Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

Greetings!

I'm new to the Bogleheads. After hearing Tony Robbins talk about compounding fees on a Tim Ferris podcast, I read the book Money, Master the Game and got fired up to learn about this stuff :annoyed and optimize my portfolio while I'm still young. That led me to Little Book of Common Sense Investing, A Random Walk Down Wall Street, and several other podcasts.

I've started trying to implement some of this on my own, but run into several questions. Any insights would be greatly appreciated! :D

Emergency funds: Done (but will be looking to move this into a Money Market fund at some point)
Debt: None
Tax Filing Status: Single
Tax Rate: ~ 28% Federal, 10% State
State of Residence: CA
Age: 27
Desired Asset allocation: 90% stocks / 10% bonds?
Desired International allocation: 15% of stocks?

Current retirement assets
Portfolio Size: Low five-figures. Just starting out.

His 401k at Fidelity
No company match.
Both Traditional and Roth 401k options are offered. I took a stab at contributing 3:1 (Roth:Traditional) for benefits of tax-free growth plus tax-diversification in retirement.

Started partially moving into the Index options. Previously I was selecting active mutual funds in the Small/Mid/Large/International cap categories:
18% Fidelity 500 Index Fund - Premium Class (FUSVX) (.05%)
13% Invesco Diversified Dividend Fund R5 Class (DDFIX) (.54%)
10% Oppenheimer International Small-Mid Company Fund Class Y (OSMYX) (1.18%)
9% T. Rowe Price New Horizons Fund (PRNHX) (.79%)
9% Fidelity® Extended Market Index Fund - Premium Class (FSEVX) (.07%)

Funds available in his 401(k)
In addition to the ones already invested above. Only including the ones I think folks will care about for now, but I can add exhaustive list if desired:
Fidelity® International Index Fund - Premium Class (FSIVX) (.12%)
Fidelity® U.S. Bond Index Fund - Premium Class (FSITX) (.07%)
(Some AM Cent target-date funds, etc.)

His Roth IRA at American Funds
I think I got caught up with a Broker when I was younger. Been making small contributions to this for a long time.
28% American Funds Growth Fund of America (AGTHX) (.66% plus 5.75% front-end sales load)

His Roth IRA at Vanguard
Recently opened this as a first step to potentially move away from American Funds.
13% Vanguard Total Stock Mkt Idx Inv (VTSMX) (.16%)

Contributions
Probably will start with 15% of gross income.

Thoughts:

Here's what I'm thinking:
  • Move all of my American Funds investment account over to Vanguard Roth IRA. Run from sales loads and find a fee-only fiduciary adviser moving forward.
  • Change Fidelity 401k investment allocations to something like:
    * 55% FID 500 INDEX PR (I read on bogleheads that you can combine the 500 index with the extended market to mimick the total U.S. market.)
    * 20% FID EXT MKT IDX PR
    * 15% FID INTL INDEX PR (This doesn't seem to have emerging market exposure.)
    * 10% FID US BOND IDX PR (Maybe 20% would be more appropriate for my age, but I'm still confused why Dave Ramsey still insists there's high correlation between stocks and bonds and recommends totally excluding them.)
  • Modify my Vanguard Roth IRA allocations to account for the shortcomings in the Fidelity 401k options (maybe add some REIT exposure or Total International exposure?)
Questions:
1. How does the above plan-of-action look?

2. Does it make sense to diversify across the 401k and Roth IRA, or due to slightly different account types should they be treated as independent lazy portfolios?

3. OSMYX looks like it has performed well. 9.5% average annual return over the last 10 years. It seems like the 1.18% expense ratio was high, but worth it, at the time that I contributed to that fund for my international exposure. Is it simply the average annual return less the expense ratio to determine the net return? Am I missing something there? The Fidelity International Index Fund - Premium Class (FSIVX) by comparison has returned only 1.76% over the last 10 years with an expense ratio of .12%. I don't know if I am understanding why indexing here would be better, but I proposed it above because it seemed to follow the model. Same logic for the DDFIX and PRNHX mutual funds. The returns look generous even with a slightly higher expense ratios. I am leaning toward ditching them, but not totally convinced.

4. The Fidelity International Index Fund - Premium Class (FSIVX) doesn't appear to include emerging market exposure as recommended in A Random Walk Down Wall Street. Does this mean it shouldn't quite count as my complete international allocation?

5. I started moving fund allocations within my 401k to add some of those Fidelity index funds, and my portfolio summary showed 3 to 4 figures lower the next day. I can't figure out if that is expected. I saw lots of "REALIZED G/L" transactions, which I assume are realized gain/losses. But I figured the exact amount invested in one fund would be moved to buy shares of another without any loss in actual net investment. Just curious if anyone has any gut insight into what I was seeing here.

