Having almost 90% of investments with Target Retirement account

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Neuro
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Joined: Sun Oct 29, 2017 10:55 pm

Having almost 90% of investments with Target Retirement account

Post by Neuro » Sun Oct 29, 2017 11:22 pm

Hey all,

I want to start off and say that I am super grateful for SatuMedia. I am a long time lurker but never posted. A couple years ago I was fortunate to come across this site when looking for investment help. At the time I had $0 invested in IRA/401K and barely knew anything beyond the difference between a Roth and Traditional account. A couple short weeks of reading the wikis and I started putting money in a target retirement account vs trying to beat the market by being a blind monkey throwing darts at the investment board :D . It has been awhile since I started this strategy and I need some advice on how to approach a couple situations.

Emergency funds: 40k
Debt: None
Tax Filing Status: Single
Tax Rate: 25% Federal
State of Residence: FL
Age: 28

Current retirement assets
Roth 401k (18k: 44% of assets)
  • VFFVX (Vanguard Target Retirement 2055 Fund Investor Shares)
Roth IRA (17k: 42% of assets)
  • VFFVX (Vanguard Target Retirement 2055 Fund Investor Shares)
HSA (5.5k: 13% of assets)
  • SelectAccount: 1k cash (Base balance needed before investing)
      Schwab: VFIAX (Vanguard 500 index admiral) - 4.5k

    Questions:

    1. As you can see, 86% of my retirement assets are in the Target Retirement 2055 Fund. While this is pretty much composed of the 3 fund portfolio, I am wondering if I should be creating this myself across the IRA/HSA accounts. For instance, the HSA might be the best place to put the more tax inefficient bonds?

    2. Similar to #1, my emergency fund is not being used effectively. I am starting to move funds into a Capital One 360 Money Market account for 1.20%. I have around 2k left that I can contribute to Roth IRA and around 2.5k for HSA. Unfortunately, I will not be able to get 401k access until the middle of next year with my current employer. If I started investing into taxable accounts, what would be a good balance for 3 fund portfolio across IRA/HSA/Taxable knowing that most of my investments are in a Target Retirement 2055 fund?

    3. I started a new job and they are using HSA bank (TD Ameritrade for investment). The benefit for me is that they put in around $400 throughout the year as an overall contribution. I am wondering if it would be worthwhile to transfer my Select Account/Schwab into this account? My thinking is that I would be able to use the 1k in cash that has to sit in Select Account without earning anything at the cost of losing the lower expense ratio admiral index fund. Is there something I may be missing with this though?

    Thanks in advance! I would greatly appreciate any advice that anyone has.

    rkhusky
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    Re: Having almost 90% of investments with Target Retirement account

    Post by rkhusky » Mon Oct 30, 2017 7:31 am

    Do you expect your salary to increase significantly in the next 10-20 years (i.e. are you pre-med, pre-law, etc?)? Are you expecting a significant pension in retirement? If the answers are both "no", then you should probably be using a Traditional 401K and investing the tax savings in a taxable account, especially in the 25% tax bracket or higher.

    The TR funds are fine if you want a hands-off approach, with Vanguard handling all the rebalancing and glide path adjustments. It becomes harder to maintain when you start investing a sizable amount in taxable.

    Here are some options, among many possibilities, for your fund selection & placement:

    1) You could use TR 2055 in tax advantaged and taxable, even though it is not the most tax efficient, if you don't really want to be bothered with portfolio maintenance and don't mind the slight tax drag, which will get larger as the fund adds more bonds in 20 years or so.

    2) You could use TR 2055 in tax advantaged and Tax Managed Balanced in taxable, which may require moving to TR 2060+ over time if your allocation to Tax Managed Balanced becomes a significant part of your portfolio, because it is 50% stock and 50% tax exempt bonds.

    3) You could use TR 2055 in tax advantaged and use Total Stock, Total International, and/or Tax Exempt Intermediate in the taxable account, where you could start with the stock funds and then start adding the muni bonds 10-20 years down the road, in order to match the asset allocation of TR 2055.

    4) You could start with TR 2055 in tax advantaged and just use Total Stock and Total International in taxable, and then move to TR 2050, TR 2045, TR 2040 etc, if the stock allocation in your taxable account starts to become significant.

