Balancing/ Allocation Advice

[aaronc879]

I'm 26 years old and even though i've been investing and learning about investing for several years, today was the first time i've broke down my investments into categories. I've only been looking at the overall total, which is just below $60,000 I saw something that surprised me and would like some advice. Here's the break down:

Large Cap 65%
Small Cap 14%
International 3% :
Co. Stock 11%
Cash 7%

By far the best investment choice in my 401k is a certain Large cap mutual fund. That's why that % is currently so high.

My projected future contributions as of now would be:

Large 28%
Small 29%
International 14%
Co. Stock 9%
Cash 20% at least until I reach 10% overall

I know this portfolio doesn't reflect it but I do have a reasonably high risk tolerance. Does this look ok? Any suggestions? I don't like bonds. I'll just increase my MM and CD's as I get older. I'm currently maxing out my 401k($15,000/yr) and Roth IRA($4000/yr) but have nothing left of my 43K/yr income to contribute to taxable accounts. Any advice is greatly appreciated.

 

[justin]

looks ok except the company stock. Why so much company stock? Concentrated holdings in a single stock can increase portfolio volatility without increased expected return. Do you get a discount on co stock purchases? Or is your company match in co stock?

 

[aaronc879]

My company match IS in company stock. That's the only option. The first couple years I was only contributing 8% ( enough for the full 2.5% match) to my 401K so the % was higher and is now going down now that i'm contributing over 30%.

 

[aaronc879]

Company stock also includes the new profit sharing of 2-5% per year as a replacement of the traditional pension. But that can be transfered out of company stock later if I want whereas the company match cannot.

 

[LOL!]

I'm a big believer in diversifying outside the US, so we have about 25% devoted to international in contrast to your 3%.

I'm also a big believer in the small cap value arena.  Thus our large cap allocation is about 40%.  So you could take some of your 65% there and use it elsewhere.

And what's the market cap of "company stock"?

 

[aaronc879]

I do plan to increase my international to around 15% but 25% seems a little high to me personaly.

 

[Poundkey]

First of all.....at age 26 you are doing a fine job. Refreshing to see someone your age this far along.
As for asset allocation.....I'll leave that to the pro's here. I would recommend (if you haven't already) reading William Bernsteins books. "Four Pillars Of Investing" is very interesting. It blends human behavior together with investment history to help the small investor form a long term plan.
On the international allocation......if I remember correctly Bernstein calls for no less than 15% and no more than 40%...depending on your risk tolerance.
Best of luck to you.

 

[aaronc879]

I'm thinking I may contribute a part of my Roth contribution next year to DODFX. Does anyone know if that would be a good quality international fund to invest in? Any better suggestions?

 

[2B]

I'm thinking I may contribute a part of my Roth contribution next year to DODFX. Does anyone know if that would be a good quality international fund to invest in? Any better suggestions?

DODFX is the main holding for my international allocation. It's primarily large caps so think S&P500 with an accent. You should have a little in emerging markets if you have a choice availble with a decent long term track record. I have Vanguard Emerging Mkts in my portfolio. It's done well for several years but recently had the crap kicked out of it but that's why we diversify.

 

[REWahoo]

I'm a DODFX investor and would recommend it. One caution...Dodge & Cox has closed a couple of their funds to new investors once they get large and unwieldy (Balanced and Stock funds). DODFX has been attracting a lot of new money and I wouldn't be surprised to see something similar happen with it. Any way you can go ahead now and invest at least the minimum in DODFX? Once you have money in the fund, they will let you add in the future, even if closed. least that's been the case with the other two closed funds.

 

[justin]

What investment options do you have in your 401k? If they are horrible fund choices (high fees and expenses), you may be better served by investing less than the full amount in the 401k, paying the taxes, and investing in better funds in a taxable account (Vanguard funds maybe?). If you were planning on switching employers soon, you might want to continue investing in the 401k and then roll over to a low cost mutual fund provider (like vanguard) when you change jobs.

 

[aaronc879]

I'm reasonably happy with the performance of the funds i've been in with my 401K. Other than company stock, i'm in DODGX, NVSCX, and REREX. Solid returns along with significant tax benefit make me think I should continue fully funding my 401K and maybe invest in DODFX and IWN in a taxable account when I get the funds in addition to my Roth.

I don't plan on leaving my employer. I don't have a college degree. Getting a job that pays more than $30,000/yr in my area isn't easy without a degree. I'm lucky to have what I have.

 

[canent]

Is this solely the equity part of your portfolio or the entire portfolio, I'm not clear on that from your original post? Some fixed income would greatly reduce your volatility without much impact on your gains. You dislike bonds, but there are other alternatives. Personally I keep about 30% of my portfolio in fixed income.