Look forward to discussing. Let me know if you need any more info! Thanks all.
Last edited by hex on Thu Jul 07, 2016 9:24 pm, edited 1 time in total.
cherijoh
Posts: 6591
Joined: Tue Feb 20, 2007 3:49 pm
Location: Charlotte NC

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by cherijoh »

hex wrote:Emergency funds: Done (but will be looking to move this into a Money Market fund at some point)
Debt: None
Tax Filing Status: Single
Tax Rate: ~ 28% Federal, 10% State
State of Residence: CA
Age: 27
Desired Asset allocation: 90% stocks / 10% bonds?
Desired International allocation: 15% of stocks?

Current retirement assets
Portfolio Size: Low five-figures. Just starting out.

His 401k at Fidelity
No company match.
Both Traditional and Roth 401k options are offered. I took a stab at contributing 3:1 (Roth:Traditional) for benefits of tax-free growth plus tax-diversification in retirement.

Started partially moving into the Index options. Previously I was selecting active mutual funds in the Small/Mid/Large/International cap categories:
18% Fidelity 500 Index Fund - Premium Class (FUSVX) (.05%)
13% Invesco Diversified Dividend Fund R5 Class (DDFIX) (.54%)
10% Oppenheimer International Small-Mid Company Fund Class Y (OSMYX) (1.18%)
9% T. Rowe Price New Horizons Fund (PRNHX) (.79%)
9% Fidelity® Extended Market Index Fund - Premium Class (FSEVX) (.07%)

Funds available in his 401(k)
In addition to the ones already invested above. Only including the ones I think folks will care about for now, but I can add exhaustive list if desired:
Fidelity® International Index Fund - Premium Class (FSIVX) (.12%)
Fidelity® U.S. Bond Index Fund - Premium Class (FSITX) (.07%)
(Some AM Cent target-date funds, etc.)

His Roth IRA at American Funds
I think I got caught up with a Broker when I was younger. Been making small contributions to this for a long time.
28% American Funds Growth Fund of America (AGTHX) (.66% plus 5.75% front-end sales load)

His Roth IRA at Vanguard
Recently opened this as a first step to potentially move away from American Funds.
13% Vanguard Total Stock Mkt Idx Inv (VTSMX) (.16%)

Contributions
Probably will start with 15% of gross income.

Thoughts:

Here's what I'm thinking:
  • Move all of my American Funds investment account over to Vanguard Roth IRA. Run from sales loads and find a fee-only fiduciary adviser moving forward.
  • Change Fidelity 401k investment allocations to something like:
    * 55% FID 500 INDEX PR (I read on bogleheads that you can combine the 500 index with the extended market to mimick the total U.S. market.)
    * 20% FID EXT MKT IDX PR
    * 15% FID INTL INDEX PR (This doesn't seem to have emerging market exposure.)
    * 10% FID US BOND IDX PR (Maybe 20% would be more appropriate for my age, but I'm still confused why Dave Ramsey still insists there's high correlation between stocks and bonds and recommends totally excluding them.)
  • Modify my Vanguard Roth IRA allocations to account for the shortcomings in the Fidelity 401k options (maybe add some REIT exposure or Total International exposure?)
Questions:
1. How does the above plan-of-action look?
2. Does it make sense to diversify across the 401k and Roth IRA, or due to slightly different account types should they be treated as independent lazy portfolios?
3. OSMYX looks like it has performed well. 9.5% average annual return over the last 10 years. It seems like the 1.18% expense ratio was high, but worth it, at the time that I contributed to that fund for my international exposure. Is it simply the average annual return less the expense ratio to determine the net return? Am I missing something there? The Fidelity International Index Fund - Premium Class (FSIVX) by comparison has returned only 1.76% over the last 10 years with an expense ratio of .12%. I don't know if I am understanding why indexing here would be better, but I proposed it above because it seemed to follow the model. Same logic for the DDFIX and PRNHX mutual funds. The returns look generous even with a slightly higher expense ratios. I am leaning toward ditching them, but not totally convinced.
4. The Fidelity International Index Fund - Premium Class (FSIVX) doesn't appear to include emerging market exposure as recommended in A Random Walk Down Wall Street. Does this mean it shouldn't quite count as my complete international allocation?
5. I started moving fund allocations within my 401k to add some of those Fidelity index funds, and my portfolio summary showed 3 to 4 figures lower the next day. I can't figure out if that is expected. I saw lots of "REALIZED G/L" transactions, which I assume are realized gain/losses. But I figured the exact amount invested in one fund would be moved to buy shares of another without any loss in actual net investment. Just curious if anyone has any gut insight into what I was seeing here.

