Safer ROTH alternative for market downturn?

[pb4uski]

Might be too late. Postal post #20 didn't help your cause.

 

[braumeister]

I just dont want to get off to a bad start in this forum. We all have different opinions.

Not to worry. The majority of members here are DIY investors, but there is a sizable minority who do use FAs for various reasons. So you'll hear both sides.

As for the abbreviations, we use them a lot. Here is a pretty good list:

Acronyms and Slang Frequently Used on the Forum

 

[OldShooter]

@michaelc, a few thoughts:

Your fund, PRWCX, has really not produced "amazing" results. According to Schwab's analysis tools, $10,000 invested 10 years ago has grown to $31,500. The same $10K, invested in the S&P 500 would have grown to $36,982. (I am not sure if they are comparing to the index or to an S&P index fund. If the former, then a fund would not have delivered the full $36,982 but it would be very close. The problem with PRWCX is probably that its bonds are holding down performance. Preferences and risk tolerance vary, but at your age and with your 10 year horizon I think 100% equities is likely to win the horse race.

It is important to understand what "diversification" means when discussing equities. The basic idea is that stocks zig and zag in a pseudo-random fashion. So if you buy enough of them, like over 100, the zigs and zags will cancel each other out. The academics would say this: "You have diversified away individual stock risk, leaving only market risk, which cannot be diversified away in an equity portfolio." IMO 100 stocks is a hopelessly large number for a retail investor to deal with, so the answer for us little guys is to buy total market funds. A US total market fund might hold 3,500 stocks where a total international market fund (VTWAX for example) holds 7,400.

As far as selecting just one fund that IMO there is not a clear choice. For DW and me, the one fund is VTWAX but zero home country bias is a bit unusual around here. Most posters seem to want some home country bias, so I think 30% international is more common. To do 30% international will take two low fee funds, 70% in a total US market fund and 30% in an total international fund. (There are several of each to choose from.) Here is quite a good video on the home country bias question: https://famafrench.dimensional.com/videos/home-bias.aspx Here is a Vanguard paper which shows 30-40% international as the sweet spot for minimum volatility: https://www.vanguard.com/pdf/ISGGEB.pdf (NB I would not say that minimum volatility is a good goal for you, though. What you want as a saver is a few good market corrections between now and retirement; that's when stocks go on sale and your money buys more.)

Finally, when looking at your portfolio for AA or diversification you should really be looking at the whole thing, taxable, IRA, and Roth. Once you have that sorted, there are some tactical income tax decisions about which assets to hold in which account. This group can help you with that too.

(FYI is group is strongly oriented to, maybe even obsessed with, FA bashing. Don't worry about it or take it personally.)

 

[michaelc]

Oldshooter,


Thanks for taking the time with you lengthy response.. I will review the videos.

 

[pb4uski]

@michaelc, a few thoughts:

Your fund, PRWCX, has really not produced "amazing" results. According to Schwab's analysis tools, $10,000 invested 10 years ago has grown to $31,500. The same $10K, invested in the S&P 500 would have grown to $36,982. (I am not sure if they are comparing to the index or to an S&P index fund. If the former, then a fund would not have delivered the full $36,982 but it would be very close. The problem with PRWCX is probably that its bonds are holding down performance. Preferences and risk tolerance vary, but at your age and with your 10 year horizon I think 100% equities is likely to win the horse race. ....

OldShooter,.

Are we looking at the same thread? OP is 57 and your're recommending 100% equities? I concede that the OP has a 10 year runway, but even so, 100% equities seems too aggressive to me in that situation.

Also, you're comparing PRWCX to an equity index fund when PRWCX is ~55/45 seems like comparing apples and oranges. PRWCX compares very favorably to a conventional 60/40 index portfolio.... see post #16.

Finally, we don't know the OPs overall AA.... we just know that the PRWCX/Roth is 19%.... so if his tax-deferred is all equities then his overall AA would be about 91/9.

 

[michaelc]

Im about 60% equities, 40% fixed in my 403(b).

