New to investing, ETF question

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Re: New to investing, ETF question

Postby Bob's not my name » Fri Dec 07, 2012 8:16 pm

Brantley wrote:I started work in September. Since I'll be in the 15% bracket
Ah, then maybe you just graduated? I'll take another shot at an article that might be relevant to your situation: http://thefinancebuff.com/how-to-save-4 ... taxes.html
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Re: New to investing, ETF question

Postby DSInvestor » Fri Dec 07, 2012 10:09 pm

Brantley wrote:Ok. Its clear I'm getting hammered on fees with the inherited IRA. I just realized what I said earlier regarding the inherited IRA funds was a mistake. They are currently in Delaware Optimum funds. When I was discussing with my advisor he was advising me to put my RMDs in American funds (that's where the confusion was). I repeat as said earlier, I will move them out soon once I feel comfortable doing so.


I just checked Delaware Optimum funds and the expense ratios are absolutely horrendous.
Delaware Optimum Large Cap Value class A expense ratio 1.60% after 5.75% front end load.
Class B expense ratio 2.25%
Class C expense ratio 2.25%
Institutional expense ratio 1.25%

There are 6 optimum funds and they all have horrendous expense ratios.
Here's a link to the express prospectus for all 6 funds.
http://prospectus-express.newriver.com/ ... =246118681

Here's a list of books that may help you get more comfortable with investing:
http://www.bogleheads.org/readbooks.htm
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Re: New to investing, ETF question

Postby Brantley » Fri Dec 07, 2012 10:38 pm

Thanks so much. Ill have to do some more research on these funds and read a few books. I'm not too worried about the load on the funds as the IRA was inherited and I already paid the fees. The expense ratio is high, but I'll have to do some comparisons to see if its even coming close to recovering those fees. I'll look up the allocation tomorrow and maybe someone can help me do a quick and dirty comparison vs if I put it in vanguard target 2055? Thanks guys
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Re: New to investing, ETF question

Postby retiredjg » Sat Dec 08, 2012 9:18 am

Brantley wrote:Back to the 80/20 split. Taking a look at the Vanguard Target Retirement funds - they have a 90/10 split for my age. You had recommended that I roll my inherited IRA into one of these funds that has such a split, but are also telling me at the same time I should be using a less aggressive split (80/20) for my 401K. My advisor currently has me at a 90/10 split, and so do the professionals at Vanguard. Why do you disagree with them?

Just to be clear, I didn't actually suggest a 90/10 split for your Inherited IRA and an 80/20 split for your 401k. I suggested 80/20 for both of them.

I'm one of those people (there are many here) who believe every portfolio should have at least 20% bonds. Investor great Ben Graham said a portfolio should have at least 25% in bonds and there are people here who would suggest that for you. I suggest it because the charts I've seen suggest that as your stock percentage goes up, your risk goes up even a little more. Good investing is all about balancing risk with expected return. I believe that balance changes a little right in the range of 80/20 - so that you get less bang for your buck as you move from 80% stocks to 90% stocks. So I think the balance is better at 80/20 (like 80/20 is sort of a sweet spot) and that portfolios should have at least 20% bonds.

There is one other issue in my mind. A 90/10 or a 100/0 portfolio suggests to me that a person thinks that stocks are somehow better than bonds. It's simply not true. And bonds often outperform stocks for years, even decades, at a time. During those times, it would be unfortunate to have such a little bit of the good stuff. That's a second reason I tend to suggest at least 20% bonds.

Not everyone agrees on this. Some people believe you should have your age in bonds (more than the 20% I've suggested for you) and some believe that 90/10 is just fine. It's a decision you'll need to make yourself.

As for why Vanguard uses a 90/10 split for the earliest target funds, I suspect that has more to do with marketing than actually suggesting what is right for you. It has been said (I was not around to see it) that the different fund families went through a competitive time when they kept juicing their target portfolios by adding more stocks. Any company that didn't keep up might have suffered a lower return for their fund with a certain date, as compared to other fund families funds with the same date.