Look forward to discussing. Let me know if you need any more info! Thanks all.
Definitely ditch the American Funds. You can open up a Roth at Vanguard and then ask them to pull the funds rather than contacting your broker and asking him/her to move them. The broker may try and convince you to stay - you don't need that hassle. The front-end loads in the American Funds are a sunk cost, so the sooner you move them the better. VG should be able to help you decide whether it makes sense to transfer in kind or sell the funds first.

There is no need to duplicate your AA across both accounts. You can simulate a Total Stock Market fund with 4 parts of S&P 500 and 1 part of Extended Market. So your proposed plan is heavily overweighting small cap stock vs. a Total Market. Also international is usuallyquoted as the % of stocks, not the total portfolio.

If you want more emerging market exposure you could use a different international fund in your IRA or when your account gets larger add in a separate emerging market fund. But my rule of thumb is to not bother with any funds unless they represent at least 5% of my portfolio, so I'm not sure I would bother trying to replicate a specific formula you found in a book.

I would suggest trying to avoid falling into to the past performance trap. It might make sense to pay extra if you knew in advance which funds would do better in the FUTURE, but overpaying for PAST performance makes no sense IMO. At some point (probably sooner rather than later) the active fund will underperform the index and then you will be paying a higher ER and making less money. What would you do then? Hopping from one fund to the next chasing performance is a good way to underperform the market! The one thing that you have control over is the expense ratio that you pay, so it makes sense to minimize that.

I'm not sure what's up with your 401k account. Depending on the custodian, the account statements can be pretty cryptic. The market has been pretty volatile - you might have seen the same drop without changing anything. Did you figure out where you would have been if you left everything alone? Has the account balance since recovered? Do any of the funds have a penalty for frequent trading? Sometimes you get charged for purchasing a fund and then selling it within 60 days. But that would only apply to recent purchases.
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

Thanks for the quick reply! Some follow-up/elaboration:
cherijoh wrote: Definitely ditch the American Funds. You can open up a Roth at Vanguard and then ask them to pull the funds rather than contacting your broker and asking him/her to move them. The broker may try and convince you to stay - you don't need that hassle. The front-end loads in the American Funds are a sunk cost, so the sooner you move them the better. VG should be able to help you decide whether it makes sense to transfer in kind or sell the funds first.
That's a great idea. I hadn't thought through how to go about it. Definitely expect that I'll get encouraged to stay. The broker showed me a plot of American Funds performance against the index previously, but I'm pretty sure it was pre-fees (and in addition, like you said, I shouldn't bother paying for past performance). How do I ask VG to help me decide whether to transfer or sell? Should I acquire a personal advisor through VG or is there some amount of free advice already available to customers?
cherijoh wrote: There is no need to duplicate your AA across both accounts. You can simulate a Total Stock Market fund with 4 parts of S&P 500 and 1 part of Extended Market. So your proposed plan is heavily overweighting small cap stock vs. a Total Market.
Copy, I will rectify this. I was originally trying to balance this against the VG Roth IRA, but I realize I'm in the Total Stock Market there and not just the S&P 500. Do you have any comments on the bond % and fund selection?
cherijoh wrote: Also international is usually quoted as the % of stocks, not the total portfolio.
Is that because international funds only invest in stocks? It looks like Fidelity® International Index Fund - Premium Class (FSIVX) is 100% stocks.
cherijoh wrote: If you want more emerging market exposure you could use a different international fund in your IRA or when your account gets larger add in a separate emerging market fund. But my rule of thumb is to not bother with any funds unless they represent at least 5% of my portfolio, so I'm not sure I would bother trying to replicate a specific formula you found in a book.

I would suggest trying to avoid falling into to the past performance trap. It might make sense to pay extra if you knew in advance which funds would do better in the FUTURE, but overpaying for PAST performance makes no sense IMO. At some point (probably sooner rather than later) the active fund will underperform the index and then you will be paying a higher ER and making less money. What would you do then? Hopping from one fund to the next chasing performance is a good way to underperform the market! The one thing that you have control over is the expense ratio that you pay, so it makes sense to minimize that.
That makes some sense. I guess I was just surprised by the huge gap in 10 year returns: ~2% for FSIVX and ~10% for OSMYX. Looking closer, it seems like OSMYX is only investing in Small/Mid International, so maybe that greater risk relative to FSIVX is what accounts for those larger returns? 2% still seems low to me for stocks, but maybe that's why international is never recommended as a large portion of the portfolio? On closer inspection it looks like that's about what the VGTSX is returning. Also is my assumption of (annual % return - expense ratio = actual % return to investor) correct?

