HELP! Best Way To Allocate 401K

[taylor510]

I'm 25, and have been with my current company for a few years. I did the "lazy" way of investing as I found out after researching my investment options and I had been putting some percentages in the majority of the accounts. I know...horrible! I won't need the money for atleast 25+ years. Not really against taking some risks while investing. I have been doing some research but would like your input on the best way to invest. The company does match up to 6%. Here are my options. Any help or ideas would be appreciated.

*I already invest a small percentage in the company's employee stock purchase plan.

Galliard Stable Value Account

PIMCO Total Return/Int

Vanguard Target Retirement Inc Trust I

Vanguard Target Retirement 2010 Trust I

Vanguard Target Retirement 2015 Trust I

Vanguard Target Retirement 2020 Trust I

Vanguard Target Retirement 2025 Trust I

Vanguard Target Retirement 2030 Trust I

Vanguard Target Retirement 2035 Trust I

Vanguard Target Retirement 2040 Trust I

Vanguard Target Retirement 2045 Trust I

Vanguard Target Retirement 2050 Trust I

Vanguard Target Retirement 2055 Trust I

American Century Value Account

Vanguard Instl Index 500

American Funds New Economy R6

T. Rowe Price Mid-Cap Value Account

T. Rowe Price Instl Mid-Cap Equity Gr

T. Rowe Price Small-Cap Value Fund

Eagle Small Cap Growth R6

American Funds EuroPacific Growth R6

[Petunia 100]

Well, there really isn't a "best" way. All you can do is make a reasonable plan, watch your costs, and fund it to the best of your ability. That said, there is an awesome all in one fund in your plan. Lucky you! See those Vanguard Target Retirement Funds? Those are pretty darn good investments. Each contains three broad market index funds at rock bottom costs. (Really, they are each the same exact fund, just at a different point on the glide path.) You're 25, will probably retire in 40 years, which would be 2053. Pick the 2050 or 2055 fund.

[taylor510]

Well, there really isn't a "best" way. All you can do is make a reasonable plan, watch your costs, and fund it to the best of your ability. That said, there is an awesome all in one fund in your plan. Lucky you! See those Vanguard Target Retirement Funds? Those are pretty darn good investments. Each contains three broad market index funds at rock bottom costs. (Really, they are each the same exact fund, just at a different point on the glide path.) You're 25, will probably retire in 40 years, which would be 2053. Pick the 2050 or 2055 fund.

Thanks for your advice. I just found out that is how the different target funds work; you would choose the one closest to the year you would retire.

I looked at the fact sheets they provide us, but I really don't know what it means. I have seen morningstar mentioned in many 401K articles; I just don't know where to begin.

[Petunia 100]

Thanks for your advice. I just found out that is how the different target funds work; you would choose the one closest to the year you would retire.

I looked at the fact sheets they provide us, but I really don't know what it means. I have seen morningstar mentioned in many 401K articles; I just don't know where to begin.

Well, do you have any specific questions?

When you are new to investing, it can all seem a bit overwhelming. But good investing really does boil down to just a few basic principals.

[kv968]

The target date funds are good choices on their own but I personally like to tweak them a bit.

Depending on your risk tolerance of course I'd suggest maybe doing something like 90% 2050/2055 target date fund and 10% T Rowe Small Cap Value. I know some think it's heresy to mess with a target date fund (and you don't have to) but by adding a little more small cap exposure to the overall mix you might make out better in the long run.

The 2050 fund has about 11% allocated to small caps and 9% to bonds. If you were add that small cap fund you'd up the small caps to 16% and your bonds would fall to 8%. Not a huge difference but something that could add a little oomph to the portfolio in the long term.

[MonkeyMama]

In addition to what KV and Petunia said, check the underlying stock/bond mix. Most Target Retirement funds are WAY on the aggressive side.

Vanguard Target Retirement 2050 is 90% in bonds (according to yahoo finance). Even the 2030 Target Fund is 80% in stocks. At 25, *most* people would advise you be 75%-85% in stocks. 70%-80% when you are 30. So, factor your risk tolerance when picking a year. You can't just "set it and forget it." You'll want to make sure over time that the stock/bond mix is one you are comfortable with. {You might want to "Set it" and re-evaluate every few years}.

