A real risk to slice-and-dice investing (that I missed)

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tiltmenot
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A real risk to slice-and-dice investing (that I missed)

Post by tiltmenot »

Hi Everyone,

This is my first post, but I have been lurking for a long time. I have learned everything I know about investing from this site and appreciate the wealth of information provided by helpful and insightful posters here. With a plan set in place around 5 years ago, our portfolio have basically been on auto-pilot, but a major event that I had not considered has occurred, leading me to my first post.

5 years ago, I decided on a heavily-tilted portfolio with 50% of my stock allocation going to domestic and the other 50% to international, with my domestic allocation divided equally between total market and small value and my international allocation divided equally between large, small, and emerging markets. Because my job's 403b did not have any suitable funds for small value, international small, and emerging market, I filled my wife's 403b, which is a Vanguard account, with these funds. During 2007 and 2008, I also bought some total stock and total international in taxable since they would be the most tax efficient funds.

Fast forward to this month when my wife's work (a college) announced the removal of most Vanguard funds from the retirement plan and states that she must move all her funds into the funds that will be part of the new plan during the month of October. At the end of the month, any funds that are no longer supported in the new plan will automatically be moved into a Vanguard Target Retirement fund. The new plan does not include any small value or international small choices. It includes an actively managed emerging market fund with an expense ration of over 1%. This means that we will have to sell our small value, international small, and emerging market and abandon our tilted portfolio. We will be forced to lock in our losses in international small and emerging market, two underperforming funds that I have been pumping money into in the course of 2012 and 2013 via rebalancing.

So I guess my question is:

1) Is this move (and its stipulations) by my wife's employer legal?
2) If the move is legal (and I am assuming it is), then aren't slice-and-dicers and tilters who rely predominantly on employer's retirement plan always at the risk of being forced to abandon their investment strategies at a moment's notice? Doesn't this mean that such risk should be considered before implementing a slice-and-dice or tilted portfolio? If I had considered this risk as a real possibility, I could have at least bought small value, international small, and emerging markets instead of total market and total international in taxable. Or I could have simply decided against tilting.

I don't think there is much I can do so I am not sure if this post belongs in this forum or in the Theory, News & General, but I would appreciate any thoughts on this situation.

Thank you for reading such a long message.
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Aptenodytes
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Re: A real risk to slice-and-dice investing (that I missed)

Post by Aptenodytes »

The risk is larger for those who have the least flexibility. You haven't really told us anything about your flexibility. What amount is in the affected funds? How much of that could you mirror in accounts under your full control, such as IRAs or taxable holdings? You don't say what kind of employer match you get, or what your IRA eligibility is. Conceivably you might justify bringing your 401k/403b contributions to zero and maxing out IRAs.

Lousy employer offerings are discussed quite a bit here. The general movement is from bad to better, though frequently individuals move from decent to horrible when they switch jobs. Your situation is far from exceptional, I suspect.

I feel your pain with respect to small and value, but I don't see why anyone would overweight emerging markets.
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tiltmenot
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Re: A real risk to slice-and-dice investing (that I missed)

Post by tiltmenot »

Aptenodytes wrote:The risk is larger for those who have the least flexibility. You haven't really told us anything about your flexibility. What amount is in the affected funds? How much of that could you mirror in accounts under your full control, such as IRAs or taxable holdings? You don't say what kind of employer match you get, or what your IRA eligibility is. Conceivably you might justify bringing your 401k/403b contributions to zero and maxing out IRAs.

Lousy employer offerings are discussed quite a bit here. The general movement is from bad to better, though frequently individuals move from decent to horrible when they switch jobs. Your situation is far from exceptional, I suspect.

I feel your pain with respect to small and value, but I don't see why anyone would overweight emerging markets.
Thanks for the quick response. My wife's 403b accounts for about 40% of our portfolio, and our Roth about 10%. These are the ones with access to Vanguard funds. Our taxable is also Vanguard and accounts for about 10%, but we don't contribute to it on a regular basis. With small value, international small, and emerging markets making up about 40% of the portfolio, we don't have a flexibility to shift funds to keep the current allocation.

