A 4-fund portfolio with limited fund options

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ScienceCat
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A 4-fund portfolio with limited fund options

Post by ScienceCat »

Hi everyone. I am currently working to set my asset allocation for my 457 (non-Roth). I would like to go for a 3 or 4 fund portfolio described here:

four fund: https://www.bogleheads.org/wiki/Vanguar ... _portfolio
three fund: https://www.bogleheads.org/wiki/Three-fund_portfolio

My issue is that my provider (savingsplus) does not give me access to total market index funds, etc. all it gives me access to are the following:
https://www.savingsplusnow.com/rsc-web- ... g-expenses. At one point they wanted to eliminate all index funds except the Large caps, and there is a risk that they will eventually do it.

Any advice of which funds to stick to?
000
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Re: A 4-fund portfolio with limited fund options

Post by 000 »

You can use the large, mid, and small index funds in an appropriate ratio to get total market.

Approximating total stock market
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ScienceCat
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you! That is what I thought. What happens if they get rid of the small and mid cap index funds? Is it better to go with their small and mid-cap funds (non-index), which have much higher expense ratios? Or would it be better to just stick to the Large-cap index fund (the one they plan to keep).

Fund Management Fees Expense Reimbursement Total Operating Expenses
Small Cap Fund 0.34% 0.05% 0.39%
Small Cap Index Fund 0.02% 0.05% 0.07%

Mid Cap Fund 0.36% 0.05% 0.41%
Mid Cap Index Fund 0.03% 0.05% 0.08%

Large Cap Fund 0.23% 0.05% 0.28%
Large Cap Index Fund 0.01% 0.05% 0.06%
000
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Re: A 4-fund portfolio with limited fund options

Post by 000 »

Assuming a reasonably large international allocation I would just do the large cap index if they dump the mid and small index funds.

But if you're talking about putting more than 70% of stocks in the US large cap index, I might take a second look at those funds. The ERs are pretty good for active management, but that doesn't necessarily mean they're good funds.
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ruralavalon
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Re: A 4-fund portfolio with limited fund options

Post by ruralavalon »

ScienceCat wrote: Thu Jan 06, 2022 12:41 am Hi everyone. I am currently working to set my asset allocation for my 457 (non-Roth). I would like to go for a 3 or 4 fund portfolio described here:

four fund: https://www.bogleheads.org/wiki/Vanguar ... _portfolio
three fund: https://www.bogleheads.org/wiki/Three-fund_portfolio

My issue is that my provider (savingsplus) does not give me access to total market index funds, etc. all it gives me access to are the following:
https://www.savingsplusnow.com/rsc-web- ... g-expenses. At one point they wanted to eliminate all index funds except the Large caps, and there is a risk that they will eventually do it.

Any advice of which funds to stick to?
ScienceCat wrote: Thu Jan 06, 2022 12:54 am Thank you! That is what I thought. What happens if they get rid of the small and mid cap index funds? Is it better to go with their small and mid-cap funds (non-index), which have much higher expense ratios? Or would it be better to just stick to the Large-cap index fund (the one they plan to keep).

Fund Management Fees Expense Reimbursement Total Operating Expenses
Small Cap Fund 0.34% 0.05% 0.39%
Small Cap Index Fund 0.02% 0.05% 0.07%

Mid Cap Fund 0.36% 0.05% 0.41%
Mid Cap Index Fund 0.03% 0.05% 0.08%

Large Cap Fund 0.23% 0.05% 0.28%
Large Cap Index Fund 0.01% 0.05% 0.06%
According to the fact sheet the Large Cap Index Fund tracks the S&P 500 Index.

In my opinion a S&P 500 index fund is good enough by itself for investing in U.S. stocks. That covers over 80% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies.

In the 29 years since the creation of the first total stock market index fund the two types of funds have had almost identical performance. Portfolio Visualizer, 1993-2021.

I would not bother with adding a mid-cap or small-cap fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
wetgear
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Re: A 4-fund portfolio with limited fund options

Post by wetgear »

ScienceCat wrote: Thu Jan 06, 2022 12:41 am Hi everyone. I am currently working to set my asset allocation for my 457 (non-Roth). I would like to go for a 3 or 4 fund portfolio described here:

four fund: https://www.bogleheads.org/wiki/Vanguar ... _portfolio
three fund: https://www.bogleheads.org/wiki/Three-fund_portfolio

My issue is that my provider (savingsplus) does not give me access to total market index funds, etc. all it gives me access to are the following:
https://www.savingsplusnow.com/rsc-web- ... g-expenses. At one point they wanted to eliminate all index funds except the Large caps, and there is a risk that they will eventually do it.

Any advice of which funds to stick to?
Don't forget that in 3 and 4 fund portfolios the key word is portfolio and you don't need to hold each fund in each account. You can pick up what's missing in your other accounts just so long as the total allocations for the entire portfolio are what you are targeting.
LeeAtlantica2020
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Re: A 4-fund portfolio with limited fund options

Post by LeeAtlantica2020 »

Yes, +1 to above poster -- so to take it further, if you've got a taxable brokerage account somewhere that has a ton of equity-based funds in it (like an S&P index tracker or total stock market fund), and you need bond exposure, load up on the bond funds in the 457 until you meet your target AA. Your AA strategy should encompass your total market investments across all accounts, tax-advantaged and otherwise.
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ruralavalon
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Re: A 4-fund portfolio with limited fund options

Post by ruralavalon »

According to the fact sheet the International Index Fund tracks the MSCI ACWI Ex-US Investable markets index. So it is a total international stock index fund.

According to the fact sheet the Bond Index Fund tracks the Bloomberg Barclays U.S.Aggregate Bond Index. So it is a total bond market index fund.

Your employer's plan offers everything you need for a three-fund portfolio.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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ScienceCat
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you everyone for the wonderful and insightful responses!

