401 (k) Help!

[Dustin0926]

Hello all,

I'm new to this forum and new to investing in general. I recently started at a new company and was offered my first 401 K. I went online to sign up and was asked to put in the percentages I wanted to allocate to each stock, bond, etc. I'm really confused as to what each stock is and how much I need to allocate. The T.Rowe Price website said I should start out aggressive with the majority of my investments in stocks and less than 10 percent bonds because of my age (25) and that money market and bonds should increase as I age. What about the retirment section's listed as 2005, 2010, 2015, etc? What should I put in there? I've listed my options below. Any help would be appreciated!

Dustin


STOCKS

AMER. EUROPACIFIC GROWTH R4
DAVIS NEW YORK VENTURE A FUND
EQUITY INCOME FUND
GROWTH STOCK FUND
VANGUARD INST INDEX
WELLSFARGO ADV SMCAP VAL INV

BONDS

PIMCO TOTAL RETURN ADMIN

MONEY MARKET/ STABLE VALUE

TRP STABLE VALUE FUND SCH E

RETIREMENT

RETIREMENT 2005 FUND
RETIREMENT 2010 FUND
RETIREMENT 2015 FUND
RETIREMENT 2020 FUND
RETIREMENT 2025 FUND
RETIREMENT 2030 FUND
RETIREMENT 2035 FUND
RETIREMENT 2040 FUND
RETIREMENT 2045 FUND
RETIREMENT 2050 FUND 100%
RETIREMENT 2055 FUND
RETIREMENT INCOME FUND

[photo]

Using your target date retirement is probably your best deal. Then, when you read more about asset allocation and the various options, you can move things around. But the target date retirement is usually an excellent first choice.

[Petunia 100]

Originally Posted by Dustin0926

Hello all,

I'm new to this forum and new to investing in general. I recently started at a new company and was offered my first 401 K. I went online to sign up and was asked to put in the percentages I wanted to allocate to each stock, bond, etc. I'm really confused as to what each stock is and how much I need to allocate. The T.Rowe Price website said I should start out aggressive with the majority of my investments in stocks and less than 10 percent bonds because of my age (25) and that money market and bonds should increase as I age. What about the retirment section's listed as 2005, 2010, 2015, etc? What should I put in there? I've listed my options below. Any help would be appreciated!

Dustin


STOCKS

AMER. EUROPACIFIC GROWTH R4
DAVIS NEW YORK VENTURE A FUND
EQUITY INCOME FUND
GROWTH STOCK FUND
VANGUARD INST INDEX
WELLSFARGO ADV SMCAP VAL INV

BONDS

PIMCO TOTAL RETURN ADMIN

MONEY MARKET/ STABLE VALUE

TRP STABLE VALUE FUND SCH E

RETIREMENT

RETIREMENT 2005 FUND
RETIREMENT 2010 FUND
RETIREMENT 2015 FUND
RETIREMENT 2020 FUND
RETIREMENT 2025 FUND
RETIREMENT 2030 FUND
RETIREMENT 2035 FUND
RETIREMENT 2040 FUND
RETIREMENT 2045 FUND
RETIREMENT 2050 FUND 100%
RETIREMENT 2055 FUND
RETIREMENT INCOME FUND

Are these the T. Rowe Price Target Retirement Funds?

I agree, a target retirement fund is a great choice. If you want to learn about asset allocation and other investing topics, you might start here:

Investment Education, Investing 101, Investment Basics, Investment Classroom, Learn to Invest | Morningstar

[bjl584]

I'd go high risk being that you are 25.

The Eurogrowth fund, the growth stock fund, and the small cap fund may be good choices.

Target funds often underperform and the New York Davis fund is a fund that I just recently sold. The fund is losing money and investors despite the market recovery over the past few years.

[disneysteve]

Originally Posted by bjl584

I'd go high risk being that you are 25.

I wouldn't debate that advice as long as OP's risk tolerance is high.

Target funds often underperform

Underperform what? If the target fund is a collection of index funds, by definition they should not underperform the market or index they are tracking.

[bjl584]

Target-Date Funds: Another Bad Year? - Yahoo! Finance



For Some Target Funds, History Repeats - Real-Time Advice - SmartMoney

[disneysteve]

Originally Posted by disneysteve

Underperform what?

Originally Posted by bjl584

Target-Date Funds: Another Bad Year? - Yahoo! Finance

That article didn't answer my question.

When we say a fund underperformed, that means it did worse than its peers or its appropriate index.

The Vanguard 2050 fund had a 1-year return of -2.54%. Admittedly, that isn't great. However, did it "underperform"? That fund is composed of 3 funds: Total Stock Market Index, Total International Stock Market Index and Total Bond Market Index.

