Help me with my investment strategy

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Topic Author
whoever
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Joined: Thu Oct 17, 2013 7:17 pm

Help me with my investment strategy

Post by whoever »

Great forum. Thanks to all bogleheads.

Emergency funds: Yes(for 18 months)
Debt: Mortgage on my rental property(230k at 4%, I am making small income on my rental property)
Tax filing status: Married filing jointly
Tax Rate: 28% Federal, 7.75% State
State of residence: NC
Age: His :43, Hers: 40

Risk tolerance: I can live upto 25% in my portfolio

Gross yearly income: $170k

Desired Asset allocation: 65% Stocks/ 35% Bonds
Desired International allocation: 40% of stocks

Current retirement assets:

Cash: 64%
Employer stock ESPP,RSUs: 9%

His 401k:

18% at fidelity

BARON GROWTH INST (BGRIX) - 30.73% (1.06)
FID DIVERSIFD INTL K (FDIKX) - 30.46% (0.84)
TRP INST LGCP CORE (TPLGX) - 17.38% (0.63)
FID BALANCED K (FBAKX) - 9.12% (0.48)
TRP MID CAP GROWTH (RPMGX) - 5.10% (0.80)
American Funds Fundamental Investors Fund Class- 2.96% (0.31)
FID FREEDOM K 2030 (FFKEX) - 2.61% (0.67)
SPTN 500 INDEX INST (FXSIX) - 1.64% (0.05)

Her 401k:

9% at two firms in Retirement target funds (0.75)

IRA/Roth:
None

Total Assets: $ 1.1 M (not counting rental property)

Contributions:

401k:
$22500 (employer matches upto 5k)

Roth IRA:
will open for self and for my wife.- $11000

His 401k Available funds:
VANG WINDSOR II ADM (VWNAX) - 0.27

PERKINS MID CP VAL I (JMVAX) - 0.73

ROYCE LOW PR STK IS (RLPIX) - 1.19

VANGUARD INTL VALUE (VTRIX) - 0.41

PIM TOTAL RT INST (PTTRX) - 0.46

Fidelity target funds: 0.45 - 0.69

FID INST MMKT (FMPXX) - 0.21

Her 401k: Thinking of moving it to IRA as she is no longer working.

Questions:
1)Should I move her 401k to IRA as she is no loner working.
2)My wife may work in future.
3)Older kid attending college in 2018, younger one in 2021. Should I invest in 529 plan?
4)I have already invested 100k in rental property. Planning to sell it spring time next year. Expecting to cash out 250k(my 100k included) at the current market price.
4)Currently in the market for buying a house (budget 400k) with 20% down.
5)What is the best way to diversify my cash and 401k ?

Thanks in advance.
Last edited by whoever on Sun Oct 20, 2013 6:09 pm, edited 1 time in total.
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BL
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Re: Help me with my investment strategy

Post by BL »

Take a look at the Three-Fund Portfolio in the Wiki:
http://www.bogleheads.org/wiki/Three-fund_portfolio

The simplest way for now with money all in tax-advantaged funds would be putting it all into target retirement funds across the board (These are mainly made up of 3-4 funds). Vanguard funds are ~.2 but others cost a bit more, so it is not the cheapest but not bad and an improvement on what you have.

Otherwise the Spartan 500 would be the best in your 401k, possibly along with the mid-cap fund. Picking lower-ER bond and international could be done here but would be cheaper in Fidelity Spartan or Vanguard funds (see link) in your other accounts. Accounts could be moved to Vanguard or Fidelity (no adviser, please) so you could get low-cost funds to make up the 3-fund portfolio.

Unless you have terrific low-cost funds available in old 401ks, it might be best to roll over to IRAs. (The exception would be if you expect to be over the Roth contribution limit, as having IRAs would then be a problem for Backdoor Roths.)

It is not clear to me if your cash is for retirement investing or for house/real estate/other near term use which should be considered separately and might need to be in safe CDs, etc.
Topic Author
whoever
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Re: Help me with my investment strategy

Post by whoever »

BL wrote:Take a look at the Three-Fund Portfolio in the Wiki:
http://www.bogleheads.org/wiki/Three-fund_portfolio

The simplest way for now with money all in tax-advantaged funds would be putting it all into target retirement funds across the board (These are mainly made up of 3-4 funds). Vanguard funds are ~.2 but others cost a bit more, so it is not the cheapest but not bad and an improvement on what you have.

