Help for a young investor: 401k / ROTH

[WetBandit]

Hello all... this is my first time posting on these threads. I would like to start with saying that I have been following for quite awhile and have read a ton of great information, so thanks to each and every one of you!

I was hoping it would put my mind at ease to post and hopefully garner some responses. I am a mid-twenties employee for a utility company. I have a 401k (Fidelity) that has been built to around 32k and a roth ira (Vanguard) with approximately 24k in it at the moment. However, I know it isnt a lot to fret over, but its still money and in the early years I would like for it to start working earlier than later (compound interest, etc.)

Within my 401k, I currently hold:

70% Company Stock (Bad idea I know, It pays great dividends and has been stable and growing for 80+ years).
15% REIT
5% Large Cap Value
5% Small / Mid Cap
5% Non-US Equity Blend

Within my ROTH, I currently hold:
50% Precious Metals and Mining (VGPMX)
25% Health Care Fund (VGHCX)
25% Energy Fund (VGENX)

The reasoning for this allocation is to be Aggressive early on to diversify in the two different account. Also, the reason for the ROTH picks were that PM&M have been beaten down recently and Healthcare / Energy have been two of the best performing funds for Vanguard for the last 25+ years.

I know I should diversify more and I am really looking to hear suggestions / expertise as to what should be the best course of action for me to take. Below I will post my 401k choices as most of you use VG and know what they offer...

Name/Inception Date    Asset Class    Category    1 Year    3 Year    5 Year    10 Year/LOF*    Returns As Of    Bench- mark
N/A
- show details. - hide details.
Investments you currently own DUKE STOCK 12/31/1998    Stock Investments    Company Stock    6.13%    17.10%    9.12%    12.17%    05/31/2013    Show
US EQ LARGE CAP GRTH 12/31/2001    Stock Investments    Large Cap    22.02%    15.27%    4.00%    6.97%    05/31/2013    Show
US EQ S&P 500 INDEX 12/31/1998    Stock Investments    Large Cap    27.25%    16.92%    5.56%    7.66%    05/31/2013    Show
Investments you currently own US EQUITY LG CAP VAL 12/31/2001    Stock Investments    Large Cap    32.79%    16.65%    4.86%    8.09%    05/31/2013    Show
US EQ ALL CAP BLEND 01/03/2008    Stock Investments    Mid-Cap    27.94%    16.19%    4.67%    4.21%    05/31/2013    Show
Investments you currently own US EQUITY SM/MID CAP 12/31/2007    Stock Investments    Small Cap    31.61%    16.27%    4.69%    4.51%    05/31/2013    Show
Investments you currently own NON-US EQUITY BLEND 12/31/1998    Stock Investments    International    31.76%    9.97%    -2.39%    7.52%    05/31/2013    Show
Investments you currently own RREEF GLB REAL EST 04/01/2011    Stock Investments    Specialty    27.48%    N/A    N/A    14.08%    04/30/2013    Show
POST RETIREMENT FUND 12/31/2007    Blended Fund Investments*    N/A    8.67%    7.83%    3.43%    2.88%    05/31/2013    Show
RETIREMENT FUND 2010 12/31/2007    Blended Fund Investments*    N/A    12.39%    9.02%    3.43%    2.79%    05/31/2013    Show
RETIREMENT FUND 2015 01/02/2008    Blended Fund Investments*    N/A    14.01%    10.15%    3.98%    3.36%    05/31/2013    Show
RETIREMENT FUND 2020 12/31/2007    Blended Fund Investments*    N/A    17.85%    11.82%    4.46%    3.66%    05/31/2013    Show
RETIREMENT FUND 2025 01/07/2008    Blended Fund Investments*    N/A    21.82%    13.48%    4.90%    4.57%    05/31/2013    Show
RETIREMENT FUND 2030 12/31/2007    Blended Fund Investments*    N/A    23.38%    14.04%    4.61%    3.72%    05/31/2013    Show
RETIREMENT FUND 2035 01/07/2008    Blended Fund Investments*    N/A    23.12%    13.99%    4.08%    3.83%    05/31/2013    Show
RETIREMENT FUND 2040 12/31/2007    Blended Fund Investments*    N/A    23.08%    13.98%    4.13%    3.25%    05/31/2013    Show
RETIREMENT FUND 2045 01/02/2008     Blended Fund Investments*    N/A    23.01%    14.00%    4.19%    3.47%    05/31/2013    Show
RETIREMENT FUND 2050 01/07/2008     Blended Fund Investments*    N/A    23.07%    14.01%    4.09%    3.86%    05/31/2013    Show
RETIREMENT FUND 2055 01/04/2008    Blended Fund Investments*    N/A    23.12%    13.99%    4.06%    3.82%    05/31/2013    Show
STABLE VALUE FUND 01/01/2008            Bond Investments    Stable Value    2.42%    2.85%    3.27%    3.35%    04/30/2013    Show
FIXED INCOME BLEND 12/31/1998            Bond Investments    Income            2.52%    5.74%    6.34%    4.71%    05/31/2013    Show

