Investment Allocation Help

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JB33
Posts: 5
Joined: Wed May 23, 2018 8:47 am

Investment Allocation Help

Post by JB33 » Wed May 23, 2018 9:16 am

I am age 44 and married with a young child.
I recently began looking more closely at my investments and planning for our future. I thought that I had done the right things in utilizing Prudential GoalMaker but after reading a bit on this forum I feel I may need to make some changes.

My employer matches 3.5% and I contribute 18%

19% - Large Cap Value / LSV Asset Management (ER .62)
19% - Large Cap Growth / Jennison Fund (ER .61)
13% - Small Cap Value / Ceredex Fund (ER .95)
13% - Small Cap Growth / Timesquare Fund (ER .90)
36% - Dodge & Cox International Stock (ER .64)

I have a pension through work.
I have money set aside in a Money Market with potential plans of using it to buy a larger home although I could invest it instead since my current home is almost paid off and the proceeding from it could be used for a down payment.
I have 6 months emergency fund in a savings account.
No Roth IRA or any other investments

There are currently 4 index funds through Prudential that I am considering since the ER is so much lower than what I currently have.

Dryden S&P 500 Index Fund (ER .04)
Northern Trust Extended Equity Market Index CIXF4 (ER .05)
Northern Trust ACWI ex-US IMI Index CIXF5 (ER .09)
Northern Trust Aggregate Bond Index CIXF2 (ER .04)

The last two index funds have a poor 10 year performance (they are both negative).

Could you please assist me with understanding any issues with my investment allocations? I am thinking a great deal should go to the S&P 500 Index fund. I am also thinking I should open a Roth IRA and my reading also points to opening an HSA however I am currently not in favor of this because I believe my use of the HSA would be more than most folks.

Thank you for any guidance you can provide!

alex_686
Posts: 3855
Joined: Mon Feb 09, 2015 2:39 pm

Re: Investment Allocation Help

Post by alex_686 » Wed May 23, 2018 10:43 am

First, I am not sure what Prudential GoalMaker is. Is it a taxable portfolio manager or is it a annuity? Bogleheads have a strong bias against most annuities.

Second, I would review the performance of the last 2 indexes. The underlying indexes have had positive returns. Are you considering the reinvestment of dividends back into the index? It is a different story if the investment is inside a annuity wrapper.

Now we come to the main point. Write up a Investment Policy Statement (IPS). See below for a link. What is critical is your goals, risk tolerance, and market expectations. This will dictated how much risk you can take on.
https://www.bogleheads.org/wiki/Investm ... _statement

I am getting hints that you are risk adverse. Partly from the lack of experience, partly from your large cash holdings. I have no idea how close you are to meeting your long term goals so it is hard to say if you should be more aggressive or less so, if you should save more or if you are on track.

You are heading in the right direction for those with a conservative asset allocation.

Your current mortgage can be treated as a negative bond, I am assuming that any cash savings has a lower interest rate your mortgage, so extra cash should be applied to your mortgage, not to cash. I am assuming you will be selling your current house to buy the new one.

Under most rational expectations a even better use of your funds would be to fund your Roth over paying down your mortgage. However this depends on how risk adverse you are.

FYI, risk aversion comes down to ability (net worth v. goals), willingness (psychological ability), and required return (return and savings required to meet your goals).

pkcrafter
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Re: Investment Allocation Help

Post by pkcrafter » Wed May 23, 2018 10:48 am

Dryden S&P 500 Index Fund (ER .04)
Northern Trust Extended Equity Market Index CIXF4 (ER .05)
Northern Trust ACWI ex-US IMI Index CIXF5 (ER .09)
Northern Trust Aggregate Bond Index CIXF2 (ER .04)
This is a far better portfolio than your current one.

I don't know what you want for a bond allocation, but 30-40% would be in the usual range for your age.
just looking at equities, I'd suggest between 15-35% for international. To approximate total stock market with the 500 and extended market use 80% 500 Index Fund and 20% extended market.

https://www.bogleheads.org/wiki/Approxi ... ock_market

I would also suggest you stop looking at current/short term performance. Settle on an allocation and ride it out, you have a long way to go.

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.

