Allocation Help

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dted
Posts: 15
Joined: Mon Oct 03, 2016 7:40 am

Allocation Help

Post by dted » Tue Nov 22, 2016 4:46 am

Beginner Boglehead here.

I've been wanting to tinker with my allocation, but I could use some help..


State of Residence: IL
Age: 30
Single
Desired Asset allocation: 90-95% stocks / 5-10% bonds
Desired International allocation: 25-30% of stocks

Current retirement assets ~$64k

Fidelity 401k - 52% of total retirement portfolio
26% Fidelity International Index FSIVX .12%
11% Fidelity 500 Index FXAIX .02%
8% Vanguard Small Cap Index VSCIX .07%
2.5% Marathon Petroleum Corp MPC
2.5% Fid Extended Market Index FSEVX .07%
2.5% Vanguard Value Index VIVIX .07%
Company match? 7%

Fidelity HSA - 8%
4.5% Fid Total Bond FTBFX .45%
4% Cash

Roth IRA at Vanguard - 39%
39% VTSAX .05%

Contributions
7% (working on building my emergency fund right now. Plan to bump this back up to 15-20% between my 401k and my Roth once that's done)

1.) I've been considering a 3 fund portfolio. I recently opened a "Brokeragelink" account through my 401k which basically seems like it gives me full access to Fidelity's full mutual fund lineup. So I could put my 401k in Vanguard Total Stock Market if I wanted. I like VSCIX, FSEVX, and VIVIX because they are a little more risky, but do I own enough of them to make a difference? I can handle some risk

2.) I'm not sure about my international fund. It hasn't done much since I bought it, and past returns don't seem promising either.. I might be impatient, but does anyone have any other recommendations? Again, I can use my Brokeragelink account to get pretty much any fund. I've been looking at FMIJX - FMI International Fund. It's a higher expense, but past returns have been a lot less bleak..

dted
Posts: 15
Joined: Mon Oct 03, 2016 7:40 am

Re: Allocation Help

Post by dted » Wed Nov 23, 2016 1:59 pm

Bump?

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Allocation Help

Post by retiredjg » Wed Nov 23, 2016 3:17 pm

It is hard to give a good answer without knowing what is available in your 401k.
1.) I've been considering a 3 fund portfolio. I recently opened a "Brokeragelink" account through my 401k which basically seems like it gives me full access to Fidelity's full mutual fund lineup. So I could put my 401k in Vanguard Total Stock Market if I wanted. I like VSCIX, FSEVX, and VIVIX because they are a little more risky, but do I own enough of them to make a difference? I can handle some risk
It is not clear yet that a brokerage link is even needed. What are the costs of the brokerage link?

You almost certainly do not want to buy Vanguard funds at Fidelity. I think it is $50 or $75 a transaction.
2.) I'm not sure about my international fund. It hasn't done much since I bought it, and past returns don't seem promising either.. I might be impatient, but does anyone have any other recommendations? Again, I can use my Brokeragelink account to get pretty much any fund. I've been looking at FMIJX - FMI International Fund. It's a higher expense, but past returns have been a lot less bleak..

Your international fund is fine for what it represents. It's just that international has not done well for a few years. This does not matter. If you ever intend to hold foreign stocks, buy them now so you will be in position when they increase in value.

Hard to say what is going on with the FMI fund. No denying it has done well. That does not mean it will do well in the future. I would not use it because of the cost.

dted
Posts: 15
Joined: Mon Oct 03, 2016 7:40 am

Re: Allocation Help

Post by dted » Wed Nov 23, 2016 6:04 pm

Here is my current options within my 401k. There are a few cut off, but those are "lifecycle" funds and one stable value fund. The numbers along the right side are the fees.

Image

There are no direct fees with Brokeragelink. You can gain access to all Fidelity Funds with no transaction fee. Then there is another 5000 non-Fidelity funds in the "Funds Network," with an assortment of "no transaction fee" and "transaction fee" funds. Then of course those funds may have a load commission attached to them, depending on each fund. I've not researched whether there is a transaction fee for Vanguard funds.

I do my best to be diversified, but it's hard watching those international numbers keep going down, especially with the past performance not being so promising either.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Allocation Help

Post by retiredjg » Thu Nov 24, 2016 9:24 am

I don't think you need the brokerage link. You have good US stocks (500 index and extended market = total stock), you have a decent (if somewhat incomplete) international, and a good bond fund. You don't really need the small cap index or the value index or the Marathon stock, but they are probably not doing a lot of harm (other than complicating the portfolio) if you keep them long term.

