Help me index my 401(k)?

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Topic Author
Volando
Posts: 35
Joined: Tue Feb 23, 2021 7:52 pm

Help me index my 401(k)?

Post by Volando »

Hello, everyone. I'm 33 years old. I've slowly been working my way towards index fund investing and I'm looking for some help to convert my 401(k), which is in an actively managed mutual fund, to passively managed index funds. I believe our 401(k) managers fee is 0.025%.

My current 401(k) fund is in a T. Rowe Price 2050 target date fund. It has an expense ratio of 0.4%. It's done well enough but frankly it's under performing slightly with higher fees and I think I'd rather switch entirely to passively managed funds. It is currently allocated as 93% equity/7 % bonds. Our other accounts (IRA and 403(b)) are all in Vanguard's 2050 target date fund, which is 90% equity/10% bonds. I'd like to try to mirror this somehow.

Vanguard's 2050 target date fund has the following allocation currently:
1) Vanguard total stock market index fund (54.2%)
2) Vanguard total international stock market index fund (36.4%)
3) Vanguard total bond market 2 index fund (6.4%)
4) Vanguard total international bond index fund (2.9%)
5) Vanguard total international bond 2 index fund (0.1%)

Here are my vanguard options:
Vanguard small cap index institutional index fund (ER: 0.04%)
Vanguard mid cap index institutional index fund (ER: 0.04%)
Vanguard institutional index fund (S&P 500 fund) (ER: 0.02%)

Here are my non-vanguard options for bonds and international:
Dimensional fund adviser international core equity I (ER:0.28%; actively managed?)
-This is broken down into 23.94% Japan, 13.09% UK, 9.21% Canada, 7.94% France, 7.37% Germany, 7.24% Switzerland, 6.77% Australia, 3.46% Netherlands, 3.17% Sweden, 2.31% Italy. So it's not a total international index fund, which I suppose is ok. However, I think it's actively managed and the expense ratio is higher than I'd like.

JP Morgan Core Plus Bond R6 (ER: 0.39%; intermediate core-plus bond category; actively managed?)
Metropolitan West Total Return Bond Plan (ER: 0.38%; Intermediate core-plus bond category; actively managed)
Black Rock High Yield Bond Institutional (ER: 0.62%; high yield bond category; actively managed)

So here are my thoughts given my options:
1) Allocate 90% to equity and 10% to bonds.
2a) Exclude international in favor of passive funds:
-Of the 90% equity: allocate 70% to Vanguard S&P 500 fund, 20% to Vanguard mid cap fund, 10% to Vanguard small cap fund.
-I'm approximating this off of morningstar's VTSAX (vanguard total stock market) break-down.
-Of the 10% bonds: allocate it to the JP morgan bond fund?
2b) Include international to try to mirror other holdings:
-Of the 90% equity: allocate 70% to domestic, 30% to international.
-Therefore, 50% S&P 500 fund, 15% mid cap fund, 5% small cap fund to make up 70% domestic. Remaining would go into international.
- Of the 10% bonds: allocate it to the JP morgan bond fund?

Additional questions:
1) I have a hard time evaluating bond funds. Black rock's seems more aggressive based on the fund description which I think I may prefer but it has a higher expense ratio.
2) Although I'd like to switch to index funds, the thought of balancing all these funds seems daunting. There's a part of me that prefers simplicity but I'd also like passive funds. Is this rebalancing something I should not be concerned about?
3) I'm leaning towards excluding international due to my options. However, I think that my preference is to hold international to try to get the haystack (hence why I like Vanguard's funds). Should I just get rid of international in this case?
4) I also have the option to engage in a self-directed account with Scwab, which I think will open up more options. Is this advisable or should I stick to current plan options?

Thanks for the feedback! :sharebeer
Last edited by Volando on Mon May 03, 2021 1:17 pm, edited 1 time in total.
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retired@50
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Re: Help me index my 401(k)?