    5) You could use Total Stock and Total Bond in your 401K, Total Stock and/or Total International in your IRA, and Total Stock and Total International in taxable, which would require the most monitoring and manual adjustments, but would be the most efficient.

    radiowave
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    Re: Having almost 90% of investments with Target Retirement account

    Post by radiowave » Mon Oct 30, 2017 7:47 am

    Target retirement funds in tax deferred and tax free accounts is a good way to simplify your portfolio in a 3/4 fund portfolio with just a slight increase in expense ratio (typically around .10%). you don't have to rebalance and someday when you withdraw in retirement, it's very straightforward. I disagree with rkhusky putting TR funds in taxable . . . yes you can do that but you loose some of the tax advantages of lower capital gains on the bond portion. Agree with Total Stock/International Stock in taxable and tax exempt municipal bond funds to round out your asset allocation.
    Last edited by radiowave on Mon Oct 30, 2017 5:52 pm, edited 1 time in total.
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    BL
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    Re: Having almost 90% of investments with Target Retirement account

    Post by BL » Mon Oct 30, 2017 8:01 am

    You might think about how much % in bonds you want, and then choose your target date fund by a nearer date if you want more than 10% bonds.
    You have done well choosing that fund. When you get to investing in taxable, then consider whether it makes sense to break into 3-fund portfolio.

    sschoe2
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    Re: Having almost 90% of investments with Target Retirement account

    Post by sschoe2 » Mon Oct 30, 2017 8:13 am

    Target retirement funds are a decent option for the 401k. I don't have as many options at Well's Fargo so I have all my 401k in 2045 which is the best option listed. The downsides to it are it has investor share level expense ratio and it is a bit more bullish on the total international than I prefer (40% of equities). My taxable and IRA are similar in makeup to the Target retirement. Total stock market, total international stock market, and short term investment grade bonds and I have only 20% international in them so that averages it down to about 25% international stock index overall.

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    David Jay
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    Re: Having almost 90% of investments with Target Retirement account

    Post by David Jay » Mon Oct 30, 2017 1:58 pm

    A regular here on BH ("neurosphere") has a signature line that says: If you have to ask if a Target Date fund is right for you, the answer is "yes".

    It is a great set-it-and-forget-it investment tool. My daughter's Roth is entirely in TR2050. My son's Roth is in TR2055.
    Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

    Johnsson
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    Re: Having almost 90% of investments with Target Retirement account

    Post by Johnsson » Mon Oct 30, 2017 4:50 pm

    David Jay wrote:
    Mon Oct 30, 2017 1:58 pm
    A regular here on BH ("neurosphere") has a signature line that says: If you have to ask if a Target Date fund is right for you, the answer is "yes".

    It is a great set-it-and-forget-it investment tool. My daughter's Roth is entirely in TR2050. My son's Roth is in TR2055.
    As long as it is kept in a retirement account.

    Neuro
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    Re: Having almost 90% of investments with Target Retirement account