As for lousy employer offerings, I think it's one thing to know about them before you invest and completely another for you to be forced to switch into them after you have invested a substantial amount of money in the plan.
redhounds
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Re: A real risk to slice-and-dice investing (that I missed)

Post by redhounds »

A couple thoughts/questions:

1. Can you exchange your other accounts enough to keep your desired allocation? It's not really eating a loss if you keep the same portfolio-wide allocation.

2. Does her 403(b) account allow her to withdraw her balance while still working? It would have to be rolled over into an IRA within the required time limits, of course, but then you could move the current balance to Vanguard and invest it however you want and direct the new money going into her 403(b) into whatever funds work best for your allocation.
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baw703916
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Re: A real risk to slice-and-dice investing (that I missed)

Post by baw703916 »

I think the problem is more general. Bad retirement fund lineups are a major threat to Boglehead investing of any type, 3 fund or tilted.
Most of my posts assume no behavioral errors.
Texas hold em71
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Re: A real risk to slice-and-dice investing (that I missed)

Post by Texas hold em71 »

Or does her 403(b) have a brokerage window that would allow you to invest in other funds for a fee? Many 401(k) plans do this. Mine does not allow access to Vanguard but it allows access to hundreds of others for a transaction fee I am so far too cheap to pay.

I don't think there is any legal requirement on what funds are offered unfortunately. Generally employers will switch out one find for a similar one based on performance. So for instance one mid cap for another mid cap fund that performed better in the last few years. My employer offers an actively managed intermediate term bond fund and therefore seems to see no reason to offer a bond index fund. It is unusual to see entire choices disappear. However I have seen streamlining of fund offerings and that may be what is occurring here. Your choices may have been too esoteric. Not enough people were in them to keep them.
ML 59
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Re: A real risk to slice-and-dice investing (that I missed)

Post by ML 59 »

See if your new plan has the option of a fund widow to allow investment options beyond the listed choices. If it does, check to be sure that there are no additional fees for its use. If not, perhaps you can request this addition through your HR dept.
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tiltmenot
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Re: A real risk to slice-and-dice investing (that I missed)

Post by tiltmenot »

redhounds wrote:A couple thoughts/questions:

1. Can you exchange your other accounts enough to keep your desired allocation? It's not really eating a loss if you keep the same portfolio-wide allocation.

2. Does her 403(b) account allow her to withdraw her balance while still working? It would have to be rolled over into an IRA within the required time limits, of course, but then you could move the current balance to Vanguard and invest it however you want and direct the new money going into her 403(b) into whatever funds work best for your allocation.
Unfortunately, the answer is no to both questions.
Texas hold em71 wrote:Or does her 403(b) have a brokerage window that would allow you to invest in other funds for a fee? Many 401(k) plans do this. Mine does not allow access to Vanguard but it allows access to hundreds of others for a transaction fee I am so far too cheap to pay.
ML 59 wrote:See if your new plan has the option of a fund widow to allow investment options beyond the listed choices. If it does, check to be sure that there are no additional fees for its use. If not, perhaps you can request this addition through your HR dept.
Thank you for the suggestions. I will look into these.
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LH
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Re: A real risk to slice-and-dice investing (that I missed)

Post by LH »

I have always been pretty unclear on one thing:

Ones ability to choose to dump ones 401K or other type holdings, like money purchase plan etc. Into an IRA at ANY time one wants.........

I am not sure, that they can forbid you to do it, with the money that is already there.

They may state, that it violates the plan or whatever, and threaten to not put any more money in the plan going forward.....

It maybe somehow -=illegal=- for you to do it, or that you have no legal right to move the money without companies permission......

But I have had people tell me they have done it.

If it is possible, either you just have the legal right to do it, or you can convince them to let you do it. I would just roll the money out to an IRA at vanguard.
Tell them you definitely want to roll the current money out, since its a big change they have done, and would prefer to continue to roll money out in future.

I have considered this in the past, but options have fallen such that my company plan would let me put my money in a brokerage account.

That is another option..... Ask if you can transfer funds to a brokerage account.

