Uncommon Cents

A few months back I borrowed money from myself to pay my tax bill for 2009. I did this by reducing (not eliminating!) my 403(b) contributions, increasing my tax withholding, and taking money out of a savings account I try to not touch.

A couple of months later, I’ve almost repaid the whole amount.

In celebration, I just increased my 403(b) contribution back to the previous amount so I can make sure I still do my maximum for 2010. In a week or so I’ll get my tax withholdings back down.

It feels nice to have repaid that to myself.

As I’ve been discussing for awhile, I finally got my asset allocation done for 2010. It took me a long time to do this, partly due to the dynamic nature of the accounts (stocks trade every business day as we all know, and prices fluctuate possibly substantially) and also due to the number of accounts I have.

The majority of my invested money is in my 403(b) which is with Vanguard. I am fortunate that my employer has instituted the Vanguard Brokerage Option (VBO) which I’ve blogged about several times. Trading online in the account is simple and apparently just like a regular Vanguard brokerage account (I don’t have one so I can’t verify this). I exchanged some dollars in one fund for some dollars in another fund–simple. Finally, to get my asset allocation where I wanted, I had to add money from my 403(b) into my VBO and buy more of a fund I was already holding.

I could not figure out a way to do it online.

I called the next day and made the transfer and asked if it was possible to move money from my 403(b) to the VBO online and was told it wasn’t and there were no plans to do so as far as the representative knew; he explained there are so many restrictions on moving money this way for various 401(k) and equivalent plans they weren’t likely to make this part of the online service anytime soon.

In my view, that’s a serious flaw, but otherwise, I’m pretty thrilled with my Vanguard Brokerage Option.

One of my personal dreams is early retirement (note: this came up on Twitter the other day–when I say early retirement I’m not meaning so I can stop working altogether in my early 50s but rather so I can find a different job to work for the last ten or so years of my career while collecting a pension from my current job). It has, for many years, also been a dream–sometimes but not always achievable–for the rest of the U.S. population as well.

Money.com has a blog post by Penelope Wang highlighting a recent Gallup poll where it appears fewer and fewer Americans are saying they’ll retire early. Whether or not that’s because they’re unable to financially (or don’t anticipate they’ll be able to financially) or because they see value in working aside from financial is not clear.

While I’m all for work–to have a job is certainly better than not to for the vast majority of people–I’d like to reach a point where it’s more optional than mandatory. I’m hoping that I can do that with my goal of early retirement–it seems, however, less Americans are having the same goal.

As those of you who have followed this blog for awhile know, I have a model portfolio made up of four funds, two stock and two bond, that I track regularly. This is actually essentialy the portfolio I have in my 403(b) as well.

Any portfolio where asset allocation is a consideration–that would be every investment portfolio–needs periodic adjustment. For me, that adjustment happens yearly. Quite frankly, if the adjustments are very minor I often leave the portfolio alone, just because it’s often more trouble than it’s worth. That’s not the case this year.

If making adjustments to your portfolio, please consider fees (commissions from sales, for instance) and taxes (which is not an issue here since these funds are all contained within a 403(b)).

Also, consider what your overall asset mixes are. For instance, last year I decided on a more aggressive than usual 75% stock/25% bond allocation; this year I’m going back to my usual 70% stock/30% bond mix. Of the stock allocation, 47.5% is a domestic stock index and 22.5% is an international stock index; with bonds, 15% will be a total bond index and the other 15% will be a GNMA fund.

To match those up with the funds I discuss in the model portfolio posts, the domestic stock fund is the Vanguard Total Stock Market Index (VTSMX), the international stock fund is the Vanguard Total International Stock Index (VGTSMX), the domestic bond index fund is the Vanguard Total Bond Market Index (VBMFX), and the GNMA fund is the Vanguard GNMA Fund (VFIIX).

Turns out that I will need to take a bit off both my domestic and international stock funds and put them mostly into VFIIX but a little into VBMFX. I will work on that today!

