Finally! I finished rolling over my 401(k) to ETrade last week. It was a bit complicated because I had to fill out some paper work for the employer contribution portion of the 401(k). It’s done now and all the funds are in the IRA and Roth IRA at ETrade. I was undecided between ETrade and Vanguard, but in the end I went with ETrade and I’ll rollover to Vanguard in about a year or so. I choose ETrade because they offered me a $1,000 rollover bonus. This is currently higher than the $600 you can get from signing up through their website , so call ETrade if you are planning to do the same. This will also give me a chance to write about the experience of rolling over to Vanguard in early 2014.
Rolling over my 401(k) feels great because it gave me a clean slate. With Intel’s 401(k), I didn’t have full control over the funds. The employer contribution portion is restricted to investing in a private hedge fund. I had control only over the investment that I contributed. The portion I controlled was up about 10% this year and I think Intel’s private hedge fund was up around 5%. Now that the IRA is at ETrade, I can do anything I want. Yes, it’s a bit dangerous, but I also have a new (more conservative) investment strategy to try.
As you recall, I had a complementary financial planning session with Personal Capital and I learned quite a few things. They recommended the sector weighted investing strategy for my stock investment. I did some research and found that the equal sector weighting strategy is less volatile than investing in the SP500 index. This is because some stable sectors such as material and utilities are grossly under-represented in the SP500. The SP500 is also over weighted toward technology and financial services which have been the most volatile sectors over the past 10 years.
Market Cap Diversification
My previous strategy was to diversify through market capitalization. I used the classic Morningstar Style box as a guide and started with VFINX (Vanguard SP500 fund.) Then I back filled with FLPSX (mid cap), PENNX (small cap), DODFX (foreign developed), and VWO (emerging markets.) This gave me diversification through mid cap, small cap, and international equities.
Here is my old investment target.
- Large cap: 35%
- Mid Cap: 5%
- Small Cap: 10%
- Foreign Developed: 15%
- Emerging Market: 15%
- Bond: 10%
- Cash and others: 10%
This wasn’t bad, but I would like to reduce volatilities now that I’m not adding to my retirement portfolio anymore. At some point I would like to start contributing again, but right now it doesn’t make sense with the level of money I’m making.
Updated Investment Strategy
Michelle, the financial planner at Personal Capital, went over our total portfolio (free) and came up with a personalized plan for us.
This is similar to my original allocation. The biggest difference is the reduced emerging market exposure (see next picture.) They suggested alternative investments instead and I think this is a good idea and should further reduce volatility in our overall portfolio.
The biggest piece of the puzzle here is the domestic equities. It is a major portion of the pie and this is where the equal sector weighting strategy comes in. I’m going to use Vanguard sector specific ETFs for this purpose. This is where having an IRA at Vanguard would be advantageous. If I’m with Vanguard, I wouldn’t have to pay the transaction fee when I rebalance. However, ETrade gave me 90 days of free trades so I’ll get everything set up and mostly leave it alone until I transfer to Vanguard in 2014. Anyway, the majority of the portfolio will be in the sector specific ETFs. I’ll also put a portion in VB and VWO to get small cap and foreign market exposure. Fixed income looks expensive to me right now so I’m going to put that allocation into VPU (utilities) for now until I feel it’s a good time to move it over.
I plugged in my target holdings into Morningstar XRay and here is the result.
You can see that the different sectors are much more equally weighted than if I just invested in VFINX (SP500.) I’ll do an update every quarter to see how this portfolio compares to VFINX and RSP. RSP is an index fund with equal weighting strategy, but the expense ratio is twice that of the Vanguard ETFs – 0.4%. If you are interested in the Holdings Detail, you can click here to see it. We don’t have any Foreign Developed holdings in this portfolio. I’ll back fill them in Mrs. RB40’s IRA.
Fees & Expenses
I’ll pay 0.19% mutual fund expense ratio to Vanguard for this portfolio. This will cost about $700, which is much better than the $1754.91 that I was paying previously (My Overdue Portfolio Checkup.) That’s $1,000 in my pocket per year instead of Fidelity’s and Royce’s. I’ll probably have to pay the transaction fee to convert the portfolio to cash when I rollover to Vanguard in 2014. That will probably cost around $100.
Whew, that was a long post. I hope it was useful and/or entertaining for some of you. (Mrs. RB40, our chief editor, fell asleep a few times before getting here.) My current target is less volatility while keeping the long term gain by staying invested in the stock market. We’ll see how this strategy pans out in the next few years. Please share any advice or criticism; I would love to hear them.
Disclosure: I am not a financial advisor and I don’t even play one on TV. I’m just a regular Joe investor who consistently added to our stock market investments over the years. You should consult a professional before making a big financial move like this.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.