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Feedback on My Allocation and Direction
Old 04-17-2011, 11:22 PM   #1
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Feedback on My Allocation and Direction

Hey guys,

Thanks so much for being such a great forum, I've learned so much over the last month I've been here, and am thankful for the knowledge you all have shared.

As I shared here, I'm 25 and have a goal of retiring by 45. At the current point and time I am currently doing the following things to work toward retirement:
  • Putting 6% of my monthly income toward my 401(k), with a 3% employer match, for a total of 9%. This is currently being invested in the Fidelity Fifepath 2040 Fund.
  • Our 2nd car will be paid off in September, so that takes $480/month off the books.
  • All 3 of our student loans will be paid off by December/January, so that's ~$200/month that frees up.
  • After that, I'll be doing 2 things:
    • Saving up ~$300/month in some sort of savings account (or maybe something riskier, like an index fund). When this money equals the amount needed for us to get out from our PMI, I will then use it to pay off that much on the mortgage.
    • We have 1 month of expenses in checking, and 4 months of expenses in savings. On the first of each month, I take all money in checking that's higher than my "1 month of expenses amount" and will put that into a savings account to hold for a few months. Then, at the end of 3-4 months when that money has totaled enough that I feel the expense ratio would be low enough for investing to be worthwhile. This would be approximately $4k-$8k.
So, I have 3 thoughts and questions:
1) Do you have any general thoughts or comments on where I'm at or my plan?
2) What do you think of the Lifepath plans from Fidelity? Am I better off managing things myself? Fidelity gives me that option.
3) Regardless of what I do with my 401(k), I think that this Ultimate Buy & Hold Strategy pdf (linked to in another thread) is pretty cool and interesting and I was thinking about going with this allocation.

Thanks!
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Old 04-18-2011, 11:52 AM   #2
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The articles from Paul Merriman (including earlier editions of this one) reinforced my value and small cap prejudices and also the 50/50 US/international split. It has served me well. You may also look into Scott Burns' various couch potato portfolios (the margarita portfolio would be easy to do with little money) or The Coffeehouse Investor portfolios.

Pick an asset allocation and stick to it. Rebalance every once in a while. Every couple of years or when the proportions are off enough to get your attention.

I wish I had started where you are starting.

Best of luck. And get disability insurance and stay healthy.
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Old 04-18-2011, 09:38 PM   #3
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Cool, thanks Ed! It was nice to look at the Couch Potato and Coffeehouse portfolios and compare them with the ones listed in the Merriman article.

I do have a question about "rebalancing". I see that phrased used a lot, so I read what Wikipedia had to say about it: Rebalancing (investment) - Wikipedia, the free encyclopedia

Let me know if I understand this correctly: I will invest periodically into my plan, let's say 20% into 5 things. However, over time some things perform better than others and my allocation will get all out of whack, with some things making up 24% of my portfolio, and others 17%. So, what I need to do periodically is to buy and sell from some of those accounts to get those numbers back to the 20% value.

That brings about 2 additional questions for me:
  • The Wikipedia article mentions re-balancing every 15 months instead of yearly because of a long-term capital gains tax. Any thoughts on this? Does it make a difference?
  • If I'm investing the money every 3 months, could re-balancing simply consist of me investing 2 parts in the "17% fund" and 0 parts in the "24% fund"? Or is it best to sell from the "24" and buy into the "17"?
Thanks!
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Old 04-18-2011, 09:45 PM   #4
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IMO it is always best to rebalance with "new money" if logical/possible. This will keep you from creating unnecessary taxable events.
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Old 04-18-2011, 10:24 PM   #5
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keep in mind if you are buying and selling within a 401k or IRA there is no taxable event to be concerned with.
Using new money as you describe will work fine while your portfolio is small. After a few years and some growth you may not have enough new money to close the gaps so buying and selling will become necessary.
Plenty of threads and debate about how and when to rebalance. Every year, two? three? five? or as a percent of the target 20% larger or smaller than planned? 15%? 25%?
You're off to a good start. Disciplined saving, aware of your spending etc... Those will be the big wins as you develop your plan.
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Old 04-18-2011, 11:48 PM   #6
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Thanks guys, I'll check out the threads on rebalancing.

