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Looking Up a Fund’s Holdings

A reader writes in, asking:

“Is it possible to find out exactly what is in a mutual fund? I’m looking for something more complete than the “largest holdings” lists which I can see on Vanguard’s website.”

Mutual funds are required by the SEC to disclose a complete list of their holdings on a quarterly basis. SEC Form N-Q is used to disclose holdings as of the end of the first and third quarters of the fiscal year, and Form N-CSR is used for the end of the second and fourth quarters.

You can look up either of these forms in the SEC EDGAR database. For example, here’s the Form N-CSR for Vanguard’s Total Stock Market Index Fund (as well as several other Vanguard funds) as of December 31, 2012.

Because these disclosures are only done on a quarterly basis — and because the funds have a 60-day window during which they can make the filing — the information provided in these disclosures is not especially timely. As a result, these disclosures will be of little use for certain purposes (e.g., trying to mimic the strategy of an actively managed fund). But they would be useful, for instance, to somebody who is trying to figure out whether a given index fund holds shares a particular company (or group of companies) to which they have ethical or religious objections.

Finding a Fund’s Form N-CSR or Form N-Q

While it only takes a few seconds to look up a fund’s N-CSR or N-Q once you know where you’re going, getting there for the first time isn’t exactly intuitive — at least it wasn’t for me. So let’s quickly walk through it step by step.

  1. Go to the SEC EDGAR homepage.
  2. Click the link for “search for filings.”
  3. Click the link to search by ticker symbol or fund name, and on the next page enter the ticker of the fund in question in the “fast search” box and click “search.”
  4. On the next page, scroll until you find the most recent thing in the “filings” column labeled either “N-CSR” or “N-Q.” Click the “documents” button next to that listing.
  5. On the next page, find “N-CSR” or “N-Q” in the “type” column and click the red link in the corresponding row. (The link itself could be named anything.) Here’s a screenshot of what you’re looking for (click to enlarge):

ScreenShotscaled

Naturally, most funds — especially broadly diversified index funds — have a heck of a lot of holdings, so browsing the list in search of a specific stock or bond will take an exceedingly long time. A much faster approach is to use “control + F” to search the page for a specific word or phrase.

A Question for You: Getting Changes in Your 401(k)

After watching last week’s Frontline documentary dealing with 401(k) fees, several readers wrote in to ask what they can actually do about the situation. They know the investment options in their employer-sponsored plans stink, but they don’t know how to go about persuading their employers to make any changes — either adding lower-cost funds or switching plan administrators.

Unfortunately, I don’t have any good input here. I’ve never lobbied an employer of mine to get better fund choices in a 401(k), nor have I seen any research on the topic.

So that’s my question for you: Have you ever tried to get your employer to make changes to your 401(k), 403(b) etc.? If so, what did you try, and what were your results? I’m interested in hearing stories of both successful and unsuccessful efforts — both are useful pieces of information.

I’ll share the results (anonymously of course) on Wednesday.

Thank you!

SIPC: What It Covers and Coverage Limits

Monday’s post about mutual fund safety brought up a few reader questions regarding SIPC coverage — both general questions about what it covers and questions about how the limits apply when you have multiple accounts with one brokerage.

What Does the SIPC Do?

When a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) steps in to make sure that all the securities that the brokerage firm purportedly held are in fact present. If customer assets are missing (e.g., the brokerage firm reported that a customer owned 500 shares of XYZ, but the brokerage firm did not actually have the shares), the SIPC takes action to restore customer assets, up to a limit.

To be clear: SIPC does not protect investors against loss due to a decline in the value of their investments. Rather, SIPC protects investors against their securities being stolen by a broker or lost when a brokerage firm fails.

Also, as mentioned in Monday’s post, when it comes to mutual funds, SIPC coverage does not apply when you hold the shares directly at the fund company. It only applies if you hold shares of a mutual fund at an SIPC-member brokerage firm. For example:

  1. You buy 100 shares of Vanguard Total Stock Market Index Fund in a Vanguard mutual fund account. (SIPC coverage does not apply.)
  2. You buy 100 shares of Vanguard Total Stock Market Index Fund in a brokerage account at E*Trade. (SIPC coverage does apply — it assures you that you do actually have 100 shares of the fund.)

Please note, however, that SIPC coverage doesn’t make option #2 safer than option #1. It simply makes it as safe as option #1 by removing the risk of funny business on the part of E*Trade.

SIPC Coverage Limits

SIPC coverage, however, has a limit. It’s capped at $500,000 per customer, with an exception of cash holdings, for which the limit is $250,000.

But many investors with portfolios north of $500,000 still don’t have to worry, because, as stated in the SIPC Series 100 Rules, “Accounts held by a customer in different capacities, as specified by these rules, will be deemed to be accounts of ‘separate’ customers.” A quick phone call to SIPC confirmed that this means there would be $500,000 of coverage for each of the following:

  • Your taxable brokerage account,
  • Your traditional IRA,
  • Your Roth IRA,
  • Your spouse’s taxable brokerage account,
  • Your spouse’s traditional IRA,
  • Your spouse’s Roth IRA,
  • A taxable brokerage account that you and your spouse own jointly, and
  • An account set up for your trust.

In other words, in some cases, a family can have SIPC protection of a few million dollars without having to hold assets at a second brokerage firm.

Note, however, that having two different accounts of the same type wouldn’t increase the coverage limit. For example, if a given brokerage firm let you have two Roth IRAs with them, you would not have $500,000 of coverage for each. The $500,000 limit would be for the two accounts combined, because both accounts are owned in the same capacity.

