Choosing from limited investment options

[Siress]

I've made a choice, but I'm curious what you lot would choose - and why.

https://www.dropbox.com/s/bcn8xmks3fdflae/Investment%20Selection.xlsx?dl=0

[shadow191]

Whats the investment time frame? The options look like a standard 401k menu and at least it's Vanguard so low expenses.

[Siress]

Can change investments anytime, but I'm lazy so consider them all long-term (i.e. >1yr). I don't think it matters, but my retirement is targeted for ~2050.

[Axel]

Time is important. More time = higher risk tolerance. If the market tanks this year you can wait it out. If it tanks in 2049 you may suddenly find yourself unable to retire when you wanted to. So generally you want your investments to get more conservative the closer you get to the goal.

These selections aren't entirely hypothetical because I actually own many of these*, though the options through my 401(k) at work and my personal IRAs at Vanguard are a but different. That said, with my 30-year time frame, I'd pick something like this:

*Institutional Index (500 Index) 35%
*Growth Index 15% (my shares are in a taxable account but wth it gets an asterisk)

*Extended Market Index 20%
*Small Cap Index 10%

Real Estate Index 10%

Emerging Markets 5%
*Total International Index 5%

Philosophy-

• Index funds are Jack Bogle's blessed gift to the world. No guessing, no active management fees, you just make a simple choice and you're guaranteed to land in the top 70-80% of performers every year.
• No target date funds. They're not awful but you pay fees to the fund on top of fees to all the underlying funds. Plus I like to DIY and they tend to be more conservative than I want.
• No bonds. Yields are abysmal and with 30 years to recover from a market crash I'm not interested in their supposed safety at this point.
• I'm an international skeptic. Long term performance just hasn't been anything like US stocks. I keep my exposure low but I'm not out of them entirely.
• Real estate, same thing. REITs haven't impressed me. I'm out of them entirely at the moment, but they're not a bad diversification tool.

This is just my choice based on my age, goals, and risk tolerance. I totally differ from most of the standard wisdom on bonds and international stocks. I also have a small company pension that in my view, takes the place of bonds and justifies a riskier equity selection. So this whole thing is not advice, it's just what I would do (and similar to what I AM doing) in my own situation.

[gabe]

I literally can't fucking like this post enough.

[Chuck E Ducky]

Time frame matters. large cap for long term low for short.

I have made a lot in the vanguard large cap. I purchased a lot just before it took off made a good chunk then pulled some out for “COVID relief” for tangible investments. I’m moving a lot into more stable like the low cap. I’m 9 years from retirement. When I get to around 5-6 years I’m going all in on stable. If I ever see a rase again the percentage will go to Roth’s to balance my pre tax to post tax investments.

[Axel]

Mmmm... maybe I misunderstand something, but it seems like you are saying large cap stocks are better for long time frames and small cap stocks are better for short time frames? It is the opposite; small cap stocks are more volatile with a higher risk and higher reward potential, so they are more suited for longer time frames.

[Chuck E Ducky]

You are correct sorry my dyslexia. The more time you have the more risky you want to go because you have time for the shares to come back. If you are short move what you don’t want to play with. I see massive short term gains in the coming months then a massive fall when inflation catches up.

[gabe]

To be honest I think that's almost TOO diversified. Personally for my "lazy man's portfolio" I would go with VTSAX (total stock market index) weighted 70-80% and VHYAX (high dividend yield) for the rest. This would give pretty good exposure to the S&P500 plus some small caps mixed in as well plus the high dividend yield gets you into some more Dow industrials plus a bunch of REIT exposure and boosts your dividend yield to a nice place. For funsies I also mix in some REIT exposure as I'm big on real estate and it boosts the dividend yield as well as a little straight S&P500 index funds. But again, those are take it or leave it; my largest returns have been from VTSAX and VHYAX.

IMO the goal for me personally is a portfolio that roughly tracks the S&P500 but with a closer to 3% dividend yield. Bonds are dead and not a winning bet in the near future and the stock market is going to be zooming to new highs for the foreseeable future based on QE, low rates, and tons of money printing. International/emerging markets are a take it or leave it for me personally as most US companies are already working internationally and US companies are held to higher accounting standards so you're not getting fed a line of BS when evaluating overseas companies.

