Starting a 401k, need some help with allocation

[nboy22]

Hey everyone,

I'm looking at starting up my 401k this next quarter since my employer matches 100% up to 3% and 50% up to 5%.

I will be turning 27 next month and I currently make $40k a year and am planning on putting 5% of that ($2,000 a year) into my 401k. I have about $9,900 in car loan debt that I am currently attacking aggressively due to ATOT's advice in one of my previous threads, but that is my only debt. The car loan should probably be paid off around the end of this year, or early next year since I'm throwing about $1200 a month at it.

I took a little survey that was included with the vanguard packet I received from my workplace and it said that I should invest 70% into stocks and 30% into bonds. Of course, since I'm starting at a younger age I would rather be more stable and make the most money in the safest way possible. Does this sound on target for someone my age?

Also, I have a sheet of selections that I can allocate percentages to: http://postimg.org/image/o07kxkg15/

Not sure if you guys could give me some tips on which bond(s) and stock(s) I should be allocating my money too, but I would greatly appreciate any advice!

 

[dbk]

you can select a lifecycle fund and it will auto adjust the allocations for you (set it and forget it method), if thats available for you.

 

[Pantoot]

Without looking at their performance or costs, I recommend you just pick one (2045 or 2055 maybe) of the targeted retirement ones.

 

[roguerower]

I'm 27 in about a week and have all of my 401k tied up in the aggressive fund. Not gonna touch it for a while so might as well try and go big now.

 

[Brainonska511]

I'd probably stick with the Vanguard funds, due to their low costs. You could also dump it all into an appropriate Target Retirement fund - it'll provide a balanced allocation immediately and will adjust between stocks and bonds as the account ages and you get closer to retirement.

 

[Gunslinger08]

I would put it all into VTIVX for now. Like dbk said, these "target retirement" funds will auto-adjust the ratio of stocks to bonds as you get older. I am a strong believer in low cost index funds, which are the entire holdings of VTIVX. The expense ratio of 0.18% is very low. You could probably do slightly better if you built the same portfolio with Admiral shares, but you don't have the buy-in for those yet.

 

[DeviousTrap]

Of course, since I'm starting at a younger age I would rather be more stable and make the most money in the safest way possible. Does this sound on target for someone my age?

Just wanted to comment on this part... NO

That's the exact opposite of the investment philosophy you want. The younger you, are the more risk tolerant you should be. The reason being is that you have a lot of time to make the money, so you can easily withstand significant market fluctuations. The older you are, the more stable of an investment choice is needed as your withdrawals will be imminent.

 

[Drako]

I'm 27 in about a week and have all of my 401k tied up in the aggressive fund. Not gonna touch it for a while so might as well try and go big now.

This.

Go for aggressive growth funds while you are young.

Also, try to max out your contribution every year.

 

[DaveSimmons]

In your shoes I would put 100% into the Vanguard Target 2055 fund.

This is a fund made up of low-expense Vanguard index funds, and it includes the total US stock market, some international stocks, and a little bit of bonds that increases over time.

It is fully diversified (thousands of stocks) and the odds are 80%+ in your favor that it will out-perform any actively managed funds that you might pick instead.

It might sound "too easy" or seem "too boring" but you could buy and hold shares of this fund over decades and do very well.

 

[SketchMaster]

You need to be putting in as much as you can while you're young, it will make a HUGE difference down the road.

 

[DaveSimmons]

Also, when you change jobs do a rollover IRA to vanguard.com and put the money into their Target 2055 fund again.

Eventually you might want additional funds to be able to have more in international, or large-cap, or whatever. But by itself this is a great fund to hold over decades.

 

[Hacp]

Your 401k is very good. I wish my options were as good. My portfolio is a diversified one. 50% large cap, 50% small cap, 50% value, 50% growth, 50% US, 50% international.

 

[kt]

A few already said this but I am going to reiterate, at your age you should put your 401k into the most aggressive fund. Just don't make a habit of checking your 401k every day, or you will second guess yourself. Check once a quarter just to see where you are at and don't change your allocation at a whim. Sometime you just need to ride out the dips.

 

[Exterous]

I took a little survey that was included with the vanguard packet I received from my workplace and it said that I should invest 70% into stocks and 30% into bonds.

