re: Questoin About Financial Advisor - Question for Janky on pg 3

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if a person is that close to retirement they should not be that exposed to the equity market. The idea with target funds is supposed to be that as you get closer to retirement they dial down the risk; and while i agree that 20-25% down compared to the S&P at 37% is great. The point is that a 2010 retirement fund should have not nearly that much equity exposure.

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Meh, I tend to disagree, but first let's get some of this stuff out of the way.

First, target retirement funds are thoroughly abused IMO. If you are retiring in 2 years, it would be exceptionally irresponsible for me to blindly recommend that you invest your funds in a 2015 target retirement fund. It would be much more relevant if you told me your age and many other factors.

Second, target retirement funds are light years better than most other funds available in a 401k, especially for the novice investor. I think we can agree that the vast majority of 401k participants are novices at best. So, while I don't believe in pouring in your money and expecting them to do the work, it is better than blindly putting your money into a default mid cap fund.

Ok, now back to the discussion about what you should do 2-3 years away from retirement. It is 2007 and let's assume you are 55 years old and looking to retire in 2 years. You've got $600,000 in your 401k at the time and you're total 401k contributions are $10,000/year (personal and company match). At 57, the social security actuarial table gives you a life expectancy of 23.26 years for a male and 26.53 years for a female. Let's plan for 25 years then. You're looking for $40,000 of gross income in your first year of retirement, and you want to account for 3% annual inflation from there. It would be reasonable at that time to assume a 5% growth rate in the next two years, then a 5% discount rate for the first 5 years of retirement, 6% in the next 5 years, and 7% for the next 15. To summarize:

- 55 y/o, retiring at 57
- 25 year life expectancy
- $600,000 401k balance
- $10,000 per year contributions
- 5% growth rate until retirement
- $40,000 gross income at retirement
- 3% inflation
- 5% discount rate for first 5 years of retirement
- 6% discount rate for next 5 years
- 7% discount rate for final 15 years

With those numbers, you're going to be retiring with $683,025 in your 401k. The inflation-adjusted income you are seeking equates to a present value of $674,467.07. The last 15 years of your cash flows are worth 46.6% ($318,220.24) of your 401k balance at retirement. In fact, over 70% of your PV cash flows are 5+ years away. With a 7% discount rate in the last 15 years, it would make sense for those funds to be in equities. Alas, JSFIX, a JPMorgan 2015 target retirement fund, has a 52.4%/44.4%/3.2% fixed/equity/cash mix as of 3/31/13. I use JSFIX because it gives a nice perspective of what a target retirement fund would/should look like 2 years before retirement.

Look, if you are in a self directed IRA, just go with a 55/45 split between AGG and VTI and adjust your split as you go - more AGG and less VTI. Howerver, most people are NOT in an IRA until they retire. If you are managing your 401k, I would highly suggest doing some sort of present value calculation based on how much income you need. In most cases, you will find that the risk with most target retirement funds is very much in line with what you need in retirement.

Lastly, I just want to stress the importance of researching the holdings of any fund, especially a target retirement fund. If you're 68 years old and retiring in 2 years, a 2015 fund is usually not for you.

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If you are set to retire in 2 years do you want your portfolio to be exposed to lose 25% of it's value in one year. Hell no and this is exactly what it did.

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Ahh, hindsight. Of course no one wants to lose 25% in one year.

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Just about anyone can call himself a financial advisor The only retirement most financial advisors care about is their own. Do yourself a favor and avoid anyone working on a comission.




This is just an ignorant statement. I've always focused on my clients needs before my own.

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Actually, I would contend that if an FA is truly worried about the sustainability and profitability of his career, putting your clients first would be the most effective way to reach said goal.

That statement can be said of most professionals. This idea that an FA is out to get you is asinine

Bump

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No. That is an actively managed fund. I have no idea why someone would buy that fund.

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Are you talking about the one he recommended, Fidelity Focused Stock Fund?

When you say active, what makes it more active than the others? I know, I'm learning but break it down for me.

Gotcha. But you would recommend FSTMX or VSTMX?

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But you would recommend FSTMX or VSTMX?

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No.

I hate funds that take huge losses. I would rather hit singles than swing for the fences and strike out.

Here are my thoughts. That fund is a large cap blend fund. It's 1,3,5,10 year returns are as follows:

13.88%
13.76%
5.5%
9.01%

It's beta for the 3,5,10 years are as follows:

1.04
1.04
1.04

In 2008 it was down 37.04%

Now, I could also own YACKX which is also a large cap blend fund and it's returns are as follows:

14.88%
13.26%
12.76%
12.08%

Beta:

.76
.94
.93

In 2008 it was down 26.05%

So, it has better returns with less risk. That seems like a better place to be in my opinion. You can really see in the 5 year returns just what avoiding the big loss can do for you.

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are the 2 I asked you about and the one you just mentioned all falling under the same category of index mutual funds?

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None of them are index funds.

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At its core, what is the main difference between yours and the 2 I posted? They all hold stocks, right?

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They are the same in the sense that they both own stocks. The difference is the management and the stocks they own and when they own them.

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Also, is this something I can get into and let it ride for a number of years?

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Yes. It is a good core fund that I have owned for a long time.

You can also look at MYIFX, which is another good one.

VTSMX and YACKX are large cap blend meaning they own both large cap growth stocks and large cap value stocks

MYIFX is Large cap growth owning only large cap growth stocks.

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So what the hell is an index fund

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It is a fund where it's sole purpose is to mirror the returns of a given index. There is no manager that buys and sells stocks inside the fund to try and achieve returns for the most part. For example, an S&P 500 fund will mirror the S&P 500 index. So in 2008 both were down right at 37%. These funds are cheaper to own because they don't have to pay a manager. Lots of people like this approach becasue they cannot fathom that a manager can beat the index consistently.

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Were the guys on pg 1 wrong?

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Not sure what you are referring to.