Am I making mistakes in my 401k/roth allocations?

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myrongains
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Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

I don't know much about bonds or retirement style investing, so I have the following allocations in my portfolios..

Age: 36
401k - 100% into FXAIX
Roth - 80% into VTI, 20% into VXUS

Should I be changing up my investment allocations at all? To me the Roth looks ok, but I'm just not sure about the 401k. Appreciate any feedback..
SnowBog
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Re: Am I making mistakes in my 401k/roth allocations?

Post by SnowBog »

Looks great to me. An S&P 500 fund is a suitable alternative to a Total Stock Market fund when one isn't available in your 401k.

Personally, I prefer to keep some of all asset classes in my 401k. So I'd probably move international into the 401k (assuming you have access to a good option). If/when you add bonds - presumably to your 401k as well - then you can easily rebalance if/as needed between them. But nothing wrong with keeping international in your Roth if you prefer it that way.
BirdFood
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Re: Am I making mistakes in my 401k/roth allocations?

Post by BirdFood »

Well, having one hundred percent stock is a decision, and a fairly aggressive one. Try to think through how you'd feel if you lost half your money in a stock crash. Would you panic and sell stock? If so, then consider moving some money into bonds, so that a crash would be less devastating and less likely to cause self-destructive behavior.
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myrongains
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

BirdFood wrote: Thu Jul 04, 2024 10:03 pm Well, having one hundred percent stock is a decision, and a fairly aggressive one. Try to think through how you'd feel if you lost half your money in a stock crash. Would you panic and sell stock? If so, then consider moving some money into bonds, so that a crash would be less devastating and less likely to cause self-destructive behavior.
SnowBog wrote: Thu Jul 04, 2024 9:58 pm Looks great to me. An S&P 500 fund is a suitable alternative to a Total Stock Market fund when one isn't available in your 401k.

Personally, I prefer to keep some of all asset classes in my 401k. So I'd probably move international into the 401k (assuming you have access to a good option). If/when you add bonds - presumably to your 401k as well - then you can easily rebalance if/as needed between them. But nothing wrong with keeping international in your Roth if you prefer it that way.
Well, the SPY isn't a single stock right - but I know what you're saying, if the market crashes I'm quite exposed. Is there a general consensus on a safer allocation at each age range? Would it help if I posted my investment options here?
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retired@50 »

myrongains wrote: Thu Jul 04, 2024 10:13 pm ...
Well, the SPY isn't a single stock right - but I know what you're saying, if the market crashes I'm quite exposed. Is there a general consensus on a safer allocation at each age range? Would it help if I posted my investment options here?
If there's a general consensus, you might find it in a target date fund suited to your age. So, if you intend to retire in 30 years (at 66) then a 2055 fund would be "about right". Vanguard's 2055 fund holds around 10% in bonds right now, and it also has a higher percentage of the stock devoted to the international stock index.
Source: https://investor.vanguard.com/investmen ... omposition

Keep in mind that asset allocation is somewhat personal, so there is also room for differing opinions.

Consider some reading on the topic of asset allocation and risk tolerance.
https://www.bogleheads.org/wiki/Asset_allocation

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

If you want opinions about the fund choices in your 401k, then list them for us with fund names, expense ratios, and ticker symbols.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
BirdFood
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Re: Am I making mistakes in my 401k/roth allocations?

Post by BirdFood »

myrongains wrote: Thu Jul 04, 2024 10:13 pm Well, the SPY isn't a single stock right - but I know what you're saying, if the market crashes I'm quite exposed. Is there a general consensus on a safer allocation at each age range? Would it help if I posted my investment options here?
Someone will probably give you the link to the format for asking for a portfolio evaluation.

And, yes, a stock index fund is far better than a single stock. However, it is still all stock.

I just Googled to see if you can easily see the allocation for a target date fund, and, yes, it's easy to get to information about "Vanguard Target Retirement Funds." You could choose the fund for the year you'll be 65 and scroll down to the allocations to see what one company thinks is an appropriate allocation for your age. You don't have to agree with them, but it's a starting point.

(Looks like Vanguard wants me to be 62% stock. I'm 50% stock. Like I said, you don't have to agree with them. :))
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Re: Am I making mistakes in my 401k/roth allocations?

Post by Northern Flicker »

Vanguard's Target Retirement 2050 is 90% stock. Being 100% stock at age 36 is not unreasonable, but it is aggressive. The question is whether you will be able to maintain your allocation in a deep, painful bear market.

If you would lose your nerve to ride it out, and reallocate to 100% cash if and when the market is down 40%, then it is too aggressive. That outcome would be a significantly lower return than a less aggressive allocation for which you are able to stay the course.

I would prefer to be 15-20% bonds at age 36 so that when the market delivers a gut punch, I can rebalance back to allocation weight. This provides something safe to do when I feel helpless, and feel like I need to do something.

But that does not mean that is right for you.

Another point concerns how stable your employment might be. If you are confident you won't lose your job in a major recession, the regular contributions you make to your 401K will ameliorate some of the risk. But these things are unpredictable. I was working in the financial services industry in 2008/2009, and the possibility of a job loss (as well as other considerations) made me glad that I was not 100% stocks then (even though my employer ultimately did not terminate any positions as a result of that crisis).

Lastly, the ratio of annual salary to account balance also matters. Will a 50% drop in the market lower your balance by an amount equal to 4 months of salary or 4 years of salary?
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Re: Am I making mistakes in my 401k/roth allocations?

Post by BitTooAggressive »

myrongains wrote: Thu Jul 04, 2024 9:45 pm I don't know much about bonds or retirement style investing, so I have the following allocations in my portfolios..

Age: 36
401k - 100% into FXAIX
Roth - 80% into VTI, 20% into VXUS

Should I be changing up my investment allocations at all? To me the Roth looks ok, but I'm just not sure about the 401k. Appreciate any feedback..
100% stocks at your age is the appropriate and desired allocation. I would add more international, others would say it’s unnecessary. Your portfolio is good and reasonable.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by KlangFool »

OP,

If you are unemployed in the coming recession and the stock market crashes 50%, how long before you have to sell your stock?

What is the size of your portfolio in terms of your annual expense? How many years?

What is the size of your portfolio in terms of your annual savings and investment? How many years?

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myrongains
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

Northern Flicker wrote: Thu Jul 04, 2024 10:31 pm Vanguard's Target Retirement 2050 is 90% stock. Being 100% stock at age 36 is not unreasonable, but it is aggressive. The question is whether you will be able to maintain your allocation in a deep, painful bear market.

If you would lose your nerve to ride it out, and reallocate to 100% cash if and when the market is down 40%, then it is too aggressive. That outcome would be a significantly lower return than a less aggressive allocation for which you are able to stay the course.

I would prefer to be 15-20% bonds at age 36 so that when the market delivers a gut punch, I can rebalance back to allocation weight. This provides something safe to do when I feel helpless, and feel like I need to do something.

But that does not mean that is right for you.

