Reconciling Buy-and-Hold philosophy with AA/TLH

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
sman09
Posts: 101
Joined: Fri Mar 23, 2018 12:02 am

Reconciling Buy-and-Hold philosophy with AA/TLH

Post by sman09 » Thu Jun 14, 2018 12:00 am

One of the recurrent themes i found in reading the investment styles of respected investment gurus, is buying a good investment not with the intention of selling but to hold for life. I assume this guideline applies for index funds/ETFs also (and not just for individual stocks).

(please correct me if my very premise is wrong or if i'm mis-stating anything)

Being so, if the idea is to buy and hold something forever (such as VTSMX or a 3-fund portfolio) where does the need for TLH arise or for that matter wash sales? Am i correctly understanding that these are of concern only for those buying and selling constantly or perhaps when one does rebalancing to adhere to one's AA plan?

Also, if one has made up the mind to be invested, once having identified the assets, is a strict adherence to an AA model even necessary - what i mean is, if i'm convinced VTSMX is a good place to park my money then every time i have an urge to buy something, i could instead buy some more of VTSMX even if that means exceeding the AA i may have set out to start with. Is that a bad thing? (If it is bad, is it to do with expected returns such a portfolio would generate or the risk it leads one to?)

I was thinking of moving from my existing target-date fund to a BH-3-fund portfolio. Thinking of rebalancing that i may have to do, i got the above thought of just letting the funds build up and wanted to get some guidance on why/why-not i should do such a thing

Thank you!

danielc
Posts: 96
Joined: Sun Dec 10, 2017 4:48 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by danielc » Thu Jun 14, 2018 12:12 am

sman09 wrote:
Thu Jun 14, 2018 12:00 am
what i mean is, if i'm convinced VTSMX is a good place to park my money then every time i have an urge to buy something, i could instead buy some more of VTSMX even if that means exceeding the AA i may have set out to start with. Is that a bad thing? (If it is bad, is it to do with expected returns such a portfolio would generate or the risk it leads one to?)
Yes. It is a bad thing. Buying more VTSMX because you are feeling exhuberant is a recipe for disaster when the next inevitable market slum appears. Increasing VTSMX means that you are making your portfolio riskier than you initially intended.
sman09 wrote:
Thu Jun 14, 2018 12:00 am
I was thinking of moving from my existing target-date fund to a BH-3-fund portfolio. Thinking of rebalancing that i may have to do, i got the above thought of just letting the funds build up and wanted to get some guidance on why/why-not i should do such a thing
If you are in a tax-advantage account, I'd recommend sticking to the AA. If you are in taxable, it can make sense to "let funds build up" on their own because selling would cause tax drag (I would still advice caution). But what you said earlier was quite different. You were talking about actually buying more stock than you were initially comfortable with just because you are temporarily exhuberant about the market. Do not try to time the market.

sman09
Posts: 101
Joined: Fri Mar 23, 2018 12:02 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by sman09 » Thu Jun 14, 2018 12:18 am

danielc wrote:
Thu Jun 14, 2018 12:12 am
sman09 wrote:
Thu Jun 14, 2018 12:00 am
what i mean is, if i'm convinced VTSMX is a good place to park my money then every time i have an urge to buy something, i could instead buy some more of VTSMX even if that means exceeding the AA i may have set out to start with. Is that a bad thing? (If it is bad, is it to do with expected returns such a portfolio would generate or the risk it leads one to?)
Yes. It is a bad thing. Buying more VTSMX because you are feeling exhuberant is a recipe for disaster when the next inevitable market slum appears. Increasing VTSMX means that you are making your portfolio riskier than you initially intended.
sman09 wrote:
Thu Jun 14, 2018 12:00 am
I was thinking of moving from my existing target-date fund to a BH-3-fund portfolio. Thinking of rebalancing that i may have to do, i got the above thought of just letting the funds build up and wanted to get some guidance on why/why-not i should do such a thing
If you are in a tax-advantage account, I'd recommend sticking to the AA. If you are in taxable, it can make sense to "let funds build up" on their own because selling would cause tax drag (I would still advice caution). But what you said earlier was quite different. You were talking about actually buying more stock than you were initially comfortable with just because you are temporarily exhuberant about the market. Do not try to time the market.
Thank you @danielc for sharing your insights! Your advice as regards taxable account is interesting, and something i had not thought about.
danielc wrote:
Thu Jun 14, 2018 12:12 am
You were talking about actually buying more stock than you were initially comfortable with just because you are temporarily exhuberant about the market.
what i actually hinted at was urge to spend some material good (do shopping) - then instead buy some more of VTSMX irrespective of how the market is behaving (more along the dollar-cost-averaging style). Did not mean to hint at any reference to "exhuberant about the market" :)

