AA Review [Asset Allocation]

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bgreen7887
Posts: 6
Joined: Sat Sep 22, 2018 8:37 am

AA Review [Asset Allocation]

Post by bgreen7887 » Sat Sep 22, 2018 9:10 am

Hello bogleheads - I'm 31 years old and recently married. I wasn't the most financially conscience in my younger years and now I'm trying to play catch up. Savings wise I have 35k in Northfield bank online savings giving a whopping 2.25% return, I switched from CIT Money Market at 1.85%. From the 35K 20K of it is untouchable for our emergency fund and the rest (so far 15K) is for our home down payment. We budget 1000 a month to go toward savings. We're aggressively paying back student loans, credit cards, and car notes (it should take 15 months) so things are a little tight to say the least.

Now on to investing. My wife is a teacher and has a pension of about 18k no match. I plan on opening her a Vanguard brokerage account at end of year and putting 90% s&p 500 or total index fund and 10% on bonds so she can have some exposure to the market. Myself - I have about 9K in my 401k that I'm getting a 100% match up to 6%. I earn about 135K annually and right now I'm contributing 13%. Now I have the total long term mindset and I'm not worried about the minor blips - corrections - or even crashes. Here's my asset allocation:

Fund Name | % of Portfolio | Expense Ratio
  • Principal LargeCap S&P 500 Index Separate Account | 43.65 % | .05%
  • Principal SmallCap S&P 600 Index Separate Account | 47.08 % | .05%
  • Federated Institutional High Yield Bond R6 Fund | 5.23 % | .52%
  • Principal Real Estate Securities Inst Fund | 3.44 % | .87%
  • Hartford International Opportunities HLS IA Fund | .60 % | .73%
Generally SmallCap have been doing really well so I was big on it. Obviously I need exposure to LargeCap so I selected the S&P 500 w/ low ER. There are other (actively managed) Small & Large cap choices that are outperforming these but their ER is close to 1%. For instance there's another Small Cap PRJIX that's 25% YTD ER .65% while the S&P 600 (i'm invested in above) is at 15% YTD. In this case is it smarter to go for the much higher returns and accept the higher ER ? 0.05 vs .65 ... I really just wanted to get some stabilization so I recently start picking up some real estate and bonds. Am I being silly here? Should I just contribute to the S&P500 & S&P 600 50% a piece and never check them until i'm 40 lol? Thanks guys sorry for the book.

ExitStageLeft
Posts: 896
Joined: Sat Jan 20, 2018 4:02 pm

Re: AA Review [Asset Allocation]

Post by ExitStageLeft » Sat Sep 22, 2018 10:37 am

bgreen7887 wrote:
Sat Sep 22, 2018 9:10 am
Hello bogleheads - I'm 31 years old and recently married. I wasn't the most financially conscience in my younger years and now I'm trying to play catch up. Savings wise I have 35k in Northfield bank online savings giving a whopping 2.25% return, I switched from CIT Money Market at 1.85%. From the 35K 20K of it is untouchable for our emergency fund and the rest (so far 15K) is for our home down payment. We budget 1000 a month to go toward savings. We're aggressively paying back student loans, credit cards, and car notes (it should take 15 months) so things are a little tight to say the least.

Now on to investing. My wife is a teacher and has a pension of about 18k no match. I plan on opening her a Vanguard brokerage account at end of year and putting 90% s&p 500 or total index fund and 10% on bonds so she can have some exposure to the market. Myself - I have about 9K in my 401k that I'm getting a 100% match up to 6%. I earn about 135K annually and right now I'm contributing 13%. Now I have the total long term mindset and I'm not worried about the minor blips - corrections - or even crashes. Here's my asset allocation:

Fund Name | % of Portfolio | Expense Ratio
  • Principal LargeCap S&P 500 Index Separate Account | 43.65 % | .05%
  • Principal SmallCap S&P 600 Index Separate Account | 47.08 % | .05%
  • Federated Institutional High Yield Bond R6 Fund | 5.23 % | .52%
  • Principal Real Estate Securities Inst Fund | 3.44 % | .87%
  • Hartford International Opportunities HLS IA Fund | .60 % | .73%
Generally SmallCap have been doing really well so I was big on it. Obviously I need exposure to LargeCap so I selected the S&P 500 w/ low ER. There are other (actively managed) Small & Large cap choices that are outperforming these but their ER is close to 1%. For instance there's another Small Cap PRJIX that's 25% YTD ER .65% while the S&P 600 (i'm invested in above) is at 15% YTD. In this case is it smarter to go for the much higher returns and accept the higher ER ? 0.05 vs .65 ... I really just wanted to get some stabilization so I recently start picking up some real estate and bonds. Am I being silly here? Should I just contribute to the S&P500 & S&P 600 50% a piece and never check them until i'm 40 lol? Thanks guys sorry for the book.
Welcome to the forum! You both have a good plan to knock out that debt. Stick to it and soon you'll be free to invest even more for your future.

Keep in mind that at this early stage of your investing career, the greatest impact on the growth of your portfolio is your savings rate. Asset allocation will matter in the long term, but right now your focus should be on investing as much as you can. As you pay off the student loans and car loans, you'll be doing your future selves a huge favor by saving those funds instead of allowing your living expenses to go up through lifestyle creep.

Investing in a taxable account is inevitable once you have maxed out your tax-advantaged savings. That means saving in accordance with the wiki page on investment priority. But you haven't maxed out the tax-advantaged savings yet, as both you and your wife can each save $5,500 per year in individual retirement accounts (IRA). There are are two kinds, the traditional IRA and the Roth IRA. I would give some thought as to which is better for your individual situation, but at least one of you should have a Roth IRA.

One of the philosophies adopted by most Bogleheads are that none of us knows nothin', so there's no point in attempting to read the market. Instead, invest in total market indexed funds and you will be guaranteed to receive whatever it is the market is giving. In your case that means having the large cap and small cap funds in a ratio equivalent to their respective capitalization in the overall stock market. That's probably about 75% S&P500 and 25% S&P600.

With the higher fees in the other funds in your 401k I would drop those like a hot potato. Actively managed funds can sometimes outperform the indexed funds but over the long term the indexed funds will do better, and with the lower expenses you end up keeping more of those earnings. I would probably ditch everything in the 401k and just have the large and small cap indexed funds. You should open up IRAs for each of you, and start purchasing the remainder of your assets allocation in the IRAs. With an account at Vanguard, Fidelity, or Schwab you can get total market indexed funds with very low expenses.

Keep doing what you're doing. Read the wiki and the recommended reading. You and your wife should take some time to understand your mutual goals and write up an Investment Policy Statement that outlines how you'll achieve those goals. An IPS is useful to keep you focused on the long game and make it easier to disregard the noise and hype of those that want to separate you from your money.

bgreen7887
Posts: 6
Joined: Sat Sep 22, 2018 8:37 am

Re: AA Review [Asset Allocation]

Post by bgreen7887 » Sat Sep 22, 2018 12:23 pm

The first word that came to my mind reading your reply was WOW! I appreciate how personable, detailed and thorough you were and taking your time to give me guidance.

Note perfectly taken about the high ER's of the actively managed funds. I guess I hear so much about diversification I felt wrong only having S&P 500 and S&P 600 funds. When we get out of debt I'll be sure to max out the 401k to it's max and we'll both have ROTH IRA's by that time.

