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Retirement-Era |OT| How to Invest For Retirement

Chaosblade

Resettlement Advisor
Member
Oct 25, 2017
2,670
How does an index fund investor underperform the funds they invest in?

Was there a typo in there?
By managing their own index funds. Pulling out of stocks in favor of bonds if they are afraid of a downturn, shuffling between different indexes based on performance, etc.
 

New Fang

Banned
Member
Oct 27, 2017
5,542
By managing their own index funds. Pulling out of stocks in favor of bonds if they are afraid of a downturn, shuffling between different indexes based on performance, etc.
If they buy/sell at inopportune times.
Ah, yeah. I guess that could happen. When you’re talking about retirement accounts though I’d imagine most people set it and leave it alone for long periods of time.
 
Nov 2, 2017
855
I've looking been looking into my 401K, which I've been investing in since about 8 years. I've been contributing to this target retirement fund below, which is an asset allocation type that currently consists of:

54% domestic stock
34% foreign stock
6.42% US bond
3.6% foreign bond


https://institutional.vanguard.com/...ional/investments/productoverview?fundId=1660

https://institutional.vanguard.com/iippdf/pdfs/FS1660.pdf

Any thoughts about switching up what I'm contributing to based on the other benchmarks I'm seeing? Or should I just not touch this and keep it simple

My expense ratio is only 0.06% on this. But then I see others like FXAIX (Fidelity Index 500) with 0.015% putting in 62% better performance over the past 5 years...

Obviously past performance doesn't dictate what will happen in the future, but I definitely don't want to miss out on anything significant if all it takes is a simple re-allocation.
Avoid emotional investing.

You're using recency bias to change your investment strategy. You're unhappy that your retirement fund contains a portion to international.

We're in a period of Large Cap Growth, which consists of the S&P 500. Some earlier posters think that they should invest in growth only, which I highly disagree.

I think a better strategy is to use blend (of value and growth) when considering a simplified portfolio.

Here's a list shows some behavior pitfalls of investing: https://www.bogleheads.org/wiki/Behavioral_pitfalls

Not a replacement for reading long books about cognitive biases, but it is a start.

Diversifying your money into foreign stock and foreign bonds sounds good, until you realize the American economy is the best economy in the world to invest in and the global economy is so tied together these days that if the U.S economy has an ugly year or two you can be certain the rest of the world is no better, so just keep it in the S&P and relax. The fees are dramatically lower AND it outperforms mutual funds at almost all times.

I literally just observed this a couple days ago as my wife got a new job and I set up her 401K for her. I looked over the retirement target fund, and directly compared it to the S&P fund. Last year the mutual fund, which is supposed to be “safer” because it’s “diversified” lost a higher percentage than the S&P. lol
Avoid saying S&P fund and recency bias trap.

S&P 600 also exists, which is used as a benchmark for small cap.

I would really advise you to not avoid international. Most people use international as a currency hedge, and right now the American dollar is considered strong where as international equivalents are unusually undervalued.

https://www.economist.com/graphic-d...-currencies-are-very-cheap-against-the-dollar

The far more interesting statistical fact, IMO, is that index fund investors themselves significantly underperform the index funds they invest in according to Vanguard.

Learning to construct a portfolio is easy. Avoiding behavioral error is hard. But everyone wants to talk about the former and not the latter.
I absolutely agree. Recency bias is not the answer.

No one knows anything.

Diversify.
Ah, yeah. I guess that could happen. When you’re talking about retirement accounts though I’d imagine most people set it and leave it alone for long periods of time.
Deceased people's portfolios tend to perform better than many.
 
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New Fang

Banned
Member
Oct 27, 2017
5,542
Avoid emotional investing.

You're using recency bias to change your investment strategy. You're unhappy that your retirement fund contains a portion to international.

We're in a period of Large Cap Growth, which consists of the S&P 500. Some earlier posters think that they should invest in growth only, which I highly disagree.

I think a better strategy is to use blend (of value and growth) when considering a simplified portfolio.



Avoid saying S&P fund and recency bias trap.

S&P 600 also exists, which is used as a benchmark for small cap.

I would really advise you to not avoid international. Most people use international as a currency hedge, and right now the American dollar is considered strong where as international equivalents are unusually undervalued.

https://www.economist.com/graphic-d...-currencies-are-very-cheap-against-the-dollar



I absolutely agree. Recency bias is not the answer.

No one knows anything.

Diversify.
Recency bias? No one knows anything?

There are decades of statistics for this kind of thing.

https://www.usatoday.com/story/mone...s-or-actively-managed-mutual-funds/110745850/
 
Oct 27, 2017
1,290
How does an index fund investor underperform the funds they invest in?
They make the same behavioral errors that haunt all investors. Just because you are using an index fund-based portfolio does not make you immune to them. Some examples:
- Increasing bond / cash allocation when the market is low and you are feeling nervous. Or sitting on cash and not investing it.
- Increasing stock allocation when the market is high and you are feeling confident.
- Shifting between international and domestic because one of them has outperformed the other in the past X years.

There are two different challenges to overcome on the road to being a successful retirement investor: the intellectual and the psychological.

The intellectual side involves knowing what to do to achieve good returns. As far as portfolio construction component goes, it is pretty simple, as you have been saying. Though I would disagree with the position that it is all easy. Optimizing one's tax liabilities can be much more intricate and requires that you take an active interest in tax law to understand it all. I work with a lot of quant PhDs, and they generally have limited understanding of it, so I doubt the general public is any better.

