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Posts posted by EdLaFave

  1. It is a verifiable fact that in the past people have seen better results with portfolios that disproportionately invest in small caps.

    Although as Bogle pointed out in one of his books, literally every investment scheme people preach is guaranteed to work well with prior data. If these schemes didn't backtest well, it would be quite difficult to sell something that's been a historic failure. The argument Bogle goes on to make (and I agree) is that the overperformance in particular asset classes or investment approaches is likely due to one of two things:

    1. Pure random chance and we're seeing a pattern where one doesn't exist (something that humans are notorious for, think of how many shapes you can see in clouds for example).
    2. A strategy that wasn't lucky, but worked in the past due to conditions that are no longer present or explainable.

  2. 8 minutes ago, tony said:

    I no longer need to offer my opinions  on this site any further  since you are now the resident expert.  

    Offer your opinions all day long. If you find incorrect data or faulty logic in my posts then point it out and I'll happily concede and update my world view.

  3. 53 minutes ago, tony said:

    The Total Market Index which tilts more to larger companies.

    By definition the total market index doesn't tilt toward anything. It invests based on market capitalization. If you tweak that by adding a small cap fund then you're adding a tilt rather than correcting a tilt.

    53 minutes ago, tony said:

    My index small cap value fund has outpaced all my other index funds by a mile and a half for two decades.

    I can always find specific funds or asset classes that outpaced the total market index (diversification vs concentrated risk). Past performance doesn't predict future performance. This line of thinking is literally representative of the argument between index vs active.

    Still, your statement doesn't provide an accurate representation of the past. If you use morningstar to chart small cap vs the total market you'll find that there are relatively small periods of time where the small caps really outperformed. I think most of the time small caps were coming out tied or behind (but I stopped looking at historical data around the 90s), but thanks to that period of overperformance (depending on when you invested) you may have come out ahead. Although the total market has dominated the last decade, especially recently:

    • 2019: 30.84% vs 27.35%
    • 2018: -5.17% vs -9.33%
    • 2017: 21.19% vs 16.24%
    • 2016: 12.68% vs 18.26%
    • 2015: 0.4% vs -3.68%
    • 2014: 12.58% vs 7.54%

    We can cherry pick specific time segments when small caps won or lost relative to the total market index. Bogle never heard persuasive evidence for why small caps would predictably outperform in the future (i.e. the market currently undervaluing them and then correcting) and he discouraged people from tilting; so do I. However, the main point here is that if you're going to tilt then you need to know you will have years/decades where it doesn't go your way and if you can't stick with your plan for life then you're very likely to come up a loser.

    53 minutes ago, tony said:

     Its added  not subtracted.

    Again, it depends on what time frame you're looking at.

    53 minutes ago, tony said:

    Frankly the worst performing class has been internationals for me over time. I could easily eliminate it and be fine even though its often heavily promoted as essential.

    By definition a diversified portfolio will always have winners and losers. This temptation to eliminate the losers is how you move away from diversification and start pumping money into assets that are at their peaks while pulling money out of assets at their lows. Although tempting, this is usually a disaster.

    We all have to accept that we can't predict the future and we see patterns where they don't exist.

    53 minutes ago, tony said:

    Ed you are an investment puritan to the extreme. Nothing wrong with that but nothing wrong with what I am doing either.

    The point of my post was to highlight that the total market fund is not over or under invested in anything. If you build a portfolio that is over or under invested in something then you are placing a bet. You're saying that the market currently has something (small cap) valued at Z% and you think that the market is going to "correct" this "undervalued" asset and shift to Y%. That's a bet.

    As I said as long as somebody makes this bet in moderation, uses low cost index funds, and sticks with the strategy until death, then I think they'll basically be fine. This is particularly true when the bet is on something as broad as small cap companies as opposed to something as narrow as Snapchat. However, don't fool yourself into thinking your not making a bet or you're correcting an unbalanced total market fund.