[taylor510]

I want to do some research and read up on the difference; but it seems that so many of the books are already over my head. Any suggestions on that?

I understand at my age I want around 80% in stocks; this is what I've found on the 2050 Fund:
Vanguard Total Stock Market Index Fund 62.7%
Vanguard Total International Stock Index Fund 27.3
Vanguard Total Bond Market II Index Fund 10.0
..which means honestly, nothing to me.


I guess some of my questions are when looking at the facts on the different ones available, how do you gauge their performance? What is the difference between the mid caps and the small caps? What do you "look" for to feel comfortable in your selections/recommendations?

Sorry if this is too many questions or if they don't make sense.

[Petunia 100]

Taylor,

When I first became interested in learning about investing, I found Morningstar's Investing Classroom to be very helpful. Despite the name, it isn't a class. It is a collection of short articles on various topics, followed by a short quiz. You do have to register to use Morningstar's site, but basic membership is 100% free.

http://http://www.morningstar.com/cover/Classroom.html

[Petunia 100]

I want to do some research and read up on the difference; but it seems that so many of the books are already over my head. Any suggestions on that?

I understand at my age I want around 80% in stocks; this is what I've found on the 2050 Fund:
Vanguard Total Stock Market Index Fund 62.7%
Vanguard Total International Stock Index Fund 27.3
Vanguard Total Bond Market II Index Fund 10.0
..which means honestly, nothing to me.

An index is a way to measure a particular market. For example, when reporting on the US stock market, references are made to the Dow Jones, or to the S & P 500.

An index fund follows the same principal. Rather than trying to choose the best stocks or bonds to purchase, it holds a bit of every stock or bond in the particular market. This eliminates the risk of choosing securities which underperform the market, and keeps costs extremely low. There is very little trading and there is no need to hire fund managers to make decisions about what to buy and sell.

So the Vanguard Total Stock Market Index owns about 5,000 stocks which trade on the New York stock market. The Total Intl Stock owns stocks included in the MSCI EAFE Index, which includes thousands of foreign corporations in both developed and emerging markets. (France is a developed market, Brazil is an emerging market). The Total Bond Market Index includes US government and corporate bonds.

[Petunia 100]

I guess some of my questions are when looking at the facts on the different ones available, how do you gauge their performance? What is the difference between the mid caps and the small caps? What do you "look" for to feel comfortable in your selections/recommendations?

Sorry if this is too many questions or if they don't make sense.

The best way to gauge performance is to compare the fund to an appropriate index. For example, a large-cap US fund is generally compared to the S & P 500 Index.

"Cap" is short for "capitalization" and refers to the total market value of a company. Generally, a small-cap is a company with a market value of less than 2 billion. A mid-cap is bigger than a small-cap but less than 10 billion. However, there is no hard and fast rule about the dividing lines. They change over time.

I invest in index funds whenever possible, because I am guaranteed to get the return of the market less expenses. Since the long-term trend of stocks and bonds is up, I feel confident that over time my account balances will also be up.

Over time, 80% of all actively managed funds underperform their index. Picking the 20% which will do better is no easy task. If you want to invest with actively managed funds, you want to look for good performance relative to the index, for low costs, and at how long the manager has been with the fund.

No need to be sorry for asking questions. That is why these forums exist, so we can discuss things and hopefully learn from each other.

[bUU]

I want to do some research and read up on the difference; but it seems that so many of the books are already over my head. Any suggestions on that?

I understand at my age I want around 80% in stocks; this is what I've found on the 2050 Fund:
Vanguard Total Stock Market Index Fund 62.7%
Vanguard Total International Stock Index Fund 27.3
Vanguard Total Bond Market II Index Fund 10.0
..which means honestly, nothing to me.

I guess some of my questions are when looking at the facts on the different ones available, how do you gauge their performance?