Otherwise the Spartan 500 would be the best in your 401k, possibly along with the mid-cap fund. Picking lower-ER bond and international could be done here but would be cheaper in Fidelity Spartan or Vanguard funds (see link) in your other accounts. Accounts could be moved to Vanguard or Fidelity (no adviser, please) so you could get low-cost funds to make up the 3-fund portfolio.

Unless you have terrific low-cost funds available in old 401ks, it might be best to roll over to IRAs. (The exception would be if you expect to be over the Roth contribution limit, as having IRAs would then be a problem for Backdoor Roths.)

It is not clear to me if your cash is for retirement investing or for house/real estate/other near term use which should be considered separately and might need to be in safe CDs, etc.
Cash is for near term 20% down for house and rest is for investment. Five to eigt years down the lane I need some of it for my kids college. Rest is for retirement.
Topic Author
whoever
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Re: Help me with my investment strategy

Post by whoever »

Should I invest in 529 or withdraw from the taxable account in 5 to 8 years time frame?
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fourwedge
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Re: Help me with my investment strategy

Post by fourwedge »

I think, in your tax bracket it is neccessary to use every tax advantaged account that is available to you. Why use after tax money when you can use the 529 to shelter some money from the IRS? If you value your $ then keep as much as you can from the govt.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.
Topic Author
whoever
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Re: Help me with my investment strategy

Post by whoever »

Any suggestions one 529 account or two?

How much is good enough to invest in 529 vs taxable account?
letsgobobby
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Re: Help me with my investment strategy

Post by letsgobobby »

GO back to the beginning and clarify what your risk tolerance is. You have 64% cash: enormous. How did that happen? Let's solve your retirement plans first, then fit the 529s into them.

re: wife's 401k, unless you are at risk for needing and then losing the backdoor Roth IRA, or her 401k offers really good investment options, rolling over to an IRA is preferred because it gives you more control.

Does your state offer a tax benefit for 529 investing?
Topic Author
whoever
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Re: Help me with my investment strategy

Post by whoever »

letsgobobby wrote:GO back to the beginning and clarify what your risk tolerance is. You have 64% cash: enormous. How did that happen? Let's solve your retirement plans first, then fit the 529s into them.

re: wife's 401k, unless you are at risk for needing and then losing the backdoor Roth IRA, or her 401k offers really good investment options, rolling over to an IRA is preferred because it gives you more control.

Does your state offer a tax benefit for 529 investing?
My risk tolerance is I can live upto 25% drop in my portfolio. 64% cash is from savings selling company stock options,espp over a period of time. I didn't actively invest in markets at all.

my wife has two 401ks from previous employers. One is in principal with 90% assets of 110k. Not great investment options. Rest is in fidelity. Good options but ER is higher. Thinking of moving to IRA with Vanguard.

State offers tax benefits upto $5500 contributions on 529

Let's solve my retirement plans. What are my options?
letsgobobby
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Re: Help me with my investment strategy

Post by letsgobobby »

Of that 64% cash, how much do you need to reserve to purchase a house in a few years?

Some of the college savings cash you should invest in a 529, in order to maximize any state tax benefit, assuming your state plan is not horrible. The rest you will invest in a taxable account. Assuming you can get your MAGI under $160,000, you qualify for the American Opportunity Credit which is $2500 annually per child. Your income is probably too high for the Lifetime Learning Credit. Translation: you want to pay at least $2500 per year of eligible expenses in cash, not from the 529, or you will lose the $2500.

I would roll over her old 401ks to a IRA.

re: retirement, you want: 40% US stocks, 25% international stocks, 35% bonds.

Pending the answers to some of the above, how about:

Taxable: 64%
31% US stocks - VTSMX (the ESPP/RSU counts as your other 9%)
25% international stocks - VTIAX
8% muni bond fund - Vanguard doesn't offer a NC Muni bond fund but read this thread here:

http://www.bogleheads.org/forum/viewtopic.php?p=81578

Taxable employer ESPP/RSU: 9%

His 401k: 18% - PTTRX - Total return (Bond)

Her IRA: 9% - VBMFX - Total bond
Topic Author
whoever
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Re: Help me with my investment strategy

Post by whoever »

letsgobobby wrote:Of that 64% cash, how much do you need to reserve to purchase a house in a few years?

