401k questions for a young'n

[LegendKiller]

As others have said.

0% bonds. Bonds are for stability. When you are young you have a long time to ride out any market cycles. On average, over your lifetime, the market will perform very well and the stability of bonds will just be a drag on your performance. If you are older and you need stability and utter asset value protection you invest heavily in bonds as your current cashflow needs dictate that you cannot outlast an economic downturn.

Personally I invest in value funds. Financial research has proven that growth funds are inferior to value funds when considering length of ownership. However, that isn't to say that you should invest in only value funds, as they both have different market timing (economic cycle) implications and utilizing both will give you awesome returns.

Overall, here is how I have my portfolio.

10% large cap
25% international
25% value
20% growth
20% small cap


Do not invest in company stock. You are depending on your 401k or other investments to provide you with future income, which your paycheck already does. Essentially you are doubling your risk in a certain area (your company) for little to no gain.

 

[NuAlphaMan]

Originally posted by: 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.

:thumbsup: I was going to tell you the exact same thing. You want diversify, but you should definitely increase your percentage in small cap and international! For me, these have been two of the top performers in my portfolio!

 

[weiv0004]

Ok, there's been some really helpful info given here, but I'm still kind fuzzy on the details. I'll look into picking up some of the reading suggestions you guys have given and then maybe juggle things around a little bit. Meanwhile, I've pulled this together based on the info you guys gave and the info given by the company I've decided to split my investment 4 ways, into these funds. Any comments? Criticisms? Mocking laughter?

25% Vanguard LifeStrategy Growth Fund (~10% growth since inception in '94 / ~15% 3 year growth)

25% Capital Guardian Emerging Markets Equity Fund (~15% growth since inception in '99 / ~35% 3 year growth)

25% DFA U.S. Small Cap Fund (~15% growth since inception in '92 / ~ 25% 3 year growth)

25% Franklin Portfolio Mid Cap Stock Fund (~15% growth since inception in '90 / ~20% 3 year growth)

 

[hellokeith]

Originally posted by: 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!

You need to see each fund's performance. My suggestion would be to balance the investment %'s over three categories: funds that performed well in the last 1-3 years, funds that performed well in the last 4-7 years, and funds that performed well 7+ years.

And DO NOT PURCHASE STRAIGHT COMPANY STOCK. Unless you are working for Intel or IBM perhaps.

 

[ebaycj]

#1 rule about 401k is:

You are 10 times better off getting your own Roth 401k and completely forgoing any traditional 401k (even if there is a company match). Now if you can get a Roth 401k through your company with a company match, then all the better.

Paying taxes now on $1000.00 >>>>>> Paying taxes 40 years down the road on the 50,000+ that your $1000 has grown into.

 

[sciencewhiz]

Originally posted by: ebaycj
Paying taxes now on $1000.00 >>>>>> Paying taxes 40 years down the road on the 50,000+ that your $1000 has grown into.

If the tax rate is exactly the same, you end up with the same amount whether you pay taxes now or later.

With a Roth, you're betting that the tax rate when you retire will be higher then when you put the money into the IRA.

 

[HombrePequeno]

Originally posted by: 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.

Usually around 10-11%. Of course that is an average and year to year returns could be drastically different from that.

If you really want a high return you could put a decent amount into an emerging market index. Vanguard's Emerging Market Index Fund has averaged 29%/yr for the last three years. Of course emerging markets are also very risky. If something similar to the Asian Financial Crisis happens again, don't be surprised if you lose half of your money in that fund. They also don't follow our economy too well. There may be a really bad year in emerging market stocks even though the US economy is hot. This is in contrast with a small cap fund that essentially mirrors the S&P but is amplified.

 

[Jadow]

with 35 years to go, 0% bonds.

50% S&P 500 (Large Cap)
30% Small and Mid Cap
20% International

 

[Jadow]

Equity
Barclays Global Investors S&P 500 Index Fund - 50%
Franklin Portfolio Mid Cap Stock Fund 10%
DFA U.S. Small Cap Fund - 20%
Capital Guardian International Equity Fund - 20%

 

[Jadow]

Originally posted by: ebaycj
#1 rule about 401k is:

You are 10 times better off getting your own Roth 401k and completely forgoing any traditional 401k (even if there is a company match). Now if you can get a Roth 401k through your company with a company match, then all the better.

Bull. Giving up on the company match is giving up on free money, as simple as that. if you put in 6%, and your company matches half that, that's an automatic 50% return.

Also, Roth max is only $4000. Which is way to low if it's all a person is saving (every penny counts though)

 

[ultimatebob]

Hmm... At your age, I'd go for percentages like this instead:

40%--large cap stocks
15%--mid cap stocks
10%--bonds
20%--small cap stocks
15%--international stocks

You're still young, so you should be investing in more small cap and international stocks, and less bonds. I personally like having a little bit in bond funds, though, just so I have at least ONE fund that isn't going down when the stock market tanks

 

[Legend]

Originally posted by: hellokeith

Originally posted by: 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!

You need to see each fund's performance. My suggestion would be to balance the investment %'s over three categories: funds that performed well in the last 1-3 years, funds that performed well in the last 4-7 years, and funds that performed well 7+ years.

And DO NOT PURCHASE STRAIGHT COMPANY STOCK. Unless you are working for Intel or IBM perhaps.

