The Money Mustache Community

Learning, Sharing, and Teaching => Investor Alley => Topic started by: Cincinnatus C on May 02, 2017, 11:39:07 AM

Title: More aggressive when contributing less?
Post by: Cincinnatus C on May 02, 2017, 11:39:07 AM
Good afternoon, everyone! I'm a longtime follower of the MMM blog and casual reader of the forums, but this is my first post; if I stumble into an etiquette blind spot, first, I apologize, and second, totally let me know!

I've been searching through the forums for advice, and I haven't found a match for my particular situation. I'm about to shift my savings strategy from building an emergency fund to attacking my student loans. I met with my financial advisor (a Fidelity rep, linked with my 403b), and she suggested that if I'm not planning to be directing huge sums of money toward investing, it might be beneficial to be more aggressive in the investments I'm holding in my 403b. I'm currently fully invested in the Vanguard Target Retirement 2045 index (VTIVX, expense ratio 0.16%), and she suggested directing at least some of my future contributions toward the blue-chip Fidelity Growth Fund (FGCKX, expense ratio 0.66%), which has a consistently, and notably, higher return.

I'm of course wary of a Fidelity rep driving me toward a Fidelity product with a higher operating fee. But what is your opinion of the general principle at work here, that if I'm going to hold off on accelerating my 403b contributions (I have and will continue to have a 6% salary deferral plus a 9.5% employer match), I should be more aggressive with what I'm investing in? Am I about to blunder into a rookie mistake? If it helps, I've been building this 403b for only a year and a half, so there's not a LOT of money in it.

If I've missed a forum that does discuss this question, I apologize for taking your time, and I'd be grateful for a link!


Title: Re: More aggressive when contributing less?
Post by: Heroes821 on May 02, 2017, 01:51:54 PM
The general advice you will get on this forum is to find a low expense broad market index fund and sit in it for years.

I would check out the investing order thread for some advice on how to balance saving vs loan repayment.
Title: Re: More aggressive when contributing less?
Post by: ysette9 on May 02, 2017, 02:33:49 PM
It sounds like the advisor is pushing you in the direction of chasing returns in order to make up for fewer contribuions. To me that sounds like a losing game because if you are in investments that are too aggressive or too exotic for your risk tolerance, you are more likely to bail when the market takes a dump and lose a lot.

I'd recommend thinking hard about how much volatility you are comfortable with riding out and select your AA accordingly. Then find the lowest-fee index fund possible that matched that, and go toast your AA with an adult beverage of your choice. (Yes, I appreciate the irony of mentioning an AA in the same sentence as advocating an adult beverage.) :)
Title: Re: More aggressive when contributing less?
Post by: Babybalrog on May 02, 2017, 02:35:06 PM
The general advice you will get on this forum is to find a low expense broad market index fund and sit in it for years.

I would check out the investing order thread for some advice on how to balance saving vs loan repayment.
I agree. Broad market fun, no bonds (which your target date fund has). This is in effect more aggressive. Remember Target Date funds start off holding large amounts of stocks (aggressive) and move to a higher percentage of bonds as you approach the date (conservative).

I think the argument of being more aggressive if you have a small amount sounds fine. I would be as aggressive as possible within the limits of your funds. Since this isn't a brokerage, you can't do anything too stupid. So either find a broad index fund (generally the lowest cost fund available to you), or play a little trick and choose the target date fund furthest out. If it still has the low (ok 0.16% isn't that low, but it's not bad) expense ratio, you will be getting more stocks in the portfolio.

And, wow, 9.5% company match? I want to get some of that! I would defiantly maximize the match. Start with the emergency fund (3 months expenses), max that match. Then start figuring out which debts to pay off and/or to invest more.
Title: Re: More aggressive when contributing less?
Post by: Cincinnatus C on May 02, 2017, 02:50:55 PM
Thank you for all of this! It's very helpful. I think I'm pretty comfortable with risk; I'm 35, so I know I have plenty of market ups and downs in my future. From the blogs and boards I've internalized the idea that when the market tanks you simply sit and wait, and if anything, divert more money to the 503b. I hadn't thought about a fund that removes bonds entirely, but I'm into it! I'll do some research into my options, and I'll definitely look at the Investing Order thread as well.

And yeah, the 9.5% is even better than it sounds: I only have to contribute 5% of my salary to get the full 9.5% match! It's an amazing benefit. Makes the baseline 15% savings rate much easier to hit (until the loans are gone, at which point I'll dramatically increase that rate)!
Title: Re: More aggressive when contributing less?
Post by: neil on May 02, 2017, 03:26:21 PM
When doing a fair comparison between two funds, asset allocation needs to be considered for a fair comparison.  Different asset types will have different relative performance given different timeframes and date selection.

