Am I diversified?

[dvd7e]

Hi,

I want to know if I am properly diversified. I am 24 yrs old (so obviously many, many yrs from retirement) and just started working out of college, only have about 5k in my 401k and 20k in short term investments/emergency funds.


Broad Market Bond Index Fund: 20% (U.S. Bonds)
S&P 500 Indexed Equity Fund: 10% (Large Cap; Blend)
Value Equity Fund: 25% (Large Cap; Value)
Small/Mid Cap Index Equity Fund: 25% (Small Cap; Growth)
New Perspective Fund (RNPFX): 15% (Large; Growth)(~65% Foreign stocks, 35% U.S.)
MSCI EAFE Indexed Equity: 5% (Large Cap; Blend) (Foreign Markets)

Overall: 20% Bonds, 80% Stocks

Am I diversified?

Thanks

[disneysteve]

I think that looks like a good allocation. Some may argue that a 24-year-old doesn't need 20% in bonds, but I don't see a problem with that. It will smooth out some of the volatility of the stocks without greatly impacting returns.

[jIM_Ohio]

Hi,

I want to know if I am properly diversified. I am 24 yrs old (so obviously many, many yrs from retirement) and just started working out of college, only have about 5k in my 401k and 20k in short term investments/emergency funds.


Broad Market Bond Index Fund: 20% (U.S. Bonds)
S&P 500 Indexed Equity Fund: 10% (Large Cap; Blend)
Value Equity Fund: 25% (Large Cap; Value)
Small/Mid Cap Index Equity Fund: 25% (Small Cap; Growth)
New Perspective Fund (RNPFX): 15% (Large; Growth)(~65% Foreign stocks, 35% U.S.)
MSCI EAFE Indexed Equity: 5% (Large Cap; Blend) (Foreign Markets)

Overall: 20% Bonds, 80% Stocks

Am I diversified?

Thanks

Have you used morning star x-ray

there is more than one way to measure diversified

For example, 80% stocks-20% bonds
if you only own 100-300 stocks, and all 80% of your money is in those 100-300 companies, you might not be diversified.

And 65% of 15% is 9%
plus 5% is 14%- You might only have 14% foreign stocks. That is "diversified", but is that what you want? and its possible some of the 5% and 9% are the same stocks, so you might not know how diversified you are until you x-ray your portfolio.

80-20 looks OK
my guess is you are overweight large cap and underweight foreign but only xray will tell you for sure.

what xray does is look at every stock in the mutual funds you own (you will need their ticker symbols)
then tell you % stocks-% bonds and % domestic vs % foreign and % growth vs % value

If you know what your targets are in each area, xray can let you see how far you are from your targets.

For example, my holdings usually look like this

90% stocks 10% bonds
35% large cap
15% mid cap
15% small cap
15% foreign large cap
10% foreign small cap and emerging markets

I expect value-growth-blend to be biased to value because T Rowe Price is a value investing house and all my money is with them.

[jefffou]

Hi,

I want to know if I am properly diversified. I am 24 yrs old (so obviously many, many yrs from retirement) and just started working out of college, only have about 5k in my 401k and 20k in short term investments/emergency funds.


Broad Market Bond Index Fund: 20% (U.S. Bonds)
S&P 500 Indexed Equity Fund: 10% (Large Cap; Blend)
Value Equity Fund: 25% (Large Cap; Value)
Small/Mid Cap Index Equity Fund: 25% (Small Cap; Growth)
New Perspective Fund (RNPFX): 15% (Large; Growth)(~65% Foreign stocks, 35% U.S.)
MSCI EAFE Indexed Equity: 5% (Large Cap; Blend) (Foreign Markets)

Overall: 20% Bonds, 80% Stocks

Am I diversified?

Thanks

I'd say your fine....

I generally don't care for rules of thumb. However, sometimes they may help a little.....

Multiply your stock portion of your portfolio times 1/2. In your case, you that would mean 40% (80% stocks X 50%). Then ask the question, "What would you do if you lost 40% of your portfolio in any given year, event, quarter, etc......?"

If your answer is, "I would probably close my position and invest the remaining funds far more conservatively," then I would suggest investing with a larger portion of bonds now, namely Treasury or Agency Bonds (or bond funds.)