    Post by Neuro » Thu Nov 02, 2017 10:58 pm

    Thank you all! Really appreciate the solid advice from everyone.
    rkhusky wrote:
    Mon Oct 30, 2017 7:31 am
    Do you expect your salary to increase significantly in the next 10-20 years (i.e. are you pre-med, pre-law, etc?)? Are you expecting a significant pension in retirement? If the answers are both "no", then you should probably be using a Traditional 401K and investing the tax savings in a taxable account, especially in the 25% tax bracket or higher.
    First off, thank you for the in-depth reply! I do expect my salary to go up around 25% in the next 10 years. I misspoke in my original post, I am in the 28% tax bracket but expect to stay there even with salary growth. With this in mind, do you think the Traditional 401K/IRA is still worth it? I need to look in more detail at all your suggestions (did not know about Tax-Managed Balance until googling it) but appreciate all the different approach breakdowns :).
    radiowave wrote:
    Mon Oct 30, 2017 7:47 am
    Target retirement funds in tax deferred and tax free accounts is a good way to simplify your portfolio in a 3/4 fund portfolio with just a slight increase in expense ratio (typically around .10%). you don't have to rebalance and someday when you withdraw in retirement, it's very straightforward. I disagree with rkhusky putting TR funds in taxable . . . yes you can do that but you loose some of the tax advantages of lower capital gains on the bond portion. Agree with Total Stock/International Stock in taxable and tax exempt municipal bond funds to round out your asset allocation.
    Appreciate the advice! This is what I need in terms of thinking about long-term allocations. Will certainly re-look into tax advantages of bonds/stocks and where they should be placed for optimal performance.
    BL wrote:
    Mon Oct 30, 2017 8:01 am
    You might think about how much % in bonds you want, and then choose your target date fund by a nearer date if you want more than 10% bonds.
    You have done well choosing that fund. When you get to investing in taxable, then consider whether it makes sense to break into 3-fund portfolio.
    Definitely another good suggestion for more hands-off approach and something I will definitely consider.
    sschoe2 wrote:
    Mon Oct 30, 2017 8:13 am
    Target retirement funds are a decent option for the 401k. I don't have as many options at Well's Fargo so I have all my 401k in 2045 which is the best option listed. The downsides to it are it has investor share level expense ratio and it is a bit more bullish on the total international than I prefer (40% of equities). My taxable and IRA are similar in makeup to the Target retirement. Total stock market, total international stock market, and short term investment grade bonds and I have only 20% international in them so that averages it down to about 25% international stock index overall.
    Appreciate the input. Seems that overall the TR fund is a great base as it uses the fundamentals of 3 fund and with some manipulation one can rather easily adjust the ratios as they please.
    David Jay wrote:
    Mon Oct 30, 2017 1:58 pm
    A regular here on BH ("neurosphere") has a signature line that says: If you have to ask if a Target Date fund is right for you, the answer is "yes".

    It is a great set-it-and-forget-it investment tool. My daughter's Roth is entirely in TR2050. My son's Roth is in TR2055.
    Haha love it! Glad to hear that, definitely seems like the best SIMPLE approach.
    Johnsson wrote:
    Mon Oct 30, 2017 4:50 pm
    David Jay wrote:
    Mon Oct 30, 2017 1:58 pm
    A regular here on BH ("neurosphere") has a signature line that says: If you have to ask if a Target Date fund is right for you, the answer is "yes".

    It is a great set-it-and-forget-it investment tool. My daughter's Roth is entirely in TR2050. My son's Roth is in TR2055.
    As long as it is kept in a retirement account.
    Good to know, will keep it in tax advantaged account.

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    Watty
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    Re: Having almost 90% of investments with Target Retirement account

    Post by Watty » Thu Nov 02, 2017 11:13 pm

    Neuro wrote:
    Thu Nov 02, 2017 10:58 pm
    First off, thank you for the in-depth reply! I do expect my salary to go up around 25% in the next 10 years. I misspoke in my original post, I am in the 28% tax bracket but expect to stay there even with salary growth. With this in mind, do you think the Traditional 401K/IRA is still worth it?
    It is almost a no brainer. A couple of things could put you in a lower tax bracket someday.

    1) You get married to someone that does not also have a high income
    2) "life happens" lots of things can derail your plans.
    3) You get to be 50 or so and realize that you can retire early in a lower tax bracket.

    rkhusky
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    Re: Having almost 90% of investments with Target Retirement account

    Post by rkhusky » Fri Nov 03, 2017 8:31 am

    Neuro wrote:
    Thu Nov 02, 2017 10:58 pm
    Thank you all! Really appreciate the solid advice from everyone.
    rkhusky wrote:
    Mon Oct 30, 2017 7:31 am
    Do you expect your salary to increase significantly in the next 10-20 years (i.e. are you pre-med, pre-law, etc?)? Are you expecting a significant pension in retirement? If the answers are both "no", then you should probably be using a Traditional 401K and investing the tax savings in a taxable account, especially in the 25% tax bracket or higher.
    First off, thank you for the in-depth reply! I do expect my salary to go up around 25% in the next 10 years. I misspoke in my original post, I am in the 28% tax bracket but expect to stay there even with salary growth. With this in mind, do you think the Traditional 401K/IRA is still worth it? I need to look in more detail at all your suggestions (did not know about Tax-Managed Balance until googling it) but appreciate all the different approach breakdowns :).
    If you are in the 28% bracket and expect to stay there, that's even more of a reason to use Traditional. See /wiki/Traditional_versus_Roth.

