401k Portfolio Allocation

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cachemoney
Posts: 53
Joined: Fri Jul 08, 2016 9:57 am

401k Portfolio Allocation

Post by cachemoney » Tue Jan 30, 2018 1:13 pm

Emergency funds: 3 months
Debt: Mortgage 2.75%
Tax Filing: Single
Tax Rate: Fed 13%, State 3%

Total portfolio ~200k
Age: 36
Yearly Max on 401k and Roth IRA

Through my Principal 401k account I have multiple Vanguard index funds available. I am unsure if I should use multiple funds of just keep Vanguard 500 Index and Total International Stock Index.

401k fund choices (bold are my current choices)
Fixed Income
LSBDX Loomis Sayles Bond Institutional Fund .66%
5.2% - PIMCO Total Return Instl Fund .46%
STHTX Virtus Seix High Income Institutional Fund .82%

Balanced/Asset Allocation
VFORX Vanguard Target Retirement 2040 Inv Fund .16%

Large US Equity
MEIKX Massachusetts Financial Svc Co MFS Value R6 Fund .49%
PLGIX T. Rowe Price/Brown Advisory LargeCap Growth I Inst Fund .62%
28.8% - VFIAX Vanguard 500 Index Admiral Fund .04%

Small/Mid US Equity

PCBIX Principal Global Investors MidCap Inst Fund .68%
6.1% - PIREX Principal Real Estate Securities Inst Fund .88%
1.7% - VIMAX Vanguard Mid-Cap Index Fund Admiral .06%
9.3% - VMGMX Vanguard Mid-Cap Growth Index Fund Admiral .07%
VMVAX Vanguard Mid-Cap Value Index Admiral Fund .07%
9.4% - VSGAX Vanguard Small-Cap Growth Index Fund Admiral .07%
1.7% - VSMAX Vanguard Small-Cap Index Fund Admiral .06%
VSIAX Vanguard Small Cap Value Index Admiral Fund .07%

International Equity
3.5% - RERGX American Funds EuroPacific Growth R6 Fund .50%
19% - VTIAX Vanguard Total International Stock Index Admiral Fund .11%


Other than 401k I have Vanguard IRAs with the following funds.
Roth:
5.5% Total Bond Index Adm
7.7% Total Stock Index Adm

Trad:
2.1% - Total Intl Bond Index

I setup my allocation across 401k, tIRA, rIRA to Personal Capital's suggestion for growth asset allocation. Although I am thinking I should move bonds out of Roth.

Which funds would you choose? I am 36 and want a good amount of growth for the next 25 years.
Thank you!
Last edited by cachemoney on Wed Jan 31, 2018 2:23 pm, edited 3 times in total.

TwstdSista
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Re: 401k Portfolio Allocation

Post by TwstdSista » Tue Jan 30, 2018 1:38 pm

Me? Given the ER on that bond fund, I'd be tempted to pick the Target date fund. Find the one with the bond allocation you want, and move the REIT allocation to your Roth, assuming that is a lower ER. That's what I'd do. (actually, I'd skip the REIT altogether)

pingo
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Re: 401k Portfolio Allocation

Post by pingo » Tue Jan 30, 2018 2:02 pm

For future reference, not everyone knows the tickers of those funds by heart, so it is important to give us fund names, too.

--Looks like you just beat me to the punch. Thanks for adding the names.

That said, I recognized most of them. Congratulations on having such nice 401k.

I prefer the simplest solution: put 100% of the money of each account (401k, RIRA and TIRA) into the same Vanguard Target Retirement Fund. If you choose the VG TR fund by the year you expect to retire, it will consist of an aggressive growth portfolio, relative to your age. That's not automatically a bad thing, if you have the tolerance and capacity for the risk, but most around here recommend that you determine the amount of stocks/bonds are appropriate for your situation, and then to pick the target retirement fund that is closest to that asset allocation.

