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[GhaleonEB]

Speaking of Roth, you might want to know that I topped mine off two Fridays ago, which of course is what has the market in its current tailspin. It is invariably the case that this would happen. When I joined my new employer's 401K two years ago, the market performed badly shortly thereafter. When I opened this Roth in September, the market tumbled 7% over the next few weeks. And since I topped it off, the market is down nearly 4%.

Heads up to discount investors, I plan to fund my Roth for 2015 in March. Keep that in mind. Sell high, buy back low.

I fund our Roths with sales of company stock, which I get three times a year. Two of them are February and April, with most if it in the latter. So the February portion will take the hit but I'll buy at a discount in April. Balance!

I'll look into the ratios you provided - my thanks for those. I'm going to hold off on making any decisions until the first week in January, when the new investment options are added to my employer's retirement plan. At that time I'll flip those funds over to the S&P500 and then figure out the rebalancing portion from there.

When I read John Bogle's book on index investing (Common Sense on Mutual Funds) he took a dim view on international indexes. His reasoning was manifold, but part it was, with globalization US based companies are generating a large share of their revenue and profits from overseas. I forget the exact % from the book, I'm sure it's changing constantly. But the general thought was, if you buy the S&P500, you're already globally diversified to the extent that their revenues are generated globally. (There were other reasons as well.) Thus there is rapidly diminishing returns for further diversification. I think there's enough to it that I'm going to worry less about international diversification this year, and focus more on the big cap / small cap US mix when I rebalance.

 

[TylerD]

I had been investing in my Vanguard rollover IRA with after-tax money and then it just dawned on me that I have both pre-tax and after-tax money in that same account. The rollover was opened in September 2013 after I left my previous employer so this is the first full year.

Doing research, it looks like I'll need to fill out form 8606 with my tax return yearly and keep track if I continue to invest after-tax money into that rollover IRA.

Made things more complicated on myself than needed. :/

Another thing, when I add to that rollover, I have been selecting the "this is a rollover account" so the contribution limit for a traditional IRA doesn't apply to that one yes?

edit: no, it looks like I'm wrong. Once it has been rolled over, that account becomes essentially a "traditional IRA" and the 5500 yearly limit applies.

sigh.

 

[Laekon]

I had been investing in my Vanguard rollover IRA with after-tax money and then it just dawned on me that I have both pre-tax and after-tax money in that same account. The rollover was opened in September after I left my previous employer so this is the first full year.

Doing research, it looks like I'll need to fill out form 8606 with my tax return yearly and keep track if I continue to invest after-tax money into that rollover IRA.

Made things more complicated on myself than needed. :/

If it is a regular IRA Vanguard should send you a form for your taxes. It's a personal IRA so there is no way to put pre-tax money into it. I'm not sure if would let you put in more than the $5K or what ever the current limit is.

My international fund is getting it's ass kicked this month and I don't know why. It's the Fidelity Spartan global index fund. It can't just be oil prices as only 8% of it is in energy.I know the money is going to be there for 20 years but it still doesn't feel good.

 

[Cyan]

I had been investing in my Vanguard rollover IRA with after-tax money and then it just dawned on me that I have both pre-tax and after-tax money in that same account. The rollover was opened in September 2013 after I left my previous employer so this is the first full year.

Doing research, it looks like I'll need to fill out form 8606 with my tax return yearly and keep track if I continue to invest after-tax money into that rollover IRA.

Made things more complicated on myself than needed. :/

? Did you have both pre-tax and after-tax money in whatever you had prior to rolling over? Because otherwise I don't see how this even works. You don't put after-tax money into a traditional IRA. Or do you mean that you're over the income limit?

 

[HOMEBOY OVER HERE]

What would the advice be to someone who has zero intent on investing in retirement?

Pray that our society has evolved beyond greed and fear enough to a point where we take care of our poor with proper healthcare, housing, healthy food and clothing.

 

[TylerD]

? Did you have both pre-tax and after-tax money in whatever you had prior to rolling over? Because otherwise I don't see how this even works. You don't put after-tax money into a traditional IRA. Or do you mean that you're over the income limit?

No. All the money that I rolled over from my employer-sponsored 401k was pre-tax.

I have been contributing to that rollover IRA with after-tax money and incorrectly selecting Yes to "Is this a rollover from an employer-sponsored plan or IRA?" when buying the funds within that account. It's continuing to track my annual contributions and yearly maximum and I'm not over the limit.

