401k Diversification

[scagnt83]

So we dump a lot of money into my wife's 401k at work. When we first started I just let Fidelity pick the funds. Which was a bad idea. They were very conservative.

Two years ago I did a lot of research and set up the funds how I thought they should be set up for aggressive growth (we're in our early 30s). I looked for funds that had at least a 10%+ track record over 15-30 years. Other than the 20% or so I put in a large cap fund. I don't have much invested in bonds though, only about 6%.

Well 2 years ago, I had a 16% return for the year. Last year, I had 24%.

So far for this year, I'm at 2.5%. I'm happy with average over the 3 years, but this year sucks!

Is that just what's gonna happen with investing from time to time? Or should I consider moving some things around?

First, that is just what happens sometimes. Some years funds just underperform. You could reallocate, but the funds you move out of could very well overperform the next year. It is not about the year to year gain, it is about the long term gain.

Personally I am a HUGE fan of plain ole Index Funds. If your plan has the options I would use them. A mix of S&P 500, Dow, Nasdaq, Euro 50, Hang Seng, Russel 2000, and maybe a bond index will perform very well. Basically you will track the general market for the lowest possible fees.
With a managed mutual fund you will pay 2-3 times in fees vs. an Indexed fund.


Second, you said you "let Fidelity choose your funds". Does that mean you just went with the "default" investment? (called a QDIO (qualified default investment option))
If so that is usually a very conservative option and not the best idea at all. That option is in place for protection of the plan sponsor (business).

The only other way that Fidelity would have chosen your funds would be if you chose for them to professionally manage your account under 3(21) Fiduciary Services. If you did that then you most likely had to fill out an investor profile, or either it was just an age based actively managed fund. It does not sound like an age based option since it was conservative and you are in your 30s... if you filled out an investor profile your wife might have done it and women usually are much more conservative than men.


If your funds have performed well, do not get discouraged by just one underperforming year. But do consider Index funds if they are available in the plan.

 

[Norwayguy]

So we dump a lot of money into my wife's 401k at work. When we first started I just let Fidelity pick the funds. Which was a bad idea. They were very conservative.

Two years ago I did a lot of research and set up the funds how I thought they should be set up for aggressive growth (we're in our early 30s). I looked for funds that had at least a 10%+ track record over 15-30 years. Other than the 20% or so I put in a large cap fund. I don't have much invested in bonds though, only about 6%.

Well 2 years ago, I had a 16% return for the year. Last year, I had 24%.

So far for this year, I'm at 2.5%. I'm happy with average over the 3 years, but this year sucks!

Is that just what's gonna happen with investing from time to time? Or should I consider moving some things around?

The funds are doing what they advertised. You said they have AVERAGED over 10% and in your small sampling that is what they have done. So yes you should expect this as your not going to constantly see a market rise, you will see upward swings and downwards. At your age the downward swings as long as they are invested in decent funds are buying you more shares at a lower price so when the market turns around you benefit from it.

 

[scagnt83]

Here's the thing WHILE you're putting money into it, you want things to go poorly, even down is fine. WHY? CAUSE YOU'RE BUYING IT.

While the growth in these funds is great, temper it with the fact that as you continue to fund the account, you're paying higher prices for the shares now.

Your complaint in perspective is like bitc hing about your steak not costing full price. YOU WANT SALES, YOU WANT YOUR CHOICES TO BE ON SALE.


Sorry for shouting but most people get this wrong. While in the accumulation stage you want the best prices you can get. When you get to the distribution phase, you want the highest prices you can get.


There is nothing wrong with purchasing conservative funds. The market will show you that over time. You need a combination of conservative, moderate and aggressive funds, along with a small amount of super aggressive to take care of what is the urge to take big risk.

You need to rethink what you're doing a bit. Think about it for a second, "I got 24% on my fund last year." Well depending on where you're at on the time line, you either paid a premium of 24% on each new share you bought, so you bought less with your money or a year or two away from retirement you posted a 24% gain so you swept a portion of that portfolio over into a conservative fund to escape market risk and banked 24%...

You want to buy on sale. You want to sell at a premium. Easily said, very hard to do as we are our own worst enemies with this stuff.

401Ks are not designed for timing the market. By design a 401k does Dollar Cost Averaging. So you are buying when the market is down and when the market is up. For a 30 something trying to time the market inside of a 401k is not warranted... there is no need since historically speaking, even if you bought at peaks, after 30-40 years you will still have decent/nice gains.


If he is a savvy investor then trying to time things out might make more sense. But study after study shows that 401k participants who try to time the market perform the worst. This is because they are not investment professionals.


That being said, at certain times, such as now when we are at historical highs, moving an account over to bonds could make a lot of sense. Then when the market corrects jump back into stocks. But that is only for historical highs. Trying to time out normal undulations in the market is often a recipe for disaster for 401k participants.

 

[LGilmore]

SC? I read his post as somebody chasing returns. He is trying to market time things. So I sorta pointed out the basics of dollar cost averaging. He is not a savvy investor as he states outright. So trying to get him to look at it another way. Down markets are great markets for people still investing, everything's on sale. The stock market is basically one of the few things where investors do the opposite of what they would with anything else. They buy high and sell low.

