Need Advice in Setting up 401k

[j29]

Hello- I'm trying to allocate my 401K. I had previously been enrolled in Goalmaker Aggressive Portfolio through Prudential so I'm a bit clueless now that I have to make these decisions myself. I've been told that since I'm 20+ years from retirement, an aggressive portfolio would be most suitable...

My choices are:

U.S. Governement Securities Fund
Fixed Interest Fund
Intermediate Bond Fund
Balanced Fund
Diversified Equity Fund
International Equity Fund
U.S. Small Cap Fund
Russell 3000 Index Fund
Johnson & Johnson Common Stock Fund

I've read that you do not want to put more than 10% percent in company stock (Enron anyone) but other than that I am not sure what to do.

Any input would be highly appreciated!

[Broken Arrow]

Hi. I'm lazy, so can you help us out with the tickers if you know them? Also, which company is handling your 401(k)?

[jIM_Ohio]

Agressive means volatile
you might see +25% returns
you might see -10% returns

both are as likely to happen as the other (if you get 3 years of +25%, there will be 3 years -10% somewhere in the 20 years too).

Agressive means +60% returns and -40% returns are as likely to happen as well. You might get 2-3 years of +60 (like this year), and you will also get 2-3 years of -40% too (like last year).

Just because everyone (including me) would tell you being aggressive with 20+ years out, only you can decide if I am right.


An aggressive portfolio might be:

45% domestic large cap
15% domestic mid cap
15% domestic small cap
(total is 75% domestic equity)
15% foreign large cap
10% foreign small cap/ emerging markets
(total is 25% foreign equity)

that will give some years of +60% and some years of -40%
that will give a few years of +25% and a few years of -10%

I have no idea what order the returns come in, but the peaks are high, the valleys are low, and best advice is if you choose that path, stay the course.

If you want mild risk, try 80% equity and 20% bonds like this:

30% domestic large cap
15% domestic mid cap
15% domestic small cap
(60% domestic total)
15% foreign large cap
5% foreign small cap
(20% foreign total)
20% bonds and cash

above will be less volatile- might not see the +60% as much, but will take away some of the -40% too. You will still see the +25% and -10% though. Not as high on the up, not as low on the down.


If you want much more mild risk, do 60-40 (60% equity and 40% bonds) like this

30% domestic large cap
5% domestic mid cap
5% domestic small cap
(40% domestic total)
15% foreign large cap
5% foreign small cap
(20% foreign total)
40% bonds and cash

reducing small and mid cap exposure by 2/3 will really reduce volatility of any portfolio considerably, but you will also lose the boost of returns some too.

Best guess is you see some +20% and -5% type returns from this.
Would not expect +60% and would not expect -40% from this (at all).

And if you want to smooth the ride out, go 40-60 (40% equity, 60% bonds). Like this

20% domestic large cap
10% domestic small cap
(30% domestic total); removed mid caps, include with small caps
5% foreign large cap
5% foreign small cap
(10% foreign total)

60% bonds and cash


100% equity expected returns are 11% average; +70% and -50% are as likely to happen; +30% and -10% as likely to happen. 11% returns with a deviation of around 20 (meaning 31% as likely as -9%). 11+20=31; 11-20=-9

80-20 expected returns are between 9 and 10%. +30% and -10% as likely to happen, with a deviation of "around 17"... meaning 9% is average 9+17=26% and 9-17=-8% meaning 26% is as likely to happen as -8%.

60-40 expected returns are between 7 and 8%. +20% and -5% as likely to happen. Deviation is still higher than return, probably around 8-10. Meaning 7+9=16% and 7-9=-2%. 16% as likely to happen as -2%.

40-60 is first time a portfolio's deviation is less than average return (meaning its ride is smoother in proportion to other portfolios). Might return 6% but deviation historically is less than 6% (call it 5.5%). Meaning 11% is as likely as 1%.
6+5.5=11.5% and 6-5.5=.5%.

Lots of numbers...