Just looked at my statement and every contribution to that account is shown as a rollover contribution. I need to contact them and see if that can be fixed or if it even matters.

edit: It isn't counting the contributions towards the yearly maximum when selecting YES to the rollover option... I definitely need to call them because I'll be missing out on deductions if I just used the info that Vanguard will be sending me.

 

[Link]

Speaking of Roth, you might want to know that I topped mine off two Fridays ago, which of course is what has the market in its current tailspin. It is invariably the case that this would happen. When I joined my new employer's 401K two years ago, the market performed badly shortly thereafter. When I opened this Roth in September, the market tumbled 7% over the next few weeks. And since I topped it off, the market is down nearly 4%.

Heads up to discount investors, I plan to fund my Roth for 2015 in March. Keep that in mind. Sell high, buy back low.

Haha, this is almost exactly what happened to me. I'm still not even back up to my initial investment.

That said, now I'm debating if I want to just max out next year all at once, or do monthly installments. Either way, I'll at least keep an eye on things and wait for a down day to invest.

 

[Randolph Freelander]

Haha, this is almost exactly what happened to me. I'm still not even back up to my initial investment.

That said, now I'm debating if I want to just max out next year all at once, or do monthly installments. Either way, I'll at least keep an eye on things and wait for a down day to invest.

My vote is for all at once as early as you can do it. We had some discussion on it back in May.

http://www.neogaf.com/forum/showthread.php?p=110609440&highlight=#post110609440

 

[Link]

My vote is for all at once as early as you can do it. We had some discussion on it back in May.

http://www.neogaf.com/forum/showthread.php?p=110609440&highlight=#post110609440

Ok, good to know. So should I just do it January 1st, or at least keep an eye on the market for a week or two and see how things are trending?

 

[Randolph Freelander]

Ok, good to know. So should I just do it January 1st, or at least keep an eye on the market for a week or two and see how things are trending?

Basically, if you have the funds, go in as early as you can. Anything else is just trying to time the market. The only "truth" we cling to is that the market will rise over time (or else we're all hosed), so given that reality, the earlier you buy, the better off you are.

If the economy is actively cratering on January 2 in the way it was in September 2008, then feel free to adopt a wait-and-see approach, of course.

 

[TylerD]

I talked to Vanguard and they are taking care of it for me.

Don't select Yes, if you want to accurately be calculating your total yearly contributions to your rollover IRA. Lesson learned and they said it's a pretty common mistake. I had done it for every contribution since opening the rollover account.

They are going to back out my contribution amounts and re-enter them so they will accurately reflect the contributions combined with my Roth IRA instead of every contribution associated with my rollover IRA being shown as a rollover.

Feel free to ridicule me!

 

[HOMEBOY OVER HERE]

is there at thread or book on short term investing? like maybe plans to spend in ten to fifteen years?

 

[Mr.Mike]

is there at thread or book on short term investing? like maybe plans to spend in ten to fifteen years?

10-15 years is pretty "long" term, at least in the sense that most people would take short term investing to mean trying to play the market.

I'd imagine most of the strategies would be the same. Maybe a bit heavier with the bonds though.

 

[anonymous_abc]

Ok question regarding emerging markets (EM).

I only have a very limited selection of EM ETF at my bank. reduced further by the desire for it to be a paying out ETF.

I've somewhat narrowed it down to
iShares MSCI Emerging Markets UCITS ETF Inc which seems to closely mirror the Vanguard FTSE Emerging Markets ETF which seems to be one of the go to EM EFT I see thrown around in discussions.
The ETF is very broadly footed in the BRIC's and many smaller countries beyond that.

Thing is looking at the historic graph, there isn't this 'it will obviously rise on average' on display. Is this because the time horizon isn't long enough. Is it expected for the EM in general to start rising again in the future? As this is long term I'm not too worried if the current plateau continues for a while.
Also the TER is pretty awful at 0.75% which would make it by far the most expensive ETF in my portfolio. But on the other hand the cheapest EM ETF available to me is at 0.4% which would also put it close to the top of the pile in my portfolio. (That ETF doesn't look as inviting to me because it is significantly less diverse)

So what should I be looking out for when wanting to diversify into the EM?
Is it to be expected that the short turn returns will be meagre or possibly even negative when taking the TER into account?
Is a high(er) TER to be expected with EM ETF?

