Author Topic: Making a mistake in 401k fund allocation. Help needed  (Read 1477 times)

LearnerGal17

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Making a mistake in 401k fund allocation. Help needed
« on: October 19, 2018, 05:28:58 PM »
Hi Everyone,

I've been a reader of the Mr.Money Mustache blog and community for a year or so now. I've learnt so much from this community and am hoping for some advice /help with my 401k Investments.

I contribute to my 401k through my employer. Been doing so for a few years now. Initially my Investments were in a Target Date fund (I'm guessing that is the default specified by my employer), but than I moved it to Index funds (or so I'm hoping based on reading the blog and posts on this forum). Currently this is my Investment (Per Fidelity website):

Vanguard Institutional Index Fund Institutional Shares (VINIX) - 50%
FidelityŽ U.S. Bond Index Fund - Institutional Premium Class (FXNAX) - 25%
FidelityŽ International Index Fund - Institutional Premium Class (FSPSX) - 20%
Vanguard Extended Market Index Fund Admiral Shares (VEXAX) - 5%

I checked the expense ration on all of the above funds and it seems to be less.

When I went into the Statements section and looked at my Personal rate of return it showed it as 0.3% (Year to date) for this year. I checked last years Personal rate of return and that is 5.2%. I'm not sure if I'm doing something wrong. I'd really appreciate some advice on what is a realistic personal rate of return I should expect with Index funds (my understanding was that it should be 7%. Please correct me if I'm wrong) and how to achieve it with Index funds.

Please pardon any errors I made while stating my question (I'm still learning)

Appreciate all the advice.


Frankies Girl

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Re: Making a mistake in 401k fund allocation. Help needed
« Reply #1 on: October 19, 2018, 06:23:41 PM »
Okay the returns part is one that is easily misunderstood:

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Approximately 10% is the average return for the S&P 500 since its inception back in 1928. Adjusted for inflation the "real return" is more like 7%. Also worth noting that nearly half of the gains from the S&P 500 resulted from dividends.

https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

Explaination that may be a better guide: https://www.thesimpledollar.com/where-does-7-come-from-when-it-comes-to-long-term-stock-returns/

So 7% is an accepted average over the lifetime of the stock market. Not in the last month. Or year. Or decade. Some years, you may see a 25% rate of return. Others, it may be down as much if not more. Your yearly ROR or your total ROR aren't as important until you start comparing it to the performance of the markets themselves, and the length of time you've been investing as well, but honestly it's way more important to realize that you aren't going to be guaranteed any specific rate of return each year, etc.

The market goes up, the market goes down. Performance of the index funds are closely tied to the overall market, not meant to outperform it not meant to lag severely. So if the market is down over the last month (which it is) then your returns will reflect this when you take a look at it. That is normal and nothing to worry about.

Suggested reading:

Short and sweet from one of the leaders in index investing: https://www.etf.com/docs/IfYouCan.pdf

https://jlcollinsnh.com/stock-series/
^read this, (either the free online blog he's been working on for about a decade, or his book recently published with more updated material) and ask more questions if there are things that don't make sense after.

I personally would not carry either VEXAX or FSPSX because I don't believe it's necessary to have non-U.S. funds and don't care about the extended market, but that's me. You could possibly look to see if your 401k offers any of Fido's zero fee index funds (just introduced) and using a Vanguard fund in a non-Vanguard account means you are likely paying a transaction fee through Fido for the privilege, but it's still a great fund and your 401k also seems to have institutional class so that's super. Fido is a decent group, and I actually use them myself exclusively and it is absolutely reasonable to use them for your total portfolio (using their stable of funds). All the funds you have now are very low ER and decent performers.

https://www.bogleheads.org/wiki/Fidelity

And finally, read through the Bogleheads wiki with special attention to their "getting started" pages to get a grasp on the steps you need to take, things that should help you stay the course (like your investment policy statement or IPS) and ask questions.

There is absolutely no problem asking when you need help or are unsure about this stuff when you're just starting out on your financial education. Reading, researching, questions, making assumptions and then confirming or disproving them, even mistakes are a good thing because you're trying... and that is already put you way out in front of most of the population.

And for what its worth, I started out about 6 years ago knowing zip about all this stuff and pretty freaked out and sure I'd never understand it, much less able to give competent advice about investing/money management. If I can do this, anyone can. ;)

LearnerGal17

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Re: Making a mistake in 401k fund allocation. Help needed
« Reply #2 on: October 19, 2018, 07:25:57 PM »
Thanks so much for the detailed reply. I hope you won't mind if I have some follow up questions (I did read a couple of the links you posted and am trying to understand this stuff better :) )

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So 7% is an accepted average over the lifetime of the stock market. Not in the last month. Or year. Or decade. Some years, you may see a 25% rate of return. Others, it may be down as much if not more. Your yearly ROR or your total ROR aren't as important until you start comparing it to the performance of the markets themselves, and the length of time you've been investing as well, but honestly it's way more important to realize that you aren't going to be guaranteed any specific rate of return each year, etc.

