S&P heavy 401k - Asset Allocation Across Accounts

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VT2006
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S&P heavy 401k - Asset Allocation Across Accounts

Post by VT2006 »

I am 31 and have my entire 401k balance in the Fidelity Spartan S&P 500 Index Fund FXAIX (.025) I did this partly to save on fees due to limited 401k choices, although I do have the Vanguard Target Retirement Funds to choose from at (.11)

Anyways my question is I want to diversify across both me and my wife's accounts, but having such a heavy position in my 401k with the S&P 500 is making it difficult.

I would like to add some Large Value (VIVAX) and both Small Blend (NAESX) and Small Value (VIVSX), but I am not sure about which International funds or REITS if needed. I've been reading a lot of Paul Merriman articles :confused

Any advice would be greatly appreciated Boggleheads!

Desired Allocation: 80/20
Emergency Fund: 6 Months
No Credit Card or Auto Debt
Mortgage: 1 year into 30yr $315k @4.625%

His 401k Fidelity Max contribution and 6% employer match
FXAIX Fidelity Spartan S&P 500 Index Fund (.025) 78k

His Roth IRA Fidelity
FBIOX Fidelity Biotechnology Portfolio Fund (.76) 7k

Her 403 b Lincoln
PTTRX Pimco Total Return Fund INSTL (.46) 23k

Her Roth IRA Vanguard
VMMX Vanguard Prime Money Market Fund (.16) 34k

Vanguard Taxable Account
VFSTX Vanguard Short Term Investment Grade Fund Investor Shares (.20) 15k - This is my emergency fund

I've been waiting for a correction and how to diversify amongst the asset classes to move my wife's money out of MM.
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BL
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by BL »

You have excellent diversified, low-ER Vanguard Target funds available. This could be used in the Roth IRAs, and Fidelity now has INDEX target funds available as well. Please don't try to be fancy. Either stay with the 500 index or this, and you will do well.

Here is a nice little booklet for young investors:
http://www.etf.com/docs/IfYouCan.pdf
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ruralavalon
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by ruralavalon »

What are you contributing annually to the Roth IRAs?

How much in dollars is the employer match in the 401k?

What are you contributing annually in the 403b?

What are the other funds offered in the 401k? In the 403b?

Why so much money market fund in her Roth IRA?
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baw703916
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by baw703916 »

The complementary fund to the S&P 500 is the completion index. Vanguard's version is VEXMX/VEXAX (ETF version VXF). You might want to consider holding that in a different account if you are holding a lot of S&P index in the 401k.
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VT2006
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by VT2006 »

baw703916 wrote:The complementary fund to the S&P 500 is the completion index. Vanguard's version is VEXMX/VEXAX (ETF version VXF). You might want to consider holding that in a different account if you are holding a lot of S&P index in the 401k.

Thanks for the advice! I do have a low expense Fidelity version in my 401k and will use that.
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by baw703916 »

VT2006 wrote:
baw703916 wrote:The complementary fund to the S&P 500 is the completion index. Vanguard's version is VEXMX/VEXAX (ETF version VXF). You might want to consider holding that in a different account if you are holding a lot of S&P index in the 401k.

Thanks for the advice! I do have a low expense Fidelity version in my 401k and will use that.

You're welcome! This wiki page may be helpful

https://www.bogleheads.org/wiki/Approxi ... ock_market
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Kevin M
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by Kevin M »

My first inclination would be to use a VG Target Retirement fund in your 401k. The slightly higher ER is worth the wonderful diversification and simplicity you get in the one fund, IMO. Generally a 500 index fund is used in a 401k because there are no good alternatives that give exposure to the other equity asset classes (small-cap, international, etc.). You do have an excellent, low-cost alternative that gives you exposure to total US and international stock markets, and decent bond exposure as well.

However, if for some reason you want to stick with the 500 index fund, then an extended market fund ("completion index") in something like a 4:1 ratio (500 index:extended market) gives you a good approximation of total US market. You can use more of the extended market fund to tilt more to small caps if desired.

I tilt to small-cap and value stocks, but generally would not recommend it unless you've really researched it extensively, and are convinced it is right for you, and that you will stick with it for many years. There is lots of debate about this here, and there are convincing arguments to go either way, IMO.

If you do decide to tilt, then my preference, if starting from scratch and if available, would be to just use a small-cap value fund, since most of the value effect has shown up historically in smaller-cap stocks, and you get the tilt to small and value in one fund.

