401K way down.. What mix of funds is best? (invest, stock, buy)

[joey2000]

Originally Posted by dsnellen

Not really. Pick any conbination of L, M, S cap funds and run a correlation coefficient analysis on them. They will all be within 5% of the S&P 500 which makes sense since they all tend to hold the same underlying stocks abeit in different percentages.

You say that like it's insignificant,...

Just because a fund has a title of L, M or S doesn't make them a L, M, or S cap fund. You need to look under the hood and analysis which stocks they hold. Many overlap significantly.

True enough!

L, M, and S caps must be a part of a portfolio, but not the first three funds. If only three funds, pick a Mid Cap, maybe a commodity index fund and a bond. This will provide a level of diversification not possible with only US equity funds.

I see no point in limiting one's portfolio to only 3 funds, making the point moot IMO.

The whole point of diversification is to reduce unsystematic risk. US equities share the risk factors thus in and of themselves will not diversify a portfolio.

Yes they will, but in a very limited way.

Bonds, BTW, are critical to the stability of a portfolio. Same with a cash account and it doesn't matter how long you have til retirement.

??? It makes all the difference in the world. If you are farther out from retirement (ie looking at things long term), you can afford to play it more aggressively, minimizing it not all but eliminating the need for much of anything in bonds/cash. If you're closer to retirement, safety becomes much more important than big gains as you have less time to ride out the highs and lows.

[drjones96]

Originally Posted by bill545

A little?? Let me say I am by NO means an "expert" but IMO that is very much a panic move you may really regret. And again, thinking you can guess the market's upturns and downturns is a gambling game you will very likely lose....."stay the course" is IMO excellent advice, long term.

Panic? No. I'm not worried at all. But it seems silly to keep dumping money into something that continues to lose lose lose. A year from now (lets hope it's only a year) when we turn a corner and start heading in a positive direction I'll flip it and start pouring money into stocks at the same rate as before...maybe even a higher percentage than before. Keep in mind I'm not pulling out all together. I'm still throwing 60% of my contribution to the stocks and I haven't reduced what I pay in. IMO that's a panic move....when you stop contributing.

[LongArm]

Originally Posted by dsnellen

Pick any conbination of L, M, S cap funds and run a correlation coefficient analysis on them. They will all be within 5% of the S&P 500 which makes sense since they all tend to hold the same underlying stocks abeit in different percentages.

I have to disagree with that last part. Take, for example, Vanguard's largecap fund, VLACX, and smallcap fund, NAESX. Over 80% of VLACX is invested in large or giant-cap companies while NONE of NAESX is. So the only overlap between the two funds, if any, would occur in the midcap category, and that's going to be relatively minor.

I agree that largecaps and smallcaps tend to move together for the most part, but the fact is, smallcaps tend to move MORE, which can mean a significant difference in returns (good OR bad). So they are similar, yet different.

I also agree that diversifying into different asset classes is the most effective way to...uh...diversify. And I do like some bonds in the portfolio, even for a young person, as they can smooth out overall portfolio volatility while not necessarily hurting long-term returns too much. IOW, risk/reward can be enhanced. That's not to say I'm against a young person being 100% in stocks if volatility doesn't bother them. And, of course, the closer you get to retirement, the more bonds you should hold in relation to stocks, blah, blah, blah.

[dsnellen]

Originally Posted by LongArm

I have to disagree with that last part. Take, for example, Vanguard's largecap fund, VLACX, and smallcap fund, NAESX. Over 80% of VLACX is invested in large or giant-cap companies while NONE of NAESX is. So the only overlap between the two funds, if any, would occur in the midcap category, and that's going to be relatively minor.

NAESX has a correlation coefficient with VLACX of 99 and 98 with ^GSPC (using weekly data for 52 weeks). They may invest in different stocks but all these stocks are subject to the same systematic risk. Systematic risk cannot be diversified, but unsystematic risk can. Currently, long US equities regardless of L,M,S category will not add much diversification to a portfolio.

Another tidbit of information, of the 79 or so equity Vanguard funds & ETFs, when compared to ^GSPC (using 252 daily closing prices), only VMNFX (78) provides any significant level of diversification. Healthcare (VHT & VGHCX) at 86 & 89 are next. The rest are 91 or higher. The point is that investing solely in Vanguard equity funds & ETFs, in any combination, will not reduce unsystematic risk. This hasn't always been true, but it is true now.

[jggaylord]

Thanks for all the input concerning my 401K. As far as Fidelity goes, my company 401K plan only offers this selection of funds, I chose this route for the tax benefits as well as the company match.

[joey2000]

Originally Posted by drjones96

A year from now (lets hope it's only a year) when we turn a corner and start heading in a positive direction I'll flip it and start pouring money into stocks at the same rate as before...maybe even a higher percentage than before

That's great - if in fact we turn the corner in a year. But trying to time the market is a questionable strat at best. What if it's 2 yrs? or 3? What if it's 6 months?

Buy low I say. I'm bullish.

[drjones96]

Originally Posted by bill545

That's great - if in fact we turn the corner in a year. But trying to time the market is a questionable strat at best. What if it's 2 yrs? or 3? What if it's 6 months?

Buy low I say. I'm bullish.

...and while we were talking the market was dropping to a new low. Anybody know where the bottom is?

[SunsetBeachFL]

Originally Posted by jggaylord

Thanks for all the input concerning my 401K. As far as Fidelity goes, my company 401K plan only offers this selection of funds, I chose this route for the tax benefits as well as the company match.