The psychological side is about ensuring that you actually follow through on the plan you create. Personally, I think that a lot of people who excel at the intellectual side struggle here. When you learn about how easy it is to outperform actively managed funds on your own, it is easy to start feeling a little arrogant, and mastering the psychological side of investing really requires humility. They think "Oh these poor fools making behavioral errors. Surely I'm too smart / disciplined to do that." There is ample data - both real world and through synthetic research on investment - that demonstrates that people's natural impulses lead them to make behavioral errors in investing that can significantly reduce their returns. And yet, it still takes some level of humility to say "I'm not a special snowflake. I will probably make behavioral errors if left to my own devices, just like everyone else." But if you are able to accept that, you can start taking actions to mitigate it.

To bring things back to the dieting metaphor I drew earlier that people objected to, I think succeeding there requires the same self-realization. Despite the basic intellectual concepts being dead simple (consume fewer calories, and do some exercises to maintain muscle and cardiovascular health), the data show most people fail at it. The arrogant approach to that fact is to think that those people are just weak. The humble approach is to understand that maintaining perfect willpower 24/7 is really difficult, and that you should take whatever steps necessary to make it easier on yourself.

Finally, back to the idea of whether it is OK to pay a financial planner to help you develop a formal plan. Personally I am a believer that actually creating a physical, written investment plan is one element you can use to reduce the likelihood of making behavioral errors. Now this is certainly something you can do on your own, but if someone wants to employ a financial planner to incur a one-time cost to help them construct the plan and then pay to consult with them every year or two afterward, that doesn't seem too bad to me. In fact, psychological research suggests that a plan produced this way might be a more effective deterrent to behavioral error, because it has the additional elements of:
1. Not wanting to have to explain to the other person when you deviate from the plan
2. Sunk cost / loss aversion effect since you paid for the plan
 

New Fang

Banned
Member
Oct 27, 2017
5,542
They make the same behavioral errors that haunt all investors. Just because you are using an index fund-based portfolio does not make you immune to them. Some examples:
- Increasing bond / cash allocation when the market is low and you are feeling nervous. Or sitting on cash and not investing it.
- Increasing stock allocation when the market is high and you are feeling confident.
- Shifting between international and domestic because one of them has outperformed the other in the past X years.

There are two different challenges to overcome on the road to being a successful retirement investor: the intellectual and the psychological.

The intellectual side involves knowing what to do to achieve good returns. As far as portfolio construction component goes, it is pretty simple, as you have been saying. Though I would disagree with the position that it is all easy. Optimizing one's tax liabilities can be much more intricate and requires that you take an active interest in tax law to understand it all. I work with a lot of quant PhDs, and they generally have limited understanding of it, so I doubt the general public is any better.

The psychological side is about ensuring that you actually follow through on the plan you create. Personally, I think that a lot of people who excel at the intellectual side struggle here. When you learn about how easy it is to outperform actively managed funds on your own, it is easy to start feeling a little arrogant, and mastering the psychological side of investing really requires humility. They think "Oh these poor fools making behavioral errors. Surely I'm too smart / disciplined to do that." There is ample data - both real world and through synthetic research on investment - that demonstrates that people's natural impulses lead them to make behavioral errors in investing that can significantly reduce their returns. And yet, it still takes some level of humility to say "I'm not a special snowflake. I will probably make behavioral errors if left to my own devices, just like everyone else." But if you are able to accept that, you can start taking actions to mitigate it.

To bring things back to the dieting metaphor I drew earlier that people objected to, I think succeeding there requires the same self-realization. Despite the basic intellectual concepts being dead simple (consume fewer calories, and do some exercises to maintain muscle and cardiovascular health), the data show most people fail at it. The arrogant approach to that fact is to think that those people are just weak. The humble approach is to understand that maintaining perfect willpower 24/7 is really difficult, and that you should take whatever steps necessary to make it easier on yourself.

Finally, back to the idea of whether it is OK to pay a financial planner to help you develop a formal plan. Personally I am a believer that actually creating a physical, written investment plan is one element you can use to reduce the likelihood of making behavioral errors. Now this is certainly something you can do on your own, but if someone wants to employ a financial planner to incur a one-time cost to help them construct the plan and then pay to consult with them every year or two afterward, that doesn't seem too bad to me. In fact, psychological research suggests that a plan produced this way might be a more effective deterrent to behavioral error, because it has the additional elements of:
1. Not wanting to have to explain to the other person when you deviate from the plan
2. Sunk cost / loss aversion effect since you paid for the plan
There is certainly logic behind everything you're saying, but two things worth pointing out.

1) I believe the vast majority of people who have 401K accounts set them up and leave them be. The most popular option in those funds is the default mutual fund named "Retirement 2045 plan", etc. You're talking about people whipping in and out of things, changing things, etc. I don't believe that describes the vast majority of people, especially in a thread about retirement accounts. Regular investors buying and selling stocks on their own, sure, but retirement accounts? no

2) Meeting with any financial advisor is likely to result in you "diversifying" in basically the same way these generic mutual funds do, because most financial advisors aren't going to meet with you and say "the S&P outperforms mutual funds almost every year, just put your money there". Instead you're likely going to end up invested in a lot of stuff that only brings down your total returns. So that's why when people are asking for basic advice in a thread like this, I think the best answer is almost always "Just throw all your retirement money into an S&P index fund". Lowest fees and solid returns. It's the simplest and history says most successful long term formula.
 
Oct 25, 2017
551
Does Vanguard offer a total international ETF? Right now we split manually between VTI and VXUS and I’m wondering where there isn’t just a cap-weighted combination.
 
Oct 27, 2017
71
I think there is good discussion going on, so thank you everyone. I was the poster who asked if a financial planner was worth it and tokkun is doing a good job of convincing me. His analogy comparing to a personal trainer helped to clarify things for me.

Let me clarify how I plan to use a financial planner New Fang . Your investing advice is sound, and is basically how I expect to invest most of my portfolio. Given the situation I am personally in what I'm hoping to get out of a financial planner is the following: advice on monthly budget, setting up college funds for my children, getting my ducks in a row regarding my will and other things of that nature, how to balance my accounts between liquid cash and investments, how to manage inherited retirement accounts into my portfolio appropriately, and how to do all this while tracking and managing my tax obligations. This is before I get started on how I setup my investments, which, like I said, I'm expecting to setup similar to how you suggested.