 

[Piecake]

Ok question regarding emerging markets (EM).

I only have a very limited selection of EM ETF at my bank. reduced further by the desire for it to be a paying out ETF.

I've somewhat narrowed it down to
iShares MSCI Emerging Markets UCITS ETF Inc which seems to closely mirror the Vanguard FTSE Emerging Markets ETF which seems to be one of the go to EM EFT I see thrown around in discussions.
The ETF is very broadly footed in the BRIC's and many smaller countries beyond that.

Thing is looking at the historic graph, there isn't this 'it will obviously rise on average' on display. Is this because the time horizon isn't long enough. Is it expected for the EM in general to start rising again in the future? As this is long term I'm not too worried if the current plateau continues for a while.
Also the TER is pretty awful at 0.75% which would make it by far the most expensive ETF in my portfolio. But on the other hand the cheapest EM ETF available to me is at 0.4% which would also put it close to the top of the pile in my portfolio. (That ETF doesn't look as inviting to me because it is significantly less diverse)

So what should I be looking out for when wanting to diversify into the EM?
Is it to be expected that the short turn returns will be meagre or possibly even negative when taking the TER into account?
Is a high(er) TER to be expected with EM ETF?

Do you have the option of just buying a total world ETF? That will include emerging markets and likely be quite a bit cheaper.

As for historic data, I think that is pretty worthless. You can't predict future returns based on past performance. Same reason why I can't comment, nor do I think anyone can, on the short-term returns of an EM etf.

For index funds, I always look for the one with the lowest cost since that is what you can actually predict. Diversity is second, but that has really never been an issue for me since there is a huge selection of index funds available here. A higher TER (expense ratio?) is to be expected with specialty etfs, but .75% sounds excessive. Of course, that could be a good deal where you are from. All I know it kinda sucks in America.

 

[anonymous_abc]

Do you have the option of just buying a total world ETF? That will include emerging markets and likely be quite a bit cheaper.

As for historic data, I think that is pretty worthless. You can't predict future returns based on past performance. Same reason why I can't comment, nor do I think anyone can, on the short-term returns of an EM etf.

For index funds, I always look for the one with the lowest cost since that is what you can actually predict. Diversity is second, but that has really never been an issue for me since there is a huge selection of index funds available here. A higher TER (expense ratio?) is to be expected with specialty etfs, but .75% sounds excessive. Of course, that could be a good deal where you are from. All I know it kinda sucks in America.

It's rather high for us too. The average TER in my portfolio is 0.28%.
I'll have another look at the other EM options.
Anyway thanks for the reply. I'll keep it in mind.

 

[RumblingRosco]

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[giga]

Filing starts January 30! So, TaxAct vs TurboTax. The former seems like a much better value. Only $18 for both federal and state e-file.

 

[GhaleonEB]

So, this is the first end-of-the-year that my wife and I have been married. We decided that once a year in January (after the holiday season) we'd take a thorough look at our financial situation and re-evaluate everything, making changes as needed. Does anyone have any advice as to what we should be looking at? FYI, we mostly just invest in mutual funds for retirement purposes, but we keep separate funds for emergency situations and also some savings for a future down payment on a home when we sell/leave our current one.

I'm thinking we will want to evaluate the following:
-Financial goals and how they may have changed
-Current net worth/savings and compare that to the year prior
-Current savings for retirement, especially tax-free accounts
-Estimated amount of money we need to save to retire comfortably by whatever age (roughly-speaking) we've decided we'd like to retire
-Savings for a future child's educational expenses
-How much money we want to give to charitable organizations in the coming year

Anyone have anything else we should be considering? We haven't really sat down to make the full list of things to look into yet, but this is what I came up with on my own so far.

This is a good list, and is similar to what I do each January as well. I would add, in addition to your financial goals, look at your priorities. Reassess what percentage of your income you are saving, and how much is going to what, and make sure that is reflective of your goals and priorities. In addition to charitable contributions, you might want to list any planned large purchases in the upcoming year, along with their planned funding source. Last year we listed planned vacations, projects and purchases (new bed, build a shed, etc.) and matched them to planned funding sources (savings, bonus, tax return) to make sure we didn't have to pull back on any long-term goals to achieve them.

It's also a good time to look at investment strategy and make any adjustments, such as rebalancing.