Point taken about the past performance. I've read that, but I expected that to apply for gaps of a couple of percent. I think I was thrown off my course of thinking by this discrepancy. Do you recommend moving all of my OSMYX, PRNHX, and DDFIX into those index funds I mentioned?
cherijoh wrote: I'm not sure what's up with your 401k account. Depending on the custodian, the account statements can be pretty cryptic. The market has been pretty volatile - you might have seen the same drop without changing anything. Did you figure out where you would have been if you left everything alone? Has the account balance since recovered? Do any of the funds have a penalty for frequent trading? Sometimes you get charged for purchasing a fund and then selling it within 60 days. But that would only apply to recent purchases.
The account balance is recovered to about where it was, but I bumped my contributions recently as well. I don't think I traded out of any funds that have a penalty. Some of the Fidelity index funds do, but I was moving into those. I guess I'll have to do some more looking into this and report back. Most likely it's very explainable, so I'm not super concerned about it (as long as moving between funds in a 401k shouldn't have any hidden consequences, which it sounds like is confirmed?)
User avatar
Duckie
Posts: 9767
Joined: Thu Mar 08, 2007 1:55 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by Duckie »

hex, welcome to the forum.
hex wrote:Age: 27
Desired Asset allocation: 90% stocks / 10% bonds?
I'd increase the bonds to at least 15%.
Desired International allocation: 15% of stocks?
That's a bit low. Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the Vanguard paper link and the discussion. I usually split the difference and recommend 30% of stocks.
His 401k at Fidelity
No company match.
Both Traditional and Roth 401k options are offered. I took a stab at contributing 3:1 (Roth:Traditional) for benefits of tax-free growth plus tax-diversification in retirement.
In the 28% bracket the pre-tax 401k is better. See 
The Case Against Roth 401(k).
Funds available in his 401(k)
Of the funds listed the best options are:
  • Fidelity 500 Index Fund (FUSVX) (.05%) -- Large caps, 80% of US stocks
  • Fidelity Extended Market Index Fund (FSEVX) (.07%) -- Mid/small caps, 20% of US stocks
  • Fidelity International Index Fund (FSIVX) (.12%) -- International, developed markets only
  • Fidelity U.S. Bond Index Fund (FSITX) (.07%) -- US bonds
Does it make sense to diversify across the 401k and Roth IRA, or due to slightly different account types should they be treated as independent lazy portfolios?
Diversify across both accounts. It's all one retirement portfolio.
The Fidelity International Index Fund - Premium Class (FSIVX) doesn't appear to include emerging market exposure as recommended in A Random Walk Down Wall Street. Does this mean it shouldn't quite count as my complete international allocation?
It's not complete. You can put all the international in your Roth IRA to avoid the issue of the missing emerging markets, small caps, and Canada.

Your desired AA is 90% stocks, 10% bonds, with 15% of stocks in international. That breaks down to
76% US stocks, 14% international stocks, and 10% bonds. You could have:

401k at Fidelity -- 59%
39% (FUSVX) Fidelity 500 Index Fund Premium Class (0.05%)
10% (FSEVX) Fidelity Extended Market Index Fund Premium Class (0.07%)
10% (FSITX) Fidelity U.S. Bond Index Fund Premium Class (0.07%)

Roth IRA at Vanguard -- 41%
27% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.16%)
14% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.19%)

Just some possibilities.
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

Duckie wrote:
Desired International allocation: 15% of stocks?
That's a bit low. Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the Vanguard paper link and the discussion. I usually split the difference and recommend 30% of stocks.
Thanks, Duckie. I'll likely increase my allocation there.
Duckie wrote:
His 401k at Fidelity
No company match.
Both Traditional and Roth 401k options are offered. I took a stab at contributing 3:1 (Roth:Traditional) for benefits of tax-free growth plus tax-diversification in retirement.
In the 28% bracket the pre-tax 401k is better. See 
The Case Against Roth 401(k).
Darn. I've flopped on this one for a long time. It seems every other thing you read says differently. I'll take some time to digest. Thanks for the link.
Duckie wrote:
The Fidelity International Index Fund - Premium Class (FSIVX) doesn't appear to include emerging market exposure as recommended in A Random Walk Down Wall Street. Does this mean it shouldn't quite count as my complete international allocation?
It's not complete. You can put all the international in your Roth IRA to avoid the issue of the missing emerging markets, small caps, and Canada.

Your desired AA is 90% stocks, 10% bonds, with 15% of stocks in international. That breaks down to
76% US stocks, 14% international stocks, and 10% bonds. You could have:

401k at Fidelity -- 59%
39% (FUSVX) Fidelity 500 Index Fund Premium Class (0.05%)
10% (FSEVX) Fidelity Extended Market Index Fund Premium Class (0.07%)
10% (FSITX) Fidelity U.S. Bond Index Fund Premium Class (0.07%)

Roth IRA at Vanguard -- 41%
27% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.16%)
14% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.19%)

Just some possibilities.
Great. That's what I was hoping for, some way to capture that missing slice by accounting for the best fund options in each. It seems like I could equivalently discard the (VTSMX) in favor of increased contributions to (FUSVX) and (FSEVX) in my 401k. That would free up some space in my VG Roth for more international or REIT right? I don't necessarily see an advantage to holding the VTSMX in there anymore considering the equivalent Fidelity options in my 401k, if I'm understanding correctly.

