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[a very cute dog]

My employer matches 4% of certain investments. Some of the available investments are index funds (among other things). I have the information on hand but being financially illiterate, how can I make an informed decision about how and what to invest in?

 

[Walter White Walker]

I don't know, but I've read the same info from numerous sources.

http://www.etf.com/etf-education-center/21017-why-are-etfs-transparent-and-tax-efficient.html
http://www.investopedia.com/articles/investing/090215/comparing-etfs-vs-mutual-funds-tax-efficiency.asp
http://seekingalpha.com/article/1979461-start-paying-attention-to-tax-efficiency

It's apparently just a function of how they're structured vs. funds - they create fewer capital gains and taxable events. It may not amount to much all things considered - beats me - but every little bit helps.

 

[Randolph Freelander]

My employer matches 4% of certain investments. Some of the available investments are index funds (among other things). I have the information on hand but being financially illiterate, how can I make an informed decision about how and what to invest in?

Quickest thing to do if you're uncomfortable is to just park your investments in the target date fund closest to your anticipated year of retirement. Some target date funds are better than others with fees, however.

To dive deeper, you should be able to see a fact sheet and prospectus for each of the funds available in your plan, hopefully a condensed version that gives you information on each fund in one high level document, and you should also be able to find a fee disclosure chart that informs you of fees and expenses for each fund.

Generally, if you follow our recommendations here and if you elect not to go into a target date fund, you'll want to seek out index funds that follow the market. We're big on large cap index funds (look for one tracking the S&P 500), then hopefully you might have small and mid cap index funds, too. We usually suggest an exposure to international markets for diversification. And depending on your risk tolerance, you might want to find yourself in a bond fund. Again, index funds for these classes would be preferred.

If you look at a target date fund that's ~30 years out, you might find a blend that looks like ~60% domestic stock, ~30% international stock, and ~10% bonds. So if you had the available index funds in your plan, you might start with such an allocation and adjust it to your preference, though you would be wise to not tip the scales drastically.

The international and bond components should be easy for you to set, generally one fund for each classification should be able to cover it. The domestic component is something you might find yourself using 2 or 3 different funds, depending upon what's available in your plan.

If you have index funds covering large, mid, and small caps, consider that a total stock market approach weights the large cap exposure very large, at around 72-75% of the blend, with mid and small caps taking up the rest at about 2 parts mid, 1 part small. A hypothetical split might be 73-18-9, for example, and then scale that down to fit within your overall domestic stock split. At 60%, that might look like 44-11-5.

I realize I'm throwing around a lot of numbers and I don't mean to suggest that you accept and follow them. They're examples. If you're uncomfortable thinking about this, again, you can just find a target date fund and deal with learning more about self-management (if you're interested) later. Or you can list the funds you have available and we can offer some more nuanced advice that you can always use or ignore.

 

[a very cute dog]

.

I'll keep all of that in mind for the future, thank you. Here's a list of everything that's available to me:

Cash equivalents

• Vanguard Prime Money Market

Short- and long-term bonds

• State Street U.S. Short-Term Gov`t/Credit Bond Index
• Vanguard Inflation-Protected Securities
• Vanguard Total Bond Market Index

Balanced (40% bonds/60% equities)

• Vanguard Balanced Index

Equity

• Vanguard Value Index
• Vanguard Institutional Index
• Fidelity Contrafund
• T. Rowe Price Large Cap Growth
• Vanguard Mid-Cap Index
• Vanguard Small-Cap Index
• Prudential Jennison U.S. Small Cap Equity
• BlackRock MSCI ACWI ex-US Index Fund
• Dodge & Cox Int`l Stock Fund

 

[chaosblade]

Expense ratios are important, but I'd probably do a mix of the Vanguard Institutional Index (majority), Mid Cap (a little), and Small Cap (very little). Would have to look more to decide splits. The ones Randolf mentioned are good though.

 

[Randolph Freelander]

I'll keep all of that in mind for the future, thank you. Here's a list of everything that's available to me:

Cash equivalents

• Vanguard Prime Money Market

Short- and long-term bonds

• State Street U.S. Short-Term Gov`t/Credit Bond Index
• Vanguard Inflation-Protected Securities
• Vanguard Total Bond Market Index

Balanced (40% bonds/60% equities)

• Vanguard Balanced Index

Equity

• Vanguard Value Index
• Vanguard Institutional Index
• Fidelity Contrafund
• T. Rowe Price Large Cap Growth
• Vanguard Mid-Cap Index
• Vanguard Small-Cap Index
• Prudential Jennison U.S. Small Cap Equity
• BlackRock MSCI ACWI ex-US Index Fund
• Dodge & Cox Int`l Stock Fund

OK, no target funds but you have most of the low cost pieces you need.

