Early Retirement Planning - All feedback welcome

**sv2007** · 06-08-2016, 08:22 PM

Originally posted by DaveInPgh View Post

because if I move balances I am locking in the horrible returns I have had in the stock funds recently. Does this make sense?

Here's something interesting. There's a saying that a certain type of people should not play the stock market. These are people who buy high and sell low. Now, you'd think why would anybody do that? Well, here's a story:

Guy likes company A, it's got a long history (of good returns) and a good outlook and MOST IMPORTANTLY (for our story) it's stock has been going up (more or less) for the last month. He jumps in. But stock pricefluctuate, he's good for a few days (and he's happy)l then it drops for the next so many days. He loses his cool and dumps it below his buy price. He repeats with Company B. Soon, after this buy-high-sell-low strategy, he's out of the game because he's lost all his money.

Now, we don't really know why he's sold company A, maybe because he thinks he should move that money to company B because A is giving him negative return while B will give him positive return? who knows, but as long as he didn't have the CORRECT reason, chances are he'll lose.

What's the correct reason?

I think that would depend on you.

It's funny that there are multiple right answers; what's correct for 1 person may not be correct for another. For a purely technical trader, the correct answer will be his charts. For a fundamentalist, the correct answer will be his research. There can also be a blend. But I'm not sure if rolling the dice can be classified as correct for anybody.

Why would it depend on you?

Because it has worked for you in the past. It's gotten you to where you are, you've refined and fine tuned it over the years. So, look within.

Let's assume our guy is a fundamentalist/chartist, maybe he saw something bad in company A and decided to get out. He loses on this trade, but probably will make it back on the next one (why? because he's been at this for years ... and overall doing well).

Substitute funds for stocks. Why did you buy these funds? Historical returns? Did something happen taking them off course? If they aren't the same fund that you bought into, then what's the point of keeping them. Is it just the normal ups and downs? If so, isn't that to be expected? Did the charts say something (how well do charts predict funds)?

I know it is important to you; and that's why you must understand that the question you ask is actually a very, very common one. I hear it a lot (esp during down times) from co-workers and friends. I gave you the long answer above; and here's the short answer: it depends on you.

**tripods68** · 06-08-2016, 08:33 PM

i recommend www.bogleheads.com for specific allocation. Those guys are experts.

Personally I love low cost index & value funds (even better with zero expenses). That's pretty good deal.

You have no debt except small cc balance that you can pay it off at anytime. It's possible to retire at 55 with very minimal expenses and no mortgage. Your expenses is roughly $56K a year...that's doable without a mortgage payment. That's the end goal for most of us trying to pay down our mortgage as quickly as possible before retiring.

If you can get 25 times your annual spending saved up and working for you, that is enough to live off – forever.

Good job!

**TexasHusker** · 06-09-2016, 05:09 AM

What sort of average annual return have you experienced with your current investment set-up?

**phantom** · 06-09-2016, 05:13 AM

Originally posted by DaveInPgh View Post

Our return in 2015 was negative and year to date is only about 3.5%. My thinking is that I should impact my allocations with future contributions (401k and through a taxable account) because if I move balances I am locking in the horrible returns I have had in the stock funds recently. Does this make sense?

I don't have much advice on the whole, but this is faulty logic, specifically the sunk cost fallacy. The money you have lost in those funds is gone. Whether you sell them and buy something else or continue to hold them does not change the fact that they've already lost value. Your best bet is to do whatever you would do if your 401k was already completely in cash with no history behind it. I can't say whether you're better to stay the course or to change your allocation. But, if you decide changing your allocation is truly in your best interest, you should just change it right away. Your balance is so high relative to your contributions that simply changing what you do with new money would make changing your allocation take a really long time.

The only time you might find some advantage to leaving the old money where it is and simply changing what you do with new money is if there is a fee associated with selling the old funds and buying new ones. But, most 401ks will let you change your allocation and then rebalance without any additional fees.