Some of the college savings cash you should invest in a 529, in order to maximize any state tax benefit, assuming your state plan is not horrible. The rest you will invest in a taxable account. Assuming you can get your MAGI under $160,000, you qualify for the American Opportunity Credit which is $2500 annually per child. Your income is probably too high for the Lifetime Learning Credit. Translation: you want to pay at least $2500 per year of eligible expenses in cash, not from the 529, or you will lose the $2500.

I would roll over her old 401ks to a IRA.

re: retirement, you want: 40% US stocks, 25% international stocks, 35% bonds.

Pending the answers to some of the above, how about:

Taxable: 64%
31% US stocks - VTSMX (the ESPP/RSU counts as your other 9%)
25% international stocks - VTIAX
8% muni bond fund - Vanguard doesn't offer a NC Muni bond fund but read this thread here:

http://www.bogleheads.org/forum/viewtopic.php?p=81578

Taxable employer ESPP/RSU: 9%

His 401k: 18% - PTTRX - Total return (Bond)

Her IRA: 9% - VBMFX - Total bond
Out of 64% cash I will keep 80k for house down payment which leaves me around 620k cash. Next year spring time I am planning to sell my rental property and I am expecting around
250k (profit+ my own equity) from that sale.

Muni bond fund: From the link you have provided it seems NC muni bond fund beats Vangaurd if the interest is going down otherwise Vangaurd is better. since interest rates seems to go up I guess Vanguard is better

Yes I will rollover my wifes 401k to IRA

Regarding retirenment you are right I am planning to go with 40% US stocks, 25% international stocks, 35% bonds.

From your AA you didn't mention % for 529. for tax benefits I have to invest alteast 5k this year in NC 529 plan.
letsgobobby
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Re: Help me with my investment strategy

Post by letsgobobby »

With between 5 and 12 years (under normal circumstances) until you use the 529 money for college, the potential benefits of using a 529 are intermediate. Of course you should maximize the state tax benefit each year, but after that, using taxable accounts rather than 529s gives you better tax loss harvesting and rebalancing opportunities. So really you're asking how much should I invest or how much can I afford to invest in 529s/college savings as opposed to my own retirement? You need to answer that personally.

For me, 100% of our 529s are in stocks because our ability to take risk in that space is extremely high (ie, the consequences of a shortfall are not severe; we'd cash flow any shortfall, save more, or our kids would take loans). Others take a much more conservative view and at 5 years out (your oldest) would have you mostly in bonds. My own opinion is that bond investing in a 529 is a waste (beyond the state tax credit) because then any putative benefit (federal tax-free earnings) are small (because bonds have low expected returns). That's another reason we load our 529s with stocks.

Remember the federal tax benefits of a 529 are only as good as the amount of earnings you have in the account. A 529 that earns nothing has no federal tax benefit at all.
Topic Author
whoever
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Re: Help me with my investment strategy

Post by whoever »

letsgobobby wrote:With between 5 and 12 years (under normal circumstances) until you use the 529 money for college, the potential benefits of using a 529 are intermediate. Of course you should maximize the state tax benefit each year, but after that, using taxable accounts rather than 529s gives you better tax loss harvesting and rebalancing opportunities. So really you're asking how much should I invest or how much can I afford to invest in 529s/college savings as opposed to my own retirement? You need to answer that personally.

For me, 100% of our 529s are in stocks because our ability to take risk in that space is extremely high (ie, the consequences of a shortfall are not severe; we'd cash flow any shortfall, save more, or our kids would take loans). Others take a much more conservative view and at 5 years out (your oldest) would have you mostly in bonds. My own opinion is that bond investing in a 529 is a waste (beyond the state tax credit) because then any putative benefit (federal tax-free earnings) are small (because bonds have low expected returns). That's another reason we load our 529s with stocks.

Remember the federal tax benefits of a 529 are only as good as the amount of earnings you have in the account. A 529 that earns nothing has no federal tax benefit at all.
Thanks. I was also thinking on similar lines. From my reading on net starting 529 way early will have lot of benefits than starting late.

