401k questions for a young'n

[weiv0004]

So I'm finally getting my 401k set up at my first "Real" job. And I'm wondering where I should put my money. Poking around on the internet, i came across this suggestion:

Aggressive--for those with 35 or more years until retirement
50%--large cap stocks
15%--mid cap stocks
15%--bonds
10%--small cap stocks
10%--international stocks

But I'm not sure what all of this means. The company has a list of different investment options, divided into categories, as follows:

Fixed Income
Balanced
Equity
International Equity
Company Stock

They've also got information on what each available fund is made up of, but the info doesn't seem to match up too well with the suggestion above. Can anybody make any sense of this for me? Thanks!

 

[K1052]

Without knowing exactly what you company's options have in them it's hard to give advice, though I suggest staying pretty much away from the last one. Are they matching your contributions?

Remember to save/invest outside your employer too. IRAs, high interest savings, bonds, property, etc..

 

[DaveSimmons]

The funds will be in the "equity" and "international equity" groups. You need to tell us what the funds are in those groups and what the info sheet for the fund says it is for us to give you more help than that.

Also, for a young'n 15% in bonds is too much. Reduce it to 10% so you can up international to 15%, or even 5% to also up small cap to 15%.

 

[Legend]

I'd go for more international and less bonds. I'd stay away from REITs (real estate) because houses keep being built and a whole bunch of baby boomers are about to die within the next 20 years...the last 10 years of boom in REITs will not be maintained.

Bonds (several types) = Fixed income
stocks = equity


Go to your library and check out an introduction to investing with the Modern Portfolio Theory.

 

[chuckywang]

I am in the exact same situation as the OP. I should also post my inventment options for you guys to give feedback.

 

[Legend]

Also read up on which asset classes (small cap, large cap, international, etc) are best for different account types. It's a tax shelter, so if you max your 401k and Roth and put money into taxable accounts, you want to optimize tax sheltering. Like I think large cap index funds are best for taxable versus small cap.

 

[FP]

Forget bonds at your age.

100% stocks FTW

 

[weiv0004]

Thanks for the replys guys. The company is matching to a degree and I am investing elsewhere. The investment options offered by my company are as follows:

Fixed Income

INVESCO Stable Value Fund
Mellon Bank EB SMAM Aggregate Bond Index Fund

Balanced

Vanguard LifeStrategy Conservative Growth Fund
Vanguard LifeStrategy Moderate Growth Fund
Vanguard LifeStrategy Growth Fund
Mellon Capital Tactical Asset Allocation Fund

Equity

Barclays Global Investors S&P 500 Index Fund
Vanguard FTSE Social Index Fund
Dodge & Cox Value Equity Fund
Wellington Growth Fund
Franklin Portfolio Mid Cap Stock Fund
DFA U.S. Small Cap Fund

International Equity

Capital Guardian International Equity Fund
Capital Guardian Emerging Markets Equity Fund

Company Stock

Company Stock Fund, Class B

There is a page or two of info on each option, is there anything I should look for in particular?

 

[weiv0004]

Ooh, another quick question. I see most of these list a small fee, such as "Investment Management fees are 0.72% of assets." I assume I have to pay this fee, but when do I pay it? Each time money goes into the fund?

 

[fallenangel99]

I think the fee only applies when you sell the fund. I'm not sure though, my company 401k fun options suck (only like 6 or 7 Fidelity funds), not very diverse

 

[DaveSimmons]

That's an annual management fee paid out of the fund itself once a year (reducing its value).

So if at the end of the year 1 share of the fund was worth $100, the mutual fund company pays itself 0.72% = 72 cents, and the share value drops to 99.28

(All mutual funds have management fees like this, but the % varies a lot and lower is better)

 

[DaveSimmons]

Vanguard LifeStrategy Growth Fund makeup:
50% Vanguard Total Stock Market Index Fund
25% Vanguard Asset Allocation Fund
15% Vanguard Total International Stock Index Fund
10% Vanguard Total Bond Market Index Fund
(see more details at www.vanguard.com)

That's a good mix of everything you want in a single fund. You'd do all right just by putting 100% of your money into that, though putting some into Barclays Global Investors S&P 500 Index Fund might make sense to reduce the overall % going into bond funds.