Some followup questions and comments:

1. Don't forget that in 3 and 4 fund portfolios the key word is portfolio and you don't need to hold each fund in each account. You can pick up what's missing in your other accounts just so long as the total allocations for the entire portfolio are what you are targeting.
This makes sense, but the assets in the taxable accounts would not have the tax benefits of the tax accounts. Would that not be problematic? Would not the capital gains taxes etc be a major hit against the account? Would buying a bunch of tax-free municipal bonds be a good strategy for a taxable account?
According to the fact sheet the International Index Fund tracks the MSCI ACWI Ex-US Investable markets index. So it is a total international stock index fund.

According to the fact sheet the Bond Index Fund tracks the Bloomberg Barclays U.S.Aggregate Bond Index. So it is a total bond market index fund.

Your employer's plan offers everything you need for a three-fund portfolio.
This is true, but these are managed funds with huge ratios (am I wrong in that assessment?). Would that be problematic? Any experience to share?
nolesrule
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Re: A 4-fund portfolio with limited fund options

Post by nolesrule »

ScienceCat wrote: Fri Jan 07, 2022 2:26 am Thank you everyone for the wonderful and insightful responses!

Some followup questions and comments:

1. Don't forget that in 3 and 4 fund portfolios the key word is portfolio and you don't need to hold each fund in each account. You can pick up what's missing in your other accounts just so long as the total allocations for the entire portfolio are what you are targeting.
This makes sense, but the assets in the taxable accounts would not have the tax benefits of the tax accounts. Would that not be problematic? Would not the capital gains taxes etc be a major hit against the account? Would buying a bunch of tax-free municipal bonds be a good strategy for a taxable account?

What about an IRA?
UpperNwGuy
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Re: A 4-fund portfolio with limited fund options

Post by UpperNwGuy »

ScienceCat wrote: Fri Jan 07, 2022 2:26 am This makes sense, but the assets in the taxable accounts would not have the tax benefits of the tax accounts. Would that not be problematic? Would not the capital gains taxes etc be a major hit against the account? Would buying a bunch of tax-free municipal bonds be a good strategy for a taxable account?
I think you might be in danger of letting the tax tail wag the dog. Taxes are likely not going to be a "major hit."

Don't buy municipals unless you are in the higher tax brackets.
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galawdawg
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Re: A 4-fund portfolio with limited fund options

Post by galawdawg »

Here are more details on each fund in your plan options: https://www.savingsplusnow.com/rsc-web- ... nt-options

As noted upthread, the Large Cap Index Fund available to you tracks the S&P 500. Most folks here hold the opinion that an S&P500 index is an outstanding option for investing in US equities. In fact, since the inception of Vanguard's total stock index fund, their S&P500 index has very slightly outperformed the total stock index fund (average annual returns of 10.62% for S&P500 Index vs 10.62% for Total Stock Index Fund). You can see the results in Portfolio Visualizer: https://www.portfoliovisualizer.com/bac ... ion2_2=100

I'd recommend you keep it simple and stick with a three fund portfolio which, in the plan options link above, would be the Large Cap Index Fund, the International Index Fund and the Bond Index Fund in whatever allocation you desire. Done!
exodusNH
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Re: A 4-fund portfolio with limited fund options

Post by exodusNH »

ScienceCat wrote: Fri Jan 07, 2022 2:26 am Thank you everyone for the wonderful and insightful responses!

Some followup questions and comments:

1. Don't forget that in 3 and 4 fund portfolios the key word is portfolio and you don't need to hold each fund in each account. You can pick up what's missing in your other accounts just so long as the total allocations for the entire portfolio are what you are targeting.
This makes sense, but the assets in the taxable accounts would not have the tax benefits of the tax accounts. Would that not be problematic? Would not the capital gains taxes etc be a major hit against the account? Would buying a bunch of tax-free municipal bonds be a good strategy for a taxable account?
According to the fact sheet the International Index Fund tracks the MSCI ACWI Ex-US Investable markets index. So it is a total international stock index fund.

According to the fact sheet the Bond Index Fund tracks the Bloomberg Barclays U.S.Aggregate Bond Index. So it is a total bond market index fund.

Your employer's plan offers everything you need for a three-fund portfolio.
This is true, but these are managed funds with huge ratios (am I wrong in that assessment?). Would that be problematic? Any experience to share?
It sounds like you're overestimating the tax impact of most passively-managed stock funds. Even taxable bond funds aren't a big problem right now because they're not paying out much more than FDIC-insured saving accounts were paying 3 years ago.

The Bogleheads wiki has an article of tax-efficient fund placement. It's worth a read.

In any event, you currently have those options. If they later decide to remove them, I wouldn't worry. The S&P 500 is a very good proxy for the whole US market.
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galawdawg
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Re: A 4-fund portfolio with limited fund options

Post by galawdawg »

ScienceCat wrote: Fri Jan 07, 2022 2:26 am Thank you everyone for the wonderful and insightful responses!

Some followup questions and comments:

1. Don't forget that in 3 and 4 fund portfolios the key word is portfolio and you don't need to hold each fund in each account. You can pick up what's missing in your other accounts just so long as the total allocations for the entire portfolio are what you are targeting.
This makes sense, but the assets in the taxable accounts would not have the tax benefits of the tax accounts. Would that not be problematic? Would not the capital gains taxes etc be a major hit against the account? Would buying a bunch of tax-free municipal bonds be a good strategy for a taxable account?
According to the fact sheet the International Index Fund tracks the MSCI ACWI Ex-US Investable markets index. So it is a total international stock index fund.

According to the fact sheet the Bond Index Fund tracks the Bloomberg Barclays U.S.Aggregate Bond Index. So it is a total bond market index fund.

