Please help me rationalise this 401k investment choice

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Topic Author
raixx017
Posts: 71
Joined: Wed Feb 28, 2018 5:41 pm

Please help me rationalise this 401k investment choice

Post by raixx017 »

Hello to all,

I've been following this forum for a few months now, and have learnt a lot.
Alas, with some knowledge comes plenty of doubts !

I was discussing the geenral Boggleheads philosophy and specifically the 3-fund portfolio with my colleague. I shared with him how that this has informed my selection of investment options in my current 401k plan. You can see the available options (the "stocks" section ) below:

Image

I picked VINIX (Vangaurd Inst Index) and DODGE & COX Intl Stock (DODFX) as a near replacment of Total market funds. (for Bonds, I picked STATE STREET US BOND INDX NL CCMCZ2 , with ER 0.05. Also, my target ratio is 90/10 ( with 60/40 between domestic and international stocks )

My colleague , although agreeing broadly on the "low expense ratio" idea, asked me why should one not pick other available options which are at least not giving -ve YTD and have comparable (or even better) performance since inception (with admittedly higher ER)? And why stick with the "Total market index" philosophy ?

I mumbled something, but could not give a convincing answer ("past performance doesn't guarantee future results", etc etc).

Does my colleague have a point? Should one be looking only at ER adjusted performance (current and past)? Am I not following the "simple 3-fund philosophy" correctly ? How can I convince him, and more importantly myself.

I look forward your words of wisdom.

Thanks !

edited: to include my current target asset allocation ratio.
Last edited by raixx017 on Sun May 20, 2018 8:45 pm, edited 1 time in total.
MJW
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Re: Please help me rationalise 401k investment choice

Post by MJW »

Why does your colleague's input carry weight for your investment choices? And why would you need to rationalize your choices to this person?

The funds you selected seem fine for what's available, having no other knowledge about your investing needs/goals. Were there other index funds available that were not shown on your screen shot? Dodge & Cox is probably a fine choice for an international fund, as is EuroPacfic Growth. I would choose either for my international allocation in a 401(k) where an index fund was not available. Another option might be to use an IRA to house your international holdings.

If you haven't already, read up on the information available on the Bogleheads.org site. That should answer your questions regarding your colleague's feedback.

I would concern myself less with what someone else thinks and more with learning as much as I can on my own and determining whether my choices are appropriate for my goals.
LeeMKE
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Re: Please help me rationalise this 401k investment choice

Post by LeeMKE »

Maybe I'm missing something from your 401K options.

Here's what I saw on your list:
There are some funds that seem to have better performance than the typical Boglehead Index fund, BUT once you calculate the added fees COMPOUNDED, the performance is below the Index funds. I looked at 5 year, 10 year and Since inception. Did I miss something?

I don't care if some other fund does better in the short term, because I wouldn't be lucky enough to hit it just right, for just the correct length of time to grab the rise and be out for the drop. That's was we call market timing. It just doesn't work. Even professionals can't get in and out at the right moments to scrap off the best performance.
The mightiest Oak is just a nut who stayed the course.
Topic Author
raixx017
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Re: Please help me rationalise 401k investment choice

Post by raixx017 »

Thanks for your replies ! My follow-on comments:
MJW wrote: Sun May 20, 2018 8:22 pm And why would you need to rationalize your choices to this person?
Mostly to be confident in my choice, backed by sound reasoning ( which at the time of discussion with my colleague, I was unable to provide)
MJW wrote: Sun May 20, 2018 8:22 pm Were there other index funds available that were not shown on your screen shot?
The rest were bonds ( updated my original post to reflect my choice there ), and T rowe price target retirement funds with the one matching my timeframe with ER ~0.75.
MJW wrote: Sun May 20, 2018 8:22 pm Another option might be to use an IRA to house your international holdings.
Thanks. That's a great idea !
venkman
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Re: Please help me rationalise this 401k investment choice

Post by venkman »

raixx017 wrote: Sun May 20, 2018 8:07 pm Does my colleague have a point? Should one be looking only at ER adjusted performance (current and past)? Am I not following the "simple 3-fund philosophy" correctly ? How can I convince him, and more importantly myself.
VINIX is a large-cap blend fund. The only fair comparison would be to another large-cap blend fund. I don't believe there were any other LCB funds on the list. The performance of the other funds should be compared to index funds in the same asset class.
Topic Author
raixx017
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Re: Please help me rationalise this 401k investment choice

Post by raixx017 »

Thanks for responding !
LeeMKE wrote: Sun May 20, 2018 8:35 pm There are some funds that seem to have better performance than the typical Boglehead Index fund, BUT once you calculate the added fees COMPOUNDED, the performance is below the Index funds. I looked at 5 year, 10 year and Since inception. Did I miss something?
So, let's take the example of MID-CAP GROWTH FUND RPMGX . From the "Since inspection" return of 13.86 and subtracting the net ER of .76 gives us 13.1%. This seems higher than VINIX. Is my calculation incorrect ? Or I'm not comparing similar fund classes ?
If latter, what can be the reasoning behind choosing total market VINIX here, over a mid-cap fund ?

