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Confused Investor Looking for Simplicity
Old 06-12-2010, 10:47 AM   #1
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Confused Investor Looking for Simplicity

Hello, everyone.

Newbie to the forum, also have a post in the "Hi, I am" forum.

My DW and I are starting our financial planning. Here is some basics:

Current savings: 401K with $10,000, 100% in S&P 500 Index Fund
Goal: ER in 20-25 years with 4% intial withdrawal
Saving: at least 20% of gross ($60,000/yr), plus any extra at the end of the month
Nestegg goal: $3,000,000 in todays dollars (but who really knows?)
Tax bracket: 33%
Risk tolerance: moderate (but who really knows - we have not experienced a bear market with significant savings at risk)

What we would like is a good investment plan that we can set on autopilot. It does not have to have the optimal portfolio (whatever that is). We just want to get from point A to point B in the simpliest way possible.

Is there a simple, tax-efficient way to invest that requires a minimal number of funds? If something were to ever happen to me, I want my wife to be able to manage our accounts without having to rely on financial planners who charge big fees.



Thank you.
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Old 06-12-2010, 11:41 AM   #2
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Hi Relax Cajun,

welcome to the board.

If you want to go on full autopilot, then a target retirement fund might be the best choice. Pick the date of your retirement (say 2030), select the appropriate fund (for example Vanguard's target retirement 2030 fund) and you are good to go. The fund owns a mixture of stocks and bonds and automatically becomes more conservative as you get closer to retirement. Rebalancing is done automatically too. It's really a set it and forget it approach.

If you want to be slightly more involved, then you can go with a basic portfolio including funds like: Vanguard total stock market index (US stocks), Vanguard total international stock index (foreign stocks) and Vanguard total bond market index (US bonds). This simple portfolio gives you a very broad exposure to the market and a fairly high degree of diversification. This portfolio requires little maintenance, except perhaps an occasional rebalancing every year or two.

It is important to control your investment costs and taxes. You should stick to mutual funds with low expense ratios, no loads and no commissions (Vanguard and Fidelity would be good choices). Also, as long as your income stays below $250K per year, you want to make sure to keep the bonds in your 401K and the stocks in your taxable account.
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Old 06-12-2010, 11:56 AM   #3
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Personal, detailed, free help can be found at: Bogleheads :: View Forum - Investing - Help with Personal Investments
Start there by reading the "sticky" threads at the top of the list of threads.
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Old 06-12-2010, 12:12 PM   #4
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Welcome RC from a fellow physician. I read your in "Hi I am" so I'll elaborate more on FIREdreamer's post. Unfortunately you and your wife make too much money to have a "simple set and forget" plan. You are lucky to have "seen the light" so early in your career. I would spend some time (I know you have plenty of spare time ) reading the recommended readings here: An updated FIRE recommended reading list (with a military twist), as well as here: Category:Books and Authors - Bogleheads. There is also the wiki here: Bogleheads.

I spent about 6 months here, at bogleheads and reading before setting up my investment plan, there is no rush.

While you are completing your training try to max out ROTH IRA's for both you and your wife as that will be lost to you as you will make to much money. You also need to consider life insurance (simple term life only) as well as disability insurance for both of you and be sure it is "same specialty" insurance. Then there is an emergency fund, for a doctor I would recommend at least 6 months of living expenses given how long credentialing, etc can take. Again no rush, just tackle one thing at a time. You have until April 2011 to make your ROTH contributions for calendar year 2010. Term life is straightforward and cheaper to get while young. DO NOT be enticed by anyone to get any "fancy" whole life or other product. For disability check with your future employer. My basic benefits came with a vanilla insurance benefit but I could upgrade to same specialty by paying extra.

Beyond that I would say to save as much as you comfortably can each year which will be a lot if you can avoid trying to keep up with the Jones'. Physicians and lawyers are notorious for living at or above their means and making poor financial decisions. Avoid that and you will be well on your way, but don't fail to enjoy the journey.

The folks here and at Bogleheads are very experienced and have loads of good advice and will readily answer questions so don't be shy.