Post by retired@50 »

Volando wrote: Mon May 03, 2021 1:10 pm
Thanks for the feedback! :sharebeer
You can use the Vanguard index funds for US stock exposure.
Here are my vanguard options:
Vanguard small cap index institutional index fund (ER: 0.04%)
Vanguard mid cap index institutional index fund (ER: 0.04%)
Vanguard institutional index fund (S&P 500 fund) (ER: 0.02%)
The approximate holding percentages are discussed in this wiki link: https://www.bogleheads.org/wiki/Approxi ... ock_market

For bond funds inside this particular plan, I'd use this fund:
Metropolitan West Total Return Bond Plan (ER: 0.38%; Intermediate core-plus bond category; actively managed)
Unless you have a better choice in another tax-deferred plan.

For international stock, what about holding that asset class in a Roth IRA?

Regards,
This is one person's opinion. Nothing more.
terran
Posts: 2016
Joined: Sat Jan 10, 2015 10:50 pm

Re: Help me index my 401(k)?

Post by terran »

Given those options I'd approximate the total US stock market using the Vanguard funds and then use your IRA and/or 403(b) to fill out your desired asset allocation with bonds and international stocks. It's a little more work than the target dates funds you're currently using, but for me it would be worth it to avoid the high fee options in your 401(k).
Topic Author
Volando
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Re: Help me index my 401(k)?

Post by Volando »

retired@50 wrote: Mon May 03, 2021 1:16 pm
For bond funds inside this particular plan, I'd use this fund:
Metropolitan West Total Return Bond Plan (ER: 0.38%; Intermediate core-plus bond category; actively managed)
Unless you have a better choice in another tax-deferred plan.

For international stock, what about holding that asset class in a Roth IRA?

Regards,
Thanks!

I'll admit there's a part of me that was leaning towards brand identification with the bond fund. I have no idea about Metropolitan West but JP Morgan stands out so that was part of what led me to that. I'll consider using Metropolitan's fund.

That's also a good idea regarding international stock. My IRAs are entirely in target date funds but I suppose I could purchase a portion into an international stock fund or even include it in my taxable account (which I forgot to mention that I have as it is smaller). I'm not 100% tied to having international in my 401K so I'll have to ponder these options more.

What are your thoughts on doing a self-directed route?
lazyinvestor30
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Re: Help me index my 401(k)?

Post by lazyinvestor30 »

Volando wrote: Mon May 03, 2021 1:10 pm Hello, everyone. I'm 33 years old. I've slowly been working my way towards index fund investing and I'm looking for some help to convert my 401(k), which is in an actively managed mutual fund, to passively managed index funds. I believe our 401(k) managers fee is 0.025%.

My current 401(k) fund is in a T. Rowe Price 2050 target date fund. It has an expense ratio of 0.4%. It's done well enough but frankly it's under performing slightly with higher fees and I think I'd rather switch entirely to passively managed funds. It is currently allocated as 93% equity/7 % bonds. Our other accounts (IRA and 403(b)) are all in Vanguard's 2050 target date fund, which is 90% equity/10% bonds. I'd like to try to mirror this somehow.

Vanguard's 2050 target date fund has the following allocation currently:
1) Vanguard total stock market index fund (54.2%)
2) Vanguard total international stock market index fund (36.4%)
3) Vanguard total bond market 2 index fund (6.4%)
4) Vanguard total international bond index fund (2.9%)
5) Vanguard total international bond 2 index fund (0.1%)

Here are my vanguard options:
Vanguard small cap index institutional index fund (ER: 0.04%)
Vanguard mid cap index institutional index fund (ER: 0.04%)
Vanguard institutional index fund (S&P 500 fund) (ER: 0.02%)

Here are my non-vanguard options for bonds and international:
Dimensional fund adviser international core equity I (ER:0.28%; actively managed?)
-This is broken down into 23.94% Japan, 13.09% UK, 9.21% Canada, 7.94% France, 7.37% Germany, 7.24% Switzerland, 6.77% Australia, 3.46% Netherlands, 3.17% Sweden, 2.31% Italy. So it's not a total international index fund, which I suppose is ok. However, I think it's actively managed and the expense ratio is higher than I'd like.

