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Willing to advise a newbie?
Old 06-14-2007, 08:14 PM   #1
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Willing to advise a newbie?

Hi, I am 21 years old and just graduated from college. I just started a 20 hour per week job at a university in upstate New York and want to join the university's tax deferred retirement plan. We have a choice of TIAA-CREF or Fidelity. My parents also work at the university, but started when only TIAA-CREF was offered, so their retirement funds are all in TIAA-CREF. They hope to retire in another 3 years - at 55 and 56 years old - but that is a topic for another thread.

I have browsed through a lot of threads on this board, and am hoping someone would be willing to provide me some advice on how to allocate my contributions to my tax deferred plan. I'm thinking Fidelity and index funds; I think 75% in stock index and 25% in bond index, but I am totally confused on which ones to chose: Vanguard 500 Index Fund - Investors Class OR Spartan 500 Index Fund - Investor Class OR Spartan US Equity Index Fund - Investor Class, etc.. There are many listed in the materials the HR department distributed, but not much in the way of descriptions (that I can make heads or tails of, anyway!) There is also a Fidelity Freedom 2050 Fund with a target retirement date, but the expense ratio on that is .77 - much higher than the expense ratio on the various index funds, which appear to run between .10 and .18.

Would any of you perhaps have any words of wisdom to offer? With only working 20 hours per week right now, I don't bring home a big paycheck, but would like to start investing 10% and try to keep doing that as long as possible, depending on what life dishes out!

Thank you very much for any input you might be willing to offer.
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Old 06-15-2007, 07:14 AM   #2
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I'd go with the US Equity fund, assuming it's a total US market fund, as its name implies. This will give you the widest diversification. You might look for an international fund among the choices.

As for bonds, at age 21, I'd say none to 10% max. Your balance is low, your time horizon is long; not much need to worry about safety or dampening volatility.
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Old 06-15-2007, 08:02 AM   #3
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You could do far worse than just buying the cheapest fidelity s&p 500 index and revisiting the decision in 20 years.

I dont think you need or want any of the TIAA-CREF options.

Not sure you need to buy any bonds right now. Maybe in ten years start putting half your contributions into a bond index, preferably short term or broad index, and the other half still into the s&p 500.

With that plan, by the time you're in your 40's, you'll have an 80/20 or 70/30 mix of stocks and bonds, enjoyed low fund expenses, and likely beaten 99% of other investment options.

As you go along and learn more about how to screw up your portfolio, you could add dribs and drabs of REITS, energy, commodities or other fun items when buying opportunities present themselves.
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Old 06-15-2007, 09:08 AM   #4
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Quote:
Originally Posted by HFWR View Post
I'd go with the US Equity fund, assuming it's a total US market fund, as its name implies. This will give you the widest diversification. You might look for an international fund among the choices.

As for bonds, at age 21, I'd say none to 10% max. Your balance is low, your time horizon is long; not much need to worry about safety or dampening volatility.
I'd agree - go with a low cost total US market index fund from Vanguard or Fidelity and sign up for auto invest, preferably through a 401(k). Come back in 20 years and ask about bonds.
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Old 06-15-2007, 11:22 AM   #5
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I'd go with one of Vanguards Target retirement funds- instant diversity and low low cost. Target 2045 for instance has the following AA:
Vanguard Total Stock Market Index Fund 72.1%
Vanguard European Stock Index Fund 10.5%
Vanguard Total Bond Market Index Fund 9.9%
Vanguard Pacific Stock Index Fund 4.7%
Vanguard Emerging Markets Stock Index Fund 2.8% Totaló100.0%

Here is a great article about these funds.
https://institutional.vanguard.com/V...lesTRFunds.jsp
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Old 06-15-2007, 01:28 PM   #6
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No fund picks to offer but want to say good for you for thinking about this stuff at your age. Smart! Very Smart!!
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Old 06-15-2007, 02:21 PM   #7
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I'd go with one of Vanguards Target retirement funds- instant diversity and low low cost. Target 2045 for instance has the following AA:
Vanguard Total Stock Market Index Fund 72.1%
Vanguard European Stock Index Fund 10.5%
Vanguard Total Bond Market Index Fund 9.9%
Vanguard Pacific Stock Index Fund 4.7%
Vanguard Emerging Markets Stock Index Fund 2.8% Total100.0%

