PP Strategy And My 401k

[Ad Orientem]

2008-09 was a highly unusual event against which only cash and LTTs really held up.

Some unusual, never to be repeated event happens every 5 to 10 years.
Just sayin...

Do what? A financial crisis that threatens the stability of the entire financial system and brings the world to the brink of a catastrophic deflationary depression is an every five or ten year event? I must respectfully disagree. You would have to go back to 1931-32 to find anything even remotely comparable. Thank God.

[flyguy]

Joining this forum was a great decision. You guys are so smart and full of great insight. Fistey also, in a good way. One final question to ask. I've researched many funds thus far, and I came across AONIX. Its been unbelievably stable, and in 2008 it barely hickupped. Given its stable but very modest growth, would this be a fund you would invest in? Would love some more input. Thanks...

[Ad Orientem]

Joining this forum was a great decision. You guys are so smart and full of great insight. Fistey also, in a good way. One final question to ask. I've researched many funds thus far, and I came across AONIX. Its been unbelievably stable, and in 2008 it barely hickupped. Given its stable but very modest growth, would this be a fund you would invest in? Would love some more input. Thanks...

A quick glance suggests it's a fund of funds. At least some of those funds could be actively managed. I am not wild about the ER which, although not brutal, is still higher than what you are likely to get from an indexed portfolio. Remember fees and expenses kill long term returns. But no, I didn't see anything that flashes any alarm bells. For what it's worth if your looking for a one stop shopping - moderately conservative fund, I think you will get better long term returns with a much lower ER going with VWINX. But AONIX held up a little better during the shit storm of 2008.

The main problem with both is that they could be vulnerable to any sudden spike in inflation. That's why I really like portfolios to have a little currency diversification, gold being preferable. But in the absence of gold some international equity exposure, perhaps 10%, is a nice hedge.

[Mark Leavy]

2008-09 was a highly unusual event against which only cash and LTTs really held up.

Some unusual, never to be repeated event happens every 5 to 10 years.
Just sayin...

Do what? A financial crisis that threatens the stability of the entire financial system and brings the world to the brink of a catastrophic deflationary depression is an every five or ten year event? I must respectfully disagree. You would have to go back to 1931-32 to find anything even remotely comparable. Thank God.

I'm probably just a bit burned from having lived through the gas crisis of the 70's, the gold crisis of the 70's, the stock market crash of 1987, the bond market crash of 1994, the tech crash of 2002 the stock market crash of 2008 the dip in 2012...

Granted, these weren't all "catastrophic" events, but if you were living through them at the time and had any money on the line (or hell, just trying to buy gas to go to work) they were all pretty much "once in a lifetime events".

And 2008 didn't even compare with 1987 or not being able to buy gas in 1978.  Only 40% down was a cakewalk.

[flyguy]

I agree but all Vanguard funds through my program have a $50 transaction fee. Sux.

[sophie]

I agree but all Vanguard funds through my program have a $50 transaction fee. Sux.

That is CRIMINAL.  And very anti-Vanguard.

Does the $50 transaction fee apply to new contributions, or only to rebalances?  In either case, minimizing these fees should be a priority for you.

Are the Vanguard target retirement or Lifestrategy funds in your plan?  If I were you I'd pick one of those and put 100% into that fund.  You would have just one new contribution per pay period instead of multiple, rebalancing is internal to the fund, and the increased ER is minimal.  If none of these funds are available, consider a balanced fund option like Wellesley.  The ER is slightly higher than target date, but it has an extensive track record.

[LC475]

flyguy, you never posted the stock list.

How to upload the 80-page document.... how about upload to Dropboxand then just post the link?

[flyguy]

Sophie,

Every single Vanguard fund in my program has a $50 Schwab transaction fee. It's on Schwab's end only.  I have multiple target funds available with no load, no transaction fee.  One of them is Schwab's own target fund SWERX, target 2040.  Let me know what you think about that one.  Would love to just be in 1 fund, but I want to make sure it's a good one.  Thanks so much.

[sophie]

Yes, definitely find out EXACTLY what will trigger that $50 fee.

What are the no-commission Schwab funds you have access to?  I'm not going to plow through 80 pages I'm afraid, but you could pick out the best options (index funds, target date retirement) and post a list.

A quick google search revealed that SWERX has an ER of 0.8 and is 80% stocks.  That's too much stocks in my opinion.  Instead of picking by target date year, I'd select based on how you want the asset allocation.  Also, ER of 0.8 is pretty high.  Vanguard's 2040 fund has an ER of 0.18.  Thus, a $10K investment would cost you $62 dollars more per year with the Schwab fund, which would more than cover one instance of the $50 fee.

[flyguy]

Hi,

Sorry it's taken so long to respond. Life has been... crazy. So, I just want to get everyone's opinions on what I've decided to do about my 401k issue. I have gone back and fourth with different ideas, and have spent dozens of hours investigating different strategies and options. Here are the facts:

1) I have spoken with a Schwab rep, and got an explanation regarding the $50 transaction fee on all Vanguard funds. They consider Vanguard competition, so they want to discourage customers from purchasing Vanguard funds. So, I've decided to stay within the Schwab fund family to keep costs as low as possible.

2) I want to have a self contained PP in my 401k to keep things simple.

3) I want to get as close as possible to HB's strategy with a 4x25 asset allocation.