Chasing the best performance typically yields the worst return. If you chased tech stocks in the late 90s after strong performance, you'd lose. If you chased Japanese stocks after their boom (80s?) you would have suffered poor results in the 90s. And I'm betting if you put your money into Precious Metals & Mining or REITs, you'd perform poorly in the next 10-20 years. Unless you really understand the market, like Buffet, you shouldn't follow top performers. Unless you are checking a fund's performance over the long haul when compared to index funds in the same asset class.

 

[hellokeith]

Good point, Legend. I neglected to state that I adjust the fund %'s at least once a year. And I avoid funds which are singularly dependent on one company.

On the flip side, "diversifying" can become a self-defeating investment obsession, so don't be afraid of performance metrics.. they are there for a number of good reasons.

 

[LegendKiller]

Originally posted by: HombrePequeno

Originally posted by: 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.

Usually around 10-11%. Of course that is an average and year to year returns could be drastically different from that.

If you really want a high return you could put a decent amount into an emerging market index. Vanguard's Emerging Market Index Fund has averaged 29%/yr for the last three years. Of course emerging markets are also very risky. If something similar to the Asian Financial Crisis happens again, don't be surprised if you lose half of your money in that fund. They also don't follow our economy too well. There may be a really bad year in emerging market stocks even though the US economy is hot. This is in contrast with a small cap fund that essentially mirrors the S&P but is amplified.

10-11% is high for large caps. Long-run market performance is in the 9-10% region, including small and mid caps. This excludes fees.

A 29% 3-year return isn't impressive. A 10 year 29% return is.

 

[LegendKiller]

Originally posted by: ebaycj
#1 rule about 401k is:

You are 10 times better off getting your own Roth 401k and completely forgoing any traditional 401k (even if there is a company match). Now if you can get a Roth 401k through your company with a company match, then all the better.

Paying taxes now on $1000.00 >>>>>> Paying taxes 40 years down the road on the 50,000+ that your $1000 has grown into.

This is very poor advice.


1. You max out on your own Roth, as others have mentioned.

2. Company match. This can be massive for some people (it's 6% $ for $ at my company, which is a lot)

3. The value dollar spent on taxes is today is much more than a dollar spent in 30 years. If you figure that you don't pay any taxes today, then all of that tax money is reinvested and earns more money tomorrow. PV back your tax flows for 30 years and you will see a huge difference.

 

[alrocky]

Originally posted by: weiv0004
I'll look into picking up some of the reading suggestions you guys have given and then maybe juggle things around a little bit... Any comments? Criticisms? Mocking laughter?

25% Vanguard LifeStrategy Growth Fund (~10% growth since inception in '94 / ~15% 3 year growth)

25% Capital Guardian Emerging Markets Equity Fund (~15% growth since inception in '99 / ~35% 3 year growth)

25% DFA U.S. Small Cap Fund (~15% growth since inception in '92 / ~ 25% 3 year growth)

25% Franklin Portfolio Mid Cap Stock Fund (~15% growth since inception in '90 / ~20% 3 year growth)

Please provide the 5 letter ticker for all the mutual funds available in your 401(k). Do you receive a company match? Do you receive company stock at a discount? Before you decide to forgo bonds, have you done a risk tolerance test? Are you maxing out the 401(k) @ $15,500 and an IRA at @ $4000? 25% in Emerging Market is much too much.

 

[AStar617]

Originally posted by: NuAlphaMan

Originally posted by: 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.

:thumbsup: I was going to tell you the exact same thing. You want diversify, but you should definitely increase your percentage in small cap and international! For me, these have been two of the top performers in my portfolio!

Interesting, thx for the input guys. And just in time for open enrollment changes!


A couple q's:

- suggested percentages for each (S&P500 index, small cap, int'l)? I'm thinking 70/15/15 off the top of my head.

- should i adjust only future contributions and leave the current balance as-is in S&P500, or reinvest my balance to reflect the contribution adjustment?

 

[AStar617]

oops double post

 

[ttown]

The 15% in bonds is too much.

Of the ones you listed -- and at a young age, I'd go:
35% Dodge and Cox Value Equity
35% Franklin mid-cap
30% Vanguard moderate growth

Definately stay away from company stock -- unless it's a VERY stable multinational co. -- but even then i'd be very reluctant.

Also, as others have said: put in at least what the company will match. If you've got enough money left-over, I'd invest the excess (above the 401k matching limit) in a Roth IRA. If you've only got pennies left-over, stick them in the 401k.

good luck -- and congratulations for realizing it's good to start early

 

[alrocky]

Originally posted by: AStar617
A couple q's:

- suggested percentages for each (S&P500 index, small cap, int'l)? I'm thinking 70/15/15 off the top of my head.

- should i adjust only future contributions and leave the current balance as-is in S&P500, or reinvest my balance to reflect the contribution adjustment?

William Bernstein in The Four Pillars of Investing suggests a ratio of 8:4:5 for Large:Small:Foreign. That works out to 47:24:29. If your money is in a taxable account you should use future contributions toward Small Cap and Foreign. If in a 401(K) or like account, you may as well rebalance the whole account to reflect your desired allocation.

-----

OP, Franklin - Templeton is a LOAD mutual fund company. I'd suggest avoiding it altogether if the LOAD is not waived for you. I don't see "Franklin Portfolio Mid Cap Stock Fund" on the Morningstar or Franklin T. website. It'd be a lot easier to suggest which funds to avoid and which to consider if we knew the 5 letter ticker for all the mutual funds available in your 401(k).