    pkcrafter
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    Re: Having almost 90% of investments with Target Retirement account

    Post by pkcrafter » Fri Nov 03, 2017 9:54 am

    Your portfolio is over 90% stock, which most investors cannot handle. Consider the asset allocation carefully and how you might respond to a 40% drop in assets, even if it's temporary. Just for reference, many posters here would recommend maybe 80% max in equity.

    Paul
    When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

    radiowave
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    Re: Having almost 90% of investments with Target Retirement account

    Post by radiowave » Fri Nov 03, 2017 11:46 am

    pkcrafter wrote:
    Fri Nov 03, 2017 9:54 am
    Your portfolio is over 90% stock, which most investors cannot handle. Consider the asset allocation carefully and how you might respond to a 40% drop in assets, even if it's temporary. Just for reference, many posters here would recommend maybe 80% max in equity.

    Paul
    Another perspective to Paul's comment is the OP is 28 so he has 30-40 years to retirement. So some dips in the market in the next couple of decades, assuming the funds are being saved for retirement, will recover and in the long run, the higher equity portion will produce higher returns than bonds/fixed income. The closer to retirement, the more incentive to be conservative with asset allocation. If I were 28 again, knowing what I know now a few years out from retirement, I would likely have just domestic and international total stock funds and emergency funds in high yield savings and CDs. (there's probably a whole other thread to start about if I could go back in time and . . . )
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    kazper
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    Re: Having almost 90% of investments with Target Retirement account

    Post by kazper » Mon Nov 06, 2017 3:38 pm

    Big fan of target retirement funds, especially for those who do not want to be as involved in their investing. It literally is the set it and forget it of investing if you can setup an automatic contribution. I recommended one to my sister, who has no investing acumen whatsoever.

    I, however, prefer to make things complicated and do a 50-60% target retirement approach mixed with a few oddball index funds just to keep things interesting (and tilt how I want)

    Neuro
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    Re: Having almost 90% of investments with Target Retirement account

    Post by Neuro » Thu Nov 09, 2017 10:36 pm

    rkhusky wrote:
    Fri Nov 03, 2017 8:31 am

    If you are in the 28% bracket and expect to stay there, that's even more of a reason to use Traditional. See /wiki/Traditional_versus_Roth.
    Watty wrote:
    Thu Nov 02, 2017 11:13 pm

    It is almost a no brainer. A couple of things could put you in a lower tax bracket someday.

    1) You get married to someone that does not also have a high income
    2) "life happens" lots of things can derail your plans.
    3) You get to be 50 or so and realize that you can retire early in a lower tax bracket.
    Wow! This was definitely not what I was expecting. I thought the response was going to be the complete opposite. I need to do more reading and actually put in the last 2k I could contribute to IRA into traditional account because of these comments. This definitely opened my eyes and I greatly appreciate it!
    pkcrafter wrote:
    Fri Nov 03, 2017 9:54 am
    Your portfolio is over 90% stock, which most investors cannot handle. Consider the asset allocation carefully and how you might respond to a 40% drop in assets, even if it's temporary. Just for reference, many posters here would recommend maybe 80% max in equity.
    Paul
    radiowave wrote:
    Fri Nov 03, 2017 11:46 am
    pkcrafter wrote:
    Fri Nov 03, 2017 9:54 am
    Your portfolio is over 90% stock, which most investors cannot handle. Consider the asset allocation carefully and how you might respond to a 40% drop in assets, even if it's temporary. Just for reference, many posters here would recommend maybe 80% max in equity.

    Paul
    Another perspective to Paul's comment is the OP is 28 so he has 30-40 years to retirement. So some dips in the market in the next couple of decades, assuming the funds are being saved for retirement, will recover and in the long run, the higher equity portion will produce higher returns than bonds/fixed income. The closer to retirement, the more incentive to be conservative with asset allocation. If I were 28 again, knowing what I know now a few years out from retirement, I would likely have just domestic and international total stock funds and emergency funds in high yield savings and CDs. (there's probably a whole other thread to start about if I could go back in time and . . . )
    Would love to read your thread if you create one! Can always keep learning and it is great to learn how other people approach situations, particularly those who have a lot of experience.