However it happened, you should not let Vanguard or any other company make this decision for you. You should pick the fund that has your desired stock to bond ratio. Simply ignore the date in the name because it has nothing to do with what might be the right split for you.
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Re: New to investing, ETF question

Postby Brantley » Sat Dec 08, 2012 9:29 am

I see where your coming from. I'm going to pick up a few books at the library to get a better handle myself. In regards to the split..

Just to be clear, I didn't actually suggest a 90/10 split for your Inherited IRA


If you can move the Inherited Roth IRA to Vanguard, you can get much lower cost funds there. Again, just use the same target date fund.


Vanguard uses a 90/10 split for the earliest target funds
Last edited by Brantley on Sat Mar 23, 2013 10:31 pm, edited 1 time in total.
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Re: New to investing, ETF question

Postby retiredjg » Sat Dec 08, 2012 9:38 am

A word about your advisor. This can be a sensitive subject, so just bear with me. An "advisor" may not really be what you think. In fact, the word can mean so many different things, it doesn't actually mean anything. And pretty much anyone can use the term, so you don't really know what kind of expertise you are getting.

For the most part, an "advisor" who wants to sell you American Funds is pretty much the same as the "advisor" who wants to sell you a Ford truck. He is a salesman. His product is American Funds. He makes his living by selling American Funds to people who walk in the door. He has no legal obligation to sell you the product that is actually in your best interest - just like the Ford truck salesman is allowed to sell a 3/4 ton truck to someone who only needs a Ford Ranger. Like I said, "advisor" may not mean what you think.

If you buy the American Funds, your entire $100k will not be invested for you. You'll only get to invest about $96k. The other $4k will be going to your salesman to compensate him for selling the company product. After that, you will have the pleasure of paying American Funds more than necessary each year to manage your money. It's not in your best interest.

I'm not saying you need to move that money before you are ready. You've said several times you just are not ready to make that move. But don't go buying anything with a load (commission) in the meantime. It will be a waste of about $4k of your money. It would be better for you to move your money to Vanguard and let the Certified Financial Planners there help you decide how to invest it. That advice may have a cost (or it might be free when you transfer a lump sum - I'm not sure). If there is a cost, it won't be $4k.

I'd be willing to wager that the planner there would suggest one of two things. Either a Target Retirement Fund (likely one of the funds at 90/10) or the LifeStrategy Growth Fund (80/20). Either way, the expenses you would pay each year would be considerably reduced from what you are paying now or what you would pay with American Funds. In the long run, there will be more money for you if you move to lower cost funds.
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Re: New to investing, ETF question

Postby retiredjg » Sat Dec 08, 2012 9:51 am

If you can move the Inherited Roth IRA to Vanguard, you can get much lower cost funds there. Again, just use the same target date fund.

What I meant was that you could use the same target fund in each of your accounts - including the inherited IRA (making the management of that account incredibly simple.)

I never meant to suggest using the earliest target fund. I think you should use a fund that is at least 80/20. But whichever split you choose, you can use that one fund for all 3 of your accounts.
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Re: New to investing, ETF question

Postby retiredjg » Sat Dec 08, 2012 9:53 am

Oh, forgot to add this link. This is a really good article written by Alan Roth (one of the posters here). It will give you some background on "advisor" and "planners".

http://www.aarp.org/money/investing/inf ... anner.html
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Re: New to investing, ETF question

Postby Brantley » Sat Dec 08, 2012 9:55 am

retiredjg wrote:
If you can move the Inherited Roth IRA to Vanguard, you can get much lower cost funds there. Again, just use the same target date fund.

What I meant was that you could use the same target fund in each of your accounts - including the inherited IRA (making the management of that account incredibly simple.)

I never meant to suggest using the earliest target fund. I think you should use a fund that is at least 80/20. But whichever split you choose, you can use that one fund for all 3 of your accounts.


