Google and watch a couple of video's on efficiency frontier. It's a fairly strait forward concept. Basically by allocating to a proper allocation you can achieve the same results and take less risk due to the movement over time of uncorrelated assets. There is a sweet spot. For the same reason I wouldn't have a someone ten to 15 years (or as stated earlier 5 years) from retirement in 95% stocks I wouldn't take a retiree to 95% bonds/cash. There are inherent risks in bonds (rising interest rates) and cash (inflation) as well that equities help to balance out during times where these factors are not good for bonds (like now). So why would I not recommend 95% stocks? Because I can achieve the same performance results over the long haul with less standard deviation. That is unless the market stops cycling.

1/11/2017 7:51:59 AM

Quote :

"Target funds also have much higher fees"

This is not always the case.

Vanguard Target Retirement 2050 Fund (VFIFX) - .16%

is made up of

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) - .16%
Vanguard Total International Stock Index Fund Investor Shares (VGTSX) - .19%
Vanguard Total Bond Market II Index Fund Investor Shares - .16%
Vanguard Total International Bond Index Fund Investor Shares - .17%

About the same expense ratio.

1/11/2017 8:53:05 AM

To be fair, if you're using Vanguard and you're comparing expense ratios, I think it only makes sense to compare to the Admiral funds.

For example,
VTSMX Admiral is 0.05% vs 0.16% investor shares

That being said, I do use target 2050 for my Roth IRA with Vanguard as well as my rollover Traditional IRA (from previous employer 401k and pension) with them. I use a mix of 4 different admiral level funds with them for my taxable account. I've considered just doing the same thing for my IRAs with them as well to trim a bit more on the fees.

1/11/2017 9:54:54 AM

I hear you, but I wasn't able to afford the admiral fund investment when I started my IRA, which is why I used the investor options.

1/11/2017 10:32:23 AM

oh for sure. I guess I was just thinking of a long-term comparison. But yeah, I still do use the 2050 for a couple of accounts.

1/11/2017 10:37:44 AM

Quote :

"Basically by allocating to a proper allocation you can achieve the same results and take less risk due to the movement over time of uncorrelated assets. "

So, let's say you're 20+ years out. Why not just say "fuck standard deviation" and take on increased risk for a higher return (although not high enough to justify said increase in risk for most investors)

[Edited on January 11, 2017 at 10:02 PM. Reason : ]

1/11/2017 10:02:01 PM

I think it's largely a matter of locking in gains from higher risk investments into lower risk investments. Sure, you might get lucky and ride the tail end of the market climb and make out like a bandit (like 2007)... Or, you might go the other way and ride right off the cliff and get fucked in the last year (like 2008). Or, you can lock in the gains, thereby avoiding the cliff while also missing out on riding the tail. Not speaking for him, but I think quiksilver is saying that, on average, you can obtain the same results as the 95%, balls-to-the-wall strategy, but with far less risk.

1/12/2017 12:13:44 AM

^^ sure you can do that and it works out for some people who do. To me its like saying you can pay full price (risk) for this item (long term returns) OR you could have it on sale and the person saying no ill pay full price. My job is to assess peoples goals and help them achieve them with out risking not achieving them. For that reason I view things differently than someone who is a young investor and willing to gamble more. Why risk failing to meet the goal for returns that arent needed? Outperformance is a great thing (and i strive for it in my investments) but taking the risk of missing the target all together would be fiduciarily irresponsible of me to recommend.

1/12/2017 10:36:13 AM

I guess I just don't see the point of having an allocation like 95% spy and 5% bonds vs 100% spy.

1/12/2017 1:42:58 PM

^^ Seems like we're just discussing alpha in about as long and drawn out rhetoric as possible. It sounds like you're saying the alpha is way to low in the aggressive equities hypothetical for someone under 55. I don't see it though IF you have 5-10 years before a liquidation event as you mentioned based on decades of history (I obviously have been looking at incomplete data if what you're saying pertaining to the mix/blend is accurate). I would certainly be interested din reading more on the alpha of the scenarios we've described based on having 5-10 years before the need to sell

[Edited on January 12, 2017 at 3:10 PM. Reason : .]

1/12/2017 3:09:48 PM

A little hard to read, but...

This is a plot of the average annual returns and risks associated with various allocations of US stocks, US bonds, and international stocks (rebalanced annually) from 2004 to 2014. US stock allocations are represented by solid lines, international stock allocations by dashed lines, and bond allocations by dash-dot-dash lines. The dot represents the overall average risk (12.80%) and return (6.89%)--a portfolio made up of 25% US stocks, 42% international stocks, and 33% bonds.



