Friday, May 3, 2013

Financial Follies

Phew - what a week! You'll notice I haven't done much on the blog front this week. That's because I've been spending all my extra free time and energy on learning the ins and outs of my investments. Building off of Monday's post on creating an Investment Policy Statement (ISP), I spent the rest of the week actively looking at what investments I currently hold and learning about what retirement options are available to me.

What are the fruits of my labor? My retirement funds are on their way to new, and I think better, investment vehicles!

Let's start with a summary of where I began:

Roth IRA
I've been contributing to the Roth account since rolling over an old 401k about 5 years ago. It is currently with Wells Fargo Investors and has a 100% holding of Franklin Income Series Class C (FCISX). It has been performing rather well, but over the last year I've done some investigating and discovered that there are some hidden fees associated with the account:

Yearly Wells Fargo fee: $40
Expense ratio: 1.14%
Management fee: 0.38
Admin fee: 0.15%
12b-1: $0.65

I forget what most of these mean except for the yearly fee of $40 and the expense ratio. The expense ratio means that I get less of the returns because of a fee to manage the account. For example, say this account has a 7% return for 2013, I only get 5.86% of the earnings. NOT. COOL.

TIAA-CREF 403(b)
This is my work retirement account. My company contribution is amazing (12% of my salary!) and I've been contributing 6% as well since last June when I started this job. I haven't been too dissatisfied with this account. Here are the holdings:

TIAA Traditional Annuities - 39%
CREF Inflation-Linked Bond - 15%
TIAA Real Estate - 10%
TIAA Mid-Cap Growth and CREF Stock - 36%

The expense ratios here range from 0.45% to 0.92%. Not terrible, but not great either. Also, I've recently discovered that annuity rates are subject to the TIAA board, and right now they are at 3%. So I'm only earning 3% on that money, and I have almost 40% invested there!  Another thing about the TIAA annuities is that if I have over $3,000 in those shares and want to move the money, TIAA will only pay them out to me over NINE YEARS. Seriously? NINE YEARS! NOT.COOL.

As you can see, things aren't bad, but I know I can do better. After a week of reading my retirement options at work and seeking advice from the Boglehead's Wiki, I've decided to go with the best index funds around. This means I'm using Vanguard for my Roth IRA and Fidelity for my 403(b). For the record, Fidelity is the only other retirement option available to me at work besides TIAA-CREF.

Let's look at my new choices:

Roth IRA - now with Vanguard
Vanguard LifeStrategy Growth Fund Investor Class (VASGX) - expense ratio 0.17%

With a low expense ratio, this is going to make me more money. Additionally, this fund is actually invested in three index funds - the Total Market US Stock, the Total Market International Stock, and the Total Bond Index Fund.

Vanguard re-balances this fund itself, so I know it will always stay 80% stocks/20% bonds. I won't be contributing to my Roth for a while, choosing to focus on upping my 403(b), so a simple, cheap, and automatic fund for the Roth IRA is what I'm looking for!

403(b) - now with Fidelity
Spartan Gloal Ex-US Index Fund (FSGUX) - expense ratio 0.34%
Spartan Total Market Index Fund (FSTMX) - expense ratio 0.06%
Fidelity US Bond Index Fund (FBIDX) - expense ratio 0.22%
Fidelity Inflation-Protected Bond Fund (FINPX) - expense ratio 0.45%

Thankfully, Fidelity has some really great low-fee index funds as well. Since I'm going to be contributing to this fund exclusively for a while, I've diversified this one a bit more in the bond area (to include TIPS, aka inflation-protected bonds), but I've also added US and international stock.

Most importantly, these accounts combined align with my overall asset allocation strategy. I talked about this on Monday and determined that it would be 70% stocks/30% bonds. I ended up with only slightly altered percentages. My entire portfolio (i.e. both accounts) now have an asset allocation of:

  • 75% stocks (55% US, 20% international)
  • 25% bonds

One final word on why I am investing this way. It is because I agree to the following theory on investing, which is actually the Bogleheads investment philosophy (named after Vanguard founder John Bogle):

  • Invest early and often
  • Never bear too much or too little risk
  • Diversify
  • Never try to time the market
  • Keep costs low
  • Minimize taxes
  • Invest with simplicity
  • Stay the course

These points all seem like common sense to me, so I can't understand why anyone WOULDN'T want to invest this way. But to each his own, I guess!

I know some of you aren't interested in investing, so this post may have been complicated for you to follow (and frankly, boring!). But if I can give my fellow 20-30 somethings any advice, it would be to invest in low cost index funds and start early. Take advantage of your work retirement accounts. Make sure you pick funds that have low expense ratios.

I hope this has been pretty simple to follow, and I've linked to definitions of terms in case you want to learn more. Next week it is back to apartment stuff!

No comments:

Post a Comment