Help me with my 401K?

[Unoriginalname]

[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.

[Sniper]

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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.


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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.

[michw]

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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.


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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.

[IdealFugacity]

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.

[DcifrThs]

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

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"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

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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

[LetsHugItOut]

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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.


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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.

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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.

[gull]

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.

[LaggyTaggy]

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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

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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.

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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.

[mosdef]

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

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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.

[Fast Food Knight]

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.