Another point concerns how stable your employment might be. If you are confident you won't lose your job in a major recession, the regular contributions you make to your 401K will ameliorate some of the risk. But these things are unpredictable. I was working in the financial services industry in 2008/2009, and the possibility of a job loss (as well as other considerations) made me glad that I was not 100% stocks then (even though my employer ultimately did not terminate any positions as a result of that crisis).

Lastly, the ratio of annual salary to account balance also matters. Will a 50% drop in the market lower your balance by an amount equal to 4 months of salary or 4 years of salary?
When the pandemic started and stocks went down, I had the same allocation and didn't sell. However I wasn't that financially smart back then so there's that.

I think this time around I wouldn't sell either. I could do bonds, not a problem. However do I need any international exposure?

I am in the engineering business (renewable energy for now) and have decent skills that I think would serve me well in a recession. My line of work doesn't get hit very hard in a recession.

My current balance is $205,000. A 50% drop in the market would mean losing $102,500, which is equal to 8 months salary. I have about $110k saved up in cash outside of my retirement funds though.
KlangFool wrote: Fri Jul 05, 2024 6:51 am OP,

If you are unemployed in the coming recession and the stock market crashes 50%, how long before you have to sell your stock?

What is the size of your portfolio in terms of your annual expense? How many years?

What is the size of your portfolio in terms of your annual savings and investment? How many years?

KlangFool
I have about $110k saved up in cash, so I would be able to cover my expenses in an unemployment situation for about 3 years. So no need to tap into 401k.

My portfolio is $205k - yearly living expenses are about $50k. So my portfolio is currently 4x my annual expense. 4 years.

In terms of annual savings and investment.. I save $21.5k into 401k, $7k into roth, 4k into HSA, $30k into cash, so total $62,500. So my portfolio is currently 3.28x my annual savings and investment. 3.28 years.
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myrongains
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

These are my portfolio options:

Vanguard Target Retire Inc Trust 1
Vanguard Target Retire Inc Trust 1 2020
Vanguard Target Retire Inc Trust 1 2025
Vanguard Target Retire Inc Trust 1 2030
Vanguard Target Retire Inc Trust 1 2035
Vanguard Target Retire Inc Trust 1 2040
Vanguard Target Retire Inc Trust 1 2045
Vanguard Target Retire Inc Trust 1 2050
Vanguard Target Retire Inc Trust 1 2055
Vanguard Target Retire Inc Trust 1 2060
Vanguard Target Retire Inc Trust 1 2065
Vanguard Target Retire Inc Trust 1 2070
Vanguard Target Retire Income&Grwth Tr 1
Arrowstreet Intl. Equity ACWI ex US Fund
Vanguard Developed Markets Idx Instl
BlackRock Advantage Small Cap Core K
NT R2000 Index Fund DC NL 3
BlackRock Mid Capitalization Eq Idx NL M
WTC-CIF II MdCap Opportunities S3
Fidelity Growth Company Commingled Pl 2
FXAIX <----------------------------------------------------- Currently 100% into this
Vanguard Windsor II Fund - Admiral
Vanguard Total Bond Market Index Inst
WAMCO US Core Plus Bond Fund
Vanguard Federal Money Market Inv



I do feel a bit at risk since SPY is at all time highs right now. Seems like a good time to reallocate my portfolio for purposes of diversification. I think bonds and some international exposure would be good but not sure on percentages/allocations.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retired@50 »

myrongains wrote: Fri Jul 05, 2024 10:48 am These are my portfolio options:

Vanguard Target Retire Inc Trust 1
Vanguard Target Retire Inc Trust 1 2020
Vanguard Target Retire Inc Trust 1 2025
Vanguard Target Retire Inc Trust 1 2030
Vanguard Target Retire Inc Trust 1 2035
Vanguard Target Retire Inc Trust 1 2040
Vanguard Target Retire Inc Trust 1 2045
Vanguard Target Retire Inc Trust 1 2050
Vanguard Target Retire Inc Trust 1 2055
Vanguard Target Retire Inc Trust 1 2060
Vanguard Target Retire Inc Trust 1 2065
Vanguard Target Retire Inc Trust 1 2070
Vanguard Target Retire Income&Grwth Tr 1
Arrowstreet Intl. Equity ACWI ex US Fund
Vanguard Developed Markets Idx Instl
BlackRock Advantage Small Cap Core K
NT R2000 Index Fund DC NL 3
BlackRock Mid Capitalization Eq Idx NL M
WTC-CIF II MdCap Opportunities S3
Fidelity Growth Company Commingled Pl 2
FXAIX <----------------------------------------------------- Currently 100% into this
Vanguard Windsor II Fund - Admiral
Vanguard Total Bond Market Index Inst
WAMCO US Core Plus Bond Fund
Vanguard Federal Money Market Inv



I do feel a bit at risk since SPY is at all time highs right now. Seems like a good time to reallocate my portfolio for purposes of diversification. I think bonds and some international exposure would be good but not sure on percentages/allocations.
See the green funds above...

You could use the Developed Markets index for some international stock.

You could use the Vanguard Total Bond Market index for US bonds.

FXAIX is sufficient for US stocks, so with all three of these funds, you could build a 3-fund portfolio which is often mentioned here on Bogleheads.

If you want the really simple route, you could just use the 2055 or 2050 fund from Vanguard. Those funds will include US and International stocks and bonds.

Either way you should wind up with a low expense, globally diversified portfolio that suits your risk tolerance and objectives.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Am I making mistakes in my 401k/roth allocations?

Post by Northern Flicker »

myrongains wrote: Fri Jul 05, 2024 10:48 am These are my portfolio options:

Vanguard Target Retire Inc Trust 1
Vanguard Target Retire Inc Trust 1 2020
Vanguard Target Retire Inc Trust 1 2025
Vanguard Target Retire Inc Trust 1 2030
Vanguard Target Retire Inc Trust 1 2035
Vanguard Target Retire Inc Trust 1 2040
Vanguard Target Retire Inc Trust 1 2045
Vanguard Target Retire Inc Trust 1 2050
Vanguard Target Retire Inc Trust 1 2055
Vanguard Target Retire Inc Trust 1 2060
Vanguard Target Retire Inc Trust 1 2065
Vanguard Target Retire Inc Trust 1 2070
Vanguard Target Retire Income&Grwth Tr 1
Arrowstreet Intl. Equity ACWI ex US Fund
Vanguard Developed Markets Idx Instl
BlackRock Advantage Small Cap Core K
NT R2000 Index Fund DC NL 3
BlackRock Mid Capitalization Eq Idx NL M
WTC-CIF II MdCap Opportunities S3
Fidelity Growth Company Commingled Pl 2
FXAIX <----------------------------------------------------- Currently 100% into this
Vanguard Windsor II Fund - Admiral
Vanguard Total Bond Market Index Inst
WAMCO US Core Plus Bond Fund
Vanguard Federal Money Market Inv



I do feel a bit at risk since SPY is at all time highs right now. Seems like a good time to reallocate my portfolio for purposes of diversification. I think bonds and some international exposure would be good but not sure on percentages/allocations.
One option would be to just allocate your 401K and Roth IRA to the same Target Retirement fund based on your projected retirement year. Then Vanguard would manage the asset allocation and rebalancing. Target Retire 2050 or 2055 would put you at 90% stock, but a more diversified stock portfolio than just holding the S&P500.

