Questions for finance gurus

[pontifex]

First, all this financial stuff makes very little sense to me.

Been talking with AXA rep about finances and IRAs and mutual funds for retirement. (I also have life insurance through them).

They came up with a plan they think will work well for me. It's an MFS Growth Allocation Fund. I would be contributing a small amount monthly (maybe like $100 to start) and they think I should do an A share. They were saying something about after 7 years if I had $15k then they would move me to something else. If I only contribute $100 a month that's only $8400 after 7 years, unless they count whatever the fund generates? Not sure if that's possible?

I then went to my bank to see what they can offer and they are suggesting an American Funds Growth Portfolio and they suggested doing a c share. They said I should do a c share because there's no guarrantee that I would have that $15k in 7 years and they also thought it wouldn't make sense to be moving the money around. If I understood correctly this fund will also cost me lower fees than the other fund in the long run.

Right now I'm not sure I want to start anything yet. Funds are low right now and putting $100 a month away is going to be rough. I realize that it's going to help later on down the road.

AXA called me today to see if I wanted to get started with them and I told them I wasn't ready yet. They seem kind of pushy to get this going.

The guy at the bank didn't seem pushy at all.

I'm kind of leaning towards going with the bank right now based on my limited understanding of all this.

 

[vi edit]

Just go to Vanguard and open up a Roth IRA account. Start putting money into a targeted retirement account (IE: 2050) and call it a day.

These investment firms are making plump commissions off of your transactions that will erode away significant earnings.

 

[Exterous]

Just go to Vanguard and open up a Roth IRA account. Start putting money into a targeted retirement account (IE: 2050) and call it a day.

These investment firms are making plump commissions off of your transactions that will erode away significant earnings.

:thumbsup: Take a real close look at the fees you would be paying. 1% may sound small but when compared to your gains its notable and compounding the lost value to fees until retirement can result in a significant amount of lsot money. For example if you invest $100k over 20 years a 1% fee will cost you $50,000 vs a 0.25% fee assuming both get ~7% return per year

And the chances of them outperforming is slim. Something like 75% of mutual funds under-perform the comparable index fund each year

 

[pontifex]

Just go to Vanguard and open up a Roth IRA account. Start putting money into a targeted retirement account (IE: 2050) and call it a day.

These investment firms are making plump commissions off of your transactions that will erode away significant earnings.

The other thing is I do have a retirement 401k plan through work which is a targeted fund. Its through Fidelity but it might even be a Vanguard target fund.

 

[maddogchen]

Is this the MFS Growth fund they are talking about? Its a front-load fund?

http://financials.morningstar.com/fund/expense.html?t=MAGWX&region=usa&culture=en_US

front load: Often associated with class 'A' shares of a mutual fund. Also known as Sales Charge, this is a fee paid when shares are purchased. Also known as a "front-end load," this fee typically goes to the brokers that sell the fund's shares. Front-end loads reduce the amount of your investment.

edit:
American Funds Growth Portfolio, also a front load fund.

http://financials.morningstar.com/fund/expense.html?t=GWPAX&region=usa&culture=en_US

From what I'm reading both of the places selling you the funds will get 5% of your money right off the bat. I would stay away.

 

[pontifex]

Is this the MFS Growth fund they are talking about? Its a front-load fund?

http://financials.morningstar.com/fund/expense.html?t=MAGWX&region=usa&culture=en_US

front load: Often associated with class 'A' shares of a mutual fund. Also known as Sales Charge, this is a fee paid when shares are purchased. Also known as a "front-end load," this fee typically goes to the brokers that sell the fund's shares. Front-end loads reduce the amount of your investment.

edit:
American Funds Growth Portfolio, also a front load fund.

http://financials.morningstar.com/fund/expense.html?t=GWPAX&region=usa&culture=en_US

From what I'm reading both of the places selling you the funds will get 5% of your money right off the bat. I would stay away.

The MFS one is correct. The American Funds one is a C share, not A share.

 

[maddogchen]

The MFS one is correct. The American Funds one is a C share, not A share.

This one?
http://financials.morningstar.com/fund/expense.html?t=GWPCX&region=usa&culture=en_US

That looks like it has a 1% deferred front load added to a 1.5% annual expense.