Just to clarify, my questions stem from a need to learn and are not meant to reflect any argumentative tone :)

Thanks, again!
PFInterest
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Re: Please help me rationalise this 401k investment choice

Post by PFInterest »

raixx017 wrote: Sun May 20, 2018 9:02 pm Thanks for responding !
LeeMKE wrote: Sun May 20, 2018 8:35 pm There are some funds that seem to have better performance than the typical Boglehead Index fund, BUT once you calculate the added fees COMPOUNDED, the performance is below the Index funds. I looked at 5 year, 10 year and Since inception. Did I miss something?
So, let's take the example of MID-CAP GROWTH FUND RPMGX . From the "Since inspection" return of 13.86 and subtracting the net ER of .76 gives us 13.1%. This seems higher than VINIX. Is my calculation incorrect ? Or I'm not comparing similar fund classes ?
If latter, what can be the reasoning behind choosing total market VINIX here, over a mid-cap fund ?

Just to clarify, my questions stem from a need to learn and are not meant to reflect any argumentative tone :)

Thanks, again!
you need to compare like index to like. so a mid cap to an s&p 500 already is off base.
even then yes, the past is not the future.
comparing RPMGX to VMGRX shows that most of the out performance came in the past 2 years.
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badbreath
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Re: Please help me rationalise this 401k investment choice

Post by badbreath »

So, let's take the example of MID-CAP GROWTH FUND RPMGX . From the "Since inspection" return of 13.86 and subtracting the net ER of .76 gives us 13.1%. This seems higher than VINIX. Is my calculation incorrect ? Or I'm not comparing similar fund classes ?
If latter, what can be the reasoning behind choosing total market VINIX here, over a mid-cap fund ?

Just to clarify, my questions stem from a need to learn and are not meant to reflect any argumentative tone :)
VINIX tracks the S&P 500 which dose about the same as total stock market. Much better then just holding Mid Cap
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx
pkcrafter
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Re: Please help me rationalise this 401k investment choice

Post by pkcrafter »

You're doing fine. VINIX is the S&P500, which is fine for broad U.S. holdings. You have Dodge and Cox for international, and that's acceptable because the ER (expense ratio) isn't too high. Performance is listed after the expense ratio is deducted, but costs do matter a lot over time. In addition, past performance is a poor indicator of future performance, so how do we pick winning funds 10-15 years from now. We know tracking an index with very low cost index funds must do well. Winning active funds rotate in at out of the top quintiles.

You have some small cap options in your company plan but the expenses are high, so they are not too attractive. You should consider all accounts as one portfolio, invest in the company plan up to the match, then fund an IRA or Roth. You can use them to hold small/mid caps if you wish. Then, if you still have some to invest, go back to the 401k.
My colleague , although agreeing broadly on the "low expense ratio" idea, asked me why should one not pick other available options which are at least not giving -ve YTD and have comparable (or even better) performance since inception (with admittedly higher ER)? And why stick with the "Total market index" philosophy ?
Your colleague is suggesting chasing recent performance, and it's not a good strategy.
Does my colleague have a point?
No.
How can I convince him, and more importantly myself.
Don't even try to convince him. If he doesn't know the facts you won't get anywhere. If you are having doubts, then you need a little more understanding as well.

Here is the S&P SPIVA Report--Index vs Active. Look at the 3rd table for 10 and 15 year performance, then figure out how you might beat it by picking a group of active funds.

https://us.spindices.com/documents/spiv ... d-2017.pdf


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
johan851
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Re: Please help me rationalise this 401k investment choice

Post by johan851 »

My favorite way to put it is "do not confuse outcome with strategy".

The Bogleheads philosophy is a long-term strategy. It's also a pretty conservative one. At any given point it's never going to have been the best strategy - it'll only have been better than most. It's impossible to tell what'll outperform, but if you hold some of everything, you're guaranteed some exposure to whatever factor, sector, etc. does great.
LeeMKE
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Re: Please help me rationalise this 401k investment choice

Post by LeeMKE »

So, let's take the example of MID-CAP GROWTH FUND RPMGX . From the "Since inspection" return of 13.86 and subtracting the net ER of .76 gives us 13.1%. This seems higher than VINIX. Is my calculation incorrect ?
Yes, this calculation is incorrect.

