Hurdle 1 of 3 - Suitability of Bonds in my 401k for Cash position

[jatwell]

Let me first say, I think I'm sold on this investing methodology.  Up until recently, I've been a passive indexer.  After a good bit of research, I bought into the idea and plunged in with some PRPFX to get my feet wet.

Recently (past couple of weeks), I've been extensively reading these forums in particular.  I've learned a lot, but I really have a few hurdles I need to overcome to be able to go "all-in" 

With my current portfolio (wife included) our current assest class allocation is:

Cash - 17.5%  (Mostly taxable savings accounts)
Bonds - 3.5% (FAGIX below in 401k currently)
PRPFX - 12.5% (some taxable, some Roth)
Stock - 66.5% (401Ks make up 60%, ~6% in Roth/Taxable)

My current taxable / tax-deffered / tax-free allocations are:

Wife 401k - 35%
My 401k(1) - 25%
My 401k(2) - 3%

Wife Roth - 5%
My Roth - 7%

Taxable - 25%

I had a lot more "cash" when I added it all up in a spreadsheet than I thought I did.  I figured I was pretty much all in on stocks as I considered my 401k as my retirement accounts and the rest was more emergency fund.  With the PP you can consider it all part of your portfolio.

What I can't get past is the percentage locked up in 401k's.  I can roll over my larger 401k (25%) to an IRA, so that will give me the flexibility to purchase LT Bonds in a tax advantaged account (this does give rise to my 2nd hurdle, but I'll leave that for another post).

My Wife's 401k is with her current employer and they do not offer a brokerage window.  The stock funds are actually excellent, with S&P500 Index (Spartan w/ 0.10) and a load of other Spartan indexs with low fees.  My current thinking would be to use her 401k for the stock and cash positions as these are the only two available assest classes.  I just need a little help in picking which Bond or Stable Value fund would be the most appropriate.

The Stable Value MIP seems like the best as a true representation of cash, but it has a 0.55 expense ratio and only 1.2% expected return.  As I was pretty much all-in on stock index funds, I am definitely fine with taking some risk and am leaning toward the FGOVX or VBTSX.  I already hold a position (3.3% overall) in FAGIX but I think that's a little too much like stock to be considered cash.

I just don't want to undermine the principles of the HB PP in the process.  What do you think would be ok to hold for the cash component?


Stable Value - No ticker, below was the best I could find
"MIP" FID Managed Income Portfolio (0.55)
http://www.surs.com/pdfs/SMP/funds/F-MaInPo.pdf
http://www.drivetimebenefits.com/media/ ... 004-10.pdf

Bonds
VBTSX Vanguard Total Bond Market Index Fund Signal Shares (0.11)
FAGIX Fidelity Capital & Income Fund (0.76)
PTTRX PIMCO Total Return Inst CL (0.47)
FGOVX Fidelity Government Income Fund (0.45)

[AdamA]

What do you think would be ok to hold for the cash component?

I see you have access to some Fidelity products.  Do you have access to FDLXX? 

[jatwell]

Nope, unfortunately the 5 listed above are it.

[AdamA]

Nope, unfortunately the 5 listed above are it.

I would not be comfortable using any of those for cash.

Why not do this:

Take the 17.5% you have in taxable savings account and buy gold coins or a gold ETF (I prefer the coins)

Use the 35% in your wife's 401K to buy stock.

Move the 25% in your big 401K into an IRA and use the fixed income window to buy 30 year treasuries or TLT.

Sell PRPFX and use the proceed to buy treasury bills, either from treasury direct or in a treasury only money market.  Do the same with your smaller roth IRAs. 

The numbers are exactly 25% x 4, but they're close enough.  You could hopefully add to your smaller positions over the course of a few months to even things out. 

Another option might be to use FGOVX, but hold it as 50% of your PP.  Buy stocks and gold 25%/25% with the rest.  I like the first option better though.

[KevinW]

My Wife's 401k is with her current employer and they do not offer a brokerage window.  The stock funds are actually excellent, with S&P500 Index (Spartan w/ 0.10) and a load of other Spartan indexs with low fees.

Just to be sure -- does your wife's 401(k) have access to Spartan Short Term Treasury (FSBIX) or Long Term (FLBAX)?

[jatwell]

Thanks for the replies so far.

Hmm, I thought there were more Spartan Funds, below are all the Stock options.  Together with the 5 Bond options above, that's all the 401k choices other than all the target-date funds.  I'm just using the Spartan Funds right now for 90% stock, 10% bond allocation. 

Spt S&P 500 45%
Spt Ext Mkt 35%
Spt Int 10%
Bond FAGIX 10%.

My wife started her new job last year, and I really liked the low fees of the Spartan funds so I rolled her previous 401k there.

The ONLY reason I did not roll her previous 401k to a TIRA is we make too much to be able to contribute to a Roth IRA each year.  Because we don't have any TIRA money, we are able to make after-tax TIRA contributions and immediately convert to Roth, effectively the same as a standard Roth contribution (some people call it a back-door Roth contribution).  I really seem to be hung up on not losing this option because I like the fact that you don't have to take minimum distributions from a Roth and the fact they can pass tax free on to your beneficiary.  If possible, I'd really like to have a 50/50 split between Roth & TIRA/401k funds. 

If I convert my old 401k, I'll lose this option as well.  That's my next hurdle I was going to post about.  Coming from an indexer mentality, I'm all about trying to minimize fees and take advantage of as many tax shelters as I can by moving as much $$ into tax-sheltered accounts.  I will lose out on moving $10k a year into a Roth doing this.  The only way to increase my Roth holdings would be to partially convert TIRA money and pay taxes on it.  I guess I could make an after tax TIRA contribution, but I don't really see a benefit in that...