TSMI: 1-year return 0.96%; corresponding index 1.08%
TISMI: -14.56%; index -14.31%
TBMI: 7.56%; index 7.92%

So the target fund very closely tracked the performance that it is designed to track. It didn't underperform at all. It just had a crappy year mainly because of the international equity market.

[Dustin0926]

Yes, this is the T Rowe Price website. So, the retirement funds are what I should be putting my percentages into? I'm assuming T Rowe Price is adding in my retirement age because it has 100% beside the 2050 option under the retirment section. That would put me retiring at 65.

[maynard]

The 2050 fund and the others with a 20XX number are target retirement date funds. You can google them for hours and read about them

Its a common fund that automatically adjusts your allocation percentages over time. When you're a long way off from retirement like you're self, that 2050 fund might be 90% stocks. Which would be more volitile but gives the best chance of reward over the long haul.

That same 2050 fund is going to self adjust to safer investements as the years go on and you get closer to retirement.

I've always had a target date fund. I like the simplicity of it and many others do as well. Its definately an acceptable choice especially if you are new to investing and retirement funds. You can always switch later

[bjl584]

Target-date retirement funds underperform in volatile markets


"in some cases, target-date funds weren't even able to outperform an all-stock, broad-market exchange-traded fund. "

"From July through September, the iShares Russell 3000 exchange-traded fund—which represents about 98 percent of all U.S. stocks—lost 15.1 percent. But during the same quarter, target-date funds held by investors with more than 25 years until retirement (for example, 2040, 2045, or 2050 funds) underperformed the ETF significantly. "

"Of the 39 funds in our screen, only two—the American Century Livestrong 2045 fund and the Franklin Templeton 2045 Retirement Target fund—beat the Russell 3000 ETF by more than one percentage point."

"Despite an average stock exposure of only 78 percent, just half of the 14 funds dated 2035 were unable to hurdle the Russell ETF."

"target-date funds are often invested exclusively in their families' own funds, which can be expensive. Of the 26 fund families that have offered target-date funds for at least four years, more than half have funds with expense ratios exceeding 1 percent, on average."

Maybe, mismanaged, poorly performing, and expensive are better words than underperform.

I guess it just boils down to a difference of opinion. I've read too many negative articles on target funds for me to be a believer. They may be a good option for someone that doesn't know anything about investing or for someone that doesn't have the time, effort, or energy to deal with their investments, but I don't like one size fits all options for anything. Peoples' situations are often too unique for a one size fits all approach.

[disneysteve]

Originally Posted by bjl584

"in some cases, target-date funds weren't even able to outperform an all-stock, broad-market exchange-traded fund. "

"From July through September, the iShares Russell 3000 exchange-traded fund—which represents about 98 percent of all U.S. stocks—lost 15.1 percent. But during the same quarter, target-date funds held by investors with more than 25 years until retirement (for example, 2040, 2045, or 2050 funds) underperformed the ETF significantly. "

"Of the 39 funds in our screen, only two—the American Century Livestrong 2045 fund and the Franklin Templeton 2045 Retirement Target fund—beat the Russell 3000 ETF by more than one percentage point."

This doesn't make sense, though. You can't compare a 2045 or 2050 target fund to a US stock index. The 2050 target fund also has 27% international stocks and 10% bonds. Using the Russell 3000 as the benchmark is misleading and inaccurate.

"target-date funds are often invested exclusively in their families' own funds, which can be expensive. Of the 26 fund families that have offered target-date funds for at least four years, more than half have funds with expense ratios exceeding 1 percent, on average."

I totally agree with this point. There are some really lousy target funds out there but those are never the ones I or anyone else around here recommend. Vanguard 2050, for example, has an expense ratio of 0.19%. That's a heck of a lot better than 1.00% or more.

I guess it just boils down to a difference of opinion. I've read too many negative articles on target funds for me to be a believer. They may be a good option for someone that doesn't know anything about investing or for someone that doesn't have the time, effort, or energy to deal with their investments, but I don't like one size fits all options for anything. Peoples' situations are often too unique for a one size fits all approach.

I can't argue with you there. I'm not proposing that target funds are right for everyone but I think they are far better than what most people actually do with their money. Just look at the participation rate in 401k plans. Now look at the rate at companies that automatically enroll employees and put them into the age-appropriate target fund option. I'd much rather see someone in a target fund than in no retirement plan at all, at least starting out. Even if someone is doing it on their own, like in a Roth, a target fund isn't a bad place to start since it gives instant broad diversification often not possible with a small balance. Once your asset base is larger, and you've taken some time to educate yourself, if you want to move into individual funds and ETFs, I think that's perfectly fine.