If that is all they offer then that is what you have to deal with, period. So, I'll go from there - another poster cited the investing method of "dollar cost averaging", google it, read and then confirm the source(s).

Do not even think about the money in your plan, it is your retirement savings. You make changes based on lifestyle changes (age, marriage - second income, divorce, etc.). Many will disagree, but you probably don't look at Social Security treatment on a regular basis - you and your employer pay into it, for your eventual benefit, but I doubt that is part of a regular thought process for you (e.g. where the funding comes from, how it is treated in the budget, how long you will have to work to collect 'x$', etc.). Please don't start me on the diatribe regarding Soc. Sec... that is another thread that is probably a beaten, dead horse.

Bottom line, you MUST have at least 3 to 6 months of savings on hand for unforeseen circumstances. I assume you've got this covered. If you can save outside the plan and maintain your current contribution, carefully consider doing that.

All that being said, savings (short-term), tax-deferred savings (short and long-term benefits) should be your immediate and I will add, very responsible, focus. Above all, work hard and enjoy life! Best of luck!

[stoploss]

A simple procedure for 401k setup and maintenance:

1. Use the highest interest rate from among the 401k's money market funds, lose the decimal, and make that rate the next highest whole number (e.g., 3.1%=4%).

2. Apply the 4% benchmark to the 10 year performance column on the plan's statement.

3. Exclude any stock mutual fund that has not equaled or surpassed the benchmark in the 10 year performance column.

4. If the benchmark has left 4 to 7 funds standing, proceed to step 5. If not, raise the benchmark by a whole number, and continue raising it till approximately 4 to 7 funds are left standing.

5. If entering the plan as a new investor, diversify (temporarily) between the 2 or 3 best stock funds (of the 4 to 7,10 year column) and the best 1 or 2 bond funds.

6. If you are not new to the plan, or if 6 months have passed since you completed steps 1 thru 5, you must now scrutinize the 10 year performance columns of your 6 monthly (online ) statements to spot any fund whose 10 year performance varies drastically over this relatively short period of time.

This is a "booby trap fund". Unlike the funds we've identified as "maximizing the blue" and "minimizing the red" over 10 years, the booby trap maximizes the blue and maximizes the red. Its volatility offers nothing that other funds, even other volatile funds, do not offer, and should be excluded. This fund will likely go below the 4% benchmark and possibly into the red(below 0% gain).

7. Now we are ready to reallocate in accordance with our true dispositions--conservative, aggressive, or something in between.
Conservatives will emphasize bonds, agrressives the stock funds, in betweens will mix it up.

8. Maintenance: zero maintenance and substantial portfolio growth are mutually exclusive in the absence of a sustained bull market in stocks. Funds must be switched, or their percentage allocations adjusted, to accommodate a finicky stock market. The alternative is insubstantial growth. An example of a moderately aggressive investor follows:

Stock market is trending up:

70% in the 1 to 3 best stock funds(10 year column)
30% in the 1 or 2 best bond funds

Stock market is trending down, 401k balance falling:

Set a stop loss on your overall balance; leave room below your balance for market to move in case stock market recovers.


At stop loss,

Switch to 30% bonds, 70% stocks, same funds, and set 2nd stop loss.

Stock market continues down, 401k balance hits stop loss:

Switch to 100% bonds, stay in the dugout till market recovers; then go back to 70% stocks, 30% bonds.

In other examples, conservative bondholders will use the money market fund(s) as their "dugout."

9. Indicators: the 2 indicators for timing the switches are childlike in their simplicity.

1st indicator: the stock funds in use. If the cream of the portfolio are having trouble holding the fort, that's the time to consider a switch and set a stop loss.

2nd indicator: your balance! This whole procedure is predicated on a catagoric refusal on your part to watch your balance go back to what it was 12 or 18 months ago, and is enforced by the stop loss.

Your stop loss will be somewhere between what it is now and what it was 12 or 18 months ago; or 6 months ago if the market is falling fast.

Preventing precipitous falls into the red is mandatory for substantial growth.

The risk is that we may miss market moves into the blue by jumping out too soon, and that this may happen frequently.

But, with the possible exception of the Harvard and Yale graduates who are managing the below 10% funds in our portfolios, I doubt that anyone's timing is going to be that bad.


My gain for the past year is 34.32%, up from previous gains in the upper 20's.

I use two stock funds and two bond funds for switching.

I'm in the stock market 100% when it's behaving. and 100% bonds when it's misbehaving. An aggressive approach, not for everyone.

But the basic set up procedure, and the resolution to abort precipitous falls into the red, will work for anyone not afraid to make a decision based on reality, rather than wishful thinking.

I may follow up with a thought on those long term studies of "stock market to other investments" comparisons.

Good luck.

"Stoploss"

[stoploss]

Ok, my edit of the above didn't go thru, so here are the corrections:

Under step 9., the line which says, "your stop loss will be somewhere between what it is now and what it was 12 to 18 months ago;" should read,

"Your stop loss will be somewhere between where your balance is now and where it was 12 to 18 months ago."

Under 9. again, the line which says, "But, with the possible exception of the Harvard and Yale graduates who are managing the below 10% funds in our portfolios, I doubt that anyone's timing is going to be that bad", should say, "...below 4% funds in our portfolios..."

Sorry for the confusion.

"stoploss"