So in my last post, TIPS and REITs I discussed a few alternate portfolio options.
However, not everyone will have access to these exact funds. In fact, I would guess the majority of you won’t have these exact funds available to you in your 401k/403bs. However, for a conventional IRA, you can build your own and can pick and choose exactly what you want. I tend to favor Vanguard here because their expense ratios are pretty much the lowest around. However, there are similar funds to approximate a three fund portfolio for most of the major players.
Let’s break it down in a little more in depth now.
At their core, the lazy portfolios attempt to achieve a few major things:
- Some kind of Stock/Bond split, based on aggressiveness. 80/20, 70/30, 67/33, 60/40 and so on. (+/- US/International Tilt for stocks)
- As big a diversity of stocks as possible. For example, VTSMX holds 3650 stocks as of 6/30/16.
- As big a diversity of bonds as possible. For example, VBMFX holds 8225 bonds as of 6/30/16.
- As low an expense ratio as possible. For example, VTSMX is 0.16% for Investor Shares, and 0.05% for Admiral Shares, as of 6/30/16.
- No load.
So, if you try to abide by those general rules, you can approximate a lazy portfolio most of the time for just about any 401k/403b. Let’s take a real world example.
A friend of mine asked for my help in choosing his 401k. He told me that it looks like his 401k is mostly Vanguard funds, so I thought this would be a slam dunk. Unfortunately, the normal players I would use VTSMX , VGTSX, and VBMFX were not all available. His options were:
Vanguard Prime Money Market Fund (0.16%)
Vanguard Selected Value Fund (0.39%) – 116 stocks
Vanguard PRIMECAP Fund (0.40%) – 131 stocks
Vanguard Extended Market Index Fund (0.22%) – 3275 stocks
Vanguard Capital Opportunity Fund (0.45%) – 140 stocks
Vanguard Explorer Fund (0.49%) – 724 stocks
Vanguard Small-Cap Index Fund (0.20%) – 1470 stocks
Vanguard Energy Fund (0.37%) – 147 stocks
Vanguard Health Care Fund (0.36%) – 71 stocks
Vanguard Small-Cap Value Index Fund (0.20%) – 858 stocks
Vanguard Small-Cap Cap Growth Index Fund (0.08%) – 705 stocks
Vanguard Global Equity Fund (0.57%) – 946 stocks
Vanguard International Growth Fund (0.47%) – 164 stocks
That’s enough words and numbers to make anyone’s eyes glaze over. Stick with me here.
I actually went through the trouble of linking all of these if any of you want to check them out individually. Please note that I think there can be some slight variations in expense ratios for 401k/403bs depending on when your employer made a deal with the different funds. It is probably worth making sure the expense ratios match up correctly.
For those of you who want to ponder over each fund, please feel free. However, for the sake of this post and ease of reading, I put the basic information which is the Expense Ratios (for Investor Shares, most of them have an Admiral Shares options which will be slightly lower), as well as Stock/Bond splits for funds I think are worth discussing.
Ok, so after discussion with my friend, he wanted to go with the same portfolio I like which is Taylor Larimore’s Three Fund Lazy Portfolio:
Like me, he would like a 80/20 split with 50% US stocks and 30% International Stocks.
Vanguard Total Stock Market Index Fund — VTSMX (.17%) VTSAX (.05%) VTI (.05%)
Vanguard Total International Stock Index Fund — VGTSX (.22%) VTIAX (.14%) VXUS (.14%)
Vanguard Total Bond Market Index Fund — VBMFX (.20%) VBTLX (.07%) BND (.07%)
***(Apparently the above numbers are out of date, and the new expense ratios are lower.) I will update them both here and in prior posts later.
Ok, so here’s the problem, of those three funds, his 401k only offers the Total Bond Market Index Fund.
So now we need to try to approximate 50% US Stocks and 30% International Stocks with as diverse a stock pool as possible, while trying to maintain low expense ratios.
However, there is no great international option:
6062 stocks versus 164 is a pretty significant difference in diversification.
So you can either choose to forego international stocks completely, or your allocation would look like this:
You would rebalance this yearly to whatever allocations you like, but in general increasing your bond % as grow older with some variation of the “age in bond” adage.