[bjl584]

Originally Posted by disneysteve

I can't argue with you there. I'm not proposing that target funds are right for everyone but I think they are far better than what most people actually do with their money. Just look at the participation rate in 401k plans. Now look at the rate at companies that automatically enroll employees and put them into the age-appropriate target fund option. I'd much rather see someone in a target fund than in no retirement plan at all, at least starting out. Even if someone is doing it on their own, like in a Roth, a target fund isn't a bad place to start since it gives instant broad diversification often not possible with a small balance. Once your asset base is larger, and you've taken some time to educate yourself, if you want to move into individual funds and ETFs, I think that's perfectly fine.

I totally agree with you there Steve. I would rather see someone invest in a Target fund than not invest in anything at all or invest in something high risk that they don't understand when they are only a few years from retirement. Target funds have their place, they just aren't for me.

[disneysteve]

Originally Posted by bjl584

Target funds have their place, they just aren't for me.

In the interest of full disclosure, I do not personally invest in a target fund either. They weren't really around when I started investing and I see no reason to switch to them now.

I just get annoyed when I see these articles saying that target funds are bad because they underperformed the Russell 3000 or something similar. The fund isn't intended to track the Russell 3000 so that's simply not a fair comparison. I could also say a target fund is bad because it underperformed the price appreciation of modern art over the past 5 years or the price of gold. That would be just as meaningless.

[bjl584]

Originally Posted by disneysteve

I just get annoyed when I see these articles saying that target funds are bad because they underperformed the Russell 3000 or something similar. The fund isn't intended to track the Russell 3000 so that's simply not a fair comparison. I could also say a target fund is bad because it underperformed the price appreciation of modern art over the past 5 years or the price of gold. That would be just as meaningless.

Aren't all funds tracked against some arbitrary index? Funds love to talk about their performance againt the S&P 500 whether it is a fair comparison or not.

[disneysteve]

Originally Posted by bjl584

Aren't all funds tracked against some arbitrary index? Funds love to talk about their performance againt the S&P 500 whether it is a fair comparison or not.

Most if not all funds compare themselves to some index but it needs to be the right index for the fund style. See my earlier post about the Vanguard 2050 fund and the 3 indexes that the 3 funds making up the target fund track. There is no single index that would be right to compare to because there is a US stock fund, an international stock fund and a bond fund within the target fund.

Almost always, an index fund will slightly underperform the index because the fund has expenses and the index does not, but the variance shouldn't be significant, maybe a couple of tenths of a percentage point.

[kv968]

Originally Posted by disneysteve

I'm not proposing that target funds are right for everyone but I think they are far better than what most people actually do with their money.

I couldn't agree with you more Steve. I've helped some of my co-workers with their 401k allocation if they ask and to tell you the truth I usually end up suggesting that they put most, if not all, of their money in the target date funds that are offered (T Rowe Price).

I know it may sound odd to most on these boards, but some (dare I say MOST?) people don't understand investing nor do they care to learn. I try to explain the very basics to them and the response I get more often than I'd like is them throwing up their hands and just saying "do whatever you want". Not very encouraging to say the least. Mind you, this isn't me trying to explain to them what a Sharpe Ratio is or how beta will affect their portfolio. This is just me trying to explain to them what a mutual or bond fund is and how they work. I don't know, maybe I'm just terrible at explaining things

I don't expect everyone to have the interest that I do in investing and I have no problem whatsoever taking the time to explain it to them (heck, I enjoy it), but a lot of people can't get over the fact that the basics aren't very hard to understand but they just don't want to deal with it. Is that a good attitude to have? I don't think so, but I can't force them to learn so I do the best I can and figure a target date fund would be the best in a situation like that.

Also I know most of them are "set it and forget" people just by looking at the allocation they chose who knows how long ago. A portfolio that I see quite often looks something like...30% company stock, 30% growth fund, 10% int'l fund, and 40% MM fund regardless of the person's age. Granted those aren't exact numbers and not everyone has an allocation like that but its not far off for most.

After doing this quite a few times I've wondered how that allocation came to be in the first place and the usual responses are they wanted to be "safe" in the MM fund, company stock "because we're a good company and it'll go back to where it was" (50% drop in 12 years) and the other funds were typically the best performers the year before they set their allocation.

That being said, not everyone I've encountered is uninformed or not willing to learn but there is, at least to me, a scary amount of people who don't understand investing and don't want to learn even the basics. I think these people especially would be best suited with a target date fund because there's FAR worse they could do with their investments and I've seen some of that.