So
1)state you are unhappy with choices and fees
2) you would want a brokerage option, failing this:
3)you would want to move existing money out to IRA (if you could just DO IT, ie, dont/try 1 or 2 maybe, consider if you have the right to legally move to money to IRA at your discretion, you may consider just doing it, transfer out 90 percent of money, and asking forgiveness later IF someone raises the issue, and agreeing not to do it in future). I did this with my HSA in fact. I did not ask permission, figuring they would not care. I just transferred 90 percent of the HSA money out the the vanguard associated HSA, and did that every year, then I talked to the HSA people my company used, and they said from thier pov, they didnt care if I just transfered all of it out, every year, after it was put in by my company, since anytime they get money from company in name of someone who has no current account, they just create a new account, and they cared zilch. I do not think my company even realized I did it.
leonard
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Re: A real risk to slice-and-dice investing (that I missed)

Post by leonard »

tiltmenot wrote:Hi Everyone,

This is my first post, but I have been lurking for a long time. I have learned everything I know about investing from this site and appreciate the wealth of information provided by helpful and insightful posters here. With a plan set in place around 5 years ago, our portfolio have basically been on auto-pilot, but a major event that I had not considered has occurred, leading me to my first post.

5 years ago, I decided on a heavily-tilted portfolio with 50% of my stock allocation going to domestic and the other 50% to international, with my domestic allocation divided equally between total market and small value and my international allocation divided equally between large, small, and emerging markets. Because my job's 403b did not have any suitable funds for small value, international small, and emerging market, I filled my wife's 403b, which is a Vanguard account, with these funds. During 2007 and 2008, I also bought some total stock and total international in taxable since they would be the most tax efficient funds.

Fast forward to this month when my wife's work (a college) announced the removal of most Vanguard funds from the retirement plan and states that she must move all her funds into the funds that will be part of the new plan during the month of October. At the end of the month, any funds that are no longer supported in the new plan will automatically be moved into a Vanguard Target Retirement fund. The new plan does not include any small value or international small choices. It includes an actively managed emerging market fund with an expense ration of over 1%. This means that we will have to sell our small value, international small, and emerging market and abandon our tilted portfolio. We will be forced to lock in our losses in international small and emerging market, two underperforming funds that I have been pumping money into in the course of 2012 and 2013 via rebalancing.

So I guess my question is:

1) Is this move (and its stipulations) by my wife's employer legal?
2) If the move is legal (and I am assuming it is), then aren't slice-and-dicers and tilters who rely predominantly on employer's retirement plan always at the risk of being forced to abandon their investment strategies at a moment's notice? Doesn't this mean that such risk should be considered before implementing a slice-and-dice or tilted portfolio? If I had considered this risk as a real possibility, I could have at least bought small value, international small, and emerging markets instead of total market and total international in taxable. Or I could have simply decided against tilting.

I don't think there is much I can do so I am not sure if this post belongs in this forum or in the Theory, News & General, but I would appreciate any thoughts on this situation.

Thank you for reading such a long message.
Yes and Yes.

Look at the plan and try to get the "best fit" in a low cost index fund for each asset class.

You may have to simply identify an indexed target retirement that has the right stock/bond ratio and adjust the rest of the portfolio.

I'll throw one more wrinkle in to this - you are lucky this is all tax adavantaged. You can make such adjustments without a tax hit. An additional risk of slice and dice in taxable are the tax implications of adjusting for events like a 401k shift or other big events that may require rebalancing the entire portfolio - taxable and tax advantaged.

Keep in mind that once you have selected index funds and have your stock/bond ratio set - for the rest close enough is very likely good enough and won't have a huge impact.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
stan1
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Re: A real risk to slice-and-dice investing (that I missed)

Post by stan1 »

A company/university can change its administrator/fund choices at any time. You have no recourse other than trying to influence the individuals at the company choose the plan administrator. Plan administrators are allowed to collect kick backs from mutual fund companies for including their funds. My guess is Vanguard is less likely to engage in this game than other fund companies.

It sounds like you were relying on having SCV, International Small, and Emerging Markets index available in the 401K/403b. Only a small percentage of plans would offer those choices. A 401K with Total Stock Market, Total International, and Total Bond would be considered very good.
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BrandonBogle
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Re: A real risk to slice-and-dice investing (that I missed)

Post by BrandonBogle »

Sorry I have no direct advice for the Op, but I have always wondered about a similar situation that maybe can spark an idea from someone.

