Budgeting Early Retirement Journey Investing Summer 2018

I Took A 3rd Look at My 401k and This is What Happened

So in the wee hours of the late night or early morning before a work day, I try to find just one more way I can accelerate My Early Retirement Journey. I know I can probably cut it down comfortably to 15 years from 30 years, but can I do just a little bit more?

The FIRE blogosphere (millennial rev, ROG, jlcollinsnh, etc..) all swear by Vanguard. They tout the benefits of the Vanguard Total Stock Index and Vanguard Total Bond Index and denounce cherry picking stocks as according to them no one can outpace the stock market. Fine, I’m a big fan of #easychoice / not re-inventing the wheel. So I felt confident enough to put my new found knowledge into practice. I was going to allocate using the above index funds in an 80/20 allocation.

Behold my surprise when my 401k did not have both of those options. It had the Vanguard Total Bond Index but not the total stock! Not wanting to lose momentum, I tried to make the 80/20 allocation work with different funds I did find. My mind was unsettled and I stared at The Prospectus for 2 to 3 hours struck with decision paralysis. After the sun went down, I gave up. And kept my Target Date Fund at 0.77% management fee. Defeated.

Then two nights ago, I re-read jcollinsnh‘s post on a simple path to wealth for his daughter. He spoke more about tracking the S&P 500. It was a phrase I had seen circling the blogosphere but one to which I had not given additional thought. My brain finally remembered it had seen that in The Prospectus. (Admittedly, some of my better ideas come after the fact…) So I looked back at the Vanguard Funds available in our 401k.

I clicked on the one that looked most similar to what I was looking for. It was called the Vanguard Institutional Index (VINIX). It’s description read: The investment seeks to track the performance of a benchmark index that measures the investment return of large capitalization stocks. The fund employs an indexing investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

Aha! S&P 500…that’s what I was looking for.
I turned to Google to find out the difference between the two (VFINX vs VTSMX).

MorningStar had this to say: For those who might be unfamiliar with the two index types mentioned, the S&P 500 tracks 500 of the largest U.S. stocks as measured by the value of their shares. …Total stock market funds, on the other hand, include both large-cap stocks and the many small- and mid-cap stocks left out of the S&P 500.  As we’ve said, a total stock market index fund encompasses a wider universe of stocks than does the S&P 500, but the difference might not be as great as you think. Stocks in the S&P 500 make up about 75% of the total U.S. equity market, so the overlap is considerable. That said, the roughly 25% of the market that is found only in the total stock market index fund does provide greater diversification because of the presence of smaller stocks. For investors with small-cap exposure elsewhere in their portfolios, the large- and mid-cap S&P 500 fund may suffice. But for a broader, one-stop-shopping fund, the total market index offers maximum diversification within the U.S. equity universe.

Eureka! I could make this work even though Vanguard 500 Fund is yet another fund, but it’s close enough to what the Institutional Fund is trying to do for my intents and purposes. I had decision paralysis no more. So this is what I decided to implement in My Early Retirement Journey 2018 Q2:

80% Stocks (3/4 with VINIX, expense ratio, 0.04%; 1/4 with VEXAX, small and mid-cap exposure, expense ratio 0.08%)

20% Bonds (VBTLX – Vanguard Total Bond Market Index Adm; expense ratio: 0.05%)

Current: Fidelity Freedom Fund 2045, expense ratio: 0.75%, managed allocation of 90/10 stock/bond

DISCLAIMER: One of the potential pitfalls with the ‘easy choice/don’t reinvent the wheel’ method is that one person’s idea often gets recycled over and over throughout the blogosphere. I’ve seen that many times in various listicles on myriad subjects outside of personal finance. And of course, there is always the never forgotten pillar that everything on the internet is TRUE. That being said, I do try to look at the background of the bloggers and other posts to see where they get their ideas. Many of them do point to other blogs so I at least have some semblance of point of origin.

Not one FIRE blogger that I follow is a financial analyst. In fact jcollinsnh has a B.A. in English. So I do consider all these things as I make these major financial, potentially life altering decisions. I do do some separate internet searches on things like indexing and Vanguard and its founder to get different perspectives. And I persist, open to the idea that it’s all one big hoax and we could all sink in the same boat but at least I’d have company.

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  1. That’s a huge reduction in your fees, well done! We use Vanguard LifeStrategy funds just because they’re easy and being in the UK it doesn’t make sense to follow JLCollinsh advice in it’s entirety. I could probably reduce the expense ratio a smidge more but it’s far too much like hard work.

    1. My Early Retirement Journey says:

      I know what you mean about the “hard work.” I tend to do things all in one go or they just kind of linger…big fan of the auto-draft set-up at the beginning of the year/ season.

  2. Thanks for writing this post! You got me to look at my 401k and sure enough, I had most of my funds in a Target Date Fund with high expense ratio that’s not even doing as well as the Index Fund! Going to re-allocate now 🙂

    1. My Early Retirement Journey says:

      That’s great news. I’m glad! Thanks for stopping by ye olde blog 🙂

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