Help me with my 401K?
 

My company matches up to 10% I want to put in 15% for a total of 25% of my Annual Income.

I have to decide how to split 100% of that between these:

SSgA Government Money Market Fund
SSgA Stable Value Fund
DWS Core Fixed Income Fund - Class A
The George Putnam Fund of Boston - Class M
Fidelity® Advisor Equity Income Fund - Class T
American Century Income & Growth Fund - Advisor Class
SSgA S&P® 500 Index Fund
SSgA Large Cap Core Equity Fund
Neuberger Berman Partners Fund - Advisor Class
Janus Adviser Forty Fund - Class S
T. Rowe Price Mid-Cap Value Fund - R Class
RS Value Fund
SSgA S&P® MidCap 400 Index Strategy Fund
DWS Mid Cap Growth Fund - Class A
SSgA MSCI EAFE Index Strategy Fund
Templeton Growth Fund, Inc. - Class R
Allianz NFJ Small-Cap Value Fund - Class A
SSgA Russell® 2000 Index Strategy Fund
DWS Small Cap Growth Fund - Class A
AllianceBernstein Global Technology Fund - Class A

I have no clue what to do, I have never had a 401K before.
I am in my early 30s and I have great job security.

I am single and I want to keep it that way, (not like that) I don't mind having a woman in my house but when I tell her to get the hell out I should not have to pay her alimony to leave.

So no kids and no wife to deal with on this one, just my money and how to make the most of it in the long run.

Humphrey

Re: Help me with my 401K?
 

At you age, all stock portfolio is fine.

www.morningstar.com is your friend.

Re: Help me with my 401K?
 

I do this for a living (allocate people's 401(k)s), so I'll give you my advice. I'll answer in 2 parts, the first to decide your stock/bond allocation, the second to choose the funds.

Take a look at these 6 portfolios, especially the losses, to see how aggressive you want to be (I apologize for the lack of columns that line up):

POTENTIAL ODDS OF WORST WORST
AVERAGE LOSING MONEY YEAR OF YEAR OF
RETURN IN ANY ONE YEAR 75 YEARS 30 YEARS

Portfolio A 11.0% 1 in 3 -47% -25%
Portfolio B 10.5% 1 in 4 -42% -22%
Portfolio C 9.8% 1 in 5 -38% -19%
Portfolio D 8.5% 1 in 6 -29% -13%
Portfolio E 7.5% 1 in 7 -23% -9%
Portfolio F 6.3% 1 in 8 -16% -4%


Column 1 is the portfolio name: Portfolio A is the most aggressive (with the most amount of stocks), and Portfolio F is the most conservative (with the least amount of stocks, and highest amount of fixed income). Column 2 is the expected return for the portfolio after investment expenses.

Columns 3, 4 and 5 have to do with the risk. How frequently does this portfolio have a losing year? Portfolio A loses about 1 out of every 3 years, but Portfolio F only loses about 1 out of every 8 years.

Column 4 is what a really bad year could look like, and it the worst year in the last 75 years (which includes the crash of '29 and the Great Depression). Portfolio A lost 47% in a year. Portfolio F, with a lot of fixed income, still lost 16% in one year (when interest rates shot up in a big hurry).

Column 5 is what a typical bad year looks like, and it is the worst year of the last 30 years. Portfolio A lost 25%, and Portfolio F lost 4%.

So, concentrating on the loss columns, what kind of losses would you feel comfortable with? Risk and reward go together, and to get a higher return, you have to be willing to accept periodic losses.

When you have an idea of what kind of losses you'd be able to handle, then you can convert the portfolios to target allocations:

Portfolio A: 100% stock
Portfolio B: 90% stock, 10% fixed income
Portfolio C: 80% stock, 20% fixed income
Portfolio D: 60% stock, 40% fixed income
Portfolio E: 45% stock, 55% fixed income
Portfolio F: 30% stock, 70% fixed income

Note: These are all globally diversified portfolio of index mutual funds.

You are young, and have a long-term time horizon. You basically can't take this money without penalty until age 59 1/2, so you can be aggressive, and use portfolio A if you want. But, the most important thing is that bad years do happen, and you don't want to be so upset with losses that you sell everything, or really make any changes to the portfolio. So, what kind of losses can you tolerate and still be able to stick with the plan?

-Tom

Choosing funds
 

I generally use the same allocation for all clients. The stock allocation is divided into these asset classes:

20% US large cap
20% US large cap value
10% US small cap
10% US small cap value
10% US real estate stocks
20% International stocks
10% Emerging markets stocks

The fixed income portfolio is generally divided as:

50% short-term bonds (high quality)
50% intermediate-term bonds (high quality)

So, someone that chose portfolio C, 80% stock, 20% fixed would have this allocation:

16% US large cap
16% US large cap value
8% US small cap
8% US small cap value
8% US real estate stocks
16% International stocks
8% Emerging markets stocks
10% short-term bonds (high quality)
10% intermediate-term bonds (high quality)

I prefer index funds whenever one is available. For value funds, the deepest value is the best. For small cap funds, the smallest cap (if diversified) is the best.

