401K Question

[geeman]

I am interested in opening a 401K account with my employer. I am new to investing so I wanted some opinions on the investment options. I don't expect you guys to do any research for me, but if you see anything in the list that looks good please let me know. I am 22 so I will be in this for the long haul.

Profile Series:
Maxim Aggressive Profile II
Maxim Moderate Profile II
Maxim Conservative Profile II

International Funds:
Oakmark International II
American Funds EuroPacific R3
Oppenheimer Global A

Small Cap Funds:
Maxim Ariel Small-Cap Value
Maxim Index 600
RS Diversified Growth

Mid Cap Value:
Lord Abbett Mid-Cap Value A
Ariel Appreciation
Fidelity Advisor Mid Cap T

Large Cap Funds:
Maxim T. Rowe Price Equity Income
American Funds Wash Mutual R3
Maxim S&P 500 Index
STI Classic Capital Appreciation Trust
Marsico Focus
Oppenheimer Capital Appreciation A

Any comments are greatly appreciated.

Thanks

 

[Bruce]

Without looking at any of the funds, I think the best thing to do would be to 8):

(1) Own 100% equities at least for the next 20 - 30 years.

(2) Diversify with large / small capitalization companies; domestic / international; value / growth.

(3) Lower expenses are better than higher expenses unless there is a real compelling reason to pay those higher expenses (like a manager with a long track record of exceptional returns); expenses directly reduce your returns. Go with index funds if they are offered.

(4) If your company gives you stock, that is good. However do not purchase additional company stock for your 401(k). If you do, you will not be properly diversified in your 401(k). If your company has financial problems, not only can you lose all your stock (think Enron) you may be out of a job also; a double hit.

(4) Always put in enough money in your 401(k) to get the maximum matching amount offered. Think of it as free money. If you put in 6% of you salary and your company matches 50 cents on the dollar on the first 6% contributed, this is like getting a 50% return. There is not many places where you can get a risk free 50% return.

(5) Always try to increase the amount you put into your 401(k) each year. If you get a raise, put in a portion of it to increase the amount of money you will have to retire on. Another option would be to not fund past the amount the company will match but instead invest in a Roth IRA.

(6) Do not try to time the market.

(7) Do not borrow against your 401(k).

(8) If you change jobs, do not take your money out of your 401(k). Not only will you pay federal tax and state tax (if you state levies a state income tax) you will pay a 10% excise (penalty) on the amount withdrawn.

 

[REWahoo]

Without looking at any of the funds, I think the best thing to do would be to 8):

...follow Bruce's advice.

REW

 

[retire@40]

What do you mean by equities?

Equities = Stock (as in corporate shares)

 

[Bruce]

Mutual funds can hold many types of financial instruments 8):

Equities

a.k.a. Stocks - where you own a share of a company and you share in the profits and price appreciation (hopefully) of the shares.

Bonds

Real Estate

Precious metals

Other mutual funds

Commodities

etc. or any combination of the above:

 

[laurence]

Yes, they can, usually your only choices in a 401k are mutual funds, which are a collection of investments. Mutual funds can have stocks, bonds, or a blend. Like Bruce said, get the low cost funds, find out which ones have the lowest expense ratios. Check out the maxim S&P index, it's expense ratio should be under .2% since it requires no active management.

I'm thinking you should look to do something like this:

25% maxim S&P
20% Maxim small cap value
20% International fund of your choice (with lowest expense ratio, hopefully)
Hmmmm.....I'm having trouble finding something else in your choices there. If you find something you like, go for it, or up the % on the above (I'm just repeating what Bruce said at this point)

If you haven't opened a Roth IRA yet, I would suggest only going up to the company match, opening a Vangaurd Roth IRA and socking away the max there, then going back to the 401k if you still have money to invest.

EDIT: Ah, Bruce answered your question, you are in good hands there, and you can't go wrong following his advice posted above. (except if you want to ER sooner than 20 or 30 years from now, then you might not hold all equities that long )

 

[geeman]

So out of the mutual funds I posted which ones are 100% equites? Is Maxim a good company, I have never heard of them before?

 

[unclemick]

Well - to put it bluntly - go with De Gaul.

1. Buy the S&P 500 - DCA up to the company match(if any).

2. Go to the library - see what they have by Bogle and Bernstein. Start reading.

3. Buy Vanguard TSM - with taxable money - look into Roth.

At 22 - keep it simple and keep the faith - DCA no matter what.