 

[JLGatsby]

25%--large cap stocks
25%--mid cap stocks
10%--bonds
20%--small cap stocks
20%--international stocks

Investing so much in large caps and bonds will leave you with a lowly retirement fund. You'll be flying coach and doing package vacations when you're old and decrepit.

 

[AtlantaBob]

Originally posted by: DaveSimmons
That's an annual management fee paid out of the fund itself once a year (reducing its value).

So if at the end of the year 1 share of the fund was worth $100, the mutual fund company pays itself 0.72% = 72 cents, and the share value drops to 99.28

(All mutual funds have management fees like this, but the % varies a lot and lower is better)

qft. And the poster afterwards is useful... you're young, you don't want a lot going into bonds, which will generally reduce earning potential. THAT SAID, you should ALSO have 3 months living expenses in a Money Market, or something else that is liquid (CD's probably aren't enough, and are enough trouble not to worry about). That way, you can pay your bills if you loose your job. I like (and use) Capital One, which has a current APR of 4.8% (ING is supposedly also good).

/dad's a finance geek.
/just moved some money to my 2006 IRA (Roth) today

 

[AStar617]

Originally posted by: binister
Forget bonds at your age.

100% stocks FTW

QFT. Don't overthink it, I say. I'm 25 and since 21 have invested 100% in an S&P500 index fund, so *very* minimal fees (no active management) and a historically comfortable return... and I love when the market is bad because that just increases the amount of shares I can buy before the inevitable upswing. Screw bonds, for 20-somethings all they do is appease you if you like watching coffee drip... dollar cost averaging FTW! :beer:

Oh yeah, make sure you contribute at least the percentage that your employer matches... or you'll be throwing away free money.

 

[weiv0004]

Wow, thanks for all the input guys. Could any one explain what the "cap" in all of these names mean? I assume it has something to do with the risk involved, but is High cap more risky, or less? Or maybe I'm way off. Also, I definately plan on putting away at least as much as my company will match, I'm just not sure how much/if any above that.

 

[RaistlinZ]

Originally posted by: AStar617

Originally posted by: binister
Forget bonds at your age.

100% stocks FTW

QFT. Don't overthink it, I say. I'm 25 and since 21 have invested 100% in an S&P500 index fund, so *very* minimal fees (no active management) and a historically comfortable return... and I love when the market is bad because that just increases the amount of shares I can buy before the inevitable upswing. Screw bonds, for 20-somethings all they do is appease you if you like watching coffee drip... dollar cost averaging FTW! :beer:

Oh yeah, make sure you contribute at least the percentage that your employer matches... or you'll be throwing away free money.

Ugh, you're missing out on some serious earning potential by not investing more into small cap stocks and international stocks.

 

[DaveSimmons]

Originally posted by: weiv0004
Wow, thanks for all the input guys. Could any one explain what the "cap" in all of these names mean? I assume it has something to do with the risk involved, but is High cap more risky, or less? Or maybe I'm way off. Also, I definately plan on putting away at least as much as my company will match, I'm just not sure how much/if any above that.

Market Capitalization = total value of all shares = how big the company is.

Some of the advice above makes more sense when you have an IRA and can pick the exact mutual funds that you want. My advice was based on the funds in your 401k. Ignore them, trust me

 

[vital]

I'm currently 25 and have 100% towards Vanguard LifeStrategy Growth Fund, what should I change it to?

 

[DaveSimmons]

Originally posted by: vital
I'm currently 25 and have 100% towards Vanguard LifeStrategy Growth Fund, what should I change it to?

You already have a very good mix of Vanguard funds just in that one fund (see details above).

What other choices does your 401k offer? Unless there are some good ones keeping your current 100% as-is still makes sense.

