AA remodel guidance

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ldp787
Posts: 6
Joined: Sat Mar 11, 2017 5:07 pm

AA remodel guidance

Post by ldp787 » Sun Oct 22, 2017 9:30 pm

Relatively new boglehead looking for AA assistance

Emergency funds: 6 months expenses in low interest savings.
Debt: Mortgage 3.375% 89k 9yrs left
Tax filing status: Married filing jointly w/ self employed DW, +2 children
Tax rate: 28% Federal, 4.95% State
State of residence: IL.
Age: Both 39
Desired AA: 80% stocks / 20% bonds
Desired Int. AA: 10%


Mid six figure

Current retirement assets

Taxable

.4% Former Co. share handout

His t401k Company match 80% of 6%.

3.6% Co. Shares Fund ER .01% (The way I understand is reinvest in Co. stock or take cash dist.)
22% Asset Aloc 2055 ER .18% (I overestimated retire date to be more aggressive)-----Edited to show composition of fund.

Target-Date 2055
Technology 15.76%
Financial Services 17.12%
Consumer Cyclical 11.41%
Healthcare 11.73%
Industrials 10.58%
Consumer Defensive 8.16%
Energy 5.18%
Basic Materials 4.67%
Communication Services 3.51%
Real Estate 8.97%
Utilities 2.90%

Cash & Equivalents 42.58%
Government 25.41%
Bank Loan 0.35%
Corporate Bond 15.89%
Future/Forward 0.64%
Agency Mortgage-Backed 7.96%
Asset-Backed 1.43%
Commercial Mortgage-Backed 2.33%
Convertible 0.16%
Covered Bond 0.05%
Government Related 2.22%
Municipal Tax-Exempt 0.00%
Municipal Taxable 0.22%
Non-Agency Residential Mortgage-Backed 0.30%
Option/Warrant 0.01%
Preferred Stock 0.40%
Swap 0.05%

Cash
4.38%
  Convertibles
0.01%
  Domestic Bond
4.87%
  Preferred Stock
0.05%
  Foreign Bond
1.29%
  Foreign Stock
32.77%
  Others
2.00%
  Domestic Stock
54.62%

Brokerage link which I believe limits me to 50% of Co. retirement acct.

5.2% Fidelity US Bond Index Premium Class FSITX ER .045%
13.2% Fidelity Total Mkt Index Premium Class FSTVX ER .035%
3.7% Fidelity Total Intl Index FD Premium CL FTIPX ER .1%


His Roth Ira at Fidelity

1.7% Fidelity Select Semiconductors FSELX ER .77%

————

Her Sep Ira at Fidelity

12% Fidelity US Bond Index Premium Class FSITX ER .045%
29.4%Fidelity Total Mkt Index Premium Class FSTVX ER .035%
7.1%Fidelity Total Intl Index FD Premium CL FTIPX ER .1%

Her Roth Ira at Fidelity

1.7% Fidelity Select Technology FSPTX ER .77%

Additionally we contribute to two 529 utma accounts which I don’t believe have any bearing in this topic but don’t want to leave any stone unturned.

————

Contributions

New annual contributions

$18k his t401k + employer 80% of first 6% match
$12k her avg. SEP Ira max contribution
$5.5k his Roth Ira
$5.5k her Roth Ira


His Co. t401k options. Blackrock is the common name in these fund holdings.

