401k options / allocation

**Slug** · 04-22-2010, 09:21 AM

Step 1. Post the expense ratios next to the funds or even better post the post-expense ratio and fee gains for the past 3, 5, and 10 years.

Step 2. Calculate years until retirement.

Step 3. Calculate ongoing 401k contribution rate + match.

Step 4. Estimate wife's risk tolerance.

Step 5. Calculate likelihood she will remain your wife until retirement. That is, should you consider this within the context of your overall retirement savings with your own savings and risk tolerance included or should you treat her situation independently.

Step 6. Allocate accordingly, probably in low expense ratio index funds (likely a total US mkt fund, an international fund, and a bond fund) if possible.

**jIM_Ohio** · 04-22-2010, 11:12 AM

I would not use expense ratio as the primary criteria for choosing a fund. It matters, but its not on the top 2 or 3 things I would look at (fund performance, asset allocation, and the holdings of the fund are MUCH more important, not even close).

Step 1- define your risk tolerance. There are lots of risks (not just 1)... if something is "risk free" it actually has the absence of one risk and probably a high amount of 2-3-4-5 other types.

For example, read these 2 threads

Saving Advice Forums

http://www.savingadvice.com/forums/investing-banking/50669-questionaire-people-starting-retirement-planning.html

Saving Advice Forums

http://www.savingadvice.com/forums/investing-banking/50734-investment-risk-questionaire.html

The second one specifically deals with risks, but it assumes some knowledge from the first thread. The goal of those threads is to make yourself ask questions (hopefully the right questions) of yourself and others which are helping you.

2) Define the risk tolerance of #1 in terms of a broad investment strategy. Usually this is expressed in terms of % stocks and % bonds (80-20 or 40-60... where 80-20 is 80% stocks and 20% bonds/cash or 40-60 where 40% is the amount of stocks and 60% is the amount of bonds/cash.

The risk tolerance you define in #1 could be many things- could be you are self employed, or work for a small family business (which is a risk)... it could be you don't want to invest $5000 and see it shrink to $2500 in 6 months (that could happen)... it could be you do not make much money, but have patience, so you want to retire by investing as little money as possible (maximize return). Define what you want in #1, then be specific about an allocation in #2.

If your goals or outlook on #1 change (get married, have a kid, get close to retirement), then change the allocation in #2.

3) Take the broad investment strategy in #2 and break it down into a detailed asset allocation

Meaning the % stocks needs a % domestic and % foreign
the % domestic needs a % large cap and % small cap
the % foreign needs a % large cap and % small cap
do you want mid caps?
do you want real estate?
do you want commodities like Gold and silver?
do you want emerging markets?
do you want frontier markets (step below emerging)?
do you want micro caps (step below small caps)

The decision at #2 is more important than the decisions at #3.

Meaning if you told me 80-20 was your chosen allocation in #2, then told me you could not decide between 30% large cap domestic and 20% large cap domestic and 10% mid cap domestic... most of us would tell you that you are splitting hairs over the 30 or 20-10 decision. The performance difference and risk difference would exist, but its not "that significant".

If you told me you were not sure between 80-20 and 40-60 in #2, most of us would tell you to re-think #1, and do your homework at #1, because the risks you take in 80-20 will be much different than the risks you take at 40-60.

And if you were 40-60 and wanted to own large caps, mid caps, small caps, micro caps, emerging markets, frontier markets etc (you want it "all"), that might be redundant (you might have asset classes with only 1% of portfolio in it), but the consequences to performance (from the redundancy) would be very low (because equity position is 40% to begin with, so owning 20 different equity classes when equities are such a small part of portfolio would make some of the 20 equity classes redundant.

If the details of #3 has you lost, focus again on #1 and #2.

#4 once you define your specific asset classes you want, choose investments (mutual funds) which fit the asset classes you want.

#5 once you start choosing funds, look at performance, expense ratios and investment style. For example just because a fund says its small cap does not mean its small cap- focus on holdings before making final decisions at #5.

I assume from your 1st post you wanted me to give you answer to #5... yet I have no idea how much stocks and bonds you want in portfolio, and how much large or small cap you want either...

read those two threads... FYI for me, I am 37 yo and my allocation is this

95% equities and 5% bonds/cash (in some accounts- like my Roths, I am 100% equity)
75% domestic equity and 25% foreign equity (any bond position lowers domestic stock allocation)

My detailed allocation is this

45% domestic large cap (or 40% if I own bonds in that portfolio)
15% domestic mid cap
15% domestic small cap
15% foreign large cap
10% foreign small cap and emerging markets
5% diversified bonds in my rollover IRA, in wife's 401k and in my 401k
no bonds in wife's rollover IRA, my Roth, or her Roth.

My risks are retire early... I am petal to the metal after performance, so I have high equity exposure. I am willing to accept HUGE fluctuations month over month and year over year to achieve the one single goal which trumps all others- that is to retire when my 2 yo twins graduate HS. In 2008 my 200k portfolio shrunk to 120k in about 3 months (lost 80k/40%). In 2009 I gained most of it back (30-40% returns across the board).

If you watch account balances, do not do what I chose (I could not tell you what my portfolio is worth today, I only check balances 2-3X per year).

Hope this makes sense and was not too complex... if you have questions, post them here.

**gpoitras** · 04-22-2010, 12:08 PM

Jim

My wife's risk level is an 8 (1 - 10 scale, 10 being the most aggressive).

So with an Asset Allocation of 80% Stocks, 15% Bonds, and 5% Cash

Of the 80% Stocks: 80% Domestic / 20% Foreign

Of the Domestic 80%: 60% Large, 30% Mid, 10% Small Cap

Of the Foreign 20%: 60% Large, 40% Mid Cap

So should this be realistic, now I'm basically forced to match it up to the available funds (original post) within VALIC. To be honest, looking at these funds, none of them really impress me. I'm looking at current and past performance, fund rankings and their morningstar ratings.

**jIM_Ohio** · 04-22-2010, 12:27 PM

Originally posted by gpoitras View Post

Jim

My wife's risk level is an 8 (1 - 10 scale, 10 being the most aggressive).

So with an Asset Allocation of 80% Stocks, 15% Bonds, and 5% Cash

Of the 80% Stocks: 80% Domestic / 20% Foreign

Of the Domestic 80%: 60% Large, 30% Mid, 10% Small Cap

Of the Foreign 20%: 60% Large, 40% Mid Cap

So should this be realistic, now I'm basically forced to match it up to the available funds (original post) within VALIC. To be honest, looking at these funds, none of them really impress me. I'm looking at current and past performance, fund rankings and their morningstar ratings.

Your allocation will matter more than the funds

the best large cap fund might be a 15% return
the S&P might return 12% same year
the worst fund might be 8% in same category

and the "standard deviations" between those is huge... meaning most funds will be about where S&P was... and as time progresses most will revert to the mean... so focus on what the funds hold, not their performance.

You want decent performance (avoid one star funds and possibly 2 star funds)
you want good manager tenure (avoid funds with managers less than 2 years in control)
and try to keep expenses below 1% on a managed fund or below .2% on an index fund.

and focus on the big ones- if you cannot find an international mid cap fund, just put all 20% of the foreign allocation into a large cap fund.

401k options / allocation