A more complete international index could be held in the Roth IRA at Vanguard. The Vanguard Total International fund includes emerging markets. Your 401k plan international does not (although there is a new one available through the brokerage link - Fidelity Total International Index).

Regarding international, you are just being impatient. Every asset class does not perform well all the time. They all have ups and downs. See this chart for how MSCI EAFE and MSCI Emerg Mkts have done in the time shown on the chart. The international stock asset class will rise to the top again. When it does, you want to already have a position there, bought at low prices, in order to reap the benefit of the rise in value.

Or you could be not-so-smart and wait and buy in after the price has gone up. :happy

https://www.americancentury.com/content ... _Table.pdf

If you happen to believe, like some, that international stocks are simply not needed, that's a fine position. But don't make the mistake of not holding them now and buying them later when they are doing well - classic investor mistake.

pingo
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Re: Allocation Help

Post by pingo » Thu Nov 24, 2016 11:17 am

Edited.

I agree 100% with retiredjg.


Another important consideration: your Fidelity 401k probably has an Automatic Rebalancer tool where you can set up your desired allocations to have your portfolio automatically rebalanced each year. This becomes the equivalent of having a GREAT DIY target date retirement fund in your 401k.

If you set up the AutoRebalancer, you could then use a single Vanguard Target Retirement Fund in your Roth IRA for a hands-off portfolio. The Rebalancer will allow you to include mid/small caps and emerging markets in the 401k without increasing complexity of portfolio management.

I normally do not go along with the 90% stock allocation, but it you ignore the HSA and keep it in bonds and cash, I'll compromise. Here's a 90/10 portfolio 401k arrangement with 25-30% of stocks in foreign markets if you use the rebalancer:

55% Fidelity 500 Index Fund (FXAIX) 0.015%
15% Fidelity Extended Market Index Fund (FSEVX) 0.07%
20% Fidelity International Index Fund (FSPSX) 0.05%
05% DFA Emerging Markets Value (DFEVX) 0.66%
10% Vanguard Total Bond Market Index Fund (VBMPX) 0.04% <--Good catch, retiredjg!

Weighted ER = 0.07% for a complete, hands-free portfolio.


The rebalancer tool may be a little hard to find. When I helped my sister find it, we had to do the following:

1. Login at NetBenefits (401k.com)
2. Click on your 401k's "Quick Links".
3. Select "Change My Investments".
4. Select "Exchange MULTIPLE Investments".
5. Click "Start Your Rebalance".
6. Insert the desired percents for each fund under "Rebalance: Choose Your Allocation".
7. On the next page, select "Rebalance my account now, and sign me up for Automatic Rebalance, to reset my desired allocations: Annually".
8. Then click Next and choose your prospectus delivery option.

Fido's AutoRebalancer will probably direct your new contributions to reflect the fund allocations. If not, you'll have to go back and REPEAT 1-3 to go to "Change Investment Elections" to make your new contributions mirror your desired asset allocation.

Thoughts?
Last edited by pingo on Tue Nov 29, 2016 12:11 pm, edited 11 times in total.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Allocation Help

Post by retiredjg » Thu Nov 24, 2016 11:38 am

I think (not sure) that last entry in the image is a Vanguard Total Bond Market. I'd use that instead of stable value.

dted
Posts: 15
Joined: Mon Oct 03, 2016 7:40 am

Re: Allocation Help

Post by dted » Mon Nov 28, 2016 10:18 am

retiredjg wrote:Regarding international, you are just being impatient. Every asset class does not perform well all the time. They all have ups and downs. See this chart for how MSCI EAFE and MSCI Emerg Mkts have done in the time shown on the chart. The international stock asset class will rise to the top again. When it does, you want to already have a position there, bought at low prices, in order to reap the benefit of the rise in value.

Or you could be not-so-smart and wait and buy in after the price has gone up. :happy

https://www.americancentury.com/content ... _Table.pdf

If you happen to believe, like some, that international stocks are simply not needed, that's a fine position. But don't make the mistake of not holding them now and buying them later when they are doing well - classic investor mistake.
Thanks for sharing that chart, that was pretty cool to look at and see how everything has it's ups and downs!

