Gyroscopic Investing

Greetings, I'm new, but I've been doing lots of reading here and in the old Boglehead threads. GREAT forum, I really appreciate it.

My big problem with moving to the PP is that 75% of our assets are in a restrictive Fidelity 401K. My husband and I have BrokerageLink available (though only for 20% of the total account), but we are not allowed to buy stocks or ETFs, only fecking mutual funds. The other 25% of everything is in Vanguard Roth IRAs.

I am aware that VUSTX isn't nearly as good as TLT for the LT Treasury allocation, but I can't buy enough TLT in our other accounts to do the job (and need to buy GLD in those, as we can't get that in the main 401K, either).

Are there any mutual funds that better approximate TLT, or is VUSTX the best I can do under the circs?

Also, any thoughts on the best Fidelity choice for the cash?

Thanks for being here, all.

It is crap like this (401k stubbornness in asset choices) that gives me faith that LTT's and gold will continue to do their job within the PP.

Sorry no insights for you.  You'll get better responses within the next few hours from people that know the funds better than I do.

Good work btw... most people give up after the 401k stupidity.

MediumTex has suggested that a 50/50 combination of VUSTX and EDV approximates 25-30 year nominal bonds.  EDV is an ETF and hence off the table, but you might consider using a similar mutual fund.  I haven't researched this before, but after some Googling it looks like PIMCO and American Century do have zero coupon funds, so they do exist.  So this is one option.

If it were me I'd just use the Spartan long term treasury fund.  It's not perfect but IMO it's an acceptable compromise.

For cash I'd use a combination of FDLXX and the Spartan short term fund.

I'm in your shoes, Liz - a lousy 401(k) with only one S&P 500 index fund. Let me explain what I do and see if you can do something similar. I have Pimco total return fund available in my 4011(k). So I put half of my bond portion into this fund and another half into EDV in my Roth IRA. This gives my a more or less good simulation of TLT. See if you have any total-bond funds offered in your 401(k) (there should be at least one based on my experience) and consider using one.

Now, you say you need to use your other accounts for gold. If these are IRA-type accounts with unlimited investment choices then I'd buy TLT or EDV or FLBIX in them and buy gold in a taxable account instead (GTU would be a good option tax-wise). You don't need to occupy precious tax-deferred space with gold as it doesn't produce capital gains or dividends.

What a great, helpful group! Thanks so much for the responses.

If it helps anyone give more advice, these are the Fido bond choices in the restricted 401K (and, as mentioned, I have 20% of the total available to buy funds of any kind, Fido or other):

FID CAPITAL & INCOME

FID GNMA

FID HIGH INCOME

FID INFLAT PROT BOND

FID INST SH INT GOVT

FID INTM GOVT INCOME

FID NEW MARKETS INC

FID STRATEGIC INCOME

FID US BD INDEX

FIDELITY GOVT INCOME

PIM TOTAL RT INST

The cash-parking choices are:

FID RET GOVT MM

FID RETIRE MMKT

INVESTMENT CNTRCT FD

The contract fund doesn't let your money out for 90 days after moving into it, just to make things extra-annoying.

Also, my first baby step into the PP was to buy the 10K minimum of FLBIX within the BrokerageLink. (That's about 20% of our BrokerageLink funds for now.)

These big-brother restrictions feel like Fidelity has our money imprisoned, very frustrating. My feeling is that if they're making it this hard to allocate the PP way, that makes it even more likely that the PP is a very good idea.

Furthermore, as long as I'm at it and since we're among friends, in the interests of optimal advice about deploying what within which accounts, here is what we're looking at:

Restrictive Fido 401K: $235,000 (only $50,000 of this can be used in BrokerageLink, but ONLY for funds, no stocks or ETFs)
Vanguard Roth IRAs: $130,000
Cash in various crappy, paying-almost-nothing bank accounts: $100,000

Lots of good ideas above.

Another thing to consider is the possibility of using PRPFX in your brokerage window.  That's just something to think about, though I don't know if it helps the overall situation that much.

As I recall, there are now some longer duration than VUSTX treasury mutual funds out there.  In a bind, though, VUSTX is certainly better than nothing.

In situations like this, EDV can be a great tool--if you only have a little IRA space for LT bonds, EDV could be a nice balancer to VUSTX (as mentioned above).

Overall, I would say do the best you can with what you've got.  It doesn't need to be perfect to work.

Liz L. wrote: What a great, helpful group! Thanks so much for the responses.

