Help me with my 401K?

[Humphrey]

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

[Uglyowl]

At you age, all stock portfolio is fine.

www.morningstar.com is your friend.

[jively]

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

[Carl_William]

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.

[jively]

[ 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

[Carl_William]

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.

[Xerion]

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.

[Moyer]

[ 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.

[jively]

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

[jively]

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