The VG TR funds are complete and simple portfolios comprised of the following funds:

Vanguard Total U.S. Stock
Vanguard Total International Stock
Vanguard Total U.S. Bond
Vanguard Total International Bond
Vanguard Short-Term Inflation Protected Bond (once the fund begins to accumulate more than 40% bonds)

Don't worry about holding stocks in a Roth vs. bonds in Traditional IRA/401k until/unless you can consistently maximize savings in those accounts and must begin saving for retirement outside of them.

Others may come along to say you can get your costs lower by allocating to individual funds instead of a VG TR all-in-one portfolio, although we cannot determine that since you haven't included the percent each account represents in the portfolio (per the recommended format here). I'll simply say that they wouldn't be steering you wrong; however, the law of diminishing returns applies to the minuscule cost savings between the two approaches and I am of the opinion that at those levels the cost savings does not overcome the inconvenience.

Also, I'm a big fan of Vanguard's particular set of Target Retirement funds. 'Nuff said.

cachemoney
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Joined: Fri Jul 08, 2016 9:57 am

Re: 401k Portfolio Allocation

Post by cachemoney » Tue Jan 30, 2018 9:52 pm

I updated the first post. Let me know if I am missing anything else important.

I like the idea of replacing bond fund with Target fund and simplifying with Target funds.

pingo
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Re: 401k Portfolio Allocation

Post by pingo » Wed Jan 31, 2018 2:05 pm

Thanks for the update. Recommendations will probably remain the same, however I'm looking over things with a fine-tooth comb.

One question:
cachemoney wrote:
Tue Jan 30, 2018 1:13 pm
With the funds above my Personal Capital account is properly balanced to a growth asset allocation.
Are you saying that your RIRA and TIRA are at Personal Capital? Or, are there additional assets in non-IRAs at Personal Capital?

cachemoney
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Joined: Fri Jul 08, 2016 9:57 am

Re: 401k Portfolio Allocation

Post by cachemoney » Wed Jan 31, 2018 2:13 pm

IRAs are both in Vanguard accounts. I was referencing Personal Capital's investment suggestion. I updated the first below to be more clear.
cachemoney wrote:
Tue Jan 30, 2018 1:13 pm
I setup my allocation across 401k, tIRA, rIRA to Personal Capital's suggestion for growth asset allocation. Although I am thinking I should move bonds out of Roth.

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sergeant
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Re: 401k Portfolio Allocation

Post by sergeant » Wed Jan 31, 2018 2:42 pm

pingo wrote:
Tue Jan 30, 2018 2:02 pm
For future reference, not everyone knows the tickers of those funds by heart, so it is important to give us fund names, too.

--Looks like you just beat me to the punch. Thanks for adding the names.

That said, I recognized most of them. Congratulations on having such nice 401k.

I prefer the simplest solution: put 100% of the money of each account (401k, RIRA and TIRA) into the same Vanguard Target Retirement Fund. If you choose the VG TR fund by the year you expect to retire, it will consist of an aggressive growth portfolio, relative to your age. That's not automatically a bad thing, if you have the tolerance and capacity for the risk, but most around here recommend that you determine the amount of stocks/bonds are appropriate for your situation, and then to pick the target retirement fund that is closest to that asset allocation.

The VG TR funds are complete and simple portfolios comprised of the following funds:

Vanguard Total U.S. Stock
Vanguard Total International Stock
Vanguard Total U.S. Bond
Vanguard Total International Bond
Vanguard Short-Term Inflation Protected Bond (once the fund begins to accumulate more than 40% bonds)

Don't worry about holding stocks in a Roth vs. bonds in Traditional IRA/401k until/unless you can consistently maximize savings in those accounts and must begin saving for retirement outside of them.

Others may come along to say you can get your costs lower by allocating to individual funds instead of a VG TR all-in-one portfolio, although we cannot determine that since you haven't included the percent each account represents in the portfolio (per the recommended format here). I'll simply say that they wouldn't be steering you wrong; however, the law of diminishing returns applies to the minuscule cost savings between the two approaches and I am of the opinion that at those levels the cost savings does not overcome the inconvenience.