Your employer's plan offers everything you need for a three-fund portfolio.
This is true, but these are managed funds with huge ratios (am I wrong in that assessment?). Would that be problematic? Any experience to share?
1. You want your desired asset allocation to apply to your overall portfolio. If you want a three-fund portfolio and are concerned about taxable gains and distributions in your taxable account, consider holding only an S&P500 Index Fund in your taxable account and hold the bond index fund in your retirement/tax-advantaged accounts. Just be sure that your overall asset allocation including all of your investment accounts is what you desire. For example, if you want an allocation of 80/20, it may mean your taxable account is 100/0 and your retirement account is 50/50 as long as the combined allocation is your desired 80/20. Here is a wiki article on tax efficient fund placement: https://www.bogleheads.org/wiki/Tax-eff ... _placement

2. Did you look at the Bond Index fund in your plan materials? https://nationwidefinancial.com/media/p ... 1CA-CA.pdf. I'm seeing a total expense ratio on that fund of 0.08%. Nothing wrong with that. The expense ratio on Vanguard's total bond index fund is 0.05%. As far as Large Cap Index, https://nationwidefinancial.com/media/p ... 6CA-CA.pdf, the expense ratio is 0.06% and the expense ratio on your International Index fund, https://nationwidefinancial.com/media/p ... 4CA-CA.pdf, is 0.10%. The Vanguard equivalent of those funds is 0.04% and 0.11% respectively.
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ruralavalon
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Re: A 4-fund portfolio with limited fund options

Post by ruralavalon »

ScienceCat wrote: Fri Jan 07, 2022 2:26 am Thank you everyone for the wonderful and insightful responses!

Some followup questions and comments:

. . . .
According to the fact sheet the International Index Fund tracks the MSCI ACWI Ex-US Investable markets index. So it is a total international stock index fund.

According to the fact sheet the Bond Index Fund tracks the Bloomberg Barclays U.S.Aggregate Bond Index. So it is a total bond market index fund.

Your employer's plan offers everything you need for a three-fund portfolio.
This is true, but these are managed funds with huge ratios (am I wrong in that assessment?). Would that be problematic? Any experience to share?
These are index funds, not managed funds. The fact sheets say that they invest in securities included in the indexes I previously indicated.

The expense ratios are not huge. The fact sheet for the Large Cap Index Fund states that the net expense ratio is 0.06%. The fact sheet for the International Index Fund states that the net expense ratio is 0.10%. The fact sheet for the Bond Index Fund states that the net expense ratio is 0.08%. Those are low expense ratios which are similar to index funds offered by Vanguard, Fidelity or Schwab.

Your employer's plan offers everything you need for a three-fund portfolio.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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ScienceCat
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you, everyone! You are absolutely wonderful! I have learned so much about the ideas. I will read the materials you suggested and will learn more about the taxable account taxes. Again, please forgive the n Some follow up.

I am aware that savingsplus does currently offer the index funds that everyone has pointed. However, there is a chance that they will be eliminating all index funds except the Large Cap Index Bond. They have actually planned to do that before, but delayed it because of COVID.

The expense rations on the actively managed funds are not that great (or am I wrong?). For example:

Large Cap Fund: 0.28%
Bond Fund: .14%
International Fund: 0.5%

Is building a 3-fund portfolio with this too fee-heavy?

Now, here is the thing: I learned that savingsplus offers a Self Directed Brokerage option through Charles Schwab. The trick is that we have to keep at least $2,500 with the savingsplus, but can invest the rest with Charles Schwab funds (https://www.savingsplusnow.com/rsc-web- ... ge-account). Also, this is the description of the service from the Charles Schwab side (https://workplacefinancialservices.schw ... e-accounts). Also, automatic deposit to Charles Schwab is not possible. I have to transfer manually (or so I understand, I will be learning more). Does that sound like it is worth it? Sadly, you cannot use the features like intelligent portfolios (roboadvisor) of Schwab with this account.

A three-fund portfolio is not that bad with Schwab it seems. According to the Boglehead wiki:

* Schwab Total Stock Market Index (SWTSX)
* Schwab International Index (SWISX)
* Schwab U.S. Aggregate Bond Index Fund (SWAGX)

As a simpler option that SavingsPlus offers a professionally managed account for a fee. Does it sound like their fees are a rip off? https://www.savingsplusnow.com/rsc-web- ... proaccount

Any comments?
000
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Re: A 4-fund portfolio with limited fund options

Post by 000 »

Their active ERs are low compared to most active funds but of course higher than index funds. There is also manager / tracking risk.

Schwab has good index funds.
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ScienceCat
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you! What does

Code: Select all

There is also manager / tracking risk.
mean exactly? Pardon my ignorance.
000
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Re: A 4-fund portfolio with limited fund options

Post by 000 »

The manager might buy bad stocks and then the active fund underperforms the index, perhaps considerably. They might also outperform.

If you can access more information about the funds you could compare recent returns of the active funds to their index counterparts to see how they've done, but that is not a guarantee of the future.
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galawdawg
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Re: A 4-fund portfolio with limited fund options

Post by galawdawg »

ScienceCat wrote: Fri Jan 07, 2022 6:02 pm Thank you, everyone! You are absolutely wonderful! I have learned so much about the ideas. I will read the materials you suggested and will learn more about the taxable account taxes. Again, please forgive the n Some follow up.

