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How to pick funds?
Old 01-02-2010, 08:43 AM   #1
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How to pick funds?

Hello everyone?

I am starting over my investment approach in 2010 and will be pretty much reallocating my entire portfolio in the next few weeks. Over the past several months I opened a Fidelity self directed account and have moved all my holdings to it from a UBS managed account. I am reading the "Investors Manifesto" and now read this forum daily. So enough with brokers, I am trying to take charge of my investments and we will see how that goes so bear with me as I try to seek some advice.

My first question is has there been a poll or thread that actually shows what funds people hold based on their life situation. I am 46 and have been retired for 2 years. Three kids (12, 13 and 16) and a wonderful wife. I have lurked on the boards and have read books and have bought into the whole low expense passively managed fund approach. My wiring would say that I should have between 35% to 40% equities based on my sleep patterns in the fall of 2008. So with that as a background, what do you guys hold given similar backgrounds. I know this is a Vanguard groupie forum. If I would have known I would have opened a Vanguard account versus Fidelity, but I assume I can buy Vanguard just as easily at Fidelity even though there "free" suggestions lean toward PEMCO and Fidelity on the bond side and index funds on the equity side.

Sorry for rambling but is there a place on the boards that people have discussed there life situation and therefore here are the allocations and funds I hold. I know its personal and individual but I am just looking for a starting point based on the collective experience here. I trust you guys more than my broker if for no other reason than I think you not getting a slice of the pie (I think?).

Sam
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Old 01-02-2010, 09:05 AM   #2
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You're pretty young with a long portfolio survival time period. This is perhaps the most important issue.

And since you still have kids at home, you need to make sure shorter-term funds are set aside for whatever needs of theirs you intend to cover (college, etc.). It's best to manage this differently than your retirement portfolio.

What is your current income needs versus your portfolio? 3%? 4%? lower? higher? This determines how much risk you need to take for your portfolio (less kids short-term expenses) to survive for 50 years. The larger the portfolio, the less you need to worry about inflation risk as you aren't drawing as heavily on the portfolio.

Over 50 years, inflation risk dominates for investing and a lower equity exposure does not help mitigate inflation risk. You have to pick a balance between inflation risk and portfolio volatility. You need to study the survival of various ratios over the long run versus the year-to-year volatility. Links to this kind of information are available in the forum FAQs section.

To give myself as an example. I retired in 1999 at 39 and was not comfortable with an equity exposure lower than 58-60% due to the time horizon I needed my portfolio to survive and beat inflation. I am now 50, and I have pulled back to 55% equities since my time horizon is now 10 years shorter. I will keep dropping the equity % as I get older.

Have you read the articles and FAQs with there links here on the forum about SWR etc.? That is where you need to get started before choosing your asset allocation and which funds to use.

Audrey
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Old 01-02-2010, 09:35 AM   #3
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For the next 8 years I would estimate a 4% withdrawal rate mainly driven by the need to pay for kids schooling etc.. After that I would think we could easily pull back to say 2.5% and live and travel comfortably.
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Old 01-02-2010, 01:42 PM   #4
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Hmmmm - well if you can get by with 2.5% withdrawals in the long run, you probably can get by with a lower equity allocation.

Have you considered any of the conservative balanced funds out there - like Wellesley Income - VWINX? Probably tailor made for your risk tolerance. Easier than rolling your own. Fidelity just doesn't seem to have anything in this class.

And you can always move your investments over to Vanguard from Fidelity - not that big of a deal if it turns out to be the simplest way of handling things. Certainly avoids the $75 transaction fee for buying into a Vanguard mutual fund - not that big of a deal if you buy in with a large chunk. Vanguard can handle the transfer for you if you decide to go that route.

If I were older (60+) and looking for a more conservative allocation I would probably go with mostly VWINX myself. I still see that as an option when I get to the 60-70 age range. Right now I handle my own allocation with various funds from several different fund families through a Fidelity brokerage account. But I set this up over 10 years ago when I was not quite 40 and started out with a higher equity allocation - 60%. There is a moderate amount of effort selecting funds, reviewing them and rebalancing - I'm not so convinced it's worth that effort even though my fairly diverse allocation has performed reasonably well over the past 10 years. A lot of this is historical - in that once you commit to a certain path you tend to stay there for tax reasons. I don't know if I beat VWINX over the past 10 years - I have to do some analysis to see if I did.

