[Editor's Note: This is a guest post from Dr. Mom, who has guest posted here previously. Her posts, comments, and forum posts have always been well-received and I always appreciate them as they require very little editing. She submitted this in response to my post a few months ago about what to do when you have a crummy 401(k). She titled this, “I am no man: Slaying Active Management in My Portfolio.” We have no financial relationship.]
It’s been a while since I invoked Tolkien for you guys. So, now you get to hear my favorite quote instead of my kids’ and husband’s, which was “Not All Who Wander Are Lost.” Mine is “I am no man.” For those of you unfamiliar with the Lord of the Rings movies, this quote is what the warrior princess, Eowyn, cries as she slays the Nazgul, an evil beast who believes himself immortal because no man can slay him. Of course, that means it takes a woman to do it.
I am not going to review all the evils of active management. The purpose of this post is to explain how I am slaying it in my own portfolio. I hope to help you understand why not to choose it if you can help it and how to argue to change it if you have a retirement plan that doesn’t offer you low cost options. Your employer has a responsibility to you to offer you a plan that does not take advantage of you. When I took over our retirement management from my husband, we had a hodge-podge of active funds and individual stocks. Remember, we are older than many of you readers. We learned finance when indexing was in its infancy and were slow to jump onto the bandwagon because we really didn’t have the time to learn about it. Active management allowed diversification from individual stock picking. The marketing then encouraged you to find “The Great Man” who would manage your money for you. Of course, once I got involved in our finances, finding the great man did not seem like the path for me, so I started my financial education. You are all so lucky to have WCI to help educate you! Let’s get started…
# 1 PIMCO Total Return Fund (PTTDX)
I fired Bill Gross over this fund years ago because of a 12b1 fee of 0.25%. For those of you unaware of this fee, it is something active funds charge you so they can go advertise to get more investors. The more investors they have, the more funds they manage, and the more fees they earn. For you, the bigger they are, the more they perform like a closet index fund, and the less you earn after fees. In bond funds in particular, you want to keep your fees as low as possible since the fund basically gives you the yield of the bonds it holds. In this low yield environment, it is particularly criminal to me to have high fees in a bond fund. PIMCO has an expense ratio of 0.75% with a 12b1 fee of 0.25%. Wow, 1% fee on a plain vanilla bond fund – makes me understand Ken’s argument of holding individual bonds. I use BND which is Vanguard’s ETF equivalent of its Total Bond Market Fund (VBMFX) which has an expense ratio of 0.06%. Plot PTTDX vs. BND in your favorite online comparison chart to see the performance for yourself. Enough said. [Editor's Note: The PIMCO fund has had pretty good returns over the years, but over the last five years has trailed the Vanguard ETF by about 0.25% per year.]
# 2 Royce Small-Cap Value Service Fund (RYVFX)
This fund was easy for me to kick out. My husband started us with a tilt to small cap without really knowing why he did it. I agreed with it, but switched us to Schwab’s US Small Cap ETF (SchA). I left a fund that was being led by a committee of men with a fee of 1.45% and a 12b1 fee of 0.25%. SchA has an ER of 0.08%. RYVFX has to beat it by 1.62% annually just to match it. That price difference is just too big a hurdle for me to pay for small cap active management. [Editor's Note: Over the past five years the passive Schwab fund has outperformed the active Royce fund by 6% a year.]
# 3 Oakmark Equity and Income (OAKBX)
I actually placed this fund in our portfolio myself. The idea was that we could dollar cost average into it monthly, which I could not do with ETF’s. It is a fund that allocates between stocks, bonds, and cash. It served as part of my small bond allocation in the early years before I became more comfortable with better choices. Its fee was “only” 0.75% with no 12b1 fee, so it didn’t get my attention as a high fee choice while I was making the changes above. The “great man” here was Clyde McGregor who did serve the fund well until he brought in a team of male underlings to oversee. Once this happened, the return was not as good, probably due to allocation choices. The fund started holding more cash. At the time I left, its cash position was about 20%. I am not going to pay them 0.75% to manage cash for me. I now use my own combination of VTI for stocks, BND for bonds, and allocate my own cash to serve my liquidity needs. [Editor's Note: Over the last five years, the passive Vanguard balanced index fund has outperformed the active Oakmark fund by about 2% per year.]