Also, I'm a big fan of Vanguard's particular set of Target Retirement funds. 'Nuff said.
+1. Simple!
Lincoln 3 EOW!

pingo
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Re: 401k Portfolio Allocation

Post by pingo » Wed Jan 31, 2018 8:02 pm

Let's talk about some things I see in the first post in this thread, as well as your current portfolio choices. Forgive my pointing out them out, but they serve as a launch pad for discussion:

1. You're young and you want growth. Understandable. Time is on your side and you're in the accumulation phase. There are different ways we utilize the word "growth" when investing, which will be explored in a couples ways.

2. Your portfolio is a growth portfolio because it has more stocks than bonds. Let's explore the concept of a "growth portfolio".

More stocks than bonds constitutes a "growth" portfolio because the highest expectation for the appreciation of capital lies in the stock market. (This is why you usually see the stated goal of "capital appreciation" in stock fund prospectuses.) A portfolio looking to preserve capital and live off of would be called an "income portfolio" and would be bond-heavy. Below you'll find a range of portfolios along the spectrum of growth vs. income:

Aggressive Growth Portfolio = 80% Stocks / 20% Bonds
Moderate Growth Portfolio = 60% Stocks / 40% Bonds (a.k.a. a classic growth portfolio)
Growth and Income Portfolio = 50% Stocks / 50% Bonds
Conservative Growth Portfolio = 40% Stocks / 60% Bonds
Income Portfolio = 0-40% Stocks / 60-100% Bonds

At roughly 90% Stocks / 10% Bonds, you're current portfolio is an extremely aggressive growth portfolio.
At age 35, the Vanguard Target Retirement 2040 Fund (VFORX) is also 90% Stocks / 10% Bonds for an extremely aggressive portfolio.

3. Within the portfolio, your funds are tilted to growth stocks. Growth stock mutual funds center around growth companies, i.e. companies that generally retain their earnings in order to put them back into expanding the company. However, that does not necessarily translate into higher returns. Growth companies are often the sexy companies that people hear in the news and it makes them want to invest in them, which can also translate into higher price-to-earnings multiples. Higher price-to-earnings multiples is another way of saying that the investor pays more money for less company. On the whole, growth stocks have been in style for several years, so they look even sexier right now. In finance, small cap growth stocks are seen as the black hole of investing, not that all small cap growth funds are equal.

The other side of the coin is "value". Less sexy companies that aren't as well known or that have fallen on hard times, but for which one can buy more of the company with fewer dollars. They also tend to pay out earnings in the form of dividends. A Nobel Peace Prize was awarded not long ago to one of the academics heavily invested in the concepts of size and value premiums over the long term. Growth stocks are fine and necessary, but no one is talking about "the growth stock premium".

Growth stocks have been outperforming recently. We want that growth in your portfolio. Will they always outperform value? No. Value will also outperform growth eventually, but no one knows when.

What to do? Own them all and keep them balanced. One should only tilt to size, value, growth or whatever if one is willing to accept complexity and after having carefully studied and considered the pros, cons and risks.

The individual funds included in the Vanguard Target Retirement portfolios (listed in an earlier post) are market neutral, but roughly comprised of half growth, half value (or as others might prefer, 1/3 growth, 1/3 core and 1/3 value). Problem solved in an efficient, complete and top-rated portfolio.

More on the way...
Last edited by pingo on Sat Feb 03, 2018 10:59 am, edited 1 time in total.

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

Re: 401k Portfolio Allocation

Post by pingo » Fri Feb 02, 2018 1:15 pm

An important question just occurred to me in terms of the future.

Do you have a reasonable expectation that eventually you may be able to invest for retirement beyond the maxing your IRA and personal 401k contributions?

cachemoney
Posts: 53
Joined: Fri Jul 08, 2016 9:57 am

Re: 401k Portfolio Allocation

Post by cachemoney » Fri Feb 02, 2018 7:29 pm

Thanks for the amount of info in that post! Also, I do plan on contributing to a taxable investment account.

pingo
Posts: 2594
Joined: Sat Sep 19, 2009 8:24 pm

Re: 401k Portfolio Allocation

Post by pingo » Sat Feb 03, 2018 10:51 am

That's important for planning purposes and leads me to my next question.