Your companies offerings - to my cynical mind - seem to have higher expenses than necessary. Be warned - I'm a 'born again' Boglehead.

P.S. - one more thing - don't confuse male hormones with the stock market - get a good used sports car, sky dive, or other fun hobby.

 

[geeman]

Ok, the expense ratio for the Maxim S&P 500 Index id 0.60%.

 

[laurence]

Yeah, that's a little high, do you have company matching?

Equities is simply another term for stocks. An S&P index holds stocks in all 500 companies listed on the S&P, and is supposed to match it's performance. So that would be an example of an all equity mutual fund. Read the literature on your funds before you buy.

Unclemick is right, DCA in, you are young, and read 4 pillars of investing. And don't take any hot stock tips!

 

[geeman]

Should I go for it even though the expense ratio is 0.60%? What does DCA stand for?

 

[laurence]

Dollar cost average. You put the same amount of dollars into the 401k every month. When stocks rise, you buy less of them (so you are buying less at high prices) and when stocks fall, you buy more (hey, it's a sale!).

The key is, does your company provide any matching? If yes, contribute up to the match. If not, open a Roth IRA and max that out first.

 

[geeman]

Oh yea, I am already doing DCA with my Roth and T Rowe Price mutual funds. I am maxing out my Roth already. My company matches up to $1000.

 

[unclemick]

Probably.

DCA - dollar cost averaging - putting a fixed amount in at regular intervals - which is what happens when up sign up for 401k.
also in taxable/or Roth land most find companies will allow you to auto deduct out of checking/savings - once you are set up.

Once you read a little Bogle and Bernstein - you will encounter the 'keep it simple' vs 'slice and dice' agruments.

That is for yet another day.

 

[laurence]

So up to $1000 is a no brainer. From there it's a debate. Different opinions on this board, but it's a split between more in the 401k or an after tax account. The key is we don't know what future tax law has in store for us, so you want to be in every category to hedge your bets.

 

[maddythebeagle]

You really rec. some good advice. This board is a great resource. I think the fees on your sp500 index fund are high. Do you work at a pretty small company that they couldnt leverage a better fund? I think that this was mentioned, but you should take the match, after that, it is up to you. Roth next and then up to the max on the 401k if you are just learning and can afford. Dollar cost average (a small amount every pay period) over 30 years with reinvested dividends=one wealthy dude).

At your age, you should be saving for a down payment for a house, also or better yet, live with your parents until they kick you out

 

[Nords]

Any comments are greatly appreciated. Thanks

When a person posting to a discussion board asks vocabulary questions like "equities" and "DCA" it's an indicator that more education would be more helpful than following the advice of even such omniscients as the members of this board. We can pick off those questions all day but it'll take a lot of your time posting back & forth. We're catching fish for you but you would do much better learning how to bait your own hook.

Before you start that 401(k) you might want to learn more about the subject. Investopedia.com is one of the best sources for vocabulary & tutorials on various subjects, including the pitfalls of 401(k)s. (But their advantages usually outweigh the drawbacks.)

You'll also want to know more about the 401(k) funds that you're buying. Morningstar is a great place to learn the contents of a fund, and your 401(k) provider may also offer a website with the same information. Funds are required to invest in things related to the nouns in their titles but they're also allowed to stray pretty far from that descriptor. 401(k) providors also tend to have much higher costs in their funds that you could get elsewhere, which is usually why the only good reason to invest in a 401(k) is the employer's matching contribution. When most people leave their company, they roll their 401(k)s over into their own IRAs with much lower expenses.

Library books that will eliminate a lot of the hype, confusion, & blatant misrepresentations are Tyson's "Mutual Funds for Dummies", just about anything by John Bogle, and Bernstein's "Four Pillars". Bernstein also has a lot of that material at his website, efficientfrontier.com. So take a step back, take a week or two off from that 401(k), read about it, determine your risk tolerance & asset allocation, and then jump back into it.

While you generally get great advice from this board and others of its ilk, I wouldn't listen to anyone with the word "advisor" in their job title. But you can post their statements here for us to dissect!

 

[geeman]

I appreciate all of the advise. I plan on going to the library soon and reading up. I work for a small company so that may be why the expense ratios are so high. I only plan on working for this company for a yuear so I don't think the fund I choose it is too vital. I think I may just do 100% Maxim S&P 500 for now.