Also, I notice the overall split you showed as an option is 59% in 401k and 41% in Roth IRA. The contribution limits are vastly different ($18,000 for 401k and $5,550 for Roth IRA, so I'm not sure how I could get to a basically 60/40 split of investment capital anyway.) Another reason to consider going Total International and maybe a little REIT in my Roth and Total U.S. with a little bonds in 401k. But this might make it more difficult to rebalance, just thinking out loud....
User avatar
Duckie
Posts: 9767
Joined: Thu Mar 08, 2007 1:55 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by Duckie »

hex wrote:It seems like I could equivalently discard the VTSMX in favor of increased contributions to FUSVX and FSEVX in my 401k. That would free up some space in my VG Roth for more international or REIT right? I don't necessarily see an advantage to holding the VTSMX in there anymore considering the equivalent Fidelity options in my 401k, if I'm understanding correctly.
You don't need to specifically hold Total Stock in your Roth IRA as long as you hold your AA of US stocks somewhere. In my example there isn't enough room for all your US stocks in the 401k. If you earn enough to max both the 401k and the Roth IRA and have some extra cash left over you could put Total Stock in taxable.
Also, I notice the overall split you showed as an option is 59% in 401k and 41% in Roth IRA. The contribution limits are vastly different ($18,000 for 401k and $5,550 for Roth IRA, so I'm not sure how I could get to a basically 60/40 split of investment capital anyway.) Another reason to consider going Total International and maybe a little REIT in my Roth and Total U.S. with a little bonds in 401k. But this might make it more difficult to rebalance, just thinking out loud....
It's not going to stay 60/40 but it doesn't have to. Keep all the bonds in the 401k. Keep all the international in the Roth IRA as long as possible. Put US stocks wherever there's room. If you choose REITs they must be in tax-sheltered. Once or twice a year add up what you have in all accounts earmarked for retirement and rebalance to fit your AA.
Engineer250
Posts: 1082
Joined: Wed Jun 22, 2016 1:41 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by Engineer250 »

hex wrote:
Duckie wrote:
His 401k at Fidelity
No company match.
Both Traditional and Roth 401k options are offered. I took a stab at contributing 3:1 (Roth:Traditional) for benefits of tax-free growth plus tax-diversification in retirement.
In the 28% bracket the pre-tax 401k is better. See 
The Case Against Roth 401(k).
Darn. I've flopped on this one for a long time. It seems every other thing you read says differently. I'll take some time to digest. Thanks for the link.
That link is one person's opinion. I am a huge fan of Roths and tax diversification. Tax rates have been going down and down in the last 100 years just as stocks going up and up. You don't see people on here assuming the stock market will ALWAYS go up, so why assume tax rates will stay the same or go down? You may retire right when some progressive movement captures the nation and tax rates get hiked. You may retire when the libertarians are in charge and tax rates get dropped. Having money in Roth IRAs can be hugely beneficial for withdrawal purposes. Sure right now you can backdoor Roth anytime you want, but that might not ALWAYS be the case. Contributing to Roths now in the next 10 years might be the only time they are available, who knows.

That said, how far are you in the 28% tax bracket? Have you looked at whether contributing more pre-tax could pull you down a bracket? At 25/28 it may not make much of a difference. I am leaning towards pre-tax right now on 401k contributions because it's the only thing keeping me in the 15% bracket. I suspect when I jump up into 25 and 28 and it no longer matters to me as much, I may actually contribute more to Roth accounts even though perhaps it makes less tax sense. I like to have my options open for the future. If you knew you were going to retire in 5 years, you could probably do some tax calculations and easily figure out what would make the most sense. But with a long timeline, nobody knows any better than predicting the stock market. It's like your asset allocation, you just have to settle on a number that makes sense to you.
Where the tides of fortune take us, no man can know.
cherijoh
Posts: 6591
Joined: Tue Feb 20, 2007 3:49 pm
Location: Charlotte NC