Compare that to a no-load fund like Vanguard with a 0.10% annual expense.

Anyway, since funds are low for you, my recommendation would be to put as much as you can each month into a savings account. Don't worry about the IRAs and investing right now. And in the mean time, read a book on finances like this one.
http://www.barnesandnoble.com/w/personal-finance-for-dummies-eric-tyson/1116891502

 

[pontifex]

This one?
http://financials.morningstar.com/fund/expense.html?t=GWPCX&region=usa&culture=en_US

That looks like it has a 1% deferred front load added to a 1.5% annual expense.

Compare that to a no-load fund like Vanguard with a 0.10% annual expense.

Anyway, since funds are low for you, my recommendation would be to put as much as you can each month into a savings account. Don't worry about the IRAs and investing right now. And in the mean time, read a book on finances like this one.
http://www.barnesandnoble.com/w/personal-finance-for-dummies-eric-tyson/1116891502

hmm...actually the printout they gave me for the American Funds one is for an A share but he said I should do a C share instead, so it seems the one you linked should be correct.

 

[kranky]

If you like the type of investment those funds represent, just go buy the index fund equivalent at Vanguard.

Look at the 12b-1 fee + the expense ratio for the Class C shares. Choose an assumed annual return. Then run a spreadsheet that shows your investments having those expenses deducted every year, versus the same investments with 0.25% deducted every year, both based on the same expected return.

Then after 20 years, see how much the difference is.

That should demonstrate the terrible impact that high investment costs have on your long-term results.

 

[pontifex]

If you like the type of investment those funds represent, just go buy the index fund equivalent at Vanguard.

Look at the 12b-1 fee + the expense ratio for the Class C shares. Choose an assumed annual return. Then run a spreadsheet that shows your investments having those expenses deducted every year, versus the same investments with 0.25% deducted every year, both based on the same expected return.

Then after 20 years, see how much the difference is.

That should demonstrate the terrible impact that high investment costs have on your long-term results.

none of that made any sense to me.

 

[Nograts]

Target date funds blow. I had one for years because I was too lazy to learn. Boy did that cost me. To the tune of ~10-20% behind what the S&P did. They are typically WAY too conservative, and also hold shitty mutual funds within mutual funds. It's just overkill.

Read you a book. Then invest in 3-4 funds. Vanguard S&P 500. Vanguard Total INTL. REITS. Then bonds depending on your age. I'm going pure equity until I'm ~35. Aggressive all the way to the grave baby.

People that don't learn about this fairly simple subject pay for it in the tunes of 10's of thousands in the end if you ask me. Target retirement dates are awful investment vehicles.

 

[DaveSimmons]

Target date funds blow. I had one for years because I was too lazy to learn. Boy did that cost me. To the tune of ~10-20% behind what the S&P did. They are typically WAY too conservative, and also hold shitty mutual funds within mutual funds. It's just overkill.

Read you a book. Then invest in 3-4 funds. Vanguard S&P 500. Vanguard Total INTL. REITS. Then bonds depending on your age. I'm going pure equity until I'm ~35. Aggressive all the way to the grave baby.

People that don't learn about this fairly simple subject pay for it in the tunes of 10's of thousands in the end if you ask me. Target retirement dates are awful investment vehicles.

You picked a lousy target fund then. Vanguard's Target fund is made up entirely of their own low-expense index funds, including US and international stock index funds plus bond funds. You can make the stock vs. bond mix more aggressive by picking a (year) that is after you will really retire, for example you will retire in 2040 but you pick the 2050 version of the fund instead.

The point of a (good) Target fund is not to beat an S&P 500 index fund, it is to give you a more diversified set of assets, including non-US stocks and bonds.

Yes, you can follow some Bogleheads 3-fund / n-fund index fund strategy instead but a Vanguard Target fund is a single-fund purchase that gives you a simpler equivalent that requires zero effort.

