401k Bond Fund Drag

[Born2Fish]

My 401k moved to Fidelity a few months ago.

We have a limited number of funds available. We also have Stable Value fund but it is basically 0% return...ballast at best.

I initially selected a combination of Target Date (TD) funds to achieve my desired AA. The TD funds include Bond Funds. Bond fund price has fallen in the past month resulting in a 1% loss in my portfolio. I don't see bond funds helping me very much going forward.

I want to get out of TD funds and use lower cost individual funds.

The combined AA for all my Fido TD investments is:
Domestic Stocks 40%
Intl Stocks 12%
Bond Funds 14%
T bills/Short Term 3%
Stable Value 31%

This is what I propose:
FXAIX (SP500) 50%
FSPSX (Intl Fund) 10%
FSSNX (Small Cap) 5%
Stable Value 35%

The expenses for the Target Date funds are ~ 0.12%.

Proposed individual stock funds expenses < .05%.

I would appreciate any feedback.

 

[OldShooter]

Feedback:

1) Your proposed portfolio looks reasonable, but like most similar posts it begs the questions: "What is the purpose of the stash?" and "How does the stash figure in your current income/expense situation?" If the stash will primarily end up in your estate, 35% FI is probably too high. If you need a withdrawal rate of 4%, 35% FI may be too low.

2) % international is a hot topic here, with zealots aplenty. DW and I own the world on a market cap basis, which currently means International is 45% of our equity position. Vanguard recommends 30-40%. Esteemed friend @PB4USKI argues passionately for zero.

3) A 1% move in a month is nothing to pay any attention to. Portfolio performance is best evaluated after a few years and ideally after a few market cycles. To react to a 1%/1 month ripple is to react to noise, not information. We look seriously at our portfolio once a year. I am involved with some nonprofits and when evaluating those portfolios my minimum period is two years and it really should be five.

 

[cooch96]

I'm of the opinion Bonds are the most overvalued asset of the day. The only bonds I have are in the Megacorps controlled retirement plan.
However, you have to be comfortable with your AA in good times and bad. So, how is your appetite for volatility? If your current AA is frustratingly slow, then transitioning out of Bonds makes perfect sense to me.

 

[Born2Fish]

Feedback:

1) Your proposed portfolio looks reasonable, but like most similar posts it begs the questions: "What is the purpose of the stash?" and "How does the stash figure in your current income/expense situation?" If the stash will primarily end up in your estate, 35% FI is probably too high. If you need a withdrawal rate of 4%, 35% FI may be too low.

I will make adjustments based on what I learn in the coming years.

2) % international is a hot topic here, with zealots aplenty. DW and I own the world on a market cap basis, which currently means International is 45% of our equity position. Vanguard recommends 30-40%. Esteemed friend @PB4USKI argues passionately for zero.

I'm with PB. I am open to change but will have to see some data that suggests it makes sense.

3) A 1% move in a month is nothing to pay any attention to. Portfolio performance is best evaluated after a few years and ideally after a few market cycles. To react to a 1%/1 month ripple is to react to noise, not information. We look seriously at our portfolio once a year. I am involved with some nonprofits and when evaluating those portfolios my minimum period is two years and it really should be five.

I plan to evaluate periodically and manually rebalance to same AA if it gets more than 5% out of target. As I get a few years of being retired, I hope I find myself copying your approach.

I appreciate the feedback.

 

[Whisper66]

I don't see any issues with your proposal. It appears appropriately conservative given your expected expenses (from other posts). I think once you and wife start taking SS, may want to retest how much $$ you wish to keep in the stable value fund. Typical thought is targeting an asset allocation, 65/35 in your case, and staying at that allocation. I personally also would consider how many years of living that 35% will cover if a bear market hits. I like to ensure I have enough fixed assets to cover a 3 year downturn in the market. But if I'm covering many more years than that, I consider moving money to equity assets for better return. But to each his own. The most critical thing is making sure you are comfortable with whatever you choose.