I know I need to hold international stock, the majority can't be wrong when they say that a portion of your portfolio should be international.

pingo wrote:Edited.

I agree 100% with retiredjg.


Another important consideration: your Fidelity 401k probably has an Automatic Rebalancer tool where you can set up your desired allocations to have your portfolio automatically rebalanced each year. This becomes the equivalent of having a GREAT DIY target date retirement fund in your 401k.

If you set up the AutoRebalancer you could then use a single Vanguard Target Retirement Fund in your Roth IRA for a hands-off portfolio. The Rebalancer will allow you to include mid/small caps and emerging markets in the 401k without increasing complexity of portfolio management.

I normally do not go along with the 90% stock allocation, but it you ignore the HSA and keep it in bonds and cash, I'll compromise. Here's a 90/10 portfolio with 25-30% of stocks in foreign markets if you use the rebalancer:

55% Fidelity 500 Index Fund (FXAIX) 0.015%
15% Fidelity Extended Market Index Fund (FSEVX) .07
20% Fidelity International Index Fund (FSPSX) .05
05% DFA Emerging Markets Value (DFEVX) .66
10% Vanguard Total Bond Market Index Fund (VBMPX) .04 <--Good catch, retiredjg!

Weighted ER = 0.07% for a complete, hands-free portfolio.
I currently use that rebalancer tool, and yes, it's not easy to find! Forgive me, but what is "weighted ER"? Average fees?

Also, I could use a little help deciphering something in my Fidelity acount. In my "Balance Overview", it shows my balance, cost basis, and YTD returns. For my international fund, it's showing YTD returns as 7.77%. How is this possible when the fund is down and I paid more than the current market value? Here is how it shows it:

Name/Initial Purchase Date
FID INTL INDEX IPR (FSPSX) 02/05/2016

Balance - $16,911.75

Cost basis - $17,301.73

YTD - 7.77%

Returns as of - 11/25/2016

retiredjg
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Re: Allocation Help

Post by retiredjg » Mon Nov 28, 2016 2:40 pm

"Weighted" ER considers how much of each fund you have. "Average" would be just the average of all the ERs even if you had 3 times as much of one thing as another.

Not sure about the other. Perhaps the fund itself (not you) has a YTD of 7.7%, but has done less well during the time you have held it. Like maybe you bought it at a peak and it has not yet recovered? Just a guess.

dted
Posts: 15
Joined: Mon Oct 03, 2016 7:40 am

Re: Allocation Help

Post by dted » Mon Nov 28, 2016 3:47 pm

retiredjg wrote:"Weighted" ER considers how much of each fund you have. "Average" would be just the average of all the ERs even if you had 3 times as much of one thing as another.
Ahhh.. Expense ratio! Brain fart!
pingo wrote:Edited.
I normally do not go along with the 90% stock allocation, but it you ignore the HSA and keep it in bonds and cash, I'll compromise. Here's a 90/10 portfolio with 25-30% of stocks in foreign markets if you use the rebalancer:

55% Fidelity 500 Index Fund (FXAIX) 0.015%
15% Fidelity Extended Market Index Fund (FSEVX) 0.07%
20% Fidelity International Index Fund (FSPSX) 0.05%
05% DFA Emerging Markets Value (DFEVX) 0.66%
10% Vanguard Total Bond Market Index Fund (VBMPX) 0.04% <--Good catch, retiredjg!

Weighted ER = 0.07% for a complete, hands-free portfolio.
I like this portfolio setup.. I hadn't looked into the DFA fund before.

I'm assuming you hadn't added in my Roth IRA money into this setup, so here's a possible setup..

42% Vanguard Total Stock Market VTSAX
25% Fidelity Intl Index FSIVX
12% Fidelity 500 Index FXAIX
08% Vanguard Total Bond Market VBMPX
05% DFA Emerging Markets DFEVX
05% Fidelity Extended Market FSEVX
03% Marathon Petroleum MPC

I do like these investments, but it can get kind of confusing when adding in my Roth IRA and trying to figure out percentages between the IRA and my 401k. So once I get my emergency fund saved up and I ramp up my retirement savings, where should I invest the majority of my contributions? Is VTSAX better than my 401k setup, or vise versa? Obviously I will be sure I get my employer match either way. Are there any advantages to investing in a 401k vs. an IRA? The expenses are only slightly higher in the 401k investments..