For the allocation to International, if there are choices for intl small or intl value, I would definitely use those; break up the 20% intl maybe as 10% intl, 5% intl value, 5% intl small.

When choices are not available, make the best substitution. If there is no emerging markets choice, make the intl choice be 30%. When there is no real estate choice, add more to US small and US small value. Mid-cap value is just fine instead of large-cap value.

Stable value is a good choice for short-term bonds. These funds generally have a good yield and no risk. Bond market index funds are good, and are in the intermediate-term bond category. Foreign bond funds are good choices, if they are currency hedged (although this is rare).

If there are no index funds available, I generally look for funds that have historical returns closest to the index. I don't want a fund that beat the index by 8% one year and then lost to the index by 8% the next year. If a fund underperorms 1% each year, but is consistent, that's the one I want.

I also like funds that say "small-cap value" or whatever, as they will tend to not have style drift. You wouldn't expect an SCV fund that is called "small-cap value" to have mid-cap growth stocks a few years from now. Finally, if 2 funds are about equal in all of these things, choose the one with the lower expense ratio.

Finally, more and more 401(k) are offering fund choices from Dimensional Fund Advisors (DFA). These are great. If you have "DFA Global Equity" as a choice, and using portfolio A, pick 100% that fund and forget about it.

Ok, so on to the funds. How about splitting the stock allocation like:

20% SSgA S&P® 500 Index Fund
20% RS Value Fund
15% SSgA Russell® 2000 Index Strategy Fund
15% Allianz NFJ Small-Cap Value Fund - Class A
30% SSgA MSCI EAFE Index Strategy Fund

And the fixed portion:

50% SSgA Stable Value Fund
50% DWS Core Fixed Income Fund - Class A

Note that I did not do a great deal of research on these particular funds. If one of the other funds is a little better in the qualities I mention before, go ahead and use the other fund.

I'll throw one more post in for good measure about allocation and rebalancing.

-Tom

Allocating and rebalancing
 

Since you are new to the plan and don't have any money in it yet, when you have your allocation, you tell the HR department, or log on the plan's web site, and choose the allocation of the funds as "future contributions." Each contribution will be split into the percentage by fund and go in correctly.

After a year or so, when you look at how much you have in each fund, it will be close, but not exactly in the correct proportion.

For example, emerging market funds have been really hot the last few years. If your target allocation for emerging markets was 8%, you might have 10% or 11% of your 401(k) in that fund after a good year. On the other hand, if your allocation to stable value is 10%, you might only have 8% in that fund now, as it didn't do as well as some of the other funds.

When your portfolio is out of balance like this, I recommend making a rebalance. You want to shift the existing money in your plan so that the allocation percentages are exactly as your target percentages. So, you are shifting money out of funds that have done well recently, and into funds that haven't done so well recently.

How exactly to do it is different based on the plan, the custodian, and their software. The best places are ones that allow you to type in the percentages, and do the whole rebalance in one step. So, you select something like "re-allocate existing funds", the list of funds show, and you can type in the 16, 16, and so on percents.

If that type of rebalance isn't available, it's probably best to actually call the custodian, speak to a representative, and tell them the percentages you want for your existing funds.

If that's not available, it can be a real pain to rebalance. You have to take your account balance, maybe in a spreadsheet, and calculate the target balance of each fund by multiplying the percent. So, if your account balance is $30,000, and you have 16% in the S&P 500 fund, your target balance is $4,800. Let's say you have only $4,600 in it now. Then you'll want to exchange $200 into that fund. Do this with the rest of your funds, and you'll end up making a bunch of small exchanges from funds to other funds.

That can be a real pain, so if that's the only way to do it on the company's web site, call a phone representative.

Hope this helps! Good luck,

-Tom

Re: Help me with my 401K?
 

My (aggressive) "keep it simple" recommendation:
25% SSgA MSCI EAFE Index Strategy Fund
25% SSgA S&P® 500 Index Fund
25% T. Rowe Price Mid-Cap Value Fund - R Class
25% Allianz NFJ Small-Cap Value Fund - Class A

Re: Help me with my 401K?
 

[ QUOTE ]
My (aggressive) "keep it simple" recommendation:
25% SSgA MSCI EAFE Index Strategy Fund
25% SSgA S&P® 500 Index Fund
25% T. Rowe Price Mid-Cap Value Fund - R Class
25% Allianz NFJ Small-Cap Value Fund - Class A

[/ QUOTE ]

This is pretty standard, but since I'm younger, I like to put a little more weight in the small caps and less in the mid-caps.

Re: Help me with my 401K?
 

[ QUOTE ]
My (aggressive) "keep it simple" recommendation:


[/ QUOTE ]
Ok, my recommendation was not simple. However, I thought there was a lot of general info that many people could use. Plus, it's more of a "teach you to fish" instead of "give you a fish." Maybe the thread could go in some kind of FAQ on how to allocate one's 401(k).