I would not call holding just the S&P500 a blunder if you are comfortable with the risk, but I would not consider it optimal either.
Last edited by Northern Flicker on Fri Jul 05, 2024 3:34 pm, edited 2 times in total.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by Northern Flicker »

myrongains wrote: When the pandemic started and stocks went down, I had the same allocation and didn't sell.
Stocks bounced back so rapidly in that bear market that it did not test investor's nerves the way 2008/2009 or 2000/2002 did.

A bear market can last for years with a persistent gloomy news cycle. And they can be worse than what we've experienced. Imagine if the SARS-Covid-1 of 2002 had been a global pandemic like Covid-2 just was, but starting just as the recovery from 2000/2002 got started. Imagine if Covid-2 started around Feb 2009 instead of around Feb 2020.

I'm not trying to be overly pessimistic. Just be sure you are comfortable with the risks you are taking.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by SnowBog »

myrongains wrote: Fri Jul 05, 2024 10:48 am I do feel a bit at risk since SPY is at all time highs right now. Seems like a good time to reallocate my portfolio for purposes of diversification. I think bonds and some international exposure would be good but not sure on percentages/allocations.
If you look at historical stock charts, it's far more common for them to be "at all time highs".

That is - after all - why we invest in them. The default expectation is that they'll be higher in 10-, 20-, 30-years.

In other words, "time in the market bets timing the market."

I had posted this in your other thread, but I think it's worth repeating as it's getting to the same point. Below is a hypothetical video of "Bob, the world's worst market timer" who only invested a few times in their life - always right before a major crash - but they never panic sold. https://m.youtube.com/watch?v=pFgPNVytlwA

The way I rationalize it in my head is the price of stocks tomorrow doesn't matter. If I invest today and see a 10% loss tomorrow - yep, that sucks, but it makes zero difference in the end. When I go to withdraw my funds decades from now, the small day-to-day changes - even including most "crashes" - are just tiny blimps on the journey of stocks to climb to every higher heights. That 10% loss is noise - won't matter...

Or if you want to inverse this, it's a fallacy to assume that you can know and or can wait for the market to "drop" before investing. Unless your crystal ball works better than mine, that's just a futile attempt at market timing. Once you realize that isn't possible, this thought of "well what if the price goes down after I invest" starts to occupy less of your brain space - and you can be more focused on long term investing - which is all that matters anyway.

For context, I used to have the exact same fear. The first few times I bought investments in my taxable account I dreading "making a mistake" and "overpaying". It took a while, but once I understood the points above, it no longer phases me. Now it's simple - I have an extra $X dollars - it gets invested ASAP per my Asset Allocation. I don't care what price I buy at, what it does tomorrow, what it does next week... I only care that it "should" be worth more in 10+ years, as that's the reason I invest...
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retiredjg »

myrongains wrote: Thu Jul 04, 2024 9:45 pm Age: 36
401k - 100% into FXAIX
Roth - 80% into VTI, 20% into VXUS
This information does not tell us as much. We do know you don't have any bonds, but without knowing the relative sizes of the 401k and Roth IRA, we don't know how much of the portfolio is in international stocks.

I'm not a fan of 100% stock portfolios. I like to see no less than 20% in bonds or fixed income assets. Even for younger people.

There are numerous discussions about how much international stock to use. If you have simply no idea, consider 20% of the stock allocation. That is the highest number Jack Bogle recommended and the lowest number that Vanguard recommends. Nobody knows what will work out best in the future. The important thing is to pick a number and stick with it rather than switch back and forth.

Once you decide on your stock to bond ratio and the amount of international stock to hold, finding the funds to fill that bill is easy.
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myrongains
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

retiredjg wrote: Fri Jul 05, 2024 4:40 pm
myrongains wrote: Thu Jul 04, 2024 9:45 pm Age: 36
401k - 100% into FXAIX
Roth - 80% into VTI, 20% into VXUS
This information does not tell us as much. We do know you don't have any bonds, but without knowing the relative sizes of the 401k and Roth IRA, we don't know how much of the portfolio is in international stocks.

I'm not a fan of 100% stock portfolios. I like to see no less than 20% in bonds or fixed income assets. Even for younger people.

There are numerous discussions about how much international stock to use. If you have simply no idea, consider 20% of the stock allocation. That is the highest number Jack Bogle recommended and the lowest number that Vanguard recommends. Nobody knows what will work out best in the future. The important thing is to pick a number and stick with it rather than switch back and forth.

Once you decide on your stock to bond ratio and the amount of international stock to hold, finding the funds to fill that bill is easy.
So, question on bonds. Given our inflationary environment - the fact that we are still printing a ton of money for wars, the fact that money is returning to us from other countries due to BRICS, etc, and that if the fed cuts rates, inflation will just rise again. 20-25 years from now is it likely that bonds will still perform well relative to inflation? I was looking at the VBTIX bond fund and that yield is 4.69%. Meanwhile, VMFXX is yielding 5.28% right now. What is the benefit of picking VBTIX over VMFXX right now?

Also my 401k is $205k 100% into FXAIX. My roth is a mere $14k, with 80% into VTI and 20% into VXUS.


What do you think of 70% US stock, 15% bonds, 15% international stock?
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Re: Am I making mistakes in my 401k/roth allocations?

Post by BirdFood »

myrongains wrote: Fri Jul 05, 2024 4:49 pm 20-25 years from now is it likely that bonds will still perform well relative to inflation?
TIPS?
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retiredjg »

myrongains wrote: Fri Jul 05, 2024 4:49 pm I was looking at the VBTIX bond fund and that yield is 4.69%. Meanwhile, VMFXX is yielding 5.28% right now. What is the benefit of picking VBTIX over VMFXX right now?
A possible benefit is that bonds will increase in value when interest rates go down. Money market will not. We don't know when that will be, of course, but the time to get into an investment is before it increases in value, not after that has already started.

Also my 401k is $205k 100% into FXAIX. My roth is a mere $14k, with 80% into VTI and 20% into VXUS.
So what you have now is about 99% US stocks and 1% international stocks. Not really a significant allocation at this point.

What do you think of 70% US stock, 15% bonds, 15% international stock?
I think that is a fine allocation just based on age and not knowing anything about your temperament.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by SnowBog »

retiredjg wrote: Fri Jul 05, 2024 5:29 pm
myrongains wrote: Fri Jul 05, 2024 4:49 pm I was looking at the VBTIX bond fund and that yield is 4.69%. Meanwhile, VMFXX is yielding 5.28% right now. What is the benefit of picking VBTIX over VMFXX right now?
A possible benefit is that bonds will increase in value when interest rates go down. Money market will not. We don't know when that will be, of course, but the time to get into an investment is before it increases in value, not after that has already started.
To say this slightly differently...

Money Market funds like VMFXX are similar to bank accounts. The only thing you can earn is the interest rate, which is going to vary over time. When interest rates do down, you'll earn less.