  4. 2 minutes ago, ChrisC said:

    If they answer that the schools can keep their employees from investing with low fee providers like Fidelity and Vanguard, then that will also be ammunition that I can use to show teachers and our benefits committee that there is a problem.

    I'm confused, is somebody pointing to this bill and telling you the problem has been solved?

    Why can't you just point to the glaring problem in front of us today to prove there is a problem? We already know districts prevent employees from picking the vendor of their choice.

  5. 26 minutes ago, ChrisC said:

    some of the republican politicians will do this, but to say they all will I think is wrong

    These are the same people who fought and defeated the fiduciary rule. Best of luck, fight the good fight. In my view, the only path forward is removal from office. Persuasion isn't an option because being "business friendly" is core to their beliefs. Pressure isn't an option because teachers don't really care. I'd love to be wrong.

  6. I am curious, but not curious enough to read the bill. Everything I know leads me to believe that some combination of the following will allow school districts to maintain their list of approved vendors:

    1. Exceptions in Subdivision 8.
    2. Exceptions in Subsection B.
    3. The definition of a qualified investment product.
    4. The registration process under Section 8A.

    It looks like there are lots of loopholes here. If you get to the bottom of the text, I'd love to read your conclusions.

  7. I've got really bad news for you that I'm sure you're fully aware of. Texas Republicans are always going to side with financial institutions over workers. I guarantee it.


    ...although I don't know what is in HB2820/HB2020 (not sure which is right, you used both).

  8. 14 hours ago, tony said:

    I'm more a 4 fund portfolio guy adding some extra small caps to the mix because Total Stock Market Index has limited exposure to smaller companies. 

    Just to add clarity for other people reading this...

    A total market fund (like VTSAX) invests in large, medium, and small companies based on the share of the US market that those companies represent. One point of nuance...this split isn't based on the sheer number of companies (there are far more small companies than large); it is based on the value of companies (large companies are far more valuable than small companies).

    So if Apple is valued at 3% of the entire US economy then 3% of a total market fund will be invested in Apple. Similarly, if Small Company ABC represents 0.000000000001% of the US economy then 0.000000000001% of the fund will be invested in Small Company ABC. Therefore a total market fund's investment in small companies is exactly equal to their value in the US economy (roughly 5%).

    If people buy additional funds with a focus on small companies, they're doing something referred to as "tilting," which is a fancy way of saying they are betting that small companies are undervalued and they believe a period of over-performance (relative to medium and large companies) is on the horizon. Said another way, this is a form of market timing and prediction, which is something I highly discourage. The bet may or may not pay off, whose to say?

    Although I wouldn't go down this road, I don't think it's terrible as long as you stick with it forever and only use low cost index funds to implement it.

  9. On 1/18/2020 at 10:38 AM, Brad Scharlott said:

    School officials tell her she has no choice but to allow that money to go into a Voya 403b

    I don't have a definitive answer. I've never heard of this and all of my experience tells me that 403b contributions (with the employee's money) are purely voluntary. So I think she has the choice, but I can't say that for sure.

    If we assume she has to put the money into a 403b, then I'm not sure why it would specifically have to be Voya. Unless Voya is the district's sole 403b vendor?

    Another reason to doubt that she has no choice, what would happen if an employee had already maxed out their 403b?

    On 1/18/2020 at 10:38 AM, Brad Scharlott said:

    she may (or may not) be able to freely roll it over to a retirement oriented instrument at TIAA.

    As others have said, she can roll it over into any IRA of her choice.

    However, if the money has to first enter the 403b, make sure you figure out the surrender fees. If the contribution is left in cash as opposed to buying mutual funds, do any potential surrender fees get waived? Do the surrender fees get waived no matter what when employment is terminated? Do the legwork to try to avoid this potential fee.

    If you assume she doesn't have to pay a surrender fee then having the money go into a tax advantaged account (like a 403b) provides maximum flexibility. You can then choose to pull the money out and pay tax on it (as you would if it were paid to you directly) as well as potential IRS penalties depending on your circumstances or you can let it stay in the account and enjoy the tax benefits.

