Young Boglehead in Training needs help

[MAdude123]

Hello All,

I've been reading a lot on this forum and just finished "Boglehead's Guide to Investing", but would like some help with my individual situation. I am 23 years old, graduated in 2007 from a private college (lots of loans, we'll get to that), and have a income around $45k. I currently invest 10% of my income in my 401k with a 4% company match. Here's my summary:


Emergency funds = 1 month of expenses + money saved for engagement ring coming up soon.

Debt:
Credit Card - $0
Student Loan (Stafford) - $16k / 6.125% (fixed)
Student Loan (Private) - $24k / 6.690% (fixed)
Student Loan (Private) - $32k / 6.690% (fixed)
Student Loand (Gates) - $3k / 5.620% (variable)

Total Debt: $75k

Tax Filing Status: Single

Tax Rate: 25% Federal 5% State MA

Age: 23

Desired Asset allocation: 90/10

Current Portfolio: 5 figures

Taxable
College Fund from Parents - $13k (down about 30% from a year ago)
45% Ivy Global Natural Resources IGNAX (1.27%)
30% Ivy Small Cap Value A IYSAX (1.76%)
25% Waddell & Reed Advisors Sci & Tech (UNSCX 1.33%)

My 401k: 4 figures (just started)
20% Columbia Acorn Intl Z ACINX
20% Janus Contrarian JSVAX
25% Keeley Small Cap Value KSCVX
25% Schwab Institutional Select S&P 500 ISLCS
10% Vanguard Inflation Protected Securities Inv VIPSX


Funds Available in 401k:
American Century Heritage Fund (1.00%)
American Century Target Mat. 2025 Fund - BTTRX (.57%)
Columbia Acorn Intl Z - ACINX (.91%)
Columbia Marsico 21st Century Z NMYAX (.99%)
Columbia Mid Cap Value Z NAMAX (.87%)
Delaware Corporate Bond Inst DGCIX (.76%)
Dreyfus Premier Strategic Value I DRGVX (1.00%)
Hartford Small Company R5 IHSUX (1.05%)
Janus Contrarian JSVAX (.98%)
Keeley Small Cap Value KSCVX (1.36%)
Manning & Napier World Opportunities Series EXWAX (1.15%)
Pioneer Global High Yield A PGHYX (1.06%)
Quant Emerging Markets Inst QEMAX (1.41%)
Schwab Institutional Select S&P 500 ISLCX (.22%)
Ssga Intl Stock Sel SSAIX (1.18%)
Vanguard Inflation Protected Securities Inv VIPSX (.20%)
Vanguard Short Term Federal Inv VSGBX (.20%)


I currently don't have a Roth IRA yet because of the $3000 investment minimum at Vanguard. I'm saving towards the $3000 and hopefully will be able to get that in before April 09.

After educating myself a bit, I want to change my funds in my 401k. I'm still a little apprehensive about completely going index with what's happened in the past ten years, but was thinking about forcing myself to go 90% ISLCX and 10% VIPSX.

Also, what do you think I should do with my taxable investment account? Do I leave the taxable account alone and hope it rebounds or try to reinvest it? I know the expense ratios are astronomical and I know it's only a paper loss until I sell the funds but I was still thinking about trying to let it rebound a bit before applying it to a loan. My other option is to sell entirely and try to find different funds, but because I need the money relatively short term, I'm stuck.

Any help would be greatly appreciated. Now that I've started to understand the basics of personal finance and investing, I'm finding the more I know, the more I know I don't know.

Thanks in advance.

[Laura]

MAdude123,

Welcome to the forum. At this time you should focus on building a solid financial base rather than hitting a home run in the market. How do you do this? You need to start retirement investing and get those loans paid off as quickly as you can. You left money in equities in your taxable account that you needed in a short period of time and the market is down. Well there isn't much to be done about that. If you leave it there it can go down a lot farther and you have very speculative investments in that account. It could also go up. By taking it out and using it to pay down some of that debt you get a guaranteed rate of return.

At the same time you have some high cost options in your 401k and a relatively small balance. The general rule of thumb for investing priority is:

1. 401k up to the match
2. Max out roth
3. Max out 401k
4. taxable investing

In your case I suggest selling your taxable investments immediately. Take $3k and open up a roth. Use another $3k to beef up your emergency fund. Finally use the other $7k to pay down your loan with the highest interest rate.