Bond funds are more like CDs, in that you "lock in" an interest rate for a period of time. (Or in the case of a bond "fund" - the average duration of the fund.) When interest rates fall, you continue to get the higher interest rates for as long as they were "locked in". That creates a "market" (demand) for people who want the higher interest rates of the older bonds.

So while rates might fall, the "value" of those bonds with higher rates rise. The inverse is true as well... When rates rise, the value of lower bonds decreases, meaning their "value" decreases.

However, there's a "balance" that happens around the bond duration. Effectively, you hit a "break even" at that point where your bonds are "immune" to those changes. If rates have fallen, you'll earn less interest but make up the difference in increased value. If rates have risen, your value would have fallen but you'd have received more interest - again ending up at about the same place.

Which is why it's relevant to align your duration of bonds.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by Northern Flicker »

myrongains wrote: ...and that if the fed cuts rates, inflation will just rise again...
How do you know that? That would not be the Fed objective. What do you know that they don't?
myrongains wrote: What is the benefit of picking VBTIX over VMFXX right now?
If rates fall, the yield of VMFXX will just fall with no compensating price appreciation. Cash funds incorporate changes in rates in either direction rapidly. That is reinvestment risk. Intermediate bonds have more stability of income level, and will appreciate, offsetting stock losses some, if rates fall when stocks fall (which is not guaranteed to happen when stocks fall).

There is nothing wrong with choosing VMFXX for a fixed income allocation in lieu of bonds. It will have more reinvestment risk, but less inflation risk.
myrongains wrote: What do you think of 70% US stock, 15% bonds, 15% international stock?
I think 15% bonds (or VMFXX) is fine. There is no consensus on the percentage of stocks to allocate internationally. I generally believe that the diversification benefit is not high enough to justify the extra complexity until you have 20-25% of equities in int'l equities. There are others who think anything above zero int'l is an error. Vanguard uses 40% of stocks for int'l in the target date funds.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by Northern Flicker »

Snowbog wrote: However, there's a "balance" that happens around the bond duration. Effectively, you hit a "break even" at that point where your bonds are "immune" to those changes. If rates have fallen, you'll earn less interest but make up the difference in increased value. If rates have risen, your value would have fallen but you'd have received more interest - again ending up at about the same place.

Which is why it's relevant to align your duration of bonds.
This is not how immunization against interest rates works. The idea is to align or match the duration of the bond portfolio to the duration of one's liabilities, using nominal bonds to match to nominal liabilities or inflation-linked bonds to match to real liabilities.

For a retirement saver, the future asset level at retirement to fund the retirement is a real liability. If long-term TIPS are used as the bond holdings for that, the investor will give up substantial diversification of shorter term volatility due to the moderately high correlation of long TIPS and stocks.

That is fine if what you care about is reducing variance of terminal wealth at retirement in real terms. But it will be less effective than intermediate nominal bonds at providing ballast to an equity-heavy portfolio to avoid heavy drawdowns at times when job loss risk is elevated.

Approximate liability matching in this case could take the form of holding a lower stock allocation and long-term TIPS, say 60-70% VT 30-40% LTPZ. Then one is aiming to beat inflation by a lesser amount than with a stock-heavy allocation, but with less uncertainty in achieving that goal. It can take a moderate amount of portfolio maintenance to maintain the duration match.

Generally, I think a retirement saver wanting a high stock allocation should stick to nominal intermediate bonds (or short-term nominal bonds or cash if not fully comfortable with interest rate risk).

Most target date funds, including Vanguard's use intermediate bonds until close to retirement. Vanguard adds short TIPS when close to or in retirement.

There are, however, proponents on here of holding long duration nominal treasury portfolios for equity diversification based on matching their duration with the duration of future (real) liabilities. That does not account for inflation, and 2022 was an ugly year for that strategy (eg VGLT down 29.45% while VTI was down 19.5%. There seem to be fewer postings advocating for that at present than in the past.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by dogagility »

myrongains wrote: Thu Jul 04, 2024 10:13 pm ...if the market crashes I'm quite exposed. Is there a general consensus on a safer allocation at each age range?
This depends upon how you define "safer". Do you mean lower volatility of the portfolio balance? Or do you mean the ability of your portfolio to support your retirement spending?

I'd suggest you read this thread: viewtopic.php?p=7611251#p7611251
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Re: Am I making mistakes in my 401k/roth allocations?

Post by Northern Flicker »

myrongains wrote: I have about $110k saved up in cash, so I would be able to cover my expenses in an unemployment situation for about 3 years. So no need to tap into 401k.

My portfolio is $205k - yearly living expenses are about $50k. So my portfolio is currently 4x my annual expense. 4 years.
With that large cash position, you are nowhere close to 100% stocks currently. If 6-12 months of expenses is an emergency fund, you are about 75-79% stock taking the remaining cash into account. Holding fixed income assets in the 401K and stock in the taxable account is more tax efficient.

What is your student loan interest rate?
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Re: Am I making mistakes in my 401k/roth allocations?

Post by SnowBog »

Northern Flicker wrote: Sat Jul 06, 2024 2:53 am
Snowbog wrote: However, there's a "balance" that happens around the bond duration. Effectively, you hit a "break even" at that point where your bonds are "immune" to those changes. If rates have fallen, you'll earn less interest but make up the difference in increased value. If rates have risen, your value would have fallen but you'd have received more interest - again ending up at about the same place.

Which is why it's relevant to align your duration of bonds.
This is not how immunization against interest rates works. The idea is to align or match the duration of the bond portfolio to the duration of one's liabilities, using nominal bonds to match to nominal liabilities or inflation-linked bonds to match to real liabilities.

For a retirement saver, the future asset level at retirement to fund the retirement is a real liability. If long-term TIPS are used as the bond holdings for that, the investor will give up substantial diversification of shorter term volatility due to the moderately high correlation of long TIPS and stocks.

That is fine if what you care about is reducing variance of terminal wealth at retirement in real terms. But it will be less effective than intermediate nominal bonds at providing ballast to an equity-heavy portfolio to avoid heavy drawdowns at times when job loss risk is elevated.

Approximate liability matching in this case could take the form of holding a lower stock allocation and long-term TIPS, say 60-70% VT 30-40% LTPZ. Then one is aiming to beat inflation by a lesser amount than with a stock-heavy allocation, but with less uncertainty in achieving that goal. It can take a moderate amount of portfolio maintenance to maintain the duration match.

Generally, I think a retirement saver wanting a high stock allocation should stick to nominal intermediate bonds (or short-term nominal bonds or cash if not fully comfortable with interest rate risk).

Most target date funds, including Vanguard's use intermediate bonds until close to retirement. Vanguard adds short TIPS when close to or in retirement.

There are, however, proponents on here of holding long duration nominal treasury portfolios for equity diversification based on matching their duration with the duration of future (real) liabilities. That does not account for inflation, and 2022 was an ugly year for that strategy (eg VGLT down 29.45% while VTI was down 19.5%. There seem to be fewer postings advocating for that at present than in the past.
My point was more generic in that bonds "value" and "rates" are inversely connected.