The efficient-market hypothesis say that gauging their performance is a pointless gesture. It asserts that everyone actively trading in financial markets have ready access to near-perfect information, and therefore one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made. So that reduces the challenge of picking what to invest in down to (a) asset allocation - making sure your investments cover different portions of the market adequately, and appropriate to your current goals; and (b) tracking error - making sure that the funds you choose accurately track the total market. One can say that Vanguard exists because of the efficient-market hypothesis - it is the underlying principle that evolved from that which prompted John Bogle to found Vanguard. Vanguard pays a lot of attention to keeping tracking error low.

What is the difference between the mid caps and the small caps?

In this context, it doesn't matter (to me). Total market funds aim to populate their portfolios with representative and proportional samples of the market.

But to answer your question: Wikipedia puts this out:

• Large-cap: Over $10 billion
• Mid-cap: $2 billion–$10 billion
• Small-cap: $250 million–$2 billion

The numbers describe the total value of shares issued for the specific company.

What do you "look" for to feel comfortable in your selections/recommendations?

I'm still learning, but increasingly I'm looking to the reputation of the fund family, and again, asset allocation and tracking error. I also, as a reflection of past habits, look at Lipper Leader scores, Morningstar ratings, and comments on fundmojo.com, but I've come to learn that that's just me deceiving myself into thinking that my attention to such things is going to help me do better than the overall market - a fiction.

An index is a way to measure a particular market. For example, when reporting on the US stock market, references are made to the Dow Jones, or to the S & P 500.

Hopefully not. Even John Bogle, who founded the first index fund, based on the S&P 500, now says that it is far too limited to be a worthwhile index to pursue. These days, the US stock market is probably best reflected by the MSCI US Broad Market Index.

This eliminates the risk of choosing securities which underperform the market, and keeps costs extremely low.

The logic being that, if there is really no way anyone can know better than anyone else what's going to happen, no sense in paying a lot of money for the privilege of someone using your money to gamble that they have some special insight. Expense ratios come right out of the gains you earn - the lower the ERs (the principle holds), the higher the gains you realize, on average.

[MonkeyMama]

@Taylor, "Yahoo finance" is your friend. If you plug in any mutual fund, you can look up all sorts of information.

Clicking on "Holdings" reveals the stock mix:

VFIFX Holdings | VANGUARD TARGET RETIREMENT 2050 Stock - Yahoo! Finance

There is also "morningstar x-ray" where you can plug in a mutual fund to get similar information. Just google it.

I personally generally look at yahoo finance when analyzing what to purchase, but then run my holdings through morningstar x-ray periodically to make sure my stock/bond percentages are where I want them to be. Since it is easy to look up multiple investments in the x-ray.

Another useful thing to know is the expense of your investments - you generally just want the lowest expenses. Vanguard generally is the place to invest for lowest expense, so you are doing well in that area. But you will need this knowledge for future 401ks.

Click on "profile" in yahoo finance:

http://finance.yahoo.com/q/pr?s=VFIFX+Profile

You like to see "N/A" for all the "sales load" expenses. GEnerally anything under 1% is desireable for "expense ratio." As you see, Vanguard's Target Retirement funds are only 0.19%.

Honestly, as a beginner, that is all you really need to know. Know what your stock/bond mix is, and make sure you aren't paying a lot of fees. The investment philosophy I follow is basically, keep fees low as possible, contribute regularly to retirement/investments, and keep it simple. The end. You can't get much more simple than one Target Retirement Fund.

You'll probably want to go with the 2030 fund, which is 80% stocks:

VTHRX Holdings | VANGUARD TARGET RETIREMENT 2030 Stock - Yahoo! Finance

Now, just make sure that it is not 80% in bonds in 10 years. You will want to check the holdings periodically. I'd probably just get in the habit of abount once a year making sure your stock/bond mix is still what you think it is/want it to be.

[taylor510]

Wow, thank you all very very much. This is a lot of information to take in; but I will do my best to continue learning. I'm going to spend some time in the next few days really taken this in and looking at the mentioned resources.

You guys have been extremely helpful!