A couple of simple and random questions

[seraphim]

1. Is there any value, in your opinion, to diversifying between two different fund families: such as opening accounts with both Vanguard and Fidelity, then running similar portfolios with both? A risk reduction?

2. Just checking to see if I have a handle on basic reallocation: suppose I plan to draw 30k a year from a 1M portfolio. Keep 30k in a checking/MM and replenish yearly from stocks or bonds. About a 60/40 split between equities and bonds, drawing from bonds when stocks are low, through the bear markets, and reallocating from stocks to bonds when stocks are high?

I know my questions are jumping around, but I'm just trying to fill in the blanks lol.

 

[Midpack]

1. Is there any value, in your opinion, to diversifying between two different fund families: such as opening accounts with both Vanguard and Fidelity, then running similar portfolios with both? A risk reduction?

2. Just checking to see if I have a handle on basic reallocation: suppose I plan to draw 30k a year from a 1M portfolio. Keep 30k in a checking/MM and replenish yearly from stocks or bonds. About a 60/40 split between equities and bonds, drawing from bonds when stocks are low, through the bear markets, and reallocating from stocks to bonds when stocks are high?

I know my questions are jumping around, but I'm just trying to fill in the blanks lol.

1. There are those who favor all their assets in one place for convenience and the benefits of services that go with larger balances, and those who favor multiple accounts for safety or fund choices. Both concepts have merits, and it's been discussed here periodically, here's one thread http://www.early-retirement.org/forums/f28/having-all-of-your-money-at-one-brokerage-33157.html

2. As you might imagine, there are many ways to handle withdrawals. Here's a discussion link http://www.early-retirement.org/forums/f47/what-drawdown-method-do-you-use-57777.html and here is a very basic tutorial Withdrawal Methods - Bogleheads

 

[seraphim]

Thanks Midpack. I'd seen people discussing methods in the first link you posted and couldn't figure out the scenarios. The bogleheads link cleared up the discussions for me.

I was pretty much looking at a lower withdrawal rate which should - under most circumstances - let the principal grow, the adjust my life style accordingly.

 

[LOL!]

A portfolio that is 60/40 will probably pay out about 3% in dividends every year, so you will not need to sell shares in many years ... except to rebalance. So if stocks drop, you will need to exchange from bond fund shares to stock fund shares regardless of your withdrawal scheme in order to maintain your 60/40 asset allocation.

So will you be able to steel yourself and buy equities when they keep dropping?

 

[traineeinvestor]

Some would question whether 12 months worth of living expenses in cash/near cash form is sufficient given:

1. the possibility of emergencies and unanticipated expenses (they can happen and, for most of us, probably will)

2. the fact that there will inevitably be one off expenses (e.g. car replacement) which don't arise every year but still need to be provided for

3. since you are intending to rely on dividends and interest and the projected yield is about equal to your annual expenses, the possibility of having a year when your income is less than expected is very real (e.g. the people who relied on dividends from financial companies pre financial crisis),

you might want to think about having a bigger cash buffer to begin with. Being forced to sell assets at a bad time (low prices) can do a lot of damage to any retirement plan. I'm also relying on cash flow from investments to fund my retirement and plan to have two years cash/near cash on hand at all times but wonder if even that is sufficient?

 

[ERD50]

Some would question whether 12 months worth of living expenses in cash/near cash form is sufficient given:

1. the possibility of emergencies and unanticipated expenses (they can happen and, for most of us, probably will)

2. the fact that there will inevitably be one off expenses (e.g. car replacement) which don't arise every year but still need to be provided for

3. since you are intending to rely on dividends and interest and the projected yield is about equal to your annual expenses, the possibility of having a year when your income is less than expected is very real (e.g. the people who relied on dividends from financial companies pre financial crisis),

you might want to think about having a bigger cash buffer to begin with. Being forced to sell assets at a bad time (low prices) can do a lot of damage to any retirement plan. I'm also relying on cash flow from investments to fund my retirement and plan to have two years cash/near cash on hand at all times but wonder if even that is sufficient?

But you have to weigh:

How often I am really going to have some big, unanticipated expense, and have to pull money at the same time that both bonds and stocks are low -

versus

the opportunity cost of having another 3-4% of my money making negative real returns (typical for cash) forever.

-ERD50

 

[ejman]

1. Is there any value, in your opinion, to diversifying between two different fund families: such as opening accounts with both Vanguard and Fidelity, then running similar portfolios with both? A risk reduction?