Large - Vanguard Institutional Index
Mid - Vanguard Mid-Cap Index
Small - Vanguard Small-Cap Index
Bond - Vanguard Total Bond Market Index.

At a quick glance, I'm not thrilled with your international selections (Black Rock, Dodge & Cox) due to the fee information I can find. But the above look solid. Edit: In looking at it, I'd probably lean towards Black Rock for my international component because of fee waivers that are apparently in place, which get expenses down to something reasonable.

 

[giga]

barry ritholtz interviewed jack bogle and it's a pretty great listen: http://ritholtz.com/2016/03/mib-jack-bogle-vanguard-group-founder-2/

 

[cbf123]

Hey guys, just a quick one if I may. I follow all the advise here for my pension pot, which I contribute to monthly into a 100% equity Vanguard fund here in the UK.

I also have a shares isa that I use for mid - short term (5-10 years) that I contribute to, too. This was also in all equities, bit I'm wondering if I'm maybe better off moving that into a mix of bonds and stocks instead? Given its shorter term nature, would this be a sensible approach?

I'm not desperate for this money, and it isn't absolutely necessary incase of an emergency, but I also don't want it to be destroyed if the markets were to turn heavily over the next few years.

What say ye? Ride it out at 100% equity or balance it to be safer, whilst also making less of a return?

 

[anonymous_abc]

Hey guys, just a quick one if I may. I follow all the advise here for my pension pot, which I contribute to monthly into a 100% equity Vanguard fund here in the UK.

I also have a shares isa that I use for mid - short term (5-10 years) that I contribute to, too. This was also in all equities, bit I'm wondering if I'm maybe better off moving that into a mix of bonds and stocks instead? Given its shorter term nature, would this be a sensible approach?

I'm not desperate for this money, and it isn't absolutely necessary incase of an emergency, but I also don't want it to be destroyed if the markets were to turn heavily over the next few years.

What say ye? Ride it out at 100% equity or balance it to be safer, whilst also making less of a return?

How old are you?
I am all ETF at 30.

 

[cbf123]

I'm 30, too. Using funds / ETF for both accounts.

But again, this isn't a long term saving unlike my pension (I plan to stay all in on a 100% equity fund with that).

This is my 'just incase' account, and I don't mind risk on it, just wondering if over such a short term it's TOO much risk.

 

[anonymous_abc]

I'm 30, too. Using funds / ETF for both accounts.

But again, this isn't a long term saving unlike my pension (I plan to stay all in on a 100% equity fund with that).

This is my 'just incase' account, and I don't mind risk on it, just wondering if over such a short term it's TOO much risk.

My mid term stuff is all in stock too. yolo.
The correct answer is: It really depends on your risk tolerance.
What is the mid term stuff for?
If you know for sure you need the money in exactly 5 years then stocks are probably not such a wise idea as if you say I don't mind it being 7 years either.

 

[cbf123]

My mid term stuff is all in stock too. yolo.
The correct answer is: It really depends on your risk tolerance.
What is the mid term stuff for?
If you know for sure you need the money in exactly 5 years then stocks are probably not such a wise idea as if you say I don't mind it being 7 years either.

Ah, a risk taker, too

Yeah that's what I'm thinking. I don't like the fact that my money isn't hitting full potential say in a load of bonds, but I'm still reasonably new to this, and I don't want to shoot myself in the foot. The money is just there, no real reason, treats, family holidays, whatever. But just not for right now if that makes sense.

Thanks for the reply!

 

[anonymous_abc]

Ah, a risk taker, too

Yeah that's what I'm thinking. I don't like the fact that my money isn't hitting full potential say in a load of bonds, but I'm still reasonably new to this, and I don't want to shoot myself in the foot. The money is just there, no real reason, treats, family holidays, whatever. But just not for right now if that makes sense.

Thanks for the reply!

In that case my suggestions would be keep a couple of grand liquid in a savings account and push everything else into the market.

