Depressing


When I had a 401k, there were no fees for transactions that took place within that account.
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On 11/6/11 3:31 PM, bo peep wrote:

Funds within a 401(k) ideally have no fees to buy or sell. My 401(k) has a brokerage option, in which one can trade individual stocks if they wish. $10 fee to buy or sell. Easy way to build a portfolio of low cost ETFs, and just pay the fee to rebalance each year if deposits during the year aren't enough to stay balanced.
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Okay I see. That may be the case. It doesn't look like I'm too far out of balance anyway. Things are down pretty much across the board.
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if you are still actively saving, rebalancing doesnt mean having to sell anything. Just point your new purchases are the underweight assets.
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My opinion: Readers should consider carefully the implications of the phrases "funds that are doing better" and "ones that aren't." With all due respect, ISTM underlying such phrases is the belief that past performance guarantees future performance. Not to beat this to death but: Not so. The fact that past performance of a fund does not guarantee the same future performance is precisely why sticking with a specific allocation plan is in my opinion the appropriate counsel for the masses and probably most of the self-described experts, too.

Sell high and buy low was one of just a few rough guidelines my dad gave me when I was in my 20s. Based on how my stock purchases and sales have done overall in the last few decades, I think it was good advice.
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On 11/10/2011 8:11 AM, Elle wrote:

Yes, better to say "asset classes that are doing better." Doing this kind of sell winner/buy loser rebalancing with individual actively-managed mutual funds or, god forbid, stocks, can be a recipe for disaster - as some pros put it, "fertilizing the weeds." Unlike entire asset classes, individual stocks can go to zero, and "bad" actively-managed funds can forever do poorly compared to readily-available alternatives like index funds.
-Tad
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iarwain spoke of giving up on a bond fund, because it was doing poorly. He shifted to an international [stock] fund, which is a very different allocation category. My take on what he was saying (as quoted in my post above) is he did not like re-balancing, because to him it meant shifting money from what he felt was a winning allocation category to a losing allocation category.
I think his approach misses the boat on the purpose of re-balancing. That is, past performance of a certain category (say, small cap value stocks) does not guarantee future performance. IOW, he should not have sold the bond fund just because bonds were not doing as well as stocks at the time.
Sorry, iarwain, don't mean to come down on you. More to clarify what the points of asset allocation and re-balancing periodically are.
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> iarwain spoke of giving up on a bond fund, because it was doing poorly
Clearly, getting rid of the bond fund was my big mistake. I had it for around six years, I think, and it had done nothing. So I think it's understandable that I got rid of it, even if it wasn't the right move.
I've decided to keep the funds that I have now, and allocate future contributions accordingly: 40% stable, 30% large cap, 30% mid cap. I've made money on the large and mid cap funds I have, and I'm replacing the international with the stable fund (to prevent loss, plus lower fees). The international funds have been the biggest loser for me. They started out quite well, then dropped like a stone. If the international funds come back, I can sell them. I don't want to sell them now and lock in my losses.
By the way, these international funds are not emerging market funds. I have an emerging market fund in my Roth IRA and it's done quite well.
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Just sharing thoughts here.
-- To me, the guideline on whether to buy or sell your international allocation should be what fraction allocation tools recommend, based on age, risk tolerance, and similar.
-- Assuming we are talking about funds with low expense ratios and no front or back loads, any data that measures performance for less than about 20 years is not meaningful, in my opinion.
-- Someone with the 60/40 allocation of stocks and bonds (well- diversified in the stocks) would not have been criticized by me when stocks were far exceeding bond performance. Instead, I would remind anyone trying to criticize a 60/40 (or similar) approach that crashes do happen. The person with the 60/40 portfolio sleeps better at night, even if s/he does not always beat the stock market in the short term.
-- I do not believe that for Joe or Jane Consumer the purpose of investing in stocks and bonds should be to make a quick buck. Rather, the goal is largely to keep up with inflation and to have Joe or Jane understand that stocks for the long run (10-20 years) generally have kept up with inflation and then some.
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Well, that was my understanding. That's why I find the fact that my 401k has actually lost money in the last 11 years so disappointing.
Regarding the 60/40 stocks/bonds mix, remember I have other accounts that are invested much more conservatively. Because of that, I felt it was all right to gamble more with my 401k. Unfortunately, at this point, it appears I am losing.
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Tad was right - I started at the beginning of Dec 1999.