**feh** · 06-09-2016, 06:13 AM

Originally posted by DaveInPgh View Post

All feedback is welcome, but I would specifically appreciate thoughts on our current 401k mix and how to go about impacting the allocations. Also, thoughts on my plan for our not yet opened Taxable account.

Thanks,

Dave

Start here: https://www.bogleheads.org/wiki/Bogl...g_start-up_kit

If you have questions after reading and understanding that page, let us know.

**DaveInPgh** · 06-09-2016, 06:19 AM

Thanks for the replies. I created this same thread on another message board that doesn't get a lot of daily traffic. Among the few responses I did get, were comments on the faulty logic regarding holding to avoid selling at a loss. So I expected those comments and realize I need to determine what I want my allocation to be and rebalance to accomplish it.

**DaveInPgh** · 06-09-2016, 06:31 AM

Originally posted by TexasHusker View Post

What sort of average annual return have you experienced with your current investment set-up?

The last couple years have been bad, but below is the 5 year return for the funds in my 401k.

Large Cap Index Fund 11.06%
Small-Mid Cap Index Fund 8.44%
International Index Fund -0.05%
Bond Index Fund 3.54%

For many years, I have read many articles about how International funds should be part of a retirement portfolio. The International Index fund I have been in has been a dog. That is one that I struggle with regarding whether I should reduce that allocation.

The Fidelity Freedom 2050 Fund has a 5 year return of 5.97%.

**feh** · 06-09-2016, 06:52 AM

Originally posted by DaveInPgh View Post

For many years, I have read many articles about how International funds should be part of a retirement portfolio. The International Index fund I have been in has been a dog. That is one that I struggle with regarding whether I should reduce that allocation.

This mindset is known as "recency bias" or "performance chasing". It is almost always a mistake.

Create a diversified portfolio with the risk profile that you are willing to stomach. Rebalance as necessary. And don't do anything else.

**DaveInPgh** · 06-09-2016, 07:00 AM

Originally posted by feh View Post

Start here: https://www.bogleheads.org/wiki/Bogl...g_start-up_kit

If you have questions after reading and understanding that page, let us know.

Thanks. Checking it out now.

**corn18** · 06-09-2016, 07:31 AM

Step 1: Choose an asset allocation that fits your risk tolerance. At your age and time to retirement, I would recommend 60/40 w/ 10% of the stock being international. But that varies from person to person and is a personal choice based on your situation and risk tolerance. The difference in returns between 50/50 and 70/30 is not that great. It all comes down to your reaction to a 40% drop in equity prices. Or a 20% drop in bond prices (as a result of rising interest rates). If you would sell @ 70/30 but hold @ 50/50, then 50/50 is the answer for you. Visit the boglehead site to get a lot more details on how to pick an AA.

Step 2: Start adjusting your holdings to match that allocation. Since all of your holdings are in tax advantaged space, it doesn't matter what you sell and buy. If you need more bonds, just sell some stock funds and buy some bond funds. Same for international. If you aren't that far off, then just adjust your contributions to make the adjustment over time (that's what I'm doing). Stick with the low/no cost index funds.

Step 3: Sit back, relax and enjoy the ride. Any market changes should result in no emotional buying or selling. All you should do is set an allocation band (I use 5%) and if things get more than 5% out of whack in your AA, then reallocate either inside the holdings or with new contributions. With equities rising right now and bonds fairly flat, I have had to adjust my contributions to keep things tracking at 60/40. The beautiful thing is, if I had to sell some equity to increase bonds, I would be selling high and buying low. This is the secret to managing an AA in a dynamic market. You are constantly buying low and selling high.

Don't even worry about losses in the tax advantaged space. They are what they are and if you are meeting your AA, it doesn't matter. Stick to your AA and do not chase returns. The reason for international is it is supposed to be negatively correlated to the US equity market. I don't believe that, so I keep my international exposure low at 10% of my 60% stock allocation. Others like the diversification, so they stretch this to 30% or even 40%.

