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Re: Rules of thumb that shouldn't be

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Lump-sum is better than dollar-cost averaging
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Re: Rules of thumb that shouldn't be

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Age in bonds
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Re: Rules of thumb that shouldn't be

Post by jasc15 »

letsgobobby wrote:In your opinion, what rules of thumb are too often incorrect to be a good rule of thumb?


My pet peeve is:

"You should usually roll over an old 401k into an IRA"

I dislike this one because it's not true for so many investors and situations:
- 401ks can have much lower expense ratios than IRAs by virtue of having access to institutional mutual funds (ie Fidelity Advantage, Fidelity Spartan Institutional, Vanguard Admiral/Signal/Institutional)
This is true in my case. I want to roll over for simplicity's sake, but the expense ratios for my bond, equity, international equity and emerging market funds are 0.03%, 0.01%, 0.03% and 0.10% respectively. I figure I will wait to roll over until the total value of this account is small enough relative to my overall portfolio such that the effect of its low expense ratios is negligible.
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Re: Rules of thumb that shouldn't be

Post by dbr »

Rules of thumb are really just "titles" for longer discussions that discuss in detail some subject in investing. As such, there are probably no rules of thumb that should not be.

If someone is actually following a rule of thumb without more investigation of why's and wherefore's, then that is probably a bad idea. From that point of view all rules of thumb should not be.
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Re: Rules of thumb that shouldn't be

Post by pkcrafter »

dbr wrote:Rules of thumb are really just "titles" for longer discussions that discuss in detail some subject in investing. As such, there are probably no rules of thumb that should not be.

If someone is actually following a rule of thumb without more investigation of why's and wherefore's, then that is probably a bad idea. From that point of view all rules of thumb should not be.
+1 Not even sure if I'd call them rules of anything. General starting guidelines, perhaps.

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Re: Rules of thumb that shouldn't be

Post by Ged »

Rolling over your 401k to an IRA is something everyone should consider. I've had 4 401k's over my career and not one on them had:

-Lower expenses than my TIRA.
-Wide selection of index funds
-Roth support
-Better bankruptcy protection under the state I was in

One did have a stable value fund for a while but that got dropped when they changed providers to a horrific plan run by an insurance company.

So yes if you have one of these super plans that are about as common as left handed screwdrivers, take advantage. But I'm happy with the rule of thumb.
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Re: Rules of thumb that shouldn't be

Post by ajcp »

Ged wrote: So yes if you have one of these super plans that are about as common as left handed screwdrivers, take advantage. But I'm happy with the rule of thumb.
+1. You shouldn't follow it if you have unusual circumstances, but institutional funds or a backdoor Roth that maybe 5% of people have to worry about isn't enough to make something not a rule of thumb.
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Re: Rules of thumb that shouldn't be

Post by dbr »

ajcp wrote:
Ged wrote: So yes if you have one of these super plans that are about as common as left handed screwdrivers, take advantage. But I'm happy with the rule of thumb.
+1. You shouldn't follow it if you have unusual circumstances, but institutional funds or a backdoor Roth that maybe 5% of people have to worry about isn't enough to make something not a rule of thumb.
I don't have the data, but there are two issues that need to be investigated:

1) By number of investors and/or by total wealth invested, I would not assume good 401K plans are rare. Most megacorps and the Federal Government have good plans, many even better than any IRA. That does not addresss liability exposure concerns either. There are a lot of awful plans in smaller companies, but those are far fewer people per plan.

2) On the opposite side, rip-off 401K rollovers outnumber intelligent rollovers by 99:1. The 401K rollover is one of the worst dealing entry points for theft of investor assets there is. (OK, hyperbole there, but the issue needs to be addressed).
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Re: Rules of thumb that shouldn't be

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Re: Rules of thumb that shouldn't be

Post by dm200 »

letsgobobby wrote:In your opinion, what rules of thumb are too often incorrect to be a good rule of thumb?