The 401(k) match, where an employer matched up to a certain contribution by an employer into their retirement account, largely disappeared last year in the midst of the economic crisis.

Now, according to CNNMoney.com, the 401(k) match is back.

While a whole bunch of companies discontinued or at least cut back on their 401(k) matches last year, 80% of the ones who eliminated their matches are saying they’re going to restore them this year.

That’s a huge help for folks saving for retirement and a positive sign that an economic recovery is underway.

Facing furloughs (”Furlough Friday” has become a common phrase here in Hawai’i), many eligible government workers have decided to retire instead.

Let’s face it: staying in a job where you face an uncertain income future versus the safety of retirement and the possibility of finding other work if you choose to makes retirement more appealing. Of course, I’m of the opinion that early retirement is a good thing–I have found the earliest retirement date at my current job and I’m sticking to that as my plan.

Whether this will help the state financially or hurt it instead is not yet clear. But I’m pretty sure this is an unintended consequence of trying to cut back on the government payroll.

I have now used the Vanguard Brokerage Option in my Vanguard administered 403(b) a few times, mostly by phone, but for the first time, I’ve also used it online. It was not quite as easy as I would have expected.

I have used Vanguard’s Web site–not with the VBO–for years, mostly to check my balances but also to reallocate my assets or to switch funds in my retirement plan. The VBO is a little different.

I had, via phone, sold out of my holdings in the T. Rowe Price International DIscovery Fund about a week ago with the intention of buying into the Vanguard Total International Stock Index Fund. I decided to then try the online option rather than call.

To say the least, I was a bit confused. The site is not quite what I was used to with Vanguard, probably since the brokerage option is administered by a different firm. There are, unfortunately, a few issues.

First off, since I have several accounts at Vanguard, and the Vanguard Brokerage Option appears like a “fund” in my two retirement accounts. When I click on that “fund”, it leads me to another page that details all the funds in those two accounts as well as revealing the details and contents of my VBO plan. When I click “Buy & Sell”on the account, it takes me to a page with numerous options on buying and selling–but none to buy Vanguard funds. Instead, I had to click on “Buy non-Vanguard funds” in order to actually file my order! Even when there, it unfortunately did not tell me what my balances were–I had to go back and manually write down the amount I had available to buy into the fund in order to put the order in.

All that said, I still love Vanguard and their funds and I am grateful for this brokerage option; I just wish their Web site for the brokerage option was easier to use.

Every time there’s a significant stock market downturn, some investors swear stocks off forever. There are often stories about people who are devastated if not destroyed financially due to the downturn which sends many scurrying for the exits.

Despite all of this, those of us who stuck in during the carnage of the last year and a half are starting to see exactly why we did so.

Yes, the market is still well off its all time highs, and honestly, the market is actually still down for the year even after the furious stock market rally of more than 37% since March 9, 2009. But that said, my portfolio is actually up for the year, and I’m hoping that it’ll gain more and more as time goes on. How is this possible?

Because I kept doing what I set out to do.

Regular investing means that I wasn’t just buying into the market when it was going up, I was buying in as it was going down as well. The dollars that were invested when the market was totally in the toilet have grown substantially over the last couple of months. If I had stopped investing, I would never have realized those gains; moreover, if I had pulled my money out of stocks and gone for the safety of bonds, I would have never realized gains in the part of my portfolio that had been hit hard over the last couple of years.

Also take those stories about financial ruin with a grain of salt: yes, it’s true these happen, but almost inevitably, when I read the details on these stories, these folks are people who were over exposed in a particular stock [a lot of times employees who were getting 401(k) matches in company stock that was well over the 5% I like to use as my limit for any particular stock being part of my overall portfolio] or those who had asset allocations that seemed wildly out of step with their age and time horizon (folks who were in retirement with 80% of their portfolio in stock).

Yes, there’s risk in the stock market, no question. But the recent stock market rally is showing those of us who have been willing to accept that risk very clearly why we did so.