I also decided to look into whether using the Lifepath 2040 plan was a good idea...and I'm starting to think the answer is no, but tell me what you think.

The current asset allocation looks like this:
Domestic Stock 61.21%
Foreign Stock 24.05%
Bonds 12.76%
Short Term 1.22%
Unknown 0.00%
Other 0.76%

Expense Ratio: 1.20% (If this link is the same plan)
Return since June 2009 (when I started): 15.59%

So, it seems that the expense ratio of 1.2% is quite high, but so is the rate of return. Is there a rule of thumb when it comes to looking at the expense ratio? What's too high? Could I have gotten a similar return by just managing it myself and using the methods talked about in this thread?

Once all of our debt is paid off in ~8 months, I'll be investing in addition to the 401k, but for now it's all I have.
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Old 04-19-2011, 11:08 AM   #7
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Are you using a broker? Why is your expense ratio so high? Oh, it is your company's 401K. It is probably run by Merrill Lynch or another broker. Insurance companies usually offer their own crap. At vanguard (not through a broker), it would be more like 0.15%.

DO NOT put money in equities that you will need in 10 years.

Google tax efficient funds and see what you get. Funds with low turnover are tax efficient.

You should be 'rebalancing' by putting new money into the asset that is down at the moment. It will be a long time before you will have enough to make it worthwhile to actually move money from one fund to another.

If you can (I forgot the rules), put something into a Roth. They are a gift from God and congress may change their mind.
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Old 04-19-2011, 11:11 AM   #8
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We used to lived in Kirkland. Do you remember when the cardboard effigy of William Shatner was posted on a traffic sign on I-405?
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Old 04-19-2011, 11:14 AM   #9
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My rule of thumb is to try to avoid paying more than Vanguard would charge me for the same type fund. 1.2 is a bit high though many are worse.
S&P 500 is up a lot more than 15% since June 09 so tough to make the argument that the fee is okay because of the great performance.
Focus on your savings rate and expenses read a few books on the recommended list. Check out some threads you're on the right track.
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Old 04-19-2011, 12:41 PM   #10
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Quote:
Originally Posted by Ed_The_Gypsy View Post
Are you using a broker? Why is your expense ratio so high? Oh, it is your company's 401K. It is probably run by Merrill Lynch or another broker. Insurance companies usually offer their own crap. At vanguard (not through a broker), it would be more like 0.15%.
Yes, it's my company's 401k through Fidelity. I plan on investing on the side (once all loans paid off), but I should (obviously) keep taking advantage of the 401k. I believe they give me the option to manage the funds within that 401k myself...so I should be able to do that at a rate lower than 1.2%, right?

Quote:
Originally Posted by Ed_The_Gypsy View Post
DO NOT put money in equities that you will need in 10 years.
Well, I won't need anything for 20 years. What's the context and idea behind this recommendation?

Quote:
Originally Posted by Ed_The_Gypsy View Post
If you can (I forgot the rules), put something into a Roth. They are a gift from God and congress may change their mind.
I am actually given the option of putting my money into a Roth or just the regular 401k. Until last month, I put 3% into the Roth and 3% into the 401k. I do have 2 questions around this:
  1. I put 6% into my 401k/Roth each month and my employer matches with another 3%. One thing I can't figure out (and just emailed my company's benefits dept to get the answer) is whether the employer match is going to the pre-tax 401k or post-tax Roth. Does anyone know?
  2. Also, I was under the impression, perhaps incorrectly, that since I'm retiring at 45, I might be better off taking my 401k and rolling it over to a traditional IRA and then getting the money via ESPP than by just withdrawing from the money I invested in my Roth. Am I completely wrong here? Is there no right answer? I'm interested in opinions (and maybe this is worth its own thread).
Quote:
Originally Posted by Ed_The_Gypsy View Post
We used to lived in Kirkland. Do you remember when the cardboard effigy of William Shatner was posted on a traffic sign on I-405?
Only been here for 2 years, so nope!

