Am I saving too little for asset allocation?

[Mark90]

I have done some research on the importance of asset allocation but I'm wondering if that is only something to worry about when I have a substantial amount saved.
I'm 29 years old. I have so far saved $17,000 (I know it's small). About $11,000 is in a total stock market index fund. The other $6,000 is in a bond fund. I have read an international fund may be smart to include.

I will likely get a nice tax refund, plus recently sold my car and bought one slightly cheaper. The total of those two will likely be close to $10,000. Where do you suggest I allocate? Or do I just place it all in my US Market Index Fund and wait until I have a larger fund until I allocate?

[disneysteve]

Welcome. First, stop putting yourself down. The fact that you already have $17,000 saved is great. That puts you far ahead of many of your peers.

Personally, I think having 35% of your money in bonds at age 29 is way too conservative.

I would agree that diversifying into international is important. You'll see us talk about a 3-fund portfolio. That would be total US stock, total international stock, and total bond market. So you've got 2 of the 3 pieces and you certainly have enough money to do all 3, even with your current 17K and certainly once you add another 10K to that.

A more appropriate allocation might be something like 70% US stock, 20% international, 10% bond (or 25% international and 5% bond).

All of this assumes, of course, that the money we are talking about is above and beyond your 6-month cash emergency fund and that you are either debt-free or have a solid plan to attack any debt you have remaining.

[Mark90]

Thank you for your help Steve. Is it best for me to sell my bond fund or just keep investing year after year in stocks until I hit that percentage. I use vanguard, is there a "buy/sell fee" if I move money from a bond fund to a stock index fund, or do they only take the fee for being in the fund, does anyone know?

Are there any international funds that you like?

I still have student loan debt at 3.9% interest. I'm paying a little extra each month but at that low rate I thought investing is also smart. I have about $30,000 left, should I be paying that off before I invest? My car is paid off and I rent. I do have emergency savings though don't know exactly how many months I could live off it. I know I can pay my rent and utilities for at least 6 months though I'd likely be living off peanut butter and jelly. If I lost my job though I'm sure I wouldn't be wasting my money on more expensive food anyway. Do these answers help you help me?

[BuckyBadger]

To answer a few of your questions:

I would try to get that $10,000 into retirement accounts. $5,500 should be able to go into a Roth IRA (in less you are over the income limits - in which case let us know and we can give you a work around). Remember that there's still time to max our your 2013 contribution if you haven't already.

Do you have a 401k or 403b at work? You can get some of that money in there by over-contributing from your paycheck and using that $10,000 as money to live on.

As far as selling that bond fund I wouldn't worry about it. Your new contributions will swamp your current allocation, so you can fix it with money going forward. I'm a fan of approximately age in bonds, or a little bit less. I personally keep 30% on bonds at the age of 33. My plan is to be 35% in bonds by the time I'm 40. Age-10 is another popular rule of thumb for bonds. So in your case I wouldn't have more than 30% bonds. There have been studies by people much smarter than me showing that it is optimal to never have less than 25% bonds in a portfolio, but 20% bonds isn't going to kill you.

As far as funds, the smartest and cheapest way to invest is to use index funds. You only need three funds and you can have a perfectly balanced portfolio. Those funds are Total US Stock, Total International Stock, and Total US Bond. Use those three and you won't need anything else for the rest of your life. And you can get them all at Vanguard. If you have other options through a work plan, use the best of the options in there (which may be limited to something less than ideal) and then fix the allocation in your IRA. You want your asset allocation to be over all your retirement funds, not *within* each retirement fund.

As far as your debt, it doesn't have to be all or nothing. Invest half, pay off debt with half, or whatever feels good to you. We keep a mortgage and invest heavily. Our rate is lower than yours and we do pay about $200 extra a month on the mortgage, though, so you can do both at once.

[jIM_Ohio]

I have done some research on the importance of asset allocation but I'm wondering if that is only something to worry about when I have a substantial amount saved.
I'm 29 years old. I have so far saved $17,000 (I know it's small). About $11,000 is in a total stock market index fund. The other $6,000 is in a bond fund. I have read an international fund may be smart to include.

I will likely get a nice tax refund, plus recently sold my car and bought one slightly cheaper. The total of those two will likely be close to $10,000. Where do you suggest I allocate? Or do I just place it all in my US Market Index Fund and wait until I have a larger fund until I allocate?

