100k : Need help for investing in equity funds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
macmf
Posts: 6
Joined: Thu Jul 30, 2020 8:17 pm

100k : Need help for investing in equity funds

Post by macmf » Fri Jul 31, 2020 5:11 pm

Hi All,

Need advice on choosing right equity funds.

1) Mortgage : $340k @ 3.125, 30 years. No other loan/debt
2) 401K : $20k. Started 1.5 years ago. Just increased to maximum allowed
3) Cash to invest : $100k, sitting in checking/savings accounts
4) Equity mutual funds outside of US in my home country : $50k as of today
5) Bond/fixed-income mutual funds : $150k, generating more returns than mortgage interest rate of 3.125
6) Tax rate : 22% Federal and 3% State(PA)
7) Age : 39, Married filing jointly
8) Income : 160k
9) Emergency fund : 6 months of expenses

Now deciding on investing available cash. One way is to pay towards mortgage but I am more inclined to get into equity mutual funds in US. Have explored a bit and thought of below funds with corresponding initial investment and then monthly contribution (1500)

Option 1: Looking to generate superior returns as compare to all index fund portfolio

1) Fidelity 500 Index FXAIX (25k)
2) Fidelity Blue Chip Growth Fund FBGRX (20k)
3) Fidelity® Select Health Care FSPHX (20k)
4) Vanguard International Growth Inv VWIGX (20k)
5) Vanguard Mid-Cap Index Fund VIMAX (15k)

Option 2: Mainly index funds

1) Vanguard Total Stock Market (VTSAX) : 20k
2) Vanguard Total International Stock(VTIAX) : 20k
3) Vanguard Health Care Fund (VGHCX) :20k
4) Vanguard 500 Index Fund (VFIAX) :20k
5) Fidelity NASDAQ Composite Index Fund (FNCMX) : 20k

Thought process behind option 1 :

1) Wanted a mix of index fund + mutual funds in order to generate superior returns over long term(10 years at least).
2) FBGRX and FSPHX to get concentrated technology and healthcare exposure in large growth .
3) VWIGX because this seems really good from holdings and returns perspective in foreign stocks.
4) VIMAX for getting into a blend of mid cap.


Please provide your inputs for below questions.

1) I did have discussion with Vanguard and Fidelity for PAS and both proposed investing in index funds. For example, Total US stock market, Total International stock market and same for bonds(Total US and International) . These are entire stock/bond market funds which would not require much advisory service and looks more of invest and forget types. Moreover no flexibility of including specific fund of choice. Then why to pay advisory fee. DIY seems more appropriate to me. Am I missing anything here?

2) Which one (option 1 or 2) would be better choice ?

3) Suggestions regarding fund selection in both options. If any fund can be replaced with better equivalent or change money allocation will make is more effective etc. ?


Thank you! ‘

000
Posts: 708
Joined: Thu Jul 23, 2020 12:04 am

Re: 100k : Need help for investing in equity funds

Post by 000 » Fri Jul 31, 2020 5:45 pm

I would not use sector or style funds. It seems you are tilting to things that have done recently. There is no guarantee they will continue to do so in the future.

A US index fund + ex-US index fund will probably be adequate for an equity portfolio.

dbr
Posts: 33184
Joined: Sun Mar 04, 2007 9:50 am

Re: 100k : Need help for investing in equity funds

Post by dbr » Fri Jul 31, 2020 6:02 pm

The only theory of stock returns that I know of usable for ordinary mutual funds that purports with credible historic support in the data to offer higher returns based on some kind of asset selection would be the Fama-French theory of return increasing depending on small cap and value loading. (Wow, there's a sentence.) Emerging market international funds also appear to offer more risk/return.

Other than that I don't know the basis for any of your suggestions in particular to be opportunities to obtain higher expected returns. Trying to fund pick based on recent past performance or timing based on current conditions usually does not work. The market already always knows more than we do and generally has well anticipated anything going on.

Note index funds are mutual funds, so there is no distinction there.