If your retirement savings plan calls for an average annual return of 7%, there are a lot of ways to balance your portfolio to do that. What quicksilver is suggesting is that you choose a lower risk allocation (e.g. 40% US stocks, 50% bonds, 10% international) instead of a higher risk allocation (e.g. 40% US, 60% international). Get your targeted returns with the least amount of risk.

If you're willing to accept higher risk, then you should balance your portfolio towards a greater return for that risk.

[Edited on January 13, 2017 at 1:38 AM. Reason : less big]

1/13/2017 1:28:35 AM

I would need to see it on a much longer time span than 10 years. That ten year span engulfs the second worst economic climate in this country in the last 80 years. What if the chart looked like 1990-2000? I don't time the market by any means, but bonds is about the last place you'd want to be in this environment, especially bond heavy.

Of course I'd take X% gain with 1/4 the risk over 1.33x% with 4x the risk, but this is a defined ten year time period.

[Edited on January 13, 2017 at 9:14 AM. Reason : .]

1/13/2017 9:10:56 AM

I get what he's trying to say, but yeah, not really an accurate reflection of an average 10 year period.

1/13/2017 3:13:53 PM

I made that plot about two years ago. My goal at the time was to compare the relative performance of various allocations; I wasn't really interested in the actual numbers. If I recall, I had a hard time finding consistent long term data I could easily import and use. I may try again this weekend if I get the time.

1/14/2017 3:49:17 PM

20 year quilt chart may help with your efforts? https://www.mfs.com/wps/FileServerServlet?articleId=templatedata/internet/file/data/sales_tools/mfsvp_20yrsb_fly&servletCommand=default . Pretty tied up over the weekend but still following. And before i get slammed for publishing a marketing piece, yes i know it is self serving to MFS but the data is correct on page one.

1/15/2017 8:05:11 AM

Holy crap, some of you put 40%-60% of your allocation in international stocks?

Is that normal for you guys?

I do about 80% domestic, 20% international....all indexed etf stocks (In my early 30's)


[Edited on January 15, 2017 at 2:46 PM. Reason : ]

1/15/2017 2:44:04 PM

Ditto

1/16/2017 12:27:35 AM

Using data from ^^^.

1/16/2017 1:28:25 AM

I get so overwhelmed when it comes to this stuff. I consider myself a pretty smart guy but investments, markets, and where to put my money has never been a strong suit. Even now, trying to reallocate my 401k, i start to get lost in where to allocate. I hate to be a "lazy" investor, and want to be more involved, but sometimes i feel like i'd be better off with someone looking after my money.

1/18/2017 7:27:49 PM

What are your thoughts on selling stock from a taxable account to put into an IRA? To me it looks like either way it doesn't matter because I'm paying taxes now or later.

1/21/2017 12:30:40 PM

you would not pay capital gains tax on the appreciation under the shelter or tax on dividends paid while in the IRA. You would only pay income tax once on the $ used to purchase once. Upfront if you used roth. At withdrawal if you used traditional. Growing money in an IRA lets you keep uncle sam out of your pocket on cap gains, dividends and interest.

1/21/2017 6:02:05 PM

^

1/21/2017 6:44:23 PM

Anyone use Betterment? I have been using Vanguard for a while now for my wife's Roth.

I just opened up one for myself(to supplement my Teacher Retirement plan) with Betterment. I feel like I like their interface better.

1/23/2017 6:43:59 PM

Is the interface worth the difference in fees?

1/23/2017 11:06:39 PM

To be honest, I didn't know there was a major difference in fees for a Roth with Vanguard vs. Betterment.

I thought both were very low fee options.

1/24/2017 11:03:18 AM

Sketch or not?
https://www.lendingclub.com/public/individual-retirement-accounts.action

1/24/2017 2:44:10 PM

Is there a contribution (not income) limit to backdoor roth iras?

1/24/2017 9:30:00 PM

^^^ Depends on what you're comparing. Betterment to a self-directed IRA? Betterment to Vanguard's Advisor Services?

Betterment's fees vary between 0.15% (more than $100,000 managed) and 0.35% (less than $10,000 managed) annually.

An IRA at Vanguard is $20 annually (but it's easily avoidable, so should cost you nothing).

Vanguard's Advisor Services charge a 0.30% fee (more than $50,000 managed).

Vanguard's Target Date funds have a 0.16% expense ratio (but the underlying funds are investor class, which tend to be more expensive than the ETF and Admiral funds).

1/25/2017 1:17:31 AM

If I start a Roth IRA with a target date fund at Vanguard can i sell it after awhile after i decide exactly what mix i want?

1/25/2017 8:40:33 AM

can't think of any reason why not.