 

[vehn]

Do the VTSMX / VTIAX funds in the OP have lower than average dividends? I was checking my dividend income from last year, and I have 4x as much $ in these funds than my company 401k... yet I received 0.5x as much dividends.

 

[Randolph Freelander]

Do the VTSMX / VTIAX funds in the OP have lower than average dividends? I was checking my dividend income from last year, and I have 4x as much $ in these funds than my company 401k... yet I received 0.5x as much dividends.

I didn't look at VTIAX, but VTSMX has a yield of 2.03%, which is slightly above the average yield for the S&P 500 (1.91% as of March 2015).

If your 401K holdings produce higher yields, it could be because those funds are executing a different capital strategy. Assuming you're just reinvesting those dividends by default, then ultimately you are looking for total return, of which dividends are a component.

 

[reggieandTFE]

I'm 33 and am vested in a defined-benefit pension. I just received a letter telling me I'll receive $1263/month when I'm 65 if stop working at my Employer today. Is there a way to estimate what that will be worth in 32 years? Some sort of reverse inflation CPI calculator? (This is purely a thought experiment, I'm not planning to be depend on the pension; it will be a nice bonus hopefully.)

 

[Randolph Freelander]

I'm 33 and am vested in a defined-benefit pension. I just received a letter telling me I'll receive $1263/month when I'm 65 if stop working at my Employer today. Is there a way to estimate what that will be worth in 32 years? Some sort of reverse inflation CPI calculator? (This is purely a thought experiment, I'm not planning to be depend on the pension; it will be a nice bonus hopefully.)

$1263 in 2048? At 2% inflation, that's $670 in today's terms, $573 at 2.5%, and $490 at 3%.

 

[tokkun]

Do the VTSMX / VTIAX funds in the OP have lower than average dividends? I was checking my dividend income from last year, and I have 4x as much $ in these funds than my company 401k... yet I received 0.5x as much dividends.

Are you sure you are looking at the dividends for the entire year? I know some Vanguard funds do quarterly distributions (just got one last week).

 

[vehn]

Are you sure you are looking at the dividends for the entire year? I know some Vanguard funds do quarterly distributions (just got one last week).

yeah I'm looking at year to date. Maybe the generated statement thingie on the 401k site is wrong, since the vanguard fund dividend does come out to ~2%

 

[Wellington]

Do the VTSMX / VTIAX funds in the OP have lower than average dividends? I was checking my dividend income from last year, and I have 4x as much $ in these funds than my company 401k... yet I received 0.5x as much dividends.

VTSMX distributions

VTIAX distribution

Not sure how you're checking but this is what Vanguard listed.

My target date fund with fidelity gives me a 2% dividend shot at the end of the year, would much prefer it spread across the whole year to capture any additional gains but whatever. Cool to see such a large number pop up between Christmas and New Years.

 

[Darren870]

Finally got my UK pensions all combined. Now I only have one there which I can't move or touch until I retire. Unless the UK laws change or I move to a country where I can transfer it to.

I would have been able to move it to Australia, but had to do it in the first 3 months. Otherwise I lose 15%.

 

[giga]

SP500 back above 2000 and close to pre NYE levels. <3 the fed.

 

[GhaleonEB]

SP500 back above 2000 and close to pre NYE levels. <3 the fed.

Buy and hold, once again, FTW. I poked in on my account to record the quarterly dividend in my records, and did a huge double take. I haven't paid any attention recently. 0_o

 

[PantherLotus]

Never panic.

(raising rates was still a mistake, right?)

 

[RuGalz]

It just sort of daunt on me that, if someone made more than the income limit for tax deduction with traditional IRA, is there any reason to contribute into traditional IRA (other than forcing oneself not to use that money right now)?

Wouldn't it be better to just put it into their own, after-tax retirement investment account in that case? Otherwise, that $5500 is getting taxed based on income bracket now and then once again when it is withdrawn based on the income level at retirement vs taxed based on income now and taxed on flat long term gain later when they are sold? Am I missing something?

 

[Randolph Freelander]

It just sort of daunt on me that, if someone made more than the income limit for tax deduction with traditional IRA, is there any reason to contribute into traditional IRA (other than forcing oneself not to use that money right now)?

