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bk10s

I Am Not A Market Timer....

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Bk

 

 

Expenses are a funny thing. They are taken out daily and they are well hidden so you never can see the damage they are doing. I would go ahead and move it all now if I where you. Its a much simpler process that way, otherwise you might have to repeat major paperwork every time you transfer an amount although you might be able to set periodic withdrawals when you originally set up the transfer.Try not to have buyers remorse should the market go down . It would go down regardless of which stock funds you would be in. Longer term you will do well in these low cost funds and pay much less than you are paying now. They have made a believer out of me. Since I got out of active funds my portfolio has done much better. It may not be so obvious at first but overtime you will make more money. Expenses are a very big deal. Most active funds never beat Index funds performance over time because among other things the drag fees put on the fund's performance.

 

You can really take the advice you are getting here to the bank ! ( instead of paying others more than you should for your investments).

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I support virtually everything said in this thread. Here are a few of my thoughts:

 

1. I documented the fundamentals of investing on my site, which speaks to a lot of what's been said so far https://educatorsfightingforfairness.wordpress.com/investing-101/

 

2. If you're going to make a change it is because you're moving into something better. Therefore, there is no reason to do it incrementally.

 

3. Any problems with your portfolio are "slow moving". Don't needlessly delay, but take your time and learn everything that is relevant. Then when you're 100% comfortable, make the changes. No rush, no pressure.

 

4. I would roll the traditional 403b into a traditional IRA. Assuming 3% inflation and 6% market returns then over ten years the 0.35% fee for your 403b will consume 13% of real returns. I'm not willing to give that up and get nothing in return. However, doing such a rollover makes performing a backdoor roth less desirable so there is a potential con.

 

5. I cannot stress enough how important it is to go through the exercise of selecting an asset allocation that you can live with in good times and bad. This is the key to wealth and sanity.

 

6. You want total market, low cost, index funds.

 

7. The things you've said lead me to believe you'd do great with an all in one fund at Vanguard (or any low cost provider). They have target date funds that get less risky as time goes on. They have LifeStrategy funds that remain static over time. This option will cost you 0.12-0.16%. Never pay more than that.

 

8. If you wanted to get fancy and save a little money, you could directly own the individual funds inside the all-in-one fund. Vanguard Total Stock, Vanguard Total International, and Vanguard Total Bond. It'll cost you about 0.07% but it'll force you to do a little maintenance work and it'll expose you to behavioral errors because it'll require you maintain your asset allocation by buying stock in a crash and selling stock in a rally...people are traditionally bad at doing this.

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Great points Ed

 

One more comment:

 

BK

 

If I could predict which active funds could be winners year in and year out and beat their respective Indexes I would never recommend an Index fund. But we can't predict that. There will always be active managed funds that will beat their indexes from time to time. But none do so consistently and the question is how do you find them consistently out of thousands of choices? Statistics show index funds win most of the time and over time.

 

I think we have given you as much info as you need now to do the right thing for yourself and your family going forward. Please keep us abreast of any developments as you move forward.

 

Tony

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Tony is 100% right. The philosophical idea is that we don't have any powers of prediction even though we feel in our souls that we do.

 

The data on active management supports this idea. In 2005 when John Bogle reviewed the performance of the 355 mutual funds that existed in 1970:

  • 223 funds (62.8%) were closed before 2005 (usually they collapsed because of abysmal performance).
  • 60 funds (16.9%) lagged the market by 1% or more.
  • 48 funds (13.5%) were within +/- 1% of the market.
  • 15 funds (4.2%) beat the market by 1-2%.
  • 9 funds (2.5%) beat the market by 2% or more.

When we look at the big winners many of them have been getting crushed and owe their status to a period of early dominance. Then comes the matter of figuring out if they won because of skill or luck...I believe they were just as skillful as the rest, which means they got lucky. Their strategy happened to work. So if it was luck that means the chance of you picking one of the big winners is also luck.

 

This is why I advocate taking what the market returns and instead of paying some fund manager to outperform...put those payments right into your own investments.

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I agree with Tony, Ed and others that you will reduce your fees by moving your 403b account to an IRA at Vanguard (assuming you use total stock and bond index funds). However if you made some changes in your 403b, you could reduce your current fees significantly, improve its diversification, reduce risk and duplication.

In your OP you mentioned reducing your risk by moving some of the index fund money into the stable value fund. Instead of reducing the index funds, I would reduce Contrafund. It has had a spectacular YTD and this would be a good time to sell. I wonder if an asset allocation of 60/40 is more risky than you really want? Do you use the same AA in your Roth IRA? Ideally all your and your wife’s accounts should be considered all together.

Let’s assume you want to remain in your 403b at least for a few more years and see what it could look like. Steve mentioned that the Total Stock Market fund has the advantage of including all 3 cap sizes, based on market capitalization. You can mimic the TSM fund by using the 3 cap sizes in the following ratio:

VG Inst. Index (S&P 500), 81%

VG Mid-cap Index, 4%

VG Small-cap Index, 15%

https://www.bogleheads.org/wiki/Approximating_total_stock_market

Notice that you can omit the mid-cap index and just use the 500 index (82%) and the small-cap index (18%). Let’s use this approximation in this example.

