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Need help with 401k plan

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Ydwedar
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Need help with 401k plan  Reply with quote  

Hello! I am a 25 year old seeking your financial expertise on my 401k plan. I am trying to reach FI as efficiently as possible so I'm investigating my 401k plan options to make sure I'm making the best choice. I've done some research about it and need help deciding between two plans that my company offers. I currently have the aggressive lifestyle fund. I was trying to find out more information about the fund (expense ratio, index fund vs active management, distribution, etc.).
After looking into it, I am thinking of switching into another fund called the Core Equity fund.

Here is the fund information for both:

Aggressive Lifestyle fund- http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIP

Core Equity fund- http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIR

Here are some points I'd like to bring up about each and what factors I'm considering for both. I like that the aggressive fund is very diversified (mostly stocks, some bonds). I can tolerate the volatility and like that it is predominantly US & international stocks, among some other funds too. However the Expense Ratio is 0.39% which isn't bad, but could be better.

The Core Equity fund is 100% S&P 500. I've read up and sticking with the S&P 500 over a few decades provides a solid return. It appears to being better than the Aggressive Lifestyle fun (judging by the last 10 years). In addition, it has an Expense Ratio of 0.02% which is a significant difference. My only concern is that it is 100% stocks which is high risk.
Something to know is that I can hold percentanges of both funds. I currently have 100% in aggressive lifestyle fund but can allocate a percentage to the Core Equity fund.

Some scenarios I have thought of are:
Switch to 100% Core Equity until 30-35. Then have a blend of both Aggressive and Core Equity Fund (50-50 maybe). Then 45-55 switch (100%) to a moderately conservative fund which has more bonds but still has some stocks. Then around 55-65 switch to conservative (more bonds than stocks).
Have 50-50 from the get-go until 35, then proceed with the rest of option 1.
Any other combo of the two (80 Aggressive/20 Core Equity, 70/30 etc).

I'm open to all suggestions. There's a lot of possibilities here so I would love to get some advice from anyone here. The percentages are flexible as well as the timelines. There are a lot of knowledgeable people who know about this topic, so I just want to get some feedback and have some other opinions before making a decision. I know it's a lot to read and think about so thank you so so much for your time and input!
Post Wed Jun 15, 2016 7:05 pm
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oldguy
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quote:
Expense Ratio is 0.39% which isn't bad, but could be better.
The Core Equity fund has an Expense Ratio of 0.02%


Comparison: If you invest $5000/yr at 11%/yr, at age 55 you'll have $1,100,000 with the .02% and $1,022, 000. (That surprised me, I was expecting something more dramatic than an $80,000 difference.)

It's great that you are looking at this now at age 25, that alone puts you far ahead of most 25 year-olds. But at any rate, I think you are being way too conservative - you have about 30 yrs of wealth-building, then you start the transition to wealth-preservation. Wealth-building means that your investment needs to outpace inflation by a significant margin. And wealth-preservation means that your money simply paces inflation, ie safe storage of your wealth, CDs, bonds, savings accounts. You should be 100% in stocks now and for many years to come.

In today's world, investors are being way too timid (no fault of their own). The modern financial planners, professors, teach the same 'safe, no risk' recipe. Planners are forced to protect themselves, if an unsophisticated customer loses money on a stock, s/he blames the planner, fires the planner, maybe sues the company, yada. So, a planner is NOT free to advise you freely, s/he must dumb it down, keep you 'safe'. But if today's investors all follow the 'safe' recipe the outcome will always be "mediocre" by definition.

Example of probable outcomes. Invest $5000/yr at 11%/yr for 30 yrs = $1,100,000. That is doable for most wage earners & couples.
Conversely, if they invested in a 2% savings account, it would take a $27,000/yr investment to get $1,100,000. That is NOT doable for most wage earners, they would see the futility and never start. Ie, some risk is required to build wealth.
(BTW, you can factor the $5000 to arrive at your own goal - $10,000/yr = $2.2M, $15,000/yr = $3.3M, and so on. )
I max'd my 401k from the time they were invented (about 1982) when I retired in 1998, it had about a million.

