401k advice needed. Which funds to choose?

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gnosis
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401k advice needed. Which funds to choose?

Post by gnosis » Sun Oct 26, 2008 3:40 pm

Here's our big picture (age, tax bracket, etc.): http://www.bogleheads.org/forum/viewtopic.php?t=21942

Here's the list of my wife's available funds that she can put in her 401k:

Fidelity's Freedom funds, the full variety

Fixed Income

Vanguard Admiral Treasury Money Market Portfolio
PIMCO Stable Value Fund
PIMCO Total Return Fund
Vanguard Total Bond Market Index Fund

Stock - (Growth/Income)

Vanguard Institutional Index (S&P 500)
Longleaf Partners Fund
LSV Value Equity Fund
Vanguard Mid Cap Index Fund
Vanguard Small Cap Index Fund
Vanguard REIT Index Fund

Stock - (Growth)

Fidelity Contrafund
Fidelity OTC Portfolio
Harbor Capital Appreciation Fund
Marsico Growth Fund
Royce Opportunity Fund

International - (Stock)

American New Perspective Fund
Fidelity Diversified International
Templeton Emerging Markets Fund
Vanguard Emerging Markets
Vanguard Total International Stock Index Fund


Her 401(k) portfolio:

15% Bonds
25% Large-Cap Stocks
32% Mid/Small-Cap Stocks
28% International Stocks
0% Individual Equities

Investments_________________Current Allocation_______Investment style
Vanguard Md-Cp Idx;Inst__________34%_______Mid/Sm-Cap Stk, Lg-Cap Stk
Vanguard Tot I Stk;Inv____________28%_______Intl Stk
Vanguard Instl Indx;InsP__________21%_______Lg-Cap Stk
Vanguard Total Bond Market In______8%_______Bonds
PIMCO Total Return Fund___________7%_______Bonds
American Funds New Perspectv______2%_______Intl Stk, Lg-Cap Stk

Her ROTH:

STAR fund


For simplicity's sake, should we move our American Funds New Perspective holdings into Int'l stocks into Vanguard's Total Int'l Index? What's 2% good for at this point anyway? Do you agree?

I'm trying to mirror Vanguard TR 2030+ in this 401k setup. I wish her 401k options included Vanguard's TR funds but they only offer Fidelity's Freedom funds which I'm just not interested in.

Do you consider the high investment in Vanguard Mid-Cap Index too risky?

It looks like Vanguard Institutional Index fund is very similar to Total Stock Index which is not offered in the 401k. If I want to have a domestic stock allocation most like Total Stock Index, should we change the setup to something like this:

Investments_________________Current Allocation_______Investment style
Vanguard Tot I Stk;Inv____________28%_______Intl Stk
Vanguard Instl Indx;InsP__________55%_______Lg-Cap Stk
Vanguard Total Bond Market In______8%_______Bonds
PIMCO Total Return Fund___________7%_______Bonds


I like the near 50/50 split between PIMCO and Vanguard's bond funds because from what I've read on these forums, they're quite different from one another. Would you do 50/50 too?

Would you consider investing in Fidelity's Contrafund? Your opinion on the fund in general? Your thoughts on any of the other funds listed?

Is 2.75% of total investments enough into Emerging Markets? I think I calculated that correctly... Total Int'l is 9.6% EM, and we're invested 28% of our total investments, so 9.6% of 28% is about 2.75%.

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PiperWarrior
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Post by PiperWarrior » Sun Oct 26, 2008 10:01 pm

If you would like to replicate Vanguard Target Retirement funds with 20% bonds, then you could do:

52% Vanguard Institutional Index (VINIX) (0.05%)
4% Vanguard Mid-Cap Index (VIMSX) (0.21%)
8% Vanguard Small-Cap Index (NAESX) (0.22%)
16% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
20% Vanguard Total Bond Market Index (VBMFX) (0.19%)

Total Stock Market is roughly:

81% Vanguard Institutional Index (VINIX) (0.05%)
6% Vanguard Mid-Cap Index (VIMSX) (0.21%)
13% Vanguard Small-Cap Index (NAESX) (0.22%)

See Approximating Total Stock Market for details. You might wonder why the allocation to the mid-cap fund is smaller than that to the small-cap fund. The reason is that S&P 500 contains some mid-cap stocks if you look at it from the MSCI perspective, which defines the 300 largest companies as large-cap and the next 450 largest companies as mid-cap. Obviously, 500 companies do not fit in 300 companies, so you get to underweight the mid-cap fund, which is not the same thing as underweighting mid-cap stocks.