I am aware that savingsplus does currently offer the index funds that everyone has pointed. However, there is a chance that they will be eliminating all index funds except the Large Cap Index Bond. They have actually planned to do that before, but delayed it because of COVID.
May I recommend that you not concern yourself with that possibility, which may not even come to pass?

if they do eliminate index funds from your plan options, that would be the best time to consider the options then available to you. We could then help you with any questions you have about your new investment options. :happy
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ScienceCat
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you everyone! No really, THANK YOU!
May I recommend that you not concern yourself with that possibility, which may not even come to pass?
This is an interesting idea. Perhaps I am worried about this too much, but back in 2020 they were planning to make the change, but now it is on hold. I suppose I can not worry about this for now. Right now my portfolio looks as follows (as suggested by my portfolio manager to whom I pay 0.43% fee):

* Bond fund: 5.04%
* Diversified Real Return Fund: 5.04%
* International Fund: 13.75%
* International Index Fund: 21.93%
* Large Cap Fund: 17.05%
* Large Cap Index Fund: 26.61%
* Midcap Fund: 4.84%
* Mid Cap Index Fund 2.96%
* Small Cap Fund: 3.76%

I did some research on these funds, and there seems to be very little difference in performance. For example:

* International Fund:
Summary: https://pasteboard.co/IRtkHsPxZhlc.png

* International Index Fund:
Summary: https://pasteboard.co/1M5p5RYc5fAn.png

With this in mind, it looks the performance difference is not significant and the portfolio the professional manager (again, who charges .43 fee) seems overly complicated. Would a Boglehead agree?

I am thinking of doing this kind of a 3-fund portfolio:

Image

How does this look:

* 64% Large Cap Index Fund (my provider does not have a full market index. My only other option is to include mid and small caps to approximate the stock market. Some Bogleheads suggest that that is not necessary and that S&P 500 actually outperforms the total market index...hmm.
* 16% Total International Index Fund
* 20% Bond Index Fund

Thoughts? Is real-estate missing from the picture a big deal? Is inclusion of the real-estate fund a good idea?
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ApeAttack
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Re: A 4-fund portfolio with limited fund options

Post by ApeAttack »

ScienceCat wrote: Sat Jan 08, 2022 12:18 am Thank you everyone! No really, THANK YOU!
May I recommend that you not concern yourself with that possibility, which may not even come to pass?
This is an interesting idea. Perhaps I am worried about this too much, but back in 2020 they were planning to make the change, but now it is on hold. I suppose I can not worry about this for now. Right now my portfolio looks as follows (as suggested by my portfolio manager to whom I pay 0.43% fee):

* Bond fund: 5.04%
* Diversified Real Return Fund: 5.04%
* International Fund: 13.75%
* International Index Fund: 21.93%
* Large Cap Fund: 17.05%
* Large Cap Index Fund: 26.61%
* Midcap Fund: 4.84%
* Mid Cap Index Fund 2.96%
* Small Cap Fund: 3.76%

I did some research on these funds, and there seems to be very little difference in performance. For example:

* International Fund:
Summary: https://pasteboard.co/IRtkHsPxZhlc.png

* International Index Fund:
Summary: https://pasteboard.co/1M5p5RYc5fAn.png

With this in mind, it looks the performance difference is not significant and the portfolio the professional manager (again, who charges .43 fee) seems overly complicated. Would a Boglehead agree?

I am thinking of doing this kind of a 3-fund portfolio:

Image

How does this look:

* 64% Large Cap Index Fund (my provider does not have a full market index. My only other option is to include mid and small caps to approximate the stock market. Some Bogleheads suggest that that is not necessary and that S&P 500 actually outperforms the total market index...hmm.
* 16% Total International Index Fund
* 20% Bond Index Fund

Thoughts? Is real-estate missing from the picture a big deal? Is inclusion of the real-estate fund a good idea?
Your pie chart with 3 index funds looks fine. Simplicity is good and the ERs are low.

You'll get real estate exposure through the index funds. No need for a separate fund.

It really is that easy.
Just another lazy index investor.
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ScienceCat
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

It really is that easy.
Thanks! Hmm...SP500 includes real-estate? I do not have access to the total market index with my provider :-(

I have read about re-balancing the portfolio to retain the split.

What are good ways of doing that?

Would contributing more to the underrepresented funds to bring up their make up a legit way of doing it? Or is selling the over-represented fund and use the money to buy more of the underrepresented fund a way to do it? Also, I have read many different takes on how often to re-balance the portfolio. Some say once a month some say once a year...anybody have a take on this?
Northern Flicker
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Re: A 4-fund portfolio with limited fund options

Post by Northern Flicker »

For the US market,

80% large cap index fund
10% midcap index fund
10% small cap fund

There have been provlems with frontrunning of the Russell 2000 small cap index in the past, and the small csp non-index fund is managed by DFA (Dinensional Fund Advisors)and Goldman, which now offers DFA-based products. By the time you add int'l stocks and bonds, the increase in ER for the active small cap fund is for a very small percentage if the portfolio.

The bond index fund and int'l index fund both look fine.

The target date funds with ER of .27% are also good options. Then you have a 1-fund portfolio, and the portfolio manager will rebalance for you.
Last edited by Northern Flicker on Sat Jan 08, 2022 4:25 pm, edited 2 times in total.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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galawdawg
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Re: A 4-fund portfolio with limited fund options

Post by galawdawg »

ScienceCat wrote: Sat Jan 08, 2022 4:33 am
It really is that easy.
Thanks! Hmm...SP500 includes real-estate? I do not have access to the total market index with my provider :-(

I have read about re-balancing the portfolio to retain the split.

What are good ways of doing that?

Would contributing more to the underrepresented funds to bring up their make up a legit way of doing it? Or is selling the over-represented fund and use the money to buy more of the underrepresented fund a way to do it? Also, I have read many different takes on how often to re-balance the portfolio. Some say once a month some say once a year...anybody have a take on this?
I too like your planned three-fund portfolio. It keeps things simple, the way they should be when investing.

As far as rebalancing, since this is a tax-advantaged account, you could just rebalance by selling some of what is over represented and buying what is underrepresented. Doing that once a year would be sufficient. Or you could certainly change the allocation of your future contributions to get things in balance, but you'll still want to adjust that annually....so I say "once and done" by manually rebalancing and then leaving it alone for a year.
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ScienceCat
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

The target date funds with ER of .27% are also good options. Then you have a 1-fund portfolio, and the portfolio manager will rebalance for you.
Thank you! That would be awesome! However, it seems that all of the target funds offered to me have a roughly 50/50 split between the domestic and international stocks. I am wondering if that is a good idea. What do Bogleheads think about this one?