One other suggestion is to look back on the prior year and see how it played out. What was your gross and net income, how much went to bills, savings, retirement, entertainment? I do that each year and often find a lot of fat we can trim, and save more as a result.

I'd also suggest making as much of your savings automatic as possible. Make your adjustments, then set it up so the investments run as hands-off as possible. Then do it again the next year

 

[RumblingRosco]

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[ThisOne]

I can choose between a hybrid plan (pension plus small 401k) or defined contribution plan (just a 401k) at my current employer. Which one should I take? Keep in mind, it is through the state that I work in and I will more than likely be employed in this state and through this system for the rest of my life.

 

[Piecake]

I can choose between a hybrid plan (pension plus small 401k) or defined contribution plan (just a 401k) at my current employer. Which one should I take? Keep in mind, it is through the state that I work in and I will more than likely be employed in this state and through this system for the rest of my life.

You are going to need to give us some more details on the pension plan and 401k before anyone can give you decent advice. I mean, I like pension plans, but for all we know, the one you are offered really sucks.

 

[Jpm989]

Hi guys looking for a little advice. I really need to go through this thread and do some reading but I'm trying to decide if I should be opening up a Roth IRA, or investing in stocks/mutual funds.

I already have an employer 401k with 3% contribution and I am putting in 10% currently.

I am 29 and feel like I should be more invested in the stock market and for investment, what do you think my best course of action will be?

 

[percephone]

Hi guys looking for a little advice. I really need to go through this thread and do some reading but I'm trying to decide if I should be opening up a Roth IRA, or investing in stocks/mutual funds.

I already have an employer 401k with 3% contribution and I am putting in 10% currently.

I am 29 and feel like I should be more invested in the stock market and for investment, what do you think my best course of action will be?

Reduce your contribution to your 401k to match the 3% of your employer. 401k are generally costly in fees. Put your 7% into other investment/retirement vehicles.

Read the OP.

 

[giga]

Hi guys looking for a little advice. I really need to go through this thread and do some reading but I'm trying to decide if I should be opening up a Roth IRA, or investing in stocks/mutual funds.

I already have an employer 401k with 3% contribution and I am putting in 10% currently.

I am 29 and feel like I should be more invested in the stock market and for investment, what do you think my best course of action will be?

1. Make sure you have a 6-month emergency fund
2. Pay off high interest loans and debts
3. Reduce the 401k to 3% and put the remaining 7% into the Roth. Max the Roth if you can.
4. And if you still have income to spare, put that into other investments.

 

[TomServo]

1. Make sure you have a 6-month emergency fund
2. Pay off high interest loans and debts
3. Reduce the 401k to 3% and put the remaining 7% into the Roth. Max the Roth if you can.
4. And if you still have income to spare, put that into other investments.

Check to see if you have a access to a Roth 401k in your employer's plan.

We got that a couple of years ago, at 36 it feels good to put $17.5K a year into a Roth retirement account.

This assumes your 401k isn't riddled with fees. Ours is index funds with no overall account fees, so my total expense ratio is in the small fractions of a percent.

 

[Jpm989]

Thanks for the replies. Income wise I am good I believe. I have 3 savings accounts with goals.

1)15,000 with .95 interest that I put 25 a week into in my Ally account in case I loose my job/emergency.

2)2000 in my credit union for a down payment on a new car which I put in 50 every week

3) 3000 in immediate cash in case of whatever

4)my checking account which I try to have above 1500 after every month for bills

5) 401k.

No kids/wife, no car payment, and no credit card debt just a mortgage.

I really like having the extra cash on tap in case anything comes up, house is a year old so I should not have any problems for a while but I feel I should be putting more in for retirement. I have some more reading to do.

 

[Chumly]

Check to see if you have a access to a Roth 401k in your employer's plan.

We got that a couple of years ago, at 36 it feels good to put $17.5K a year into a Roth retirement account.

This assumes your 401k isn't riddled with fees. Ours is index funds with no overall account fees, so my total expense ratio is in the small fractions of a percent.

Wait you can put 17.5k in a Roth 401k? I swear my employer said the limit was still the 6k or whatever it is for mine. Going to have to check my benefits again.



Btw does anyone have any recommendations on how much you should save in a taxable stock account? I have a 6 month saving already built up but I am trying to decide if I should put away like 2-3% of our pay in a taxable account so we can build up liquid savings that we can use in the future.

