Setting up my 401K, not sure how to allocate (23yrs old)

[K-Dubb]

Hi, I am 23 and I am trying to allocate my 401K. I would say since i am young that my risk is fairly high. However, i dont want to have to worry about paying much attention to my 401K either. I do not plan on ever taking any out of it, until i retire of course .

My choices are:

SSgA Government Money Market Fund
PIMCO Total Return Fund - Class A
DWS High Income Plus Fund - Class S
SSgA Life SolutionsSM Income & Growth Fund
SSgA Life SolutionsSM Balanced Growth Fund
SSgA Life SolutionsSM Growth Fund
AllianceBernstein Growth and Income Fund - Class A
DWS Large Cap Value Fund - Class A
SSgA S&P® 500 Index Fund
Neuberger Berman Partners Fund - Advisor Class
Oppenheimer Capital Appreciation Fund - Class A
Fidelity® Advisor Equity Growth Fund - Class T
Franklin Rising Dividends Fund - Class A
SSgA S&P® MidCap 400 Index Strategy Fund
Alger MidCap Growth Institutional Fund - Class I
American Century International Growth Fund - Advisor Class
Templeton Growth Fund, Inc. - Class R
Allianz NFJ Small-Cap Value Fund - Class A
SSgA Russell® 2000 Index Strategy Fund
DWS Small Cap Growth Fund - Class A


From what I have read on here, I probably want to put some of it in PIMCO, but other than that I am not sure. It has also be recommended to me to put some of it in a growth fund as well, but which I am not sure. Any help or advise would be great!

[kv968]

Hey K-Dubb, welcome. Good to see your getting started with investing while you're so young.

If you don't want to have to pay much attention to your allocation, my suggestion would be to go with the index funds. You won't have to worry about "style drift" and will only have to rebalance when your percentages of what you hold get out of line.

You might want a portfolio something like this:

40% - S&P 500 (Ssga S&P 500)
10% - Mid-cap (Mid-cap 400)
15% - Small-cap (Russell 2000)
25% - Int'l (American Century Int'l Growth)
10% - PIMCO Total Return Fund

That'll give you good coverage of the stock market and 25% in int'l exposure. The PIMCO fund would be your bond fund. You could hold more or less in that depending on how much volatility you feel you can handle. You may not even need any in the mid-cap since the S&P 500 may hold those stocks also. You could always adjust the other percentages also.

And if your employer matches any of your contributions, try to put at least enough to get the match.

[disneysteve]

Originally Posted by kv968

You might want a portfolio something like this:

40% - S&P 500 (Ssga S&P 500)
10% - Mid-cap (Mid-cap 400)
15% - Small-cap (Russell 2000)
25% - Int'l (American Century Int'l Growth)
10% - PIMCO Total Return Fund

I think this is a great breakdown. I would do the same.

[K-Dubb]

Thank you! I will try them out! Is the best place to research these morningstar?

[disneysteve]

Originally Posted by K-Dubb

Thank you! I will try them out! Is the best place to research these morningstar?

There is no such thing as a "best" place for research. Morningstar is good. Also visit the company sites for the individual funds. Stop by you local library and find the last mutual fund special issues of Money and Kiplinger's and check the charts in there (that info might be available online at the magazines' websites). You want to focus on performance, expenses and ratings within their peer groups. Index funds should track the index very closely, usually within a few tenths of a percent.

[kv968]

If you do use Morningstar, click on the "tools" tab. In there under "research tools" you'll find a link to compare mutual funds. That's a good tool to use to compare style, expense ratios and performance of different funds. Like Steve said just make sure you compare within their own peer group.

[K-Dubb]

You guys are awesome. Thank you!

[K-Dubb]

Ok guys, i am having a heck of a time trying to find the ticker symbols for these. The names do not match exactly what is listed for my 401k, so I just want to make sure i have these right?

SVSPX - S&P 500 (Ssga S&P 500)
found IJH, but that was ishares and not SSgA - Mid-cap (Mid-cap 400)
found IWM, but this was Ishares and not SSgA - Small-cap (Russell 2000)
TWGAX - Int'l (American Century Int'l Growth)
PTTAX - PIMCO Total Return Fund


Also, i noticed that the American Century fund has a restriction of some sort of market restriction in redeeming the shares. It shows a 61 day holding period with a 2% fee if taken out before then. Is this normal?

[disneysteve]

Originally Posted by K-Dubb

It shows a 61 day holding period with a 2% fee if taken out before then. Is this normal?