100% bonds: $70,000 ==> $100,844 100% stocks: $70,000 ==> $ 85,056 60/40 s/b: $70,000 ==> $ 92,642 40/60 s/b: $70,000 ==> $ 95,864
One interesting thing to note - that $500 that was deposited at the beginning of Dec 1999 -- makes for over $1000 difference in the end with the bonds - that's the result of compounding the average annual return over the nearly 12 year period for that very first $500 payment. For bonds, that was 6.2%/yr.
The difference for the stocks, however, was putting in that extra $500 at the beginning and at the end, you end up only $548 more -- the average annualized return over that 12 year period for stocks was, in fact, only 0.29%. So, yeah, if you'd made a lump sum deposit in Dec 1999 and did nothing else but let it compound over 12 years, it was pretty much a lost decade.
The 60/40 annualized return over the 12yrs was just under 3% and the 40/60 annualized return over 12yrs was almost 4.2%
One more minor note - when I asked Tad to check against the Vanguard Balanced index, he got $71,000 ==> $97,000 even though that fund is 60% stocks and 40% bonds, too. Why did the 60/40 portfolio I noted above do worse? It's because the stocks in my portfolio above are just the S&P500 and the Vanguard Balanced Index, for stocks, tracks the MSCI US Broad Market Index, which includes a micro, small and mid-caps all missing from the S&P 500, and over that decade, small-caps averaged 5.4%, just a bit under what bonds did (though with a lot more volatility). As a check against this, if I do 40% bonds, 42% S&P500 and 18% small-caps, I get exactly what we expect: $97,089 and an annualized average return of 4.04% over the period.
I was going to do some of these portfolio historical return numbers anyway, and this was a great excuse to add the "periodic investment" question at the end of it. Thanks for sparking this interesting discussion!
(And thanks, of course, to Tad for the numbers check!)
--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com
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5-10 years. As I said before, I have other income sources lined up. A pension, two other retirement accounts, savings, and social security. As of now, my projections still look good, but of course I had originally expected a lot more from the 401k.
Regarding the spreadsheet, remember I've increased the amount I've put in as the years have gone on, so a consistent input wouldn't accurately reflect my situation.
Again, I got rid of the bond fund partly because I have low risk investments in other accounts, so I've looked at the 401k as a place to gamble. Unfortunately, so far it hasn't paid off. If what you guys are saying is true, if I hold on for another five years I should be showing a return, yes? Barring another collapse.
The only alternative I can think of would be to buy back into the bond fund, but I'm thinking that would have a worse effect than selling it in the first place. Wouldn't that just lock in my losses from the international funds (which is what I exchanged my bond fund for)?
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I'm not sure I understand why you're trying to game the 401(k) in isolation.
Your overall retirement plan should be a single plan which takes into account all the various accounts (as well as future expected additional cash-flows like the pension).
Now, the accounts where you are responsible for managing the investments - put them all together on a single spreadsheet and figure out your asset allocation.
Now, do you have a target allocation in mind? If not, before you mess with things, figure that out. You seem to be trying to time something here - you got out of bonds because they didn't preform well and jumped into international stocks. That was a losing move. Now you've jumped from internationsl stocks into cash because, well, because once again, you've bought an asset class just in time for it not to perform well. This is a losing game. Stop jumping and start with a plan. Then follow the plan.

And that's why it's called gambling rather than investing. If you want to win in the long run, fold that account into the bigger retirement plan and stop gambling with it.

Nobody's saying that. What we are saying is that different asset classes move in different ways at different times. Rather than trying to be in just the right one at the right time - which nobody knows how to do - we are saying diversify amongst asset classes and rebalance periodically if one of them outperforms the others or underperforms the others significantly. In the long run, a balanced portfolio managed to a target allocation with *no* attempt to time the market is much more likely to do well than what you've been doing.