Millions of investors locked in their losses last year AFTER losing 30% - 60% of their portfolio. They believed the world was coming to an end and began to "cut their losses" at exactly the wrong time. They took the funds and went to CD's, Stable Value Funds, and Money Market accounts, guaranteeing their losses. One should pre-determine their threshold before such an event occurs, lessening the likelihood of such a response.

At your age, you shouldn't be too concerned with how much you could afford to lose. Instead, ask the question how much could you lose and NOT sell the funds associated with the loss.

My $.02.

Jeff
401k Advice

[Mike75]

Ya, I would say you are very diversified. I think you or whoever is managing your finance, is doing a great job with it.

[dvd7e]

So I actually took a look at my 401(k) and it turns out that all employer contributions are invested in company stock. This can't be changed, or rebalanced to other holdings. So right now 25% of my (small) account balance is invested in a single stock - how do I get around this when it comes to diversifying my allocations? If it were up to me, I would never own a single stock (especially my own company - not because I have any insider info or because of lack of trust or anything, I'm just already over dependent on the company as it is, with my salary)

Any suggestions?

[disneysteve]

So I actually took a look at my 401(k) and it turns out that all employer contributions are invested in company stock. This can't be changed, or rebalanced to other holdings.

There were changes made to the laws a couple of years ago that addressed this so that people wouldn't end up with a ton of company stock.

From a Financial Week article:

"The PPA included a provision that if 401(k) participants receive a matching contribution in company stock, then they must be permitted to divest the company stock after three years of service. The provision suggests that companies are assuming greater fiduciary risk if company stock holdings in 401(k)s grow out of control. As a result, many companies seem to be responding, and they are going above and beyond the PPA requirements. Roughly 67% of plans now permit participants to diversify or transfer company stock contributions immediately, compared with 46% in 2005, according to Hewitt."

You say you just started working so this may not apply to you since you haven't been there long enough unless your company rules are better than federal law requires. Otherwise, you may be stuck for the first 3 years. Just make sure you aren't buying any more company stock on your own.

[jIM_Ohio]

So I actually took a look at my 401(k) and it turns out that all employer contributions are invested in company stock. This can't be changed, or rebalanced to other holdings. So right now 25% of my (small) account balance is invested in a single stock - how do I get around this when it comes to diversifying my allocations? If it were up to me, I would never own a single stock (especially my own company - not because I have any insider info or because of lack of trust or anything, I'm just already over dependent on the company as it is, with my salary)

Any suggestions?

Do an xray of your portfolio
then put your company into the fold- did the xray show that any of the mutual funds own your company too? If so, dump them.

If your company is a large company, it is probably in one or more large cap funds. Reduce large cap exposure- if your theoretical allocation was 35% large caps, and your company stock is a large cap, drop that theoretical allocation down to 25% and add 5% bonds and 5% of something else not correlated to large company stocks.

[dvd7e]

Do an xray of your portfolio
then put your company into the fold- did the xray show that any of the mutual funds own your company too? If so, dump them.

If your company is a large company, it is probably in one or more large cap funds. Reduce large cap exposure- if your theoretical allocation was 35% large caps, and your company stock is a large cap, drop that theoretical allocation down to 25% and add 5% bonds and 5% of something else not correlated to large company stocks.

The problem is that xray requires a ticker symbol, and several of the core funds in my 401k offerings don't have ticker symbols.

For example, the Broad Market Bond Index Fund, which has no ticker symbol listed, but it says that its bench mark is the "BarCap US Agg Bond TR USD".
There is an ETF called "SPDR Barclays Capital Aggregate Bond" with ticker symbol LAG - can I use that as a substitute?

[dvd7e]

So one of the problems (if you can call it that) in getting a good Asset Allocation is that my 401k offers 8 different core funds. I can also put up to 75% of my account balance into a Self Managed Account, or I could go with a Target Date Fund.

The Core funds include:
Stable Value Fund (High Short Bonds)
Broad Market Bond Index Fund (High Interm. Bonds)
S&P 500 Indexed Equity Fund (Large Blend)
Value Equity Fund (Large Value)
Investment Co of America (Large Value)
American Century Growth Fund (Large Growth)
Small/Mid Cap Index Eq Fund (Small Growth)
New Perspective Fund (Large Growth)
MSCI EAFE Indexed Equity (Large Blend)

Most of these options seem Large Cap heavy, and there are no options for REIT's, Commodities, Emerging Markets, and other diversifiers.