 

[Born2Fish]

I don't see any issues with your proposal. It appears appropriately conservative given your expected expenses (from other posts). I think once you and wife start taking SS, may want to retest how much $$ you wish to keep in the stable value fund. Typical thought is targeting an asset allocation, 65/35 in your case, and staying at that allocation. I personally also would consider how many years of living that 35% will cover if a bear market hits. I like to ensure I have enough fixed assets to cover a 3 year downturn in the market. But if I'm covering many more years than that, I consider moving money to equity assets for better return. But to each his own. The most critical thing is making sure you are comfortable with whatever you choose.

That makes perfect sense.

 

[pb4uski]

....Vanguard recommends 30-40%. Esteemed friend @PB4USKI argues passionately for zero. ...

I think passionately might be an overstatement. I'm just not a fan of international equities.

For years I followed Vanguard's recommendations for 30-40% of international. After many consecutive years of disappointing returns from international equities I sold out. I'm now from Missouri when it comes to that asset class.... "show me" something and I'll reconsider but until then I'm skeptical.

Portfolio Visualizer suggests that that a 42/18/40 portfolio has consistently underperformed a 60/0/40 portfolio since 2012. Click on the Rolling Returns tab and check out 3-year and 5-year roling returns since 2012.

https://www.portfoliovisualizer.com...mbol4=VBMFX&allocation4_1=40&allocation4_2=40

 

[Finance Dave]

I think your suggestion is very reasonable. Ours is similar, although we're a bit more risk averse, so equities are lower. One other thing to consider is how concerned you are about inflation, and whether your portfolio is set up for high levels. We have a tiny amount of copper to help with that as we come out of the pandemic cycle, and we have some TIPS as well.

We use CD ladders and SPDAs for our fixed income....which don't pay much but are very stable and relatively "safe".

 

[Dtail]

I think passionately might be an overstatement. I'm just not a fan of international equities.

For years I followed Vanguard's recommendations for 30-40% of international. After many consecutive years of disappointing returns from international equities I sold out. I'm now from Missouri when it comes to that asset class.... "show me" something and I'll reconsider but until then I'm skeptical.

Portfolio Visualizer suggests that that a 42/18/40 portfolio has consistently underperformed a 60/0/40 portfolio since 2012. Click on the Rolling Returns tab and check out 3-year and 5-year roling returns since 2012.

https://www.portfoliovisualizer.com...mbol4=VBMFX&allocation4_1=40&allocation4_2=40

Feel the same about International equities and currently at 0% on them.

 

[Markola]

Your proposed allocation looks fine but will you honestly stick with it long enough for its components to cycle and do their jobs? I ask, because if you’re willing to time the bond market it’s a straight line to timing everything else, which is impossible to do and becomes the real drag on investors’ returns.

Your target date funds cost a minuscule amount more than the underlying funds but might the TD is doing a much more valuable service for you by dispassionately rebalancing and preventing investing mistakes.

I’m not lecturing, because I am prone to all the mistakes, which is why I automated such decisions and got them away from my itchy trigger fingers. Glad I did, too. Good luck.

 

[Dash man]

Feel the same about International equities and currently at 0% on them.

I’ve been zero in international equities for over a decade, but recently put 10% in. I’d never put 30-40%. I won’t touch international bonds.

 

[OldShooter]

Y ... Your target date funds cost a minuscule amount more than the underlying funds but might the TD is doing a much more valuable service for you by dispassionately rebalancing and preventing investing mistakes. ...

One caution on that: I used to generically recommend "target date" funds to some people, but I did a little investigating. It turns out that the "target date" basket contains apples, oranges, kumquats, and more. For a given target date, every fund has a different fixed/equity ratio. Further, the ratios change over time in many different ways. Some do what I expected, which was a smooth transition as the owner nears retirement, then again a smooth transition during the early years of retirement. I saw one, though, that held the percentages constant until very near retirement, then made a fairly fast trasition as it neared the target date, and finally going with another fixed ratio going forward. I wouldn't say one current ratio is necessarily better than another nor would I say that one transition profile is better than another. But it's important for any buyer to examine the goods, making sure they are suitable before plunking down the cash.

Another aspect of the funds in the basket is how the equities are selected. Broad market index or based on some stock picker's taste. This is especially important because the fund reports only a blended return, so it is difficult or impossible to asses the performance of the equity tranche. Also, bad things can happen with stock pickers: https://www.reuters.com/article/us-...ers-on-risky-path-to-retirement-idUSKBN1GH1SI My suggestion is to buy only target date funds where the equity portion is based on a broad index.