pingo
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Joined: Sat Sep 19, 2009 8:24 pm

Re: Allocation Help

Post by pingo » Mon Nov 28, 2016 7:50 pm

dted wrote:I'm assuming you hadn't added in my Roth IRA money into this setup
I see that there was some ambiguity in my post:
pingo wrote:If you set up the AutoRebalancer, you could then use a single Vanguard Target Retirement Fund in your Roth IRA for a hands-off portfolio...Here's a 90/10 portfolio 401k arrangement with 25-30% of stocks in foreign markets if you use the rebalancer:
I had suggested you put the Roth in a target retirement fund so that once you setup the 401k account (with its weighted ER) as suggested, all accounts would be on auto-pilot ("hands-off portfolio").

Since the 401k Rebalancer would need you to input a percentage out of 100 for each fund, I reverted to looking at that account in isolation.
dted wrote:Is VTSAX better than my 401k setup, or vise versa?...Are there any advantages to investing in a 401k vs. an IRA? The expenses are only slightly higher in the 401k investments.
A 4:1 ratio of Fido 500:Extended Mkt is half the cost (weighted ER of 0.026%) vs. VTSAX ER 0.05% . Your 401k is also the only place you can get Vanguard Total Bond for ER 0.04% vs Vanguard Admiral Shares at ER 0.06%. The weighted ER of 0.14% for Fido International + DFA Emerging Mkts at market weight is close enough to Vanguard's Total International - Admiral ER 0.12%. (Market weight is 85:15 whereas I arranged the funds at an 80:20 relationship because the account looked cleaner to me that way.)
pingo wrote:I normally do not go along with the 90% stock allocation, but it you ignore the HSA and keep it in bonds and cash, I'll compromise. Here's a 90/10 portfolio with 25-30% of stocks in foreign markets if you use the rebalancer:

55% Fidelity 500 Index Fund (FXAIX) 0.015%
15% Fidelity Extended Market Index Fund (FSEVX) 0.07%
20% Fidelity International Index Fund (FSPSX) 0.05%
05% DFA Emerging Markets Value (DFEVX) 0.66%
10% Vanguard Total Bond Market Index Fund (VBMPX) 0.04% <--Good catch, retiredjg!

Weighted ER = 0.07% for a complete, hands-free portfolio.
dted wrote:I like this portfolio setup.. I hadn't looked into the DFA fund before.
DFA is an excellent firm that knows what it is doing. I would not hesitate to use their emerging markets value fund to further your exposure to foreign equities and to permit you to have a set-and-forget portfolio through the auto-rebalancing.
dted wrote:42% Vanguard Total Stock Market VTSAX
25% Fidelity Intl Index FSIVX
12% Fidelity 500 Index FXAIX
08% Vanguard Total Bond Market VBMPX
05% DFA Emerging Markets DFEVX
05% Fidelity Extended Market FSEVX
03% Marathon Petroleum MPC


I do like these investments, but it can get kind of confusing when adding in my Roth IRA and trying to figure out percentages between the IRA and my 401k.
You have zero need to coordinate between the Roth and 401k. We sometimes suggest that one's asset allocation is better achieved through "asset location" (across accounts) if it will: (1) simplify portfolio management while we balance the strongest and weakest accounts for a portfolio that is (2) complete and (3) cost-effective. However, your Roth is at Vanguard (with its automatically rebalanced Target/LifeStrategy funds) and your 401k has an Autorebalancer with excellent options. Neither is weaker than the other. This gives you the opportunity to meet all three goals more simply:

1. With the Roth and 401k on auto-pilot we achieve greater simplicity.
2. Both the 401k options and Vanguard's Target/LifeStrategy Funds achieve maximum diversification across stocks and bonds, independently.
3. Per my suggestion, you'd have a current 401k-Roth-HSA weighted ER of 0.12% which is slowly moving itself toward 0.07% because the greatest contribution potential over time lies in the 401k, which will eventually dominate the portfolio.
dted wrote:So once I get my emergency fund saved up and I ramp up my retirement savings, where should I invest the majority of my contributions? Obviously I will be sure I get my employer match either way.
Contribute to your employer sponsored retirement plan(s) to get the all possible matching contributions from your employer. Then, contribute to your Roth IRA up to the max. Then, begin increasing employer sponsored retirement plan savings until you can max those out each year as well. Once that happens, come back here for more help.
dted wrote:03% Marathon Petroleum MPC
I don't like the inclusion of Marathon Petroleum, but if you want it, set a cap at 2-3% of your 401k and reduce your Fido 500 by the same amount. Keep in mind that it reduces diversification and increases risk. If MPC is your employer, you can easily lose your job at the same time the stock is tanking because both problems may stem from the same issue.
Last edited by pingo on Thu Dec 01, 2016 1:57 pm, edited 3 times in total.