This would be far better than going towards a 'safer' investment. Over long periods of time safe investments are only safe because they trade potential returns for principle protection. (With all this advice please keep in mind that no one can see the future and that all of the advice is based off of research on historical trends which may or may not continue - although historical trends suggest that it will )

As a general rule over 10 years the stock market will give you better returns than a bond fund so given your time frame more stocks than bonds would be better. I would consider 80% stocks or more. For example the VFFVX 2055 fund is almost 90% stocks and FWIW I was at 90% stocks at your age

An important thing remember is that more aggressive allocations only work if you are disciplined. With a stock heavy portfolio you need to be prepared to see it lose 50% of its value in a short period of time and not bail out of your selections. Sure many say they own't but all we need to do is look at 2008-2009 to find thousands of examples where people jumped ship when the prices kept going down. Few returned in time to make their money back when the market recovered and most are now behind those who stayed in. If you can't 'Stay the course' then go for a more conservative mix but realize that this comfort and security is likely at the expense of gains. (But it would be better than going aggressive and then selling at the bottom only to have to get back in during the swing back up)

The only 'bad' thing (and its not really that bad) I will say about the Vanguard Target funds is that some think they are a bit light on international holdings. They are certainly a very very good option but some schools of thought (myself included) would combine 5-10% VTSGX with 90-95% VTIVX. I would suggest doing some reading though so you don't just do it because 'Dang that Exterous guy seems pretty cool and has a high post count so I'll do it' but rather because 'I know and understand the potential risks and benefits of doing this'

 

[DaveSimmons]

Good points, especially about needing to be able to ignore the market.

I stayed in the market and kept buying more stock index funds during the 2008-2009 crash. The funds I held onto have recovered, and the new purchases I made during the crash gained an extra 25%+ within a year or so.

With your 401k remind yourself you're investing it to use decades from now, so a big drop for a year or three means nothing except that you get to buy fund shares at a discount while the share price is down. Buy, hold forever.

 

[ultimatebob]

Yeah... the rules of thumb for young people investing in a 401k is to always invest up to the matching amount, and try to invest that money aggressively in medium to high risk mutual funds comprising mostly of stocks.

Don't worry about bonds until you're 35 or so. Especially now, when bonds aren't doing well.

 

[cyclohexane]

Suggest you put the maximum $17,500 in per year. Let it grow, you'll have over $1M when you retire.

 

[NoTine42]

What happens to bond prices when interest rates rise?

What is the current interest rate?

I think there are better options to consider if you are looking at "security"

 

[DaveSimmons]

What happens to bond prices when interest rates rise?

Bond funds usually lose value, because the fund is holding onto "old" bonds that pay less than the new, higher rate.

Imagine you have a 1-year CD paying 1.0%. Interest rates rise, and now a 1-year CD pays 1.25%. No one would want your old CD when they could get a new CD paying more.

Stock index funds are the safest high-yield choice for someone young enough to ride out any dips in the market.

 

[seepy83]

Suggesting that someone max out ($17.5k/year) in their 401k when they're only making $40k/year is absurd.

 

[WackyDan]

You want to diversify, but you want to be aggressive at your age and move to more stable mix within five years or so of retirement.

Bond funds are ok and I have about 20% of my 401k in bonds (I'm 44). They are slow growers but if the economy tanks again they will be the best performers and balance some of your losses on stocks.

It only takes a couple of hours to research some of the stock funds and such that are offered in your 401k... The larger the company the more diverse the options.

If your company offers a stock purchase plan and you are confident in the stability and growth prospects of the company that is another excellent way to invest.

 

[BurnItDwn]

Suggest you put the maximum $17,500 in per year. Let it grow, you'll have over $1M when you retire.

17.5K yearly in 401K on an income of 40K is pretty much an insane pipe dream.

 

[WackyDan]

Don't worry about bonds until you're 35 or so. Especially now, when bonds aren't doing well.

When they aren't doing well is the time. He should be heavy on stocks, but bonds pay big with the next recession. He should have some bond funds on the mix.

 

[DaveSimmons]

When they aren't doing well is the time. He should be heavy on stocks, but bonds pay big with the next recession. He should have some bond funds on the mix.

The Vanguard Target fund does include a little bit of bonds, but I'll disagree with you.

Bond funds are best for someone needing short-term protection against drops in the stock market. If you needed to be able to pull money out of a regular brokerage account or if you're close to retirement then bonds are nice to have.

If you're 30+ years away from retirement then a recession is a great time to buy stock funds in your 401k. You're getting a nice discount on your fund shares because the market has tanked, and you have plenty of time to wait for the market to recover.

Your bond fund might gain 2% / year during the recession while your bottom-of-the-market stock fund share purchases gain 5-10 times that much.

 

[OutHouse]

Suggest you put the maximum $17,500 in per year. Let it grow, you'll have over $1M when you retire.

thats almost half his gross pay, not much room for rent or building an emergency fund.