401k thread inspired by Russ

[dscher]

I get it but be careful. The target date fund (TDF) that you choose (or in which you may have been defaulted) should have represented your projected retirement date, and as a result it should already be pretty aggressive. It’s entirely possibly you want it to be more aggressive - and that’s obviously your prerogative. But the TDF is an asset allocation that’s being professionally managed and based upon a ton of research (albeit managing to the “average”). So investing alongside throws off that research and in some way negates the professional management. But as long as your eyes are open and you understand your TDF then doing some supplemental investing might benefit you.

Agreed. Target date funds are great for most common investors who don't spend their time in the markets. They will give you a broad market asset allocation that will give you a good amount of hedging (bonds) against risk assets during market downturns ...like the one we are likely to experience here soon. Imo. John Bogle had a great way of passive investing for 401ks... (Or investing in general) and that was to have your age in bonds. Ex. 40 yr old would carry 60/40 stock to bond ratio. This ensures you become less risky as catch up time decreases.

 

[Folster]

One thing that's been particularly frustrating for me in my portfolios is how much international equities have been dragging down my performance. It's really tough justifying keeping the exposure while international keeps causing me to underperform common US market benchmarks.

This chart illustrates why it's important to have international exposure, but you can see that since 2009 US equities have reigned supreme. InternationaI is definitely due for a run, and it did outperform in 2017. However, in 2018 and so far in 2019 international has lagged the US.

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Most aggressive allocation funds or target dates funds that are not near the target year have 30% or more in international stocks so over the last decade many people's retirement accounts have significantly underperformed the S&P 500 if they used those types of managed products.

Has anybody scrapped international or paired down in their retirement accounts?

I'm sitting at about 20% international in my 401K and 25% in my Roth and both are 100% equities. (I'm 36 for perspective).

 

[jf-08]

One thing that's been particularly frustrating for me in my portfolios is how much international equities have been dragging down my performance. It's really tough justifying keeping the exposure while international keeps causing me to underperform common US market benchmarks.

This chart illustrates why it's important to have international exposure, but you can see that since 2009 US equities have reigned supreme. InternationaI is definitely due for a run, and it did outperform in 2017. However, in 2018 and so far in 2019 international has lagged the US.

You must be registered for see images attach

Most aggressive allocation funds or target dates funds that are not near the target year have 30% or more in international stocks so over the last decade many people's retirement accounts have significantly underperformed the S&P 500 if they used those types of managed products.

Has anybody scrapped international or paired down in their retirement accounts?

I'm sitting at about 20% international in my 401K and 25% in my Roth and both are 100% equities. (I'm 36 for perspective).

I totally poo canned my international holdings about 3 years ago in my 401K. I am in an Index fund, two growth funds and a small cap stock fund now. I ditched real estate holdings as well back then.

I think at your age, being really aggressive isn't a bad thing, which to me eliminates international exposure.

 

[Ouchie-Z-Clown]

I totally **** canned my international holdings about 3 years ago in my 401K. I am in an Index fund, two growth funds and a small cap stock fund now. I ditched real estate holdings as well back then.

I think at your age, being really aggressive isn't a bad thing, which to me eliminates international exposure.

A couple of items of clarification:

You list “index fund” as if it’s a different asset class from “growth funds” or a “small cap stock.” An index fund is a different investment philosophy (passive market return verses attempts at active outperformance). So depending on the fund, an index could be a growth fund or small cap.

Also, international equity is the most aggressive of the broad asset classes. If someone has a long time horizon until retirement or wants to be aggressive historically they should likely be invested more heavily in international equity. It might seem counterintuitive but with the long bear market for international equities means at present you’re buying those stocks at a steep discount. And the reason you stay invested through all market cycles (again with a lengthier time horizon) is dollar cost averaging - you’re buying at different prices points which on average should result in a lower total cost than is likely compared to buying when the investment is in favor.

 

[Folster]

A couple of items of clarification:

You list “index fund” as if it’s a different asset class from “growth funds” or a “small cap stock.” An index fund is a different investment philosophy (passive market return verses attempts at active outperformance). So depending on the fund, an index could be a growth fund or small cap.

Also, international equity is the most aggressive of the broad asset classes. If someone has a long time horizon until retirement or wants to be aggressive historically they should likely be invested more heavily in international equity. It might seem counterintuitive but with the long bear market for international equities means at present you’re buying those stocks at a steep discount. And the reason you stay invested through all market cycles (again with a lengthier time horizon) is dollar cost averaging - you’re buying at different prices points which on average should result in a lower total cost than is likely compared to buying when the investment is in favor.