So you would say I'd use a target fund that isn't geared towards to time I retire? The 2055 target fund is tailored towards someone of my age who is looking to retire around 65.
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Re: New to investing, ETF question

Postby Brantley » Sat Dec 08, 2012 9:56 am

retiredjg wrote:Oh, forgot to add this link. This is a really good article written by Alan Roth (one of the posters here). It will give you some background on "advisor" and "planners".

http://www.aarp.org/money/investing/inf ... anner.html


I'll take a look
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Re: New to investing, ETF question

Postby retiredjg » Sat Dec 08, 2012 10:03 am

Brantley wrote:Quick question. I started work in September. Since I'll be in the 15% bracket - should I take out more than the RMD ($5000 total) as it will be taxed at 15%?

I think this could be a good idea for this year when you will be in a very low tax bracket. Getting money into Roth status at 15% (plus state tax of course) is a pretty good deal.
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Re: New to investing, ETF question

Postby retiredjg » Sat Dec 08, 2012 10:10 am

Brantley wrote:So you would say I'd use a target fund that isn't geared towards to time I retire? The 2055 target fund is tailored towards someone of my age who is looking to retire around 65.

I'm saying to use a fund that reflects the stock to bond ratio you decide is right for you. Ignore the date in the name. If you pick 80/20, that would be Target 2035 or 2030 (or maybe a combination). Or it could be the LifeStrategy Growth Fund which is at 80/20 and contains exactly the same stuff.

If you pick 90/10, it could be any number of the target funds that are sitting at 90/10 right now.

Just because the fund has 2055 in the name does not mean it is tailored for you. People tend to think that, but it is no necessarily true.
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Re: New to investing, ETF question

Postby retiredjg » Sat Dec 08, 2012 10:33 am

Just looked back at your original post and noticed the term "family advisor". So you are using the advisor that your family uses, perhaps someone that they have trusted for a long time.

Perhaps, this adds some complexity to your moving that money to Vanguard. You might be seen as that foolish child who is being reckless and moving his money that he doesn't know how to manage to that place that we don't know anything about and which doesn't have our family advisor to help him make wise decisions and all because some idiots on the internet told him it was a good idea.

Pretty close?

This puts a different light on why you are reluctant to move your money at this point. You might need to wait a little, especially if you are still living at home. You sure want to get more knowledge and experience under your belt or they really will see you as young and reckless and you will undoubtedly hear about it.

Don't let this be a wedge that drives conflict in your family. Just take your time, keep learning, and time your move accordingly. It might even be a couple of years. At your age, it can be hard to be patient, but that may be exactly what you need to do for this to work out happily. It's not going to wreck your future to leave this money where it is until the time is better to make the move.

Have you found our book list yet? http://www.bogleheads.org/readbooks.htm In a major city, many of these are probably available at the library.
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Re: New to investing, ETF question

Postby Brantley » Sat Dec 08, 2012 11:09 am

Thanks for picking up on that. If I did move away from my advisor, my parents may see me as a bit of a risk taker. Its not exactly that situation though. I'm no longer living at home, and the 'family advisor' I use is actually an advisor that was recommended to my dad by his fiance. She has been using him for a while, and is pleased with the returns. From my conversations with them, my dad and his fiance don't seem to know too much about investing. If I move all my money out, they definitely will question it, but at this point I'm not really too concerned about that. I'm more concerned about making the right move for me.

I requested all the books on that list.
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Re: New to investing, ETF question

Postby Brantley » Sat Dec 08, 2012 11:09 am

retiredjg wrote:
Brantley wrote:So you would say I'd use a target fund that isn't geared towards to time I retire? The 2055 target fund is tailored towards someone of my age who is looking to retire around 65.

I'm saying to use a fund that reflects the stock to bond ratio you decide is right for you. Ignore the date in the name. If you pick 80/20, that would be Target 2035 or 2030 (or maybe a combination). Or it could be the LifeStrategy Growth Fund which is at 80/20 and contains exactly the same stuff.