JP Morgan Core Plus Bond R6 (ER: 0.39%; intermediate core-plus bond category; actively managed?)
Metropolitan West Total Return Bond Plan (ER: 0.38%; Intermediate core-plus bond category; actively managed)
Black Rock High Yield Bond Institutional (ER: 0.62%; high yield bond category; actively managed)

So here are my thoughts given my options:
1) Allocate 90% to equity and 10% to bonds.
2a) Exclude international in favor of passive funds:
-Of the 90% equity: allocate 70% to Vanguard S&P 500 fund, 20% to Vanguard mid cap fund, 10% to Vanguard small cap fund.
-I'm approximating this off of morningstar's VTSAX (vanguard total stock market) break-down.
-Of the 10% bonds: allocate it to the JP morgan bond fund?
2b) Include international to try to mirror other holdings:
-Of the 90% equity: allocate 70% to domestic, 30% to international.
-Therefore, 50% S&P 500 fund, 15% mid cap fund, 5% small cap fund to make up 70% domestic. Remaining would go into international.
- Of the 10% bonds: allocate it to the JP morgan bond fund?

Additional questions:
1) I have a hard time evaluating bond funds. Black rock's seems more aggressive based on the fund description which I think I may prefer but it has a higher expense ratio.
2) Although I'd like to switch to index funds, the thought of balancing all these funds seems daunting. There's a part of me that prefers simplicity but I'd also like passive funds. Is this rebalancing something I should not be concerned about?
3) I'm leaning towards excluding international due to my options. However, I think that my preference is to hold international to try to get the haystack (hence why I like Vanguard's funds). Should I just get rid of international in this case?
4) I also have the option to engage in a self-directed account with Scwab, which I think will open up more options. Is this advisable or should I stick to current plan options?

Thanks for the feedback! :sharebeer
If you are really worried about re balancing (your 401k generally should offer auto rebalancing, so look for that) and you value simplicity, you might just choose S&P500 and not worry about the mid and small cap.

Also depending the amount of money you have in current 401k, and the other accounts, the choice of just using S&P 500 would just work for the next 10 odd years given your age without worrying about diversification given high expense of funds.
Topic Author
Volando
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Re: Help me index my 401(k)?

Post by Volando »

terran wrote: Mon May 03, 2021 1:20 pm Given those options I'd approximate the total US stock market using the Vanguard funds and then use your IRA and/or 403(b) to fill out your desired asset allocation with bonds and international stocks. It's a little more work than the target dates funds you're currently using, but for me it would be worth it to avoid the high fee options in your 401(k).
Another good point. I'm somewhat tied to mirroring my assets across accounts that I think I'm overlooking using the other accounts to balance things out. That might make sense to keep the TSM approximation in here and try to build out bonds in other accounts. Thanks!

Also thanks, both of you for sharing the wiki link. I had overlooked that when trying to research the approximation.
Topic Author
Volando
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Joined: Tue Feb 23, 2021 7:52 pm

Re: Help me index my 401(k)?

Post by Volando »

lazyinvestor30 wrote: Mon May 03, 2021 1:25 pm
If you are really worried about re balancing (your 401k generally should offer auto rebalancing, so look for that) and you value simplicity, you might just choose S&P500 and not worry about the mid and small cap.

Also depending the amount of money you have in current 401k, and the other accounts, the choice of just using S&P 500 would just work for the next 10 odd years given your age without worrying about diversification given high expense of funds.
It's less than 6 figures. I don't think I'll be with the company for 10 years so that may be another option as I'll have new options whenever I change jobs. Thanks!
Topic Author
Volando
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Joined: Tue Feb 23, 2021 7:52 pm

Re: Help me index my 401(k)?