AlohaJoe
Posts: 3310
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by AlohaJoe » Thu Jun 14, 2018 12:54 am

sman09 wrote:
Thu Jun 14, 2018 12:00 am
One of the recurrent themes i found in reading the investment styles of respected investment gurus, is buying a good investment not with the intention of selling but to hold for life.
That's a recurring theme? To hold it for life? I can't think of a single investment guru who has actually done that. They may write it but they don't do it; and I'd judge people by what they do instead of what they write. Both Buffet and Bogle frequently (well, frequently for Buffet, less so for Bogle) sell things instead of holding for life. Just this year Buffet has sold American Airlines, GM,and IBM. Last year Buffet sold his entire stake in GE. Bogle doesn't trade as much but he market timed in 2015, 2007, and 1999. He says he doesn't rebalance but he adjusts his asset allocation every 6-7 years so it would have a pretty similar effect.

It seems to me that "hold for life" is a platitude that might be a decent high level guidance but is pretty far from a rule that you should use to trump all other decisions you make in a long investing life. In the same way that "you shouldn't kill people" is a good default but then most people come up with lots of perfectly reasonable (to them, at least) exceptions to that rule.

What's more, there are plenty of respected investment gurus who don't say hold for life without rebalancing. They all provide their reasons for it. It is pretty easy to go read their arguments.
Am i correctly understanding that these are of concern only for those buying and selling constantly
No, this isn't the case. The two things aren't related.
Also, if one has made up the mind to be invested, once having identified the assets, is a strict adherence to an AA model even necessary
No, it isn't necessary. But most people like it, primarily for behavioural reasons. As I said above, there are lots of books that explain why they recommend rebalancing.

danielc
Posts: 96
Joined: Sun Dec 10, 2017 4:48 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by danielc » Thu Jun 14, 2018 2:14 am

sman09 wrote:
Thu Jun 14, 2018 12:18 am
what i actually hinted at was urge to spend some material good (do shopping) - then instead buy some more of VTSMX irrespective of how the market is behaving (more along the dollar-cost-averaging style). Did not mean to hint at any reference to "exhuberant about the market" :)
Ah. You did say that, and I just wasn't paying enough attention. Well... that's personal finance. It's hard to say. You have to live a little. You don't want to be a spendrift, but you also don't want to be a miser. I guess the usual advice is to make a budget. The simplest version can be just a shoe box with a postit note that says "I can buy whatever I want with this money". Then every paycheck you put a fixed dollar amount on that box, and you agree with yourself that you're not going to feel guilty about spending that money, and in exchange, you can only spend the money that is actually inside the box.

aristotelian
Posts: 4115
Joined: Wed Jan 11, 2017 8:05 pm

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by aristotelian » Thu Jun 14, 2018 5:55 am

When you harvest losses, you replace the down fund with another fund that is similar but not identical (eg S&P500 for Total Stock). You remain invested just as before, but with less taxes to pay. It has nothing to do with timing the market.

indexonlyplease
Posts: 1006
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by indexonlyplease » Thu Jun 14, 2018 7:08 am

I believe for most they will never harvest losses because most of their investments are in tax deferred accounts. So when you sell you pay taxes at your current rate.

But last year I started buying taxed investments. So yes I will be learning more on tax loss harvesting.

