Seeking Advice for Re-allocation of Retirement Accounts

[ThriftyTexan]

Hello all,
I am suffering from decision paralysis!!!! I’m seeking advice for annual re-allocation of my retirement accounts. Normally I would re-allocate by making changes to my 401k investments and let the monthly purchases slowly re-allocate my investment. But, I was laid off in June 2008 and have returned to school. I will most likely be self-employed or work for someone who doesn’t offer 401k. My 401k investments have been rolled over to TDAmeritrade along with my Roth accounts so all of my retirement funds are at TDAmeritrade. I am 47 and plan to partially retire in 20 years at age 67. In 2009 I added to my bond investments, but I’m still pretty low in that area. I’ve tried to follow jIMOhio’s advice for “specific questions” . Hopefully this isn’t TMI. So here goes….

Rollover IRA: $98,000
Roth IRA: $38,000
Total Retirement Investments: $136,000

My current allocation mix is:
Bond Mutual Funds 10% or $13,600
Stock Mutual Funds 68% or $92,480
Real Estate Stock Mutual Funds 12% or $16,320
International Stock Mutual Funds 10% or $13,600

My target allocation mix is based on Consumer Reports recommendation of subtracting your age from 110 and putting the remainder in stocks (110 -47 = 63% in stocks):
Bond Mutual Funds 37% or $50,320
Stock Mutual Funds 43% or $58,480
Real Estate Stock Mutual Funds 10% or $13,600
International Stock Mutual Funds 10% or $13,600

By my estimates I need to sell $36,720 ($50,320 - $13,600) in Stock MFs and invest in Bonds or Bond MFs. I’ve been doing this over the past two years, but the amounts have been very small due to unemployment.

Questions:
1. My local TDAmeritrade rep is suggesting that I allow them to pick $50K in corporate bonds to invest in through TDAmeritrade with no transaction fees. Yes, I’m aware that TDAmeritrade makes money off of the “spread”. And no, they haven’t told me which corporate bonds yet. They’ll tell me that when I’ve decided which mutual funds to sell. I’ll research their suggestions on FINRA’s website. Corporate bonds make sense to me because these are Rollover and Roth IRA accounts. Any thoughts about using retirement funds to invest in corporate bonds or allowing TDAmeritrade to pick those bonds?
2. My real estate MFs are both in my Roth account and have done horribly. The EUEYX fund has lost close to 60% with a 1.45% Net Expense Ratio and REACX has lost 30% with a 1.14% Net Expense Ratio. OK so I didn’t used to include the Expense Ratio in my MF research, but then I read something and the light bulb went off. Now I do make sure the expense ratio is around 0.80% or below. The TDAmeritrade rep seems to think I should dump both of these real estate MFs because they have performed so poorly and their expense ratios are high -- I’m paying them to do a really crappy job. IMO I’m at my target allocation in real estate and I should just hold onto them until they recover – even if it takes the next 20 years until I retire. Any thoughts?
3. To reach my target bond allocation, I would have to sell some of my MFs that are at a loss. For now, should I just sell the gains from the winners and invest that in bonds?
4. My current bond investments ($13,600) are Vanguard Intermediate Term Bond ETF (BIV) and Vanguard High-Yield Corporate Fund (VWEHX). I realize BIV holds almost 50% in US Treasury bonds, but I went with it even though it is in a tax-free account. Should I sell these also and invest directly in the TDA selected Corporate Bonds?

Thanx!!!

[jIM_Ohio]

First, if your target allocation is correct, selling at a loss means little, your goal should be to have investments in the right allocation for you.

My target allocation mix is based on Consumer Reports recommendation of subtracting your age from 110 and putting the remainder in stocks (110 -47 = 63% in stocks):
Bond Mutual Funds 37% or $50,320
Stock Mutual Funds 43% or $58,480
Real Estate Stock Mutual Funds 10% or $13,600
International Stock Mutual Funds 10% or $13,600

So I would start with above, and ask the following questions:

1) Is consumer reports correct? Other studies have shown go petal to the metal until about 8 years to retirement (petal to metal means about 80% equities or more) then within 8-12 years to retirement sell equities in a bull market and move to a 60-40 or 40-60 type stable portfolio.
There are so many other schools of thought for allocation. Find one which has substance

2) Establish the proper allocation for you at high level (% stocks-% bonds-%cash-% commodities) and also a % domestic-% foreign
If we assume the 110-47=63% stocks is correct, then you have 37% to allocate to bonds, real estate and other.
If we don't make that assumption, you will have much different allocation.
Consider adding the following to portfolio
a) real estate (you already have this and should keep the asset class)
b) bonds (you already have this, keep the asset class and possibly include other bond types like emerging markets or I-bonds)
c) commodities (I did not see this listed, a 10% position would help stability of portfolio.
d) Dividend paying stocks (as an overweight equity class)

3) Identify a detailed allocation
% large cap domestic stocks
% dividend stocks
% mid cap stocks
% small cap stocks
% foreign large cap
% foreign small cap
% emerging markets
% government bond
% corporate bond
% commodities

4) Pick mutual funds or ETFs which match the allocation in #2 and #3.