Again, I appreciate any and all responses! Have a GREAT Weekend!

[matchewed]

1. If you know that investing in the company you work for is a bad idea stop doing it. It is a high risk move. The share price is no realistic indicator for the health of the company. Plenty of companies have existed for 80+ years and disappeared. If the company goes belly-up so too does your 401k.

2. Come up with an investment strategy and stick with it.

3. The S&P 500 Index is great for young people.

4. The target date retirement funds are a good way to introduce bonds. It depends on the manager but a far enough one will slowly introduce bonds into the funds, you'll have to look them up individually to find one which satisfies you.

All that aside I wanted to revisit number 2 for a second. You gave some great information but are missing one key component. What are you trying to achieve? Outline that and work backwards from there to determine how you get there. Try to invest in a way which matches that and adjust as needed.

[aj_yooper]

Great advice from mattchewed. 

Develop a written asset allocation plan and stick to it.  Start reading at Bogleheads and William Bernstein books.  IMO, you are taking too much risk in your stash and you are all over the place.  Get a base plan and add more index funds to diversify your risk.

[WetBandit]

Thank you for the replys. You are both right, my diversification is all over the place. My thing is I want to place my money and leave it. I am not one for selling / buying constantly. For the most part, I want compound interest to work for me. My thing is, I am very bad at diversification because there are so many funds. Thats why I thought about using my 401k as a base index holding (S&P, Large Cap, Small Cap, etc) and my ROTH as kind of a specialty fund. However, I do need to work on selling quite a bit of my company stock as it is too high! ... but what to buy into?

Everything I have seen from Bogle and read on these threads is to go with index funds, but my thing at the moment is that everything seems so high. Im not one for timing the market, but would it be good to jump in at the present time whether it be s&p, total stock market, etc with prices so high or just wait?

As for which funds I should hold in my ROTH adn 401k prob. depends on whichever Expense Ratios are lower between VG and Fidelity, correct?

[WetBandit]

Also, I forgot to ask ... I know that everyone has their opinions, right or wrong but I wanted to ask which funds that you all recommend at the moment and near future for a buy and hold scenario... what is something similar that you are doing with your portfolios, albeit the age difference might be quite a factor =)

[aj_yooper]

mattchewed suggested the target retirement funds for a good start (Vanguard offers them); they are a mix of stocks including international exposure. 

Do as mattchewed suggests, and work backwards from your goals.  Decide on your asset allocation strategy.  Have an emergency fund.  Consider taxable and sheltered accounts as the building blocks and apply your AA to the totality.  Avoid high fees like you would a pestilence.  Avoid turnover and interest in your taxables.  I like the Wm. Bernstein books (The Investor's Manifesto, but there are many more he recommends:  http://www.efficientfrontier.com/reading.htm  Keep your investment expenses as low as you can by avoiding "My guy at Schwab, or MS"; they are not your friends.

Welcome. 

[grantmeaname]

Everything I have seen from Bogle and read on these threads is to go with index funds, but my thing at the moment is that everything seems so high. Im not one for timing the market, but would it be good to jump in at the present time whether it be s&p, total stock market, etc with prices so high or just wait?

If you're not one for timing the market, just do it. Or are you saying you don't want to be thought of as one for timing the market, but you really are for it?

[aj_yooper]

OP can also do value averaging:  http://www.bogleheads.org/wiki/Value_averaging

They show it in in a more complex way.  Or, Bernstein in The Investor's Manifesto 152 to 154. 

[WetBandit]

Grantmeaname, Im just saying that I do not like to time the market ... I have tried this since late 2007 (just starting out) and I have never benefitted. Also, I would like some funds that money can be stashed in year to year and I dont have to worry about it. I will look into the ones mentioned, but one that I may strongly consider is the Total Stock Market Index Admiral Shares that many have mentioned. Does anyone also have an opinion on the energy, healthcare and metals fund VG has to offer?