JB33
Posts: 5
Joined: Wed May 23, 2018 8:47 am

Re: Investment Allocation Help

Post by JB33 » Wed May 23, 2018 11:08 am

pkcrafter wrote:
Wed May 23, 2018 10:48 am
Dryden S&P 500 Index Fund (ER .04)
Northern Trust Extended Equity Market Index CIXF4 (ER .05)
Northern Trust ACWI ex-US IMI Index CIXF5 (ER .09)
Northern Trust Aggregate Bond Index CIXF2 (ER .04)
This is a far better portfolio than your current one.

I don't know what you want for a bond allocation, but 30-40% would be in the usual range for your age.
just looking at equities, I'd suggest between 15-35% for international. To approximate total stock market with the 500 and extended market use 80% 500 Index Fund and 20% extended market.

https://www.bogleheads.org/wiki/Approxi ... ock_market

I would also suggest you stop looking at current/short term performance. Settle on an allocation and ride it out, you have a long way to go.

Paul
Thank you for your reply. I am not certain what my bond allocation should be. I read a bit about the methods for calculating asset allocation for stocks earlier. One method was subtract your age from 100, so that would be 56% stocks. The other method (I believe is Warren Buffets method) is put 90% in S&P index fund and 10% in short-term governments. I think I tend to be more aggressive with my 401k at this point, mainly because it is not really where I would like it to be at although it's not terrible. With the little knowledge I have at this point it sounds like I want to follow Warren Buffets method although I don't know what is meant by short-term governments. Please forgive me for my ignorance here I am not yet knowledgeable enough to answer your questions the way you probably need me to.

cslovacek
Posts: 4
Joined: Tue May 22, 2018 2:30 pm

Re: Investment Allocation Help

Post by cslovacek » Wed May 23, 2018 11:13 am

Don't worry about Managed Vs Index funds in your option list.

Allocate 25% into the following 4 categories of mutual funds, selecting the funds with the strongest track record of returns.

-Growth (Mid-Cap Growth)
-Growth & Income (Large-Cap Blend)
-Aggressive Growth (Small-Cap Growth)
-International

That's all you need. Your current portfolio is fine, but it doesn't have to be broken down that much. Second, you do not needs bonds in your portfolio. I'll be in 100% equities for my entire life. You will come out ahead by doing so and it's very possible to average a 10-12% return following the above portfolio.

JB33
Posts: 5
Joined: Wed May 23, 2018 8:47 am

Re: Investment Allocation Help

Post by JB33 » Wed May 23, 2018 11:22 am

alex_686 wrote:
Wed May 23, 2018 10:43 am
First, I am not sure what Prudential GoalMaker is. Is it a taxable portfolio manager or is it a annuity? Bogleheads have a strong bias against most annuities.

Second, I would review the performance of the last 2 indexes. The underlying indexes have had positive returns. Are you considering the reinvestment of dividends back into the index? It is a different story if the investment is inside a annuity wrapper.

Now we come to the main point. Write up a Investment Policy Statement (IPS). See below for a link. What is critical is your goals, risk tolerance, and market expectations. This will dictated how much risk you can take on.
https://www.bogleheads.org/wiki/Investm ... _statement

I am getting hints that you are risk adverse. Partly from the lack of experience, partly from your large cash holdings. I have no idea how close you are to meeting your long term goals so it is hard to say if you should be more aggressive or less so, if you should save more or if you are on track.

You are heading in the right direction for those with a conservative asset allocation.

Your current mortgage can be treated as a negative bond, I am assuming that any cash savings has a lower interest rate your mortgage, so extra cash should be applied to your mortgage, not to cash. I am assuming you will be selling your current house to buy the new one.

Under most rational expectations a even better use of your funds would be to fund your Roth over paying down your mortgage. However this depends on how risk adverse you are.

FYI, risk aversion comes down to ability (net worth v. goals), willingness (psychological ability), and required return (return and savings required to meet your goals).
Hi alex_686. Thank you for your reply. Prudential Goalmaker is an asset allocation tool that is part of Prudential Retirement 401k I have through work. It looks at your Time Horizon (21) and your Risk Category (I prefer to be risky with my 401k at this point) to determine where to allocate your funds. I will try to take a look at the last 2 indexes to understand their performance better. I generally use the information provided in Prudential Retirement to understand the indexes performance. For these two indexes it shows that their 10 year performance is negative. I will also work on an ISP however at this point I may not have enough knowledge to complete it with confidence. My main goal is to grow my money in the 401k at this point so I lean toward an aggressive risk category. With that said the money I have outside my 401k for whatever reason I feel a little less risky with although I don't like having so much earning less than 2%.