 

[giga]

Thanks for the replies. Income wise I am good I believe. I have 3 savings accounts with goals.

1)15,000 with .95 interest that I put 25 a week into in my Ally account in case I loose my job/emergency.

2)2000 in my credit union for a down payment on a new car which I put in 50 every week

3) 3000 in immediate cash in case of whatever

4)my checking account which I try to have above 1500 after every month for bills

5) 401k.

No kids/wife, no car payment, and no credit card debt just a mortgage.

I really like having the extra cash on tap in case anything comes up, house is a year old so I should not have any problems for a while but I feel I should be putting more in for retirement. I have some more reading to do.

You're in good shape. I would probably put that $3k into the Roth IRA, as you have enough in your checking and emergency to fund your month to month expenses. Right now it's just sitting there losing value with inflation. Remember, Roth IRA contributions can be withdrawn any time without penalty.

 

[Jpm989]

Thanks giga for the information. Reading over the OP, seems like index funds are a good investment. I'm planning on doing the Roth IRA and drop my 401k down to 6% because my employer will match 50% up to 3%.

Are index funds something I want to get into in addition to my 401 and Roth?

I use Fidelity if that makes any difference, as I'm still a noob when it comes to long term investments, but im trying to learn

 

[Piecake]

Thanks giga for the information. Reading over the OP, seems like index funds are a good investment. I'm planning on doing the Roth IRA and drop my 401k down to 6% because my employer will match 50% up to 3%.

Are index funds something I want to get into in addition to my 401 and Roth?

I use Fidelity if that makes any difference, as I'm still a noob when it comes to long term investments, but im trying to learn

401ks and Roth IRAs are simply vehicles that you put investments in. Think of them simply as nothing but weird things that you can put investments in, like stocks, etfs, bonds, and mutual funds, so that you gain a tax advantage.

I would recommend investing in index funds and putting those index funds in your 401ks and Roth IRAs. Fidelity is fine since they offer a lot of index funds. All you have to do is find the comparable index fund listed in the OP. Or you could always choose something a bit different if you are more comfortable with that.

401k to max
Fully fund Roth IRA
Invest the rest in your 401k

 

[Husker86]

401k to max match is what Piecake means (I'm sure )

Fidelity has a lot of no-commission ETFs: ITOT is good for a total US market. IVW is large cap growth, I have a bit in that. IJR if you want some small cap exposure.

For Mutual Funds, FUSEX is the S&P500 fund.

 

[RumblingRosco]

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[Escape Goat]

Any good online calculators to determine if filing taxes jointly versus separate is better for a newly married couple in the US? Also, if we file jointly this year are we stuck doing so forever? Since I am currently a student I am pretty confident joint filing will be better, but once I finish my Ph.D. I will likely have a pretty significant income that may make us reconsider joint filing.

The tax agency i used to work for figured it both ways and used the one with the bigger return. Though your finances may not be so complex to warrant hiring an accountant.

 

[Laekon]

Thanks giga for the information. Reading over the OP, seems like index funds are a good investment. I'm planning on doing the Roth IRA and drop my 401k down to 6% because my employer will match 50% up to 3%.

Are index funds something I want to get into in addition to my 401 and Roth?

I use Fidelity if that makes any difference, as I'm still a noob when it comes to long term investments, but im trying to learn

The Fidelity funds you want to shoot for based on the 3 index fund strategy are

FSTVX - Total US Market
FSGDX - Global Market
FSITX - US Bond Fund

Those are the Spartan Advantage class funds that take a higher initial investment($10K) but have the lowest expense ratios. For $2.5K entry I think these are the recommended Fidelity Investor class funds. The only difference is a slightly higher expense ratio.

FSTMX - Total US Market
FSGUX - Global Market
FBIDX - US Bond fund

I think Fidelity automatically converts you to the lower expense funds once you hit the $ amount. I combined a new IRA and roll over 401k this year and they changed the IRA funds for me.

 

[RumblingRosco]

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[Piecake]

401k to max match is what Piecake means (I'm sure )

Fidelity has a lot of no-commission ETFs: ITOT is good for a total US market. IVW is large cap growth, I have a bit in that. IJR if you want some small cap exposure.

For Mutual Funds, FUSEX is the S&P500 fund.