At least I think I am correct.

retiredjg
Posts: 32655
Joined: Thu Jan 10, 2008 12:56 pm

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by retiredjg » Thu Jun 14, 2018 8:15 am

To me, "buy and hold" means deciding on a basic plan and sticking to it even when things look grim. It means not jumping into every asset class as it has a good year and not jumping out of every asset class as it has a bad year.

Decide what asset classes you want and the relative ratios and stick to that (other than planned migrations with age). If an asset class is not right for your portfolio when it is doing badly, it's also not right for your portfolio when it is doing well. And vice versa. The asset classes that are right for your portfolio are right even during the times they are lagging.

If I've decided I want a 40% allocation to an asset class, it is not terribly important to me which of several low cost options I use. I can even switch from one to another, if it suits me, without materially changing the characteristics of my portfolio.

This is what happens with tax loss harvesting. The goal is to "harvest" some losses that I can later use to reduce taxable income. I save a little money without changing the portfolio enough to matter.

Some investors take "buy and hold very literally - they hold on to the original shares they bought. There is nothing wrong with this. It is a perfectly fine plan.

It is also not entirely necessary, in my opinion, if being a little more flexible satisfies your needs.

dbr
Posts: 26915
Joined: Sun Mar 04, 2007 9:50 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by dbr » Thu Jun 14, 2018 8:21 am

As far as I am concerned phrases like "buy and hold" don't really mean anything. At best they are a reference to a more nuanced discussion that includes such topics as rebalancing, tax lost harvesting, contributing and withdrawing money, and so on. Taking the concept literally is mostly just nonsense. Investment by mantra doesn't work.

retiredjg
Posts: 32655
Joined: Thu Jan 10, 2008 12:56 pm

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by retiredjg » Thu Jun 14, 2018 8:43 am

dbr wrote:
Thu Jun 14, 2018 8:21 am
Investment by mantra doesn't work.
:D

At it's most basic level, I think "buy and hold" was used to say "don't chase returns". Since many people don't understand what "chasing returns" means, "buy and hold" is more easily understood and followed. And I don't think it is bad advice when used with reason.

It's a little like "just do it" when deciding whether to exercise. Or "just say no" when faced with choices about drugs.

A mantra can remind a person of good and solid decisions they have made in past during less stressful times. No need to analyze everything again and again, "just do it".

wolf359
Posts: 1240
Joined: Sun Mar 15, 2015 8:47 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by wolf359 » Thu Jun 14, 2018 2:38 pm

I'm seeing some clues that you're new to investing, and that you're still figuring out your investment strategy.
sman09 wrote:
Thu Jun 14, 2018 12:00 am
One of the recurrent themes i found in reading the investment styles of respected investment gurus, is buying a good investment not with the intention of selling but to hold for life. I assume this guideline applies for index funds/ETFs also (and not just for individual stocks).
The intent is to have a long-term perspective when buying investments. Make sure that you would be comfortable with a holding period of forever. If the stock markets closed down for ten years, make sure you would be fine with what you hold.

This is a philosophy more than a practical strategy, however. While you INTEND to hold forever, there are a number of reasons that you might sell. When you retire, you might actually want to live on the proceeds of your investment!

Buying and holding minimizes trading costs and taxes. When buying and holding index funds, long holding periods have a positive expectation for return. (Hold the US stock market, and there is a high expectation that the value will be higher 20 or 30 years later).
Being so, if the idea is to buy and hold something forever (such as VTSMX or a 3-fund portfolio) where does the need for TLH arise or for that matter wash sales? Am i correctly understanding that these are of concern only for those buying and selling constantly or perhaps when one does rebalancing to adhere to one's AA plan?
TLH and rebalancing are tactics. Buy and hold is a strategy. They are not mutually exclusive.

Tax Loss Harvesting is performed to generate paper losses, so that you can lower your cost basis and offset profits. If done properly, you stay invested in a similar investment. If done improperly, you end up with a wash sale, where some or all of the transaction is disallowed. You don't have to do TLH at all.