  10. 11 hours ago, JT1906 said:

    Hi Tony, can you explain what equities are? I hope this isn’t a dumb question.  

    "Equities" is a fancy way of referring to stocks.

    Similarly, "securities" is a fancy way of referring to any financial holding (stocks, bonds, etc.).

    ...every subculture seemingly has to invent their own terminology if for no other purpose than to keep people from joining the club. Don't worry about it.

  11. 28 minutes ago, Omar said:

    I have emergency funds (6-months of normal expenses; I decided on 6 months as I'm single with no other income sources) that have just been sitting in a low yield savings account. I have now moved those savings to a higher yield savings account and would like to take some of that money to fully fund a ROTH IRA. I plan to replenish my 6-month emergency fund throughout the year and once replenished, again take some of it and fund the Roth account (and on and on). It makes sense in my head, but how does this sound to you?


    In my view, the purpose of an emergency fund is to guarantee (within reason) that you'll always be able to cover unplanned expenses. Driven by that goal, this is what I did:

    1. When I first started out, I barely had enough money to cover an emergency. Therefore, I kept my money in a high yield savings account.
    2. As I saved more, I definitely had enough money to cover an emergency but if I lost half that money in the market then I'd be in trouble. Therefore, I kept money in a high yield savings account.
    3. Now that I have more than enough money to go through a cataclysmic market crash and still handle an emergency...well, I keep everything invested.

    I will never voluntarily put money into an asset class that has a low expected/guaranteed return. I just won't ever do it.

    Some people will cling to fear. They'll talk about the pain and suffering of selling stock for an emergency at a market "low". Well how reasonable is this fear? I invested my 10k emergency fund in 2010 and that block of money is now worth 36k. Had I let it grow at 2% for that time (a very generous interest rate that wasn't attainable for each of those years) then I'd only have 12k. As you can see, even in this supposedly doomsday scenario of a 50% market drop, my stock emergency fund is still worth 6k more than the savings account emergency fund.

    Aside from fear, this is just another example of how "mental accounting" hurts you. Money is fungible and when people start to mentally put chunks of money into "boxes" for specific purposes, they often make mathematically inferior decisions.

    Still, whatever helps somebody sleep at night, good for them.

    56 minutes ago, Omar said:

    should I allocate the Roth account with Vanguard Total Stock and/or Total International Stock, or would you recommend something else since this is what is part of my 403(b) account (along with Total bonds)? Thank you for any advice you can provide.

    As a general rule of thumb, I put my asset class with the highest expected returns in my Roth account. In practice this means I will never hold bonds in my Roth account.

    So the question becomes, should I put domestic stock or international stock in the roth? I don't know. I was too lazy to do the research to see if US stocks have a higher expected return or not. I know for sure that International stocks have lagged US stocks for well over a decade now. I also know international stocks have much lower P/E ratio, which would normally indicate higher returns in the coming years. So who knows?

    Ultimately, I decided to keep international stock in my taxable account because doing so gives you a tax credit. Unfortunately international funds are also less tax efficient than domestic funds so I'm not even sure if that pays off. But, since I made that decision, I put domestic stock in my Roth.

    ...I think the main take away for you is, just make sure bonds aren't in your Roth account. If you want your Roth to be all domestic, all international, or a mix...you'll be fine. Just pick something and stick with it.

  12. 1 hour ago, ChrisC said:

    I will say it is difficult for me to believe that the only fees with NEA Direct invest are $35 admin fee per year and the Mutual fund expense ratio. Are you all sure there are no other fees?

    I enrolled my ex-wife in this plan around March of 2017 and we haven't noticed any other fees (trust me, we've been looking for them).

    I'm feeling too lazy to dig into this right now, but there might be a 0.01% 12b-1 fee added on top of each fund. I have a vague memory of this being the case, but I couldn't find it in 15 seconds of looking so I gave up.

    2 hours ago, ChrisC said:

    Another concern I have is investing with a company that seems to be so incompetent when I call them and they can't give me any answers. All the more reason for us to keep pressing for Fidelity and Vanguard. 