retiredjg
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Re: Allocation Help

Post by retiredjg » Tue Nov 29, 2016 9:26 am

I have not used it, but it seems like the rebalancing tool only deals with your 401k. I doubt you can add your Roth IRAs funds to it. If that is correct, running 2 separate mini-portfolios is the right approach if you want to use the rebalancing tool. Holding a Target Fund or a LifeStrategy fund in the Roth IRA is a good idea. You could hold separate funds in the Roth IRA, but you would have to rebalance them yourself.

If you are buying MPC in your 401k, it likely means you are working for Marathon. Be very cautious about holding your own company stock. It is not wise to have both your income and your retirement based on the same company. If it fails or has some bad years, you could lose your income and a sizable portion of your retirement savings at the same time. If you want to hold it, keep the percentage very low, certainly not more than 5%.

If you are getting part of your match in MPC, you obviously have to take it. Just don't keep a lot of it.

I have one very slight difference of opinion with pingo on where to put your money. Since your 401k is so good, you could put more in there than just enough to meet the match before filling your Roth IRA. I would make sure that at least half, maybe 2/3, of what you are saving for retirement is going to the 401k and definitely enough to get all the match. I just don't think you need to fill the Roth IRA before going back to put more in the 401k. That is the best approach when a person has a lousy 401k, but you don't have that problem.

pingo
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Re: Allocation Help

Post by pingo » Tue Nov 29, 2016 11:57 am

retiredjg wrote:I have one very slight difference of opinion with pingo on where to put your money. Since your 401k is so good, you could put more in there than just enough to meet the match before filling your Roth IRA. I would make sure that at least half, maybe 2/3, of what you are saving for retirement is going to the 401k and definitely enough to get all the match. I just don't think you need to fill the Roth IRA before going back to put more in the 401k. That is the best approach when a person has a lousy 401k, but you don't have that problem.
retiredjg's advice is more compelling and sensible, especially considering the need for a single person to reduce his/her current tax burden.

dted
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Re: Allocation Help

Post by dted » Tue Nov 29, 2016 12:54 pm

I had never even considered a target retirement fund at Vanguard. That makes things so much easier.

I do work for MPC so I understand it is risky investing with them and maybe not necessary, but I also see a lot of upside with them and I like how the company operates. I definitely will not allow it to get over 3% of my portfolio. There are people I work with that are 100% invested in MPC :shock:
pingo wrote:retiredjg's advice is more compelling and sensible, especially considering the need for a single person to reduce his/her current tax burden.

Speaking of.. I opened my Roth IRA while I was at my old job, and have continued to do Roth 401k contributions currently. When I came to my current job, my income doubled what I made at my old job. So as my income continues to rise, I'm questioning doing Roth contributions any longer. What income should you start doing traditional contributions?

pingo
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Re: Allocation Help

Post by pingo » Tue Nov 29, 2016 2:20 pm

Worry about whether to use a tax-deductible Traditional IRA once you're maxing your personal 401k contributions every year ($18,000/yr).

The 401k becomes more important now because every dollar you contribute reduces your taxable income and it's your taxable income that determines your tax bracket. You may or may not qualify to deduct any/all contributions to a traditional IRA (see here), but without more information it's a great idea to do as retiredjg suggests and it's probably not a terrible idea to stick with the Roth IRA rather than a Traditional. If you want the benefits of a Traditional IRA (greater tax deduction), just contribute more to the 401k rather than open another IRA.

You are 30 and single and are talking about your income having doubled, but you haven't indicated your federal and state tax brackets. I'm guessing that you're at least in the 25% federal bracket (see here) and it looks like you're probably taxed 3.75% by the State of Illinois (see here).
Last edited by pingo on Tue Nov 29, 2016 6:49 pm, edited 1 time in total.

retiredjg
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Re: Allocation Help

Post by retiredjg » Tue Nov 29, 2016 4:32 pm

You need to determine what your tax bracket is. Since you are single and your salary just doubled in a job with a 401k….I think it is unlikely (although possible) you are in one of the lower brackets (10% or 15%).

