fact that I did get started sooner rather than later, and now Iím just trying to figure out the best plan to adjust investments for a long-term plan.

To give a general idea of finances, here we go:

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-Me:  $40,000 Roth IRA with American Funds 
-Spouse: $38,000 Roth IRA with American Funds
A mixture of actual funds, but an average fund fees of 0.6% to 0.7 %

-$16,000 in a brokerage account through the same adviser invested in FCISX
-$15,000 recently invested with Portformulas (actively managed) overall  fees  1.45%

-Me: $6,000 in a 401k (only American Fund R3 share options) average fund fees around 1.0%
-Spouse: $16,000 in a 401k (only American Fund R3 share options) average fund fees around 1.0%

Employer matches 2% of the first 4% contributed to the 401k. Weíre currently just doing the minimum to meet the match.

A few other background details. We still have $30,000 left to pay off on a mortgage with a 3.5% interest rate.

We have no children and no expected need for any of the money weíve invested or continue to invest, so everything is considered long term and strictly for retirement.

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With the above summary, the first thing Iím not a fan of is the fees. There is also clearly a great body of evidence out there to support going with lower fee passive funds.

The 401k I canít do too much about, I did inquire if it would be possible to have a self-directed option or some Vanguard options, and Iíve been told that our corporate team is actually reviewing options anyhow, but itís too soon to say anything though the outcome would be available by our next semi-annual 401k option in July.

Since that will matter in any decision I make there, I decided to table the 401k aspect for the time being. The big decision with that is do I actually contribute the max to the 401k even though the fund options are not great, or would it be wiser to invest alternatively in taxable accounts. Pretending that no better options become available, given the general fees and the employer match listed my feeling is that itís not worth it but Iím not in any way an expert so the thoughts of others more experienced than me would be appreciated.

Since how much I do or donít contribute to my 401k will also impact how much I do or donít need to invest in taxable funds, those 2 are related, so ďnew taxable investingĒ is also tabled.

That leaves the Roth IRAs and the other 2 taxable accounts. For whatever reason I feel a lot less confident that I have any clue what I can or should do with the taxable accounts (or how to do it.) They are also overall less money, and Iím also not actively adding to them, so it seemed like a good idea to start by focusing on the Roth accounts which are actively being invested in.

Iím thinking of switching to Vanguard, and Iíve spent a lot of time on their website looking into the process (which they seem to make fairly easy,) but I am left with a few questions/concerns.

1)   I feel like I should really know what funds to put the money in before I move it. I was looking a VASGX, but wanted some thoughts on that versus picking my own balance of those same or similar funds (perhaps somewhat less in bonds.) Or just in general what would be suggested for someone with a 20 year time horizon and a very high risk tolerance.

2)   Aside from choose what to invest in I admit to still not being sure if it should be a mutual fund or ETF. Iíve read a lot about both. From what I can tell the way Vanguard handles ETF versus mutual fund versions of the same fund is more identical than it would be in many other investment companies which to some extent seems to negate the common differences between the 2 that would be pros or cons. I have no interest in actual day trading, so the only reason Iíd choose and ETF is if for some other reason it provides tax advantage, and from what I can tell, in the case of Vanguard and in my situation (which is just pick a few funds, and auto-invest in them for the long haul) nothing specifically helps me to know if I should pick one versus the other or if it really matters too much in my case. Any perspective here would also be much appreciated.

Vanguard's website did advise to contact the current company you are invested with to verify if there were any special paperwork needs for the transfer etc. As you will probably not be surprised to hear, my adviser tried to dissuade me from switching out of the American Funds because:

a)   Iíve already paid a big load fee to get a ďpremium rateĒ for A shares of these funds and by changing out Iím wasting that.
b)   They are really good funds and she hasnít seen evidence that Vanguard is better and their funds often do worse.

Because she does have a lot of financial experience compared to me, I donít want to dismiss what sheís saying out of hand, so instead I chose to consider it ďwith a grain of salt.Ē

When I compared the performance of every single fund I was invested in to the VTSAX they all under-performed it. The closest was The Growth Fund of America. So from that I decided to simplify it even more. My thought is that I already paid the load fees for these American Funds, I canít get them back, so at this point they donít matter anymore. When Iím comparing the 2 funds above, VTSAX has 0.5% lower fess basically, and it performed better over the past 10 years that the best performing American Fund. It seems like a no-brainer that I should move to Vanguard and that a and b have no merit.