 

[alrocky]

Morningstar Books on Fund Investing, Vanguard Diehards Reading List. Eric Tyson's Mutual Funds for Dummies is a primer. I've read Berstein's The Four Pillars of Investing and Ferri's All About Asset Allocation, 2 of the 7 books on the General Investing list on the Diehards link.

50%--large cap stocks
15%--mid cap stocks
15%--bonds
10%--small cap stocks
10%--international stocks

Consider a higher percentage in small cap and international stocks.

Please provide the 5 letter symbol for each mutual fund available in your 401(k). The fees you referenced are Expense Ratios, the internal cost of running the mutual fund company - the lower the number the more efficient it's run and the less costly it is to you. You may notice that the Vanguard funds tend to have very low fees. Index funds tend to have lower costs to run and generally are cheaper to run too. Large caps tend to be cheaper and small caps more costly.

"Cap" is Market Capitalization and refers to the size of the companies the mutual fund invests in. So a "High Cap" is not more risky. Enter the 5 letter ticker for a domestic mutual fund on the Morningstar site. Click the Portfolio link and note the breakdown of the Market Capitilzation of it's holdings. Of the the 9 boxes, the top 3 represent the largest companies in the US, many of which you may know by name. The bottom 3 are small companies, most of which you likely don't know.

 

[HombrePequeno]

Originally posted by: weiv0004
Wow, thanks for all the input guys. Could any one explain what the "cap" in all of these names mean? I assume it has something to do with the risk involved, but is High cap more risky, or less? Or maybe I'm way off. Also, I definately plan on putting away at least as much as my company will match, I'm just not sure how much/if any above that.

Cap means market capitalization. A large cap fund is a fund that invests primarily in large companies like GE, Microsoft, etc. These generally have lower returns but are safer. Small cap companies are riskier but offer higher return (average of 16%). Depending on your age it may be okay to put a decent amount into small cap. I personally have the majority in the Vanguard Small Cap Growth Fund because I'm only 21 and am fine with taking some risks with the few grand I have in there.

 

[chambersc]

Originally posted by: HombrePequeno

Originally posted by: weiv0004
Wow, thanks for all the input guys. Could any one explain what the "cap" in all of these names mean? I assume it has something to do with the risk involved, but is High cap more risky, or less? Or maybe I'm way off. Also, I definately plan on putting away at least as much as my company will match, I'm just not sure how much/if any above that.

Cap means market capitalization. A large cap fund is a fund that invests primarily in large companies like GE, Microsoft, etc. These generally have lower returns but are safer. Small cap companies are riskier but offer higher return (average of 16%). Depending on your age it may be okay to put a decent amount into small cap. I personally have the majority in the Vanguard Small Cap Growth Fund because I'm only 21 and am fine with taking some risks with the few grand I have in there.

For the large caps, what's a fair estimate for returns.

 

[tm37]

Originally posted by: DaveSimmons
That's an annual management fee paid out of the fund itself once a year (reducing its value).

So if at the end of the year 1 share of the fund was worth $100, the mutual fund company pays itself 0.72% = 72 cents, and the share value drops to 99.28

(All mutual funds have management fees like this, but the % varies a lot and lower is better)

Lower is not always better.

If a fund is getting 11% gains and charging a 1% management fee you are better off than if the fund is 8% gains and charging .5%

100 +11% = $111 - 1% = $109.89

100 + 8% = $108 - .5% = $107.46

 

[LegendKiller]

Originally posted by: DaveSimmons
Market Capitalization = total value of all shares = how big the company is.

Some of the advice above makes more sense when you have an IRA and can pick the exact mutual funds that you want. My advice was based on the funds in your 401k. Ignore them, trust me

Market Cap doesn't tell you how big the company is. It tells you how much other people value the company, not just how big it is but how big it could be (since stock price is a reflection of future cashflows). It is the market consensus of how much the equity is worth and how much it will pay in the future.