Now is just a matter of me allocating my funds in both portfolios with the funds that offer the lowest ER so I am not duplicating investments.

Thanks again for the advice. I may head out this evening and purchase a few of the recommended reads.

[WetBandit]

Sorry grant, I meant to also say that its not about timing the market, its just that most funds are rated as a hold due to most not knowing what is going to happen. What I meant was that I just hated to buy now since everything has rose to all time highs.... not that I believe a huge dip is coming, but should I wait for a few months and see how things play out or dive in and dont look back, while dca along the way...

[grantmeaname]

Does anyone also have an opinion on the energy, healthcare and metals fund VG has to offer?

Here's my opinion, which is not worth much more than you paid for it: everything you know about energy and healthcare and much, much more is also known by the institutional investors and fund companies of the world. If you're interested in investing in the sector solely because it's expected to grow faster, or because the pace of innovation is rapid, keep in mind that everyone else knows it too and it's more or less priced into the sector's stocks already. With that in mind, I figure you'd do just as well putting all that in VTSAX with the rest of it.

I may head out this evening and purchase a few of the recommended reads.

Use your local library! This is a frugality forum too, after all ;)

[grantmeaname]

Sorry grant, I meant to also say that its not about timing the market, its just that most funds are rated as a hold due to most not knowing what is going to happen. What I meant was that I just hated to buy now since everything has rose to all time highs.... not that I believe a huge dip is coming, but should I wait for a few months and see how things play out or dive in and dont look back, while dca along the way...

Waiting a few months is timing the market. Throw it in now as a lump sum or DCA it, but don't sit out on the sidelines because some talking heads said things were high. Either way, just do it. Spend the next five years investing every time the market goes up or down!

[WetBandit]

I have been waiting in the past to put lump sums in before the dividend date, but I will throw it in soon and sleep better at night =)

Sometimes it helps to be slapped around a bit..investing can be stressful, ha.

[WetBandit]

After further review, I think I have decided to set my allocations accordingly .... I would like some feedback / thoughts why it is good / may not be good... this investment stuff is getting to me and I just want to set and forget for awhile.

401K (Fidelity)
40% Target 2050
25% Non-US (International)
25% Large Cap Value
10% Company Stock

Roth IRA (Vanguard)
25% Energy Fund
25% Healthcare Fund
20% Total Stock Market Index
15% Precious Metals and Mining
15% REIT Index

[matchewed]

Personally I view the Total Stock Market Index as covering your energy, healthcare, and precious metals and mining. Especially if you want to set and forget and have much anxiety about the process.

The benefits are many - low fee, guaranteed market return, very set and forget. This buys you as much time as you need to research and determine what you feel comfortable with while giving you all the awesome benefits of investing in a simple index fund.

[aj_yooper]

This is what your Target 2050 gets you:

1   Vanguard Total Stock Market Index Fund Investor Shares   62.9%
2   Vanguard Total International Stock Index Fund Investor Shares   27.2%
3   Vanguard Total Bond Market II Index Fund Investor Shares†   9.9%
Total   —   100.0%
 Characteristics as of 04/30/2013

I think you are thinking too hard right now.  IMO, the Target 2050 would be a good set and forget fund for your 401k and Roth.  Then, get the books from the library and do some thoughtful reading.  In the meantime, your 2050 will be chugging along with its monthly additions while you increase your understanding of investing and your own risk preference.  It's not a 5k sprint, but a multiple of 100k runs.  Take your time.

[Khan]

WetBandit, pay very close attention to the expense ratio's of the 401k funds. One reason I'm not particularly invested in my target date fund is because its expense ratio is 1%.

Fidelity? Check if you have these investment options, and see if you want them in your 401k, as I like them in mine:

Blended Fund Investments  ASSET ALLOCATION  TARGET DATE 2050  15%
Stock Investments  LARGE CAP GROWTH  FID GROWTH COMPANY  10%
Stock Investments  LARGE CAP BLEND  LARGE CAP US STOCK  5%
Stock Investments  LARGE CAP BLEND  VANG INST INDEX PLUS  15%
Stock Investments  SMALL CAP BLEND  SMALL CAP US STOCK  10%
Stock Investments  SMALL CAP BLEND  BTC RUSSELL 2500  5%
Stock Investments  FOREIGN  BTC ACWI EX US IMI  15%
Stock Investments  DIVERSFD EMERGING MKTS  BTC EMERGING MKTS  15%


Specifically: BTC's have surprisingly low expense ratio's.

