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MissHavisham

Newbie Question, Finally got a Vanguard 403(b)

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Hello! I am a member of the fb group and decided to come here to say hello and to ask for help here incase there are some of you that only hang out around here. 

My school district only had AXA Equitable and after about 2 years of pressing they have finally added Vanguard as a 403(b) provider.  The onboarding process is finishing up and I'll be making contributions by the end of the month. 

I've read the Simple Path to Wealth and have learned so much from the 403b Wise FB group.  I fully fund my Back Door Roth IRA.  

 

Now that I have access to a Vanguard 403(b) I will be maxing that out as well, contributing the full $19,500.  

 

My question is, what should I hold in my 403b?  I know it is advisable to put bonds in the tax deferred account, but I'm not ready for bonds yet.  I am 35 and I feel like I've missed out on time in the market and I have decided to accept that risk for a period of 5 years. In 5 years when I turn 40 I will introduce some bonds.  I also don't know how I feel about International yet.  Which again, is why i am 100% stock.  {I'm learning about TIPS and other bonds which is why I dont have them yett. I want to fully understand them before I commit.} 

My question is, now that I will be fully funding my 403b, how do I best make up for missing time and limit tax issues.  

 

My Roth IRA is 100% VTSAX.  I'm wondering if it is dumb to have VTSAX in the 403b as well.  What would you do? What would you hold in your 403b?

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Welcome!  I don't think it is "dumb" to be a 100% stock in your retirement accounts at age 35, as long as you have a solid emergency fund. I also don't think there is anything wrong with being 80/20 or 70/30 at that age.  Either way, if you are maxing out both your backdoor Roth IRA and 403b, plus maybe a pension, you are going to be very well set for a fairly early retirement.

 

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Welcome MissHavisham. I hang out in both places. I also hang out on the presentations that Dan and Scott give on Zoom. They have investing presentations and the next one is next week. Registration: https://403bwise.org/events/details2/event-investing-basics-1 

Regarding your concern about "missing out", please allow me to provide a perspective since I have history just based on my age :- ). When I started investing in the stock market in 1994 at the ripe young age of 46, the Dow Jones Industrial Average was an astonishing record high of about 4,500! I was nervous too. Yesterday it closed at 28,586! But during those years, I have also experienced 2 massive crashes and the short lived crash this year. 

You read CL Collins terrific book. He said to invest forever as the markets will go up OVER TIME 15-20 years. So, you are doing the right thing. I believe most of us here have a international stock market exposure to diversify. Collins follows Bogle's advice is that most people will trust the U.S. Stock market than any other country or style (value vs. growth). I disagree but its a tiny disagreement. My own portfolio is a little more complicated but not much. The point is that I understand how it works with the markets over time. 

Bonds are tough to understand at first. I read The Only Guide to a Winning Bond Strategy you'll ever need by Larry Swedroe and Bonds Investing for Dummies by Russel Wild. The best way to learn about bonds is to invest in them. Discover the differences in risk and return between short, mid and long durations and how bonds fluctuate when interest rates change. Learn how a bond fund works. 

But as others said, you are fine with 100% stocks now and slowly add a bond allocation in the future. Bonds do not necessary grow your portfolio, they reduce risk and keep your emotions and your portfolio in check. 

Again welcome,

Steve

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On 10/3/2020 at 10:13 PM, MissHavisham said:

I know it is advisable to put bonds in the tax deferred account

This really depends on your taxable income. It is true that a larger percentage of the income bond funds generate is taxed as ordinary income rather than being taxed as qualified income (i.e. capital gains rates). Therefore, somebody in the top tax bracket will clearly want to pay attention to this, but somebody with essentially no ordinary income won't care.

On 10/3/2020 at 10:13 PM, MissHavisham said:

I'm not ready for bonds yet.  I am 35 and I feel like I've missed out on time in the market and I have decided to accept that risk for a period of 5 years.

I am 100% stocks and I would strongly discourage you from this course of action.

The reason to hold bonds is to protect you from yourself. When you own bonds you're reducing your expected returns in exchange for less volatility. The reason you're doing this is because you've decided one of two things about yourself is true:

  1. You are at risk for selling stocks during a crash and probably not buying back in until the recovery is well under way. Said another way, you're at risk for selling low and buying high.
  2. You won't be able to sleep at night during a crash with a stock heavy portfolio.

