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Old 07-11-2019, 05:08 PM
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401(k) Investment Advice


About 15 years ago, I set up a 401(k) account back when I working at a private company. I made pre-tax contributions to it for about 4 years, and then went to work for a public agency that does not have a 401(k) plan available. (It has a 457(b) plan instead, which I have also been contributing to.)

Anyway, I kept tabs on the 401(k). It has been orphaned since I left the company, so I can no longer make additional contributions (but I can move money around within it). When I first set it up, I put 50% of the contributions into an index fund, 25% into a large cap growth fund, and 25% into bonds for some reason. I remember reading something at the time in Consumer Reports that the best hands-off long-term investment strategy was to put your money into an index fund for the long haul, and to not worry about moving it to something less risky until you get close to retirement. I took that advice for half my money at least.

So 15 years later, the account has grown, but not equally so. I have records on hand going back to 2010, and the portion invested in the index fund and growth fund both increased by about 3 times (increase of 200%) since then. The portion invested in bonds, on the other hand, has increased by just 30% over that time. The bonds, which started off as 25% of my contributions, now make up just 12% of my portfolio.

So my first thought is that the bonds are obviously under-performing, that I never should have invested in bonds in the first place, and because I am 50 years old and hopefully have 17-20 years more to work, I should move all the money invested in bonds into the index fund.

On the other hand, the advice given on the Fidelity website is that bonds should now make up about 15% of my portfolio, and that I should "rebalance" my portfolio and move some money the other way and into bonds, which is the exact opposite advice.

Any thoughts? Thanks!

Bonus question: my son just graduated from college and started a job with a 401(k) plan available. I need to help him set it up. What should he invest in? I'm thinking 100% index fund for him, because the bonds didn't work our for me, and even my large cap growth fund didn't do quite as well as the index fund (probably not helped by it's relatively high management fees compared to the index fund).
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Old 07-11-2019, 05:12 PM
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Bonds are generally considered safer investments. With that reduced risk comes reduced returns. The advice to generally move towards safer investments (like bonds) as one approaches retirement is, I think, fundamentally sound.

ETA: and as for your young son, yes, I'd advise him to just throw it all in a whole-market index fund and leave it alone for the next few decades.

Last edited by HurricaneDitka; 07-11-2019 at 05:13 PM.
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Old 07-11-2019, 05:46 PM
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Originally Posted by HurricaneDitka View Post
Bonds are generally considered safer investments. With that reduced risk comes reduced returns. The advice to generally move towards safer investments (like bonds) as one approaches retirement is, I think, fundamentally sound.

ETA: and as for your young son, yes, I'd advise him to just throw it all in a whole-market index fund and leave it alone for the next few decades.
This, in a nutshell. Bonds make less money, but since they're based on the US government "paying" its bills, they're all but guaranteed to keep growing, thus they give very low return. Stocks give a much higher yield, on average, but they're not safe. It IS possible to lose most or all of your investment, especially if the market crashes a la 2008 - just ask all of the hopeful retirees from the time who couldn't retire because all of their savings were wiped out.

Generic advice is to start aggressive when you're young, and become more conservative as time goes on. Under 35-40, you still have time to recover if everything is wiped out. At 60, not so much.

Rebalancing your account essentially "locks in" the gains you've already made. By moving some money from stocks to bonds, you protect your investments from huge market downturns, at the cost of losing some of the power of compounding returns. It also goes the other way - if the stock market takes a massive crap, rebalancing helps you get back in at the bottom of the trough. Basically, it cuts the tops and bottoms off of the stock market roller coaster ride.
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Old 07-11-2019, 05:53 PM
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Your bonds have underperformed your equities since we've had such a hot equities market over the past 7 - 9 years. If you rebalance consider it profit taking. If and when the economy crashes, you'll be happy you did.


The idea is to decide what total level of risk you want up front, and then invest to meet it, and rebalance to keep that level until your risk profile changes, like getting close to retirement. Your son's is different from yours which is different from mine.

This has worked well for me. It made me buy equities during the recession which has paid off nicely.