# 4 Fidelity Contrafund (FCNTX)
So, now we come to Will Danoff. His fund did serve us well for many years likely due to his recognizing momentum before others joined in. As his fund grew, it became a closet index fund as well. Much of his out-performance comes from his early years. The performance lately really just mimics the S&P 500, but he charges me 0.70% to do it. Then in late 2013, I noticed an aberration in the chart. His fund dropped about 8% when the S&P 500 did not. Then, this pattern repeated in 2014 and in 2015. Why? I may not have the answer, but really did not like what I found as I searched for one. At some point in the last few years, Fidelity and some other companies have moved from a purely mutual fund model to a partly collective investment trust model. The move is most likely to be able to compete with the low cost fee providers like Vanguard and Schwab.
What is a collective investment trust or CIT? It is an investment vehicle that operates like mutual fund but is only available to qualified retirement plans. Ominously, it traces its roots back to the late 1920’s. It is not regulated by the SEC. It is regulated by the Office of the Comptroller of Currency, a part of the U.S. Treasury. They are not required to give statistics, investment details, or prospectuses like mutual funds. Thus, they cost less to run and have a lower management fee. I personally take issue with the use of opacity to lower fees. And, by the way, they access their money differently, which can make rollovers problematic.
As it turns out, Fidelity Contrafund is moving some of its assets from a mutual fund model to a CIT model. It will then be able to offer the CIT participants in the plan a lower fee than the mutual fund participants. Being the leftover higher fee-paying participant in Contrafund while they can potentially play me against an opaque entity to their benefit is not for me. [Editor's Note: Over the last 5 years, the passive Vanguard 500 Index Fund outperformed the active Contrafund by 0.23% per year.]
In conclusion, I have hopefully given you some food for thought about active management from the perspective of one woman who has had enough of it. Coming full circle, let’s go back to Eowyn. Ladies, we are all part warrior and part princess. Use the warrior when it comes to financial management. Gentlemen, if you have a female partner who is not particularly into finance, help awaken her inner warrior. She can serve you well.
As always, best wishes from Dr. Mom.
While all these popular mutual funds are all actively-managed by men, the issue wasn't so much the men as the active management. What disappointments (or successes) have you seen from the active managers in your life? Do you invest in CITs? Why or why not? Comment below!
Great post dr. Mom
Thanks JN. You will be given plenty of chances to form your own opinion of active management if you watch for them. The day after I originally wrote this piece, the Sequoia Fund run by Robert Goldfarb imploded due to a very large exposure to a single company, Valeant Pharmaceuticals. Mr. Goldfarb and his fund had a long history of outperformance and excellent Morningstar ratings, which did not protect him from reversion to the mean. I fear the backlash from the mutual fund industry will be that many more funds will become closet index funds as their managers fear for their jobs if they stray too far below their indices.
I have already made up my mind about actively managed funds. I have been doing vanguard (or tiaa cref briefly) index funds since high school. Its like Bogle was saying in a web cast (paraphased about hedge funds, but in this context I will use it actively managed funds) …they can get you 192% return this year, but what about next year, or last year.
Warren buffet even placed his money (literally a million dollars) on index funds over actively managed / hedge funds (http://fortune.com/2016/05/11/warren-buffett-hedge-fund-bet/)
Also…Why do you “I fear the backlash from the mutual fund industry will be that many more funds will become closet index fund…”.
I assume that long term closet index funds will be snuffed out by real index funds. Being actively managed means you need to have higher fees, and if they have the same picks / gross returns as true index funds, then the closet index funds won’t be able to compete in any meaningful manner. They may still be able to fool some of the people all of the time but the vast majority of people will eventually wise up and go to lower fee index funds.
P.S. and FYI Malcolm Gladwell started a pod cast called revisionist history, this month, so it only has 2 episodes so far.
Doctor Mom another great post! Congrats. I agree that the younger folks who read this blog do not realize how lucky they are. I too remember the world before passive index funds and Vanguard etfs. It is so easy now to take control and slay the orcs posing as investment advisors and just do it yourself. I will try to outline some of my costly high fee mistakes when I have more time later in the day. We all make them I just choose to learn from them and try to look at the big picture and stay positive.
One of my better decisions was staying away from our state’s (Alabama) initial 529 offerings due to my burgeoning wariness of active management. Their prepaid college tuition plan has since gone bankrupt. The company that held their initial direct 529 offering was Van Kampen Funds which doesn’t even exist anymore. Their current 529 plan is a little better. I roll my money in each year to get the tax credit. Then, I take my distributions from it so I don’t have to pay state tax on the distribution.
