Tuesday, January 28, 2014

401k allocation, should I stay diversified or move everything to a target date index fund?

Posted on 2:32 PM by Unknown
 Over at Reddit we read the following discussion:  401k allocation, should I stay diversified or move everything to a target date index fund? 
submitted ago by homiewannalive

I am currently 22 getting my full employer match on my 401k and have set it up to be 'aggressive'. I use mostly stock options that are foreign and domestic, I though about just moving my entire allocation to the target date fund for 2055. The 401k is through Fidelity.
Would it be smart to move 'everything' to a target date fund or still leave some sort of allocation else where?

 EDIT: 401k Options
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[–]luckeye 13 points ago

Put it all in the total market index fund. .07% expense ratio makes it your best option.
[–]Pzychotix 4 points ago

Do note that the Spartan total market index fund is US stocks only and wouldn't get the exposure to foreign stocks.
[–]luckeye 2 points ago

True, but if this account has a low balance then it doesn't really matter all that much. And if he has a Roth IRA or similar, he can diversify through another account.
[–]tryingtohelp2010 1 point ago

That's my recommendation too. I am currently investing in that (have for a year now) through my 403b. It's best for the low cost fee approach.
[–]NeedHobbies 1 point ago

+1. Use an IRA for low-cost bonds & international stocks and you've got a simple 3-fund portfolio.
[–]Rinx 0 points ago

100% stocks is a terrible allocation for so many reasons. You'd be much better off with a target date fund and getting small exposure to bonds. It will also leave you with little exposure to emerging markets and other international funds, and no REITs either.
The best answer is to go educate yourself so you don't need advice from internet strangers :) If you don't want to do that then target date funds seem like your best bet, even with the slightly higher expense ratio.
[–]luckeye 2 points ago
If he is only investing up to the employer match, it really doesn't matter. We are talking about a few thousand dollars. He can diversify in a Vanguard Roth IRA
[–]United StatesaBoglehead 9 points ago

Fidelity target date funds are on the expensive side. If you post a list of your 401k options and their expense ratios we can give you better advice.
[–]ArtificialNebulae 5 points ago

Not to mention needlessly complex. This is a copy-paste of what's in the Freedom 2040 fund:

  • 9.25% Fidelity Series Equity-Income Fund
  • 7.61% Fidelity Series All-Sector Equity Fund
  • 7.47% Fidelity Series Growth Company Fund
  • 6.53% Fidelity Series Growth & Income Fund
  • 6.08% Fidelity Series Blue Chip Growth Fund
  • 5.94% Fidelity Series Stock Selector Large Cap Value Fund
  • 4.65% Fidelity Series Opportunistic Insights Fund
  • 4.64% Fidelity Series Intrinsic Opportunities Fund
  • 3.74% Fidelity Series Small Cap Opportunities Fund
  • 1.86% Fidelity Series 100 Index Fund
  • 1.13% Fidelity Series 1000 Value Index Fund
  • 1.13% Fidelity Series Small Cap Discovery Fund
  • 0.75% Fidelity Series Real Estate Equity Fund
  • 2.44% Fidelity Series Commodity Strategy Fund
  • 9.54% Fidelity Series International Growth Fund
  • 9.45% Fidelity Series International Value Fund
  • 5.91% Fidelity Series Emerging Markets Fund
  • 1.95% Fidelity Series International Small Cap Fund
  • 1.55% Fidelity Series Investment Grade Bond Fund
  • 6.57% Fidelity Series High Income Fund
  • 0.65% Fidelity Series Floating Rate High Income Fund
  • 0.67% Fidelity Series Emerging Markets Debt Fund
  • 0.46% Fidelity Series Real Estate Income Fund
  • 0.07% Other
Compared to Vanguard's 2040 Target Retirement:

  • 63.0% Vanguard Total Stock Market Index Fund Investor Shares
  • 27.0% Vanguard Total International Stock Index Fund Investor Shares
  • 8.1% Vanguard Total Bond Market II Index Fund Investor Shares
  • 1.9% Vanguard Total International Bond Index Fund Investor Shares
[–]homiewannalive[S] 2 points ago

401k Options
Imgur made the image blurry for some reason but it should still be legible, if not let me know.
[–]DocBrownMusic 2 points ago

It's the thumbnail that's blurry -- the original image itself doesn't seem blurry to me: http://i.imgur.com/hDIUdVt.png
If you want the original URL link, it's on the right side of the page, or you can just click on the thumbnail itself
[–]CalvinsStuffedTiger 2 points ago

I have a philosophical question for you guys. If your employee is matching you x% and giving you free money. Then wouldn't taking more risk with your company 401k and weighing more heavily in developing markets and be more conservative with your post tax Roth IRA?
[–]ductyl 4 points ago

Not really. You should treat the "free money" the same as the money you invested. That's like saying, "if you get a bonus at work, shouldn't you go spend it all on scratch tickets?" Just because the money isn't something you directly took from your paycheck doesn't mean it should be treated any differently than the money you earned normally. A financial plan should apply to every dollar you control, regardless of it's source.
[–]CalvinsStuffedTiger 1 point ago

Err...wouldn't it be better to take more risk...forgive my nonsensical mobile type.
[–]United StatesaBoglehead 1 point ago
Then wouldn't taking more risk with your company 401k and weighing more heavily in developing markets and be more conservative with your post tax Roth IRA?
Maybe. You should do what your asset allocation/financial goals call for no matter where the money is coming from. If that's upping the risk level with small caps and developing markets then go for it.
[–]CouchCushionStrategy 1 point ago

In his case yes, but not always.
The target date funds for my fidelity 401k have lower expense ratios than Vanguard, though to be fair administrative fees that are part of the plan kind of erase some of that benefit.
[–]EventualCyborg 1 point ago

0.8% isn't terrible, and it would expose him to some micro, small, and medium caps and internationals (both developed and developing) which is important.
[–]Brassmonkeyhunk 1 point ago

Probably a dumb question, but my 401K is also through Fidelity and my target funds are the Black Rock Lifepath and my expense ratio is .14%. Why are there different types of target funds? Does it depend on the employer?
[–]lightcloud5 1 point ago

Different companies (e.g. Schwab, Vanguard, Fidelity, BlackRock) are free to make their own target date fund products, just like there are multiple funds that track the S&P 500.
Note that although the objective of a Target Date Fund 20XX remains the same across target date funds, different target date funds will use different means to achieve them. For instance, some target date funds may be more aggressive than others, even if they have the same target date year.
[–]theplaidavenger 3 points ago

Do you have an IRA. Or money to open one? Going 100% total stock market for the low ER then using an IRA to get bonds and international stocks at a lower ER then your 401k would be ideal for your situation.
Don't give up maximizing the match to do this though.
[–]KhabaLox 1 point ago
Going 100% total stock market for the low ER then using an IRA to get bonds and international stocks at a lower ER then your 401k would be ideal for your situation.
If he goes with a Roth IRA, I would actually suggest the opposite. Put your aggressive funds (read, equity indexes) in the Roth account and put your less aggressive (read, bond indexes) in the pre-tax account. That way, you capture the big(ger) gains in the post tax account.
Of course, at 22, he'll probably only want minimum bond exposure, so he could buy-in for the minimum on a bond fund in his 401(k), and put the rest into an equity index.
[–]jk147 1 point ago
All of my allocations are in target funds, IRA included.
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