Winging it with Indexing

[Gerbil Wheel]

I am age 42, own a rental home (8 yrs. left on the note), currently rent where I live now, have approx. $115k in a Roth IRA, $70k in a traditional IRA (80% equity index/20% bond index combined) and $7k in current employer’s 401(k). I am in the 28% marginal federal tax bracket.

I also have some “chicken money” that I have been skittish to invest (now up to $75k thanks to a recent gift) …but I want to get it invested now. I am adding about $1,500 per month to this.

IMO pessimism is your friend…the current doom and gloom environment tells me that this is a good time to invest.

I am the kind of person that dislikes complexity. When I do investment research, I tend to get choice overload and analysis paralysis. I often end up winging it using indexing, which I am doing in my IRAs (and about to do again here!).

I want things to run (as close as possible) on autopilot so I don’t have to make frequent decisions about changing investments. Some people say the “set it and forget it” days are over, that we are in a new environment…but people also used to talk about the “new economy” in the late 90s, so I think pessimism and optimism can each run to extremes.

I don’t want to pay an advisor 1% of my money…well, not yet anyway, not until later in my accumulation phase, when with several hundred thousand dollars I can expect (?) to get better service as a larger client and at which time I will be less inclined to self-manage my investments.

I am thinking about dropping $5,000 into each of these iShares ETFs ($60,000 total) on a market dip. No dollar cost averaging, just doing it. I can buy these commission-free with Fidelity, where I have my accounts. This is money I could keep in these investments for 5 to 8 years. I will keep about $15-$20k in emergency fund at all times.

What do you think about this investment strategy?

Also do you think about paying a fee-only advisor for their insight as an alternative to this?

Equity
IWV – Russell 3000
IWB – Russell 1000
ACWX – MSCI All World Ex-US
EFA – MSCI Euro, Austrl, Far East
IJH – Mid-Cap 400
IJR – Small-Cap 600

Fixed Income
AGG – Barclay’s Aggregate Bond
IGOV – International Treasury
TIP – Barclay’s TIPs
SHV – Barclay’s ST Treasury
ICF – Cohen & Steer’s Realty Majors (REITs)
HYG – High Yield Corporate Bond

Thanks
Gerbil Wheel

 

[easysurfer]

I like your approach in disliking complexity and winging it with indexing. Also, about not paying an advisor 1%, and instead manage it yourself.

 

[chinaco]

Consider a VG balanced fund. Some of VGs balanced funds are Fund of Index Funds.

Alternately, VG has some good balanced managed funds.

Then the Manager will rebalance according to the policy.

 

[LOL!]

The market dip was back at the beginning of the month. Things are up almost 10% since then. Did you invest then? Why not?

Since all your accounts are tax-advantaged, you would do well in a so-called Target Retirement fund that contained all index funds. I think Vanguard is one of the few places with such funds. They would have expense ratios in the 0.2% range. The Fidelity Freedom Funds simply suck since they are filled with actively managed funds and have expense ratios of 0.8% or so.

iShares are OK, but I wouldn't restrict myself to them. You should have an asset allocation plan. For example,

UT% US total market index (FSTMX)
SC% US small cap value index (IJS)
FT% Foreign total market index (*VEU, or FSIIX, VEA or EFA)
FS% Foreign small cap (*VSS or SCZ)
BT% Total Bond index (BND or FBIDX)
(* VEU and VSS contain developed and developing markets, while the others only contain developed markets. You want some of those emerging markets equities, so be sure to get them somehow).

then you can add stuff around the edges if you like.

A fee-only advisor would be no better than a book unless you needed embarassing hand-holding. Also check out Bogleheads Investing Advice and Info for lots of free advice.

 

[Gerbil Wheel]

Thanks for the replies...this money would not be tax-sheltered, so I probably would need to allocate more of it to tax-efficient funds and allocate more of the IRA money to tax-in-efficient funds.

I also like the idea of a limited number of investments...maybe I will scale back to one or two investments in each account.

 

[Gerbil Wheel]

Heck, maybe I should just move everything to Vanguard and take advantage of whatever free asset allocation service they offer...I do own a number of Vanguard products that might tranfer in-kind...just thinking out loud.