-Tom

Re: Help me with my 401K?
 

"My company matches up to 10% I want to put in 15% for a total of 25% of my Annual Income."

Dear Humphrey,

I am a little confounded on the above statement.

I presume you mean:

You mean that you can shelter 15% of you income in a 401(k), and your company will match 100% the first 10% of your pay, but not the additional 5%. If this is so, then your company has one of the far best 401(k) plans in the USA. I consider you very fortunate to have a 401(k) plan so generous. My company (an aerospace company) matched 8%, and permitted employees to put in an additional 4% (that was years ago). At the time, this was about the most generous 401(k) plan in the industry. I will mention that some of the higher paid employees were not permitted by the government to shelter the additional 4%. Also….

Years ago; IBM would only match 50% of their employee’s 401(k) contributions; and even today -- many smaller companies don’t match anything for their 401(k) plans. I will mention that the recent tax shelter saving plans are much more generous today than 10 or 15 years ago.
.

Re: Help me with my 401K?
 

Dear jively,

I appreciate you posts. I am retired and have been investing for a long time. I have done OK. I survived the bubble bust in the years late 2000 until early 2003. I had many friends (many brilliant engineers and scientists) who got hit hard when the bubble collapsed. In the last few years I bought most all of the asset allocation books (William J. Bernstein; etc.) and learned a lot -- stuff I wish I was aware of when I was 35 through 55. I feel; if the young guys follow your advice they will benefit many fold in the long run. I’m going to ask you a favor, and I will understand if you don’t answer, or if you don’t know the answer….

The question is in regard to the loads and 12b-1 fees that load mutual fund companies charge investors. For instance, America Funds generally charge a 5.75% (6.1% net) upfront load for Class A funds up to a $25,000 purchase. Eighty-six percent (86%) of this load fee is funneled back to the brokerage house that sold the fund to the individual. I was curious; in general, what percent of this money funneled back to the brokerage house is shared with the broker salesman (the account rep). If you know the answer, I would appreciate also knowing it.

Also America Funds did charge a yearly Class A fund 0.12% 12b-1 fee; now increased to a 0.23 or 0.24%. This fee is funneled back to the brokerage house. Again – I am curious what part of this fee is shared with the broker salesman (the so-call account executive). I would guess many 60% is given (earned by?) to the salesman. Do you know or have an opinion? I would appreciate it if you (or anybody else) gave me an estimate (just a ballpark estimate). I realize that most brokers don’t want to share stuff like this with the public.

Most warm regards, Carl

PS: I have one America Fund that I bought 35 years ago and it is up 55 times with the dividends & cap gains re-invested; but I paid lots of tax on this fund, but it did great. Most of my other mutual funds are in my 401(k) which CityStreet manages; or with the Vanguard Group which I manage.

Re: Help me with my 401K?
 

[ QUOTE ]
Dear jively,
[...]
I’m going to ask you a favor, and I will understand if you don’t answer, or if you don’t know the answer….

The question is in regard to the loads and 12b-1 fees that load mutual fund companies charge investors. For instance, America Funds generally charge a 5.75% (6.1% net) upfront load for Class A funds up to a $25,000 purchase. Eighty-six percent (86%) of this load fee is funneled back to the brokerage house that sold the fund to the individual. I was curious; in general, what percent of this money funneled back to the brokerage house is shared with the broker salesman (the account rep). If you know the answer, I would appreciate also knowing it.

Also America Funds did charge a yearly Class A fund 0.12% 12b-1 fee; now increased to a 0.23 or 0.24%. This fee is funneled back to the brokerage house. Again – I am curious what part of this fee is shared with the broker salesman (the so-call account executive). I would guess many 60% is given (earned by?) to the salesman. Do you know or have an opinion? I would appreciate it if you (or anybody else) gave me an estimate (just a ballpark estimate). I realize that most brokers don’t want to share stuff like this with the public.

[/ QUOTE ]
I'm sorry but I do not know the answer. I am a CFP (Certified Financial Planner) professional, and I work for a company that is a Registered Investment Advisor. I do not have any NASD licenses (Series 6, 7, etc.) so I can not earn commissions on any investment product. I am not a broker.

There is a lot of debate between investment advisors on fee-based vs. commission. There are plenty of stockbrokers that "churn" their client accounts, turning over their portfolios every year, alternating between A-shares, B-shares, ETFs, variable annuities: investment products that can have high loads or commissions.

My favorite advice is from Nick Murray, who is an advisor coach who writes for Financial Advisor Magazine. He says basically that the relationship between an advisor and a client has to be a long-term one, and that the advisor has to be fairly compensated. A-shares and B-shares do not correctly compensate an advisor to have a low-turnover, long-term relationship with a client.