Yes. Many funds have instituted these types of fees due to problems with trading irregularities a few years ago. Mutual funds should be long-term investments. If you aren't planning on holding a fund for at least a few years, and certainly longer than a few weeks, you probably shouldn't be buying it.

[kv968]

I couldn't find tickers for those funds either. There is one for a small-cap fund but I don't think that's an index fund.

The ticker you have for the American Century fund is the correct ticker for the fund but not the class you have. I couldn't find that ticker either. The one you have is for the Institutional class whereas the shares you'll have are an Advisor class. The only difference I could see is that the expense ratio is .25% higher on the Advisor shares. You should be ok to at least track it with the ticker you have.

And like Steve said, the 2% redemption fee is normal for some funds such as int'l or small-cap where they try to discourage people from trying to time the market.

[disneysteve]

Originally Posted by kv968

they try to discourage people from trying to time the market.

Just as a further explanation of this, in case you are interested...

There is a big difference between trying to time the market by buying individual stocks and mutual funds. With individual stocks, you buy them, another shareholder sells them. The transaction doesn't really affect anyone else who owns that stock.

With a mutual fund, however, share redemptions potentially impact everyone. If the fund manager has to sell stocks held in the fund to raise cash to pay the customer, that can generate trading costs and taxable gains that get passed on to everyone who owns shares of the fund. So a lot of short-term redemptions can drag down the overall performance of the fund which his bad for everyone involved.

[K-Dubb]

Originally Posted by kv968

I couldn't find tickers for those funds either. There is one for a small-cap fund but I don't think that's an index fund.

The ticker you have for the American Century fund is the correct ticker for the fund but not the class you have. I couldn't find that ticker either. The one you have is for the Institutional class whereas the shares you'll have are an Advisor class. The only difference I could see is that the expense ratio is .25% higher on the Advisor shares. You should be ok to at least track it with the ticker you have.

And like Steve said, the 2% redemption fee is normal for some funds such as int'l or small-cap where they try to discourage people from trying to time the market.

Are you sure that is not the correct ticker for the American Century fund? Google finance is showing it as correct? http://finance.google.com/finance?q=TWGAX
I thought ADV stood for advisor?

As for the other two that i could not find, Russell 2000, and midcap 400, how are you supposed to track something you cannot find ? You would think they would have the tickers on our company 401k info sheets, but they do not.

[kv968]

Originally Posted by K-Dubb

Are you sure that is not the correct ticker for the American Century fund? Google finance is showing it as correct? http://finance.google.com/finance?q=TWGAX
I thought ADV stood for advisor?

As for the other two that i could not find, Russell 2000, and midcap 400, how are you supposed to track something you cannot find ? You would think they would have the tickers on our company 401k info sheets, but they do not.

You're right K-Dubb, that is the ticker for that class. I must have been looking at something else, sorry about that.

As for the others, I still can't find anything for them. They have a small-cap company and small-cap value but neither should be considered an index. The only mid-cap fund I could find was a value fund and that shouldn't be considered an index either. They may not have a ticker because they aren't actually a mutual fund but a commingled pool or something that SSgA has worked out with your particular 401k plan. They work the same way but since they're not widely available to the public they don't assign them a ticker. I have similar things in my 401k from Fidelity and Northern Trust. They're indexes with no tickers but with those I found the fund companies' publicly held funds and use those tickers just for reference. They are usually only off a percent or two due to different expense ratios.

If you feel uncomfortable investing in a fund without a ticker (which is understandable), you could choose a different fund in that class if you still want the exposure and in the small-cap at least you really should. In the small-cap sector I would go with Allianz NFJ Small-Cap Value (PCVAX) over DWS Small Cap Growth Fund (SSDAX). So far as the mid-cap goes, if you don't want that fund you could nix it altogether and still be ok. The S&P 500 may have some of those stocks in it anyway.

[K-Dubb]

Thanks!

[kv968]

You're welcome.

[Andrew]

You all helped K-Dubb so well I was hoping you could do the same for me. I'm 25 and will be investing about 9-10% of my salary a year (~ $6,000/year). Due to my age, I'm willing to assume risk in order to potentially earn greater returns.