We wouldn't buy hamburger at 10 bucks a pound or at least much of it, but put it at 2.99 and we're loading the freezer up. In just about every other life purchase we look for sales, with the market we tend to buy more after the price goes up.

DCA and Rebalancing would both be good concepts for him to understand.

My point about sweeping gains and moving conservative with them was nearer retirement "A year or two away from retirement" .

Did securities for 25 years, installed 401ks in a few blue collar companies. I don't disagree with you as nothing you've said is wrong. It's just speaking to a different market and trying to open them up to a different way of looking at it.

Buy at a discount, sell at a premium. This doesn't mean I am promoting market timing, it's promoting rebalancing a portfolio.

Mutual Funds and even stocks are all about shares, acquiring shares in the accumulation phase. Getting a person in a plan to "understand" a negative return isn't necessarily bad, especially when it really isn't, is important. If he understands that a down market actually did him a favor in share accumulation for when that market returns to an up market, that's a good thing.

 

[scagnt83]

SC? I read his post as somebody chasing returns. He is trying to market time things. So I sorta pointed out the basics of dollar cost averaging. He is not a savvy investor as he states outright. So trying to get him to look at it another way. Down markets are great markets for people still investing, everything's on sale. The stock market is basically one of the few things where investors do the opposite of what they would with anything else. They buy high and sell low.

We wouldn't buy hamburger at 10 bucks a pound or at least much of it, but put it at 2.99 and we're loading the freezer up. In just about every other life purchase we look for sales, with the market we tend to buy more after the price goes up.

DCA and Rebalancing would both be good concepts for him to understand.

My point about sweeping gains and moving conservative with them was nearer retirement "A year or two away from retirement" .

Did securities for 25 years, installed 401ks in a few blue collar companies. I don't disagree with you as nothing you've said is wrong. It's just speaking to a different market and trying to open them up to a different way of looking at it.

Buy at a discount, sell at a premium. This doesn't mean I am promoting market timing, it's promoting rebalancing a portfolio.

Mutual Funds and even stocks are all about shares, acquiring shares in the accumulation phase. Getting a person in a plan to "understand" a negative return isn't necessarily bad, especially when it really isn't, is important. If he understands that a down market actually did him a favor in share accumulation for when that market returns to an up market, that's a good thing.

401Ks automatically DCA. You are putting in a set portion of your funds on a regularly scheduled basis.

But by restating your point in the last paragraph I understand what you were trying to convey now. You just had a lot about getting in low vs. high, so it seemed you were promoting timing the market inside his 401k.


But I think that you might have misunderstood him to an extent. His concern is that his MFs were underperforming the market as a whole (or their peer class). At least that is what I understood his concern to be.

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Did securities for 25 years, installed 401ks in a few blue collar companies.

Well I currently install 401Ks ...

(just joking around with you ... well not about currently doing them ... but just being immature to be immature )

 

[LGilmore]

The big thing I got from his remarks is he is looking for the wonder fund, and honestly there ain't no such animal out there to be found. Index funds are close, for sure, but not fool proof.

the ones that scare me are the target funds. I call them fire and forget, I think they will be the next thing the industry gets called to the carpet for. The concept of not watching your money is ripe conceptually with those.

What I would like to see the OP do is investigate the styles of funds the holdings within them and make his choices based on what he learns over "How'd it do last year?" Last year is over. While yes, returns matter, they shouldn't be the main driver for choice.

And no worries about teasing me. You've already found out from that other place, I'm not real bad. At least if I disagree with you, I try to explain why? Doesn't happen with all of them there does it?

 

[Norwayguy]

The big thing I got from his remarks is he is looking for the wonder fund, and honestly there ain't no such animal out there to be found. Index funds are close, for sure, but not fool proof.

the ones that scare me are the target funds. I call them fire and forget, I think they will be the next thing the industry gets called to the carpet for. The concept of not watching your money is ripe conceptually with those.

What I would like to see the OP do is investigate the styles of funds the holdings within them and make his choices based on what he learns over "How'd it do last year?" Last year is over. While yes, returns matter, they shouldn't be the main driver for choice.

And no worries about teasing me. You've already found out from that other place, I'm not real bad. At least if I disagree with you, I try to explain why? Doesn't happen with all of them there does it?

Not to mention when looking at those prior year averages how often has the manager changed over as well.

 

[rhinopackage]

There is a lot to be said about 401k, your other investments now that your income is increasing and your standard of living is leveling out. Sounds like it is time to consider working with a planner who understands the myriad options available from properly designed cash value life, to bonds, to equities to private investments.

I don't suggest finding a professional who is skilled in all those areas, however, they should be able to help you understand the use, value, risk and opportunity in those areas and help you develop a plan that is sound.

At the very least start with a MorningStar report to see where you dollars are currently allocated by company/fund and look to reduce duplication.

Finally on the 401k maximizing its value ends with the employer match. As long as the employer matches the dollars you put in that is essential 'found money' after that any extra dollars you put into the 401k likely would generate a better return in other places.