This is just a lot for me to handle at all at once, and doesnt take into account related but adjacent things in my life right now such as grieving for my parents, winding down their estate, and managing my normal family life including 2 grade school kids and a wife who goes to school 1st shift and works 2nd shift, often leaving me in charge of the kiddos.

So the option of paying a professional to help me figure out the financial side for a one time fee is appealing. Especially if there is no recurring costs except for (much cheaper) follow ups that are made at my request.
 
Nov 2, 2017
855
Recency bias? No one knows anything?

There are decades of statistics for this kind of thing.

https://www.usatoday.com/story/mone...s-or-actively-managed-mutual-funds/110745850/
I never said anything against index funds. Funds of index funds can be a strategy for people who want to keep things simple. When people complain about fees, you have to remember some investments take 3.00 to 5.00 out there. Once you hit the 0.20 area, then it really doesn't matter.

tokkun I believe uses a retirement fund as well since tokkun doesn't believe he's smarter than what Vanguard provides. Concentrate on saving money in one fund is a simple strategy.

You must be very new here. I wrote the shorthand guide that's borrowed in the OP on how to invest if you are a tl;dnr person.

I even link to a pamphlet for new investors here on how to invest by WIlliam Bernstein.

"Do not confuse strategy with outcome" is constantly repeated at Bogleheads.

If you're going super long, you could take a look at small cap value investing (hence why I mentioned S&P 600), but I don't like the idea since again a constant theme repeated in here: Past performance does not mean future returns.

Does Vanguard offer a total international ETF? Right now we split manually between VTI and VXUS and I’m wondering where there isn’t just a cap-weighted combination.
You mean Total World?

Yes, VT. 55% US, 45% ex-US.

Mutual fund version with admiral shares supposedly just went online last week: https://www.bogleheads.org/forum/viewtopic.php?p=4220154#p4220154

I still like to split because there are more stocks in the individual funds than total world holds. However, I wouldn't be against using just one fund for investing.
 
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Oct 25, 2017
551
I still like to split because there are more stocks in the individual funds than total world holds. However, I wouldn't be against using just one fund for investing.
What's your split out of curiosity? My household is currently 60 US (VTI), 20 US bonds (BND) and 20 international (VXUS). This is one part of the decision making process I find more intimidating, so maybe I will just move our future purchases to VT.

Also as far as I can tell there's no reason to use the Vanguard funds as opposed to purchasing their ETFs - am I wrong in this?
 
Oct 27, 2017
4,226
Just to chime in, financial advisors are nowhere near worth what they charge. The only value is see in them is talking people out of doing something stupid when markets tank. Otherwise setting up and managing a lazy and effective portfolio isn't rocket science. I've been DIY for a long time now and it's just not that difficult nor does it take barely any time.
I can see the value of a financial planner for something like Blergmeister's case. He's looking for overall financial advice tailored to his specific situation for a one-time charge not just someone to manage his investments.
 
Nov 2, 2017
855
What's your split out of curiosity? My household is currently 60 US (VTI), 20 US bonds (BND) and 20 international (VXUS). This is one part of the decision making process I find more intimidating, so maybe I will just move our future purchases to VT.
50/50

I'm satisfied with underperformance of international in order to stay diversified.

I can see how you got your allocation.

John Bogle (may he rest in peace) wrote in his books that no one investor should invest more than 20% allocation in international. Vanguard recommends 20% to 40% allocation in international.

20% would be the middle of the road agreement. You don't have to change your strategy if that's what you're satisfied.

What's important is rebalancing those percentages according to your investment plan whether it's a 5% or 10% deviation.

Also as far as I can tell there's no reason to use the Vanguard funds as opposed to purchasing their ETFs - am I wrong in this?
Choice of using ETFs is personal. I value simplicity, so I stick to mutual funds whenever possible. Otherwise, ETFs are perfectly fine.

ETFs tend to be more tax efficient than mutual funds (with exception of Admiral shares of Vanguard Mutual funds).

Vanguard users can convert equivalent mutual funds to ETFs any time. There is no conversion to go back though.
 
OP
OP
TheTrinity
Oct 25, 2017
245
That Bogleheads wiki link was very informative, thanks for that!
While I've managed to avoid most of those problems I can definitely see myself in some of them.

I'm literally involved in one of these right now where I have company stock that was granted at ~$140/share and it's going to vest in a couple months where the value is now ~$74/share. Yes, it's worth $9000 now when at it's peak it was worth $18,000. Logically I should probably still sell it as soon as it vests but instead of it feeling like I'm gaining $9000 it feels like I'm LOSING $9000.

I don't actually know what I'm going to do. I would feel better emotionally if it at least went back up to $100/share or something.
 
Oct 27, 2017
1,810
Not sure if this is the correct thread for this, apologies in advance if it’s not.

So my property taxes were miscalculated when I got my house and now my monthly payment has gone up by $200 to cover the escrow account. My question is: will my monthly payment go back down for the remainder of the year if I do an additional escrow payment that covers the entire account for the year?
 
Oct 25, 2017
551
That Bogleheads wiki link was very informative, thanks for that!
While I've managed to avoid most of those problems I can definitely see myself in some of them.

I'm literally involved in one of these right now where I have company stock that was granted at ~$140/share and it's going to vest in a couple months where the value is now ~$74/share. Yes, it's worth $9000 now when at it's peak it was worth $18,000. Logically I should probably still sell it as soon as it vests but instead of it feeling like I'm gaining $9000 it feels like I'm LOSING $9000.