Post by Volando »

Another thought. I'm not particularly squeamish when it comes to the stock market and I still have some time to go. I could potentially exclude bonds for now and add them back in later when I have better options? We already have some in other accounts so it's not like I'm excluding them entirely.
lazyinvestor30
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Re: Help me index my 401(k)?

Post by lazyinvestor30 »

Volando wrote: Mon May 03, 2021 1:29 pm Another thought. I'm not particularly squeamish when it comes to the stock market and I still have some time to go. I could potentially exclude bonds for now and add them back in later when I have better options? I already have some in my other accounts so it's not like I'm excluding them entirely.
Yes, you are correct that you will have options in the future. If I were you, just plop down everything you can in the S&P 500 and not worry about it for another 7-8 years. You can always reevaluate when you switch jobs.

P.S - I was in your exact situation a couple years ago and this was the choice I made.
Topic Author
Volando
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Re: Help me index my 401(k)?

Post by Volando »

Thanks for helping me work through that all! :D Pulled the trigger on total stock market approximation from the wiki since they re-balance proportions and it matches my philosophy of trying to get the haystack. Opted out of international and bonds here and will try to compensate in other accounts.
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ruralavalon
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Re: Help me index my 401(k)?

Post by ruralavalon »

Volando wrote: Mon May 03, 2021 1:10 pm Hello, everyone. I'm 33 years old. I've slowly been working my way towards index fund investing and I'm looking for some help to convert my 401(k), which is in an actively managed mutual fund, to passively managed index funds. I believe our 401(k) managers fee is 0.025%.

My current 401(k) fund is in a T. Rowe Price 2050 target date fund. It has an expense ratio of 0.4%. It's done well enough but frankly it's under performing slightly with higher fees and I think I'd rather switch entirely to passively managed funds. It is currently allocated as 93% equity/7 % bonds. Our other accounts (IRA and 403(b)) are all in Vanguard's 2050 target date fund, which is 90% equity/10% bonds. I'd like to try to mirror this somehow.

Vanguard's 2050 target date fund has the following allocation currently:
1) Vanguard total stock market index fund (54.2%)
2) Vanguard total international stock market index fund (36.4%)
3) Vanguard total bond market 2 index fund (6.4%)
4) Vanguard total international bond index fund (2.9%)
5) Vanguard total international bond 2 index fund (0.1%)

Here are my vanguard options:
Vanguard small cap index institutional index fund (ER: 0.04%)
Vanguard mid cap index institutional index fund (ER: 0.04%)
Vanguard institutional index fund (S&P 500 fund) (ER: 0.02%)

Here are my non-vanguard options for bonds and international:
Dimensional fund adviser international core equity I (ER:0.28%; actively managed?)
-This is broken down into 23.94% Japan, 13.09% UK, 9.21% Canada, 7.94% France, 7.37% Germany, 7.24% Switzerland, 6.77% Australia, 3.46% Netherlands, 3.17% Sweden, 2.31% Italy. So it's not a total international index fund, which I suppose is ok. However, I think it's actively managed and the expense ratio is higher than I'd like.

JP Morgan Core Plus Bond R6 (ER: 0.39%; intermediate core-plus bond category; actively managed?)
Metropolitan West Total Return Bond Plan (ER: 0.38%; Intermediate core-plus bond category; actively managed)
Black Rock High Yield Bond Institutional (ER: 0.62%; high yield bond category; actively managed)

So here are my thoughts given my options:
1) Allocate 90% to equity and 10% to bonds.
2a) Exclude international in favor of passive funds:
-Of the 90% equity: allocate 70% to Vanguard S&P 500 fund, 20% to Vanguard mid cap fund, 10% to Vanguard small cap fund.
-I'm approximating this off of morningstar's VTSAX (vanguard total stock market) break-down.
-Of the 10% bonds: allocate it to the JP morgan bond fund?
2b) Include international to try to mirror other holdings:
-Of the 90% equity: allocate 70% to domestic, 30% to international.
-Therefore, 50% S&P 500 fund, 15% mid cap fund, 5% small cap fund to make up 70% domestic. Remaining would go into international.
- Of the 10% bonds: allocate it to the JP morgan bond fund?