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by cherijoh »

hex wrote:Thanks for the quick reply! Some follow-up/elaboration:
cherijoh wrote: Definitely ditch the American Funds. You can open up a Roth at Vanguard and then ask them to pull the funds rather than contacting your broker and asking him/her to move them. The broker may try and convince you to stay - you don't need that hassle. The front-end loads in the American Funds are a sunk cost, so the sooner you move them the better. VG should be able to help you decide whether it makes sense to transfer in kind or sell the funds first.
That's a great idea. I hadn't thought through how to go about it. Definitely expect that I'll get encouraged to stay. The broker showed me a plot of American Funds performance against the index previously, but I'm pretty sure it was pre-fees (and in addition, like you said, I shouldn't bother paying for past performance). How do I ask VG to help me decide whether to transfer or sell? Should I acquire a personal advisor through VG or is there some amount of free advice already available to customers?
No need for an advisor. The issue comes down to cost and whether or not VG offers that fund. Some non-VG funds have a transaction cost to buy or sell. Your broker might charge you a fee to sell, so it could be cheaper to transfer in kind and sell at VG or it might make sense to sell at broker and get the money transferred. If you sell before transferring, you will be out of the market for some time period, but there is no way to predict if stocks will go down or up, so no way to know if this is a good or bad thing.
hex wrote:
cherijoh wrote: If you want more emerging market exposure you could use a different international fund in your IRA or when your account gets larger add in a separate emerging market fund. But my rule of thumb is to not bother with any funds unless they represent at least 5% of my portfolio, so I'm not sure I would bother trying to replicate a specific formula you found in a book.

I would suggest trying to avoid falling into to the past performance trap. It might make sense to pay extra if you knew in advance which funds would do better in the FUTURE, but overpaying for PAST performance makes no sense IMO. At some point (probably sooner rather than later) the active fund will underperform the index and then you will be paying a higher ER and making less money. What would you do then? Hopping from one fund to the next chasing performance is a good way to underperform the market! The one thing that you have control over is the expense ratio that you pay, so it makes sense to minimize that.
That makes some sense. I guess I was just surprised by the huge gap in 10 year returns: ~2% for FSIVX and ~10% for OSMYX. Looking closer, it seems like OSMYX is only investing in Small/Mid International, so maybe that greater risk relative to FSIVX is what accounts for those larger returns? 2% still seems low to me for stocks, but maybe that's why international is never recommended as a large portion of the portfolio? On closer inspection it looks like that's about what the VGTSX is returning. Also is my assumption of (annual % return - expense ratio = actual % return to investor) correct?

Point taken about the past performance. I've read that, but I expected that to apply for gaps of a couple of percent. I think I was thrown off my course of thinking by this discrepancy. Do you recommend moving all of my OSMYX, PRNHX, and DDFIX into those index funds I mentioned?
You need to compare apples to apples, so it is never a good idea to compare two funds with different size and growth/value tilt and then attribute the outperformance to better stock picking. For international, you also have to consider specific country/region weightings. Stuff like this can be in and out of favor.

Prior to becoming a Boglehead I had investments in active mutual funds. But I went ahead and took the plunge and haven't looked back. By purchasing "the market" I find it is easier to tune out all of the noise and let my portfolio chug along.
hex wrote:
cherijoh wrote: I'm not sure what's up with your 401k account. Depending on the custodian, the account statements can be pretty cryptic. The market has been pretty volatile - you might have seen the same drop without changing anything. Did you figure out where you would have been if you left everything alone? Has the account balance since recovered? Do any of the funds have a penalty for frequent trading? Sometimes you get charged for purchasing a fund and then selling it within 60 days. But that would only apply to recent purchases.
The account balance is recovered to about where it was, but I bumped my contributions recently as well. I don't think I traded out of any funds that have a penalty. Some of the Fidelity index funds do, but I was moving into those. I guess I'll have to do some more looking into this and report back. Most likely it's very explainable, so I'm not super concerned about it (as long as moving between funds in a 401k shouldn't have any hidden consequences, which it sounds like is confirmed?)
If you panic and sell everything when stocks are down and then repurchase stocks when they are up, you can fall far short of the fund performance you would have gotten had you left it alone. But otherwise switching funds doesn't trigger taxes or other negative consequences that I know of.
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

Engineer250 wrote:
hex wrote:
Duckie wrote: In the 28% bracket the pre-tax 401k is better. See 
The Case Against Roth 401(k).
Darn. I've flopped on this one for a long time. It seems every other thing you read says differently. I'll take some time to digest. Thanks for the link.
That link is one person's opinion. I am a huge fan of Roths and tax diversification. Tax rates have been going down and down in the last 100 years just as stocks going up and up. You don't see people on here assuming the stock market will ALWAYS go up, so why assume tax rates will stay the same or go down? You may retire right when some progressive movement captures the nation and tax rates get hiked. You may retire when the libertarians are in charge and tax rates get dropped. Having money in Roth IRAs can be hugely beneficial for withdrawal purposes. Sure right now you can backdoor Roth anytime you want, but that might not ALWAYS be the case. Contributing to Roths now in the next 10 years might be the only time they are available, who knows.