If it helps anyone give more advice, these are the Fido bond choices in the restricted 401K (and, as mentioned, I have 20% of the total available to buy funds of any kind, Fido or other):

.....

PIM TOTAL RT INST

.....

The cash-parking choices are:

.....

INVESTMENT CNTRCT FD

The contract fund doesn't let your money out for 90 days after moving into it, just to make things extra-annoying.

PIM TOTAL RT INST = PTRAX if I'm not mistaken? That's the one I mentioned in my post above. A great fund overall, although it can't replace LT bonds portion completely. So FLBIX through brokerage window and some more (FLBIX or EDV or TLT) in other accounts would do the trick.

As to cash portion, is INVESTMENT CNTRCT FD some sort of a stable value fund? It might be a better option than FRTXX, although you you should realize that it bears additional risk. Another option could be high-yield savings accounts and health savings accounts (if you are eligible):
http://www.depositaccounts.com/savings/
http://www.depositaccounts.com/savings/ ... ounts.html

Liz L. wrote: These big-brother restrictions feel like Fidelity has our money imprisoned, very frustrating. My feeling is that if they're making it this hard to allocate the PP way, that makes it even more likely that the PP is a very good idea.

It's not like Fidelity is evil, it's just your particular plan is restrictive. But given that you have PIMCO fund and a brokerage link you are in a much better situation than many investors. Better plans usually come with higher administrative costs for employer. My previous 401(k) was even worse - no brokerage window and Fido-only active funds.

Liz, one of the main points to keep in mind when planning your assets placement - bonds are the worst in terms of tax efficiency, so you should try to use your tax-deferred or tax-free accounts for bonds first and then work with the room left to place stocks, cash and gold. Even if you come to a point you have to buy stocks in a taxable account any TSM or S&P500 index fund is very tax-efficient as it usually has a low turnover rate.

Eh, those bond options are more limited than I thought.  So far all the Fidelity 401ks I've seen have had the full Spartan line available.

Another idea that's been suggested here is to merge the 25% cash and 25% bond allocations into one 50% intermediate treasury allocation.  Again not ideal, but we're making lemons out of lemonade.  I'm not very familiar with those funds, but with that said the closest thing to an intermediate treasury index appears to be FID INTM GOVT INCOME.

KevinW wrote: Another idea that's been suggested here is to merge the 25% cash and 25% bond allocations into one 50% intermediate treasury allocation.  Again not ideal, but we're making lemons out of lemonade.  I'm not very familiar with those funds, but with that said the closest thing to an intermediate treasury index appears to be FID INTM GOVT INCOME.

It's not pretty, but that would probably be a good approach, given the constraints.

MediumTex wrote:

KevinW wrote: Another idea that's been suggested here is to merge the 25% cash and 25% bond allocations into one 50% intermediate treasury allocation.  Again not ideal, but we're making lemons out of lemonade.  I'm not very familiar with those funds, but with that said the closest thing to an intermediate treasury index appears to be FID INTM GOVT INCOME.

It's not pretty, but that would probably be a good approach, given the constraints.

Here's the composition of the fund: http://fundresearch.fidelity.com/mutual ... /31617K303
It holds 65% in Treasuries, the rest is in Fannie/Freddie and some other mortgage-related stuff. Not ideal, but should work in this case.

Can you take out a loan against your 401k? 

Most plans will let you do this.  You usually have to pay yourself a small interest rate, but otherwise lose no money.  It can be a great way to move money around/rebalance, and you're free to put the "borrowed" money wherever you'd like.

Also, MT's plan of considering PRPFX is about as simple as it gets, and probably would be a great way to go if things start to feel too complicated for you.

I don't like the idea of synthesizing LT bond piece by combining a legitimate 100% treasury bond fund (TLT, EDV, VUSTX, etc) with a non-100% treasury bond fund like BND, which has holds non-US treasury bonds like Fannie Mae, Lehman Bros, etc. From what I understand, non-sovereign treasury bonds will not react strongly positively in a deflation scenario, as was shown in the Fall 2008 Financial Crisis.

AFAICT, this would be the hierachy from best to worse methods of achieving your LT bond allocation. Note that #1-4 consisting of exclusively 100% LT treasury bonds.

1. Hold a ladder of treasury bonds like craigr advocates, a bond ladder of 30 yr bonds with a remaining maturity bt 25 to 30 yrs, & once a year sell any bond that has a remaining maturity of 20 yrs.  Presumably when 1 needs to sell bonds to rebalance, they start with selling the bond with the shortest remaining maturity.  (Note: actually I don't completely understand how this process works, would be great if someone explained the process thoroughly, as well as explained the buy/sell trading fee & bid-ask spreads from different treasury bond custodians, like Treasury Direct (cost to sell bond?) & Fidelity (someone here said no trading fee at Fidelity?)