Name/Inception Date Asset Class Category 1 Year 3 Year 5 Year 10 Year/LOF* Returns As Of
US STOCK FUND ER .17%
09/30/1994 Stock Investments Large Cap 18.52% 10.35% 13.73% 6.89% 09/30/2017
LG CAP US STCK INDEX ER .01%
02/29/1988 Stock Investments Large Cap 18.63% 10.86% 14.26% 7.54% 09/30/2017
TOTAL US STOCK INDEX ER .01%----Benchmark: DJ US Total Stk Mkt
11/30/2007 Stock Investments Large Cap 18.78% 10.82% 14.26% 7.62% 09/30/2017
SM & MID US STK INDX ER .02%
01/31/2001 Stock Investments Mid-Cap 19.21% 10.53% 14.20% 8.38% 09/30/2017
INTL STOCK FUND ER .44%
10/31/1999 Stock Investments International 20.18% 6.27% 8.33% 0.78% 09/30/2017
INTL STOCK INDEX ER .02%----Benchmark: MSCI AC Wld ex US (N)
11/30/2007 Stock Investments International 19.92% 4.99% 7.22% 1.04% 09/30/2017
SHARES FUND ER .01%
02/29/1988 Stock Investments Specialty 1.31% 8.90% 5.97% 4.54% 09/30/2017
ASSET ALOC 2040 ER .18%
11/01/2007 Blended Fund Investments* N/A 17.12% 8.59% 10.75% 5.17% 09/30/2017
ASSET ALOC 2045 ER .18%
11/01/2007 Blended Fund Investments* N/A 17.11% 8.60% 10.88% 5.23% 09/30/2017
ASSET ALOC 2050 ER .18%
11/01/2007 Blended Fund Investments* N/A 17.17% 8.61% 10.93% 5.21% 09/30/2017
ASSET ALOC 2055 ER .18%
02/01/2012 Blended Fund Investments* N/A 17.07% 8.60% 11.08% 11.04% 09/30/2017
STABLE VALUE ER .31%----Benchmark: BBgBarc 3M t-bill
11/30/1999 Bond Investments Stable Value 2.28% 2.38% 2.46% 3.11% 09/30/2017
TOT RETURN BOND ER .29%----Benchmark: BBgBarc U.S. Agg Bond
10/31/1999 Bond Investments Income 1.91% 3.46% 2.97% 5.71% 09/30/2017

I believe I added the benchmarks and additional info. Nothing will allow viewing without being logged in to the site. I still have very little comprehension when it comes to bonds so I apologize if I did not include all that was asked.


Stable Value
0.02% Daily 0.19% MTD 1.89% YTD Return. I do not see anything about a guaranteed rate. When I look at the composition is states 100% cash & equivalents.
You are not permitted to make a direct exchange from Stable Value Fund to Fidelity BrokerageLink® (which are considered "Competing Funds"). Before exchanging between these funds, you must first exchange to a non-competing fund for 90 days. These requirements are typically imposed by issuers such as insurance companies, banks or other approved financial institutions as a condition for issuing investment contracts to retirement plans.
Investment elections for any investment option are not allowed within the Company Match source.
Investment elections for any investment option are not allowed within the Qnc-Match Co Corr Contrib source.
Exchanges are limited to 8 exchange(s) quarterly. All exchanges processed with the same trade date count as a single exchange.

Total return bond
Weighted avg. maturity 10.66yrs Duration 6.22yrs
Credit quality
AAA 65.85%
AA 3.94%
A 12.38%
BBB 14.74%
BB 2.66%
B 1.00%
Below B 1.30%
Not Rated -1.89%

Intermediate-Term Bond
Cash & Equivalents 27.99%

Government 20.27%

Corporate Bond 13.86%

Agency Mortgage-Backed 13.61%

Government Related 7.80%

Future/Forward 6.10%

Commercial Mortgage-Backed 4.37%

Asset-Backed 2.35%

Non-Agency Residential Mortgage-Backed 1.71%

Swap 0.95%

Bank Loan 0.64%

Municipal Tax-Exempt 0.16%

Municipal Taxable 0.16%

Preferred Stock 0.02%

Convertible 0.01%

Covered Bond 0.00%

Option/Warrant 0.00%


While I have tried to read and digest everything in the WIKI and forum I still lack much confidence and knowledge other than the basics. I got trigger happy after finding this forum, convinced the skeptical DW we needed to drop Edward Jones for her Sep Ira, picked her and my brokerage link funds based off the wiki 3 fund portfolios. Shortly thereafter, I opened our Roth iras and picked higher ER technology sector funds that I felt will do well. However I neglected to take the time and make one proper AA for all of our accounts as a whole. Also I did not think about small, mid, value and growth that I have been paying more and more attention to as of late.