Additional questions:
1) I have a hard time evaluating bond funds. Black rock's seems more aggressive based on the fund description which I think I may prefer but it has a higher expense ratio.
2) Although I'd like to switch to index funds, the thought of balancing all these funds seems daunting. There's a part of me that prefers simplicity but I'd also like passive funds. Is this rebalancing something I should not be concerned about?
3) I'm leaning towards excluding international due to my options. However, I think that my preference is to hold international to try to get the haystack (hence why I like Vanguard's funds). Should I just get rid of international in this case?
4) I also have the option to engage in a self-directed account with Scwab, which I think will open up more options. Is this advisable or should I stick to current plan options?

Thanks for the feedback! :sharebeer
Your employer's 401k plan offers some very good fund choices, you are fortunate.

1) For U.S. stocks I suggest Vanguard institutional index fund (S&P 500 fund) (VIIIX) ER 0.02%. "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" link, "Other considerations" . A S&P 500 index fund covers over 80% of the U.S.stock market investing in stocks of selected large-cap and mid-cap U.S. companies. In the 29 years since the creation of the first total stock market index fund the two types of funds have had almost identical performance. Portfolio Visualizer,1993-2021. I used the oldest share classes to get the longest period for comparison.

2) For international stocks I suggest DFA International Core Equity I (DFIEX) ER 0.28%. This is a good diversified, developed markets stock fund with a low expense ratio. It's performance has compared well to a developed markets stock index fund. Portfolio Visualizer, 2006-2021.

3) For bonds I suggest Metropolitan West Total Return Bond Plan (MWTSX) ER 0.38%. Although actively managed it is a good diversified (36% government bonds, 19% corporate bonds, 41% securitized), intermediate-term (effective duration = 6.35 years), investment-grade bond (credit quality = BBB) fund, with a low expense ratio. It's performance has compared well to a total bond market index fund. Portfolio Visualizer, 1998-2021. I used the oldest share classes to get the longest period for comparison.

I would not bother with the Self Directed Brokerage Account.
Last edited by ruralavalon on Mon May 03, 2021 2:48 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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retired@50
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Re: Help me index my 401(k)?

Post by retired@50 »

Volando wrote: Mon May 03, 2021 1:22 pm What are your thoughts on doing a self-directed route?
I'd skip it since the funds you already have available are adequate.

Regards,
This is one person's opinion. Nothing more.
Topic Author
Volando
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Re: Help me index my 401(k)?

Post by Volando »

ruralavalon wrote: Mon May 03, 2021 2:43 pm Your employer's 401k plan offers some very good fund choices, you are fortunate.

1) For U.S. stocks I suggest Vanguard institutional index fund (S&P 500 fund) (VIIIX) ER 0.02%. "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" link, "Other considerations" . A S&P 500 index fund covers over 80% of the U.S.stock market investing in stocks of selected large-cap and mid-cap U.S. companies. In the 29 years since the creation of the first total stock market index fund the two types of funds have had almost identical performance. Portfolio Visualizer,1993-2021. I used the oldest share classes to get the longest period for comparison.

2) For international stocks I suggest DFA International Core Equity I (DFIEX) ER 0.28%. This is a good diversified, developed markets stock fund with a low expense ratio. It's performance has compared well to a developed markets stock index fund. Portfolio Visualizer, 2006-2021.

3) For bonds I suggest Metropolitan West Total Return Bond Plan (MWTSX) ER 0.38%. Although actively managed it is a good diversified (36% government bonds, 19% corporate bonds, 41% securitized), intermediate-term (effective duration = 6.35 years), investment-grade bond (credit quality = BBB) fund, with a low expense ratio. It's performance has compared well to a total bond market index fund. Portfolio Visualizer, 1998-2021. I used the oldest share classes to get the longest period for comparison.