If you pick 90/10, it could be any number of the target funds that are sitting at 90/10 right now.

Just because the fund has 2055 in the name does not mean it is tailored for you. People tend to think that, but it is no necessarily true.


Is using a fund such as that going to move me to a more conservative allocation earlier than is appropriate down the road?
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Re: New to investing, ETF question

Postby DSInvestor » Sat Dec 08, 2012 11:26 am

Brantley wrote:Is using a fund such as that going to move me to a more conservative allocation earlier than is appropriate down the road?
The TR fund will have a glide path. If the glide path results in an AA that differs from your desired AA, you can exchange your current TR fund for any other fund without tax consequences inside IRA and 401k accounts. Pick another fund that more closely matches your desired asset allocation.

TR funds will change their asset allocation gradually growing the bond allocation until it reaches 30/70 stock/bond at which time the fund will merge into TR Income fund.

LifeStrategy funds maintain asset allocation. For example, LifeStrategy Growth has 80/40 AA. If you decide you wish to change your AA to 60/40, you'd exchange for LifeStrategy Moderate Growth which has 60/40 AA.

They key is to pick an asset allocation that you'd be comfortable holding. Once you have that, fund selection is easy. If you find yourself worrying about losing lots of money if stock markets crash, maybe reducing your stock allocation will help you sleep better. Try to control the things that you can control such as investment expenses, savings rate etc. You can't control market returns but if you can minimize investment expenses, strive for tax efficiency, you reduce drag on your portfolio returns. If you save at a high rate, you may not need to be as aggressive with your AA to achieve your financial goals.
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Re: New to investing, ETF question

Postby retiredjg » Sat Dec 08, 2012 11:55 am

Brantley wrote:I requested all the books on that list.

Oh dear. :shock:
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Re: New to investing, ETF question

Postby Brantley » Sat Dec 08, 2012 11:56 am

retiredjg wrote:
Brantley wrote:I requested all the books on that list.

Oh dear. :shock:


Well..just the general investing ones
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Re: New to investing, ETF question

Postby dbr » Sat Dec 08, 2012 12:05 pm

retiredjg wrote:
Brantley wrote:I requested all the books on that list.

Oh dear. :shock:


On the contrary. I think that is not a bad idea at all.
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Re: New to investing, ETF question

Postby Brantley » Sat Dec 08, 2012 12:27 pm

It seems like most of this thread has focused on cost, rather than looking at performance. I did a little comparison on marketwatch.com to see how Delaware funds have done in comparison to a similar Vanguard Admiral fund. Here's what I got:

Image

I couldn't find a small/mid cap version of vanguard, so I just used the Vanguard mid cap. Is this overall a fair comparison?
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Re: New to investing, ETF question

Postby DSInvestor » Sat Dec 08, 2012 12:31 pm

If your fund is a small/mid cap value fund, look at both Vanguard's mid cap value index (VMVIX investor, VMVAX Admiral) and small cap value index (VISVX Investor, VSIAX Admiral) funds and blend the returns.

Don't forget that the fund's performance is before your 1.25% Advisor fee is subtracted.
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Re: New to investing, ETF question

Postby retiredjg » Sat Dec 08, 2012 2:17 pm

Brantley wrote:It seems like most of this thread has focused on cost, rather than looking at performance. I did a little comparison on marketwatch.com to see how Delaware funds have done in comparison to a similar Vanguard Admiral fund.

I didn't look at all, but some of these are simply not apples to apples comparisons. For example OIFIX does not compare to Total Bond Market. One is mid quality, one is high quality. One contains junk bonds, one does not. Etc. The fund with the higher risk had the higher returns - just as expected. But one is apples and one is not.

The other thing is this. Looking at performance in the past does not tell you anything about what will happen in the future. This is somewhat counter-intuitive. I know you have not grasped that yet, but you will with time. Here's why.