The opposite tactic is Tax Gain Harvesting, where you take profits and pay your taxes so that you raise your cost basis. Why would you do that? If your tax rate is low or zero, then you may want to take profits and pay at that rate. For example, in a child's UTMA account, you may want to TGH to keep their basis high. That way, if they need to sell in the future, they've already paid taxes at the 0% rate they had as a child (when they had no significant income.) TGH and TLH don't affect return in the long term. They're just tactics used for tax purposes.

Rebalancing is also a tactic. It is used to adjust risk, and may be used to capture returns. It is not guaranteed that rebalancing will improve returns, and may not be absolutely required, either.
Also, if one has made up the mind to be invested, once having identified the assets, is a strict adherence to an AA model even necessary - what i mean is, if i'm convinced VTSMX is a good place to park my money then every time i have an urge to buy something, i could instead buy some more of VTSMX even if that means exceeding the AA i may have set out to start with. Is that a bad thing? (If it is bad, is it to do with expected returns such a portfolio would generate or the risk it leads one to?)
Personal finance is, well, personal. What works for one person may not work for others. I love this approach, and practice it myself.

If you decide to forgo that coffee at Starbucks, or you figure out how to save money on something, those savings are useless unless you capture and invest them. I immediately transfer the money from my checking to savings, so it disappears from my account immediately, and I mentally count the money as spent. Once a month, I transfer the excess savings to a Fidelity account, where I buy a Total Stock Market fund.

Why not send it to my main Vanguard account? It is pure mental accounting. My Vanguard account follows my overall asset allocation, and is tracked as such. My Fidelity account is 100% equities. It's all found money, so its fluctuations don't bother me. While the result is that my actual asset allocation is higher than I originally set, I have found that it's a way to sneak some additional risk into my investments without negatively impacting my results. The amounts that I set aside this way are insignificant compared to my primary portfolio, which also lets me mentally take greater risks with it. However, since I've been doing this for years and we've been having a bull market, the side portfolio is actually getting to a decent size.
I was thinking of moving from my existing target-date fund to a BH-3-fund portfolio. Thinking of rebalancing that i may have to do, i got the above thought of just letting the funds build up and wanted to get some guidance on why/why-not i should do such a thing
Before you switch from target date to BH 3-fund, write out an investment policy statement. (See https://www.bogleheads.org/wiki/Investm ... _statement.) In the IPS, write down what you're investing in, and why. Make sure you write down what you will do if different circumstances come up -- new money, need to raise money, TLH, TGH, market crash, rebalancing, etc. Then, as you start discovering new strategies, and you're tempted to change your AA or buy a shiny new investment vehicle, you can brush off your IPS and learn WHY you didn't do that originally.

A target date fund is easy. Just keep buying it. If you're going to get something with moving parts, make sure you know what you're buying, why you're buying it, and how you'll handle various situations so you don't panic.

sman09
Posts: 101
Joined: Fri Mar 23, 2018 12:02 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by sman09 » Thu Jun 14, 2018 2:55 pm

wolf359 wrote:
Thu Jun 14, 2018 2:38 pm
I'm seeing some clues that you're new to investing, and that you're still figuring out your investment strategy.
sman09 wrote:
Thu Jun 14, 2018 12:00 am
One of the recurrent themes i found in reading the investment styles of respected investment gurus, is buying a good investment not with the intention of selling but to hold for life. I assume this guideline applies for index funds/ETFs also (and not just for individual stocks).
The intent is to have a long-term perspective when buying investments. Make sure that you would be comfortable with a holding period of forever. If the stock markets closed down for ten years, make sure you would be fine with what you hold.

This is a philosophy more than a practical strategy, however. While you INTEND to hold forever, there are a number of reasons that you might sell. When you retire, you might actually want to live on the proceeds of your investment!