Long ago, my mom and I worked for the same company and we both had 401k through Fidelity from them. She left the company years before I did. After the left, but before I did, the company decided to move the 401k from Fidelity to Vanguard. I had to stop logging into Fidelity and start logging into Vanguard. However, since I have other accounts at Fidelity, I can still see my old 401k listed with a zero balance. My mom was never given a choice to move to Vanguard. Her options were to stay as-is, or convert to an IRA. She decided to stay as-is until maybe 10 years ago. For me, I am no longer with that employer, but I still am in that Vanguard 401k from them. While writing this post, I logged into that account at Fidelity and see the fund choices available (Fidelity Equity, Magellan, Spartan 500, Growth, Intl Discovery, Freedom target date, Freedom Income, Puritan, Intermediate Bond).

Was my employer just special and/or kind, or does some provision require Fidelity to provide ex-employees who remained in the 401k the ongoing option of retaining their account? Could something like this be allowed for the Op, where his/her wife could keep the existing 403b, not make any more contributions to it, and future contributions go to the new 403b?
Leesbro63
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Re: A real risk to slice-and-dice investing (that I missed)

Post by Leesbro63 »

Slice and dice doesn't work well for large taxable accounts due to rebalancing taxation.
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tiltmenot
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Re: A real risk to slice-and-dice investing (that I missed)

Post by tiltmenot »

LH wrote: 1)state you are unhappy with choices and fees
2) you would want a brokerage option, failing this:
3)you would want to move existing money out to IRA (if you could just DO IT, ie, dont/try 1 or 2 maybe, consider if you have the right to legally move to money to IRA at your discretion, you may consider just doing it, transfer out 90 percent of money, and asking forgiveness later IF someone raises the issue, and agreeing not to do it in future). I did this with my HSA in fact. I did not ask permission, figuring they would not care. I just transferred 90 percent of the HSA money out the the vanguard associated HSA, and did that every year, then I talked to the HSA people my company used, and they said from thier pov, they didnt care if I just transfered all of it out, every year, after it was put in by my company, since anytime they get money from company in name of someone who has no current account, they just create a new account, and they cared zilch. I do not think my company even realized I did it.
Thanks for the suggestions. After reading your comment, I checked the IRS site on rollover IRAs. I haven't read it carefully yet, but upon first glance, there was no stress placed on the need for distribution to come from a former employer. I will pursue the matter with HR and Vanguard further.
stan1 wrote: It sounds like you were relying on having SCV, International Small, and Emerging Markets index available in the 401K/403b. Only a small percentage of plans would offer those choices. A 401K with Total Stock Market, Total International, and Total Bond would be considered very good.
Yes, the former plan was great. I am not denying that. I guess I am in the minority in thinking this, but my problem is the fact that I came up with the long-term investment plan that I did precisely because there was such a great plan that I can utilize. I am almost inclined to see it, wrongly perhaps, as a form of bait-and-switch. If employers can do change the plan on a whim for the worse, then having a great 401k or 403b plan really means nothing, except to save expenses on the most typical funds that would have to be included in a retirement plan because of the employer's fiduciary responsibilities.

Looking around the web, I found that UNC changed its retirement plan recently, but when they did so, they allowed you to keep your funds, even if they would no longer be available in the new plan and you will not be able to add to them, and also provided a brokerage window. If these options were available to me/my wife (I will ask for them, but the plan rules suggest they don't allow either), then I would have less of a problem.
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BL
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Re: A real risk to slice-and-dice investing (that I missed)

Post by BL »

Good luck. I understand the disappointment of such a change, but these frustrating things happen often.

If the ERs on the Target Retirement Funds are low, just pick the preferred stock/bond ratio and leave it as a set and forget plan and do your slice and dice where you can. Depending on what you have available elsewhere, I suppose you could adjust it even further. You have at least one good balanced fund now, which beats many 401ks.
Texas hold em71
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Re: A real risk to slice-and-dice investing (that I missed)

Post by Texas hold em71 »

Not sure how much you make but many people in lower tax brackets opt to contribute enough to get the match and put the rest in a Roth. You take a tax hit now to save taxes in the future. Since you mention no Roth but a taxable I suspect you make too much to contribute to a Roth directly. You could do a back door Roth and get more control over fund selection. You will have to do the math on taxes versus your goals but if the plan offers good choices for what you hold in taxable or your 403(b).

