401K help

[Exterous]

Explain to me the whole idea of fees. I agree that fees make a difference if a manager consistently underperforms them or you are looking at specific equity sector/index exposure; however let's look at at a simple example.

Investment A. 5 Year return -.47% net, annualized. Fees management .17%, trading .01% (estimated).

Investment B. 5 Year return 7.07% net, 10.89% gross, annualized. Fees, short rebate and trading .60%, Management, 1.91%, incentive 1.21%

Investment A. Vanguard 500.

Investment B. A fairly well known hedge manager.

I guess were it my money, net returns would be more important than gross.

Even equity replacement, long bonds + equity futures with 1.0% expense ratios outperforms the SPX, fairly handily.

Your time frames are too short. Sure there are funds that will outperform the market for a short duration but by the time you know what those funds are its too late. The funds that outperform the market for extended times are virtually non-existent while most will underperform (Something like 84% didn't meet their benchmarks in 2011 IIRC*) How are you going to pick the winners? History has more than shown that past performance is no indicator of future performance

Honestly the chance of outperforming the market is so small for more than 5 years straight I would take a real hard look at that fund as its time it most likely running out

Edit: Yep:
http://www.huffingtonpost.com/2012/03/12/stock-market-mutual-fund-fail_n_1340665.html
A bit worse than usual but, by and large, you are more likely to underperform

 

[The-Noid]

Your time frames are too short. Sure there are funds that will outperform the market for a short duration but by the time you know what those funds are its too late. Previous performance is no guarante of future performance

The 10 year return is 7.31% net of fees. Unfortunately that is basically the whole track record.

Again there is a reason pensions, endowments, etc continue to move huge amounts of portfolio to actively managed.

Look at your state's pension and see how much has moved to alternative investments. 20+% in most cases.

Don't get me wrong, like I said expenses are important but in this day and age it is not the only characteristic to look at. Not the overriding blanket, that a lot will push.

In the case of the bigger pensions and endowments, they have near fees to trade (.02%) and still chose to move money to outside managers in core/satellite configurations.

 

[Exterous]

Again there is a reason pensions, endowments, etc continue to move huge amounts of portfolio to actively managed.

Ah...what? I am by no means an expert on pensions but I was under the impression that there is a very large move to passively managed funds:
http://www.pionline.com/article/20120206/PRINTSUB/302069996

Look at your state's pension and see how much has moved to alternative investments. 20+% in most cases.

I am not sure actively managed counts as 'alternative'

 

[DaveSimmons]

Investment B. A fairly well known hedge manager.

That's taking a massive risk with your retirement money compared to passive index funds.

Over decades the odds of a hedge fund or any actively managed fund outperforming the S&P 500 index are very, very low.

If you want to gamble and try to time when a hedge fund is hot vs. when it crashes and burns, that's great. It's just bad advice to recommend it to 99% of people putting money into their 401k and IRA for retirement.

Again there is a reason pensions, endowments, etc continue to move huge amounts of portfolio to actively managed.
Look at your state's pension and see how much has moved to alternative investments. 20+% in most cases.

And some of them have suffered huge losses. This is also being done by people who work full-time to actively manage the pension funds not someone spending an hour or less a month to take care of their 401k.

Weekend investors should in general stay away from picking stocks and putting money into hedge funds. Index funds are much safer.

 

[brianmanahan]

put 100 - age percent into stocks, and the rest into bonds

use passive index funds for both stocks and bonds

rebalance every year as you get older

/thread

 

[DaveSimmons]

put 100 - age percent into stocks, and the rest into bonds
use passive index funds for both stocks and bonds
rebalance every year as you get older
/thread

Do you know what Vanguard's Target <year> funds are and how they work?

Hint: they make doing this a lot easier.

 

[Exterous]

Do you know what Vanguard's Target <year> funds are and how they work?

Hint: they make doing this a lot easier.

That depends on if you agree with their bond and international allocation (which they have been adjusting)

 

[Genx87]

Alright, I'll just do the 2055 index thing then. Surely online strangers wouldn't do me wrong


2011 was the first year we had any retirement and I just did 3% to get the 3% emplohyer match. This January I wised up a bit and upped it to 7% + 3%. Now my company is being bought out (hence the change to ING) and they give 4% so I'm upping my part to 11% to get 15, or I might even do 20%. If I hit the cap during the year, will my employer automatically stop contributions?

Yes, if you hit the cap of 17K your company stops matching. So if you plan to hit the cap like I am, then work the % so the cap equals your match + company match.

