Moving away from cash

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Moving away from cash

Postby LEGO7 » Sun Jun 23, 2013 12:13 pm

I am a newbie here looking for some thoughtful advice on how to start putting some of my cash back into the market. Any advice on some of my allocations or funds would be appreciated greatly also. My networth is around 147k, with 71k sitting in low interest cash account.

31 y/o - engineer - 70k annual salary- single - no debt/no student loans/ no property

401K- $66,400:
Fund Price Shares Current Election % Value
Am Cent Equity Income Inv $8.53 379.420 5 $3,236.45
BlackRock S&P 500 Stock Fd Svc $191.83 9.045 5 $1,735.10
Dreyfus Bond Market Index Inv $10.54 745.503 10 $7,857.60
Federated Mid-Cap Index $25.37 264.057 10 $6,699.13
Federated Treas Obligation SS $1.00 15,771.913 0 $15,771.91
Fid Adv Small Cap Class A $26.03 89.906 10 $2,340.26
Harbor International Fd Admin $61.55 223.894 20 $13,780.68
JPMorgan Equity Inc Fd Select $11.68 152.549 5 $1,781.77
MFS Total Return $16.23 265.896 10 $4,315.49
Royce Pennsylvania Class FI $12.71 168.328 10 $2,139.44
T Rowe Growth Stock Adv $40.78 165.591 15 $6,752.80

Roth IRA- $8.2k
stock-price-shares
WMTWMT $73.03 35
SSGRXSSGRX $28.66 71.526
INTCINTC $24.19 50
PGPG $75.25 14
GLDGLD $123.60 5
CASH -- 0 $502

Cash-Checking and savings account- $71k


The reason I have way more then reasonable in cash is because I took some substantial hits in 2008/2009 and soured me on investing for a while. Basically I bought high and sold low, and didn't stay the course. Other then that I live frugally for the most part and took a lot of advice from the book-"The Automatic Millionaire"by David Bach. Its difficult to see money you work very hard for disappear so quickly and not let hit effect your investing outlook. I also am under the impression that much of the market is controlled by large hedge funds and computer trading and isn't as easy for the personal investor. But I am at a time in my life where my risk should be high and I need to start taking advantage of the tools that are available to me. Maybe start buying some total stock market indexes once a month?
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Re: Moving away from cash

Postby Rainier » Sun Jun 23, 2013 1:26 pm

If investing wasn't for you after the crash what has changed now? The market is at record highs and now you want back in?

That isn't exactly the best timing. Unless you have seen the light I'd stick with guaranteed investments for now, cash, cd, ibonds....
- Bill
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Re: Moving away from cash

Postby Occupier » Sun Jun 23, 2013 1:39 pm

If I were you I would explore the wiki this site. Especially books to read, and sample portfolios. You look like you just got investments scatter shot because they sounded good at the time you had some money. When you own a lot of actively managed funds from different providers you tend to just hold something like the Vanguard Total Stock market (and total international) in a very tax and cost inefficient manner. If I were you I wold just hold the three Vanguard total funds, US stock market 40%, International 30%, and total bond 30%. And I would take that cash and buy a house. Dave
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Re: Moving away from cash

Postby Twins Fan » Sun Jun 23, 2013 1:52 pm

LEGO7 wrote: I also am under the impression that much of the market is controlled by large hedge funds and computer trading and isn't as easy for the personal investor. But I am at a time in my life where my risk should be high and I need to start taking advantage of the tools that are available to me. Maybe start buying some total stock market indexes once a month?


Know how to "beat" that?.... Own the market. I.E... indexing.

It seems like it will be tough to give any advice here, since you didn't like or handle "risk" well at all before, but now feel like you're ready to take on more risk?? You may just be very risk averse, or conservative... and nothing wrong with that. Everyone is different... and you're situation could be much worse you could spend all your money and have a bunch of debt. Cash in savings isn't the worst thing out there...

