Portfolio Review - Reallocation from Target Retirement Funds

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MaineManKevin
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Joined: Sun Mar 02, 2014 1:38 pm
Location: Freeport, ME

Portfolio Review - Reallocation from Target Retirement Funds

Post by MaineManKevin » Sun Mar 02, 2014 1:41 pm

Summary
Emergency funds: $10,000 (6 months expenses)
Debt: None
Tax Filing Status: Single
Tax Rate: 25% Federal, 8.5% State
State of Residence: ME
Age: 28
Desired Asset allocation:
- 65% stocks (50% US, 15% International)
- 15% bonds
- 15% REITs
- 5% Cash

Current retirement assets

Taxable
$0***

***I technically have ~$20,000 in a few high yield checking/savings accounts, and short-term CDs earning an aggregate 2.75% APY. This money is dedicated to a future home purchase in the next 2-3 years and therefore not a “retirement” asset.

401k (Fidelity)
- 52% of total Retirement Assets ($16,000) -- FID FREEDOM K Target Retirement 2050 Fund (FFKHX) -- (0.68% exp)
- Company match? 100% of First 4%

Roth IRA (Vanguard)
- 48% of total Retirement Assets ($15,000) -- Vanguard Target Retirement 2045 Fund (VTIVX) -- (0.18% exp)

Contributions

New annual Contributions
401k – $3,400 remaining personal contributions (8% contribution rate)
401k – $1,600 remaining employer contributions (4% employer match)
401k Total – $5000
Roth IRA – $0 (already maxed out 2013/2014 contributions)
Taxable – $0 (all additional savings are currently going to home purchase funds mentioned above)

Available funds

Funds available in 401(k)
FID BLUE CHIP GR K (FBGKX) -- 0.61%
FID FUND K (FFDKX) -- 0.42%
FID OTC K (FOCKX) -- 0.62%
SPTN 500 INDEX INST (FXSIX) -- 0.05%
FID EQUITY INCOME K (FEIKX) -- 0.54%
BARON ASSET INST (BARIX) -- 1.05%
FID VALUE K (FVLKX) -- 0.54%
AF EUROPAC GROWTH R5 (RERFX) -- 0.55%
SPTN INTL INDEX ADV (FSIVX) -- 0.17%
FID FREEDOM K 2000 (FFKBX) -- 0.45%
FID FREEDOM K 2005 (FFKVX) -- 0.50%
FID FREEDOM K 2010 (FFKCX) -- 0.54%
FID FREEDOM K 2015 (FKVFX) -- 0.57%
FID FREEDOM K 2020 (FFKDX) -- 0.59%
FID FREEDOM K 2025 (FKTWX) -- 0.62%
FID FREEDOM K 2030 (FFKEX) -- 0.67%
FID FREEDOM K 2035 (FKTHX) -- 0.68%
FID FREEDOM K 2040 (FFKFX) -- 0.68%
FID FREEDOM K 2045 (FFKGX) -- 0.69%
FID FREEDOM K 2050 (FFKHX) -- 0.69%
FID FREEDOM K 2055 (FDENX) -- 0.69%
FID FREEDOM K INCOME (FFKAX) -- 0.45%
FID PURITAN K (FPUKX) -- 0.47%
SPTN US BOND IDX ADV (FSITX) -- 0.17%
USAA INCOME FUND (USAIX) -- 0.58%
MIP II CL 1 -- 0.56%

Funds available in Roth IRA
Vanguard Funds

Questions

This will be a humbling experience, I’m sure, but that’s why I’m here – to learn and improve my retirement investing!

Over the past 9-12 months I’ve done enough retirement investing/AA research to build a solid foundation around the fundamentals, and with my fledgling knowledge I feel confident/empowered enough to break out of the Target Retirement funds in order to A) decrease expenses, and B) have more control over my desired AA.

As stated above my desired AA is:
- 65% stocks (50% US, 15% International)
- 15% bonds
- 15% REITs
- 5% Cash

I am thinking about the below AA spread across the 401k/Roth IRA accounts, which conforms to the AA I stated above. I was hoping that the bountiful intellect that graces this forum could take a look and advise as to whether my new AA looks sound. I’m aware that with the continuation of 401k contributions that my AA will become imbalanced, but I plan to rebalance quarterly (if that’s too frequent, please advise on that note as well).