Ok my retrospective mistake. I dollar cost averaged several thousand dollars per month in the 90s into several different American Funds. At the time this company seemed to be the lesser of many evils. Vanguard has eaten its dust. I long ago switched out the funds that were tax protected. The problem is the taxable account. I still have a sizable position in Growth Fund of America which is a closet indexer. It has an ER of 0.65 which costs me $3345/year. The problem $236k LTCG. Fundamental Investors. ER 0.6 costing me $4510/year. Problem $400k LTCG. American Fund Tax Exempt Fund. ER 0.54 Costing $2666/year. Problem $54596 LTCG. At 15% I am looking at $103K in additional tax, 20% $138K, and $158k at 23%. I just did a partial roth conversion last week so I continue to pay the excess ER for now. These funds have started self-distributing large LTCG in December and do do reinvest those so I think the problem is resolving itself. A first world problem to be sure. Have I said today that I hate paying taxes more than high ER.
Glad to hear you’ve made the transition away from the thievery of those active funds, Dr. Mom.
I used to have a hodgepodge of index funds with higher expense ratios, active funds, and funds of funds, many of which were in a taxable account. I believe yours were held in retirement accounts, which makes it very easy to make changes without tax consequences.
When you’ve got less-than-ideal funds in a taxable account, you have to be creative and willing to take a smaller hit now to avoid a larger hit later. My taxable account in now 100% Vanguard index funds. I reduced the tax hit with a combination of donations, tax loss harvesting, and making the switch over multiple years.
I may have the material for another guest post. Thanks for the inspiration, Dr. Mom!
Glad to be of service. Yes, they were mostly in retirement funds. Some were in taxable. I sold out to tax loss harvest or when we needed the money for something else. How I currently think about finance is related to how I talk to my kids who are 14, 22, and 23 about it. I primed my kids for learning finance with years of “mommy math.” I used to challenge them that I could turn any topic into math. It helped them understand how important learning it was and to think creatively about applying it to their lives. Try it with yours-might give you perspective for more posts. Continued good luck with your blog!
Another great post Dr Mom! And what you mention here is so intriguing…”Mommy Math”… would you give us some examples of getting your kids down this road? Maybe another guest post 🙂
Not sure guest post on this topic fits with site as it is only relevant in so far as you need the math vocabulary to learn finance. My kids always heard “math matters” from both my husband and me. We checked math homework almost nightly through elementary school and supplemented in any way needed (the sillier the better) to help them grasp concepts. Mommy math was the term they used for summer supplementation so they wouldn’t forget concepts. For me it was fun watching them learn to think. I now discuss finance in yoga terms with my daughter, weight training with my older son, and basketball with my youngest.
The issue with many 401 and 403 plans is that they do not offer many index funds, if any
Bogle says the difference between Active and Passive Investing=2%
2% over 40yrs is 100’s of thousands of lost dollars-THE TYRANNY OF COMPOUNDING in the opposite direction
2% fees on a million=20k=OUCH!!!!!!!!!!!!!!!!!
My initial 403b in the 1990’s did offer one, but it was in the early years of indexing. I hadn’t learned much finance then. The marketing was heavily biased against indexing back then which unfortunately swayed me. I didn’t get that the finance industry was not operating from the same moral and fiduciary standard that physicians do.
Thanks so much for all your comments! You really helped me understand that as we approach retirement and our sequence of returns risk years that my need to take risk is now lower than my willingness and ability to take it. It has helped me be at peace with the asset allocation choices we are making.
What’s the solution?
It isn’t intuitive that a professional cant beat an index fund over the long haul. This combined with the army of financial advisors out there using either cherry picked data, half truths, or even worse will make this a conversation that needs to be repeated time and time again. The only thing worse is permanent insurance pushers which you seem to have avoided (at least didn’t mention in this). Thats like investing with super high loads, ongoing high fees, crazy surrender charges, and tax inefficient unless you are one of the few that keeps until death.
Yes. We avoided inappropriate insurance products. Bought term life only.
My 457/403b options finally include both the Vanguard Total Stock Market index fund and the Vanguard Total International Stock index fund (plus about 25 actively managed fund options which I no longer have any money in). But on the bond side, there are no index funds: only the Templeton Global Bond and the PIMCO Total Return Fund, both of which have an expense ratio around 0.8%. Last time our “advisors” came to talk to our group, I asked about getting an index bond fund option. They erupted into a 3 minute lecture explaining that although index stock funds can be good, index bond funds have inherent flaws that make them always bad. I know enough to know they are just spouting BS, but not enough to argue with them coherently. Anybody have any ideas on how to combat this? Any resources giving data on the advantages of index bond funds specifically?