My pet peeve is:

"You should usually roll over an old 401k into an IRA"

I dislike this one because it's not true for so many investors and situations:
- 401ks can have much lower expense ratios than IRAs by virtue of having access to institutional mutual funds (ie Fidelity Advantage, Fidelity Spartan Institutional, Vanguard Admiral/Signal/Institutional)
- if you are eligible for a backdoor Roth IRA, or may become eligible in the future, rolling over an old 401k into an IRA potentially creates additional unnecessary taxes
- 401ks have greater protection from creditors than IRAs, at least in some states and from some creditors
- many 401ks offer a stable value fund, which is a unique, low risk option not available in an IRA


Judging by the recent thread about tax adjustment and the wiki article on tax efficient asset location, some would probably include the following on the list:

"stocks should go in taxable, bonds should go in tax-advantaged"

Any others that folks can think of?
YES - The details vary by state, and I think the regs/laws may have changed in the last few years, but I was badly burned (and given incorrect information from an attorney) when I lost a civil judgment (business related contract/obligation) case and a very large amount (about $300,000) was seized from my IRA (most of which had been rolled over from 401k plans at previous employers). The 401k would have been protected. The information/advice from attorneys was incorrect (I think) because there is a difference between protection in bankruptcy and protection from judgment (where there is no bankruptcy).
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Re: Rules of thumb that shouldn't be

Post by Bungo »

letsgobobby wrote: "You should usually roll over an old 401k into an IRA"

I dislike this one because it's not true for so many investors and situations:
- 401ks can have much lower expense ratios than IRAs by virtue of having access to institutional mutual funds (ie Fidelity Advantage, Fidelity Spartan Institutional, Vanguard Admiral/Signal/Institutional)
- if you are eligible for a backdoor Roth IRA, or may become eligible in the future, rolling over an old 401k into an IRA potentially creates additional unnecessary taxes
- 401ks have greater protection from creditors than IRAs, at least in some states and from some creditors
- many 401ks offer a stable value fund, which is a unique, low risk option not available in an IRA
Also, you can withdraw from your current employer's 401(k) penalty-free if you retire at age 55, whereas the minimum age is generally 59 1/2 if you roll it into an IRA. Good reason to keep the 401(k) and, perhaps, to avoid switching jobs as you approach your 50s, if you want to retire early and access your tax-advantaged savings without penalty.
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Re: Rules of thumb that shouldn't be

Post by dbr »

dm200 wrote: YES - The details vary by state, and I think the regs/laws may have changed in the last few years, but I was badly burned (and given incorrect information from an attorney) when I lost a civil judgment (business related contract/obligation) case and a very large amount (about $300,000) was seized from my IRA (most of which had been rolled over from 401k plans at previous employers). The 401k would have been protected. The information/advice from attorneys was incorrect (I think) because there is a difference between protection in bankruptcy and protection from judgment (where there is no bankruptcy).
Wow, I had never heard of that actually happening to someone, though I had spent a lot of time trying to figure out what is what on that. One thing I know is that a lot that is written and said about the issue starts by looking under bankruptcy law where one will never find the conditions that apply when the issue does not involve a bankruptcy.
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Re: Rules of thumb that shouldn't be

Post by Sbashore »

Crushtheturtle wrote:Age in bonds
+1.
So much depends on other factors like other assets, potential retirement income streams, actual retirement income streams and risk ability, willingness, need, etc.
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Re: Rules of thumb that shouldn't be

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Re: Rules of thumb that shouldn't be

Post by chuppi »

letsgobobby wrote:In your opinion, what rules of thumb are too often incorrect to be a good rule of thumb?

Judging by the recent thread about tax adjustment and the wiki article on tax efficient asset location, some would probably include the following on the list:
"stocks should go in taxable, bonds should go in tax-advantaged"
Isn't this the rule of thumb that is correct?
Stocks will have mostly capital gains and relatively less dividend. You pay tax immediately on the dividends but don't have to worry about the capital gains until you sell. With bonds, you are taxed on the yield year after year.

What am I missing?
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Re: Rules of thumb that shouldn't be

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Re: Rules of thumb that shouldn't be

Post by Bungo »

Does "invest at market weighting" count as a rule of thumb for this exercise?
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Re: Rules of thumb that shouldn't be

Post by chuppi »

Bungo wrote:
letsgobobby wrote: "You should usually roll over an old 401k into an IRA"

Also, you can withdraw from your current employer's 401(k) penalty-free if you retire at age 55, whereas the minimum age is generally 59 1/2 if you roll it into an IRA. Good reason to keep the 401(k) and, perhaps, to avoid switching jobs as you approach your 50s, if you want to retire early and access your tax-advantaged savings without penalty.
I am just curious about this one. If you change jobs, you can rollover your previous employer 401K into the new employer 401K. My wife did this when she switched jobs recently. (The new employer 401K is with fidelity and has good options with very low expense ratio).