Let’s also assume that you want to reduce the risk in your 403b account and you’ve decided to move to a 50/50 AA. And that you want 20% of your stocks in international stocks. 20% of 50% is 10% international and 40% domestic stocks. 82% of the 40% is 33% large-cap domestic stocks. 18% of 40% is 7% small-cap domestic stocks.

So your 403b at WEA could look like this:

VG Inst. Index, ER=0.02%, 33%

VG Small-cap Index, ER=0.05%, 7%

VG Total Int’l Stock Mkt Index, ER=0.11%, 10%

Pru. Stable Value fund, 50% (no ER ever supplied for SVFs)

A 403b account similar to this is very broadly diversified, and certainly has lower risk than what you have now. The average weighted ER of the 3 index funds is 0.04% and is slightly lower than what is possible in a VG IRA. As mentioned in my previous post, the $300/yr admin fee adds to those very low ERs, but probably less than the 0.35%. Divide $300 by your 403b balance to get the actual percentage.

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I wonder if your Roth IRA is also with WEA? If so, it would definitely be worthwhile to move it to Vanguard. The WEA IRA charges 0.45%/yr with a $600/yr cap for WEAC members and a $750/yr cap for WEAC non-members. I don’t see how those fees can be justified. When Vanguard, Fidelity and a number of other low-cost providers charge no fees for their IRAs (other than the fund’s ERs), WEA’s IRA fees are not justfiable.

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I agree with Tony, Ed and others that you will reduce your fees by moving your 403b account to an IRA at Vanguard (assuming you use total stock and bond index funds). However if you made some changes in your 403b, you could reduce your current fees significantly, improve its diversification, reduce risk and duplication.

In your OP you mentioned reducing your risk by moving some of the index fund money into the stable value fund. Instead of reducing the index funds, I would reduce Contrafund. It has had a spectacular YTD and this would be a good time to sell. I wonder if an asset allocation of 60/40 is more risky than you really want? Do you use the same AA in your Roth IRA? Ideally all your and your wife’s accounts should be considered all together.

Let’s assume you want to remain in your 403b at least for a few more years and see what it could look like. Steve mentioned that the Total Stock Market fund has the advantage of including all 3 cap sizes, based on market capitalization. You can mimic the TSM fund by using the 3 cap sizes in the following ratio:

VG Inst. Index (S&P 500), 81%

VG Mid-cap Index, 4%

VG Small-cap Index, 15%

https://www.bogleheads.org/wiki/Approximating_total_stock_market

Notice that you can omit the mid-cap index and just use the 500 index (82%) and the small-cap index (18%). Let’s use this approximation in this example.

Let’s also assume that you want to reduce the risk in your 403b account and you’ve decided to move to a 50/50 AA. And that you want 20% of your stocks in international stocks. 20% of 50% is 10% international and 40% domestic stocks. 82% of the 40% is 33% large-cap domestic stocks. 18% of 40% is 7% small-cap domestic stocks.

So your 403b at WEA could look like this:

VG Inst. Index, ER=0.02%, 33%

VG Small-cap Index, ER=0.05%, 7%

VG Total Int’l Stock Mkt Index, ER=0.11%, 10%

Pru. Stable Value fund, 50% (no ER ever supplied for SVFs)

A 403b account similar to this is very broadly diversified, and certainly has lower risk than what you have now. The average weighted ER of the 3 index funds is 0.04% and is slightly lower than what is possible in a VG IRA. As mentioned in my previous post, the $300/yr admin fee adds to those very low ERs, but probably less than the 0.35%. Divide $300 by your 403b balance to get the actual percentage.

krow36 - Love the simplicity of your suggestion. Thank you so much for your research. Like Steve, Ed, Tony, and others, I'm "all in" on low fees!!!

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I support virtually everything said in this thread. Here are a few of my thoughts:

 

1. I documented the fundamentals of investing on my site, which speaks to a lot of what's been said so far https://educatorsfightingforfairness.wordpress.com/investing-101/

 

2. If you're going to make a change it is because you're moving into something better. Therefore, there is no reason to do it incrementally.

 

3. Any problems with your portfolio are "slow moving". Don't needlessly delay, but take your time and learn everything that is relevant. Then when you're 100% comfortable, make the changes. No rush, no pressure.

 

4. I would roll the traditional 403b into a traditional IRA. Assuming 3% inflation and 6% market returns then over ten years the 0.35% fee for your 403b will consume 13% of real returns. I'm not willing to give that up and get nothing in return. However, doing such a rollover makes performing a backdoor roth less desirable so there is a potential con.

 

5. I cannot stress enough how important it is to go through the exercise of selecting an asset allocation that you can live with in good times and bad. This is the key to wealth and sanity.

 

6. You want total market, low cost, index funds.

 

7. The things you've said lead me to believe you'd do great with an all in one fund at Vanguard (or any low cost provider). They have target date funds that get less risky as time goes on. They have LifeStrategy funds that remain static over time. This option will cost you 0.12-0.16%. Never pay more than that.

 

8. If you wanted to get fancy and save a little money, you could directly own the individual funds inside the all-in-one fund. Vanguard Total Stock, Vanguard Total International, and Vanguard Total Bond. It'll cost you about 0.07% but it'll force you to do a little maintenance work and it'll expose you to behavioral errors because it'll require you maintain your asset allocation by buying stock in a crash and selling stock in a rally...people are traditionally bad at doing this.

Ed - I have my daughter in the LifeStrategy Funds!

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