BTW, you might want to roll over your 401(K) into an IRA. No tax issues and you will have better control of it.
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Old 07-11-2019, 06:27 PM
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...BTW, you might want to roll over your 401(K) into an IRA. No tax issues and you will have better control of it.
I've heard this before, but in what way will I have "better control of it"? While I can't add money to the account, I can do whatever else I want with it (such as rebalancing).

As far as I can tell, my former employer pays the fees to maintain the plan with Fidelity. Why shouldn't I let them keep doing this for me?
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Old 07-11-2019, 06:49 PM
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The advice you've gotten above is pretty much exactly what I would have said. Although, I would question your use of the term "index fund." You seem to imply that it is a stock (or "equity") index fund. But there are also bond index funds. You should avoid those during the early and middle part of your working life. They grow too slowly. Stick with stocks, be they index funds or other types of diversified mutual funds.

Last edited by Tim R. Mortiss; 07-11-2019 at 06:50 PM.
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Old 07-11-2019, 07:06 PM
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Originally Posted by Tim R. Mortiss View Post
The advice you've gotten above is pretty much exactly what I would have said. Although, I would question your use of the term "index fund." You seem to imply that it is a stock (or "equity") index fund. But there are also bond index funds. You should avoid those during the early and middle part of your working life. They grow too slowly. Stick with stocks, be they index funds or other types of diversified mutual funds.
Right, when I referred to index funds above, I was referring to an equity index fund, like the Fidelity® 500 Index Fund.

So let's see, I've been working for 28 years now. I've hopefully got 17-20 years more to work before I retire, assuming I stay healthy and employed.

Should I keep some of my portfolio in bonds (currently 12% of the account in question), increase the bond percentage, or decrease it?
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Old 07-11-2019, 08:13 PM
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I think you are fine, but be prepared to see big drops in your account. I did - in 2000-2002 I lost 41% and in 2008-2009, 46%.

I let it ride and kept investing - it came back. Since 2009 (when I stopped working at 60) my retirement account has tripled.

If I had known what I know now when I was your son's age, I would have:
  1. Invested aggressively - 90-100% stock index funds
  2. Maxed out my 401k
  3. Maxed out a Roth IRA

Had I done that I could have retired at 50.
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Old 07-11-2019, 08:46 PM
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Originally Posted by robby View Post
I've heard this before, but in what way will I have "better control of it"? While I can't add money to the account, I can do whatever else I want with it (such as rebalancing).

As far as I can tell, my former employer pays the fees to maintain the plan with Fidelity. Why shouldn't I let them keep doing this for me?
II

I have a fidelity account. I changed from a 401k to a self directed IRA. I don’t recall any cost in doing so.
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Old 07-11-2019, 09:03 PM
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Originally Posted by bubba001 View Post
II

I have a fidelity account. I changed from a 401k to a self directed IRA. I don’t recall any cost in doing so.
OK, so it didn't cost anything to switch, but what are the advantages in doing so?

The reason I'm asking is because I've been told for the last decade that I can switch my old 401(k) to an IRA, but I have yet to hear a reason why I would want to do this.
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Old 07-11-2019, 09:10 PM
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Originally Posted by jasg View Post
I think you are fine, but be prepared to see big drops in your account. I did - in 2000-2002 I lost 41% and in 2008-2009, 46%.

I let it ride and kept investing - it came back. Since 2009 (when I stopped working at 60) my retirement account has tripled.
Right, I went through the big drop in 2008-2009 as well. I didn't touch anything, and it came back. The bond portion was much less volatile, of course.

Quote:
Originally Posted by jasg View Post
If I had known what I know now when I was your son's age, I would have:
  1. Invested aggressively - 90-100% stock index funds
  2. Maxed out my 401k
  3. Maxed out a Roth IRA

Had I done that I could have retired at 50.
I'm leaning towards advising my son to invest 10% of his pre-tax income in an equity index fund. I'd like to get him set up now, so he doesn't miss the income.
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Old 07-11-2019, 09:17 PM
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Originally Posted by robby View Post
I've heard this before, but in what way will I have "better control of it"? While I can't add money to the account, I can do whatever else I want with it (such as rebalancing).