The other concern was if moving would generate any sort of cost, but I donít think so. However Iím unsure if the actual mutual funds are American Fund specific which would force them to be sold which would be a cost, but I guess thatís a question Iíll ask Vanguard before hitting go on this.

This was a really long post, so Iím going to circle back and summarize the key questions.

1)   Is it worth contributing more than the minimum match to my 401k, or do I go taxable accounts?
2)   How do people feel about VASGX, or specifically what would they recommend for my situation (long time horizon, fairly aggressive.)
3)   Mutual funds versus ETFs. Further explanation or thoughts on if one or the other makes more sense in my situation (investing in a few funds for the long haul.)
4)   Am I missing something in my evaluation of my financial adviser's concerns about me switching funds, or anything else that would actually make moving to Vanguard a bad idea.

Thanks in advance for any thoughts on this.
« Last Edit: April 19, 2016, 04:01:47 PM by bobby7 »

MDM

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Re: I could use some perspective (and courage) to make investment changes
« Reply #1 on: April 19, 2016, 04:46:23 PM »
1)   Is it worth contributing more than the minimum match to my 401k, or do I go taxable accounts?
2)   How do people feel about VASGX, or specifically what would they recommend for my situation (long time horizon, fairly aggressive.)
3)   Mutual funds versus ETFs. Further explanation or thoughts on if one or the other makes more sense in my situation (investing in a few funds for the long haul.)
4)   Am I missing something in my evaluation of my financial adviser's concerns about me switching funds, or anything else that would actually make moving to Vanguard a bad idea.
bobby7, welcome to the forum.

Your post shows that you have good instincts and ask good questions - well done!

First to your specific questions:
1) Probably 401k will be best, but see below.
2) VASGX would be fine.  VTTSX is another good option.  See https://www.bogleheads.org/wiki/Three-fund_portfolio.
3) Either is fine.  See https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds.
4) No.  See above about you having good instincts.  Yes, you will likely want to sell your current funds and that will cause some cost, but so it goes.

The long version:
Here is the "usual advice", current as of the posting date.  See the 'Investment Order' tab in the case study spreadsheet for the latest version.   
"Max..." means "contribute up to the maximum allowed for..., subject to your ability to pay day-to-day expenses."   
   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks:   
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   
   
Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),   
   putting money into that business might come somewhere before, in parallel with, or after step 5.

bobby7

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Re: I could use some perspective (and courage) to make investment changes
« Reply #2 on: April 19, 2016, 07:49:11 PM »
Thank you in general, and in particular for the 2 boglehead links. They explained things in much clearer terms than a lot of the other resources I had read previously.

In particular, I found the ETF vs. Mutual Fund topic monumentally helpful. It made it clear that the best choice in my case would be mutual funds.

At this point I feel confident to at least take that first step of converting my Roth IRA to Vanguard and I'll continue to do my research to decide what further steps to take.

Frankies Girl

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Re: I could use some perspective (and courage) to make investment changes
« Reply #3 on: April 19, 2016, 08:59:55 PM »
Quote
Vanguard's website did advise to contact the current company you are invested with to verify if there were any special paperwork needs for the transfer etc. As you will probably not be surprised to hear, my adviser tried to dissuade me from switching out of the American Funds because:

a)   Iíve already paid a big load fee to get a ďpremium rateĒ for A shares of these funds and by changing out Iím wasting that.
b)   They are really good funds and she hasnít seen evidence that Vanguard is better and their funds often do worse.

Because she does have a lot of financial experience compared to me, I donít want to dismiss what sheís saying out of hand, so instead I chose to consider it ďwith a grain of salt.Ē

MDM's post is pure gold, but wanted to point out the complete asshattery going on with America Fund's sales rep.

Point A - is called sunk cost fallacy. It breaks down to the idea that that money is gone, so staying invested with them somehow means you'll make up for the lost funds paid out? Nope. It's gone whether you leave or stay; it should no longer be of consideration other than a goose to move away from a company that uses that as a reason to stay with them. What they're basically saying is "But we've already robbed you of a nice chunk of change right at the start, so if you leave, we won't get the benefit of robbing you of more money in the future!" At least that is how you should see it. ;)

Point B - Outright lying and hoping you won't be the type to actually look at any of the funds in question and make comparisons. Of course, if you do, they'll tell you all sorts of amazing facts and figures and try to distract and discourage you from doing this... much like a slight of hand artist has perfected their patter and the art of misdirection. You aren't supposed to ask those questions. And they can absolutely stretch the truth and outright lie to you unless you have hard facts to call them on it, and they'll probably still wiggle out of it. It isn't worth your time really, other than to leave.