Argue not with the fool… I would change your tactic. You’ve won the battle by having Vanguard index funds started. Talk to HR, not the advisors. Focus on the fee difference between the funds you have and Vanguard’s bond index. Ask HR to watch John Oliver’s recent show on the retirement industry. Humor over arguing may effect the change you want: https://www.youtube.com/watch?v=gvZSpET11ZY.
Are you in my 401(k)? We had the same justification for keeping PIMCO over TBM. Eventually they gave us both. I didn’t care all that much because they offer a Schwab Brokerage/PCRA option, so you can just go buy whatever you want as an ETF.
The explanation I’ve heard (recently, actually) about why bond index funds are a bad idea is that the fund is weighted by how many bonds (i.e. how much debt) the companies issue (compared to stock index funds which, obviously, are weighted by market cap). As the argument goes, you’re thus buying a bunch of the most heavily leveraged companies, which is argued to be a very risky proposition.
I suppose my response is that Apple, GE, and Verizon issue a ton of bonds and their debt is highly rated (typically). But I haven’t really thought through a good response to the argument above against bond index funds. Any thoughts?
Efficient market hypothesis holds that this has been priced into each bond. Discussed in a Vanguard PDF you can find with a search “Vanguard International bond fund PDF”
I don’t have one….except that bond index funds seem to keep outperforming managed ones. Bogle argues that price matters even more with bonds than with stocks.
Friends of mine who do not have index options went to HR and complained illustrating the cost difference. They weren’t quick fixes but after a few years and employees threatening to leave plan the managing companies conceded.
Doesnt the employer have a Fiduciary responsibility to the participants? So, demonstrating that the particular active fund among the choices provided isnt the best in class- based on fees, performance, etc- should prompt a speedy remedy, I’d think. No employer would want to be sued over flouting ERISA. Would this be a tactic that might work better?
Potentially. I think a lot of people are uneducated on the impact and cost of active funds in a retirement plan.
Unless you’re HR person or rep is up to speed the managing 401k is going to place the mutual funds of their choice/and profit first.
Inertia is a strong principle.
Funny you should mention that: http://www.forbes.com/sites/johnwasik/2016/06/20/does-your-401k-cost-too-much-go-to-court/#42de822ef343
Wow, that was a good read and sounds like a step in the right direction. Of course, not easy to do- how many people are willing to risk their careers by suing an employer?.. but getting the word out itself will help significantly.
And doctors are in both similar (as employed by big organizations) and dissimilar situations (as in small grp practice). In fact, the thought occurred to me in the first place since I am now kind of in the employer’s shoes (recently helped start the retirement plan for my husband’s small grp practice) and having the best in class options is good for both employees and employers- after all, it’s the employers also have their money in the same 401k!
Doctors may find it easier to convince their employers since the set up (even the big corporate structures) is smaller than the giants mentioned in the article- and it may be easier to navigate the maze of HR to get the job done.
The challenge with that DOCBEANS is that ERISA enforcement lies under the Department of Labor as opposed to the SEC and FINRA. The SEC spends much more time scrutinizing investments and fees. While the SEC or FINRA do not go as far as saying what is best-in-class, they will offer investor bulletins from time to time addressing fees and potentially harmful traps out there. The DOL, however, approaches it more from an employment law vantage. DOL lays out the fiduciary responsibilities pretty clearly and in the case of index funds, the two most applicable parts of the definition are:
1) the plan must provide diversification
2) the plan must have reasonable expense
Obviously there is a great deal of gray area here. Per the DOL, diversification is defined as ‘at
least three different investment options so that employees can diversify investments within
an investment category, such as through a mutual fund, and diversify among the investment
alternatives offered.’ And they leave ‘reasonable’ undefined when it comes to expenses.
They are starting to move the needle in the right direction with the recent passage of the so-called Fiduciary rule as it applies to all retirement accounts, including IRAs. It would be nice to seem them further integrate the diversification and expense piece by making every 401k offer a passive option in each category along with an active option (remember that while we may not believe in active management, there are millions that still do and you have to allow them the same right to invest.)
