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Turning 26yrs in Jan / retirement situation advice

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coaster
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quote:
Originally posted by Darga19
...We did not adjust our withholding so I expect the return to be large. However, I want to wait until it's all said and done to see what happens becuase it will give a good picture of what to expect for the near future, at least until we have kids, so we can adjust witholdings at that time. .

A better way is to use tax software (my preference is TurboTax) to plug in all the expected numbers for the next year and adjust your withholding accordingly. i.e. you buy the 2010 TurboTax now; you can use it to do your 2010 taxes, but also in a "hypothetical" return you plug in all the numbers you expect for 2011 NOW and see what kind of ballpark refunds you're looking at, and then adjust your withholding to get the desired result. (You can always change your withholding during the year if something major changes).
Post Fri Dec 17, 2010 6:55 pm
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Darga19
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1. Ups or downs to putting all 401k large cap stocks in an index fund (I have the Dryden SP500 available to me) as opposed to splitting between the 2 Growth and Value funds that are available? ....one advantage is lower expense ratio. Any downside?

2. How often should your portfolio be rebalanced? Prudential does mine quarterly with Goalmaker, but I'm considering canceling Goalmaker and doing it myself (looks like all it takes is a couple clicks and resetting your original percentages of the asset types.....).
Post Sat Dec 18, 2010 4:52 pm
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coaster
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When my investments were all funds; I gave each a percent of the p'folio; when one fund exceeded its percent by 10 percent (i.e. a 20% allocation went over 22%) then I did no more buying of that fund; putting subsequent purchases into funds that were below their percent. This is a derivative of what's called "value averaging" in which you buy the funds that are underperforming; the theory being that it forces you to buy "value" and to avoid buying what's overpriced.

I did that for a few years and frankly didn't see much advantage in it.

Now that my all my funds are in my IRA I just let them run.....

With my stocks my only criteria for balancing is that no one position exceed 10% of the p'folio.

My approach now to balancing is that pretty much I don't. For me, value averaging was going overboard. Balancing is what's done when your p'folio goals change, requiring a change in the asset mix. Balancing is not something done to meet targets. But to each his own, I guess.
Post Sun Dec 19, 2010 1:42 am
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Darga19
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quote:
Originally posted by coaster
When my investments were all funds; I gave each a percent of the p'folio; when one fund exceeded its percent by 10 percent (i.e. a 20% allocation went over 22%) then I did no more buying of that fund; putting subsequent purchases into funds that were below their percent. This is a derivative of what's called "value averaging" in which you buy the funds that are underperforming; the theory being that it forces you to buy "value" and to avoid buying what's overpriced.

I did that for a few years and frankly didn't see much advantage in it.

Now that my all my funds are in my IRA I just let them run.....


That value average as you call it, seems to be what Prudential's Goalmaker is all about. The sell the higher stock and rebuy the lower stock (to obtain your original percentages of allocation) quarterly.

quote:
Originally posted by coaster
With my stocks my only criteria for balancing is that no one position exceed 10% of the p'folio.


Can you explain this? What do you mean by 'position'?
Post Mon Dec 20, 2010 1:03 pm
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oldguy
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When you buy an individual stock, you have a 'position' in that company, ie, a 'holding', you own some of it.

A common rule is to never allow a single stock to add to more than 10% of your holdings - some use 5%. The 10% rule means that you would need at least 10 stocks in your portfolio, 20 would be better. In a way, you would be building your own mini-mutual fund. But, since the invention of mutual funds, no need to do all of that - just buy the 'bundle'.
Post Mon Dec 20, 2010 1:21 pm
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coaster
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.... except if you want to out-perform the professional fund managers. Laughing

It's not hard to do. The dirty little secret is that professional fund managers can't have too much of their money sitting in cash, so they have to put that money in the dogs. It's not so much a matter of "out-performing" the fund managers as it is the fund managers "under-perform" because of the huge amounts of money that they need to have invested. And what makes it worse is having to manage the assets to meet purchases and redemptions; forcing buying and selling when sitting tight might be the best strategy.

No, it's not hard to do but does require a certain amount of work, time, patience and fortitude; perhaps more than is appropriate for most people. And so......ya, funds are better for most.
Post Mon Dec 20, 2010 4:31 pm
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Darga19
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2 Questions regarding index funds...