As far as I can tell, my former employer pays the fees to maintain the plan with Fidelity. Why shouldn't I let them keep doing this for me?
Most 401Ks have a limited number of investment options. If you move it to an IRA, you are no longer limited. That's going to be especially useful when you get older and start moving stuff to things which produce more income.
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Old 07-11-2019, 09:17 PM
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The old 401(k) likely had a very limited selection of funds that you had to select from. Moving to an IRA and you will be able to select from just about any mutual fund, ETF, or even individual stocks or bonds.

So why would you do it? You need to look at the expense ratios that you are currently paying on your funds (and yes, these are paid by you, not your previous employer). These fees can really eat into your returns, and since you have a long timeframe (17-20 years) you should move into a fund with low expense ratios. Do you know what fees you are paying in your current 401(k)?
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Old 07-11-2019, 09:33 PM
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To clarify the fee. It sounds as if your previous employer is paying the fee to the company managing the plan, which pays for bookkeeping, managing records, mailing statements, etc. But the funds themselves also charge a fee in the form of an expense ratio, and these come directly from your returns. You won't see a line item in your statement that shows these fees being deducted because they take them out from the investment returns. So you won't notice them slowly bleeding you.

Last edited by Dag Otto; 07-11-2019 at 09:33 PM.
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Old 07-11-2019, 10:18 PM
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The old 401(k) likely had a very limited selection of funds that you had to select from. Moving to an IRA and you will be able to select from just about any mutual fund, ETF, or even individual stocks or bonds.
My 401(k) is through Fidelity, so there seems to be a pretty broad choice of investment fund options (none of which are ETFs or individual stocks and bonds, but I wouldn't likely be investing in those anyway). Regardless, the selection isn't so much an issue with me, as I tend to get paralyzed with too many choices, anyway.

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...So why would you do it? You need to look at the expense ratios that you are currently paying on your funds (and yes, these are paid by you, not your previous employer). These fees can really eat into your returns, and since you have a long timeframe (17-20 years) you should move into a fund with low expense ratios. Do you know what fees you are paying in your current 401(k)?
Yes, I believe so. They are as follows:
  • Fidelity® 500 Index Fund: 0.015%
  • JPMorgan U.S. Research Enhanced Equity Fund Class L: 0.44%
  • Fidelity® Intermediate Bond Fund: 0.45%

Quote:
Originally Posted by Dag Otto View Post
To clarify the fee. It sounds as if your previous employer is paying the fee to the company managing the plan, which pays for bookkeeping, managing records, mailing statements, etc. But the funds themselves also charge a fee in the form of an expense ratio, and these come directly from your returns. You won't see a line item in your statement that shows these fees being deducted because they take them out from the investment returns. So you won't notice them slowly bleeding you.
I presume the fees for each individual fund (which are a percentage of your returns) are similar whether you have a 401(k) or an IRA. However, if I were to switch to an IRA, is there a fee I would then have to pay to cover managing the plan, bookkeeping, etc.?

To attempt to answer my own question, it appears the answer is that these fees range from minimal to zero.

https://www.magnifymoney.com/blog/li...ira-providers/

If I were to stick with Fidelity, the account maintenance fee is apparently zero. There do seem to be transaction fees for some non-Fidelity funds.
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Old 07-11-2019, 10:23 PM
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Most 401Ks have a limited number of investment options. If you move it to an IRA, you are no longer limited.
OK, thanks. That makes sense.

Quote:
Originally Posted by Voyager View Post
That's going to be especially useful when you get older and start moving stuff to things which produce more income.
Out of curiosity, what types of things are those?

Also, it sounds like I don't need to worry about these things for now, so if I'm OK with my current investment choices, I presume I can make the switch at some point in the future?
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Old 07-11-2019, 11:09 PM
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OK, so it didn't cost anything to switch, but what are the advantages in doing so?