I am looking for help on how to build a better AA with the options/ accounts/ tax status I have presently. I am not dead set on only having 3-4 funds nor having my asset allocation being 80/20 but am interested in more experienced insight into what more seasoned SatuMedia opinions are.
Last edited by ldp787 on Wed Nov 01, 2017 8:58 pm, edited 2 times in total.

Beensabu
Posts: 105
Joined: Sun Aug 14, 2016 3:22 pm

Re: AA remodel guidance

Post by Beensabu » Mon Oct 30, 2017 10:56 pm

Bump.

Perhaps someone helpful will ignore the sector fund picking, since it's so small, and come save you from my questionable advice.

Plus thoughts:

What's the breakdown of this?: Asset Aloc 2055 ER .18%

If you know your desired AA, then you don't need this target date fund, especially since you have such low ERs on some of the components that make this up (US stock, ex-US stock, bonds):

TOTAL US STOCK INDEX ER .01%
INTL STOCK INDEX ER .02%

Maybe hold bond allocation in low cost fund in 401k brokerage or SEP IRA?

Maybe be careful to limit company stock to a certain predetermined small percentage of portfolio?

Small, mid, value, and growth are covered in a total market index. If you want to tilt, then do it, but know why. Convince yourself or don't bother.
I think. I do not know.

ldp787
Posts: 6
Joined: Sat Mar 11, 2017 5:07 pm

Re: AA remodel guidance

Post by ldp787 » Wed Nov 01, 2017 7:14 am

Beensabu, thanks for the response.

Indeed I agree, my thought was to utilize my low cost options you listed in my t401k and depart from the target date fund. I was not sure about what to do as far as a bond fund and if the one I picked based off the WIKI was the "best" choice. My interest in tilting towards small/mid growth in recent months has been swayed I would say mostly in part to the podcast of Paul Merriman. I realize past is no indicator of future, and it might be more risky which is why I struggle with both adding some, but at the same time believe I have decades of risk tolerance. I realize I have to make up my mind and deal with the outcome.

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ruralavalon
Posts: 11694
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: AA remodel guidance

Post by ruralavalon » Wed Nov 01, 2017 8:26 am

Welcome to the forum :) .

It's good to see that you have no consumer debt, and are making maximum contributions to his 401k, her SEP IRA, and both Roth IRAs. It was a very good idea to move from Edward Jones to Fidelity. Fidelity now offers a good selection of low expense ratio index funds to use.

I think you are doing very well, and will have almost nothing to suggest for improvement.


Asset allocation.
ldp787 wrote:
Sun Oct 22, 2017 9:30 pm
Age: Both 39
Desired AA: 80% stocks / 20% bonds
Desired Int. AA: 10%
At age 39 you could consider bumping your bond allocation up to something like 25-30% in my opinion. Please see the wiki article Boglehead's Investment Philosophy, part 3 "Never bear too much or too little risk".

I suggest around 20-30% of stocks in international stocks. Historically that would have captured about 84-99% of the maximum diversification benefit. For a pdf of a Vanguard paper on the subject Google "Considerations for Investing in Non-U.S Equities", see pp. 5-6. Opinions here on international stocks vary quite a bit, all the way from 00-50% of stocks in international stocks.

That would work out to about 25% bonds, 20% international stocks, and 55% domestic stocks. Asset allocation is a very personal decision which you must make based on your own ability, willingness and need to take risk.


His traditional 401k.
In my opinion the funds to consider using in his 401k include:
1) BlackRock Total U.S. Stock Index Fund, ER .01%
2) BlackRock International Stock Index Fund, ER .02%
3) BlackRock Stable Value Fund, ER .31%
(2.28% 2.38% 2.46% 3.11% 09/30/2017)
4) BlackRock Total Return Bond Fund, ER .29%
(1.91% 3.46% 2.97% 5.71% 9/30/17)

In your 401k materials or website there should be a fact sheet for each fund, which gives details on each of these funds.

1) Which index is used by the U.S. total stock fund?

2) Which index is used by the international stock index fund?