DD
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Old 06-12-2010, 12:55 PM   #5
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Quote:
Current savings: 401K with $10,000, 100% in S&P 500 Index Fund
Goal: ER in 20-25 years with 4% intial withdrawal
Saving: at least 20% of gross ($60,000/yr), plus any extra at the end of the month
Nestegg goal: $3,000,000 in todays dollars (but who really knows?)
You should be able to achieve your goal in 18 years if you continue to contribute at the same rate at 7% return.
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Old 06-12-2010, 01:15 PM   #6
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Is $60K your annual savings or gross salary?
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Thanks for the replies
Old 06-12-2010, 01:26 PM   #7
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Thanks for the replies

Thanks to everyone for the advice.

I did read several sources, including Boglehead's Guide to Investing, Little Book of Commonsense investing, Retire Early and Live Well, Work Less Live More, etc. That may be part of the problem, ie getting a lot of different advice from different sources. The challenge seems to be to take everything into account and come up with a plan that works best for you. I think I have a pretty good grip on the basics of asset allocation, risk tolerance, etc. I know little about advanced topics. Some of the problem too, is that I have never had much to invest. So, I know about somethings in theory, but have not been in battle, so to speak, and do not know how to execute some things in practice. I have never had to rebalance in a taxable account, for example, or how and when to tax loss harvest. My wife has not read anything about investing and finances, so the portfolio must be very easy for her to manage should something happen to me.

Here is a simple investment plan I have been considering:
Two Asset Classes:
Bonds: PIMCO Int Term Bond Fund (PTRAX) in 401/457 plans, Vanguard Int Term Muni Fund (VWITX)

Stocks: SSgA S&P 500 Index Fund in 401/457 plans, Vanguard Total Stock Market (VTSMX) in taxable

I think a final allocation of 50/50 would be easy for DW to maintain, ie a "couch potato portfolio". Here are the two ways I was thinking of getting there:

1. Put 100% in stock and ignore it. In 15-20 years, start buying chunks of bonds to reach 50/50 by the time we retire.

2. Start with 80% in stocks, reduce it by 1% a year until we get to the 50/50 target.



3 questions:

1. which of the above two options would be best?

2. If I have just one fund in my taxable account, should I have my distributions re-invested or put into a money market fund to buy shares later.

3. Is the addition of international stocks worth the extra time and tax cost of rebalancing in my taxable account? I am not trying to get the maximum diversity, return, etc. Just want to reach our goals and sleep well at night while we are doing it.

Sorry for the long post. I want to do this right the first time.
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Old 06-12-2010, 01:29 PM   #8
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The $60,000 is the least that we will save each yr. Gross salary is $300,000. If our salary goes up, we will save a higher percent (ie only increase our spending by inflation). If we have extra money in our checking account at the end of the month, we will save that as well.
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Old 06-12-2010, 02:15 PM   #9
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Do you really want it that simple? You can go very very simple if you do not mind paying more taxes than you need to. Otherwise, you will need to have at least 4 funds, but preferably more.

Taxable accounts, where you hold tax-efficient funds:
1) A total US stock market index fund. Examples: VTI, VTSMX, VTSAX, etc.
2) A total international stock market large-cap index fund. Ex: VEU, VFWIX, etc.
You may wish to have some small cap stocks:
3) A total international stock market small-cap index fund. Ex: VSS, VFSVX
4) A US small cap fund. Ex: VBR, IJS, VB, VISVX, NAESX, etc

All the above could be held in tax-advantaged accounts as well.

Tax-advantage accounts:
5) A US total bond market fund, such as VBMFX, BND, PTRAX
6) An inflation-protected securities fund such as VIPSX, TIP
7) If you like a REIT fund such as VNQ

You could also just use a Target Retirement fund in tax-advantaged and a tax-efficient fund or two in taxable.

Perhaps you are thinking that each account needs a few funds, but they do not. Most of your accounts could have a single fund in them. For example, my spouse has a 401(k) with just one fund in it, the PIMCO total return fund you already mentioned. She has 3 IRAs that have the same fund in it, namely the Vanguard short-term investment grade bond fund. The IRAs do not get new contributions, so there is nothing to do with them. Her 401(k) gets automatic contributions from her paycheck. In essence, these accounts are set-and-forget.