 

[aaronc879]

This is my entire portfolio. As I said, I currently have 7% in cash (fixed Income) and hope to gradually increase it to 20%. I don't want to go above 20% fixed income until i'm around 40 years old otherwise I won't have a chance at getting enough growth to retire by 50.

 

[AltaRed]

Company stock also includes the new profit sharing of 2-5% per year as a replacement of the traditional pension. But that can be transfered out of company stock later if I want whereas the company match cannot.

As another poster has said, you are doing very well for your age. A 20% cash/fixed income component in MMF or similar is fine for your current age. It also a reserve fund for the unexpected.

Only caution I will express is to keep your company stock component to the smallest extent you can, e.g. the company match. It is considered very risky to have too many eggs in one basket, i.e your salary and your investments. You can never be sure when another Enron may surface, no matter how good the company is today.

 

[aaronc879]

Thanks for the advice on company stock. I'll look into transfering the profit sharing portion of my employer contributions from company stock to another fund... probably DODGX.

 

[2B]

At 26 you don't need any "fixed income" but I'd recommend 3 to 6 months of living expenses in a readily available account. That means outside of a Roth, IRA or 401k. This could be a money market account or a CD where you just lose the last 90 days of interest if you cash out. Hopefully, you'll never need it but you probably will someday.

The basic "formula" is to put as much into your 401k as needed to get the match, fully fund your Roth and then go back to fully fund the 401k (or until the money runs out). If you can save after tax outside of these. This assumes you have the 3 to 6 month emergency fund in place.

You're doing great even starting to seriously save at 26.

 

[justin]

I'm reasonably happy with the performance of the funds i've been in with my 401K. Other than company stock, i'm in DODGX, NVSCX, and REREX. Solid returns along with significant tax benefit make me think I should continue fully funding my 401K and maybe invest in DODFX and IWN in a taxable account when I get the funds in addition to my Roth.

I don't plan on leaving my employer. I don't have a college degree. Getting a job that pays more than $30,000/yr in my area isn't easy without a degree. I'm lucky to have what I have.

My thoughts on:
DODGX - .52% expense ratio; 12% annual turnover
NVSCX - 1.2% expense ratio; 142% annual turnover
REREX - .88% expense ratio; 35% annual turnover

DODGX - good; REREX - ok; NVSCX - bad.

Most of us have the same issues as you do: limited GOOD fund choices in 401k plans. For my portfolios, I do my allocations for my overall portfolio, including my+DW's 401k, multiple IRA's and taxable accounts. In practice, I end up having my 401k investments in very non-diversified positions, but they are just part of my overall allocation plan.

You could do the same with your 401k to a certain extent. Put all that you can in the better fund choices - DODGX first, then REREX as a second choice. Try to skip NVSCX in your 401k if you can. Then in your IRA, have all small caps.

So your plan would look something like this:

Large 32% (in 401k)
Small 21% (in IRA)
International 18% (in 401k)
Co. Stock 9% (in 401k)
Cash 20% at least until I reach 10% overall (in 401k)

Does that make sense? In other words, try to pick the best funds in your 401k, and then for the sectors that don't have good choices in your 401k, invest in them in IRA's or taxable accounts where you have flexibility to choose whatever you want. Hopefully you'll get to a point where you're ability to invest in taxable accounts will increase with future pay raises, and you'll have more flexibility to get to your ideal portfolio allocation.

 

[aaronc879]

Thanks for the advice Justin. I'll limit myself to just DODGX and REREX in my 401K and go with small caps in my ROTH. Is IWN a good start for small caps? I already have some invested in that. Is there something that you think is better that you would reccomend?

 

[justin]

Thanks for the advice Justin. I'll limit myself to just DODGX and REREX in my 401K and go with small caps in my ROTH. Is IWN a good start for small caps? I already have some invested in that. Is there something that you think is better that you would reccomend?

I've got my money with Vanguard - small cap index and small cap value index. Looks like IWN is a good choice too. Check out VBR - a fraction of a percent cheaper. 6 in one half, 1/2 dozen in the other I guess though. I invest in the regular mutual funds, not ETFs, just because I dollar cost average and buy 1-2 times per month on auto-invest.

Just checked IWN vs. VBR - the former follows Russell 2000 Value index, while the latter tracks the MSCI US Small Cap Value index. I can't intelligently comment on the pros and cons of these two indexes.

Smart move though - manage all your different accounts (401k, IRA(s), taxable) as a single portfolio, and take advantage of the best funds and most favorable tax treatment in each account.