Help me with my 401K?

[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.