Wouldn't it be better to just put it into their own, after-tax retirement investment account in that case? Otherwise, that $5500 is getting taxed based on income bracket now and then once again when it is withdrawn based on the income level at retirement vs taxed based on income now and taxed on flat long term gain later when they are sold? Am I missing something?

The first part you overlook is the Roth, which has a higher income limit before it phases out (for those where the deductibility of the traditional IRA would actually phase out), and you also have the "backdoor" conversion you can utilize. Gains in the Roth would be tax-free.

Should the conversion law change or if the Roth is otherwise unavailable to you and you are stuck with a traditional IRA without any deductibility, your IRA would now have a cost basis that would be subtracted formulaically from future distributions, which would reduce your tax liability. In the interim, gains are accumulating and dividends are being reinvested with no impact to your tax situation year to year.

I haven't thought deeply about non-deductible contributions to a traditional IRA versus regular investing, though the marginal tax rates versus capital gains rates (under current law) would make me probably lean towards regular investing, though it would make tax filing season just a bit more of an undertaking (you're likely to have transactional gains and dividends to report each year). However, if you are in this situation and have a 401K available to you, then you'll want to go ahead and max that out to get all the tax advantages you can, and then you can come back to the question of IRA versus regular investing.

 

[RuGalz]

The first part you overlook is the Roth, which has a higher income limit before it phases out (for those where the deductibility of the traditional IRA would actually phase out), and you also have the "backdoor" conversion you can utilize. Gains in the Roth would be tax-free.

Depending on things, sometimes we are way under the limits sometimes we can go over. For simplicity, I just throw everything into traditional instead of having to calculate and do adjustments by the end of the year. Also I feel like we may be at lower tax bracket by the time we retire. Speaking of backdoor conversion, what is the thought process to determine if it's worth doing? I keep going back and forth about doing and not doing in my own case. Without really knowing my financial situation will be after retired, or when I'll be retired, not being forced to withdraw a minimum amount after age of 70 1/2 gives some flexibility.

In the interim, gains are accumulating and dividends are being reinvested with no impact to your tax situation year to year.

Yea I guess that's one big thing I missed.

 

[Randolph Freelander]

Depending on things, sometimes we are way under the limits sometimes we can go over. For simplicity, I just throw everything into traditional instead of having to calculate and do adjustments by the end of the year. Also I feel like we may be at lower tax bracket by the time we retire. Speaking of backdoor conversion, what is the thought process to determine if it's worth doing? I keep going back and forth about doing and not doing in my own case.

Year to year, it's worth doing when you can't get the IRA deduction, for sure. You're already paying the tax, might as well avoid additional taxes tomorrow.

As for accumulated assets in a traditional IRA, it's hard to say, though I would lean against it (assuming your income and/or the conversion would push you into higher marginal rates). The thought being that you'd pay a high marginal rate now just to avoid regular income tax in the future (that progresses through the lower marginal rates before getting into higher ones). Only if you think your top marginal rate now is going to be lower than what you expect to pay on average in the future should you do it. Big problem: who knows what tax rates are going to be 20 or 30 years from now? 40 years?

I personally think and have stated before that no Congress would have the will to significantly raise rates on the middle class. However, if the political will of the nation shifts and we elect someone like Bernie Sanders, and that someone is actually able to implement his or her preferred policies regarding healthcare and education, then rates would necessarily increase and my bet would have been the wrong one.

 

[tokkun]

It just sort of daunt on me that, if someone made more than the income limit for tax deduction with traditional IRA, is there any reason to contribute into traditional IRA (other than forcing oneself not to use that money right now)?

Wouldn't it be better to just put it into their own, after-tax retirement investment account in that case? Otherwise, that $5500 is getting taxed based on income bracket now and then once again when it is withdrawn based on the income level at retirement vs taxed based on income now and taxed on flat long term gain later when they are sold? Am I missing something?

Advantages of an after-tax IRA:
- You are not taxed on gains until you withdraw the money. If you happen to want to invest in income-generating vehicles like bonds, this shields you from a bunch of taxes that you would otherwise have to pay immediately in a taxable account slowing the growth of your investments.

- IRAs offer some legal protections that are not offered by taxable accounts. For instance they are protected when filing for bankruptcy.

- You have the option to later roll the money over into a Roth IRA without penalty since you have already payed taxes (but I think the lifetime of this loophole is limited).