That said, how far are you in the 28% tax bracket? Have you looked at whether contributing more pre-tax could pull you down a bracket? At 25/28 it may not make much of a difference. I am leaning towards pre-tax right now on 401k contributions because it's the only thing keeping me in the 15% bracket. I suspect when I jump up into 25 and 28 and it no longer matters to me as much, I may actually contribute more to Roth accounts even though perhaps it makes less tax sense. I like to have my options open for the future. If you knew you were going to retire in 5 years, you could probably do some tax calculations and easily figure out what would make the most sense. But with a long timeline, nobody knows any better than predicting the stock market. It's like your asset allocation, you just have to settle on a number that makes sense to you.
I'm just barely into the 28% bracket. So I could probably commit enough pre-tax to bump me down to the 25% bracket, but that probably wouldn't make that much of a difference since the 28% only applies to the last few income dollars, right?

You're absolutely right about not being able to predict the future taxes or legislation. Do you have any recommended reading on how to pick that allocation (ratio of Traditional to Roth)?
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

Duckie wrote: You don't need to specifically hold Total Stock in your Roth IRA as long as you hold your AA of US stocks somewhere. In my example there isn't enough room for all your US stocks in the 401k.
Oh, I think I might have taken above recommendations and started playing with 15% bonds and 30% of stocks in International. In that case, maybe I did have enough space in my 401k. I'll have to crunch again.
Duckie wrote: It's not going to stay 60/40 but it doesn't have to. Keep all the bonds in the 401k. Keep all the international in the Roth IRA as long as possible. Put US stocks wherever there's room. If you choose REITs they must be in tax-sheltered. Once or twice a year add up what you have in all accounts earmarked for retirement and rebalance to fit your AA.
Looking into executing this. The REIT idea is because it sounds nice to be partially invested in real estate while I'm just renting right now, and both David Swenson and Burt Malkiel recommend at least 10% of REIT. But I don't think it will immediately be able to more than 5% of my portfolio, so I might have to wait until next year's contribution to Roth IRA to consider.

Do you have any recommended time of year or strategy for when to rebalance? I know market timing is not something to be concerned with, but just wondering if there are any other considerations (I've heard capital gains/dividends are often distributed near the end of the calendar year). I can probably do some searching on this.

Cheers 8-)
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

cherijoh wrote:
hex wrote:Thanks for the quick reply! Some follow-up/elaboration:
cherijoh wrote: Definitely ditch the American Funds. You can open up a Roth at Vanguard and then ask them to pull the funds rather than contacting your broker and asking him/her to move them. The broker may try and convince you to stay - you don't need that hassle. The front-end loads in the American Funds are a sunk cost, so the sooner you move them the better. VG should be able to help you decide whether it makes sense to transfer in kind or sell the funds first.
How do I ask VG to help me decide whether to transfer or sell? Should I acquire a personal advisor through VG or is there some amount of free advice already available to customers?
No need for an advisor. The issue comes down to cost and whether or not VG offers that fund. Some non-VG funds have a transaction cost to buy or sell. Your broker might charge you a fee to sell, so it could be cheaper to transfer in kind and sell at VG or it might make sense to sell at broker and get the money transferred. If you sell before transferring, you will be out of the market for some time period, but there is no way to predict if stocks will go down or up, so no way to know if this is a good or bad thing.
This is extremely helpful. I'll need to do some more reading here to make sure I don't incur unnecessary fees. All of it's in the Growth Fund of America (AGTHX). I've already stopped my automatic, sales-loaded contributions into there based on this discussion. Now I'll just need to be careful with the transfer :arrow:.
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

Thanks everyone for the feedback so far :sharebeer. Open to any other eyes or advice. This has been incredibly helpful.
Engineer250
Posts: 1082
Joined: Wed Jun 22, 2016 1:41 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by Engineer250 »

hex wrote: You're absolutely right about not being able to predict the future taxes or legislation. Do you have any recommended reading on how to pick that allocation (ratio of Traditional to Roth)?
I think it's absolutely as personal as percentage in stocks/bonds is. Maybe for me personally I would have preferred to be 50/50. But in actuality I am 75/25 since a Roth 401k option didn't exist for me until x years into my investing. I did try to put a majority of funds towards the Roth at that point, but like I said now I am back the other direction to keep in a lower tax bracket. If I could afford it I would probably be contributing 50/50. I think most people would say if your stock/bond balance was 80/20 or 70/30 you'll probably be fine either way. I think a similar attitude to tax-deferred versus Roth is probably reasonable. Even a 90/10 ratio is probably better than 100 tax deferred. But whether 50/50 or 70/30 or 90/10 is really the best answer is a complete unknown. Knowing what number is "right" would come too close to predicting the future. I know folks who think you should contribute 100% to tax deferred to get the maximum tax advantage today, and then backdoor Roth in a laddered system when your income is low because if you can finagle it you can hang out in the 15% tax bracket during your earning years and then manage to achieve 0% tax responsibility at about the time you've achieved financial independence. Then there are folks like Dave Ramsey who believe you should pay down all your debt (including mortgage) as a priority and then do all possible money towards Roth accounts. So I suspect you could find a lot of smart and intelligent people on both sides. Like I said I'm less concerned that I "overpay" on taxes today so much as having as wide a variety of options as possible in the future. But I'm not as anti-tax as many are though so I might be a weirdo. So that was a huge, rambling paragraph to say it's all personal and probably whatever allocation you choose, be it 100% tax deferred or 100% Roth, you will absolutely be fine.
Where the tides of fortune take us, no man can know.
User avatar
Duckie
Posts: 9767
Joined: Thu Mar 08, 2007 1:55 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by Duckie »