3) What is the current return paid by the stable value fund? What rate is guaranteed? What restrictions are there on buying and selling the fund? Please post a link to the fact sheet if possible. (A stable value fund can be a good substitute for a bond fund.)

4) If possible please post a link to the fact sheet for the total return bond fund. What is it's average effective duration? What is it's average credit quality? What portion is in corporate bonds, and governmental bonds? (The expense ratio is fairly low, no reason not to use the fund.)


idp787 wrote:Also I did not think about small, mid, value and growth that I have been paying more and more attention to as of late.
If broad market indexes are used for the stock funds, then it may not be necessary to consider adding anything.


idp787 wrote:I am looking for help on how to build a better AA with the options/ accounts/ tax status I have presently. I am not dead set on only having 3-4 funds nor having my asset allocation being 80/20 but am interested in more experienced insight into what more seasoned SatuMedia opinions are.
Is there anything else you are interested in beyond the three-fund portfolio?

I tend to keep pretty close to a three-fund portfolio in my own investing, and usually don't try to cover more in a suggested portfolio unless someone has indicated a specific interest.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

ldp787
Posts: 6
Joined: Sat Mar 11, 2017 5:07 pm

Re: AA remodel guidance

Post by ldp787 » Wed Nov 01, 2017 9:08 pm

Ruralavalon thanks for your input. I edited my post with the updated info for the funds. I don't per say have any interests in going above the 3 fund I simply picked the technology sectors until I could get to some premium buying power and lucked into some good picks, but realize it could have easily went the other way. I just thought about adding something else but I can appreciate the KISS method and what all is covered between three index funds.

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ruralavalon
Posts: 11694
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: AA remodel guidance

Post by ruralavalon » Thu Nov 02, 2017 6:13 am

ldp787 wrote:
Wed Nov 01, 2017 9:08 pm
Ruralavalon thanks for your input. I edited my post with the updated info for the funds. I don't per say have any interests in going above the 3 fund I simply picked the technology sectors until I could get to some premium buying power and lucked into some good picks, but realize it could have easily went the other way. I just thought about adding something else but I can appreciate the KISS method and what all is covered between three index funds.
I agree it's good to keep it simple with a three-fund type portfolio. The funds in his 401k are good enough to allow that.

The BlackRock Total U.S. Stock Index Fund using Dow Jones U.S. Total Stock Market Index covers all cap sizes, so nothing additional is necessary for U.S. stocks in his 401k in my opinion.

The MSCI ACWI ex-U.S. used by the BlackRock International Stock Index Fund covers larger companies in both developed and emerging markets, and omits only smaller stocks which are only about 4% of international stocks (an almost trivial amount). In my opinion nothing else is necessary for international stocks in his 401k.

I'm still thinking about the bond fund in his 401k.

I see nothing wrong with the small 3-4% allocation to the technology fund, if you wish to continue that.

. . . . .

Is the employer match in his 401k given in the form of the company stock fund?

What are the restrictions if any on exchange to other investments from the company stock fund in his 401k?

What is the dollar amount of the maximum annual employer contribution in his 401k?

Are any fees charged for using the Brokerage Link in his 401k?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

ldp787
Posts: 6
Joined: Sat Mar 11, 2017 5:07 pm

Re: AA remodel guidance

Post by ldp787 » Thu Nov 02, 2017 8:50 pm

ruralavalon wrote:
Thu Nov 02, 2017 6:13 am

I agree it's good to keep it simple with a three-fund type portfolio. The funds in his 401k are good enough to allow that.

The BlackRock Total U.S. Stock Index Fund using Dow Jones U.S. Total Stock Market Index covers all cap sizes, so nothing additional is necessary for U.S. stocks in his 401k in my opinion.

The MSCI ACWI ex-U.S. used by the BlackRock International Stock Index Fund covers larger companies in both developed and emerging markets, and omits only smaller stocks which are only about 4% of international stocks (an almost trivial amount). In my opinion nothing else is necessary for international stocks in his 401k.

I'm still thinking about the bond fund in his 401k.