Audrey
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Old 01-02-2010, 02:17 PM   #5
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Quote:
Originally Posted by Sowhatdoidonow View Post
Hello everyone?

I am starting over my investment approach in 2010 and will be pretty much reallocating my entire portfolio in the next few weeks. Over the past several months I opened a Fidelity self directed account and have moved all my holdings to it from a UBS managed account. I am reading the "Investors Manifesto" and now read this forum daily. So enough with brokers, I am trying to take charge of my investments and we will see how that goes so bear with me as I try to seek some advice.

My first question is has there been a poll or thread that actually shows what funds people hold based on their life situation. I am 46 and have been retired for 2 years. Three kids (12, 13 and 16) and a wonderful wife. I have lurked on the boards and have read books and have bought into the whole low expense passively managed fund approach. My wiring would say that I should have between 35% to 40% equities based on my sleep patterns in the fall of 2008. So with that as a background, what do you guys hold given similar backgrounds. I know this is a Vanguard groupie forum. If I would have known I would have opened a Vanguard account versus Fidelity, but I assume I can buy Vanguard just as easily at Fidelity even though there "free" suggestions lean toward PEMCO and Fidelity on the bond side and index funds on the equity side.

Sorry for rambling but is there a place on the boards that people have discussed there life situation and therefore here are the allocations and funds I hold. I know its personal and individual but I am just looking for a starting point based on the collective experience here. I trust you guys more than my broker if for no other reason than I think you not getting a slice of the pie (I think?).

Sam
You might also try the Asset Allocation tutorial thread. This won't so much tell you what allocation other people have, as give you some tools to decide on what allocation is appropriate for you, given your life circumstances, risk tolerance and so on.
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Old 01-02-2010, 02:17 PM   #6
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I am unaware of a poll or thread where people listed their asset allocations. There is the AA tutorial thread: Asset allocation tutorial? but I don't think that is exactly what you wanted. Over on Bogleheads, folks list asset allocations all the time but not all in one place: Bogleheads :: View Forum - Investing - Help with Personal Investments

I don't think such a list would be useful to you. Every family and their finances are different. You listed characteristics that are rare: Retired in mid-40s with 3 teenagers.

Suppose I write that I am semi-retired (I work part-time, my spouse works full-time), have 2 teenagers and my asset allocation is 31% US stocks, 31% foreign equities, 31% fixed income and 7% commercial real estate. I like to have my equities to be half US, half foreign, half large cap, half small cap, half blend and half value. That is, I like a Fama&French inspired small-cap and value tilted portfolio. Is that info really helpful to you?

Have you read all the articles at FundAdvice.com - Home ? I think that would be good place to start along with some books. What books have you read?
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Old 01-03-2010, 09:24 AM   #7
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I pretty much follow the FundAdvice asset weightings, with just a few tweaks. I threw in real estate before they did, and I have energy also, and a little more emerging markets now.

I'm with Fidelity also. They list a lot of Vanguard funds, but you will be charged a fee each time you buy. Not too bad if you buy in big chunks. They don't have a fee when you sell, which is nice for withdrawals at least. Fees kind of discourage rebalancing as well. So I'd look for comparable no transaction fee funds. Or you can go with ETF's, which may have a lower "fee" for you, and are lower cost.

That said, I don't mind active funds and I maintain smaller accounts for DW and myself where the Vanguard minimums would too limiting for my smallest allocations. So look around at what's available at Fidelity.

I wouldn't hesitate to move to Vanguard just to avoid fees if you have your heart set on their index funds. I used to have accounts at both places, which is easy enough to manage via EFT's to a common checking account. Fidelity has a nice mySmart Cash checking account that can pull cash from your investment account for overdrafts or to maintain a minimum balance. And you can buy ETF's (or stocks) and mutual funds in the same account, which was why I switched from Vanguard to Fidelity in the first place. Not sure what Vanguard's account structure looks like now.
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