A 2045 target date fund is actually pretty aggressive.  It is 90% stock.  The "problem" is that the US market has been red hot since 2010 and everyone else basically has not.  Only 55% of the fund is in US stock versus 35% international and 10% bonds (both which have basically been flat).  It will shift to bonds over time but it is not fair to consider it "conservative" at this point in time when it is basically a stock fund.

Furthermore FGCKX seems to be imbalanced toward US tech stocks.  When you compare it to a pure US tech fund (VITAX, for instance) the correlation is clear.  In theory, you can simply overweight tech firms if you want that as a strategy.  What you pay 0.66% for is for someone to make that decision for you.

Portfolio size really has little to do with strategy beyond overcoming some practical limits (like account minimums and commissions).  Early on, your portfolio is driven by your savings rate and income, not your investment selection and returns.  You can't "fix" a low savings rate with aggressive investing.  That isn't an excuse to make poor decisions, but it is more important to establish your investment patterns to match how you want to be invested in the long term.  In the end, you are the final decision maker and need to trust in your selection.  The rep will sleep well either way.  There's nothing wrong with finding a nice and simple starting point to get your feet wet in stocks while you figure out how you want to build your portfolio.

These are, of course, my opinions and in the long run it is best to form your own.  But there's really no wrong way to invest in the short term as long as what you are doing qualifies as investing.  A target date fund far in the future is simple, easy to understand, cheap and fairly aggressive at this point in time.  In the meantime, continue to learn.  Even if you adjust your portfolio today or a few years from now, it should come with knowledge gained and discovering the path that better suits you and your lifestyle. - this is not a bad place to start if you are looking for beginner info.
Title: Re: More aggressive when contributing less?
Post by: highflyingstache on May 02, 2017, 06:48:25 PM
It appears you consider things in a series of linear events. All considered many investors use leverage, of many forms. Housing being the most common for sure, certainly, you can use this in your application. You'll see the questions asked here about using a HELOC for investing, it's in a sense similar to what I propose.

You've mentioned putting everything on hold for your current debt. That being said, if you were to refinance or already have your debt below your expected return rate of your investments, perhaps it could be better moving money investment way, even if you are paying out on that debt.
In simple illustration, if your debts are 4%, your expected return 7% from investments, it still looks as 3% before fees, inflation, etc. However, even like true margin accounts, you should only leverage just as much as you feel comfortable. I've previously been as high as 23% leveraged before. My comfort isn't really much higher. Many here are zero. Many have houses that change the variable, but appears a different wrapped present. As evidence, take a peak at the forums discussing paying off your mortgage vs investing. It's a heated debate, which uses leverage; but only if the numbers make sense. If you're not plotting to be in the positive, I certainly wouldn't go near it and thus pay off that debt as quickly as possible.
Finally, using the leverage, always have it accessible to be called on. If you can't liquidate your position quickly, to cover the cost loaned to you, also, don't be in that position.
Title: Re: More aggressive when contributing less?
Post by: Babybalrog on May 03, 2017, 07:59:22 AM
Just to add a little more.

I think your first savings should defiantly be safe. This is the emergency fund people talk about as well as other basic money. After that go all stocks. You already have the right mindset for dips in the market, those are buying opportunities. And I didn't talk about debts but highflyingstache makes a lot of good points. A home mortgage is leverage and with low enough interest rates you can stay invested, unlike your parents generation who had mortgages over 6% and over 10%. Those were worth paying off.
Title: Re: More aggressive when contributing less?
Post by: Cincinnatus C on May 03, 2017, 10:27:55 PM
Thank you for all of this; it's really clarifying. Regarding leverage, my only debt is my student loans, which are at 6.625%. That's high enough that I really want to get it off my back—I'm generally very debt-averse, and this is definitely a higher interest rate than I'd like—and it has my net worth in the negative, so that's another impetus for me to get rid of it. I also have Income-Based Repayment, and while I'm going to be paying way over the minimum payment (actually, I'll be making higher monthly payments than even a standard plan would require), my job is a bit unstable, and I don't think I'm willing to give up IBR's flexibility right now for a slightly lower rate. (SoFi quoted me a 1% decrease.) So I'm pretty much at peace with loan repayment as my next priority.

As for stocks, I'll definitely be doing more research this summer—I'm excited for it!