The reason I'm asking is because I've been told for the last decade that I can switch my old 401(k) to an IRA, but I have yet to hear a reason why I would want to do this.
One reason to avoid having an IRA has to do with a strategy called a 'backdoor Roth'. Before you commit to having an IRA, make sure you wouldn't ever want to do a 'backdoor Roth'.
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Old 07-11-2019, 11:18 PM
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I'm leaning towards advising my son to invest 10% of his pre-tax income in an equity index fund. I'd like to get him set up now, so he doesn't miss the income.
That is an excellent idea - but I would challenge him to shoot for 15% - eventually. As I said, max out the 401k then a Roth. My biggest regret is that I ignored the Roth advantages for too long.

Also point out that the power of compounding means that investing for ten years from 25-35 beats starting at 35 and continuing until 65. Of course, 25-65 is even better as is starting before 25.
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Old 07-12-2019, 12:55 AM
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My 401(k) is through Fidelity, so there seems to be a pretty broad choice of investment fund options (none of which are ETFs or individual stocks and bonds, but I wouldn't likely be investing in those anyway). Regardless, the selection isn't so much an issue with me, as I tend to get paralyzed with too many choices, anyway.

Yes, I believe so. They are as follows:
  • Fidelity® 500 Index Fund: 0.015%
  • JPMorgan U.S. Research Enhanced Equity Fund Class L: 0.44%
  • Fidelity® Intermediate Bond Fund: 0.45%

I presume the fees for each individual fund (which are a percentage of your returns) are similar whether you have a 401(k) or an IRA. However, if I were to switch to an IRA, is there a fee I would then have to pay to cover managing the plan, bookkeeping, etc.?

To attempt to answer my own question, it appears the answer is that these fees range from minimal to zero.

https://www.magnifymoney.com/blog/li...ira-providers/

If I were to stick with Fidelity, the account maintenance fee is apparently zero. There do seem to be transaction fees for some non-Fidelity funds.
Those fees don't look outrageous. But a very quick glance at the JPMorgan U.S. Research Enhanced Equity Fund looks like it's not substantially different than the S&P 500. It invests in large cap stocks, which is the same asset class as the S&P 500, and it probably doesn't perform much differently than the S&P 500 (it appears to very slightly underperform), yet the fee is 29 times the fee of the Fidelity 500 index fund. If it's not substantially different, why pay 29 times more than you have to?

Your real issue appears to be asset allocation, and Fidelity stating that you should have 15% rather than 12% in bonds is somewhat trivial compared to the fact that you don't have any exposure to mid and small cap stocks, but own two funds that have pretty much the same thing in large cap funds. I suggest you spend the next few weeks or so learning what you can about asset allocation, determine what is right for you, and then see what funds are available that you can buy that will give you the allocation you want. I know you said you tend to get paralyzed with too many choices, but knowing what it is you want will go a long way towards overcoming that.
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Old 07-12-2019, 01:06 AM
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Out of curiosity, what types of things are those?

Also, it sounds like I don't need to worry about these things for now, so if I'm OK with my current investment choices, I presume I can make the switch at some point in the future?
When I was your age I was invested kind of like you are now.
There are certain classes of stocks, and funds that contain them, which consist of stocks paying reasonable dividends in unexciting sectors. I have one income fund which is making 5% relative to what I put into it, 3% relative to what it is worth now. So yield goes down with a rising market, and I'd guess up in a falling market. The good thing is that if these investments generate enough cash for you to live on (plus Social Security etc.) you don't care what the market value is.
They have names like Income Fund. I suspect Fidelity has them when the time comes.
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Old 07-12-2019, 07:01 AM
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I base my IRA allocations on when I'm going to need the money. I'm in retirement, so I withdraw money monthly to supplement my pensions. I keep two years worth of withdrawal money in cash equivalents. That's eight separate two-year certificates of deposit in a ladder so that one matures every quarter.

Then I keep seven years worth of money in a bond index fund at Vanguard.