401(k) – FXSIX – Spartan 500 Index Institutional – $7,750.00
401(k) – FSEVX – Spartan Extended Market Index Adv. – $3,750.00
401(k) – FSITX – Spartan US Bond Index Adv. – $4,500.00

Roth IRA – VTSMX – Vanguard Total Stock Market Index – $4,500.00
Roth IRA – VGSIX – Vanguard REIT Index Fund Investor Shares – $4,500.00
Roth IRA – VGTSX – Vanguard Total International Stock Index – $4,500.00
Roth IRA – VMMXX – Vanguard Prime Money Market Fund – $1,500.00***

Total - $31,000

***A note of the 5% Cash (VMMXX) allocation - the only reason I see to hold cash in a retirement fund (at my age) is for a bit of capital preservation, as well as the potential use of said cash if the markets are to dip dramatically. I understand that's market timing in a sense, and why not have all funds "in the game", but I think it provides some options for flexibility/agility. If anyone has any thoughts on this, or other Vanguard stable-value options instead of VMMXX, please let me know.***

Thanks in advance for any advice/help.
Last edited by MaineManKevin on Sun Mar 02, 2014 3:08 pm, edited 1 time in total.

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steve roy
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Re: Portfolio Review - Reallocation from Target Retirement F

Post by steve roy » Sun Mar 02, 2014 2:49 pm

Your asset allocation seems quite reasonable, and you're striving for low costs, so that's also good. (Me, I weight to small value, but I don't think that's something that's necessary.)

My only advice would be NOT to rebalance quarterly. Rebalancing between every 18 to 36 months would be better. Many here rebalance annually.

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Taylor Larimore
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Confident and Empowered

Post by Taylor Larimore » Sun Mar 02, 2014 2:56 pm

MaineManKevin:

Welcome to the Bogleheads Forum!
I feel confident/empowered enough to break out of the Target Retirement funds in order to A) decrease expenses, and B) have more control over my desired AA.
Be careful what you wish for. Any decrease in expenses is negligable and there is a chance that Target Fund administrators know more than you do. :wink: Vanguard has 12 Target Funds to choose from--Fidelity has 13.

Strive for simplicity; not complexity.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

dickenjb
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Location: Philadelphia PA

Re: Portfolio Review - Reallocation from Target Retirement F

Post by dickenjb » Sun Mar 02, 2014 3:01 pm

Your plan looks fine. Are you trying to overweight mid/small? 4:1 Spartan S&P500 to Extended Mkt approximates total stock market.
MaineManKevin wrote:I technically have ~$20,000k in a few high yield checking/savings accounts, and short-term CDs earning an aggregate 2.75% APY. This money is dedicated to a future home purchase in the next 2-3 years and therefore not a “retirement” asset.
I doubt you have $20 million in your house fund. Lose 3 zeros or lose the "k".

History has shown that the performance drag of cash is not gained back by rebalancing bonus - but if it makes you feel good to have 5% in cash, go for it.
Last edited by dickenjb on Sun Mar 02, 2014 3:03 pm, edited 1 time in total.

MaineManKevin
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Location: Freeport, ME

Re: Portfolio Review - Reallocation from Target Retirement F

Post by MaineManKevin » Sun Mar 02, 2014 3:03 pm

Hey Steve,

I was considering directing a portion of my Roth Funds to the Vanguard Small Cap Value Index Fund (VISVX) in order to gain some small-cap weight, but I wasn't certain that given the infancy of my portfolio that is necessary (perhaps I should just focus on VTSMX for now until I get to VTSAX, and then add additional VISVX for small-cap exposure).

VTSMX does have ~10% small-cap exposure I believe, but adding some amount of VISVX would indeed help tilt my portfolio towards smalls, which I think would be a good thing (not sure if my current portfolio size justifies it though).

I go back-and-forth on the idea.

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RyeWhiskey
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Re: Portfolio Review - Reallocation from Target Retirement F

Post by RyeWhiskey » Sun Mar 02, 2014 3:05 pm

I'm 27 and I found that the more I learned about everything the more I wanted to simplify my financial plan. I own only one fund for my retirement and couldn't be happier. :beer
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dickenjb
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Location: Philadelphia PA

Re: Portfolio Review - Reallocation from Target Retirement F

Post by dickenjb » Sun Mar 02, 2014 3:06 pm

MaineManKevin wrote:I was considering directing a portion of my Roth Funds to the Vanguard Small Cap Value Index Fund (VISVX) in order to gain some small-cap weight, but I wasn't certain that given the infancy of my portfolio that is necessary (perhaps I should just focus on VTSMX for now until I get to VTSAX, and then add additional VISVX for small-cap exposure).
I am not a tilter, more of a VTSAX kind of guy so I am somewhat biased. But read my post above - you are already tilting by owning more Ext Mkt Idx than 25% of your S&P500 holding.

livesoft
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Re: Portfolio Review - Reallocation from Target Retirement F

Post by livesoft » Sun Mar 02, 2014 3:09 pm

I use the Spartan Advantage index funds in my 401(k).