Here is a great article about these funds.
https://institutional.vanguard.com/V...lesTRFunds.jsp
OOPS!! I just realized you don't have access to the Vanguard funds full line-up. Given the small set of options, I'd opt for the Freedom fund. It's simple and it gives broad diversity. You could do far worse! Here is what M* has to say about it:
Quote:
This target-date fund, aimed at investors for whom retirement is more than 40 years away, certainly has some points in its favor. First, its 0.76% expense ratio is quite reasonable for a fund that allocates nearly 90% of its assets into equities and provides significant exposure to foreign and mid-cap stocks.(And that price tag will only drop as the fund increasingly shifts its assets into Fidelity's fixed-income funds, which tend to be cheaper.)



Kudos
One of the cheaper options in its category.

Fidelity has substantial expertise across a number of asset classes and investment styles.


Risks
The fund holds nearly 20 other Fidelity funds, resulting in substantial overlap.

Some of the underlying funds are middling performers or are run by inexperienced skippers.
AA
Cash 3.0
Stocks 87.9
Bonds 7.7
Other 1.4
Foreign Stocks 24.2 (as a % of assets)
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Old 06-15-2007, 06:58 PM   #8
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ewwww.... the Freedom funds are a little to expensive for my tastes.

However, Fidelity's Four-in-One Index Fund is right up an indexers alley. 0.23% plus holds:

Equity Funds
Spartan 500 Index Fund - Investor Class 54.40%
Spartan International Index Fund - Investor Class 16.36%
Spartan Extended Market Index Fund - Investor Class 15.10%

Fixed-Income Funds
Fidelity U.S. Bond Index Fund 14.09%

Not too shabby and instant diversification in one fund.

TC's Retirement Annuity expense ratios are a little high as well [around 0.50%]. However, you can't beat their TIAA Real Estate fund for directly held real estate.

- Alec
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Old 06-19-2007, 10:15 AM   #9
Confused about dryer sheets
 
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Thank you all very much for your advice. You all have convinced me on not needing bonds at this point. I looked at the Freedom Fund 2040, but the expense ration of .76 bothers me. I do have additional items I could use help with, though:

Under the description "Large Blend", there are 3 index funds: Spartan Total Market Index Fund - Investor Class, Spartan 500 Index Fund - Investor Class, and Vanguard 500 Index Fund - Investor Class. The first two have expense ratios of .10, while Vanguard's is .18. Is there any advantage to having some of each of these, or is one enough? (I'm not sure what the difference is between "500 Index" and "Total Market". I've read info on each of these at Fidelity's website, but if the difference is in the descriptions, I've not been able to identify it.) Is it that the first trys to mirror the s&p 500 and the second trys to mirror s&p, Dow Jones, etc? (I could be all wet on that guess / supposition!)

I'm also looking at the Spartan Extended Market Index Fund (under "mid blend") with an expense ratio of .10. What is meant by "Extended Market"? Also, the Spartan International Index fund (classified as "International/Global") with an expense ratio of .20. I've read on this forum (and HFWR also stated in his replay) that it is important to have international exposure. Is it important enough to warrant twice the expense ratio?

In your opinion and based on your experience, would it make sense to do the following:

10% Spartan International Index Fund (international)
30% Spartan Extended Market Index Fund (mid blend)
30% One of (which?) / a combination of all 3 of the "Large Blend" items listed in paragraph 2 above
30% Spartan US Equity Index Fund

Thank you for your advice and patience with me.

P.S. As Cute Fuzzy Bunny says, I'm looking forward to learning more about how to screw up my portfolio!
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Old 06-19-2007, 12:50 PM   #10
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And you've come to the right place for that extended learning!