 

[OldShooter]

Are we looking at the same thread? OP is 57 and your're recommending 100% equities? I concede that the OP has a 10 year runway, but even so, 100% equities seems too aggressive to me in that situation.

Well, different strokes for different folks. We were close to 100% equities until we actually retired. But that's why I said "Preferences and risk tolerance vary ... "

Also, you're comparing PRWCX to an equity index fund when PRWCX is ~55/45 seems like comparing apples and oranges. PRWCX compares very favorably to a conventional 60/40 index portfolio.... see post #16.

Yup. Guilty again. And back to the 100% recommendation. Dragging all those bonds like a boat anchor seems silly to me.

Finally, we don't know the OPs overall AA.... we just know that the PRWCX/Roth is 19%.... so if his tax-deferred is all equities then his overall AA would be about 91/9.

And if it is all bonds? Both are irrelevant hypotheticals. As you say, we don't know. But of course that never stops this group. That's why I encouraged him to look at his big picture and not just at the Roth.

It's a little bit heretical, but I don't think that volatility equals risk during the accumulation phase. If anything, volatility may be an advantage to the extent that the investor has chances to buy stocks on sale. Dollar cost averaging basically does this automatically for him/her. At some point a retiring investor needs to dampen volatility because it starts to look like SORR. That's the point where a fixed income tranche is needed.

IMO the main risk for an individual in the accumulation phase is to miss out on gains because he/she is afraid of equity volatility when, actually, it doesn't matter a whit.

 

[kjpliny]

Welcome to the forum!

I don’t have high risk tolerance and I’m 5 years younger than you, but I am really comfortable with the Wellesley fund. I do not suffer from FOMO (fear of missing out) syndrome, nor am I a devout follower of the pervasive Greed is Good mentality. I sleep well at night, I’m happy and don’t really need much more than what I already have. I would absolutely be crushed mentally by a severe market crash were one to happen and If I was more exposed to stocks. I would rather make little than lose most of what I have worked for my whole life if things went really bad and didn’t recover. I also don’t fully trust these manipulated markets, but I really have always been somewhat suspicious of the markets...it runs in the family genes.

My best advice for you is to go with an asset allocation that you are comfortable with, in good times and in bad. Staying the course can sometimes be your best approach as long as you are meeting your financial and quality of life goals.

 

[mrfeh]

Im about 60% equities, 40% fixed in my 403(b).

You should be looking at your portfolio as a whole, not individual accounts.

Did you read the Bogleheads investing startup kit page?

 

[target2019]

Referring to a FA I just met with for advice as "an idiot" is not necessary, but ok, I understand.

target2019, my ROTH is held directly with T Rowe Price, just the one fund, Capital Appreciation.

michaelc,
1. Have you put all of the investments into an analysis, so you can see what the overall A/A is? That is where your first look should be.
2. Expense ratio of PRWCX is too high (.71) to hold for a long time. Most will tap TAXABLE, TAX-DEFERRED, ROTH, in that order. So you're speaking of ROTH, and I see that getting tapped in more than ten years. So you might consider something more frothy than PRWCX.
3. PRWCX only has 210 holdings, and is actively managed according to some secret formula. Are you okay with a 40% drop in the fund as in 2009 period? That is what I see when I look back.
4. If you read the various links posted by others, you'll get a better understanding of risk and protection.
5. Myself, I'd use a low expense ratio S&P 500 fund. Maybe:
https://www.morningstar.com/funds/xnas/preix/quote
6. Do you have access to other ETFs or Funds without sales charge?

Afterthought:
https://www.schwab.com/resource-cen...ats-your-portfolio-role-various-asset-classes
Nice intro to asset classes.

 

[michaelc]

Target2019,


Thanks, but I dont know where you are seeing PRWCX was down 40% in 2008/2009. According to Yahoo Finance, is was only down 27.17% in 2008.

 

[davebarnes]

2. Expense ratio of PRWCX is too high (.71) to hold for a long time.

Excellent point.
See https://humbledollar.com/2020/02/counting-the-costs/ for a short article talking about costs.