    Honestly, that's how I feel about every product or service I buy. You're right to be paranoid/untrusting when it comes to anything in the financial industry so I'd like to encourage that instinct.

    In this case the incompetence you're seeing is likely because:

    1. The customer reps are poorly paid and unskilled.

    2. The customer reps are likely only trained on the products that generate revenue for Security Benefit.

    Please push for Fidelity and Vanguard. The ease of enrollment there will result in more people signing up.

    1 hour ago, tony said:

    I nudge him at times for being so adamant for finding the absolute lowest fee

    It's okay that we have different views on this, but I do acknowledge the reality that some people will want to pay in order to not rebalance themselves. I just want people to make an educated decision on what that convenience is worth to them.

    In this case it'll cost an extra 0.29% to buy a single fund-of-funds at Aspire than it will cost to buy the three fund portfolio at NEA DirectInvest. Let's assume 6% annual returns and 3% inflation. After 1 year that extra fee will consume 10.7% of inflation adjusted profits. After 30 years that fee will consume 14.25% of inflation adjusted profits.

    Rebalancing takes maybe 30 minutes per year. It's a personal decision whether or not that convenience is worth it.

  13. What information are you trying to get?

    I can't remember if I dealt with a "plan number" or not. I do remember when I researched TIAA they looked up my school district, gave me a plan number, and then I could enter that plan number into their website to see the funds available in my plan. Certainly the district/TPA know the plan number associated with their relationship to Security Benefit. Similarly, Security Benefit must know it to and be able to look it up given the school district's name. So yeah, keep pushing. Good luck.

  14. Let me save you some time. Read the page where I ranked the best vendors available in Florida (a great proxy for the nation as a whole).

    You're right about Aspire, I documented them here.

    You'll find that Security Benefit's NEA DirectInvest is better than Aspire. I documented that plan here.

    Finally, you'll find that Vanguard and Fidelity are the best. Vanguard is documented here and Fidelity here.

  15. 20 minutes ago, ChrisC said:

    I figured this advisor was ripping them off with his fees just like he put them in the expensive mutual funds, but I never used an advisor, so I didn't know what a fair price would be.

    If Vanguard is the standard for a fair advisor then they'd charge you 0.30% and put you in either a three fund portfolio or a single fund-of-funds. So we're talking about a total expense of 0.36% - 0.46% or so?

    This other advisor is charging 0.3752% and they're using funds that cost around 0.9%. So thats a total of 1.2752%, which is more than 3x as expensive. Then to add insult to injury they're charging 5.5% sales commission every time shares are purchased. It should be criminal.

  16. I can't stress this enough, paying even $1 to a financial advisor is an absolute waste of money and using a financial advisor sets the stage for you to be taken advantage of. Having said that, if you're trying to figure out what a "fair" price is, Vanguard charges 0.3% for their "Personal Advisory Service."

    Security Benefit's NEA DirectInvest is an elite 403b plan that I documented here. For a variety of reasons, Vanguard and Fidelity are better, but this is an objectively elite plan with rock bottom fees and the ability to build a fully diversified portfolio.

    If they can max out their 403b then investing the remaining money in Aspire's self-directed 457b is a great idea. I documented that plan here.

    It would be nice to get Vanguard added because they'd provide some competition to NEA DirectInvest, but the plans are comparable. However, it would be a real benefit to add Fidelity to compete with Aspire's 457b, there is an opportunity for some real savings there.

  17. 18 hours ago, Omar said:

    Thank you Ed and Krow

    No problem. Please try to educate your coworkers. We need more people willing to speak up on this issue.

    18 hours ago, Omar said:

    Although I really like the idea of a simple, single fund, I'd also like to minimize the fees I pay

    That's exactly why I don't have a single fund-of-funds. However, be psychologically prepared to maintain your asset allocation:

    1. If international is lagging domestic (as it has been doing for a very long time), you'll be pumping new money into that instead of the high performing domestic.
    2. If stocks are crashing, you'll be pumping new money into that instead of your steady bonds.

