Beginner Asset Allocation Questions

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Beginner Asset Allocation Questions

Postby rdlaner » Thu Apr 04, 2013 1:37 am

I'm new to the Boglehead forum, but have been reading many posts for the past few weeks after finishing the "Boglehead's Guide to Investing." It has been very enlightening and as a result, I have a few beginner questions I was hoping to get help with.
First off, I just started taking advantage of the 401(k) matching plan that is provided by my work. Currently, I have 6% of each paycheck deducted towards the 401(k) as that is the max that my company will match.
Also, I have just recently gotten married and as a result my expenses have gone up since my wife is not yet working. As such, I have quite a bit less left over for savings. However, my wife did bring with her a chunk of money that she had saved somewhere near $15k.
I currently have the beginnings of an emergency fund set aside in a MMA of about $8k.

From what I have learned about asset allocation and placing the correct funds in their respective taxable or tax-advantaged accounts, I'm inclined to have my work 401(k) comprised mostly of bonds and in a addition, open a taxable account for stocks. However, since nearly all of my retirement investing for the time being will be through my work's 401(k) account, I don't think that I will have the additional funds (besides the $15k previously mentioned) to open a taxable account to invest in stocks.
Ideally, I would like to conservatively invest the $15k towards a down payment on a house in the intermediate future, likely 4-6 years.

First question: given this scenario, is still to wise to invest in stocks within a 401(k)?
Given that I am 28 years old, I would like to have stocks make up a larger portion of my early portfolio. Given the limited selection of funds in my employers 401(k), this is the allocation I am considering:
Vanguard Inflation-Protected Securities: 5%
Vanguard Total Bond MarketIndex: 20%
Vanguard REIT Index: 10%
Vanguard Total Stock Market Index: 45%
Vanguard European Stock Index: 20%
From what I have researched, most of these funds seem fairly worthwhile. The one I am most unsure about, however, is the Vanguard European Stock Index. It, however, is the only low cost international stock fund that I can choose with this 401(k).

Second question: Does this asset allocation look reasonable and is VEURX a worthwhile component for international diversification?

Last question, give my the information that I have briefly outlined, are there any suggestions on a wiser plan for investing?



Thanks for the great feedback so far. Forgive me for not providing more info, I'll try to fill in the gaps as per the posting outline:
Emergency funds: Roughly two months worth of funds. I would like to get this up to 3-4.
Debt: I do have remaining college/grad school debt. The interest rates on those loans range from 2.5% to 6.5%. I believe I have about $20K remaining.
Tax Filing Status: Will be filing as married
Tax Rate: I believe I am in the 25% fed tax bracket, no state tax.
State of Residence: WA
Age: 28
Desired Asset allocation: ~75% stocks / ~25% bonds
Desired International allocation: Unsure. As mentioned before, I am uncertain about the international fund offered in my 401(k) (VERUX).
Last edited by rdlaner on Fri Apr 05, 2013 1:40 am, edited 1 time in total.
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Re: Beginner Asset Allocation Questions

Postby ieee488 » Thu Apr 04, 2013 8:56 am

rdlaner wrote:Ideally, I would like to conservatively invest the $15k towards a down payment on a house in the intermediate future, likely 4-6 years.

For something you need in 4-6 years, "investing" is the wrong word to use.
Put in short-term CDs and be done with it.

For someone starting out, your 401K seems a bit too complicated for me.
Just Total Bond and Total Stock would be what I would invest in.
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Re: Beginner Asset Allocation Questions

Postby ofcmetz » Thu Apr 04, 2013 5:46 pm

1. Figure out how much you need in cash for your emergency fund and start saving towards that goal. Keep it in something safe like a money market at your local credit union or maybe an online bank like Ally Bank or something similar.

2. Asset Allocation. You seem to want a 75% Stock/ 25% Bond allocation which is very reasonable for your age. I suggest keeping things simple and just owning three funds. As you learn more you may want to hold more funds but any further diversification is not really necessary to be diversified.

I would use the Total Bond Market and Total Stock Market index funds in the 401K. I don't think the European Stock Index is a good international substitute as it's too concentrated. Instead, I would open up a ROTH IRA at Vanguard and use the Total International Stock Index there.

The most important part of building wealth at this point is doing things that increase your net worth. Saving in your 401K is probably the easiest as you can make it an automatic thing. After awhile you are so used to what is taken out that it's painless. I would aim at getting to a nice 15% or more savings rate at this point. You can also increase your savings when you get raises.

If you want a more in depth answer from some of the bogleheads then I suggest you post in this format.

viewtopic.php?f=1&t=6212
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Re: Beginner Asset Allocation Questions

Postby Twins Fan » Thu Apr 04, 2013 6:02 pm

I agree that if that $15K is supposed to be for a down payment in the near future, I wouldn't be "investing" that at all. Put it in a CD or money market account, let it sit, and add to it. Or, put the $15K with your $8K and you have your emergency fund... whatever you need there $$?

