Forum Mailbag: 529 Allocation, Schwab, Newborn Whole Life, And More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, Mr. Money Mustache, Rockstar Finance, and Reddit. This is a roundup of my favorite discussions happening around the internet.

1. Bogleheads: 529 Asset Allocation

Question: Pepperz is a new parent who received $650 as a gift from the grandparents to invest in the newborn’s 529. When allocating his investments for the new 529 contribution, he chose the “Aggressive” option, which was 100% stocks (70% Total Stock Market, 30% International Stock Market). Unfortunately, there is no investment option in his 529 that matches the allocation he uses for his retirement accounts (70% stocks, 30% bonds). He is wondering whether it is ok to use a different allocation in his 529 and retirement accounts.

WSP’s Take: I generally try to think about all my tax-advantaged accounts (HSA, 529, IRA, 401k) as one large tax-advantaged portfolio. You do not have to have the same allocation for each of your tax-advantaged accounts. For example, if you choose to have an asset allocation of 70% stocks and 30% bonds, you could have 100% stocks in one retirement account, and 40% stocks in a different retirement account. I invest my 529 just as aggressively as my retirement and taxable accounts.

I know some may feel that the 529 money should be invested more conservatively than retirement money. After all, the money from the 529 will be withdrawn far before the money from an IRA. However, I consider a 529 plan to be a convenient vehicle to store college tuition money that otherwise would be allocated in a taxable account. Thanks to the 529’s tax advantages, I choose to leave the money there instead of a taxable account. There is no need to be more conservative in a 529 compared to your taxable or retirement accounts.

2. Mr. Money Mustache: Time to Consider Schwab?

Question: Fifh noticed that Schwab recently lowered their expense ratios. They now advertise their rates to be lower than comparable funds to Fidelity and Vanguard. Fifh is wondering whether this news is affecting anyone’s investment strategies.

WSP’s Take: This is welcome news. Schwab is continuing the price war between the major index fund managers. It was only three months ago that Fidelity lowered its rates and took out front-page ads in the Wall Street Journal advertising how its index funds had lower expense ratios than those of Vanguard. I suspect it won’t be too long until Vanguard lowers its rates as well.

In terms of deciding between Fidelity, Vanguard, and Schwab, it is all about personal preference. You can’t go wrong with any of these three companies. It is like choosing between Coke and Pepsi. I bet the composition of the two soft drinks is nearly identical, but people have strong preferences for one over the other. (I’m a Coke guy).

3. White Coat Investor: Newborn Whole Life Insurance?!?!?!?

Question: Atxeng was pitched a $2 million dollar whole life insurance policy for his newborn child. It would cost $20,000/year for 10 years. When his child turns age 18, he could use the whole life insurance to pay for college (85k/year x 4 years). He wonders whether this is a good idea.

WSP’s Take: There were many excellent responses to his post, including from the White Coat Investor himself. I don’t really need to reiterate that this is a bad investment / insurance policy. You should not mix insurance and investing. There are very good investment opportunities (index funds). There are very good insurances (term life insurance, own-occupation disability insurance). There are no good insurance policies that also serve as investments. The most complicated and confusing investments or insurance policies are often the worst financial instruments.

4. Bogleheads: How To Move To A Three-Fund Portfolio

Question: 1030danielle has a hodgepodge of different mutual funds (some index funds, some active funds) spread out over multiple retirement accounts, including a 401(k), Roth IRA, and traditional IRA. He/she would like to switch to a three-fund portfolio, but does not know how to make the switch. He/she doesn’t know whether to switch the investments all at once, or to switch them slowly over a year. At this time, 1030danielle is leaning towards moving them slowly, because it will be beneficial to take advantage of “dollar cost averaging.”

WSP’s Take: First, congratulations to him or her for switching to a three-fund portfolio. I am sure s/he will find this to be simpler and cheaper to manage his investments in this way. In terms of how best to make the switch, I do not see any good reason why 1030danielle should switch the investments piecemeal. There are no tax consequences to switching investments in tax deferred accounts. Go ahead and sell all of the current mutual funds and purchase the three-fund portfolio. The concept of dollar cost averaging is typically used for investing new money, not rebalancing a portfolio. I am not a fan of dollar-cost averaging in general, but that is a subject for another post.

5. Reader Mailbag: S&P 500 + Extended Market vs. Total Stock Market

Question: I recently got the following question (lightly edited for clarity and anonymity) from a reader of the blog:

Dear WSP: Thank you for the posts on investing! I think your posts are very clear and concise, and your recommendations are really helpful! It is refreshing to read and I agree with many of your recommendations.

I have been fulfilling my desire to trade individual stocks in my ROTH IRA account as you suggested that I avoid trading in a taxable account. I have a question regarding my current taxable account at Vanguard. I have only two positions: Vanguard Extended Market ETF (VXF) and Vanguard S&P 500 ETF (VOO). They were picked for me years ago and I have not sold or bought more shares. What do you think about these ETFs compared to what you recommended – the Total Stock Market index fund? Thank you very much!

WSP’s Take: I would keep the portfolio as is. The S&P 500 ETF plus the Extended Market ETF gives you exposure to large-cap, mid-cap, and small-cap companies, just like the Total Stock Market index funds. The Extended Market ETF was designed precisely for your portfolio: to fill in the gap between and S&P 500 index and the Total Stock Market index. Therefore, I would leave your taxable account exactly as is. If there is new money you would like to put into the taxable account, you can purchase either the S&P 500 or the Total Stock Market index. Good luck and congrats on a great start to investing!

Wall Street Shares: 5 Articles I Enjoyed Reading This Week

1. White Coat Investor: When To Drop / Reduce Disability and Life Insurance? – you don’t necessarily need disability and life insurance forever. WCI discusses the decision to drop / reduce disability or life insurance when your financial situations warrants it.
2. Physician On Fire: Splurging On My First Love – this is what personal finance is all about. For his Valentine’s Day post, PoF talks about his past, current, and future travel plans. For him, travel is what he’s saving and sacrificing for.
3. Dads, Dollars, and Debts: Take A Step Back and Breathe – sometimes life and work get stressful. DDD reminds us of a simple way to refocus ourselves when things get tough.
4. Future Proof, MD: Treat Your Credit Score Like Your Board Score – FPMD cleverly compares credit scores to USMLE Step 1 scores.
5. Smart Money, MD: How To Burn Through a $1 Million Salary – just in case you weren’t sure how, SMMD gives you a real-life roadmap.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?