C-shares, that charge 1% annually paid to the advior, do fairly compensate the advisor. 1% is roughly what a fee-based firm like mine charges based on assets managed. Both have no incentive to turn over the portfolio, so that a portfolio that is properly balanced and diversified may never need to be changed (besides rebalancing or changes of goals), and a tax efficient long-term relationship can flourish with excellent long-term investment returns.

-Tom

Re: Help me with my 401K?
 

[ QUOTE ]
Ok, my recommendation was not simple. However, I thought there was a lot of general info that many people could use. Plus, it's more of a "teach you to fish" instead of "give you a fish." Maybe the thread could go in some kind of FAQ on how to allocate one's 401(k).

[/ QUOTE ]

Halfway authoritive answers to this question would be veryvery nice. I'm in a similar position to the OP (albeit w/ a far inferior plan), and really do not know what to do. At the moment I have 100% in an s&p 500 index fund ... I suspect this is not at all optimal. (I won't retire for 40 years or so; can handle a decent bit of risk.)

Re: Help me with my 401K?
 

afs, take a look at OP and provide more detail on your situation, if you are looking for more specific guidelines for your particular situation.

The general analysis provided by jively in this thread, is an excellent start for anyone looking for guidance to do their own research (as you should), when following a passive indexing plan.

Re: Help me with my 401K?
 

[ QUOTE ]
At the moment I have 100% in an s&p 500 index fund ... I suspect this is not at all optimal.

[/ QUOTE ]
Not that I'm the greatest investor ever, but this is exactly what I did when I was in a 401(k), so I for one don't think it's a terrible idea.

Re: Help me with my 401K?
 

[ QUOTE ]
afs, take a look at OP and provide more detail on your situation, if you are looking for more specific guidelines for your particular situation.

The general analysis provided by jively in this thread, is an excellent start for anyone looking for guidance to do their own research (as you should), when following a passive indexing plan.

[/ QUOTE ]

For the record, I just realized that the 'halfway authoritative' statement might sound like a dismissal of advice people (mainly jively) posted -- it wasn't meant this way at all. Quite the opposite, honestly. Just wanted to make that clear.

In any case, to respond:

I'm 25 years old, & only recently started making a decent salary [Edited by request] After finally eliminating my debt, I enrolled in my employer's retirement plan at the beginning of the year. My office is only ~30 people, so their plan is nothing like Humphrey's -- a SARSEP plan, no matching monies from employer, rules are essentially (afaik) equivilent to a 401k. At the moment I'm putting in 8%; once I'm at the magic '3 months salary in the bank' point, I'll put in the maximum 15%. The plan is through AXA and offers about 75 funds, most w/ absurdly high fees. I don't have a wife, dependants, or a martgage (and before someone says I'd be better off w/ the later -- I live in NYC, and even if it's a good investment, I really don't want to spend 300k to live in a dump in south jamaica.) I won't be retiring for 35-45 years, so I'm ok w/ losing ~50% in a year if I can feel confident that I'll be ahead in 15 years.

I'm sure that jively's advice is very good -- the problem is, I'm very ignorant & simply don't understand the concepts behind the advice. (Which is ironic & humbling/humiliating, given that most of the work I've been doing lately is development on pre & post trade analysis software for an algorithmic trading suite.) So maybe this is just another request for a basic retirement planning book.

Really, I have 2 (big) questions -- what sort of distribution of funds makes sense for someone in my spot? (Which despite maaaany cosmetic differences is not that far off from Humphrey's, I'd think.) ... And then, what sort of criteria do you use to pick individual funds for each 'role' in the collection? ... With my extremely slight knowledge, I'd take 3 index funds, one s&p 500, one large cap foreign markets, and one emerging markets ... if there even _is_ such a thing as an index for the later two -- see how little I know? ... Not enough to justify an opinion there, certainly. In any case, none of the funds offered by my plan match the description of the last two.

Re: Help me with my 401K?
 

Jively,

Thanks for the reply. Excuse my time delay in thanking you. I understand what you are saying, and it's seems fair to me.

I think some people can handle their own financial accounts, but then there are many others who can benefit from a good long term financial consultant. But....

Basically I'm against mutual funds with 12b-1 fees and financial intermediaries "brokers" who sell them. There is no benefit to the investor from 12b-1 fees -- it's just a yearly drain on their account.

Re: Help me with my 401K?
 

[ QUOTE ]
I won't be retiring for 35-45 years, so I'm ok w/ losing ~50% in a year if I can feel confident that I'll be ahead in 15 years.

[/ QUOTE ]
Ok, so this sounds like you are OK with Portfolio A, 100% stocks, so I would recommend this asset allocation:

20% US large cap
20% US large cap value
10% US small cap
10% US small cap value
10% US real estate stocks
20% International stocks
10% Emerging markets stocks

[ QUOTE ]
The plan is through AXA and offers about 75 funds, most w/ absurdly high fees.

