Help with 401K setup

[ashleyd1983]

Hello... I am trying to set up my 401K at work. I am new to this and do not really understand how to choose your allocations. Please give me any advice/tips that you have. Thanks in advance! By the way, I am 26 years old and just starting my 401K. So far, this is what I am thinking..

SSgA S&P Mid Cap Index- 20%
SSgA Russell Small Cap Index- 20%
Allianz NFJ Small Cap- Class A- 15%
Alger Mid Cap- Class I- 15%
Alger Small Cap- Class A- 15%
Franklin Rising Dividends- Class A- 8%
Fidelity Advisor Equity Growth- Class T- 7%

Please offer your advice.

[jIM_Ohio]

1) determine your risk tolerance
2) define an asset allocation of % stocks-% bonds and %domestic-%foreign and %large-% small which defines the risk tolerance
3) choose mutual funds which meet criteria of #2

If you do 3 before 1 and 2, the choices you make will be less effective long term.

[jpg7n16]

Here's two links you may find of interest:

Beginners' Guide to Asset Allocation, Diversification, and Rebalancing
Mentioned in the SEC article: Asset Allocator

I notice that you have very little large cap allocation. Is that intentional? Why did you choose all mid/small cap funds?

[ashleyd1983]

Thank you. Like I said, I am new to this. I really was not certain of my choices, which is why I asked for advice.

[jpg7n16]

Thank you. Like I said, I am new to this. I really was not certain of my choices, which is why I asked for advice.

Not a problem

The more info you give us about who you are, what's important to you, what your feelings on risk are, etc. - the better advice we can give you. (see Jim's signature)

[ashleyd1983]

I am definitely not a huge risk taker. I obviously want to choose the right things that are going to make my money grow. I want what is going to be the most effective long-term. I can post all of my account options tomorrow. I am locked out for 24 hours since I just set it up today. I am just a little clueless when it comes to all of this.

[jpg7n16]

Well welcome Glad we can help you out!

As long as you know there are no guarantees, then stocks are a good way to go. The larger and more stable companies make for more stable stocks, so it'd be smart to put a good amount into them. The smaller companies have good growth opportunities, but also are not as stable as the bigger companies. Think... some papa's burger hut vs mcdonalds. It's really easy for papa's burger hut to expand by creating a couple new locations. But if the economy comes across hard times, McDonalds can probably weather any storm that comes at it. Papa's burger hut... not so much.

Small cap stocks are sort of like the papa's burger illustration. They have good growth potential (and thus higher rates of return), but also carry more risk - which you've said you don't really want. (I personally am okay with a lot of risk and have a higher % in small caps)

Now just because they are riskier doesn't mean you have to avoid them entirely. They add good returns to your overall portfolio. You just don't want them at 50% - like you have listed above.

There are companies out there (I have fidelity) that have created what are called "Target Date Funds." Have you ever heard of them? They are professionally managed funds that do all the asset allocation for you along the way. If you are uncomfortable with allocation, they can be a great way to go. You just choose a fund with a target close to when you want to retire and let them allocate for you. And they are pretty good options for moderate risk investors.

Here's some example funds:
Vanguard Target Retirement 2050 Report (VFIFX) | Portfolio
Fidelity Freedom 2050 Report (FFFHX) | Portfolio

If you scroll down a bit on those pages, on the left you will see a portfolio breakout. Notice that they are more weighted to the Giant and Large cap stocks, but still have investments in the mid, small, and micro companies.

If you have an option like those, a great idea for you would be to put 85% in that fund, with 5% to a good bond fund, and the other 10% to either a large-cap or broad index fund (like an S&P500 index). This would give you a good overall allocation with a little extra stability from the bonds and index fund.

[jIM_Ohio]

I am definitely not a huge risk taker. I obviously want to choose the right things that are going to make my money grow. I want what is going to be the most effective long-term. I can post all of my account options tomorrow. I am locked out for 24 hours since I just set it up today. I am just a little clueless when it comes to all of this.

Check this thread

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

and then this one too

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

How well do you understand statistics?

The two most important factors with risk is "what happens 66% of the time" and standard deviation.

Do you know what stocks are?
Do you know what bonds are?
Do you know what cash is?

Most risk profiles are expressed as % stocks-%bonds-% cash. Because you are young, the bonds and cash will probably get lumped into % stocks-% bonds, with a small cash position in the bond portion.

100-0, 80-20 and 60-40 would be the probable allocations to start with (100% equities, 80% equities-20% bonds or 60% equities and 40% bonds).

What I can tell you is "66% of the time" the returns are this...

100% equities will average about 11% returns over a 20 year period
80-20 will average about 9% returns over 20 year period
60-40 will average about 8% returns over 20 year period

average is a CRUEL word... and before you decide based on averages, know that the deviations of all of above are higher than the average...

