PP Heresy: Recommendations for a Boglehead 401k

[hedgehog]

Quick question.

I did not want to open a new thread. I understand the permanent portfolio is called: the Permanent Portfolio. Simple.

But is there a name of a John Bogle Portfolio? Index Funds, etc. But do you have a fancy name for Bogle portfolios like the PP is named?

I understand if you adjust the Bogle portfolio with are you get the Life Cycle or Target Retirement portfolio but that is a little more advanced.

[Ad Orientem]

A Boglehead portfolio is a rather generic term for any portfolio that aims to do three things.

* Keeps fees and expenses to a minimum.
* Relies mostly or entirely on passive investing (indexing) with reinvested dividends
* Diversifies across bonds and stocks usually adjusting allocation to favor bonds as you get older

There is no magic formula. But a common Boglehead portfolio would be an S&P 500 index fund or near equivalent ETF and a total bond market index fund with 1% in bonds for every year of your age up to around 70%.  Some use static allocations like 60/40 or even 50/50 and just rebalance ever couple of years.

[LC475]

OK, one final question on the stock index funds...

I've got three low-cost Spartan stock index funds available in my 401k: SP500 (0.05%), Extended Market (0.07%) and International (0.10%).  Thoughts?  I was thinking splitting equally between the Extended Market and International indices.

You can create your own Total US Stock Market fund by combining the S&P500 and the Extended Market.  The S&P gives you all the big companies, and the Extended Market mops up the rest, the small caps.  Together, in the right ratio, it should be very similar to a Total Stock Market fund.

That is probably what I would do.

But then, I don't see the advantage of owning International stocks.  You get the privilege of paying higher fees, in exchange for the privilege of taking on currency risk.  No thanks.

[Ad Orientem]

OK, one final question on the stock index funds...

I've got three low-cost Spartan stock index funds available in my 401k: SP500 (0.05%), Extended Market (0.07%) and International (0.10%).  Thoughts?  I was thinking splitting equally between the Extended Market and International indices.

You can create your own Total US Stock Market fund by combining the S&P500 and the Extended Market.  The S&P gives you all the big companies, and the Extended Market mops up the rest, the small caps.  Together, in the right ratio, it should be very similar to a Total Stock Market fund.

That is probably what I would do.

But then, I don't see the advantage of owning International stocks.  You get the privilege of paying higher fees, in exchange for the privilege of taking on currency risk.  No thanks.

For a Boglehead portfolio with no gold? I would absolutely want some international stocks in there. Otherwise you are really exposed to inflation risks.

[LC475]

For a Boglehead portfolio with no gold? I would absolutely want some international stocks in there. Otherwise you are really exposed to inflation risks.

I thought TennPaGa said he already owned lots of gold (about 25%, just as recommended), it's just in a different account.

Anyway, I do not think that owning international stocks protects you from inflation.

Think about it: imagine the US Dollar in high inflation.  Are interrnational stocks going to be doing well?

My own answer is a strong "not necessarily!" to that.

[Ad Orientem]

For a Boglehead portfolio with no gold? I would absolutely want some international stocks in there. Otherwise you are really exposed to inflation risks.

I thought TennPaGa said he already owned lots of gold (about 25%, just as recommended), it's just in a different account.

Anyway, I do not think that owning international stocks protects you from inflation.

Think about it: imagine the US Dollar in high inflation.  Are interrnational stocks going to be doing well?

My own answer is a strong "not necessarily!" to that.

Perhaps I misread the train of comments. I thought we were discussing a Boglehead portfolio for a 401K without gold. International stocks give you an element of currency diversification that without gold I think would be critical. If the US Dollar is being debased chances are most other currencies will be rising against it. Is it ideal? No. But I think it's the best Plan B if precious metals are not part of the portfolio.

[LC475]

I can only buy gold in my rollover account, and pretty soon, it is going to need to be 75% gold. So I may end up going with AO's BH approach on the next rebalancing.

I just encountered an unanticipated drawback of having split my PP across a 401k and an IRA due to lack of gold availability in the 401k:

A rebalance band has been triggered due to the drop in gold.  However, because of my IRA composition (57% gold, 46% treasuries, and 7% cash), it's value has been dropping alot lately.  So if I rebalance and try to maintain the PP, my IRA will be over 85% gold.  Obviously, if this would happen again (a rebalancing band triggered by gold at a lower bound), I would be unable to rebalance.

So I'm very likely now to BH my 401k with the 25% SP500, 25% international stock index, and 50% bond fund recommended here and keep the PP in my IRA only.  When I change jobs, I will roll over the 401k into the IRA and go full-on PP again.

