Hair brain or financial genius???

March 13, 2009 2:18 PM

Is this a hair-brained idea? You are not my financial adviser, trying to time the market is a bad idea, etc. but I've been entertaining making a change to the way the money in my 401K is invested. I've got about 12 years to retirement at 60, I have a defined benefit pension equal to 50% of my current salary and a portable pension that should be worth about $200K by retirement. So here's the Idea...

This is the current mix in my 401K:

Vanguard International Value Fund (value stocks from non-U.S. markets) 9.50%


Vanguard PRIMECAP Fund Investor Shares (large- and mid-cap growth-oriented equities) 20%


Vanguard Total Bond Market Index Fund Institutional Shares (Invests in U.S. Treasury, investment-grade corporate, mortgage-backed, and asset-backed securities.) 12%


Vanguard Total International Stock Index Fund (Diversified index portfolio of non-US stocks representing the major developed and emerging equity markets.) 9.5%

Vanguard 500 Index Fund Signal Shares 19%



Vanguard Extended Market Index Fund Signal Shares (mid- and small-capitalization stocks) 9%

Vanguard Wellington Fund Investor Shares (Portfolio emphasizing large- and mid-capitalization value stocks.) 11%

Vanguard Windsor Fund Investor Shares (Portfolio emphasizing large- and mid-capitalization value stocks.) 10%


Now for the hair-brain part. I'm considering, under the assumption that, even if the market has yet to hit bottom, over the next 12 years I will realize greater gains by putting all my eggs in the Primecap and S&P 500 Index funds.

Tell me just how stupid or overwhelmingly insightfull you think doing so might be.

posted by Carbolic to work & money (24 comments total)

I'm considering, under the assumption that, even if the market has yet to hit bottom, over the next 12 years I will realize greater gains by putting all my eggs in the Primecap and S&P 500 Index funds.

Why do you believe this to be true?
posted by jeb at 2:22 PM on March 13

Nobody knows the future, but Nouriel Roubini, who had predicted the crash is saying he thinks the recession will only last to mid 2010.
posted by delmoi at 2:26 PM on March 13

jeb: I'm pulling at least 50% of the idea out of my ass. The other 50% or less is connected to the idea that the kinds of companies held in those two funds will receive higher levels of benefit from an economic upturn.
posted by Carbolic at 2:34 PM on March 13

For all-Vanguard portfolio advice you should go ask at Bogleheads. They'll tell you that you're crazy just as much as we will (hint:you're crazy), but they may also have more constructive ideas.
posted by xil at 2:37 PM on March 13 [1 favorite]

I think (but am ready to be wrong) that we've never had the market down for over a decade. But, didn't you buy into the other funds at a higher price, and so to move the money you'd have to take the loss of selling them at a low price?
posted by Houstonian at 2:41 PM on March 13

First of all: harebrained. Like a bunny rabbit.

Second of all: Diversification is always a good idea. Some money in a bond fund is an insurance policy against more equity madness, and those international funds have taken big losses and have just as much room to recover as the S&P.
posted by mr_roboto at 2:54 PM on March 13

It might be brilliant. It might be a disaster. In recessions in the recent past in the US, things haev bounced right back, so stocks might have a great return. But before that, and in other countries, stocks have underperformed bonds over 10-12 years.
posted by procrastination at 2:59 PM on March 13

I would be tempted to change my allocation for new contributions to weight more heavily toward the stock funds that have declined the most over the last year or so. If you reallocate funds you have already contributed, you should draw from mutual funds that have not declined as much as the funds you're moving into. If you have any funds that have actually made money in the past year, those would be the ones to look at liquidating, if you decide to follow this strategy.

But since you're so close to retirement, some caution is advised. You should (by the usual 120-minus-age guideline) be only about 30% in stocks at this point. The stock market's declne is a tremendous buying opportunity, but that doesn't mean you should suddenly have 60% in stocks. Instead, assuming the stock portion of your portfolio has been sucking much more than the bonds, simply rebalancing to about 30% equities might mean buying a lot more stock than you have now, and do what you want.
posted by kindall at 3:02 PM on March 13

This won't be as big of change as you think.

Right now you're 12% fixed income and 88% equity (though the Wellington fund has some fixed income, but I'm ignoring that). So you'd be moving to 100% equity, but you had a huge equity allocation to begin with.

Within your equity allocation, you have a ton of overlap and probably too many different funds for no good reason that I can tell. I bet if you looked at the top 50 holdings for each fund and did a cross-holdings analysis, you'd be surprised at the result.

Switching from your current collection to just S&P 500 / PRIMECAP would mostly just shift you to a more US-centric portfolio. Is that what you intend?

I think you need to come up with a better description of what you hope to accomplish and why. And also analyze what this would cost you in transaction fees (if any).
posted by mullacc at 3:09 PM on March 13

It also depends on how solvent your pension fund is. Defined benefit is great -- I think the usual need is around 75% of salary upon retirement -- but if your pension fund has suddenly lost 40% of its holdings, you're in trouble.
posted by jeather at 3:11 PM on March 13

@mullacc-- he's also talking about going essentially all growth-leaning-largecap US equity. I don't understand why you would think that an all-growth-leaning-largecap US equity portfolio would beat out any other linear combination of the funds you've got listed. I also don't really get how those guys fill up a whole fund with "growth" names that are also largecaps, but I didn't look at the pfolios.
posted by jeb at 3:14 PM on March 13

Carbolic-- I think this is a pretty crazy idea, but...I honestly don't understand why you think like, the S&P fund will definitely beat the small and midcap fund. Like I don't even understand the theoretical basis of this strategy enough to point out where it might be flawed.
posted by jeb at 3:15 PM on March 13

jeb: That's my point exactly. The distinction between value/growth in these large cap funds with hundreds of holdings is, in my opinion, not that material and vastly less important than the geographic factor.