Edit: and thank you galawdog!
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galawdawg
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Re: A 4-fund portfolio with limited fund options

Post by galawdawg »

ScienceCat wrote: Sat Jan 08, 2022 5:11 am
The target date funds with ER of .27% are also good options. Then you have a 1-fund portfolio, and the portfolio manager will rebalance for you.
Thank you! That would be awesome! However, it seems that all of the target funds offered to me have a roughly 50/50 split between the domestic and international stocks. I am wondering if that is a good idea. What do Bogleheads think about this one?

Edit: and thank you galawdog!
I hold the opinion that target date funds are a good "default" option for those who lack the interest, knowledge or ability to manage their own portfolio. You don't appear to be in that camp.

On the downside, target date funds have higher costs (and costs matter) and they lock you into the fund manager's allocations and glide path. Plus, other than having some different "date" options, they are one-size-fits-all. As you discovered, what they want to choose for you is not what you would choose for yourself.

Do you mind rebalancing once a year, a process that will likely take you no more than five (5) minutes? If you don't mind doing that, skip the target date fund. You'll save money and you can invest in the funds and allocation that are right for you.
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Re: A 4-fund portfolio with limited fund options

Post by Northern Flicker »

ruralavalon wrote: In my opinion a S&P 500 index fund is good enough by itself for investing in U.S. stocks. That covers over 80% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies.

In the 29 years since the creation of the first total stock market index fund the two types of funds have had almost identical performance.
The US economy has become less diverse over those years so that tech is now about 40% of the S&P500. The diversification benefit of holding the total market portfolio in lieu of just the S&P500 currently probably is greater than it has been over most of those 29 years.

That said, I think choosing to hold only the S&P500 for US equity exposure currently is only a minor error at worst. Increased diversification does not guarantee that the total market will overperform the S&P500 moving forward.

Your most important decision is the ratio of stocks and bonds. This will be the primary driver of risk and potential reward. This will determine how far the portfolio falls during a deep, painful bear market for equities.

The ratio of US and non-US stocks is the next most important decision. It will have a greater influence on risk and potential reward than whether you hold only the S&P500 for US equity exposure.

Whether you hold the S&P500, a total market portfolio, or even a US portfolio tilted to increased exposure of smaller stocks is less important than the first two decisions, but it still matters. US stock likely will have the largest allocation of the assets you hold. Elimination of the smallcap and midcap US equity funds is not a disaster because the active ones they have are low enough cost. At typical allocation weights they will only contribute an excess of 4-5 basis points to portfolio cost.

I think including about a 5% allocation to the real return fund is worthwhile.

Diversification is a tool for dealing with the uncertainty that is associated with the future. It puts us in a position to be successful over the widest range of potential outcomes, but does not guarantee the best outcome.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: A 4-fund portfolio with limited fund options

Post by ruralavalon »

Northern Flicker wrote: Sat Jan 08, 2022 4:58 pmThe US economy has become less diverse over those years so that tech is now about 40% of the S&P500. The diversification benefit of holding the total market portfolio in lieu of just the S&P500 currently probably is greater than it has been over most of those 29 years.
That seems reasonab!e. I had never considered that idea, so you made me check.

Still the two types of funds have had almost identical performance during the last decade. Portfolio Visualizer, 2011-2021.
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Re: A 4-fund portfolio with limited fund options

Post by grabiner »

ScienceCat wrote: Fri Jan 07, 2022 2:26 am Thank you everyone for the wonderful and insightful responses!

Some followup questions and comments:

1. Don't forget that in 3 and 4 fund portfolios the key word is portfolio and you don't need to hold each fund in each account. You can pick up what's missing in your other accounts just so long as the total allocations for the entire portfolio are what you are targeting.
This makes sense, but the assets in the taxable accounts would not have the tax benefits of the tax accounts. Would that not be problematic? Would not the capital gains taxes etc be a major hit against the account? Would buying a bunch of tax-free municipal bonds be a good strategy for a taxable account?
Unless you have a bad 401(k), you should max out the 401(k) and IRA before any taxable retirement savings, for exactly this reason. But if you do have a taxable account, you can hold whatever is not available in your other accounts there. This can be municipal bonds (in a high tax bracket, or a moderate bracket if Vanguard has a fund for your high-tax state), or taxable bonds (in a low tax bracket), or stock index funds (in any tax bracket). If your 401(k) doesn't have a good international fund, a taxable account is a fine place to hold an international index.
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you everyone! You are an amazing bunch! So much information, research, and experience! I have made the following decisions:

1. I will tell SavingsPlus that I want a Self Directed Brokarage Account through Charles Schwab. I guess I am not ok with where and how SavingsPlus international Index Fund invests. I like it that SWISX invests in developed markets (am I wrong?).

2. I have read the Bogle rule of owning your age (37) in stocks and then 100 - your age in equities. Based on that, I have constructed the following Charles Schwab Plan:

Fund Allocation
Schwab Total Stock Market Index (SWTSX) 51.00%
Schwab International Index Fund (SWISX) 12.00%
Schwab U.S. Aggregate Bond Index Fund (SWAGX) 37.00%

I am required to leave $2500 at the SavingsPlus core account. I am thinking of putting it all into bonds for risk minimization (I really do not know)

In light of (2), should I re-balance the portfolio every year to move one percent from equities to funds?

What is your take on this?