That said, I'm glad I didn't wrack my brain my trying to anticipate rebalancing scenarios when I set the PP up a couple years ago.

He has gold, he just can't get much more (for now).  The gold is in a different account, the IRA.  The 401k will be switching over to stocks and bonds, since that's what's available to it.  My understanding is that the IRA will be retaining the gold position.  He is not going to be selling the existing gold, rather will be buying more of it to rebalance.  Eventually, if gold continues to fall, this will become impossible, once gold constitutes 100% of the IRA.

Conceptually, it should be considered all one portfolio, even though it's spread over different accounts.  So going "Boglehead" (stocks and bonds), or even pure stocks, or pure bonds, or pure cash within the 401k is not any problem.  It's the total makeup that matters.

[LC475]

For a Boglehead portfolio with no gold? I would absolutely want some international stocks in there. Otherwise you are really exposed to inflation risks.

I thought TennPaGa said he already owned lots of gold (about 25%, just as recommended), it's just in a different account.

Nah. 

I have HBPP's in both my rollover IRA and Roth IRA.  My 401k (where I don't have access to gold) is about 2.5x as big as the sum of those two.

Ahh, I get it.  I had misunderstood.  I thought you intended to do the plan of buying more gold to make the IRA 75% or 85% gold.  Instead you plan on selling the gold you have (currently 57% of the IRA) down to make it 25% of the IRA.  Is that correct?

I personally would say, why not just keep everything balanced, even if you have to make the IRA 100% gold?  That way, you have 25% (or so, maybe eventually 20% and then 15% if gold keeps falling down below $1000/oz and beyond) of the money that's precious to you in gold, which will protect you in case of inflation.  You have foreseen a coming problem of not being able to buy enough gold, and it's true that having only 15% of your money in gold is not ideal, but it seems that in answer to that problem you are going the wrong direction and selling off even what little you have.  If your 401k is 2.5 times the size of the IRAs (and growing), then the IRAs are 28% of your portfolio.  25% of 28% will be just 7% (and shrinking).  In the event of inflation, will that 7% or less slice of gold grow enough to offset losses in the other 93%?

But, I don't know your whole situation.  It seems like you intend this to be only a short-term expediency.  Who knows, this could be a great plan for you.  But I wonder, if since you intend to go "full-on PP" again soon, it might save on some transaction fees to not be selling off gold now, only to buy it again not much later.  Just things to think about, though you've probably already thought of them.  But those are my thoughts, anyway.

[LC475]

If the US Dollar is being debased chances are most other currencies will be rising against it. Is it ideal? No. But I think it's the best Plan B if precious metals are not part of the portfolio.

But which currencies? It depends on why the US dollar is experiencing inflation.  In many sorts of collapse scenarios, the dollar would take down many other currencies with it.  The dollar is not the Kroner.  It would not just quietly collapse in its little corner of the world, leaving everyone else OK.  And many other currencies have the same weaknesses -- lack of convertability, potential for central bank mismanagement -- as the dollar.  Also, several currencies are actually pegged to the dollar.  And even if a foreign currency is strong against a crashing dollar, that does not mean that the economy of that foreign country will be prospering.  I do not believe in "decoupling" like Peter Schiff.  Rather, I think it most plausible, right now and for at least several years to come, that if the US dollar collapsed the economies of nearly all nations all around the world would be hit and hit hard.

So, to my analysis, it goes beyond a Plan A and a poor Plan B substitute.  That would imply they are two different ways to try to accomplish the same thing.  The goals of Plan A and Plan B are not planning for the same thing at all.

Plan A is making a bet on US dollar inflation
Plan B is making a bet on prosperity in overseas economies

They really are not related.

[LC475]

Yeah, hassle is bad.  There also is definitely value in the mere fact of having everything neatly wrapped up in one single bookkeeping bundle.  In theory we can abstract away from accounts and put it all back together again, but, like you, I like things self-contained and decided I'd be happier that way when setting up my Permanent Portfolio recently (see my thread on that).

I'm glad you found a good solution.  I'm sure it will just be a stepping stone to something even better!

[hedgehog]

There is no magic formula. But a common Boglehead portfolio would be an S&P 500 index fund or near equivalent ETF and a total bond market index fund with 1% in bonds for every year of your age up to around 70%.  Some use static allocations like 60/40 or even 50/50 and just rebalance ever couple of years.

Great points. I didn't hear about the 1% rebalance to bonds per year. So if you are 25 you start with 0% bonds or 25% bonds?