I don't actually know what I'm going to do. I would feel better emotionally if it at least went back up to $100/share or something.
I'm trying to convince my partner to sell some company stock that lost only 10-15% of its value from all-time peak last year. It's still such good value! But it's hard to see past the former high.
 
Oct 26, 2017
83
Not sure if this is the correct thread for this, apologies in advance if it’s not.

So my property taxes were miscalculated when I got my house and now my monthly payment has gone up by $200 to cover the escrow account. My question is: will my monthly payment go back down for the remainder of the year if I do an additional escrow payment that covers the entire account for the year?
You should call and talk to your mortgage lender, they will have some sort of escrow manager who can help get these questions answered. If you want to add money directly to your escrow, talk to them and they will sort out what your payment schedule should be in addition to that. If you don't notify them they probably won't adjust the payment amount. They will just refund you any surplus balance the next time they check your escrow, which is probably about once a year.

My house was estimated too high, then too low, zoned wrong, re-appraised, and a pile of other things that swung my taxes all over the place. All it usually took to sort out any changes was a short call to my lender to discuss the escrow account.
 

New Fang

Banned
Member
Oct 27, 2017
5,542
I never said anything against index funds. Funds of index funds can be a strategy for people who want to keep things simple. When people complain about fees, you have to remember some investments take 3.00 to 5.00 out there. Once you hit the 0.20 area, then it really doesn't matter.
You told me "no one knows anything". The data on S&P 500 funds vs mutual funds is a known thing.

50/50

I'm satisfied with underperformance of international in order to stay diversified.
Thank you for acknowledging that fact.

On a side note. I'm just curious. Do you believe it's possible the S&P 500 could take a terrible turn, and international investments would do better?
 
Oct 27, 2017
1,810
You should call and talk to your mortgage lender, they will have some sort of escrow manager who can help get these questions answered. If you want to add money directly to your escrow, talk to them and they will sort out what your payment schedule should be in addition to that. If you don't notify them they probably won't adjust the payment amount. They will just refund you any surplus balance the next time they check your escrow, which is probably about once a year.

My house was estimated too high, then too low, zoned wrong, re-appraised, and a pile of other things that swung my taxes all over the place. All it usually took to sort out any changes was a short call to my lender to discuss the escrow account.
Dang, that’s quite the roller coaster. I had no idea it could get that crazy, I was expecting the first miscalculation to be the end of it. I’ll give them a call to sort this out and have a better understanding of what exactly happened. Thanks.
 

Chaosblade

Resettlement Advisor
Member
Oct 25, 2017
2,670
I put in 70/30 domestic/international, but I don't rebalance so it's nowhere close to that right now. Wish vanguard had an option to target allocations. Might just change my contributions for this year to 60/40.
 
Oct 25, 2017
3,446
Thoughts on investments strategies for more short term goals 3 to 6 years?

My savings account is sitting at 2.2% (I think the highest savings is at 2.4%?).

This money would be going towards helping down payment towards a house for my mom & a separate down payment for myself towards a home.
 
Oct 27, 2017
1,290
There is certainly logic behind everything you're saying, but two things worth pointing out.

1) I believe the vast majority of people who have 401K accounts set them up and leave them be. The most popular option in those funds is the default mutual fund named "Retirement 2045 plan", etc.
Great. If you go find the progenitor thread on GAF you will see I was the original target date fund evangelist.

You're talking about people whipping in and out of things, changing things, etc. I don't believe that describes the vast majority of people, especially in a thread about retirement accounts. Regular investors buying and selling stocks on their own, sure, but retirement accounts? no
Believe what you want to believe. I'm just talking about what the data show. Color me skeptical that the average retirement investor is so disciplined, though. Lots of people wiped out their retirement accounts investing in tech stocks during the Dotcom boom. If you are old enough you may remember that there was a big policy debate at the time about whether to allow Americans to directly invest their Social Security balances. Despite GWB winning the election, that whole plan went kaput because people lost so much in their retirement accounts that they realized it was a bad idea.

You don't need to be a day trader to suffer these losses though. It just takes one moment of weakness to panic during a downturn and pull your money then be on the sidelines for the recovery. Go read some of the Bogleheads threads about the mistakes they made during the financial crisis. Even the true believers fall victim to it, because it is human nature.

2) Meeting with any financial advisor is likely to result in you "diversifying" in basically the same way these generic mutual funds do, because most financial advisors aren't going to meet with you and say "the S&P outperforms mutual funds almost every year, just put your money there". Instead you're likely going to end up invested in a lot of stuff that only brings down your total returns.
This is why I advised Blergmeister to inquire about their potential financial planner's investment strategy prior to paying any money. Like I have said a few times, the point of asking is not because you expect some fancy market-beating portfolio. The point is to see if the advisor is sensible or not and whether you can trust them to act in your best interest.

So that's why when people are asking for basic advice in a thread like this, I think the best answer is almost always "Just throw all your retirement money into an S&P index fund". Lowest fees and solid returns. It's the simplest and history says most successful long term formula.
Except that is not what was asked. Blergmeister asked about a situation involving inheritance of a sizable retirement portfolio. They need to deal with calculating the correct RMD withdrawal schedule to avoid penalties. They need to adjust their tax withholding to avoid underpayment due to said RMDs. They want to set up a 529 or otherwise structure the money to help pay for education costs for their children. A "something something index fund" answer is not sufficient.

tokkun I believe uses a retirement fund as well since tokkun doesn't believe he's smarter than what Vanguard provides. Concentrate on saving money in one fund is a simple strategy.
Yep. My retirement accounts are 100% in a single Vanguard Target Date fund.