If you are in the 25% bracket or higher, I'd use traditional 401k (not Roth 401k) and Roth IRA.

We don't know how much you are saving. If you are saving $23,500 you can fill both. If you are saving less, put a lot in the 401k and some in the Roth IRA. That's just an opinion, what seems best to me.

I think 3% of your portfolio in MPC is fine. Encourage your friends to consider what happens if the company gets on rocky ground. Loss of income AND loss of retirement savings at the same time could be devastating and it is completely avoidable.

Have you been at your new job long enough to know your taxable income?

dted
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Re: Allocation Help

Post by dted » Wed Nov 30, 2016 4:50 am

Taxes are not my strong suit and I get lost when trying to figure out the whole tax planning thing haha

I've been here a year and a half, but I haven't worked a full tax year yet. I'm in the 25% tax bracket, with the possibility to be in the 28% bracket within a year or two. Hoping to save $15k/year minimum once I ramp up my savings, maybe $20k. Right now I'm only saving 7% + 7% employer match while I build my emergency fund.

retiredjg
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Re: Allocation Help

Post by retiredjg » Wed Nov 30, 2016 6:52 am

Then I would suggest traditional 401k and Roth IRA, mostly 401k to reduce your taxable income.

pingo
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Re: Allocation Help

Post by pingo » Wed Nov 30, 2016 11:54 am

^ That.
dted wrote:Taxes are not my strong suit and I get lost when trying to figure out the whole tax planning thing haha

I've been here a year and a half, but I haven't worked a full tax year yet. I'm in the 25% tax bracket, with the possibility to be in the 28% bracket within a year or two. Hoping to save $15k/year minimum once I ramp up my savings, maybe $20k. Right now I'm only saving 7% + 7% employer match while I build my emergency fund.
Just remember that your taxable income is not the same as your gross income. A down and dirty way to figure it out is to use the following table (appropriated from Bob's not my name):

$xx,xxx annual gross income
- $xx,xxx personal 401k contributions (without the match)
- $ x,xxx medical/dental plan
= $xx,xxx Adjusted Gross Income (AGI)
- $6,300 Standard Deduction if filing single, or whatever you can itemize if greater
- $4,050 for 1 personal exemption
= Taxable Income <--Use this figure to check your tax bracket here because you pay taxes on this money.

There always more to it, but that might give you a better idea.

dted
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Re: Allocation Help

Post by dted » Wed Nov 30, 2016 4:48 pm

pingo wrote: Just remember that your taxable income is not the same as your gross income. A down and dirty way to figure it out is to use the following table (appropriated from Bob's not my name):

$xx,xxx annual gross income
- $xx,xxx personal 401k contributions (without the match)
- $ x,xxx medical/dental plan
= $xx,xxx Adjusted Gross Income (AGI)
- $6,300 Standard Deduction if filing single, or whatever you can itemize if greater
- $4,050 for 1 personal exemption
= Taxable Income <--Use this figure to check your tax bracket here because you pay taxes on this money.

There always more to it, but that might give you a better idea.
Ahh okay.. I was just taking the standard deduction off my gross income (usually I take the standard deduction). I'll still be in the 25% bracket and possibly the 28% in time.

I think I'm all set guys! I like this setup, so much simpler

need403bhelp
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Re: Allocation Help

Post by need403bhelp » Tue Jun 06, 2017 9:49 am

pingo wrote:A 4:1 ratio of Fido 500:Extended Mkt is half the cost (weighted ER of 0.026%) vs. VTSAX ER 0.05% . Your 401k is also the only place you can get Vanguard Total Bond for ER 0.04% vs Vanguard Admiral Shares at ER 0.06%. The weighted ER of 0.14% for Fido International + DFA Emerging Mkts at market weight is close enough to Vanguard's Total International - Admiral ER 0.12%. (Market weight is 85:15 whereas I arranged the funds at an 80:20 relationship because the account looked cleaner to me that way.)
Sorry to hijack an old thread - but where do these market weights come from (e.g., 85:15 of Fido International + DFA Emerging Markets)?

