Question about 401ks...

[Newbie]

I'm 26 and have my 401k money (about $7500) in 2 index funds. One is an S&P 500 index (80%) and the other is a bond index (20%).

I've heard about how everything should be stocks when you're younger but am I really missing out on much with this strategy?

Note: Fees are 0.35 and 0.70 respectively for the S&P and Bond index...

[sweeps]

Many studies have shown that there is little difference in return between an 80/20 and a 100/0 allocation. But the 80/20 actually gives you a smoother ride.

Perhaps more of a concern is your lack of exposure to international stocks. You're putting all your eggs in the large U.S. corporation basket.

[mwgr5]

The percent of equities in the portfolio should really be based on your risk tolerance. An all equities portfolio can have high variance. If you are comfortable with a 35%+ short term drop in the value or your portfolio than you should be more willing to have 100% equities.

Many people are not comfortable with this variance. If you can't sleep at night because of your asset allocation, you should change it. The worst mistake most investors make is selling after a market collapse, rather than buying low and selling high.

So if you are comfortable with 100% equities, change your portfolio. Like the previous poster said, and 80/20 portfolio will reduce return only slightly.

Also, consider adding international component or a small/mid cap US index fund for greater diversification.

Overall, you are doing a great job investing early in low cost index funds. If you stay the coarse you will be well off in retirement!

[Newbie]

I really don't understand this stuff too much so I've just been doing index funds. Is 10% a good allocation to an international fund? I'd be at 70/20/10 that way..

I'm looking at TGVAX btw...

[sweeps]

If you want simple, choose a "lifecycle" fund. Vanguard, Fidelity, T.Rowe Price all offer them. With one fund, you get exposure to domestic stocks of all sizes, international stocks, emerging markets, and bonds.

For example: Vanguard Target Retirement 2045 Fund (VTIVX)

[disneysteve]

If you want simple, choose a "lifecycle" fund. Vanguard, Fidelity, T.Rowe Price all offer them. With one fund, you get exposure to domestic stocks of all sizes, international stocks, emerging markets, and bonds.

Very good advice, but since this is a 401K we're talking about, those funds might not be among the options. In that case, I think putting 10% into an international fund, preferably also an index, would be a great start to help diversify your portfolio.

[sweeps]

Very good advice, but since this is a 401K we're talking about, those funds might not be among the options. In that case, I think putting 10% into an international fund, preferably also an index, would be a great start to help diversify your portfolio.

Good point. But then maybe OP should be considering a Roth IRA, which of course would allow lifecycle funds, and could possibly net a bigger return in the long run.

[disneysteve]

Good point. But then maybe OP should be considering a Roth IRA, which of course would allow lifecycle funds, and could possibly net a bigger return in the long run.

Unless, of course, there is an employer match. 50% instant return beats any Roth account.

[sweeps]

Unless, of course, there is an employer match. 50% instant return beats any Roth account.

Usually, but not always.

If the funds in the 401k are crap, a good Roth fund even without a match will blow away the fund in the 401k.

$10,000 in a fund that returns 10% per year will be worth $174,494 at the end of 30 years. $15,000 in a fund that returns 7% a year will only be worth $114,184. And I haven't even counted the benefits of a Roth for someone who is (presumably) early in his career and has a low effective tax rate.

[humandraydel]

I agree with the others - you need some international and small/mid cap exposure. I'd suggest at least 20% and up to 35% international. I'd also suggest 15-25% small cap. So, overall, I'd suggest something like this (if possible):

20% Bonds
20% International
20% Small/mid cap
40% Large cap (S&P 500)

[Newbie]

Thanks a lot for the advice so far guys. Let me clarify some things...

- I have a 50% company match so I don't have an IRA right now. Also, I'm not too sure about paying taxes now for money I might not be around to spend! lol Maybe you guys can convince me otherwise..

- There are 4 retirement target funds so would I be better served by just picking the 2040 one and forgetting about my 70/20/10 plan? I see the expenses at .085

Here's the info on it:

Equity 90.0%
S&P 500® Index Fund 45.0
Daily MSCI® EAFE Index Fund 25.0
S&P MidCap 400® Index Fund 10.0
Russell 2000® Index Fund 10.0

Fixed Income 10.0%
Lehman Long Government Bond Fund 10.0

[humandraydel]

Thanks a lot for the advice so far guys. Let me clarify some things...

- I have a 50% company match so I don't have an IRA right now. Also, I'm not too sure about paying taxes now for money I might not be around to spend! lol Maybe you guys can convince me otherwise..

- There are 4 retirement target funds so would I be better served by just picking the 2040 one and forgetting about my 70/20/10 plan? I see the expenses at .085

Here's the info on it:

Equity 90.0%
S&P 500® Index Fund 45.0
Daily MSCI® EAFE Index Fund 25.0
S&P MidCap 400® Index Fund 10.0
Russell 2000® Index Fund 10.0

Fixed Income 10.0%
Lehman Long Government Bond Fund 10.0

Ok, here's the convincing argument on a Roth: Contributions to a Roth IRA can be withdrawn at ANY time, penalty free, tax free. What you can not withdraw penalty free, tax free is the earnings on those contributions. In other words, you could contribute $4k per year to a Roth for 10 years. At the end of 10 years you have contributed $40k, however, it has grown to 75k. You could then withdraw the $40k you have contributed, leaving $35k to continue to grow tax free until retirement. Now obviously it's strongly suggested that you keep the money invested, but it is possible to withdraw the contributions.

As for the Lifecycle fund, there is absolutely nothing wrong with it. It is the ultimate in investment simplicity and perfect for those who really want nothing to do with managing their investments. It's worth noting that you can essentially get the exact same portfolio for cheaper by just buying the individual index funds in the same proportions, though. For some people the small amount saved in expenses isn't worth the hassle of managing the 401k.