401k AA - no Total Market Fund option

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
srmach05
Posts: 36
Joined: Tue Jan 10, 2017 10:40 am

401k AA - no Total Market Fund option

Post by srmach05 »

Hi all, currently my wife's (32yo) 401k - managed by Voya - is sitting in a T Rowe Price Retirement target date fund -- ER .76%.

Having realized that the ER is higher then we'd prefer, I'm trying to construct lower-cost investment portfolio - targeting 80/20 using a 3 fund portfolio. The vast majority of the funds her employer's plan offers are relatively high fees, but they do offer a few Vanguard funds (symbols listed below) - including Total Bond Market and Total International Stock. The only sticking point is they do not offer a Total Market Fund, but only what appears to be an S&P Index Fund (it isn't called an S&P fund, but website states it "seeks to track the performance of the Standard & Poor’s 500 Index") and something called an Extended Market Index Fund.

Vanguard's website describes the Extended Market Index Fund (VEXMX) as "The fund is considered a complement to Vanguard 500 Index Fund. Together they provide exposure to the entire U.S. equity market."

Should I be investing in both of these funds to capture the whole market - if so any allocation recommendations?


Thanks in advance!


Vanguard funds available (share class may be inaccurate, pulling fund name word-for-word off of print-out. When in doubt I assumed Investor share class):

Vanguard Total Bond Mkt Index Fund -- VBMFX
Vanguard Inst Index Fund -- VINIX
Vanguard Ext Market Index -- VEXMX
Vanguard Tot Intl Stk Fund -- VGTSX
retiredjg
Posts: 42768
Joined: Thu Jan 10, 2008 12:56 pm

Re: 401k AA - no Total Market Fund option

Post by retiredjg »

Yes, combining the 500 Index and the Extended Market Index (about 80:20) gives you something very much like the total stock market. The 500 index stocks are the large cap stocks and the Extended Market is everything else.

Looks like a good plan and you'll probably lower your costs significantly.
User avatar
badbreath
Posts: 987
Joined: Mon Jul 18, 2016 7:50 pm

Re: 401k AA - no Total Market Fund option

Post by badbreath »

Vanguard Total Bond Mkt Index Fund -- VBMFX
Vanguard Inst Index Fund -- VINIX
Vanguard Ext Market Index -- VEXMX
Vanguard Tot Intl Stk Fund -- VGTSX
Thats funny the funds you posted is exactly what I have in my 401k
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx
CFR
Posts: 72
Joined: Sun Jan 22, 2017 1:35 pm

Re: 401k AA - no Total Market Fund option

Post by CFR »

srmach05 wrote:Hi all, currently my wife's (32yo) 401k - managed by Voya - is sitting in a T Rowe Price Retirement target date fund -- ER .76%.

Having realized that the ER is higher then we'd prefer, I'm trying to construct lower-cost investment portfolio - targeting 80/20 using a 3 fund portfolio. The vast majority of the funds her employer's plan offers are relatively high fees, but they do offer a few Vanguard funds (symbols listed below) - including Total Bond Market and Total International Stock. The only sticking point is they do not offer a Total Market Fund, but only what appears to be an S&P Index Fund (it isn't called an S&P fund, but website states it "seeks to track the performance of the Standard & Poor’s 500 Index") and something called an Extended Market Index Fund.

Vanguard's website describes the Extended Market Index Fund (VEXMX) as "The fund is considered a complement to Vanguard 500 Index Fund. Together they provide exposure to the entire U.S. equity market."

Should I be investing in both of these funds to capture the whole market - if so any allocation recommendations?


Thanks in advance!


Vanguard funds available (share class may be inaccurate, pulling fund name word-for-word off of print-out. When in doubt I assumed Investor share class):

Vanguard Total Bond Mkt Index Fund -- VBMFX
Vanguard Inst Index Fund -- VINIX
Vanguard Ext Market Index -- VEXMX
Vanguard Tot Intl Stk Fund -- VGTSX
Using a system of equations y=Hx and solving for X while minimizing the error....

VINIX has a style box of:
28 31 28
05 05 03
00 00 00


VEXMX has style box of:
00 01 03
12 13 21
16 18 17


Using matrix math and least mean squares fit I came up with:
VINIX 82.8%
VEXMX 17.2%

Morningstar shows that combo as:
23 25 24
06 06 06
03 03 03


I myself had about 5 funds in my 401k, so I did the same matrix / least mean squares math to create my own mix. I have been working on a tutorial on how to do this, but am not certain anybody would be interested. The same method can be used to create a tilted mix any way you want.