For example, I tried to use the least squares method to reproduce the optimal combination of FSIVX & DFEVX to mimick VGTSX so that the "world regions" percent distribution is closest to that of VGTSX as reported by Morningstar's Instant X-Ray tool. The closest allocation seems to be 74% FSIVX & 26% DFEVX (my work at https://drive.google.com/open?id=0B4n_r ... TI0N0NuZVk).

If I instead focus on minimizing the stock style diversification, I get the best allocation is 80:20 rather than the 85:15 you reference above.

Am I missing something? Where do these market weights such as 85:15 come from?

Thank you so much!!!

retiredjg
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Re: Allocation Help

Post by retiredjg » Tue Jun 06, 2017 10:18 am

I don't know where the number came from, but I'd like to suggest it does not matter much. Anything in that neighborhood is a good choice.

It could be any number of things. For instance, some people might round up to the nearest 5 and some might round down. Also these relationships (market weight of developed to market weight of emerging) are like a moving target - they change from year to year. Another thing is that some index providers consider a country to be emerging while another index provider puts that same country into the developed category. When you start mixing the two, things get wonky - a country may be under or overweighted, but there is no way around it if those are the choices you have to work with. And there could be many things I have not thought of.

And for that matter, there is little difference in 74/26, 80/20 and 85/15.

The point is that investing is really quite imprecise and trying to make it precise will drive you nuts. You've quite likely learned a lot by pursuing the path you have shown us in your link. Pick a number you like and use it. :happy

need403bhelp
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Re: Allocation Help

Post by need403bhelp » Tue Jun 06, 2017 10:32 am

retiredjg wrote:I don't know where the number came from, but I'd like to suggest it does not matter much. Anything in that neighborhood is a good choice.

It could be any number of things. For instance, some people might round up to the nearest 5 and some might round down. Also these relationships (market weight of developed to market weight of emerging) are like a moving target - they change from year to year. Another thing is that some index providers consider a country to be emerging while another index provider puts that same country into the developed category. When you start mixing the two, things get wonky - a country may be under or overweighted, but there is no way around it if those are the choices you have to work with. And there could be many things I have not thought of.

And for that matter, there is little difference in 74/26, 80/20 and 85/15.

The point is that investing is really quite imprecise and trying to make it precise will drive you nuts. You've quite likely learned a lot by pursuing the path you have shown us in your link. Pick a number you like and use it. :happy
Ok, got it - thank you so much! I just wanted to make sure that I wasn't missing some kind of "big book of market weights" or something of that nature that describes the ideal markets...

In that case, I will just go with 74/26 or probably 75/25.

Thank you again!!! :D

pingo
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Re: Allocation Help

Post by pingo » Tue Jun 06, 2017 1:27 pm

Great questions. Kudos to you for taking a closer look.

Retiredjg is right. It is a fuzzy issue. I wanted to keep things simple and advise conservatively since it can be hard for anyone to hold Emerging Markets in a separate fund. They are * v O l a T i L e ! *

To put me somewhere in the ballpark, I checked Morningstar.com's breakdown of Vanguard Total International here.

Near the bottom of the page, under "Market Classification", it puts EM at between 15% and 17%, depending on whether you look at the Vanguard index fund or it's benchmark per Morningstar.com. I called it 85:15, applied the math to the portfolio and then rounded the resulting fund percent upward to 5% of the portfolio to make it look more presentable, but which resulted in a still-reasonable 80:20 relationship.

It's not perfect, but neither is investing. I have learned to embrace the imprecision. A 75:25 ratio can also reasonable.
Last edited by pingo on Wed Jun 07, 2017 1:14 pm, edited 2 times in total.

retiredjg
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Re: Allocation Help

Post by retiredjg » Tue Jun 06, 2017 3:44 pm

pingo wrote:Near the bottom of the page, under "Market Classification", it puts EM at between 15% and 17%, depending on whether you look at the Vanguard index fund or it's benchmark per Morninstar.com.
To further the point, there were times maybe 8 years ago that numbers of this type were at 75/25 and 77/23 for quite awhile. It changes over time. Not only might market weights change, but the international index used by a fund may change.

Close enough is good enough. Trying to get more precise than close enough just sucks the energy out of you with no real benefit.

need403bhelp
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Re: Allocation Help

Post by need403bhelp » Tue Jun 06, 2017 5:32 pm

pingo wrote:Great questions. Kudos to you for taking a closer look.