You recommended earlier to move all 401k funds to bonds. Is this due to tax efficient fund placing considering returns on bonds are not that great?
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whoever
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Re: Help me with my investment strategy

Post by whoever »

Does it makes sense to invest a small portion in MMA or Cds which can be counted towards bonds allocation?
dbr
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Re: Help me with my investment strategy

Post by dbr »

whoever wrote:Does it makes sense to invest a small portion in MMA or Cds which can be counted towards bonds allocation?
These days, and maybe most if the time, money market funds are for convenience in holding and moving money around in the short run. You almost inevitably have some cash in a money market just managing day to day transactions. It is possible to avoid almost all of them if you want. Interest paying checking accounts are also an alternative. There is a difference between a money market account at a bank and a money market mutual fund at a fund company, but in practice that is not very relevant. Brokers and fund companies set you up with a sweep account for handling cash transactions. This may be a separate brokerage money market fund or may be a money fund you already have. Again

CD's are a viable investment opportunity that may be attractive when one can find yields competitive with bonds with no volatility and great security. One should check carefully on the conditions that may limit cashing out early or plan on having a certain lack of liquidity.
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BL
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Re: Help me with my investment strategy

Post by BL »

Don't forget I-Bonds up to $10,000/person/year. There are tax savings if used for your child's education if child is not listed as co-owner. Also there is no state income tax on interest. They can be cashed after 1 year, with 3-months interest penalty.

Edt:
See the government site, treasury direct http://www.treasurydirect.gov/ for information. A few years ago you could buy them at your local bank, but now both those and Series E bonds can only be bought online (plus IRS tax refund way).
Last edited by BL on Mon Oct 21, 2013 12:10 pm, edited 1 time in total.
Topic Author
whoever
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Re: Help me with my investment strategy

Post by whoever »

BL wrote:Don't forget I-Bonds up to $10,000/person/year. There are tax savings if used for your child's education if child is not listed as co-owner. Also there is no state income tax on interest. They can be cashed after 1 year, with 3-months interest penalty.
Thanks. I am getting lost with different types of bonds for tax saving purposes. Any help is appreciated.
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whoever
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Re: Help me with my investment strategy

Post by whoever »

Thanks for all the suggestions. I am trying to understand all the different bond options.

1)Muni bonds in taxable account: Vangaurd doesn't offer NC muni bonds. Have to go with others with little bit higher ER. Any suggestions?
2)I-bonds: From treasurydirect. 20k(Mine + my wife)
3)My 401k: Move them all to PTTRX - Total return (Bond)
3)Her rollover IRA: VBMFX - Total bond

Quite a few bonds are listed in the following tool. Anything to consider?


https://personal.vanguard.com/us/funds/ ... alentyield

Are there any other options regarding bonds for tax saving purpose?
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whoever
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Re: Help me with my investment strategy

Post by whoever »

How about NC tax-free funds by wellsfargo?

http://a584.g.akamai.net/f/584/1326/1d/ ... Retail.pdf
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whoever
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Re: Help me with my investment strategy

Post by whoever »

Bumping the thread. Appreciate the help regarding choosing bonds for my portfolio
letsgobobby
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Re: Help me with my investment strategy

Post by letsgobobby »

whoever wrote:Thanks for all the suggestions. I am trying to understand all the different bond options.

1)Muni bonds in taxable account: Vangaurd doesn't offer NC muni bonds. Have to go with others with little bit higher ER. Any suggestions?
2)I-bonds: From treasurydirect. 20k(Mine + my wife)
3)My 401k: Move them all to PTTRX - Total return (Bond)
3)Her rollover IRA: VBMFX - Total bond

Quite a few bonds are listed in the following tool. Anything to consider?


https://personal.vanguard.com/us/funds/ ... alentyield

Are there any other options regarding bonds for tax saving purpose?
A lot of this is fiddling on the margins which may be why no one has swooped in with a clear, definitive instruction as to what is best. The general rule of thumb is to first use tax-deferred space to hold your bonds. Only if you need more space should you look for things such as I bonds and municipals. Some of that general rule of thumb has been turned on its head in recent years due to very competitive yields on municipals relative to treasuries, such that some commentators have advocated preferentially holding (muni) bonds in taxable and stocks in tax-advantaged; but this is still a minority opinion.

re: the Wells Fargo NC muni fund, I assume you'd look at duration, credit quality, and fees and compare them to the Vanguard national muni fund or the Nuveen NC fund and make your best pick.