Then, of course, expense ratios vary quite a bit.

So I no longer just say "target date fund" as if they were all the same. They aren't.

 

[Markola]

^^^^^ All good points. The OP mentions his/her target date funds are FIDO, if that clarifies.

 

[OldShooter]

^^^^^ All good points. The OP mentions his target date funds are FIDO, if that clarifies.

Yes. Actually IMO that's a risk. It was Fido that went crazy with its target date funds (see link). But, importantly, there are certainly target date products from other vendors also available through Fido. Maybe with a small fee but that is a pittance to a long term investor. The OP should at least look them over.

 

[Born2Fish]

Your proposed allocation looks fine but will you honestly stick with it long enough for its components to cycle and do their jobs? I ask, because if you’re willing to time the bond market it’s a straight line to timing everything else, which is impossible to do and becomes the real drag on investors’ returns.

Your target date funds cost a minuscule amount more than the underlying funds but might the TD is doing a much more valuable service for you by dispassionately rebalancing and preventing investing mistakes.

I’m not lecturing, because I am prone to all the mistakes, which is why I automated such decisions and got them away from my itchy trigger fingers. Glad I did, too. Good luck.

OK, I tell myself I'm not really trying to time the market. My 401k changed from Principal to Fido in late 2020. In my prior 401k I held SP500, Small Caps, and Stable Value (SV paid pretty good int rate).

When it changed to Fido I selected Target date funds, and Stable Value (cash) as a starting point. SV is basically cash/ballast...no interest rate. I kinda "winged it" but left enough in SV that I was able to sleep at night.

After several months I have learned that I do not like the high ratio of Int funds to US and I do not like the impact of bond funds.

The ratio of US to Intl in every TD fund is appx 60/40, way too high. The Bond Fund AA changes depending on the Target retirement date, but the Intl is always around 2/3 of the US allocation.

For example:

2060 TD fund percentages are: 54 US, 36 Intl, 10 Bonds

2030 TD fund: 39 US, 26 Intl, 31 Bonds, 4 short term

2015 TD fund: 25 US, 17 Intl, 43 Bond, 15 short term

This current exercise is to dump the Bond Funds and significantly reduce the allocation of Intl funds.

I also noticed that he target date US total market fund holds a few thousand companies - this is VERY good. But I don't see an option to buy this fund in MY COMPANY 401k choices outside of the TD funds. So I am buying SPY and IWM (or Fidos equivalent ETFs) to gain market breadth.

Should I add mid-cap as well?

BTW I hold SPY, IWM, CDs, Preferred Stocks, 20% cash, and a few individual stocks in my tIRA. Roth is 100% SPY.

 

[Out-to-Lunch]

^^^^^ All good points. The OP mentions his/her target date funds are FIDO, if that clarifies.

It turns out that it does not. Fidelity has at least three series of target-date funds available to anyone, plus an unknown number of custom ones cooked up for large employers.

Of the three widely available ones, one series is actively managed (Fidelity Freedom), one is passive (Fidelity Freedom Index), and one has some of each (Fidelity Freedom Blend). ERs for the fully active ones are ~0.7%, and the passive ~0.12%.

This is quite old, but I happened to come across this comparison of funds I made years ago the other day:

Fidelity Freedom 2030 (FFFEX) ER = 0.74
Equity Funds (82.67%)
** Fidelity Disciplined Equity Fund 9.77%
** Fidelity Equity-Income Fund 9.76%
** Fidelity Growth & Income Portfolio 9.32%
** Fidelity Blue Chip Growth Fund 8.58%
** Fidelity Mid-Cap Stock Fund 7.61%
** Fidelity Growth Company Fund 7.00%
** Fidelity Value Fund 6.51%
** Fidelity Europe Fund 5.68%
** Fidelity OTC Portfolio 4.74%
** Fidelity Overseas Fund 4.10%
** Fidelity Diversified International Fund 4.07%
** Fidelity Japan Fund 1.65%
** Fidelity Small Cap Independence Fund 1.21%
** Fidelity Small Cap Growth Fund 0.88%
** Fidelity Small Cap Value Fund 0.87%
** Fidelity Southeast Asia Fund 0.84%
Fixed-Income Funds (17.33%)
** Fidelity Capital & Income Fund 3.67%
** Fidelity High Income Fund 3.64%
** Fidelity Investment Grade Bond Fund 3.50%
** Fidelity Government Income Fund 2.51%
** Fidelity Strategic Real Return Fund 2.01%
** Fidelity Intermediate Bond Fund 2.00%