Buying and holding minimizes trading costs and taxes. When buying and holding index funds, long holding periods have a positive expectation for return. (Hold the US stock market, and there is a high expectation that the value will be higher 20 or 30 years later).
Being so, if the idea is to buy and hold something forever (such as VTSMX or a 3-fund portfolio) where does the need for TLH arise or for that matter wash sales? Am i correctly understanding that these are of concern only for those buying and selling constantly or perhaps when one does rebalancing to adhere to one's AA plan?
TLH and rebalancing are tactics. Buy and hold is a strategy. They are not mutually exclusive.

Tax Loss Harvesting is performed to generate paper losses, so that you can lower your cost basis and offset profits. If done properly, you stay invested in a similar investment. If done improperly, you end up with a wash sale, where some or all of the transaction is disallowed. You don't have to do TLH at all.

The opposite tactic is Tax Gain Harvesting, where you take profits and pay your taxes so that you raise your cost basis. Why would you do that? If your tax rate is low or zero, then you may want to take profits and pay at that rate. For example, in a child's UTMA account, you may want to TGH to keep their basis high. That way, if they need to sell in the future, they've already paid taxes at the 0% rate they had as a child (when they had no significant income.) TGH and TLH don't affect return in the long term. They're just tactics used for tax purposes.

Rebalancing is also a tactic. It is used to adjust risk, and may be used to capture returns. It is not guaranteed that rebalancing will improve returns, and may not be absolutely required, either.
Also, if one has made up the mind to be invested, once having identified the assets, is a strict adherence to an AA model even necessary - what i mean is, if i'm convinced VTSMX is a good place to park my money then every time i have an urge to buy something, i could instead buy some more of VTSMX even if that means exceeding the AA i may have set out to start with. Is that a bad thing? (If it is bad, is it to do with expected returns such a portfolio would generate or the risk it leads one to?)
Personal finance is, well, personal. What works for one person may not work for others. I love this approach, and practice it myself.

If you decide to forgo that coffee at Starbucks, or you figure out how to save money on something, those savings are useless unless you capture and invest them. I immediately transfer the money from my checking to savings, so it disappears from my account immediately, and I mentally count the money as spent. Once a month, I transfer the excess savings to a Fidelity account, where I buy a Total Stock Market fund.

Why not send it to my main Vanguard account? It is pure mental accounting. My Vanguard account follows my overall asset allocation, and is tracked as such. My Fidelity account is 100% equities. It's all found money, so its fluctuations don't bother me. While the result is that my actual asset allocation is higher than I originally set, I have found that it's a way to sneak some additional risk into my investments without negatively impacting my results. The amounts that I set aside this way are insignificant compared to my primary portfolio, which also lets me mentally take greater risks with it. However, since I've been doing this for years and we've been having a bull market, the side portfolio is actually getting to a decent size.
I was thinking of moving from my existing target-date fund to a BH-3-fund portfolio. Thinking of rebalancing that i may have to do, i got the above thought of just letting the funds build up and wanted to get some guidance on why/why-not i should do such a thing
Before you switch from target date to BH 3-fund, write out an investment policy statement. (See https://www.bogleheads.org/wiki/Investm ... _statement.) In the IPS, write down what you're investing in, and why. Make sure you write down what you will do if different circumstances come up -- new money, need to raise money, TLH, TGH, market crash, rebalancing, etc. Then, as you start discovering new strategies, and you're tempted to change your AA or buy a shiny new investment vehicle, you can brush off your IPS and learn WHY you didn't do that originally.

A target date fund is easy. Just keep buying it. If you're going to get something with moving parts, make sure you know what you're buying, why you're buying it, and how you'll handle various situations so you don't panic.
Thanks a lot @wolf359 for the detailed response and explaining various concepts to me!

Also, very nice to know you have already been practicing a strategy (tactic?) of directing any extra funds to a your Fidelity account - the way you explained it and do it is interesting and makes sense.

I will do the IPS as you suggest and as was also suggested by another member in response to another post of mine.

My target date fund is fine as it is - it was the expense ratio on the fund (0.65%) that made me start thinking of switching over. If letting the target date fund continue for one more year as i solidify my investment knowledge (to avoid the repeat of me investing in Betterment and Wealthfront to give them a try) would be the best thing to do, i would be just fine.