There is going to be a pretty strong consensus here that just buying total market index funds, US and international is a good enough idea. Small cap value tilts might be out of fashion here but used to be kind of a favorite. Overweighting REITS has been popular from time to time but I don't know that the case is a good one. Note that growth stocks don't "grow" more but rather being on the other end from "value" may be higher priced and lower returning. Probably the opportunities to invest in Amazon and Apple are gone, but who knows.

theorist
Posts: 651
Joined: Sat Sep 28, 2019 11:39 am

Re: 100k : Need help for investing in equity funds

Post by theorist » Fri Jul 31, 2020 6:15 pm

In option 2), total stock market and the S&P 500 fund are almost redundant. Total stock market overlaps the latter in about 75-80% of holdings.

I am not sure why you want to tilt to healthcare. I do understand the tilt to growth, given recent performance and recency bias, though I don’t really do it myself. I might replace your fund selection with the following:

Total stock market VTSAX 60%

Total international VTIAX 20%

PRGSX (T Rowe Price) 20%

The last is a 50/50 global stock fund with a strong growth tilt. It accomplishes some of what your growth fund choices do, both domestically and internationally, with one fund. It has performed extremely well. And overall this keeps you mostly indexed with broad exposures in case growth and healthcare do not outperform.

User avatar
David Jay
Posts: 8912
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: 100k : Need help for investing in equity funds

Post by David Jay » Fri Jul 31, 2020 10:06 pm

Don't let the word "Growth" lead you to believe that the fund will outperform in the future. In fact, Fama/French suggests that "Value" stocks have a more logical chance to outperform (Value and Growth opposite halves of the market).

As others have said, use Total Market (US and International) as the only 2 funds for your stock allocations.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

User avatar
geerhardusvos
Posts: 826
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: 100k : Need help for investing in equity funds

Post by geerhardusvos » Sat Aug 01, 2020 12:16 am

macmf wrote:
Fri Jul 31, 2020 5:11 pm
Hi All,

Need advice on choosing right equity funds.

1) Mortgage : $340k @ 3.125, 30 years. No other loan/debt
2) 401K : $20k. Started 1.5 years ago. Just increased to maximum allowed
3) Cash to invest : $100k, sitting in checking/savings accounts
4) Equity mutual funds outside of US in my home country : $50k as of today
5) Bond/fixed-income mutual funds : $150k, generating more returns than mortgage interest rate of 3.125
6) Tax rate : 22% Federal and 3% State(PA)
7) Age : 39, Married filing jointly
8) Income : 160k
9) Emergency fund : 6 months of expenses

Now deciding on investing available cash. One way is to pay towards mortgage but I am more inclined to get into equity mutual funds in US. Have explored a bit and thought of below funds with corresponding initial investment and then monthly contribution (1500)

Option 1: Looking to generate superior returns as compare to all index fund portfolio

1) Fidelity 500 Index FXAIX (25k)
2) Fidelity Blue Chip Growth Fund FBGRX (20k)
3) Fidelity® Select Health Care FSPHX (20k)
4) Vanguard International Growth Inv VWIGX (20k)
5) Vanguard Mid-Cap Index Fund VIMAX (15k)

Option 2: Mainly index funds

1) Vanguard Total Stock Market (VTSAX) : 20k
2) Vanguard Total International Stock(VTIAX) : 20k
3) Vanguard Health Care Fund (VGHCX) :20k
4) Vanguard 500 Index Fund (VFIAX) :20k
5) Fidelity NASDAQ Composite Index Fund (FNCMX) : 20k

Thought process behind option 1 :

1) Wanted a mix of index fund + mutual funds in order to generate superior returns over long term(10 years at least).
2) FBGRX and FSPHX to get concentrated technology and healthcare exposure in large growth .
3) VWIGX because this seems really good from holdings and returns perspective in foreign stocks.
4) VIMAX for getting into a blend of mid cap.


Please provide your inputs for below questions.

