Author Topic: Should I change my 401k asset allocation? Also, am I missing any investments?  (Read 24672 times)

implet

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I posted yesterday in the Ask a Mustache category which gave me the encouragement I needed to take my money out of my regular checking/savings account and put it into investments for the first time! I put $25,000 into a Vanguard Total Stock Market Admiral fund and $11,500 (for 2012 and 2013) into a Vanguard Roth IRA Total Stock Market Fund. I left $8500 in my bank for now so that I feel a bit safe still. I'm going to try to get that cash cushion to be smaller as I get more confident! So exciting/scary!!!

My only debt is a car loan with 0% interest that has one year left on it. Should I pay this off now, or just coast until the end with the 0%?

Now that did this, I want to make sure my 401k that I have through my company is right. I put in the 6% (before tax) that my company matches. They match the first 4% at 100% and the next 2% at 50%. Right now my current balance $48,000 and is allocated like this:

  • 75.24% SP500 Equity Index
  • 10.05% Large Cap
  • 8.57% Company Stock
  • 6.15% Domestic Bond Index
   

Should I change my future contributions and/or rebalance this?

Are there any other investments I should consider? Am I missing something obvious? Is this too risky if there's a chance I'll need some money to put towards a down payment for a house in the next 2-5 years?
« Last Edit: November 03, 2013, 08:08:53 PM by implet »

KingCoin

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First, you're 94% stocks. This is very aggressive. That's fine since you're only 26 and this is a retirement account, but be prepared for a bumpy ride.

Can you list the actual funds you own and their expense ratios? I assume Large Cap is large cap equity, which is more or less going to be identical to S&P500. Domestic Bonds can mean a lot of things.

Why do you own company stock? Unless there's a significant financial incentive to do so, you should own 0 stock in the company you work for. 

implet

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I only own company stocks because when I started work someone there told me to because our stock normally does well. There is no extra incentive to have that over anything else.  The S&P expense ratio is .0435% and it's labeled Gross. Domestic Bond Index has Gross Exp Ratio of .0789%, Large Cap Equity Fund has an expense ratio of .5089%, and my company's stock doesn't have an expense ratio.

The other options I can pick are International Equity Index with a ratio of .1431%, Small/Mid Cap Equity Index with .064%, Small/Mid Cap Equity with .7731%, Bond Plus Fund with .4231%, Fixed Income Fund with .3555%, and Inflation Response Multi-Asset Fund with .8231%. There are a bunch of different "target date" funds with expense ratios at .1056%.

Since a 401k is for retirement age I thought it was fine to do stocks. For the Roth IRA and the other Total Stock Market fund I opened today, should I be more conservative on those since early financial independence is the dream? I started reading this blog and I thought Mr. Mustache recommended just putting all money into an index fund for the most part. I'm working my way through reading this entire blog (I'm about halfway through), so maybe there is more good info I haven't gotten to yet.

yolfer

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Somewhat off topic, but my company "matches" our 401k contributions in the form of company stock into the 401k. It recently occurred to me that I should be selling that stock and reallocating it into my chosen 401k asset allocation! Not sure why it never dawned on me until now.

Anyway, a warning to others: just because your company gives you stock doesn't mean you have to keep it.

Back to your question: it's my opinion that you should be more diversified. Consider all your holdings (401k, IRA, and taxable) as one big portfolio. As KingCoin said, you're 94% stocks. Nothing wrong with that in theory, as long as you've researched the alternatives and decided it's what helps you sleep best at night. (It might be heretical to say this here, but "MMM said so" is fine for some things and maybe not for others?)

For instance, MMM invests in real estate (which is easier to do then you think, eg. http://www.mrmoneymustache.com/2011/08/15/become-a-lazy-landlord-with-reits/). There are plenty of other investments (TIPS, gold, international stocks, etc.)

Hope this helps!