Instead of worrying about "rates rising" or "rates falling", understanding that there's a "counter balance" with the "value" of the bonds (which will fall - or rise - opposite of what the rates are doing) might help put things into perspective.

At a later point, it might be more relevant to get into concepts like LMP. Didn't think that was necessary now.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

Northern Flicker wrote: Sat Jul 06, 2024 12:33 pm
myrongains wrote: I have about $110k saved up in cash, so I would be able to cover my expenses in an unemployment situation for about 3 years. So no need to tap into 401k.

My portfolio is $205k - yearly living expenses are about $50k. So my portfolio is currently 4x my annual expense. 4 years.
With that large cash position, you are nowhere close to 100% stocks currently. If 6-12 months of expenses is an emergency fund, you are about 75-79% stock taking the remaining cash into account. Holding fixed income assets in the 401K and stock in the taxable account is more tax efficient.

What is your student loan interest rate?
Student loan interest rate is 3%. I don't want to pay it off because it reduces my emergency fund by a lot which I also am holding as a potential downpayment on a future home. Paying $72k to save $2500 of interest every year and increase my exposure to a bad situation in an unemployment scenario doesn't' seem like a good move.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by Northern Flicker »

No reason to pay off a 3% loan when you can earn a higher rate of interest with the cash. The student loan offsets the inflation risk of a similar amount bonds or cash with duration not exceeding the duration of the student loan. (Duration is not term to maturity if comparing).

It would be good to identify asset buckets more clearly. Decide how much you need for an emergency fund. Then you know how much you have saved towards a down payment on a residence (or how much can be invested in a taxable account if not targeting a purchase of residence).
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

BirdFood wrote: Fri Jul 05, 2024 4:57 pm
myrongains wrote: Fri Jul 05, 2024 4:49 pm 20-25 years from now is it likely that bonds will still perform well relative to inflation?
TIPS?
So if I invest in the bond fund:

Vanguard Total Bond Market Index Inst

Does this have TIPS? I don't know enough about bonds to know if I'm buying the right fund for that.

Sorry for my likely amateur questions. I know nothing of bonds lol.




I think I will likely go 70% US stock, 15% bonds, and 15% international stock (atleast, for my 401k). In my roth I will continue how I've been allocating; 80% into VTI and 20% into VXUS.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retiredjg »

No. Total Bond Index does not contain any TIPS bonds.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by celia »

myrongains wrote: Thu Jul 04, 2024 9:45 pm I don't know much about bonds or retirement style investing, so I have the following allocations in my portfolios..

Age: 36
401k - 100% into FXAIX
Roth - 80% into VTI, 20% into VXUS
Your whole portfolio should add up to 100%.

As originally posted, it looks like you have nothing in taxable and your tax-deferred could be worth $1,000 and Roth $500,000 or it could be tax-deferred $500,000 and Roth is $1,000.

Please edit your original post to help get better responses.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

celia wrote: Sun Jul 07, 2024 10:06 pm
myrongains wrote: Thu Jul 04, 2024 9:45 pm I don't know much about bonds or retirement style investing, so I have the following allocations in my portfolios..

Age: 36
401k - 100% into FXAIX
Roth - 80% into VTI, 20% into VXUS
Your whole portfolio should add up to 100%.

As originally posted, it looks like you have nothing in taxable and your tax-deferred could be worth $1,000 and Roth $500,000 or it could be tax-deferred $500,000 and Roth is $1,000.

Please edit your original post to help get better responses.
I'm confused.

The 401k is tax deferred.
The Roth IRA is after tax money.


Are you asking about money I have invested in a brokerage for things like individual stocks such as TSLA, AAPL, etc?
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retired@50 »

myrongains wrote: Sun Jul 07, 2024 10:26 pm
celia wrote: Sun Jul 07, 2024 10:06 pm
myrongains wrote: Thu Jul 04, 2024 9:45 pm I don't know much about bonds or retirement style investing, so I have the following allocations in my portfolios..

Age: 36
401k - 100% into FXAIX
Roth - 80% into VTI, 20% into VXUS
Your whole portfolio should add up to 100%.

As originally posted, it looks like you have nothing in taxable and your tax-deferred could be worth $1,000 and Roth $500,000 or it could be tax-deferred $500,000 and Roth is $1,000.

Please edit your original post to help get better responses.
I'm confused.

The 401k is tax deferred.
The Roth IRA is after tax money.


Are you asking about money I have invested in a brokerage for things like individual stocks such as TSLA, AAPL, etc?
I suspect celia's question has to do with what percentage of your total portfolio is in each of the accounts?

In other words, if you have a $100,000 portfolio and $75,000 is in the 401k, and the other $25,000 is in the Roth account that information will tell us things about how you might better construct your portfolio and which account to use for which asset class.

As an example:
75% 401k
25% Roth
0% taxable

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

retired@50 wrote: Sun Jul 07, 2024 10:41 pm
myrongains wrote: Sun Jul 07, 2024 10:26 pm
celia wrote: Sun Jul 07, 2024 10:06 pm
myrongains wrote: Thu Jul 04, 2024 9:45 pm I don't know much about bonds or retirement style investing, so I have the following allocations in my portfolios..

Age: 36
401k - 100% into FXAIX
Roth - 80% into VTI, 20% into VXUS
Your whole portfolio should add up to 100%.

As originally posted, it looks like you have nothing in taxable and your tax-deferred could be worth $1,000 and Roth $500,000 or it could be tax-deferred $500,000 and Roth is $1,000.

Please edit your original post to help get better responses.
I'm confused.

The 401k is tax deferred.
The Roth IRA is after tax money.


Are you asking about money I have invested in a brokerage for things like individual stocks such as TSLA, AAPL, etc?
I suspect celia's question has to do with what percentage of your total portfolio is in each of the accounts?

In other words, if you have a $100,000 portfolio and $75,000 is in the 401k, and the other $25,000 is in the Roth account that information will tell us things about how you might better construct your portfolio and which account to use for which asset class.

As an example:
75% 401k
25% Roth
0% taxable

Regards,
Ah, ok.

401k - $205,000. 100% into FXAIX
Roth - $14,000. 80% into VTI, 20% into VXUS.
HYSA - $110,000 (I don't plan to touch this, aside from monthly DCA into an index like SPY and a dividend fund like SCHD perhaps, around $1.5-2k total).

I'm simply planning to change the 401k to 70% FXAIX, 15% bond fund, 15% international fund. However now I'm hesitant with the bonds allocation since apparently the bond fund does not have TIPS. I'm not sure my 401k servicer even has that option (or if this even matters)
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retiredjg »

The list you showed us contains Vanguard Total Bond Index but no TIPs fund. The Total Bond is fine for the "safer" side of your portfolio.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retired@50 »

myrongains wrote: Sun Jul 07, 2024 11:16 pm
I'm simply planning to change the 401k to 70% FXAIX, 15% bond fund, 15% international fund. However now I'm hesitant with the bonds allocation since apparently the bond fund does not have TIPS. I'm not sure my 401k servicer even has that option (or if this even matters)
At age 36, TIPS isn't something you should worry about. If you were 66, sure.

Regards,
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

Well, I rebalanced my 401k.