1) I did have discussion with Vanguard and Fidelity for PAS and both proposed investing in index funds. For example, Total US stock market, Total International stock market and same for bonds(Total US and International) . These are entire stock/bond market funds which would not require much advisory service and looks more of invest and forget types. Moreover no flexibility of including specific fund of choice. Then why to pay advisory fee. DIY seems more appropriate to me. Am I missing anything here?

2) Which one (option 1 or 2) would be better choice ?

3) Suggestions regarding fund selection in both options. If any fund can be replaced with better equivalent or change money allocation will make is more effective etc. ?


Thank you! ‘
Don’t get all fancy, put it all in VTSAX. Seriously. Add in total non-us too if you like.
VTSAX and chill

annu
Posts: 741
Joined: Mon Nov 04, 2019 7:55 pm

Re: 100k : Need help for investing in equity funds

Post by annu » Sat Aug 01, 2020 2:31 am

I would seriously consider paying towards mortgage. It is 100% sure deal. If not fully towards it, even big percentage will be great idea. Also with mortgage gone, your emergency fund will be a lot more controlled and reliable.

Topic Author
macmf
Posts: 6
Joined: Thu Jul 30, 2020 8:17 pm

Re: 100k : Need help for investing in equity funds

Post by macmf » Sat Aug 01, 2020 9:46 am

Thank you all for your advice. Provided much needed direction. Really appreciate!!

User avatar
grabiner
Advisory Board
Posts: 27396
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: 100k : Need help for investing in equity funds

Post by grabiner » Sat Aug 01, 2020 11:17 am

macmf wrote:
Fri Jul 31, 2020 5:11 pm
4) Equity mutual funds outside of US in my home country : $50k as of today
Are you familiar with the Passive foreign investment company rules for US investors? Depending on how these funds are treated, you may be better off getting the money out of mutual funds and into either conventional accounts (such as CDs) in the foreign country, or into US investments. (However, if you expect to return to the foreign country, selling the funds now for a capital gain may result in a bigger tax bill than holding the funds until you return and selling them there, depending on how the foreign country taxes them.)

However you invest this, it should be considered part of your portfolio. If you have a CD in a foreign bank, that is fixed income just as a CD or bond fund in the US is, so it counts as fixed income in your asset allocation.
5) Bond/fixed-income mutual funds : $150k, generating more returns than mortgage interest rate of 3.125
While they did so in the past, I wouldn't expect that to continue. The one-year return on Vanguard Total Bond Market Index was 10.40%, but that is because rates fell. With a current yield of 1.17% and a duration of six years, that is what you can expect as a six-year annualized return; if rates rise this year, you will lose enough in value that you get back to the 1.17% return in six years.

Therefore, if yo don't need the liquidity, selling these bonds to pay down the mortgage is a good idea.

Another important tax consideration is that most of the $100K will have to be invested in a US taxable account. You can contribute to a 401(k), and you and your spouse can each contribute to IRAs, but beyond that, you probably want the taxable portion in an index fund, such as Vanguard Total Stock Market or Total International. These two funds will give you close to the stock market return, because the IRS and state of PA won't take too much for taxes. If you have an active fund you like, and it is low-cost, hold it in your IRAs, or in your 401(k) if it is an option.

If you use mutual funds (not ETFs), use Vanguard rather than Fidelity. The ETF structure allows mutual funds to avoid distributing capital gains. At Vanguard, the mutual fund and ETF are share classes of the same fund, so both get the advantage. Thus Fidelity's index funds, while they should about have the same pre-tax return as Vanguard's, are likely to have a lower after-tax return.
Wiki David Grabiner

Topic Author
macmf
Posts: 6
Joined: Thu Jul 30, 2020 8:17 pm

Re: 100k : Need help for investing in equity funds

Post by macmf » Sun Aug 02, 2020 10:10 am

grabiner wrote:
Sat Aug 01, 2020 11:17 am
macmf wrote:
Fri Jul 31, 2020 5:11 pm
4) Equity mutual funds outside of US in my home country : $50k as of today
Are you familiar with the Passive foreign investment company rules for US investors? Depending on how these funds are treated, you may be better off getting the money out of mutual funds and into either conventional accounts (such as CDs) in the foreign country, or into US investments. (However, if you expect to return to the foreign country, selling the funds now for a capital gain may result in a bigger tax bill than holding the funds until you return and selling them there, depending on how the foreign country taxes them.)