 

[OldShooter]

Welcome to the forum!

I don’t have high risk tolerance and I’m 5 years younger than you, but I am really comfortable with the Wellesley fund. I do not suffer from FOMO (fear of missing out) syndrome, nor am I a devout follower of the pervasive Greed is Good mentality. I sleep well at night, I’m happy and don’t really need much more than what I already have. I would absolutely be crushed mentally by a severe market crash were one to happen and If I was more exposed to stocks. I would rather make little than lose most of what I have worked for my whole life if things went really bad and didn’t recover. I also don’t fully trust these manipulated markets, but I really have always been somewhat suspicious of the markets...it runs in the family genes.

My best advice for you is to go with an asset allocation that you are comfortable with, in good times and in bad. Staying the course can sometimes be your best approach as long as you are meeting your financial and quality of life goals.

@michaelc, this post is good counterpoint to mine. While I would encourage you to not let fear drive your investing it is equally valid, as @kjpliny suggests, to trade some volatility for adequate peace of mind.

 

[michaelc]

davebarnes,


Interesting article. I always thoughts PRWCX's ER was borderline high for my liking.

 

[pb4uski]

Target2019,


Thanks, but I dont know where you are seeing PRWCX was down 40% in 2008/2009. According to Yahoo Finance, is was only down 27.17% in 2008.

-27.17% is right for PRWCX for 2008 per Portfolio Visualizer but I suspect that targt was looking at a longer period.

I look at peak to trough. Peak was Oct 2007 and bottom was Feb 2009.

PRWCX declined ~36%.... close to the 40% target mentioned.

For the same period VTSAX declined ~50%.

Wellington was down 32% so pretty close to PRWCX.... I'd say that given it's AA that PRWCX performed admirably.

https://www.portfoliovisualizer.com...cation2_2=100&symbol3=VWENX&allocation3_3=100

 

[target2019]

Target2019,
Thanks, but I dont know where you are seeing PRWCX was down 40% in 2008/2009. According to Yahoo Finance, is was only down 27.17% in 2008.

Peak to trough...
22.33 on 7/9/2007
11.81 on 3/2/2009
-47%

I could be wrong. My first WAG was eyeballing a chart on my phone earlier.

 

[pb4uski]

Peak to trough...
22.33 on 7/9/2007
11.81 on 3/2/2009
-47%

I could be wrong. My first WAG was eyeballing a chart on my phone earlier.

By using just the raw share prices the 47% doesn't include the impact of dividends or capital gains distributions.

But it doesn't explain the magnitude of the difference. Per PV from Jul 2007 to Feb 2009 (PV only does whole months) was -23.72%.

 

[simple girl]

I personally would not get out of the TRP Cap Appr fund. It is an excellent fund, IMO. It is now closed to new investors. I'm super happy I'm in it, and wish I could put more in it!

 

[pb4uski]

Yes, another reason why the FA's advice is bad, the fund is closed to new investors. I meant to mention that earlier but forgot.

 

[FinancialDave]

I agree, Wellesley is more appropriate for conservative investors in retirement.

Wellington is Wellesley's less conservative cousin.

However, you should probably also think about tax efficient placement. I would decide what I want my overall asset allocation (AA) to be, then fill the 403b with fixed income up to your fixed income allocation and the fill out the rest with stocks. That will also put higher growth equties in your tax-free Roth and keeping bonds in your 403b since withdrawals will be taxes as ordinary income when withdrawn.

Having stocks in tax-deferred accounts effectively converts growth that would be tax at preferential tax rates to income that will be taxed at ordinary tax rates.

Just to be clear, as far as your spendable income goes it doesn't make one bit of difference whether you put your growth in the Roth or the fixed income, IF your tax rate into the Roth is the same as your tax-rate out in retirement.

In most cases, your tax rate is less in retirement which favors putting the growth in the tax-deferred IRA.

https://seekingalpha.com/article/3979557-myths-concerning-roths-iras-and-rmds