401k advice?

piedmontFebruary 23, 2007

I'm curious how people spread their 401k funds around. I'm 35, I have 122k in my 401k and using online calculators they tell me I need about 3 million by the time I retire and I'm going to fall short of my retirement goals at the rate I'm going. My 401k was doing very well when I was investing in 1 small cap and 1 mid-cap fund, usually I'd get 12-25% personal rate of returns. After meeting with a financial adviser he said I need to spread it out. I did between 2 small caps, 2 mid caps, and 1 European fund and my rate of return is now consistently around 4-6% and I've noticed I've fallen behind in reaching my retirement goal and I should increase my contributions. Had I not heeded his advice I'd be making 8-17% gains. By the way, I've given it 3 years now, and 12 statements in a row I'd been better off had I kept it to how I had it originally.

What's your opinion on putting them back to 2 funds vs. spreading them like my advisor recommended or even how do you go about planning your 401k?

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Chemocurl zn5b/6a Indiana

As they say, Hindsight is 20/20. Who really knows for sure what a fund will or will not do?

Are there only 5 funds available? 2 Small-cap, 2 Mid-cap, and 1 European?

Just having a choice of 5 doesn't allow one to be very diversified.


    Bookmark   February 23, 2007 at 2:01PM
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1st, the days of getting returns of 12-25% are over.
2nd,by "spreading it out", i am fairly certain your advisor didn't mean for you to add the same class of funds,you don't need 2 small cap funds or 2 mid cap funds..in a 401k, you are best to just have an index fund, that tracks the entire market..expenses are the lowest you'll find..
3rd, forget the retirement calculators, they "overestimate" your needs,i recently saw a calculator that has a more accurate calculation of $$$ needed for retirment,if i find it, i'll post it...You need to realize the current calculations for retirement are GOOD for the brokers, as they "suggest" you to ramp up your savings, at the benefit of fees generated for brokers :)
Not that there is anything wrong with saving too much, but it also scares people..

    Bookmark   February 23, 2007 at 2:30PM
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For choices I have

1 European, 2 Small Caps, 2 Mid Caps, 5 Large Caps, 3 Balanced Funds, 1 Fixed what I stated is what I invest in. I've noticed a soft pattern that based on the gains/loss of the Large cap, the middle caps are usually twice it and the small is usually quadruple. That is, more often than not if the Large caps gained 2% this quarter, the mid-caps are usually posting around 4% gains and small caps around 8% gains. Works in the negative direction as well. I originally had 80% small caps and 20% middle. Now I'm 40% small, 45% mid, and 15% European. Maybe my question should be, with my age and I like to take risks should I move more into small caps since I can recover if they don't fair well since I feel like I'm playing it too safe. Or, is the name of the game to finish the race, not to win.

    Bookmark   February 23, 2007 at 2:38PM
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Ah... thanks. What do you recommend then for a mix, I don't have an index fund as a choice. That's stupid considering that I think I read 80% of the funds of a 401k statistically have not beaten index funds. Our small cap choices do pretty good, last quarter they returned 17%, they usually are around 6-12%. It may have been an adjustment because they got slammed the quarter prior.

    Bookmark   February 23, 2007 at 2:56PM
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i'd be 65-35, stocks/bonds...I can't believe your 401k choises don't have an index fund...What company is the 401k thru?...here is a table i find useful to allocate $$$ to different risk tolerance levels.

Risk Tolerance % Stocks % Large Cap Stocks % Small Cap Stocks % International
Stocks % Bonds % Cash %
Aggressive 95% 40% 25% 30% 0% 5%
Moderately Aggressive 80% 35% 20% 25% 15% 5%
Moderate 60% 30% 15% 15% 30% 10%
Moderately Conservative 40% 20% 10% 10% 45% 15%
Conservative 20% 15% 0% 5% 55% 25%
Short Term 0% 0% 0% 0% 40% 60%

    Bookmark   February 23, 2007 at 3:05PM
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Here's what I do with my 401k and retirement is 13 years away. I have 5 funds - 1 international, 1 small cap, 1 med cap, 1 large cap and 1 company stock. I believe this provides plenty of diversification (and yes it's a conscious decision to be in my employer's stock but not too heavily). At the same time every year and just once each year, I review the performance and make needed allocation changes. I don't assume that I will leave the allocation as is forever. Based on recent performance, I have been more heavily weighted toward international.

In past years, my employer also offerred awful fund choices. We had a couple of years where none of the options had positive returns. My employer revamped the program and since then, we've had much better performing funds to choose from. If that's part of the problem for you, you could also call your 401k manager just to find out what's going on with your program. Just to compare, over the last 3 years my international fund has returned 20.24%, the small cap has returned 13.22% and our 2 midcap choices have returned 6.7% and 19.22%, respectively.

