Constructing a “Total Market Index”

[steelyman]

I have a 457 (deferred compensation) account that has a selection of 17 funds, one of which is a stable value fund, which is a reason why I don’t roll it over.

The remaining funds are mostly Vanguard’s target date offerings but there are also Vanguard S&P 500 with expense ratio 0.01% and a Russell 2000 index fund with ER 0.02%.

What I’d really like is a total US market fund to place money not contained in the stable value offering. But no offering of that type. So I jiggered things this week to invest in the S&P and R2K funds at an 80/20 ratio, which might approximate a total market fund.

Seem reasonable? It’s a done deal now so I’ll see how it goes.

 

[HI Bill]

I eliminated my target date fund, by buying BND, VXUS, VTI and VOO. No need to pay higher expense ratio for a single fund like a target date fund, which, IMHO, are all too conservative with respect to bond AA.

 

[steelyman]

I eliminated my target date fund, by buying BND, VXUS, VTI and VOO. No need to pay higher expense ratio for a single fund like a target date fund, which, IMHO, are all too conservative with respect to bond AA.

Thanks for the comment. I wasn’t clear: I never had any target date funds in the account, but had the Russell which can be an up-and-down thing. I moved 80% of that into the S&P 500.

The stock piece of the 457 feeds the stable value: if/when times are good and a threshold is exceeded, I move the excess into the stable value and start again. The stable value generates income on its own too.

I suppose, from a “bucket” point of view, the account serves for emergency or eventual long-term care if needed. IRA/403(b) are a separate retirement source.

 

[audreyh1]

I have a 457 (deferred compensation) account that has a selection of 17 funds, one of which is a stable value fund, which is a reason why I don’t roll it over.

The remaining funds are mostly Vanguard’s target date offerings but there are also Vanguard S&P 500 with expense ratio 0.01% and a Russell 2000 index fund with ER 0.02%.

What I’d really like is a total US market fund to place money not contained in the stable value offering. But no offering of that type. So I jiggered things this week to invest in the S&P and R2K funds at an 80/20 ratio, which might approximate a total market fund.

Seem reasonable? It’s a done deal now so I’ll see how it goes.

Yeah - sounds close enough.

I think 80% S&P500 and 20% Russell 2000 would be a good combination and good to rebalance against each other. It's a little higher in small cap than the total market index. You are missing mid-cap companies in this combo, so having a larger exposure to small-cap to diversify against the large cap of the S&P500 may be your best bet.

 

[pb4uski]

According to Vanguard's Portfolio Watch the US Stock Market is 74% large-cap, 19% mid-cap and 7% small cap as of 2/28/19.... so 74% S&P 500 index fund and 26% extended market index would be equal to total stock market.

Does your 401k offer the Vanguard Extended Market Index fund? If so, then you have your answer.... 74%/26% (as of 2/28/19).

If not, the Russell 2000 is small-cap... the smallest 2000 stocks of a 3000 US stock universe.... so a combination of an S&P 500 fund and a Russell 2000 fund would be missing mid-caps.... basically 501-1000.

Then again... 80/20 may be close enough.

 

[steelyman]

Thanks, audreyh1 and pb4uski. Good comments to think about.

Unfortunately, the 457 doesn’t offer an extended or completion fund, just the S&P and Russell. It does have an international fund, I think “all-world ex-US” or something along those lines, but I’d rather stay domestic.

So it seems I get the extremes on either side of the spectrum and the mid-caps (as you point out) are the donut hole.

I’m happy with the choices they do provide as the expense ratios look good. The S&P fund is from Vanguard and the Russell 2000 is from Northern Trust.

The choices have changed considerably since I started participating in around 2006. Pretty much a thorough revamp that now focuses on Vanguard, leaning toward target date funds. They do have a Vanguard Total Bond Market Institutional Plus (something like that) fund with a low expense ratio, about the same as Fidelity’s equivalent. It can be found on Vanguard’s site on the institutional side, ticker VBMPX.

I guess I’ll sit back and watch what happens, rebalancing along the way as suggested.

 

[mrfeh]

I jiggered things this week to invest in the S&P and R2K funds at an 80/20 ratio, which might approximate a total market fund.

Seem reasonable?

Yes.

 

[pb4uski]

You might consider have a friendly chat with the relevant powers that be explaining the donut hole and asking that they add Total Stock or Extended Market Index to the menu of funds offered.