[/ QUOTE ]
Ok, so you need to get the list of the 75 funds, and try to figure out which asset class each fund is for. Plus, you can use the criteria I mentioned in this post as to which funds to use. Any fund that says "Index" is going to be a winner. Funds that say "Small Cap Value" in the fund name generally are Small Cap Value. [img]/images/graemlins/wink.gif[/img] (So you can get a lot of information just from the fund name.)

AXA's web site for your plan probably has links to Prospectuses or Fund Info sheets that should say which asset class they are. Don't be surprised in 40 of the 75 funds are Large Cap Growth Funds. Don't pick any of those.

The stuff about "deepest value" is a little advanced...so you can skip it. If you just pick funds with the right asset classes, and use the allocation above, you should do very well. Most large cap value funds, for example, have similar returns over long periods of time.

Good luck,

-Tom

Re: Help me with my 401K?
 

[ QUOTE ]
[ QUOTE ]
I won't be retiring for 35-45 years, so I'm ok w/ losing ~50% in a year if I can feel confident that I'll be ahead in 15 years.

[/ QUOTE ]
Ok, so this sounds like you are OK with Portfolio A, 100% stocks, so I would recommend this asset allocation:

20% US large cap
20% US large cap value
10% US small cap
10% US small cap value
10% US real estate stocks
20% International stocks
10% Emerging markets stocks

[ QUOTE ]
The plan is through AXA and offers about 75 funds, most w/ absurdly high fees.

[/ QUOTE ]
Ok, so you need to get the list of the 75 funds, and try to figure out which asset class each fund is for. Plus, you can use the criteria I mentioned in this post as to which funds to use. Any fund that says "Index" is going to be a winner. Funds that say "Small Cap Value" in the fund name generally are Small Cap Value. [img]/images/graemlins/wink.gif[/img] (So you can get a lot of information just from the fund name.)

AXA's web site for your plan probably has links to Prospectuses or Fund Info sheets that should say which asset class they are. Don't be surprised in 40 of the 75 funds are Large Cap Growth Funds. Don't pick any of those.

The stuff about "deepest value" is a little advanced...so you can skip it. If you just pick funds with the right asset classes, and use the allocation above, you should do very well. Most large cap value funds, for example, have similar returns over long periods of time.

Good luck,

-Tom

[/ QUOTE ]


This is pretty close to what I'm shooting for. A simpler version is 1/3 small cap, 1/3 large cap, 1/3 international, all index funds.

Could someone fill me on on the 'emerging market' funds? How have these done historically and what do they usually include?

Re: Help me with my 401K?
 

I am a realtive newbie at retirement investing and am still learning so someone step in if im out of line. Everyone seems to be talking about which fund to pick but but no one seems to be questioning putting the extra 5% into his 401k. I would think the OP would be better served taking the 100% match up to 10% and then taking then extra 5% and maxing out a Roth IRA. The Roth IRA would knock out his tax liability on the backend while giving him more investment options and freedom with his asset allocation. Am i way off here?

Re: Help me with my 401K?
 

No. That is some great advice.

Re: Help me with my 401K?
 

[ QUOTE ]
Could someone fill me on on the 'emerging market' funds? How have these done historically and what do they usually include?

[/ QUOTE ]
"International" usually means developed international countries. For US investors, it means Canada, most of Europe, Japan, Hong Kong, Singaopre, Australia and New Zealand.

Emerging markets are less developed but faster growing coutries. DFA currently uses these countries: Brazil, Chile, Czech Rep, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Poland, South Africa, Taiwan, Thailand, and Turkey. Historically, they have done very well, and they have done very well in recent years. However, they are risky, and can have big down years.

-Tom

Re: Help me with my 401K?
 

MrNow posted a link to a nice chart here showing relative returns for various investments

Re: Help me with my 401K?
 

I feel for you. You have a [censored] of homework to do before you can make an intelligent decision.

the "mutual funds for dummies" version is this, if it has income in the name, it is pretty conservative and trys to provide 5 or so percent payout for old people who want to live off thier saved money.

If it says value, it tries to buy low priced companies with a good price (of stock) to earnings ratio. unfortunately ford matches this criteria so these funds are good if thier managers are good, bad if otherwise. you have to check thier histories and keep up with them to make sure that the same management is handling them as was when they had thier good track record.

If it has government or money market in it, it is basically a savings account, 2-5% usually closer to the 2%.

If it has index in the name then it is a basket of stocks that reflect whatever index it is trying to mimic. such as the s&p500 or the dow, it might be like an oil index where it trys to correlate to the price of oil. These let you make general assumptions about the market direction and be able to benifit without having to take on the risk of putting all your money with one company..like betting on energy prices to go up, but not having to put all y our money into an enron.

If it says small cap, it is investing in high growth potential companies that are capitalized for less than 500 million, mid caps are some higher range, and then large caps are your multi billion dollar cap companies. sorry, i cant recall the specific cap ranges off hand.

you then have a shares, b shares, and c shares. I am sorry but you are just going to have to wade thru a prospectus to figure out the diff on those... i could give you the 'dummies' version, but you need to understand that completely before you make a decision and i refuse to take on that responsibility of making you feel you understand it, when you really dont.