Now if I go into the account, it does not distinguish between what was rolled over and new. Does that mean that you can withdraw this penalty free if you retire at 55?
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Re: Rules of thumb that shouldn't be

Post by Toons »

"401ks can have much lower expense ratios than IRAs by virtue of having access to institutional mutual funds (ie Fidelity Advantage, Fidelity Spartan Institutional, Vanguard Admiral/Signal/Institutional)" :happy

+! :happy Exactly
On a side note ,I am expecting a call from a Fidelity Rep today,as they administer the 401k plan we are invested in regarding NUA tax treatment. :happy

"You must have a triggering event."One of which is:
"you MUST distribute all assets from all qualified plans at your former employer, not just the one that held the shares of stock." :shock:


http://www.marketwatch.com/story/employ ... 2013-04-26
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: Rules of thumb that shouldn't be

Post by dbr »

chuppi wrote:
letsgobobby wrote:In your opinion, what rules of thumb are too often incorrect to be a good rule of thumb?

Judging by the recent thread about tax adjustment and the wiki article on tax efficient asset location, some would probably include the following on the list:
"stocks should go in taxable, bonds should go in tax-advantaged"
Isn't this the rule of thumb that is correct?
Stocks will have mostly capital gains and relatively less dividend. You pay tax immediately on the dividends but don't have to worry about the capital gains until you sell. With bonds, you are taxed on the yield year after year.

What am I missing?
You are missing that tax effciency is about tax cost and not tax rate. For example, when bonds pay nearly zero in yield you also pay zero tax cost on bonds, and they are tax efficient.

The situation becomes much more complicated if tax efficiency is taken to mean the locations optimizing, for example, after tax spending in a hypothetical retirement as a function of where investments are located during both accumulation and deccumulation. The answer might be still different if what is to be optimized is after tax use of a legacy by individual heirs or by tax-exempt organizations.
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Re: Rules of thumb that shouldn't be

Post by Bungo »

chuppi wrote:I am just curious about this one. If you change jobs, you can rollover your previous employer 401K into the new employer 401K. My wife did this when she switched jobs recently. (The new employer 401K is with fidelity and has good options with very low expense ratio).

Now if I go into the account, it does not distinguish between what was rolled over and new. Does that mean that you can withdraw this penalty free if you retire at 55?
Good question, I'm not sure of the answer but a bit of initial googling suggests that you can:

http://www.401khelpcenter.com/401k_educ ... 9KLL0BUkqg
Better yet, get any old 401k's rolled into your current 401k before you retire from your current job so that you will have access to these funds penalty free.
Would like to see this confirmed on an official IRS web site, but I haven't located it yet. By the way, I believe that it's up to the employer whether to allow incoming rollovers into your 401(k) plan, so this option may not be available for everyone. Your wife's plan sounds great! The only really low expense fund available in my plan is the Spartan S&P 500 index fund.
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Re: Rules of thumb that shouldn't be

Post by HIinvestor »

One thing about rolling funds over--if you MAY wish to do a backdoor IRA, you don't want to have any other taxable IRA accounts and may wish to actually roll funds into your 401K or similar accounts if the plan allows rollovers. Each person's situation is different and customized financial planning to minimize taxes is really the key. For us, I rolled over my traditional IRA before making a non-deductible IRA contribution for 2013 and 2014. I then converted both contributions into a Roth IRA with virtually no taxes.

My former employer's 457 plan (government equivalent to 401K) has fairly low administrative fees and OK investment options. I was happy to be able to do the backdoor rollover before this option becomes disallowed.
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Re: Rules of thumb that shouldn't be

Post by greg24 »

Whatever causes a lot of people to think "rule of thumb" means "unbreakable commandment".
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Re: Rules of thumb that shouldn't be

Post by bottlecap »

Rules of thumb are great for what they are. Every one of the rules of thumb mentioned thus far has value. It should not surprise or annoy you that in some cases they do not apply.