If your investment includes only index funds I would think that there is very little benefit to splitting between fund families as long as the funds were constructed to track the same index and the expense ratios were about the same. For actively managed funds there might be a difference in philosophy (i.e "group think") that might make it worthwhile to split between different fund companies. I have some investments in actively managed funds with Vanguard (Wellesley, Wellington), with Fidelity (Contra) with Franklin Templeton (Mutual series) and with the Acorn fund for many years although the last one keeps changing managing companies I think the current owner is GASP! Ameriprise. These have actually worked well for me having owned them for many many years but I probably would not buy into them today if I were starting out with the exception of the Vanguard funds.

 

[Alan]

Historically DW's IRA's have been in Fidelity and mine in VG and we have left them that way. Our joint, after tax, account is with VG and that is where we are drawing from until we reach 59.5 and are able to draw on IRA's.

We have 5 years of withdrawals in I-Bonds in case of a long down market. In our short time in the market, since '95, we experienced 3 straight losing years ~10 years and I'm aware that it can easily happen again.

 

[traineeinvestor]

But you have to weigh:

How often I am really going to have some big, unanticipated expense, and have to pull money at the same time that both bonds and stocks are low -

versus

the opportunity cost of having another 3-4% of my money making negative real returns (typical for cash) forever.

-ERD50

Very true, but it only has to happen once and your retirement can be wrecked....and anecdotally at least it did happen for a number of people during the financial crisis (and every crisis that preceded that one) - a few medical bills, the kids crshing the car and a few dividends being cut at the wrong time and the margin of safety starts slipping away along with the ability to sleep at night.

On the other hand, if the opportunity cost of having an extra year's worth of expenses in the form of cash/near cash is going to make the difference between financial success or failure in retirement, that might be an indication of retireing too soon.

If the spread is (say) 2.5% pa, on $30,000 that's $750 a year. Not to be sneezed at, but (IMHO) a cheap from of insurance.

Or all this could mean that I'm just too conservative?

 

[seraphim]

So will you be able to steel yourself and buy equities when they keep dropping?

Being new to investing, that's a question I'm still asking myself. I do understand the concept of buying more shares when prices are low. My biggest fears are mostly that I'll lose all our reserve money and look like a dolt *grin*. Probably a common fear to all new investers.

A portfolio that is 60/40 will probably pay out about 3% in dividends every year, so you will not need to sell shares in many years ...

Dividends are a subject I'm still researching. Do index MFs actually pay dividends? Research I've done indicates maybe yes, maybe no lol. Or do only individual stocks that I personally own pay diviends?

since you are intending to rely on dividends and interest and the projected yield is about equal to your annual expenses,

My question was merely whether I understood how the reallocation process worked, shifting funds back and forth between stocks and bonds. We also have over 60K in pensions. Our expected (basic) expenses are about 60k a year, without changing our lifestyle, plus extended travel time in the RV. That 30K reserve SHOULD increase slightly over time: if we only use 20K of the 30K, then add 30K the next year...

Would an added money market with another 30K reserve be wise and pay more inreturns than a standard savings account, what with the ER on a MM?

 

[seraphim]

If your investment includes only index funds I would think that there is very little benefit to splitting between fund families as long as the funds were constructed to track the same index and the expense ratios were about the same.

My main concern was if one of the two familes experienced business difficulties of some sort. I know there is insurance to cover certain types of fraud, etc, as well, but if one fund had problems that affected, even temporarily, access to my funds, then there would be a second option.

 

[pb4uski]

Yes, MFs pay dividends, short-term capital gain distributions and long-term capital gain distributions. For the most part, you can think of it as a look-through to the underlying portfolio of stocks or bonds, as the case may be.

You seem to understand how balancing works. Say your AA is 60 stocks/40 bonds and you want to hold 3% in cash. Some people would consider the cash to be part of the 40 of fixed income, so your AA is actually 60 stocks/37 bonds and 3 cash. Other people consider the cash separate from the investments, so the overall AA would really be 58 stocks/39 bonds and 3 cash.

Let's say you want to be 60 stocks/37 bonds /3 cash at the beginning of each year. At the end of 2012 you have 66/34/0. on Jan 2, 2013 you would sell 6 of stock, buy 3 of bonds and retain 3 of cash, bringing your portfolio AA to your 60/37/3 target. Same thing the following year.

I personally don't see any value to using multiple vendors for investing other than just making my accounts more complicated than they need to be, but I know others feel differently.

