401K elections -- help

[neguy11]

Hi I am fairly new to having a 401K. I started it in August and have about $1000 in it. My employer will match 100% of the first 3% and 50% of the next 2%, so I put in 5% of each paycheck. I am 22 so very young.

Right now my elections are:
RERFX - 35% (Europacific Growth Fund)
TFEQX - 35% (Templeton Foreign Equity Fund)
VTIVX - 20% (Vanguard 2045)
RBFFX - 10% (American Bonds Fund)

I put 35% in each of the first two funds simply because they have the highest returns over time. Well I am worried about the economy in 2008, so I am wondering if I should change my elections.

My choices are:

Asset Allocation
VANGUARD ASSET ALLOCATION FUND

Foreign Large Blend
EUROPACIFIC GROWTH FUND R5

Foreign Large Value
TEMPLETON FOREIGN EQUITY FUND

Inflation-Protected Bond
VANGUARD INFLATION PROTECTED SECURITIES
BOND FUND OF AMERICA
VANGUARD TOTAL BOND MARKET
VANGUARD 5 INDEX PORTFOLIO

Large Growth
GROWTH FUND OF AMERICA
STRATUS GROWTH PORTFOLIO

Large Value
WASHINGTON MUTUAL INVESTORS FUND
FIDELITY ADVISOR EQUITY INCOME
WEITZ PARTNERS VALUE FUND

Mid Blend
VANGUARD STRATEGIC EQUITY FUND

Mid Growth
ALLIANZ RCM MID-CAP INSTL FUND
COLUMBIA ACORN FUND CL Z

Mid Value
GOLDMAN SACHS MID CAP VALUE FUND

None
VANGUARD BALANCED INDEX
FEDERATED US TREASURY CASH RESERVES

Short-Term Bond
STRATUS GOVERNMENT SECURITIES PORTFOLIO

Small Blend
VANGUARD SMALL CAP STOCK FUND

Small Value
VANGUARD SMALL CAP VALUE INDEX

Target Date
VANGUARD TARGET 2015
VANGUARD TARGET 2025
VANGUARD TARGET 2035
VANGUARD TARGET 2045
VANGUARD TARGET RETIREMENT INCOME

I like the idea of being aggressive and getting a lot of money, my eyes are like ($) ($), but I also fear waking up some morning and losing a lot of money.

If you have any ideas I'd appreciate. I know I should speak to a financial advisor, but I have no idea how to find one and don't really have time to meet with one.

[buzz]

Oh, if only there was an investment with high return and low risk!

First of all, congratulations for starting your retirement saving at such a young age. Your 401k is a long-term investment. You need to learn to ignore short-term fluctuations to a certain extent. The peaks and valleys are not representative of the long-term performance of the funds. When the values decrease, (and they will from time to time) just be patient and they will rebound.

Your selections do not reflect the classic view of diversification--it is very heavily biased toward foreign stocks. But for now, I see no major problem with it. I would recommend that you educate yourself in market investment. Some years down the line, when you have more invested, you will want to have a strategy in mind.

For now, at your age, and with the amounts involved, there is no pressing need for a change. Maybe increase your contributions to the 2045 fund to balance the foreign stocks with domestic, but that is completely optional.

[disneysteve]

Originally Posted by neguy11

I put 35% in each of the first two funds simply because they have the highest returns over time.

I like the idea of being aggressive and getting a lot of money, my eyes are like ($) ($), but I also fear waking up some morning and losing a lot of money.

Picking a fund based on past returns is a losing strategy. Think about it. The idea is to buy low and sell high. Your way is buying high - picking the fund that had a great year.

You need to determine your asset allocation. How much of your portfolio do you want in each type of asset: large companies, small companies, foreign companies, bonds, etc.? Once you determine that, you can work on selecting funds. Past performance is important because you want funds with good track records, but you also want funds that match your investment goals, have low expense ratios and, hopefully, no sales loads (though that isn't always possible within a company plan).

Your current selections need evaluating. The point of a target date fund is that it is already diversified. The Vanguard 2045 fund has 10% in bonds which is probably plenty for a 22 year old. 2045 also holds about 18% in foreign stocks. The remaining 72% is in the Total Stock Market Index of domestic stocks. If you start buying a bunch of funds on top of 2045, you throw off the overall allocation. That isn't necessarily bad as long as you are doing it with intent, rather than just to chase performance figures.

Until you take some time to study investing and learn about all the different options, it might be best for you to put all of your money into the 2045 fund and be done with it. Don't forget to look at things like expense ratios. 2045 has an ER of just 0.19%. RERFX is 0.53%. TFEQX is 0.81%. RBFFX is 0.35%. Over time, those higher expense ratios will seriously eat into your profits. Over the next 40 years, that can cost you thousands and thousands of dollars in lost retirement assets.

[jIM_Ohio]

Originally Posted by neguy11

I am 22 so very young.