Disadvantages:
- When you withdraw the money it will be taxed as ordinary income. In the taxable account, the appreciation of your investments and qualified stock dividends would be taxed as capital gains instead. Under current laws capital gains taxes are significantly lower than ordinary income taxes for people in the middle class.

- You may not be able to take advantage of certain tax breaks available to taxable accounts such as tax loss harvesting.

- Under current laws you could just roll the after tax account into a Roth IRA, so there is really no point to holding after tax IRA dollars unless you are worried about the step transaction doctrine.

If we imagine a future where the backdoor Roth loophole has been closed, then after tax IRAs could be useful for people who cannot contribute to a traditional or Roth IRA and just want to use the after tax IRA to hold the bond allocation in their portfolio. It is generally superior to a taxable account if you just want non-tax-exempt bonds.

 

[RuGalz]

Alright, thanks. It's definitely something to think about. Gonna have to dig through previous years of tax returns to see how much we would have to pay back if we do the conversion as well.

 

[Randolph Freelander]

Alright, thanks. It's definitely something to think about. Gonna have to dig through previous years of tax returns to see how much we would have to pay back if we do the conversion as well.

Your previous years' income and taxes are not relevant, except so far as whether or not you were eligible to deduct your IRA contributions at that time. If you convert a traditional IRA to a Roth, the converted contributions (deductible portion) and gains will count as ordinary income in the year of the conversion. This income is essentially added to the top of your pile, so to speak, so it will be taxed at your top marginal rate.

 

[RuGalz]

Your previous years' income and taxes are not relevant, except so far as whether or not you were eligible to deduct your IRA contributions at that time. If you convert a traditional IRA to a Roth, the converted contributions (deductible portion) and gains will count as ordinary income in the year of the conversion. This income is essentially added to the top of your pile, so to speak, so it will be taxed at your top marginal rate.

Er, yea that's what I really meant to say. Hopefully most of the documentations will be done "automatically".

 

[Randolph Freelander]

America.

http://www.bloomberg.com/news/artic...more-are-confident-of-retirement-are-we-crazy

The retirement confidence of Americans has come a long way since the recession. The percentage of workers either very or somewhat confident that they will be able to afford a comfortable retirement now stands at 63 percent, up from 51 percent three years ago and 49 percent in 2011.

But wait for the truly American part

The percentage of workers saying they or their spouse saved for retirement is 69 percent in 2016, down from 75 percent in 2009. That number has bounced around a lot, between 57 percent in 1994 to as high as 78 percent in 2000. Whatever the reason for the significant decline this year, it's bad news for our retirement prospects—as is the fact that fewer than half of workers (48 percent) have even tried to figure out how much money they'll need to live on in retirement.

Confidence: up
Actual saving and planning: down

More from the article

Workers with a retirement plan contributed the most to the higher overall confidence numbers. Many of the “very confident” have, or have a spouse who has, a defined contribution plan, an IRA or a defined benefit plan from a current or previous employer. Twenty-six percent of workers with such savings plans were “very confident” about being able to afford retirement, compared with 10 percent of those who don't have accounts.

People without any of those options were more confident, too. The percentage of workers without a plan who said they were “somewhat confident” rose from 21 percent last year to 29 percent this year. One possible reason is a decrease in the unemployment rate, Vandermillen said.

Still, there's a big savings gap between those with access to a retirement plan and those without: 34 percent of respondents with a retirement plan who answered a survey question about savings said they had saved at least $100,000. Just five percent of those without a plan said they'd saved that much. Only 9 percent of workers with access to a retirement plan reported savings of $1,000 or less; it was 67 percent for those without a plan.

And just one more thing to make us all feel good about ourselves

In a charming testament to human nature, while not enough people are saving for retirement, they're definitely thinking about what they'll do when they retire. Sixty-seven percent of workers said they had thought about how to occupy their time. Just 36 percent said they had talked with a financial adviser about retirement planning.

 

[Piecake]

Sounds like a lot of those people will be still working, or at least trying to find a job

 

[anonymous_abc]

It's painfully sad.
I honestly believe the government should force these people help themselves...

 

[tokkun]

It's painfully sad.
I honestly believe the government should force these people help themselves...

That is what Social Security and (in a less direct sense) Medicare are - or at least were supposed to be if Congress had not raided their funds as if they were some kind of generic tax.