2. Hold a fund like TLT that is a reasonable approximation of #1, & may be cheaper expense wise for smaller accounts (TLT's expense ratio of 0.15% might be less than the transaction fee to buy/sell individual treasury bonds).

3. Synthetic TLT to create a combination of similar years to maturity & duration, using funds which are 100% US treasury bonds: For Vanguard Brokerage custodian customers, hold 50% EDV / 50% TLT, which is MediumTex's idea of a "synthetic TLT".  I am using this method currently.  (Side note: for VBS tax-sheltered accounts, having at least 1 of your funds be a mutual fund is nice in that it allows you to throw any "remainder money" into it since Vanguard mutual funds are in decimal units, which is not the case with the integer ETFs.

4. My hypothesis: Use EDV for the entire bond holding, but in 2/3 relation to the other stock/bond/cash assets.  Based on MediumTex's idea that EDV has 1.5 volatility in relation to TLT. See below.

5. Bad idea: Create a Synthetic TLT using a fund that is not 100% US treasury bonds, such as BND.

--

EDV for entire bond holding idea:

I asked the idea in another post about the possibility of using EDV for the entire LT bond allocation, BUT holding it in 2/3 ratio to the other asset types, given that EDV has ~1.5X the volatility of TLT.

I'd appreciate any comments/feedback on this idea.

eg for 4X25 PP, this would mean
stock, gold, cash each have 3 parts out of total of 11 parts ~27.3% each target allocation.  With standard 40% rebalancing bands, this would mean buying up to 27.3% if the asset falls to 16.4%, or selling down to 27.3% if the asset rises to 38.2% of the portfolio

EDV bond, 2 parts of a total of 11 parts ~18.1%.  Buy up to 18.1% if EDV falls down to 10.9%, sell down to 18.1% if EDV rises to 25.3%
--

Similarly, for a 3X33 non-cash PP, this would mean
stock & gold - each 3 parts out of a total of 8 parts ~37.5%, with standard 40% rebalancing limits of 22.5% to 52.5%.  To avoid ever having an asset equaling over half the port, 1 could use 30% rebalancing limits of 26.3% to 48.8%

EDV bond, 2 parts of 8 ~25%. 40% rebalancing limits of 15% to 35%. 30% rebalancing limits of 17.5% to 32.5%

Cabron, I think a lower allocation of EDV for long bonds is workable, but if one is prone to watching the performance of individual assets, could lead some to market timing. For myself, I really enjoy receiving the monthly interest, regardless of how the valuations are doing, from long bonds, and would miss that with EDV.

I was thinking the same thing as 6 Iron--in periods of relative stability you might miss the lower level of overall portfolio income generated by underweighting LT bonds by using zero coupons exclusively (I'm assuming we are talking about using EDV in lieu of individual zero coupon bonds; EDV generates actual quarterly income whereas zero coupon bonds do not).

I don't think there is any right answer to this issue.  As I recall, in "Why Te Best Laid Investment Plans..." HB seemed to endorse the approach cabronjames is suggesting, but later on in a newsletter talked about the larger traditional LT bond exposure being preferable because of the portfolio income issue.

Ultimately, it probably doesn't matter that much.  Whatever feels most comfortable to the individual investor might be the best guide in this area. 

Thanks, Tex, for correcting me. I wrongly assumed that EDV did not generate regular income.

6 Iron wrote: Thanks, Tex, for correcting me. I wrongly assumed that EDV did not generate regular income.

It doesn't exactly (the underlying bonds don't pay dividends) but the accrued interest is paid out quarterly, along with whatever the fund has to pay out at year end, which can be a lot if there were a lot of redemptions during the year.  I think it was 2009 when it paid out a $12 per share dividend at year end.  In a taxable account that would have been an unhappy surprise.

My understanding is that EDV should only be considered in a tax-sheltered account, even in addition to the rule that LT bonds are the priority for tax-sheltered.  IIRC EDV in a taxable account, may require yearly taxes beyond dividend taxes, even if 1 simply holds EDV during the yr (no sells or buys).

Thanks to 6 Iron, & MT for the feedback.

For me, considering the idea to use EDV in a 2/3X fashion I described, is a "401k lemonade" & "not enough tax-sheltered space" problem, as opposed to a personal preference.