Understand that you pay the fee every year. So, the expense is 24 times that of the index fund, each year. This expense reduces your principle each year, compounding the damage done every year in the future. This is one reason you can't get ahead with the managed funds.

And then, most folks hop from one fund to another, almost always after a drop, and before a rise. We are our own worst enemies, trying to outsmart a market that is too random to predict.

Finally, my guess is that the per-capita millionaires on the Bogleheads forum is way higher than any other place you can name. How close to Financial Independence is your buddy at work? Probably not too.
The mightiest Oak is just a nut who stayed the course.
krow36
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Re: Please help me rationalise this 401k investment choice

Post by krow36 »

One of the basic tenants of Boglehead thinking is to maximize diversification. Equity funds can be broken down into growth or value or a blend of the 2. Some years growth funds do better than value funds, some years it's the reverse. Rather than betting that growth funds will do better than value funds this year because that's what happened last year, Bogleheads will own a blend fund that covers both.

VINIX is an institutional class of Vanguard 500 Index fund. This fund is a blend of growth and value stocks, mostly large caps but it includes some mid-caps also. Over many years (10-15?) it has tracked very close to the Total Stock Mkt fund which is a blend that includes large, mid and small caps. That is, TSM covers the total US stock market, based on capitalization.

The Callan Periodic Table shows how variable the results of various categories of stock and bond funds can be.
https://www.callan.com/wp-content/uploa ... d_2018.pdf

When looking at rates of return, the "since inception" rate is almost always worthless because funds start at widely different times in the past. The YTD rate is not very useful either because you should only be interested in longer rates of return.
ks289
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Re: Please help me rationalise this 401k investment choice

Post by ks289 »

LeeMKE wrote: Sun May 20, 2018 8:35 pm Maybe I'm missing something from your 401K options.

Here's what I saw on your list:
There are some funds that seem to have better performance than the typical Boglehead Index fund, BUT once you calculate the added fees COMPOUNDED, the performance is below the Index funds. I looked at 5 year, 10 year and Since inception. Did I miss something?

I don't care if some other fund does better in the short term, because I wouldn't be lucky enough to hit it just right, for just the correct length of time to grab the rise and be out for the drop. That's was we call market timing. It just doesn't work. Even professionals can't get in and out at the right moments to scrap off the best performance.
The performance data are reported net of expenses so the fees have already been taken into account.

The issue as other posters mentioned is that the proper comparison for VINIX would be other large cap funds. Also, there are certainly funds that outperform index funds, but it is difficult to sustain over time with higher expenses.
Northern Flicker
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Re: Please help me rationalise this 401k investment choice

Post by Northern Flicker »

My colleague , although agreeing broadly on the "low expense ratio" idea, asked me why should one not pick other available options which are at least not giving negative YTD and have comparable (or even better) performance...
Because past performance is not very predictive of future performance.

I would suggest that you consider getting smallcap and midcap exposure with the fund DFA Targeted Value. It is designed to be paired with an S&P500 fund. It could be set to 20% of US equity as a starting point. Eg:

44% VINIX
11% DFFVX
35% DODFX
10% US bonds
Risk is not a guarantor of return.
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goingup
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Re: Please help me rationalise this 401k investment choice

Post by goingup »

ks289 wrote: Mon May 21, 2018 2:47 am
LeeMKE wrote: Sun May 20, 2018 8:35 pm Maybe I'm missing something from your 401K options.

Here's what I saw on your list:
There are some funds that seem to have better performance than the typical Boglehead Index fund, BUT once you calculate the added fees COMPOUNDED, the performance is below the Index funds. I looked at 5 year, 10 year and Since inception. Did I miss something?

I don't care if some other fund does better in the short term, because I wouldn't be lucky enough to hit it just right, for just the correct length of time to grab the rise and be out for the drop. That's was we call market timing. It just doesn't work. Even professionals can't get in and out at the right moments to scrap off the best performance.
The performance data are reported net of expenses so the fees have already been taken into account.
Correct. All performance data is net of fund expenses. No need to subtract out ERs.
uberme
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Re: Please help me rationalise this 401k investment choice

Post by uberme »

Do they have any target date funds available?
TropikThunder
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Re: Please help me rationalise 401k investment choice

Post by TropikThunder »

MJW wrote: Sun May 20, 2018 8:22 pm I would concern myself less with what someone else thinks and more with learning as much as I can on my own and determining whether my choices are appropriate for my goals.
If you can’t explain your choice to someone else, that means you yourself don’t understand why you’re making that choice.

