Can someone help with 401K allocation?

[LadyT]

My sister asked for advice on how to diversify her 401K, but I'm not a pro at that like some of you here, so I'd love some opinions please! She is 26. Thanks for any advice!

 

Asset Allocation

Manning & Napier Pro-Blend Cons. Term S

Manning & Napier Pro-Blend Extend Term S

Manning & Napier Pro-Blend Max Term S

Manning & Napier Pro-Blend Mod Term S

Maxim Con Profile II Portfolio Initial

 

International Funds

BlackRock Global Alloc Fund R

Dreyfus Greater China I

Janus Overseas Fund T

Thornburg International Value R4

 

Specialty

BlackRock Health Sciences Opps Inv A

Ivy Science & Technology Y

Prudential Jennison Natural Resources A

MFS Utilities Fund R4

Oppenheimer Gold & Special Minerals A

Prudential Global Real Estate A

 

Small Cap Funds

Buffalo Small Cap

Fidelity Advisor Small Cap A

Victory Small Company Opportunity R

Wells Fargo Advantage Small Cap Val Inv

 

Mid Cap Funds

JHancock3 Disciplined Value Mid Cap I

JPMorgan Diversified Mid Cap Growth Sel

Lord Abbett Value Opportunities A

 

Large Cap Funds

American Beacon S&P 500 Idx Instl

American Funds Fundamental Inv R3

American Funds New Economy Fund - R3

Janus Forty S

Pioneer Fundamental Value A

T. Rowe Price Growth Stock Fund - Adv

Vanguard 500 Index Investor

 

Balanced Funds

Buffalo Flexible Income

Invesco Van Kampen Equity & Income A

 

Bond Funds

Federated Instl High Yield Bond Instl

Federated US Govt 1-3 Yr Instl

Loomis Sayles Investment Grade Bond A

Sentinel Government Securities A

 

Self-Directed Options

TD AMERITRADE SDB Money Market

TD AMERITRADE SDB Securities

 

Fixed

Key Guaranteed Portfolio Fund

[Baddies4Breakfast]

(I'm in my 20's as well.)

 

Wish there was more information on any fees or commissions for those funds as well as expense ratio. Lots of those end in "A" and that usually means there's a front-end load, so as soon as you put your money in with each paycheck, some fund manager gets a piece of that money as commission. Usually a bad idea in my opinion. I have my Roth IRA with Vanguard and love their low expense ratios and love index funds in general. My 401k at work has some expensive funds but I found a S&P 500 Index fund (the only fund that had "Index" in it) and am putting a lot into that one. It's 100% American stocks so doesn't diversify with bonds or international, but my Roth IRA gets some of that so I'm not worried.

 

The "Vanguard 500 Index Investor" in your sister's list looks pretty attractive. The expense ratio on Vanguard's website looks to be 0.17%, which is very, very nice. I'd definitely contribute to that if my 401k offered it. Might want to add a bond fund and some other kind of stock fund if she wants to further diversify, but I'm so frugal honestly I go for lowest expense ratios and choose almost any index fund if a 401k offers it. I'm fine with the volatility of the S&P 500.

 

Wish there was more info provided on all the funds like loads, fees, commissions, expense ratios, and what sector the funds are in. I bet a lot of those funds will have 1% and higher expense ratios and some more fees and loads.

 

It also depends on your sister's tolerance for risk and understanding that at such a young age, if the market tanks, it doesn't mean you became poorer or lost that money. It's just what the market does, and retirement isn't for like 30 or 40 more years.

[LadyT]

(I'm in my 20's as well.)

 

Wish there was more information on any fees or commissions for those funds as well as expense ratio. Lots of those end in "A" and that usually means there's a front-end load, so as soon as you put your money in with each paycheck, some fund manager gets a piece of that money as commission. Usually a bad idea in my opinion. I have my Roth IRA with Vanguard and love their low expense ratios and love index funds in general. My 401k at work has some expensive funds but I found a S&P 500 Index fund (the only fund that had "Index" in it) and am putting a lot into that one. It's 100% American stocks so doesn't diversify with bonds or international, but my Roth IRA gets some of that so I'm not worried.

 

The "Vanguard 500 Index Investor" in your sister's list looks pretty attractive. The expense ratio on Vanguard's website looks to be 0.17%, which is very, very nice. I'd definitely contribute to that if my 401k offered it. Might want to add a bond fund and some other kind of stock fund if she wants to further diversify, but I'm so frugal honestly I go for lowest expense ratios and choose almost any index fund if a 401k offers it. I'm fine with the volatility of the S&P 500.