When looking at your 401k plan document, do you see any information about whether your employer also has a 401k After-Tax savings option? (It's not the same as a Roth 401k option.) It might also be called an elective savings account or some other name to refer to it, but it would be in your 401k plan doc.

We should know this before proceeding.

cachemoney
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Joined: Fri Jul 08, 2016 9:57 am

Re: 401k Portfolio Allocation

Post by cachemoney » Sat Feb 03, 2018 5:37 pm

I do not see anything about after-tax savings in the plan document.

cachemoney
Posts: 53
Joined: Fri Jul 08, 2016 9:57 am

Re: 401k Portfolio Allocation

Post by cachemoney » Thu Feb 08, 2018 10:44 am

So the plan doc and HR don't mention after-tax savings, but on the website contributions page I can enter amounts into Salary Deferral Contribution, Roth Elective Deferral, and Employee Nondeductible.

So my guess is that employee nondeductible is the after-tax savings. :oops:

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ruralavalon
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Location: Illinois

Re: 401k Portfolio Allocation

Post by ruralavalon » Thu Feb 08, 2018 11:29 am

cachemoney wrote:
Tue Jan 30, 2018 1:13 pm
Emergency funds: 3 months
Debt: Mortgage 2.75%
Tax Filing: Single
Tax Rate: Fed 13%, State 3%

Total portfolio ~200k
Age: 36
Yearly Max on 401k and Roth IRA

Through my Principal 401k account I have multiple Vanguard index funds available. I am unsure if I should use multiple funds of just keep Vanguard 500 Index and Total International Stock Index.

401k fund choices (bold are my current choices)
Fixed Income
LSBDX Loomis Sayles Bond Institutional Fund .66%
5.2% - PIMCO Total Return Instl Fund .46%
STHTX Virtus Seix High Income Institutional Fund .82%

Balanced/Asset Allocation
VFORX Vanguard Target Retirement 2040 Inv Fund .16%

Large US Equity
MEIKX Massachusetts Financial Svc Co MFS Value R6 Fund .49%
PLGIX T. Rowe Price/Brown Advisory LargeCap Growth I Inst Fund .62%
28.8% - VFIAX Vanguard 500 Index Admiral Fund .04%

Small/Mid US Equity

PCBIX Principal Global Investors MidCap Inst Fund .68%
6.1% - PIREX Principal Real Estate Securities Inst Fund .88%
1.7% - VIMAX Vanguard Mid-Cap Index Fund Admiral .06%
9.3% - VMGMX Vanguard Mid-Cap Growth Index Fund Admiral .07%
VMVAX Vanguard Mid-Cap Value Index Admiral Fund .07%
9.4% - VSGAX Vanguard Small-Cap Growth Index Fund Admiral .07%
1.7% - VSMAX Vanguard Small-Cap Index Fund Admiral .06%
VSIAX Vanguard Small Cap Value Index Admiral Fund .07%

International Equity
3.5% - RERGX American Funds EuroPacific Growth R6 Fund .50%
19% - VTIAX Vanguard Total International Stock Index Admiral Fund .11%


Other than 401k I have Vanguard IRAs with the following funds.
Roth:
5.5% Total Bond Index Adm
7.7% Total Stock Index Adm

Trad:
2.1% - Total Intl Bond Index

I setup my allocation across 401k, tIRA, rIRA to Personal Capital's suggestion for growth asset allocation. Although I am thinking I should move bonds out of Roth.

Which funds would you choose? I am 36 and want a good amount of growth for the next 25 years.
Thank you!
Asset allocation.
First you have to make at least a tentative decision on a desired asset allocation.

At age 36 I suggest around 20-25% in bonds. This is expected to significantly decrease portfolio volatility (risk) with a relatively small decrease in portfolio performance. Please see the wiki article "Asset allocation", and the wiki article "Boglehead's Investment Philosophy".