I see nothing wrong with the small 3-4% allocation to the technology fund, if you wish to continue that.
I think I should transfer my brokerage picks back and stick with my 401k options. The Dow index benchmark with .01 ER will be THE fund pick in my/his 401k due to our accounts being roughly 50/50 in asset value if I combine assets as a whole. I believe I'll just need to sit down and run the expenses both ways to see if it would be a significant cost difference in keeping separate or combining.

Is the employer match in his 401k given in the form of the company stock fund?
Yes
What are the restrictions if any on exchange to other investments from the company stock fund in his 401k?
No restrictions
What is the dollar amount of the maximum annual employer contribution in his 401k?
No limit at my current compensation rate
Are any fees charged for using the Brokerage Link in his 401k?
No

Thanks for the responses, I just need to calculate a few things and make the changes. Not sure where credit is due but,"don't let perfect get in the way of good enough." I can drag my feet with the best of 'em.

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ruralavalon
Posts: 11694
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Location: Illinois

Re: AA remodel guidance

Post by ruralavalon » Fri Nov 03, 2017 6:53 am

Asset allocation.
ldp787 wrote: Age: Both 39
Desired AA: 80% stocks / 20% bonds
Desired Int. AA: 10%
At age 39 you could consider bumping your bond allocation up to something like 25-30% in my opinion. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles SatuMedia® investment philosophy, part 3 "Never bear too much or too little risk", and "Asset allocation".

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). You can find lots of debate here on international allocation, opinions running from 00% to 50% of stocks in international stocks.

That would work out to about 25% bonds, 20% international stocks, and 55% domestic stocks. Asset allocation is a very personal decision which you must make based on your own ability, willingness and need to take risk.



Fund selection.
In selecting funds strive for a combination of broad diversification (to reduce risk) and low expense ratios (to increase your net gain). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Wiki article "Three-fund portfolio". Forum discussion, "The Three-Fund Portfolio".

It is often best to look at all accounts together as a single unified whole, rather than consider each account separately. Start fund selection by choosing only the one or two best funds (diversified + low ER) in the work-based accounts, where the choices offered are limited. Then complete the rest of the asset allocation using the nearly unlimited choices available in the IRAs

Domestic stocks. The BlackRock Total U.S. Stock Index Fund using Dow Jones U.S. Total Stock Market Index covers all cap sizes, so nothing additional is necessary for U.S. stocks in his 401k in my opinion. That fund is the equivalent of Fidelity Total Market Index Fund Premium Class (FSTVX) ER 0.035% which you will be using in other accounts.

The expense ratios on the U.S. total market funds in the 401k and BrokerageLink are nearly identical (just 0.025% difference, the lower ratio being in the 401k), I see no reason to use the BrokerageLink to buy more U.S. total market funds. Tiny differences in expense ratios have no real impact, and can be less important than other differences between funds.

I see nothing wrong with the small 3-4% allocation to the technology fund, if you wish to continue that. If not, then switch the Roth IRAs to Fidelity Total Stock Index Fund. For what it's worth, the only sector fund I would use is a real estate fund.

The employer match in his 401k is given in the form of the company stock fund, no restrictions on sale. Some people like to hold some employer stock, if that is what you wish that should be a very limited amount. But I suggest selling the company stock and putting that into the very diversified BlackRock Total U.S. Stock Index Fund in his 401k.

International stocks. The MSCI ACWI ex-U.S. used by the BlackRock International Stock Index Fund covers larger companies in both developed and emerging markets, and omits only smaller stocks which are only about 4% of international stocks (an almost trivial amount). In my opinion nothing else is necessary for international stocks in his 401k. That fund is the near equivalent of Fidelity Total International Index Fund Premium Class (FTIPX) ER 0.010%, which covers stocks of both larger and smaller companies in both developed and emerging markets, and which you will be using in other accounts.

The expense ratios on the total international stock funds in the 401k and BrokerageLink are nearly identical (just 0.01% difference, the lower ratio being in the BrokerageLink), I see no reason to use the BrokerageLink to buy more international total stock fund. Tiny differences in expense ratio have no real impact, and can be less important than other differences between funds.