There are always some actively managed funds that outperform index funds. I think it is in the neighborhood of 20%. Not sure, but let's use that number for discussion. So what you really want is to invest in that 20% that will outperform index funds. The trouble is, the funds in that 20% are not the same each year. Sometimes a fund will out-perform. Sometimes that fund will under-perform. So you never know which ones to buy. And you never can know which ones to buy unless you can somehow predict the future.

But if you buy the index funds, you know you'll be doing as well as or better than 80% of the actively managed funds. Over time, if you don't meddle with things all the time, you will probably make more money using the index funds.

I understand you need to do these comparisons as part of your learning process. Just be careful about what you are comparing and be careful about how much value you give the comparisons as they may not represent anything like what you will see during your investing career.
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Re: New to investing, ETF question

Postby Brantley » Wed Dec 12, 2012 2:51 pm

Ok see here's the play.

Had a chat with my financial adviser's assistant - pretty smart woman. I was going to take out $5k this year from my inherited IRA to move to a Roth. She propositioned that I should take out $10k, put in $5k now, and $5k after the new year. I don't know how I didn't think of this, and I should still barely be under the 25% bracket. Knowing that my adviser will give me smart advise that involves moving money out of their hands is making me think twice about moving away from them. While yes I know the fees are very high, I need to do some serious historical analysis to see how my IRA has actually been performing. I know you all preach that historical performance means nothing, and that just because a fund did well in the past it won't do well in the future, but I need to see the facts in front of my face in regards to my own money to believe that. I'll have to do some more reading and research.

One question - should I wait to put the money into my new IRA until after the New Year? I know you have until 4/15 to contribute. I have a feeling stocks may take a dive if something negative comes out of this fiscal cliff. I could see us maybe going over it for a day or two, then the government will be forced to make a decision. Thoughts?
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Re: New to investing, ETF question

Postby retiredjg » Wed Dec 12, 2012 3:19 pm

I don't see any reason to wait.
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Re: New to investing, ETF question

Postby DSInvestor » Wed Dec 12, 2012 8:14 pm

IRA Contributions for 2012 can be made from now until April 15, 2013 (tax filing deadline).
IRA Contributions for 2013 can be made from Jan 01, 2013 until April 15, 2014.

Here's a 10 yr growth chart comparing OILVX, 500 Index VFINX, Value index VIVAX, Total Stock VTSMX funds:
Image

Here's a 10 yr growth chart comparing OIIEX against Vanguard Total International VGTSX:
Image

Don't forget that the 1.25% advisor fee will further reduce your return. I believe the advisor fees are subtracted separately.

If you want to compare returns by year, use yahoo finance to look up the fund tickers then click on performance page. You will see returns by year to allow you to tabulate the returns. Here's the yahoo performance page for OILVX:
http://finance.yahoo.com/q/pm?s=OILVX+Performance

If you want to compare growth charts, use morningstar to look up a fund then click on the charts tab. You can enter other fund tickers to the charts.
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Re: New to investing, ETF question

Postby Brantley » Wed Dec 12, 2012 8:26 pm

Thanks good stuff. I'll dig into it more when I get some time
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Re: New to investing, ETF question

Postby Brantley » Fri Dec 14, 2012 11:57 am

Question: If I want to go with a Vanguard Target fund, does it make sense to recreate the fund using ETFs if I'm going to contribute to the fund on an annual basis? I would just readjust with each annual contribution. From an expense ratio perspective, it would be slightly cheaper.
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Re: New to investing, ETF question

Postby DSInvestor » Fri Dec 14, 2012 12:18 pm

Brantley wrote:Question: If I want to go with a Vanguard Target fund, does it make sense to recreate the fund using ETFs if I'm going to contribute to the fund on an annual basis? I would just readjust with each annual contribution. From an expense ratio perspective, it would be slightly cheaper.