Remember the basic Law of Investing - risk and return are directly proportional. But avoid uncompensated (foolish) risk, you need to be compensated for your risk. Learn the basic math of finance, compounding, etc. The Rule of 72 (derived from e^0.72). We are now a math/physics challenged nation, 28th out of the 28 developed nations, as recently as 1950 we were first. So you'll want to self-learn.
Post Wed Jun 15, 2016 9:24 pm
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Ydwedar
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Thank you for such a long and detailed response! I've been wanting to get some input other than my own on this topic as I have been researching financial things for a while now. I do agree that the difference (both in the expense ratio as well as the comparative rate of return of both funds) compounded over decades puts the core equity fund way ahead of the aggressive. I was only hesitant because I have The target retirement fund 2060 Roth IRA with vanguard which is also 90% stocks but more diversified with large cap, small cap, international stocks, in addition to the 10%bonds. It's still a majority stock so I wasn't sure if I should put my other fund 100% stocks as well. I liked that the aggressive fund was very diverse (even within its stock options), but not sure if it's worth the extra cost. So you think I should switch to 100% core equity fund? Or what would be your advice?
Post Wed Jun 15, 2016 9:41 pm
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oldguy
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http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.V2HerTWyDSZ

Here's a site where you can run some 30-year blocks to see what the historical life-span wealth-building averages.

Personally, I would (and did) go with the SP500. Over the years, only about 15% of the fund managers - pension funds, mutual fund managers, etc - beat/match the SP500. And it's not even the same 15%, year to year. And it makes sense - the fund managers must pick from the same SP500 stocks that the unmanaged index tracks, except that they can load some sectors, thin others, leave some out, and manage to their best skills. But it is very hard to consistently earn 14%/yr (from an 11%/yr population of stocks) - ie, the 3% manager overhead is a strong headwind.

As for estimating the market 30 years into the future, that is outside of the science of predictability. (Fortunately. Because if someone found a way to predict from 30 years away the Market would no longer be a market, we would all buy the same thing - which in itself would confound the 30 year outcome.) Whether your 90%/10% bond mix will beat the 100% portfolio is inside the margin of error - unknowable. Same with the various mixes of your two fund types, one may excel for a decade, then crash and reverse the composite.

Market THEORY is very complex, there are 1000's of books in the library explaining complex systems designed to beat the Indices. But when theory is reduced to PRACTICE it is deceptively simple. Buy the Index incrementally, never sell, never "time" your buys, just accumulate. And in 30 yrs, the probable outcome is that you will have bested 85% of the professional fund managers and stock pickers.
Actually, it is liberating to grasp that concept - you no longer have to bother yourself with studying stocks to find the optimal ones, trends, fluctuations, worrying that you bought the wrong amount. You are now free to simply invest incrementally w/o concern over shortterm trends.
Post Thu Jun 16, 2016 12:13 am
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Ydwedar
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I agree. I'm not using any sort of financial adviser because their fees significantly reduce earnings. That and they can't "beat the market" and aren't really any better than me at making investment choices. I'm totally all about getting a well balanced index fund. I do agree that it appears that if the S&P is the benchmark that is always referenced/what everyone tries to beat, it must be relatively stable and successful over the long term. I also agree I have decades to be risky and can switch to more of a blend/incorporate more bonds perhaps when I am 50 or over. Thank you for the reassurance. Just wanted another opinion to see if mine had some merit (I only started researching financial investments etc as of recently, so i like seeking advice from more knowledgeable, experienced people). Thanks again!
Post Thu Jun 16, 2016 12:44 am
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oldguy
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quote:
I also agree I have decades to be risky and can switch to more of a blend/incorporate more bonds perhaps when I am 50 or over.


Exactly.
And a 100% position in the SP500 Index isn't overly risky, its is actually a moderate risk. Higher risk would be picking sectors (banking stocks, automotive stocks, ie, putting all your money onto a single industry). Followed by one or two individual stocks, small company stocks, penny stocks, short sales, put & call options, writing covered calls, buying contracts on commodity futures (oil, sugar, coffee, orange juice, corn, soybeans.) I've listed them in the order of increasing risk, commodity futures are 'risky'.
Post Thu Jun 16, 2016 4:46 am
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louiefrias
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Read this book.  Reply with quote  

"Tax free retirement" by Patrick Kelly. Get it on Amazon. Once you read it you'll RUN from your thoughts on that nasty 401(k).
Post Wed Oct 05, 2016 8:41 pm
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