[jIM_Ohio]

Your first step is to choose how much risk you want, then plug the funds into the framework above

U.S. Governement Securities Fund
Fixed Interest Fund
Intermediate Bond Fund
Balanced Fund
Diversified Equity Fund
International Equity Fund
U.S. Small Cap Fund
Russell 3000 Index Fund
Johnson & Johnson Common Stock Fund

Diversified Equity Fund- probably large cap domestic?

International Equity Fund- might be only international option you have...

U.S. Small Cap Fund- small cap =small cap in all descriptions above

Russell 3000 Index Fund- mid cap and small cap combined into one.

You will want to look into what the russell 3000 is, my best guess is that it is a mid-small cap combination index.

Russell 2000 is typically the small cap benchmark
so Russell 3000 is probably including mid caps into the index

ticker symbols help, but once you decide how much risk to take, it is easy to plug and play any array of mutual funds into the risk profile.

If you chose the either of top 2 risk profiles (100% equity or 80-20) I would advise to add a SMALL dose of company stock. For 2009 my company stock was my best performer, granted only 4% of my money went there for my 401.

My employer is bigger than yours
and what I did was took the 80-20 allocation above, and did this:

36% domestic large
30% mid/small cap (like the russell 3000 fund)
15% foreign large
10% emerging markets
4% company stock
5% bonds

I am about 17 years from retiring, I add 2% to bond allocation per year, as a I slowly ratchet down my volatility. My larger than your company stock replaced 4% of the large cap allocation.

"The only 2 entities bigger than my company are FIFA and the catholic church"- quote from our CEO... "bigger" is measured by the number of countries we reside in... not by money or other...

[Slug]

What are the fund fees and expense ratios?

Don't presume JNJ is like Enron. JNJ stock is like owning a dozen healthcare companies and pays a decent dividend. That said, I still wouldn't go over 10% either.

[LMA]

Firs of all define what you mean by retirement. That words keeps on showing up everywhere when it comes to financial planning but what does it really mean?

Second, you basically need to educate yourself so that you understand where your money is going. What you are doing here is a good first step.

But this being a 401k it is money you can't touch until age 59 so if that is a ways away then putting most of your allocation (70-80%) in stocks will give you the greatest potential for growth.

Be careful, you can go crazy with asset allocation formulas (see above) but I always like KISS. All the choices you list up there are completely different so find out exactly what each one of them is and then make your decision. Ask the custodian for your 401k to help you out.

[Snodog]

Personally I would never go with an 100% equity portfolio. At least 20% bonds greatly reduces risk and doesn't slow you down that much if you rebalance. Although I must admit we are currently 30 years into a bull market for bonds that can't continue indefinetly.

I used this site to come up with my portfolio. Here is what I went with.

[j29]

Thank you ALL for the great advice! After looking into Russell 3000, I found out that it's a large-cap index of the top 3,000 stocks in the Russell 3000 Index. I decided to allocate my 401k investments like this:

U.S. Governement Securities Fund...................5%
Intermediate Bond Fund..................................10%
Diversified Equity Fund.....................................15%
International Equity Fund.................................20%
U.S. Small Cap Fund.........................................15%
Russell 3000 Index Fund (^RUA)......................25%
Johnson & Johnson Common Stock Fund.........10%

Special thanks to jIM Ohio for the easy to understand breakdown. BTW, my guess is that you work for Coca Cola ???

Thanks again!

[TermMonster]

J29 -
You're going to get a million different opinions on what is "aggressive." The fact is you absolutely cannot build an aggressive portfolio if you are uncomfortable sustaining significant losses. Last year, aggressive investors (those invested 100% in equites) lost 50% of their portfolio. Are you comfortable losing 50%? More importantly, once you lose 50% will you stay committed to the strategy? If the answer to either of these questions is "no" or even "maybe" - you are NOT an aggressive investor.

The conventional wisdom suggests that you have enough time until your retirement to recover from these types of losses. Time is on your side but we are emotional animals who exhibit varing degrees of fear and greed - both of which are destructive to building wealth. Be honest with yourself and if you can't stomach losing money, don't take too much risk. Make sense?