Retiredjg is right. It is a fuzzy issue. I wanted to keep things simple and advise conservatively since it can be hard for anyone to hold Emerging Markets in a separate fund. They are * v O l a T i L e ! *

To put me somewhere in the ballpark, I checked Morningstar.com's breakdown of Vanguard Total International here.

Near the bottom of the page, under "Market Classification", it puts EM at between 15% and 17%, depending on whether you look at the Vanguard index fund or it's benchmark per Morninstar.com. I called it 85:15, applied the math to the portfolio and then rounded the resulting fund percent upward to 5% of the portfolio to make it look more presentable, but which resulted in a still-reasonable 80:20 relationship.

It's not perfect, but neither is investing. I have learned to embrace the imprecision. A 75:25 ratio can also reasonable.
Thank you so much for sharing your thoughts, your reference, and your methodology. Thank you again!

need403bhelp
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Re: Allocation Help

Post by need403bhelp » Tue Jun 06, 2017 5:39 pm

retiredjg wrote:
pingo wrote:Near the bottom of the page, under "Market Classification", it puts EM at between 15% and 17%, depending on whether you look at the Vanguard index fund or it's benchmark per Morninstar.com.
To further the point, there were times maybe 8 years ago that numbers of this type were at 75/25 and 77/23 for quite awhile. It changes over time. Not only might market weights change, but the international index used by a fund may change.

Close enough is good enough. Trying to get more precise than close enough just sucks the energy out of you with no real benefit.
Got it, thank you so much!

For what it is worth, I think the reason my numbers are slightly different is that Vanguard uses slightly different definitions of developed markets than the Fidelity options in FSIVX.

The reason I say this is that the largest difference my 74% FSIVX + 26% DFEVX mix from VGTSX is the North America percent - my ratio has 0.83% whereas VGTSX is 7.64%. As FSIVX has 1.12% invested in North America and DFEVX has 0% invested in North America, there is actually NO ratio of the two that gets closer than 1.12% invested in North America (in the case of 100% FSIVX).

With that said, even if I change my least squares calculation to ignore differences in the North America allocation, I still get lowest sum of squared residuals with 74/26 split.

Thank you all again!

retiredjg
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Re: Allocation Help

Post by retiredjg » Tue Jun 06, 2017 6:30 pm

It's all about Canada.

The Fidelity fund follows an EAFE index - developed markets in Europe, Austrailasia, and Far East. An EAFE index is missing all of North America which includes Canada.

The Vanguard fund contains Canada because it does not use an EAFE index. It uses an index that includes Canada.

It's not a perfect fit. You just do the best you can.

There is a Wiki page on international funds if you care to learn more.

need403bhelp
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Re: Allocation Help

Post by need403bhelp » Tue Jun 06, 2017 6:47 pm

retiredjg wrote:It's all about Canada.

The Fidelity fund follows an EAFE index - developed markets in Europe, Austrailasia, and Far East. An EAFE index is missing all of North America which includes Canada.

The Vanguard fund contains Canada because it does not use an EAFE index. It uses an index that includes Canada.

It's not a perfect fit. You just do the best you can.

There is a Wiki page on international funds if you care to learn more.
Got it. That is what I thought but wasn't 100% sure.

I did look at the Wiki page on international funds, although it seemed to have mostly examples re the Thrift Savings Plan (https://www.bogleheads.org/wiki/Approxi ... ock_market).

Thank you again for your helpful comments!

retiredjg
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Re: Allocation Help

Post by retiredjg » Wed Jun 07, 2017 5:26 am

Sorry, I was thinking there was a Wiki with info about a lot of international funds, but it is only the Vanguard international funds. Nevertheless, you might find it interesting. Not sure the numbers in the tables are current.

https://www.bogleheads.org/wiki/Compare ... onal_funds

need403bhelp
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Re: Allocation Help

Post by need403bhelp » Wed Jun 07, 2017 8:53 am

retiredjg wrote:Sorry, I was thinking there was a Wiki with info about a lot of international funds, but it is only the Vanguard international funds. Nevertheless, you might find it interesting. Not sure the numbers in the tables are current.

https://www.bogleheads.org/wiki/Compare ... onal_funds
No worries, and thank you so much for the helpful reference!!!

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