Makes me feel somewhat sympathetic to ol' GWB's plan to allow people to put those contributions in private investment accounts or at least Gore's Lockbox. Of course these days it's just a wealth transfer from the young to the old, and young people can't have any confidence of whether that money will be around when they are in retirement.

 

[anonymous_abc]

That is what Social Security and (in a less direct sense) Medicare are - or at least were supposed to be if Congress had not raided their funds as if they were some kind of generic tax.

I'm aware of the principle. But it is clearly not enough.

How much can an average Joe in the US expect to get out of SS?

 

[sphinx]

probably the place to ask....

I have a house that would reach a six-digit figure in Dls/Eur in worth. This house is currently being rented to a wonderful family so it generates income.

On my own, I live in a modest apartment, have a job which gives me a decent salary from which I pay all necessary things in life, I currently live in Germany, and will probably stay here for good. In a bit less than 3 years I get the permanent residence.

that house I rent is in my home country (Mexico) and whenever my family isn't there to help dealing with the people renting the house, I will invariably have to sell...

I have no idea what to do.

sell it later? sell it now? where should I put the money if I do?

I know I don't want to buy another house or apartment here in Germany with that money, I want to rent for life. Having a house of my own was emotionally a terrible experience for which I wasn't prepared. I am alone and will not have wife/husband or kids so I am perfectly fine in my small apartment.

buying more properties (like 2 smaller ones) doesn't sound very realistic since I am not cut out for that life, I don't want to deal with strangers and their house/income problems or with the properties deteriorating over time when they aren't being rented.

so tl;dr, what should any smart man in his late 30's do with savings that go above 200k dls that doesn't involve buying properties?

 

[anonymous_abc]

probably the place to ask....

I have a house that would reach a six-digit figure in Dls/Eur in worth. This house is currently being rented to a wonderful family so it generates income.

On my own, I live in a modest apartment, have a job which gives me a decent salary from which I pay all necessary things in life, I currently live in Germany, and will probably stay here for good. In a bit less than 3 years I get the permanent residence.

that house I rent is in my home country (Mexico) and whenever my family isn't there to help dealing with the people renting the house, I will invariably have to sell...

I have no idea what to do.

sell it later? sell it now? where should I put the money if I do?

I know I don't want to buy another house or apartment here in Germany with that money, I want to rent for life. Having a house of my own was emotionally a terrible experience for which I wasn't prepared. I am alone and will not have wife/husband or kids so I am perfectly fine in my small apartment.

buying more properties (like 2 smaller ones) doesn't sound very realistic since I am not cut out for that life, I don't want to deal with strangers and their house/income problems or with the porperties deteriorate over time when they aren't being rented.

so tl;dr, what should any smart man in his late 30's do with savings that go above 200k dls that doesn't involve buying properties?

Index Funds.

If you want to go all hands off just put it all into a low cost MSCI World Index Fund.

 

[sphinx]

Index Funds.

If you want to go all hands off just put it all into a low cost MSCI World Index Fund.

any links that explain the concept for a 4-year-old toddler, apples, oranges and all?

 

[Makai]

any links that explain the concept for a 4-year-old toddler, apples, oranges and all?

You're buying every stock in the market.

 

[a very cute dog]

OK, no target funds but you have most of the low cost pieces you need.

Large - Vanguard Institutional Index
Mid - Vanguard Mid-Cap Index
Small - Vanguard Small-Cap Index
Bond - Vanguard Total Bond Market Index.

At a quick glance, I'm not thrilled with your international selections (Black Rock, Dodge & Cox) due to the fee information I can find. But the above look solid. Edit: In looking at it, I'd probably lean towards Black Rock for my international component because of fee waivers that are apparently in place, which get expenses down to something reasonable.

Thank you for the detailed response! BUT how should I split it and why? Or, in lieu of demanding free financial advice, what are good resources for making an informed decision? I'd like to take advantage of this to the best of my ability.

 

[anonymous_abc]

any links that explain the concept for a 4-year-old toddler, apples, oranges and all?

It's a weighted index that contains the entire global market to some extent.

Many financial institutions and banks offer Index Funds that closely match the MSCI world index.

It the simplest way you can get a very diversified portfolio with everything from Apple to some Chinese telecommunications companies.

If you have the money in Germany, just open a free Depot at any bank (personally I have mine at ING-DiBa) and buy MSCI World index fund (for example from iShares). Just buy the one with the lowest TER and forget about it.
It might drop some years but it will grow others and historically you will have a 7% anual return.