1. (This one I also posted earlier...really curious here...). Are there ups or downs to putting all /part of 401k large cap stocks in an index fund (I have the Dryden SP500 available to me) as opposed to splitting between the 2 Growth and Value funds that are available? ....one advantage is lower expense ratio. Any downside?

2. How do you choose which index fund to invest in? For example, the only index fund that is available to me in my 401k is the Dryden one mentioned above. However, the 2 large cap funds I'm currently invested in are benchmarked against different index funds...i.e. not the SP500 but the Russell 1000 Value and Growth Funds. So the question is...how do you choose which index fund is the best choice??

Obviously if I had the Russell 1000 funds available I'd just choose those as opposed to the managed funds that are trying to beat them...but switching to an index fund in my case would be switching to a different fund altogether.

**EDIT**

OK so I just I'd some reading and learned that the Russell 1000 index performs almost identical to the sp500, so, my question becomes:

Is there any advantage to having separate growth and value funds as opposed to one all encompassing balanced index fund, especially when factoring in that the growth and value funds have higher expense ratios??
Post Mon Dec 20, 2010 5:35 pm
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coaster
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My opinion is that IF you're an active investor and you've chosen mutual funds as your investment vehicles, then is it your goal to outperform the index by choosing your own investments? The purpose of an index is to provide the investing public with a one-number representation of how the "market" is doing. But the individual stocks that make up the market, nor the individual stocks that make up the index, have any knowledge of the index, and their individual performance will be better or worse than the index. An easy (though not technically correct way) to look at it is that one-half will be doing better than the index and one-half will be doing worse. If you choose an index fund, then you will never do any better than average (by definition). If you think you can do better than average and are willing and able to do the grunt work, then why settle for the average? The only reasons to settle for the average are 1) when the average will achieve your objective and 2) you don't have the time/knowledge/ability/motivation to try to do better. Pay close attention to reason #1. If the index fund achieves the object, and you are satisfied with the objective, then there's no reason to take the extra risk that you can't do #2 (which can only be discovered through actual experience).

BTW, the idea that the index represents the market is a bunch of crap, anyway. The components of the index are periodically rejilggered to "make the index more representative of the market", but if you've been watching this process for a number of years, it begins to dawn that the companies they throw out of the index are a bunch of dogs, while the ones they put in as replacements were "hot" this past year.
Post Mon Dec 20, 2010 11:44 pm
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oldguy
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Here's another take on it -

If you put your $16.500/yr 401k max into a CD for 30 yrs it will match inflation, ie you will have a purchasing power of $495,000. For most persons retiring in 2040, that is going to be an unacceptable outcome. (In fact, it would be quite a disappointment in 2010).

Conversely, if you put that same $16,500/yr into an 11%/yr index it would be $3,650,000, a more satisafactory outcome.
The point is - a wage earner CANNOT 'save' his way to wealth, you must 'invest' in appreciating assets so that your compounding significantly outpaces inflation.

Above & beyond taking that giant step, the question reduces to - do I want to accept what the market gives me (the broad index) or do I want to add more risk and try for another 1% or 2%?

A broad general index (total market or SP500) gives you the historical 11%/yr. Narrower index funds, ETFs, MidCap funds, Small Cap funds, add risk and add possible return. But you need enough time to statistically realize that return. Eg, the University Endownments regularly get 15% returns over 50, 100, 200 yrs. They are not constrained by human lifetimes - they can buy dirt anywhere and wait until Disney builds a Park on it, they can wait a century for it. OTOH the NASDAQ investors in 2000 that took a risk to get 15% to 18% returns can't wait. Now, 10 yrs later, they are still down 50% - many won't live to see fruition.