    You need to be able to always buy what seems to be doing poorly, sometimes terribly. That's how this works.

    18 hours ago, Omar said:

    Currently I am contributing $7.5K to my 403b and I'm making some financial changes to try to increase contributions to $10K. Does this seem like a good starting point and/or is there anything else you advise I consider/read before opening the Vanguard account?

    If you read the links I posted earlier then you know enough to get going. You can always learn more, but it won't change the core fundamentals:

    1. Lower your spending as much as possible without impacting actual happiness, which is different than the fleeting happiness you get from a useless purchase.
    2. Invest as much as possible in low cost, total market index funds.
    3. Know that bonds reduce expected returns, but based on your personality, you may need them to keep yourself from making disastrous investing decisions.
    4. Once you pick an asset allocation, stick with it unless your life circumstances change. Market crashing? Do what you were doing before. War started? Do what you were doing before. Read some business news? Do what you were doing before. Friend bragging about the millions they've made in bitcoin? Do what you were doing before.
    5. Max out your tax advantaged accounts (IRA, 403b, 457b, HSA, etc.) before investing through a taxable account.

    There's lots of information to learn beyond those 5 points, but this will get you to the promised land. Everything else is either useless or a mere optimization.

    18 hours ago, Omar said:

    would a Roth IRA be best, or just any funds

    There may be some confusion (maybe I need to write a blog post on this):

    1. At the highest level there are two different types of accounts: taxable and tax advantaged. As the names imply, tax advantaged accounts receive tax benefits that a taxable account does not.
    2. Tax advantaged accounts have yearly contribution limits and/or income restrictions. Examples of tax advantaged accounts are IRA, 401k, 403b, 457b, HSA, etc. Tax advantaged accounts often come in two flavors: Roth and Traditional.
    3. Regardless of what type of account we're talking about Taxable, Traditional 401k, Roth IRA, etc. you're allowed to purchase investments (stocks, mutual funds, etc.) within those accounts.

    Having said that, we've spoken extensively about Roth vs Traditional on this form. Nobody can definitely say if a Traditional is better than a Roth because it relies on future information we don't have and information specific to each person. However, I feel entirely comfortable predicting that the majority of people, in most cases, will be better off using a Traditional account rather than a Roth. I consider this to be an optimization.

    If a teacher has a pension that increases the appeal of using a Roth. If a teacher won't be getting social security that increases the appeal of using a Traditional. If you want to get into Roth vs Traditional discussion just say the word and we can.

  18. 19 minutes ago, Omar said:

    I was able to find information for my District (in California) in the CalSTRS 403bCompare website

    If I were you I'd prefer to get this information from your district or the TPA (Third Party Administrator) that your district is using. You're going to have deal with these people anyways.

    403bcompare may or may not be up to date and it definitely doesn't list anything about your 457b options.

    19 minutes ago, Omar said:

    It has many options

    I don't know what the CTA Retirement Savings Plan is, but I don't know of any vendors better than Vanguard and Fidelity (maybe a state run 457b can occasionally compete, but I'm not sure and I don't think California's can).

    19 minutes ago, Omar said:

    Would my next step be to (1) Stop current transfers to Invesco, (2) open account with one of the products below (Vanguard 403b), (3) and transfer Invesco funds to Vanguard (abour 30K)?

    This may be the easiest course of action:

    1. Establish an account with Vanguard.
    2. Redirect new contributions to Vanguard.
    3. Rollover the Invesco account to Vanguard.

    If you begin by stopping contributions to Invesco then you'll likely miss out on 403b contributions for a few paychecks. To compensate for that you'll have to artificially inflate your initial Vanguard contributions and then go back and change it to a sustainable level later. It is important that you get as much in your 403b as possible.

    You haven't said how much you're contributing. Remember you can put 6k in an IRA, 19,500 in a 403b, and another 19,500 in a 457b. If you're not investing more than 6k then it is probably quite a bit easier to not worry about making new contributions to a 403b or 457b.