 

[tokkun]

Thank you for the detailed response! BUT how should I split it and why? Or, in lieu of demanding free financial advice, what are good resources for making an informed decision? I'd like to take advantage of this to the best of my ability.

https://www.bogleheads.org/wiki/Lazy_portfolios#Three_Fund_Lazy_Portfolios

 

[giga]

We're in a bunny market.

http://awealthofcommonsense.com/2016/03/were-in-a-bunny-market/

So bunny markets don’t happen all that often, which is part of the reason so many investors are so frustrated right now. A flat-ish market is out of the ordinary. Investors don’t like to see things that are out of their comfort zone.

This can lead to unforced errors.

When nothing is happening in the markets people tend to try to make something happen on their own. The problem most don’t realize is that trying harder in the markets tends to leave you worse off, not better. Patience is always a virtue in the markets, but maybe more so during a bunny market. You can’t force things.

 

[draetenth]

https://www.bogleheads.org/wiki/Lazy_portfolios#Three_Fund_Lazy_Portfolios

Thanks for this link. It's been an interesting read, but now it has me questioning my stuff so I have questions:

1) Is it a big deal that most of the lazy portfolios have 3 or 4 funds, but I have 5 (I've mainly looked at Rick Ferri's Core Four since it has 3 of the funds I use and 3 recommended in the OP)? I basically looked at the target retirement fund closest to me, but chose the stocks individually so I could have better control over the stock/bond allocation. The five I use (in both my Roth and taxable funds are Index funds) are Total Stock Market, Total International Stock Market, Inflation-Protected Securities (TIPS), Total Bond Market, and Total International Bond Market.

Should I be getting rid of one? The site seems to suggest that Tips isn't good for the non-IRA fund/taxable funds because it isn't tax efficient.

The "Core Four" looks like it replaces the TIPS and the Total International Bonds with something called Vanguard REIT Index Fund (VGSIX), though reading the topic about Core Four has someone stating that TIps is nice because none of the other 3 funds in the Core Four has TIPS while REIT is included in the Total Stock Market so it balances things out better.

At least, I know I want to keep the Total Stock Market, Total International Stock Market and the Total Bond Market since the OP and the Core Four are at least agreement with that.

It looks like it's down to whether I want:

a) Just TIPS
b) TIPS and International Bond (what I have now and no reason for it other than it's what was in the Target Date fund I looked at)
c) Just REIT

And whether I should make changes to just my taxable fund, my Roth fun, or both.

2) I've thought about rebalancing my funds at one point since my allocations have gotten a bit off from what I like. Currently, I've just stopped putting money into the funds that are over what I want allotted, but I've thought about taking directly from that fund and put in another.

Would this hurt me come tax time? I don't want to rebalance a fund only to learn I would have to pay taxes on most of what I was "selling" in exchange for other funds. I would do it for both my taxable account and my Roth. However, I'm not talking about going from the taxable account to the Roth and vise versa. When I want to rebalance, I would use the funds inside the Roth to balance each other out (and the taxable funds to balance out the taxable funds).

I'm 31 with a so I'm currently a bit aggressive with my current setup (I know this is mostly due to risk tolerance - I'm a government employee with a pension so I feel like I can be aggressive): 90% Stocks 10% Bonds:

70% Total Stock Market
20% Total International Stock Market
4% TIPS
4% Total Bond
2% International Bond.

 

[tokkun]

RE: Allocation

My personal opinion is that simpler portfolios are better because:
- The more complex your portfolio is, the more likely you are to tinker with allocations.
- If you are an average human, the more you tinker with your allocations, the more money you will lose. Or so academic studies have shown.

I really doubt that having 4% US bonds, 4% TIPS, and 2% international bonds is going to perform appreciably different from just having 10% US bonds.

RE: Rebalancing

If it involves selling shares in a taxable account it will probably incur tax penalties, so you should avoid doing that. The alternatives are to use auto-balancing funds like Target Date funds, to rebalance only via contributions, or to focus on balance across your accounts rather than within them and do most of the adjusting in the tax exempt accounts.