You have a bunch of Vanguard funds listed there in your 401k. Do you have the target date retirement funds from Vanguard available in your 401k? If so, I say pick one of those and start putting all your contributions into that.

I don't think you should be thinking about taxable accounts yet. You have tax advantaged space available and some savings plans (down payment). Save the taxable stuff for later. You're young and just getting started out.
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Re: Beginner Asset Allocation Questions

Postby chaz » Thu Apr 04, 2013 6:08 pm

Look at the forum wiki.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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Re: Beginner Asset Allocation Questions

Postby rdlaner » Fri Apr 05, 2013 1:56 am

To answer some of the questions that have arisen:

ofcmetz wrote:1. Figure out how much you need in cash for your emergency fund and start saving towards that goal. Keep it in something safe like a money market at your local credit union or maybe an online bank like Ally Bank or something similar.
viewtopic.php?f=1&t=6212


Good advice, I have a small amount of savings each month designated to building up my emergency fund, I hope to contribute more in the future.

ieee488 wrote:For something you need in 4-6 years, "investing" is the wrong word to use.
Put in short-term CDs and be done with it.


I agree. I think I'll make use of a CD for this.

Twins Fan wrote:You have a bunch of Vanguard funds listed there in your 401k. Do you have the target date retirement funds from Vanguard available in your 401k? If so, I say pick one of those and start putting all your contributions into that.


Unfortunately, I don't have target date retirement funds available in my 401(k) selection.

ofcmetz wrote:I would use the Total Bond Market and Total Stock Market index funds in the 401K. I don't think the European Stock Index is a good international substitute as it's too concentrated. Instead, I would open up a ROTH IRA at Vanguard and use the Total International Stock Index there.


Also, thanks for the input on VEURX, I think I may scrap it and go with your advice on opening a Roth IRA at Vanguard to use the Total International Stock Index, I may use some of the $15k mentioned before to start that. The only thing is that at this time, I won't likely be able to add to it since most of my current retirement savings will be the deductions from my paycheck into the 401(k).



It seems like most of the feedback is pretty consistent with continuing to build the 401(k), albeit, a simpler version and not to worry about a taxable account for now.

One more question I have is regarding my remaining student loan debt. Is it advisable to use some or most or all of the $15k I have available to paying that off? Since it has been advised not to invest that in a taxable account, it's not likely that I can make a greater return on that money than the interest I am paying on my loans.
What suggestions would be made with this?



Thanks again for all the great feedback!
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Re: Beginner Asset Allocation Questions

Postby xram » Fri Apr 05, 2013 6:41 am

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Re: Beginner Asset Allocation Questions

Postby Twins Fan » Fri Apr 05, 2013 11:34 am

rdlaner wrote:One more question I have is regarding my remaining student loan debt. Is it advisable to use some or most or all of the $15k I have available to paying that off? Since it has been advised not to invest that in a taxable account, it's not likely that I can make a greater return on that money than the interest I am paying on my loans.
What suggestions would be made with this?


This is one of those things where there is no "right" answer and you will get different opinions. I think it comes down to... what will make you sleep better at night.

On one side, you have $15K on hand and about $20K of student loans, so you could wipe most of the loans out. With some of them being 6.5% interest, that's a good move to knock those out.

On the other side, you have plans of buying a home soon and $15K "in savings" now. If you throw all of that at the student loans, would you be able to save that much up again in a few years?

Also, you're married now... have you talked to the wife about what she would be comfortable with, as far as the $15K?

I think maybe a "combo" approach with the $15K may be good... use some to plus up your emergency fund to the level you want, knock out the higher interest (6.5) student loans, and throw the rest in a savings account set aside for the down payment.
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On the road to investment success.

Postby Taylor Larimore » Fri Apr 05, 2013 12:18 pm

rdlaner:
Welcome to the Bogleheads Forum!

I am pleased that you found our Bogleheads Guide to Investing "enlightening." I will try to answer your questions:
First question: given this scenario, is it still to wise to invest in stocks within a 401(k)?
Given that I am 28 years old, I would like to have stocks make up a larger portion of my early portfolio. Given the limited selection of funds in my employers 401(k), this is the allocation I am considering:
Vanguard Inflation-Protected Securities: 5%
Vanguard Total Bond MarketIndex: 20%
Vanguard REIT Index: 10%
Vanguard Total Stock Market Index: 45%
Vanguard European Stock Index: 20%
From what I have researched, most of these funds seem fairly worthwhile. The one I am most unsure about, however, is the Vanguard European Stock Index. It, however, is the only low cost international stock fund that I can choose with this 401(k).