Expenses would be lower if you use ETF to replicate a Target Fund but you'd give up the simplicity and automatic rebalancing. Vanguard's Target funds have a very low expense ratio of 0.17-0.19%. You may be able to get the ER down to under 0.10% with ETF. The difference of 9 basis points on $10K (2012 and 2013 contributions) invested is about $9/yr. Your 100K Inherited IRA managed by your advisor is costing you 2.5-3% which is 2.5 - 3K/yr. Save $9 or $3000 per year? Which is a better use of your time?

The move from er=3% to 0.19% is huge savings about 2800/yr on 100K portfolio. Moving from 0.19% to 0.10% on 100K portfolio saves another $100/yr.

Scenario 1: All accounts use TR fund.
If your 401k, Roth IRA and Inherited IRA all used a TR fund with the same asset allocation, this gives you simplicity and makes it easier to stick to your investment plan. Every contribution you make to any account will maintain your AA. Every RMD you take will maintain AA. The asset allocation of the entire portfolio will be maintained through all market conditions. This makes it easier for you to stick to your investment plan.

Scenario 2: All accounts used ETFs or separate funds:
If you used ETFs or separate funds in each account, you'd have to decide which ETF/fund to buy or sell to maintain your asset allocation.

Scenario 3: Mix of types of funds.
If you use a TR fund in 401k, separate funds (Delaware or American) in Inherited IRA and ETFs in the Roth IRA, you'll have a big mess and it'll be difficult to see what you really own. If you can't determine what your portfolio's current stock/bond mix is, how will you know which fund/ETF to buy or sell to maintain AA?

Target funds are great if you're investing entirely in tax advantaged accounts. Target funds have a growing allocation of taxable bonds which are not tax efficient and are not recommended for taxable accounts unless you're in a very low tax brac ket. If your situation changes so that you max out all tax advantaged accounts and start investing in taxable accounts, this would be a great time to consider separate funds or ETFs instead of Target funds. With separate funds or ETFs, you can practice tax efficient fund placement to minimize tax cost.
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Re: New to investing, ETF question

Postby Default User BR » Fri Dec 14, 2012 4:22 pm

What would be happening is that you would use the TR fund's current allocation as yours. Nothing wrong with it, but nothing magic either.


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Re: New to investing, ETF question

Postby Brantley » Thu May 23, 2013 10:02 am

Making the leap today over to Vanguard. I'll keep you guys posted on how it goes
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Re: New to investing, ETF question

Postby mnvalue » Thu May 23, 2013 12:15 pm

Since you're new to investing, I'd recommend using funds instead of ETFs. It's a lot simpler (you buy in dollar amounts, can buy fractional shares, etc.) and the expense ratios are the same between the Admiral shares and ETFs in most (all?) cases. And you avoid the cost of the bid/ask spread on the ETFs.
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Re: New to investing, ETF question

Postby Brantley » Thu May 23, 2013 1:36 pm

That's the plan. Going with Target 2055
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Re: New to investing, ETF question

Postby Brantley » Wed Jun 12, 2013 5:30 pm

DSInvestor wrote:
Brantley wrote:Question: If I want to go with a Vanguard Target fund, does it make sense to recreate the fund using ETFs if I'm going to contribute to the fund on an annual basis? I would just readjust with each annual contribution. From an expense ratio perspective, it would be slightly cheaper.


Expenses would be lower if you use ETF to replicate a Target Fund but you'd give up the simplicity and automatic rebalancing. Vanguard's Target funds have a very low expense ratio of 0.17-0.19%. You may be able to get the ER down to under 0.10% with ETF. The difference of 9 basis points on $10K (2012 and 2013 contributions) invested is about $9/yr. Your 100K Inherited IRA managed by your advisor is costing you 2.5-3% which is 2.5 - 3K/yr. Save $9 or $3000 per year? Which is a better use of your time?

The move from er=3% to 0.19% is huge savings about 2800/yr on 100K portfolio. Moving from 0.19% to 0.10% on 100K portfolio saves another $100/yr.