The reason I use target date funds and recommend them to others (when available at low cost in their plans) is because of the same drum I have been beating in my past few posts: I believe this is one way to reduce the chance of making behavioral errors. I know that the target date fund costs slightly more in management fees than what I would pay if I used the components and built the fund itself. I also know that this is not an optimal tax-efficient asset allocation, because I really aught to put the International stuff completely in my taxable account, put the bonds in my traditional tax-deferred dollars, etc. But I am willing to pay those costs because I think that I think they are less than the cost of making behavioral errors. Hence why I have some understanding toward people who want to employ a financial planner out of a similar motive.

My taxable account is sadly a different story. I use a bunch of different index ETFs because I want to be able to do tax loss harvesting, and I am frequently tempted to try to get clever there and try to beat the market.
 
Oct 29, 2017
378
Believe what you want to believe. I'm just talking about what the data show. Color me skeptical that the average retirement investor is so disciplined, though.
...
My taxable account is sadly a different story. I use a bunch of different index ETFs because I want to be able to do tax loss harvesting, and I am frequently tempted to try to get clever there and try to beat the market.
While I have very little doubt about your argument on index fund investors under-performing, I do have questions about two potential confounders on that research, one of which you already mentioned. I am not well versed in reading economic white papers, never mind that I do not know the primary source.

Did the authors of that paper take into account index fund investors who do properly tax loss harvest? And by "properly," I mean "Boglehead properly," choosing a substitute asset of similar risk, e.g., VTSAX to VLCAX. If I harvested a $10K loss at the end of December 2018 but VLCAX is tracking on par with VTSAX, would the authors' analysis counted me as under performing since I realized that loss compared to someone who kept VTSAX and kept it simpler?

Did the authors take into account the expectant gradual shift of asset allocation over an investor's lifetime? I would expect this to be the case, as hopefully the authors did not compare Person A who stayed 100% VTSAX all the way to age 65, to Person B who went 100/0 to 80/20 to 65/35 to 50/50 over the same time frame.

Actually, I have a third question. Why do you choose ETFs for your taxable account? Compared to mutual funds, aren't ETFs more likely to promote daytrader behavior and are not as easy to dollar-cost average your contributions?
 
Oct 27, 2017
1,290
While I have very little doubt about your argument on index fund investors under-performing, I do have questions about two potential confounders on that research, one of which you already mentioned. I am not well versed in reading economic white papers, never mind that I do not know the primary source.
I was unable to locate the Vanguard publication, but Morningstar has done similar research and I was able to find this presentation that includes a description of their methodology and some asset-class and sector-based results. The presentation is an easy read, so I recommend checking it out:
https://www.sec.or.th/TH/Documents/SEC_WPF/sec_wpf_1058_02_ppt.pdf

You can find data for individual funds on their website. Compare Total Returns and Investor Returns to determine the gap. For instance, VTSAX:
http://performance.morningstar.com/fund/performance-return.action?p=investor_returns_page&t=VTSAX

Did the authors of that paper take into account index fund investors who do properly tax loss harvest? And by "properly," I mean "Boglehead properly," choosing a substitute asset of similar risk, e.g., VTSAX to VLCAX. If I harvested a $10K loss at the end of December 2018 but VLCAX is tracking on par with VTSAX, would the authors' analysis counted me as under performing since I realized that loss compared to someone who kept VTSAX and kept it simpler?
Yes and no.

The data is computed on a fund-by-fund basis, then aggregated. It takes into account gains / losses made while holding the fund. If you sell Fund A and buy Fund B, the gains you get while holding Fund B do not get counted toward Fund A, if that is what you are asking. However if you are looking at the aggregate data for a category (e.g. US equities), then they would be included.

I should clarify that the calculation does not require tracking individual portfolios. It uses a dollar-weighted average of all investors in the fund during the period being analyzed. So infrequent individual events, like TLH, are less likely to skew the data.

Did the authors take into account the expectant gradual shift of asset allocation over an investor's lifetime? I would expect this to be the case, as hopefully the authors did not compare Person A who stayed 100% VTSAX all the way to age 65, to Person B who went 100/0 to 80/20 to 65/35 to 50/50 over the same time frame.
Selling or buying as part of a shifting asset allocation would be treated no differently than any other transaction. But as I mentioned in the previous answer, the data is not based on individuals, it is based on all investors in a given fund. Moreover, both equity and bond funds exhibit a performance gap in most periods they measured, which would be somewhat difficult to reconcile with a theory that the data is skewed by rebalancing.

Actually, I have a third question. Why do you choose ETFs for your taxable account? Compared to mutual funds, aren't ETFs more likely to promote daytrader behavior and are not as easy to dollar-cost average your contributions?
I generally don't do DCA. I use ETFs in my taxable account for a number of reasons that are pretty much all based on tax loss harvesting.

- When I do TLH, I want to know whether I am going to sell at a loss. I can guarantee that with an ETF. That is harder to do with mutual fund transactions because they execute at the end of the day using the average price.
- For the same reason, I can immediately use the proceeds of an ETF sale to buy a replacement fund.
- There is a greater selection of ETFs (including non-Vanguard ETFs) that I can trade for free in my Vanguard account than there are mutual funds. This makes it easier to do fund rotation. For instance the international ETFs between Vanguard, iShares, and SPDR are different enough to allow trades without worrying about wash sales.
- There is no minimum investment to worry about like there is with Vanguard's mutual funds.
- In an effort to dissuade day trading, Vanguard will sometimes impose fairly arbitrary trading restrictions on their mutual funds, and this can sometimes interfere with TLH.

If not for TLH, I tend to prefer mutual funds for ease-of-use reasons (single daily price, fractional shares, dividend reinvestment).
 
Oct 25, 2017
3,446
50/50

I'm satisfied with underperformance of international in order to stay diversified.

I can see how you got your allocation.

John Bogle (may he rest in peace) wrote in his books that no one investor should invest more than 20% allocation in international. Vanguard recommends 20% to 40% allocation in international.

20% would be the middle of the road agreement. You don't have to change your strategy if that's what you're satisfied.