Your primary decision is your stock/bond allocation. You decided on 75% stocks/25% bonds which appears reasonable to me.

The general rule is to fill-up your retirement accounts with taxable bonds. Inasmuch as your portfolio contains only a tax-deferred account (401K) you should use it for stocks (usually a good location).

You have good reason to be "unsure" about using only a European sector fund for international stocks. I have a solution:

Open Roth IRAs for both you and your wife before April 15th for your 2012 contributions. This will allow you and your wife to immediately invest up to $21,000 ($5,000 each for 2012 and $5,500 each for 2013). These contributions will grow tax-free and be available at any time and for any reason without tax or penalty. Up to $10,000 of earnings in each Roth will also be available without tax or penalty for a new home purchase after 5 years from January 1, 2012.

Second question: Does this asset allocation look reasonable and is VEURX a worthwhile component for international diversification?

I like your proposed portfolio very much (except for the limited European stock fund). This can be remedied by using the more diversified Vanguard's Total International Fund in your new Roth(s).

Last question, give my the information that I have briefly outlined, are there any suggestions on a wiser plan for investing?

See above. You might also consider paying-off the high interest student loan if you feel the money will not be necessary for the home downpayment.

In my opinion, you are on the road to investment success.

Congratulations and best wishes.
Taylor
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Re: Beginner Asset Allocation Questions

Postby rdlaner » Sat Apr 06, 2013 4:06 pm

Thanks xram, Twins Fan, and Taylor.
I think all your advice resounds very well with me. I think I will adopt a mixed approach with the $15k: pay down some of the high interest student loans, throw a little into the emergency fund, and then put the rest into a Roth IRA.

Taylor, since you suggested opening the the Roth IRA's, what sort of asset allocation would you recommend? Would it be a straight forward 3 fund portfolio:
Total Stock Market
Total Bond
Total International Stock?

Or, would you suggest something different for this specific situation. Since I suspect that I may end up using some of these funds for a house down payment in the undetermined future, I am more inclined to weigh this account towards bonds and securities. What do you think?

Thanks again! This has been most helpful.
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Asset Allocation Questions

Postby Taylor Larimore » Sat Apr 06, 2013 5:06 pm

rdlaner wrote:Thanks xram, Twins Fan, and Taylor.
I think all your advice resounds very well with me. I think I will adopt a mixed approach with the $15k: pay down some of the high interest student loans, throw a little into the emergency fund, and then put the rest into a Roth IRA.

Taylor, since you suggested opening the the Roth IRA's, what sort of asset allocation would you recommend? Would it be a straight forward 3 fund portfolio:
Total Stock Market
Total Bond
Total International Stock?

Or, would you suggest something different for this specific situation. Since I suspect that I may end up using some of these funds for a house down payment in the undetermined future, I am more inclined to weigh this account towards bonds and securities. What do you think?

Thanks again! This has been most helpful.

rdlaner:

Yes, I would simply confine your overall portfolio to the three funds you listed for simplicity. The amount you save is far more important that any extra return you might receive from anything more complicated.

Yes. it makes sense to locate your least risky funds (Total Bond Market) into the Roths for the future house downpayment.

Keep your stock/bond ratio with the overall 75%/25% allocation (or something close) that you desire.

Best wishes.
Taylor
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Re: Beginner Asset Allocation Questions

Postby rdlaner » Sun Apr 14, 2013 7:34 pm

Thanks for all the help everybody.

One last question that I need clarified. I'm about to open a Roth IRA as suggested, with the intent of withdrawing the money for a house downpayment. My timeline for buying a house is 3-5 years.

I understand I can withdraw up to $10k of earnings as long as i've held the account for at least 5 years. However, it is possible that I may need to withdraw earlier than 5 years. From what I've read here:
http://www.kiplinger.com/article/real-e ... chase.html

It states that I can withdraw earnings from the Roth prior to 5 years and avoid the 10% penalty, however, I will have to pay taxes on the withdrawn earnings.

Can someone verify this? I haven't been able to confirm this in the IRS documentation, so I'm hoping to get as many sets of eyes on this as possible.

Thanks!
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Re: Beginner Asset Allocation Questions

Postby Twins Fan » Sun Apr 14, 2013 8:59 pm

rdlaner wrote:It states that I can withdraw earnings from the Roth prior to 5 years and avoid the 10% penalty, however, I will have to pay taxes on the withdrawn earnings.

Can someone verify this? I haven't been able to confirm this in the IRS documentation, so I'm hoping to get as many sets of eyes on this as possible.

Thanks!


You have "earnings" in there too many times.

You can withdraw your contributions to a Roth anytime and tax free. You must have had the account for 5 years in order to get the exception to withdrawing from earnings for first home. If you withdraw from the earnings before the 5 year mark for the first home, you will be taxed on the earnings portion.
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