1/25/2017 9:31:46 AM

the vanguard site will let you change how you want to allocate your funds

1/25/2017 10:11:14 AM

Cool, sorry.. that question felt very stupid after i got into Vanguard and set it all up.

1/25/2017 11:04:40 AM

David.. yes you can only contribute $5,500 ($6,500 if you are over 50) to an IRA so your contributions are limited. However, current balances in traditional IRAs can be converted at any time but taxes will be due upon conversion. So yes annual limit but no less mit if you have existing IRA balance to convert.

1/25/2017 5:34:50 PM

Thanks!

1/26/2017 11:03:33 PM

Right now it says 90% stocks, 10% bonds.

2/8/2017 8:00:11 AM

To do a backkdoor roth it sounds like I need to start with a non-deductible IRA contribution.
Why not just leave it in that investment vehicle?

2/27/2017 11:30:19 PM

Quote :

"To do a backkdoor roth it sounds like I need to start with a non-deductible IRA contribution. Why not just leave it in that investment vehicle?"

Because the assumption/safety of a Roth is that you don't know what future tax rates will be. By doing a backdoor roth, you would pay the known tax rate today and have untaxed income in the future. Not true if you leave it in a traditional IRA

2/27/2017 11:57:35 PM

To clarify ^ . Non-deductible principal will distribte tax free but earnings wont in a traditional. With Roth your earnings distribute tax free along with principal.

2/28/2017 4:06:32 PM

Ah, duh. Thanks guys.

3/3/2017 5:37:36 PM

Sure. It's a lot to absorb. Been doing it professionally 11 years and with tax code changes and so many different possibilities/products it often takes me a minute to arrive at the answer of a seemingly simple comparison.

3/3/2017 7:48:29 PM

I feel like I have everything I need for a fat retirement account except wads of extra money to put in it.

3/6/2017 9:22:59 PM

So I'm stupid. I contributed to my Roth for the full year like i've done every year since college. It's been automatic for about a decade via Vanguard so I don't even think about it.

However, I moved for a new job last year. I just did my taxes this weekend and as I'm inputting my W-2s, I quickly realize that I didn't even think about Roth income limits and I'm going to end up being totally ineligible. I guess I need to figure out how to withdraw my contributions from last year and re-invest them in my taxable account? And we're already a few months into this year's contributions too. pwnt. #firstworldproblems

Has anyone else here over-contributed due to a salary increase pushing them into the phase-out or totally ineligible bracket in a given year?

3/7/2017 11:41:00 AM

as far as i know, just withdraw the contributions from last year before april 16, and you have until tax time next year for this year's contributions

3/7/2017 2:39:01 PM

yeah i did a little reading yesterday and it seemed that was the case. I'll just look into withdrawing it from Vanguard. I've never pulled anything out obviously but I imagine principal withdrawal from a Roth is fairly straight-forward. Couldn't quite tell if penalties would apply or not (due to the over-contribution).

[Edited on March 7, 2017 at 4:33 PM. Reason : ]

3/7/2017 4:28:53 PM

I have done this

You'll have to withdraw your contributions as well as any gains on those contributions. Vanguard or whoever should be able to accurately estimate how much gains you've had in that calendar year and withdraw it for you.

It was actually much simpler than I thought it was. Call your broker

[Edited on March 7, 2017 at 8:24 PM. Reason : ]

3/7/2017 8:24:04 PM

double post..

[Edited on March 7, 2017 at 8:24 PM. Reason : ]

3/7/2017 8:24:04 PM

thanks I'll contact them. The gains was definitely part of what I had concerns about.

3/7/2017 9:23:29 PM

I have had clients do this many times. It's not the end of the world and not hard to correct. On our systems there is a specific coding on the withdrawal called "removal of excess contributions." Coding this way as opposed to "normal premature distribution" makes reporting cleaner to the IRS. May want to ask about that when you call.

3/8/2017 7:03:19 AM

great tip. Thanks for that.

3/8/2017 9:12:08 AM

Quote :

"I just did my taxes this weekend and as I'm inputting my W-2s, I quickly realize that I didn't even think about Roth income limits and I'm going to end up being totally ineligible "

So this happened to me this year. i've never reported my roth on taxes because i've never thought it was required, especially since i never get a 10xx form for it or anything. my wife's new job doesn't have a 401k, so i entered in her IRA information, which is when I also saw that our roth was ineligible for the 2016 year, and it appears it was the previous year as well.

Do I need to correct this? How will the system know to work itself out when I retired in 30+ years? Also, same applies for the IRA. That was ineligible for deduction status as well, so how will the system know in 30 years not to charge tax on that portion of the contribution?

3/9/2017 9:59:56 AM