What's important is rebalancing those percentages according to your investment plan whether it's a 5% or 10% deviation.



Choice of using ETFs is personal. I value simplicity, so I stick to mutual funds whenever possible. Otherwise, ETFs are perfectly fine.

ETFs tend to be more tax efficient than mutual funds (with exception of Admiral shares of Vanguard Mutual funds).

Vanguard users can convert equivalent mutual funds to ETFs any time. There is no conversion to go back though.
Why is my Vanguard Retirement Target Fund allocating 34% to foreign stock?
 
Oct 29, 2017
378
I was unable to locate the Vanguard publication, but Morningstar has done similar research and I was able to find this presentation that includes a description of their methodology and some asset-class and sector-based results. The presentation is an easy read, so I recommend checking it out:
https://www.sec.or.th/TH/Documents/SEC_WPF/sec_wpf_1058_02_ppt.pdf

You can find data for individual funds on their website. Compare Total Returns and Investor Returns to determine the gap. For instance, VTSAX:
http://performance.morningstar.com/fund/performance-return.action?p=investor_returns_page&t=VTSAX



Yes and no.

The data is computed on a fund-by-fund basis, then aggregated. It takes into account gains / losses made while holding the fund. If you sell Fund A and buy Fund B, the gains you get while holding Fund B do not get counted toward Fund A, if that is what you are asking. However if you are looking at the aggregate data for a category (e.g. US equities), then they would be included.

I should clarify that the calculation does not require tracking individual portfolios. It uses a dollar-weighted average of all investors in the fund during the period being analyzed. So infrequent individual events, like TLH, are less likely to skew the data.



Selling or buying as part of a shifting asset allocation would be treated no differently than any other transaction. But as I mentioned in the previous answer, the data is not based on individuals, it is based on all investors in a given fund. Moreover, both equity and bond funds exhibit a performance gap in most periods they measured, which would be somewhat difficult to reconcile with a theory that the data is skewed by rebalancing.



I generally don't do DCA. I use ETFs in my taxable account for a number of reasons that are pretty much all based on tax loss harvesting.

- When I do TLH, I want to know whether I am going to sell at a loss. I can guarantee that with an ETF. That is harder to do with mutual fund transactions because they execute at the end of the day using the average price.
- For the same reason, I can immediately use the proceeds of an ETF sale to buy a replacement fund.
- There is a greater selection of ETFs (including non-Vanguard ETFs) that I can trade for free in my Vanguard account than there are mutual funds. This makes it easier to do fund rotation. For instance the international ETFs between Vanguard, iShares, and SPDR are different enough to allow trades without worrying about wash sales.
- There is no minimum investment to worry about like there is with Vanguard's mutual funds.
- In an effort to dissuade day trading, Vanguard will sometimes impose fairly arbitrary trading restrictions on their mutual funds, and this can sometimes interfere with TLH.

If not for TLH, I tend to prefer mutual funds for ease-of-use reasons (single daily price, fractional shares, dividend reinvestment).
Thanks for the response. Appreciate the professional insight.
 
Oct 25, 2017
3,446
Due to the ease of being able to automate the funding, the .015% expense ratio, no minimum to invest, the fact that my ROTH 401K is already with Fidelity, I think I want to fund my ROTH IRA with FXAIX or FSKAX

I haven't seen too many people say anything about Fidelity Funds here...

I'll also need to determine the mutual fund I want to go with for (slighty) more international exposure.

For taxable investments, I'll probably stick with Vanguard ETFS or a robo investor to automate that and make it much easier.
 
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Nov 2, 2017
855
You told me "no one knows anything". The data on S&P 500 funds vs mutual funds is a known thing.
Technically, phrase thrown at Bogleheads is, "Nobody knows nothing."

We choose to passively invest by using index funds since passive always beats active for average investors. The stock market is a loser's game.

We also do not know what the future holds, so we can't be confident.

Acknowledging these facts, we should hold low-cost diversified investments.

Additionally, stick to allocation %. That judges how well a portfolio will do in the future. Swaying away from it results in underperformance and even disaster. In other words, stay the course.

On a side note. I'm just curious. Do you believe it's possible the S&P 500 could take a terrible turn, and international investments would do better?
I don't know. Neither should you say what the S&P 500 or international investment will do because when it starts performing not to your liking, will you sell everything?

Back in 2000-2008, investors were talking about international, and now everyone shits on it.

I like this paper written in 2012 by Vanguard. Take a read: Considerations for investing in non-US equities

Knowing that much about international, I would be uncomfortable holding 0% in any portfolio.

Due to the ease of being able to automate the funding, the .015% expense ratio, no minimum to invest, the fact that my ROTH 401K is already with Fidelity, I think I want to fund my ROTH IRA with FXAIX or FSKAX
FSKAX since it's more diversified.

3381 stocks > 503 stocks

If you want (and if available) to be a guinea pig, you are welcome to invest in zero expense ratio fund FZROX. It however contains only 2521 stocks. Also given Fidelity's tracking history errors, don't expect this fund to match equivalents. It has so far matched in its very short history, but I wouldn't count on that to last.

I haven't seen too many people say anything about Fidelity Funds here...
Plenty of posters here invest at Fidelity.

Here's a guide: https://www.bogleheads.org/wiki/Fidelity

You can also invest Blackrock iShare ETFs commission-free there.

I'll also need to determine the mutual fund I want to go with for (slighty) more international exposure.
FTIHX

The zero fund equivalent doesn't make sense to me, but if you want to do it, I can't stop you.

For taxable investments, I'll probably stick with Vanguard ETFS or a robo investor to automate that and make it much easier.
No to robo investor. Keep your investing simple.

Last time I read somewhere that ITOT is more tax-efficient than VTI. Haven't verified myself.