However you invest this, it should be considered part of your portfolio. If you have a CD in a foreign bank, that is fixed income just as a CD or bond fund in the US is, so it counts as fixed income in your asset allocation.
5) Bond/fixed-income mutual funds : $150k, generating more returns than mortgage interest rate of 3.125
While they did so in the past, I wouldn't expect that to continue. The one-year return on Vanguard Total Bond Market Index was 10.40%, but that is because rates fell. With a current yield of 1.17% and a duration of six years, that is what you can expect as a six-year annualized return; if rates rise this year, you will lose enough in value that you get back to the 1.17% return in six years.

Therefore, if yo don't need the liquidity, selling these bonds to pay down the mortgage is a good idea.

Another important tax consideration is that most of the $100K will have to be invested in a US taxable account. You can contribute to a 401(k), and you and your spouse can each contribute to IRAs, but beyond that, you probably want the taxable portion in an index fund, such as Vanguard Total Stock Market or Total International. These two funds will give you close to the stock market return, because the IRS and state of PA won't take too much for taxes. If you have an active fund you like, and it is low-cost, hold it in your IRAs, or in your 401(k) if it is an option.

If you use mutual funds (not ETFs), use Vanguard rather than Fidelity. The ETF structure allows mutual funds to avoid distributing capital gains. At Vanguard, the mutual fund and ETF are share classes of the same fund, so both get the advantage. Thus Fidelity's index funds, while they should about have the same pre-tax return as Vanguard's, are likely to have a lower after-tax return.

Thank you for the comprehensive info touching every aspect. Was not familiar with Passive foreign investment company. This is very helpful.

Topic Author
macmf
Posts: 6
Joined: Thu Jul 30, 2020 8:17 pm

Re: 100k : Need help for investing in equity funds

Post by macmf » Mon Aug 03, 2020 3:53 am

H All,

Please help in resolving couple of more questions.

1) Is it ok to invest the available funds(after 401K & IRAs) in VTSAX & VTIAX in one lump sum or start with more conservative approach of may be 5k-7k per month. Specifically because stock market kept on increasing since April 2020 despite of current economic situation and could enter in correction phase in near future(that’s what I see in news and different articles). Not trying to time the market but just want to take an informed decision before investing (lump sum vs spread investable funds in 10-12 months) considering current situation?

2) thinking of 75/25 in VTSAX/VTIAX or any other ratio could be more appropriate ?

Thank you!

southwest_stacker
Posts: 161
Joined: Mon Feb 07, 2011 2:29 am

Re: 100k : Need help for investing in equity funds

Post by southwest_stacker » Mon Aug 03, 2020 6:47 am

If you currently had 100k in vtsax & vtiax would you sell 90k of it today and buy back 10k more of them each month for the next 9 months? If not what is the difference between that and stretching your initial purchase out over ten months?

Let’s say you did take ten months to buy. When you reached that point since you are “all in” would you sell 90% and buy back 10% over the next ten months and just keep repeating this cycle over and over? If not what is the difference?

3funder
Posts: 1405
Joined: Sun Oct 15, 2017 9:35 pm

Re: 100k : Need help for investing in equity funds

Post by 3funder » Mon Aug 03, 2020 10:55 am

000 wrote:
Fri Jul 31, 2020 5:45 pm
I would not use sector or style funds. It seems you are tilting to things that have done recently. There is no guarantee they will continue to do so in the future.

A US index fund + ex-US index fund will probably be adequate for an equity portfolio.
+1

User avatar
grabiner
Advisory Board
Posts: 27396
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: 100k : Need help for investing in equity funds

Post by grabiner » Mon Aug 03, 2020 6:25 pm

macmf wrote:
Mon Aug 03, 2020 3:53 am
H All,

Please help in resolving couple of more questions.