The balance is kept in equities, split up between the Vanguard Total Stock Market Index Fund, The Vanguard International Stock Index Fund, and the Vanguard REIT Index Fund. Probably 60% Total Stock Fund, 30% International Stock Fund, and 10% REIT Index Fund, although those percentages are liable to drift because I only rebalance annually.

Something you need to look at when you consider expenses is what they are in relation to the return, not the portfolio. For example, you mention the Fidelity Intermediate Bond Fund has a fee of 0.45%, which you called minimal. The ten year return on that fund is 4.0%, which means that over the last decade 11.25% of the return goes to fees. You might not call that minimal. I sure wouldn't. My largest holding is in the Vanguard Total Stock Market Index and has a ten year return of 14.71% with an expense ratio of 0.04%, that's about 0.3% on return.
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Old 07-12-2019, 07:18 AM
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Rebalancing your account essentially "locks in" the gains you've already made. By moving some money from stocks to bonds, you protect your investments from huge market downturns, at the cost of losing some of the power of compounding returns. It also goes the other way - if the stock market takes a massive crap, rebalancing helps you get back in at the bottom of the trough. Basically, it cuts the tops and bottoms off of the stock market roller coaster ride.
The key with rebalancing is to do it on a set schedule, rather than at random times when you think the market is particularly high or low; the latter approach is basically trying to time the market, which is likely to work out poorly for most folks.

As Voyager has said, the idea is that you choose a stock/bond investment ratio for your portfolio to establish a risk profile you're basically comfortable with. Since stocks and bonds tend to perform differently, the actual ratio in your portfolio will tend to drift over time. So once per year you review your portfolio to see what you need to buy/sell in order to get it back to your target ratio. In a typical year, the stocks will outperform bonds, so you'll sell a few stocks and use the proceeds to buy bonds. If a recession hits, stocks perform worse than bonds - so in this case you end up selling bonds so you can buy stocks. You're doing this on a set schedule, so there's no wondering about whether this is a good time to buy/sell anything, you just follow the rule once per year: buy/sell whatever you need to restore your target ratio. The net result is that this strategy forces you to sell things that are priced high (locking in those gains) and buy things that are priced low, even if they are not currently at their absolute peak/trough (it's not possible to do the latter unless you can predict the future).

Some people think that being 100% in bonds is the safest thing, but it's not. Not only does being 100% in bonds give you the lowest return, it also doesn't minimize your risk (defined as the uncertainty/range of possible nest egg sizes at the end of your multi-year investment period). You can minimize your risk by keeping about 20% of your assets in stocks, while increasing your average return at the same time. This is why the standard advice for retirees is to keep roughly that much in stocks, rather than moving 100% to bonds.

At the same time, as the plot I linked to shows, being 100% in stocks means taking on a lot of extra risk for only a very small increase in average return. If you're willing to sacrifice half a percent from your annual average return (by targeting 20% bonds in your portfolio), you can greatly reduce your risk, increasing the likelihood that your nest egg will hit (or be very close to) its expected target at the end of your investment period. So even for new investors at the start of their professional career, it's sensible to keep a significant portion of their portfolio in bonds.

There are target-date retirement mutual funds available that keep a portion of the fund in bonds. The fund manager rebalances on a regular basis, and the bond percentage increases year after year, with the intent that the investor doesn't need to bother with rebalancing. But the performance of the specific stocks involved, along with the fund's expense ratio, are much more important considerations. It's probably smarter to invest in other funds that perform better and/or have a lower expense ratio, and just manage the annual rebalancing yourself (this also lets you choose whatever stock/bond ratio you're most comfortable with).

So, my advice to the OP? 12% bonds is not a bad place to be at 50. I wouldn't move any of that to stocks at this point. In fact, year after year from now on, I'd suggest rebalancing on an annual basis to increase your bond percentage by maybe a couple of points. So on January 1, 2020, rebalance to 14% bonds. On 1/1/2021, rebalance to 16% bonds. And so on. In 15 years, when you're close to retirement, you'll be at about 42% bonds, 58% stocks. The rule of thumb is that your stock percentage should be 100 minus your age, i.e. at 65 you should have 35% stocks in your portfolio. So my advice has you taking on a little more risk than is generally recommended; it's up to you whether you want to take on that risk (in pursuit of greater gains) or be more conservative (for a lower but more predictable nest egg result), as by ramping up your bond percentage faster than I suggested.