Thoughts on investments strategies for more short term goals 3 to 6 years?

My savings account is sitting at 2.2% (I think the highest savings is at 2.4%?).

This money would be going towards helping down payment towards a house for my mom & a separate down payment for myself towards a home.
3-5 year CD. See if you can get a rate of 3.5% or higher.

I don't expect rates to last. US is the only country giving very high positive interest rates when compared to the rest of the world.

Bogle in his final revision of his little book to investing is pretty dismal in investing outlook. A US-only equity portfolio is only expected 5% gain for the next ten years. He also only expects 3% from bond investments (2% for treasury, 4% for corporate bond).

Nobody knows nothing.
 
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FliXFantatier

Master of the Reality Stone
Avenger
Oct 25, 2017
3,003
Los Angeles
Due to the ease of being able to automate the funding, the .015% expense ratio, no minimum to invest, the fact that my ROTH 401K is already with Fidelity, I think I want to fund my ROTH IRA with FXAIX or FSKAX

I haven't seen too many people say anything about Fidelity Funds here...

I'll also need to determine the mutual fund I want to go with for (slighty) more international exposure.

For taxable investments, I'll probably stick with Vanguard ETFS or a robo investor to automate that and make it much easier.
I have everything with Fidelity, for the same reasons, my 401k is there.
No complaints.
 
Oct 29, 2017
3,945
I am posting this there instead of the home owner thread because it's more a financial/math thing.

I am calculating the current price of a house, and how much it will have cost me after 25 years with interest, and I used the CAGR formula to figure what growth rate this would correspond to over the amortization period. So the inputs are initial value, the final value which is the initial value +loan +interests over the amortization period. This gives me a growth rate, so I can see if that rate is realistic or not to at least cover the costs.

But I want to try to add other inputs, like for example taxes, insurance, and renovations, and inflation. I was wondering if anyone knows of some formula used to calculate this? I assume it's pretty common that people want to know how much money they put in an investment over years (say a business, a house, etc.) and figure the growth rate needed to cover all expenses over the period.

edit: I guess I need to look into some profit formulas.

edit2; Found this https://www.creditfinanceplus.com/calculators/home-value-appreciation-profits-future-sale.php
 
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Oct 25, 2017
3,446
Technically, phrase thrown at Bogleheads is, "Nobody knows nothing."

We choose to passively invest by using index funds since passive always beats active for average investors. The stock market is a loser's game.

We also do not know what the future holds, so we can't be confident.

Acknowledging these facts, we should hold low-cost diversified investments.

Additionally, stick to allocation %. That judges how well a portfolio will do in the future. Swaying away from it results in underperformance and even disaster. In other words, stay the course.


I don't know. Neither should you say what the S&P 500 or international investment will do because when it starts performing not to your liking, will you sell everything?

Back in 2000-2008, investors were talking about international, and now everyone shits on it.

I like this paper written in 2012 by Vanguard. Take a read: Considerations for investing in non-US equities

Knowing that much about international, I would be uncomfortable holding 0% in any portfolio.



FSKAX since it's more diversified.

3381 stocks > 503 stocks

If you want (and if available) to be a guinea pig, you are welcome to invest in zero expense ratio fund FZROX. It however contains only 2521 stocks. Also given Fidelity's tracking history errors, don't expect this fund to match equivalents. It has so far matched in its very short history, but I wouldn't count on that to last.



Plenty of posters here invest at Fidelity.

Here's a guide: https://www.bogleheads.org/wiki/Fidelity

You can also invest Blackrock iShare ETFs commission-free there.



FTIHX

The zero fund equivalent doesn't make sense to me, but if you want to do it, I can't stop you.



No to robo investor. Keep your investing simple.

Last time I read somewhere that ITOT is more tax-efficient than VTI. Haven't verified myself.


3-5 year CD. See if you can get a rate of 3.5% or higher.

I don't expect rates to last. US is the only country giving very high positive interest rates when compared to the rest of the world.

Bogle in his final revision of his little book to investing is pretty dismal in investing outlook. A US-only equity portfolio is only expected 5% gain for the next ten years. He also only expects 3% from bond investments (2% for treasury, 4% for corporate bond).

Nobody knows nothing.
Thanks for the response.

I've made a contribution which is a mix of FSKAX and FTIHX. I'm going to also get some index bonds in there as well for a 80% stock / 20% bonds mix and increase the bond allocation as I get older.

I think I want to get 2017 ROTH IRA maxed out by allocating towards income towards contributions in the first few months. That ROTH IRA account is really the best in terms of flexibility - I really wish 7 years ago that I knew what I know now. This will essentially serve as my retirement investment vehicle, potential early retirement vehicle, source of income for potential home ownership down payment, and the back up emergency savings to my emergency savings account.

I'm also going to start contributing a lot more to my 401K account rather than ROTH 401K for a bit of hedging. Right now in terms of that mix it's 85% ROTH and 15% traditional. Figure I get that allocation closer to 70%/30% and get the tax deduction.

One thing I want to follow up on is saving for a home. Assuming I was able to max out my IRA and 401K contributions, any remainder would need to go towards my 2.2% savings account into another investment account. A taxable investment account may be too risky due to the short time frame of 3-5 years. I'm not seeing CD rates as high as 3.5% and I think flexibility will be very important when it comes to opportunity that might arise when it comes to home ownership - I don't want to not have access to my money when I good opportunity comes.

By default will just continue to contribute to my ROTH IRA to max that out and put the rest towards a mix of ROTH 401K and traditional 401K.
 
Oct 26, 2017
708
Hey guys,

So I had an 401k with my employer, but back in July 2017 they got bought out and it got rolled over to a new company. I ignorantly assumed it would go into some sort of retirement fund but I guess since then it's just been sitting as a "cash sweep" account or something. I looked around their website and it seems very bare bones, and I can't figure out how to move it into something that could generate a return.

