Help with Schwab 401k portfolio

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halcyon_days
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Joined: Tue Dec 04, 2018 10:33 am

Help with Schwab 401k portfolio

Post by halcyon_days » Tue Dec 04, 2018 10:39 am

Hello, I am a risk-tolerant 26-year-old seeking advice on my 401k portfolio through Schwab.

Here are my limited options:

Target Date Fund:
SM450 - Schwab Mngd Ret Trust 2050 Cl IV (E/R = 0.45%)

Large Company:
MADVX - BlackRock Equity Dividend Instl (E/R = 0.73%)
NLIGX - Nuveen Large Cap Growth I (E/R = 0.94%)
SWPPX - Schwab S&P 500 Index (E/R = 0.03%)

Small/Mid Company:
NSVAX - Columbia Small Cap Value II Inst (E/R = 1.06%)
FLMVX - JPMorgan Mid Cap Value L (E/R = 0.87%)
LAGWX - Lord Abbett Developing Growth A (E/R = 0.96%)
VSMAX - Vanguard Small Cap Index Adm (E/R = 0.05%)
MGOYX - Victory Munder Mid-Cap Core Growth Y (E/R = 1.01%)

Intl/Global:
JMIEX - JPMorgan Emerging Markets Equity L (E/R = 1.13%)
OIGYX - Oppenheimer International Growth Y (E/R = 0.85%)
SWISX - Schwab International Index (E/R = 0.06%)

Bonds:
LLDYX - Lord Abbett Short Duration Income I (E/R = 0.39%)
PRRIX - PIMCO Real Return Instl (E/R = 0.88%)
PTTRX - PIMCO Total Return Instl (E/R = 0.55%)

And here are my current asset allocations chosen for me by GuidedChoice:

Large Company:
MADVX - BlackRock Equity Dividend Instl (13%)
NLIGX - Nuveen Large Cap Growth I (13%)
SWPPX - Schwab S&P 500 Index (27%)

Small/Mid Company:
NSVAX - Columbia Small Cap Value II Inst (3%)
FLMVX - JPMorgan Mid Cap Value L (10%)
LAGWX - Lord Abbett Developing Growth A (3%)
VSMAX - Vanguard Small Cap Index Adm (6%)

Intl/Global:
JMIEX - JPMorgan Emerging Markets Equity L (9%)
OIGYX - Oppenheimer International Growth Y (5%)
SWISX - Schwab International Index (11%)

I am familiar with the three-fund portfolio concept and am also aware of the general advice that I should have 6% of my assets in bonds. I am wondering if I should abandon the current allocation and instead chose a single fund from each category with the lowest expense ratio. Any advice on how to allocate my assets among the available funds would be greatly appreciated.

Thank you!

bryanm
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Re: Help with Schwab 401k portfolio

Post by bryanm » Tue Dec 04, 2018 12:35 pm

I would probably just split between SWPPX, VSMAX, and SWISX for the equities. I don't see what the others are really getting you for the higher cost. I don't know enough about bonds to comment (but at your age and risk tolerance, I recommend doing some searching on the board to see if 100% equities might work for you).

As an alternative, see if you have access to Schwab's Personal Choice Retirement Account (PCRA). If so, you can self-direct and get access to more funds. That might not be any better for equities (since your options don't seem bad), but could be a way to get more selection on the bond front.

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mhadden1
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Location: North Alabama

Re: Help with Schwab 401k portfolio

Post by mhadden1 » Tue Dec 04, 2018 1:06 pm

halcyon_days wrote:
Tue Dec 04, 2018 10:39 am
I am wondering if I should abandon the current allocation and instead chose a single fund from each category with the lowest expense ratio.
I think you are close to the right track.

For example you could do something like

70% US Stocks - SWPPX - Schwab S&P 500 Index (E/R = 0.03%)

If you wanted, you could approximate the total US stock market by directing a portion of the US stocks to
VSMAX - Vanguard Small Cap Index Adm (E/R = 0.05%) I used to do this in my own 401k. The Bogleheads wiki has a page discussing such approximations.

25% International Stocks - SWISX - Schwab International Index (E/R = 0.06%)

5% Bonds - PTTRX - PIMCO Total Return Instl (E/R = 0.55%)

The ER of the bond fund is higher than optimal, but not so terrible. This won't matter so much until the amount in the fund builds up quite a bit. As the decades roll by, you will probably increase your allocation to bonds, and find a more inexpensive and optimal way to achieve it.

The actual US/International/Bond percentages to choose are well-debated on this forum. One way to inform yourself is to look at the composition of appropriate Target Date funds to see what professionals do. At age 26, I do not consider it folly to not bother with bonds at all for a few years.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

GibsonL6s
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Re: Help with Schwab 401k portfolio

Post by GibsonL6s » Tue Dec 04, 2018 1:08 pm

The Schwab fund would be about 91% equities (55% 30% domestic / Intl of the overall mix) 8% FI, 1% cash 4% RE 1% commodities as a point of reference. You could lower your overall costs by using the funds bryanm suggest in the mix you like. The closest to a bond index fund is probably PTTRX if you want some bonds.

