Help with 401k allocation

**tinapbeana** · 12-22-2006, 02:07 PM

Re: Help with 401k allocation

welcome chet, nice to have you here with us!

i myself have some of my 401k in pimco total return and phoenix, among other things. i'm also young and am comfortable with the risk. personally my portfolio contains a fair amount of small-mid cap and international, along with a portion of large cap and cash equivalent for some stability. but that's just me, YMMV.

you might want to try reseraching on mornigstar.com or in the mutual fund section of scottrade.com. for instance, there you can find out that VHGEX(12.07), PHRAX (17.58), and FRSGX(8.12) have all outperformed the S&P 500(8.02) for the past 10 years when it comes to average annual return...

**meaghanchan** · 12-22-2006, 02:13 PM

Re: Help with 401k allocation

A couple additional questions might help fine-tune these suggestions...

1. What is your risk tolerance (conservative, aggressive, in the middle?)
2. What are the ERs (expense ratios) on these funds?
3. Are you open to investing in other ways (ie a Roth IRA where you can choose your own funds)?
4. Do you want a hands-off approach, or are you open to doing some stuff yourself (such as rebalancing every year)

With those answered, I could probably give you better suggestions, but here's some initial advice...

I would do one of these:
A)
100% Fidelity Freedom 2040 Fund FFFFX

OR
B)
50% Fidelity Spartan US Equity Fund FUSEX
30% Vanguard Global Equity Fund VHGEX
20% PIMCO Total Return Fund PTRAX

Now, the advantage of A is that it's a one-fund option that you don't ever have to touch or worry about rebalancing. It'll take care of itself. It also has low expense ratios.

The advantage of B (or something like it) is that you can set up your allocation exactly how you want it- Maybe the Freedom Fund doesn't have as much international as you would like, or maybe it doesn't have as much small cap as you would like... Doing a more 'slice and dice' approach, as opposed to a one-fund approach, gives you more flexibility. You'll notice, though, that I didn't include any mid-caps, small-caps, or REITs. That's because (though I may be wrong, I'm not familiar with all the funds) it looks like you don't have any low-cost options for those asset classes. If you wanted small-cap, mid-caps, and REITs, you could open up an IRA (Roth or traditional, I reccommend Roth) to give you some allocation to those asset classes.

This is just a suggestion, hope others chime in with their thoughts.

Oh, BTW- I'm 24, and 100% of my retirement allocation is in a Vanguard target retirement fund similar to the Fidelity Freedom 2040 fund.

**kv968** · 12-22-2006, 02:44 PM

Re: Help with 401k allocation

Originally posted by tinapbeana

you might want to try reseraching on mornigstar.com or in the mutual fund section of scottrade.com. for instance, there you can find out that VHGEX(12.07), PHRAX (17.58), and FRSGX(8.12) have all outperformed the S&P 500(8.02) for the past 10 years when it comes to average annual return...

This is a case of comparing funds to the wrong benchmark. You have to be careful because some funds do this to tout their returns. The funds probably did beat the S&P 500 (I didn't check) for the past 10 years, however their holdings have nothing to do with the S&P 500. VHGEX is a global fund, PHRAX is a real estate fund and FRSGX is a small/mid-cap growth fund. The S&P 500 is made up mainly of large-cap blend/value stocks. The closest it comes to any of these funds is that it contains about 3% mid-cap growth stocks with no small caps and that's about it. You have to compare apples to apples in order to get the right perspective on how funds are performing.

**Chet** · 12-22-2006, 02:49 PM

Re: Help with 401k allocation

Originally posted by meaghanchan

A couple additional questions might help fine-tune these suggestions...

1. What is your risk tolerance (conservative, aggressive, in the middle?)
2. What are the ERs (expense ratios) on these funds?
3. Are you open to investing in other ways (ie a Roth IRA where you can choose your own funds)?
4. Do you want a hands-off approach, or are you open to doing some stuff yourself (such as rebalancing every year)

To answer your questions:

1. I would have to say I lean more towards mod-aggressive. Also, I plan on never borrowing money from my retirement accounts, so I'm in it for the long haul.

2. Not sure about the ERs. I'll have to look those up. But from what I've read I should try to keep those as low as possible, correct?

3. I currently have a Roth IRA with T. Rowe Price. I chose the target 2045 fund. I try to contribute as much as I can every year.

4. I would rather just set it up once and forget about it, but I won't mind having some maintenance.

Thanks for the replies all.

**humandraydel** · 12-22-2006, 02:56 PM

Re: Help with 401k allocation

You've gotten pretty good advice so far. At 25 your risk tolerance is about as high as it gets. You've got 30-40 years to ride out any downturns in the market.

The target retirement funds (fidelity freedom) are an okay choice if you absolutely want to set it and forget it, but I wouldn't suggest them if you are at all interested in investing.

A good generic asset allocation for someone at your age is:

25-30% Large cap
15-25% Mid Cap
15-20% Small Cap
15-20% International
10-15% Real Estate

As for the individual funds, I don't have any advice because I haven't looked into them. Do take expense ratios into account though. The difference over 30 years between a 1% or 2+% expense ratio can be a million dollars!

**kv968** · 12-22-2006, 03:08 PM

Re: Help with 401k allocation

I would say go with the Fidelity Freedom 2040 in your 401k. It's going to have a lot of overlap with the T Rowe Price fund but if you want a basic "set-it-and-forget-it" type account that's the best way to go. However with those funds you won't get much exposure to small caps and about a 20% exposure to foreign stocks so if you'd like to have some "maintenance" in your account, you could add some of those in with the other funds available to you. You could also throw a small portion of real estate too since there's none at all in the retirement funds. There's more risk involved with the small-caps and the real estate funds but you say your risk is mod-aggresive and you're young so a little of each of those classes could really help you out.

Help with 401k allocation