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A place for Get Rich Slowly readers to ask questions
and exchange ideas
It is currently Thu Jul 24, 2014 6:35 pm




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 Post subject: Re: Roth IRA
PostPosted: Sun Dec 02, 2012 7:43 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1749
Justus wrote:
I don't understand *why* or *how* index funds are relatively tax efficient, though. I realize it has something to do with interest income versus capital gains. I'm just not sure I understand fully. Are dividends the interest income? Is it the fact that with most index funds, most of the returns come in the form of capital gains rather than dividends?

Basically, index funds are considered tax efficient because they typically don't trade very often. The broader the index, the less likely there will be trading. For example, every year the composition of the S&P 500 changes by a few companies. When that happens, the fund has to sell and buy shares of the companies that respectively fall out or get included into the index. When that happens, taxable gains/losses (in the form of capital gains) are generated. By way of comparison, total market index funds are even more tax efficient. Since those funds ostensibly contain the entire market (not really, but close enough), there are even fewer changes there every year (relative to the overall size of the index) in comparison to a fund indexed to the S&P 500.

Dividends are not interest. It does help some people to think of them that way, but they're really not the same. Certainly qualified dividends are handled differently from interest income by the IRS, although that might change soon. Also, note that interest rates and company dividends are influenced by very different things.

And remember that capital gains within a fund are only generated if stocks are sold. So if the value of your fund goes way up but the fund itself hasn't sold any funds, it's entirely possible that your annual statement would show very little in the way of capital gains. In fact, your dividend amount could exceed the capital gains amount, although the bulk of portfolio growth might come from the rising values of the stocks held in the fund.


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 Post subject: Re: Roth IRA
PostPosted: Sun Dec 02, 2012 11:18 am 

Joined: Mon Oct 08, 2012 10:03 am
Posts: 19
I would say that you should go with Vanguard. They keep their fees low which means you will keep more money in your pocket. They also have the mutual funds that are balanced appropriately for your age. Just choose the fund with the date closest to your retirement date. It is somewhat set it and forget it, but I encourage educating yourself on personal finance. There are a lot of great books out there.

_________________
Adam

http://www.FifteenYearPlan.com - How could this 35 year old save enough to retire working only fifteen years? AND WHY AREN'T YOU doing these things


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 Post subject: 2014 update
PostPosted: Tue Jul 01, 2014 10:22 pm 

Joined: Sun May 29, 2011 4:50 am
Posts: 169
18 months later ....

I did open that Roth IRA with Vanguard. I've set up a monthly auto draft so that I consistently fund it along with my 401k to the limit. I've also simplified my 401k so basically I've got the following between the two accounts:

(RothIRA) Total stock market fund
(401k) Large cap domestic index fund.
(401k) Large cap international value index fund.
(401k) Bond fund

I've taken a "set it and forget it" approach. I lose no sleep worrying about the investment choices or reading stock news.


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 Post subject: Re: 2014 update
PostPosted: Wed Jul 02, 2014 5:47 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1749
Justus wrote:
18 months later ....

I did open that Roth IRA with Vanguard. I've set up a monthly auto draft so that I consistently fund it along with my 401k to the limit. I've also simplified my 401k so basically I've got the following between the two accounts:

(RothIRA) Total stock market fund
(401k) Large cap domestic index fund.
(401k) Large cap international value index fund.
(401k) Bond fund

I've taken a "set it and forget it" approach. I lose no sleep worrying about the investment choices or reading stock news.

Congratulations! You're on your way to getting rich slowly! :) What percentages in each fund? Asset allocation is a big deal. Given what happened last year, you should have been making a ton of money. The trick is holding on when the market tanks, which it inevitably will, since the market always reverts to the mean.


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 Post subject: Re: Roth IRA
PostPosted: Thu Jul 03, 2014 2:44 am 

Joined: Sun May 29, 2011 4:50 am
Posts: 169
My target asset allocation is currently:
44% domestic
29% international
27% bond

The domestic stocks have been doing well and so I've been reallocating my contributions into the under-weighted categories.