PS: you should do a bit of research into the tax-implications of your portfolio. This wiki page is like the bible of how to manage the taxes of your investments but it's a pretty dense read: http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

COguy

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I would recommend a good book on Asset Allocation and Modern Portfolio Theory.  The Four Pillars of Investing is a good choice that will cover most of your bases.  Read that and you should be able to answer your questions.

Personally, I would put my money into a target date fund with a stock/bond mix that you like.  These are not going to knock the ball out of the park, but they will be good while you learn more.

Next, I would stick with what you have for a while.  Get a feel for your risk tolerance and try to read enough that you can look back at your original questions and authoritatively answer them.  Develop and investment policy statement so you know what to do and why you do it.

http://www.bogleheads.org/wiki/Investment_Policy_Statement

Finally, keep in mind that during those first 5 years of stashing, your savings rate will crush your return rate.  So, focus on learning and saving mostly for when you have some real money built up and don't get too caught up on the return you are getting.

implet

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Yolfer and COguy: I was hoping to follow simple advice and not have to think too much about the nitty gritty of where to put investments. Maybe that is a naive notion that I have to change and read about to smarten up if I want to become financially independent. I was hoping that there is some kind of obvious financial advice for every situation or something.  :-/

For the bogleheads posts you both posted, I don't have enough of a base knowledge to understand implications of what I'm reading. I think I'd have to start somewhere much more basic. I understand basic things like future value and present value calculations but that's where my financial knowledge ends. I know nothing about taxes or the stock market etc. And while I can understand concepts when I read them I have a hard time figuring out what to do practically with the knowledge.

COguy, when you say to stick with what I have for a while, do you mean right now or after I move money into a target date fund?

I suddenly feel super stressed out about this :(
« Last Edit: February 20, 2013, 05:33:10 PM by implet »

KingCoin

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Short term advice:
Move all your 401k assets to the target date fund. This has a low expense ratio, and will invest in a mix of stocks and bonds appropriate to your investment horizon. This is the ultimate "set-it-and-forget-it" option. Definitely sell the company stock. Owning stock in the company you work for is an investment cardinal sin.

Medium term advice:
Get a few books on personal finance and investing and read them. "A Random Walk Down Wall Street" by Malkiel and "The Four Pillars of Investing" by Bernstein are good places to start. Read enough books so that major investing concepts become intuitive. Learning the difference between investments such as corporate bonds, government bonds (TIPs as well as fixed coupon), REITs, stocks, and money market funds, as well as  the tax implications of accounts  like an Roth/Traditional IRA, 401k, and taxable accounts is absolutely essential. You can get some advice from some yahoos on internet message boards, but when things get ugly, you'll want to have a firm handle on what's going on and what you need to do (or not do) to react.

implet

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Ok, the target date funds start with 2010 and increase by 5 years through 2060. In this category is also something named target ret income. Should I pick the year I'm first eligible to withdraw? So 2045 or so? It feels crazy to write out 2045 by the way, I've never thought that far into the future!

I'll start with a random walk because I'm 99% sure my boyfriend owns it! For the rest, it will be a good reason to finally get a library card now that I'm being frugal and all :)

In the meantime while I read up on everything do you think it's ok to leave my new Roth and other investment account as following the total market? Is this not what most people do?

KingCoin

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2045 if fine. The later you go, the more heavy the portfolio will be on stocks.

There's nothing wrong with having an all stock portfolio, especially since bond returns are abysmal at the moment.  You just have to have a long term outlook. At some point, those funds will fall 25% or more, and you have to be mentally prepared to "stay the course". It's all too common for someone without a firm handle on investing (and even common for those who do) to panic and liquidate at the worst possible time. 2008/2009 is a great example. Market fell 50% and then bounced back 100%.  The Vanguard Total Stock Market fund is good for US stocks, though you'll want to diversify geographically eventually. It's prudent to have 20-30% exposure to emerging market and foreign developed markets. You'll probably want 10% each in REITs and government bonds as well. It's not a change you have to make tomorrow, as foreign markets will be pretty correlated to US markets in the short term, but I'd look to balance out your portfolio over the next 6mo. Random Walk should send you down the right path.