I am glad that i am learning from the wiki and from these discussions - more than that, thankful that fellow members (including experienced, senior veteran investors) are willing to help. :happy

retiredjg
Posts: 32655
Joined: Thu Jan 10, 2008 12:56 pm

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by retiredjg » Thu Jun 14, 2018 5:42 pm

sman09 wrote:
Thu Jun 14, 2018 2:55 pm
My target date fund is fine as it is - it was the expense ratio on the fund (0.65%) that made me start thinking of switching over. If letting the target date fund continue for one more year as i solidify my investment knowledge (to avoid the repeat of me investing in Betterment and Wealthfront to give them a try) would be the best thing to do, i would be just fine.
This is a good example of when the literal concept of "buy and hold" is a bad idea.

You should not continue holding a fund at .65% if you can get essentially the same portfolio at .1% or whatever by exchanging to lower cost funds that cover the same asset classes (more or less).

The most important characteristic of your portfolio is the stock to bond ratio. After that, probably the US to international ratio.

Everything that comes after that is just details. People obsess over them, but they are not what really drives the portfolio.

sman09
Posts: 101
Joined: Fri Mar 23, 2018 12:02 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by sman09 » Thu Jun 14, 2018 10:33 pm

retiredjg wrote:
Thu Jun 14, 2018 5:42 pm
sman09 wrote:
Thu Jun 14, 2018 2:55 pm
My target date fund is fine as it is - it was the expense ratio on the fund (0.65%) that made me start thinking of switching over. If letting the target date fund continue for one more year as i solidify my investment knowledge (to avoid the repeat of me investing in Betterment and Wealthfront to give them a try) would be the best thing to do, i would be just fine.
This is a good example of when the literal concept of "buy and hold" is a bad idea.

You should not continue holding a fund at .65% if you can get essentially the same portfolio at .1% or whatever by exchanging to lower cost funds that cover the same asset classes (more or less).

The most important characteristic of your portfolio is the stock to bond ratio. After that, probably the US to international ratio.

Everything that comes after that is just details. People obsess over them, but they are not what really drives the portfolio.
Really appreciate you taking the time to further add these useful info - will keep them in mind.

You should not continue holding a fund at .65% if you can get essentially the same portfolio at .1% or whatever by exchanging to lower cost funds that cover the same asset classes (more or less).
will keep this in mind - thought of waiting for 6 months to an year before getting hands-on. Your statement sounds like a call-to-action to me! The one reason im hesitating is for lack of knowledge how to do rebalancing when the time comes.

retiredjg
Posts: 32655
Joined: Thu Jan 10, 2008 12:56 pm

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by retiredjg » Fri Jun 15, 2018 6:57 am

sman09 wrote:
Thu Jun 14, 2018 10:33 pm
will keep this in mind - thought of waiting for 6 months to an year before getting hands-on. Your statement sounds like a call-to-action to me! The one reason im hesitating is for lack of knowledge how to do rebalancing when the time comes.
There is no reason to wait. People here can help you figure out which funds to use. In order to help you with this, you need to give a lot of information and it needs to be in a certain format. This helps you organize the information in a way that makes it easy for someone to help you. The format is shown in the link at the bottom of this message.

It is some work to gather and organize all the information. This will help you understand your portfolio better.

From the nature of your questions, I think you may not be quite ready. But I think in a few days or weeks, things will be clearing up for you. You should be ready soon. People here can help if you run into difficulty.

Have you found the "Getting Started" section in the Wiki? Spend some time with this information. Be sure to watch the videos. Explore other areas of the Wiki -there is a lot of knowledge stored there. Investing is not rocket science. It can be quite simple.