I often have discussions who want high returns with no risk, which is kind of like wanting to lose weight by sitting on the couch watching a 24 marathon while eating Krispy Kreme donuts and drinking Pepsi Throwback.

On the other hand, I sometimes talk to people who have no idea what they’re invested in because they turned over control of their portfolio to an advisor, and start questioning when they end up with huge capital gains to pay tax on, but not much growth–if any–in their portfolios. On examination, their advisors have filled their taxable portfolios with actively managed mutual funds that spun off capital gains with significant tax implications if not in sheltered accounts–which they weren’t.

And if I had a third hand, I could use it to hold the discussions I’ve had with folks who bought some fund or stock that they knew nothing about, but was recommended by a friend, financial advisor, or article they read.

Here are some tried-and-trued ways to manage your risk:

Decide how much risk you can actually tolerate: one of the positives of the recent market downturn was that it gave investors a chance to see how they really tolerated risk. It’s one thing to say you’re okay with seeing your assets cut in half, but it’s another to actually experience it. If you really can’t tolerate risk at all, consider getting out of the stock market altogether and put your money in high quality government bonds or FDIC or equivalent backed certificates of deposit–but understand that you’re guaranteeing that your rate of return will be rather low.

Diversify, diversify, diversify: Notice that when I’ve been discussing my portfolio as of late, I’ve been discussing not just mutual funds, but a few index funds–funds that are basically the entire stock market or the entire bond market. It’s owning a little of everything rather than a lot of one thing. While the recent stock market downturn shows that it is indeed possible that the entire market will sink at the same time, it’s a lot less likely than if you owned just one stock or one sector of the market. Conversely, if you own individual stocks, limit how much you put in that stock to at most four or five percent of your total portfolio. That may be difficult if your 401(k) match is in company stock, but going heavily into a single stock is a big risk–just think how you’d have done if your entire portfolio was in Enron or Worldcom a few years back, or Fannie Mae or Freddie Mac just recently.

Allocate your assets depending on your time horizon: At my age, hoping to retire from my current job in under 10 years but having a “normal” retirement age about 25 years from now, I’m more than happy to have 75% of my portfolio in the stock market, split 50% domestic and 25% international, with the remaining 25% in high quality bonds. If I was a bit younger, say in my 20s (well, okay, a lot younger), I’d be comfortable with having 90% of my money in stocks. On the other hand, if I was in my mid 50s, I’d be closer to 65% in stocks, and in retirement, I’d be more likely to be at 50%. If I was in my 80s, maybe just 35% in stocks.

Invest regularly: As I have stated before, statistically, dollar cost averaging doesn’t really work the way people think it does. However, what does work is putting money away regularly. Don’t stop investing; have a plan that takes everything above into account and stick to it. I know people who stopped investing late last year when the market started falling–now that we’ve had a couple of months of gains, those people have clearly lost out on some recouping of their dollars.

If you’re going to invest and do well, risk is part of the deal. There are many things that you can do to try to manage your risk and it’s important to have an understanding of how much risk you’re willing to take. Consider some of these tried and trued methods of dealing with investment risk over time.

If you recall, March 2009 was the first month in a long time with significant gains. As I’ve been discussing on the blog recently, those gains continued through April.

The Vanguard Total Stock Market Index (VTSMX) ended the month with another gain, this time of 8.80%. The T. Rowe Price International Discovery Fund (PRIDX) did even better, with an increase of value of 12.09%. And finally, the bond portion of the portfolio did fine as well: the Vanguard Total Bond Market Index (VBMFX) was down a cent, or .09%; the Vanguard GNMA Fund (VFIIX) was also down a cent, again, a microscopic .09%, but both continuing to pay their fine dividend yields of 4.65% and 4.71% respectively.

This marks our second straight month of significant gains in the portfolio! Again, let’s not get too high when these happen, and keep perspective on the fact that the S&P 500 is still down for the year, but things look much, much better right now than they did in February.

We’ll continue checking in with our portfolio as time goes on, but the last two months have been outstanding!