Setting up my 401K, not sure how to allocate (23yrs old)

[Andrew]

Re: Setting up my 401K, not sure how to allocate (23yrs old)

You all helped K-Dubb so well I was hoping you could do the same for me. I'm 25 and will be investing about 9-10% of my salary a year (~ $6,000/year). Due to my age, I'm willing to assume risk in order to potentially earn greater returns.

I had issues formatting my Excel spreadsheet into the forum, but the ratings are from Morningstar, as well as the roles. Here are the options our broker made available to us:

Aggressive Ticket Expense Class Role Rating
JH Franklin Small-Mid Growth FRSGX 0.96 Medium Growth Support 2
JH Small Cap Value Index VISVX 0.73 Small Value Support 3
JH Small Cap Growth Index VISGX 0.73 Small Growth Support 5
JH American Funds Europacific Growth Fund RERCX 1.11 Large Blend Core 4
JH DFA International Value DFIVX 0.98 Large Value Support 4
JH Energy Fund VGENX 0.81 Sector Specialty 5
JH Allianz RCM Tech Fund RAGTX 1.76 Sector Specialty 3

Growth
JH Riversource Mid Cap Value Fund AMVAX 1.45 Medium Value Support 4
Small Cap Opportunities Fund JHSOX 1.11 Small Blend NR
JH DWS RREEF Real Estate Securities Fund RRRAX 0.8 Sector Support 2
JH American Funds Growth Fund of America AGTHX 0.94 Large Growth Core 5
JH Oppenheimer Global Fund OPPAX 1.08 Large Growth Core 4
Quantitative Mid Cap Fund JIQMX 0.87 Mid-Cap Growth NR

Growth and Income
JH Davis New York Venture Fund NYVTX 0.87 Large Blend Core 4

There are fixed income funds such as PIMCO Total Return and PIMCO Real Return, but I'm not necessarily interested in investing in those as of yet. Plus, I intend on being actively involved with my 401k.

Currently, I'm thinking of the following scheme with expenses in parentheses:
30% VISGX: Vanguard Small Cap Growth Index (.73)
30% AGTHX: American Funds Growth Fund (.94)
30% RERCX: American Funds EuroPacific (1.11)
10% VGENX: Vanguard Energy (.81)

It's an aggressive strategy but my horizon is quite long and the stock exposure is spread out pretty evenly (I think) amongst large cap value (26.6%), large cap growth (34.7%), mid/small value (10.06%), and mid/small growth (28.62%).

Let me know what you guys think.



- Andrew

[kv968]

Re: Setting up my 401K, not sure how to allocate (23yrs old)

Let me just ask a couple of questions first...

This is in a 401k I take it?

Are American Funds Growth Fund of Amer. and Davis NY Venture Fund the only US large cap funds available?

and

How did you come up with the percentage breakdowns of your asset locations at the end?

[smartatmoney]

Re: Setting up my 401K, not sure how to allocate (23yrs old)

Hey K-Dubb, welcome. Good to see your getting started with investing while you're so young.

If you don't want to have to pay much attention to your allocation, my suggestion would be to go with the index funds. You won't have to worry about "style drift" and will only have to rebalance when your percentages of what you hold get out of line.

You might want a portfolio something like this:

40% - S&P 500 (Ssga S&P 500)
10% - Mid-cap (Mid-cap 400)
15% - Small-cap (Russell 2000)
25% - Int'l (American Century Int'l Growth)
10% - PIMCO Total Return Fund

That'll give you good coverage of the stock market and 25% in int'l exposure. The PIMCO fund would be your bond fund. You could hold more or less in that depending on how much volatility you feel you can handle. You may not even need any in the mid-cap since the S&P 500 may hold those stocks also. You could always adjust the other percentages also.

And if your employer matches any of your contributions, try to put at least enough to get the match.

If you follow the rule of thumb that you should be invested 120-your age in stock, then you should be 97% stocks. I would lower your bond fund to 5% and put that extra in International. But that's just me.

[meaghanchan]

Re: Setting up my 401K, not sure how to allocate (23yrs old)

If you follow the rule of thumb that you should be invested 120-your age in stock, then you should be 97% stocks. I would lower your bond fund to 5% and put that extra in International. But that's just me.

I forget what author it is that studied this (I'm lending out my copy of the book right now) but it's been shown that having up to 10% or even 20% in bonds substantially decreases volatility in a portfolio, without decreasing returns very much at all.

Having some money in bonds (I don't know if 3% is enough, maybe it is) also gives you an opportunity to capture the rebalancing bonus that lets you buy low and sell high. Take a $10,000 portfolio, invested 90% in stocks, 10% in bonds. Let's say stocks have a really, really bad year and drop by 50%, while bonds return an average of 6%. If you've added nothing new during the year (I know a false assumption but the math's starting to get tricky) your portfolio might be at, say, $5,560 ($4500 stocks, $1060 bonds). At the end of the year you get to rebalance back to 90/10- leaving $554 in bonds and buying $504 of now-cheap stocks. If you were 100% invested in stocks, your portfolio value would be $5000, and you'd have no new money (at least from rebalancing) to be buying cheap stocks with.

Though I use the 120-age formula, my 'floor' for bonds is 10%, because of those facts. Even though I'm 24, I have 10% invested in bonds. When I hit 31, that number will start decreasing along the 120-age guideline.

[Broken Arrow]

Re: Setting up my 401K, not sure how to allocate (23yrs old)

Interesting thought, Meganchan! Thanks for sharing.