Merriman relies a lot on historical results to make his case, and tends to speak in present tense based on past results--at least last time I listened to him some years ago; e.g., "this portfolio provides the highest risk-adjusted return", instead of "this portfolio provided the highest risk-adjusted return over this particular time period". I used to constantly shout out the tense correction as I listened to him--so frustrating!

There have been extended periods when tilts to small-cap and value stocks have underperformed the broad market. I would do quite a bit more reading by quite a few other authors, as well as read some of the extended discussions on this forum about the merits of tilting vs. sticking with total market funds, before committing to a tilted portfolio.

Kevin
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Lafder
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by Lafder »

What stood out to me is this

"Her Roth IRA Vanguard
VMMX Vanguard Prime Money Market Fund (.16) 34k "

I would only use cash or money market in your emergency fund. This 34k would be in stocks or bonds if it was mine :)

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ruralavalon
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by ruralavalon »

VT2006

To offer any specific ideas we need to know:
1) what funds (fund names, tickers & expense ratios) are offered in the 401k and 403b; and
2) how much money is being contributed annually to each account.
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Rupert
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by Rupert »

Two things about your portfolio jumped out at me. First, why is your wife's Roth IRA invested entirely in a money market fund? You should hold stocks there with high growth potential. I suggest holding your international stocks there, such as Vanguard's Total International Stock Market Index. Second, you're holding all your bonds in your wife's 403b. From your perspective, this might seem fine, but if I were your wife, I wouldn't like it. What if you divorce? She'll be stuck with the lower-performing retirement plan while you get the higher-performing one. This might be resolved via QDRO, but you don't want to go there. It's my personal preference to duplicate something like a three-fund portfolio in each spouse's retirement accounts, as opposed to holding all stocks in one spouse's account and holding all bonds in the other's.
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VT2006
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by VT2006 »

Rupert wrote:Two things about your portfolio jumped out at me. First, why is your wife's Roth IRA invested entirely in a money market fund? You should hold stocks there with high growth potential. I suggest holding your international stocks there, such as Vanguard's Total International Stock Market Index. Second, you're holding all your bonds in your wife's 403b. From your perspective, this might seem fine, but if I were your wife, I wouldn't like it. What if you divorce? She'll be stuck with the lower-performing retirement plan while you get the higher-performing one. This might be resolved via QDRO, but you don't want to go there. It's my personal preference to duplicate something like a three-fund portfolio in each spouse's retirement accounts, as opposed to holding all stocks in one spouse's account and holding all bonds in the other's.
Thanks everyone for all of the recommendations!

A couple of points I left out.

I don't desire International exposure in our portfolio and would like to stick with a Total Stock Market / bonds for the majority of our portfolio.

My wife has always contributed to MM for her Roth since before we got married. Now that I am taking a closer look at our portfolio as "One" I will move this into Total Stock Market Admiral and Small Cap Value Index Admiral eventually, I'm not comfortable moving $34k into those funds right now in an overvalued market and will wait for a correction to transfer into those funds.

I max out both Roth IRA's and my 401k. In addition I put in $1k monthly into the Vanguard Taxable Account (Short Term Investment Grade Fund) - I treat that as my cash account i.e. emergency fund and saving for daycare expenses for future baby.
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by ruralavalon »

VT2006 wrote:I would like to add some Large Value (VIVAX) and both Small Blend (NAESX) and Small Value (VIVSX), but I am not sure about which International funds or REITS if needed. I've been reading a lot of Paul Merriman articles :confused
. . . . .
A couple of points I left out.

I don't desire International exposure in our portfolio and would like to stick with a Total Stock Market / bonds for the majority of our portfolio.

My wife has always contributed to MM for her Roth since before we got married. Now that I am taking a closer look at our portfolio as "One" I will move this into Total Stock Market Admiral and Small Cap Value Index Admiral eventually, I'm not comfortable moving $34k into those funds right now in an overvalued market and will wait for a correction to transfer into those funds.

I max out both Roth IRA's and my 401k. In addition I put in $1k monthly into the Vanguard Taxable Account (Short Term Investment Grade Fund) - I treat that as my cash account i.e. emergency fund and saving for daycare expenses for future baby.
That clarifies a lot.

Can you tell us the 2 or 3 lowest expense ratio stock funds and 2 or 3 lowest expense ratio bond funds in both the 401k and the 403b? Are there small cap value funds or REIT funds either account? Please give the fund names, tickers and expense ratios.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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VT2006
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by VT2006 »

Here are the lowest expense funds available for my 401k and wife's 403b:

My 401k
FXAIX Spartan 500 Index Instl .03
VBTIX Vanguard Total Bond Market Index Instl .06
FSEVX Spartan Extended Market Index Adv .07

No Small Cap Value or Reits available.

