# Why My Retirement Savings Accounts are Currently 100% in the Stock Market

In his recent post "Stocks for the Medium Run,” Brad DeLong gives a good argument for being in the stock market based on likely future returns. The graph is explained there.

My own portfolio allocation in terms of paper assets hasn’t changed much for a while. Leaving aside checking and saving accounts, my University of Michigan Retirement Saving Account–92% of all my retirement savings–is entirely in Fidelity’s Spartan International Fund. Despite how long it has been since I put a summertime grant through the National Bureau of Economic Research (NBER)–and so how few months’ worth of pension payments it represents–my NBER Retirement Saving Account represents 8% of my retirement savings. This is because Vanguard’s Emerging Market Stock Index Fund has done well over the last two decades or so, and returns build on themselves through compounding.

International Diversification. My reasoning for having most of my retirement savings in an international index fund is primarily diversification. I figure that my salary will go up more if the U.S. economy does well than if the U.S. economy does badly. So my job is like a U.S. stock fund. Therefore, investing in other major countries (mostly Europe and Japan in the Spartan International Fund) is a way to avoid putting all of my eggs in one basket.

Why have 100% of my paper assets in stocks? I am not yet 52 years old. The fact that I am tenured and have quite a bit of pay coming between now and when I retire about 20 years from now also means that only a fraction of my overall resources are in stocks even though almost 100% of my paper assets are in stock. So I don’t feel that what I am doing is all that risky. And even a conservative read of past history suggests that stocks are likely (though not certain) to earn several percentage points more than bonds annually over the next few decades.

Economists call the asset value of future pay “human wealth.” One of the most overlooked principles of asset allocation and portfolio choice is that one needs to think about this human wealth in choosing how much stock to hold. Thinking about one's human wealth matters in two ways.

1. The size of the portfolio including human wealth is larger, so that any given size of investment is a smaller percentage of the total–often much smaller.
2. The risks in one's human wealth have to be considered, as I did in trying to balance out my U.S. job with European and Japanese stocks.

Annual Fees. The one other big consideration in my portfolio choices is fees. In my “Monetary and Financial Theory” class, I do calculations showing that for long-term investors, fees of 1% per year can easily reduce the amount of retirement spending one can afford by 10% to 20%. An annual fee of 1% per year is close to being the average level of fees, but it is horrifically high for what most investors are getting, despite mutual fund company claims.

Vanguard’s fees are generally low for each asset class. Fidelity has a mix of high-fee and low-fee funds. So for them, like most mutual fund companies, one needs to drill down into the fund’s website to look up the fees. (After clicking on SPTN INTL INDEX INS, scrolling down gets to the fees in the third window’s worth of text.) Even then, what they say is not that easy to understand. I hope the following means I am paying 7/100 of 1% of the value of what I have in Fidelity’s Spartan International Fund. Or do I need to add the 12/100 of 1% “management fee” for total annual fees of 19/100% per year?

1.00%

Short-term Fee Period

90 Days

Management Fee

0.12%

Expenses & Fees

Expense Ratio

as of 05/04/2012

0.095%

($0.950 per$1000)

Expense Ratio after Reductions

as of 02/29/20120.07%

($0.70 per$1000)

Expense Cap

as of 09/08/2011

0.07%

($0.70 per$1000)

Expense Cap is a limit that Fidelity has placed on the level of the expenses borne by the fund until 04/30/2013 and indicates the maximum level of expenses (with certain exceptions) that the fund would be paying until that time. After the expiration date, the Expense Cap may be terminated or revised, which may lower the fund’s yield and return.

You should compare this .07% per year (or .19% per year if I need to add the “management fee”) with what you are paying in fees. Vanguard is the only company I know of with a consistent low-fee policy. Fidelity seems to have at least some low-fee funds like mine sprinkled in with its high-fee funds. Many other mutual fund companies are much, much worse than Fidelity with its mix of high- and low-fee funds. TIAA-CREF, an important fund for academics, used to have low fees, but has increased them in more recent years.

Implications of the Financial Crisis. The combined value of my retirement savings accounts has gone through some large fluctuations in recent years. But I didn’t make any reallocations and kept all of the new retirement saving account contributions from my paycheck going 100% into Fidelity’s Spartan International Fund, and the value of my retirement savings accounts has mostly bounced back to where it was before the fall of Lehman (September 15, 2008).

I take the view that the Great Recession, as bad as it is, has likely left the long-run future of the economy relatively unchanged. (See “Things are Getting Better: 3 Videos” for perspective, and pay special attention to what Alex Tabarrok says in his TED talk flagged there on the effect of the Great Depression on long-run economic growth.) Given that view, I have often consoled myself with the idea that, since it is a long time before I plan to retire, that for the most part, I own more or less the same stream of future dividends as before the  Financial Crisis of 2008 and the Great Recession. The market price of that stream of future dividends has gone down, but that fall in the market price is only about as important as having the market price of one’s house go down when one plans to live in it for the rest of one’s life. From that perspective, the fall in the market price of my stream of future dividends matters, but not in a big way. (Older people for whom more of the dividend stream will come after their death have to worry more about a long-lasting decline in the market price, since they will want to sell the tail end of the dividend stream to someone younger.)

Of course, if only I had had a functioning crystal ball, I could have done much better. If I think of valuing assets by how much retirement spending they can support, my stocks haven’t gone down that much in the retirement spending I think they can support, but I missed the amazing bull market in Treasury bills and Treasury bonds. If I had had that crystal ball in the past few years, but it refused to function to predict anything beyond today’s date, I would have been out of the stock market in 2008, but I would still be in the stock market now.

If you think I am making a mistake–or could to better–I am glad to hear investment advice from anyone in the comments section.