Woops, good catch

We have fairly straightforward finances. No stock sales, no dependents, we both only have a single form of income, no real estate changes this year, and I contribute to an IRA while my wife contributes to her 403b. So, I think an accountant is unnecessary at this stage of our lives.

Not to mention that is an extra expense. Save, save, save!

I am curious, does anyone here implement a tilt strategy?

http://www.forbes.com/sites/rickferri/2014/07/17/to-tilt-or-not-to-tilt/

I am rather skeptical, but would be interested in hearing other people's thoughts on it.

 

[GhaleonEB]

I think Fidelity automatically converts you to the lower expense funds once you hit the $ amount. I combined a new IRA and roll over 401k this year and they changed the IRA funds for me.

This is correct. We started out in all Spartan class funds and Fidelity converted them to Advantage a few days after each fund hit the threshold.

 

[percephone]

I am curious, does anyone here implement a tilt strategy?

http://www.forbes.com/sites/rickferri/2014/07/17/to-tilt-or-not-to-tilt/

I am rather skeptical, but would be interested in hearing other people's thoughts on it.

Value stocks have higher returns than growth stocks by about 10% a year.

I am reading W.J Bernstein's 4 pillars and the case is made to go 3:2 or even 2:1 in small cap, small value and value index funds vs. Total Stock market or S&P 500 for the US stocks index funds.

Of course, the risk is higher since value company do go under more frequently but the
lots of them get out of the doghouse and have higher gains. The expected return of a value stock is much higher than a growth stock. Of course, there's an higher risk, if the value stock survive and get back on track the stock will rise by a higher margin than a boring growth stock.

The risk of owning such a stock by itself is high but in a index funds, you own all those stocks, and some will survive and thrive.

 

[Nintendad]

This is kind of great. I just got money for when my grandfather passed away and I was looking to see the smartest or best way to make the most money out of it.

 

[Randolph Freelander]

I am curious, does anyone here implement a tilt strategy?

http://www.forbes.com/sites/rickferri/2014/07/17/to-tilt-or-not-to-tilt/

I am rather skeptical, but would be interested in hearing other people's thoughts on it.

That's interesting. I was probably a bit over-allocated to small and mid-caps earlier this year in my 401K, and I used new contributions and employer matches (once moved) to increase my large caps as a percentage of my portfolio to more closely mimic a total market approach (my plan does not offer such a fund). The article above talks about going even heavier, with 75% in a total market fund and then another 25% just in small caps, and rebalancing every year to maintain that ratio. It also mentions it is a life-long strategy, because it might not work out over a year or even a decade.

I didn't compare that exactly, but if you look at the S&P 500 (large caps) versus the Russell 2000 (a popular small cap index) going back to the beginning of 1988 (Yahoo's tracking of the Russell goes back to late 1987), you see this graph:

The S&P is the blue line, Russell is the red. Throughout the life of the graph, you can see how the indices swap the lead several times. At one point, the S&P was well ahead. Over the past 12 years, it's typically been the Russell that's ahead, or even. And now, of course, the Russell is well out front (though if you look at just this year, the S&P has a huge advantage). Who knows that perhaps in a handful of years, particularly if this year's trend hold up, that the S&P might not be back out front.

But even that only tells part of the story, because if you started investing in 1988, and kept investing, and if you rebalanced, you'll buy into and sell out of indices at various highs and lows, so your results wouldn't match the graph unless you just bought in all at the beginning and never contributed another dime. So what I did was take entirely too much time and put together scenarios that bought $5000 into the market at the beginning of each year from 1988 to the present. I had 3 scenarios.

-- 75% S&P, 25% Russell, rebalanced at the end of each year
-- 75% S&P, 25% Russell, no rebalancing ever.
-- 100% S&P

And here are the results:

You can see that the the rebalanced tilt and S&P-only strategies swapped positions a couple of times, though the tilt strategy has maintained the overall lead since 2003. You might also notice that the tilting strategy that doesn't rebalance at all, while never leading, tracks the rebalanced tilt strategy fairly closely.

If you started this strategy in 1988, you're well ahead of the market now, but even 13 or 14 years into it, you weren't convinced. On the other hand, if you started in 2003, you'd probably be ridiculously pleased with the strategy, but you've never experienced a prolonged downturn in small caps (and who knows if the 2014 trend will hold for a few years).