Wife's 403b
VINIX Vanguard Institutional Index .04
VBTOX Vanguard Total Bond Market Index .06
PTTRX Pimco Total Return Instl .46

No Small Cap Value or Reits available
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by ruralavalon »

T20-06 wrote:I am 31
. . . . .
Desired Allocation: 80/20
In my opinion your desired asset allocation is within the range of what is reasonable.

VT2006 wrote:I would like to add some Large Value (VIVAX) and both Small Blend (NAESX) and Small Value (VIVSX), but I am not sure about which International funds or REITS if needed. I've been reading a lot of Paul Merriman articles :confused
. . . . .
A couple of points I left out.

I don't desire International exposure in our portfolio and would like to stick with a Total Stock Market / bonds for the majority of our portfolio.
A combination of S&P 500 and Extended Market in a 4:1 ratio approximates the total domestic stock market. Wiki article, "Approximating total stock market"

A simpler combination of Large Blend and Small Cap Value can give you the same effect as using Large Blend, Large Value, Small Blend, and Small Value. Forum discussion, "Ultimate Buy and Hold - 8 slices vs 4". R. Ferri blog post, "Winning with Small Value Stocks".

Most Bogleheads allocate REITs up to 10% of their total portfolio according to a forum poll.

Using 41% S&P 500, 10% Extended Market, 05% REIT and 24% Small-Cap Value (= 80% total stocks) gives this Morningstar style box, per their "instant x-ray":
15/18/11
10/11/07
11/09/04
VT2006 wrote:My wife has always contributed to MM for her Roth since before we got married. Now that I am taking a closer look at our portfolio as "One" I will move this into Total Stock Market Admiral and Small Cap Value Index Admiral eventually, I'm not comfortable moving $34k into those funds right now in an overvalued market and will wait for a correction to transfer into those funds
Bogleheads discourage attempts at market timing. You can't predict when a "correction" will occur. Keep in mind that cash in a money market fund is now giving a negative real return considering inflation. So while you wait for that "correction" she is losing about 02% per year to inflation plus whatever gain might be coming from investing that money.

. . . . .

Here is an example portfolio to consider, using the overall 80/20 asset allocation, with 05% in REIT. Total portfolio = $142k. Annual contributions = $29k. All percentages are rounded off.

His 401k @ Fidelity (55% of total; $78k; adds $18k/yr + employer match = >62% of annual contributions)
35%, Spartan 500 Index Instl (FXAIX) ER 0.03%
10%, Vanguard Total Bond Market Index Instl (VBTIX) ER 0.06%
10%, Spartan Extended Market Index Adv (FSEVX) ERE 0.07%

His Roth IRA @ Fidelity (05% of total; $07k; adds $5.5k/yr = <19% of annual contributions)
05%, Spartan® Real Estate Index Fund - Investor Class (FRXIX) ER 0.23%
00%, Spartan® Total Market Index Fund - Fidelity Advantage Class (FSTVX) ER 0.05%, <= add later to limit REIT to 05% or 10% at most

Her 403b @ Lincoln (16% of total; $23k)
06%, Vanguard Institutional Index (VINIX) ER 0.04%, <= S&P 500 index fund
10%, Vanguard Total Bond Market Index (VBTOX)ER 0.06%

Her Roth IRA @ Vanguard (24% of total; $34k; adds $5.5k/yr = <19% of annual contributions)
24%, Vanguard Small-Cap Value Index Fund Admiral (VSIAX) ER 0.09%

. . . . .

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: Bogleheads® investment philosophy
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by Majormajor78 »

One thing I didn't notice being asked is if you have a brokerage link option available in your 401K. If so this will allow you to purchase any mutual fund and give you commission free access to all of Fidelity's funds including their full lineup of Spartans: https://www.fidelity.com/mutual-funds/i ... y-fidelity
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by ddurrett896 »

I was in your same boat and with an AA of 100 equities, I went with...