Hint, one is more advantageous if your a short term holder of the investment, one is more advantages if your a mid to long term holder and one just rapes you either way.

that is the quick and dirty primer on mutual funds....

as a young man you should be 40 to 80 percent growth/aggressive the rest in bonds or money markets...here again it depends on your individual risk tolerance...but let me make one thing clear, and this is the most important thing, if you feel you are not being agressive enough, you are wrong. you are better off making 5 or 10% anually for 20 or 30 years, than to make 60 or 80 % for a few years then experience an 80% drawdown.. trust me, been there done that. the slow and steady accumulation of wealth is the way to go. You can never know your true risk, the worst illusion you can live under is that your money is with a well known mutual fund company and in one of thier "conservative" funds so your risk is limited...that is utter [censored]. if you are not managing your money as far as the major market moves.... then no one is because mutual funds only want you to buy more, they never go to cash, they never reduce your market risk, that is up to you.

If you want a reading list to start your education look for books written by Stein, Schwager, Covel...there are many others that are worthy as well, but brevity is important.

Re: Help me with my 401K?
 

[ QUOTE ]
Take a look at these 6 portfolios, especially the losses, to see how aggressive you want to be (I apologize for the lack of columns that line up):

POTENTIAL ODDS OF WORST WORST
AVERAGE LOSING MONEY YEAR OF YEAR OF
RETURN IN ANY ONE YEAR 75 YEARS 30 YEARS

Portfolio A 11.0% 1 in 3 -47% -25%
Portfolio B 10.5% 1 in 4 -42% -22%
Portfolio C 9.8% 1 in 5 -38% -19%
Portfolio D 8.5% 1 in 6 -29% -13%
Portfolio E 7.5% 1 in 7 -23% -9%
Portfolio F 6.3% 1 in 8 -16% -4%


Column 1 is the portfolio name: Portfolio A is the most aggressive (with the most amount of stocks), and Portfolio F is the most conservative (with the least amount of stocks, and highest amount of fixed income). Column 2 is the expected return for the portfolio after investment expenses.

Columns 3, 4 and 5 have to do with the risk. How frequently does this portfolio have a losing year? Portfolio A loses about 1 out of every 3 years, but Portfolio F only loses about 1 out of every 8 years.

Column 4 is what a really bad year could look like, and it the worst year in the last 75 years (which includes the crash of '29 and the Great Depression). Portfolio A lost 47% in a year. Portfolio F, with a lot of fixed income, still lost 16% in one year (when interest rates shot up in a big hurry).

Column 5 is what a typical bad year looks like, and it is the worst year of the last 30 years. Portfolio A lost 25%, and Portfolio F lost 4%.

So, concentrating on the loss columns, what kind of losses would you feel comfortable with? Risk and reward go together, and to get a higher return, you have to be willing to accept periodic losses.

When you have an idea of what kind of losses you'd be able to handle, then you can convert the portfolios to target allocations:

Portfolio A: 100% stock
Portfolio B: 90% stock, 10% fixed income
Portfolio C: 80% stock, 20% fixed income
Portfolio D: 60% stock, 40% fixed income
Portfolio E: 45% stock, 55% fixed income
Portfolio F: 30% stock, 70% fixed income


[/ QUOTE ]

Which portfolio do you think would be most appropriate for someone that has 17 years until retirement? I'm doing some research for my mother. Right now she has 100% in stock. I understand the columns you posted, but I'm dreading the thought of trying to explain that to her. Thank you all for your help.

Re: Help me with my 401K?
 

10% is indeed generous. My company only matches 50% up to 6%. That's a bit lousy, but I learned that it was still better than many other companies.

Have you asked if your company offers Roth 401k? If so, I think that is a better choice than 401k, if you are in no hurry to reduce your tax burden. Roth 401k works like a Roth IRA, it will allow your earnings to be withdrawn tax-free, but has a yearly limit equal that of the 401k.

Re: Help me with my 401K?
 

I'm signed up with One America through AUL.

I'm 27 and have been in the program for a little over a year.

My allocations are:
MFS Value 15% (Large cap)
Fidelity VIP Contrafund 30% (Large cap blend)
Vanguard Explorer 20% (Small cap growth)
Thornberg International Value 35% (international blend).

The international fund is blowing up. Doing over 14% this year TO DATE. I just picked it up and dumped my S&P 500 fund because I assumed the S&P would top-off soon (looks like it is, having dropped over 400 points recently).

Of course this is a 401K so you don't have to alter your elections too often.

My company puts in 3% automatic. I add 4%. No match. Our year-end bonus is up to 7% of our salary in form of 401K contribution. It takes 3 years for me to be vested in the bonus allocations though.

My personal rate of return is 19.18% over the last year.