For example, the Windsor funds is supposed to have a "large- and mid-cap" focus, but the median market cap is $38.6B, compared to $37.9B for the S&P 500. If this were my portfolio, I'd just think of the equity world as consisting of three broad buckets: US, developed international and emerging markets. Then I'd pick a broad index fund for each, probably under-allocating to emerging relative to the other two. Keep it simple and avoid unintended overlap.
posted by mullacc at 3:32 PM on March 13

your suggestion is neither stupid or overwhelmingly insightful.
the stock market growth for the next few years will not be explosive, it will be fairly slow.
there will be bumps and suprises along the way.
> only bet what you can afford
> diversify appropriately
> measure risk and reward to whats appropriate for you
if you like a bit of risk in your life, go for it.
personally, i am a single guy with liquidity, so i can absorb some risk.
i'm keeping about 10-20% of my
investments in the market in top200 stocks,
and hoping for the best.
also mullacc is spot on, it depends what your goals are.
i think that to investigate changes to your current situation is appropriate,
but to think that pushing it into S&P500 is not your magic answer.
posted by edtut at 3:35 PM on March 13

It's a "hare-brained" idea. As in, dumb as a bunny.

/grammar police
posted by BitterOldPunk at 3:38 PM on March 13 [1 favorite]

Seconding checking into the pension here's one article, I had another article about municipal pension funds going too strong into the mortgage backed securities and now are dangerously underfunded.
Twelve years may be enough for a turn around for your fund, but the next couple of years are going to be brutal if pension distributions cease to flow.
posted by readery at 4:46 PM on March 13

You've given me a lot of the anti-validation I was looking for.

I do have a lot of overlap between funds (one of them is one of my company's largest stockholders). I had limited the account to 4 or 5 funds but I went to a financial adviser a few years ago who recommended adding a few others (I have a BBA in Finance, which means next to nothing plus it was obtained 20+ years ago, but I was a little leery of the number of funds he recommended.)

My company's defined pension is over funded (they are very conservative) but it is a multi-multi billion dollar corp. so it is unlikely that it would make them a takeover target,

The funds I was thinking about moving everything into are the biggest losers but not by a large margin.

I don't plan on completely leaving the work force once I retire. It's just that my defined pension tops out at 60 and I could pick and choose how much I want to work after retirement (lawyer).

I live very cheaply so I could easily survive if I zeroed out the 401K but I'd rather not.
posted by Carbolic at 5:51 PM on March 13

BitterOldPunk: I think it was a spelling error more than grammar. I'd have to have a "hare brain" in order to be "hare brained" wouldn't I? (not a gammarian/grammarist)
posted by Carbolic at 6:13 PM on March 13

According to Quinion, both "harebrained" and "hairbrained" have a long pedigree, because "hair" used to be an acceptable spelling of "hare."

I found this out because I was going to post a correction earlier today, but decided to Google it first to make sure I was right. :-)
posted by kindall at 6:46 PM on March 13

I think (but am ready to be wrong) that we've never had the market down for over a decade. But, didn't you buy into the other funds at a higher price, and so to move the money you'd have to take the loss of selling them at a low price?

You mean other then this ten year period we're in right now?
posted by delmoi at 9:23 PM on March 18

kindall: I'm confused by your answer.

I wasn't familiar with the 120 minus your age rule (for me 120 - 48 = 72) but as best I can tell it says I should be 72% into equity/stocks. I'm already about 80% equity and 20% bonds. How would rebalincing to 30% equity have me buying more stocks? (Did you think I was saying I'm sixty now? I meant that I will be 60 in 12 years).
posted by Carbolic at 10:47 PM on March 19

mullacc: I'm thinking about putting myself into funds that will benefit most from the recovery, if and when it comes. No transaction fees would be involved. My, probably uneducated assumption, is that the S&P and the kinds of stocks held by Primecap have taken a worse than deserved beating. I other words, that there are more undervalued stocks in those funds. I'm looking at at least 12 years before I draw anything from the 401K and possibly more than 20.
posted by Carbolic at 10:56 PM on March 19

kindall: I'm confused by your answer.

I just meant that getting back to whatever your target percentage of stocks is will require buying a lot of stock right now. Let's say your target percentage of stock is 50% and last time you balanced your portfolio, that's where you put it. Now a year later, stocks are down 50% (for simplicity, assume your other holdings are flat). This means that you are now 33% in stocks.

So to rebalance your portfolio, you will have to bring that back up to 50%. Either you'll put in new money and put it all into stocks until you're balanced again, or you will sell some of your other holdings and buy more stock. The new-money approach is what I'd recommend because in reality, your other holdings are probably down too, just not as badly as your stock.

But either way you're buying a lot of stock, and so just rebalancing may be enough to achieve your goal if your goal is just to take advantage of the depressed stock market. Maybe temporarily change your allocation to overweight stocks a little (i.e. if your target is 50%, go to 55%) -- the 120-minus-your-age rule is just a guideline.

This is why investment experts recommend periodic rebalancing. Basically, you take profits on what's been doing well and buy more of what's been underperforming.
posted by kindall at 10:16 AM on March 22

I basically decided to do nothing. Thanks for your view points.
posted by Carbolic at 6:14 PM on April 18