100% equity has about a 15-19 deviation
meaning the 11% average 66% of the time will also have 11-15=-4% and 11+15=26% returns 66% of the time. That means -4% happens as much as +26% returns, and the average will be about 11% over 20 year and 30 year periods.

80-20 has a deviation of about 13. Meaning 9-13=-4 and 9+13=22. So 66% of the time returns are between -4% and +22% and average to about 9% over 20 and 30 year periods.

60-40 has a deviation of about 10 or 11.

I have a website which gives exact returns for the portfolios, I do not have it bookmarked on this PC, so I might be off on above... I do know for sure the deviations show negative returns for all 3 portfolios which happen often (meaning you can expect good returns and negative returns from anything with more than 40% stocks).

As time progresses, the risk of losing money goes down (because of compounding).

My suggestion is this...

1) do not let anyone tell you how much risk to take
2) what you want to learn is about the risks, not the investments themselves. The risks to learn about are inflation, interest rate, return risk, market risk and a few others.
3) Risks are NEVER eliminated. If someone says something is risk free, it usually has a lot of another risk included. For example if someone says a CD at your bank is risk free, it means the principal is not at risk, but the inflation risk of same investment is thru the roof. The absence of one risk will be a lot of another risk then. NOTHING is risk free.
4) If you are not sure what to do... start with a 60-40 (balanced) portfolio until you know for sure what is going on. Pick a large cap stock fund for 20%, a small cap stock fund for 20% and a foreign stock fund for 20%, then put 40% into one single bond fund which has government bonds in it.

You could do better than those 4 fund selections, but you can also do much much worse (what I picked is balanced, which is what 60-40 is generally considered.

Your primary risk (IMO) with 60-40 is that it will not give high end returns... the probability you get 20% returns any one year is low, and you need good years like 20%-50%-100% once in a while IMO to make investing pay off.

[maat55]

Hello... I am trying to set up my 401K at work. I am new to this and do not really understand how to choose your allocations. Please give me any advice/tips that you have. Thanks in advance! By the way, I am 26 years old and just starting my 401K. So far, this is what I am thinking..

SSgA S&P Mid Cap Index- 20%
SSgA Russell Small Cap Index- 20%
Allianz NFJ Small Cap- Class A- 15%
Alger Mid Cap- Class I- 15%
Alger Small Cap- Class A- 15%
Franklin Rising Dividends- Class A- 8%
Fidelity Advisor Equity Growth- Class T- 7%

Please offer your advice.

Does your 401k provider have target date funds? You might use one to your year of retirement while you learn about allocation.

[ashleyd1983]

Guys thank you so very much for all of the helpful information. To be honest, I really have no clue how all of this works. It is slightly confusing to me, and I don't really understand the differences between these funds and how to choose. These are the funds that are available:

SSgA Government Money Market Fund
PIMCO Total Return Fund - Class A
DWS High Income Plus Fund - Class S
SSgA Life Solutions Balanced Growth Fund
SSgA Life Solutions Growth Fund
SSgA Life Solutions Income & Growth Fund
AllianceBernstein Growth and Income Fund - Class A
DWS Large Cap Value Fund - Class A
Franklin Rising Dividends Fund - Class A
SSgA S&P 500 Index Fund
Fidelity Advisor Equity Growth Fund - Class T
Oppenheimer Capital Appreciation Fund - Class A
SSgA S&P MidCap Index Fund
Alger Mid Cap Growth Institutional Fund - Class I
Allianz NFJ Small-Cap Value Fund - Class A
SSgA Russell Small Cap Index Fund
Alger Small Cap Growth Institutional Fund - Class I
Janus Overseas Fund - Class S
Templeton Growth Fund, Inc. - Class R

Thank you so much again. I really appreciate it.

[jIM_Ohio]

Guys thank you so very much for all of the helpful information. To be honest, I really have no clue how all of this works. It is slightly confusing to me, and I don't really understand the differences between these funds and how to choose. These are the funds that are available:

SSgA Government Money Market Fund
PIMCO Total Return Fund - Class A
DWS High Income Plus Fund - Class S
SSgA Life Solutions Balanced Growth Fund
SSgA Life Solutions Growth Fund
SSgA Life Solutions Income & Growth Fund
AllianceBernstein Growth and Income Fund - Class A
DWS Large Cap Value Fund - Class A
Franklin Rising Dividends Fund - Class A
SSgA S&P 500 Index Fund
Fidelity Advisor Equity Growth Fund - Class T
Oppenheimer Capital Appreciation Fund - Class A
SSgA S&P MidCap Index Fund
Alger Mid Cap Growth Institutional Fund - Class I
Allianz NFJ Small-Cap Value Fund - Class A
SSgA Russell Small Cap Index Fund
Alger Small Cap Growth Institutional Fund - Class I
Janus Overseas Fund - Class S
Templeton Growth Fund, Inc. - Class R

Thank you so much again. I really appreciate it.

start with 60-40 until you know better... and do it like this

20% SSgA S&P 500 Index Fund
20% SSgA Russell Small Cap Index Fund
20% Janus Overseas Fund - Class S
20% SSgA Government Money Market Fund
20% PIMCO Total Return Fund - Class A

the 40% is split 20% bonds and 20% cash
once you realize you can be (want to be???) more aggressive, it should be easy to liquidate money market. If you decide to be more conservative than a 60-40 allocation, then feel free to change my choices.