I did want to ask you another question. You said 75% on LargeCap and 25% on SmallCap. Is it OK to have 100% exposure to equities at the moment when valuations in the market seem so high? Again, I'm going to invest my 13% at the moment no matter what - with the match that comes out to around 1100 every two weeks. Folks seem to think they'll be a correction in the near future. Since I just started investing this will be the first chance I maybe get to buy some things at a "discount".

retiredjg
Posts: 33831
Joined: Thu Jan 10, 2008 12:56 pm

Re: AA Review [Asset Allocation]

Post by retiredjg » Sat Sep 22, 2018 12:48 pm

bgreen7887 wrote:
Sat Sep 22, 2018 9:10 am
Now on to investing. My wife is a teacher and has a pension of about 18k no match.
What does this mean? Is her pension currently worth about $18k? Does she put in $18k a year? Does the employer put in $18 k a year? Something else entirely?

I plan on opening her a Vanguard brokerage account at end of year and putting 90% s&p 500 or total index fund and 10% on bonds so she can have some exposure to the market.
Unless she is not eligible, a Roth IRA would probably be a better choice than a taxable account (which is what most people mean when they way a brokerage account).

Myself - I have about 9K in my 401k that I'm getting a 100% match up to 6%. I earn about 135K annually and right now I'm contributing 13%. Now I have the total long term mindset and I'm not worried about the minor blips - corrections - or even crashes. Here's my asset allocation:

Fund Name | % of Portfolio | Expense Ratio
  • Principal LargeCap S&P 500 Index Separate Account | 43.65 % | .05%
  • Principal SmallCap S&P 600 Index Separate Account | 47.08 % | .05%
  • Federated Institutional High Yield Bond R6 Fund | 5.23 % | .52%
  • Principal Real Estate Securities Inst Fund | 3.44 % | .87%
  • Hartford International Opportunities HLS IA Fund | .60 % | .73%
The Large Cap and Small Cap funds are very good choices. You probably have too much in the small cap fund though. The ratio of the two should be near 80/20 or 75/25 unless you are intentionally tilting to small cap value (an advanced investment choice, probably not appropriate for a beginner).

As for the bond fund, it sounds like it is a junk bond (low quality bond) fund. That is probably not your best choice. What other bond funds do you have to choose from?

You do not need a real estate fund that costs that much. In fact, you don't "need" one at all.

The international fund is pretty high cost. This is not uncommon inside a 401k type plan. International stocks are something you could look to put inside Roth IRAs after you start them. Then drop this high cost fund in the 401k.

The best predictor of investment success is cost, not performance. Like most new investors, you are paying too much attention to performance. Start paying more attention to costs.

bgreen7887
Posts: 6
Joined: Sat Sep 22, 2018 8:37 am

Re: AA Review [Asset Allocation]

Post by bgreen7887 » Mon Sep 24, 2018 1:01 pm

What does this mean? Is her pension currently worth about $18k? Does she put in $18k a year? Does the employer put in $18 k a year? Something else entirely?
Hi @retiredjg appreciate the reply. This means thus far she accumulated 18K lifetime over maybe 5 years. There is no employer match it's just a forced saving. (note taken about ROTH IRAs)

As for the bond fund, it sounds like it is a junk bond (low quality bond) fund. That is probably not your best choice. What other bond funds do you have to choose from?
You are right it mention that those are "junk bonds" ... I have this as the only other choice https://www.morningstar.com/funds/xnas/ptrqx/quote.html PTRQX ticker.

Here's what updated Asset Allocation would turn into:
  • 10% Bond Fund
  • 20% S&P 600 SmallCap
  • 70% S&P 500 LargeCap

retiredjg
Posts: 33831
Joined: Thu Jan 10, 2008 12:56 pm

Re: AA Review [Asset Allocation]

Post by retiredjg » Mon Sep 24, 2018 1:20 pm

That would probably be a better fond choice if the expense ratio of that fund inside your 401k is not too high. Remember you have to determine the ER in your plan. It may be different from what you find on the retail internet.

bgreen7887
Posts: 6
Joined: Sat Sep 22, 2018 8:37 am

Re: AA Review [Asset Allocation]

Post by bgreen7887 » Mon Sep 24, 2018 1:23 pm

.41% ER on the bond fund. In this situation can you inform me on your thought process.