Basically don't spread too thin and don't buy into fear. When the ship sinks, everything goes down these days so you might as well buy into the best performers based on today's conditions, not based on "defensive" plays which basically screw you both coming and going.

*edit* Axel pretty much nails it. Buy that portfolio...except blend in REITs to taste based on how much dividend yield you want.

[Siress]

VHYAX and VTSAX are not among the rather small selection. I, too, am a lazy investor, though.

[ford]

Pretty sure my stuff is 50% s&p 500 and 50% low-fee target date index type fund.

Both my parents and my wife's parents tried to time the market at different points in their working careers moving huge chunks of money from high fee mutual funds to paltry return bonds... to their detriment. And I think they started those accounts before Roth was a thing.

With that kind of nightmare in mind, I don't mind vangaurd/fidelity target date funds because compared to mutual funds the fees are still very low.

[Siress]

That's a really detailed response, Axel ! Thank you.

The reason that I said that time doesn't matter is that - per the documentation - I can transfer these holdings between funds without penalty. Regardless, I can see how it would still be important if I was near retirement. I assume the transfer allowance will be true up to 2050. Most of my investments are tied up in S&P and specific US companies in the tech and healthcare sectors. For this reason, I've been contemplating the extend market index (VEMPX) and small cap index funds (VSMAX). My choice for now is VIGIX because it has had the strongest performance over the last 10 years (7th by lifetime performance) and has a very low expense ratio. This administration feels like it's going to be good to established industries, so that doesn't hurt.

[shadow191]

If your investment horizon is 2050, then moving stuff around based on a new presidential administration or any other short term news won't really matter. Leave that type of stuff for your trading accounts, not your retirement plan. Long term, the biggest indicator of performance is asset allocation. There's a reason that the average 401k performance is less than half of the average performance of the S&P over the long term. Too many individuals try to trade and mistime things.

Long term isn't 1+ years, that's still short term. Long term is at least 10 years out. So thinking about the next year or 2 or 5 isn't the best way to invest money you're not going to need for 30. Being able to move your money without penalty is somewhat different than investment horizon. If you have a plan, then outside of regular rebalancing you shouldn't have to move funds too much. If you're constantly trying to move stuff based on changing market conditions, you're probably already a step behind the "smart" money and more likely to lower your investment performance.

Target date funds aren't bad, especially Vanguard which are low cost. They're great for people who don't want to learn investment basics and helps them participate in 401ks. Also they're basically required by regulations now for that reason.

The other recommendations made on specific allocations are pretty solid especially advice on index funds. I spent 5 years as a financial advisor at large brokerage, then 3 years as a 401k/pension consultant, then another 5 running pension plans for one of largest corporations in US and it's overall made me pretty cynical about entire industry. Almost all of my investments are in indexed ETFs outside of current 401k which is Vanguard funds as that's our provider. In my experience, just paying attention to asset allocation, appropriate risk for investment horizon, and focusing on expenses should get you ahead of just about anyone trying to sell you a strategy.

[Axel]

I agree that target funds are fine if you want to set it on autopilot and forget about it. Most people aren't as interested in investing as I am (take my wife*) and if that's you, you could do a lot worse. The most important thing is to plan your asset mix and keep feeding it every paycheck
But with a little work you can easily build a diversified portfolio that's heavier on equities and earns much higher returns. I personally don't think bonds have any place in a retirement account with a 30 year timeline. That's just my own opinion and it goes against the conventional wisdom so please don't take it as investing advice, just my own strategy. The opportunity cost is too expensive to pay for the supposed safety they offer IMHO

*Please

Edit: Looking at Siress's options again, those target date funds aren't too bad, especially the older ones closer to retirement when, yes, I will need to pull back to safety. Perhaps I let the garbage target date funds in my own 401(k)s bias me... But you can still do better

[sniper97]

Also, depending on how much you have saved for retirement, you may still want to grow part of it. Avoid bond exposure, recent history, growth has outpaced value, US outpacing the world, look back 20 years, the world mkts rarely beat the US.