Ok so I understand that part of the statement a bit better now. I am still a little nervous as to how the ROR over this year was 0.3%. If I understand correctly that may be due to the performance of the market last month ? Overall if I understand what you wrote accurately I don't need to worry about the 0.3% ROR for this year and can keep my investment as it is ?
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You could possibly look to see if your 401k offers any of Fido's zero fee index funds (just introduced)

I checked but I don't seem to see any other Index funds offered other than the ones I've listed. It's my employers 401k so I'm not sure I have much choice in the matter. Do you think it might be a better idea to put in as much as my employer matches into Fidelity and start a seperate 401(k) in Vanguard for the remaining amount I'd like to save (If that is possible) ?

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And for what its worth, I started out about 6 years ago knowing zip about all this stuff and pretty freaked out and sure I'd never understand it, much less able to give competent advice about investing/money management. If I can do this, anyone can. ;)

Thanks so much for sharing your experience. I always feel I'm making mistakes with my 401(k) and listening to other experience and words of encouragement does help :)

Frankies Girl

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Re: Making a mistake in 401k fund allocation. Help needed
« Reply #3 on: October 19, 2018, 08:19:35 PM »
Thanks so much for the detailed reply. I hope you won't mind if I have some follow up questions (I did read a couple of the links you posted and am trying to understand this stuff better :) )

So 7% is an accepted average over the lifetime of the stock market. Not in the last month. Or year. Or decade. Some years, you may see a 25% rate of return. Others, it may be down as much if not more. Your yearly ROR or your total ROR aren't as important until you start comparing it to the performance of the markets themselves, and the length of time you've been investing as well, but honestly it's way more important to realize that you aren't going to be guaranteed any specific rate of return each year, etc.

Ok so I understand that part of the statement a bit better now. I am still a little nervous as to how the ROR over this year was 0.3%. If I understand correctly that may be due to the performance of the market last month ? Overall if I understand what you wrote accurately I don't need to worry about the 0.3% ROR for this year and can keep my investment as it is ?

Index funds (what you are investing in and are recommended) track what the total market is doing. So when the market is up, the index funds will be up roughly that same amount. But if the market drops, then they will also drop along with it. And yes, the market has had an off month. Down days/months/years absolutely will happen, it is normal, expected and not anything to panic over.

You don't change your investments unless your asset allocation gets really out of balance. So no, you don't change things up because of a bit of volatility in the market (which is code for "market be crazy right now"). Because you decided when you picked your funds I'm assuming that you wanted an asset allocation of basically 75% stock and 25% bond index funds - based off of your 4 funds you're holding, with a mix of international, U.S. and extended market. If you're not sure why you chose that mix, that would be another thing to examine again to reconfirm you're comfortable with that AA and your blueprint for why/what and when/if you do whatever is your IPS.

https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Investment_policy_statement

For instance, I have an AA of something like 85% stock index and 15% bond/cash. One of my IPS rules is that I don't sell or buy unless that AA gets more than 5% out of balance, and I don't calculate that percentage but once a year because constant rebalancing is a waste of time/money - especially in times of market volatility. In a really good year, I might see my AA skew to something like 92%/8% and therefore that would kick in my IPS rule to rebalance - meaning I'd sell off enough of the well-performing stock index to buy the lower performing bond index to get the AA back on target (my 85%/15% AA).

And if you're feeling panic about "losing" money due to a market correction (which is a 10% loss) or a full on crash (20% or more) then a few things to tell yourself: 1) it's not a real loss unless you lock in that loss by panic selling. 2) the market will go back up. You don't lose the actual shares of your stocks/bonds - they just might be temporarily worth less. Wait it out, stop looking at the accounts if it scares you and they will recover. Or again, if seeing it lose significant amounts scares you so bad you REALLY can't deal, reconsider that your AA may need to be much more conservative and rebalance once you figure out what AA you would be more comfortable with (I'd still suggest waiting until the market starts its recovery tho so you aren't selling off stocks at a low and locking in those temporary losses due to panic).

Oh - one of the other things to help reframe the drops is that you need to keep investing because the stocks are ON SALE! The ones you currently hold may be worth less, but the ones you buy now are lower priced too, so buy when prices are low, and you get a great bargain! So stock market up? Hooray, your portfolio is doing great! Stock market down? Hooray, you can use your buy-in to get cheap stocks and grow your portfolio even more when it recovers! It's all good!

The market will drop, stay flat and sometimes crash. This is completely, totally normal and expected. The only thing no one can tell you is exactly when it will happen and exactly how long it will last. But even the worst crashes in history are now mearly long passed data points and if you don't sell at the bottom, you don't lose anything. Since you're not investing for next week or year, I'm hoping it is for decades or even 50+ years, the drops aren't that big a deal. Don't get caught up in the right now when it comes to investing for true wealth.