Do I Provide Biased Information? (Yes.)

Last Friday I mentioned that every source, including this one, has biases and conflicts of interest. A few readers asked for clarification regarding my biases, so I thought it would be a good idea to go over them to help you better evaluate the information you receive here.

My Conflicts of Interest

First and most obviously, I have some conflicts of interest due to the fact that I participate in a handful of affiliate programs:

  • Amazon,
  • Legalzoom and MyCorporation.com,
  • Mint.com, and
  • eHealthInsurance.

If you’re not familiar with what affiliate programs are, I’d encourage you to read this article. In short, I receive a commission any time you follow a link from my site to one of those sites and buy their products or sign up for their services. This means I have a conflict of interest in that it’s more profitable for me to recommend these companies rather than their competitors.

Obviously Amazon is the most relevant one because I rarely link to or discuss the other companies. Fortunately, Amazon does actually tend to be the lowest-cost place to buy the books that I publish.

My Biases

More importantly, like any human, I have a whole list of natural biases.

The one that probably has the largest effect on this blog is known as confirmation bias. That is, once I’ve taken a position on a topic (either in an article, in one of my books, or with my own portfolio), I have a natural inclination to:

  1. Read articles and studies that confirm I’ve made good choices with the positions I’ve taken rather than sources that would indicate the opposite, and
  2. Be undesirably closed-minded about sources providing opposing viewpoints.

do make a point to expose myself to opposing viewpoints on a fairly regular basis. But the reason I have to make a point to do this is because my natural inclination is to do just the opposite.

This (unintentional) filtering of sources probably slants the information I provide here in favor of the things that I already believe in — things like:

In other words, this bias probably results in me overstating my case at various points in time. I’d love to give you an objective assessment of the degree to which this happens. But I can’t. I’m biased.

Asset Allocation is Not a Goal

More and more often these days, I see people trying to cram their entire financial lives into a stock/bond asset allocation.

For example, a recent retiree might count his Social Security as a bond (because it provides income) and his house as a stock (because its value bounces around a lot). And this is done for the purpose of adding everything up to check that his asset allocation matches the recommendation from a rule of thumb or online calculator.

But So What?

The above approach seems entirely backward to me. Asset allocation is not a goal. Asset allocation is a tool to help you meet your goals.

For example, our hypothetical retiree might know that he needs $45,000 of income per year. From that, he can subtract any non-investment income (e.g., Social Security, pension, part-time work) to determine how much income he needs from his portfolio. Then, he can select an asset allocation that he believes is most likely to satisfy the required level of income without taking on an unacceptable level of risk.

In other words, first look at your overall financial picture (necessary expenses, available sources of income) to determine what gaps will have to be filled by your investments. Then you can use asset allocation-related tools (online calculators, historical studies, rules of thumb, etc.) to design a portfolio that’s likely to fill in those gaps.

The purpose of asset allocation is to help you fit your portfolio into the rest of your financial life — not the other way around.

What to Do with a Windfall

A reader writes in to ask,

“Does it make sense to apply what I call the ‘retirement model’ to a large windfall — that is, spending a percentage of the windfall each year, while allowing the rest to grow? If so, what withdrawal rate do you recommend? The 4% rule, I gather, means that the money could likely run out after 30 years or so. Since I am 33 now, that means that it could run out just as I was hitting retirement. What withdrawal rate should I use to have the money last until I am 100?

And what about your readers? I’d be curious to see how other readers have dealt with this experience.”

Mike’s note: What follows is my answer to this question. If you’re comfortable sharing your own answer, please chime in via the comments section on this post.

You’re right that if you wanted the money to last for 60+ years, it would be wise to use a withdrawal rate lower than 4%.

To back up a step though, I doubt that’s the approach I’d apply at all. Rather than thinking about at what rate you can spend from this money, I’d simply incorporate the windfall into your existing plans. That is, now that you have this additional money, at what rate (if any) do you still need to be saving for retirement and other financial goals?

Matching Resources to Goals

To go about answering this question, I’d make a list of your financial goals in order of importance. For example:

  • Basic retirement living expenses,
  • A replacement for your aging car,
  • College for children,
  • “Fun” spending in retirement,
  • etc.

Then I’d make a list of resources available to meet those goals:

  • Your current and future work income,
  • Your existing savings (including the new windfall),
  • Social Security,
  • etc.

Then I’d play a matching game — allocating resources to satisfy your goals in order of importance. Once the highest priority goal is satisfied (using any combination of resources), you can start allocating resources to the next highest priority.

For example, if retirement is the #1 priority, are your existing savings (including the windfall) large enough that they would likely fund your retirement if you let them grow untouched between now and your planned retirement age? If so, then you no longer need to save for retirement every year, and you can begin allocating resources to other goals. (Of course, this decision should be revisited periodically based on how well the money is/isn’t growing over time.)

Tax-planning note: Even if you no longer have to save for retirement per se, it still likely makes sense to max out your retirement accounts every year. For example, contribute $16,500 to a 401(k) and $5,000 to a Roth IRA, while spending $21,500 out of the taxable windfall you received in order to effectively transfer as much of the windfall as possible to tax-advantaged accounts.

In short, my suggestion would be to make decisions from the broader perspective of how to meet as many of your goals as possible (in order of importance) using your total resources rather than trying to figure out what to do with just this one part of your resources.

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