There's no "lock" in. You have losses. They're already locked in by the fact that they've happened. Your future investment plan shouldn't depend on your past mistiming. Stop trying to get into the right thing at the right time. Get into the right thing(s), keep an eye on the long-term, and keep in balance.
If your plan says you should have X% in bonds, get yourself to the point where you do have X% in bonds. Maybe do so in an incremental fashion (if you don't have enough, make new additions to the portfolio into whatever you don't have enough of). The faster you make the move, the more you have to lose if the timing is off -- but if you keep trying to time things just right, you are more likely to not actually get it done.
Now there are some things you can do to try to moderate some of the risk. For example, within the bond universe, some parts look (to me) more overvalued than others. And there are concerns about when the Fed is going to start pushing interest rates up - frankly I'd thought they were going to go up sooner, but it looks like they've committed to keeping (at least the ones the government controls directly - which is really just the short-end of the curve) rates very low for the next couple of years.
Nevertheless, trying to time the bond market (ie. go short before rates go up, go long before they go down) is at least as difficult as trying to time getting in and out of stocks. So be careful with trying to be too smart here.
But keep an eye on the big picture. If you have more conservative investments in account A and more aggresive investments in account B and account B has underperformed, that doesn't mean you have to change account B - it means you need to make sure that your plan incorporates both A and B at the same time. Maybe you really should have your 401(k) all in equities - do you have an IRA which is all bonds? Stop looking at the 401(k) in isolation and start looking at the bigger picture.
--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com
  Click to see the full signature.
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I'm not trying to game it in isolation. I just looked at how it was doing and found it to be disappointing. Being as it was a collection of mutual funds, I would have expected to have made something from it in the past 11 years, even though the market has gone down.
Clearly it was a mistake to dump the bond fund. I've admitted that repeatedly. I got some bad advice which I bought into at the time, and I became impatient with it, because it wasn't performing. It's not that I was trying to time it. I just decided that since I had other conservative accounts, I thought I could gamble more with the 401k. In hindsight, I should have kept my original mix.
At the time I got into the international funds, I thought it was a good idea to do so. Climates change. I no longer think it's a good idea for me to buy more international funds. I still have all the ones I bought - if they go up I will profit from them. I'm just not going to be buying any more in the foreseeable future.
If you look at all my accounts I think I'm well diversified. But this thread was specifically about the 401k. If it was my Roth that was losing money, I'd be writing about that instead.
You say stick to the plan but if what you are doing is losing money, don't you think you should consider revising it?
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iarwain;732204 Wrote:

Read the book Pioneering portfolio management : an unconventional approach to institutional investment by David F. Swensen. You can then manage your portfolio better.
--
maraba


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So what do you think I should do now? Given that the one move I made in ten years was apparently a wrong one, should I just hold on to what I have and hope things get better in the next five years? Or should I make a move? And if I do make a move, doesn't that lock in my losses?
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Um, it depends.

Again, it depends.

The key is not making a move just for the sake of making a move. You need a plan. You need a system. And, assuming it's a good one, you need to (a) move your portfolio to be in line with the plan -- which may be done immediately or may be done gradually; and (b) you need to periodically make sure your plan is still a good one; and (c) you need to periodically tweak things to keep yourself inline on that plan's path.
Now, coming up with that plan may be very easy or may not be. Are you talking about just your collective retirement accounts? How are they invested? What's your current asset allocation?
And then, what's your risk tolerance? Time horizon? Investment options?
It doesn't have to be complicated - a good plan is usually a simple one. But simple doesn't necessarily mean easy, either.
Without knowing a lot more about your sitution, it's impossible to make specific recommendations. And anyone who makes specific recommendations with as little information as you've presented is doing you a disservice.
Take a look at the numbers I posted the other day with returns from different asset allocations (I did 100% bonds, 100% stocks, and also 60/40 and 40/60). Volatilies of those ultra-simple portfolios are different - the all-bond one is much lower volatility than the all stock one. And long-term expected returns are also different - long-term expected returns from a 100% bond portfolio, especially right now with once-in-a-generation low interest rates - are going to be lower than the last 15 years of bond returns were.
--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com
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Last year we were told that, if big banks default, the whole economy could suffer. Now we are being told that, if Greece defaults or Italy defaults, the whole financial system in Europe and maybe the USA could come tumbling down. I am getting the message that investing in anything, including traditionally super-safe investments like US treasury bonds, is risky, because some small nation somewhere might default on its debts and the whole financial system could collapse. I wonder how putting cash under the mattress would work out. Well, at least I have assets in real estate, which hopefully will not tumble down for a while.
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I hear you. With the current global economy, it seems like anytime there's any bad news anywhere in the world, the whole market tumbles several hundred points. The West doesn't have the economic power it used to hold for so long. It's frustrating.
I would have been so much better off just putting my 401k money into some sort of stable fund. At least I'd be getting something back. Hindsight is 20/20
I'm just wondering if there's any light at the end of this tunnel. Is there any point to continuing to play this game?
Things did look a lot better this summer when the markets were up a little. I could still make some gains, but things are going to have to improve for that to happen.
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Maybe not cash, but a few gold bars and some diamonds under the mattress might not be a bad idea. But several more tried-and-true things may still be prudent, despite current uncertainty in the financial markets. For example, pay off all debts as soon as possible. Own your own home as soon as possible. Diversify your investments; don't put all your eggs in the same basket. I would put these things ahead of rebalancing a portfolio.
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