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hutina8888

Vanguard 403b Question

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Hi all, been a lurking member for awhile now, really enjoy reading and learning these posts about 403b and investing. 

My question surrounds how Vanguard charges/bills for fees on expense ratio. Based on my transaction history I see that every month a $5 monthly fee is taken out which totals to the yearly $60 fee. However, I never see charges relating to expense ratios (transferred my 403b from another provider in August of 2019 where I clearly saw third-party managing fees and charges for expense ratios). Are these fees automatically adjusted by Vanguard when monthly contributions are made?

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Hutina, 8888

That's a good question that is difficult to explain.  Rest assured even if you don't get the full picture, with Vanguard you are paying much less than most others. You are being taken care of and not being taken to the cleaners

The sixty dollars is taken  directly straight off your balance. However, you don't directly pay the fee incurred from an expense ratio, To calculate expense ratio fees, multiply the Vanguard expense ratio as a decimal by the value of your investment. For example, if you select a fund with an expense ratio of 0.65%, you will annually be charged $65 in fees for every $10,000 you invest in the fund.  You do not notice anything however. You won't see the charge. It simply gets subtracted (on a daily basis, I think) from the assets in the fund. It's  subtracted daily and charged monthly so  If the expense ratio is 0.17%, and you have on average $100,000 in the fund for a year, you will 'lose' $100,000 0.0017 = $170. to site another example.

Unfortunately many teachers fret about that $60.00 fee not realizing that the expense ratio of the fund is much more damaging over time so you want to pay the very least you can for a mutual fund or funds.

I hope this helps. You will never see the expense ratio being taken out.

 

Tony

 

 

 

 

 

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At the end of every day that the stock market is open, the value of each stock (and then each mutual fund) is determined. Let’s say the stock market is open 250 days out of the year. That (end-of-the-day value) times (the expense ratio) times (1/250) equals that day’s net asset value (NAV). The NAV is what is reported in the newspaper, internet, and your statement. The NAV has already been reduced by 1/250 of the expense ratio. Over the course of the year, all of the expense ratio will have been taken by the financial company. Does this make sense?

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Hi hut,

Call Vanguard and ask them your question. 

Below is a real life example of what Tony and krow36 were saying. I created this table for my blog with my portfolio and the ERs. While it is not 100% accurate I simply multiplied the ER times the amount of money in each investment to get a fairly close estimate. 

For years I have paid between $1100 to $1300 annually. Disclosing in dollars is much clearer than saying I only pay .0064%. I have saved so much in costs, my portfolio went up in value despite taking large distributions occasionally for over a decade since I retired. Of course, I have been lucky that the stock market has soared since 2008 (except with a couple of years with near zero returns). 

Hope this helps,

Steve 

Q3 2020 Costs.png

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In addition, I'd like your opinion on my current 403B allocation.

Age: 38

Current Contribution:  403B $19,500 - no Roth option 😞

40% Vanguard Growth Index

20% Vanguard International Growth Index

20% Vanguard Value Index

10% Vanguard Small Cap

10% Vanguard Real Estate

Is this too aggressive? 

Thanks,

Tina

 

 

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Yes it's aggressive but only you can say it's "too aggressive". It's certainly not what we would suggest for a beginning investor, but I don't think you are a beginner.  How did you feel in March when the market dropped like a rock? Would you be able to keep from exchanging into a MM fund if the market dropped 50% like it did in 2008-2009? Your growth funds are certainly doing great these days. I think you might consider exchanging 10% Small Cap and 10% Real Estate for 20% Total Bond Index. 

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2 hours ago, hutina8888 said:

Is this too aggressive? 

Not necessarily at your age BUT  it is very aggressive.  I was allocated 100% stocks, like you at your age. You could easily lose 50% of your money in a down market though.  I did twice. IT absolutely could happen. If you can sleep at night than you can stay in 100% stocks as you are currently positioned.  It might pay off. Your teacher pension and social security  could be considered as your bond allocation. That sounds logical enough justification.

However if you feel worried about a potential large drop than I would suggest you  start learning about  and adding some bonds as you go forward.