And how it compared to a custom fund from DW's employer:

Fidelity [employer] Pathway Fund 2030 ER = 0.15

[employer] Domestic Equity Index Fund 35.0%
Vanguard Small Cap Index Fund 7.5%
[employer] International Equity Index Fund 25.0%
Vanguard REIT Index Fund 7.5%
[employer] Bond Fund 10.0%
[employer] TIPS Fund 15.0%

I know which one I would prefer!

 

[OldShooter]

@Out-to-Lunch, from those lists it appears that you are focusing on prior results, which are not at all predictive. S&P publishes a semiannual “Manager Persistence” report comparing managers results over years. The answer is always the same: Only really poor managers’ results persist, probably because of high fees. Top managers do poorly.

Here is a chart based on one of the S&P resports. On the left is a stack of managers split into quintiles based on 5 years of results through the end of 2011. On the right is the results achieved by the top left quintile in the next five years. Note that pure randomness would have put 20% of those managers into each of the 2012-2016 quintiles. The actual results are worse than random!

​

Just like the warning says: Past performance does not predict future results. Another representation of this result is the quilt chart:https://www.callan.com/periodic-table/

 

[capjak]

My portfolio asset allocation is based on all my funds (taxable/tax deferred and tax free). I can not tell from your post if this is specific for tax deferred only or your entire portfolio. IMO the decision is based on all your money not what is in any one account.

 

[Out-to-Lunch]

@Out-to-Lunch, from those lists it appears that you are focusing on prior results, which are not at all predictive.

You are preaching to the wrong guy!

If you re-read my post, you will see that I was clarifying a point for another poster, not advocating anything.

I thought it would be obvious by my emphasis on ERs, but perhaps I should have made it explicit. I would MUCH rather have the low-cost, broad-index fund solution, as opposed to that writhing can of worms in the first fund!

 

[Born2Fish]

I think passionately might be an overstatement. I'm just not a fan of international equities.

For years I followed Vanguard's recommendations for 30-40% of international. After many consecutive years of disappointing returns from international equities I sold out. I'm now from Missouri when it comes to that asset class.... "show me" something and I'll reconsider but until then I'm skeptical.

Portfolio Visualizer suggests that that a 42/18/40 portfolio has consistently underperformed a 60/0/40 portfolio since 2012. Click on the Rolling Returns tab and check out 3-year and 5-year roling returns since 2012.

https://www.portfoliovisualizer.com...mbol4=VBMFX&allocation4_1=40&allocation4_2=40

PB4 - thanks for the visualization tool.

Thanks all for your feedback!

Here's my plan.

1. I don't have a US Total Market Fund available in my Fido 401k outside of the Target Date funds.
2. TD Funds ALL have a 60/40 ratio of US/Intl funds.
3. I don't want any Intl funds.

So, I am going to construct my own Total US Market Fund using a ratio of:
FXAIX (77%), FSMDX(17%), and FSSNX(6%). (Low expense funds available in my Fido 401k.)

I found tables to construct a Total US Market fund here: https://www.bogleheads.org/wiki/Approximating_total_stock_market
(scroll down to FIDELITY table)

I am going to hold my nose and continue to invest in Fido_Bond_fund.

My Fido 401k investments in Total_US_Market_Fund and FIDO_Bond_Fund will sum to 80% of my total 401k portfolio.

So the result as a percent of total 401k portfolio is roughly:
Total_US_Stock 70%, BondFund 10%, Stable value 20%.

I will let this run a while and see how things look.

For the record, I have other investments in 401k, ROTH which give me around 60% US stocks overall.

All is good!

 

[pb4uski]

Sounds like a good plan.