I'm not familiar with all the funds you hold in your accounts, but it looks like it could be simplified a whole bunch. What are the expense ratios of the funds?

How much do you contribute to your 401k and Roth... do you max them out? Will you be maxing them out going forward?

I don't think you need to jump into taking more risk with your cash, or no need to "move away" from cash (that you have now). I'm guessing it would be quite stressful for you, if you were to do that? As mentioned, look into CDs or I bonds for some of your cash if you want it to grow a little more.
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Re: Moving away from cash

Postby ogd » Sun Jun 23, 2013 2:07 pm

Hi LEG07,

One of my favorite investor writers, Barry Ritholz, has a recent Washington Post editorial that seems tailor-made for you.

http://www.ritholtz.com/blog/2013/06/mi ... to-do-now/

It's more about the mental accounting than the specifics, but I think that's the very first thing you need to address. No asset allocation will work for you if you're prone to bail out every time the markets take a trip south.

As for the specifics, see this post viewtopic.php?t=6212 about how to give all the information that we'll need for an informed reply. In particular, we're missing the "funds available in 401k" section and the planned contributions.

Cheers!
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Re: Moving away from cash

Postby BolderBoy » Sun Jun 23, 2013 2:58 pm

LEGO7 wrote:The reason I have way more then reasonable in cash is because I took some substantial hits in 2008/2009 and soured me on investing for a while... But I am at a time in my life where my risk should be high and I need to start taking advantage of the tools that are available to me. Maybe start buying some total stock market indexes once a month?


Above, you cite the exact reason that folks come up with appropriate asset allocations (stock/bond splits). If 2008-09 caused you anxiety, then use that level of anxiety to help you come up with the AA that is right for you. Clearly, 100% stocks isn't right for you, regardless of your declaration about taking high risks now.

Other responders have suggested some reading in the wiki - good idea. Most of the books suggested are at your local library. When you've read and see that so many folks all say the same thing, the light will come on and you'll know what to do for you.

Welcome to the forum!
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Re: Moving away from cash

Postby LEGO7 » Sun Jun 23, 2013 3:13 pm

I have added the expense ratios of the 401K:

Am Cent Equity Income Inv $8.53 379.420 5 $3,236.45 -
(0.95%)
BlackRock S&P 500 Stock Fd Svc $191.83 9.045 5 $1,735.10
(0.35%)
Dreyfus Bond Market Index Inv $10.54 745.503 10 $7,857.60
(0.4%)
Federated Mid-Cap Index $25.37 264.057 10 $6,699.13
(0.55%)
Federated Treas Obligation SS $1.00 15,771.913 0 $15,771.91
(0.45%)
Fid Adv Small Cap Class A $26.03 89.906 10 $2,340.26
(1.06%)
Harbor International Fd Admin $61.55 223.894 20 $13,780.68
(1.02%)

JPMorgan Equity Inc Fd Select $11.68 152.549 5 $1,781.77
(0.8%)
MFS Total Return $16.23 265.896 10 $4,315.49
(.77%)
Royce Pennsylvania Class FI $12.71 168.328 10 $2,139.44
(1.2%)
T Rowe Growth Stock Adv $40.78 165.591 15 $6,752.80
(0.93%)

My 401K is 10% of my salary and I don't actively invest in the RothIRA anymore. Buying a house would make sense to me if I lived in the midwest or in a small town, but right around DC where I am now it would probably be equivalent to San Francisco or NYC in that buying a starter house would be living way above my means unless I wanted to sit 3hours a day in traffic just to get to the city. Plus I am considering some employment options outside the country and would rather not have to worry about selling a house.
I definitely prefer conservative investing, but in 2008/2009 when it seemed like the financial world was going to end I definitely made some irrational decisions. That doesn't mean I am going to sell everything anytime a stock drops. My plan wouldn't ever be to buy into everything at once, but slowly start owning dividend stocks or total index funds. The recent run up has made me more cautious of jumping in now even if it is just a little bit at a time. Thanks for all the responses and suggestions. I wish my 401k had vanguard index funds but it doesn't. I enjoyed reading the article from Barry Riholz, he made a lot of strong points about something that probably gets ignored more often then not when dealing with personal finance investing.
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Re: Moving away from cash

Postby stlutz » Sun Jun 23, 2013 4:18 pm

First off, welcome to the forum, LEGO7!