 

Frankly,

I don't like your allocation. Why not move into a Vanguard Target Fund close your age of retirement and let Vanguard handle the allocations for you. Than all you have to worry about is the saving and not the management. They will automatically, lower the risk for you as you get closer to retirement.

Or you could reduce your holdings. You could do:

1. Vanguard Total Stock Market Index, -this one fund would allow you to combine both your  value,  growth , and real estate fundsr since this one fund contains all  of those holdings.  (50%)

2.Keep the 20% in your  current international Fund

3 Add 20% to Total Bond Index (if you feel too aggressive)

4. I'd keep the 10% in small cap but  that's my personal opinion. The total Stock Index Fund also has some small caps too. So you could dump this too and go 60% into The Vanguard Total Stock Market Index.

I used to have 28 funds!!  You don't want to make that mistake.  More is not better.Keep it as simple and streamlined as possible.

I hope this helps!!

 

Tony

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Hi Tina,

Thanks for putting your AA up.

I agree with the others that 100% stocks is not a good idea. Furthermore, it is not diversified. You have way too much of your portfolio in growth stocks 60%. Of course, growth has been rip roaring for a couple of years but sooner or later it will change to one or both of the other styles: Value and or Blend. I have all of my stocks in blend so I get reasonable returns over time. 

I was in growth stocks in the late 90s and I lost 70% in the tech wreck. I will never do that again. 

It is OK to have 100% stocks if you are a seasoned investor and already been through a rough period. If not scale back into some bond funds as the others have said. In the stock side make sure your AA cover both value and growth, not just one. The Total Stock Market Index and the Total International stock market index covers all stocks including value and growth. 

Best of fortunes,

Steve

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Thank you all for sharing your insight, I definitely take all your advice into consideration when I adjust my allocation in the near future. 

I have more than enough funds in my portfolio and I agree that I should keep it more manageable. It's that FOMO mentality I am battling with. 

Let me provide a bit more background information on my current allocation. 

I was very lucky that I started working exactly around the 2008-2009 great recession and also started my contribution during that time, some very small amount though as I barely started working, wish I was able to dump $19,500. And around fall of 2019 I thought the market was running a little too  and rebalanced my account to about 50% (TIPS and Money Market) totally regretted that after the market continued to rip to new highs. Then came the pandemic was very glad that my portfolio didn't take a big hit in March. I made some minor adjustments, moved about 10% from Money Market to Growth and Value in March and April thinking the market would take a long time to recover and missed out on that V-shaped recovery on the other 40% of my portfolio in "cash position".

My current portfolio consists of

TIPS 40%, Value 20%, Growth 15%, Bond 5%, Real Estate 5%, International 10% This is about ratio of 55/45 equity to bond.

My thinking is that if the market crashes, especially the growth segment,  it's a good time to average in to increase my exposure to equities and once I get to about 70/30 or maybe even 80/20 I'll change back to a more conservative approach. 

Again thank you all very much. This is such a wonderful platform and I have learned a lot from you all and saved a ton of money in the process. 

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One suggestion. Try and establish an allocation you like based on a few good funds as recommended above and stick with those funds  Try not to make too many changes  into new funds based on market conditions. I used to do that and it usually doesn't pay off because the market direction can't be predicted.  We can listen to financial pundents and  financial news reporters thinking they know something. They don't. They are speculating.  I still strongly recommend a Vanguard Target fund. It's made up index funds that are right for you at every age and managed by professionals for you. 

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403bvanguard01.jpg.b9a01d1bea201bb8270a7683e9cd6273.jpg

Age: 38 (Same as you)

My allocation is in the same index funds that make up the early stages of target date funds - typical four fund portfolio. I've maintained it at ~90/10 since moving to Vanguard in 2016.

If you're contributing regularly, and well diversified, you shouldn't have a sense of FOMO. I own a little bit of almost everything and stick with it for the market gains and declines. My investing behavior has been the same whether the market is flat, up 20%+ or down 30%+.

Stay the course 🤞

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Hutina

 

You've received good accurate advice. I hope you act on it.  I wish I had this kind of advice at your age.

 

Tony

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