I had issues formatting my Excel spreadsheet into the forum, but the ratings are from Morningstar, as well as the roles. Here are the options our broker made available to us:

Aggressive Ticket Expense Class Role Rating
JH Franklin Small-Mid Growth FRSGX 0.96 Medium Growth Support 2
JH Small Cap Value Index VISVX 0.73 Small Value Support 3
JH Small Cap Growth Index VISGX 0.73 Small Growth Support 5
JH American Funds Europacific Growth Fund RERCX 1.11 Large Blend Core 4
JH DFA International Value DFIVX 0.98 Large Value Support 4
JH Energy Fund VGENX 0.81 Sector Specialty 5
JH Allianz RCM Tech Fund RAGTX 1.76 Sector Specialty 3

Growth
JH Riversource Mid Cap Value Fund AMVAX 1.45 Medium Value Support 4
Small Cap Opportunities Fund JHSOX 1.11 Small Blend NR
JH DWS RREEF Real Estate Securities Fund RRRAX 0.8 Sector Support 2
JH American Funds Growth Fund of America AGTHX 0.94 Large Growth Core 5
JH Oppenheimer Global Fund OPPAX 1.08 Large Growth Core 4
Quantitative Mid Cap Fund JIQMX 0.87 Mid-Cap Growth NR

Growth and Income
JH Davis New York Venture Fund NYVTX 0.87 Large Blend Core 4

There are fixed income funds such as PIMCO Total Return and PIMCO Real Return, but I'm not necessarily interested in investing in those as of yet. Plus, I intend on being actively involved with my 401k.

Currently, I'm thinking of the following scheme with expenses in parentheses:
30% VISGX: Vanguard Small Cap Growth Index (.73)
30% AGTHX: American Funds Growth Fund (.94)
30% RERCX: American Funds EuroPacific (1.11)
10% VGENX: Vanguard Energy (.81)

It's an aggressive strategy but my horizon is quite long and the stock exposure is spread out pretty evenly (I think) amongst large cap value (26.6%), large cap growth (34.7%), mid/small value (10.06%), and mid/small growth (28.62%).

Let me know what you guys think.



- Andrew

[kv968]

Let me just ask a couple of questions first...

This is in a 401k I take it?

Are American Funds Growth Fund of Amer. and Davis NY Venture Fund the only US large cap funds available?

and

How did you come up with the percentage breakdowns of your asset locations at the end?

[smartatmoney]

Originally Posted by kv968

Hey K-Dubb, welcome. Good to see your getting started with investing while you're so young.

If you don't want to have to pay much attention to your allocation, my suggestion would be to go with the index funds. You won't have to worry about "style drift" and will only have to rebalance when your percentages of what you hold get out of line.

You might want a portfolio something like this:

40% - S&P 500 (Ssga S&P 500)
10% - Mid-cap (Mid-cap 400)
15% - Small-cap (Russell 2000)
25% - Int'l (American Century Int'l Growth)
10% - PIMCO Total Return Fund

That'll give you good coverage of the stock market and 25% in int'l exposure. The PIMCO fund would be your bond fund. You could hold more or less in that depending on how much volatility you feel you can handle. You may not even need any in the mid-cap since the S&P 500 may hold those stocks also. You could always adjust the other percentages also.

And if your employer matches any of your contributions, try to put at least enough to get the match.

If you follow the rule of thumb that you should be invested 120-your age in stock, then you should be 97% stocks. I would lower your bond fund to 5% and put that extra in International. But that's just me.

[meaghanchan]

Originally Posted by smartatmoney

If you follow the rule of thumb that you should be invested 120-your age in stock, then you should be 97% stocks. I would lower your bond fund to 5% and put that extra in International. But that's just me.

I forget what author it is that studied this (I'm lending out my copy of the book right now) but it's been shown that having up to 10% or even 20% in bonds substantially decreases volatility in a portfolio, without decreasing returns very much at all.

Having some money in bonds (I don't know if 3% is enough, maybe it is) also gives you an opportunity to capture the rebalancing bonus that lets you buy low and sell high. Take a $10,000 portfolio, invested 90% in stocks, 10% in bonds. Let's say stocks have a really, really bad year and drop by 50%, while bonds return an average of 6%. If you've added nothing new during the year (I know a false assumption but the math's starting to get tricky) your portfolio might be at, say, $5,560 ($4500 stocks, $1060 bonds). At the end of the year you get to rebalance back to 90/10- leaving $554 in bonds and buying $504 of now-cheap stocks. If you were 100% invested in stocks, your portfolio value would be $5000, and you'd have no new money (at least from rebalancing) to be buying cheap stocks with.

Though I use the 120-age formula, my 'floor' for bonds is 10%, because of those facts. Even though I'm 24, I have 10% invested in bonds. When I hit 31, that number will start decreasing along the 120-age guideline.

[Broken Arrow]

Interesting thought, Meganchan! Thanks for sharing.