Author Topic: My friend asked me to help her select her 401k funds  (Read 1828 times)

diggingout

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My friend asked me to help her select her 401k funds
« on: February 19, 2016, 06:51:15 AM »
So my best friend is very well off, much better than me, but has no idea what to do with all of her money.  She's 28, and has a $300k net worth.  She told me that all of her 401k is in a Vanguard 2050 Target Retirement fund, but she wanted to play around with diversifying her contributions.  She doesn't have the VTSAX or the VTSMX as options, but has some other good ones through her employer.  I suggested the following mix, but wanted to check here to make sure I gave her solid advice:

50% 2050 Target Retirement Fund
20% Vanguard 500 Index Fund Investor Shares (VFINX)
5% Vanguard Small-Cap Index Fund Investor Shares (NAESX)
5% Vanguard Mid-Cap Index Fund Investor Shares (VIMSX)
5% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
15% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)

As always, thank you all for your great advice!

mskyle

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Re: My friend asked me to help her select her 401k funds
« Reply #1 on: February 19, 2016, 07:31:49 AM »
Well the Target 2050 fund contains:
Vanguard Total Stock Market Index Fund Investor Shares    54.0%
Vanguard Total International Stock Index Fund Investor Shares    36.0%
Vanguard Total Bond Market II Index Fund Investor Shares    6.9%
Vanguard Total International Bond Index Fund Investor Shares    3.1%

So she's already invested in VGTSX and I'm pretty sure Bond Market II is the institutional version of VBMFX. Is there a reason you want to put her so heavily into bonds? If she really is targeting 2050 as her retirement date, then 20% bonds seems on the high side to me (and Vanguard, obvs!). Is she aware that the Target 2050 is already diversified? What exactly are her concerns?

I don't think there's anything wrong with staying 100% in Target 2050 or another Target fund - they're as diversified as a lot of index fund portfolios and basically take care of all the rebalancing for her (and since it's a 401k she doesn't need to worry about tax-awareness or anything). And the fees are still very low. I think a lot of people believe that complicated investments are always a better idea than less-complicated ones, but often they're really just more complicated.

I'm a bit older than your friend and with not quite so much money in my account, but I just do a lazy portfolio, 90/10 stocks/bonds, 60/40 US/International. I'm basically just replicating the target fund but I can get the expenses down a little bit by investing in the underlying funds. Like, fractions of a percent. But the cost of that is that I do have to do my own rebalancing.
« Last Edit: February 19, 2016, 07:33:36 AM by mskyle »

andy85

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Re: My friend asked me to help her select her 401k funds
« Reply #2 on: February 19, 2016, 07:36:31 AM »
So my best friend is very well off, much better than me, but has no idea what to do with all of her money.  She's 28, and has a $300k net worth.  She told me that all of her 401k is in a Vanguard 2050 Target Retirement fund, but she wanted to play around with diversifying her contributions.  She doesn't have the VTSAX or the VTSMX as options, but has some other good ones through her employer.  I suggested the following mix, but wanted to check here to make sure I gave her solid advice:

50% 2050 Target Retirement Fund
20% Vanguard 500 Index Fund Investor Shares (VFINX)
5% Vanguard Small-Cap Index Fund Investor Shares (NAESX)
5% Vanguard Mid-Cap Index Fund Investor Shares (VIMSX)
5% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
15% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)

As always, thank you all for your great advice!
minus the retirement fund that is pretty close to the funds i hold in my 401k

40% s&p
20% mid/small cap
25% international
15% bonds

i dont really see as reason for a target fund in addition to other funds since the purpose of a target fund is to diversify within the fund. If she wants to keep it to 1 fund, then just move it to a later target date that weighs more heavily towards stocks...

..just my opinion...

Heckler

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Re: My friend asked me to help her select her 401k funds
« Reply #3 on: February 19, 2016, 08:17:34 AM »
The biggest difference between the target fund and adding the others might be that you are loosing the advantage of having vanguard set the allocations year to year, gradually increasing the bond component as she ages.  Is reducing equity risk over time something she wants to manage herself?

Going 50% target date is just confusing her asset allocation. There's no reason for it.  Either 100% target date or set your own AA and create an IPS which defines how she will change it over time. 
« Last Edit: February 19, 2016, 08:25:09 AM by Heckler »

GGNoob

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Re: My friend asked me to help her select her 401k funds
« Reply #4 on: February 19, 2016, 08:21:34 AM »
So that she doesn't have to manage the allocation herself, she may as well stay 100% in the 2050 Target Date Fund. It's as diversified as you can get with all index funds.

Interest Compound

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Re: My friend asked me to help her select her 401k funds
« Reply #5 on: February 19, 2016, 08:46:34 AM »
So my best friend is very well off, much better than me, but has no idea what to do with all of her money.  She's 28, and has a $300k net worth.  She told me that all of her 401k is in a Vanguard 2050 Target Retirement fund, but she wanted to play around with diversifying her contributions.  She doesn't have the VTSAX or the VTSMX as options, but has some other good ones through her employer.  I suggested the following mix, but wanted to check here to make sure I gave her solid advice:

50% 2050 Target Retirement Fund
20% Vanguard 500 Index Fund Investor Shares (VFINX)
5% Vanguard Small-Cap Index Fund Investor Shares (NAESX)
5% Vanguard Mid-Cap Index Fund Investor Shares (VIMSX)
5% Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
15% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)

As always, thank you all for your great advice!

Your recommendations do not increase her diversification. She already owns all of that in the 2050 Target Retirement Fund, only now she has to manage everything herself. If diversification is her goal, tell her she's already in the best option.