Advice for diversifying and simplifying 401K and IRA

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Topic Author
Poisns1
Posts: 37
Joined: Thu Apr 13, 2017 2:19 pm

Advice for diversifying and simplifying 401K and IRA

Post by Poisns1 »

1) I was hoping to consolidate my company (Fidelity) 401k allocations to make it easier to manage and while providing diversification. I looked at selling all positions and moving into a 2030 TDF but this fund has almost 30% in Foreign stock. I've been given advice to hold an AA of 60/40 with 50% US STOCK INDEX and only 10% International Stock. The next closest fund which is the 2035 TDF has 35.33% in International Stock. Both of these funds seem to have International Stock allocations that are too high?

My currrent 401k portfolio:
401k current value about 1.24M (Asset Allocation 2030 fund 15%, Total Return Bond 7%, Total US Stock (large cap) 12%, AT&T US Stock Fund (large cap 10%, International Stock Index 20%, Large Cap US Stock Index 16%, SM & MD US Stock 20%). TOTAL = 1.14M

AS OF 4/30/2021; Morningstar Category: Target-Date 2030
Fund Category
Convertibles 0.34%
Foreign Stock 29.45%
Preferred Stock 0.03%
Foreign Bond 2.78%
Domestic Bond 27.10%
Domestic Stock 33.24%
Cash 4.50%
Other 2.55%

Considering that, I'm just leaning towards moving everything into a 3 fund approach by selecting these funds:

50% Total US Stock Index (100% Portfolio in BlackRock US Equity Market F) n/ Expense .01
10% International Stock Index (100% Portfolio in BlackRock MSCI ACWI ex-US) Expense .02
40% Total Return Bond ( Domestic Stock0.01%,Preferred Stock0.00%,Others0.00%,Foreign Stock0.00%,Convertibles2.15%,Cash2.82%,Domestic Bond78.40%,Foreign Bond16.61) Expense .14

Does this sound like a good AA for a 60/40 3 fund portfolio?

2) I would like to move my wife's holdings out of these expensive funds into a similar 60/40 allocation (as BH posters suggested to keep all accounts at the respective AA of 60/40). I believe that I have the freedom to choose any fund including Fidelity funds in her IRA account? Can I get suggestions on which funds to choose which would be similar to the new funds selected in my 401k Fidelity account (60/40 allocation Total Stock Index, International Stock Index, Bond Fund)?

Currently holdings that I'd like to move for lower expenses/fees and diversification:
FDVLX 39.36%
FEQTX 29.42%
JATTX 31.21%
lakpr
Posts: 7993
Joined: Fri Mar 18, 2011 9:59 am

Re: Advice for diversifying and simplifying 401K and IRA

Post by lakpr »

Poisns1,

Welcome to the forum.
Poisns1 wrote: Mon Jun 21, 2021 1:57 pm <<snip>>
I'm just leaning towards moving everything into a 3 fund approach by selecting these funds:

50% Total US Stock Index (100% Portfolio in BlackRock US Equity Market F) n/ Expense .01
10% International Stock Index (100% Portfolio in BlackRock MSCI ACWI ex-US) Expense .02
40% Total Return Bond ( Domestic Stock0.01%,Preferred Stock0.00%,Others0.00%,Foreign Stock0.00%,Convertibles2.15%,Cash2.82%,Domestic Bond78.40%,Foreign Bond16.61) Expense .14

Does this sound like a good AA for a 60/40 3 fund portfolio?
That is an excellent portfolio indeed.
Ask if your 401k custodian provides a tool for automatic rebalancing among the three funds, and if it does, choose to do so once a quarter.
Poisns1 wrote: Mon Jun 21, 2021 1:57 pm 2) I would like to move my wife's holdings out of these expensive funds into a similar 60/40 allocation (as BH posters suggested to keep all accounts at the respective AA of 60/40). I believe that I have the freedom to choose any fund including Fidelity funds in her IRA account? Can I get suggestions on which funds to choose which would be similar to the new funds selected in my 401k Fidelity account (60/40 allocation Total Stock Index, International Stock Index, Bond Fund)?

Currently holdings that I'd like to move for lower expenses/fees and diversification:
FDVLX 39.36%
FEQTX 29.42%
JATTX 31.21%
Typically we recommend FSKAX (Fidelity Total Stock Market Index fund), FTIHX (Fidelity Total International Index fund) and FXNAX (Fidelity US Bond Index fund). You can use the same 50:10:40 ratio for your wife's holdings too.
Topic Author
Poisns1
Posts: 37
Joined: Thu Apr 13, 2017 2:19 pm

Re: Advice for diversifying and simplifying 401K and IRA

Post by Poisns1 »

Thanks for the advice/reply lakpr.

I'm also preparing for retirement at the end of the year and will most likely be choosing to take a lump sum (vs opting for monthly annuity/pension payment) and invest on my own.

I'm thinking of keeping the same overall AA for the lump sum (as suggested by many fellow BH'ers) and could just do the same 50/10/40 and pick the Fidelity Funds of FSKAX (Fidelity Total Stock Market Index fund), FTIHX (Fidelity Total International Index fund) and FXNAX (Fidelity US Bond Index fund) to keep it simple.

