Total Newbie- 401K advice?

[Moyer]

My mother asked me for advice today about her 401K (no idea why she asked me), I told her I'd look into it.

I know absolutely nothing about this other than what it says on her account summary, so please bear with me here.

It appears she has all of her funds seperated equally into 5 different mutual funds. I think she can choose between 12 mutual funds though.

She's thinking about using less diversity and only having funds in 4 different mutual funds, just because 1 of them hasn't done as well as the others in the past few years. As far as I can tell, the best thing to do is split it up into all 12 mutual funds and spread it out as much as possible, since it's a long term investment. Am I wrong?

I think the reason she wants to change is that she took some huge losses a couple years ago and she thinks she's due for a big jump.

Does this make any sense? If there's any other info you need, please just ask.

[MaxPower]

She could just put all her funds into an S&P index fund (if it is available in her plan). That will give her plenty of diversification and probably perform better than all of the other funds.

The past performance of the funds is going to tell you very little about how they will do in the future. The S&P index outperforms 90% of mutual funds over the long term.

[BadBoyBenny]

You should contact the mutual fund company or read prospectuses and find out what the costs are for each of the funds. I would go with the lowest cost fund (assuming they are all equities). This will almost always be an index.

Unless each fund only focuses on one sector or something like international stocks, having 12 different funds does nothing to guarantee that you are more diversified than owning one index fund.

A fund's performance over the short term means nothing of how they will do in the coming year. It's usually a crapshoot guessing with mutual funds. They best way to gaurantee superior terms is by not paying high fees to fund managers and high trading costs to actively managed funds.

In my 401k I put 60% into Vanguard S&P index and 30% into a total market index and 10% into a fund that deals in international stocks. But I'm not experienced enough to tell you that is an optimal allocation, it just felt like a good mix to me.

[Moyer]

This is a list of what is available in her plan:

STABLE RETURN FUND EBT
PIMCO TOTAL RETURN
AMERICAN CENT. INCOME & GROWTH
VAN KAMPEN COMSTOCK
WELLS FARGO INDEX
AIM BLUE CHIP
WELLS FARGO LARGE CO. GROWTH
VAN CAMPEN AGGRESSIVE GROWTH
FIDELITY MID CAP
DREYFUS EMERGING LEADERS
JANUS OVERSEAS
FIDELITY ADV DIVERSIFIED INTL

[adios]

I don't see how your original thought to allocate equally among the available funds could be that bad of a choice FWIW.

[RocketManJames]

I didn't look *that* carefully at the list of available funds. But, by allocating evenly across a list of funds, you are not necessarily achieving your diversification goals. Also, you could be over-allocating or under-allocating in certain risk groups, which is dependent upon your financial needs. As someone else pointed out in this thread, there may be significant overlap between the holdings across funds... you need to take this into account.

For example, someone who is 3 years away from retirement should not be 90% invested in US equities and 10% invested in emerging growth. What if your company offered 10 funds. 1 was fixed-income, 1 was a money-market, 6 were US equity-based, and 2 were foreign equity-based. If you equally invested, you are nowhere near what you should be in terms of risk if you are in need of money soon (retirement/ready to buy a house/etc).

My 2 cents.
-RMJ

[adios]

I agree with the advice about using something like SPY but I don't see anything in that list anywhere close to it. Of course one should do due diligence before allocating investment money. However I'm making the following assumptions:

1) That allocations equally in the funds mentioned will probably under perform the SPY only slightly but the risk will be about the same.

2) That the investor has long holding period, at least 5 years.

3) The investor has no desire to do there own due dilligence.

4) The investor wants returns that are about equal to SPY.


Sure everything you posted is true and it is tantamount to saying that one should do due diligence and I couldn't agree more. But most people aren't willing to or don't have the insight to make a reasonable choice (perhaps me too /images/graemlins/smile.gif) thus spreading out the investment among the funds provided seems to be the best alternative given the assumptions I mentioned.

[BadBoyBenny]

The next question would be how soon is she planning on taking money out. If it's less than 5 years it would be a good idea to have a large portion in the PIMCO or Stable Return to preserve capital in case the market does poorly over the short run.

Also how much risk is she willing to take on? I'm invested in 100% stocks because I'm only 24 and won't be able to take the money out without penalty for over 35 years. Stocks are almost certain to outperform other investments given that length of time. I also don't care if my protfolio drops 20% in a year because of my conviction that stocks will do better in the long haul.

If I had those choices for myself I'd probably put it all in the Well's Fargo index. Maybe 10% in the international fund because I get worried something catastrophic might happen to the dollar in the next 30 years.

Really though, its hard to give good advice without knowing a lot about a person's present situation and future needs.

[Ray Zee]

before you can even consider a fund youmust look at its expenses. remember they are there to make themselves money not you. read that line again please.
check all the expenses like 12b-1 then start to pick one or two out that looks good.

[jcx]

As previously stated, more specifics are needed to give a better recommendation. I'm not sure how old your mother is, but I assume she is still working for the company that sponsors this 401k. The basket of funds available to her is actually not too bad - I only get 5 to choose from where I work. However, if/when she separates from this job if she is not satisfied with the investment choices available she can roll this into an IRA at a discount brokerage firm and benefit from being able to select from hundreds of funds instead of a dozen. You can even invest in stocks, but you should really know what you are doing before trying this. Whatever the case, she should be pumping as much as she can afford into this account, and at the bare minimum the % her company matches, if any. Good luck.