401k Allocations:
by BogleRetirement » Sun Feb 09, 2014
11:47 am
Hi all, I am 24 years old and need help with deciding what fund to put my 401k in. I am not too familiar with investments.
I am 24 so I am willing to take risk. I have also been maxing out my ROTH IRA since I was 19 through Vanguard which I have put in a target fund, however I think I might want to change the fund to something more with high reward an was wondering if anyone can chime on this as well.
Here is the list of funds available to me for 401k.
My company matches $0.50 per $1.00 of employee contributions on the first six percent (6%) of eligible pay.
Large Cap:
FID BLUE CHIP GR
FID EQ DIV INCOME
FID FIDELITY FUND
FID OTC PORTFOLIO
SPTN 500 INDEX ADV
TRP EQUITY INC ADV
Mid Cap
FID MID CAP STOCK
FID VALUE
SPTN EXT MKT IDX ADV
Small Cap
FID SMALL CAP STOCK
FID STK SEL SM CAP
International
FID INTL DISCOVERY
FID WORLDWIDE
SPTN INTL INDEX ADV
Blended Investments
FID BALANCED
FID FREEDOM 2000
FID FREEDOM 2005
FID FREEDOM 2010
FID FREEDOM 2015
FID FREEDOM 2020
FID FREEDOM 2025
FID FREEDOM 2030
FID FREEDOM 2035
FID FREEDOM 2040
FID FREEDOM 2045
FID FREEDOM 2050
FID FREEDOM 2055
FID FREEDOM INCOME
Targeted Fund
FID Retirement 2055
Posts: 2
Joined: 8 Feb 2014
Re: 401k Allocations:
by timboktoo » Sun Feb 09, 2014 4:25 pm
Choosing the funds is your last step. Begin with choosing an asset allocation. Once you know what percentage you want to allocate to US stocks, international stocks and bonds, you can find the funds that will best fit your asset allocation.
I'd warn you not to try to outperform for the sake of outperforming. The purpose of a retirement portfolio is to provide you with a retirement. As I see it, you can do this in one of two ways and still be following a Boglehead philosophy.
1. You can invest simply with broad market index funds, such as a Three Fund portfolio. The target retirement funds Vanguard sells are similar to this, though they now include a small percentage to unhedged international bonds.
2. You can slice and dice, trying to maximize risk-adjusted returns.
You seem to have more interest in the latter than I do. I would recommend you read William Bernstein's books in that case.
- Tim
Posts: 69
Joined: 31 Mar 2013
Re: 401k Allocations:
by Laura » Sun Feb 09, 2014 4:30 pm
Hello and welcome,
Can you add the expense ratios next to each of the funds you list? That is important. Also, please list the amount of new money going into each of your accounts annually including matching funds.
I am guessing the only options in your 401k with low costs are:
SPTN 500 INDEX ADV
SPTN EXT MKT IDX ADV
SPTN INTL INDEX ADV
Also, I am not sure what you mean by "more rewarding" for your target retirement fund? If you pick a fund that matches your target asset allocation you will get what the market returns in each asset class since you are invested in everything. That is the best way to invest so you don't need anything more rewarding. However, since you probably don't have a low cost bond fund in your 401k plan unless I missed something then you will want to work to build a low cost portfolio across both accounts. You can use the 401k for your US equity and the roth for bonds. International can go where it fits. Best choice is the roth to use Total Intl Stock Market because it holds both developed and emerging markets while the Spartan fund in your 401k has developed only. However, it is still a great choice.
401k
Spartan 500
Spartan Extended market (mid/small cap S&P completion at ratio of about 75/25 500/ext market)
maybe Spartan Intl if you need more.
roth
Total Bond Market
Total Intl Stock Market
Knowing the amount of new money going to each account will make it easy to structure this so you maintain your target asset allocation primarily through new contributions.
Laura
Posts: 6258
Joined: 19 Feb 2007
Re: 401k Allocations:
by BogleRetirement » Sun Feb 09,
2014 10:50 pm
Thanks for the reply.
I am actually "new" to the whole retirement game. I have been working since I was 18 and set up a ROTH IRA and have been maxing it out with Vanguards "Target retirement fund 2055". I just got my real big boy job, and want to have a better understanding of what I should be looking at when I am allocating my money to these funds.
I had read on a forum before that since I am young I should take a little bit more risk since by ROTH IRA fund is quite safe, not too risky, so not high enough reward.
And from reading other threads on Bogleheads I shouldn't put all my basket in one bucket like I did for my ROTH, so I plan on changing that up once I am ready to max out next month.
Posts: 2
Joined: 8 Feb 2014
Re: 401k Allocations:
by Laura » Sun Feb 09, 2014 11:07 pm
You are still confused. The Target Retirement fund is NOT putting all of your eggs in one basket. You are correct, that is a bad idea. However, the Vanguard Target Retirement fund invests in almost everything in the market. Look inside and you will find Total US Stock Market and Total US bond market, Total Intl Stock Market and Total Intl Bond Market. You have a piece of your egg in almost everything possible to invest in. This is a hugely diversified portfolio inside that one fund and is basically the opposite of putting all your eggs in one basket. Anything you invest in will duplicate holdings that you already have and will not give you additional diversification. All it will give you is overweighting in one category or the other.
You appear to have a Fidelity Freedom fund in your account. This isn't as good an option as the Vanguard fund because it holds a lot of high cost funds. In Fidelity the four-in-one index is a better option but it only comes in one flavor with an asset allocation of 75/25. For that reason you may want to move your account to Vanguard.
Now, if you told us you were investing everything in the stock of one company, that would be putting all your eggs in one basket and we would tell you to diversify. However, you are already diversified so don't worry about that.
Depending on which target retirement fund you have in your account it probably is very risky. The 2055 fund holds about 90% in stocks and 10% in bonds. This is a good allocation for a new investor. Here is a table offered by Larry Swedroe based on the 1970s bear market showing the amount of decline for various stock/bond allocations:
Max Equity - Exposure Max loss
20%...............5%
30%..............10%
40%..............15%
50%..............20%
60%..............25%
70%..............30%
80%..............35%
90%..............40%
100%.............50%
"Maximum Portfolio Loss X 2 = Maximum Equity Allocation"
Your portfolio would probably drop 40% or more in a big market decline. This is risky. Holding a few bonds allows you to diversify into that asset class which does outperform all other asset classes from time to time. To diversify you want a little bit in every asset class since it is impossible to know which asset class will do well in any given year. Take a look at the Callan Table to see what I mean.
I encourage you to do some reading to educate yourself before you go down the wrong path. I suggest starting with a book that helped me...Personal Finance for Dummies or Investing for Dummies. The Bogleheads Guide to Investing is also a great choice.
Laura
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