I also have Schwab at work and have avoided the PCRA as I am afraid I would tinker too much :D

pdavi21
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Re: Help with Schwab 401k portfolio

Post by pdavi21 » Tue Dec 04, 2018 1:12 pm

1. Plus 1 to everyone suggesting three lowest expense ratio funds.
2. I would possibly suggest Extended market to compliment SP500 fund instead of small cap blend.
Extended market is essentially Total US stock minus the SP 500. I guess it's different if you want to overweight small cap...but you'd still be missing some mid cap.

megabad
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Re: Help with Schwab 401k portfolio

Post by megabad » Tue Dec 04, 2018 1:21 pm

halcyon_days wrote:
Tue Dec 04, 2018 10:39 am
I am familiar with the three-fund portfolio concept and am also aware of the general advice that I should have 6% of my assets in bonds. I am wondering if I should abandon the current allocation and instead chose a single fund from each category with the lowest expense ratio. Any advice on how to allocate my assets among the available funds would be greatly appreciated.
I am on board with your thinking to move away from the target fund. At 26, I would either not hold bonds or hold them elsewhere in small quantity. There are many choices for asset allocation, but my allocation might look something like:

50% SWPPX - Schwab S&P 500 Index (E/R = 0.03%)
10% VSMAX - Vanguard Small Cap Index Adm (E/R = 0.05%)
40% SWISX - Schwab International Index (E/R = 0.06%)

halcyon_days
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Joined: Tue Dec 04, 2018 10:33 am

Re: Help with Schwab 401k portfolio

Post by halcyon_days » Tue Dec 04, 2018 2:34 pm

Wow, thanks for the great feedback everyone! I was hesitant to use only SWPPX and VSMAX to capture domestic equities since this seems to leave out medium-size companies. Unfortunately I don't have a access to "total market index" type funds. I will be splitting my investments between SWPPX, VSMAX, and SWISX once I have done more research to determine exact percentage allocations. I have about $8k in the account now. Is it possible to achieve the new mix with a rebalance, or do I have to sell my current positions and buy new ones?
megabad wrote:
Tue Dec 04, 2018 1:21 pm
At 26, I would either not hold bonds or hold them elsewhere in small quantity.
mhadden1 wrote:
Tue Dec 04, 2018 1:06 pm
At age 26, I do not consider it folly to not bother with bonds at all for a few years.
Got it, no bonds for me.

megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Help with Schwab 401k portfolio

Post by megabad » Tue Dec 04, 2018 3:03 pm

halcyon_days wrote:
Tue Dec 04, 2018 2:34 pm
Is it possible to achieve the new mix with a rebalance, or do I have to sell my current positions and buy new ones?
Are you asking should you try to rebalance with new investments or via buying selling of existing investments? Since there are not tax consequences in a 401k, I would sell and buy to meet your desired allocations as soon as you determine what they are. That way you start off with exactly the allocation you wanted.

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ruralavalon
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Location: Illinois

Re: Help with Schwab 401k portfolio

Post by ruralavalon » Tue Dec 04, 2018 7:15 pm

Welcome to the forum :) .


Asset allocation.
At age 26 I suggest about 20% in bonds or other fixed income investments (like CDs). This is expected to substantially reduce portfolio volatility (risk), with only a relatively modest decrease in portfolio return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk", and "Asset allocation".

In my opinion 100% in stocks is a bad idea; 100% in any type of asset is a bad idea.

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). (You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box (upper right, this page).

This works out to about 20 bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.




Fund selection.
In selecting funds strive for a combination of broad diversification (to reduce risk) and low expense ratios (to increase your net gain). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Wiki article "Three-fund portfolio". Forum discussion, "The Three-Fund Portfolio".

In my opinion in your 401k the funds to consider using are:
1) 60%, Schwab S&P 500 index Fund (81% of U.S. stock market) (SWPPX) ER 0.03%;
2) 20%, Schwab International Index Fund (developed markets only) (SWISX) ER 0.06%; and
3) 20%, PIMCO Total Return Institutional (intermediate-term bonds) (PTTRX) ER 0.55%.

I suggest switching both the existing balance and new contributions to these funds.


1) Domestic stocks.
For domestic stocks I suggest using a total stock market index fund where available; otherwise an S&P 500 index fund is good enough by itself for domestic stocks. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations".

An S&P 500 index fund covers 81% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies, and in the 26 years since the creation of the first total stock market index fund the total return of the two types of funds has been almost identical. Morningstar, "growth of $10k" graph, VTSAX vs VFIAX. In the first 10 years the S&P 500 fund did better, in the last 10 years the total market fund did better, and over the 26 years the total market fund gave a little more return (0.11% per year), but at the cost of a little more volatility (risk): nisiprius post, in the forum discussion "Exchanging the S&P 500 for the TSM". See also Allan Roth, CBS Moneywatch, "John C. Bogle on the S&P 500 vs. the Total Stock Market". So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically made little difference in performance.