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Re: Rules of thumb that shouldn't be

Post by Abe »

From Wikipedia, the free encyclopedia

A rule of thumb is a principle with broad application that is not intended to be strictly accurate or reliable for every situation. :beer
Slow and steady wins the race.
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bertie wooster
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Re: Rules of thumb that shouldn't be

Post by bertie wooster »

livesoft wrote:Lump-sum is better than dollar-cost averaging
I was going to say the opposite.
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Re: Rules of thumb that shouldn't be

Post by placeholder »

chuppi wrote:Now if I go into the account, it does not distinguish between what was rolled over and new. Does that mean that you can withdraw this penalty free if you retire at 55?
Just because you don't see it in your normal account view doesn't mean that the custodian isn't doing separate accounting for the rollover contribution like in my plan the only way to see the separation between the various sub accounts is to go to the withdrawal page.
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Re: Rules of thumb that shouldn't be

Post by jimmyq »

Here's another that could get someone into trouble:

"You can withdraw 4% of your balance, adjust for inflation each year, and never run out of money"
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Re: Rules of thumb that shouldn't be

Post by heyyou »

This is true in my case. I want to roll over for simplicity's sake, but the expense ratios for my bond, equity, international equity and emerging market funds are 0.03%, 0.01%, 0.03% and 0.10% respectively.
My 401k at mega-corp (300,000 employees counting the part timers) had those low fund fees with a .7% admin fee! Not hard to beat the total fees using retail IRA providers.
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Re: Rules of thumb that shouldn't be

Post by dm200 »

dbr wrote:
dm200 wrote: YES - The details vary by state, and I think the regs/laws may have changed in the last few years, but I was badly burned (and given incorrect information from an attorney) when I lost a civil judgment (business related contract/obligation) case and a very large amount (about $300,000) was seized from my IRA (most of which had been rolled over from 401k plans at previous employers). The 401k would have been protected. The information/advice from attorneys was incorrect (I think) because there is a difference between protection in bankruptcy and protection from judgment (where there is no bankruptcy).
Wow, I had never heard of that actually happening to someone, though I had spent a lot of time trying to figure out what is what on that. One thing I know is that a lot that is written and said about the issue starts by looking under bankruptcy law where one will never find the conditions that apply when the issue does not involve a bankruptcy.
It happened to me! OUCH!!!

Unfortunately for me, not long after this - the rules changed in my state increasing the protection of IRAs from judgments - where no bankruptcy. Maybe the reason we don't hear about this very much is that even the attorneys that go after individuals with civil judgments may not even kinow the difference. Again, unfortunately for me - the attorney for the company that filed and obtained this judgment against my small company employer and 4 individuals (after a civil jury trial) is an "expert" in such matters AND the company going against us spared no expense in funding their attorneys' going after us with great intensity. The judgments should have been split between the 3 individuals and the company, BUT the compan and the other three individuals all declared bankruptcy - so I was left taking almost the entire hit.
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Re: Rules of thumb that shouldn't be

Post by ajcp »

dbr wrote:
ajcp wrote:
Ged wrote: So yes if you have one of these super plans that are about as common as left handed screwdrivers, take advantage. But I'm happy with the rule of thumb.
+1. You shouldn't follow it if you have unusual circumstances, but institutional funds or a backdoor Roth that maybe 5% of people have to worry about isn't enough to make something not a rule of thumb.
1) By number of investors and/or by total wealth invested, I would not assume good 401K plans are rare. Most megacorps and the Federal Government have good plans, many even better than any IRA. That does not addresss liability exposure concerns either. There are a lot of awful plans in smaller companies, but those are far fewer people per plan.
I didn't mean that good 401k plans are rare, from what I've seen they're getting much better. But I do think plans that can actually beat retail funds are fairly rare, though I don't have any data to back that up.
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Re: Rules of thumb that shouldn't be

Post by Dandy »

Almost by definition a rule of thumb is a lot less than a commandment. You shouldn't base your financial future on a rule of thumb - it is a starting point for most people. It is a general guideline. People who follow a rule of thumb, any rule of thumb, blindly are being foolish or lazy. The problem isn't the "rule" it is people thinking it is applicable to every situation and the media hyping a guideline as more than that.