At a minimum, I'd strongly suggest annual reallocations.

    Bookmark   February 24, 2007 at 6:33AM
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A diversified portfolio is one that is allocated in different segments of the market, as others have pointed out. The percentages are pretty much up to you -- if you do not tolerate high risk, then a balanced portfolio in equal percentages spread amongst 4-5 different asset classes (NOT different funds in the same asset class!) will give you, overall, a decent return in a good year, and less loss in a bad year.

Should your current or any new employer offer a lifecycle option, you could use that to simplify your investment options.

One thing you MUST remember is that over time, your portfolio will become 'unbalanced' due to one or more asset classes doing better than the others. You need to rebalance your EXISTING portfolio back to the original percentages, every 1-2 years. Many people forget to do this. This is your money, so treat it with the attention it deserves!

We are very aggressive investors, so it doesn't bother us to be 80% invested in equities as we take the long-term view. Yes, it was nerve-wracking to lose 26% of the portfolio's value from 2000 - 2002. It was also great to have tripled the portfolio from YE 2002 through YE 2006.

I'm not sure where qdognj gets his figures -- I'm guessing he seems to be a fairly conservative investor, based on his postings -- but in 2006 some of the PERS (largest pension fund in the world, the California state employees fund) results were:

Large Cap US Equity (Dodge & Cox) - 18.55%
International Equity (Templeton Foreign Equity) - 20.64%
Real Estate Securities Option (DWS Fund) - 30.59%

You can compare this to some of the common "benchmarks" 2006 performances:
S&P Index: 15.80%
Wilshire 5000 Index: 21.12%
Wilshire 4500 Index: 16.07%
MSCI EAFE (International) Index: 26.86%
Russell 2000 Index: 18.35%
Balanced Index (60% S&P 500, 40% Lehman Aggregate [bonds]): 11.12%

You can do well enough with regular contributions and moderate compounding; you are still young enough to have enough time to "ride out" the hills and valleys of investment management. You are doing, frankly, much better than we did at your age, and are to be congratulated!

    Bookmark   February 24, 2007 at 9:58PM
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The key is to diversify and rebalance regularly. However, not all mid-cap funds are good funds, same goes for large cap, small cap. There are a bunch of variables. If you'd like to pay for advice, I used a website called "Smart 401k". But that was because I have about 60 funds to choose from, your list is much limited.

    Bookmark   February 25, 2007 at 8:42AM
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I think in your place I'd choose 1 each of small and mid cap (try to figure out which ones are better), large cap, and foreign. I wouldn't bother with money market or 'stable value.' These tend to be little better (or even worse than) a plain old CD at the bank.

I'd also petition the boss for more choices.

Do you have investments outside the 401k? Don't forget to include those in your asset allocation strategies (i.e., if you already have a large cap fund, don't bother with the one from the 401k unless it's better for some reason. In which case, change the allocation of the non-401k one.)

    Bookmark   February 27, 2007 at 12:54PM
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The whole point of spreading out is when and if there is a huge drop in one of the funds, your entire portfolio won't be wiped out. This has happend to MANY people nearing retirment with too much exposure in the high tech stocks when the market tanked, and they HAD to push back their retirement. We know some!

I agree with the above post about over-estimating the retirement needs. Rather than think about what you need to retire in the future, ask what you need to retire today. Most people get social security of $500 to 1500 per month per person (If you both worked, it would be double that). In today's situation, most people WILL NOT have the company pension plan. I think people that have their houses paid off and no debt have very comfortable retirement with $500,000 saved in today's dollars. With 3 to 4% inflation in 30 years, that comes out to be about 1.2 to 1.6 mil. Way off the mark from 3 mil. Also don't forget, you won't be taking out the entire amount at once and the principal continues to earn money while invested.

BTW, both my husband and I work in fields where our intellectual knowledge gives us high incomes. In our fields, most people DO NOT stop working at age 65. There is too much knowledge base, job satisfaction, and excitement in our work to stop working and NOT get paid great money. However, many scale down and work much less than full time in semi-consulting capacity. If you can take a month off after working a month, why would you not work? This also gives added income during the early phase of semi-retirement, and one does not have to start drawing on the social security or the nest egg. So if you are in a job that you like, there is NO reason you have to completely stop working.

If you do not have kids now, I would put away as much as you can. Early compounded earning is so much more effective than what you can do later. Once the kids come, it is much harder to save and you will have to save for college if you believe in that.

    Bookmark   February 27, 2007 at 1:51PM
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As you are in mid 30's, your portfolio should consist of 90% or more stock, and the rest in bond or money market. Nearly all retirement planners that I've seen say that.

    Bookmark   March 1, 2007 at 1:01AM
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