3. I am currently contributing to 457 (Traditional through SavingsPlus) and to 403b (Roth through Fidelity). I also have access to 401K. I have read that both 457 and 403b are not ERISA protected, which concerns me. Therefore, wanting to maximize two plans while having the benefit of some ERISA protection, I plan to do the following:

a. Max out 457 traditional (already doing it; that is where most of my funds are), move it to Schwab and use strategy in (2). Put the required $2,500 I must leave in the SavingsPlus in the SavingsPlus core account into bonds (or what do you recommend).

b. Start contributing to 401K Roth and use the strategy in (2)

c. Take the remaining funds in 403b (around 5k), take them out of the target fund, and put them into S&P 500 or FSKAX.



Again, thank you all so much and sorry for so many questions!
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Re: A 4-fund portfolio with limited fund options

Post by Marshall-Dillon »

I have Savings Plus and use the Schwab PCRA self directed brokerage. It opens up a world of options and has no fees associated.
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Re: A 4-fund portfolio with limited fund options

Post by Northern Flicker »

ScienceCat wrote: 2. I have read the Bogle rule of owning your age (37) in stocks and then 100 - your age in equities. Based on that, I have constructed the following Charles Schwab Plan:

Fund Allocation
Schwab Total Stock Market Index (SWTSX) 51.00%
Schwab International Index Fund (SWISX) 12.00%
Schwab U.S. Aggregate Bond Index Fund (SWAGX) 37.00%
I believe SWISX tracks the MSCI EAFE index. If you want to hold exclusively developed markets ex-US, you also could choose to use a fund that tracks a FTSE developed markets index, which additionally will incorporate exposure to Canadian and S. Korean equities. You additionally will acquire exposure to Samsung, Hyundai, Posco Steel, Canadian banks and natural resources companies with such a fund. The Vanguard ETF VEA would be a good choice if the account has brokerage capability. The ETF IDEV would provide exposure to Canadian equities, but not S. Korean equities.

Holding your age in bonds as an allocation decision is a conservative allocation. If that is the level of risk consistent with your comfort level, then that is the appropriate allocation for you. As default allocation advice, it is fairly dated.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you so much!

Few follow up questions:
I believe SWISX tracks the MSCI EAFE index. If you want to hold exclusively developed markets ex-US, you also could choose to use a fund that tracks a FTSE developed markets index, which additionally will incorporate exposure to Canadian and S. Korean equities. You additionally will acquire exposure to Samsung, Hyundai, Posco Steel, Canadian banks and natural resources companies with such a fund. The Vanguard ETF VEA would be a good choice if the account has brokerage capability. The ETF IDEV would provide exposure to Canadian equities, but not S. Korean equities.
VEA does seem to be much more diverse with 4094 holdings (according to https://www.zacks.com/funds/etf/VEA/holding), whereas SWISX covers 861 in comparison (according to this: https://www.schwabassetmanagement.com/allholdings/SWISX) seems and the expense ratio is similar to that of SWISX. I will be happy to replace SWISX with VEA, but few questions here:

1.
I have Savings Plus and use the Schwab PCRA self directed brokerage. It opens up a world of options and has no fees associated.
I wonder if VEA is available through Schwab PCRA.

2. Any reasons to not go VEA as compared to SWISX?

I may ramp up the risk a little:

Schwab Total Stock Market Index (SWTSX) 60.00%
VEA (preferred) or Schwab International Index Fund (SWISX) 10.00%
Schwab U.S. Aggregate Bond Index Fund (SWAGX) 30.00%
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Re: A 4-fund portfolio with limited fund options

Post by Northern Flicker »

As an ETF, VEA should be available through any brokerage. Whether or not it is available with commission-free trades is a separate question.

I believe SWISX tracks a large cap index, whereas VEA is an all-cap/total market index in addition to incorporating stocks from Canada and S. Korea.

VEA has about 75% of what is a total int'l fund (that would also include emerging markets) if measured by market capitalization.

One way to assess risk is to think about what your maximum acceptable drawndown is during a deep, painful bear market. You should be able to just rebalance back to your allocation. If you would instead pull the plug to stop the bleeding by moving out of stocks after a substantial downdraft, then the allocation is too risky.

If you come up with that number, i.e. the maximum acceptable downdraft, then double it. The result is your maximum acceptable allocation to stocks. You can allocate a less than this amount to stocks, as stocks can fall more than 50%. And we can imagine how we will respond or react, but until we are actually in the bear market, we don't always know how we will react.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you everyone!

1. Some more questions. Is it wise to spice up the a 3-fund portfolio with some dividend stocks or would that be redundant because I already have a full US market index?

2. Is anybody here investing with a 3-fund portfolio? Any experience you can share about performance etc?
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Re: A 4-fund portfolio with limited fund options

Post by exodusNH »

ScienceCat wrote: Sun Jan 09, 2022 11:20 pm Thank you everyone!

1. Some more questions. Is it wise to spice up the a 3-fund portfolio with some dividend stocks or would that be redundant because I already have a full US market index?

2. Is anybody here investing with a 3-fund portfolio? Any experience you can share about performance etc?
Dividends are just forced micro-sales of your stocks. This is different from bonds where they are interest payments.

Ben Felix has a good explanation: https://youtu.be/f5j9v9dfinQ
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you!
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Re: A 4-fund portfolio with limited fund options

Post by Northern Flicker »

If you are asking if you should buy some individual stocks, the answer is no. That is a colossally bad idea. You should read about idiosyncratic risk, and try to understand why it is uncompensated risk.

If you want a higher expected return you will have to take more risk, but taking more risk is not always associated with a higher expected return. The latter is what is meant by uncompensated risk.

If you wanted to allocate some of your US equity allocation to a diversified dividend fund like SCHD or VIG, you would not harm yourself as long as you are committed to staying the course.

The way to boost expected return is either to increase your allocation to stocks or to tilt the stock allocation to one or more equity risk factors. The latter also takes alot of resolve to stay the course.

One of the benefits of target date funds is avoiding behavioral errors, which are more likely to occur when we manage our own funds.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

That makes sense! Thank you!