Before deciding #4 (your original question), make sure your logic at #1-#2-#3 is correct.

For example your foreign allocation appears low to me- I would want between 15-25% of portfolio in foreign stocks or foreign bonds- anytime US gets a weak dollar, foreign investments will be best performers probably.

As previously stated, if stability of portfolio is the goal, consider adding more asset classes (like commodities). I would keep real estate and make sure the holdings are good (I have T Rowe Price Global Real Estate in my portfolio).

[ThriftyTexan]

Thanx for the info jIM_Ohio. I understand what you're saying about the picking the proper allocation for me. I guess the 110 - your age thing is a knee-jerk/emotional reaction to the current market. I need to research the allocation mix. As far as your suggested mix in your #3 response:

3) Identify a detailed allocation
% large cap domestic stocks
% dividend stocks
% mid cap stocks
% small cap stocks
% foreign large cap
% foreign small cap
% emerging markets
% government bond
% corporate bond
% commodities

I need to review my current investments because I think I have several of those in my mix already. I'll spend some time looking at this tonight before responding. I'll probably post again late tonight or tomorrow morning. And then, I'll need to research the allocation percentages and figure out how I'm going to move forward with this.

I'm still curious what people on this thread think about investing in individual bonds as opposed to bond funds? And, does anyone pick their own bonds or do they leave that up to an advisor?

Thanx again

[jIM_Ohio]

Thanx for the info jIM_Ohio. I understand what you're saying about the picking the proper allocation for me. I guess the 110 - your age thing is a knee-jerk/emotional reaction to the current market. I need to research the allocation mix. As far as your suggested mix in your #3 response:

3) Identify a detailed allocation
% large cap domestic stocks
% dividend stocks
% mid cap stocks
% small cap stocks
% foreign large cap
% foreign small cap
% emerging markets
% government bond
% corporate bond
% commodities

I need to review my current investments because I think I have several of those in my mix already. I'll spend some time looking at this tonight before responding. I'll probably post again late tonight or tomorrow morning. And then, I'll need to research the allocation percentages and figure out how I'm going to move forward with this.

I'm still curious what people on this thread think about investing in individual bonds as opposed to bond funds? And, does anyone pick their own bonds or do they leave that up to an advisor?

Thanx again

Whether they are in your mix now or not should not be relevant until you are picking funds. Before you choose funds you need to know the high level allocations.

Start with % stocks-% bonds
then also choose % domestic-% foreign

and have a reason each of those is chosen
I would suggest anything less than 75-25 (stocks-bonds/other) and 75-25 (domestic foreign) is too conservative based on age 47 with only 136k invested with current savings rate. You will be working for another 30 years, I think, so being aggressive is OK (unless your expenses are low, or you increase saving percentage to 30-40% of gross income). Increasing savings rate to work less than another 30 years would suggest to me that being conservative more than I show below is in order (below is an example, not what you should do).


Then once you know the allocations you break that down more.

If 75-25 and 75-25 were the choices, you would do something like this

20% large cap stocks
15% dividend paying stocks
15% foreign large cap stocks
15% small cap stocks (domestic)
5% small cap stocks (foreign)
5% emerging markets stocks (foreign)
--
10% domestic bonds (corporate and government)
10% real estate
5% commodities

If you look at that breakdown, its 75% stocks and 25% other
its 75% domestic and 25% foreign

If you chose 25% large cap vs 10% small cap, returns won't change (much) vs the 20% and 15% I put above.
If you chose 30% foreign vs 25% foreign returns won't change (much)
If you chose 40% bonds vs 20% bonds returns would change more (probably) than a 5-10% move between large cap stocks and emerging markets stocks.

Focus on the high level allocation first, not the fund selections or what you own now. In the end fund selection has less to do with return than the high level allocations.


But the above only works out right if 75-25 is the chosen allocation and there is no way to know if that's right for you without you identifying a timeframe to retire and how much risk you want to take.