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bprisco

New Teacher | Provider Suggestions

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Hello,

I am a new teacher looking into 403B options and am seeking advice.  After doing some research, I found that it is best to select an investment provider vs. an insurance, is this correct?  If so, I have narrowed my choices down to Fidelity and Vanguard due to low costs and expense ratios (403bcompare.com).  Can anyone provide advise or tips in making a decision between providers?  Steve's post from 7/24 explored a similar question.  However, I do not know the difference between an all-in-one vs. 3 fund portfolio.  Is anyone willing to explain?
 
Am I possibly overlooking another quality choice?  My full list of options are:
AIG Valic
American Fund
AXA (which I read on this site is to be avoided)
Fidelity
First Investors
Franklin Templeton
ING National Trust-NY
Mass Mutual VA
Metlife
New England Financial Co.
New York LIfe Insurance Co of NY
Oppenheimer
RiverSource
The Legend Group/ADSERV
Vanguard
Wilton Reassurance Life Co of NY
 
This is all very new to me; however, I am trying to educate myself and make the smartest decision towards my financial security.  These posts and recommended sites have helped me begin to grasp the concept of saving for retirement. I thank you all greatly. 
 
*Note, I plan to retire in approx. 25 years. 
 
Thank you,
bprisco

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Bprisco

Looks like you know  what to do seeing that you have Fidelity and Vanguard. So this is a no brainer. One or the other is fine of these two.

This page from Vanguard might help explain an all in one fund :https: //investor.vanguard.com/mutual-funds/all-in-one-funds

Basically its one fund made up of other funds. Target funds are a good example. You pick one fund and within itself it is comprised of other funds.Target funds are managed for you by internal management . They will be adjusted for you in terms of allocation and become more conservative as you get closer to your retirement date."One Fund And You Are Done" as the saying goes. Life strategy funds and Vanguard Balanced Index Fund are similar except they have a fixed allocation and they are not managed for you. You will have to watch them yourself as they don't get more conservative as you get closer to retirement . 

A 3 fund portfolio simply means you chose the funds individually that you want but you maintain diversification.

1. Total Stock Market Index

2. Total International

3. Total Bond

These are the three that usually make a 3 fund portfolio up but you will have to decide what percentages you want and will have to adjust those percentages yourself as your life circumstances change. Also a 3 fund portfolio could become a 4 or 5 fund portfolio if you would want to chose some other asset class . Some folks add Small Cap Value Fund or Extended Market Index Fund to further diversify the portfolio towards small caps which will make your portfolio more aggressive. The thinking here is that some feel Total Stock Market Index is tilted heavier towards large caps although it does have small caps included. Adding small caps adds another dimension of diversification. Currently small caps are doing much better than other classes of stocks.Others might decide to add international bonds .

If you want it all done for you its hard to beat a target fund and Vanguard and Fidelity both have them. JUST make sure if you go Fidelity you pick their index fund target funds as their managed  target funds  are more costly.

Doing the 3 fund portfolio on your own is minimally cheaper than going the Target route but the extra few cents you pay is worth it since everything is done for you.A good 3-4 fund portfolio is broadly diversified, low-cost, passively managed, regularly rebalanced, and consistent with its owner's need, ability, and desire to take risk.

Tony

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I agree with Tony that Fidelity and Vanguard are by far your best choices.  The differences between them are minimal.  Some would say that Vanguard has slightly better fund choices, but Fidelity has slightly better custom service.  I use Vanguard and have not had any significant customer service issues myself.                                                                                      

For someone new to investing I would recommend an all in fund like a Target Date Fund or a Vanguard Life Strategy fund.  If you choose a target date fund, it doesn't have to match your expected retirement year exactly.  Just pick one that matches your desired asset allocation, and be aware that it will adjust slowly more towards bonds as you approach the target year.  If you pick a life strategy fund like Vanguard Life Strategy Growth (VASGX) it will keep the same stock/bond ratio permanently, 80/20 in this case.

The amount you save by maintaining your own 3 fund portfolio as opposed to an all-in-one fund is about 10 basis points, or 1/10th of 1% annually.  If you have $100,000 in your account, the Target Date Fund or Life Strategy Fund will cost you about $100 bucks a year more than the 3 fund portfolio, but rebalancing to maintain the desired asset allocation will be done automatically for you.

 

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Yes, you want an "investment provider," but what that means in practice is that you want a vendor that will give you access to low cost, total market, index funds without adding on a bunch of fees and complexity.

I'm not familiar with everybody on the list but Fidelity and Vanguard are the two best vendors in the industry and it really isn't close. I wrote about and documented them here. I think you're fine with either, you'll get slightly lower fees with Fidelity and you'll get a better, more trustworthy culture with Vanguard.

You may want to read my Investing 101 page, which explains the all-in-one fund and 3 fund portfolios. The gist is, all-in-one requires no maintenance at all from you and is a bit more expensive while the 3 fund requires very minimal maintenance from you and is cheaper.

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35 minutes ago, tony said:

Some folks add Small Cap Value Fund or Extended Market Index Fund to further diversify the portfolio towards small caps which will make your portfolio more aggressive.

