Trying to keep it simple

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Trying to keep it simple

Postby crake » Fri Mar 15, 2013 9:10 am

Hi all. I've been lurking these forums for about 2 years now. I've learned an immense amount and want to start out by thanking everyone for being so helpful. I started reading investment advice when I started my first job about 3 years ago. I quickly discovered the advantages of low cost, passive investing and no ones been able to convince me that there is a better option yet.

My wife and I have made it to the point where we can start maxing out our retirement accounts. Up until now my wife was not working full time so we only had my 401K to consider. Asset allocation was easier then. Moving forward we will have my 401k, my wifes 457b, and each of our Roth IRA's which I lump into the same group. Below, I have only included the low cost index funds available to us. I'm not interested in investing in anything else.

In a perfect world I would have access to Vanguard target retirement funds in each account and 100% of my money would go there. Since that is not the case I am doing my best to approximate the three fund portfolio which would be 60% TSM, 30% TISM, and 10% TBM. If you look at the funds in my 401K and 457B you can see that there are a few shortcomings which I am using the IRA to make up for. Upon analysis of the Spartan Total International fund I learned that it does not include emerging markets. I also needed to add the extended market index to my IRA to balance the S&P 500 Index in the 457b plan. The percentages below have been tax adjusted assuming a 15% tax rate in retirement.

Emergency funds: Yes plus enough money for a down payment on a future house.
Debt: Car loan at .9% (I have the cash to pay it off but don't feel the need to).
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 6% State
State of Residence: MD
Age: 24
Desired Asset allocation: 60% Domestic stocks / 30% International stocks / 10% bonds


Current retirement assets Low 5 figures.

Taxable
none

His 401k Pre-Tax
24% SPTN INTL INDEX ADV (FSIVX) (.17%)
6% SPTN TOT MKT IDX INS (FSKTX) (.07%)
10% SPTN US BOND IDX IS (FXSTX) (.07%)
0% VANG INFL PROT ADM (VAIPX) (.11%)

Her 457b Pre-Tax
36% Vanguard 500 Index Signal (VIFSX) (0.06%)
0% Dreyfus Bond Market Index Basic (DBIRX) (0.16%)

His/Her Roth IRA at Vanguard
6% Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX) (.33%)
7% Vanguard 500 Index Fund Investor Shares (VFINX) (.17%)
11% Vanguard Extended Market Index Fund Investor Shares (VEXMX) (.28%)

Annual Contributions
$19705 his 401k (also specify any employer matching contributions)
$17500 her 457b (also specify any employer matching contributions)
$10000 Roth IRA

    Questions

  • Have I achieved my goal of approximating the three fund portfolio given the available options? Is there a better way of getting there?
  • Is there anything missing that I should add? I listed that I have VAIPX available in my 401K. Should I consider adding this to my AA? Would an REIT fund in the IRA be worth considering? As my subject line says, I am trying my best to keep it simple.
  • How should my AA change over time? I am thinking of keeping this AA until I'm 30 and than increasing my bond % by 1 percent every year. As you can probably tell by my age and my contribution amounts retiring early will hopefully end up being a possibility for me. It's too early in life to decide if that is what I want to do but should it be a factor in my AA?
  • Can(should?) you convince me to not be obsessive over rebalancing? I made a spread sheet that rebalances all of the funds for me based on the available money in each account. The spreadsheet breaks down the AA into smaller categories such as Mid Cap, Small, Cap, Emerging Markets, Etc. Right now my plan is to check once per month and rebalance if any of the categories is off by 5% or more. I am thinking that I need to do this so frequently because my contributions are going to be a large part of my total assets at least for these first couple of years. Money will be going into these accounts at different rates which I think will have a big effect on my AA throughout the year.
  • 457b vs 403B? My wife has both options available. I didn't know what a 457b was until I saw her benefits guide but it seems that the only difference is no early withdrawal penalties on the 457b. That sounded great to me as a mentioned before, early retirement will hopefully be an option. Is there anything I'm missing?
  • Is there any good reason to diversify my bond allocation across accounts? Should I consider that I may be drawing down from the 457b first? All my bonds are in my 401k now because it is the cheapest bond fund I have available
crake
 
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Re: Trying to keep it simple

Postby BBL » Sat Mar 16, 2013 8:39 am

Welcome, crake

Can(should?) you convince me to not be obsessive over rebalancing? I made a spread sheet that rebalances all of the funds for me based on the available money in each account. The spreadsheet breaks down the AA into smaller categories such as Mid Cap, Small, Cap, Emerging Markets, Etc. Right now my plan is to check once per month and rebalance if any of the categories is off by 5% or more. I am thinking that I need to do this so frequently because my contributions are going to be a large part of my total assets at least for these first couple of years. Money will be going into these accounts at different rates which I think will have a big effect on my AA throughout the year.


There is no reason not to rebalance frequently while all of your funds are in tax advantaged accounts. Once a month is fine. Just expect that you will accomplish the goal of sticking to your AA targets and not necessarily get the so-called 'rebalancing bonus'. Market movements/trends may mean rebalancing hurts your returns but that isn't why you're doing it, right? :D

I'll add that obsessing over most anything is not good. I'm willing to bet your attitude toward this will change over time. Can you imagine obsessing over that spreadsheet over the next, let's say, 60 years? I bet you'll relax a bit as the years pass.

How should my AA change over time? I am thinking of keeping this AA until I'm 30 and than increasing my bond % by 1 percent every year. As you can probably tell by my age and my contribution amounts retiring early will hopefully end up being a possibility for me. It's too early in life to decide if that is what I want to do but should it be a factor in my AA?


Generally speaking, reducing your equity AA [risk exposure] as you age is a good idea. You're starting with a risky AA - 90/10. Your proposal to increase bonds as you age beginning at 30 may be just fine. It's important to plan to reduce risk exposure over time to the extent and in the manner that works for you.

You won't develop an IPS at 24 that will be perfect and never require additions and revisions but that is by no means a reason not to develop the best possible plan based on your situation and revise it as necessary over the course of time. The written plan is extremely helpful [staying the course, etc.] especially in down markets.

I wanted to address those two issues and get you a *bump* so that others may address some of your other questions - I've got to run. Let me add a 'good on you' for getting your financial house in order so early. That's great. :beer
To win without risk is to triumph without glory. Pierre Corneille
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BBL
 
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Re: Trying to keep it simple

Postby crake » Sat Mar 16, 2013 10:46 am

Thanks for the advice. I believe I am rebalancing for the right reason. My reason for rebalancing is to stick to my target AA. My question may end up being more theoretical than I originally thought. As much as I've thought about what a good AA would be it was still a somewhat arbitrary decision. I could have just as easily chosen a 60/25/15 allocation or 65/30/5 allocation and they would have been just as "correct" as my 60/30/10 allocation.

It seems that the advantage of picking an allocation and sticking to it is that it helps the investor to stay disciplined; not that the specific AA chosen maximizes returns over other similar allocations.
crake
 
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