Advice to OP's son? Unless he's willing to do research on forecasts for various market segments, I'd recommend 80% of his investment be in index stock funds, and the other 20% in a bond fund, along with annual rebalancing to maintain that ratio until he's in his mid-50s, at which point he would be wise to start shifting the balance toward bonds.

For a good book on investing, including some very basic explanations of why stocks are better than bonds for long-haul investors and why rebalancing works, I recommend The Intelligent Asset Allocator. In the early parts of the book, he communicates the fundamentals of investment with easy to understand examples involving a benevolent uncle and some coin tosses, and goes on to show how actual investment strategies would have performed during any given period of actual stock market performance. It's pretty illuminating.
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Old 07-12-2019, 08:57 AM
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(snip) The rule of thumb is that your stock percentage should be 100 minus your age, i.e. at 65 you should have 35% stocks in your portfolio. So my advice has you taking on a little more risk than is generally recommended; it's up to you whether you want to take on that risk (in pursuit of greater gains) or be more conservative (for a lower but more predictable nest egg result), as by ramping up your bond percentage faster than I suggested. (snip)
I snipped a lot of stuff I agree with to get to some that I don't. Any allocation should take into account both how much you have and how much you need and not be fixed by your age. A 65 year old who needs X dollars per year and has only 5X dollars shouldn't have 35% in stocks, the risk is too high. If the same person has 25X dollars they can have more than 35% in stocks as they can outlast a ten year drop in value.
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Old 07-12-2019, 09:16 AM
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I snipped a lot of stuff I agree with to get to some that I don't. Any allocation should take into account both how much you have and how much you need and not be fixed by your age. A 65 year old who needs X dollars per year and has only 5X dollars shouldn't have 35% in stocks, the risk is too high. If the same person has 25X dollars they can have more than 35% in stocks as they can outlast a ten year drop in value.
Sensible. Rules of thumb apply to typical cases, not to outliers.
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Old 07-12-2019, 10:42 AM
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Bonds make less money, but since they're based on the US government "paying" its bills, they're all but guaranteed to keep growing, thus they give very low return.
The OP is not talking about Treasury Bonds, these are corporate bonds. Very different risk/reward.
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Old 07-12-2019, 11:27 AM
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Actually, they're both corporate and treasury bonds. The OP said the fund was the Fidelity Intermediate Bond Fund, which according to the website is a mixture.
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Old 07-13-2019, 07:34 PM
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While I'm going to answer the OP's question, this is rather general investing advice and represents my philosophy.

In general, you want to be invested in things with the highest average returns and lowest correlations. Bonds are not particularly correlated with stocks, but they aren't 100% uncorrelated. In order to get as many different things as possible uncorrelated with each other, you want to spread out into as many different fields as you can find reasonable investments in and can stomach the time the manage them. For me, this is a lot of different things, but it sounds like for OP, not so much. The easiest way to get this kind of diversity is a retirement target date fund, but these are funds of funds and thus have two levels of fees. If you can do the same balancing yourself, you can save one layer of fees. But if you don't want to bother and like the idea of division of labor, just throw it all into a retirement target date fund offered by Fidelity. Which target date to use if you're smack in the middle of two, or are just unsure, depends on your tolerance for risk.

Going beyond that, if you can handle rebalancing 2 things, they should be a total stock market fund and a total bond market fund. I use Schwab, so I'll just tell you that with them there are SWTSX and SWAGX. Develop a plan, either using internet resources or paying an advisor an hourly rate to come up with one, in which your allocation between the two slowly trends more towards bonds as you age. At least once a year buy and sell to get to the allocation desired for the current year.

If you feel like you can juggle more things, you can add a small-cap fund like SWSSX and change your main large-cap fund to an S&P 500 fund like SWPPX. Stocks of smaller companies tend to not be as correlated as the stocks of large companies, so your rebalancing is more likely to catch each of them when they're out of equilibrium and thus get yourself a small bump in return by buying low and selling high. Again, develop a plan where you slowly move out of both equity funds and into bonds, and rebalance at least once per year.