Mike

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Before she starts looking for international exposure, she should find out what the composition is of her target date fund.  A good one should have some portion invested in an international index.


COguy

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Hey Implet,
   Sorry I didn't post sooner and if my response to your question seems irrelevant now then feel free to disregard it.  First, Please don't feel super stressed.  There is really nothing to be stressed about.  Keep in mind that your savings rate is the most important factor right now.  So,  just keep saving and things will work out.

If I were you this is what I would do:

1) Move your 401k to a target date fund (post the stock/bond/other allocations and we can help you choose one, but I bet the 2045 will work fine)
2) Keep your taxable money as is and be prepared to stay the course during the inevitable big drop (who knows when it will happen)...please come here for support if you need it.
3) Focus on your savings rate and living an awesome life.
« Last Edit: February 21, 2013, 10:08:27 AM by COguy »

James

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I posted yesterday in the Ask a Mustache category which gave me the encouragement I needed to take my money out of my regular checking/savings account and put it into investments for the first time! I put $25,000 into a Vanguard Total Stock Market Admiral fund and $11,500 (for 2012 and 2013) into a Vanguard Roth IRA Total Stock Market Fund. I left $8500 in my bank for now so that I feel a bit safe still. I'm going to try to get that cash cushion to be smaller as I get more confident! So exciting/scary!!!

I'm almost 27 and my only debt is a $218 car loan with 0% interest that has one year left on it. Should I pay this off now, or just coast until the end with the 0%?

Now that did this, I want to make sure my 401k that I have through my company is right. I put in the 6% (before tax) that my company matches. They match the first 4% at 100% and the next 2% at 50%. Right now my current balance $48,000 and is allocated like this:

  • 75.24% SP500 Equity Index
  • 10.05% Large Cap
  • 8.57% Company Stock
  • 6.15% Domestic Bond Index
   

I set this up when my company was using a different provider, this year it changed to Fidelity (I'm not 100% sure if it's Fidelity or a service that uses them. At the bottom of the page it says NetBenefits provided by Fidelity). Should I change my future contributions and/or rebalance this?

Are there any other investments I should consider? Am I missing something obvious? Is this too risky if there's a chance I'll need some money to put towards a down payment for a house in the next 2-5 years?

I also have NetBenefits provided by Fidelity, it has worked fine for the past 4 years I've had them.  I agree with the others on the "set it and forget it" with the target date fund.  Focus on maximizing what you put in it, rather than worry about exactly where to put it for now.

I'd pay off the car with the bank account funds.  The interest rate on those funds is not high enough to worry about, and it simplifies the financial situation.  That is only if it doesn't limit what you contribute to your investments, it's not a big deal either way, but you asked so that's my opinion. :)

Finally, regarding your Vanguard, you are 27 and I'd be happy with that allocation.  Just don't move things around out of fear in the future, you shouldn't be making changes when the market changes.


implet

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Thanks for all of the help everyone :)  I do know the rule about not pulling your money out of the market when it dips! Even though I haven't done anything financially since starting work other than my 401k, I would always check it and I guess be amused about the ups and downs. I knew not to touch it and I was cool with the fluctuation. I'm wondering if I'll be naturally inclined to feel so cool with it now that my "real" money is in the market and not just my "old" money. I think I will but you never know. I have a lot of reading ahead of me!

The 2045 Target Date Fund has an asset allocation of 88.45% stock, 8.93% bond, 1.31% cash, and 1.3% other. The fund inception date is 12/28/2012, is that ok? When I click on a performance and risk tab says that this is not a mutual fund. Then under Cumulative Total Returns it lists Target Retirement 2045 Fund, then under that MSCI US Broad Mkt (G), then under that Vanguard Retirement 2045 Composite Index. I can't tell if they are comparing the Target 2045 fund with the other two, or of the fund is made up of the other two.