    19 minutes ago, Omar said:

    Or just talk to the product provider or a CFP for guidance with this next part?

    It is in your best interest to kill whatever instinct is telling you to pay other people to manage your money. They'll inevitably put your money in their pockets.

    19 minutes ago, Omar said:

    Which Vanguard products do people here advice for a middle career teacher (20 years completed) with at least 15 more years still to go?

    Please read my Investing 101 page. That'll give you the fundamentals in an easy to understand, condensed way.

    Then read my Vanguard page. That'll tell you how to apply those fundamentals.

    Then come back and ask questions.

    19 minutes ago, Omar said:

    I did find an archived list of the old 403(b)wise Fiduciary Advisory Directory and saw a couple of people in Southern California (San Gabriel/LA) area or would be open to other recommendations in the area if that is a must.

    ...again, kill that instinct.

  19. 17 minutes ago, ScottO said:

    Roth IRA usage/allocation is a separate topic than what I originally wanted to discuss, but for some people the liquidity of a Roth IRA is important and could be what gets someone started investing. We all have different investment goals, time horizons, financial situations, etc. Yes, there are drawbacks to the idea of not maximizing the tax benefit on earnings and overall opportunity cost, but if you can make someone feel comfortable enough to get in the habit of regularly putting money into an account and watching that money grow(even at a lower rate of return) that's good. Perhaps they rebalance later if their financial situation changes and the idea of using the account as an emergency fund is no longer applicable(or proven to be incredibly disadvantageous on a forum they are a member of 😋.)

    I believe you're missing the point.

    Let's just assume it is a good idea to treat your Roth IRA as a savings account. It is still sub-optimal to hold your bond allocation in your Roth IRA. Your asset with the highest expected performance should be put in the Roth IRA because the (hopefully) larger growth will be tax free.

    I would argue vigorously against treating certain accounts differently than others (like imagining that your bonds represent an emergency fund), but again, let's put that argument aside. If you wanted to only use bonds for your emergency withdrawals then it is easy:

    1. Hold bonds in some other account (say your Traditional 401k).

    2. Hold stocks in your Roth IRA.

    3. Sell 10k of stocks in your Roth IRA.

    4. Exchange 10k of bonds in your other account for stocks.

    You've effectively sold 10k worth of bonds and your Roth IRA is enjoying the benefit of containing your highest expected performer.

    17 minutes ago, ScottO said:

    Bogleheads says if you're going to do it, don't consider the emergency fund a part of your overall asset allocation.

    Again, this is mental accounting that just doesn't hold up to math. Your portfolio is the summation of all of your accounts and it should match your expected risk tolerance. Anything you do to get away from that is a mistake.

    The only potential exception I'd make to this is if your portfolio is so small that unexpected expenses combined with a downturn really would wipe you out. But in that case your ability to take risk is so small that your portfolio should effectively be all bonds...which would mean you aren't jumping through the mental hoops that the "bucket" system demands.

  20. 11 minutes ago, sschullo said:

    I have not seen these prized returns since the tech bubble 20 years ago.

    It looks like the US market was up just shy of 31%. That is a great year any way you slice it. We may or may not hit a bear market soon. However, I'd like to add some context to the implication that great returns point to us potentially being on the cusp of bad news. We've broken the 20% mark 3 times in the last 10 years and one of those times, 2013, was even better than this year.

    • 2017: 21.19%
    • 2013: 33.51%
    • 2009: 28.76%

    The bear market will eventually happen, but as they say, more money is lost preparing for bear markets than going through actual bear markets!

    ...it's also worth noting that the following years have tempered the explosive growth that we've seen in the years mentioned above:

    • 2018: -5.17%
    • 2015: 0.4%
    • 2011: 1.08%

  21. 8 minutes ago, whyme said:

    I guess we can't rule out zero ER funds from them

    I would love to see it.

    At this point I'm waiting for a negative expense ratio that'll pay me to own the fund. The notion seemed ludicrous until a few years ago when I heard about central banks keeping interest rates below 0. So who knows?

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