So for the three-fund portfolio, does it make sense to do the following?

(1) Contribute a fixed dollar amount monthly to each fund.
(2) Not worry about whether the portfolio retains desired allocations throughout the year.
(3) Rebalance the portfolio once a year to restore the proportions.

Edit 1: Edited my plan for clarity.

Edit 2: Anyone who is using Charles Schwab Self-Directed Brokarage, does Charles Schwab provide tools for re-balancing portfolios? You cannot use, for example, the intelligent portfolios with that account. Any good tools out there to help re-balance?

Edit 3: In a tax-advantaged account is there a benefit/down-side to re-balance often/rarely?
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Re: A 4-fund portfolio with limited fund options

Post by Northern Flicker »

Set up automatic contrbutions to be invested per asset allocation. One possible advantage of the in-plan mutual funds is that this can be fully automated. Perhaps that is now true of some or all brokerage options, but when I had access to a 401K with a brokerage option, the investment had to be allocated manually to use that option, an underestimated downside.

Allocating new contributions at allocation weight will limit portfolio drift, but explicit rebalancing will at times be needed. It can be done at regular intervals, or when deviations exceed some amount. I usually rebalanced when the market conditions made me feel jittery or after a large equity downturn, and other times when deviations warranted it. It is the safe thing to do when you feel like you need to do something as long as you stick to your allocation weights. Some investors write doen an investment policy statement to codify their asset allocation and rebalancing policy.

It is not ideal to do it too often, but it won't cause significant harm either. I think some target date funds are rebalanced daily.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you! This is very helpful.

Finally, is there any merit in using different asset allocation strategies across different accounts?

For example, maxing out multiple plans (e.g., 401k and 457) and using a more conservative three-fund strategy on one and more aggressive one on the other? Possibly with the different providers?
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Re: A 4-fund portfolio with limited fund options

Post by grabiner »

ScienceCat wrote: Mon Jan 10, 2022 5:57 am Thank you! This is very helpful.

Finally, is there any merit in using different asset allocation strategies across different accounts?

For example, maxing out multiple plans (e.g., 401k and 457) and using a more conservative three-fund strategy on one and more aggressive one on the other? Possibly with the different providers?
There is no risk-based reason to do this. If the US stock market loses half its value, you will lose the same amount of purchasing power regardless of which account holds the US stocks.

However, there could be a reason based on expenses. If one plan has a better fixed-income option than the other, while the stock options are equally good, you would hold your fixed income in that plan. (A common example is the TIAA Traditional Annuity, which is better than any bond fund at retail; if you have a TIAA 403(b), you might hold your fixed income there and hold stock in other retirement plans.)
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you again! I am looking to replicate my portfolio allocation above on the Fidelity Roth IRA.

The Boglehead wiki suggests the following:


* Fidelity ZERO Total Market Index Fund (FZROX) or Fidelity Total Market Index Fund (FSKAX)
* Fidelity ZERO International Index Fund (FZILX) or Fidelity Total International Index Fund (FTIHX)
* Fidelity U. S. Bond Index Fund (FXNAX)

If I am not looking for exposure only developed international markets, would FSPSX be a good choice (https://fundresearch.fidelity.com/mutua ... /315911727)? Any better suggestions?
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Re: A 4-fund portfolio with limited fund options

Post by exodusNH »

ScienceCat wrote: Tue Jan 11, 2022 12:21 am Thank you again! I am looking to replicate my portfolio allocation above on the Fidelity Roth IRA.

The Boglehead wiki suggests the following:


* Fidelity ZERO Total Market Index Fund (FZROX) or Fidelity Total Market Index Fund (FSKAX)
* Fidelity ZERO International Index Fund (FZILX) or Fidelity Total International Index Fund (FTIHX)
* Fidelity U. S. Bond Index Fund (FXNAX)

If I am not looking for exposure only developed international markets, would FSPSX be a good choice (https://fundresearch.fidelity.com/mutua ... /315911727)? Any better suggestions?
Assuming you have room in other retirement accounts, don't hold bonds in Roth. You want that space for your holdings that are more likely to grow. That maximizes your tax-free wealth.
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Re: A 4-fund portfolio with limited fund options

Post by ruralavalon »

ScienceCat wrote: Tue Jan 11, 2022 12:21 am Thank you again! I am looking to replicate my portfolio allocation above on the Fidelity Roth IRA.

The Boglehead wiki suggests the following:


* Fidelity ZERO Total Market Index Fund (FZROX) or Fidelity Total Market Index Fund (FSKAX)
* Fidelity ZERO International Index Fund (FZILX) or Fidelity Total International Index Fund (FTIHX)
* Fidelity U. S. Bond Index Fund (FXNAX)

If I am not looking for exposure only developed international markets, would FSPSX be a good choice (https://fundresearch.fidelity.com/mutua ... /315911727)? Any better suggestions?
In general its often better to use only stock funds in a Roth account.

It's often better to coordinate investments among all accounts treating all accounts together as a single unified portfolio, rather than treat each account separately. I believe you have mentioned using a 457b account, a 403b account, a Roth IRA and a taxable brokerage account.

You also mentioned that you have access to a 401k plan.

You could help us answer your questions if you listed all of the accounts you currently use, and for each account (1) list the funds you currently use in each account, (2) state what percentage of the total portfolio is in each account, and (3) how much you contribute annually to each account.

What funds are available to use in the 403b plan, and in the 401k plan?

What is your tax bracket, both federal and state?

Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

Please see this for information needed and format: Asking Portfolio Questions.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Please find my investments below followed by questions.

Edit 1: I hope the formatting looks look ok you your side. On my side it looks good during preview.

Edit 2: Seems the formatting does not look right in some browsers. Tried to edit it to make it look better.