[Ad Orientem]

There is no magic formula. But a common Boglehead portfolio would be an S&P 500 index fund or near equivalent ETF and a total bond market index fund with 1% in bonds for every year of your age up to around 70%.  Some use static allocations like 60/40 or even 50/50 and just rebalance ever couple of years.

Great points. I didn't hear about the 1% rebalance to bonds per year. So if you are 25 you start with 0% bonds or 25% bonds?

Bogleheads aren't really too dogmatic about numbers and percentages. They operate on the theory that everyone's risk tolerances will be somewhat different. Your asset allocation will depend on your individual situation and what you are comfortable with

If I were 25 and inclined to use a Boglehead portfolio, and assuming I had good job security and a decent cash cushion for emergencies, I would probably start with a 70/30 allocation and adjust it every five years or so to reflect my getting closer to retirement. But again this is a personal choice. That kind of allocation will have some pretty heavy volatility.  Of course if you are only doing the Boglehead in your 401K and are doing a PP in the rest of your investments you can afford to shrug off some of that volatility when you are in your twenties.

Your mileage will vary.

[hedgehog]

Thanks.

[PFG]

Great discussion here. In a simialar boat as many.

I do have access to a S&P 500 stock index.

As for bonds, there is a Bond Market Account (TIAA):

http://www1.tiaa-cref.org/public/perfor ... /1006.html

http://enroll.tiaa-cref.org/resources/ffs/194408407.pdf

Looks like it mirrors the Barclays US Agg Bond Index. Thoughts on using this for my bonds?

It would not be the ONLY bonds in my PP, just the only bonds in my 401.

.44% expense ratio. Not good, not awful.

Thoughts?

[rhymenocerous]

Since most of my contributions go into my 401k, I just try to maintain a 50/50 split between S&P500 / US Bond Index there.  In my Roth and taxable accounts, I try to keep my LTT and gold holdings equal to each other.  I technically count the US Bond Index as my "cash."  It's not a perfect solution, but I think it's good enough.

[PFG]

Thanks for the reply. I can also use TGBAX: http://quotes.morningstar.com/fund/tgbax/f?t=tgbax

Any reason to use that over the TIAA fund? A little extra expense.

Trying to find the "least stinky sock" to help give my 401 some diversity and not be 100% stock.

[rhymenocerous]

I'd stick with the index fund.  It has lower expenses and does not change its holdings based on what the managers anticipate happening in the market.  It also looks like it has a higher credit quality.

[Lowe]

If I were 25 and inclined to use a Boglehead portfolio, and assuming I had good job security and a decent cash cushion for emergencies, I would probably start with a 70/30 allocation and adjust it every five years or so to reflect my getting closer to retirement. But again this is a personal choice. That kind of allocation will have some pretty heavy volatility.  Of course if you are only doing the Boglehead in your 401K and are doing a PP in the rest of your investments you can afford to shrug off some of that volatility when you are in your twenties.

I am a guy in my late 20s.  While I have a PP in a taxable account, I have no access to gold in my IRA, which is with Fidelity.  In trying to devise a Boglehead portfolio in the fashion you describe, I read through this thread for advice.  What I have in mind is the following, or something close to it.


35% - FTSMX - Spartan Total Market Index (ER 0.10)

35% - FSIIX - Spartan International Index (ER 0.20)

30% - FIBIX - Spartan Intermediate Treasury Index (ER 0.20)


The average maturity in the Treasury fund is 7 years.  I considered a barbell between shorter and longer funds, but this should be about the same.  This will be a volatile portfolio, and does not cover much at all for inflation risk, so I am open to alternatives.

Some of these I can only get through a brokerage window, or something, so I may not be able to get this exactly. Might have to switch in the Spartan 500 for domestic equity, and the Vanguard equivalent for Int'l, but the results should be the same.


EDIT : Meant to write FIBIX, not FLBIX.

[KevinW]

Well, like I said way back on page 1, I advocate a more conservative stock allocation somewhere in the 30-50% range. So my recommendation is to increase the allocation to FIBIX and decrease FTSMX and FSIIX proportionally.

I am a guy in my late 20s.  While I have a PP in a taxable account, I have no access to gold in my IRA, which is with Fidelity.  In trying to devise a Boglehead portfolio in the fashion you describe, I read through this thread for advice.  What I have in mind is the following, or something close to it.

Are you sure about this? A Fidelity brokerage IRA should let you buy any ETF. And Fidelity has an in-house gold buying service:
https://www.fidelity.com/trading/invest ... r-platinum
If this is an IRA, and not a 401k, you also have the option of rolling it over to a brokerage that meets your needs better.