Bonds. The BlackRock Total Return Bond Fund, ER 0.29%, in his 401k looks like a good choice for a bond fund, however the fund is actively managed and information on the fund is limited. Perhaps a better fact sheet will be forthcoming. On the other hand in the BrokerageLink Fidelity U.S Bond Index Fund Premium Class (FTIPX) ER 0.045% has a lower expense ratio, and is an index fund which uses the very diversified the Bloomberg Barclays U.S. Aggregate Bond Index. Therefore I suggest using the part of his 401k at the BrokerageLink to hold the bonds in his 401k.

No fees are charged for using the BrokerageLink in his 401k.

To make portfolio management and rebalancing easy its sometimes helpful to have a one or more accounts which contain all three basic asset types (bonds, international stocks, and domestic stocks).



New annual contributions
$18k his traditional 401k + employer 80% of first 6% match
$12k her avg. SEP IRA max contribution
$5.5k his Roth IRA
$5.5k her Roth IRA
Total = $41k + employer match


Example portfolio.
Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to accommodate the fund offerings in your 401k. Current portfolio size = "Mid six figure". New annual contributions = $41k + employer match. The asset allocation is: about 25% bonds, 20% international stocks, and 55% domestic stocks. The percentages given are percentages of the total portfolio, not of a given account. The suggestion is to switch both the existing balances and the new contributions to the funds indicated. All percentages and dollar amounts are rounded off, so may not add up exactly. Sometimes I state 00% to indicate funds you might want to add in the future.

Taxable account (00% of total)
0.4% Former Company share handout

His traditional 401k (26% of total; adds $18k/yr + match 80% of 6%, about 44% of new annual contributions)
00%, Company Shares Fund ER .01% (the employer match is given in the form of the company stock fund.)
19%, BlackRock Total U.S. Stock Index Fund, ER .01%
07%, BlackRock International Stock Index Fund, ER .02%
00%, BlackRock Total Return Bond Fund, ER .29%

Fidelity BrokerageLink in his 401k, "which I believe limits me to 50% of Co. retirement acct" (22% of total)
09%, Fidelity Total Market Index Fund Premium Class (FSTVX) ER 0.035%
03%, Fidelity Total International Index Fund Premium Class (FTIPX) ER 0.10%
10%, Fidelity U.S. Bond Index Fund Premium Class (FSITX) ER 0.045%

His Roth IRA @ Fidelity (2% of total; adds $5.5k/yr, about 13% of new annual contributions)
02% Fidelity Select Semiconductors (FSELX) ER 0.77%
00%, Fidelity Total Market Index Fund Premium Class (FSTVX) ER 0.035%

Her SEP IRA @ Fidelity (49% of total; adds $12k/yr, about 29% of new annual contributions)
15%, Fidelity US Bond Index Fund Premium Class (FSITX) ER 0.045%
24%, Fidelity Total Market Index Fund Premium Class (FSTVX) ER 0.035%
10%, Fidelity Total International Index Fund Premium Class (FTIPX) ER 0.10%

Her Roth Ira @ Fidelity (2% of total; adds $5.5k/yr, about 13% of new annual contributions)
02%, Fidelity Select Technology (FSPTX) ER 0.77%
00%, Fidelity Total Market Index Fund Premium Class (FSTVX) ER 0.035%


Rebalancing.
Because the funds will grow at different and unpredictable rates, it may be necessary every year or two to rebalance in order to maintain the desired asset allocation. Wiki article, "Rebalancing". You can easily adjust the asset allocation by exchanging between funds inside the BrokerageLink part of his 401k or inside her SEP IRA.

. . . . .

I suggest that you read one or two books on general investing. Wiki article, "Books: recommendations and reviews".

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:Getting Started

ldp787
Posts: 6
Joined: Sat Mar 11, 2017 5:07 pm

Re: AA remodel guidance

Post by ldp787 » Fri Nov 03, 2017 4:48 pm

Thank you for your time and response. It helps put my questions at ease. :sharebeer

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