I've decided to follow Jack's and zdrave's suggestion to invest my 401k in BlackRock S&P 500 Index Fund - Institutional Class (BSPIX) (0.11).
I'm wondering that in addition to BSPIX, should I invest a small percentage of my 401k in Columbia Mid Cap Index Fund - Class A (NTIAX) (0.46) & Columbia Small Cap Index Fund - Class A (NMSAX) (0.50) in order to reflect a total stock index. Considering the ERs on these funds, would it be good strategy? I appreciate your opinions.
It's six of one, half a dozen of the other. If you choose to add the mid and small cap funds, you're saying you think mid and small caps will grow more than large caps, by at least a ~0.5% margin (i.e., the difference in expense ratios). Not having a crystal ball, I have no idea whether that's the case or not.
If you want to do that, I'd suggest cap-weighting the percentages to replicate a total market fund (again, unless you had a particular conviction that smaller companies would outperform and wanted to "tilt"). According to
jlcollinsnh (who has an excellent
series of articles which you should read in their entirety), if you want to replicate the total market your percentages would look like this:
- ~81% Large cap (an S&P 500 fund)
- ~6% Mid cap
- ~13% Small cap
(Or at least, that was the proportion in May 2013 when the article was written.)
If we go back to the earlier example we can see another option: instead of buying the mid and small caps in your 401K, you could minimize the expense ratio by buying the asset classes that are expensive in your 401K in a different account instead (as much as possible):
401K:
$18000 $16200 BSPIX- $1200 NTIAX
- $600 NMSAX
Vanguard IRA:
Vanguard taxable:
- $12000 VXUS
$2000 VTI- $2000 VB (Vanguard Small-Cap ETF)
- $2500 BND
Of course, the composition of a small-cap index will change more frequently than the S&P 500, possibly generating more taxable events. Somebody else will have to explain the implications of that, and whether it's a significant consideration or not (it probably isn't).
Finally, the other lazy option is that if you're not planning to stay in the same job for a very long time, you could consider just leaving it in the S&P 500 fund for now, then rolling it over to an IRA with a total-market allocation whenever you change jobs.
The bottom line, though, is I'm honestly not sure whether I'd even bother -- a total market allocation is fine, and a S&P 500 allocation is fine too.
One last thing: everything I've said in this thread was predicated on your statement that you wanted to use a 3-fund portfolio (which, of course, is increasingly inaccurate if you're buying separate small- and mid-cap funds...). At 29, you may not want as high a bond allocation as I've listed in the above examples. (For comparison purposes, I'm 31 and own
zero bonds because I have debt and would just pay that down instead, if I were inclined to invest in "bond-like" things.) Just something for you to think about. There's no single "correct" asset allocation; whatever you like (within reason -- don't put all your money in derivatives, gold and commodities futures!) and works for you, is what you should do.