[jIM_Ohio]

Thank you ALL for the great advice! After looking into Russell 3000, I found out that it's a large-cap index of the top 3,000 stocks in the Russell 3000 Index. I decided to allocate my 401k investments like this:

U.S. Governement Securities Fund...................5%
Intermediate Bond Fund..................................10%
Diversified Equity Fund.....................................15%
International Equity Fund.................................20%
U.S. Small Cap Fund.........................................15%
Russell 3000 Index Fund (^RUA)......................25%
Johnson & Johnson Common Stock Fund.........10%

Special thanks to jIM Ohio for the easy to understand breakdown. BTW, my guess is that you work for Coca Cola ???

Thanks again!

I do not work for coca cola
company is headquartered in Europe....

I will question the russell 3000 being large cap...
it has to own mid caps at minimum and probably small caps too...

I did a yahoo search
Broad market
Russell 3000®

Russell 3000 is close to a total stock market index, if you are going to use it, best advice is let that me the only domestic fund you own and put 55% of the money there....

"Definition
The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. "

U.S. Governement Securities Fund...................5%
Intermediate Bond Fund..................................10%
Diversified Equity Fund.....................................0%
International Equity Fund.................................20%
U.S. Small Cap Fund.........................................0%
Russell 3000 Index Fund (^RUA)......................55%
Johnson & Johnson Common Stock Fund.........10%

If you need to verify this is good advice (I would check me on this)

do the following:

compare the xray of each fund at morningstar.com

put in your portfolio above into xray. Assume you have 100,000 and divide 35000 into one fund, 5000 in another 10,000 in another.

Then xray the portfolio I listed which removes your small cap and diversified equity.

Here is my GUESS
the russell 3000 xrays to about 80% large cap, 20% mid and small cap
wilshire 5000 I am much more familiar with, and it is about 75% large and 25% mid and small. Because russell has fewer small caps, I assume it is weighted to large caps more.

so the portfolio I outlined in this post will have less small caps but it also has less overlap (I can pretty much guarantee the diversified equity would have 100% of its holdings in russell 3000).

My original guess on russell 3000 being mid and small caps was incorrect, so some of my first two posts have mis information in them.

[Broken Arrow]

Hmm, this issue pertaining Russell 3000 piqued my interest.

It would appear that it's a competing large-cap index from Russell Investments.

For comparison, I x-rayed iShares' S&P 500 ETF (IVV) and iShares' Russell 3000 ETF (IWV). Of course, iShares isn't an accurate representation of these indexes, but you can't x-ray the index itself.

Both are rated large cap blend, both track (mostly) large-cap companies, and for that matter, both share exactly the same top 10 holdings.

The differences are subtle. For example, x-ray reveals that the Russell 3000 is 99.78% domestic, whereas the S&P 500 is 100% . Also, even though both are designed to track large-caps, x-ray shows that the Russell 3000 has 21% mid-cap and 9% small-cap exposure, whereas the S&P 500 only has a 14% mid-cap exposure.

As for the ETFs themselves, the S&P 500 is a $20.06 billion fund with an expense ratio 0.09%, whereas the Russell 3000 is a $2.87 billion fund with an expense ratio of 0.2%.

Well, I learned something new today.

[jIM_Ohio]

And to a new investor, knowing the details of what BA was commenting on might be "over your head", but it does appear to be a good total market index, which is close to wilshire 5000 (which BA did not analyze, but will be about 75% large and 25% small and mid caps when an xray is done, IIRC).

[kv968]

U.S. Governement Securities Fund...................5%
Intermediate Bond Fund..................................10%
Diversified Equity Fund.....................................0%
International Equity Fund.................................20%
U.S. Small Cap Fund.........................................0%
Russell 3000 Index Fund (^RUA)......................55%
Johnson & Johnson Common Stock Fund.........10%

I'd suggest taking 5-10% off of the 3000 and add it to the Small Cap Fund (depending on the fund's makeup). There may be some overlap but the 3000 doesn't delve very deep into small caps so whatever overlap there is will be minimal. However keep in mind in doing so it would most likely raise the volatility of the portfolio a bit.