alex_686
Posts: 3855
Joined: Mon Feb 09, 2015 2:39 pm

Re: Investment Allocation Help

Post by alex_686 » Wed May 23, 2018 11:23 am

JB33 wrote:
Wed May 23, 2018 11:08 am
One method was subtract your age from 100, so that would be 56% stocks. The other method (I believe is Warren Buffets method) is put 90% in S&P index fund and 10% in short-term governments. ...I want to follow Warren Buffets method although I don't know what is meant by short-term governments.
100 - age is a rule of thumb, so take it with a large grain of salt. Use it as a starting point, not a ending point. Also, SS and your pension are bond-like assets so they should be considered bonds in this calculation.

Warren Buffet's statement is another rule of thumb, so take it with a large grain of salt. Buffet also has a very high capacity and willingness to take risks. Short term governments is any government bond with a maturity of less than 3 years.

A better place to start, in my opinion, is a Target Date fund. Vanguard, Blackrock, etc - does not matter much. The allocation is based on your retirement date, is generic, and is conservative. Once again, use this as a starting point. If you go down this route pick the allocation that suits you, don't just blindly pick the one with the right year.

alex_686
Posts: 3855
Joined: Mon Feb 09, 2015 2:39 pm

Re: Investment Allocation Help

Post by alex_686 » Wed May 23, 2018 11:36 am

JB33 wrote:
Wed May 23, 2018 11:22 am
Hi alex_686. Thank you for your reply. Prudential Goalmaker is an asset allocation tool that is part of Prudential Retirement 401k I have through work. It looks at your Time Horizon (21) and your Risk Category (I prefer to be risky with my 401k at this point) to determine where to allocate your funds. I will try to take a look at the last 2 indexes to understand their performance better. I generally use the information provided in Prudential Retirement to understand the indexes performance. For these two indexes it shows that their 10 year performance is negative. I will also work on an ISP however at this point I may not have enough knowledge to complete it with confidence. My main goal is to grow my money in the 401k at this point so I lean toward an aggressive risk category. With that said the money I have outside my 401k for whatever reason I feel a little less risky with although I don't like having so much earning less than 2%.
Some minor pints here.

Try to track down the performance of the actual indexes. i.e., got to MSCI's web site to look up IMI's performance. Most 401k providers give you your personal rate of return. Depending on when you re-balanced, contributed, etc. you could have very different returns. Plus past performance is a weak indication of future performance.

So, growing your money to be less aggressive is technically not a goal. Step back just a bit. I desire X dollars for retirement is a goal. Y dollars for my child's education. Z dollars to buy that sports car, vacation, boat, etc. Risk tolerance is that I I need at least 50% of X for retirement, I can only stand to lose 20% in a single year, etc.

After you have done that you can get a better idea of how much risk you need to take to meet your goals.

And feel free to post your IPS here. We will be happy to review and make suggestions. IPS are always evolving things because we are ever evolving creatures.

Fallible
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Re: Investment Allocation Help

Post by Fallible » Wed May 23, 2018 11:50 am

alex_686 wrote:
Wed May 23, 2018 11:23 am
JB33 wrote:
Wed May 23, 2018 11:08 am
One method was subtract your age from 100, so that would be 56% stocks. The other method (I believe is Warren Buffets method) is put 90% in S&P index fund and 10% in short-term governments. ...I want to follow Warren Buffets method although I don't know what is meant by short-term governments.
100 - age is a rule of thumb, so take it with a large grain of salt. Use it as a starting point, not a ending point. Also, SS and your pension are bond-like assets so they should be considered bonds in this calculation.

Warren Buffet's statement is another rule of thumb, so take it with a large grain of salt. Buffet also has a very high capacity and willingness to take risks. Short term governments is any government bond with a maturity of less than 3 years.

A better place to start, in my opinion, is a Target Date fund. Vanguard, Blackrock, etc - does not matter much. The allocation is based on your retirement date, is generic, and is conservative. Once again, use this as a starting point. If you go down this route pick the allocation that suits you, don't just blindly pick the one with the right year.


I agree the OP should consider a target date fund and an allocation that is right for him, i.e., for his need, ability, and willingness to take risk. The latter refers to personal risk tolerance and takes up the question of how much money he can afford to lose in a market crash. Here are the wiki pages on asset allocation (with links to need, ability, and willingness blogs by Larry Swedroe), and risk tolerance:

https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Risk_tolerance
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

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