[aj_yooper]

WetBandit, pay very close attention to the expense ratio's of the 401k funds. One reason I'm not particularly invested in my target date fund is because its expense ratio is 1%.

Expenses definitely matter.  The Target ER is 0.18% at Vanguard, just a little over the isolated funds.  When the OP has more in his account, he can easily use his new understanding of his possibly more complicated AA and make changes in the fund choices.

[grantmeaname]

OP's 401k is at Fidelity and he is paying .82% for a target date fund that lags the indices and its competitors.

[grantmeaname]

WetBandit, is that all of your 401k options? Do you have access to any of the "Fidelity Spartan" line of index funds? What are the expense ratios on the funds you currently own other than the 2050 retirement fund?

[aj_yooper]

OP's 401k is at Fidelity and he is paying .82% for a target date fund that lags the indices and its competitors.

My bad! But the thought still works for the Vanguard fund.  Use the target allocation in individual funds for his Fidelity work then would do. I think OP is thinking too much now. 

All bold ?

[irastache]

I'll echo a few comments:

1. I suggest 0 company stock. You already get a paycheck from the company, that is enough.
2. Target date funds work best as a complete strategy. If you want to use a target fund, make it 100%. Else you are overlapping with your other picks and instead of getting Target 20XX, you are more like some other Target date fund.
3. Waiting some time to make an investment is market timing. In my opinion, sector plays are also equal to market timing. Many smarter people are betting against some sector or another. If someone KNEW a sector would do better, they would be 100% in it.
4. Here is a simple way to write a plan and stick to it: http://www.longtermreturns.com/2012/03/selecting-investment-strategy.html

[grantmeaname]

My bad!

Hey, it wasn't exactly clear from OP's post - it took me a few minutes' rereading to make sure.

The thought only works for the Vanguard fund because it holds only three funds. The Fidelity fund holds 25 funds, so it's not a good idea to try and replicate it. That's why OP should figure out which of the funds in his 401(k) have reasonable expense ratios, use those, and then make up for any shortcomings in the Roth.

[WetBandit]

Name/Inception Date  Asset Class  Category  Gross Expense Ratio**  Shareholder Fees 
N/A - show details. - hide details. 
 DUKE STOCK
12/31/1998  Stock Investments Company Stock 0.02%  No additional fees apply. 
US EQ LARGE CAP GRTH
12/31/2001  Stock Investments Large Cap 0.05%  No additional fees apply. 
US EQ S&P 500 INDEX
12/31/1998  Stock Investments Large Cap 0.05%  No additional fees apply. 
 US EQUITY LG CAP VAL
12/31/2001  Stock Investments Large Cap 0.07%  No additional fees apply. 
US EQ ALL CAP BLEND
01/03/2008  Stock Investments Mid-Cap 0.16%  No additional fees apply. 
 US EQUITY SM/MID CAP
12/31/2007  Stock Investments Small Cap 0.80%  No additional fees apply. 
 NON-US EQUITY BLEND
12/31/1998  Stock Investments International 0.72%  No additional fees apply. 
 RREEF GLB REAL EST
04/01/2011  Stock Investments Specialty 0.95%  No additional fees apply. 
POST RETIREMENT FUND
12/31/2007  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2010
12/31/2007  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2015
01/02/2008  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2020
12/31/2007  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2025
01/07/2008  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2030
12/31/2007  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2035
01/07/2008  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2040
12/31/2007  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2045
01/02/2008  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2050
01/07/2008  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
RETIREMENT FUND 2055
01/04/2008  Blended Fund Investments* N/A 0.53%  No additional fees apply. 
STABLE VALUE FUND
01/01/2008  Bond Investments Stable Value 0.28%  No additional fees apply. 
FIXED INCOME BLEND
12/31/1998  Bond Investments Income 0.14%  No additional fees apply.

For a few that were mentioning expense reatios these are it and the funds that are available to me. I really am not a big fan of Fidelity, but not much I can do about it. As you can see, the retirement funds for my 401k are much higher than those at VG. I may just pick 4-5 low ER funds in my 401k and choose the 2050 retirement for my ROTH.... not real sure.