My choices are:
Asset Allocation
VANGUARD ASSET ALLOCATION FUND

Foreign Large Blend
EUROPACIFIC GROWTH FUND R5

Foreign Large Value
TEMPLETON FOREIGN EQUITY FUND

Inflation-Protected Bond
VANGUARD INFLATION PROTECTED SECURITIES
BOND FUND OF AMERICA
VANGUARD TOTAL BOND MARKET
VANGUARD 5 INDEX PORTFOLIO

Large Growth
GROWTH FUND OF AMERICA
STRATUS GROWTH PORTFOLIO

Large Value
WASHINGTON MUTUAL INVESTORS FUND
FIDELITY ADVISOR EQUITY INCOME
WEITZ PARTNERS VALUE FUND

Mid Blend
VANGUARD STRATEGIC EQUITY FUND

Mid Growth
ALLIANZ RCM MID-CAP INSTL FUND
COLUMBIA ACORN FUND CL Z

Mid Value
GOLDMAN SACHS MID CAP VALUE FUND

None
VANGUARD BALANCED INDEX
FEDERATED US TREASURY CASH RESERVES

Short-Term Bond
STRATUS GOVERNMENT SECURITIES PORTFOLIO

Small Blend
VANGUARD SMALL CAP STOCK FUND

Small Value
VANGUARD SMALL CAP VALUE INDEX

Target Date
VANGUARD TARGET 2015
VANGUARD TARGET 2025
VANGUARD TARGET 2035
VANGUARD TARGET 2045
VANGUARD TARGET RETIREMENT INCOME

I like the idea of being aggressive and getting a lot of money, my eyes are like ($) ($), but I also fear waking up some morning and losing a lot of money.

If you have any ideas I'd appreciate. I know I should speak to a financial advisor, but I have no idea how to find one and don't really have time to meet with one.

You need to think about the statement in red. If you wake up and your $1000 has shrunk to $500, are you going to lose sleep at night.

My advice at age 22 is time will remove most of the risk of losing money. You have time, time is the single biggest factor when investing and getting high returns. Use this.

I will suggest 3 strategies for you.

1) aggressive. 100% equities. 75% domestic, 25% foreign.
2) moderately aggressive. 80% equities, 20% bonds. 55% domestic, 25% foreign, 20% intermediate term bonds.
3) Conservative growth. 60% equites, 40% bonds. 40% domestic, 20% foreign, 20% intermediate term bonds 5% high yield, 5% cash, 10% corporate bonds.

1) is shooting for the best return possible over time. 12% returns could be the outcome, which means your investment doubles every 6 years. There will be years you lose 30%, there will be years you gain 30%. 10% is a realistic return expectation, meaning money doubles every 7 years.

2) is taking some precautions. I would expect 8% returns over time, meaning money doubles every 9 years. Might lower worst case to losing 15%. Might lower best case to 25%. You lower the probability of a bad year some, but if market tanks, 80% of the investment is affected.

3) is taking fewer precautions. 7% returns over time, meaning money doubles every 10 years. Might lower worst case to -5% type returns, but good years are tempered (not as high as other two).

Example portfolios for all 3:

1) GROWTH FUND OF AMERICA 20%
FIDELITY ADVISOR EQUITY INCOME 25%
VANGUARD STRATEGIC EQUITY FUND 15%
VANGUARD SMALL CAP STOCK FUND 15%
EUROPACIFIC GROWTH FUND R5 25%* (my wife owns this fund)

2) GROWTH FUND OF AMERICA 10%
FIDELITY ADVISOR EQUITY INCOME 25%
VANGUARD STRATEGIC EQUITY FUND 10%
VANGUARD SMALL CAP STOCK FUND 10%
EUROPACIFIC GROWTH FUND R5 25%* (my wife owns this fund)
STRATUS GOVERNMENT SECURITIES PORTFOLIO 20% (might subsitutue Vanguard retirement income fund here)

3) FIDELITY ADVISOR EQUITY INCOME 20%
VANGUARD STRATEGIC EQUITY FUND 10%
VANGUARD SMALL CAP STOCK FUND 10%
EUROPACIFIC GROWTH FUND R5 20%* (my wife owns this fund)
VANGUARD TARGET RETIREMENT INCOME 40%


or you could pick the date you retire (2050??) and choose that target date fund. In that case you are allowing Vanguard to choose how much risk you take for you.

[atomicrc11]

Jim has some good advice. I personally own the Growth Fund of America and the Europacific Growth Fund R5. My 401k is a similar distribution of #1, with the exceptions of me owning some different funds due to the choices in my 401k. I have the two funds mentioned above at 25% and 20% respectively along with Fidelity Freedom (FDFFX) at 20%, 20% T. Rowe Price Midcap fund (RPMGX) and 15% Fidelity Small Cap fund (FSLCX). T. Rowe Price recommends that if you are in your early 20's to go with 100% equities. Even in my selection I end up having about 6% cash/bonds in my portfolio as some funds keep cash on hand in case some investors pull out. This way they don't have to redeem stocks and incur capital gains on all their investors. If this seems like too much, just put all your money into the Target Retirement 2050 fund as this will do all the diversification for you.