    I do not know how I would respond if stocks started to tank, while TR funds do stop human emotion from a lot of things, I think Paul makes a good point. Having a slightly higher bond ratio would make me feel better in those situations. Going to probably start investing into TR 2035 as that would slowly start balancing my stocks closer to 85% vs 90%. This is probably negligible in the long run though.
    kazper wrote:
    Mon Nov 06, 2017 3:38 pm
    Big fan of target retirement funds, especially for those who do not want to be as involved in their investing. It literally is the set it and forget it of investing if you can setup an automatic contribution. I recommended one to my sister, who has no investing acumen whatsoever.

    I, however, prefer to make things complicated and do a 50-60% target retirement approach mixed with a few oddball index funds just to keep things interesting (and tilt how I want)
    It is nice coming back after a couple years worried about decisions and reading these kinds of comments! This definitely seems to be the general consensus. So happy I found SatuMedia when I did. The TR fund makes it really easy to switch to 3 fund as well which is always nice to fall back on if I want to "keep things interesting" :happy

    JBTX
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    Re: Having almost 90% of investments with Target Retirement account

    Post by JBTX » Thu Nov 09, 2017 10:59 pm

    Neuro wrote:
    Thu Nov 09, 2017 10:36 pm
    rkhusky wrote:
    Fri Nov 03, 2017 8:31 am

    If you are in the 28% bracket and expect to stay there, that's even more of a reason to use Traditional. See /wiki/Traditional_versus_Roth.
    Watty wrote:
    Thu Nov 02, 2017 11:13 pm

    It is almost a no brainer. A couple of things could put you in a lower tax bracket someday.

    1) You get married to someone that does not also have a high income
    2) "life happens" lots of things can derail your plans.
    3) You get to be 50 or so and realize that you can retire early in a lower tax bracket.
    Wow! This was definitely not what I was expecting. I thought the response was going to be the complete opposite. I need to do more reading and actually put in the last 2k I could contribute to IRA into traditional account because of these comments. This definitely opened my eyes and I greatly appreciate it!

    While I will agree from a numbers perspective a traditional is the way to go, it is important to understand some of the assumptions behind those numbers

    1. If you are maxing out your 401k and/or IRA's, an $18,000 contribution in a Roth is essentially more than an $18,000 max investment in a traditional IRA. With the Roth, you will never pay taxes again. With the traditional, you will pay them down the road when you withdraw them.

    The assumption in saying the traditional is better, is that

    1. You are not maxing out your retirement vehicles, you can and will contribute MORE to a traditional than you would to a Roth (ie you are reinvesting the tax savings from the traditional back into the traditional

    2. OR - If you are maxing out with your traditional contribution, you will take the tax savings from your investment and put that in a taxable account and keep it as long as you keep your traditional contribution - in this case the traditional will still likely be better at 28%, but it is a much closer comparison.

    I agree at 25-28% you definitely want to have a good chunk in your traditional, for the reasons previously stated above. Having a substantial amount in transnationals gives you some flexibility of when you want to take it out and at what tax rates prior to retirement. However, contributing to a Roth at 25-28% still has a lot of merits, even if your retirement tax rate is a few points lower.

    I personally kind of subscribe to the philosophy of its good to have a decent mix of both traditional and Roth, because the future is unpredictable, both in terms of what your future income could be, and what the tax code could look like in 40 years. Also, you have to take into account the impact of social security on your taxes paid in retirement - which is admittedly difficult to do.

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    Watty
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    Re: Having almost 90% of investments with Target Retirement account

    Post by Watty » Thu Nov 09, 2017 11:42 pm

    Neuro wrote:
    Thu Nov 09, 2017 10:36 pm
    Wow! This was definitely not what I was expecting. I thought the response was going to be the complete opposite. I need to do more reading and actually put in the last 2k I could contribute to IRA into traditional account because of these comments. This definitely opened my eyes and I greatly appreciate it!