Over the long term, while acknowledging the whole bit about past performance and future results, the tilt strategy probably is sound, but you have to live with the increased volatility of small caps and you have to know you're looking at it over multiple decades, not for any single year. With me, since I look at the figures daily (I'm insane), the volatility drives me crazy. Yet, I still stay in small caps (though not excessively so) because it's beneficial to do so, though I might not go a full 25% on top of what a total market approach would be. (Once I factor out international, I'm probably a couple of percentage points higher in mid-caps, and maybe 4 or 5 points higher in small caps than I might be if I tracked a total market index exactly, but that's reasonably close to my comfort zone, I imagine, though time will tell.)

 

[Husker86]

Thanks for doing that work!

I am a daily checker as well, though I've been very good about not reacting further than "Dammit stupid stocks!"

 

[giga]

Just found out that my dad has been putting his retirement accounts into funds with 1%+ expense ratios with performance rates that doesn't even match total stock index funds. Dying.

 

[PflargBlarg]

Just found out that my dad has been putting his retirement accounts into funds with 1%+ expense ratios with performance rates that doesn't even match total stock index funds. Dying.

This is why you have to wonder why they don't teach this kind of thing in high schools. If people were actually educated about this kind of thing, those ridiculous funds would be down the drain so fast.

 

[percephone]

This is why you have to wonder why they don't teach this kind of thing in high schools. If people were actually educated about this kind of thing, those ridiculous funds would be down the drain so fast.

Gotta pay for all those yachts.Stock brokers are salesmen and salesmen have to sell.

 

[Piecake]

That's interesting. I was probably a bit over-allocated to small and mid-caps earlier this year in my 401K, and I used new contributions and employer matches (once moved) to increase my large caps as a percentage of my portfolio to more closely mimic a total market approach (my plan does not offer such a fund). The article above talks about going even heavier, with 75% in a total market fund and then another 25% just in small caps, and rebalancing every year to maintain that ratio. It also mentions it is a life-long strategy, because it might not work out over a year or even a decade.

I didn't compare that exactly, but if you look at the S&P 500 (large caps) versus the Russell 2000 (a popular small cap index) going back to the beginning of 1988 (Yahoo's tracking of the Russell goes back to late 1987), you see this graph:

The S&P is the blue line, Russell is the red. Throughout the life of the graph, you can see how the indices swap the lead several times. At one point, the S&P was well ahead. Over the past 12 years, it's typically been the Russell that's ahead, or even. And now, of course, the Russell is well out front (though if you look at just this year, the S&P has a huge advantage). Who knows that perhaps in a handful of years, particularly if this year's trend hold up, that the S&P might not be back out front.

But even that only tells part of the story, because if you started investing in 1988, and kept investing, and if you rebalanced, you'll buy into and sell out of indices at various highs and lows, so your results wouldn't match the graph unless you just bought in all at the beginning and never contributed another dime. So what I did was take entirely too much time and put together scenarios that bought $5000 into the market at the beginning of each year from 1988 to the present. I had 3 scenarios.

-- 75% S&P, 25% Russell, rebalanced at the end of each year
-- 75% S&P, 25% Russell, no rebalancing ever.
-- 100% S&P

And here are the results:

You can see that the the rebalanced tilt and S&P-only strategies swapped positions a couple of times, though the tilt strategy has maintained the overall lead since 2003. You might also notice that the tilting strategy that doesn't rebalance at all, while never leading, tracks the rebalanced tilt strategy fairly closely.

If you started this strategy in 1988, you're well ahead of the market now, but even 13 or 14 years into it, you weren't convinced. On the other hand, if you started in 2003, you'd probably be ridiculously pleased with the strategy, but you've never experienced a prolonged downturn in small caps (and who knows if the 2014 trend will hold for a few years).

Over the long term, while acknowledging the whole bit about past performance and future results, the tilt strategy probably is sound, but you have to live with the increased volatility of small caps and you have to know you're looking at it over multiple decades, not for any single year. With me, since I look at the figures daily (I'm insane), the volatility drives me crazy. Yet, I still stay in small caps (though not excessively so) because it's beneficial to do so, though I might not go a full 25% on top of what a total market approach would be. (Once I factor out international, I'm probably a couple of percentage points higher in mid-caps, and maybe 4 or 5 points higher in small caps than I might be if I tracked a total market index exactly, but that's reasonably close to my comfort zone, I imagine, though time will tell.)