 

[seraphim]

That's the confirmation I was looking for. Putting it into layman's (simple) terms for me crystalised the process.

I'm inferring from previous comments, as well, that a 70/30 mix - in general - will yield better results. With our pensions we may not need so much in bonds.

At the moment, I have about 88K in taxable income to start a portfolio. Expecting another 85k by year's end (after probate) and 170K in tax deferred funds in the next month or two.

Come January, there's about 670k in deferred retirement accounts to roll over into a portfolio, plus about 56k in a cash buyout. Another 14k or so in savings account, and 65K in a MM (which will be used to cover atty fees and estate tax (about 50k)).

I'm crunching numbers now to see if I want to payoff the 68k balance on a mtg (11 years remaining @ 6.25% about $850 month in mortgage payment only) using part of that first 88k, or refinance and suffer the payments for 11 years. In the long run (11 years), I think the numbers would support paying off the loan now. The next ten months could use that payment getting completely debt free: a car and RV loan.

But, I'm starting to see various plans forming in my mind. Thanks for everyone's assistance. You don't know what a help you've been.

 

[ERD50]

Very true, but it only has to happen once and your retirement can be wrecked....and anecdotally at least it did happen for a number of people during the financial crisis (and every crisis that preceded that one) - a few medical bills, the kids crshing the car and a few dividends being cut at the wrong time and the margin of safety starts slipping away along with the ability to sleep at night.

On the other hand, if the opportunity cost of having an extra year's worth of expenses in the form of cash/near cash is going to make the difference between financial success or failure in retirement, that might be an indication of retireing too soon.

If the spread is (say) 2.5% pa, on $30,000 that's $750 a year. Not to be sneezed at, but (IMHO) a cheap from of insurance.

Or all this could mean that I'm just too conservative?

Maybe, maybe not, but I think you are overstating the case.

If you take a hit that could 'wreck' your retirement, I really doubt that an extra 3-4% of that portfolio in cash would be the difference between success/fail. It's gone after the first draw-down. The math just doesn't work for me. A single 3-4% hit isn't likely to wreck a retirement or not by pulling from cash versus your AA.

And the flip side, since we expect our portfolios to have a positive real return over long time periods (else, we would not use a 3-4% WR), the odds are good that if disaster hits, your AA is up, not down. Just re-balance with the WD.

I guess the question is, just how much 'insurance' is that $750/year ad infinitum buying you?

-ERD50

 

[ERD50]

My main concern was if one of the two familes experienced business difficulties of some sort. I know there is insurance to cover certain types of fraud, etc, as well, but if one fund had problems that affected, even temporarily, access to my funds, then there would be a second option.

There is very little downside to splitting the accounts across two vendors. A little more complicated to some, so maybe they chose not to, but that's your call.

I think the odds of a real business difficulty occurring that would freeze your funds at a place like Vanguard or Fidelity are extremely slim. And you would have some cash to tide you over. But you could possibly be a victim of identity theft, or just some computer glitch that took a while to get straightened out. I wouldn't fret over having my money at one place, and I wouldn't question anyone who felt better with it split. It's so easy either way, do what makes you feel good.

-ERD50

 

[rescueme]

Historically DW's IRA's have been in Fidelity and mine in VG and we have left them that way.

Similar for DW/me, except that our 401(k)'s have been with FIDO (different employers) and our personal IRA's (both TIRA & Roth) have been with VG.

While I've taken my retirement income from the FIDO side for the last five years since retirement, my DW (who retired yesterday ) will be taking hers from the VG side.

The difference in drawing from our respective accounts is that DW want's an "automatic paycheck" (which she already received on March 25th) and VG handles without any intervention or any variation in withdrawls, whereas I have multiple accounts and month to month variations in withdrawls (due to me covering the vast majority of expenses). For me, the FIDO "option" works best.

I guess for us is that we are taking the "best of each" to satisfy our needs and wish to keep a bit of our investments in different companies. No difference than the way we invest (e.g. not in one stock/fund).

Just our situation...

 

[LOL!]

From the nature of the questions on this thread, I would suggest that the seraphim take some time to read a good book about all this. May I suggest Jack Bogle's "Common Sense on Mutual Funds" 10th anniversary edition as a good book to read?

 

[seraphim]

LOL

I'm reading my butt off! *grin*. Seriously, the questions here are gap fillers - sometimes the authors assume some knowledge I don't have, and I don't want to assume anything. Stocks are mentioned in one book as paying dividends, but MFs are never referred to, as far as I see, as stocks.