Keep investing 10% of your salary for retirement but put 4% in your 401k to get the full match then direct the other 6% to your roth. You are at the beginning of your investing lifecycle so each contribution significantly changes the value of your portfolio. Don't spend a lot of time worrying about your exact asset allocation right now. You could do this:

roth
Target Retirement Fund

401k
American Century Target Mat. 2025 Fund - BTTRX (.57%)

Spend your energy on increasing your income so you can reduce your debt and build up your emergency fund. If you have an unexpected need for a car or some other expense you are going to go further into debt unless you can save more cash. That is hard to do with that much student debt and your income level. If you cannot earn more in your primary job you can look into a part-time job somewhere else temporarily. You are talking about an engagement and that will bring other expenses. Until you can get out from under the loan burden you are going to be limited in your life choices because a decent percentage of your monthly income will go toward servicing debt.

Congrats for focusing on this now. You are young and by focusing on this early can build a very solid financial foundation.

Laura

[MAdude123]

Hi Laura,

Thanks for the quick response and recommendations. I'm curious as to why you suggested American Century Target Mat. 2025 Fund - BTTRX (.57%) for my 401K. I thought that where I was young and had many years to retirement that I should be more aggressive and be more invested in stocks, whereas this fund is 100% bonds.

Is there a particular reason why you recommend that I shouldn't invest in Schwab Institutional Select S&P 500 ISLCX (.22%) and Vanguard Inflation Protected Securities Inv VIPSX (.20%)? Those obviously have the two lowest expense ratios and seem to fit inline basic index investing.

Again, thanks for the suggestions and I look forward to hearing more.

Thanks

[YDNAL]

Thanks for the quick response and recommendations. I'm curious as to why you suggested American Century Target Mat. 2025 Fund - BTTRX (.57%) for my 401K. I thought that where I was young and had many years to retirement that I should be more aggressive and be more invested in stocks, whereas this fund is 100% bonds.

Dude,

I'm not Laura but will pinch-hit in the meantime. Likely since the Century Fund has Target and 2025 in the name, this threw Laura a bit off - not realizing the fund is 100% Bonds. It is obvious to me, though, that the intent was to suggest TR2025 for both Roth and 401K.

Absent a traditional TR2025 fund in the 401k, consider something like this:

Roth (once established)
Vanguard Total International

401K
Schwab Institutional Select S&P 500 ISLCX (.22%) - 75% of Domestic
Keeley Small Cap Value KSCVX (1.36%) - 25% of Domestic
Vanguard Short Term Federal Inv VSGBX (.20%)
note: the KSCVX fund is pricey and growthy (not value tilted), but you must do the best you can with available choices.

The Domestic composition looks like this:
75/25 ISLCX/KSCVX
23 24 19
05 06 07
03 07 06 <- KSCVX drives mostly this line, I tried 70/30 and 65/35 as well

Regards,
Landy

[muddlehead]

at 23, you need to be 100% in the equity market in your 401k. closest thing to a total stock market index fund they offer. imho you need to pay off the debts before attacking roth etc...

[YDNAL]

at 23, you need to be 100% in the equity market in your 401k. closest thing to a total stock market index fund they offer. imho you need to pay off the debts before attacking roth etc...

Muddle,

You are not fully diversified at 100/0 Stocks/Bonds at any age.

Regards,
Landy

[muddlehead]

exactly correct. we can agree to disagree about diversification for a 23 yr old.

[YDNAL]

at 23, you need to be 100% in the equity market in your 401k.

You are not fully diversified at 100/0 Stocks/Bonds at any age.

exactly correct. we can agree to disagree about diversification for a 23 yr old.

[Laura]

MAdude,

Landy is correct that I did not know the 2025 fund is only bonds. Sorry for the mistake. I was posting very early in the morning.

I agree with Landy's proposed portfolio and also agree that you should hold some bonds. Interestingly bonds have out performed stocks for the last 10 years and they provide with you the opportunity to rebalance between the two major asset classes of stocks and bonds.

Laura

[MAdude123]

Thanks for all of your input. I think I'll be making some fund changes and some strategy changes based on your recommendations. I've started to pay down the loans as quickly as possible with a substantial "snowball" starting with the highest interest rate.

Thanks a lot.

[giacolet]

Laura wrote:

Finally, use the other 7k to pay down your loan with the highest interest rate.

MAdude123 wrote:

I've started to pay down the loans as quickly as possible with a substantial "snowball" starting with the highest interest rate.

I note that the two private loans have the highest interest rate and the larger principle balances.

The two institutional loans have much smaller balances, one only 3k.

From the point of view of a mortgage lender, the two private loans probably aren't reported to a credit bureau.

You may want to consider reducing the number of accounts and pay off the two lower balances first. This shows that you pay off your bills and might result in a higher credit score.

There's a significant psychological advantage in paying off two lenders. A 19k reduction in your total obligations looks better if two loans are eliminated rather that having four outstanding obligations.