I suggest around 20-30% of stocks in international stocks. Historically 20% of stocks in international stocks would have captured about 85% of the maximum diversification benefit, and 30% of stocks in international stocks would have captured about 99% of the maximum diversification benefit. For a pdf of a Vanguard paper on the subject you could Google "Considerations for Investing in Non-U.S Equities", see pp. 5-6.

That works out to about 20% bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision which you must make based on your own ability, willingness and need to take risk.


Fund selection.
The simplest solution is to use the same target date fund in all accounts, using the target date fund nearest your desired asset allocation.

Otherwise I suggest a three-fund type portfolio. In selecting funds strive for a combination of broad diversification (to decrease risk) and low expense ratios (to increase net return). Using individual funds, rather than a target date fund, lets you choose the exact asset allocation you want, change the allocation in the way you want over the coming years, and be more tax-efficient when you start a taxable account.

In my opinion, in your 401k the funds to consider using are these:
Vanguard 500 Index Fund Admiral Shares (VFIAX) ER 0.04%;
Vanguard Small-cap Index Fund Admiral Shares (VSMAX) ER 0.06%;
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%; and
PIMCO Total Return Fund Institutional (PTTRX) ER 0.46%

I suggest not using the real estate fund, the expense ratio of 0.88% is too high to even consider in my opinion.

Because the S&P 500 and small-cap funds both include stocks of mid-cap companies, the mid-cap funds just duplicate and are unnecessary.

"Growth" funds historically have not done as well as either value or blend funds, in fact growth funds have done very poorly. For a good short article on this subject by Larry Swedroe at ETF.com you could Google "The 'Black Hole of Investing' ".



Domestic stocks.
I prefer a total stock market index fund if available. Otherwise a S&P 500 index fund is good enough for domestic stocks, it covers 81% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies. In the 25 years since the creation of the first total stock market index fund thereto types of fund have had almost identical performance. So there was little to gain by adding small-cap and more mid-cap to what is in the S&P 500 Fund.

If you want you can do 82/18 S&P 500/small-cap to mimic the holdings of a total stock market index fund. Please see the wiki article "Approximating Total Stock Market". In my opinion adding the small-cap fund is optional and is not necessary.


International stocks.
Vanguard Total Stock Market Index Fund Admiral Shares (VTIAX) ER 0.11% is very diversified investing in stocks of both larger and smaller companies in both developed and emerging markets, and has a very low expense ratio. I suggest using this fund.

American Funds EuroPacific Growth R6 (RERGX) ER 0.50% is a good actively managed fund, investing in larger companies in both developed and emerging markets, with a moderate expense ratio. But I always suggest using a good index fund instead of good actively managed fund.


Bonds.
PIMCO Total Return Fund Institutional (PTTRX) ER 0.46% is a good actively managed, intermediate-term, investment grade bond fund, with a moderate expense ratio. I wouldn't hesitate to use it in a 401k which lacks a good intermediate-term bond index fund.

I do not suggest using an international bond fund. That adds additional expense and complexity with no readily apparent benefit. There has been a lot of discussion here about this. You can find more than you probably want to know by using the Google search box (upper right, this page) to search for forum discussions on "international bonds".


Fund placement.
In a taxable account, if you later use one, it's better in general to use very tax-efficient stock index funds. Please see the wiki article "Tax-efficient Fund Placement". Examples include Vanguard Total Stock Market Index Fund and Vanguard Total International Stock Index Fund. Those funds are also suitable for any other type of account.

Bond funds are not very tax-efficient and in general should be placed in tax-advantaged account, preferably a tax-deferred account like a traditional 401k or traditional IRA.

Balanced funds, like target date funds, are also not very tax-efficient.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

cachemoney
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Joined: Fri Jul 08, 2016 9:57 am

Re: 401k Portfolio Allocation

Post by cachemoney » Fri Feb 09, 2018 10:10 am

OK, I just exchanged Total Intl Bond Index for Total Bond Index in my tIRA account. I was thinking about dumping the Intl Bonds for a few months anyways.

Thanks for the help so far. It's definitely got me thinking about simplifying the number of funds.

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