    One thing to check on is if your income is too high to get a deduction for the IRA. Above a certain income level you can still contribute to the IRA but you don't get a tax deduction. This is tracked and when you eventually withdraw the money you come out OK but it might mean that you have to keep track of it and file an extra tax form every years for the next 40 years. Unless you have a long term plan on how this will work then it might not be worth the complexity. If you are in that situation then a "back door Roth" would be an option to consider.

    /wiki/Backdoor_Roth_IRA

    This is not a problem with a 401k.

    rkhusky
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    Re: Having almost 90% of investments with Target Retirement account

    Post by rkhusky » Fri Nov 10, 2017 6:48 am

    Watty wrote:
    Thu Nov 09, 2017 11:42 pm
    One thing to check on is if your income is too high to get a deduction for the IRA.
    Second this. Roth is definitely better than non-deductible Traditional. Taxable is usually better than non-deductible Traditional. Look at the second table at this page: /wiki/Non-ded ... tional_IRA

    What works for most people is to use Traditional 401K and Roth IRA. Once those are maxed, invest in a taxable account with tax efficient index funds.

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    BL
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    Re: Having almost 90% of investments with Target Retirement account

    Post by BL » Fri Nov 10, 2017 8:26 am

    rkhusky wrote:
    Fri Nov 10, 2017 6:48 am
    Watty wrote:
    Thu Nov 09, 2017 11:42 pm
    One thing to check on is if your income is too high to get a deduction for the IRA.
    Second this. Roth is definitely better than non-deductible Traditional. Taxable is usually better than non-deductible Traditional. Look at the second table at this page: /wiki/Non-ded ... tional_IRA

    What works for most people is to use Traditional 401K and Roth IRA. Once those are maxed, invest in a taxable account with tax efficient index funds.
    +1

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    Re: Having almost 90% of investments with Target Retirement account

    Post by pkcrafter » Fri Nov 10, 2017 11:44 am

    Neuro wrote:
    Thu Nov 09, 2017 10:36 pm
    pkcrafter wrote:
    Fri Nov 03, 2017 9:54 am
    Your portfolio is over 90% stock, which most investors cannot handle. Consider the asset allocation carefully and how you might respond to a 40% drop in assets, even if it's temporary. Just for reference, many posters here would recommend maybe 80% max in equity.
    Paul
    radiowave wrote:
    Fri Nov 03, 2017 11:46 am
    pkcrafter wrote:
    Fri Nov 03, 2017 9:54 am
    Your portfolio is over 90% stock, which most investors cannot handle. Consider the asset allocation carefully and how you might respond to a 40% drop in assets, even if it's temporary. Just for reference, many posters here would recommend maybe 80% max in equity.

    Paul
    Another perspective to Paul's comment is the OP is 28 so he has 30-40 years to retirement. So some dips in the market in the next couple of decades, assuming the funds are being saved for retirement, will recover and in the long run, the higher equity portion will produce higher returns than bonds/fixed income. The closer to retirement, the more incentive to be conservative with asset allocation. If I were 28 again, knowing what I know now a few years out from retirement, I would likely have just domestic and international total stock funds and emergency funds in high yield savings and CDs. (there's probably a whole other thread to start about if I could go back in time and . . . )
    Would love to read your thread if you create one! Can always keep learning and it is great to learn how other people approach situations, particularly those who have a lot of experience.

    I do not know how I would respond if stocks started to tank, while TR funds do stop human emotion from a lot of things, I think Paul makes a good point. Having a slightly higher bond ratio would make me feel better in those situations. Going to probably start investing into TR 2035 as that would slowly start balancing my stocks closer to 85% vs 90%. This is probably negligible in the long run though.
    Neuro, because you do not know how you would respond is precisely why I replied as I did. The record is pretty clear that many newer investors sell under the extreme discomfort that an out-of-control market crash can create, and they were confident that they wouldn't.

    Even questionnaires aren't very useful because the test is taken when the investor is in an exuberant state, and that's also the state newer investors are in when they want to start investing. It can lead to taking higher risk than would normally be chosen.



    Paul
    When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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