If you search old threads, Livesoft came up with a strategy to borrow from a 401(k) and invest the proceeds in taxable to get around poor fund choices. I do not recall the details so read carefully before applying to your own situation.
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ResearchMed
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Re: A real risk to slice-and-dice investing (that I missed)

Post by ResearchMed »

Can your wife speak with someone in HR/Employee Benefits?
It's probably worth a try, in a helpful/inquiring way, without putting them on the defensive.

Instead of "we hate the new 403b plan, whatever were you thinking" (even if you rightly feel this way!), perhaps something along the lines of "now that you've been making some adjustments" [sounds like it's more than just "adjustments", but whatever...!] and then continue with something like, "have you considered adding a Brokerage Option?" - and have some specifics of how 403b's WITH Brokerage Options actually operate, and what flexibility it offers the Employees who wish to "make choices". If the new vendor has this potential, it wouldn't require a major re-do of what the Employer has already just "re-done". (It also might not reduce any "benefits" aka kickbacks to the Employer - I'm not sure about how all that works.)

In some cases, the plan administrators (HR? other College Administrators?) simply may have no idea about some possible ways the 403b could be structured. Or they might not realize anyone would care.
It can be amazing, sometimes, how very little "people speak up", so the "powers that be" truly don't know. This only matters if the Admin actually cares, of course, and that varies a lot.

We are fortunate that the Employer DOES "listen" (although we didn't realize that at first).

I've wondered if some of the "bad 401k" plans (are 403b's generally "better", being part of a non-profit environment??) are in part because the Admin simply don't know? Regardless of the umbrella plan fees, if outside fund families are allowed, then is it really difficult to include more low-cost index funds? Or a greater variety of fund types? (I obviously don't know the answer to this.)
After all, presumably at least some of the Admin members own retirement funds are also in these plans.

And NOW, you have a bit of legal "help". It is the Plan Administrator (the college) that is the ERISA-mandated Fiduciary. We used that in the past, even before it was clarified recently.
[Note: This kind of "talk" is less friendly than what is suggested above. We felt we were in a situation where there was little/no risk to employment. However, it's always prudent to have that in the back of one's mind when "confronting" an Employer.]

You might try contacting the new vendor to see IF they ever offer a Brokerage Option in any 403b (or 401k?) plans. If they do, then the barrier for your wife's College is probably much lower than if everyone is starting from scratch.

It's worth asking, and it's worth gently asking again. A lot of Employees (including the Admin!) have a LOT of total money - and their retirements - at stake.

We've "asked questions" - quite a variety of questions - starting several years ago, and it was with some surprise that we later found out that *real* changes WERE being made. We just weren't privy to the process until it was a "done deal". More recently, there have been some very specific changes being made, again directly as a result of our questions and/or complaints. (We just got a phone call that there will be yet another change, this one based upon what we claimed was inappropriate "bookkeeping" by the vendor. It can be slow, or not so slow. But if no one ever tries to make changes, changes are much less likely to occur.)

Good luck. I hope your wife is able to find someone willing to listen, if she decides to try speaking with them.

RM
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Re: A real risk to slice-and-dice investing (that I missed)

Post by livesoft »

A taxable account is a good place for Vanguard Emerging Markets index fund (VEIEX, VWO).
A taxable account is not a bad place for Small-cap value index. Our entire US small-cap asset allocation is in this fund in our taxable account.

Since the taxable account probably produces about 2% to 3% in dividends every year, one can use those dividends to buy EM and SCV if one desires. I didn't read carefully, so I cannot tell if you are contributing to taxable or not.

The Roth IRAs can also hold some of these non-TotalIndex assets.

The 403(b) can hold lots of fixed income if needed. Or if the 403(b) offers ExtendedMarket Index, that is a good substitute for small-cap value.

My spouse's 401(k) has also been pretty craptacular, so we have always worked a slice-and-dice portfolio around it. Right now, the money market account has been the best fund for her current 401(k). Just imagine that.