For us, almost all our accounts are set-and-forget. We do rebalancing in my 401(k). This is mostly achieved by new contributions. We do not sell anything at a gain, but do sell things at a loss when we do tax-loss harvesting in our taxable account.

That's it. I find it very simple. If you think this is complicated, maybe you should hire someone to do these things for you?
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Old 06-12-2010, 02:21 PM   #10
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Quote:
Originally Posted by Relaxed Cajun View Post
...
3 questions:

1. which of the above two options would be best?
Neither of those options would be best.

Quote:
2. If I have just one fund in my taxable account, should I have my distributions re-invested or put into a money market fund to buy shares later.
It won't matter. Many folks prefer to not re-invest in a taxable account because it takes up an extra line on their tax return later when they sell.
Read this: Whether to Reinvest Dividends in a Taxable Account - Bogleheads

Quote:
3. Is the addition of international stocks worth the extra time and tax cost of rebalancing in my taxable account? I am not trying to get the maximum diversity, return, etc. Just want to reach our goals and sleep well at night while we are doing it.
What extra time? What tax cost of rebalancing?
Yes, it is worth the diversity.

You spent more time reading my response than it should take to do any rebalancing every year or so.
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Old 06-12-2010, 02:34 PM   #11
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Hello Relaxed Cajun,

If you and DW are proficient in using a spreadsheet, I think using that would help simplify things. That way, a spreadsheet can be made to tally up your investment amounts and calculate your asset allocations, etc. I think several of us (myself included) use spreadsheets as part of our system. It would take some time to create at first, but once done, then for the most part you just "plug in" your totals from your various statements and have the spreadsheets calculate where you stand and if you need to reallocate, etc.

That's my approach: invest in index funds (for the most part), tally up, rebalance about once a year. I said for the most part because I have some things that aren't index funds (such as savings bonds), but I just put that in the section of my spreadsheet of fixed income.
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Old 06-12-2010, 02:56 PM   #12
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Quote:
Originally Posted by Relaxed Cajun View Post
1. Put 100% in stock and ignore it. In 15-20 years, start buying chunks of bonds to reach 50/50 by the time we retire.

2. Start with 80% in stocks, reduce it by 1% a year until we get to the 50/50 target.



3 questions:

1. which of the above two options would be best?
2 is essentially what I have done. Will be interested to hear why LOL doesn't think that is a good idea.

I second or third the addition of International equities. Anything between 20-50% is reasonable. So once you have your asset allocation determined then you need to deal with location in order to minimize taxes. Like easysurfer I use a spreadsheet. Every month I run the numbers, determine which asset class is lagging the most from my asset allocation and buy that. Takes 10 minutes max.

DD
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Old 06-12-2010, 03:33 PM   #13
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Thanks again.

LOL!, I think my post may have been confusing. I did not think that I needed a multiple funds in each account, I was just giving the funds I would use for each account if I needed to place that asset class there. I would keep all our bonds in our 457/401 plans, put some S&P 500 index there if I had the room, and all of our taxable would be in VTSMX. So I should only have three funds total.

What I meant about the international stock is that if I added that asset class it would require me to have two stock funds in my taxable account (VTSMX plus international fund). When our account is so big that I cannot rebalance it with just new money/distributions I would have to sell shares of the winner each year to buy the loser, thus incuring capital gains taxes. It would also be an extra fund to deal with. I was curious if the advantages of the extra asset class are worth it. It seems that everyone thinks that they are, so I will consider adding foreign to the mix (25% of the stock total maybe).

BTW, I think that I once I start investing I will realize how easy all this is and not make such a big deal out of having to fiddle with an extra fund or two.


Thanks
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Old 06-12-2010, 03:54 PM   #14
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When your taxable account is large, the movements are not so much that you would need to sell shares of the winner. Furthermore, if you are judicious about tax-loss harvesting, your carryover capital losses will allow you to realize gains and pay no taxes.

I think a spreadsheet is way too complicated unless you are spreadsheet kind of person. I am not a spreadsheet guy and found easier ways to do this. I keep track of my asset allocation online and let others do the spreadsheet thing. With a spreadsheet, you have to type in the numbers. I type my numbers into something called Morningstar Portfolio Manager and get all kinds of free analysis from that that it would take a rather sophisticated spreadsheet to provide.