I do not duplicate the allocation in my Roth or traditional IRAs. I like those accounts to be simple with one or two funds in them. I use the 401(k) for rebalancing.

So you could put a target retirement in the Roth. Or you could put just 2 funds in the Roth. Or do something else.

Note that the Vanguard Small-cap Value fund (VISVX) and the Fidelity Extended Market Index fund are not all that different. Compare them in a "growth of" chart at Morningstar. I own both.
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MaineManKevin
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Re: Portfolio Review - Reallocation from Target Retirement F

Post by MaineManKevin » Sun Mar 02, 2014 3:40 pm

dickenjb wrote:
MaineManKevin wrote:I was considering directing a portion of my Roth Funds to the Vanguard Small Cap Value Index Fund (VISVX) in order to gain some small-cap weight, but I wasn't certain that given the infancy of my portfolio that is necessary (perhaps I should just focus on VTSMX for now until I get to VTSAX, and then add additional VISVX for small-cap exposure).
I am not a tilter, more of a VTSAX kind of guy so I am somewhat biased. But read my post above - you are already tilting by owning more Ext Mkt Idx than 25% of your S&P500 holding.
But the Ext Mkt Idx is currently now only 18% of my total stock AA (across Roth IRA and 401k), 48% of stock allocation just in 401k (which I think shouldn't be focused on in terms of a holistic view on my AA). I originally had the notion of adding the Ext Mkt Idx to the 401k stock allocation as a complimentary weighting to the S&P500 Idx (so to make a faux VTSMX idx that's seen in my Roth).

So I guess you're advising that there's no need to add the the Vanguard Small Cap Value Index Fund (VISVX) because I'm already weighted appropriately between my VTSMX (Roth IRA) and the Ext Mkt / S&P500 Idx's (401k) holdings. Correct?

MaineManKevin
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Location: Freeport, ME

Re: Confident and Empowered

Post by MaineManKevin » Sun Mar 02, 2014 3:57 pm

Taylor Larimore wrote:MaineManKevin:

Welcome to the Bogleheads Forum!
I feel confident/empowered enough to break out of the Target Retirement funds in order to A) decrease expenses, and B) have more control over my desired AA.
Be careful what you wish for. Any decrease in expenses is negligable and there is a chance that Target Fund administrators know more than you do. :wink: Vanguard has 12 Target Funds to choose from--Fidelity has 13.

Strive for simplicity; not complexity.

Best wishes.
Taylor
Taylor - I very much appreciate your note. Very grounding.

I'm certain that the deficit of my knowledge compared to that of the Target Fund Administrators could certainly fill at least 95% of the books in "Taylor's Gems" (I'm making good headway there, though)! But like I said in my original post -
This will be a humbling experience, I’m sure, but that’s why I’m here – to learn and improve my retirement investing!
Right now I'm just exploring my options, and hopefully learning enough as to not cause myself any undue harm. "Strive for simplicity; not complexity." will certainly be the cornerstone of my investing ethos.

Thanks again,
Kevin

tj
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Re: Portfolio Review - Reallocation from Target Retirement F

Post by tj » Sun Mar 02, 2014 4:46 pm

RyeWhiskey wrote:I'm 27 and I found that the more I learned about everything the more I wanted to simplify my financial plan. I own only one fund for my retirement and couldn't be happier. :beer

Which fund? :)

dickenjb
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Location: Philadelphia PA

Re: Portfolio Review - Reallocation from Target Retirement F

Post by dickenjb » Sun Mar 02, 2014 5:03 pm

MaineManKevin wrote: But the Ext Mkt Idx is currently now only 18% of my total stock AA (across Roth IRA and 401k), 48% of stock allocation just in 401k (which I think shouldn't be focused on in terms of a holistic view on my AA). I originally had the notion of adding the Ext Mkt Idx to the 401k stock allocation as a complimentary weighting to the S&P500 Idx (so to make a faux VTSMX idx that's seen in my Roth).