I largely agree with you. However, I would differentiate international into developed and emerging when saying that international is more aggressive than US.

I know you know the difference so the following is mainly for others. I wouldn't classify developed international which contains companies largely from Japan, UK, Canada, France, Germany and other developed countries as more aggressive than US equities.

Now emerging international, commonly referred to as emerging markets are much more aggressive with exposure to China, India, Russia, and Brazil.

I'm torn on whether total international is more aggressive than total US. They have very similar betas.

 

[Ouchie-Z-Clown]

I largely agree with you. However, I would differentiate international into developed and emerging when saying that international is more aggressive than US.

I know you know the difference so the following is mainly for others. I wouldn't classify developed international which contains companies largely from Japan, UK, Canada, France, Germany and other developed countries as more aggressive than US equities.

Now emerging international, commonly referred to as emerging markets are much more aggressive with exposure to China, India, Russia, and Brazil.

I'm torn on whether total international is more aggressive than total US. They have very similar betas.

Yes a developed international equities fund would have similar volatility, but still adds benefits of diversification. But a whole world fund that includes emerging markets should, over time (and we were talking a healthy time horizon) serve to punch up the level of risk of a portfolio.

 

[AZCB34]

I have a small amount of international but given this being the global economy I figure I am getting international exposure simply by going through large cap funds. Those companies are dealing with currency issues, global political issues, security issues.

The argument against what I am doing largely revolves diversification but I just prefer sticking with US

 

[dscher]

I largely agree with you. However, I would differentiate international into developed and emerging when saying that international is more aggressive than US.

I know you know the difference so the following is mainly for others. I wouldn't classify developed international which contains companies largely from Japan, UK, Canada, France, Germany and other developed countries as more aggressive than US equities.

Now emerging international, commonly referred to as emerging markets are much more aggressive with exposure to China, India, Russia, and Brazil.

I'm torn on whether total international is more aggressive than total US. They have very similar betas.

I'm a chart analyst and well versed within the 401k arena as well... Fwiw, I'm seeing international exposure, in the charts, to possibly not be such a bad place to be in the foreseeable future. If anything happens to the dollar it will hurt large cap indexs like the S&P. Smaller cap would be less affected.. Long story short..I'm right about your age as well and I have recently gone to total bond funds for my exposure at the moment in my 401k. We are in a precarious spot right now in the markets and the risk/reward is not worth it for stock exposure. Imo of course. But, if you were to stay in stocks I would just go with a simple tdf that will match your age in bonds. 35 percent bonds to 65 percent stocks. Then rebalance every five years or so... They will get you global exposure.. and will do the most important thing in any market. Hedge against any major market downturns.

 

[Folster]

I'm a chart analyst and well versed within the 401k arena as well... Fwiw, I'm seeing international exposure, in the charts, to possibly not be such a bad place to be in the foreseeable future. If anything happens to the dollar it will hurt large cap indexs like the S&P. Smaller cap would be less affected.. Long story short..I'm right about your age as well and I have recently gone to total bond funds for my exposure at the moment in my 401k. We are in a precarious spot right now in the markets and the risk/reward is not worth it for stock exposure. Imo of course. But, if you were to stay in stocks I would just go with a simple tdf that will match your age in bonds. 35 percent bonds to 65 percent stocks. Then rebalance every five years or so... They will get you global exposure.. and will do the most important thing in any market. Hedge against any major market downturns.

100% fixed income in your 30s when you are 25-30 years away from retirement is insane IMO.

The total world equity market which includes US is up over 15% YTD and it sounds like you may have missed much of that. Did you switch to bonds in Q4 of 2018. If so you likely sold low. Timing the market is never a good long term strategy.

 

[dscher]

100% fixed income in your 30s when you are 25-30 years away from retirement is insane IMO.

The total world equity market which includes US is up over 15% YTD and it sounds like you may have missed much of that. Did you switch to bonds in Q4 of 2018. If so you likely sold low. Timing the market is never a good long term strategy.

I sold around the top in November before the 20 percent plus plunge. I'm not a novice market timer. If you don't understand technical analysis, then yes..it can be almost impossible to market time. Successfully trading , I tell people, is much like professional gambling. The ones with risk management and systems they trust and follow will always come out on top. They make a great living doing this.. It's the novice players that lose their ass. The stock market is no different. Technical analysis is very lucrative for many.. and that is not just dumb luck. But, I could go on and on.

