Can someone explain 401k investing to me?

Over at Reddit we read the following discussion:  Can someone explain 401k investing to me? (self.personalfinance)

submitted 16 hours ago* by dpgaspard

I get the basics. My company is matching money I put up. I don't need that kind of info. I need a little more detail on how to choose good investments.

I chose the option to allow someone else to manage my 401k. I assumed I wouldn't keep up with it. I also assumed that the 1 paragraph they write about each investment wasn't enough for me to choose something intelligently. I'd like to change that mentality this year.

I just received an e-mail saying my company was adding these two new funds to our plan, but I don't really know what I'm looking at.

• What is the important information on these pages?
• Where else should I look for good information?
• Are these good/bad?
• Why?

If it helps. I'm 32, my company matches 3.5%. I put 8% in. 4% Roth, 4% Traditional. The only input I've put into my managed fund is that it can be "High Risk" stocks. For the past 2 years, it's risen 19% over my investments, so I really can't complain. I just don't know what I should be looking for. Any input would be appreciated.

http://www.viewjhfunds.com/usa/C01/peia/index.html

www.viewjhfunds.com/usa/C01/glda/index.html

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[–]United Statespentium4borg 2 points 16 hours ago

You should start by reading the long-term investing start-up kit link in the sidebar.

Generally, you want to figure out your risk tolerance and asset allocation, and then select low-cost broad market index funds to meet that asset allocation.

Investing is not so complicated that you need a professional to do it for you. There's nothing to "keep up with." Furthermore, having a professional invest for you generally just reduces you returns and/or costs you money. It's much better to do the modest reading required to learn how to control your own investment account.

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[–]United StatesSoftware_Engineer 2 points 16 hours ago

have a mix of stocks and bonds mixed on your risk tolerance and perhaps age.

stock funds tend to correlate extremely strongly with each other and your best strategy is to pick the funds with the lowest fees (lowest expense ratios)

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[–]United Statescatjuggler 2 points 16 hours ago

Check out this asset allocation tool: http://cgi.money.cnn.com/tools/assetallocwizard/assetallocwizard.html

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[–]MenloParker 2 points 13 hours ago

19% over the last two years is a pretty bad return... the US stock market rose by 33.66% and that's not even including dividends.

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[–]rawbdor 1 point 2 hours ago

he said 19% over his own investing,.... If we take his claim at face value, thats pretty good ;)

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[–]sleepyguy22 2 points 16 hours ago

Important information:

1) the fee to manage the fund. Anything over 2% and you're getting royally screwed, and even anything over 1% is pretty crappy. Some funds are less than 0.25%, but not a lot of providers offer those. Look to see if they do!

2) how it's invested. Usually a mixture of stocks / bonds. In stocks, it's international vs domestic, big vs small cap, etc. Try to invest in something that you understand, and makes sense to you. I.E. going all in with foreign chinese construction stocks may not be the most logical... But that's all a personal choice, and has to be juggled with the risk factor.

3) risk vs rewards. The younger you are, the riskier you should go. Find a fund with a high risk, and you could be rewarded dramatically. If you are nearing retirement, keep it in a safe place.

4) look for an index fund. Often times mutual funds try to 'beat the market', and while some of them are successful, nothing has ever beaten a true index fund. A lot of professionals now recommend to throw everything in an index fund. This tracks all stocks in a certain market/exchange/sector. For example, most of my 401k is in a general index fund tracking US and foreign stocks. Also, I wanted to try something new, and I have a good feeling about healthcare in the next few years, so I also invested a smaller amount in a healthcare fund that tracks the major US healthcare companies.

The biggest thing you should look for is the fee they charge. The latest trend is to put it in low-cost funds, since a high fee can really eat at your long-term gains.

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[–]DiggingNoMore 1 point 16 hours ago

I wouldn't go with the option for someone else to manage the money. You say you wouldn't keep up with everything, but that's the exact point. Just keep pouring money into it and don't try to shift money around from fund to fund. That is market timing. Don't try to do it.

My recommendation is to put most of the money in stocks (some kind of Total US Stock Fund and also a Total International Stock Fund), and a much smaller portion (say 10 or 20%) into a Total Bonds Fund.

All things being equal, go for ones with smaller expense ratios.

Keep it that simple and you don't need a financial manager.

Who is the 401k with? Vanguard, Joh Hancock, etc?

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[–]dpgaspard[S] 1 point 16 hours ago

Joh Hancock

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[–]DiggingNoMore 1 point 15 hours ago

Haha, I should've noticed the URL (which I didn't click because I'm on my phone). I also laugh because you copied my typo of "Joh Hancock." It's supposed to be "John." Anyway, I had a 401k with JH at an old employer, but I'm in the middle of rolling it to Vanguard.

Many of the JH funds I was being offered had fairly high expense ratios, like 0.9 or higher. Even if your expense ratios are high, though, you still want to get as much money in there as you can, because of:

1. The employer match
2. The money you put in a Traditional 401k is tax-advantaged
3. If you don't put in money in a given year, you can't go back and make up the lost tax-advantaged space.

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[–]dpgaspard[S] 1 point 9 hours ago

My employer matched the first 3.5%, but I put 4% in the Roth and 4% in the traditional, because I wasn't really sure which was better.