 

Wish there was more info provided on all the funds like loads, fees, commissions, expense ratios, and what sector the funds are in. I bet a lot of those funds will have 1% and higher expense ratios and some more fees and loads.

 

It also depends on your sister's tolerance for risk and understanding that at such a young age, if the market tanks, it doesn't mean you became poorer or lost that money. It's just what the market does, and retirement isn't for like 30 or 40 more years.

Thank you so much for the response! I will ask her if she can get me more details to post, like you mentioned above. Her tolerance is high, she understands that she has more time to "recover" and can be a little more aggressive than someone older.

[Kevin20]

You could spend a lot of time overthinking this and not accomplish much. You mentioned "diversification", and that's a sensible objective. The point of diversification in asset allocation is to moderate risk by splitting your money up among different asset classes that do not necessarily move in tandem. Fancy financial theory lingo says it this way: you can reduce your portfolio's beta [a measure of risk] by diversifying among asset classes that have low correlation with one another [one goes up, one goes down or stays flat, they don't do the same thing at the same time].

 

If you're wondering why not only buy things that always go up all the time ... well nothing always goes up, and you can't reliably predict what will go up and what will implode.

 

Now as a practical matter, without having special software and databases to analyze, what that means is to buy several different types of funds. And you've got the fund types labeled there: International, Specialty, Small Cap, Mid Cap, etc.

 

I think splitting the money up among 4 or 5 different funds and fund-types is a good basic approach. For a young person with the list you have, I'd go with these four types, though this isn't gospel, just my opinion:

Large Cap

Small Cap

International

Balanced

 

I'd put most in the Large Cap and Small Cap funds. Maybe something like 35 / 35/ 15 / 15%.

 

As for which funds, I'm not up to speed on specific funds these days, but likely as not you can't anticipate the best ones anyway. A sensible approach is to use the one with the lowest total fees built into it, for each category (which is probably a Vanguard where that's available). That's actually the advice that the leading Nobel-Prize winning theorists of financial economics of the past 60 years would give.

 

I'd avoid getting too narrow or specific. That means avoid any specialty funds. For international avoid a single-country fund like that China fund (which by the way you might be surprised to know that China's stock market has done nothing but decline for 5 years now.)

 

A mistake people make in 401k's is to get hung up on finding the one best fund. Another mistake is to "diversify" by buying 4 different funds, all of the same fund type.

Edited September 7, 2012 by Kevin20

[LadyT]

You could spend a lot of time overthinking this and not accomplish much. You mentioned "diversification", and that's a sensible objective. The point of diversification in asset allocation is to moderate risk by splitting your money up among different asset classes that do not necessarily move in tandem. Fancy financial theory lingo says it this way: you can reduce your portfolio's beta [a measure of risk] by diversifying among asset classes that have low correlation with one another [one goes up, one goes down or stays flat, they don't do the same thing at the same time].

 

If you're wondering why not only buy things that always go up all the time ... well nothing always goes up, and you can't reliably predict what will go up and what will implode.

 

Now as a practical matter, without having special software and databases to analyze, what that means is to buy several different types of funds. And you've got the fund types labeled there: International, Specialty, Small Cap, Mid Cap, etc.

 

I think splitting the money up among 4 or 5 different funds and fund-types is a good basic approach. For a young person with the list you have, I'd go with these four types, though this isn't gospel, just my opinion:

Large Cap

Small Cap

International

Balanced

 

I'd put most in the Large Cap and Small Cap funds. Maybe something like 35 / 35/ 15 / 15%.

 

As for which funds, I'm not up to speed on specific funds these days, but likely as not you can't anticipate the best ones anyway. A sensible approach is to use the one with the lowest total fees built into it, for each category (which is probably a Vanguard where that's available). That's actually the advice that the leading Nobel-Prize winning theorists of financial economics of the past 60 years would give.

 

I'd avoid getting too narrow or specific. That means avoid any specialty funds. For international avoid a single-country fund like that China fund (which by the way you might be surprised to know that China's stock market has done nothing but decline for 5 years now.)

 

A mistake people make in 401k's is to get hung up on finding the one best fund. Another mistake is to "diversify" by buying 4 different funds, all of the same fund type.

Thank you so much Kevin!!

Edited September 8, 2012 by LadyT