 

[photoguy]

I think the first thing you should do is develop an asset allocation plan and then decide what ETFs, index funds, etc that you need invest in to meet that. There's a lot of advice on this topic at bogleheads forums.

 

[headingout]

I too favor simplicity and low expenses. Started investing in my mid-30's, now in early 50's. My holdings have steadily progressed from individual stocks/bonds to a handful of low-expense mutual funds, about 1/2 Vanguard. I currently have only 9 holdings and hope to reduce even that by several before I FIRE in the next few years. In my experience (YMMV), asset allocation between asset classes more fine-grained than simply US/foreign/real estate/bonds is difficult to implement, costly, time-consuming, and hard to justify.

 

[easysurfer]

Here's my simple strategy (I do believe that KISS, less is more ).. I try to pretty much just invest in 4 funds. VG MM, Tot Bond, Tot Stock, Tot Int'l Stk, then just play around with the allocations to meet my target. Both in IRAs and not. When I rebalance, I try to do so within IRA first to not have a taxable event.

The exceptions to the funds are some EE savings bonds that I had while w*rking, and a little in Lending Club investment. My HSA I put it in VG Wellington which is a balanced fund, but I really don't treat this as an investment but to pay for my health needs.

I prefer to manage the allocations myself (via spreadsheet) than to have that automated.

 

[Gerbil Wheel]

Yeah I really don't like the idea of all so many investments when you can accomplish the same with less...why complicate it?

 

[growing_older]

I try to pretty much just invest in 4 funds. VG MM, Tot Bond, Tot Stock, Tot Int'l Stk, then just play around with the allocations to meet my target. Both in IRAs and not. When I rebalance, I try to do so within IRA first to not have a taxable event.

I also like this strategy. Personally, I have a few more funds and feel a little like I got carried away with slicing and dicing. I'm starting my kids with a simpler version Tot Stock and Tot Int'l, and when their balances get big enough we'll consider adding Tot Bond.

 

[LOL!]

Yeah I really don't like the idea of all so many investments when you can accomplish the same with less...why complicate it?

So the solution is simple: Move all your assets to Vanguard. Invest in a Target Retirement fund in all your tax-advantaged accounts. In your taxable account, invest in the Vanguard FTSE all-world ex-US fund. This is because (a) VFWIX is tax-efficient, (b) you get the foreign tax-credit, and (c) the Target Retirement funds are underweighted in foreign stocks anyways.

Just pick a TR fund, so that the total percentage of bonds that you want for your total portfolio is reached. Do not pick a TR fund based on some year.

That's it. Two funds. Low expense ratios. Indexes. Passively managed. Very tax efficient. Simple.

 

[jebmke]

So the solution is simple: Move all your assets to Vanguard. Invest in a Target Retirement fund in all your tax-advantaged accounts. In your taxable account, invest in the Vanguard FTSE all-world ex-US fund. This is because (a) VFWIX is tax-efficient, (b) you get the foreign tax-credit, and (c) the Target Retirement funds are underweighted in foreign stocks anyways.

Just pick a TR fund, so that the total percentage of bonds that you want for your total portfolio is reached. Do not pick a TR fund based on some year.

That's it. Two funds. Low expense ratios. Indexes. Passively managed. Very tax efficient. Simple.

This is suboptimal if your taxable accounts is less than your target equity allocation.

 

[LOL!]

^I don't disagree, but you are making me think too hard. Can you explain why?

 

[jebmke]

^I don't disagree, but you are making me think too hard. Can you explain why?

Oops, I think I mis-poke. Had bonds on the brain and was thinking there would end up being bonds in taxable and equity in tax-deferred. Shouldn't reply so quickly with glass of wine in my hand . As long as taxable is first filled with equity, should be OK. your plan works OK -- only risk may be over-weighting international.

 

[rgarling]

As long as taxable is first filled with equity, should be OK. your plan works OK -- only risk may be over-weighting international.

He could fix this defect by adding a second fund in the taxable account. e.g. Total Stock Market (VTSMX) as necessary to get the desired blend.