COGuy, you mentioned the "inevitable big drop". Do you just mean big drops that happen periodically, or do you/investors think something like 2008 is on the horizon?

Finally, do you guys have any good resources for either podcasts or something I can listen to in the car to learn some of what I need to know? I have a long drive tomorrow and monday and need something to listen to!

yolfer

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I know it's overwhelming all the decisions to make, but KingCoin's "invest in something simple while you slowly learn more" is excellent advice. Then you'll be able to learn at your own speed without the stress of "what do I do with this money!?" Personally, it took me about 7 years to get the courage to move from a Target Retirement fund into an allocation of my own choosing!

Maybe post a screenshot of the fund allocation (with personal info redacted) so we can try to figure it out? 88% stock is good to know, but it would be more helpful to know exactly where it's invested (e.g. to help answer Mike's question about international exposure).

I'm almost positive COguy meant the normal periodic cycles of the market. Otherwise, I'd like to look into the crystal ball he must have!

implet

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I can't find any more detailed information than this: 

COguy

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That composition looks good.  Especially for your "old" money like you put it.  One financial adviser, who is a regular contributor on the bogleheads forums, Rick Ferri has noted that his clients appear to have a lower risk tolerance in their "new" money and that is why I mentioned that you need to keep it invested and make sure you have an adequate cash buffer. 

But, you seem to have that well in hand.  I wish I was that way.  Personally, I have to keep quite a bit of safe money in my "new" money as you put it to feel secure.

As far as the inevitable crash, I was thinking along the line of Jim Collins' article title: "Stocks ó Part 1: Thereís a major market crash coming!!!! and Dr. Lo canít save you."  Like the normal gyrations and the occasional 50% drop:) probably a long way down the road. 

I wish I had a crystal ball like that, I would be rich!!

As far as podcasts, I have no idea.  I liked Jim Collins interview on Mad Fientist, but I don't know how helpful that would be. 

http://www.madfientist.com/jlcollinsnh-interview/

Anyone know of any podcasts that might actually teach someone about investing?

pbkmaine

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Vanguard has lots of good stuff on its website.  Also log into www.morningstar.com.  Morningstar has the largest database of mutual fund information. There's a free part and a part you pay a monthly fee for.  Explore the free part first.  Vanguard target date funds are designed for you to use the target date that is nearest your age 65. It's divided among a total US stock market fund, total international stock index fund, total US investment-grade bond index fund, and (this is brand new) total international bond index fund. Once you are near the target date, there's a short term TIPS (inflation protected bond) component.  The Vanguard target date funds are a great option - low cost and well diversified. Can you do better on your own? Anything is possible, but the odds are against you. Individual investors tend to make terrible market timing decisions - buying at market highs and selling at market lows. 

By the way, the phrase "Net Benefits" is an indication that Fidelity is operating the platform your retirement plan is on.  It's an open platform, which means it allows for non-Fidelity funds.  I would explore the website. There are good educational materials and calculators on it. 

MikeinOhio

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Any thoughts on this info from the WSJ on Target Date Funds?  I looked up mine today and the 13%YTD looked nice, but a total index like Vanguart VTSMX looks better.  Is this an issue with diversification? 



Here is the WSJ article - http://online.wsj.com/article/SB10001424127887324049504578541831083543670.html

matchewed

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It's issue with whatever the management decides to invest in. The particular target date is irrelevant other than a general rule of thumb that the closer you get to traditional retirement age for that target group the more bonds will be bought, but by how much or what percentages it is up to the management.

They're used because they're easy and simple. No need to rebalance as someone will do that for you. But you can accomplish the same using index funds and some small amount of investing knowledge.

grantmeaname

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But you can accomplish the same using index funds and some small amount of investing knowledge.
And a little more investing knowledge allows you to minimize your tax bill, a luxury you don't get with an all-in-one fund.

Dee18

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I looked into some target funds and decided against them because the fees were higher.