Again, I'm coming to grips with all of this and it is really taking a lot of thinking/convincing myself.  I'm not trying to tinker with the makup of the HB PP, I'm basically trying to figure out in my current situation the best way to implement and take full advantage of all tax shelters.  To accomplish this, I need a good plan

I do see other options for tax sheltering such as I-Bonds in a taxable account and plan to incorporate those as well.  I think phys gold will be my primary asset in the taxable portion.

I wish there was more information out there on the Stable Value Fund.  It truly looks like a cash account as it bills itself as a MM replacement, I'd love to see some graphs of how it did around the 2008 crash.  I just don't understand it very well, seems to try to keep the share price always at $1.00... so how do you gain any interest (more shares granted??).  I seem to remember reading (I think I've read most of this whole board ) MediumTex used a stable value fund in his 401k for some of his cash position, I'm just not sure if it's the same thing.

I might be able to just rebalance her account to overall percentages of 25% stock, 10% stable value.  The downside to that a good chunk of new investments every year will go to our 401k's where my current 401k ONLY has stocks (there's nothing even like a MM) and hers only has stock and a "quasi" cash option that's not really great.

Heh, I feel like I'm rambling on and over-thinking this...

Large Cap
AF GROWTH OF AMER R5
Inception Date 05/15/2002  24.30 -0.34 3.62 N/A 6.28 05/31/2011
ALLNZ NFJ DIV VAL AD
Inception Date 05/08/2000  28.57 -3.30 1.40 5.77 7.40 05/31/2011
* SPTN 500 INDEX INV
Inception Date 02/17/1988  30.59 3.30 2.90 2.61 9.44 06/30/2011
Mid-Cap
COL MID CP VAL OP R4
Inception Date 02/14/2002  32.96 2.07 4.59 N/A 9.98 05/31/2011
RAINIER SM/MID CAP
Inception Date 05/10/1994  35.70 -1.76 3.40 7.24 11.61 05/31/2011
* SPTN EXT MKT IDX INV
Inception Date 11/05/1997  39.22 7.89 5.93 7.39 6.65 06/30/2011
Small Cap
ALLNZ NFJ SMCPVAL AD
Inception Date 11/01/1995  28.87 5.58 8.03 11.60 12.42 05/31/2011
HARTFORD SMCO HLS IA
Inception Date 08/09/1996  38.66 4.72 5.64 7.51 9.22 05/31/2011
International
AF EUROPAC GROWTH R5
Inception Date 05/15/2002  30.29 -0.27 5.77 N/A 9.72 05/31/2011
INVS DEVLP MKTS INST
Inception Date 10/25/2005  27.82 5.30 13.07 N/A 16.68 05/31/2011
* SPTN INTL INDEX INV
Inception Date 11/05/1997  32.14

[MediumTex]

A stable value fund in a 401(k) plan will give you the cash-like performance of t-bills.  There is more risk in stable value funds than t-bills, but the stability is the same (i.e., no interest rate risk).  The risk is of default, though this risk is IMHO acceptable if there is no other option available within the 401(k) plan.

[KevinW]

I'm confused about which funds are available in which 401ks.  But it's clear that you can't implement an orthodox 4x25 in the current structure since the only accounts that could hold gold and bonds (taxable and Roth) add up to less than 50% of the portfolio (37%).

As Adam1226 suggested you can roll 401k(1) into a traditional IRA holding bonds, and buy taxable gold, which gets you to a clean 4x25 which is also quite tax- and expense-efficient.  But that complicates your backdoor Roth conversion scheme.

You have a dilemma between implementing a pure PP and optimizing your tax deferral.  You'll have to make your own decision about how to prioritize these conflicting goals.  If it were me I'd prioritize purity.

Have you looked into asking any of the 401k providers to add a brokerage window or access to the Spartan treasury funds?

[AdamA]

The downside to that a good chunk of new investments every year will go to our 401k's where my current 401k ONLY has stocks (there's nothing even like a MM) and hers only has stock and a "quasi" cash option that's not really great.

I would consider contributing less to tax deferred accounts, if it's at the expense of maintaining a pure PP.

 

[jatwell]

Thanks for the replies.

I will follow up with seeing if I could possibly get add'l Spartan funds or a brokerage window in my wife's 401k, I'm not sure how much traction that would get.  It's a pretty large company, so at least to me that would seem like a big deal to get pushed through.  I'd be interested to know if anyone else has any experience doing this and success stories though

One other thing I'm investigating at this point is setting up a sole proprietorship since I'm currently doing a little contracting on the side (8-10k this year).  It looks like Fidelity offers a fee-free Solo 401k plan.  I'm not sure on all the rules, but if I max out my 401k at my current job, I couldn't contribute any salary deferral, but there is a provision where I can direct 25% "profit-sharing" to the solo 401k up to 49K total.  Going that way, another "if" I'm looking into is the ability to roll my large 401k to the Solo 401k so I would gain full control it and not actually have any TIRA money to allow my continued "work around" Roth contributions.

If this actually works, maybe I can setup my wife with a simple sole-proprietorship as well and have her sell some random stuff and do the same with her 401k

I may be missing something important there, but at first glance this looks feasible and I'm chasing that down now.

[AdamA]

Jatwell--

One thing to think about when you're looking into all of this is that the numbers don't have to be exactly 25% x4.  Just get as close as you can. 

Also, make sure you understand the difference between Treasury Bills and the other "cash" funds you were looking at.  Most of those funds were not cash funds, they were bond funds, and they were bond funds that held debt from a lot of non US Treasury entities. 

Don't be so concerned about using tax-deferred accounts that you settle for the wrong investment vehicles.  You'll break your PP.