70% FXAIX
20% VTMNX
10% VTBIX

I imagine 10 years from now I may just change to 60/20/20, and another 10 years to 50/20/30
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retired@50 »

myrongains wrote: Mon Jul 08, 2024 12:09 pm Well, I rebalanced my 401k.

70% FXAIX
20% VTMNX
10% VTBIX

I imagine 10 years from now I may just change to 60/20/20, and another 10 years to 50/20/30
Congratulations.

Now just keep contributing, and try to ignore market fluctuations.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Am I making mistakes in my 401k/roth allocations?

Post by momopi »

myrongains wrote: Mon Jul 08, 2024 12:09 pm Well, I rebalanced my 401k.
70% FXAIX
20% VTMNX
10% VTBIX
I imagine 10 years from now I may just change to 60/20/20, and another 10 years to 50/20/30
I'd have preferred to leave it at 100% FXAIX for now. Quoting Charlie Munger, "The first rule of compounding: Never interrupt it unnecessarily.”

With your current asset allocation, you're at 2/3 in equities and 1/3 in cash. Do you really need to rebalance to add bonds right now?

If you desire more international stock and bond exposure in your 401k account, add it with your on-going contributions.
Last edited by momopi on Mon Jul 08, 2024 9:47 pm, edited 1 time in total.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by celia »

celia wrote: Sun Jul 07, 2024 10:06 pm Your whole portfolio should add up to 100%.

As originally posted, it looks like you have nothing in taxable and your tax-deferred could be worth $1,000 and Roth $500,000 or it could be tax-deferred $500,000 and Roth is $1,000.

Please edit your original post to help get better responses.
If I did my math correctly and understood all your posts, this is what i think you have and is formatted according to our guidelines:

401k

43.6% FXAIX Fidelity 500 Index
12.5% VTMNX Vanguard Developed Markets (intl)
6.3% VTBIX Vanguard Total Bond Index

Roth

3.4% VTI Vanguard Total Stock Market
0.8% VXUS Vanguard Total Intl Stock

Taxable

0%

HYSA

32.8% SPY(?) SPDR S&P 500
0.6% SCHD(?) Schwab US Dividend


Your seven funds total $329k which is an average of $47K per fund. The ones less than 5% of the portfolio won't impact it very much. These small accounts could double and your portfolio will remain just about the same as if you didn't own them.

OP, does this view of your portfolio look like what you own? It may seem odd to you as I suspect these are held at 3 custodians.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

celia wrote: Mon Jul 08, 2024 8:13 pm
celia wrote: Sun Jul 07, 2024 10:06 pm Your whole portfolio should add up to 100%.

As originally posted, it looks like you have nothing in taxable and your tax-deferred could be worth $1,000 and Roth $500,000 or it could be tax-deferred $500,000 and Roth is $1,000.

Please edit your original post to help get better responses.
If I did my math correctly and understood all your posts, this is what i think you have and is formatted according to our guidelines:

401k

43.6% FXAIX Fidelity 500 Index
12.5% VTMNX Vanguard Developed Markets (intl)
6.3% VTBIX Vanguard Total Bond Index

Roth

3.4% VTI Vanguard Total Stock Market
0.8% VXUS Vanguard Total Intl Stock

Taxable

0%

HYSA

32.8% SPY(?) SPDR S&P 500
0.6% SCHD(?) Schwab US Dividend


Your seven funds total $329k which is an average of $47K per fund. The ones less than 5% of the portfolio won't impact it very much. These small accounts could double and your portfolio will remain just about the same as if you didn't own them.

OP, does this view of your portfolio look like what you own? It may seem odd to you as I suspect these are held at 3 custodians.
In the HYSA, nothing is invested. It's just collecting interest in a savings account. I mentioned SPY and SCHD as future investments of which I'd put in $1.5-2k per month.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retired@50 »

myrongains wrote: Tue Jul 09, 2024 8:36 am I mentioned SPY and SCHD as future investments of which I'd put in $1.5-2k per month.
SPY is a fine fund, but there are less expensive alternatives that hold the same stocks and track the same index.

Consider VOO instead. Why pay 0.095% when you could pay 0.03% in expenses? :shock: Or, if you're at Fidelity, FXAIX for 0.015%.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

retired@50 wrote: Tue Jul 09, 2024 8:39 am
myrongains wrote: Tue Jul 09, 2024 8:36 am I mentioned SPY and SCHD as future investments of which I'd put in $1.5-2k per month.
SPY is a fine fund, but there are less expensive alternatives that hold the same stocks and track the same index.

Consider VOO instead. Why pay 0.095% when you could pay 0.03% in expenses? :shock: Or, if you're at Fidelity, FXAIX for 0.015%.

Regards,
Good point! In your opinion since VOO pays dividends is there any value in purchasing SCHD?

I know this is a loaded question but I want to start investing that six figures in my HYSA on a monthly basis and want to pick a good fund. I find it a bit troublesome that SPY is held up by 7 tech stocks and am curious if diversification into an international fund makes sense, instead of dumping it all into VOO.
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Re: Am I making mistakes in my 401k/roth allocations?

Post by retired@50 »

myrongains wrote: Tue Jul 09, 2024 11:44 am
retired@50 wrote: Tue Jul 09, 2024 8:39 am
myrongains wrote: Tue Jul 09, 2024 8:36 am I mentioned SPY and SCHD as future investments of which I'd put in $1.5-2k per month.
SPY is a fine fund, but there are less expensive alternatives that hold the same stocks and track the same index.

Consider VOO instead. Why pay 0.095% when you could pay 0.03% in expenses? :shock: Or, if you're at Fidelity, FXAIX for 0.015%.

Regards,
Good point! In your opinion since VOO pays dividends is there any value in purchasing SCHD?

I know this is a loaded question but I want to start investing that six figures in my HYSA on a monthly basis and want to pick a good fund. I find it a bit troublesome that SPY is held up by 7 tech stocks and am curious if diversification into an international fund makes sense, instead of dumping it all into VOO.
So, if you want to de-emphasize (to some extent) the large cap US companies in VOO, you could use VTI, which is the total US market, so it also contains the mid cap and small cap companies. This tactic will only take you so far, because VTI also contains those 7 huge companies in a market weight proportion.

Adding international will put that part of your investment into a whole different set of companies. Consider researching VXUS or VEA. Both would be considered suitable for a taxable brokerage account.

SCHD is focused on dividends and dividend paying companies. This is usually less desirable in a taxable account because the fund will create more income that will show up your tax return. In other words, it creates more "tax-drag" which is usually best avoided when possible.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Am I making mistakes in my 401k/roth allocations?

Post by SnowBog »

myrongains wrote: Tue Jul 09, 2024 11:44 am
retired@50 wrote: Tue Jul 09, 2024 8:39 am
myrongains wrote: Tue Jul 09, 2024 8:36 am I mentioned SPY and SCHD as future investments of which I'd put in $1.5-2k per month.
SPY is a fine fund, but there are less expensive alternatives that hold the same stocks and track the same index.