[Lowe]

Thanks for the advice, Kevin.  It is a stock heavy allocation.  I figured to decrease the equity portion over time, as Ad Orientem described.

60/40 or 50/50 might be a better starting point.  I will re-read your comments.  I was considering Wellesley, alone, as an alternative.  The expense ratio is somewhat higher for that.

...

I may not be using the term IRA correctly.  It is a 403b, which is the same thing as a 401k.  I was told by a rep that ETFs are not allowed for my plan, even through the BrokerageLink option, which expands the selection of mutual funds.

I did not know that one could buy physical gold through Fidelity.  I will ask about that.

[Ad Orientem]

Hi Lowe,
First you need to give yourself an honest gut check. How much volatility can you really handle? 70/30 is not for the faint of heart or anyone who might need any of that money in the next five years. That said if you can handle it then I have no heartburn with your fund choices. A few thoughts though.

For a boglehead type portfolio you might want to go with a total bond market index fund. In any event BND is pretty heavy on treasuries already. But it has other stuff to add some zip to its yield. Boglehead portfolios don't rely on volatility for their gains to the degree that the PP does. They like yield and dividends.

[Lowe]

@ Kevin + Ad Orientem

For some time I had been allowing my contributions to go into the default, one of the Fidelity Target Date funds.  I don't think those funds are terrible, but they are very equity heavy, until the glide path, and they all have ERs ~0.65.

Yesterday I finally rebalanced into something more reasonable.  It is the Rick Ferri 3 fund portfolio: 60/40, not as aggressive as I had originally planned.  It took this long for me to pull the trigger, because I am usually busy with work, and I just don't have the head space for extensive research.  I took advice from you both, reducing equity, and using a total bond index instead of treasuries.  I was able to get the advantage class for each fund (Adv).


%ClassInv ER Adv ER
40US StockFSTMX 0.10 FSTVX 0.07
20Int'l StockFSIIX 0.20 FSIVX 0.17
40BondsFBIDX 0.22 FSITX 0.17


BTW, I did ask Fidelity about buying physical gold, but that is apparently not allowed for my plan.  Since ETFs are also not allowed, a PP is out of my reach.  However I am fairly satisfied with the above.

[Ad Orientem]

@ Kevin + Ad Orientem

For some time I had been allowing my contributions to go into the default, one of the Fidelity Target Date funds.  I don't think those funds are terrible, but they are very equity heavy, until the glide path, and they all have ERs ~0.65.

Yesterday I finally rebalanced into something more reasonable.  It is the Rick Ferri 3 fund portfolio: 60/40, not as aggressive as I had originally planned.  It took this long for me to pull the trigger, because I am usually busy with work, and I just don't have the head space for extensive research.  I took advice from you both, reducing equity, and using a total bond index instead of treasuries.  I was able to get the advantage class for each fund (Adv).


%ClassInv ER Adv ER
40US StockFSTMX 0.10 FSTVX 0.07
20Int'l StockFSIIX 0.20 FSIVX 0.17
40BondsFBIDX 0.22 FSITX 0.17


BTW, I did ask Fidelity about buying physical gold, but that is apparently not allowed for my plan.  Since ETFs are also not allowed, a PP is out of my reach.  However I am fairly satisfied with the above.

No real complaints here.

[KevinW]

Yeah, this seems simple and sensible.

[Libertarian666]

@ Kevin + Ad Orientem

For some time I had been allowing my contributions to go into the default, one of the Fidelity Target Date funds.  I don't think those funds are terrible, but they are very equity heavy, until the glide path, and they all have ERs ~0.65.

Yesterday I finally rebalanced into something more reasonable.  It is the Rick Ferri 3 fund portfolio: 60/40, not as aggressive as I had originally planned.  It took this long for me to pull the trigger, because I am usually busy with work, and I just don't have the head space for extensive research.  I took advice from you both, reducing equity, and using a total bond index instead of treasuries.  I was able to get the advantage class for each fund (Adv).


%ClassInv ER Adv ER
40US StockFSTMX 0.10 FSTVX 0.07
20Int'l StockFSIIX 0.20 FSIVX 0.17
40BondsFBIDX 0.22 FSITX 0.17


BTW, I did ask Fidelity about buying physical gold, but that is apparently not allowed for my plan.  Since ETFs are also not allowed, a PP is out of my reach.  However I am fairly satisfied with the above.

Can you buy GTU? That is very similar to physical gold although obviously it isn't as shiny.