For the taxable account, you view your entire portfolio as one big pot of money. Do not set up your 401k as 60/40, and your IRA's as 60/40 and your taxable as 60/40. Just make sure the overall AA is right. Bonds in a taxable account are not tax efficient. REITs in a taxable fund are not tax efficient. Domestic stock index funds with a very low turnover rate are very tax efficient. So are international stock index funds due to the foreign tax credit. Keep bonds in tax advantaged accounts.

So, if you are already at the AA you want in your 401k+IRA's and you start putting money into a taxable account in stock funds, then just buy fewer stock funds in your tax advantaged accounts to keep your AA on track.

Those are the basic tenants of the boglehead approach to investing. I will not assert it is the best way. I will only assert that I tried picking stocks and funds for a while and I wasn't very good at it and it stressed me out big time. Now that I am a boglehead, investing is boring. Others can beat my returns, but I know me and I know what fits me and this fits me just fine.

That being said, I do find that I have a very nice base retirement savings set up and that has spurred an interest in exploring something more risky that could provide greater returns than my indexing. I have some left over money each year beyond the 401k, IRA's and taxable retirement contributions. I want to branch out, and I find 97guns, TexasH and a few other's approaches intriguing. I may get the guts to branch out next year with the extra money, but I also know that if I just put the extra money into my retirement accounts, I might be able to retire at 56 instead of 60. So, low risk path to retirement at 56 and live comfortably for the rest of my retired days. Or, take some risk and ...

Tom

**DaveInPgh** · 06-09-2016, 08:07 AM

Thanks again for all of the responses. I have read the Bogleheads Investing Start-Up Kit as well as some other pages on that site. I have a question in regards to "Total U.S. stock market index fund" referenced in the portfolio examples.

I still need to put more thought into whether I want to change my allocations. I didn't mention it in my original post, but I previously (10+ years ago?) decided on the 90% stock allocation because I had an aggressive goal for early retirement. The realization that I need to start investing in a Taxable account to avoid withdrawal penalties is the only reason I started questioning my allocations.

Anyway, if I were to switch to a Boglehead Three-fund approach, would I eliminate the Index Fund that mirrors the Russell 2500 and just focus on the other 3 Index Funds currently owned in my 401k plan?

**corn18** · 06-09-2016, 08:51 AM

Originally posted by DaveInPgh View Post

Thanks again for all of the responses. I have read the Bogleheads Investing Start-Up Kit as well as some other pages on that site. I have a question in regards to "Total U.S. stock market index fund" referenced in the portfolio examples.

I still need to put more thought into whether I want to change my allocations. I didn't mention it in my original post, but I previously (10+ years ago?) decided on the 90% stock allocation because I had an aggressive goal for early retirement. The realization that I need to start investing in a Taxable account to avoid withdrawal penalties is the only reason I started questioning my allocations.

Anyway, if I were to switch to a Boglehead Three-fund approach, would I eliminate the Index Fund that mirrors the Russell 2500 and just focus on the other 3 Index Funds currently owned in my 401k plan?

Could you list all the funds you have available to you in your 401k? We may be able to build a mirror of a total stock market fund from what you have. If those are it, then your split of 50/20 between S&P and Russell is fine. The correlation between the S&P and Vanguard Total Stock Market Fund (TSM) is remarkably close. People like TSM because it has many, many more stocks so more diversification.

Your other funds are quite good if you get them at no expense ratio (ER). You are lucky to have them available.

Tom

**DaveInPgh** · 06-09-2016, 09:08 AM

Tom

I have 32 funds available in my 401k, 9 of which are Target date funds. The only Index funds are the 4 I am currently in. The remainder are actively managed funds with expense ratios ranging from .22% to .89%. The Index Funds I am in consistently beat the comparable actively managed funds.

**sv2007** · 06-09-2016, 09:18 AM

Originally posted by DaveInPgh View Post

The realization that I need to start investing in a Taxable account to avoid withdrawal penalties is the only reason I started questioning my allocations.

FYI: You can withdraw without hte penalty if you take regular distributions based on your life expediency. This allows early retirees to use retirement savings.

Early Retirement Planning - All feedback welcome