[grantmeaname]

If you're happy with the vanguard target 2050 fund described above, then you could try and replicate it between your IRA and your 401(k) - you could hold 85% "US EQ S&P 500 INDEX" or "US EQ ALL CAP BLEND " and 15% fixed income in your 401k, and 100% international in your IRA. Then your total allocation would be in the ballpark of 65% domestic stock, 12% bonds, and 23% international stock, and you wouldn't have to hold anything with a high expense ratio.

If that's not the blend you want, the general principles still apply. Buy the best funds in your 401(k) in the right proportions, then buy the worst 401k funds' equivalents in your IRA. Make sense?

[WetBandit]

Grant,

Those were my thoughts exactly. I really like the REIT funds for long term hold, but I was thinking..why hold that in my 401k with an ER of .95 when I can hold the same fund (different holdings) with Vanguard at .10.

Is there a rule of thumb as to which funds to stay away from with an expense ratio of XX and higher? Is anything less than 1% good? .50 or below?

[grantmeaname]

Less is always better. With Vanguard most funds are at .25 or below, so maybe that's a good rule of thumb if there is one.

[Khan]

Wetbandit, lower expense ratios are almost always better, and should be sought after whenever possible. The problem with Mutual funds and the higher expense ratio funds(such as the Target Date Funds) is that in effect because of the scale of said funds, and that everything tends towards the mean, you can't hope to beat the market, which is true of everyone. Therefore, if you *are* the market, you must try to replicate it as closely as possible. An expense ratio of 1% means that you are not matching the market, you're lagging it by 1%, per year. Over time that difference just becomes bigger and bigger.

[aj_yooper]

Wetbandit, lower expense ratios are almost always better, and should be sought after whenever possible. The problem with Mutual funds and the higher expense ratio funds(such as the Target Date Funds) is that in effect because of the scale of said funds, and that everything tends towards the mean, you can't hope to beat the market, which is true of everyone. Therefore, if you *are* the market, you must try to replicate it as closely as possible. An expense ratio of 1% means that you are not matching the market, you're lagging it by 1%, per year. Over time that difference just becomes bigger and bigger.

+1 Khanjar.  Investment efficiency is crucial, especially if attempting ER where a + 1 could mean being more relaxed or looking for a side job.  Indexes are way cheaper than managed funds so some of your preferences are costing you.   One stop funds tend to charge more than the sum of the ERs too, even with Vanguard.  If you ever switch jobs, consider moving the Fidelity money to a cheaper spot. 

[Reepekg]

Name/Inception Date  Asset Class  Category  Gross Expense Ratio**  Shareholder Fees 
N/A - show details. - hide details. 
 DUKE STOCK
12/31/1998  Stock Investments Company Stock 0.02%  No additional fees apply. 

Am I the only person who finds it absolutely outrageous that they are charging WetBandit 0.02% just to hold company stock? Face punch. WetBandit, seriously. At 70% of 32k and an expense ratio of 0.02%, you are paying $4.50 a year (and ever increasing when you add to it) for something you could pay 10 bucks for once and hold forever in a brokerage account. There are companies you can DRIP for free as a non-employee. This ER just strikes me as unjust. Get rid of this stock now for all the reasons mentioned.

Some other general things:
1) Don't worry about market timing, just get your plan invested today. You are mostly talking about selling one equity fund to buy another equity fund inside a retirement plan. If you think the market is high, you're just selling high and buying high.
2) You are rightly interested in diversification. Most funds, however, are already diversified because that is their function. I would recommend spending less effort picking a bunch of different specialized funds at higher expense ratios and focus on a few funds that own a huge number of companies (and many of the same companies as the specialized funds) at extremely low expense ratios like < 0.10% It sounds like you're already headed in this direction.

[WetBandit]

Reep,

I greatly appreciate you commenting on the post. It is funny that I was sitting here reading other boards and looking over the ER as we speak. I regret to continue harping on the subject as I am sure others are too, but investing is important and stressful. Some things I have gathered over the last few days for my ROTH is too invest 50% into VTSAX (VG Total Stock Market) and 25% into VGHCX (healthcare) and 25% VGENX (Energy). The latter two have been the top two performing VG funds since 84' and pay nice dividends. The Total Stock market should be fine since I am 26years old...the market almost always goes up with some dips here and there, but given my early career I have plenty of time to worry about the ups and downs.