I'll put Bogle next on my list. Just did a d/l to Kindle.

 

[pb4uski]

...I'm inferring from previous comments, as well, that a 70/30 mix - in general - will yield better results. With our pensions we may not need so much in bonds. ....

I'm crunching numbers now to see if I want to payoff the 68k balance on a mtg (11 years remaining @ 6.25% about $850 month in mortgage payment only) using part of that first 88k, or refinance and suffer the payments for 11 years. In the long run (11 years), I think the numbers would support paying off the loan now. The next ten months could use that payment getting completely debt free: a car and RV loan.....

The principles are the same be it 60/37/3, 70/27/3 or whatever, but of course, the higher the first number the higher the risk and volatility, but over the long run the higher the return.

See attached link for various model portfolios and historical returns

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

If I had a 6.25% mortgage, I would either refinance (I recently refi'd for 3.375% for 15 years) or pay it off.

 

[seraphim]

. If I had a 6.25% mortgage, I would either refinance (I recently refi'd for 3.375% for 15 years) or pay it off.

Running the numbers, I'm going to pay it off this week. To keep it would require a 30k annual draw after retirement, but eliminating the debt means I can use a 20k annual draw with 68k less from the 1M portfolio. Initially a smaller portfolio, but the 10k a year left invested should make up the difference quickly, and be a plus during the next 10 years. If my math is good.

Thanks for the link. The info is more understandable in that format.

 

[Birchwood]

There is nothing wrong with keeping half in say, VAnguard and half in Fidelity.
If the market moves sideways, or the market is dull, you may not require a lot of rebalancing.

I would advice "flexibility" in the % of withdrawal. I do 2%, 3% or 3.5%
depending on the market cycle.

I also would keep a total of 6 months in living expenses in a easily access
fund, cash, or CD for emergency situations.

 

[seraphim]

I would advice "flexibility" in the % of withdrawal. I do 2%, 3% or 3.5%
depending on the market cycle.

I also would keep a total of 6 months in living expenses in a easily access
fund, cash, or CD for emergency situations.

Thanks Birchwood

With the loss of the mortgage payments, the pensions would cover needs and basic entertainment, and a 2% draw would be the real fun stuff, which I could live without (RV travelling). Except for emergencies, the flexibility should be downward to a lesser draw. Anything more should reinvested for growth.

The best laid plans... *grin*

I was considering an 60-80k energency fund: but where to put it for best returns?

My biggest problem at the moment is that DW and I are at odds about whether to stay with an advisor her parents used: DW has helped her Mom with finances for 12 years, and is nervous about investing a large sum without an adviser. It's the typical fee-based setup with 12b-1 commissions.

 

[donheff]

Back to the multiple accounts question, DW has 401Ks at Fidelity and our other accounts are at VG (and I have a TSP). We don't plan to consolidate. It is probably paranoid but I worry about some glitch tying up our entire portfolio - maybe identity theft like ERD mentioned.

 

[pb4uski]

My biggest problem at the moment is that DW and I are at odds about whether to stay with an advisor her parents used: DW has helped her Mom with finances for 12 years, and is nervous about investing a large sum without an adviser. It's the typical fee-based setup with 12b-1 commissions.

I have used VGs financial planning service numerous times and they are pretty good (though there are some things about their service that bugs me), but what they recommend is usually no-load, no 12b-1 and typically very low ERs. Above a certain amount of investable funds the service is free, at worst they charge $500 IIRC. Might be worth checking out if it would give your DW peace of mind.

 

[LOL!]

Multiple vendors and accounts have an advantage when dealing with early redemption fees. It would be rare to make use of this, but here is a "fer-instance":

In your Fidelity account you buy an International Index fund with a 2% early redemption fee for the first 90 days. You also have an international index fund in your Vanguard account bought 90 days ago. A month later you want to sell some international (pick any reason you want: rebalancing, pay off mortgage, go on cruise, bad feeling about Greece, whatever), so you sell the International in the Vanguard account because there is no longer an early redemption fee with it.

Another example: Foreign market crashes 5% in one day because Mubarak goes to jail. You exchange into foreign stock mutual fund. The next day, foreign market recovers 5%. You want to sell those new shares of the foreign stock fund, but it has an early redemption fee, so you sell shares held at another vendor instead. Result: Quick one-day gain of 5%.

So the idea is that your different vendors do not know that you are trading mutual funds among all of them while avoiding restrictions and early redemption fees. Of course, if you are doing this, maybe you want to use ETFs instead?