So what other options are there?
Well, he could always go with a Target Retirement Fund, which is kind of the ultimate set it and forget it option, since it automatically tries to rebalance based on their own set intervals. For someone his age, who will probably work 30 years, he would be looking at a fund which matures 30 years from now, which is the Vanguard Target Retirement 2045 Fund.
Vanguard Total Stock Market Index Fund Investor Shares – 54.2%
Vanguard Total International Stock Index Fund Investor Shares – 35.8%
Vanguard Total Bond Market II Index Fund Investor Shares – 7.0%
Vanguard Total International Bond Index Fund Investor Shares – 3.0%
The good part? These are good choices. I personally don’t see the need for International Bonds, but hey it’s fine. However…. this is a 90/10 split… pretty aggressive… maybe TOO aggressive if you ask me.
For the 2030 fund, they are trying for a 75/25 split. This is pretty aggressive for a person planning to retire in 14 years.
For the 2020 fund, they are trying for a 60/40 split. This is pretty aggressive for a person planning to retire in 4 years.
Overall, I think these funds are “ok”, but they might be too aggressive for me. If you go by the “age in bonds” adage, and you assume retirement is around age 65, then these funds are very aggressive. I would think the 2020 fund should be the reverse… trying for a 40/60 split, rather than a 60/40 split at that point.
If you decide to go with this option, your allocation looks like this:
Ok here’s another option, you can try to use LifeStrategy Funds.
The good news is these funds use the same funds as the Target Retirement Funds:
Vanguard Total Stock Market Index Fund Investor Shares
Vanguard Total International Stock Index Fund Investor Shares
Vanguard Total Bond Market II Index Fund Investor Shares
Vanguard Total International Bond Index Fund Investor Shares
As I stated above, these are all good funds.
For simplicity’s sake:
So you would just kind of choose when to move your money over. For example:
Today, you would opt for:
Growth Fund – 100% because you are 35 years old, and have 30 years of work ahead of you. (80/20)
15 years later, you change to:
Moderate Growth Fund -100% because you are 50 and you want to decrease your risk a little. (60/40)
10 years after that, you change to:
Conservative Growth Fund – 100% because you are 60 and planning to retire soon. (40/60)
5-10 years after that, you change to:
Vanguard LifeStrategy Income Fund – 100% because you have plenty of money for retirement and don’t need any volatility in your life. (20/80)
Of course, you can fiddle around with the ages a little, if you are more or less aggressive. However, this is a reasonable approximation for the “age in bonds” adage.
What would YOU do?
This is a tough question. All things considered, I think I would opt for the LifeStrategy plan I just outlined. It has good funds and I know the Stock/Bond allocations. All I need to do is choose when I want to rebalance to be more conservative. Most likely, I would do it exactly the way I described above, at 50, 60, and 70 years of age.
Would I prefer to rebalance yearly? Absolutely. However, I think this is a reasonable alternative.
One more possibility would be to use either:
These are essentially already 60/40 stock splits, with Balanced being more diversified than Wellington. This is a conservative allocation for when you are younger than 40, and then becomes more aggressive for every year after 40. For this reason, at some point later in your career, like between 40 and 50 years old, you will need to rebalance your portfolio yourself into something else, such as a LifeStrategy or Target Fund or one of the above options.
You can also try talking to your human resources department about getting you the funds you want.
Someone, somewhere decided to add these funds to the list for their employees to use. This someone could potentially add the funds you want if your argument is compelling enough. They may not even talk to you, but it might be worth a shot if the funds available to you are really bad with high expense ratios.
One last thing:
These asset allocations, portfolio types, and rebalancing are mostly just to educate yourself.
Research has shown the most important thing about saving retirement is saving early, saving often, and using index funds. Stay the course.
The exact allocation or portfolio style you choose does not matter nearly as much as the first three items.
I always think to myself… oh this will be a short post, but then I actually write it and it’s always 1500+ words.
Approximating an asset allocation and portfolio type you like can be difficult.
Just remember the important parts: No Load, Expense Ratio, # Stocks, # Bonds, Stock/Bond Split.
Save early. Save often. Index Funds. Stay the Course.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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