Second off, a few of the initial responses were a bit harsh. Most everybody screws up investing when they are in their 20s--I know I did. That just the reality of life. That's okay as long as you continue to save during those years which it looks like you've done. When you're just starting out, saving as much as you can makes a lot more of a difference than the returns you earn on those savings. Now that you have some real money saved up, however, it's time to get a good plan together that you can stick with for many years to come.

Third, there is nothing wrong with being conservative. Too often, people who are relatively younger are encouraged to take too much risk. That said, I'm always trying to promote taking moderate amounts of risk. Rules of thumb that are common are that you should have your age in bonds/CDs etc. A 60% stocks/40% bonds balanced portfolio is also a common approach (and is what I like personally).

Fourth, you don't need dozens of mutual funds to invest effectively. There are only two funds in your 401K that you should be using--the S&P 500 index fund and the Bond Market Index fund. The others simply have expenses that are too high.

Fifth, given that the investment options in your 401K are kind of meh, I would recommend investing in the 401K up to the company match, then fully funding your Roth IRA, and only then adding more to your 401K. Where is your Roth IRA currently held? I assume it's at a brokerage firm? If we know which firm, we could give some recommendations about good investment options to consider there.

Sixth, Make sure you keep short-term savings and "emergency fund" money apart from your investment portfolio.

Seventh, read one of the books that are promoted on this site (no need to read all of them unless you like doing that sort of thing). Since we were taking about it on another thread today, I like William Bernstein's "Investor's Manifeso", simply because it does address investing in good times and bad.

I'll stop counting now. :D
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Re: Moving away from cash

Postby Call_Me_Op » Sun Jun 23, 2013 4:21 pm

Lego,

Warning: It appears that you continuing your pattern of emotional investing and performance chasing. You need to do a lot more studying before you enter the market in any significant way, IMO.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Moving away from cash

Postby widestance » Sun Jun 23, 2013 5:31 pm

Like others have said, read up a bit and try to come to terms with what your real risk tolerance is.

Having said that, i ran your current investments in Morningstar's Instant X-ray tool.

As it stands now, your current allocations are:

25% Cash
61% Stock (66% US, 34% Intl)
13% Bonds
1% other (Gold)

If you want to slowly get back into the market, you could start moving out of the Federated Treas Obligation Fund and adding to the asset class you feel is underfunded. Once those holdings have been fully converted, you have a few options such as: upping 401k contributions and supplementing your take home pay out of your cash savings, starting moving cash from savings to your Roth, or both.

Do you have other 401k investment options other than the ones you've listed?
Everybody's got a plan until they get punched in the face - Mike Tyson
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Re: Moving away from cash

Postby LEGO7 » Sun Jun 23, 2013 6:44 pm

stlutz wrote:First off, welcome to the forum, LEGO7!

Second off, a few of the initial responses were a bit harsh. Most everybody screws up investing when they are in their 20s--I know I did. That just the reality of life. That's okay as long as you continue to save during those years which it looks like you've done. When you're just starting out, saving as much as you can makes a lot more of a difference than the returns you earn on those savings. Now that you have some real money saved up, however, it's time to get a good plan together that you can stick with for many years to come.

Third, there is nothing wrong with being conservative. Too often, people who are relatively younger are encouraged to take too much risk. That said, I'm always trying to promote taking moderate amounts of risk. Rules of thumb that are common are that you should have your age in bonds/CDs etc. A 60% stocks/40% bonds balanced portfolio is also a common approach (and is what I like personally).