To get around this, I could open a holding in the "Self Managed Account" and pick some of these diversifiers. The problem is that there are transaction fees with any holdings in the self managed account, whereas (I believe) there are no transaction fees with the Core Funds. So in the Rebalancing department, there is a bit of a penalty w/ the self managed account (I looked up the fees. For No Load Mutual Funds its $35/transaction) There is also a 0.10% adminstrative expense.


OR....I could go for simplicity with a Target Date Fund. Total expense ratio is 0.21 to 0.3%, with following breakdown for a 25 yr old.
US Large Cap: 28%
US Small/Mid Cap: 9.5%
Non-US Stock: 35%
Emerging Markets: 12.5%
Commodities: 5%
Global Real Estate: 5%
U.S. Core Bonds: 5%

So...

1) Should I go with the Target Date Fund?
or
2) A combination of the core funds listed, with some REIT's, Commodities etc with the Self Managed Account?


(Also, as a side note I was able to do a fund transfer and reinvest my company contributions that were in company stock into other holdings)

[jIM_Ohio]

The problem is that xray requires a ticker symbol, and several of the core funds in my 401k offerings don't have ticker symbols.

For example, the Broad Market Bond Index Fund, which has no ticker symbol listed, but it says that its bench mark is the "BarCap US Agg Bond TR USD".
There is an ETF called "SPDR Barclays Capital Aggregate Bond" with ticker symbol LAG - can I use that as a substitute?

LOL

I have same problem with my 401k

If you can find an ETF which tracks the index, that gives you a decent chance to replicate the holdings in xray.

[jIM_Ohio]

So one of the problems (if you can call it that) in getting a good Asset Allocation is that my 401k offers 8 different core funds. I can also put up to 75% of my account balance into a Self Managed Account, or I could go with a Target Date Fund.

The Core funds include:
Stable Value Fund (High Short Bonds)
Broad Market Bond Index Fund (High Interm. Bonds)
S&P 500 Indexed Equity Fund (Large Blend)
Value Equity Fund (Large Value)
Investment Co of America (Large Value)
American Century Growth Fund (Large Growth)
Small/Mid Cap Index Eq Fund (Small Growth)
New Perspective Fund (Large Growth)
MSCI EAFE Indexed Equity (Large Blend)

Most of these options seem Large Cap heavy, and there are no options for REIT's, Commodities, Emerging Markets, and other diversifiers.

To get around this, I could open a holding in the "Self Managed Account" and pick some of these diversifiers. The problem is that there are transaction fees with any holdings in the self managed account, whereas (I believe) there are no transaction fees with the Core Funds. So in the Rebalancing department, there is a bit of a penalty w/ the self managed account (I looked up the fees. For No Load Mutual Funds its $35/transaction) There is also a 0.10% adminstrative expense.


OR....I could go for simplicity with a Target Date Fund. Total expense ratio is 0.21 to 0.3%, with following breakdown for a 25 yr old.
US Large Cap: 28%
US Small/Mid Cap: 9.5%
Non-US Stock: 35%
Emerging Markets: 12.5%
Commodities: 5%
Global Real Estate: 5%
U.S. Core Bonds: 5%

So...

1) Should I go with the Target Date Fund?
or
2) A combination of the core funds listed, with some REIT's, Commodities etc with the Self Managed Account?


(Also, as a side note I was able to do a fund transfer and reinvest my company contributions that were in company stock into other holdings)

I am going to answer your question indirectly. I say keep fees to a minimum (meaning do not do self managed account) and then use a Roth IRA and other investments to round out portfolio.

This is because I would not pay more to be diversified. This is also because a 401k is temporary- you will not have it your whole life. A Roth IRA on the other hand you will have your whole life- so make sure the Roth looks like the way you want it, and get the 401k close.


You list your allocation as 80-20 stocks bonds
what about an allocation for domestic-international (like 75% domestic and 25% foreign)
what about an allocation for large-mid-small?
Possibly like 35% large cap-10% mid cap-10% small cap-20% foreign large and 5% emerging markets-10% bonds-10% cash?