But I do long term trade/invest my 401k obviously.. I have actually netted over 5% being in the bond fund since I got out in November. With a drawdown of 20% that we had, you need about 25% to get back to even.. so that was a wash. Along with being in vti since that time.

 

[dscher]

But...as I said. This is my strategy based on my intermarket analysis and interpretation of the amount of market risk there is right now in the markets. I definitely to not advocate this for most investors. My decision to go to 100% bonds was not a decision taken lightly.

Also, i can easily manage my 401k myself and move money from fund to fund when need be. I have been in stock funds for the past 8 years prior to re allocating. Fwiw.

Sorry for the long rambling post. Lol

 

[Ouchie-Z-Clown]

I have a small amount of international but given this being the global economy I figure I am getting international exposure simply by going through large cap funds. Those companies are dealing with currency issues, global political issues, security issues.

The argument against what I am doing largely revolves diversification but I just prefer sticking with US

You’re right. Many “domestic” companies are truly international now. Coca Cola, apple, etc.

 

[Folster]

I sold around the top in November before the 20 percent plus plunge. I'm not a novice market timer. If you don't understand technical analysis, then yes..it can be almost impossible to market time. Successfully trading , I tell people, is much like professional gambling. The ones with risk management and systems they trust and follow will always come out on top. They make a great living doing this.. It's the novice players that lose their ass. The stock market is no different. Technical analysis is very lucrative for many.. and that is not just dumb luck. But, I could go on and on.

But I do long term trade/invest my 401k obviously.. I have actually netted over 5% being in the bond fund since I got out in November. With a drawdown of 20% that we had, you need about 25% to get back to even.. so that was a wash. Along with being in vti since that time.

I think you are overstating market losses in Q4.

The S&P 500 lost about 7% in October, was up nearly 2% in November, and was down a little over 9% in December. Growth stocks got hit the hardest so people chasing FANG stocks really got hit.

If you sold in November, you still caught October losses. Sure you avoided December's 9% loss but you also missed out on the S&P 16% return YTD. The Barclays Aggregate bond index is only up 1.6% YTD.

I'm not convinced anybody can market time effectively long term. Some may get luck once or twice but study after study show us that market timers significantly underperform in the long term.

Warren Buffet recently won a million dollar 10 year bet against a collection of hedge funds. In 2007 he bet the S&P 500 would outperform the hedge funds and he won going away. The S&P 500 averaged a modest 7.1%, but it still crushed the hedgefunds that only averaged 2.2%.

 

[Folster]

You’re right. Many “domestic” companies are truly international now. Coca Cola, apple, etc.

Yes many mega cap US companies are global or multi-national in scope.

 

[dscher]

I think you are overstating market losses in Q4.

The S&P 500 lost about 7% in October, was up nearly 2% in November, and was down a little over 9% in December. Growth stocks got hit the hardest so people chasing FANG stocks really got hit.

If you sold in November, you still caught October losses. Sure you avoided December's 9% loss but you also missed out on the S&P 16% return YTD. The Barclays Aggregate bond index is only up 1.6% YTD.

I'm not convinced anybody can market time effectively long term. Some may get luck once or twice but study after study show us that market timers significantly underperform in the long term.

Warren Buffet recently won a million dollar 10 year bet against a collection of hedge funds. In 2007 he bet the S&P 500 would outperform the hedge funds and he won going away. The S&P 500 averaged a modest 7.1%, but it still crushed the hedgefunds that only averaged 2.2%.

I have a different perspective on the numbers than you.. so we will just agree to disagree.

Best of luck to ya.

 

[AZCB34]

100% fixed income in your 30s when you are 25-30 years away from retirement is insane IMO.

The total world equity market which includes US is up over 15% YTD and it sounds like you may have missed much of that. Did you switch to bonds in Q4 of 2018. If so you likely sold low. Timing the market is never a good long term strategy.

For the average investor who is going into a target date fund, bonds are a good and expected thing. They won't crush it but the damage on paper is lessened with those bonds. Keeps the average guy from panicking and selling when everyone and their brother knows they shouldn't.

 

[dscher]

For the average investor who is going into a target date fund, bonds are a good and expected thing. They won't crush it but the damage on paper is lessened with those bonds. Keeps the average guy from panicking and selling when everyone and their brother knows they shouldn't.

Most definitely. Especially when we are talking about a 401k. Dollar cost averaging is big.. and having a healthy percentage of bonds to hedge against inevitable drawdowns is a safe and smart bet . Imo

 

[Folster]

For the average investor who is going into a target date fund, bonds are a good and expected thing. They won't crush it but the damage on paper is lessened with those bonds. Keeps the average guy from panicking and selling when everyone and their brother knows they shouldn't.

