What to suggest to son in first 401K?

[bubba]

DS starts his first real/career job in a couple of weeks. He will sign up for 401K but is very, very risk adverse (wish I was.....). Anyway, haven't seen the investment options yet, but I believe my question is general enough that the investment options do not matter too much.

He's a bright kid, but at this point, he doesn't seem to be interested in learning about investing. I expect that will come later, but right now he's just concerned with getting fully engaged with the new job.

What would you suggest for a 23 yr old who is very risk adverse for his 401K? Would it be a terrible suggestion to let him accumulate a balance in a Stable Value type fund, and then recommend he start investing into something more like a balanced fund? I am afraid if he goes into equities first thing, and the losses start to stack up, it will spook him away from the market forevermore. At least a Stable Value Fund shouldn't be moving down with the market and give him the feeling that he isn't just throwing money away.

ETA: He has asked for our opinions or I'd stay out of it!

 

[travelover]

From a rational standpoint, I'd go with a low ER equities index fund. I can't give any advice on dealing with the emotional implications. I'm poorer today for staying in fixed income investments when I first started investing.

 

[Nova]

Maybe half in stable value fund and half in a balanced fund, with a recommendation to re-evaluate annually. A discussion about diversification should help with his risk anxiety. With him just starting a new job, now is probably not the best time to give him your favorite financial planning how-to book...maybe a month or two before it's time for him to do an annual evaluation of his 401k allocation. Just a suggestion.

 

[LOL!]

He should go to Bogleheads :: View Forum - Investing - Help with Personal Investments and read the "sticky" threads at the top on how to ask for 401(k) advice.

The answer will depends on his choices and their expense ratios.

If he is risk averse (spelling?), then he just needs to have less equities, but remember that bonds are not risk-free either. He can learn about all this by reading the short book "The Bogleheads' Guide to Investing".

 

[Animorph]

I'd set him into something simple, maybe a retirement date fund, a balanced fund, or a broad index fund, but stay as aggressive as you can. Then tell him to fully and automatically fund it, but otherwise just don't even look at it. I don't think he'll worry too much if he is not watching it. It doesn't matter what its value is until he retires and starts withdrawals.

Also start a Roth if his income permits. He may not be able to later on if his income rises too far. He can also withdraw his contributions from the Roth if necessary, so it makes a decent emergency fund. Roth is a clear winner over taxable investing, and might be better than the 401k (unless it has a Roth option) while his income is low and taxes might be less than in retirement.

 

[donheff]

Bubba: I convinced my son and my daughter to invest in index funds as opposed to picking stocks and/or managed funds. This morning DS stopped by to drop his dog off (we provide doggy day care) and mentioned that he saw Warren Buffet on the Today Show. Matt Lauer (sp?) asked him where he would recommend a 20 year old with $1000 to invest put the money. He said he should put it in an index fund and leave it there for 20 years.

 

[FUEGO]

I would explain to him that now is the time to take risks. He won't be touching the money for 40 years or so. Losing temporarily over the course of the year or even over a few years shouldn't change his outlook. Most 20-somethings I know look at their 401k infrequently anyway. As you say - they just aren't that concerned with what is going on with them.

If he has the option of a lifecycle fund or target retirement fund, you may want to suggest one of those as long as it isn't expensive ER wise. Otherwise, some index fund and stable value or bond fund. 60/40% might be a good default if he is risk averse (knowing that he will need growth over the long term).

 

[brewer12345]

Beaver cheese futures, preferably leveraged.

Seriously, a single fire and forget fund would be ideal, perhaps a balanced or target fund. I would also suggest you buy him a beginner book on investing.

 

[MichaelB]

Beaver cheese futures, preferably leveraged.

Seriously, a single fire and forget fund would be ideal, perhaps a balanced or target fund. I would also suggest you buy him a beginner book on investing.

Agree on target fund. Simple and easy, and can be changed if/when son becomes interested in investing.

Brewer, that's Venezuelan Beaver Cheese, if you please. Jeez - you got something against the land of Chavez ?

 

[brewer12345]

Brewer, that's Venezuelan Beaver Cheese, if you please. Jeez - you got something against the land of Chavez ?