Interesting. Thanks for the great post. One thing though is that the the article specifically mentions small cap value indexes, not small caps in general. I don't get the reasons behind it, but apparently that is an even more effective and 'sound' tilt. I'd imagine that those numbers would be even better than the ones you posted.

Thinking about it some more, I probably will never do it. I am not saying I think the strategy is BS, it is just that one of the reasons why I like index investing so much is that I don't have to do anything. Also, if I did tilt, and it went bad for me over a period of time I am not sure how I would handle that. Another benefit of index investing for me is that it stress free for me. If I started tilting or employed a bunch of other crazy things I'd get upset and stressed for 'guessing' wrong.

It is kind of weird to think stress-free investing is worth more to me than a possible increased return, since I know even a .5% increase is a huge deal, but I can only conceptualize that as a gamble. I think that is a warning to me that things won't go well for me if I do this and it hits one of its periodic snags.

 

[anonymous_abc]

That's interesting. I was probably a bit over-allocated to small and mid-caps earlier this year in my 401K, and I used new contributions and employer matches (once moved) to increase my large caps as a percentage of my portfolio to more closely mimic a total market approach (my plan does not offer such a fund). The article above talks about going even heavier, with 75% in a total market fund and then another 25% just in small caps, and rebalancing every year to maintain that ratio. It also mentions it is a life-long strategy, because it might not work out over a year or even a decade.

I didn't compare that exactly, but if you look at the S&P 500 (large caps) versus the Russell 2000 (a popular small cap index) going back to the beginning of 1988 (Yahoo's tracking of the Russell goes back to late 1987), you see this graph:

The S&P is the blue line, Russell is the red. Throughout the life of the graph, you can see how the indices swap the lead several times. At one point, the S&P was well ahead. Over the past 12 years, it's typically been the Russell that's ahead, or even. And now, of course, the Russell is well out front (though if you look at just this year, the S&P has a huge advantage). Who knows that perhaps in a handful of years, particularly if this year's trend hold up, that the S&P might not be back out front.

But even that only tells part of the story, because if you started investing in 1988, and kept investing, and if you rebalanced, you'll buy into and sell out of indices at various highs and lows, so your results wouldn't match the graph unless you just bought in all at the beginning and never contributed another dime. So what I did was take entirely too much time and put together scenarios that bought $5000 into the market at the beginning of each year from 1988 to the present. I had 3 scenarios.

-- 75% S&P, 25% Russell, rebalanced at the end of each year
-- 75% S&P, 25% Russell, no rebalancing ever.
-- 100% S&P

And here are the results:

You can see that the the rebalanced tilt and S&P-only strategies swapped positions a couple of times, though the tilt strategy has maintained the overall lead since 2003. You might also notice that the tilting strategy that doesn't rebalance at all, while never leading, tracks the rebalanced tilt strategy fairly closely.

If you started this strategy in 1988, you're well ahead of the market now, but even 13 or 14 years into it, you weren't convinced. On the other hand, if you started in 2003, you'd probably be ridiculously pleased with the strategy, but you've never experienced a prolonged downturn in small caps (and who knows if the 2014 trend will hold for a few years).

Over the long term, while acknowledging the whole bit about past performance and future results, the tilt strategy probably is sound, but you have to live with the increased volatility of small caps and you have to know you're looking at it over multiple decades, not for any single year. With me, since I look at the figures daily (I'm insane), the volatility drives me crazy. Yet, I still stay in small caps (though not excessively so) because it's beneficial to do so, though I might not go a full 25% on top of what a total market approach would be. (Once I factor out international, I'm probably a couple of percentage points higher in mid-caps, and maybe 4 or 5 points higher in small caps than I might be if I tracked a total market index exactly, but that's reasonably close to my comfort zone, I imagine, though time will tell.)

This is interesting, I've often wondered if buy and hold with or without rebalancing is better. And it confirms what I suspected. Rebalancing does increase overall gains but not vastly. Taking time and cost involved into account it might not really be worth it.

 

[Lazyslob]

you guys are sheeple

 

[anonymous_abc]

you guys are sheeple

As opposed to the majority who don't give saving money (for retirement) a second thought?

 

[percephone]

This is interesting, I've often wondered if buy and hold with or without rebalancing is better. And it confirms what I suspected. Rebalancing does increase overall gains but not vastly. Taking time and cost involved into account it might not really be worth it.

You do it when you put new money in or you do disbursement.