 

[steelyman]

You might consider have a friendly chat with the relevant powers that be explaining the donut hole and asking that they add Total Stock or Extended Market Index to the menu of funds offered.

It won't hurt to try! However given that 457 plans like this are for governmental (in this case, state-wide) employees, the ship turns slowly if at all. Total Stock would suit me just fine and eliminate the need to rebalance, instead just siphon off shares every so often.

 

[38Chevy454]

Keeping the money in the 457 is good for the advantages it provides being a 457 account. But as you identified, you also have limited choices for the investments. Choices that are made far out of your control. So you have to optimize what you can within the limits of available choices. I like the 80/20 mix suggested, it's about as close as you can get within your available choices.


This same problem exists for almost all 401/403/457/TSP/401 Roth or similar employer savings accounts. The participants in the program are limited to whatever choices the administrators have made available. At least in OP's case, the fees are low and that helps. Some can have fairly high fees and you are just stuck until you can transfer money out to a self-directed IRA.

 

[LOL!]

Yes, does seem reasonable.

See also:
https://www.bogleheads.org/wiki/Approximating_total_stock_market
where the percentages are updated every once in a while. In the latest rendition the ratio is 83/17 so 80/20 is more than reasonable.

 

[Big_Hitter]

wilshire 5000?

 

[steelyman]

Thanks for the replies, I feel more comfortable with my recent change and glad I made it.

Unrelated to the allocation I have in the 457 account: as I mentioned, I’ve participated through contributions from 2006 till leaving employment. We were allowed to contribute the same annual maximum as our 403(b) plan and I did (viewed it as an alternative to no company match but resulted in a lot of payroll deduction = lesser take home).

I’d never withdrawn anything until 2017 when I took out $10K to invest elsewhere. That withdrawal made me understand the process of dealing with the administrator (T. Rowe Price). It was quite different than my usual experience with places like Fidelity and Vanguard. More rules and paperwork required, less freedom in choosing what funds to draw down (had to be done proportionally, mandatory 20% withholding). These rules might be 457-imposed, not specific to T. Rowe Price. That initial withdrawal had to be either by check or wire because ACH transfer was not established (it is now).

So a few hurdles and lessons learned. But I know the ropes now for any later withdrawals (my contribution time is over). Fortunately I was under no time pressure to get it done.

 

[OldShooter]

Interesting, I just looked up the Russell 2000 and what I got was this:

"The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index."
​

Since the 1000 is their large cap index and the 3000 is their total market index, it appears that the "small cap" nameplate on the 2000 is probably somewhat inaccurate. It looks to me like it is actually an extended market index. So by using it the OP with the S&P 500, the OP is really only missing large caps that are not in the holy 500. Missing those can't have much of an effect on the overall portfolio since the holy 500 is 80% of the US market cap.

Said another way, the OP has a total market portfolio with a small/mid cap tilt. Which is probably not bad either.

 

[pb4uski]

Another thought: Buy the S&P 500 and Russell 200 as planned and fill the donut hole of 501-1000 by buying a mid-cap index fund in one of your other accounts (if you have one)... like in a tIRA or taxable account or Roth. Put the three positions together and you have something akin to Total Stock.

Or stick to your 80% S&P 500 fund and 20% Russell 2000 fund and deem it "close enough" and declare victory

 

[steelyman]

Another thought: Buy the S&P 500 and Russell 200 as planned and fill the donut hole of 501-1000 by buying a mid-cap index fund in one of your other accounts (if you have one)... like in a tIRA or taxable account or Roth. Put the three positions together and you have something akin to Total Stock.

Or stick to your 80% S&P 500 fund and 20% Russell 2000 fund and deem it "close enough" and declare victory

Roger that! [emoji4]

I do have a lot in total market funds (both Vanguard and Fidelity) in a rollover traditional IRA, a Roth IRA, and a Roth 403(b). I also have an explicit mid-cap in the rollover IRA but I want to draw that fund down through withdrawals/rebalances as they arise (I do things very slowly).

My bucket brain thinks of these as my “retirement portfolio”, the stuff that’ll help me fund my retirement. I allocate those separately for “champagne wishes and caviar dreams” (was that the phrase?).

The 457, in my mind, is different and I think I’m good with the 80/20 two-fund split. I’ll leave it be and watch it over time. I’m convinced it’s better than it was.