SP500 (FXSIX) 55% in 401k
Extended markets (VEXAX) 25% in Roth
International stock (VTIAX) 20% in Roth

When I age and add bonds, I luckily have a low cost Total Bond fund (VBMFX) and will rebalance the SP500 to some of the VBMFX.
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VT2006
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by VT2006 »

Thanks for the suggestions. Where can I find recommended portfolio % per asset class? Ex. How much REITS and Small Cap Value Index to hold. I personally don't know much about REITS and if they are necessary.
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by Lafder »

REITS and small cap are not necessary :)

This might give you some ideas http://www.bogleheads.org/wiki/Lazy_portfolios

As far as your idea of waiting to move from money market cash to the market until there is a crash, there is an idea that time in the market matters more than timing the market. How big a drop are you waiting for to buy ? How many years would you wait ? I would say making transfers on an ongoing basis would come out ahead of waiting for a market "crash." But supposedly 2/3 of the time, going all in with a lump sum would beat out dollar cost averaging. Of course you need to do what you are comfortable with. For me I would hold more bonds before I would hold cash beyond my emergency fund.

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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by Kevin M »

VT2006 wrote:Thanks for the suggestions. Where can I find recommended portfolio % per asset class? Ex. How much REITS and Small Cap Value Index to hold. I personally don't know much about REITS and if they are necessary.
I would just stick with a total market-cap type of approach until you've thoroughly researched the pros and cons of tilting away from the market, and are convinced it is right for you and that you will stick with it despite years of underperformance. I would not just do it because it's done in some lazy portfolio, or even because of reading a book or two that makes it sound like a great idea. And this is coming from someone who tilts to small, value and REITs.

At the extreme, a prominent forum member and Boglehead author, Larry Swedroe, presents a somewhat compelling case for using exclusively small-cap value stocks (global, not domestic only) and bonds. The theory and empirical evidence is that this allows you to have less overall exposure to stocks, achieve a similar expected return, and limit the risk involved in extreme negative stock market events ("left tail risk"). So you can find Bogleheads with anywhere from 0% to 100% tilt to small-cap value.

Kevin
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Re: S&P heavy 401k - Asset Allocation Across Accounts

Post by ruralavalon »

VT2006 wrote:I would like to add some Large Value (VIVAX) and both Small Blend (NAESX) and Small Value (VIVSX), but I am not sure about which International funds or REITS if needed. I've been reading a lot of Paul Merriman articles :confused
. . . . .
A couple of points I left out.

I don't desire International exposure in our portfolio and would like to stick with a Total Stock Market / bonds for the majority of our portfolio.
VT2006 wrote: I personally don't know much about REITS and if they are necessary.
REITs are not absolutely necessary, you could stick with total stock market and total bond market funds. Adding low correlation asset classes to a portfolio increases long-term return while decreasing risk. Real estate is one of the few asset classes that has a low correlation to both stock and bond markets. REIT index funds are the most convenient way to invest in the real estate market. R. Ferri blog post, "REITs And Your Portfolio".

VT2006 wrote:Where can I find recommended portfolio % per asset class? Ex. How much REITS and Small Cap Value Index to hold.
REITs. Rick Ferri has recommended a REIT index fund at 10% of the portfolio for younger and mid-career investors in his book All About Asset Allocation, 1st edition, pp. 227-232, Tables 12-1, 12-2, 12-3 and 12-4. See also, Rick Ferri blog post, "REITs And Your Portfolio". For a summary of expert recommendations (L. Swedroe, B. Malkiel, Wm. Bernstein, R. Ferri) in the range 5% -15% of the portfolio, see: "What Asset Allocation Level Should You Use for Real Estate Investment Trusts (REITs)?"

Small-Cap Value. Rick Ferri has recommended Small-Cap Value at 30% of domestic stocks in his book All About Asset Allocation, 1st edition, p. 107. See also: Rick Ferri blog post, "Winning with Small Value Stocks".

Extended Market. As mentioned before, a combination of S&P 500 and Extended Market in a 4:1 ratio approximates the total domestic stock market. Wiki article, "Approximating total stock market".

Bonds. You wanted an 80/20 stock/bond allocation.

. . . . .

Combining the above relationships we get a portfolio like this:

20%, Vanguard Total Bond Market Index (VBTIX + VBTOX)
41%, S&P 500 index funds (VINIX + FXAIX)
10%, Spartan Extended Market Index Adv (FSEVX), <= 4:1 ratio S&P 500 to Extended Market equals total stock market
05%, Spartan® Real Estate Index Fund - Investor Class (FRXIX), <= limited to 05% because of the size of her Roth IRA
24%, Vanguard Small-Cap Value Index Fund Admiral (VSIAX), <= equals 30% of stocks (30% of 80% = 24%)
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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