 

[brianmanahan]

That depends on if you agree with their bond and international allocation (which they have been adjusting)

exactly, i want slightly more bonds and more equity international than the target year funds allocate

 

[DaveSimmons]

exactly, i want slightly more bonds and more equity international than the target year funds allocate

For the bonds part you can adjust the % by picking a different Target <year>, for example a Target 2030 will have more bonds than a Target 2050.

The target fund is better for many investors because it does rebalance over time automatically, and you also only have one minimum level to reach vs. 3 for a set of total US stocks, international and bond index funds.

If you have over ~$50K to invest and don't mind doing the work to rebalance the funds yourself then buying the 3 index funds separately will let you pick your own %s and save a tiny bit on the fund expenses.

 

[Exterous]

The 10 year return is 7.31% net of fees. Unfortunately that is basically the whole track record.

Taking another stab at this one it looks like the Vanguard 500 Index Investor class has a 10.4% return over a span of 36 years. You are going to be hard pressed to find a fund that can average that. Top rated funds for the last 20 years will get you an average of 12% and there are only a handful of those.

Could you pick a fund that does better than an index fund over the short term? Yep. But you need to be able to know when to switch and who to bet on. How are you going to figure that out? How do you decide what fund manager is an 'expert' in the market and will beat the average - who has a special insight or advantage that all the other funds somehow managed to overlook?

 

[The-Noid]

Taking another stab at this one it looks like the Vanguard 500 Index Investor class has a 10.4% return over a span of 36 years. You are going to be hard pressed to find a fund that can average that. Top rated funds for the last 20 years will get you an average of 12% and there are only a handful of those.

...

 

[airdata]

Buy gold or cash out and throw it down at a casino, you'll have as much chance of making a return.

 

[brianmanahan]

Buy gold or cash out and throw it down at a casino, you'll have as much chance of making a return.

^ derp

 

[Exterous]

I don't disagree that in most cases long-only active can't beat long-only passive, especially given a long enough time horizon. The constraint however remains that you are long-only. The returns of the 70's and 80's are not relevant in today's investing environment as the objectives and constraints of institutions were much different (basically non-existent in this day and age) and the economic landscape was also extremely different, 8% growth does not compare well to sub 2% growth.

I am not really talking about institutions here - this thread is primarily talking about a personal investment - retirement at that. This is not someone whose job it is to maintain a fund so it is unknown how much time and effort they are going to spend managing it. Given the type of question that was asked there is no way that I would recommend this person jump into the sea of mutual funds. It is far to easy to get fleeced by high fees and poor performance as more funds under-perform that market than over perform.

I clearly stated that there is money to be made in the short term but the questions I asked were not rhetorical. They were asked to gauge the level of investment knowledge you/the OP had. If you cannot answer those questions than you shouldn't be investing in mutual funds. And you have to be able to answer honestly - not blind yourself with hubris. That is an easy way to lose a lot of money

Your conditioned into a mind set that hasn't worked in 10 years and based on our current fundamentals has a few more years not to work. Again, in most cases a lot of work needs to be done to find managers that aren't simply beta grazers and actually outperform but there is a reason they continue to be added in core (index) and satellite (active) strategies.

I would argue that 'worked' depends on your view. The fund market seems to be getting more polarized. Some funds are doing very well, or at least very well relative to the market but there are even greater numbers that are under performing (Up 10% vs norm I believe). What that means is more than ever before you need to invest the time and effort to understand what you are investing in. But are people really going to invest the time to understand what standard deviation does to returns, Beta, their entire portfolio's risk/reward - understand that by choosing X fund they are over weighted in tech stocks so they need to reduce Y's holdings or that Apple comprises too much of their stock % across their fund holdings? I would say the majority of them will not. There are studies that show the majority of households spend less than 1 hour a month on retirement planning (Something like 9.5 hours a year). Americans spend 3x as much time per year on making a car choice than retirement planning (It was either in a TED talk or an article from the guys that wrote 'Millionaire next door). How are these people going to answer the questions that I asked you? My bet is that they can't. That they are throwing darts in the dark or going on past performance only

For these people choosing a mutual fund probably won't work and an index fund would have worked better (Or for those people who have shit fund options like my wife's 403B. First Investors or Vanguard. Um - Vanguard please)

FWIW I have both mutual funds and index funds (And a stack of TR profile reports sitting next to me at my desk)

 

[Exterous]

^ derp

Indeed