Until that time, the only thing I can recommend is that if someone feels their plan truly lacks diversification or is literally all actively managed, then solicit some help from an expert. You might have some technical knowledge but here’s the inside secret: You need to be able to sell it to the employer. Find a company in your area that deals in 401k plan design. Take it to them and get their thoughts. They might have an interest in competing for your company’s plan business. And if they do, now you have some firepower. They will bring in the experts and if you are lucky, you will get a better provider with more diversification and lower costs.
Does the expense ratio of a fund include the 121b fee (if the fund has those type of fees)?
Good question! Bonus points to you. Some active funds list it as a separate fee, so it is easy to avoid them. Just because others don’t list it doesn’t mean it isn’t rolled into their higher ER.
No, that’s separate.
According to Morningstar, the mutual fund’s expense ratio INCLUDES the 12b-1 fee.
Quoting Morningstar:
“The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.”
“Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund’s average net assets, is accrued on a daily basis.”
Great post! When we were getting started, we asked our (free*) Fidelity advisor to choose some funds for us. PIMCO was one, and I think JKK was another. We used the next few months to read Bogleheads and everything else we could get our hands on.
Then, we sold everything he’d bought for us and bought all index funds. We paid some fees to cash out so soon, but it was a valuable lesson. At least we weren’t paying 1% AUM fees too!
*They didn’t charge us extra fees for the advice, just extra fees built into the bad funds.
See below. My comment didn’t pop up under yours…
Congrats on learning from your mistake faster than we did! Smart people learn from their mistakes. Smarter people learn from the mistakes of others. I post mine in the hope some of you can avoid the ones we made.
I fell for front-loaded and back-loaded funds back in my 20’s, which is the cherry on top of “idiot fees”, 12b-1 included.
Since index funds have gained so much popularity in the last decade or so, I wonder how that’s affected the business of selling actively managed funds over time, if at all.
Great post against the perils of active management!
However I don’t understand the argument against the collective investment trust. Fewer regulatory requirements does not mean no regulation.
Collective trusts are not a real problem if you use a reputable custodial firm — Vanguard, Fidelity and Black Rock all use them.
Here’s a good article on the topic:
https://thefinancebuff.com/collective-trust-vs-mutual-fund-whats-the-difference.html
Sorry. Response below…
Thanks for sharing that.
If you are benefitting from the CIT’s lower fees in your retirement fund, perhaps you don’t mind the opacity. They still aren’t as low as Schwab and Vanguard’s that I can access in mine though. In the link, he did not address that there can be difficulty in rolling them over if you leave your employer. I was in Fidelity Contrafund as they were moving some of its assets from the mutual fund model to the CIT model. It affected the performance of my mutual fund shares. I did not receive prior notice of the move. I don’t like the gamesmanship that seems to be involved.
My 401(k) target retirement date plan is in a CIT with a gross expense ratio of 0.01%. It says that the fund “invests in a chosen index through a series of collective investment trusts maintained and managed by BTC, each such fund representing one of the indices,”
I do have the option of setting up a Fidelity brokerage link account and investing through that instead, not sure if it may be worth the extra effort…
Hard to say. Hence the opacity. Sounds like you knew you were getting into a CIT so had the opportunity to research it. I was in the mutual fund class that took a hit when Fidelity started selling off tranches of stock to convert some FCNTX from a mutual fund to a CIT. I was given no notice unless it was buried deep in annual paperwork that I missed when I read it. Plot FCNTX vs the S&P over the last 5 years. Watch starting in 2013 the December drops. It has been underperforming since. Maybe it is coincidence. Maybe not. I also question its liquidity if I am right. I got tired of trying to research it and just sold it.
Dr Mom,
Over the years I’ve enjoyed reading your advice, comments and experiences. Like you, I’ve had to learn a few lessons the hard way! Funny now but boy I’d love to start over with greater WCI insight.
The timing of your post couldn’t be better as I’ve been struggling on whether i should incorporate some active funds in my 401k. I’m 25-30 years from retirement, annual salary of 400k+ and max out my 401k, HSA, 529s, etc.
My asset allocation is the following index funds:
Vanguard Lg Cap 35% (0.05)
Vanguard Mid Cap 10% (0.09)
Vanguard Small Cap 15% (0.09)
Vanguard International 30% (0.14)
Vanguard Total Bond 10% (0.07)
I’ve had a decent year so far with returns of 8.5%. Probably some are doing better but I’ve been happy as I’ve constructed everything by myself based on my own research and equation.
