Fund Choices 101

[Da Nag]

Time to suck up the pride...I'm an idiot when it comes to understanding investment options and strategy. I'm hoping not to stay that way for long, but I could sure use some advice on how to distribute funds in our portfolio.

My wife and I have identical investment options - same employer, same plans. We've each got a 401(k), 401(a) and 457(b). We're contributing the maximum each year.

We're 5.5 years from ER - we'll both be 50. We've both got decent pensions, but they won't kick in until 54. Our plan is to rely fairly heavily on the 457(b) from 50-54, given the ability to withdraw with no tax penalty.

Given the pensions and length of time until we'll withdraw from the 401(k) and 401(a) plans, we're fine assuming a fair amount of risk with those. However, I'm wondering if we should allocate things differently in the 457(b) plans, given the need to start accessing them sooner, and the reliance we'll have on those funds for the first 4 years.

Our current combined balances and distributions are below. My guess is, I went way overboard on the bond fund (PTRAX), probably in all plans. Basically, I mixed and matched from the only Morningstar 5 Star funds available to us....please be kind with your observations.

401(a): $67K
35% H & W MID CAP VAL I (HWMIX)
35% DODGE & COX STOCK (DODGX)
30% PIMCO TOT RETURN ADM (PTRAX)

401(k): $135K
35% H & W MID CAP VAL I (HWMIX)
35% DODGE & COX STOCK (DODGX)
30% PIMCO TOT RETURN ADM (PTRAX)

457(b): $103K
25% H & W MID CAP VAL I (HWMIX)
75% PIMCO TOT RETURN ADM (PTRAX)

_________________________________________________
Below are the investment options available to us through Fidelity Netbenefits.

Stock Investments

Large Cap
AM CENT SELECT INV
* DODGE & COX STOCK
FID BLUE CHIP GROWTH
VANGUARD INST INDEX

Mid-Cap
CALAMOS GROWTH A
* H & W MID CAP VAL I
MUTUAL BEACON Z

Small Cap
ARIEL FUND
HEARTLAND VALUE
NB FASCIANO INVT

International
TEMPLETON FOREIGN A

Blended Investments
FID BALANCED
FID FREEDOM 2000
FID FREEDOM 2005
FID FREEDOM 2010
FID FREEDOM 2015
FID FREEDOM 2020
FID FREEDOM 2025
FID FREEDOM 2030
FID FREEDOM 2035
FID FREEDOM 2040
FID FREEDOM INCOME
VANG WELLESLEY ADM

Bond Investments

Stable Value
FID MGD INC PORT II

Income
* PIMCO TOT RETURN ADM

 

[ats5g]

Wow, I'm surprised that no one has responded yet. I'll take a shot. From my [rough] calculations in totalling all of the accounts, you've got roughly 55% stocks and 45% bonds. Does that sound about right. When you say overboard on PTRAX, do you mean you think you've got too many bonds?

Do you know what % of stocks and bonds you and your wife want? Do you want to be focusing in on large cap value stocks [DODGX] and Mid cap value stocks [HWMIX]? This will most likely be the majority of the determinant of the returns of your portfolio, not the individual funds you choose. Nothing wrong with choosing the three funds you've got, but it is kind of hard passing up VWIAX and an expense ratio of 0.14%!!

Are you looking for us to recommend individual funds for you to invest in? Without knowing what % of your money you want in stocks and what % you want in bonds, it's gonna be hard to narrow down fund selection to the level I think you want.

- Alec

 

[Da Nag]

I'll take a shot. From my [rough] calculations in totalling all of the accounts, you've got roughly 55% stocks and 45% bonds. Does that sound about right.

Thanks much for the feedback, Alec.

Since posting, I've grabbed a copy of Quicken and fetched my portfolio details. It's spitting out the overall percentages for our entire portfolio as follows:

32% Domestic Bonds
44% Large Cap Stocks
6% Small Cap Stocks
2% International Stocks
1% Other Asset Class
13% Cash

However, I'm guessing this might not be real useful info...my thinking being, that my asset mix should be different for the funds we need to start grabbing from in about 5 years (the 457(b) accounts), compared to the 401(a) and 401(k) accounts. We don't anticipate drawing from those two accounts for at least 9 years, possibly longer.

