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Playing Planner with My 401k
I like to play financial planner when it comes to investing my retirement money.
So when I started at FiLife and was presented with a brand new retirement plan, I figured I’d use it as an opportunity to do a little check-up on my two existing 401ks and bring everything up to speed.
I’m obviously no professional, though I’ve yawned my way through plenty of dry but informative conferences for real financial advisors. Presenters there drilled the importance of diversification, rebalancing, and investing overseas into my brain. I became a proponent of investing in index funds somewhere along the way and adopted some mantras of my own.
For one, stock-picking is a fool’s game. And never buy anything from an insurance company but basic insurance.
I could’ve made life easy and directed all of my new 401k money into my plan’s target-date fund (these invest in a mix of stocks and bond funds that gradually become more conservative as you reach retirement).
For me, that would’ve been the Fidelity Freedom 2040 Fund.
But there were a couple of things that bothered me: The asset allocation (85% stocks, 15% bonds) was too conservative for my taste, and it would have spread my money across 22 actively-managed funds. That seemed like way too many. So I dialed up Morningstar fund analyst Greg Carlson to get his take.
He confirmed what my gut told me: investing in all of those funds can produce a lot of overlap. “Why invest in three large-cap growth funds? I would rather see the focus on one really good large-cap manager.”
A Fidelity spokeswoman said they do it this way to achieve broad diversification and spread risk among those funds. That’s a perfectly valid argument.
Still, I attempted to concoct something better. I used two other target-date funds as a guide: the 2040 at T. Rowe Price, because they have a reputation for being slightly more aggressive with their allocations, and Vanguard, because, well, they’re Vanguard. They have a knack for keeping things simple and cheap.
Here’s what I came up with: nearly 50% of my 401k in large-cap domestic funds; 10% in mid-cap; another 10% in small-cap; 25% in international; and almost 5% in REITs. I put everything in index funds when they were offered (though I also own the Fidelity Growth Company Fund because I’ve owned it forever, it’s closed to new investors, and it’s done well).
And yes, I know that I’m missing bonds. According to Vanguard, I should have about 10% of my 401k in them; T. Rowe advises something similar.
When the markets swoon, my portfolio would be in for a smoother ride if I owned a stodgy bond fund. But I’m in my early thirties. I figure I can get away with an all-stock allocation for a bit longer. What do you think? How do you divvy up your retirement money? I’d love to hear some of your tricks.
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(6) Comments
Tara,
Have you ever heard that you can self direct your 401(k) and IRA funds? That way you are not relegated to merely stocks, bonds and mutual funds. You can invest in hard money loan pools, direct real estate ownership, private placements of great non-public businesses and the like. You can still invest in traditional traded assets as well. A great website to learn about these is http://www.penscotrust.com If you like to play “planner” this is one of the most fun ways to do it. Enjoy!
Steve Heideman
Tara,
I’m a firm believer in index funds, because they are low cost and due to the law of averages, the average of all stocks in a given index tend to do better than the average stock. Vanguard has some very nice low cost index funds. If I do buy non-index funds in my 401K, I try to take advantage of the fact that 401K money is tax free.
Tara,
I think you have a great strategy. Though using the target funds is a good default for a lot of people who have the blinders on, they do have their faults. The fee’s are slightly higher and they are definitely more conservative. I think you can start to make some minor tactical adjustments over time (i.e. maybe have a target of 5% Real Estate but drop to 3% when it is pricey) I would definitely have 5-10% in fixed income. It is proven that you are taking undue risk for the same return of a 90/10 portfolio. Good Luck!
Lawrence Vick
I have reviewed some of the Target allocation funds when re-allocating my husband’s deferred comp. I find that, to my taste, most of them are underweighted to international equities. Given the falling dollar and the rate of growth overseas, I am willing to make a bigger long-term bet outside of the U.S. Granted, a lot of the large U.S. corps will also benefit from these factors, but I still think that most Target Funds have international allocations that are too low.
Vanguard is right.
10% in fixed income is a good idea.
Consider incorporting emerging markets (VWO)into the international mix.
Passive investing is superior to active management.
“Playing” financial planner is like children “playing” doctor.
Even if you do your own investing you still should try to find a CFP who will evaluate your overall financial picture.
Buz
Like the aggressiveness. No real need to move into any Fixed Income yet. If the market loses 40% tomorrow, think of it as the opportunity to improve your dollar cost –the money is staying in your 401k for 30 more years.
