Cost of moving current 401k funds to new allocation ?

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darthvader747
Posts: 51
Joined: Thu Feb 19, 2009 9:11 pm

Cost of moving current 401k funds to new allocation ?

Post by darthvader747 » Mon Feb 18, 2013 10:28 am

I have around 60k tied up in the target 2045 fund. Investments in the fund were made over last 4 years.
So, I am guessing I benefited from dollar cost averaging.

Now I want to stop investing in the 2045 fund and invest in individual index funds (see below - New Allocation).

Would it make more sense to just stop investing in the 2045 going forward or move money from the 2045 and buy shares in the new funds that I would like to invest in. My concern is that buying 60k at current prices means I am not going to benefit from dollar cost averaging.

What would you recommend?

Option 1 - move the 60k from target fund (The returns have been quite good in the 2045)
Option2 - Stop investing in target 2045 fund from next paycheck and invest in new funds selection


----------------------------------------
Current Allocation:

Target 2045 fund

New Allocation:

401k (70-30 allocation):

S&P 500 - 42%
R2000 - 7%
RERGX - 21%
AGG Bonds - 30%

pkcrafter
Posts: 12106
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
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Re: Cost of moving current 401k funds to new allocation ?

Post by pkcrafter » Mon Feb 18, 2013 11:40 am

darthvader747 wrote:I have around 60k tied up in the target 2045 fund. Investments in the fund were made over last 4 years.
So, I am guessing I benefited from dollar cost averaging.

DCA adds no benefit in a rising market

Now I want to stop investing in the 2045 fund and invest in individual index funds (see below - New Allocation.)

Is the TR2045 fund from Vanguard?

Would it make more sense to just stop investing in the 2045 going forward or move money from the 2045 and buy shares in the new funds that I would like to invest in. My concern is that buying 60k at current prices means I am not going to benefit from dollar cost averaging.

Your 60k is already in the market, so you are just making a sideways move by switching to different funds. If you are worried about current prices, it sounds like you are considering timing, which DCA would do. It also means you would basically be getting out of the market and starting all over again which doesn't sound like a good idea.

One other simple thing you can do if you want to overweight, especially if you do have a Vanguard TR fund, is just add small cap either in the 401k or an IRA


What would you recommend?

Option 1 - move the 60k from target fund (The returns have been quite good in the 2045)
Option2 - Stop investing in target 2045 fund from next paycheck and invest in new funds selection

Use Option 1 by switching funds while remaining fully invested at your target AA, or just add small cap and hold the TR fund. You might need to get a TR fund with a lower stock AA if you add small cap.

Paul



When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

darthvader747
Posts: 51
Joined: Thu Feb 19, 2009 9:11 pm

Re: Cost of moving current 401k funds to new allocation ?

Post by darthvader747 » Mon Feb 18, 2013 1:27 pm

pkcrafter "It also means you would basically be getting out of the market and starting all over again"

Did you mean moving funds from the 2045 to the new funds is like getting out of the market and starting over? Also was I right in understanding that this wouldn't be a good idea.

Little confused with this statement:
"Use Option 1 by switching funds while remaining fully invested at your target AA, or just add small cap and hold the TR fund. You might need to get a TR fund with a lower stock AA if you add small cap."

Can you elaborate on this please?

Switching funds - My plan allows me to redirect money to other funds - Option 1
Stop investing in 2045 from next paycheck onwards (Keep the 60k invested in the 2045) - Option 2

Pros & cons of each option (if any cons)?
I am concerned about buying 60k worth of new shares in funds at today's prices (This may not be a legitimate concern).

pkcrafter
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Joined: Sun Mar 04, 2007 12:19 pm
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Re: Cost of moving current 401k funds to new allocation ?

Post by pkcrafter » Mon Feb 18, 2013 2:42 pm

darthvader747 wrote:pkcrafter "It also means you would basically be getting out of the market and starting all over again"

Did you mean moving funds from the 2045 to the new funds is like getting out of the market and starting over? Also was I right in understanding that this wouldn't be a good idea.

I meant if you sell and DCA back in you will essentially be out of the market when you start to DCA back in, and that isn't a good idea.

Little confused with this statement:
"Use Option 1 by switching funds while remaining fully invested at your target AA, or just add small cap and hold the TR fund. You might need to get a TR fund with a lower stock AA if you add small cap."

Can you elaborate on this please?

You can switch to the individual funds you want and set up with your desired AA, or you can keep the TR fund and just add small cap if you want to overweight it. If you do decide to keep the TR fund and just add small cap that's going to increase the overall stock allocation in your 401k and you may need to choose another TR fund with a lower stock allocation to keep your AA where you want it.

Switching funds - My plan allows me to redirect money to other funds - Option 1
Stop investing in 2045 from next paycheck onwards (Keep the 60k invested in the 2045) - Option 2

Don't keep the TR fund and start adding to individual funds if you want to change everything, just do the transfer. If your motive is just to increase small caps, you can do that by keeping the TR fund and buy just the small cap fund as a supplement. I like the TR fund better than individual choices because you get total market and total international, and you don't get those with the individual funds. The only reason to switch is if you want to boost small caps because your new individual fund portfolio has the same international % as the TR fund and the international in the TR fund is better. Your 7% to small cap overweights small a modest amount.

Pros & cons of each option (if any cons)?
I am concerned about buying 60k worth of new shares in funds at today's prices (This may not be a legitimate concern).

Don't think of it as buying 60k worth of new shares, you are simply transferring to different shares.



Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

darthvader747
Posts: 51
Joined: Thu Feb 19, 2009 9:11 pm

Re: Cost of moving current 401k funds to new allocation ?

Post by darthvader747 » Mon Feb 18, 2013 4:46 pm

Got it. Thanks!

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