 

[DaWhim]

first question to ask is did you have to pay for the consultation?

answer is probably no. so what is in it for these people to waste their precious time on you? money of course. watch out for their funds suggestion and the fee. they will be getting kickback from the funds they can get you to sign up, higher the fund charges their fees, higher the money these "planners" can get.

either you learn to invest or pay for a financial planner, you will come out ahead.

 

[DaveSimmons]

pontifex: as everyone is telling you, run far away from those high-expense funds they are pushing to buy themselves a new car.

When you're ready, go to vanguard.com instead like vi edit recommended. Set up your own fund there, pay in for decades, retire well-off.

 

[Nograts]

You picked a lousy target fund then. Vanguard's Target fund is made up entirely of their own low-expense index funds, including US and international stock index funds plus bond funds. You can make the stock vs. bond mix more aggressive by picking a (year) that is after you will really retire, for example you will retire in 2040 but you pick the 2050 version of the fund instead.

The point of a (good) Target fund is not to beat an S&P 500 index fund, it is to give you a more diversified set of assets, including non-US stocks and bonds.

Yes, you can follow some Bogleheads 3-fund / n-fund index fund strategy instead but a Vanguard Target fund is a single-fund purchase that gives you a simpler equivalent that requires zero effort.

You basically said what I said in about 10x as many words. Even then their target retirement fund trailed S&P by about .6% so I guess if you aren't in it for the money then yeah, choose a sub-par fund.

 

[Exterous]

none of that made any sense to me.

Short summary: Fees and Expense Ratios lower your returns. The larger the fees the lower your returns. Try and avoid high fees unless you are really really really (really) sure they know something the market doesn't and can consistently generate industry leading returns to offset the high cost

Target date funds blow. I had one for years because I was too lazy to learn. Boy did that cost me. To the tune of ~10-20% behind what the S&P did. They are typically WAY too conservative, and also hold shitty mutual funds within mutual funds. It's just overkill.

That really depends on the target fund. The Vanguard ones holds 4 index funds in various amounts:

Vanguard Total Stock Market Index Fund Investor Shares
Vanguard Total International Stock Index Fund Investor Shares
Vanguard Total Bond Market II Index Fund Investor Shares†
Vanguard Total International Bond Index Fund Investor Shares

Its also a bit unfair to compare most Target date funds solely to the S&P 500 as they often include international in the mix.

Target retirement dates are awful investment vehicles.

So I broke down what a pretty standard portfolio would be using index funds from from the areas you mentioned:

Vanguard S&P 500. Vanguard Total INTL. REITS. Then bonds depending on your age.

bonds: 20% = 20,000 @ 3.4 = 20680
Equity: 50% = 50,000 @ 9.97 = 55000
F Equity 20% = 20,000 @-1.05 = 19700
REIT 10% = 10,000 @ 9.09 = 10910

Total = $106290

2050 Target Date:
$100,000 @ 5.9 = 105900

$400 difference on $10k is not 'awful' by any means. And if you look at the weightings a stronger international performance could easily have elevated the performance of the Target Date over the manually constructed portfolio. For a 20 (or even 30) year old its not a bad thing to have under performing international index stocks in the mix as that equates to buying them on sale now and being able to sell them (most likely) for a larger gain later. If historical trends continue that $400 dollar difference to buy more international shares could eaisly work out better in the long run than a $400 better return today

 

[Nograts]

Short summary: Fees and Expense Ratios lower your returns. The larger the fees the lower your returns. Try and avoid high fees unless you are really really really (really) sure they know something the market doesn't and can consistently generate industry leading returns to offset the high cost



That really depends on the target fund. The Vanguard ones holds 4 index funds in various amounts:

Vanguard Total Stock Market Index Fund Investor Shares
Vanguard Total International Stock Index Fund Investor Shares
Vanguard Total Bond Market II Index Fund Investor Shares†
Vanguard Total International Bond Index Fund Investor Shares

Its also a bit unfair to compare most Target date funds solely to the S&P 500 as they often include international in the mix.



