Sanity Check: All Bonds in 401K and Target Date Funds

[phiMD]

Sanity check: I sit on my company’s benefits committee and, when reviewing our 401(k) profit-sharing plan, I’ve noticed I’m in the minority holding only bonds.

Following BH advice, I stick to a boring, low-cost Vanguard Intermediate Bond Fund, while most participants favor target-date funds heavily weighted in equities, which have performed beyond well recently. Am I missing something?

Is it because most people lack a significant taxable portion of their net wealth? At 41, married with 3 kids, my portfolio is ~65/35 stocks/bonds, totaling $4.5M ($3M taxable, $1M tax-deferred, $0.5M Roth/HSA), but I seem to be the outlier.

[Silk McCue]

We’ve never had a significant portion of our investments in Taxable. For the average investor holding only bonds in an employer plan would be a poor decision. It sounds like it makes sense for you.

Cheers

[3funder]

It's fine.

[gavinsiu]

Many investors don't have investment outside of their employer savings plan. I assume that you have taxable investment and is not in all bonds for your entire portfolio.

[phiMD]

Yes, my taxable/HSA/Roth accounts are 100% stocks. Just need a sanity check..

[breakfastinbed]

Three answers:

1) Most Americans know very little about investing and target fund dates are the default. That's what most of my coworkers invest in, for example. I don't have empiric data for this but I imagine if you could access 401K data for all Americans, the vast majority are invested in a target fund date with their retirement date as the target.

2) Many Americans who DO know something about investing probably aren't going to have 35% bonds at age 41, particularly in the medical field (which I assume is the field you're referencing) where people get their "adult paychecks" starting in their 30s. This is fairly conservative, which is the overall general opinion of the 60/40 portfolio in the accumulation phase, outside of this forum.

3) Are your colleagues as wealthy as you? I'm not sure you should expect your coworkers to invest in the way someone who is very wealthy would. If your plan works for you, that's what matters.

[rkhusky]

Yes, my taxable/HSA/Roth accounts are 100% stocks. Just need a sanity check..

Your portfolio is on the conservative side, but well within the realm of reasonable. And, for tax efficiency, having all stock in Roth and taxable and all bonds in Traditional is great.

[phiMD]

Well said and thank you. Yes, medical field. I plan to move to 70/30 next year, which I assume is more reasonable for 41 yo old. Above all, know thyself, I know I'm more conservative than my peers (immigrant to US, worked very hard, hate large volatility/variance in wealth). I don't consider myself wealthy, I have no idea what my peers net wealth is in comparison to mine..

Three answers:

1) Most Americans know very little about investing and target fund dates are the default. That's what most of my coworkers invest in, for example. I don't have empiric data for this but I imagine if you could access 401K data for all Americans, the vast majority are invested in a target fund date with their retirement date as the target.

2) Many Americans who DO know something about investing probably aren't going to have 35% bonds at age 41, particularly in the medical field (which I assume is the field you're referencing) where people get their "adult paychecks" starting in their 30s. This is fairly conservative, which is the overall general opinion of the 60/40 portfolio in the accumulation phase, outside of this forum.

3) Are your colleagues as wealthy as you? I'm not sure you should expect your coworkers to invest in the way someone who is very wealthy would. If your plan works for you, that's what matters.

[rkhusky]

Well said and thank you. Yes, medical field. I plan to move to 70/30 next year, which I assume is more reasonable for 41 yo old. Above all, know thyself, I know I'm more conservative than my peers (immigrant to US, worked very hard, hate large volatility/variance in wealth). I don't consider myself wealthy, I have no idea what my peers net wealth is in comparison to mine..

AA and risk is quite personal. Also consider if you might retire early, which might call for a different AA than for someone planning to retire at 65-70.

I would consider 60/40 - 80/20 to be well within reasonable.

[gavinsiu]

Yes, my taxable/HSA/Roth accounts are 100% stocks. Just need a sanity check..

Depending on allocation, you are probably ok. What happens is that for many investors, their retirement plan is their only vehicle for investment, so an allocation for Target fund is actually good. If you have enough equity, allocation to bond is actually good since it shelters it from taxes and your 401K won't grown large enough to have a RMD issue.

[breakfastinbed]

Based on your age and stated net worth, you are likely in the top 5% of physicians. Congratulations on the fruits of your hard work!

In general physicians may have different asset allocations than the public due to later onset of income (30s), high income, and higher than average risk tolerance. I personally like the view that you should not invest in bonds until 10-15 years before retirement (which may already apply to you). I think this is a pretty common approach among docs, at least among my colleagues. I’m in my mid-30s and 100% equities, as is everyone I talk to about finance at the hospital (including much older docs) though pretty much everyone I know is in a high acuity practice setting, which I think affects risk tolerance…

But this is all just thoughts on why your colleagues are invested differently. Risk tolerance/asset allocation is an individual decision after all. You should do what helps you sleep best at night; you don’t need to chase returns. All I’ll say is before making a long-term decision on your asset allocation, I’d recommend reviewing a variety of sources to get a variety of perspectives. Whitecoatinvestor is a good start.

Well said and thank you. Yes, medical field. I plan to move to 70/30 next year, which I assume is more reasonable for 41 yo old. Above all, know thyself, I know I'm more conservative than my peers (immigrant to US, worked very hard, hate large volatility/variance in wealth). I don't consider myself wealthy, I have no idea what my peers net wealth is in comparison to mine..

Three answers:

1) Most Americans know very little about investing and target fund dates are the default. That's what most of my coworkers invest in, for example. I don't have empiric data for this but I imagine if you could access 401K data for all Americans, the vast majority are invested in a target fund date with their retirement date as the target.