If you want to juggle even more, you can look at a mid-cap fund like SWMCX, large-cap growth like SWLGX, and large-cap value like SWLVX. The more slices that you cut your portfolio into that are likely to be uncorrelated, the more you can gain from rebalancing by selling each segment at higher than average prices. If you have a taxable account in addition to your retirement accounts, I would recommend holding some international index funds, perhaps even branching out into international small and emerging markets equity funds. You could diversify into these in a retirement account, but you'll pay foreign taxes on dividends and can't claim the foreign tax credit. I wish I could find, but have yet to see, an international equity fund specifically designed to be held in retirement accounts by only investing in companies that either don't pay dividends or are domiciled in countries that respect IRAs' tax-free status, such as Canada, or countries that don't tax dividends, like Singapore. (See here, down at the bottom - search for Singapore). You can instead invest in individual stocks in those places, but that entails more risk and more need to watch the market and pay attention.

So I've mentioned the various types of equities there are out there you could consider diversifying into, but there are also various types of bond investments to consider. When you're young, you probably don't want anything in ultra-safe investments besides an allocation to cash that you still put into the riskiest cash money market there is available, but there are bond investments that entail more risk and thus have higher return associate with them. There are three main categories here: Floating rate loans, Sub-investment grade Corporate bonds, and Emerging Market or even Frontier Debt. You can find funds paying around 6% for each of these, which is less than the average yield on stocks, but is comparatively safer while not resorting to the more anemic 3% on high quality corporate bonds or 2% on Treasuries or CDs. These are particularly suited to retirement accounts if you have a taxable account as well, since they produce ordinary income (not capital gain or qualified dividends), which you want to keep out of your taxable accounts as much as possible.

The story doesn't stop with stocks and bonds though. And I'm not talking about options, futures, commodities, and such, as those are more gambling unless you're in the business and want to hedge your holdings. I stay way away from those, since I like being a passive investor and staying with index funds. I have time to commit to rebalance frequently, but not to do research. Anyway, there's other investments that are available to retail investors that are relatively new that I've gotten involved with and have a small portion of my portfolio devoted to.

One is peer-to-peer lending. I'm not going to mention any specific sites, you can use google to find some. Each loan is extremely risky, but with $25 minimum investments, you can diversify quite a bit. You can automate your investing and get a reasonable return, or you can take the time to look at each borrower's credit profile and not invest in the ones you think are less likely to pay them back and hopefully enhance your reward. I'm somewhat concerned about what returns are going to be like once the next recession hits, but these sites offer access to an asset class that's not available elsewhere, and as I said up front, diversity is my number one goal.

And then there's real estate. If you're really rich, you can invest directly in real estate, but most of us don't have the kinds of funds to do so with commercial buildings and don't either want to put a large percentage of our assets into a rental home or just plain don't want to be land lords. There are mutual funds that invest in publicly traded REITs, and you can stick with them if you're really risk averse and want to stay on your broker's website, but there are a number of crowdfunding real estate websites set up that you can again use google to find that offer higher rates.

Both of these last two are long-term investments. Don't put very much money into them, and don't expect to be able to access it easily. Despite those cautions, I feel they are very good ways to diversify your portfolio beyond what's offered at your broker. Both offer the ability to set up an IRA which you can roll over funds from a retirement account into, which is almost definitely what you want to do for them because they're taxed as ordinary income (although with real estate, you might get the 20% pass-through deduction on REIT dividends - still not as good as qualified dividends though). Put less than 5% of your portfolio into each, and you'll hopefully smooth things out a bit, having investments that are less correlated than if you stick to stocks and bonds.

