PP for a young investor

[foglifter]

My daughter started her first job and the company has just bumped the 401(k) match to 6% (well, they also shut down the pension plan on the other hand  ). So to get the full match she needs to contribute at least 6%. Given that she also needs to build her emergency fund and start paying her college loans this is realistically a maximum she can set aside for retirement at this time. So my original plan for opening an IRA and use it for gold and LTT while using 401(k) for cash and stocks can't be implemented yet.

Hence a question: what asset allocation strategy would make sense for her in her first years while she's limited to her 401(k) investment options? The plan offers a handful of SSgA institutional index funds with pretty low expense ratios and a few active target retirement funds. The index funds have no tickers according to the plan information so I included the underlying indices:

Stable Value Option
Bond Index Fund  (Barclays Capital U.S. Aggregate Bond Index)
U.S. Large Cap Index Fund (S&P 500 Index)
U.S. Mid Cap Index Fund  (S&P MidCap 400 Index)
U.S. Small Cap Index Fund  (Russell 2000 Index)
International Index Fund  (MSCI EAFE)
Real Estate Index Fund  (Wilshire REIT Index )


Thanks! 

[Pkg Man]

I assume there is no self-managed brokerage option?  If you want your daughter to stay reasonably close to the PP, then the Stable Value, S&P500, and Aggregate Bond Index would be my recommendation (one-third each). 

But if it were me I would add the EAFE and perhaps MidCap as well (more or less one-fifth each, depending on taste).  Given that there may be a lot of ground to make up later in Treasuries and Gold, this might be best and just treat the EAFE and MidCap as part of the VP.  Once the LTT and Gold portions are filled in the Bond Index could be sold off and added back to the Stable Value and S&P 500 fund. 

While this is a lot in equities, it is still less than the "own your age in bonds" adage.  And although I am a believer in the PP, I think it is wise to have some pure international exposure in the VP.

I am sure you will get a variety of opinions on this.

[KevinW]

None of those fund options are suitable for the gold or bond portions of the Permanent Portfolio.  If/when your daughter can stretch to fund a Roth, then you could use a brokerage account to buy gold and/or bonds and it would become feasible to implement a PP.

In the mean time, my $.02 is to use a different conservative investing strategy.  Contrary to most financial advisors I think new young investors should invest conservatively so they get positive feedback that investing actually works.  Also, in the first few years the portfolio is small and so making consistent contributions is much more important than investment returns.  If the PP will be an option within 1-3 years I might just put everything in the bond index fund for now.  If the PP horizon is farther out I would use a conservative Boglehead style portfolio, with 50%-70% in the bond index and the remainder in some combination of the S&P500 and EAFE indices.  You could also use the "retirement income" target fund, although those tend to have high expense ratios and I think it's best to be vigilant about expenses from the very start.

[foglifter]

Pkg Man and KevinW, thanks for your input.
There is a Self-Managed Account option, but it is expensive:
- $25 annual fee
- 0.10% additional annual "operating expense" (also charged on the core 401k account)
- $19.95 stock/ETF transactions 
- $5 fee for executed Limit Orders/Stop Orders 

I think it's better to wait until she saves enough to open an IRA in Fido or Vanguard.

As to the asset allocation, I decided to start with the following:
20% US Large Cap (S&P500)
20% International (MSCI EAFE)
20% Total Bond
40% REIT

I treat REIT portion as small cap exposure, so I give it a higher %% so it represents both small cap and REIT.

Pkg Man, would you mind elaborating on your idea of including stable value fund into the allocation? I think given her age total bond should be good enough.

[Pkg Man]

REVISED REPLY: 

As far as the Stable Value fund, it is likely close enough to use as the cash piece of a PP.  Not perfect, as I am sure it invests in other than ST Treasuries, but probably good enough.  The S&P500 fits the bill for stocks, but she would need to buy TLT and one of the Gold ETFs (I think I now prefer IAU).  Since she is just starting out the SV fund could be used to safely park the cash until a certain amount is accumulated, say 2 year's worth of 401K contributions, then buy into the other 3 PP assets.  That would be the most conservative approach, though not what I would do.

The only decision I might question is the 40% in REITS.  It doesn't fit in the PP and not what I like in the VP, but that's just my personal preferences.  Either way she can always begin a PP at a later point in time after she has accumulated a bit to work with. 

I wouldn't let the fees stop me from using the brokerage option down the road, especially if it meant several years delay in establishing a PP.  It is likely less than the fee for PRPFX and once the base amount is large enough she shouldn't be trading too often even while adding to her account. 

[foglifter]

Oh, I forgot to mention that I consider REITs as her VP, although it might not be the time yet to have a VP for her at all.

We'll see how it goes in terms of funds accumulation: I don't exclude an option of using SMA if her arrival to a full PP turns out to be delayed due to lack of funds.

[KevinW]

Hmm, well I wouldn't let your expenses(tail) wag your asset allocation(dog).  Meaning, you'd like her to use the PP, which is a conservative low-volatility portfolio, but the transaction costs are high so instead you'll advise her to use a high-volatility portfolio with 80% in equities  .  These are very different approaches, and I'm not sure I would put thousands of dollars into volatile assets just to save <$200 per year.

IMO asset allocation has a much larger impact than expenses, so one should first decide on an allocation, and then implement that plan in the cheapest way possible.  From personal experience, if you give a semi-invested investor advice on how to set up a portfolio, it can be difficult to get them to consider making changes later.  Also, if the plan is to hold 80/20 equities/bonds for a few years then switch to the PP, you are essentially betting on prosperity over that time frame, and I personally wouldn't do that right now.  This is why, if the PP is not an option, my general advice is to use a different conservative low-volatility strategy.

I agree that the fee structure is horrendous, but I also agree with Pkg Man that it may not be a show stopper.  Can your daughter mix the self-managed account with the provided index funds?  If so, she could implement a PP using

25% Stable Value Option (cash)
25% U.S. Large Cap Index Fund (stocks)
25% TLT (self-managed)
25% IAU/GLD/etc. (self-managed)

If she rebalances yearly, she would make 0-2 ETF trades each year, so the expenses would be $25-$65 plus the "operating expense."  Annoying, but in the same league as other household bills or the expense ratio on expensive funds like PRPFX.  As Pkg Man said, she could accumulate cash in Stable Value for 1-2 years to avoid fees at first.

But, I'm just a stranger on the internet, so do whatever makes you guys comfortable. 

[foglifter]

Yes. she can mix both core and SMA with up to 50% of the core balance eligible for use in SMA. Looks like this would perfectly allow for a pure PP allocation when time comes.

Given that her portfolio is currently in $$ range  there is no risking thousands of dollars yet. I will certainly scale back later. I also use this initial allocation for educational purposes as I explain her every position and want her to see how the positions fluctuate as time goes by.

Thanks guys, you've been very helpful!