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

Rebalancing can be quite simple too.

wolf359
Posts: 1240
Joined: Sun Mar 15, 2015 8:47 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by wolf359 » Fri Jun 15, 2018 8:29 am

sman09 wrote:
Thu Jun 14, 2018 2:55 pm
My target date fund is fine as it is - it was the expense ratio on the fund (0.65%) that made me start thinking of switching over. If letting the target date fund continue for one more year as i solidify my investment knowledge (to avoid the repeat of me investing in Betterment and Wealthfront to give them a try) would be the best thing to do, i would be just fine.
I didn't ask for greater detail on your target date fund, and I probably should have. Which one is it?

Not all target date funds are equal. The best ones are built around index funds, and have low expense ratios. For example, the Vanguard Target 2035 has a expense ratio of 0.14%.

The worst ones have high expense ratios, and are really funds of funds, including actively traded funds, and are really a way for the fund family to throw you into all the mutual funds that they want to sell. For a benchmark, the average ER for a target date fund is currently around 0.70%-0.73% (depending on source for the number), and the average ER for a passive index target date fund is around 0.50%. Yours is slightly better than average, but if you stick with one, switch to Vanguard's product.

Continuing to pay the fee while you figure out your plan is okay if it means that you end up in something that you can stick with. However, I do like making allocation changes like this when the market is near all-time highs (like now), so the equities are at their highest level. (It doesn't actually matter if you're immediately re-investing all the funds and not spending or withdrawing them. This is purely psychological for me.)

What is much more impactful to your performance is when you constantly change strategies, change allocations, and tweak your portfolio. Investor behavior is the biggest contributor to poor performance. When stocks dropped 10-15% a few months ago, it was the wrong time to decide your asset allocation was incorrect and to adjust it. When you're in a target date fund, all your adjustments are made for you, and you have less opportunity to mess it up (you only see one big fund and not the moving parts.)

In addition, with a diversified portfolio, there is usually one fund that lags or that you dislike. (With the 3-fund, that is usually bonds.) In a bull market when equities climb for years, people will trash bonds and wonder why you hold them at all. Some posters campaign against them, wondering why you'd hold any if you have a mortgage. But in the depths of 2008-2009, nobody was trashing bonds, or especially treasuries. Back then, they wished they had more. When you adopt a 3-fund strategy, that's one of the things that you will have to decide and stick with.

Yes, the fee you're paying is higher than it needs to be, and yes, it would have an impact if you stayed with it. But figure out your next move first, and make sure you document (in the IPS) exactly what you chose and why, to avoid the need to change it in the future. A year won't make that much of a difference, especially with your current relatively low balances. (Imagine how much you'd be paying with $1M in that fund.) However, it shouldn't take a year for this decision.

sman09
Posts: 101
Joined: Fri Mar 23, 2018 12:02 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by sman09 » Sun Jun 17, 2018 2:35 am

retiredjg wrote:
Fri Jun 15, 2018 6:57 am

There is no reason to wait. People here can help you figure out which funds to use. In order to help you with this, you need to give a lot of information and it needs to be in a certain format. This helps you organize the information in a way that makes it easy for someone to help you. The format is shown in the link at the bottom of this message.

It is some work to gather and organize all the information. This will help you understand your portfolio better.
thank you for the suggestion and encouragement - i hope to gather, organize and post the information for feedback
retiredjg wrote:
Fri Jun 15, 2018 6:57 am

From the nature of your questions, I think you may not be quite ready. But I think in a few days or weeks, things will be clearing up for you. You should be ready soon. People here can help if you run into difficulty.
thanks again and great to hear that! :happy
retiredjg wrote:
Fri Jun 15, 2018 6:57 am

Have you found the "Getting Started" section in the Wiki? Spend some time with this information. Be sure to watch the videos. Explore other areas of the Wiki -there is a lot of knowledge stored there. Investing is not rocket science. It can be quite simple.

https://www.bogleheads.org/wiki/Getting_started
yes, thank you - i have been reading the wiki widely and found it to be an amazing resource. Not yet watched the videos you mentioned about - hope to do so soon