Hope this helps!
C.
Topic Author
srmach05
Posts: 36
Joined: Tue Jan 10, 2017 10:40 am

Re: 401k AA - no Total Market Fund option

Post by srmach05 »

Awesome, this is all really helpful. Thanks!
Spirit Rider
Posts: 13912
Joined: Fri Mar 02, 2007 2:39 pm

Re: 401k AA - no Total Market Fund option

Post by Spirit Rider »

CFR wrote:Using a system of equations y=Hx and solving for X while minimizing the error....

VINIX has a style box of:
28 31 28
05 05 03
00 00 00


VEXMX has style box of:
00 01 03
12 13 21
16 18 17


Using matrix math and least mean squares fit I came up with:
VINIX 82.8%
VEXMX 17.2%

Morningstar shows that combo as:
23 25 24
06 06 06
03 03 03


I myself had about 5 funds in my 401k, so I did the same matrix / least mean squares math to create my own mix. I have been working on a tutorial on how to do this, but am not certain anybody would be interested. The same method can be used to create a tilted mix any way you want.
I see two basic problems with trying reduce this down to a mathematical equation:
  1. You are assuming style boxes are accurate enough representations of the distributions.
  2. A matrix LMS fit places equal weight to market capitalization and growth/value. Most people would not equally weight them in their asset allocation.
I much prefer the ratio identified by retiredjg, besides it is far easier to calculate.
lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: 401k AA - no Total Market Fund option

Post by lack_ey »

Spirit Rider wrote:I see two basic problems with trying reduce this down to a mathematical equation:
  1. You are assuming style boxes are accurate enough representations of the distributions.
  2. A matrix LMS fit places equal weight to market capitalization and growth/value. Most people would not equally weight them in their asset allocation.
I much prefer the ratio identified by retiredjg, besides it is far easier to calculate.
For what it's worth, 80:20 is also actually closer if you do the calculation that makes more sense here IMHO: weight by relative market capitalization directly.

Index data:
http://us.spindices.com/indices/equity/sp-500/
http://us.spindices.com/indices/equity/ ... -index-ci/

As of January 31, S&P 500 total market cap $20,601,213.53 million, completion index total market cap $5,130,303.11. Calculate based on that ratio (okay, you can also update to a more recent estimate by noting the returns since January are roughly 4.1% and 2.8% respectively). So that turns out to be something like 80.3% to 19.7%.
CFR
Posts: 72
Joined: Sun Jan 22, 2017 1:35 pm

Re: 401k AA - no Total Market Fund option

Post by CFR »

Spirit Rider wrote:
CFR wrote:Using a system of equations y=Hx and solving for X while minimizing the error....

VINIX has a style box of:
28 31 28
05 05 03
00 00 00


VEXMX has style box of:
00 01 03
12 13 21
16 18 17


Using matrix math and least mean squares fit I came up with:
VINIX 82.8%
VEXMX 17.2%

Morningstar shows that combo as:
23 25 24
06 06 06
03 03 03


I myself had about 5 funds in my 401k, so I did the same matrix / least mean squares math to create my own mix. I have been working on a tutorial on how to do this, but am not certain anybody would be interested. The same method can be used to create a tilted mix any way you want.
I see two basic problems with trying reduce this down to a mathematical equation:
  1. You are assuming style boxes are accurate enough representations of the distributions.
  2. A matrix LMS fit places equal weight to market capitalization and growth/value. Most people would not equally weight them in their asset allocation.
I much prefer the ratio identified by retiredjg, besides it is far easier to calculate.
Not certain what you mean by equal weighting. Solving for LMS over the entire matrix yields the least amount of error over the desired outcome. You certainly can decide to weight one box over another if you wish and the math exists for that too. Sure the math is simple with two if you do trial and error, but what if you have three? My math is solid and accurate. As far as the style boxes accuracy, if Morningstar did not round the box that would be best but they don't. That cannot be controlled.

So I will use my example of five funds. I do not actually have vanguard funds, but the equivalent indexes. Yes it is probably overkill but I used it so here it is.