If you want to add VSMAX - Vanguard Small Cap Index Adm (E/R = 0.05%) then an 82/18 mix of S&P 500 and small-cap will approximate the content of a total stock market index fund. Wiki article, "Approximating total stock market". In my opinion this is not necessary, it is optional if you prefer to do this.


2) International stocks.
Schwab International Index Fund (SWISX) ER 0.06% invests in developed markets only. I would not add the emerging markets fund, JMIEX - JPMorgan Emerging Markets Equity L (E/R = 1.13%), because the expense ratio is so high.


3) Bonds.
In my opinion PIMCO Total Return Institutional Class (PTTRX) offered in your 401k is a good choice for a bond fund. Although actively managed it is a well diversified intermediate-term bond fund with a moderate expense ratio, and compares well to a total bond market index fund. nisiprius post in forum discussion "Bond Fund for Three-Fund Portfolio", Total Bond Market vs PTTRX?

Both have a long history with good performance. Morningstar, “Growth of 10k”, "PTTRX vs VBTLX".

Do you have access to Schwab's Personal Choice Retirement Account (PCRA)? If so that could give you access to a total bond market index fund, Schwab US Aggregate Bond Index Fund (SWAGX) ER 0.04%.

. . . . .

I suggest that you read one or two books on general investing. Wiki article, "Books: recommendations and reviews". When I first stated managing my own investments, I found this tutorial very helpful in learning investing terminology/jargon and some of the investing basics. Morningstar, "Investing Classroom". Also take a look at the Boglehead’s wiki, the "getting started" link I give below.

If you have any questions just ask.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

typical.investor
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Re: Help with Schwab 401k portfolio

Post by typical.investor » Tue Dec 04, 2018 8:48 pm

ruralavalon wrote:
Tue Dec 04, 2018 7:15 pm
In my opinion in your 401k the funds to consider using are:
1) 60%, Schwab S&P 500 index Fund (81% of U.S. stock market) (SWPPX) ER 0.03%;
2) 20%, Schwab International Index Fund (developed markets only) (SWISX) ER 0.06%; and
3) 20%, PIMCO Total Return Institutional (intermediate-term bonds) (PTTRX) ER 0.55%.
I agree this is a good plan as well as the possibility of adding VSMAX if desired.

Personally though, I would add at least 5% JMIEX for the exposure to emerging markets despite it's higher costs.

Returns from Jun 1997 - Nov 2018 [life of Schwab International Index SWISX]

VEIEX 6.85% (Vanguard emerging markets)
JMIEX 6.47%
SWISX 4.24%

Of course, if you can get VEIEX or VEMAX (admiral class) or VWO (ETF) or SCHE (Schwab emerging ETF) in taxable, that's even better.

[cue the "with 20 years of underperformance why include international at all" dialog]
VTSMX 7.30% (Vanguard Total market US stocks over that time)

My answer to the anti-international crowd is that I prefer myself to target the market with exposure to both stocks that have done better recently and those that haven't, and that the market will price according to all available information which means future US outperformance isn't the guaranteed slam-dunk that some argue it is. Rather, valuations resulting from pricing will likely result in the opposite.

In the end, whatever you feel comfortable with is the best plan for you and that is all that matters. There is no singular best way - our risk tolerances all differ.

halcyon_days
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Joined: Tue Dec 04, 2018 10:33 am

Re: Help with Schwab 401k portfolio

Post by halcyon_days » Wed Dec 05, 2018 1:55 pm

ruralavalon wrote:
Tue Dec 04, 2018 7:15 pm
Welcome to the forum :) .
Thank you for the warm welcome and the extremely well-supported comment :). You are one of the few people suggesting that I hold any bonds. After following the advice of the earlier comments I changed my allocations to:

50% SWPPX
20% VSMAX
30% SWISX

This mix will capture ~99% of the maximum possible diversification benefit as stated in your Vanguard reference. I need to do some more reading and soul searching before deciding on a PTTRX allocation.

Jack FFR1846
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Re: Help with Schwab 401k portfolio

Post by Jack FFR1846 » Wed Dec 05, 2018 1:59 pm

My own opinion.....until you have $100k invested, just get US Equity. Don't consider bonds or anything else. So my ultra simple portfolio recommendation is this:

100%: SWPPX - Schwab S&P 500 Index (E/R = 0.03%)
Bogle: Smart Beta is stupid

halcyon_days
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Joined: Tue Dec 04, 2018 10:33 am

Re: Help with Schwab 401k portfolio

Post by halcyon_days » Thu Dec 06, 2018 1:20 pm

Thank you Jack! I think I am going to stick with the three fund portfolio for now.

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