I would not bother with the Self Directed Brokerage Account.
Thank you for the analysis. I still have time to modify my change and you gave me some good food for thought with the comparisons. As I mentioned, the mutual fund had me in 7% bonds. All other accounts have 10% bonds. Do you think that it's meaningful to include 10% here? I'm not particularly concerned about behavioral issues with a market downturn and I'm not sure that 10% is going to move the needle all that much either way. Regarding international, developed markets makes up a smaller percentage of international total. If I were to include should I still use it as a stand in for total and try to reach 30-40% or should I keep it at a smaller allocation? Thanks!
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ruralavalon
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Re: Help me index my 401(k)?

Post by ruralavalon »

Volando wrote: Mon May 03, 2021 3:14 pm
ruralavalon wrote: Mon May 03, 2021 2:43 pm Your employer's 401k plan offers some very good fund choices, you are fortunate.

1) For U.S. stocks I suggest Vanguard institutional index fund (S&P 500 fund) (VIIIX) ER 0.02%. "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" link, "Other considerations" . A S&P 500 index fund covers over 80% of the U.S.stock market investing in stocks of selected large-cap and mid-cap U.S. companies. In the 29 years since the creation of the first total stock market index fund the two types of funds have had almost identical performance. Portfolio Visualizer,1993-2021. I used the oldest share classes to get the longest period for comparison.

2) For international stocks I suggest DFA International Core Equity I (DFIEX) ER 0.28%. This is a good diversified, developed markets stock fund with a low expense ratio. It's performance has compared well to a developed markets stock index fund. Portfolio Visualizer, 2006-2021.

3) For bonds I suggest Metropolitan West Total Return Bond Plan (MWTSX) ER 0.38%. Although actively managed it is a good diversified (36% government bonds, 19% corporate bonds, 41% securitized), intermediate-term (effective duration = 6.35 years), investment-grade bond (credit quality = BBB) fund, with a low expense ratio. It's performance has compared well to a total bond market index fund. Portfolio Visualizer, 1998-2021. I used the oldest share classes to get the longest period for comparison.

I would not bother with the Self Directed Brokerage Account.
Thank you for the analysis. I still have time to modify my change and you gave me some good food for thought with the comparisons. As I mentioned, the mutual fund had me in 7% bonds. All other accounts have 10% bonds. Do you think that it's meaningful to include 10% here? I'm not particularly concerned about behavioral issues with a market downturn and I'm not sure that 10% is going to move the needle all that much either way.
I usually suggest about 20% of portfolio in fixed income even for a young investor.

Wiki articles "Asset allocation" link, and "Bogleheads® investment philosophy" link, part 3 "Never bear too much or too little risk".
.

It's up to you. Asset allocation is a very personal decision which you must make based on your own personal ability, willingness and need to take risk.


Volando wrote: Mon May 03, 2021 3:14 pmRegarding international, my understanding is that developed markets make up 25% of international total. If I were to include should I still use it as a stand in for total and try to reach 30-40% or should I keep it at a smaller allocation? Thanks!
Developed markets are about 75% of a total international stock index fund like Vanguard Total International Stock Index Fund (VTIAX). In my opinion you can use the DFA developed markets fund to stand in for a total international fund. Portfolio Visualizer, 2006-2021.

I usually suggest something in the range of 20-30% of stocks in international stocks.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
Volando
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Re: Help me index my 401(k)?

Post by Volando »

I decided to put my change on pause for a few days. I felt myself wavering as I thought more about it so I thought holding off would be good until I can set an allocation I'm confident I can stick with.

On that note: I have a follow-up question that I'm hoping someone can answer. I couldn't quite find it doing a search on the forums but if it's been discussed before please let me know. If I am approximating the total stock market, I know that I should start with what is listed in the wiki. But how would one maintain this over time as there is drift in the market? My understanding is the S&P 500 makes up somewhere around 80% of the US market (Correct me if I'm wrong). Lets say 4 years from now it drifts to 60%. If I'm approximating the market, wouldn't I want the S&P 500 fund to be 60% instead of the 81% that is currently in the wiki? Or is the idea that I should try to maintain the allocation as is currently over time? And if I did maintain the market cap, what would be the best source to compare this against?