Is there a certain threshold on the ER that would make you say "Ok too high and take your chances w/ all equities". Couldn't I do 100% equities until I turn 40 for instance? 80/20 split Large to Small?

Is the 10% significantly reducing my risk or not by so much?

retiredjg
Posts: 33831
Joined: Thu Jan 10, 2008 12:56 pm

Re: AA Review [Asset Allocation]

Post by retiredjg » Mon Sep 24, 2018 1:45 pm

There are some here who will say you don't need any bonds until you are older. I don't happen to be one of them and I suspect that most are youngsters who have never endured a "good" market downturn and who have no idea of what it is like.

In my opinion, a portfolio should have both stocks and bonds (or other fixed income investments), even for people who are young.

You absolutely should not change your desired stock to bond ratio based on cost. The stock to bond ratio is the first and most important portfolio decision you make. Cost comes after that and is frequently a matter of finding the best choice of what you have offered.

I would not think twice about using a .41% ER (or higher) bond fund if that is what I had available in my work plan and that was the best or only place I had to put bonds.

The 10% you are considering is not going to reduce your risk a great deal. That is why you should increase that number as time passes. I suggest you start with 20%, a number i consider a better minimum.

bgreen7887
Posts: 6
Joined: Sat Sep 22, 2018 8:37 am

Re: AA Review [Asset Allocation]

Post by bgreen7887 » Mon Sep 24, 2018 1:54 pm

Boy am I soaking all of this up!

The pickle that I'm in is since I didn't have crap saved for 20's I feel severely behind. I know it's arbitrary and not 1 size fits all but I read you should have 1 times your salary in investments by 30. 1.5 times by 35 and such. I would be able to save more but the focus is on the massive debt bc that definitely would cripple us in the future. I'm ok with it bc it's less than 2 years. I haven't been through a "good" decline - I felt the January decline which was good for me bc I started investing 9/2017 and man the end of last year was SWEET! I got used to it and Jan was a wake up call. I know that compared to like 2000 or 2008 wasn't even a hiccup. So I say I can handle it but I would prefer to lose as little as possible.

I'll run some simulations to compare the risk and decide on the % of bonds. Thank you so much.

ExitStageLeft
Posts: 896
Joined: Sat Jan 20, 2018 4:02 pm

Re: AA Review [Asset Allocation]

Post by ExitStageLeft » Mon Sep 24, 2018 1:57 pm

I would be reluctant to be 100% in equities, but there are plenty of folks who feel that is fine until one reaches age 40. If it is part of an investment strategy that you can stick with even when the market drops like in 2008 then you should invest how you and your wife are comfortable doing.

It seems neither of you can deduct a traditional IRA contribution because you both have retirement plans and your AGI is well above $120k. One option would be to open a rIRa for you or your wife and fill it with an indexed total bond fund like FSITX or VBTLX.

retiredjg
Posts: 33831
Joined: Thu Jan 10, 2008 12:56 pm

Re: AA Review [Asset Allocation]

Post by retiredjg » Mon Sep 24, 2018 2:13 pm

The chart near the bottom of this link might be useful. Some believe that stocks can easily drop 50% and that the chart is too conservative. In other words, 100% stocks could drop to 50% in value. 80% stock/20% bonds could drop 40% in value, etc.

https://www.bogleheads.org/wiki/Risk_tolerance

bgreen7887
Posts: 6
Joined: Sat Sep 22, 2018 8:37 am

Re: AA Review [Asset Allocation]

Post by bgreen7887 » Mon Sep 24, 2018 2:46 pm

Thank you for the Risk Tolerance link. I think I have came to my conclusion - I'll sleep on it before I make any adjustments.
  • 10% Bond Fund (PTRQX) | .41% ER
  • 22.5% S&P 600 SmallCap | .05 %ER
  • 67.5% S&P 500 LargeCap | .05 %ER
:P

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