But I'm also wondering if should consider going with 1 "Life Strategy Fund." Would this be an easier approach then the 3 fund portfolio? Would the LSF fund need rebalancing or you just buy it and done? Any Pros/Cons to going with the LFS versus the 3 Fidelity Funds?
lakpr
Posts: 7993
Joined: Fri Mar 18, 2011 9:59 am

Re: Advice for diversifying and simplifying 401K and IRA

Post by lakpr »

Poisns1 wrote: Mon Jun 21, 2021 4:55 pm But I'm also wondering if should consider going with 1 "Life Strategy Fund." Would this be an easier approach then the 3 fund portfolio? Would the LSF fund need rebalancing or you just buy it and done? Any Pros/Cons to going with the LFS versus the 3 Fidelity Funds?
Life Strategy funds are a good solution, *IF YOU AGREE* with their composition. Vanguard funds typically use 40% of the allocation to international equities. Personally I disagree with that high allocation to international equities, I kept my bar at 20% instead. My own portfolio is 55:15:30 (a strict 20% allocation would have meant 56:14:30, but I like my ratios to be multiples of 5).

That desire to hold a different percentage of international equities or bonds in the portfolio than the underlying fund, would make the life strategy funds somewhat unworkable. Either you agree with the allocation and go all-in (and surely the daily rebalancing benefit cannot be beat; if you tried to do that on your own you would be pulled up for excessive trading!), or it is back to choosing a 3-fund portfolio.

Usually within the 457 plan or the 401k plan or the 403b plan, there would be some mechanism to automatically rebalance every so often. My 401k plan offers automatic rebalancing of assets within a given bucket (Trad. 401k, Roth 401k, After-tax 401k) among the choices in the plan in the ratios that we choose. The most frequent rebalancing that they would do is once-quarterly.

With this tool available, I have no need to look into the life strategy funds, I can choose my specific asset allocation and have the program automatically rebalance once a quarter taking emotions out of the picture for rebalancing.

Perhaps you have something available like that in your and your wife's 401k plans? If Fidelity is the custodian, surely they have a tool like that ...
etfan
Posts: 251
Joined: Sun May 16, 2021 4:22 pm

Re: Advice for diversifying and simplifying 401K and IRA

Post by etfan »

lakpr wrote: Mon Jun 21, 2021 6:46 pm Life Strategy funds are a good solution, *IF YOU AGREE* with their composition. Vanguard funds typically use 40% of the allocation to international equities. Personally I disagree with that high allocation to international equities, I kept my bar at 20% instead.
Does anyone know the reason behind the 20% number?

Typically Bogleheads say you can't outsmart the market, and so you own the whole market based on each equity's actual weight.

For example, total market indexes have a specific percentage of AAPL. You typically don't see anyone saying, "I disagree with that allocation of AAPL. I think it should be less."

But when it comes to international equities, the common advice is about 20%, which is far less than its actual size.
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Advice for diversifying and simplifying 401K and IRA

Post by lakpr »

etfan wrote: Mon Jun 21, 2021 7:55 pm Does anyone know the reason behind the 20% number?
I don't know about others, but my decision is driven by the desire to capture the diversification benefit offered by international equities, and at the same time capture the higher returns offered by US equities (and which I expect to continue; please I am not going to debate this point, you have your opinions and I have mine).

A Vanguard paper from 2012 claimed that if you allocate 20% of your equities allocation to international equities, you will capture 84% of the diversification benefit (however which way they calculated it), and at 30% of equities you will capture 99% of the diversification benefit. Increasing international allocation beyond 30% appears to not provide any further diversification benefit but only expose you to the returns of the international equities -- either overwhelming or underwhelming, compared to US equities.

I find, for me, that 20% allocation hits that sweet spot. I may be giving up a tiny bit of diversification benefit, but capture the higher returns of US equities. This is a figure that I think I can stick to throughout my investing, even as I increase the bonds percentage in my overall portfolio as I age and approach retirement (I turned 50 last year, I'd like to call it quits in 10 years max).
etfan
Posts: 251
Joined: Sun May 16, 2021 4:22 pm

Re: Advice for diversifying and simplifying 401K and IRA

Post by etfan »

lakpr wrote: Mon Jun 21, 2021 8:37 pm A Vanguard paper from 2012 claimed that if you allocate 20% of your equities allocation to international equities, you will capture 84% of the diversification benefit (however which way they calculated it), and at 30% of equities you will capture 99% of the diversification benefit.
Do you know why Vanguard doesn't follow their own findings in funds like "target dates" and "whole world"?

One reason I could think of is they try to not be "opinionated" in their allocations and just follow market weight instead, despite what they know to be true (e.g. the paper you mentioned).
lakpr
Posts: 7993
Joined: Fri Mar 18, 2011 9:59 am

Re: Advice for diversifying and simplifying 401K and IRA

Post by lakpr »

etfan wrote: Tue Jun 22, 2021 12:48 am
lakpr wrote: Mon Jun 21, 2021 8:37 pm A Vanguard paper from 2012 claimed that if you allocate 20% of your equities allocation to international equities, you will capture 84% of the diversification benefit (however which way they calculated it), and at 30% of equities you will capture 99% of the diversification benefit.
Do you know why Vanguard doesn't follow their own findings in funds like "target dates" and "whole world"?

One reason I could think of is they try to not be "opinionated" in their allocations and just follow market weight instead, despite what they know to be true (e.g. the paper you mentioned).
Yes I know and happen to disagree with that "market weight" approach. This is a Personal Investment forum, and one must be convinced enough to stick to an asset allocation through ups and downs. I don't think I will be able to stick to 40%, if I am not convinced about that in the first place. If you are, good for you! I am not going to change my mind, and not going to try to change your mind either.

What you see as "opinionated", I view it as a virtue and conviction to stick to that AA throughout their investment lifecycle. It is that discipline that leads to successful retirement
Topic Author
Poisns1
Posts: 37
Joined: Thu Apr 13, 2017 2:19 pm

Re: Advice for diversifying and simplifying 401K and IRA

Post by Poisns1 »

So would I be better off bumping Total International Stock making it a 40/20/40 AA versus 50/10/40?
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