For me, we max out our I bond purchases (actually $25k per married couple - you can buy $5k on your tax return) and otherwise leave all bonds in tax-advantged. We buy stocks in taxable accounts. This works well for us.

i don't think there's one perfect solution...
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whoever
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Re: Help me with my investment strategy

Post by whoever »

Thanks. That make sense.

Vanguard has least ER followed by Nuveen(0.78) with Front load 4.2 but with state tax advantage. Wellsfargo has the highest ER.

Looks like vanguard is best option considering low ER
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whoever
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Re: Help me with my investment strategy

Post by whoever »

Recently in our 401k plan fidelity target funds were replaced by Vanguard target funds with .11 ER.

Target 2035 has 85% stocks total stock + international and 15% total bond index.

Should I move from Pimco bond fund(.48 ER) to vanguard target funds and readjust bond allocation in my taxable account or her IRA to meet 30% bond allocation. If so which vanguard bond funds should I consider?

Thanks in advance
letsgobobby
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Re: Help me with my investment strategy

Post by letsgobobby »

the drawback is your 401k will then become stock heavy, meaning you'll need to hold more bonds elsewhere to maintain your AA. If you can do that all in tax-deferred accounts like her IRA, that is fine. If you need to do it in taxable, then per my earlier post that is not usually the recommendation.
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whoever
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Re: Help me with my investment strategy

Post by whoever »

letsgobobby wrote:the drawback is your 401k will then become stock heavy, meaning you'll need to hold more bonds elsewhere to maintain your AA. If you can do that all in tax-deferred accounts like her IRA, that is fine. If you need to do it in taxable, then per my earlier post that is not usually the recommendation.
Thank you. How easy or difficult with future rebalancing since 401k target fund is static allocation and internally it changes with age?
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BL
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Re: Help me with my investment strategy

Post by BL »

whoever wrote:
letsgobobby wrote:the drawback is your 401k will then become stock heavy, meaning you'll need to hold more bonds elsewhere to maintain your AA. If you can do that all in tax-deferred accounts like her IRA, that is fine. If you need to do it in taxable, then per my earlier post that is not usually the recommendation.
Thank you. How easy or difficult with future rebalancing since 401k target fund is static allocation and internally it changes with age?
The 2010 has nearly 60% bonds and Income (if you have it) is about 70% bonds. You can choose any date that meets with your stock/bond wishes and change in 401k whenever that is too far from your wishes.
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Bustoff
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Re: Help me with my investment strategy

Post by Bustoff »

Vanguard's Principles for Investing Success
http://www.vanguard.com/pdf/s700.pdf

See: Develop a suitable asset allocation using broadly diversified funds.
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whoever
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Re: Help me with my investment strategy

Post by whoever »

BL wrote:
whoever wrote:
letsgobobby wrote:the drawback is your 401k will then become stock heavy, meaning you'll need to hold more bonds elsewhere to maintain your AA. If you can do that all in tax-deferred accounts like her IRA, that is fine. If you need to do it in taxable, then per my earlier post that is not usually the recommendation.
Thank you. How easy or difficult with future rebalancing since 401k target fund is static allocation and internally it changes with age?
The 2010 has nearly 60% bonds and Income (if you have it) is about 70% bonds. You can choose any date that meets with your stock/bond wishes and change in 401k whenever that is too far from your wishes.
We have Vanguard Target Retirement Income Trust II and 2010 target fund. 2010 will be reflect income trust after 7 years which 2017.

Following is the breakup for Vanguard Target Retirement Income Trust II

https://institutional.vanguard.com/VGAp ... undId=1471

Looks line income is better option since allocation is static. Let me know if it makes sense to go with Vanguard Target Retirement Income Trust II.
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Re: The Three Fund Portfolio

Post by whoever »

[I moved these posts from Re: The Three Fund Portfolio into here. --admin LadyGeek]

In our 401k recently vanguard target retirement funds are introduced with 0.11 ER. Other funds are non vanguard with high ER. Is it a good option to move to target retirement funds given it has Total international index bond in it?