I hear the Columbian product is just as good and a lot cheaper.

 

[MichaelB]

I hear the Columbian product is just as good and a lot cheaper.

No such thing. A cheap knock-off. Border envy. There can be only one. Besides, everybody knows there are no beavers in Colombia.

 

[brewer12345]

Besides, everybody knows there are no beavers in Colombia.

Ah, but there are hippos: A hippo critical situation - Los Angeles Times

 

[REWahoo]

"Wild hippo cheese futures"? Gimme a break....

 

[brewer12345]

"Wild hippo cheese futures"? Gimme a break....

Hey, we are just pushing the Efficient Frontier out by finding ever better diversifiers.

 

[REWahoo]

Hey, we are just pushing the Efficient Frontier out by finding ever better diversifiers.

Next you're gonna tell me hippo cheese futures are negatively correlated to bulk shippers and gold?

 

[ls99]

Have no good suggestion for investment. Clearly he needs to learn how to deal with losing some $$$.

In that vein, take $50.- in singles, go up on a high balcony and start tossing them one by one. At least in this exercise he will derive some pleasure from the fluttering bills, and some from watching others pick them up.

In real life the money will just vanish. Consider the previous activity as training wheels for a severe market downturn.

 

[brewer12345]

Next you're gonna tell me hippo cheese futures are negatively correlated to bulk shippers and gold?

Actually, I was going to suggest negative basis trades between Columbian hippo cheese futures and Venezuelan beaver cheese futures...

 

[MichaelB]

Actually, I was going to suggest negative basis trades between Columbian hippo cheese futures and Venezuelan beaver cheese futures...

Doesn't the efficient market hypothesis say that arbitrage is a figment of your imagination? OTOH Venezuelan beaver cheese and Colombian hippo mud - now that's diversification.

 

[brewer12345]

Doesn't the efficient market hypothesis say that arbitrage is a figment of your imagination? OTOH Venezuelan beaver cheese and Colombian hippo mud - now that's diversification.

On the contrary, efficient markets depend upon arbs to remain efficient. South American national cheese futures markets could use some increased efficiency, IMO.

 

[Alan]

Our son asked the same thing of me 3 years back when he started his first job. After reviewing his options I recommended he contribute up to the employer match and put the money in the balanced fund on offer, and to put any extra in his VG Roth IRA (balanced fund) that we set up for him on his 18th birthday.

He is not so much risk averse as "couldn't care less for the next 20 years", but realizes he needs to start saving early because his company does not have a pension plan, and he knows that our plan is to live to 100 and spend all our money

 

[Bimmerbill]

I thought I remember reading that the amount contributed matters more than the asset allocation. So, MAX it out if he can. Especially early. Wish I did.

 

[bubba]

Thanks so much for all the advice. I'll be talking with him over the weekend. For some reason, I hadn't even thought about the Roth. I have always been about minimizing current taxes for myself, but if I could go back to 23 and start over, I surely would enjoy watching a Roth growth.

 

[Alan]

Thanks so much for all the advice. I'll be talking with him over the weekend. For some reason, I hadn't even thought about the Roth. I have always been about minimizing current taxes for myself, but if I could go back to 23 and start over, I surely would enjoy watching a Roth growth.

My son is still a low wage earner so tax advantages with a Roth are at a premium now since his tax rate is so low - the 401(k) has no good fund choices and so his tax savings are very low.

 

[jblack]

Agree with the Roth and keep-it-simple approaches mentioned. The biggest thing (IMO) at this point is to formalize a behavior and foundation of savings.

About 10 years ago I was in a similar boat and did about half of this, which at least got me started early. A few years later my career & income started to accelerate with the focus I had put on it, plus I got married and we were DINKs.....and although I had made 1-2 risky investments that went south along the way, I/we never compromised the foundation of saving via 401ks / IRAs, an emergency fund, and eventually a taxable account aimed at ER.

The lessons both on savings & risk have been remarkable. I don't feel like I missed out on swinging for the fences working for a startup or starting too late to save.

 

[walkinwood]

I'd suggest 80% equities / 20% short-term treasury bonds in the lowest expense fund available.

A stronger suggestion would be to ignore his 401K balance for the foreseeable future.