hex wrote:Oh, I think I might have taken above recommendations and started playing with 15% bonds and 30% of stocks in International. In that case, maybe I did have enough space in my 401k. I'll have to crunch again.
You don't need to try to cram all your US stocks into the 401k. There are no drawbacks to holding them in two accounts. It's normal.
The REIT idea is because it sounds nice to be partially invested in real estate while I'm just renting right now, and both David Swenson and Burt Malkiel recommend at least 10% of REIT. But I don't think it will immediately be able to more than 5% of my portfolio, so I might have to wait until next year's contribution to Roth IRA to consider.
Total Stock Market holds REITs at the market weight. If you want to overweight them, that's fine, but TSM already has some.
Do you have any recommended time of year or strategy for when to rebalance? I know market timing is not something to be concerned with, but just wondering if there are any other considerations (I've heard capital gains/dividends are often distributed near the end of the calendar year).
Just pick a date and use it every year. Maybe around your birthday. I always rebalanced in January after I maxed my annual Roth IRA contribution. Both Total Stock and Total International Stock have quarterly dividends.
Last edited by Duckie on Sat Jul 09, 2016 7:15 pm, edited 1 time in total.
spammagnet
Posts: 2477
Joined: Wed Apr 27, 2016 9:42 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by spammagnet »

Achieve your asset allocation across your entire portfolio, not within each account. If you try to replicate the same AA in each account you probably will end up with some account/allocation balances being small, in dollar terms. That prevents you from hitting the threshold necessary to buy Admiral (Vanguard) or Premium (Fidelity) funds, where expenses are lower.
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

Engineer250 wrote:
hex wrote: You're absolutely right about not being able to predict the future taxes or legislation. Do you have any recommended reading on how to pick that allocation (ratio of Traditional to Roth)?
I think it's absolutely as personal as percentage in stocks/bonds is. Maybe for me personally I would have preferred to be 50/50. But in actuality I am 75/25 since a Roth 401k option didn't exist for me until x years into my investing. I did try to put a majority of funds towards the Roth at that point, but like I said now I am back the other direction to keep in a lower tax bracket. If I could afford it I would probably be contributing 50/50. I think most people would say if your stock/bond balance was 80/20 or 70/30 you'll probably be fine either way...
Yeah, I think the interesting thing from Duckie's link was the ability to avoid paying the taxes now, and then pay them in a cheaper state later in life. If I move out of CA (real possibility), contributing to pre-tax now could keep that option open rather than contributing to a sunk cost. You can always make a Roth conversion a little later if desired. I wasn't thinking along those lines.

Also the idea of filling up the lower 15% tax bracket with income in retirement makes a lot of sense. All of this makes me think some diversification (maybe even 50/50) keeps options open and prevents having to predict the future.
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

Duckie wrote: Total Stock Market hold REITs at the market weight. If you want over to overweight them, that's fine, but TSM already has some.
Good to know. Thanks.
Duckie wrote: I always rebalanced in January after I maxed my annual Roth IRA contribution. Both Total Stock and Total International Stock have quarterly dividends.
That's not a bad idea. Sounds like it doesn't make much sense to dollar-cost average your Roth IRA contribution since it's so small. January it is.
User avatar
Topic Author
hex
Posts: 18
Joined: Tue Jul 05, 2016 10:23 pm

Re: Mid-Twenties Migrating 401k and Roth IRA to Index Funds (+Misc Qs)

Post by hex »

spammagnet wrote:Achieve your asset allocation across your entire portfolio, not within each account. If you try to replicate the same AA in each account you probably will end up with some account/allocation balances being small, in dollar terms. That prevents you from hitting the threshold necessary to buy Admiral (Vanguard) or Premium (Fidelity) funds, where expenses are lower.
Ah, good point. Definitely want to keep those costs as low as possible. Thanks!
Post Reply