Author Topic: New to this, need advice  (Read 3163 times)

bkru21

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New to this, need advice
« on: April 30, 2013, 03:02:34 PM »
Hello all,

I have started taking a serious interest in my future financial situation, and need some advice to see if I'm on the right track. I'm 26, 3 years out of college, and have a good job that will certainly turn into a great career. I am currently in the 25% tax bracket.

I have about $90k in savings account right now, earning 1%. I have been saving up for a down-payment on a house for the last year, so that is why I have so much stocked away. I've been waiting for the housing bubble to burst around here, as I believe it is artifically high. In the meantime, I want to start putting my money into something else that has a higher interest rate (more on that later).

My employer offers both a 401(k) and Roth 401(k). I put away 10% (5% in each) of my income in that. My previous employer had a 401k through the same company, but I rolled that over into a Rollover IRA. Both the 401k and Roth 401k use the same asset allocation, as follows:

Stocks: 85%
Bonds: 10%
Money Market: 5%

50% of my contribution goes to a target retirement fund, with the rest being 30% equities, 15% Vanguard Index, and 5% Vanguard Bond fund. Is this good? How should I rebalance?

My IRA is really messed up, probably a consequence of my rollover. It shows 90% of it in stocks, although I have 30% in stocks, 30% in Real Estate, and 30% in short term bonds. I am assuming the 90% number is not entirely true, as the 30% invested in Real Estate is the equity securities of real estate companies. The bond fund is giving me no returns and I want to switch that money over to the real estate fund is which is absolutely killing.

So is this sufficient? Should I start putting my savings more into the IRA, or contribute more to my 401k? Please keep in mind I have no debt, but if I buy a house, my monthly income will go more towards that mortgage.

KingCoin

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Re: New to this, need advice
« Reply #1 on: April 30, 2013, 04:30:05 PM »
You're young, so I think 85% equity in your 401k's is fine, especially in a very low yielding bond environment. You might consider some exposure to REITs, foreign developed equity, and emerging market equity if you don't have already.

What specific securities do you own in your IRA? "Equity securities of real estate companies" can mean a lot of things. For simplicity, it probably makes sense to come up with an investment policy for your retirement assets, and then invest all your retirement funds the same way.

If you're sitting on 90k of cash, I'd be maxing out your 401k and IRA, especially if you're getting a 401k employer match.

The bond fund is giving me no returns and I want to switch that money over to the real estate fund is which is absolutely killing.

I'd be very careful about this line of thinking. In the investment world it's called "performance chasing" and has been the cause of plenty of investing misery from tulips to tech stocks to Miami condos. If anything, you should probably be re-balancing away from star performers rather than doubling down. It's probably worth reading a book like Random Walk Down Wall Street to get a feel for big picture investment strategy.

bkru21

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Re: New to this, need advice
« Reply #2 on: April 30, 2013, 07:45:51 PM »
What specific securities do you own in your IRA? "Equity securities of real estate companies" can mean a lot of things. For simplicity, it probably makes sense to come up with an investment policy for your retirement assets, and then invest all your retirement funds the same way.

If you're sitting on 90k of cash, I'd be maxing out your 401k and IRA, especially if you're getting a 401k employer match.

King, thanks for replying, I really appreciate it. 30% of my IRA is in a Capital Appreciation fund (PRWCX) that is composed mostly of common domestic stocks. The other 30% is a REIT fund (TRREX), which is mostly towards assets or revenues related to real estate companies (~50%). The last 30% is a short term bond fund (PRWBX) to give me a bit more security.

401k is maxed out with employer match (100% match up to 3%, 50% at 4%).

The bond fund is giving me no returns and I want to switch that money over to the real estate fund is which is absolutely killing.

I'd be very careful about this line of thinking. In the investment world it's called "performance chasing" and has been the cause of plenty of investing misery from tulips to tech stocks to Miami condos. If anything, you should probably be re-balancing away from star performers rather than doubling down. It's probably worth reading a book like Random Walk Down Wall Street to get a feel for big picture investment strategy.

True, I was being a little short-sighted. I am going to take some out of the real estate fund and maybe look into emerging markets.

KingCoin

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Re: New to this, need advice
« Reply #3 on: May 01, 2013, 03:10:51 PM »
I have a hard time blessing that IRA portfolio.

The biggest problem is that with expense ratios near 0.75%, you're paying way too much in management fees for the REIT and Equity funds. The bond fund has a yield to maturity of 0.93% and you're paying 0.52% in fees (i.e. you're paying over half your maximum potential gains to the manager).

30% stock, 30% REITs, 30% short term bonds (essentially cash) is kind of a screwy stand-alone allocation, buy since you're 85% equity in your 401k, this is probably OK.

Your best bet is to
1) Read a few books on personal finance, investing, and portfolio construction. These books should generally promote low cost index funds. Probably not how you want to spend a couple weekends, but you have enough dough on hand that it's well worth your time you get smart on this stuff.
2) Figure out how you want to slice and dice both your taxable and retirement funds.
3) Invest in low cost index funds like those offered by Vanguard. You should be shooting for expense ratios lower than 0.35%.

Joet

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Re: New to this, need advice
« Reply #4 on: May 01, 2013, 03:21:30 PM »
If you are looking at buying a house soon, you want that liquid for a downpayment. What I like is a rolling program of moving funds towards high-yield money market accounts [cruise fatwallet finance forum for latest best deal], and Ibonds. Ibonds require a 12 month holding period so put 10k per year into those regardless. The rest probably should be in such a money market sad to say.

I don't know what "maxxing out" your 401k means [17,500/yr + employer match?] but if your'e doing that you might want to back off a little , say to the point where you capture only the "free money", aka match. Perhaps thats 5% for you.

Beyond that a Roth IRA makes sense [backdoor if income is too high], as the Roth allows a withdrawl within 5 years for the purchase of a house penalty free. And contributions can come out at any time [just not earnings]

beyond that with "long term" money I'd recommend a boglehead 3-fund portfolio at whatever asset allocation you can stand for this "long term" money. Note that most/all of your 90k 'cash' taxable portfolio is probably not in this category.

For the long term portfolio I'd shoot for low ER if your 401k offers any of the following:

Total US equity market index [or S&P 500 next best]
Total foreign equity index market
Total US bond market
Tilt to a REIT if you must

sample ratios for someone in their 20s:
50% US equity
20% foreign equity
10% REIT
20% total bonds

I'm a huge fan of target retirement funds from Vanguard. Basically the above recommendation approximates a 2035 target fund. A target 2055 fund will have less bonds, the global ER will be around 0.10 or less. Awesome. No need to "improve" this, index the markets on autopilot. Dont chase yields, sectors. Worry about your income/job/etc
« Last Edit: May 01, 2013, 03:24:36 PM by Joet »

bkru21

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Re: New to this, need advice
« Reply #5 on: May 02, 2013, 04:49:29 PM »
Thanks for replying all.

King: You're right, the IRA is kinda screwy. I will take some time to readjust and learn what's better. Unfortunately, at the time I signed up, those funds were the better of the ones offered (some of the lowest fees besides an index fund).

Joet: What I meant by maxxing is I get all of the company match. I certainly will take your portfolio advice into consideration, thanks!