You should have been given a prospectus and it should pretty much lay out what kind of approach you need. You are still pretty young so you should go fairly aggressive. Not 100% stocks, though. You aren't THAT young.

Good luck.

Re: Help me with my 401K?
 

jively is giving very good advice.

If you want to learn more, morningstar.com is great, specifically the "Vanguard Diehards" forum, which is fantastic for the kind of decisions you're trying to make, even if you're not a Vanguard customer. It's the Two Plus Two of investing.

Re: Help me with my 401K?
 

One more thing: jively, I am interested in working with a financial advisor who has access to DFA funds. Could you e-mail your contact info to me at [email protected]? Thanks.

Re: Allocating and rebalancing
 

I am also new to investing (I just signed on with my first "real" job this week) and I have a simple question. Why would you want to take money out of funds that are doing well and shift them to funds that are not doing as well?

Re: Allocating and rebalancing
 

[ QUOTE ]
I am also new to investing (I just signed on with my first "real" job this week) and I have a simple question. Why would you want to take money out of funds that are doing well and shift them to funds that are not doing as well?

[/ QUOTE ]

This is assuming both funds are well-regarded funds and that the slump/surge is just due to market fluctuations and not something more detrimental.

When you take money out of funds that are doing well, you are selling high. When you increase your holding in the fund that wasn't doing well, you are buying low. This is what you want to be doing.

Things to make sure:

Note any fees that you will incur when you do this.
Make sure that the fund that was slumping wasn't due to it being a bad fund. Obviously, this will take some research.

Re: Help me with my 401K?
 

[edit]Wow, didn't realize I revived a 9 month old thread[/edit]

So far I'm seeing a few different pieces of advice about how to allocate your 401k funds in this thread. I'm still not convinced though.

Currently I have all of my 401k money going into an S&P 500 index fund. Here's my reasoning:

1. It's my understanding that a very small percentage of mutual funds actually beat the S&P 500 index.

2. Non-index funds generally have larger expense ratios and aren't as tax efficient because they generally have larger turnover percentages.

Basically, it seems most actively managed funds have about the same or less of a return than the S&P 500 AND have more fees to boot.

I'm still pretty new to the investment world, so please feel free to point out any fallacies in my logic. So far I've yet to encounter a convincing argument about why I shouldn't go 100% index funds.

Re: Help me with my 401K?
 

[ QUOTE ]
I'm still pretty new to the investment world, so please feel free to point out any fallacies in my logic. So far I've yet to encounter a convincing argument about why I shouldn't go 100% index funds.


[/ QUOTE ]

You have to read past the specific funds suggested, which were based on the funds available to the OP.

Jively's allocations are well detailed in this thread, and worthy of consideration.

You state that your funds are 100% in an S&P500 index. While thats certainly a good first step, reviewing Jively's suggestions for allocations to other indexes, would be worthwhile.

Re: Help me with my 401K?
 

[ QUOTE ]
This is pretty close to what I'm shooting for. A simpler version is 1/3 small cap, 1/3 large cap, 1/3 international, all index funds.


[/ QUOTE ]

I just opened an Etrade Roth IRA account with 4K. I don't want to spend much time managing my money, and after reading this forum for a couple hours decided on roughly the dispersement above. The problem I'm finding is that all of the index funds I've looked at purchasing require a 2.5K minimum investment. This really doesn't allow me to diversify with only 4K to work with. Anyone know of index funds with lower minimum purchase requirments, or is this just an Etrade requirement? Any other advice would be appreciated. I didn't think of looking into this prior to funding the account.

Re: Help me with my 401K?
 

Min. investments, at least in Roth accounts, are not all that unusual. A lot of times it's really the fund's requirement, rather than the broker's.

Just invest the 4k, and diversify with 4 more k next year, and 4 more the next. Then you will use the new 4,000 addition each year thereafter to rebalance your portfolio.

Re: Help me with my 401K?
 

[ QUOTE ]
[ QUOTE ]
Could someone fill me on on the 'emerging market' funds? How have these done historically and what do they usually include?

[/ QUOTE ]
"International" usually means developed international countries. For US investors, it means Canada, most of Europe, Japan, Hong Kong, Singaopre, Australia and New Zealand.

Emerging markets are less developed but faster growing coutries. DFA currently uses these countries: Brazil, Chile, Czech Rep, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Poland, South Africa, Taiwan, Thailand, and Turkey. Historically, they have done very well, and they have done very well in recent years. However, they are risky, and can have big down years.

-Tom

[/ QUOTE ]

EM should definitely be in an allocation in some form.

they aren't overly uncorrelated with developed world equities at this point and likely won't become uncorrelated anytime soon (correlated business cycles globally+ many EMs are commodity exporters and thus depend on int'l growth for high returns. those that don't export commodities export other stuff and many equities in those companies thus depend on international demand).