I would focus less on portfolio and more on your personal habits. Are you saving regularly? What percentage of your gross income are you saving? What is the annual gain as a percent of your contribution (for example did you earn $1700 on your $17,000 portfolio last year- 10%)

When your contribution is 1% of your portfolio, allocation will matter much much more (it still matters now, but the fact you are 35% bonds is less important, I would focus on new money coming in- if you contribute another $10,000 that bond percentage just got cut in half).

I am 40 years old and have 40% in bonds while saving 20% of my gross pay. The 20% savings rate is much more important than the 40% bonds.

[feh]

Ditto what everybody else said above.

No need to sell anything. Determine what AA you are comfortable with and use new contributions to get there.

[BuckyBadger]

I am 40 years old and have 40% in bonds while saving 20% of my gross pay. The 20% savings rate is much more important than the 40% bonds.

This bears repeating.

Unless you are doing something WILDLY inappropriate with your investing (stock picking, so insane asset allocation, or investing in actively managed funds with high expense ratios) the number one thing that will help you succeed is putting away as much money as you can. Pick a percentage. Raise it 1% every six months until you feel the pinch. If you're at a nice percentage - say, >15% - keep it there for a while. If you're feeling pinched at 5%, you need to make adjustments to be able to put more away. If you can get your savings rate up to 30% while still enjoying life, that's great and will serve you well in the future.

Don't forget about short term, non-retirement savings. The only safe place for this (money needed is less than 5-7 years or so) is a savings account - not invested. Think about saving a little each month for your next car replacement, to make sure you have an emergency fund, and for your next big goal. A house down payment? A nice vacation? That should be part of your short term savings goals, as well.

[Mark90]

To answer a few of your questions:

I would try to get that $10,000 into retirement accounts. $5,500 should be able to go into a Roth IRA (in less you are over the income limits - in which case let us know and we can give you a work around). Remember that there's still time to max our your 2013 contribution if you haven't already.

Do you have a 401k or 403b at work? You can get some of that money in there by over-contributing from your paycheck and using that $10,000 as money to live on.

I maxed my Roth last year. I plan to do the same this year.
My company doesn't offer 401k plan, is there a "work around" you can offer?

[BuckyBadger]

I maxed my Roth last year. I plan to do the same this year.
My company doesn't offer 401k plan, is there a "work around" you can offer?

Sadly, no. If you are maxing your Roth and have no 401k/403b option through work, the rest of your investing must be through taxable accounts. My only suggestion then is to make sure you keep bonds out of taxable accounts.

Oh, I thought of something - do you get health care through your employer? Is there a high deductible plan available with an associated HSA (Health Savings account - different from an FSA)? You can max out the HSA, pay for medical expenses out of pocket, and use the HSA as a "medical IRA."

You're doing great, though! It's unfortunate that you don'r have more retirement account options available, but you're well on your way to a great future! Saving is the important part. Some day you'll be at a job where you can stuff away more money in tax advantaged accounts.

[Mark90]

for your next big goal. A house down payment?.

A home purchase is likely in my near future (1-3 years). Should I be focusing more on the house than retirement? Still saving for both but maybe a large chunk of the $10k to a savings account for a house fund? Or what so you suggest?

[BuckyBadger]

A home purchase is likely in my near future (1-3 years). Should I be focusing more on the house than retirement? Still saving for both but maybe a large chunk of the $10k to a savings account for a house fund? Or what so you suggest?

How much will you need to spend to get a house that will work for you? (Not "How much will you get approved for" - rather, how much should you actually spend.) Think about monthly bills and how much of a payment you can afford. Think about having a big enough emergency fund for house-size issues and repairs.

Now, what's 20% of that purchase price, plus a couple grand for closing costs?

How much do you make? It's possible that you can do all three things at once - save for house, save for retirement, and pay off student loans - but you're going to have to prioritize. Lets say you keep putting away 10% for retirement - which in my opinion is kind of the minimum you should consider. What's left over? Can you set a 2-3 year savings plan to meet the down payment? Will you still have a smidge left over to prepay on the loans? Or hold off on the loan prepayment until you save for the house, then hit the loans with what you were previously putting away for the house. There's all sorts of ways to approach it - you're luck to be thinking about them ahead of time.

[snafu]

Mark, do you get an employer match? I too think your Bond percentage is high for age but the sum is modest and can be adjusted with contribution 2014, possibly with sum from 2013 if you have contribution space. I too like DS's suggested allocation but would include 2% for an Emerging Mkt. MF when there is enough to meet the minimum purchase requirement.

The ROTH programs if your income permits are special as you can access profit [not contribution] should it be needed. If you chose to buy a home in 3 yrs., you need a plan to save the 20% down payment. BuckyBadger offered a terrific starting point for discussion... what do you think?