Total market funds try to mimic the performance of all stocks (in this case, US based) by adding some mid and small cap stocks to the core s&p 500. Usually they have about 6000-8000 stocks, cap weighted.

The upshot is there isnt a lot of mid and small cap, they're still usually 70-80%+ large cap s&p500ish funds. The addition of the smaller company stocks may boost returns...but they might not...depends on how the markets move in the future.

The "extended market" fund is pretty much the slice of "total stock market" that isnt the S&P500 piece...ie the mid and small cap hunk. By blending the s&p500 fund and the extended market fund, you can mimic a total market fund but "up" the mid and small cap pieces...which tend to be more volatile and higher returning over time...perhaps quite appropriate for someone your age.

If you want to get fancy and start screwing up your portfolio right off the bat...a split three ways between the s&p 500 fund (cheapest you can find), the extended market fund, and the international index fund wouldnt hurt.
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Old 06-21-2007, 04:18 PM   #11
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My Two Cents

Quote:
Originally Posted by Samson View Post
(I'm not sure what the difference is between "500 Index" and "Total Market". I've read info on each of these at Fidelity's website, but if the difference is in the descriptions, I've not been able to identify it.)
FSMKX tracks the S&P 500 index and FSTMX tracks the Wilshire 5000 index. As mentioned by CFB, their performance is more or less the same because they're heavily-weighted toward the largest cap stocks: FSMKX: Basic Chart for SPARTAN 500 INDEX FUND INVESTOR - Yahoo! Finance

Quote:
Originally Posted by Samson View Post
Also, the Spartan International Index fund (classified as "International/Global") with an expense ratio of .20. I've read on this forum (and HFWR also stated in his replay) that it is important to have international exposure. Is it important enough to warrant twice the expense ratio?
According to Fidelity, the expense ratio has been reduced to 0.10% (Fidelity Investments:) for the foreseeable future. At any rate, a 0.20% expense ratio is dirt cheap. International investing is in theory more expensive than domestic because you have to put the effort into dealing with foreign tax and security regulations and currency conversions.

I have to say, I wish I had the great deal you have in your retirement plan. My small employer uses Big Fat Megacorp 401(K) plus an independent advisor and I found out this Spring that between the two of them, they're skimming 1.3% off the top of my 401(K) savings every year. That's after the management fees and expenses for the funds I'm invested in.

Quote:
Originally Posted by Samson View Post
In your opinion and based on your experience, would it make sense to do the following:

10% Spartan International Index Fund (international)
30% Spartan Extended Market Index Fund (mid blend)
30% One of (which?) / a combination of all 3 of the "Large Blend" items listed in paragraph 2 above
30% Spartan US Equity Index Fund
Among the funds you cited, there are really only three asset classes:
  • S&P 500 index funds (FSMKX, VFINX, FUSEX)--I lump FSTMX here, even though it tracks the Wilshire 5000
  • Mid/small-cap blend (FSEMX)--tracks the Wilshire 4500 completion index
  • International (FSIIX)--tracks the MSCI EAFE index
As a previous poster suggested, since you're young, you could just put 1/3 of your contributions in each.

If you're not comfortable with short-term risk, you could play around with several of the online asset allocation tools to find proportions that you might find more suitable:
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Old 06-21-2007, 09:56 PM   #12
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Among the funds you cited, there are really only three asset classes:
  • S&P 500 index funds (FSMKX, VFINX, FUSEX)--I lump FSTMX here, even though it tracks the Wilshire 5000
  • Mid/small-cap blend (FSEMX)--tracks the Wilshire 4500 completion index
  • International (FSIIX)--tracks the MSCI EAFE index
As a previous poster suggested, since you're young, you could just put 1/3 of your contributions in each.
I agree with the above two posters. This is simple and diverse.
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Old 06-22-2007, 06:25 PM   #13
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You folks are the best. Thanks so much for your help!
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