Scenario 1: All accounts use TR fund.
If your 401k, Roth IRA and Inherited IRA all used a TR fund with the same asset allocation, this gives you simplicity and makes it easier to stick to your investment plan. Every contribution you make to any account will maintain your AA. Every RMD you take will maintain AA. The asset allocation of the entire portfolio will be maintained through all market conditions. This makes it easier for you to stick to your investment plan.

Scenario 2: All accounts used ETFs or separate funds:
If you used ETFs or separate funds in each account, you'd have to decide which ETF/fund to buy or sell to maintain your asset allocation.

Scenario 3: Mix of types of funds.
If you use a TR fund in 401k, separate funds (Delaware or American) in Inherited IRA and ETFs in the Roth IRA, you'll have a big mess and it'll be difficult to see what you really own. If you can't determine what your portfolio's current stock/bond mix is, how will you know which fund/ETF to buy or sell to maintain AA?

Target funds are great if you're investing entirely in tax advantaged accounts. Target funds have a growing allocation of taxable bonds which are not tax efficient and are not recommended for taxable accounts unless you're in a very low tax brac ket. If your situation changes so that you max out all tax advantaged accounts and start investing in taxable accounts, this would be a great time to consider separate funds or ETFs instead of Target funds. With separate funds or ETFs, you can practice tax efficient fund placement to minimize tax cost.


Is it worth replicating target 2055 if I can use admiral shares? Seems about half the expenses, but with target fund I can set it up once, set up the automatic RMDs, and forget it. Can't decide
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Re: New to investing, ETF question

Postby retiredjg » Thu Jun 13, 2013 8:51 am

Brantley wrote:Is it worth replicating target 2055 if I can use admiral shares? Seems about half the expenses, but with target fund I can set it up once, set up the automatic RMDs, and forget it. Can't decide

It's up to you. Once you get into the low cost range (such as .18%) getting to lower cost is an exercise in diminishing returns. Yes, you could save a little money but at what cost? If you like the convenience of target funds, the cost may not be worth it to you.

If the cost is cut by half, the difference would be about .09%. For every $10k you have invested, the difference in cost per year is $9. Or $90 more for every $100k you have invested. If the convenience of not having to rebalance is worth that to you, stick with the target fund. At least until you start putting retirement money into a taxable account. Then things might need to change due to tax-efficiency issues.
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Re: New to investing, ETF question

Postby Brantley » Thu Jun 13, 2013 10:24 am

Hey guys,

Thanks for all the help earlier convincing me to move my funds over to Vanguard and the other general knowledge I absorbed. Here’s my current info, and I have a few questions.

Emergency funds: Covered – Could draw from Inherited IRA if absolutely necessary
Debt: None
Tax Filing Status: Single
Tax Rate: 25% Federal, 5.3% State
State of Residence: MA
Age: 24
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 30% of stocks
Total portfolio size: Low six figures
Taxable
9% cash – Ally Savings (.84% APY)

His 401k
2.7% fund name (Vanguard Target Retirement 2055 Trust I (VFFVX?) (.0825%)
Company match – 50% of first 6% starting after 1 year of employment

His Roth IRA at Vanguard
8.4% fund name (Vanguard Target 2055 VFFVX) (.18%)

His Inherited Traditional IRA at Vanguard
79.9% fund name (Vanguard Target 2055 VFFVX) (.18%)

Contributions

New annual Contributions
$8,250 his 401k (no match yet)
Around $1500 his Roth IRA from RMDs related to Inherited IRA


Questions:
1. My cash at Ally Bank is sitting in the account most likely to pay for expenses coming up within the next five years (down payment on house, vacation?, etc.). Is there really anywhere better I could put it?
2. Anything else you can suggest? I feel pretty comfortable where I am as of now but am open to all ideas.

Thanks

-Brantley
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Re: New to investing, ETF question

Postby mnvalue » Thu Jun 13, 2013 11:58 am

It doesn't matter since you're all target funds and thus there's no rebalancing to calculate, but in the future, if the cash is not for retirement, don't include it in the total.

You could put some of your savings into Ally Bank High Yield 5-year CDs with their low early withdrawal penalty.