You should read about "anchoring" and something called the "sunk cost fallacy". Whatever has happened is in the past, it's over. You can only make decisions based on what is in your best interest now and in the future. If you are somebody who needs to hold bonds then you should hold bonds regardless of what happened in the past. If you are somebody who can handle 100% stocks then you should be 100% stocks regardless of what happened in the past.

On 10/3/2020 at 10:13 PM, MissHavisham said:

I also don't know how I feel about International yet.  Which again, is why i am 100% stock

International (what?) and stocks aren't mutually exclusive categories. There are international stocks and international bonds.

I won't make a strong argument for a certain percentage of your stocks being international and I won't make a strong argument for a certain percentage of your bonds being international. I will however make a strong argument that you should pick a percentage and stick with it forever. No matter what.

On 10/3/2020 at 10:13 PM, MissHavisham said:

how do I best make up for missing time and limit tax issues.

You cannot make up for lost time, whatever happened has happened. The only thing you can do is make sound decisions going forward, which should not be affected by whatever happened in the past.

I'm not sure what tax issues you're concerned with. You've only told us about a 403b and an IRA. Neither are taxable accounts and therefore everything you buy and sell within those accounts will have no impact on your taxes.

On 10/3/2020 at 10:13 PM, MissHavisham said:

My Roth IRA is 100% VTSAX.  I'm wondering if it is dumb to have VTSAX in the 403b as well.  What would you do? What would you hold in your 403b?

I would go through the process of identifying an asset allocation that fits my psychology and I'd buy the funds to achieve that asset allocation based on which account allows me to buy those funds for the lowest amount of fees. You may benefit from reading the Investing 101 page I wrote.

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I started contributing to a Vanguard target date fund, then bought the same index funds it held. I think of it like moving from a automatic transmission to manual transmission car - I wanted a little more control over the glide path (rpm range.)

403bvanguard01.jpg.b9a01d1bea201bb8270a7683e9cd6273.jpg

Roth IRA is 100% stock, 60/40  US/International
Taxable is 100% stock, VTSAX

When it comes to allocation, the most important thing is that you are invested and stay that way. Making sizable contributions is going to help a lot. There's a quote out there from someone about how when you have $100k, the next $10k will come eventually, but if you have $1mil that next $10k is inevitable.... or something(I understand the math behind it, but I don't have the million to prove it right or wrong.) Gotta build up that nest egg.

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5 hours ago, ScottO said:

There's a quote out there from someone about how when you have $100k, the next $10k will come eventually, but if you have $1mil that next $10k is inevitable.... or something(I understand the math behind it, but I don't have the million to prove it right or wrong.) Gotta build up that nest egg.

I think the math proves it doesn't? It takes longer to get a 10% increase than it takes to get a 1% increase! 😊

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11 hours ago, krow36 said:

 

I think the math proves it doesn't? It takes longer to get a 10% increase than it takes to get a 1% increase! 😊

The math proves it, but I still don't know what it feels like qualitatively 😋 

Found the quote:

"To turn $100 into $110 is work. To turn 100 million into $110 million is inevitable." Edgar Bronfman

https://www.investopedia.com/financial-edge/0211/why-the-first-1-million-is-the-hardest.aspx

https://www.whitecoatinvestor.com/the-second-million-why-the-rich-get-richer/

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What’s the explanation of the Bronfman quote? Is the idea that the person getting 10% on $100 is doing so through actual labor while the person getting 10% on a million is doing it through sitting on their butt?

I don’t know if that was meant to be an indictment, but it sounds like a pretty brutal critique of our system.

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Back to Miss Havisham: I think some of the musings here about the role of bonds, etc., may have obscured a direct answer to your question. 

Your plan seems excellent.  A+. Vanguard is a great, low cost option.  Maxing out the retirement accounts is a giant step in the right direction: keep that up every year and you're extremely likely to have a prosperous retirement.  Holding a Total US Market Fund in a retirement account is far from "stupid"--it should be the core equity holding for pretty much everyone. 

100% stocks is fine, so long as you don't get spooked and sell when the market takes a scary dive (as it will multiple times in your investing lifetime).  Just remember that what matters is what this fund will be worth in, say, thirty years: the zigs and zags of market value in the intervening years are irrelevant "noise." So long as you stay the course with that investment, you're doing great. 

As you learn more, you may decide to diversify by adding international stocks; you can easily do that by leaving the TSM fund alone and directing new contributions into a total international fund (or into a bond fund, or whatever fund you've identified as a good permanent addition to the portfolio).  

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