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 Post subject: Re: Roth IRA
PostPosted: Thu Jul 03, 2014 7:30 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1749
Justus wrote:
My target asset allocation is currently:
44% domestic
29% international
27% bond

The domestic stocks have been doing well and so I've been reallocating my contributions into the under-weighted categories.

Your methodology is fine and should serve you well over the years to come.

I can't really make an informed comment about your asset allocation since I don't know your particular circumstances but at a glance, I'll make a general comment that your allocation seems to be a bit too conservative for someone under the age of 40, particularly if you were planning to work for the next quarter century or more. On the other hand, that might be the right proportion of bonds if you're heavy into value or small caps in the equity part of your portfolio.

Also, the international portion of your equity portfolio is 40%, which is higher than most people have. While that's not a bad thing, I'm a little curious as to how you reached that decision.


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 Post subject: Re: Roth IRA
PostPosted: Thu Jul 03, 2014 11:44 am 

Joined: Sun May 29, 2011 4:50 am
Posts: 169
Hi Vintek,

For bonds, I did the age minus ten. I was actually thinking of increasing my international proportion, to better emulate the proportion of US/Intl by market-cap. What are your thoughts? What resources would you recommend to get better informed?


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 Post subject: Re: Roth IRA
PostPosted: Fri Jul 04, 2014 1:49 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1749
Justus wrote:
For bonds, I did the age minus ten. I was actually thinking of increasing my international proportion, to better emulate the proportion of US/Intl by market-cap. What are your thoughts? What resources would you recommend to get better informed?

The age minus 10 is a modification of the original rule of using your age as the basis for bond holdings. As time went on and people started living longer, the rules were modified. You're using age minus 10. Current thinking for a lot of folks now is age minus 20 (or 120 minus your age to arrive at the equity percentage).

Frankly, rules of thumb are just that -- a guideline (not a hard and fast rule) for where you should be and for most people, they're about right. It's important to understand these guidelines because you know the reasoning that goes into them, so you'll know if your particular circumstances should deviate from it. Also, your individual risk tolerance plays a part in all this. You want to take on enough risk so that your money grows fast enough so you don't want to outlive your money. But at the same time, it's no good to take on a ton of risk if you wind up staying awake at night worrying about how much money you've lost during a market downturn. That's why I prefer guidelines that incorporate a range rather than a straight calculation.

Now let's get to your particular case. If you refer to page 12 of the Transparent Investing document you read a year and a half ago, you'll see a table called Common Portfolio Guidelines. As you can see for holdings of 20+ years, you fall within the recommended range but pretty far over on the conservative side. There's nothing wrong with that but as I say, I think you can afford quite a bit more risk. You've got over a quarter century left to go, but you're edging close to the (risky side of the) recommended ratio for an investment period of 10 years. Personally, I lean toward higher risk, but I'm unusually risk tolerant. You might be fine just where you are. That's up to you to decide.

As for the International vs. US allocation, you can see in http://www.cbsnews.com/news/asset-allocation-guide-us-vs-international-equity/ that he recommends 30-50% International allocation for equities. Your allocation pretty much places you squarely in the middle of that range, which is fine. But what do other experts do? I took a look at what the target retirement funds for 2040 look like and here's where they stand:
  • Vanguard 2040 - US Stocks 63.2%, International Stocks 26.8%, Bonds 10%
  • T Rowe Price 2040 - US Stocks 58.4%, International Stocks 30%, Bonds and Other 11.6%
  • Fidelity 2040 - US Stocks 63.1%, International Stocks 27%, Bonds and Other 9.8%

What does the above tell you? All of them hover around 90% in equities and within the equity portion, the international allocation is around 30% vs. the 40% you have in your portfolio. Are they right? Are you wrong? Nobody knows. Don't make yourself crazy second-guessing yourself. All I'm saying in my previous post is that your allocation seems a bit conservative (by holding a lot of bonds) and a little heavier in International stocks than most portfolios given your timeline. But as mentioned above, you're certainly within the range that most people would recommend. If you're happy with your current allocation, don't change it. If you'd like a bit more money when you retire (assuming this is at 67 years old), then pull back on the bonds a bit, at least for now. If you're leery of doing this as the US Markets hit all time highs, just DCA your money into stocks over time.


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