 

[Piecake]

Thanks for this link. It's been an interesting read, but now it has me questioning my stuff so I have questions:

1) Is it a big deal that most of the lazy portfolios have 3 or 4 funds, but I have 5 (I've mainly looked at Rick Ferri's Core Four since it has 3 of the funds I use and 3 recommended in the OP)? I basically looked at the target retirement fund closest to me, but chose the stocks individually so I could have better control over the stock/bond allocation. The five I use (in both my Roth and taxable funds are Index funds) are Total Stock Market, Total International Stock Market, Inflation-Protected Securities (TIPS), Total Bond Market, and Total International Bond Market.

Should I be getting rid of one? The site seems to suggest that Tips isn't good for the non-IRA fund/taxable funds because it isn't tax efficient.

The "Core Four" looks like it replaces the TIPS and the Total International Bonds with something called Vanguard REIT Index Fund (VGSIX), though reading the topic about Core Four has someone stating that TIps is nice because none of the other 3 funds in the Core Four has TIPS while REIT is included in the Total Stock Market so it balances things out better.

At least, I know I want to keep the Total Stock Market, Total International Stock Market and the Total Bond Market since the OP and the Core Four are at least agreement with that.

It looks like it's down to whether I want:

a) Just TIPS
b) TIPS and International Bond (what I have now and no reason for it other than it's what was in the Target Date fund I looked at)
c) Just REIT

And whether I should make changes to just my taxable fund, my Roth fun, or both.

2) I've thought about rebalancing my funds at one point since my allocations have gotten a bit off from what I like. Currently, I've just stopped putting money into the funds that are over what I want allotted, but I've thought about taking directly from that fund and put in another.

Would this hurt me come tax time? I don't want to rebalance a fund only to learn I would have to pay taxes on most of what I was "selling" in exchange for other funds. I would do it for both my taxable account and my Roth. However, I'm not talking about going from the taxable account to the Roth and vise versa. When I want to rebalance, I would use the funds inside the Roth to balance each other out (and the taxable funds to balance out the taxable funds).

I'm 31 with a so I'm currently a bit aggressive with my current setup (I know this is mostly due to risk tolerance - I'm a government employee with a pension so I feel like I can be aggressive): 90% Stocks 10% Bonds:

70% Total Stock Market
20% Total International Stock Market
4% TIPS
4% Total Bond
2% International Bond.

I really only think TIPS make sense when you get older and have a whole lot less stock in your portfolio. Stocks are a very good hedge against inflation and bonds really arent. When you are reducing your stocks and buying bonds, then buying some TiPS makes sense to retain that inflation hedge. I don't see the purpose at all when you are at 90% stocks.

Why do you feel like you need bonds anyways? From your post, it doesnt sound like you are using bonds to mitigate risk. I am not a huge fan of bonds until you are much closer to your retirement, but if you want to keep them (and you should always do what you are comfortable with), then I don't see much point in international bonds. I would straight up go with just US bonds.

As for REITS, I honestly liked the idea of them as well for a while, but there is one thing you must understand. Tilting your portfolio to one sector is a sector bet. You are betting that REITS will outperform the market. REITS certainly could do that, but there is nothing inherent about REITS that give them a better chance to outperform the market than anything else.

If you want to tilt your portfolio you might want to look into small-cap value stocks. I do not do this, but apparently there is some logic and evidence to back it up.

2) If you sell a fund and it is in a taxable account then you will be paying taxes on that event. If it is in your 401k or Roth IRA then you will be not paying taxes if you sell those funds to re-balance.

It is important to re-balance, but you could do it like once every year or two and be perfectly fine. There is no need to sell your fund to re-balance in a taxable account.

 

[draetenth]

Thanks to the advice tokkun and Piecake! I've decided to at least drop the International Bonds and will ignore the TIPS (won't sell it, but won't put anything in until I start moving from stock heavy to balanced stock/bonds in like 25 years).

I use a spreadsheet to keep track my funds (mainly how much I want to allocate to each fund) so rebalancing isn't really an issue because I can see which funds I need to add more to without the need of actually selling anything.

Why do you feel like you need bonds anyways? From your post, it doesnt sound like you are using bonds to mitigate risk. I am not a huge fan of bonds until you are much closer to your retirement, but if you want to keep them (and you should always do what you are comfortable with), then I don't see much point in international bonds. I would straight up go with just US bonds.

No particular reason other than to diversify. I suppose I could just say screw the bonds for now and just go 100% stock until I'm 55 or so.

 

[anonymous_abc]

Saving money is a hell of a drug...