So I broke down what a pretty standard portfolio would be using index funds from from the areas you mentioned:


bonds: 20% = 20,000 @ 3.4 = 20680
Equity: 50% = 50,000 @ 9.97 = 55000
F Equity 20% = 20,000 @-1.05 = 19700
REIT 10% = 10,000 @ 9.09 = 10910

Total = $106290

2050 Target Date:
$100,000 @ 5.9 = 105900

$400 difference on $10k is not 'awful' by any means. And if you look at the weightings a stronger international performance could easily have elevated the performance of the Target Date over the manually constructed portfolio. For a 20 (or even 30) year old its not a bad thing to have under performing international index stocks in the mix as that equates to buying them on sale now and being able to sell them (most likely) for a larger gain later. If historical trends continue that $400 dollar difference to buy more international shares could eaisly work out better in the long run than a $400 better return today

AXA doesn't have Vanguard funds, and not everywhere will. I'd also wager most target date funds aren't as sensible as vanguard, and most are terrible.

 

[pontifex]

So if i already have a vanguard target date fund, would it be better to open a new one or just put more into the current one? I am currently putting 10‰ into my retirement fund and my employer matches up to 6‰. I am making about $42k before taxes.

 

[Nograts]

So if i already have a vanguard target date fund, would it be better to open a new one or just put more into the current one? I am currently putting 10‰ into my retirement fund and my employer matches up to 6‰. I am making about $42k before taxes.

Target retirement dates are meant to be one stop shops for investing. So yes, if you already have one, just continue to invest in that. No diversification needed.

 

[DaveSimmons]

AXA doesn't have Vanguard funds, and not everywhere will. I'd also wager most target date funds aren't as sensible as vanguard, and most are terrible.

Which is why we're saying to go to vanguard.com and set up the fund directly with them. They offer Roth IRAs, 401k rollovers to IRA, and non-retirement accounts.

 

[DaveSimmons]

So if i already have a vanguard target date fund, would it be better to open a new one or just put more into the current one? I am currently putting 10‰ into my retirement fund and my employer matches up to 6‰. I am making about $42k before taxes.

You can just put more into the current one. Is this your 401k? That's great! Many 401ks have lousy funds. We had third-rate funds at work until we decided to pay extra for access to Vanguard funds.

After you max out your 410k and pay off any debt (other than a mortgage), when your salary increases a bit and you want to invest more then you can look at opening a Roth IRA directly with vanguard.com and put more money into a "second copy" of the Target fund.

If you change jobs, you can roll over your 401k into a traditional IRA at vanguard.com and get a "third copy" of the Target fund. As you change jobs over the decades just keep rolling over into that IRA.

 

[pontifex]

Ill have to double check but pretty sure it is Vanguard

 

[DaveSimmons]

It's worth checking since some bad target funds use "actively managed" funds with stock-pickers and high expenses instead of using cheap and safer index funds.

It still is usually worth putting in to your 401k up to the % that your employer matches, since that matching is instant free money.

 

[brianmanahan]

Target date funds blow. I had one for years because I was too lazy to learn. Boy did that cost me. To the tune of ~10-20% behind what the S&P did.

sometimes the US outperforms international (2008-now), but sometimes international outperforms the US (2002-2007).

what years are you talking about?

i bet if it were 2002 to 2007, you would like the international outperforming the S&P by %80.

 

[Exterous]

AXA doesn't have Vanguard funds, and not everywhere will. I'd also wager most target date funds aren't as sensible as vanguard, and most are terrible.

Well the same can be said for any investment area given all the smaller shops out there so that statement isn't entirely useful. That doesn't mean those areas are to be avoided and it certainly shouldn't be used as reason to apply the broad based generalizations of target date funds like you did.

The 4 largest 401k managers do offer plans like Vanguard's (Vanguard, Fidelity, Blackrock, SSGA) and those make up over 2/3 of assets under management by the top 10. A quick look at some of the offerings from the other big boys like Schwab and T. Rowe Price shows that, while they are not quite as good their composition and returns are not far off what we have been talking about and include a lot of index funds. There are also a host of others like TIAA-CREF that don't make the top 10 list but do offer good target date funds.

Given the enormity of the providers that do offer Vanguard comparable target date funds I think it would be harder to find someplace that doesn't offer them as opposed to one that does. Of course you are at the mercy of your company 401k administrators and some of those people like to think you have to slice and dice to make real money so YMMV