[kv968]

Originally Posted by bjl584

Aren't all funds tracked against some arbitrary index? Funds love to talk about their performance againt the S&P 500 whether it is a fair comparison or not.

There really can't be an "index" that target funds can be compared to because with making up such an index one would have to assume what the best allocation of funds would be.

For example, a target date "index" could say a 2050 target fund should hold 60% U.S. equity, 30% int'l and 10% bonds. First of all, who's to say that's the right allocation and secondly what if your target fund doesn't feel it should hold those percentages? In such a case your fund may have outperformed the proper individual indexes in domestic, int'l and bonds but because of its overall allocation didn't outperform the target fund "index".

I think the best way, if any, to evaluate a target fund is to deconstruct the components of the fund as Steve did with the Vanguard fund and compare them to the appropriate indexes. For example, say the fund holds 20% in int'l funds, 60% in large cap domestic, 10% in small-cap domestic and 10% in bonds. Take 20% of the return of the MSCI/EAFE index, 60% of the S&P 500, 10% of the Russell 2000 and 10% of the Barclays' Aggregate Bond Index, add them up and compare that to the returns of your fund. It won't be perfect but a good barometer I think. Another way would be to compare it to the same date target fund of another company and/or use Lipper ratings to see how some of their metrics stack up to other funds in the category. Granted, neither is perfect but that's about the best you can do and its much more accurate than just comparing it to the S&P or Russell 3000.

The main thing to keep in mind when choosing a target fund, and I think this is where people tend to get in trouble, is to not totally base your decision on which fund to invest in by the year you're supposed to retire. Look at the allocation different companies use for the same date (they differ quite a bit) and also look at different years to see if one that isn't your "retirement date" better fits your investing profile and risk tolerance.

Actually what I do is reverse it all and occasionlly use a target date fund as an "index" to MY investing. Since I use different funds and allocations for my investing, I find it more accurate to compare my returns to that of an appropriate target fund rather than say the S&P 500 since I don't invest exclusively in domestic equities. It's not a perfect fit but gives me a clearer picture of how I'm doing.

[jpg7n16]

Originally Posted by bjl584

Target-date retirement funds underperform in volatile markets


"in some cases, target-date funds weren't even able to outperform an all-stock, broad-market exchange-traded fund. "

"From July through September, the iShares Russell 3000 exchange-traded fund—which represents about 98 percent of all U.S. stocks—lost 15.1 percent. But during the same quarter, target-date funds held by investors with more than 25 years until retirement (for example, 2040, 2045, or 2050 funds) underperformed the ETF significantly. "

Using the same logic:

"In some cases, stock based funds weren't even able to outperform an all-cash, money market fund."

"From July through September, the iShares Russell 3000 exchange-traded fund—which represents about 98 percent of all U.S. stocks—lost 15.1 percent. But during the same quarter, money-market funds held by investors with more than 25 years until retirement (for example, 2040, 2045, or 2050) outperformed the ETF significantly."

The logic being: based on this hand-picked 3 month timeframe, we should avoid stocks entirely because cash was a better investment.

Are you convinced that we should completely avoid stocks now? Me neither. Nor am I convinced that based on those 3 months, that we should completely avoid target date funds.

"Despite an average stock exposure of only 78 percent, just half of the 14 funds dated 2035 were unable to hurdle the Russell ETF."

Really? "Despite being 50% in stocks, the portfolio was unable to earn more than 100% stock portfolios."

"target-date funds are often invested exclusively in their families' own funds, which can be expensive. Of the 26 fund families that have offered target-date funds for at least four years, more than half have funds with expense ratios exceeding 1 percent, on average."

This problem affects ALL mutual funds, not just target-date ones. But as DS pointed out above, there are always lower cost options.

From: Is Your Mutual Fund Ripping You Off? - CBS News

Average Expense Ratio
Large-cap funds 1.28%
Small- and Mid-cap funds 1.50%
Diversified international funds 1.49%
Corp. Bond funds 0.89%
Gov't Bond funds 0.91%
Money market funds 0.57%

[jpg7n16]

Originally Posted by kv968

The main thing to keep in mind when choosing a target fund, and I think this is where people tend to get in trouble, is to not totally base your decision on which fund to invest in by the year you're supposed to retire. Look at the allocation different companies use for the same date (they differ quite a bit) and also look at different years to see if one that isn't your "retirement date" better fits your investing profile and risk tolerance.

Agreed. They're set up for a moderate investor. If you're conservative or aggressive, there may be better options, or ways to adjust your portfolio to fit your risk level.

I pretty much agree with the sentiment above that they're not right for everyone, but they seem to get a bad rap a lot of the time because people don't understand them.