Helping a friend with IRA money

[brokrken]

Hi all, looking for your suggestions/advice on something. I have a friend who's company just changed ownership and she was able to roll her 401k to an IRA and start new in the new 401k. The old 401k money equals about $400k. She is 45, no DH or DKs and plans on 15 more years of work at a mid 6 figure salary job.

She had a few meetings with an advisor, that I sat in on, and he was of course offering to manage for 1% of assets a portfolio of managed mutual funds, which had expense ratios of 1-2%. I explained the long term costs of this and explained to her that we could do a low cost fund set it and forget it portfolio that we'd just need to rebalance once per year.

My question to you all is if we want a 25-30% bond allocation and want to do this with 4-5 low cost index funds max, what would your recommendations be.

 

[RetireBy90]

I have the same categories that I have had for a while now. % is now that I have retired - I had higher in stocks and much less in cash before.

US big cap (S&P 500 fund) 25%
US small or mid cap (Russell 2000 fund) 20%
Developed world fund 10%

US govt bonds 15%
Developed world bonds 10%
Cash 20%

 

[travelover]

I'd recommend a lazy portfolio of Vanguard or Fidelity funds similar to this: https://www.bogleheads.org/wiki/Three-fund_portfolio

 

[MBAustin]

Good for you to help your friend out like this - she will be much better off with your advice than that advisor's!!

Another option could be a low-expense target date fund, which has the advantage that they handle the rebalancing.

 

[Doribe]

I would advise your friend to use one or more asset allocation tools at Vanguard, Fidelity, Schwab or other free sources. The free tools will help her define her risk tolerance and make recommendations. Another way is to look at a target fund and copy the allocation. If she is more aggressive, use a target fund farther out. My personal target allocation is

Asset..............................Target %

Domestic equities................50
Foreign..............................25
Bonds-------------------------15
REIT..................................5
Cash.................................5

 

[pb4uski]

....My question to you all is if we want a 25-30% bond allocation and want to do this with 4-5 low cost index funds max, what would your recommendations be.

65%-70% Vanguard Total Stock + 35%-30% Vanguard Total Bond would be easy.... or go with Vanguard Target Retirement 2030 Fund (VTHRX)

Vanguard Total Stock Market Index Fund Investor Shares	42.10%
Vanguard Total International Stock Index Fund Investor Shares	27.70%
Vanguard Total Bond Market II Index Fund Investor Shares**	21.40%
Vanguard Total International Bond Index Fund	8.80%
100.00%

 

[youbet]

65%-70% Vanguard Total Stock + 35%-30% Vanguard Total Bond would be easy.... or go with Vanguard Target Retirement 2030 Fund (VTHRX)

Vanguard Total Stock Market Index Fund Investor Shares	42.10%
Vanguard Total International Stock Index Fund Investor Shares	27.70%
Vanguard Total Bond Market II Index Fund Investor Shares**	21.40%
Vanguard Total International Bond Index Fund	8.80%
100.00%

And if your friend would be more comfortable with a brokerage house with brick and mortar locations, you can do exactly the same at Fidelity or Schwab. Easy Peasey......

 

[Koolau]

I still recall Scott Burns' "Couch Potato" portfolio. Don't recall the details and the following "update" doesn't have the mix either, but I'm sure anyone can find it with a quick Google search. In any case, it's based on very broad diversification AND low fees. IIRC, he even had one version with only 2 (count, 'em two) funds. Most folks can't beat the markets, so the least they can do is keep fees minimal (Certainly less than 0.1%). Naturally YMMV.

https://www.uexpress.com/scott-burns/2015/2/15/couch-potato-investing-wins-again

 

[OldShooter]

@brokrken, I suggest that you steer your friend to one of the robo-advisors. You will be a "throat to choke" any time your friend's portfolio disappoints him. Do you want that?

I ran a short, two year experiment with the Schwab robot. I gave it $100K on the first day of a calendar quarter and compared its results quarterly with a test portfolio that was about 70%US and 30% International passive funds.

It build a kind of silly portfolio, I guess to impress the customer that investing is complicated. About ten funds, but things like large cap, mid cap and small cap passive funds -- which could obviously be replaced with a total market fund. It also held maybe 5% in low-interest cash; this is probably how they make their money as the service was free.

The investment mix was based on a questionnaire trying to assess risk tolerance, age, etc. I had to game the questions several times to get a 95% equity portfolio.

After 2 years the robot's performance was below but within striking distance of my benchmark. My conclusion was that this robot, at least, is a reasonable choice for a novice investor who wants a hands-off portfolio.

There are other robots out there, some IIRC charging 25bps. My guess is that all will produce similar passive portfolios and will produce similar and acceptable results.

 

[target2019]

Keep it simple. 50% total us stock, 25% total int'l, 25% total us bond market. That would be in the IRA. The more funds you have, the harder it gets.
In the new 401k, we'd have to know what's available. The amounts going in are smaller, so a good opportunity to tilt in one additional fund.

 

[Which Roger]

You will be a "throat to choke" any time your friend's portfolio disappoints him. Do you want that?

+1 I've helped a couple of friends and relatives with investments over the years, but I only do so when the person is willing to dig deep and understand why I am recommending a passive strategy. At a shallower level, the salesperson-disguised-as-advisor sound bites like "my fund has beat the market the past 10 years..." sound much more impressive than "You don't know what the market will do going forward, so you should focus on minimizing costs, managing risk, etc". If the friend doesn't have this level of understanding, you could be in big trouble the next time the market has a big drop.

 

[SumDay]

I recently moved my 401(k) to my brand new Vanguard IRA. I found this Morningstar article and suggestion really helpful: https://www.morningstar.com/articles/762379/retirement-bucket-portfolios-for-vanguard-investor.html

I saw this article recommended several times on Bogleheads, just FYI.

 

[brokrken]

All good recommendations and in line with my thinking as well. Thanks!


A few of you have expressed concern about how my friend would react in a down market and hold me accountable. I've helped her with many things like this in the past and there's never been an issue, so I don't expect one to start now.

 

[Clone]

You will be a "throat to choke" any time your friend's portfolio disappoints him. Do you want that?

A close friend of mine was looking for investment advice. I backed away from giving him strong advice for this reason.

He found a financial advisor who was not concerned. Put him into a bunch of high-risk investments, and decimated his portfolio when the market went the other direction. And for the financial advisor defenders out there, he did have the assorted 'Type xx' numbers and no finra reports.

At some point, all we can do is direct our friends to a decent source of information, and hope that they can make good decisions. Some folks are going to get sold junk, and there are many folks out there that are motivated sellers.

 

[steelyman]

I just say I am not qualified (not a CFA, no degree in finance) but wouldn’t mind sharing what I do. That means my allocation in percentages and which firms have the money. If there are any questions I answer. I did print out a Quicken-generated chart of the annual returns of my portfolio for a bunch of years and said “this is normal and to be expected”.

[ADDED] Just realized that didn’t answer the question. The percentage I would recommend would be an allocation of a Vanguard target date fund chosen appropriately for her age and expectations.

 

[OldShooter]

I just say I am not qualified (not a CFA, no degree in finance) but wouldn’t mind sharing what I do. That means my allocation in percentages and which firms have the money. If there are any questions I answer. I did print out a Quicken-generated chart of the annual returns of my portfolio for a bunch of years and said “this is normal and to be expected”.

+1

This is basically what I do with students in my investing class. I say "I am not you. I cannot tell you what you should do. All I can do is to show you what my wife and I do and hope that can be at least a little bit helpful."

Allocation in percentages and which firms have the money.

Exactly.