Anyway, can I roll it over to a new company again? What company would you guys recommend? Any other recommendations you guys have for this?
 
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Oct 27, 2017
460
Robinhood App, legit?

Does anyone know how legit the Robinhood app is? I have been reading up Robinhoods revenue model, and even though details are not completely clear, it seems to be using this "payment for order flow" as their revenue source. With that in mind, it seems kind of sketchy at first glance, but again, I don't have a lot of background on this.
 
Nov 14, 2017
28
Robinhood App, legit?

Does anyone know how legit the Robinhood app is? I have been reading up Robinhoods revenue model, and even though details are not completely clear, it seems to be using this "payment for order flow" as their revenue source. With that in mind, it seems kind of sketchy at first glance, but again, I don't have a lot of background on this.
I've been using it for a while and haven't noticed anything sketchy. I don't think I've sold anything with it, but all my buys have executed as expected. No hidden fees so far.
 
Oct 27, 2017
460
I've been using it for a while and haven't noticed anything sketchy. I don't think I've sold anything with it, but all my buys have executed as expected. No hidden fees so far.
Thanks. Yeah, I guess looking at it long-term too, how can they sustain their business model and it seems like the orders are being funneled through a few 3rd parties, and thats where they are making their money off of. Just don't want to dump thousands (even if it is like only 5 or 10k) in there and in a few years find out that it was all a pyramid scheme or something.
 

FliXFantatier

Master of the Reality Stone
Avenger
Oct 25, 2017
3,003
Los Angeles
Thanks. Yeah, I guess looking at it long-term too, how can they sustain their business model and it seems like the orders are being funneled through a few 3rd parties, and thats where they are making their money off of. Just don't want to dump thousands (even if it is like only 5 or 10k) in there and in a few years find out that it was all a pyramid scheme or something.
Why not put it in something we know works? IRA at vanguard for example. I don’t see the point. And if you want to day trade this is not the thread for that. 😝
 
Oct 27, 2017
460
Why not put it in something we know works? IRA at vanguard for example. I don’t see the point. And if you want to day trade this is not the thread for that. 😝
Hey, sorry, I didn’t mean I wanted to day trade, more worried about that this app would just collapse. I guess what caught me even more off guard was their attempt to hold a beta for a checking/savings account all in one and then disappeared 24 hours later. Like I was interested in that and using robin hood to do some investing for retirement and to use as a savings / checking account, but then the FDIC came in and shut that down. That’s where I got spooked.

Just looking for more concrete information on them. That’s all.
 
Oct 27, 2017
1,779
Doing taxes got me in a money-mood so I foolishly went and checked my 401k 4th quarter statement. Bleh!! And I'd been doing so good not looking at it through the market crap the past few months, lol!!
 
OP
OP
TheTrinity
Oct 25, 2017
245
The 4th quarter will very shortly be a minor blip that wasn't even worth thinking about. We're personally already back at a new peak of investment assets and there's still bonuses, RRSP matching, ESPP, stock grant vesting, and tax returns to roll in.
 
Oct 26, 2017
5,278
Florida
Total 401k noob here.

Left a job after 4 years and I'm trying to pull out my 401k there.

And I see things like:

"Put Option"
Lump Sum/Defer/In-Kind Direct Rollover
Rollover
Selling My Shares

I have no idea what I am doing and am just trying to take this money out and pocket it so I can invest it elsewhere.
 
Oct 25, 2017
13,630
U
Total 401k noob here.

Left a job after 4 years and I'm trying to pull out my 401k there.

And I see things like:

"Put Option"
Lump Sum/Defer/In-Kind Direct Rollover
Rollover
Selling My Shares

I have no idea what I am doing and am just trying to take this money out and pocket it so I can invest it elsewhere.
Uhhhhhh you don't want to pocket the money. You have a pay taxes and a penalty if you do that.

Roll it over into your current employer's 401k or an IRA.
 

FliXFantatier

Master of the Reality Stone
Avenger
Oct 25, 2017
3,003
Los Angeles
I was just catching up on some book keeping as I was not motivated to do so during the market downturn of Q4. :p

Anyway I had not really appreciated how radically Fidelity had cut the prices on their index funds. Thank you Fidelity and thank you market competition.
Most funds have been consolidated accross my 401k, IRA and post tax accounts. :)
 

Chaosblade

Resettlement Advisor
Member
Oct 25, 2017
2,670
Hmm, think I am just going to roll it over into another 401k plan and start the Roth on my own.

Think I'm to try and do both.
That's the easiest way to go about it. A traditional to Roth conversion isn't a decision to be made lightly and gets into heavier number crunching financial advise, weighing the benefit of Roth's tax free growth versus the additional gains traditional would get from not paying those taxes now.

I'm in the same boat, my 401k is traditional and even after I roll it over I'll keep it that way, but my IRA is a Roth. I assume I'll be able to roll it over to my Vanguard account and have both the traditional and Roth there.
 

Prax

Member
Oct 25, 2017
583
Just read about new Vanguard portfolio ETF for Canadians:
https://www.vanguardcanada.ca/individual/mvc/loadImage?country=can&docId=18889

VEQT, basically 100% equities with home bias for your aggressive but too lazy to rebalance needs.

Allocation to the underlying funds as of December 31, 2018:
Vanguard U.S. Total Market Index ETF: 38.9%
Vanguard FTSE Canada All Cap Index ETF: 30.0%
Vanguard FTSE Developed All Cap ex North America Index ETF: 23.6%
Vanguard FTSE Emerging Markets All Cap Index ETF: 7.5%

I don't have that much in liquid funds, but I'm finally making enough that I'm heading past the next tax bracket so while I was making moves to open and invest in an RRSP and saw this come up.

(there's also a more conservative one: VCIP - 20/80)
 
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