BUT, they do provide high returns w/ slightly higher risk as a major break in the historic trends of these countries has recently occurred. typically, when EM growth was huge, they'd borrow and consume. now, they are saving and lending. that is huge and it seems they are much more well posed to turn into the late cycle than historicaly they have been.

either way, they should be in equity allocation as they are not 100% correlated with developed world equities and shouldn't be expected to be. + they provide high returns and their increased risk doesn't offset the diversification gain from an overall portfolio allocation perspective.

Barron

Re: Help me with my 401K?
 

[ QUOTE ]
[ QUOTE ]
This is pretty close to what I'm shooting for. A simpler version is 1/3 small cap, 1/3 large cap, 1/3 international, all index funds.


[/ QUOTE ]



I just opened an Etrade Roth IRA account with 4K. I don't want to spend much time managing my money, and after reading this forum for a couple hours decided on roughly the dispersement above. The problem I'm finding is that all of the index funds I've looked at purchasing require a 2.5K minimum investment. This really doesn't allow me to diversify with only 4K to work with. Anyone know of index funds with lower minimum purchase requirments, or is this just an Etrade requirement? Any other advice would be appreciated. I didn't think of looking into this prior to funding the account.

[/ QUOTE ]


I'm new to this stuff, so someone please correct me if my advice is bad!

You should consider investing in an exchange-traded fund. ETFs are funds meant to mimic indices and -- like index funds -- have very low fees. The distinguishing characteristic of ETFs is that they trade in intra-day trading on the stock market. This means that the "minimum investment" is merely the price of a single share -- almost certainly less than 2.5k!

To find ETFs that represent the indices you're interested in, check out http://finance.yahoo.com/etf.

Re: Help me with my 401K?
 

Good advice. Another useful site that lists funds and ETFs is http://altruistfa.com/dfavanguard.htm

ETFs are a convenient way of not having to deal with fund minimums. ETFs perform nearly the same as funds. The difference is that they are traded on an exchange, hence the Exchange-Traded part of ETF. That being said, make sure the commissions from trading are very small relative to the investment priciple.

ETFs are purchased through a brokerage. It sounds like you're already set up through E*Trade which is good. Here are the ETFs that I would suggest purchasing:

Small cap domestic: IWC or VB
Large cap domestic: VV
Foreign: VEU

That being said, I personally don't see the need to split up your domestic allocation between large cap and small cap stocks. I would recommend just combining the allocations into a total domestic allocation, which VTI would be the best ETF for.

Re: Help me with my 401K?
 

[ QUOTE ]
[ QUOTE ]
My (aggressive) "keep it simple" recommendation:
25% SSgA MSCI EAFE Index Strategy Fund
25% SSgA S&P® 500 Index Fund
25% T. Rowe Price Mid-Cap Value Fund - R Class
25% Allianz NFJ Small-Cap Value Fund - Class A

[/ QUOTE ]

This is pretty standard, but since I'm younger, I like to put a little more weight in the small caps and less in the mid-caps.

[/ QUOTE ]

Why do you guys not invest in funds that aren't actively managed? There are funds that beat the market over 10 years, one of the ones i like has beat by over 50% a year (vs the s&p).. and whoever was talking about the DFA (dimensional funds) is right.. the emerging markets fund by dfa has a 10 year average of around 20%... thats amazing (the average is around 10% on the 10 year).......if youve got 30 years then just give your money to an active manager who will beat the market over the long run.

Re: Help me with my 401K?
 

[ QUOTE ]
Why do you guys not invest in funds that aren't actively managed?

[/ QUOTE ]

There's very little indication that the extra return that can be extracted from active management is higher than the fees. Fees for actively managed mutual funds are crazy.

Re: Help me with my 401K?
 

I'm 23 years old and setting up my first 401k. I have a basic understanding of investing and I get it that I should do something risky since I have so much time before drawing on the money. Aside from that, I have no idea how I should setup my allocations and I'd love some help.

My company matches 25% of the first 7% I contribute. At this point I've decided to stick with just 7% because I'll be buying a house soon and need the extra cash. Here are my options:

JPMorgan SmartMix 2010
JPMorgan SmartMix 2015
JPMorgan SmartMix 2020
JPMorgan SmartMix 2030
JPMorgan SmartMix 2040
INVESCO Stable Value
JPMorgan Core Bond-Select
American Century Large Company Value-Inv
SSgA S&P 500 Fund-D
American Funds Growth Fund of America-R4
STI Classic Small Cap Value Equity-I
Artisan Small Cap
Julius Baer International Equity Fund-A
Coca-Cola Enterprises Inc. Stock Fund

The Smartmix 2040 got my attention because it's described as "designed for investors who will retire in or around 2040 and want a professional to determine the asset mix and fund selection in their portfolio." It is defined as 54.9% Domestic Equity, 26.2% International Equity, 9.8% Fixed Income, 8.2% Real Estate, .9% Cash.


So I'm wondering if I should just stick 100% of my contribution in there, or if there is a wiser choice. Please let me know what you would do if you were in my shoes. Thanks in advance.