My most concern is my 401k. I have been working for roughly 3 years and had my investments going into Company Stock (Energy Utility that pays 4.50% yield) and Fixed Income (bonds). When I first started I set it and left it, not really knowing. I figured it had a history of growth and re-invest the divys overtime...but you mention the .02 ER and that I should sell possibly ...

My AA right now is 70% company stock, 15% REIT at a whopping .92%!!!, 5% Large Value, 5% Small Cap, 5% International. This has changed over the past few days as I have tried to sell some funds and get a better asset allocation. However, I know that I am still far from it!! Right now, I do not know what I should have future allocations going too for my 401k (since ROTH is all stock), while trying to keep ER down.

I know this is long and maybe confusing but all comments and suggestions are always welcome and helpful. I would like to set this thing and forget asap.

[aj_yooper]

Think of your Roth and 401k (plus any others you have or may start) as the portfolio.  Decide on your portfolio decision regarding stocks v. bonds, your AA.  Write down your AA and build a spreadsheet so you know what your portfolio will look like.  Within the spreadsheet, use a column for location of funds (401k or Roth).  Establish your stock funds percentages, e.g. Total Market, sectors, and foreign, and your bond choice(s).  The Roth and the 401k have different cash inflows to them and different ER on funds you want in your mix so you could draw the inflows and see how you need to direct your money to keep the approximate AA mix and to minimize your costs.  Your 401k will have more cash to spend, but you have higher costs there.   Determine where it is cheaper to hold the fund categories you picked.  This will be a puzzle to solve.  Look at your biggest chunks first.  A simpler plan will get you going faster.

Remember, you don't get to buy a fund's past annualized returns; you get what the market delivers.  Revisit AA at least yearly or when it is significantly out of your AA limits.  I would use a simple mix to start-say 80/20 AA.  Within the 80, do 60 total market and 20 foreign.  Just buy short term investment grade bonds.  If you have a lot of fund choices, you are probably going to have higher costs and more difficulties getting it started.  Tinker with it more in the future. 

[WetBandit]

Ok. After taking it all in I have decided for my 401k:

60% Large Value, .05% ER
25% Small Cap, .80% ER
10% Non-US, .72% ER
5% Company Stock, .02%.

Roth
50% Total Stock Market Index
20% Healthcare
20% Energy
10% US-REIT

Thoughts?

Also, if i stick with this allocation would it be wise to sell my current funds to equal these allocations?

[Reepekg]

This looks pretty reasonable to me. Any changes would be in the personal preferences realm rather than glaring commonly made mistakes.

[WetBandit]

Agreed Reep,

After posting that, I thought more about the ER. At this time, being young and risk tolerant...I am going to dump all of my 401k for the foreseeable future into the Large Value Cap at .07% ER. Nothing really outperforms the market and with the Small Cap and International funds having such a high ER im going to ditch them. As time to retire approaches, I may roll everything into a 2050 fund and bonds....for now, I dont see any danger in allocating about 95% large value and 5% company stock and letting it rise for awhile. I know people say diversify and to each their own, but Fidelity stinks and I am thinking to diversify...the expense ratios would take a decent chunk later down the road. Think that is a dumb mistake?

As for the ROTH...it is set as mentioned above.

[Khan]

Partly, yes that is a mistake. The importance of diversification is that, let's say you're invested in American large stocks for the next 10 years. Let's say it trades sideways for that entire time, but BRIC does outstanding, emerging markets does +8%/yr, and EU has a crash over the next 3 years(hard crash) but then start's going on a run for the next 7, but you invested only in US Large cap because of the expense ratio.

You missed out on all of those positives in other markets by putting all your money in only one thing. Yes, expense ratio is incredibly important, but so is diversification. Example: during the .boom it didn't matter what tech stocks you had, every single one of them was going to pay you handsomely for your time up until the bust, where a lot of them fell sideways, some disappeared, etc. Another example that Peter Lynch cites from his own experience was US Auto stocks during his time managing Magellan. Sure, he picked the better ones by going with Chrysler(+300%) I believe, but the others still doubled in value at the same time.

So, while .07% is definitely something to put decent chunks of your money in, Markowitz's portfolio theory shows us that by diversifying our asset classes we truly can gain from it, and though 1% for a targetted date is fucking stupid as far as I'm concerned(put in your own leg work and balance it yourself), .3-1% to get exposure to other markets/asset classes is something worth doing. And when the shit hits the fan in the US or Europe, it's unlikely that the same thing is happening for the same reasons in Brazil, or China.