Also, got hold of the bogleheads guide to investing second edition book to build my basics
retiredjg wrote:
Fri Jun 15, 2018 6:57 am
Rebalancing can be quite simple too.
again, very encouraging and gives me the confidence that i can eventually be on my own moving away from the expensive target date funds

sman09
Posts: 101
Joined: Fri Mar 23, 2018 12:02 am

Re: Reconciling Buy-and-Hold philosophy with AA/TLH

Post by sman09 » Sun Jun 17, 2018 2:54 am

wolf359 wrote:
Fri Jun 15, 2018 8:29 am
I didn't ask for greater detail on your target date fund, and I probably should have. Which one is it?
Mine is Freedom 2045 fund class K (Fidelity)
Domestic Equity - 60%
International Equity - 30%
Bonds - 7%
Other: Short-term investments and net other assets

wolf359 wrote:
Fri Jun 15, 2018 8:29 am
Not all target date funds are equal. The best ones are built around index funds, and have low expense ratios. For example, the Vanguard Target 2035 has a expense ratio of 0.14%.

The worst ones have high expense ratios, and are really funds of funds, including actively traded funds, and are really a way for the fund family to throw you into all the mutual funds that they want to sell. For a benchmark, the average ER for a target date fund is currently around 0.70%-0.73% (depending on source for the number), and the average ER for a passive index target date fund is around 0.50%. Yours is slightly better than average, but if you stick with one, switch to Vanguard's product.
Thanks for the information!

mine has an expense ratio: .65%

Since my 410k is through my employer and Vanguard is not an option, i will have to stick with Fidelity. Perhaps i could rollover my old 401k in to a Vanguard IRA and fund a Vanguard target-date fund? (i read in the forums that vanguard target date funds are also a BH style 4 fund portfolio)



wolf359 wrote:
Fri Jun 15, 2018 8:29 am

Continuing to pay the fee while you figure out your plan is okay if it means that you end up in something that you can stick with. However, I do like making allocation changes like this when the market is near all-time highs (like now), so the equities are at their highest level. (It doesn't actually matter if you're immediately re-investing all the funds and not spending or withdrawing them. This is purely psychological for me.)
Thanks again for the input on what you would do in my shows.

my current AA in my TD fund is 90% equity - if i move to an AA of 70/30 or 75/25 (Still deciding), that would mean moving from a equity-heavy position to a slightly lower position - i hope market being at a high like now is a good time to do so

wolf359 wrote:
Fri Jun 15, 2018 8:29 am
What is much more impactful to your performance is when you constantly change strategies, change allocations, and tweak your portfolio. Investor behavior is the biggest contributor to poor performance. When stocks dropped 10-15% a few months ago, it was the wrong time to decide your asset allocation was incorrect and to adjust it. When you're in a target date fund, all your adjustments are made for you, and you have less opportunity to mess it up (you only see one big fund and not the moving parts.)
In addition, with a diversified portfolio, there is usually one fund that lags or that you dislike. (With the 3-fund, that is usually bonds.) In a bull market when equities climb for years, people will trash bonds and wonder why you hold them at all. Some posters campaign against them, wondering why you'd hold any if you have a mortgage. But in the depths of 2008-2009, nobody was trashing bonds, or especially treasuries. Back then, they wished they had more. When you adopt a 3-fund strategy, that's one of the things that you will have to decide and stick with.
Thanks a lot for taking the time to explain this to me - yes, i have begun to appreciate the value of bonds and i'm sure i will also have the moments of wondering why hold them in a bullish market. but, hearing it from experienced investors like you should help me stick to the AA

wolf359 wrote:
Fri Jun 15, 2018 8:29 am

Yes, the fee you're paying is higher than it needs to be, and yes, it would have an impact if you stayed with it. But figure out your next move first, and make sure you document (in the IPS) exactly what you chose and why, to avoid the need to change it in the future. A year won't make that much of a difference, especially with your current relatively low balances. (Imagine how much you'd be paying with $1M in that fund.) However, it shouldn't take a year for this decision.

yes, i will get to preparing an AA and go from there. Thanks again @wolf359 for your help!

Post Reply