If there's any validity to this type of thinking, then perhaps knowing the asset mixes for each of the two categories would be useful. Again, from Quicken:

401(a)/401(k) Mix

21% Domestic Bonds
57% Large Cap Stocks
7% Small Cap Stocks
4% International Stocks
1% Other Asset Class
10% Cash

457(b) Mix

55% Domestic Bonds
19% Large Cap Stocks
5% Small Cap Stocks
4% International Stocks
1% Other Asset Class
20% Cash

When you say overboard on PTRAX, do you mean you think you've got too many bonds?

I think so...even more so after looking at the Quicken breakdown, assuming it's accurate. Sorry for the display of ignorance, but here's what I think I want:

Higher risk/higher return in the 401(k)/401(a) plans. My basic understanding is, this means a higher percentage of stock funds, and a lower percentage of bond funds. Beyond that, I've no clue - I don't know the difference between large/mid/small cap stocks, nor do I know what's considered a high or low percentage.

On the 457(b) plans, I think I can still afford to be pretty agressive with them, given that withdrawal won't start for 5.5 years.

Are you looking for us to recommend individual funds for you to invest in? Without knowing what % of your money you want in stocks and what % you want in bonds, it's gonna be hard to narrow down fund selection to the level I think you want.

That was the general idea...except I can't intelligently comment on the stock/bond percentages, as I'm not enlightened (yet) as to how the decision affects risk over the time periods I'm interested in.

In a nutshell...our dual pensions are going to be pretty good at age 54, probably supplying 75-85% of our desired living income. So, other than the funds needed for ages 50-54 from the 457(b), we're fine with a fairly aggressive strategy.

Thanks again for any info,

Bill

 

[ats5g]

Hey again Bill,

Sorry for the delay in replying.

However, I'm guessing this might not be real useful info...my thinking being, that my asset mix should be different for the funds we need to start grabbing from in about 5 years (the 457(b) accounts), compared to the 401(a) and 401(k) accounts. We don't anticipate drawing from those two accounts for at least 9 years, possibly longer.

If I recall correctly, some of the posters that are retired here stash a couple of years of living expenses in a MM, short term bond fund, or a stable value fund [much like the FID MGD INC PORT II you've got]. Much like the "bucket theory" put forth by many people, including Frank Armstrong. Then they put the rest in a diversified mix of stock funds, bond funds, reits, etc.

So, since you'll be withdrawing from the 457b first, it then makes sense to put the 457 money into the stable value fund and bond fund [PIMCO TOT RETURN ADM]. So, I think a fairly easy way to see how much $$ to put into these two 457's is to see how much your going to need when you retire in 5.5 years. So, for example, if you'll need say $30,000/year [pre-tax], you can probably ballpark that you'll need this times the number of years from 50-54 [4 or 5] in the 457's [$120,000-150,000]. That make any sense??

Basically, I view the asset allocation decision as a three part decision tree:

1) Your need to take risk: How much return do you need to reach for?
2) Your willingness to take risk: How much volatility and downside risk can you stand?
2) Your ability to take risk: will you be able to keep the same standard of living if your portfolio swings a lot in value? - is very volatile.

Say you've got a pension that covers the majority of your expenses, and you only need to withdraw a small % of your portfolio, like 1-2%. You probably don't have much need to take risk because you don't need that high of a return on the portfolio to sustain your withdrawals. However, let's say that you can in fact stand your portfolio dropping upwards of 50% in one year, you may have a high willingness to take risk. Since you've got the large pension, you likely have the ability to take a lot of risk. But the question is still, should you? It really depends on the person.

My advice would be not to go to far in either direction - either a whole lot of stock, or a whole lot of bonds. Maybe 50/50 to start out with until you've done some self education. Or perhas even 60-70% in the stable value fund until you've got a good handle on 1,2, + 3 above.

- Alec