[Siress]

My attempt to summarize here:

Ticker	Description	Axel (+Gabe)	Ford	Siress	Shadow191
VIIIX	Institutional Idx.	35	50		I guess?
VIGIX	Growth Inst. Idx.	15		100
VEMPX	Extended Mkt Idx	20
VSMAX	Small Cap Idx	10
VGSNX	Real Estate Idx	10
VEMIX	Emerging Mkts Idx	5
VTPSX	Total Intl Idx	5
VFIFX	Target 2050	not bad	50		not bad

Long term, the biggest indicator of performance is asset allocation.

I'm of the opinion that Savings Rate is a far better indicator than Asset Allocation. The goal, for me at least, is to attain enough savings that financial independence is possible. i.e. that my expected rate of ROI is greater than my rate of spending.

Avoid bond exposure, recent history, growth has outpaced value, US outpacing the world, look back 20 years, the world mkts rarely beat the US.

You aren't kidding... I dug this up a while ago to show my grandfather why I disagreed with his "buy gold and silver" investment philosophy. If you look closely over time scales of 'nearing retirement age' (e.g 10yrs) you can also see why it's really important to have bonds as a backup in case the stock market takes a dive.

[shadow191]

Agree with you that savings rate is most important. I was speaking from a return standpoint. But when I was a financial advisor, my biggest piece of advice for people working was to make sure they were hitting savings targets because if they didn't, it wouldn't matter what the rate of return was. That's most people's biggest issue - what they think they need to save and what they actually have to save are very different numbers.

A long time ago, people didn't have to think about it as they could rely on pensions but those days are long gone. All of the risk and responsibility lies on the individual now.

[Siress]

That's most people's biggest issue - what they think they need to save and what they actually have to save are very different numbers.

Without a doubt. I feel awful about the state of affairs compared to what it could be. Public school has never prepared people for that responsibility, and now the market is such that it's not even a real possibility for the majority of Americans starting a career. I'm terrified of how bad things can get if the current generation start reaching retirement age without savings to help support themselves and their children/grandchildren through times of need.

I've crunched the numbers and found that for savings rates (SR) of 5-7% Social Security reduces my working years by 3yrs to hit financial independence (FI), while a SR of 10-15% is only reduced by 2 years to reach FI. Conversely, that's also about how much longer I'd need to work in order to secure enough savings forthat I can pass on that nest egg to my heirs. What terrifies me, though, is that there are some major life expenses that have to be accurately accounted for as well, and those expenses are increasing at a rate that greatly outpaces my increase in earnings... healthcare, housing, childcare, even food since my family has become more conscious of the environmental impacts of many cheaper options and taken it upon themselves to avoid supporting such practices. And if we're to pay for our kids college tuition, even 1/2 of it, that's going to be a major hit from the looks of it.

The future looks bleak when I only look at the numbers. And I wish that weren't the case. I need more optimism in my financial analysis... I only ever look at the bad scenarios and try to avoid them rather than also looking at how good things could be.

[Axel]

The future looks bleak when I only look at the numbers. And I wish that weren't the case. I need more optimism in my financial analysis... I only ever look at the bad scenarios and try to avoid them rather than also looking at how good things could be.

Damn, you make me look like an optimist 😆

All we can do is plan for those factors we control to mitigate the ones we can't. There are reasonable scenarios where I could stop saving today and have enough to retire at 60 (it's a home run, but quite within the realm of possibility), but I keep socking away 20% because every extra dollar makes the cushion a little thicker. And if my home run scenario comes through then maybe I'll be sipping strawberry daiquiris on a beach somewhere in the Bahamas at age 50 living off Substantially Equal Periodic Payments

Or maybe I'll get hit by a bus in 10 years and then you'll find Mrs. Axel down in the Bahamas sipping daiquiris, who can tell

[gabe]

The numbers are why I prefer high percentage dividend paying stocks as a buffer. If all else fails you have that passive income stream rolling in.