In my taxable account I have Total stock market and total international stock index funds. I am think of opting for target retirement income fund to maximize bond investment in 401k and fully invest in total stock index funds in taxable account. How does one calculates asset allocation given target funds have four index funds plus short term TIPS and taxable account has index funds?
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Re: The Three Fund Portfolio

Post by steve roy »

parsi1 wrote:Vanguard Target dated funds were perfect 3-Fund portfolios until they added the International Bond to the mix. What do you all think about adding the international bond to the 3 fund portfolio? It seems like the international bond has lower yield than the total US bonds.
Personally, I like the fact that Vanguard Retirement Income has a slug of short-term TIPS. Not so sure how I feel about the international bond fund, but it does add diversity. I keep in mind that there is no perfect, only good, better and worse.

I'll settle for good.
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Re: The Three Fund Portfolio

Post by abuss368 »

whoever wrote:In our 401k recently vanguard target retirement funds are introduced with 0.11 ER. Other funds are non vanguard with high ER. Is it a good option to move to target retirement funds given it has Total international index bond in it?

In my taxable account I have Total stock market and total international stock index funds. I am think of opting for target retirement income fund to maximize bond investment in 401k and fully invest in total stock index funds in taxable account. How does one calculates asset allocation given target funds have four index funds plus short term TIPS and taxable account has index funds?
I would consider starting a new thread as you might get specific answers. [Done, see below. --admin LadyGeek]

That said, while I do not prefer or invest in the new Total International Bond Index fund, it appears the allocation is very low and possibly immaterial in some of the Target and Life Strategy funds. My preference would have been to increase the overall international allocation (i.e. Total International Stock and Bond funds) with a simple increase to Total international Index fund.
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Re: The Three Fund Portfolio

Post by CABob »

whoever wrote:In our 401k recently vanguard target retirement funds are introduced with 0.11 ER. Other funds are non vanguard with high ER. Is it a good option to move to target retirement funds given it has Total international index bond in it?

Difficult to say without more information about the availability of other investments in the 401k, but, in general, I think it would be an excellent investment for a 401k. At some point you may want to separate it into its component parts for better control of allocations, but, you may not want to do so which is okay.

In my taxable account I have Total stock market and total international stock index funds. I am think of opting for target retirement income fund to maximize bond investment in 401k and fully invest in total stock index funds in taxable account. How does one calculates asset allocation given target funds have four index funds plus short term TIPS and taxable account has index funds?

In my case, my IRA has individual stock and bond funds, mostly index funds, while my DW’s IRA has a target retirement fund. In addition I also have taxable accounts with individual stocks, mutual funds, and ETFs. To keep track of them I use a spreadsheet which tracks the various asset allocations. For the target retirement fund I separate the amount into the various pieces using the allocations that Vanguard uses. In other words I enter the dollar amount in the fund and the spreadsheet separates that amount into total stock, total bond, international, etc. It took a while to set up the spreadsheet but is now easy to maintain which I do quarterly.
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Re: The Three Fund Portfolio

Post by pingo »

@ whoever: The inclusion of international bonds in the Vanguard Target funds are no reason to avoid them. It's just my opinion, but while international bonds are not absolutely necessary nor absolutely essential for a good portfolio, I do not believe they hurt Vanguard's Target Retirement series. They increase diversification without increasing complexity for the investor. One of the most important reasons for the 3-fund portfolio is simplicity (for which there are always trade-offs) balanced with the need for ample diversification and assets that'll get the job done.

The 3-Fund Portfolio gets the job done. So do Vanguard's Target Retirement funds.

The only question remaining is whether a target fund is appropriate for you situation when considering the number, location and types of accounts you have.
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Re: Help me with my investment strategy

Post by LadyGeek »

FYI - I moved several of the OP's posts from Re: The Three Fund Portfolio into here.
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Re: Help me with my investment strategy

Post by umfundi »

I have not read the whole thread.

If your state has a 529 plan with deductions but which is otherwise horrible, do a "back door" 529: Contribute funds, get the deduction, then immediately withdraw them for college expenses.

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whoever
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Re: Help me with my investment strategy

Post by whoever »

Due to target retirement funds availability in my 401k I am looking for suggestions to meet target asset allocation in all accounts combined.
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