Consider VOO instead. Why pay 0.095% when you could pay 0.03% in expenses? :shock: Or, if you're at Fidelity, FXAIX for 0.015%.

Regards,
Good point! In your opinion since VOO pays dividends is there any value in purchasing SCHD?

I know this is a loaded question but I want to start investing that six figures in my HYSA on a monthly basis and want to pick a good fund. I find it a bit troublesome that SPY is held up by 7 tech stocks and am curious if diversification into an international fund makes sense, instead of dumping it all into VOO.
IMHO this is a common misperception...

Whether you are talking about an S&P 500 fund like VOO or a Total Stock Market fund like VTI - it represents the market - as the market currently exists as measured by market capitalization.

Yes, currently - and for many years - Tech has been dominating the market. But that hasn't always been the case, and won't always be the case.

I find a historical perspective helps. This video (or those similar) show how much the top 10 companies have changed over time. https://www.youtube.com/watch?v=HPmULCFYg3A

You'll notice that Tech previously led the market back in the late 1990's, before it fell with the Dot.com bubble. In 2011, Apple put Tech back on top, and Tech has been having a good run since then.

However, if you notice there were other "leaders" over the years - including Oil & Gas for many of them (among others). If you compare this change in leadership with the overall price of these funds - what do you notice? Basically nothing... The "market weight" is simply a reflection of "investors" on "who" they think are the "most valuable" companies at any given point in time. The "value of the market" is based on the economy continuing to grow - regardless of who's leading that growth.

As of today, Microsoft is the largest company by market cap. At some point in the future (no idea when), that won't be the case, and perhaps that won't be the case for any of the "tech" companies. Maybe the "next big thing" will be biomedical devices (or who knows - not trying to "predict" anything, just point out there will be a "next big thing" and there is no guarantee it will come from "tech" companies). That means that money (market capitalization) flows from "Tech" (current market leaders) to whoever the next market leaders will be. Effectively, money moved from your right pocket to your left pocket.

That's the fundamental benefit of holding a "Total Stock Market" (or S&P 500 as a reasonable proxy) fund as you own effectively everything. You don't care who the "leaders" are, if/when they change you'll simply hold the new leaders, and the leaders after that, and the leaders after that. When tech falls out of favor (and it will - it's just a matter of time - again look at the video), it won't matter. So, the fact that "tech is dominating" or "most of the market cap is in a few companies" really doesn't matter. That's basically always been the case, and always will be the case, and who those companies are is largely irrelevant. By "owning the market" it will make no difference when the "leaders" (company or industry) changes. That's the point - we aren't "picking winners" or "relying on the current winners", we hold everything. We own today's leaders, tomorrow's leaders, and we'll own future businesses that don't exist yet but will eventually dominate the market when they show up as well. If "tech" implodes tomorrow - in the long run, it won't matter to my retirement accounts.

Now, international is a bit different. The "Total Stock Market" represents US based businesses. Many of them - such as Microsoft - are globally diversified businesses, where people like Jack Bogle felt they provide "enough" international diversification especially when viewed against regulatory and financial protections which are not the same across the globe. But a "Total Stock Market" does not have exposure to the "world's economy", as great companies based out of Europe, Asia, etc. aren't represented. As such, many feel holding some international adds diversification. Should the US fall on hard times, international diversification could provide a major benefit. "How much" international is an oft debated topic - again with "acceptable" answers anywhere from 0% to "overweight" international (which could be something like 50% of their stocks in international).

If you really want to dig into the International debate, this very long thread has the arguments presented... viewtopic.php?t=409214
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Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

SnowBog wrote: Tue Jul 09, 2024 12:54 pm
myrongains wrote: Tue Jul 09, 2024 11:44 am
retired@50 wrote: Tue Jul 09, 2024 8:39 am
myrongains wrote: Tue Jul 09, 2024 8:36 am I mentioned SPY and SCHD as future investments of which I'd put in $1.5-2k per month.
SPY is a fine fund, but there are less expensive alternatives that hold the same stocks and track the same index.

Consider VOO instead. Why pay 0.095% when you could pay 0.03% in expenses? :shock: Or, if you're at Fidelity, FXAIX for 0.015%.

Regards,
Good point! In your opinion since VOO pays dividends is there any value in purchasing SCHD?

I know this is a loaded question but I want to start investing that six figures in my HYSA on a monthly basis and want to pick a good fund. I find it a bit troublesome that SPY is held up by 7 tech stocks and am curious if diversification into an international fund makes sense, instead of dumping it all into VOO.
IMHO this is a common misperception...

Whether you are talking about an S&P 500 fund like VOO or a Total Stock Market fund like VTI - it represents the market - as the market currently exists as measured by market capitalization.

Yes, currently - and for many years - Tech has been dominating the market. But that hasn't always been the case, and won't always be the case.

I find a historical perspective helps. This video (or those similar) show how much the top 10 companies have changed over time. https://www.youtube.com/watch?v=HPmULCFYg3A

You'll notice that Tech previously led the market back in the late 1990's, before it fell with the Dot.com bubble. In 2011, Apple put Tech back on top, and Tech has been having a good run since then.

However, if you notice there were other "leaders" over the years - including Oil & Gas for many of them (among others). If you compare this change in leadership with the overall price of these funds - what do you notice? Basically nothing... The "market weight" is simply a reflection of "investors" on "who" they think are the "most valuable" companies at any given point in time. The "value of the market" is based on the economy continuing to grow - regardless of who's leading that growth.

As of today, Microsoft is the largest company by market cap. At some point in the future (no idea when), that won't be the case, and perhaps that won't be the case for any of the "tech" companies. Maybe the "next big thing" will be biomedical devices (or who knows - not trying to "predict" anything, just point out there will be a "next big thing" and there is no guarantee it will come from "tech" companies). That means that money (market capitalization) flows from "Tech" (current market leaders) to whoever the next market leaders will be. Effectively, money moved from your right pocket to your left pocket.

That's the fundamental benefit of holding a "Total Stock Market" (or S&P 500 as a reasonable proxy) fund as you own effectively everything. You don't care who the "leaders" are, if/when they change you'll simply hold the new leaders, and the leaders after that, and the leaders after that. When tech falls out of favor (and it will - it's just a matter of time - again look at the video), it won't matter. So, the fact that "tech is dominating" or "most of the market cap is in a few companies" really doesn't matter. That's basically always been the case, and always will be the case, and who those companies are is largely irrelevant. By "owning the market" it will make no difference when the "leaders" (company or industry) changes. That's the point - we aren't "picking winners" or "relying on the current winners", we hold everything. We own today's leaders, tomorrow's leaders, and we'll own future businesses that don't exist yet but will eventually dominate the market when they show up as well. If "tech" implodes tomorrow - in the long run, it won't matter to my retirement accounts.

Now, international is a bit different. The "Total Stock Market" represents US based businesses. Many of them - such as Microsoft - are globally diversified businesses, where people like Jack Bogle felt they provide "enough" international diversification especially when viewed against regulatory and financial protections which are not the same across the globe. But a "Total Stock Market" does not have exposure to the "world's economy", as great companies based out of Europe, Asia, etc. aren't represented. As such, many feel holding some international adds diversification. Should the US fall on hard times, international diversification could provide a major benefit. "How much" international is an oft debated topic - again with "acceptable" answers anywhere from 0% to "overweight" international (which could be something like 50% of their stocks in international).