It is like saying don't put all your eggs in one basket. It is generally good advice but if your second basket has big holes in it then you might not follow the "rule".
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Re: Rules of thumb that shouldn't be

Post by Awsi Dooger »

Past performance can't be used to predict future results.

I see that here all the time. It's not correct. Logically it can't be correct. There are so many variables that I guarantee at every point in time somebody has isolated the perfect one to represent the current scenario, the historical parallel, and therefore where we're headed. The problem is scope, the ability to be good/great enough to isolate which variable is most vital and representative now, as opposed to six years ago or ten months from now. I'm sure there are specialists, either subjectively or with numbers. Seemingly a blend is ideal, pooled experts from varying angles. I wouldn't be surprised if considerable advancement is forthcoming when somebody a notch above really looks into this, like a Nate Silver of stocks. Of course, somebody could already have the answer and prefer to shun the limelight and simply shut up. I've seen that countless times in Las Vegas. Big tickets accompanied by few words.

I certainly don't know or care enough about corporations or the market to research anything. I'll rely on earnings uptick and index funds. Logical grind. But the reason I'm skeptical is that I was told the same thing when I arrived in Las Vegas. Everybody seemingly had the same approach -- subjectively handicapping the games based primarily on current form. It led to erratic results and lots of anguish and second guessing. I kept telling friends this can't be the optimum method. "What else are you going to do?" When I mentioned historical research I was told the same thing, that history means nothing since the players aren't the same, the coaches change, and so forth. I wasn't swayed. Very quickly I discovered that history indeed pointed to staggering advantage as long as you were creative enough. I didn't care about obvious stuff, like Jets vs. Dolphins series history. I looked at seemingly peripheral angles and uncovered plenty of them, like a home underdog flopping if it won outright as home underdog in its prior game, or an NFL team collapsing if it won its previous game with a low number of rushing attempts. I won't continue. I realize I have a tendency to stray from the topics of this board. But the points stand. Everything I see on this board is basic and straight forward. I guarantee there are eccentric investing outsiders looking from strange angles and absolutely delighted that they have uncovered trump card historical trends that the world is happily oblivious of.
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Re: Rules of thumb that shouldn't be

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Edited...too off topic
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Re: Rules of thumb that shouldn't be

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Removed...too off topic...
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dbr
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Re: Rules of thumb that shouldn't be

Post by dbr »

I grew up on Minitab and knew some of the people who developed it.
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Re: Rules of thumb that shouldn't be

Post by joe8d »

Sbashore wrote:
Crushtheturtle wrote:Age in bonds
+1.
So much depends on other factors like other assets, potential retirement income streams, actual retirement income streams and risk ability, willingness, need, etc.
+2
All the Best, | Joe
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Re: Rules of thumb that shouldn't be

Post by placeholder »

Awsi Dooger wrote:Past performance can't be used to predict future results.
I haven't seen that often although I do see "Past performance doesn't guarantee future results" which is a very different animal.
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Re: Rules of thumb that shouldn't be

Post by ASUGrad »

On the 401k protections notes also look at Rollover IRAs. They keep a lot of the 401k protections in many states where traditional IRAs do not :wink: . Otherwise I agree on all fronts. You should consider costs and if you think you will ever do a backdoor roth before doing a RO.

"Your emergency fund should cover 3-6 months of expenses."

I actually read an even worse version of this that stated the months of savings should equal the current unemployment rate. Yea... so when unemployment is at 5% only 5 months, but 'after' it goes to 10% you should up it to 10.... because you know in advance you won't be apart of that 10%. Maybe it should be based on how hard it would be for you to find a job with similar pay. Someone who is 55 in upper management with two kids and mortgage is likely going to need more savings than a 30 year old single professional who gets constant messages from recruiters on LinkedIn and is fine with relocating.

"100 - your age = stock allocation."

Same as age in bonds, but the above is how I have always heard it.

"Get a life insurance policy worth at least 6 times your household income." (from Mint.com)

Why does a single man making 50k a year with no dependants need 300k worth of life insurance. Why does he need any at all? Even assume her is married and they only have 100k in debt combined, and neither relies on the other for income beyond paying towards that debt. Why wouldn't 100k work?
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