2) Many Americans who DO know something about investing probably aren't going to have 35% bonds at age 41, particularly in the medical field (which I assume is the field you're referencing) where people get their "adult paychecks" starting in their 30s. This is fairly conservative, which is the overall general opinion of the 60/40 portfolio in the accumulation phase, outside of this forum.

3) Are your colleagues as wealthy as you? I'm not sure you should expect your coworkers to invest in the way someone who is very wealthy would. If your plan works for you, that's what matters.

[rkhusky]

Beware of recency bias. 2008 is now 16 years ago. Young investors don’t know what it feels like to have a couple million in stocks and see the financial system collapsing, with stocks dropping 50%. 2000-2002 was also bad with the market dropping significantly (nearly 50%) over a three year period.

[phiMD]

Good point, recency bias is real

Beware of recency bias. 2008 is now 16 years ago. Young investors don’t know what it feels like to have a couple million in stocks and see the financial system collapsing, with stocks dropping 50%. 2000-2002 was also bad with the market dropping significantly (nearly 50%) over a three year period.

[Tramper Al]

Sanity check: I sit on my company’s benefits committee and, when reviewing our 401(k) profit-sharing plan, I’ve noticed I’m in the minority holding only bonds.

Following BH advice, I stick to a boring, low-cost Vanguard Intermediate Bond Fund, while most participants favor target-date funds heavily weighted in equities, which have performed beyond well recently. Am I missing something?

Is it because most people lack a significant taxable portion of their net wealth? At 41, married with 3 kids, my portfolio is ~65/35 stocks/bonds, totaling $4.5M ($3M taxable, $1M tax-deferred, $0.5M Roth/HSA), but I seem to be the outlier.

As you know and correctly mention, it is your total, overall (tax-adjusted) asset allocation that matters, not just what you are holding in this one account - which for you is just a fraction of the whole.

Everyone's situation is different, of course, and those target date funds are designed, however crudely, to serve a reasonable allocation in the event that it is the employee's only investment.

I plan to move to 70/30 next year, which I assume is more reasonable for 41 yo old.

I just noticed that you plan to Increase (?) your % equities allocation next year, so more risk as you get a little older? I'm sure you know that more commonly, people aim for a little less risk when getting older, having larger portfolio, and one less year of salary ahead. You are in a conservative range regardless, so I would just ask if you want to be 70/30, why not now?

[phiMD]

Great question, I feel like I could tolerate slightly more risk (hence 70/30), I have the unfortunate habit of rebalancing too often, so I'm trying to set one date annually (early Jan) to rebalance.

Best,

Sanity check: I sit on my company’s benefits committee and, when reviewing our 401(k) profit-sharing plan, I’ve noticed I’m in the minority holding only bonds.

Following BH advice, I stick to a boring, low-cost Vanguard Intermediate Bond Fund, while most participants favor target-date funds heavily weighted in equities, which have performed beyond well recently. Am I missing something?

Is it because most people lack a significant taxable portion of their net wealth? At 41, married with 3 kids, my portfolio is ~65/35 stocks/bonds, totaling $4.5M ($3M taxable, $1M tax-deferred, $0.5M Roth/HSA), but I seem to be the outlier.

As you know and correctly mention, it is your total, overall (tax-adjusted) asset allocation that matters, not just what you are holding in this one account - which for you is just a fraction of the whole.

Everyone's situation is different, of course, and those target date funds are designed, however crudely, to serve a reasonable allocation in the event that it is the employee's only investment.

I plan to move to 70/30 next year, which I assume is more reasonable for 41 yo old.

I just noticed that you plan to Increase (?) your % equities allocation next year, so more risk as you get a little older? I'm sure you know that more commonly, people aim for a little less risk when getting older, having larger portfolio, and one less year of salary ahead. You are in a conservative range regardless, so I would just ask if you want to be 70/30, why not now?

[Tramper Al]

Great question, I feel like I could tolerate slightly more risk (hence 70/30), I have the unfortunate habit of rebalancing too often, so I'm trying to set one date annually (early Jan) to rebalance.

So that is soon anyway. To be fair, though, I would not call what you are contemplating a rebalancing, or return to the stated plan. This is in fact a NEW plan. It's more of a psychology thing, know oneself, but for me the few times in my investing career I have decided to make some kind of change like this, the minute I made up my mind I could not shake the feeling that I had just made my portfolio 5% out of whack (in your example). And anything that happened (market-wise) in the interim before I fixed it might cause me a little regret. But you've got to do what works for you, of course.

Good luck.

[phiMD]

You're exactly right, thanks for calling that out.

Great question, I feel like I could tolerate slightly more risk (hence 70/30), I have the unfortunate habit of rebalancing too often, so I'm trying to set one date annually (early Jan) to rebalance.

So that is soon anyway. To be fair, though, I would not call what you are contemplating a rebalancing, or return to the stated plan. This is in fact a NEW plan. It's more of a psychology thing, know oneself, but for me the few times in my investing career I have decided to make some kind of change like this, the minute I made up my mind I could not shake the feeling that I had just made my portfolio 5% out of whack (in your example). And anything that happened (market-wise) in the interim before I fixed it might cause me a little regret. But you've got to do what works for you, of course.

Good luck.

[retired@50]

Yes, my taxable/HSA/Roth accounts are 100% stocks. Just need a sanity check..

If you're maintaining the overall asset allocation in your signature line, then you're fine.

My Rollover IRA is 100% bonds.

Regards,

[phiMD]

Thank you all. Happy Thanksgiving