[jpg7n16]

ehhhh I just don't like that much in bonds/cash as Jim suggested.

I'd probably do:
25% SSgA S&P 500 index
25% DWS Large Cap Value
20% Allianz NFJ Small Cap
15% Janus Overseas
15% Pimco Total Return

I just can't make myself put any retirement funds in cash when it's 40 years away and I need no liquidity at all right now. I personally feel Money Market funds in retirement accounts are a wasted opportunity until retirement is 2-5 years away. (let me emphasize that's my personal opinion)


You can go to Morningstar Stock, Mutual Fund, Hedge Fund, ETF Investment Research and at the top in the "quotes" box, start typing in the name of the fund. In the middle there's a button that says "portfolio" and it will give you more detail. Also note the expenses tab or the expenses on the "quote" page. Some of those SSgA have close to 2% in expenses - which seems high. The index fund is good though at 0.18%.

[jaine]

I personally am a fan of the efficient market hypothesis. It's worth googling.

My attempt to sum up what that means (sorry to the experts if I botch this)
- Stock prices instantly reflect what we know about how well they will do in the future.
- Once someone identifies a stock that's likely to do better than the market, it's too late to see any advantage from buying it because the price has already gone up to reflect that knowledge.
- Follow that thought to its logical conclusion - the only way to beat the market is if you luck out. Some stocks will beat the market over the long term and some won't, but it's impossible to predict in advance which ones are which because the prices already reflect everyone's best guess.

Various studies have shown that (on average) managed funds do not beat the market (meaning on average managed funds don't do better than index funds) - in fact on average they do a little worse because managed funds have higher expense ratios and management fees. Financial companies tend to discontinue managed funds that are doing worse than index funds and that skews the numbers into making it look like managed funds are better. After adjusting for that, managed funds on average perform worse than index funds because of the higher fees. Obviously some funds have performed better than the market in the past and some have performed worse, but I believe that you can't predict in advance which is which for the future.

So - I look for index funds, not managed funds, and I look for the lowest possible expense ratio - the fees being the only part of the equation that I can predict.

I have a mix of small cap, mid cap, large cap, US and foreign stocks. All index funds and all with very low expense ratios.

I have 100% of my retirement savings in stocks at the moment because I have a high risk tolerance and I'm also young (28).

[ashleyd1983]

Thank you all so much for the advice and recommendations. I appreciate it so much, and I definitely understand more clearly how all of this works. I updated my allocations to the following:

25% SSgA S&P 500 Index
20% SSgA S&P Mid Cap
20% Allianz NFJ Small Cap
20% PIMCO Total Return
10% SSgA Government Money Market
5% Janus Overseas

I just used a combination of your recommendations and came up with this. Let me know what you think. Thanks again!

[jIM_Ohio]

Thank you all so much for the advice and recommendations. I appreciate it so much, and I definitely understand more clearly how all of this works. I updated my allocations to the following:

25% SSgA S&P 500 Index
20% SSgA S&P Mid Cap
20% Allianz NFJ Small Cap
20% PIMCO Total Return
10% SSgA Government Money Market
5% Janus Overseas

I just used a combination of your recommendations and came up with this. Let me know what you think. Thanks again!

This is better than what you had before... your next move should be increasing international to between 10-30% of portfolio.

You have 75% equities and only 5% international. That is conservative in some cases, and I think you can increase returns without much additional risk by moving money from mid caps to foreign.

**edit to add: 40% mid+small cap vs 25% large cap will be a volatile ride... small caps are known to be much more volatile than large caps, with mid caps also being more volatile than large caps... if you are looking for where higher returns will come from, it will be for one of these reasons

1) you have 75% equities- this will probably generate about 8-9% annual returns
2) you have 40% small+mid caps small caps tend to have more ups and downs, so if I said 80% equities had a volatility of 13, its probably that with small cap overweight that same volatilty increases (some). For that additional risk, you should be rewarded with higher returns.
3) If you do not think that the additional risk is going to give you a higher reward (higher return) shift the position... meaning you want 75% equities, but 40% small and mid might be too much, so look at either a higher large cap position, or higher foreign position.

Last I checked, the total market was about 75% large cap, 15% mid cap and 10% small cap (meaning if you compare returns to wilshire 5000, that index is 75% large, 15% mid and 10% small).