If "he" has access to 401(k), then you might want to look at his 401(k) and her 401(k) together. If his 401(k) is mediocre, then you could pick the least bad fund in his 401(k) and complement it with her 401(k) and IRAs. If you are interested in doing so, then you might want to post the relative size of your accounts like so:

50% His 401(k)
40% Her 401(k)
10% Her Roth IRA
gnosis wrote:Do you consider the high investment in Vanguard Mid-Cap Index too risky?
It's certainly riskier than a bunch of established companies in S&P 500, but that doesn't mean that you will necessarily lose. Risky stocks tend to have a higher expected return. One approach to a portfolio construction is to tilt away from the "safe" stocks like S&P 500 while increasing high-quality bonds. This way, you can maintain a similar expected return while reducing volatility. At least, the history worked this way. Note that as you move away from the total market portfolio, the tracking error increases. That is, your portfolio behaves less and less like the total market. If your risky stocks underperform for a long time (say, 10 years), you may regret that you've taken the additional risk. This is called tracking error regret. These issues (tracking error, tracking error regret, size tilt, etc) are discussed in The Only Guide to a Winning Investment Strategy You'll Ever Need.
gnosis wrote:Would you consider investing in Fidelity's Contrafund? Your opinion on the fund in general?
I wouldn't pay 0.89% for a large-cap growth mutual fund. The research shows that small-cap stocks tend to outperform large-cap stocks and that value stocks tend to outperform growth stocks over the long term given sufficient diversification. In other words, large-cap growth is doing two things against higher expected return. I would at least avoid large-cap and growth tilt.
gnosis wrote:Your thoughts on any of the other funds listed?
Historically, the REIT fund has increased the risk adjusted return of a portfolio. I am not intimately familiar with other funds.
gnosis wrote:Is 2.75% of total investments enough into Emerging Markets? I think I calculated that correctly... Total Int'l is 9.6% EM, and we're invested 28% of our total investments, so 9.6% of 28% is about 2.75%.
I am afraid you looked at "9.6%" in Vanguard Total International Stock Index Fund (VGTSX).

These days a part of VGTSX hold stocks directly, not just through underlying funds. About 20% of the ex-US markets is EM, so you have a bit over 5% of her 401(k) in EM. Is that enough? Up to you. It's your portfolio. You can increase EM for its higher expected return if you wanted to, but that doesn't mean it's risk free.

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gnosis
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Post by gnosis » Tue Oct 28, 2008 6:24 pm

Her 401k = 92%
Her Roth = 8%

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gnosis
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Post by gnosis » Wed Nov 05, 2008 12:55 pm

PiperWarrior wrote:If you would like to replicate Vanguard Target Retirement funds with 20% bonds, then you could do:

52% Vanguard Institutional Index (VINIX) (0.05%)
4% Vanguard Mid-Cap Index (VIMSX) (0.21%)
8% Vanguard Small-Cap Index (NAESX) (0.22%)
16% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
20% Vanguard Total Bond Market Index (VBMFX) (0.19%)
Took your advice here and changed the equity portion as you suggested. I decided for the bonds portion to keep a blend of PIMCO Total Return and VBMFX for the reason I mentioned earlier. Much thanks

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gnosis
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Post by gnosis » Wed Nov 05, 2008 1:09 pm

PiperWarrior wrote:If you would like to replicate Vanguard Target Retirement funds with 20% bonds, then you could do:

52% Vanguard Institutional Index (VINIX) (0.05%)
4% Vanguard Mid-Cap Index (VIMSX) (0.21%)
8% Vanguard Small-Cap Index (NAESX) (0.22%)
16% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
20% Vanguard Total Bond Market Index (VBMFX) (0.19%)
Let's say the total investments are 80% into 401k and 20% in Roth. If I want to keep the same AA as quoted above, what would you put into the Roth?

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PiperWarrior
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Post by PiperWarrior » Wed Nov 05, 2008 8:04 pm

gnosis wrote:Let's say the total investments are 80% into 401k and 20% in Roth. If I want to keep the same AA as quoted above, what would you put into the Roth?
In that case, you might use Extended Market. Extended Market is the entire domestic stock market with S&P 500 removed. So

52% Vanguard Institutional Index (VINIX) (0.05%)
4% Vanguard Mid-Cap Index (VIMSX) (0.21%)
8% Vanguard Small-Cap Index (NAESX) (0.22%)
16% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
20% Vanguard Total Bond Market Index (VBMFX) (0.19%)

becomes something like:

52% Vanguard Institutional Index (VINIX) (0.05%)
12% Vanguard Extended Market Idx (VEXMX) (0.24%)
16% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
20% Vanguard Total Bond Market Index (VBMFX) (0.19%)

which you could split like:

Roth IRA
12% Vanguard Extended Market Idx (VEXMX) (0.24%)
8% Vanguard Total Intl Stock Index (VGTSX) (0.27%)

401(k)
52% Vanguard Institutional Index (VINIX) (0.05%)
8% Vanguard Total Intl Stock Index (VGTSX) (0.27%)
20% Vanguard Total Bond Market Index (VBMFX) (0.19%)

Easy Rhino
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Post by Easy Rhino » Thu Nov 06, 2008 3:24 am

This probably would have been better if appended to your original topic.

For instance, do you yet have, or soon plan to have, a taxable account for equities?

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gnosis
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Post by gnosis » Thu Nov 06, 2008 7:57 am

Easy Rhino wrote:This probably would have been better if appended to your original topic.

For instance, do you yet have, or soon plan to have, a taxable account for equities?
No, we have no plans in the near future to have a taxable account for equities. Just 401k and our Roths for the next few years.

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