Fourth, you don't need dozens of mutual funds to invest effectively. There are only two funds in your 401K that you should be using--the S&P 500 index fund and the Bond Market Index fund. The others simply have expenses that are too high.

Fifth, given that the investment options in your 401K are kind of meh, I would recommend investing in the 401K up to the company match, then fully funding your Roth IRA, and only then adding more to your 401K. Where is your Roth IRA currently held? I assume it's at a brokerage firm? If we know which firm, we could give some recommendations about good investment options to consider there.

Sixth, Make sure you keep short-term savings and "emergency fund" money apart from your investment portfolio.

Seventh, read one of the books that are promoted on this site (no need to read all of them unless you like doing that sort of thing). Since we were taking about it on another thread today, I like William Bernstein's "Investor's Manifeso", simply because it does address investing in good times and bad.

I'll stop counting now. :D


STLUTZ,
I appreciate the detailed response. My rothIRA right now is at scottrade.com. My company matches 401k only up to 3%, so I can lower the amount of pretax income sent to my 401k. It looks like the investors manifesto only set me back about $10 at Amazon, so I can read that at the pool after it comes. After reading through the wiki notes off this site, I feel that some of this information that might seem really basic to users of this site is not really promoted to protect mutual fund and 401k royalties. My intention is to not make the mistakes I made in my 20s again and build my nest egg the right way. A $15k-20k emergency fund is probably all I need in cash based on how I live.
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Re: Moving away from cash

Postby LEGO7 » Sun Jun 23, 2013 6:48 pm

widestance wrote:Like others have said, read up a bit and try to come to terms with what your real risk tolerance is.

Having said that, i ran your current investments in Morningstar's Instant X-ray tool.

As it stands now, your current allocations are:

25% Cash
61% Stock (66% US, 34% Intl)
13% Bonds
1% other (Gold)

If you want to slowly get back into the market, you could start moving out of the Federated Treas Obligation Fund and adding to the asset class you feel is underfunded. Once those holdings have been fully converted, you have a few options such as: upping 401k contributions and supplementing your take home pay out of your cash savings, starting moving cash from savings to your Roth, or both.

Do you have other 401k investment options other than the ones you've listed?


Unfortunately, those are the only 401k options I have.
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Re: Moving away from cash

Postby widestance » Sun Jun 23, 2013 7:22 pm

LEGO7 wrote:Unfortunately, those are the only 401k options I have.


In that case, i'd probably go with the funds STLUTZ recommended and reallocate to them at percentages you feel comfortable with in your 401k. You may want to consider converting the holdings you have in your roth into international stocks.

If you wanted an AA of something on the order of 60% Stock (15% Intl)/ 40% Bonds
You could reallocate your 401k assets by holding 35k in S&P, 31k in Bond Index. Then in your Roth, add $5,500 to it, liquidate your current holdings, and then purchase an international stock index (VGTSX, VXUS).
Everybody's got a plan until they get punched in the face - Mike Tyson
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Re: Moving away from cash

Postby ogd » Sun Jun 23, 2013 7:59 pm

Hi LEGO7,

If I were you, with that 401k and taking into account your skittishness, I would recommend something like:

Emergency cash 20k, remove from asset allocation.
Taxable cash savings 20k, use a good savings account from depositaccounts.com.
(I suggest you keep a cushion of cash so you don't feel threatened by market fluctuations, or you decide to switch jobs or countries with some downtime, etc).
Use the rest of the 30k to live while you max out your 401k. If you want, you can also open a personal taxable account at Vanguard and buy some VTIAX (international stocks). Or VXUS at Scottrade, same thing packaged as ETF.

Like some other posters have said, your 401k is not great, but it's not terrible either -- at least those two index funds exist. I still think you should max it out in preference to the taxable account. Here's why: the tax cost of even efficient stock funds like VTSAX (i.e. from dividend taxes) is higher than the expense differential. Furthemore, in the future you might get better options in the 401k or switch companies and it would be a pity if you wasted the 17.5K/year cap. I also think that the 401k is something that you'll inherently perceive as long-term money, which is a good thing when the markets fluctuate.