Quote:
Originally Posted by Darryl View Post
My rule of thumb is to try to avoid paying more than Vanguard would charge me for the same type fund. 1.2 is a bit high though many are worse.
S&P 500 is up a lot more than 15% since June 09 so tough to make the argument that the fee is okay because of the great performance.
Focus on your savings rate and expenses read a few books on the recommended list. Check out some threads you're on the right track.
Thanks, will do. Any questions I posted for Ed may as well be for you too
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Old 04-20-2011, 01:21 PM   #11
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Quote:
Originally Posted by studbucket View Post
  1. I put 6% into my 401k/Roth each month and my employer matches with another 3%. One thing I can't figure out (and just emailed my company's benefits dept to get the answer) is whether the employer match is going to the pre-tax 401k or post-tax Roth. Does anyone know?
  2. Also, I was under the impression, perhaps incorrectly, that since I'm retiring at 45, I might be better off taking my 401k and rolling it over to a traditional IRA and then getting the money via ESPP than by just withdrawing from the money I invested in my Roth. Am I completely wrong here? Is there no right answer? I'm interested in opinions (and maybe this is worth its own thread).
1) one thing uncle same is good at, is making sure your money is taxed. any company match, will be taxed. for all intents and purposes, it is the same as contributing to the DC plan pre-tax. i do the same as you, and contribute all my money as roth funds. my company helps to spread that exposure out a bit. that's my DC plan anyway...

2) 401k's are protected under certain laws which sometimes IRA's aren't. combine that with the investing choices offered within the plan and you have your answer. (hint: 1.2% in fees is high just by a decimal place) not sure if one can initiate a 72(t) through a 401k or if it has to be an IRA. that will drive your decision as well.
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Old 04-21-2011, 11:26 PM   #12
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Quote:
Originally Posted by ronocnikral View Post
1) one thing uncle same is good at, is making sure your money is taxed. any company match, will be taxed. for all intents and purposes, it is the same as contributing to the DC plan pre-tax. i do the same as you, and contribute all my money as roth funds. my company helps to spread that exposure out a bit. that's my DC plan anyway...

2) 401k's are protected under certain laws which sometimes IRA's aren't. combine that with the investing choices offered within the plan and you have your answer. (hint: 1.2% in fees is high just by a decimal place) not sure if one can initiate a 72(t) through a 401k or if it has to be an IRA. that will drive your decision as well.
I might make a separate thread on 401k->IRA->72t vs. Roth IRA. I am still not sure which would would be best for me (and why).

Thanks for your help.
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Old 04-22-2011, 01:24 PM   #13
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So, a quick clarification. If you just want to invest in the Blackrock LifePath 2040 fund, it's a 1.2% fee. However, looking at my statement more closely, it appears that I'm not charged that amount through the company's 401k. Rather, it's a 0.15% fee, and I currently have a 0.17% expense ratio.
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Old 04-22-2011, 07:33 PM   #14
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Sounds like you're getting an institutional rate leaving you with a low expense ratio. 401k fees can be quite murky depending on your company and the plan.
Looks like you're 85/15 for an AA. Is that the allocation you want at this time?
I guess there are pros&cons depending on current income and tax rates and expected rates in 20-30-40 years (uh good luck forecasting that one).
IMO roths are the best thing since sliced bread and I fill them first and then deal with 401 & after tax.
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Old 04-22-2011, 10:22 PM   #15
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No, 85/15 is not what I'm going for now, but it's what the Lifepath plan signed me up for. I wasn't sure how I wanted to do asset allocation when I started, now I have a better idea. I'm still not sure if I'm going to muck much with Lifepath (though I did change it from 100% in 2040 to 75% in 2040 and 25% in 2030). I'm thinking about just following my 60/40 AA when it comes to all of the money I invest outside of the 401k. Looking at the online calculators and my retirement plans, the 401k will only make up 25% or less of my portfolio anyway.

As for Roths, I'm definitely leaning toward them, or at least going 3% into Roth 401k and 3% into traditional 401k.

The online 401k Roth vs. Traditional calculators all put me as slightly ahead (like $510k vs $490k, after taxes), and I'll have access to more money sooner.