And did you post the choices in the new 403(b)? There might be something we can see there for you.
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livesoft
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Re: A real risk to slice-and-dice investing (that I missed)

Post by livesoft »

If you have carryover losses, then you can sell in taxable with lower tax consequences.

You may wish to do some double exchanges. Here's an example:

Sell small-cap international in 403(b). Sell Total Market in taxable.
Buy total market in 403(b). Buy small-cap international in taxable.

Note that there is no locking in of losses. You still have the same asset allocation and the same exposure to the funds you had before. There is no wash sale involved either, unless the Total Market sold in taxable is sold at a loss.
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tiltmenot
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Re: A real risk to slice-and-dice investing (that I missed)

Post by tiltmenot »

ResearchMed wrote:Can your wife speak with someone in HR/Employee Benefits?
It's probably worth a try, in a helpful/inquiring way, without putting them on the defensive.
ResearchMed,

Thank you for your post. Your suggestions have been very helpful in figuring out our approach to dealing with HR regarding the situation. We are still wavering on how to approach this move by the school though: 1) as an inconvenience to a demanding employee who is seeking an individual favor; 2) as a major step-back to the benefit package for all employees that needs to be discussed with other employees and resisted in unison. Option 1) will probably get us further with less damage, but Option 2) might be better for the future of the school.
livesoft wrote:If you have carryover losses, then you can sell in taxable with lower tax consequences.

You may wish to do some double exchanges. Here's an example:

Sell small-cap international in 403(b). Sell Total Market in taxable.
Buy total market in 403(b). Buy small-cap international in taxable.

Note that there is no locking in of losses. You still have the same asset allocation and the same exposure to the funds you had before. There is no wash sale involved either, unless the Total Market sold in taxable is sold at a loss.
Livesoft,

Thank you for your suggestions. Your posts have helped me immensely as I learned my way around investing. I had thought of your suggestions as I do have Total Stock and Total International in taxable. Unfortunately, I bought them (last THL) at the bottom of the market so they have major gains, and I have already used up my carryover losses. With that said, even if I had carryover losses to use, wouldn't such a move still be considered a tax hit? Wouldn't it mean I lose losses that I could have applied to my taxes ($3000) unless I had more carryover losses than I could ever use (if such is possible)?

I guess I am being too picky about the specific funds. If you say that Extended Market is a good substitute for Small Value, then I guess I can make this work, as the new plan does offer Extended Market as the only domestic stock option that is not large caps. However, given Ex.M.'s growth-y nature, I did not think of it as a good substitute to Small Value. In the end, the question is how much difference does it really make? And perhaps, my answer to this question might be more than it actually does.
livesoft
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Re: A real risk to slice-and-dice investing (that I missed)

Post by livesoft »

tiltmenot wrote:I guess I am being too picky about the specific funds. If you say that Extended Market is a good substitute for Small Value, then I guess I can make this work, as the new plan does offer Extended Market as the only domestic stock option that is not large caps. However, given Ex.M.'s growth-y nature, I did not think of it as a good substitute to Small Value. In the end, the question is how much difference does it really make? And perhaps, my answer to this question might be more than it actually does.
One can simply M* chart "growth of" VEXMX and VISVX. Surprise! Or maybe not. :)
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tiltmenot
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Re: A real risk to slice-and-dice investing (that I missed)

Post by tiltmenot »

livesoft wrote: One can simply M* chart "growth of" VEXMX and VISVX. Surprise! Or maybe not. :)
But can't the same be said for Total Market and Small Value? Looking at the charts, the differences aren't that large between the three. The fact that VEXMX has the highest growth in the last 5-10 years suggests to me that small premium existed during this period but not value, and, indeed, Small Growth has outpaced them all during this period. But if you decide to tilt, don't you have to at least believe that the difference in funds must matter at some point (i.e., it doesn't matter until it does)?
livesoft
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Re: A real risk to slice-and-dice investing (that I missed)

Post by livesoft »

Why do I see signs pointing out the various ways to Dublin? Who is that over on the side of the road dancing on the head of a pin?

Just go with the flow. You've got to play the hand you were dealt. You dance with the one who brought you. Stop with the negative waves.
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