Diversifying when all your 401(k) funds suck?

[edro]

Right now I have my 401(k) in a Retirement Blend fund that is 90% Stocks.
I haven't read the prospectus, and I'm not even sure it will tell what stocks are in the blend.

Of course, almost all of the optional funds are doing poorly.

Is anyone diversified into many (8+) funds on their 401(k)?

Because there is no penalty for moving money between funds, why not put ~10% in each?

BTW, does the prospectus tell what stocks are in the blend?

 

[kranky]

You can't simply assume dividing up your money across all funds is going to make you diversified. You have to know what they invest in. You might find that the "Retirement Blend" fund simply invests in the other funds.

I have a combination of a large company growth fund, a large company value fund, a S&P 500 index fund, an international stock fund and a bond fund.

How many years until you retire?

 

[edro]

30, unless I get lucky (financially).

 

[dullard]

1) Put your funds into this tool. That tool is very powerful and is used by many experts.

2) Check the grid result. It'll look like a tic-tac-toe board. A diverse portfolio will have significant percentages in each of the 9 boxes. If one box (or more) is quite small or if one box (or more) is quite large in comparison to the others, then you are not diverse. Note: ideally, you'd be diverse in that grid in multiple countries.

3) If you want to go into a lot more detail, check the stocks, it'll tell you how much you owe of what stock.

 

[JS80]

Mid cap aggressive growth is the way.

 

[sactoking]

As a related topic, verifying diversity can be hard. There is ABSOLUTELY nothing stopping the fund manager of your "Large Cap Income" fund from putting 75% of the money into Zimbabwean penny stocks. The whims of the fund manager are not disclosed in any prospectus.

 

[JS80]

Originally posted by: sactoking
As a related topic, verifying diversity can be hard. There is ABSOLUTELY nothing stopping the fund manager of your "Large Cap Income" fund from putting 75% of the money into Zimbabwean penny stocks. The whims of the fund manager are not disclosed in any prospectus.

No that would not be allowed.

 

[LordSnailz]

Originally posted by: dullard
1) Put your funds into this tool. That tool is very powerful and is used by many experts.

2) Check the grid result. It'll look like a tic-tac-toe board. A diverse portfolio will have significant percentages in each of the 9 boxes. If one box (or more) is quite small or if one box (or more) is quite large in comparison to the others, then you are not diverse. Note: ideally, you'd be diverse in that grid in multiple countries.

3) If you want to go into a lot more detail, check the stocks, it'll tell you how much you owe of what stock.

Re: #2, is it true that you should try to model your portfolio to hit all 9 squares semi-equally? I would think your portfolio can still be kinda diverse without really hitting all 9 ...

 

[sciencewhiz]

Originally posted by: sactoking
As a related topic, verifying diversity can be hard. There is ABSOLUTELY nothing stopping the fund manager of your "Large Cap Income" fund from putting 75% of the money into Zimbabwean penny stocks. The whims of the fund manager are not disclosed in any prospectus.

What funds do you buy that don't show top holdings in the prospectus and/or annual reports?

 

[dullard]

Originally posted by: LordSnailz
Re: #2, is it true that you should try to model your portfolio to hit all 9 squares semi-equally? I would think your portfolio can still be kinda diverse without really hitting all 9 ...

I over-simplified it quite a lot in #2. But what I put is a good starting point. You don't need to hit them equally. There are good reasons to overload some regions more than others (for example, you might want your large cap to be twice as big as your small cap). Or you might want to underweight an area (Historically, small cap growth has the most risk by far and the returns really don't justify the risk). But, if you have extreme differences in some boxes, then you aren't as diverse as you want to be.

Also, that tool doesn't take into account other forms of investments. To truely check your diversity, you need a good balance of these:
[*]Cash in your bank account (which should basically be added to your bond amounts, so most people overweight bonds more than they think they are),
[*]Your equity in your house (most people are way more into this form of real estate investment than any other investment, making your stock % far less than the common goal of 80%-90%).
[*]Your investments in your education, antiques, collectables, etc.
[*]Investments into other items such as commodoties, metals, energy, REIT, etc.

 

[edro]

Whoa, nice tool. Thanks.

Looks like I am very heavily in the Large Cap Domestic Growth corner.

 

[dullard]

Originally posted by: edro
Whoa, nice tool. Thanks.

Looks like I am very heavily in the Large Cap Domestic Growth corner.

You are welcome. It is a common mistake for people to pick 8 funds, put ~12% in each, and think that they are diverse. But if all 8 funds are large cap, then you really just have 100% of large cap and you are not diverse at all.

That tool is quite useful in checking your picks. You'll probably never get exactly the mix you want with mutual funds, but that tool will help get you close.

 

[sactoking]

No that would not be allowed.

It very much IS allowed and is a dirty little secret of the mutual fund world. The paperwork you're given on a fund shows what the funds GOALS are, but they are by no means a legal contract binding the fund manager into just those markets!

What funds do you buy that don't show top holdings in the prospectus and/or annual reports?

What funds do you have that show EVERY trade in and out over the course of the year?!?

You do know that an annual report is a snapshot, right? It's not a flow over time. There's nothing preventing a manager from buying Microsoft, Yahoo, GE, Nabisco, etc in December for the annual report listing and then selling them in favor of speculating in Krugerrand in February. In fact, many of the 'best' fund managers do just this. That way, when they send out the annual reports they look prudent. Who's going to fire someone who lost 27% in 2006 when they were invested in such solid companies? They don't mention that they only held those stellar offerings for 12 days.

 

[sciencewhiz]

Originally posted by: sactoking

No that would not be allowed.

It very much IS allowed and is a dirty little secret of the mutual fund world. The paperwork you're given on a fund shows what the funds GOALS are, but they are by no means a legal contract binding the fund manager into just those markets!

What funds do you buy that don't show top holdings in the prospectus and/or annual reports?

What funds do you have that show EVERY trade in and out over the course of the year?!?

You do know that an annual report is a snapshot, right? It's not a flow over time. There's nothing preventing a manager from buying Microsoft, Yahoo, GE, Nabisco, etc in December for the annual report listing and then selling them in favor of speculating in Krugerrand in February. In fact, many of the 'best' fund managers do just this. That way, when they send out the annual reports they look prudent. Who's going to fire someone who lost 27% in 2006 when they were invested in such solid companies? They don't mention that they only held those stellar offerings for 12 days.

That would show in the turnover rate.

What fund (other then a small hedge fund) pulls the antics you describe. Name it/them.