But, as I've been learning in the other threads, it appears that having different "buckets" of money in taxable and non-taxable accounts is favorable for future flexibility.
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Old 04-23-2011, 07:33 PM   #16
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Since none of us knows future tax rates there is something to be said for "tax diversification" (taxable/traditional ira's & roth) and then managing how you move the money out.
When you look at your AA it should be a snapshot of ALL your assets. From an AA perspective it doesn't matter that one acct is all stock and another acct is all bonds etc.... From a tax management perspective you should be holding your least tax efficient items in roth or traditional or 401k and your most tax efficient funds in your taxable acct...
If 60/40 is your plan and the lifepath fund has a competitive er it's perfectly fine to use the fund while complementing it with other funds that will bring your AA to your desired target.
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Old 04-24-2011, 01:21 PM   #17
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After that, I'll be doing 2 things:
    • Saving up ~$300/month in some sort of savings account (or maybe something riskier, like an index fund). When this money equals the amount needed for us to get out from our PMI, I will then use it to pay off that much on the mortgage.
You're off to a great start!

Just one comment on the above - if you know that you will be putting this extra chunk of money into partially paying down your mortgage, there are two reasons why I wouldn't do that:
1) Simply take that $300/month and write an extra check to the mortgage company to make an extra principal payment (call them first to see how to do this - some lenders have specific requirements, and some even have a prepayment penalty attached). Why let the $300/month sit in a savings account for 2 years or so earning 0.10%, while you're paying much more on your mortgage?
2) DON'T put that $300/month into an index fund if your goal is to pay down the house to below 80% LTV - the market fluctuates too much in the short term when you have other new long-term money going to equities and you will need to sell it in just a short amount of time.

Also, remember - by law, the lender must recalculate your mortgage if you have brought the LTV below 80%. However, most lenders have requirements about the minimum amount of time from the mortgage start until when they will do this (some require 24 months minimum; others, longer). They are supposed to automatically take you off of PMI, but keep an eye on that once it dips below the 80% and call them the next day to find out the status.
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Old 04-26-2011, 03:45 PM   #18
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Thanks guys!

@MooreBonds: Since I posted last, I actually started on the calculations and decided that I was going to do what you recommended: just pay the money directly toward the mortgage.

FWIW, it's going to take 4-5 years at $300/month extra to get below PMI. Should have put more down on the house, and it costs a decent bit. Doesn't matter though, house is a sunk cost, and I'm making my finances better moving forward, not gnashing my teeth over decisions in the past.
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Old 04-27-2011, 10:56 AM   #19
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Quote:
Quote:
Originally Posted by Ed_The_Gypsy
DO NOT put money in equities that you will need in 10 years.

Well, I won't need anything for 20 years. What's the context and idea behind this recommendation?
The stock market can be underwater for ten years. I once thought that Mutual Shares was a conservative place to put funds, so I did. At one time it was. Then when we bought our first house, I cashed out and found that it had lost 10% over ten years.

If your event horizon is less than ten years, consider your investment options very carefully.
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Old 04-27-2011, 11:08 AM   #20
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Yes, it's my company's 401k through Fidelity. I plan on investing on the side (once all loans paid off), but I should (obviously) keep taking advantage of the 401k. I believe they give me the option to manage the funds within that 401k myself...so I should be able to do that at a rate lower than 1.2%, right?
Sorry, they will take 1.2% no matter who manages it (sucker!).

Looking back (a long ways), I am now of the opinion that I should have never put money in a 401k. I should have invested it outside of any company plan. And I should have invested at least 10% of my salary. But I should have been better educated financially, too. At great length, I have come to the conclusion that the tax deferral is an illusion, IMHO. The big gotcha is keeping track of all your purchases and sales over 40 years so you can deal with the tax man. This is not such a big problem today with spreadsheets and the documentation that brokers and mutual funds provide today. One way to simplify that is to save money in the bank every paycheck over the course of a year, then buy stuff all at once, once a year. In this case, consider ETFs (also new products since I started). Over 30-40 years, the difference between monthly DCA and annual DCA is insignificant.
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