If you really want to dig into the International debate, this very long thread has the arguments presented... viewtopic.php?t=409214
retired@50 wrote: Tue Jul 09, 2024 12:33 pm
myrongains wrote: Tue Jul 09, 2024 11:44 am
retired@50 wrote: Tue Jul 09, 2024 8:39 am
myrongains wrote: Tue Jul 09, 2024 8:36 am I mentioned SPY and SCHD as future investments of which I'd put in $1.5-2k per month.
SPY is a fine fund, but there are less expensive alternatives that hold the same stocks and track the same index.

Consider VOO instead. Why pay 0.095% when you could pay 0.03% in expenses? :shock: Or, if you're at Fidelity, FXAIX for 0.015%.

Regards,
Good point! In your opinion since VOO pays dividends is there any value in purchasing SCHD?

I know this is a loaded question but I want to start investing that six figures in my HYSA on a monthly basis and want to pick a good fund. I find it a bit troublesome that SPY is held up by 7 tech stocks and am curious if diversification into an international fund makes sense, instead of dumping it all into VOO.
So, if you want to de-emphasize (to some extent) the large cap US companies in VOO, you could use VTI, which is the total US market, so it also contains the mid cap and small cap companies. This tactic will only take you so far, because VTI also contains those 7 huge companies in a market weight proportion.

Adding international will put that part of your investment into a whole different set of companies. Consider researching VXUS or VEA. Both would be considered suitable for a taxable brokerage account.

SCHD is focused on dividends and dividend paying companies. This is usually less desirable in a taxable account because the fund will create more income that will show up your tax return. In other words, it creates more "tax-drag" which is usually best avoided when possible.

Regards,
Great writeup, thanks. I think I will go with VTI in my taxable brokerage, I will DCA every month. Maybe do the same allocation as my Roth, and make 20% of my contributions go to VXUS.

So $1200 into VTI, $300 into VXUS every month.

One reason I prefer these two over VOO is that it will be easier to accumulate enough shares to sell covered calls on.
SnowBog
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Re: Am I making mistakes in my 401k/roth allocations?

Post by SnowBog »

myrongains wrote: Tue Jul 09, 2024 3:00 pm One reason I prefer these two over VOO is that it will be easier to accumulate enough shares to sell covered calls on.
Repeat after me "there is no such thing as a free lunch."

Options trading has its own risks. If you follow Boglehead's principles, basic things like live below your means, invest the rest, and stay the course - there is no "need" to deal with options. https://www.bogleheads.org/wiki/Boglehe ... philosophy

IMHO this is yet another example of why "we" (the humans involved) are often our "biggest risks" to finding financial success. We feel like we should "do more", "take on more risk", "try to squeeze a little better return." And it's especially bad when it initially "works" and we tell ourselves our plan was brilliant, and that "luck" had nothing to do with it, as then we just do it more and more, bigger and bigger. And then if it doesn't work...

Ultimately, this is "personal finance" - so you are free to do whatever you want. And I'm sure others will chime in and say how they use options in their plans...

But for my two cents, "keep it simple." You just need a few basic funds, disciple, and patience. Put your "energy" into continuing to grow your skills, career, and earning potential - giving you even more money to invest - and ultimately reap the rewards of a boring - yet highly effective - Boglehead's style investment approach.
Northern Flicker
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Re: Am I making mistakes in my 401k/roth allocations?

Post by Northern Flicker »

myrongains wrote: Mon Jul 08, 2024 12:09 pm Well, I rebalanced my 401k.

70% FXAIX
20% VTMNX
10% VTBIX

I imagine 10 years from now I may just change to 60/20/20, and another 10 years to 50/20/30
This is good. Minor nitpick-- you didn't rebalance, you changed your allocation. Rebalancing is resetting back to your chosen allocation if it has drifted away due to market action. I am making the point because rebalancing is something that is safe to do when the portfolio has drifted. Changes to target allocation take on timing risk and should be done very sparingly, with a very solid basis, and not in response to projections of future returns.
Northern Flicker
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Joined: Fri Apr 10, 2015 12:29 am

Re: Am I making mistakes in my 401k/roth allocations?

Post by Northern Flicker »

myrongains wrote: Great writeup, thanks. I think I will go with VTI in my taxable brokerage, I will DCA every month. Maybe do the same allocation as my Roth, and make 20% of my contributions go to VXUS.

So $1200 into VTI, $300 into VXUS every month.

One reason I prefer these two over VOO is that it will be easier to accumulate enough shares to sell covered calls on.
Taxable stock investments should be holdings you plan to hold until retirement. Once there is sn embedded gain, it may not be desirable to sell them except as withdrawals in retirement. VTI and VXUS (or the often more tax efficient IXUS) are good choices for a taxable account, but selling covered calls should not be a consideration.

It is best to consider taxable investments, Roth, trad IRA, and 401K assets as a single portfolio with a single target asset allocation.
Jeepergeo
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Re: Am I making mistakes in my 401k/roth allocations?

Post by Jeepergeo »

myrongains wrote: Thu Jul 04, 2024 9:45 pm I don't know much about bonds or retirement style investing, so I have the following allocations in my portfolios..

Age: 36
401k - 100% into FXAIX
Roth - 80% into VTI, 20% into VXUS

Should I be changing up my investment allocations at all? To me the Roth looks ok, but I'm just not sure about the 401k. Appreciate any feedback..
Looks good for a 36 year old. You have plenty of time ahead. There may be bumps and sumps here and there, so learn to not panic and go with the long term vision. As you get into your late 40s or early 50s, reconsider your AA and start to build gradually up on bonds.
Topic Author
myrongains
Posts: 152
Joined: Thu Apr 27, 2023 3:25 pm

Re: Am I making mistakes in my 401k/roth allocations?

Post by myrongains »

Northern Flicker wrote: Tue Jul 09, 2024 8:15 pm
myrongains wrote: Mon Jul 08, 2024 12:09 pm Well, I rebalanced my 401k.

70% FXAIX
20% VTMNX
10% VTBIX

I imagine 10 years from now I may just change to 60/20/20, and another 10 years to 50/20/30
This is good. Minor nitpick-- you didn't rebalance, you changed your allocation. Rebalancing is resetting back to your chosen allocation if it has drifted away due to market action. I am making the point because rebalancing is something that is safe to do when the portfolio has drifted. Changes to target allocation take on timing risk and should be done very sparingly, with a very solid basis, and not in response to projections of future returns.
Well, I'm looking at my balances as of today and they are allocated now based on these percentages. I clicked "rebalance" when I made those allocations. I hope I didn't make a mistake.

So you're saying that many years from now it might turn out that due to the gain of one fund being much larger than the other, it could cause the 70/20/10 ratio to become something different? I hadn't even thought of that. So hypothetically it could go 60/35/5 and then I'd have to rebalance based on my risk tolerance at that time.. interesting.
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