With your tax rate, you might consider putting the RMDs into your 401k instead of a Roth IRA. To do that, you'd increase your 401k contributions coming out of your paycheck and treat the RMDs as part of your paycheck; you can't directly transfer them. Or, you might choose to keep doing Roth for some tax diversification. This is a judgement call that you could go either way on. I'm struggling with the same question (Roth without maxing out 401k) myself. If you do decide to increase your 401k contributions, remember that you need to put in the pre-tax equivalent of $1500 (since Roth is after-tax) or you've effectively reduced your overall savings rate: that'd be 1500 / (1-.25-.053) = $2152 or 1500 / (1-.25-(.75 * .053)) = $2112 if you itemize and thus deduct state taxes. I think I did the math right, if not someone will hopefully correct me. Some additional reading on the topic is available in the wiki: http://www.bogleheads.org/wiki/Traditional_versus_Roth

Something else to think about more generally... since you're already talking about being on track with the downpayment savings, are you on track to buy your next car in cash? For example, if you think you'll spend $15,000 on a decent used car and it'll last you 7 years, then you want to be saving $178.57 as a "car payment". If your current car has 3 years left on it, then you need 4 * 12 * $178.57 = $8,571.36 saved up now in your "car fund". Adjust those numbers to your circumstances, of course.
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Re: New to investing, ETF question

Postby Brantley » Thu Jun 13, 2013 1:46 pm

mnvalue wrote:
You could put some of your savings into Ally Bank High Yield 5-year CDs with their low early withdrawal penalty.


Only 1.5%? Not sure if that's even worth it to me.


With your tax rate, you might consider putting the RMDs into your 401k instead of a Roth IRA.


I've considered this exactly move. I can see an advantage going both ways. If I put it in a Roth, then I have a bit more cash flow throughout the year, and the simplicity of transferring the exact amount of my RMD to my Roth (as the amount is known). If I put it in my 401k, I'll have a lower tax bill at the end of the year, and I'll have more money in the market throughout the year (additional 401k contributions throughout the year). Realistically it would probably only be about a $125 hit from my paycheck per month, which I would probably put in savings regardless. As you mentioned I don't mind a bit of diversification, so I'm a bit up in the air about it.

Something else to think about more generally... since you're already talking about being on track with the downpayment savings, are you on track to buy your next car in cash? For example, if you think you'll spend $15,000 on a decent used car and it'll last you 7 years, then you want to be saving $178.57 as a "car payment". If your current car has 3 years left on it, then you need 4 * 12 * $178.57 = $8,571.36 saved up now in your "car fund". Adjust those numbers to your circumstances, of course.
My car has about 55,000 miles on it. Don't plan on selling or replacing any time soon. I think its a bit too far out for me to specifically set aside money for a new one, and I most likely will not pay for the car outright. Right now I'm trying to save as much as I can (roughly $2k-$3k/month including retirement) while still enjoying myself. Maybe in a few years I'll reevaluate my specific saving goals.
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Re: New to investing, ETF question

Postby Brantley » Fri Jun 14, 2013 10:55 am

mnvalue wrote:With your tax rate, you might consider putting the RMDs into your 401k instead of a Roth IRA.

Thinking about this again, I really like this idea. I took out 10,500 from my account last year as I started work mid year and was in a low tax bracket (15%). I put $5,000 in a Roth in 2012, and $5,500 in a Roth in 2013. I still need to take my RMD for this year. I'll just bump up my withholding % based on what my estimated year end balance is (can only adjust % in increments of 1 anyway), and I can ensure most of my RMD this year stays invested.
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Re: New to investing, ETF question

Postby Brantley » Sun Sep 01, 2013 5:41 pm

Brantley wrote:1. My cash at Ally Bank is sitting in the account most likely to pay for expenses coming up within the next five years (down payment on house, vacation?, etc.). Is there really anywhere better I could put it?

Any more thoughts on this? Too young for I-Bonds?
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