Good luck getting away from them. I've dealt with both them and another similar firm. All very nice people, but they are sales reps - and their main interest in your money is making more of it their money. If you benefit a bit, great, but you are not their priority.



I'd suggest reading Jim Collins' stock series when you get a chance. He's a greatly entertaining writer and the series is fantastic for learning your way around the market and investing.

http://jlcollinsnh.com/stock-series/

bobby7

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Re: I could use some perspective (and courage) to make investment changes
« Reply #4 on: April 20, 2016, 03:35:48 PM »

Quote
I'd suggest reading Jim Collins' stock series when you get a chance. He's a greatly entertaining writer and the series is fantastic for learning your way around the market and investing.

http://jlcollinsnh.com/stock-series/

Thanks for the additional reading material suggestion. I've spent a lot of time reading up on finance related topics, but I'd liken it to needing a bottle of shampoo and going to the shampoo aisle at the local retail store. There is so much shampoo out there that its nearly impossible to know what to get, or if what you are getting is any good, and you can't read all the labels.

That's why I particularly appreciate suggestions that help me cut to the things which have more merit and value

DrF

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Re: I could use some perspective (and courage) to make investment changes
« Reply #5 on: April 25, 2016, 02:00:38 PM »
Bobby -

You should feel secure in the amazing response you received from MDM and Frankies, both exceptional.

You are on the right path. Keep digging, and be your own best advocate. Nobody cares as much as you do about your financial security.

MDM

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Re: I could use some perspective (and courage) to make investment changes
« Reply #6 on: April 25, 2016, 03:19:36 PM »
marketmap, you might want to start your own thread in Investor Alley, similar to the Dual Momentum thread that stretches to 21 pages....

Drifterrider

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Re: I could use some perspective (and courage) to make investment changes
« Reply #7 on: April 26, 2016, 05:23:11 AM »
A few other background details. We still have $30,000 left to pay off on a mortgage with a 3.5% interest rate.

After you take advantage of all the tax deferred accounts you can, and if you have a comfortable (to you) balance in your emergency fund, have you considered extinguishing your mortgage?  You could pay yourself that 3.5% instead of the bank.


MDM

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Re: I could use some perspective (and courage) to make investment changes
« Reply #8 on: April 26, 2016, 04:40:49 PM »
marketmap, you might want to start your own thread in Investor Alley, similar to the Dual Momentum thread that stretches to 21 pages....
Thanks. With thorough examination of Dual Momentum over past 2 - 3 years, I decided that it had too many transactions per year / portfolio monitoring time spent for the output gained.
Not suggesting anything about Dual Momentum itself.

Am suggesting that you put your strategy into its own thread for discussion.  "Academic evidence has shown..." can be applied to many strategies: yours, Dual Momentum, etc. etc.

bobby7

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A few other background details. We still have $30,000 left to pay off on a mortgage with a 3.5% interest rate.

After you take advantage of all the tax deferred accounts you can, and if you have a comfortable (to you) balance in your emergency fund, have you considered extinguishing your mortgage?  You could pay yourself that 3.5% instead of the bank.

I have considered that, but with the current income level it would not be possible to max all tax advantaged investments right now, so it would be a matter of invest versus pay off the mortgage sooner. At this point the majority of the payments are going to principal because we've already paid it down a fair deal, so when weighing "pay it off sooner" versus "invest more sooner" I lean toward investing more sooner because I think that will come out further ahead in the long-run.

If I get to a point where I can max my tax advantaged accounts though, that will be next for me. :)

In other news...

My fund transfer to Vanguard from American Funds did just complete today (yay!) and I just put in a sell order for the mutual funds I had, so now I must decide what to reinvest in.

This may seem like an odd feeling, but as much as they have a number of nice "package funds" like the target retirement date series or the life-strategy series I feel like investing everything in one of them would lead to complacency. They do so much for you that it doesn't require you to monitor and think and with some things in life becoming complacent is more dangerous. Money seems like one of those things.

Does anyone else struggle with those same types of feelings, or just me? I mean in reality I'll end up investing in the same 2-4 funds anyhow, its just a matter of if they come prepackaged and pre-allocated and auto-balanced or if I make those decisions and do the more involved monitoring on my own.

DrF

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You are getting the feeling that you may be able to do it better than the "automated" process can. There are many discussions on this thread on why that is a fallacy and a bad idea. Focus your mental effort on reducing spending, increasing income, health, and happiness.