Setting Up My Retirement Investments with TIAA-CREF

This is a long post mostly so I can look back and remember what I did, but I’m posting it publicly in case anyone is in a similar position and could benefit from my research.

About a year ago I became eligible for my employer’s retirement plan, and at the time I was completely overwhelmed by this whole new world of mutual fund investments. Not only was I given a large selection of funds to choose from, but I was also given the choice of providers: Fidelity and TIAA-CREF. I did a little research, but couldn’t really decide what to do, so I just selected the defaults, Fidelity with the 2050 target fund, and let it sit.

Then, over the Thanksgiving weekend, I started reading the long-term investment thread at Something Awful where it quickly became apparent that (1.) choosing assets to invest in doesn’t have to be that hard, (2.) expense ratios (what a fund costs) matter a lot, and (3.) high-cost actively managed funds in general don’t perform better than their lower-cost index-based equivalents.

So I took another look at what was available to me in Fidelity, and I didn’t like what I saw. Two stock index funds, each tracking the S&P 500; one REIT index fund, and one bond index fund. The rest of the funds available were actively managed with expenses around 0.8% or more. Even the few Vanguard funds available to me through Fidelity seemed obscure and expensive.

Then I remembered about TIAA-CREF. I pulled up a list of their offerings, and it made me a little more optimistic. Not only are their options cheaper overall, but they also have index funds available for more market segments. Really the worst thing that could be said after an initial look is that they could have more international representation, but it would turn out that, for me, it doesn’t really matter.

I started reading TIAA-CREF’s literature and taking their asset allocation (AA) quizzes, you know the ones. Well, considering I’m only 25 and I have a good 40 years until retirement, I would consider myself more willing to take on risk than someone a little older. Their quiz would have me put 86% into equities, 9% in real estate, and 5% in bonds. Why 9% real estate? Why not ten, or eight? And can 5% of your portfolio really affect anything?

At this point, I should note that TIAA’s Real Estate Account (TREA) is a unique investment vehicle among providers in that it invests directly in commercial real estate, rather than in companies that manage real estate as the more risky REIT funds do. There is really nothing else like it, and that made it hard to reconcile with other popular AA tips I found on the internet, such as having a simple three-fund portfolio. I wanted to know whether I should include real estate, if I should follow TIAA-CREF’s advice for AA, why they chose the numbers they did, and also why the Bogleheads advocate slightly more conservatives allocations. I may be young, but I don’t want to turn the risk up to 11 just because I can. I want managed risk that I can understand.

So I picked up a copy of The Intelligent Asset Allocator by William Bernstein, hoping it would shed some light on my questions. To be honest, I was hoping it would have The Answer in it, that it would point me to The Optimal Asset Allocation. Thankfully, it did a whole lot better than that. It stated in no uncertain terms that there is no such thing as an optimal asset allocation (except in retrospect), and anyone claiming to have one is conning you. The book started off by providing useful metrics for measuring the performance (in terms of annual return) and risk (in terms of standard deviation) of different asset classes. It was an easy, quick read that gave me a few techniques for understanding the behavior of different asset classes, and how they’ve historically interacted with each other in portfolios. Best of all, it gave me the confidence to tackle the same sort of research on my own.

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