At a minimum, OP, I would respond that YTD is way too short a timeline (<6 months), different sectors/styles have different periods of relative over/underperformance (see Callan Periodic Table of investments), and that you already have a full time job and prefer not to spend non-working hours trying to predict which of the 9 Morningstar styleboxes to chase next.
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dm200
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Re: Please help me rationalise this 401k investment choice

Post by dm200 »

The word "rationialise" (or "rationalize") - differences in American and British English.

My previous manager was English (immigrated to the US) and (initially until I learned the British meaning) was confused when he would say he was "rationalizing" something - meaning logically and correctly backing up his conclusions with the facts.

I was used to the more common US use/meaning of the word meaning illogically defending a decision with misuse or misinterpretating the facts.

"He rationalized continuing to smoke cigarettes because his body weight was stable."
magicrat
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Re: Please help me rationalise this 401k investment choice

Post by magicrat »

You are just taking what the market as a whole returns, less a very small fee. If anyone needs to "justify" their investment choices it is your colleague, who is deviating, not you.
Doctor Rhythm
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Re: Please help me rationalise this 401k investment choice

Post by Doctor Rhythm »

Ask your colleague, "Do you have special knowledge, experience, and wisdom others lack that lets you know which stocks or market sectors will outperform the market -- you know, because you're a financial genius?" If not, your best bet is to create a diverse portfolio that tracks the overall market and does so at minimal expense. The people who say "Yes, I am a genius!" run actively managed funds, and the vast majority of them fail to beat the market.

I would add that comparing returns "since inception" is pretty useless unless the funds had identical inception dates. Imagine a fund that opened in 2007 and took a 40% loss in the next two years before climbing back up. Now imagine an identical fund that opened in 2009 when the market had already tanked. Same portfolio, same strategy, same expenses - but markedly different "returns since inception."
aristotelian
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Re: Please help me rationalise this 401k investment choice

Post by aristotelian »

I would go with VINIX and hold international in a taxable account or Roth with lower expense ratio. If you wanted to hold a small amount of the DFA Targeted Value fund I would not object. Biggest issue is lack of a bond fund but maybe they just aren't showing from your screenshot.
MJW
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Re: Please help me rationalise 401k investment choice

Post by MJW »

TropikThunder wrote: Mon May 21, 2018 2:41 pm
MJW wrote: Sun May 20, 2018 8:22 pm I would concern myself less with what someone else thinks and more with learning as much as I can on my own and determining whether my choices are appropriate for my goals.
If you can’t explain your choice to someone else, that means you yourself don’t understand why you’re making that choice.
Right...I don't disagree, but the OP doesn't owe the colleague an explanation or a protracted argument. That the OP was not armed with a sound rebuttal to a faulty line of reasoning is indicative of the need to learn. The OP should be able to explain it for the reason you state, but also isn't obligated to. I guess I'm just thinking about it through my own personal bias that these types of discussions with friends, co-workers, etc. are usually fruitless.
epictetus
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Re: Please help me rationalise this 401k investment choice

Post by epictetus »

if you haven't done so i would suggest reading John Bogle's "Little book of common sense investing."
Focus on what you can control
Topic Author
raixx017
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Re: Please help me rationalise this 401k investment choice

Post by raixx017 »

Thanks to all for reading and replying to this thread !

I've learnt a few new things today.
And yes, I was more concerned with having confidence (or lack thereof) in the choices I make, rather than explaining it to someone. Your responses and link to resources have helped me with that.

A few quick points to cover questions that have been asked here:
1) Yes, there are bond funds. I describe in the original post ( I picked STATE STREET US BOND INDX NL CCMCZ2 , with ER 0.05)
2) My 401(k) does offer target retirement fund with a whooping 0.75% for my matching time-period. So, I gave it a pass.
3) I will read about SCV tilting more. Until I learn enough, going to stick with VINIX.
4) Choosing to invest in international stocks elsewhere is a great idea !
I already have VTIAX (admiral Total International stock) in my taxable account. Probably, best to use that. ( All of my other tax advantaged accounts: HSA/Roth IRA, are invested in Vanguard target retirement fund, at the moment . Later, when I have some more funds to invest, I'm planning on adding Bonds separately (to the tax advantaged account) to offset VTIAX and VTSAX in my taxable one).

Thanks to all !

Love and Respect !
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