Switching from TR funds to DIY Three Funds, is it worth it ?

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Topic Author
armeliusc
Posts: 549
Joined: Wed Dec 21, 2011 8:40 am

Switching from TR funds to DIY Three Funds, is it worth it ?

Post by armeliusc »

Hello all,
We currently have the same Vanguard TR 2045 funds in my 401k, 403b, and two Roth IRAs (my wife's and mine) at Vanguard. I dont have any taxable at the moment so fund placement for tax efficiency is not a factor (at least for now), and I am pretty happy with this fund at this point regarding its AA. However, I have been debating whether I should switch from the TR fund to the 3-fund portfolio. I understand that TR fund is also basically 3-funds. Some motivations for the switch are:

1. Just shave a bit more of the ER. My 401k/403b (they have the same fund choices) offers two funds of interest for this:
  • Vanguard Institutional Index fund (VINIX, ER: 0.04%)
  • Vanguard Total Bond Market Institutional Shares (VBTIX, ER: 0.07%)
To "complete" the 3-fund, I have to use the two Roth IRAs to have Vanguard Extended Market (VEXMX) and Total International (VGTSX). The former is needed to complement VINIX to approximate Total Stock Market. Using these funds (w/ admiral shares in the Roth IRA) my weighted ER would be about 0.09% (see planned AA below), compared to 0.19% of the TR funds.

2. I suppose using these funds separately will allow me to see how each of the funds behave in my portfolio, furthering my edification

3. I may in the future want to tilt and/or slice&dice and/or have enough to be able to have taxable.

The "cons" is that some more effort is needed to rebalance and/or direct future contribution to maintain my AA.

My questions are:
1. First and foremost, do you think this worths doing ?
At this point only have enough to get Total international as admiral share in one Roth IRA. The other Roth IRA will have to have both Total Intl and Extended market and thus not enough for admiral shares, until maybe another year or two. Even with this arrangement, my weighted total ER would be about ~0.12% (excluding 25bps 401k/403b administrative fee). Does that small different int the ER even matter ? Is there any other good motivation to a DIY 3-fund or should I just forget about this ?

2. Here's my planned AA at the moment:
500 index fund (VINIX) : Extended market (VEXMX) : Total Int'l (VGTSX) : Bond (VBTIX) = 45 % : 15% : 30% : 10%, which means
Stock : Bond = 90% : 10%
For Stock: Domestic / Int'l= 66.67% : 33.33%
For Domestic: 500 index fund : extended market = 75% : 25%
Note that I have a slight tilt (+5%) to the extended market to approximate total stock market than the one in the wiki. I also have a little more International allocation than TR 2045. But mostly I base my AA on TR 2045. Any comments on this AA ? Both my wife and I are 32 years old if that matters.

3. Another future complication is that since the total contribution to 401k + 403b is greater than to the Roth IRAs (about 3:1 ratio, maxing out both Roth IRAs), at some point I will not have enough space in the Roth IRA to get the Extended Market and Total International to maintain my AA. What to do about this ? I suppose one possible solution is to put the "extra" contribution back as TR.

Thank you in advance for any and all comments. I have learned a great deal from this forum, and really appreciate it. Below is the rest of my 401k fund choices in case of any interest:

Vanguard Target Retirement 2010-2055
DFA International Value I
Fidelity International Discovery
Fidelity Stock Selector Small Cap
Invesco Van Kampen Small Cap Value Y
Columbia Acorn Z
Columbia Mid Cap Value Z
Allianz NFJ Large Cap Value Instl
Fidelity Contrafund
Fidelity OTC Portfolio
ING VP Growth and Income
Vanguard Institutional Index Fund
Fidelity Puritan Fund
Calvert Income I
Vanguard Total Bond Market Index Inst
ING Fixed Fund Fixed
Nationwide Bank Account Fixed
TD Ameritrade SDB Money Market
TD Ameritrade SDB Securities

Best,
AC
User avatar
BL
Posts: 9874
Joined: Sun Mar 01, 2009 1:28 pm

Re: Switching from TR funds to DIY Three Funds, is it worth

Post by BL »

I think you are very fortunate to have these low-cost funds available across the board. Personally, I would not change the simple efficient current choice, possibly until I had significant taxable funds as well (after fully funding tax advantaged accounts.), where target fund might not be appropriate.
chaz
Posts: 13604
Joined: Tue Feb 27, 2007 1:44 pm

Re: Switching from TR funds to DIY Three Funds, is it worth

Post by chaz »

It's nice to have these low-cost funds available. Great ERs.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
dickenjb
Posts: 2941
Joined: Tue Jan 05, 2010 12:11 pm
Location: Philadelphia PA

Re: Switching from TR funds to DIY Three Funds, is it worth

Post by dickenjb »

I would not switch if all were in tax advantaged.

Wait until you have a larger portfolio and some taxable investments.

10 basis points on $100K is only $100 a year.
Topic Author
armeliusc
Posts: 549
Joined: Wed Dec 21, 2011 8:40 am

Re: Switching from TR funds to DIY Three Funds, is it worth

Post by armeliusc »

Thanks for the responses. I think I'll stick with the TR funds at least for a few more years or until there's a good reason to switch.
lks
Posts: 215
Joined: Fri May 16, 2008 8:42 am
Location: SoCal

Re: Switching from TR funds to DIY Three Funds, is it worth

Post by lks »

If you don't have the courage to rebalance during a severe stock market decline and take advantage of buying low, then having Vanguard do it for you can be a great advantage. Only you know if the higher fund of funds ER vs Admiral ER is worth it.
gt4715b
Posts: 534
Joined: Mon Jun 11, 2007 10:29 am

Re: Switching from TR funds to DIY Three Funds, is it worth

Post by gt4715b »

If you do what you're planning you'll have to:
1.) Faithfully rebalance amongst the 3 funds, i.e. don't start market timing
2.) Management fund location issues

This doesn't seem worth to to me given that your planned AA is not much different from the Target Retirement funds, so it's MUCH easier to just keep everything in the TR funds until your AA diverges from the Target Retirement funds.
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