Last edited by glowacks; 07-13-2019 at 07:36 PM.
  #28  
Old Today, 12:17 AM
jharvey963 is offline
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Originally Posted by Voyager View Post
When I was your age I was invested kind of like you are now.
There are certain classes of stocks, and funds that contain them, which consist of stocks paying reasonable dividends in unexciting sectors. I have one income fund which is making 5% relative to what I put into it, 3% relative to what it is worth now. So yield goes down with a rising market, and I'd guess up in a falling market. The good thing is that if these investments generate enough cash for you to live on (plus Social Security etc.) you don't care what the market value is.
They have names like Income Fund. I suspect Fidelity has them when the time comes.
Not to pick on you, but this is a basic misunderstanding that the investment industry pushes on us. They say that in retirement you need "income" and in order to get "income" you need to invest in dividend paying stocks. This is a fundamental mis-characterization of the situation. In retirement, you don't need "income", you need cash flow. And how is it better to get this cash flow? By investing in dividend paying stocks, on which you will be paying full tax rates on the entire amount you use? Or by selling small amounts of stock on which
1. You will only have to pay the much lower capital gains tax rate, and
2. You only have to pay that lower tax rate on the PROFIT you've made on the stock, not the cost basis?
  #29  
Old Today, 02:07 AM
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Originally Posted by jharvey963 View Post
Not to pick on you, but this is a basic misunderstanding that the investment industry pushes on us. They say that in retirement you need "income" and in order to get "income" you need to invest in dividend paying stocks. This is a fundamental mis-characterization of the situation. In retirement, you don't need "income", you need cash flow. And how is it better to get this cash flow? By investing in dividend paying stocks, on which you will be paying full tax rates on the entire amount you use? Or by selling small amounts of stock on which
1. You will only have to pay the much lower capital gains tax rate, and
2. You only have to pay that lower tax rate on the PROFIT you've made on the stock, not the cost basis?
I was trying to keep it simple. Yes, cash flow is what is important, and it includes reduced expenses and money from social security,
One of the things about being retired is that you can control your taxable income pretty well. Thus, dividends do not have to be taxed at a high incremental rate. And while post-tax investments can be sold with little tax liability, pre-tax investments can have significant tax liability. I'm moving some into Roth IRAs for the long term, but the amount depends on where I stand in relation to income. My accountant figures that out.
Finally, this kind of investment is a good balance between bonds and aggressive equities. I don't know about you, but winter - I mean a crash - is coming. A good cash flow means I don't have to sell during a crash. I've done profit taking on some of my more aggressive funds to move them to these safer funds. I fully realize that I've given up gains by doing so - I'm not attempting to time the market - but I still think it is a good thing to do.
So far so good, and it will get even better when I hit 70 and take my maxed out Social Security.
  #30  
Old Today, 05:51 AM
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Originally Posted by jharvey963 View Post
[...]how is it better to get this cash flow? By investing in dividend paying stocks, on which you will be paying full tax rates on the entire amount you use? Or by selling small amounts of stock on which
1. You will only have to pay the much lower capital gains tax rate, and
2. You only have to pay that lower tax rate on the PROFIT you've made on the stock, not the cost basis?
I won't disagree with the facts here but if you invest in dividend-paying stocks, even if you pay taxes on the dividends you are preserving capital, and risk is relatively low. If you sell stocks and pay tax on the gains, you are liquidating your capital; also there is some risk in holding stocks that are acquired with the expectation of growth. Neither one is right or wrong but the total picture has to be taken into account, including your total portfolio, tolerance for risk, and how long you need it to last.
  #31  
Old Today, 03:47 PM
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Originally Posted by Chisquirrel View Post
This, in a nutshell. Bonds make less money, but since they're based on the US government "paying" its bills, they're all but guaranteed to keep growing, thus they give very low return.
It's already been pointed out that we should be talking about both government and corporate bonds, but I'd like to mention that bonds can easily go down in value. If you buy a bond from the issuer and hold it until maturity, then your returns are predetermined, but (I think) usually you'll be buying and selling bonds from other traders, for whom the anticipated future interest rates play a big factor. If interest rates go up, then that bond you own which gives you a 3% return looks a lot less attractive to potential people who might want to buy that bond from you, so the price takes a severe hit.
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