I have a thread on asset allocation: Asset allocation tutorial?
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Old 06-12-2010, 03:58 PM   #15
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2 is essentially what I have done. Will be interested to hear why LOL doesn't think that is a good idea.
"Stocks" were defined by Relaxed Cajun for his #2 to be a limited set of US stocks overweighted to large-caps. Not good in my opinion.
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Old 06-12-2010, 04:35 PM   #16
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Hi there,

I'd just like to add that you should go slow. You said you've never experienced a bear market. William Bernstein talks about the difference between crashing in a flight simulator and being in an actual plane crash. I started investing slowly in Feb 2007, finally decided to invest everything aggressively in May 2008, went on to lose 40% of my life savings a few months later, being almost fully invested in stock funds, freaked out (but didn't sell), and failed to continue buying during late 2008 and early 2009 when the market bottomed out.

I cursed my bad luck, but really I was to blame. I didn't know much about market history and I didn't understand the risk I was taking. I wasn't in the frame of mind to take advantage of the low prices when the market bottomed because I lost confidence in the market.

Before you invest aggressively, really think about what it would be like to lose half of your money. Would you be able to sleep at night? Would your wife be okay with it?

I find the advice in the books to be remarkably consistent. Invest in a diversified portfolio of low-cost funds at predetermined intervals to take the emotion out of it. Implementing the strategy is easy and takes only a couple minutes. I think the hardest thing for me has been developing the confidence that all will be well with a long enough time horizon and being happy when there is a downturn as I can buy more shares.
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Old 06-12-2010, 06:52 PM   #17
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"Stocks" were defined by Relaxed Cajun for his #2 to be a limited set of US stocks overweighted to large-caps. Not good in my opinion.
Got it. I thought the issue was with the "glide path" for reducing equity exposure as FIRE approaches.

DD
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Old 06-12-2010, 07:09 PM   #18
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RC you would be surprised how much your new contributions will be able to rebalance your portfolio. I have seen no convincing evidence that rebalancing adds significantly to your returns, it is a risk management tool. If you are comfortable with a slight increase in your risk level when one asset is slightly out of balance it is fine to leave it there until you catch up with new contributions. As LOL stated you will be able to TLH and offset gains if you have to. In addition you will likely have equities in your tax deferred space given you are starting at 80:20. Rebalancing within those accounts is tax free.

I know it sounds complicated but once you start doing it it is rather easy.

One other consideration to increase your tax deferred space is to find a locums job as an independant contractor. This will allow you to set up another tax deferred IRA such as a SEP IRA and save up to ~20% of your income from that job.

DD
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Old 06-13-2010, 08:21 AM   #19
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I actually have the option of transitioning to private practice after 3 years (no non-compete clause). I did not even think about it, but extra tax deferred savings could be another reason to do that.

Thanks to everyone for all the great advice.
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Old 06-13-2010, 03:45 PM   #20
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Hi Relax Cajun...
If you want to be slightly more involved, then you can go with a basic portfolio including funds like: Vanguard total stock market index (US stocks), Vanguard total international stock index (foreign stocks) and Vanguard total bond market index (US bonds). This simple portfolio gives you a very broad exposure to the market and a fairly high degree of diversification. This portfolio requires little maintenance, except perhaps an occasional rebalancing every year or two.

It is important to control your investment costs and taxes. You should stick to mutual funds with low expense ratios, no loads and no commissions (Vanguard and Fidelity would be good choices). Also, as long as your income stays below $250K per year, you want to make sure to keep the bonds in your 401K and the stocks in your taxable account.
+1

Hard to beat for diversification, low-cost, and ease. Mutual funds are probably better for regular investing, with no commissions. ETFs might be easier for rebalancing purposes. I've decided to set fairly wide rebalancing bands, to avoid too frequent rebalancing in volatile times, such as now, and to avoid catching the falling knives, in case of another Dow 6000...

Studies I've seen indicate rebalancing every 2-3 years is adequate, but I'm using a fixed 25%, which should accomplish the same purpose. Previously, i.e. before late summer 2008, I was using 10%. YMMV on that front.
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