1) Is it ok to invest the available funds(after 401K & IRAs) in VTSAX & VTIAX in one lump sum or start with more conservative approach of may be 5k-7k per month. Specifically because stock market kept on increasing since April 2020 despite of current economic situation and could enter in correction phase in near future(that’s what I see in news and different articles). Not trying to time the market but just want to take an informed decision before investing (lump sum vs spread investable funds in 10-12 months) considering current situation?
What you are considering here is dollar-cost averaging. This doesn't make sense as a market-timing move; if it is right for you to invest gradually into the market, it is also right for me to pull most of my money out of the market and move it back in gradually. But it is reasonable as a psychological move; you are adding a lot more money to stock, and increasing your risk, so it makes sense to increase gradually.

The downside of dollar-cost averaging is that you miss out on a small amount of market returns. Investing $100K at $5K per month is probably going to cost you too much; I would suggest a period of about six months.

This is independent of whether you put the money in the 401(k) and IRAs. If you want to put, say, $15K in stock every month, and you have already added $20K to the 401(k) and IRAs, you can put $15K of that money in stock in August, and the other $5K in bonds. Then, in September, you can put the other $5K in the 401(k) in stock, and another $10K in the taxable account.
2) thinking of 75/25 in VTSAX/VTIAX or any other ratio could be more appropriate ?
Asset allocation is a personal decision; 75/25 is in a reasonable range of US/foreign split.
Wiki David Grabiner

000
Posts: 708
Joined: Thu Jul 23, 2020 12:04 am

Re: 100k : Need help for investing in equity funds

Post by 000 » Mon Aug 03, 2020 6:30 pm

Dollar cost averaging (DCA) is fine. It reduces risk. Just don't take too long. Six months is probably long enough.

Topic Author
macmf
Posts: 6
Joined: Thu Jul 30, 2020 8:17 pm

Re: 100k : Need help for investing in equity funds

Post by macmf » Tue Aug 04, 2020 8:08 pm

grabiner wrote:
Mon Aug 03, 2020 6:25 pm
macmf wrote:
Mon Aug 03, 2020 3:53 am
H All,

Please help in resolving couple of more questions.

1) Is it ok to invest the available funds(after 401K & IRAs) in VTSAX & VTIAX in one lump sum or start with more conservative approach of may be 5k-7k per month. Specifically because stock market kept on increasing since April 2020 despite of current economic situation and could enter in correction phase in near future(that’s what I see in news and different articles). Not trying to time the market but just want to take an informed decision before investing (lump sum vs spread investable funds in 10-12 months) considering current situation?
What you are considering here is dollar-cost averaging. This doesn't make sense as a market-timing move; if it is right for you to invest gradually into the market, it is also right for me to pull most of my money out of the market and move it back in gradually. But it is reasonable as a psychological move; you are adding a lot more money to stock, and increasing your risk, so it makes sense to increase gradually.

The downside of dollar-cost averaging is that you miss out on a small amount of market returns. Investing $100K at $5K per month is probably going to cost you too much; I would suggest a period of about six months.

This is independent of whether you put the money in the 401(k) and IRAs. If you want to put, say, $15K in stock every month, and you have already added $20K to the 401(k) and IRAs, you can put $15K of that money in stock in August, and the other $5K in bonds. Then, in September, you can put the other $5K in the 401(k) in stock, and another $10K in the taxable account.
2) thinking of 75/25 in VTSAX/VTIAX or any other ratio could be more appropriate ?
Asset allocation is a personal decision; 75/25 is in a reasonable range of US/foreign split.

Thank you David!

Topic Author
macmf
Posts: 6
Joined: Thu Jul 30, 2020 8:17 pm

Re: 100k : Need help for investing in equity funds

Post by macmf » Tue Aug 04, 2020 8:09 pm

000 wrote:
Mon Aug 03, 2020 6:30 pm
Dollar cost averaging (DCA) is fine. It reduces risk. Just don't take too long. Six months is probably long enough.
Sure. Thank you!

Post Reply