At the risk of nit-picking language, I'd just add that this isn't exactly adding diversification because the Total Stock Market Index fund invests in small and mid size companies. By adding a Small Cap fund or an Extended Market fund what you're doing is investing in those companies more heavily than the proportion those companies represent in the economy. You're "over-weighting" small/mid size companies.

If you look at historical data, this approach does produce higher returns. You may hear this fact and wonder why in the world you wouldn't adopt this strategy. Well, I can promise you that every strategy you'll ever hear about will have been successful using past data. People won't popularize something that has been a failure; they'll look back at the data and work backwards from there to come up with a strategy. Unfortunately, we can never know if this derived strategy just happened to work in the past or if it is somehow a guaranteed result based on some fundamental truth of our economy...a truth that existed then and will continue to exist. So folks like Bogle have argued against this approach because it is based on the idea that you can predict which asset classes will outperform...a philosophy that runs counter to his core thesis that "nobody knows nothing."

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MN Gopher, thank-you for contributing to this board. We need you here. Everyone always adds some info. I am glad you mentioned that you don't necessarily have to pick the fund closest  to your year of retirement. You can pick other dates if you wish a more aggressive or a more conservative approach.

4 hours ago, EdLaFave said:

At the risk of nit-picking language,

Ed you are a purist to a fault. I get what you are saying though. I just offered a possible  small cap suggestion to possibly increase his returns. International bonds too have been a controversial addition. Bogle doesn't like them  but Vanguard adds them to their target funds. Still my small cap add on to my life strategy funds is whats keeping me in the black right now.  I do think Total Stock might be underweighted in small caps. Many folks add Vanguard Extended Index. Others add Emerging Markets Index  even though total international has a good weighting in them.

Bogle is close to ninety. As we get older we sometimes fail to see how things may change. He has been right usually though and tends to underweight internationals while Vanguard recommends like 30% of your portfolio. I'm at 20% closer to what Bogle recommends.

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3 hours ago, tony said:

Ed you are a purist to a fault.

You're right. I truly wonder if I'd be diagnosed with some kind of condition...honestly.

I just want folks read reading this thread to know that they're fully diversified in US stocks with the Vanguard Total Stock Market Index Fund. Plenty of reasonable people add additional funds to "overweight" their favorite asset classes (small/mid, value, real estate, and so on), but I want folks to know that this approach represents a more complex and speculative strategy that investing legends actually disagree with (presumably some agree too)...so there shouldn't be pressure to dive deeper into something that may already feel overwhelming.

3 hours ago, tony said:

I do think Total Stock might be underweighted in small caps.

Do fact check me, but I believe the index the Total Stock Market tracks does weight small/large and value/growth in the exact proportion those businesses represent in the economy.

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59 minutes ago, EdLaFave said:

You're right. I truly wonder if I'd be diagnosed with some kind of condition...honestly.

I just want folks read reading this thread to know that they're fully diversified in US stocks with the Vanguard Total Stock Market Index Fund. Plenty of reasonable people add additional funds to "overweight" their favorite asset classes (small/mid, value, real estate, and so on), but I want folks to know that this approach represents a more complex and speculative strategy that investing legends actually disagree with (presumably some agree too)...so there shouldn't be pressure to dive deeper into something that may already feel overwhelming.

Do fact check me, but I believe the index the Total Stock Market tracks does weight small/large and value/growth in the exact proportion those businesses represent in the economy.

Do fact check me, but I believe the index the Total Stock Market tracks does weight small/large and value/growth in the exact proportion those businesses represent in the economy.

. i do know a while back Vanguard  International index increased their emerging markets allocation because supposedly it was underrepresented.

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Here is an article that addresses the issue.  I am not posting this to be "right" Just for general information and you can be your own judge. This is one man's opinion. Steve S incidentally does not care for the author of this article.Others suggest an emerging markets index fund in addition to Total International is a good idea. Rick Ferri used to swear by adding a High Yield Bond Fund. Others yet recommend  adding a real estate fund. Still I agree if you are not adventurous a basic 3 fund low cost index portfolio is all you need to be successful. I just like to increase my odds that I am truly diversified so I own a small cap value fund. 

Ed is a purist  in the John Bogle tradition and I totally respect that. I am too but something tells me the author here  might be right.

https://www.marketwatch.com/story/why-vanguard-total-stock-market-isnt-the-best-fund-in-the-fleet-2014-12-03

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12 minutes ago, tony said:

I am not posting this to be "Right" Just for general information and you can be your own judge.

I suspect there might be a miscommunication surrounding what we are right or wrong about.

My contention is that the Total Stock Market fund owns each asset class (small to large, value to growth) in proportion to their market capitalization. I also agree the overweighting scheme has been successful in the past. The article doesn’t conflict with that.

I’m not sure how we are defining the term diversification. Yes Total Stock Market has a small percentage in small companies, but that is because small companies represent a small portion of the economy. I don’t think overweighting an asset relative to market capitalization equates to increased diversification. I get the sense that perhaps you view diversification in more absolute terms...in that case splitting your portfolio into thirds (big, mid, and small) would represent maximum diversity?

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