Emergency Fund: yes

Taxable: Wealthfront (0.25% annual fee)---Wealthfront
Fund Name----------------------------------------------Symbol---------% of the portfolio----Expense Ratio
Schwab US Broad Market ETF------------------------SCHB-----------------2.25---------------0.03
Vanguard Tax-Exempt Bond Index ETF-------------VTEB-----------------1.18---------------0.06
Schwab US Dividend Equity ETF---------------------SCHD-----------------1.00---------------0.06
Schwab International Equity ETF---------------------SCHF-----------------0.39---------------0.06
iShares MSCI Emerging Markets ex China ETF--EMXC-----------------0.03---------------0.25
Cash-----------------------------------------------------------N/A------------------0.06---------------N/A

Taxable: Fidelity (self-managed)
Fund Name----------------------------------------- Symbol-------------% of the portfolio-----Expense Ratio
Fidelity Mid CAP Index Fund----------------------FSMDX--------------------1.14---------------0.03
Fidelity 500 Index Fund-----------------------------FXAIX---------------------1.62---------------0.01
Fidelity US Bond Index Fund----------------------FXNAX--------------------0.67---------------0.03
Cash------------------------------------------------------N/A------------------------3.70---------------N/A

Retirement: SavingsPlus 457K Pre-Tax/No Matching (Professional Management Fee: 0.42%)
Fund Name------------------------------------------------- Symbol-----% of the portfolio------Expense Ratio
Bond Fund-----------------------------------------------------???-------------3.51----------------------0.21
Diversified Real Return Fund-----------------------------???-------------2.85----------------------0.45
International Fund-------------------------------------------???-------------9.60----------------------0.5
International Index Fund ----------------------------------???-------------15.38---------------------0.12
Large Cap Fund --------------------------------------------???--------------11.99--------------------0.3
Large Cap Index Fund ------------------------------------???--------------18.68--------------------0.06
Mid Cap Fund------------------------------------------------???--------------3.40---------------------0.43
Mid Cap Index Fund----------------------------------------???--------------2.08---------------------0.08
Small Cap Fund---------------------------------------------???--------------2.64---------------------0.61
** The above funds are the only funds available in the plan except the target funds. No ticker symbols are provided by the program.

Retirement: SavingsPlus 401K Pre-Tax/No Matching (Professional Management Fee: 0.42%)
Fund Name--------------------------------------------------Symbol---% of the portfolio------------Expense Ratio
Bond Fund-----------------------------------------------------???-------------------0.08--------------------0.21
Diversified Real Return Fund-----------------------------???-------------------0.06--------------------0.45
International Fund-------------------------------------------???-------------------0.21--------------------0.5
International Index Fund ----------------------------------???-------------------0.33--------------------0.12
Large Cap Fund --------------------------------------------???-------------------0.26---------------------0.3
Large Cap Index Fund ------------------------------------???-------------------0.40--------------------0.06
Mid Cap Fund -----------------------------------------------???-------------------0.07--------------------0.43
Mid Cap Index Fund----------------------------------------???-------------------0.04--------------------0.08
Small Cap Fund----------------------------------------------???------------------0.06--------------------0.61
** The above funds are the only funds available in the plan except the target funds. No ticker symbols are provided by the program.

Retirement: Fidelity 403b Roth/No Match
Fund Name-----------------------------------------------------------------------------------------Symbol---------% of the portfolio-----Expense Ratio
Vanguard Institutional Target Retirement 2050 Fund Institutional Shares----------VTRLX----------------17.32---------------0.09%

What I want to do:

1. Start a Charles Schwab PCRA account and follow a 3-fund portfolio (with little to no emerging markets) -- better funds and no management fee.
2. Migrate the taxable account from Fidelity to Wealthfront and adjust the percentages to match my split (for simplicity)
3. Dump 403b, max out Roth 401k, max out Pre-tax 457, and contribute to Roth IRA with Fidelity -- want to max out two funds if possible and have some ERISA protection. I plan to rollover 403b to Roth IRA if possible, or, if impossible, just put it all into Fidelity's SP 500.

How do my plans sound?
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Re: A 4-fund portfolio with limited fund options

Post by ruralavalon »

What I want to do:

1. Start a Charles Schwab PCRA account and follow a 3-fund portfolio (with little to no emerging markets) -- better funds and no management fee.
2. Migrate the taxable account from Fidelity to Wealthfront and adjust the percentages to match my split (for simplicity)
3. Dump 403b, max out Roth 401k, max out Pre-tax 457, and contribute to Roth IRA with Fidelity -- want to max out two funds if possible and have some ERISA protection. I plan to rollover 403b to Roth IRA if possible, or, if impossible, just put it all into Fidelity's SP 500.

How do my plans sound?
Are you still employed by the firm that offers the 403b? You may not be able to rollover the 403b account of still employed there.

Why do you believe that the 457b account has no ERISA protection? Is your employer's a non-profit or charity? Or is your employer a government or government agency?

Are there any fees charged for using the Schwab PCRA?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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ScienceCat
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

Thank you!
Are you still employed by the firm that offers the 403b? You may not be able to rollover the 403b account of still employed there.
Yes, still employed at the same place. I thought might be like that.
Why do you believe that the 457b account has no ERISA protection? Is your employer's a non-profit or charity? Or is your employer a government or government agency?
I have checked, and it seems to be the case for my case.
Are there any fees charged for using the Schwab PCRA?
No fees are charged for this service.
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ScienceCat
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Re: A 4-fund portfolio with limited fund options

Post by ScienceCat »

P.S. When it comes to Roth IRA, I see many sites suggesting inclusion or eREITS and dividend stocks due to tax advantages. Good idea?

I am thinking of doing a split between

* FSKAX (70%)
* FSPSX (10%)
* SCHD (20%)
Last edited by ScienceCat on Wed Jan 12, 2022 1:03 pm, edited 1 time in total.
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