Here is what I've done, after investigating EVERY single option available to me in my plan, keeping in mind cost effectiveness, simplicity and staying as true as possible to HB's plan:

SWTSX -25%
SWLBX -25%
SWMXX -25%
TGLDX -25%

Now I know it's not perfect for obvious reasons. However, if we look at TGLDX for example and compare it to the historical spot price of gold, it matches up almost perfectly. Why would we believe that when gold shifts back into a bull market, TGLDX would not follow?

Please chime in and let me know your thoughts.  Really looking forward to hearing from all the smart folks here.

Thanks!

[Ad Orientem]

Hi,

Sorry it's taken so long to respond. Life has been... crazy. So, I just want to get everyone's opinions on what I've decided to do about my 401k issue. I have gone back and fourth with different ideas, and have spent dozens of hours investigating different strategies and options. Here are the facts:

1) I have spoken with a Schwab rep, and got an explanation regarding the $50 transaction fee on all Vanguard funds. They consider Vanguard competition, so they want to discourage customers from purchasing Vanguard funds. So, I've decided to stay within the Schwab fund family to keep costs as low as possible.

2) I want to have a self contained PP in my 401k to keep things simple.

3) I want to get as close as possible to HB's strategy with a 4x25 asset allocation.

Here is what I've done, after investigating EVERY single option available to me in my plan, keeping in mind cost effectiveness, simplicity and staying as true as possible to HB's plan:

SWTSX -25%
SWLBX -25%
SWMXX -25%
TGLDX -25%

Now I know it's not perfect for obvious reasons. However, if we look at TGLDX for example and compare it to the historical spot price of gold, it matches up almost perfectly. Why would we believe that when gold shifts back into a bull market, TGLDX would not follow?

Please chime in and let me know your thoughts.  Really looking forward to hearing from all the smart folks here.

Thanks!

Sorry for the delay in responding. The site went tits up on me and it took at least twenty minutes to reload the page. Back to the question at hand...

Regrettably what you have is not an HBPP. Your bond fund is not US Treasury and its duration is way too short. The gold fund is mostly mining stocks. During the recent bull market in Gold, the miners consistently underperformed the real thing, often very badly. Gold is gold and mining stocks are... well, just stocks. I have serious doubts that you can create a functional HBPP within the constraints of your 401K. Those doubts increase dramatically if you are committed to using Schwab funds. It sucks but this is not uncommon with 401Ks. Very often it's either flatly impossible, or just not worth the aggravation of trying to jam the proverbial round peg into the square hole.

My advice in these cases is to just go with a Jack Bogle special and call it a day. Basically a Boglehead portfolio, although not ideal, is a perfectly acceptable alternative in these kinds of situations. Call it Plan "B." In your case I'd just stick 65% in SWLBX (although it's tad bit pricey) and the rest in SWTSX. Rebalance when SWLBX hits 55% or 75% and move on. You can run the PP in your other accounts.

[LC475]

SWTSX -25%
SWLBX -25%
SWMXX -25%
TGLDX -25%

How about:

SWTSX for stocks.  Great!
SWLBX TLO for bonds.  TLO is one of the commission-free ETFs in Schwab's OneSource ETFs program.
SWMXX for cash: hey whatever, probably good enough.  Wouldn't SCHO be even better, though?
SGOL for gold. Again, should be available and free through Schwab ETF OneSource™.

http://www.schwab.com/public/schwab/inv ... ceETFs.asp

Are these not available to you?  Schwab should be all for you getting these -- they're not from competitors, they're the stuff Schwab wants you to get.

[Ad Orientem]

How about:

SWTSX for stocks.  Great!
SWLBX TLO for bonds.  TLO is one of the commission-free ETFs in Schwab's OneSource ETFs program.
SWMXX for cash: hey whatever, probably good enough.  Wouldn't SCHO be even better, though?
SGOL for gold. Again, should be available and free through Schwab ETF OneSource™.

http://www.schwab.com/public/schwab/inv ... ceETFs.asp

Are these not available to you?  Schwab should be all for you getting these -- they're not from competitors, they're the stuff Schwab wants you to get.

From the opening post:

4) Trading ETF's is not allowed by my company program.

That pretty much why I think in this case a Boglehead type portfolio is the best option.

[sophie]

+1.

Here's what I did:

50% total bond
40% total market (stocks)
10% international stocks (total market ex-US)

Either set to rebalance annually, or check in once per quarter and rebalance if needed.  Set yourself some rebalance bands, e.g. 40% of each allocation.  So you'd rebalance if international stocks stray below 6% or above 14%, etc.

I saw that some other people advocated less of an exposure to stocks (e.g. 40%).  That's fine too.  This portfolio will drop in a 2008 scenario, but it'll be reasonably resilient with small dips like we've had in the past few months.

Forget the target date funds.  I suggested that when I thought that you were incurring $50 transaction fees on every purchase.  This portfolio with auto-rebalance does the same thing as a target fund but with about half the ER.  Easiest money you ever made.

[Ad Orientem]

50/50 works if you can handle a little more near term volatility. Just remember that stocks are far more volatile than bonds.

[LC475]

Ahh.

flyguy, does your plan allow direct roll-over into a self-directed IRA?  It very well might.  In that case, you could use the 401k for the stock portion, as it has a very good stock fund, and roll the rest over into an independent IRA where you can do cash, bonds, and gold.  And then periodically rebalance by rolling over more funds as the stock portion becomes too big from your monthly automatic contributions.  Just a thought.  Maybe check into it.