So, since most of us are given only a 30-yr block to build our wealth before we must shift to our wealth preservation mode, many of us get better results by using 11% products that have always reverted to the mean within any 30 yr block (altho every generation has to wrestle with 'what if it doesn't do it THIS time??). In my case, I've done stock picking, shorted stocks, tried market timing, bought put options, call options, covered calls, and corn futures - all good fun - but none of them helped me become wealthy. Very Happy
Post Tue Dec 21, 2010 2:53 am
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coaster
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Coupla thoughts, though, that put yet another take:

Market indexes aren't a "product" -- they don't guarantee 11%, nor do they guarantee that in any particular time-frame. The numbers used to predict the results an index might produce over a certain time period are based on historical performance, and history repeats in broad strokes, it doesn't repeat in details. The numbers are details. For example this past "Great Recession" (and yes, it is now PAST) finally broke the "no losing rolling 10-year period". This doesn't negate the points about long-term results or the points about added risk, but it does "fuzz" them to the point where the uncertainty might generate an interest in some closer attention to ongoing results. (viz. the example about the NASDAQ. The idiots who are still down 50% had all their money in a bubble because of their GREED. Then they kept it there trying to get it back. Active management to outperform an index doesn't mean throwing away good sense).

Second thought: "reversion to the mean" is a crock. There's no rubber band pulling the outlying variance back to the middle. In fact, it's the other way around. It's the variance that's pulling the middle off to the side. The mean is a moving target. Each day generates a new mean. There's no probabalistic property that limits the variance. There's no guarantee that it won't keep going off either to zero or to infinity. Other than statistically-speaking those two events are of negligible risk. But there's no "reversion" to prevent either from occuring (the zero-case at least for one having occurred). But again, that's history. And history doesn't predict the future, not in its details. Mostly what history does is provide a framework for interpretation; a sort of an arms-length way of remaining above the daily zigs and sags: things go up, things go down, over time more things go up than things go down. That's the way it's happened; there's no reason to believe it won't continue that way.

Ya, if I had only one place I could put my money, I'd put it in a broad market index. Probably not the SP500 because it's too artificial. Maybe the Russ 3K or the Wilshire. Don't know which funds follow those, though. BUT .... there ARE so many alternatives, and in my own experience, I have and I can outperform the indexes. That doesn't in any way make it the "right" way; it's the right way for me, but because it works for me that doesn't mean it works for everybody. So, for someone who's just starting, I can't argue against a broad market index fund. Just be aware of what you're buying: the average. If the average gets the job done, then average is good enough.....
Post Tue Dec 21, 2010 6:32 am
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Darga19
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Thanks for your thoughts guys.

All that said, I'm going to allocate my large cap stock portion of my 401k into that index. The funds I'm in now have higher expense ratios and over the past 10 years, one is slightly better than the index and the other is worse (which sounds like its commonplace), and neither one by that much. So, I think sticking with the lower cost option makes good sense for me. Since I'm young and still learning, I think the low cost / historically average suits me, at least for now.

Ok, that said, does it make sense to allocate some of the remaining assets to the higher risk small and mid cap funds? I don't have index funds of this type available to me in my plan, but the ones that are available (a small cap Kennedy and a mid cap Artisan) have done well and have good morningstar ratings. However, they do have higher expense ratios.

Or, would it make more sense to go more on the average/conservative side and keep the majority of the 401k in the sp500 index and maybe 10% bonds if that is advisable, and delegate my Roth for emerging markets/international/small cap indicies? If I did it that way I'd avoid the higher cost managed funds, but would the numbers make sense in terms of allocating the right amounts of $ in the right areas (considering my contribution rates)? Also would the 401k be diverse enough that way?

So many things to consider. At any rate, I'm thinking a target fund for my Roth might not be best...I think a range of index funds will be better suited for me. There really doesn't seem to be many downsides to them. With this much time to go till retirement (30+ yrs) I think nice steady 'average' returns with low cost funds will do me well!!
Post Tue Dec 21, 2010 1:51 pm
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oldguy
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quote:
At any rate, I'm thinking a target fund for my Roth might not be best...I think a range of index funds will be better suited for me. There really doesn't seem to be many downsides to them. With this much time to go till retirement (30+ yrs) I think nice steady 'average' returns with low cost funds will do me well!!


You are probably over-analizing. The differences between the vehicles that you are considering is within the rounding error, and well inside anyone's ability to make 30-yr predictions. The key metrics are long time (30 yrs), return (10% to 12%), and steady disciplined input.

quote:
Second thought: "reversion to the mean" is a crock. There's no rubber band pulling the outlying variance back to the middle. In fact, it's the other way around. It's the variance that's pulling the middle off to the side. The mean is a moving target. Each day generates a new mean.


