401k question - shift to a three-fund portfolio?

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jwright19
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Joined: Sun Feb 07, 2016 11:06 am

401k question - shift to a three-fund portfolio?

Post by jwright19 » Tue Nov 14, 2017 1:31 pm

I'm in the process of rolling my previous employer 401k to my new employer plan, which has quite a few low cost, quality options. I decided to run an analysis with Blooom to see what they would recommend for my allocation, and below is what they selected:

Fund: // Recommended Allocation // Expense Ratio
(DFREX) DFA REAL ESTATE SEC PRTL INSTL 4% .19%
(DFSVX) DFA US SMALL CAP VAL CL INSTL 4% .52%
(VFWSX) VANGUARD FTSE ALL WORLD 36% .1%
(VMCIX) VANGUARD MID CAP INDEX FD 12% .05%
(VSGIX) VANGUARD SMALL CAP GRTH INSTL 4% .06%
(VITSX) VANGUARD TOTAL STOCK 40% .03%

My Roth IRAs (mine and my spouse) are 100% allocated in Total World Stock Index (VTWSX), and I'm looking to shift my 401k to 80/20 to be a little less aggressive. I'm 33 years old and hope to retire somewhere between 55-60. Up to this point, I have been 100% in equities for my retirement accounts.

My question - if I move to an 80/20, is there any reason why I shouldn't consider simplifying to a three-fund portfolio? I was considering:

Vanguard Total Stock (VITSX) - 60%
Vanguard FTSE All World (VFWSX) - 20%
Vanguard Total Bond MKT (VBTIX - .04% er) - 20%

Although all the expense ratios are reasonable in this case, this would certainly improve in that area, and I'm drawn to the simplicity. The biggest difference I see other than introducing the bonds is that Blooom's recommendation was playing heavier to the mid and small cap markets.

There aren't really any other funds in my 401k to consider (not interested in the Vanguard Target Date funds really) other than:
VANGUARD GROWTH INDEX FUND (FIGIX - .05% er)
VANGUARD VALUE INDEX FUND (VIVIX - .05% er)

I'd appreciate your insight!

mega317
Posts: 1120
Joined: Tue Apr 19, 2016 10:55 am

Re: 401k question - shift to a three-fund portfolio?

Post by mega317 » Tue Nov 14, 2017 2:15 pm

jwright19 wrote:
Tue Nov 14, 2017 1:31 pm
My question - if I move to an 80/20, is there any reason why I shouldn't consider simplifying to a three-fund portfolio?
These are independent decisions. I think 80/20 is a reasonable if slightly aggressive allocation at your age for your entire retirement portfolio. If you hold 80/20 in the 401k and 100/0 in the Roths, then you aren't really 80/20.

There is nothing wrong with tilting to some area you think might outperform the market such as small cap or real estate. I am not familiar with the research on this but I am skeptical that anyone can know what will outperform the market in the future. For that reason plus simplicity and expenses, I prefer the three fund portfolio.

jwright19
Posts: 6
Joined: Sun Feb 07, 2016 11:06 am

Re: 401k question - shift to a three-fund portfolio?

Post by jwright19 » Tue Nov 14, 2017 2:25 pm

Right - I should have clarified that sentence a little better; assuming I move to an 80/20 allocation in my 401k (with an understanding that this isnt truly an 80/20 allocation across all my retirement accounts), are there any thoughts on why I might not want to go with the three-fund I'm considering above?

Thanks!

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Duckie
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Re: 401k question - shift to a three-fund portfolio?

Post by Duckie » Tue Nov 14, 2017 7:38 pm

jwright19 wrote:assuming I move to an 80/20 allocation in my 401k (with an understanding that this isnt truly an 80/20 allocation across all my retirement accounts), are there any thoughts on why I might not want to go with the three-fund I'm considering above?
If you want an 80/20 AA in this specific account then those three funds are the best / simplest / cheapest options.

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ruralavalon
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Re: 401k question - shift to a three-fund portfolio?

Post by ruralavalon » Tue Nov 14, 2017 8:32 pm

In my opinion at age 33 a 20% allocation to bonds is within the range of what is reasonable.

It's often better to treat all accounts as one unified portfolio, rather than allocate each account separately. I encourage you to consider a 20% bond allocation across all accounts including the Roth IRAs.

In my opinion the three funds you list are very suitable for the creation of a three-fund type portfolio, I see no downside to using them in your 401k.

In my opinion the Blooom recommendation is unnecessarily complex. Also the extra funds they recommend are probably not very helpful, although the DFA real estate fund and the DFA Small-cap Value Fund might be useful at higher allocations.The mid-cap index fund just overlaps and duplicates what is in the total stock market index fund. I would not use a small-cap growth fund. Larry Swedroe, etf.com, "The 'Black hole of Investing' ".

The 20% bonds, 20% international stock, and 60% domestic stocks allocation is within the range of what is reasonable in my opinion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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