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You could possibly look to see if your 401k offers any of Fido's zero fee index funds (just introduced)

I checked but I don't seem to see any other Index funds offered other than the ones I've listed. It's my employers 401k so I'm not sure I have much choice in the matter. Do you think it might be a better idea to put in as much as my employer matches into Fidelity and start a seperate 401(k) in Vanguard for the remaining amount I'd like to save (If that is possible) ?

You can't open a 401k or other workplace sponsored account yourself; they are all through your employer and they do control the offerings in them. But again, what you have is great; just mentioning that Fido started offering even more amazing no fee funds in the last two months and if they have them available for you, super, if not, no big deal. :)




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And for what its worth, I started out about 6 years ago knowing zip about all this stuff and pretty freaked out and sure I'd never understand it, much less able to give competent advice about investing/money management. If I can do this, anyone can. ;)

Thanks so much for sharing your experience. I always feel I'm making mistakes with my 401(k) and listening to other experience and words of encouragement does help :)

Yup. I was you not too long ago. I know exactly what you're thinking about how crazy this stuff sounds and just starting to make sense of it all - overwhelming and yet mind-blowingly awesome if you can just get a handle on it. And you will. Keep reading those sites and asking questions and working it all out - it is a fantastic feeling to take control of your financial future! :)
« Last Edit: October 19, 2018, 08:26:59 PM by Frankies Girl »

chasesfish

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Re: Making a mistake in 401k fund allocation. Help needed
« Reply #4 on: October 20, 2018, 06:11:11 AM »
Frankie's Girl hit on almost everything.

Don't be too shaken about your return.   Bond funds are down some this year and stock funds are up some.

How old are you?  The thing that jumps out at me is you have nearly 50% bonds and aren't currently retired.

RWD

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Re: Making a mistake in 401k fund allocation. Help needed
« Reply #5 on: October 20, 2018, 09:11:43 AM »
How old are you?  The thing that jumps out at me is you have nearly 50% bonds and aren't currently retired.
What? It looks like 25% to me?

LearnerGal17

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Re: Making a mistake in 401k fund allocation. Help needed
« Reply #6 on: October 20, 2018, 01:49:42 PM »
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You don't change your investments unless your asset allocation gets really out of balance. So no, you don't change things up because of a bit of volatility in the market (which is code for "market be crazy right now"). Because you decided when you picked your funds I'm assuming that you wanted an asset allocation of basically 75% stock and 25% bond index funds - based off of your 4 funds you're holding, with a mix of international, U.S. and extended market. If you're not sure why you chose that mix, that would be another thing to examine again to reconfirm you're comfortable with that AA and your blueprint for why/what and when/if you do whatever is your IPS.

https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Investment_policy_statement

Thanks for confirming my thoughts. Sometimes I panic because people tell me they are getting much higher returns. My panic is because I just don't want to be making mistakes in my Index funds AA. So really appreciate the advice and the links.

One of the links that you had posted earlier and was a detailed explanation and very helpful to a beginner like me was this one: Short and sweet from one of the leaders in index investing: https://www.etf.com/docs/IfYouCan.pdf

I'm reading through the other links as well. Just that the link above really stood out to me :)

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You can't open a 401k or other workplace sponsored account yourself; they are all through your employer and they do control the offerings in them. But again, what you have is great; just mentioning that Fido started offering even more amazing no fee funds in the last two months and if they have them available for you, super, if not, no big deal. :)

Understood :) . Would it be possible for me to open a Roth IRA at Vanguard or would you suggest keeping it at Fidelity ? (Since I don't have a Roth IRA through my employer)

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Yup. I was you not too long ago. I know exactly what you're thinking about how crazy this stuff sounds and just starting to make sense of it all - overwhelming and yet mind-blowingly awesome if you can just get a handle on it. And you will. Keep reading those sites and asking questions and working it all out - it is a fantastic feeling to take control of your financial future! :)

100% with you on that :)  !!

LearnerGal17

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Re: Making a mistake in 401k fund allocation. Help needed
« Reply #7 on: October 20, 2018, 01:52:25 PM »
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Frankie's Girl hit on almost everything.

Don't be too shaken about your return.   Bond funds are down some this year and stock funds are up some.

How old are you?  The thing that jumps out at me is you have nearly 50% bonds and aren't currently retired.

I agree with you. Her posts were super helpful.

I'm 33 years old. Will be 34 pretty soon. I thought I only had 25% in Bonds. This one: FidelityŽ U.S. Bond Index Fund - Institutional Premium Class (FXNAX) - 25%

Please correct me if I'm understanding incorrectly or I've missed something.

LearnerGal17

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Re: Making a mistake in 401k fund allocation. Help needed
« Reply #8 on: October 20, 2018, 01:54:26 PM »
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What? It looks like 25% to me?

That's what I thought as well :) . Do correct me if there is any mistake in my understanding.