My 401k offers actively managed health care and REIT funds that are tempting as some of my partners have historically made $$$ with these 2 funds. I’ve been hesitant to incorporate them b/c they carry much higher ERs of 0.79 for the Health fund and 0.99 for the REIT. The health fund had a 5 year stretch at 20+ % returns but has since dropped and REITs are having a great year currently at 13-14% returns.
Do you avoid active funds all together even if it means that you’re missing an AA or sector? I certainly wouldn’t do anything crazy but I’ve been considering adding both sectors at 6-8% range….that’s why the timing of your post was perfect!! I’ve almost done it twice but as an ‘indexer’ I just couldn’t pull the trigger :).
Also, I’d welcome any comments or suggestions about my current 401k AA.
Thank you again!!! The WCI and posts like yours are why i check the site first thing when I wake up.
Bailey
I think it’s a reasonable allocation. Adding a dash of REIT or health care would be fine too.
You know you can get notices of new posts on Facebook, Twitter, or email, right?
You’re a machine!!! Not sure how you do it. I may add a dash of each.
As for Facebook, I like to keep that 100% devoted to political posts and people arguing 😉
Thanks.
Also WCI, on any given year do you have a goal return that you consider a good year as a way of assessing 401k-appropriate AA? Obviously more is better but do you shoot for achieving a set return?
6%? 8%?
Thx
No. That sounds like a terrible way to manage a long-term portfolio. I take what the market gives for my asset allocation and try to minimize expenses and taxes. I use 5% real in long-term projections and track my returns and that’s about what they’ve been over the last decade+, but one year it might be -30% and another year it might be + 30%.
Your AA looks fine for that far out from retirement. I use lower international (15%) personally. I agree with Bogle there. Unless I plan to allocate at least 10% to something I don’t bother. I do allocate it to REITS with VNQ. Although once REITS are added as their own sector to the S&P I will rethink that. It should happen soon. As a physician I feel my job is enough exposure to healthcare. Read Phil DeMuth’s The Affluent Investor which helps you think about incorporating your lifestyle into AA choices. Would I use an active fund ever? Yes, if I had a reason to think it was worth the cost but for me that would be a rare occurrence. If both these funds have made others big $$$ you may have missed that opportunity. Don’t performance chase or you could hit them right at their time for underperformance (reversion to the mean). Good luck.
P.S. The most important part of your return is your stock to bond allocation. What you choose within each is less important. If you haven’t read Graham’s Intelligent Investor it is time. He recommends not going above 75% stock unless in specific instances which to me you meet. But, decide for yourself.
I had researched on the bogle head forums what was a reasonable international allocation and 30% seemed to be the average or most common. Honestly, maybe its a US bias but that’s one part of my portfolio that I’ve been uncomfortable with and have considered dropping it to 15-20% range too.
I’m allocated aggressively but have a long, long way to go.
I did not know that REITs would be added to the S&P 500…great to know!
I’ll order both books as I have not read them.
Thank you again.
B
You are younger than we are so having a higher international allocation is more reasonable as you have a longer time to let it play out. Your allocation is personal and only you know what you are comfortable with. As physicians we make much more important decisions often with less data. Use that ability to your benefit in planning AA.
I have been trying to get my foreign stock allocation above 20% for at least 2 years. I keep buying vtiax but it keeps dropping so I buy more. Currently 18%. I also have VNQ An asset allocation is a work in progress. Bailey vanguard recommends 30% foreign now as well. I will be happy with 20.
I too have my 30% in VTIAX. It’s certainly done nothing this year. With Brexit and more countries likely to follow I’m not expecting anything stellar in the near future. If you read thru all the boglehead forums you’ll find a broad range with most being 20-50% of their AA. 30% seemed to be the consensus average. I could probably be 20% and be happy but for the moment I left it at 30%.
I spents weeks reading, researching, thinking about the appropriate allocation and what I came up with that if vanguard as whole (I know Jack Bogle says up to 20% if you must) recommended 30% and a lot of boglehead are doing 30% I should too.
Excuse my ignorance, but how have you returned 8.5% this year with that asset allocation?
Not sure but my account says returns for the year 8.45%. I’ve thought too that’s its high based on the AA.
I started contributing 1/1/2016 and for the first few months I was automatically enrolled into a preset plan with my 401k company. I want to say it was a 60:40 allocation but that has been my best guess??
Probably a calculation issue. Maybe that’s an annualized return or maybe it’s counting contributions etc.