Most target date funds have very little bond exposure until you get close to the target year. Even a 2025 fund has over 60% equity exposure and most 2030 funds have over 70%.

Investor temperament is a separate matter entirely because moderate investors with a 60/40 stock to bond ratio still lost 25% in 2008 and found no solace in not losing 40%. They still made the same poor decision to sell low.

 

[AZCB34]

Most target date funds have very little bond exposure until you get close to the target year. Even a 2025 fund has over 60% equity exposure and most 2030 funds have over 70%.

Investor temperament is a separate matter entirely because moderate investors with a 60/40 stock to bond ratio still lost 25% in 2008 and found no solace in not losing 40%. They still made the same poor decision to sell low.

They didn't lose until they foolishly sold.

A 20 year old will have 10% on a target date fund and that does make sense for the majority of investors whip don't have the time, knowledge or willingness to set a different portfolio

 

[Ouchie-Z-Clown]

Most target date funds have very little bond exposure until you get close to the target year. Even a 2025 fund has over 60% equity exposure and most 2030 funds have over 70%.

Investor temperament is a separate matter entirely because moderate investors with a 60/40 stock to bond ratio still lost 25% in 2008 and found no solace in not losing 40%. They still made the same poor decision to sell low.

Oooh be careful. Don’t lump all target date funds together. They can be VERY different from one and other. For instance at age 65 the equity exposure can range anywhere from 10-50+%. That’s one issue with target date funds, they solve for “the average” but they all have different research pointing in different directions. Some are aggressive some are moderate some are conservative, but there’s little way for participants in plans to know which type they have.

 

[Ouchie-Z-Clown]

They didn't lose until they foolishly sold.

A 20 year old will have 10% on a target date fund and that does make sense for the majority of investors whip don't have the time, knowledge or willingness to set a different portfolio

Some target date funds only have 1% bond exposure.

 

[dscher]

Most target date funds have very little bond exposure until you get close to the target year. Even a 2025 fund has over 60% equity exposure and most 2030 funds have over 70%.

Investor temperament is a separate matter entirely because moderate investors with a 60/40 stock to bond ratio still lost 25% in 2008 and found no solace in not losing 40%. They still made the same poor decision to sell low.

That seems excessively high for a 2025 tdf. Interesting. Another option is to just utilize a fixed income fund or total bond fund option and do 50/50 or 100% bonds, if you are over the age of 60. Imo.

Capital preservation, I would argue, is of utmost importance once you reach retirement age.. 20 to 25% will seem like nothing compared to a 40 to 50% drawdown. You lose 50, gotta make back about 70 for breakeven. 20% is more in the range of 23 to 25. Not nearly as bad... Especially in retirement when that dollar cost averaging goes away with new contributions being added to the portfolio. Jmo.

As the great sage Warren Buffett says. Rule # 1. Never lose money. Rule #2 never forget rule #1
....and I'll add, especially in retirement.

 

[Folster]

I'm a bit jaded I talk to working and middle class investors all day long. The number of people who call to take a premature distribution from their IRA is mind-blowing. Obviously, I have confirmation bias because the people who never take money out rarely call.

I spent most of Q4 talking people off the ledge. People knee jerk to a 5% loss much less a 20-40% loss. The majority of people are so ignorant to successful long term investing. I enjoy educating them, but as the saying goes; you can lead a horse to water, but you can't make it drink.

 

[Folster]

For the record, I'm currently allocated as follows in my 401K.

20% S&P 500 index
20% Large cap growth fund
10% Large cap value
20% International Growth/Blend
20% Small and Midcap index
10% company stock

 

[dscher]

I'm a bit jaded I talk to working and middle class investors all day long. The number of people who call to take a premature distribution from their IRA is mind-blowing. Obviously, I have confirmation bias because the people who never take money out rarely call.

I spent most of Q4 talking people off the ledge. People knee jerk to a 5% loss much less a 20-40% loss. The majority of people are so ignorant to successful long term investing. I enjoy educating them, but as the saying goes; you can lead a horse to water, but you can't make it drink.

Absolutely. I don't blame the average investor though.. full time jobs, family, etc..it takes a lot of hard work and time to really understand the markets. I always liken it to speaking another language.. so I typically have a difficult time finding ways to relate the information in an easy format for them to understand. Especially technical analysis.. I don't even go there.

Btw, nice risk asset diversification.