I hope I phrased this clearly but if I didn't make sense I can try to rephrase it.
MrJedi
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Re: Help me index my 401(k)?

Post by MrJedi »

Volando wrote: Tue May 04, 2021 10:14 am I decided to put my change on pause for a few days. I felt myself wavering as I thought more about it so I thought holding off would be good until I can set an allocation I'm confident I can stick with.

On that note: I have a follow-up question that I'm hoping someone can answer. I couldn't quite find it doing a search on the forums but if it's been discussed before please let me know. If I am approximating the total stock market, I know that I should start with what is listed in the wiki. But how would one maintain this over time as there is drift in the market? My understanding is the S&P 500 makes up somewhere around 80% of the US market (Correct me if I'm wrong). Lets say 4 years from now it drifts to 60%. If I'm approximating the market, wouldn't I want the S&P 500 fund to be 60% instead of the 81% that is currently in the wiki? Or is the idea that I should try to maintain the allocation as is currently over time? And if I did maintain the market cap, what would be the best source to compare this against?

I hope I phrased this clearly but if I didn't make sense I can try to rephrase it.
Without new contributions, the index funds take care of this naturally since they are cap weighted.

You would get drift in your scenario if you continued to contribute at 81% vs 60% of new funds though.

This small amount of drift is quite insignificant though, especially as your portfolio grows. Taking 1 day each year to rebalance or to adjust new contributions is usually more than sufficient.
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retired@50
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Re: Help me index my 401(k)?

Post by retired@50 »

Volando wrote: Tue May 04, 2021 10:14 am I decided to put my change on pause for a few days. I felt myself wavering as I thought more about it so I thought holding off would be good until I can set an allocation I'm confident I can stick with.

On that note: I have a follow-up question that I'm hoping someone can answer. I couldn't quite find it doing a search on the forums but if it's been discussed before please let me know. If I am approximating the total stock market, I know that I should start with what is listed in the wiki. But how would one maintain this over time as there is drift in the market? My understanding is the S&P 500 makes up somewhere around 80% of the US market (Correct me if I'm wrong). Lets say 4 years from now it drifts to 60%. If I'm approximating the market, wouldn't I want the S&P 500 fund to be 60% instead of the 81% that is currently in the wiki? Or is the idea that I should try to maintain the allocation as is currently over time? And if I did maintain the market cap, what would be the best source to compare this against?

I hope I phrased this clearly but if I didn't make sense I can try to rephrase it.
Personally, I doubt that such a large drift (80% to 60%) would occur in such a short time frame (4 years) as you describe. However, if it did, I suspect they would update the wiki.

I've been using a slightly different "rule of thumb" for quite a while, and it's still pretty close to target. I use 70% large cap, 20% mid cap, and 10% small cap to approximate the US market. It may not be perfect, but it gets me where I'm going. Of course, this is only an issue when you don't have access to a "total market" fund to begin with.

Regards,
This is one person's opinion. Nothing more.
terran
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Re: Help me index my 401(k)?

Post by terran »

If the S&P 500 becomes a smaller portion of the market then you would change your asset allocation to match, but the ~80% figure is pretty consistent, so I doubt it'll shift anywhere near as low as 60%.
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ruralavalon
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Re: Help me index my 401(k)?

Post by ruralavalon »

terran wrote: Tue May 04, 2021 10:24 am If the S&P 500 becomes a smaller portion of the market then you would change your asset allocation to match, but the ~80% figure is pretty consistent, so I doubt it'll shift anywhere near as low as 60%.
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A S&P 500 index fund has been good proxy for a total stock market index fund for as long as I have been using index funds.
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Volando
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Re: Help me index my 401(k)?

Post by Volando »

Thanks, everyone! It seems I was over-estimating the extent and impact of the drift. My takeaway is not to worry about it and just rebalance yearly :D .
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