Maybe, maybe not. Human behavior is nearly constant, it has been for 1000's of years. Look at the great Cathedrals of England built in the 1100's, the banking systems in 1300, the political monetary systems, the Rule of Law. Humans are continually ambitious, curious, always exploring & inventing.

In recent centuries -
1. Population growth. The US population growth - 1% to 2%.
2. Inflation - long term monetary inflation - 3%.
3. Consumption - our human propensity to consume ever more as we went from cabins w/ an out house to mcmansions w/ appliances and 3 cars - 2% to 3%,
4. Productivity - industrialization, mass production, automation, specialization, design for manufacturability, computerization, CAD/CAM, lights-out factories. The increased output per person means that a company can build more product with less labor, ie higher earnings - 4% to 5%.

These sum to 10%/yr to 13%/yr. So business sales (and earnings) need to grow at 10% to 13% to keep up with human demand. We may go a couple decades with low/no growth - the 1929 Depresion, the 1966 to 1981 Flat Spot, the 2000 ro 2010 lost decade. And we may go a couple of decades with high growth - the 18%/yr returns from 1981 to 2000. But, over the decades we eventually revert to the mean of 10% to 12%.
Post Tue Dec 21, 2010 4:40 pm
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coaster
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quote:
Originally posted by oldguy
Maybe, maybe not. Human behavior is nearly constant, it has been for 1000's of years..... Humans are continually ambitious, curious, always exploring & inventing.

In recent centuries -
1. Population growth. The US population growth - 1% to 2%.
2. Inflation - long term monetary inflation - 3%.
3. Consumption - our human propensity to consume ever more as we went from cabins w/ an out house to mcmansions w/ appliances and 3 cars - 2% to 3%,
4. Productivity - industrialization, mass production, automation, specialization, design for manufacturability, computerization, CAD/CAM, lights-out factories. The increased output per person means that a company can build more product with less labor, ie higher earnings - 4% to 5%.

These sum to 10%/yr to 13%/yr. So business sales (and earnings) need to grow at 10% to 13% to keep up with human demand. We may go a couple decades with low/no growth - the 1929 Depresion, the 1966 to 1981 Flat Spot, the 2000 ro 2010 lost decade. And we may go a couple of decades with high growth - the 18%/yr returns from 1981 to 2000. But, over the decades we eventually revert to the mean of 10% to 12%.


Excellent points!! And to the heart of the mystery of appreciating assets. When you marry human behavior with increasing population it explains much. Both the appreciation and the reversion. As long as there are humans involved there will be swings. Fear and greed are responsible for the bubbles and the panics. And eventually common sense rules and is responsible for the reversion. But the equilibrium point is in motion upward. If it were not, there wouldn't be appreciation. The numbers are the statistical history of the behavior times the demographics.

So, I agree with your points illustrating how the numbers should come out over time. But those numbers would be a whole lot different if humans had litters of a dozen, or if they lived 500 years, and the mean would be a completely different number. So the numbers themselves have no magic; they're just a portrait of the nature of the beast as it is, and as it has been. I hear "reversion to the mean" referred to by the talking heads as a reason WHY some market behavior should proceed as they forecast. That's why I call it a crock. They have cause and effect reversed.

And here's a thought: since population growth is compounding because the birth rate exceeds the death rate, the mean itself should be trending up. Maybe a research project for when there's more time…..

Darga, I think we've hijacked your thread……. Laughing

(... and I've become a little too philosophical....) Confused
Post Wed Dec 22, 2010 5:56 am
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Darga19
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quote:
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Darga, I think we've hijacked your thread……. Laughing


Have at it. I like hearing educated and experienced people talk about interesting topics...knowledge is priceless.

Just like playing guitar with someone that's been playing for 50 years, so much for a young buck like myself to learn. Experience is everything.

....I tend to relate many things in life to music.....can't remember exactly what I wrote but I think I've babbled on about it in this very thread before lol Rolling Eyes
Post Wed Dec 22, 2010 1:45 pm
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coaster
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.... and you can't imagine what a pleasure it is to have an actual discussion with people who express themselves so well, and who aren't here only to sell something. Very Happy

What kind of music do you like?
Post Wed Dec 22, 2010 4:35 pm
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