So I guess you're advising that there's no need to add the the Vanguard Small Cap Value Index Fund (VISVX) because I'm already weighted appropriately between my VTSMX (Roth IRA) and the Ext Mkt / S&P500 Idx's (401k) holdings. Correct?
You are 100% correct to look at everything as one portfolio. But your proposes portfolio holds VTSMX in Roth which is market weight across all capitalizations. Then in 401(k) you should hold Spartan 500 / Ext Mkt in 4:1 ratio IF YOU WISH to simulate TSM. IF you wish to tilt toward small cap, your proposal does that.

In other words, the TSM you propose to hold in Roth already contains mid / small.
Last edited by dickenjb on Sun Mar 02, 2014 5:23 pm, edited 1 time in total.

dickenjb
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Re: Portfolio Review - Reallocation from Target Retirement F

Post by dickenjb » Sun Mar 02, 2014 5:23 pm

Here is my suggestion:

401(k) – FXSIX – Spartan 500 Index Institutional – $12800
401(k) – FSEVX – Spartan Extended Market Index Adv. – $3200

Roth IRA – VGSIX – Vanguard REIT Index Fund Investor Shares – $4500
Roth IRA – VGTSX – Vanguard Total International Stock Index – $4500
Roth IRA – VBTLX - Vanguard Total Bond - $6000

Total - $31,000

Much simpler, gives you your 15% in REITS. Only 4 funds counting the "synthetic TSM" in 401(k) as one. Plays to the strength of your low cost choices in 401(k).

Since you have roughly $5K going into each of your two buckets each year, should be able to keep in balance. Don't get crazy about rebalancing, once a year is plenty.

MaineManKevin
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Re: Portfolio Review - Reallocation from Target Retirement F

Post by MaineManKevin » Sun Mar 02, 2014 6:49 pm

dickenjb wrote:Here is my suggestion:

401(k) – FXSIX – Spartan 500 Index Institutional – $12800
401(k) – FSEVX – Spartan Extended Market Index Adv. – $3200

Roth IRA – VGSIX – Vanguard REIT Index Fund Investor Shares – $4500
Roth IRA – VGTSX – Vanguard Total International Stock Index – $4500
Roth IRA – VBTLX - Vanguard Total Bond - $6000

Total - $31,000

Much simpler, gives you your 15% in REITS. Only 4 funds counting the "synthetic TSM" in 401(k) as one. Plays to the strength of your low cost choices in 401(k).

Since you have roughly $5K going into each of your two buckets each year, should be able to keep in balance. Don't get crazy about rebalancing, once a year is plenty.
Regarding the fund allocation you suggested above, my understanding of the best approach for an AA from a tax-efficiency perspective was to place the least-efficient asset classes (in this case Bonds) in the 401k (tax-deferred) bucket and place the highest-growth/return asset classes (TSM) in the Roth IRA (tax-free) bucket.

It looks like you're suggesting I do the opposite (majority of growth/return assets would be placed in the 401k). I'm not saying this isn't correct, I just want to make sure I follow your rationale other than for the sake further simplicity (striving for both simplicity and tax efficiency here).

If I were to go with my original proposal, I follow you on adjusting the S&P500 and Ext Mkt Idx balance in the 401k to synthesize a TSM weighting - thus keeping my total AA of large-cap to mid/small-cap 4:1.

Thanks for your input thus far.

retiredjg
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Re: Portfolio Review - Reallocation from Target Retirement F

Post by retiredjg » Mon Mar 03, 2014 11:19 am

Once your portfolio is large, you can keep bonds out of your Roth IRA if you want. However, opinions vary a lot as to whether bonds in Roth is a good thing, a bad thing, or a neutral thing. So I doubt that it matters. And I don't think it has anything to do with tax-efficiency, but I suppose that could depend on your definition of that term.

Right now, your Roth IRA is large in comparison to your 401k. That's why the bonds just naturally fall into the Roth IRA. That will change over time since you can contribute a lot more to the 401k than to the Roth IRA. As the 401k grows, the bonds will more easily flow into the 401k. At some point, all the bonds will fit there if you want.

Right now, you just want to get a complete and efficient portfolio. Keeping bonds out of Roth IRA makes no sense at this point. If it ever makes sense at all.

I like target funds, but the Fidelity Freedom target funds are just dumb. And expensive. Your costs will be much lower in the long run by using these individual funds. I think this is a good move and I think your portfolio is now large enough to get it done.

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