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Need help understanding fund statistics
Old 09-27-2016, 01:06 PM   #1
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Need help understanding fund statistics

When I was thinking about rolling over my 401K into my standard IRA, I asked about what institutional class benefits I would be loosing and was told that my cash position was in a "Managed Investment Portfolio" that guaranteed a minimum yield of 1.2% and a stable share value of $1.00. I thought that was a great deal so I sold all the stock funds into the MIP in the 401K and bought an equivalent amount of stock funds in the IRA using the 0% cash position.

Reading the fine print, I see that the "guaranteed" stable $1.00 share price is only something that will be "managed to maintain", but it can break the buck.

I also see that there are certain events such as early retirement withdrawal that might trigger a payout at "mark to market" and not at full balance. That will need some "explaining" when I call them.

The composition, while allowing options and swaps, seems to be primarily U.S. Treasury bonds and GNMA and FNMA paper.

The average annual yield is 1.23%, but the expense ration (gross) is 0.78% and the management fee is 0.58%.

I guess these are my questions:

Is the average yield of 1.23% after the two expenses have been taken out? That is what I have been assuming. That is, if I am happy getting 1.23% then I can ignore the high expense rates.

Do you think I tricked myself into one of those high fee / high profit investment products that they like to sell to stupid investors?

At this point, I am thinking that I might be better off just rolling over to the IRA and investing this position in some sort of short term government bond index fund.

At one point I thought I might be better off buying some treasury bonds directly, but the customer service bond specialist told me that the $70 or so fee for making a bond purchase would wipe out all of my interest on the bond so I should stick with funds. Do any of you buy bonds from Treasury Direct?

Thanks for the advice.

Joe
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Old 09-27-2016, 01:26 PM   #2
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In your IRA you are not limited to funds, but could haven chosen to purchase a CD. Is there a CD that pays more than 1.23%? I think so.

As for your stable value 1.23%, I think that is after fees. I think many folks have stable value funds paying more than that. For instance, I consider the TIAA Traditional Annuity that I am invested in that pays 3.0% to be a stable value.

I have bought an I-bond at Treasury Direct.
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Old 09-27-2016, 02:08 PM   #3
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Quote:
Originally Posted by joesxm3 View Post
Do you think I tricked myself into one of those high fee / high profit investment products that they like to sell to stupid investors?

... Do any of you buy bonds from Treasury Direct?

Thanks for the advice.

Joe
1. Yes. Go to your local library and pick up a book on Investing For Dummies. Not necessarily that title but certainly that level. In my humble opinion what you have done is guaranteed yourself that you will never beat the rate of inflation

2. Should I wish to buy treasury bonds, I would simply go into my Schwab account and purchase them. I hate fees
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Old 09-27-2016, 02:24 PM   #4
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I suspect the 1.23% is after fees. You would be just as well off investing in a CD in an IRA or a short-term (say 5 year) target maturity bond fund.

What is your intent with that money and how liquid and safe does it need to be?
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Old 09-27-2016, 02:27 PM   #5
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Where's the 401K and who is the IRA with? You should have better/lower cost options than what you listed.
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Old 09-27-2016, 03:05 PM   #6
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The accounts are with one of the major brokerage companies.

The money is part of my cash or bond allocation. Currently I am cash heavy both due to planning for ER, which I did last month, and a feeling that both bond and equity markets are overvalued at the moment. I could go either way on the liquidity for this piece of money, but I would like to get some better (low risk - don't we all) returns on the dead cash.

Now that I am ER, I am starting to work on positioning things. I am 59 and plan to wait until 70 for SS and have no pensions. I figure that I would put aside at least 5 years of expenses in some sort of cash position, perhaps laddered CD's and then try to move to a more aggressive allocation with the remainder. I am close to 50% cash right now.

The reason for the high cash is that I had a much higher equity exposure in 1987, 2000 and 2008 and took close to 45% hits during those dips. Being about to retire, I was not in the mood to have my ER foiled by a 2016/2017 repeat. I realize I will probably have to increase risk to get close to the typical annual return that the models use.

I might like the concept of the 5 year bucket, a really long term bucket and a middle bucket between the two.

The brokerage company seems to only offer secondary market CD's with lousy yields, or at least that is all they have when I happen to look. Banks that I deal with have some better rates and I have some CD's with them already.

Based on the comments so far, I think I will give some serious consideration to rolling the 401K into my IRA and putting more of the cash position into some short duration bond funds (despite my worry that the current capital gain bonanza on bonds is not normal).

Thanks.

Joe
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Old 09-27-2016, 04:34 PM   #7
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You can do a bond ladder too. Fidelity charges $1 per bond and will build the ladder for free. Not sure what brokerage you use, but they may have something similar. You should be able to double up that yield pretty easily. With some risk, you can get into the 4's via RE income funds, high yield and high yield muni and with a little more risk into the 5's with international bonds. You can create a nice mix that should provide a lot of cushion for any rate increases.
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Old 09-27-2016, 05:25 PM   #8
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Andrews Federal Credit Union is offering 3% on a 7 year CD in an IRA. you would have to open and IRA there, transfer $ and then buy the CD. 6 month penalty for early withdrawal.

Another option I use in my IRA are target maturity bond ETFs. They are like having a proportionate interest in a diversified portfolio of bonds. They have investment grade and high-yield versions and maturities from 2016 to 2026. See Product List - Exchange Traded Funds | Guggenheim Investments - Investment Management for Financial Professionals

BlackRock also has a similar product called iBonds maturing from 2017 to 2024.

These can be sort of like having a bond ladder but more diversified. I use them as a substitute for CDs in my IRA (conceding to a bit of credit risk and some interest rate risk but I intend to hold them to maturity).
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Old 09-27-2016, 06:00 PM   #9
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CO and P4,

Thanks for the advice guys. I will look into the bond ladder and check out those ETF's. The ETF's seem very interesting.

I appreciate your help. This is why I like this forum. So many people willing to share their knowledge.
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