[matchewed]

The companies in the US Large Cap are so global they would be buoyed by any rapid gains in emerging markets and BRIC though. I'm not against diversifying but the companies consisting of the US equity market are literally everywhere doing entire global business. I don't think it is a high risk at all to stay invested in US Large Cap.

[Reepekg]

After posting that, I thought more about the ER. At this time, being young and risk tolerant...I am going to dump all of my 401k for the foreseeable future into the Large Value Cap at .07% ER. Nothing really outperforms the market and with the Small Cap and International funds having such a high ER im going to ditch them.

Exactly, at 28 I'm 100% S&P500 in my retirement account because of the 0.07% ER, and then diversified in taxable accounts where I can a find better deal on expenses. You would be doing sort of the same thing by being expense efficient in your 401k and then more diversified in your Roth.

I agree with matchewed, but some people like owning small/mid cap and I wouldn't call you wrong for putting allocating 35% of one account that way.

[Hotstreak]

60% Large Value, .05% ER
25% Small Cap, .80% ER
10% Non-US, .72% ER
5% Company Stock, .02%.

Roth
50% Total Stock Market Index
20% Healthcare
20% Energy
10% US-REIT

Hey WetBandit -- I know the conversation continued after this post.  The biggest thing I see here is using high ER funds in your 401k when those could be moved to your Roth.  I would ditch the Healthcare and Energy, unless you know something that every professional and amateur investor in the world doesn't know.  Those sectors are included in your Total Stock Market, and spread over Large Cap, Small Cap, International, and even your own company stock (assuming an energy utility).  Forget about "Roth" and "401k" for a minute.  Think how you want your total funds allocated:

XX% Large Cap
XX% Small Cap
XX% Total Market
XX% International
XX% REIT or Bonds

Then go through and find the most efficient way to distribute your dollars in each fund to reach your XX%'s, with little or no concern for which tax classification a particular investment fund sits in.


As far as the company stock is concerned, look at it from the CEO perspective.  Isn't it great to have a huge number of people that invest in your company every month, just because that's the default and lots are too lazy to change it?  If you didn't work for this company, but instead worked for a competitor, would you still choose to invest in their stock?  Probably not.  Do you feel that your individual contribution to the company is so great, that it drastically increases their bottom line compared to their competitors?  Again, probably not, even if you're an excellent worker.  So, what exactly are you basing this bet on?  Probably nothing.  And the fact that your paycheck comes from them, means your total financial well being is already weighted heavily towards the company (look at your annual income vs. the annual expected "average market increase" of your portfolio.  Which is bigger?).  Not a good idea, not at all. 

[WetBandit]

Match & Reep,

Thank you for your insight and its sort of "easing" to know that others are on the same page. From this post and reading other boards I have come to the conclusion that the S&P or Large Cap (Similar) are good enough for a young investor. Over time the market goes up and its a good set and forget. Of course, there is risk that the market tanks however, why we are young....buy more, right? I am all for diversifying as well, but at this point with ~35k in my 401k I dont think diversifying is going to help a whole lot. Some are for small, medium, large, etc but noone knows what sector is going to outperform.. over the history of the fund i chose it has outperformed any other fund since inception while having an ER less than .1! Its absurd that my med and small caps are over .5%! I hope I am doing right by just setting my Large Cap allocation to 95% and company at 5%... atleast for the next 20-25 .... are you two doing kind of the same?

As for the company stock, they match up to 6% regardless....I invest 10% for a total of 16%. I hold company stock due to the history (I understand all businesses go under eventually), but they have always paid a dividend and the yield is 4.50% ... so mainly I hold for the dividends and some stability when the market tanks...not to mention we are continuing to grow and expand into other markets .... just my thing I guess.

As for the Roth, I have read Jlcollins posts (great reads and highly recommend), he suggests 100% into the vtsmx fund and let it ride, which covers the total stock market 3,000+ stocks. However, I continue to hold 25% Healthcare and 25% Energy. I understand this may take away from compounding interest over time but those two stocks have performed at a high level (best performing VG funds since 1984). They pay great divys, capital gains, etc ... and my logic is that with everyone constantly needing energy and power being distributed to third world countries, there will always be a need. Same with HC as people are getting older and more people are being born there will always be a need ... just another thought of mine =)

I appreciate all comments and insight anyone has... things I mention are my thoughts...they are not to disprove anyone else or ignite a flame.

Thanks for the comments on this post!