I personally use the vanguard personal performance tool. If most of your stuff is there it is simple
To follow on the quotation theme (albeit from a less “literary” source): “There’s a difference between knowing the path and walking the path.”
I know the indexing path quite well, but I find myself straying from it far too often. I have three choices for my 403b and 457: Vanguard, Fidelity, and TIAA. Ironically, the cheapest indexing options are at Fidelity, with the funds formerly known as “Spartan” (I think they are being rebranded as just Fidelity as Fido seeks to draw passive investors from Vanguard). What is even more ironic is that the biggest active fund temptations are at Vanguard. With half a dozen options at 40 basis points or less you can always find a few that seem to outperform the index by a percentage or two over 1, 5, and 10 years. I figure, “Hey, for an extra 20 or 30 basis points I probably won’t do much worse than the index and I may outperform it.” It is a seductive trap but the past doesn’t predict the future and eventually those awesome managers will guess wrong.
That last point may be even more important than the fee issue. The 401k at my wife’s old firm had access to the institutional class of PIMCO total return (PTTRX). Ten years ago the minimum investment was $100k (now it’s a cool million) but there was no minimum in the 401k. Buying it felt like driving a Rolls or a Bentley and compared to the class that Dr Mom mentions it looks like a real bargain: 0.46% ER and no 12b fees. Back then it was crushing the index at any time period you might choose and it wasn’t that much more expensive than an index either.
So, what’s the problem with PTTRX? Well, Bill Gross guessed wrong, PIMCO pushed him out and several hundred billion in fund outflows later it still lags the index. And yet I still hold on to some in my wife’s rollover account (if I sold it I don’t have a million dollars lying around to buy it again ;).
Learn from my mistake and beware false idols. If you are in it for the long haul eventually those superstar managers will let you down. Furthermore, by the time they are heralded as geniuses their best years are probably behind them. Buying Berkshire Hathaway in 1990 would have been genius but buying now you are just setting yourself up for a fall.
So true. I learned it with Ken Heebnet and CGMFX.
Outstanding article Dr. Mom!
Full Disclosure: I am a CFP with a small advisory firm in Wisconsin. I’ve followed WCI for a few years now and have always appreciated the commentary as much as the articles. I thought I’d add my two cents and provide a little more fuel to the fire burning down the industry of active management. I share this information whenever I can because I spent close to a decade selling those load funds that were mentioned above. I would spend hours arguing with no-load investors about the virtues of active management. However, after spending years educating myself on the science of investing (many thanks Vanguard and Dimensional Fund Advisors!) I came to the conclusion that there was a better way to invest. The evidence was clear and so was my decision: leave Wall Street and become a fee-based independent investment advisor using ETFs and passive investments for those that wanted professional money management and fee-only for those that wanted financial planning only. And I’ve never looked back.
I wanted to clarify something on the 12b-1. This is cleverly disguised as a “marketing and advertising and distribution fee”. Make no mistake — this is a straight up commission. When I was on the dark side, I was trained by one of the most prominent Wall Street firms and sellers of actively managed mutual funds. We were trained on how to sell the funds and share classes with the best 12b-1 fees. Why? Because it was residual. Every quarter, the advisor that sold a fund with a 12b-1 fee would get that amount pulled from your account and deposited into their company’s commission account, and in turn, paid to them based on whatever percentage their compensation is. So if an advisor has 100 million dollars in AUM, with an ongoing 12b-1 of .25%, that’s 250,000 per year from those clients’ accounts into the coffers of the advisor’s firm, on top of the load that probably came with it. And at most brokerage houses, the advisor’s cut is 40-60% of that 250k. For what? Because they showed you a pretty advertising piece touting how many stars the fund has? It is scary how many meetings I have with people with load funds at other brokerage firms and when I ask what the advisor’s reasoning was, and ultimately what the client based the decision on, was how many stars the fund was given on Morningstar. That’s a pretty hefty paycheck and ongoing ‘salary’ paid to someone who can count up to 5 stars. This is negligence but there is no shortage of money going into those places on a daily basis. Anyway…rant over.
Much like the medical profession, the investment profession is continually evolving and uncovering new information. Unfortunately, the big paychecks in the investment profession come from the active management side, so they still have a pretty loud voice. However, the continued growth of Vanguard and meteoric rise of Dimensional Fund Advisors proves that the voices are starting to be shouted down.
Fascinating. Thanks for sharing your perspective!