I would come up with allocation BEFORE chooseing the funds. Might turn out you need to change the target date to find the allocation you want "right now".

The allocation is more important than which fund you pick.


You might compromise allocation in 401k.

If this is allocation you choose

35% large cap-10% mid cap-10% small cap-20% foreign large and 5% emerging markets-10% bonds-10% cash?

You might look at 401k and say you can do without the mid cap, so doing 30% large cap and 20% small cap works. Many small cap funds will own mid caps too, so its not a huge deal one way or other...

and you might not find that emerging markets fund, so you decide to do 25% foreign large cap.

In this example you have your 80-20 allocation requirement satisified in 401k
and you have your 75-25 domestic-foreign allocation
but the exact makeup of the allocation to mid caps and emerging markets was compromised.


Then you go to Roth and make sure you get the exact holdings you want.

If this was allocation

35% large cap-10% mid cap-10% small cap-20% foreign large and 5% emerging markets-10% bonds-10% cash?

Make sure its exactly that in the Roth.


Eventually your 401k will be rolled into an IRA, and when you do that (might be in 30 years) you can change to the exact allocation you want.


Pick allocation first
Pick funds second

If you pick funds before knowing what allocation you want, you might end up taking on more risk that you wanted. The target date allocation has 85% stocks and 15% other (commodities, real estate, bonds). You wanted 80% stocks and 20% bonds.

The target date fund is more diversified but also riskier than your initial portfolio IMO.


BTW-

The allocation above is really close to what I do (without the bonds)
The mid cap compromise I had to do (my 401k offers no mid caps). So my 401k has more small caps than my Roth, but in my Roth, my small caps and mid caps are just the way I want them.

[Beppington]

Hi,

I want to know if I am properly diversified. I am 24 yrs old (so obviously many, many yrs from retirement) and just started working out of college, only have about 5k in my 401k and 20k in short term investments/emergency funds.


Broad Market Bond Index Fund: 20% (U.S. Bonds)
S&P 500 Indexed Equity Fund: 10% (Large Cap; Blend)
Value Equity Fund: 25% (Large Cap; Value)
Small/Mid Cap Index Equity Fund: 25% (Small Cap; Growth)
New Perspective Fund (RNPFX): 15% (Large; Growth)(~65% Foreign stocks, 35% U.S.)
MSCI EAFE Indexed Equity: 5% (Large Cap; Blend) (Foreign Markets)

Overall: 20% Bonds, 80% Stocks

Am I diversified?

Thanks

At that age 90/10 might be suggested, but it sounds like you know enough to set it at what you're comfortable with.

I wish my personal finances had my attention at your level when I was 24!

I think you're on a path to becoming very wealthy.

[disneysteve]

At that age 90/10 might be suggested

I don't have stats in front of me but if you look at the average return of 80/20 vs. 90/10, they are pretty similar but 80/20 is safer and less volatile. I believe 80/20 performance is actually better over time than 90/10 or 100/0.

[jIM_Ohio]

I don't have stats in front of me but if you look at the average return of 80/20 vs. 90/10, they are pretty similar but 80/20 is safer and less volatile. I believe 80/20 performance is actually better over time than 90/10 or 100/0.

Its not better than 100-0

100-0 is about .5% better

I get my data from this site here

Flexible Retirement Planner


100% stocks 10.3% return 14.5% standard deviation (S&P 500 only)
90-10 is 10.5% return with 15.8% deviation (.2% higher return for 1.3% deviation)
80-20 is 10% average return with 14.3% standard deviation
55-45 is 8.5% return with a 9.9% deviation

My conclusion is that it is better to stay 100% stocks for as long as possible and only add bonds once you want to lower your deviation of returns (meaning within 5-10 years of needing the money).

For example 90-10 we would think is "less risky" because it has bonds, but according to the data the returns vary too much to gain anything extra in the return. If you go further down the allocations (like 40-60) you will see that performance (average returns) drop only slightly while deviation drops dramatically with more bonds and cash. If you notice that a 55-45 portfolio returns only 1.5% less than an 80-20 portfolio, but your returns vary 5% less- meaning the volatile ride has smoothed out by doubling the bond position.