1. S&P 500 VOO
2. Russell 1K Growth VONG
3. Russell 1k Value VONV
4. S&P 400 Midcap IVOO
5. Russell 2k VTWO

You can look on Morningstar Instant Xray for each set of style boxes. The first two are:

S&P500
28 31 28
05 05 03
00 00 00


Russell 1k Growth
06 28 46
03 07 10
00 00 01


And so on....(need a third at least with some small cap stocks which the Russell 2k will have)

I want a VTI equivalent which the style box would be:
VTI
23 25 24
06 06 06
03 03 03


Solving for LMS, I calculate the following ratios:

VOO 25.2%
VONG 33.2%
VONV 31.5%
IVOO 2.2%
VTWO 7.9%

Comparing this portfolio to VTI. Please see below and tell me where this method is inaccurate, flawed, etc. becuase I think it turned out pretty dang close.

Approximating Portfolio

Image



VTI

Image


Regards,
C.
CFR
Posts: 72
Joined: Sun Jan 22, 2017 1:35 pm

Re: 401k AA - no Total Market Fund option

Post by CFR »

Also, to the original poster, here is the comparison of what I suggest versus the 80/20 split others have suggested. Obviously you can make your own determination. Compare with VTI. I contend my is superior and math is solid. Your mileage may vary. :D.

C.

My split

Image


80/20 split

Image
retiredjg
Posts: 42768
Joined: Thu Jan 10, 2008 12:56 pm

Re: 401k AA - no Total Market Fund option

Post by retiredjg »

Huh? Are we really discussing the difference between "about 80:20" and 82.6:17.4? Does anyone really believe there is a meaningful difference between those two?
CFR
Posts: 72
Joined: Sun Jan 22, 2017 1:35 pm

Re: 401k AA - no Total Market Fund option

Post by CFR »

retiredjg wrote:Huh? Are we really discussing the difference between "about 80:20" and 82.6:17.4? Does anyone really believe there is a meaningful difference between those two?
Yes, why not? In a group that tries to shave 10 basis points off of ER, some may want that ratio as good as possible. :shock:
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: 401k AA - no Total Market Fund option

Post by PFInterest »

You can also listen to buffet and do just s&p...
retiredjg
Posts: 42768
Joined: Thu Jan 10, 2008 12:56 pm

Re: 401k AA - no Total Market Fund option

Post by retiredjg »

CFR wrote:
retiredjg wrote:Huh? Are we really discussing the difference between "about 80:20" and 82.6:17.4? Does anyone really believe there is a meaningful difference between those two?
Yes, why not? In a group that tries to shave 10 basis points off of ER, some may want that ratio as good as possible. :shock:
Why not? Because no matter what you buy, the ratio is going to change every second that the market is open. In practical terms, the ratios are essentially the same. There is no significant difference.

I know the ratio to get the same morningstar 9 style box is not exactly 80/20. But 80/20 is easy to do and close enough to get the job done well. To try to get more accurate than that is dancing on the head of a pin.
peppers
Posts: 1481
Joined: Tue Oct 25, 2011 7:05 pm

Re: 401k AA - no Total Market Fund option

Post by peppers »

I have to believe that if an individual is at 80/20 or 78/22 or 82/18 then they are close enough. Horseshoes and hand grenades and all that.
"..the cavalry ain't comin' kid, you're on your own..."
tanstaafl
Posts: 57
Joined: Fri Feb 19, 2016 8:25 pm

Re: 401k AA - no Total Market Fund option

Post by tanstaafl »

I think the disagreement may be over interpretation of OP's question. Yes, 80/20 would be easier to track, but I appreciate CFR's detailed reply (and as a "math person", I have similar least-squares methods of maintaining my AA, so I'm sympathetic to the approach). I'll just echo earlier sentiment that your 401k has some terrific options, and don't dismiss too easily the suggestion to just use the 500 index for simplicity.
CFR
Posts: 72
Joined: Sun Jan 22, 2017 1:35 pm

Re: 401k AA - no Total Market Fund option

Post by CFR »

retiredjg wrote:
CFR wrote:
retiredjg wrote:Huh? Are we really discussing the difference between "about 80:20" and 82.6:17.4? Does anyone really believe there is a meaningful difference between those two?
Yes, why not? In a group that tries to shave 10 basis points off of ER, some may want that ratio as good as possible. :shock:
Why not? Because no matter what you buy, the ratio is going to change every second that the market is open. In practical terms, the ratios are essentially the same. There is no significant difference.
I suspect the changes are quite insignificant if at all. In fact I would guess those funds will very closely track VTI for a very long time. In any case, anybody is free to do whatever they want with their portfolios right? I added my two cents, worth as much as anybody else's two cents.
Post Reply