In the 401k, buy Dreyfus Bond Market Index in the amount needed to bring your fixed income allocation (after adding the taxable cash) to 50%. Yes it's conservative but I think it's a good idea. At the current asset levels, that means only 12K (investable assets 125K, divided by two, minus 50k cash), but the 50k cash will be moving into the 401k adding to this position. With the rest of the 401k, buy BlackRock S&P 500 Stock.

In the Roth, buy either VXUS (int'l stock market) or VTI (domestic stock market) depending on whether you chose to invest in VXUS with taxable money already.

As for investing more in the Roth (via the backdoor method), that's a longer discussion. It's certainly preferable to the taxable account, so you should do it while you're working through that cash (401k contributions will take a couple of years to deplete it). Afterwards, is it preferable to 401k contributions above employer match? I don't know, opinions vary, you can read around on this site and all over the web really. It might be a reasonable thing to do in your current tax bracket.

Over time you might want to be a little less conservative, or decide that 50% fixed income suits you just fine. As long as it's about your level of comfort and not your guesses about the market, it's OK to have a little attitude adjustment every now and then.

Hope this helps!
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Re: Moving away from cash

Postby LEGO7 » Fri Jun 28, 2013 11:17 am

Thanks a million for the post OGD, I am sorry I haven't been available to reply sooner. Your plan makes a lot of sense to me but I do have a few questions. If I end up putting the majority of my net worth in my 401K, does that cause many problems for me if I need the extra money in 5, 10, maybe 20 years(buy a car, house, start a business, ect.)? I always thought of 401K as a tool to save for retirement after 65, and with charges in place to curb early withdrawal. With what I am spending now I can easily put 17.5k a year in my 401k pretax, I just didn't because I didn't like the mutual funds or the fact that my money was somewhat not accessible for 35 years. But then again, I would still have some money in taxable accounts plus I can withdrawal 10K from the rothIRA for a first house down payment. Also, what about putting a little bit in the Federated Mid-Cap index whos expense ratio is only 0.55% for some diversification? Should I transfer everything at once, or spread it out over a couple of months? Should I wait for a day where the stock market is 5% or 10% above today to transfer the mutual funds into bond index funds?
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Re: Moving away from cash

Postby ogd » Fri Jun 28, 2013 1:52 pm

Hi LEGO7,

You are right that a 401k puts the money out of reach, but that might not be a bad thing. Again, I am counting as an advantage the psychological aspect of thinking of it as long-term money, making you less likely to sell when the market is having a fit. I have also recommended a cash cushion in the taxable account to address future needs, and you should definitely ramp that up when a larger expense is on the horizon. This might be now if you foresee a house purchase in the next 5 years. A car is less worrying because it usually comes with advantageous loan terms and little or no downpayment.

Remember also that you can borrow money from a 401k, paying yourself back with interest. It's not quite a good value proposition (you end up getting double-taxed on that interest when you retire), but better than withdrawal penalties. And yes, the Roth is also a good source, and like I said I am neutral as to whether you should favor it over the 401k. All I can say with certainty is that both are preferable to the taxable account.

LEGO7 wrote:Also, what about putting a little bit in the Federated Mid-Cap index whos expense ratio is only 0.55% for some diversification?

The mid-cap space is only 6% of the US market, so I wouldn't bother given the complication and the extra expenses. The S&P 500 is 80%, spread across all sectors.

LEGO7 wrote:Should I transfer everything at once, or spread it out over a couple of months? Should I wait for a day where the stock market is 5% or 10% above today to transfer the mutual funds into bond index funds?

The other side of that coin is that the stock market could go down 20% making you wish you had a larger income allocation. I would just do it now and get it over with. It's not a good idea to try to second-guess the market.

Hope this helps!
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