Thoughts on allocation/fund selection for 25 year old son

[Kings over Queens]

Let me get your take on this.

25 year old son has access to a 401k at work. There is no match, so no real incentive to participate, but he does.

The financial advisor, who happens to be a friend (kids went to high school together), guided him to the following allocations.

24.4% into TWEIX (american century equity income)
25.15% into FUNYX (pioneer fundamental growth Y)
15.41% into VIMAX (vanguard mid cap index)
15.61% into VSMAX (vanguard small cap index)
9.65% into JPVZX (JPMorgan developed international value r2)
9.77% into RNWGX (american funds new world r6)
(The totals are off by a smidge due to rounding)

I should mention that VFIAX is an available option.

Thoughts?

 

[FREE866]

I'm a fan of simple and low cost so I'm inclined to say go 100% into VFIAX. I mean, at 25 in a 401K you're looking at a 34 year time horizon minimum so def all stock. The top two funds have very high expense ratios and the bottom two I couldn't find. But yeah, some international exposure is probably a good idea too. And I like the VSMAX for small cap exposure.

 

[Gallaher]

Looks reasonable, but:
I don’t care about equity income investing for a 25 year old. I’d focus on growth.
Nor do I care about international investing, we live in a global economy. John Deere, WalMart, Apple etc all give international exposure.
Now that I think about it, why six funds? Why those six funds? Why those allocation percentages?
Why not just three low cost index funds?
Your post says “There is no match, so no real incentive to participate, but he does.”
I feel differently, for me the incentive to invest is tax free growth not a company match.
Just my opinion, does not mean I’m right.

 

[Texas Proud]

A big question from me is what tax bracket is he in.... and can he invest in ROTH?

I would max out the ROTH if he is not making that much.. as many here has found out having a lot of tax deferred accounts can lead to a bad tax situation when you retire... might as well get ahead of the game and not have to worry about ROTH conversion.... right?

 

[Kings over Queens]

Your two replies confirm what I was thinking.

I can only speculate why he pushed him into these funds, makes no sense, and I'm not happy about it.

I just rebalanced everything to 70/15/15 VFIAX/VIMAX/VSMAX.

@Gallaher, when I said no incentive, I agree with your point on the savings being an incentive, I should share he already funds a roth IRA, and while the extra savings is nice, absent the match, I'm less enthused. This is his first job and not a high income situation.

 

[Kings over Queens]

A big question from me is what tax bracket is he in.... and can he invest in ROTH?

I would max out the ROTH if he is not making that much.. as many here has found out having a lot of tax deferred accounts can lead to a bad tax situation when you retire... might as well get ahead of the game and not have to worry about ROTH conversion.... right?

I have to check a current pay stub but I'd suspect bottom of the 12%. That's another bone of contention I had, the "financial advisor" had him deferring money at first. I want to see his recent stub and forecast his 24 return to see if it makes sense to convert it now. We're only talking about a couple thousand dollars so not the end of the world, but still.

 

[OldShooter]

Six funds, sliced so finely, is a brain-dead portfolio. Probably your friend/FA just pushed the robo-visor button and took what he was given. You need to lose this guy.

As is frequently said around here, "Nobody knows nuttin' " This is especially true about the future. I'd put him in a world fund like VT or in a low-cost total US market fund like VFIAX, seasoned to taste with an international fund like VTIAX.

Beware high expense ratios like JPVZX, FUNYX, and RNWGX , which are popular with fund companies managing 401Ks.. Few at the sponsoring company understand or care about expense ratios, allowing the 401K manager to rape employees with impunity.

 

[big-papa]

My daughter entered the working world after college about a year and a half ago. For her age (now 22) I really like the idea of 100% stock, split between US and International. In particular I like the index that URTH tracks which is large cap US and large cap developed international. But it's e/r is too high for my taste so we synethesized it with a cheap SP500 fund and a cheap international developed fund. This is what she holds currently in her Roth 401K and taxable accounts.

Cheers

 

[Al18]

VFIAX/VIMAX/VSMAX looks good to me. If there any money left over to invest, some SCHD in a brokerage account looks good.

 

[Qs Laptop]

Wow, kind of a lousy selection. None of those managed funds are going to beat their index, plus they cost a lot in expenses.

He's 25 years old. With youth on his side he needs to be aggressive.

I would go:
VFAIX/VIMAX/VSMAX
60/25/15 (or similar, but the bulk needs to be in VFAIX)

[Old Shooter faints as I recommend index funds...]

 

[38Chevy454]

100% equities for sure. As to what funds, stick with low fees as you can. Fees compound the opposite way over time, reducing growth. It will depend on what his employer choices are. I wouldn't worry about international or any bond/fixed income type. I agree with doing some Roth if he can handle the after tax cost. I personally would mix S&P500 index, NASDAQ index, and US Market index; if those choices are available.

 

[OldShooter]

I would go:
VFAIX/VIMAX/VSMAX
60/25/15 (or similar, but the bulk needs to be in VFAIX)

[Old Shooter faints as I recommend index funds...]

Actually, OldShooter is wondering if your Magic 8 Ball has accurate insight decades into the future and thus knows which sectors will be winners? Financials? Really?

 

[Stormy Kromer]

Can anyone tell us why International exposure is good for you. I'm going by my own experience over the last 35 years.

 

[Al18]

FYI most target date funds have a LOT of international exposure. For example, the Fidelity Freedom 2055 fund FDEEX has 40% international. 10 year annualized return (CAGR) is 9.10%

 

[2HOTinPHX]

Here is a great short video that should be shown to every young kid to get them fired up about starting to save early to get that compounding going. I love this comment below the video: Compound interest is the 8th wonder of the world!!! I wish this concept sank in with me when I was in my 20's

 

[2HOTinPHX]

Can anyone tell us why International exposure is good for you. I'm going by my own experience over the last 35 years.

Supposedly for diversification from what I have heard. I have also heard you get enough exposure to international with the large cap companies in the S&P. YMMV

 

[SnowballCamper]

Without the matching funds, and in the 12% tax bracket, is there really much of an advantage to the 401k? Why not just save in a regular brokerage, use one fund, like VTI for now, and pay the low dividend tax rate now, rather than regular income tax rates later? Am I missing something here?

 

[Stormy Kromer]

FYI most target date funds have a LOT of international exposure. For example, the Fidelity Freedom 2055 fund FDEEX has 40% international. 10 year annualized return (CAGR) is 9.10%

No offense or questioning but.....SP has whooped them both. Easily. For as long as you want to look back.

Having an International Fund in your portfolio reminds me of bringing a .200 hitter to the All Star Game FULL OF .300 hitters.

This is from a guy who has had 30% of his portfolio in International for over 30 years. Less than 4% annual return......

My advice is buy VG Total Stock Index, I'll see you in 10 years and compare results.

 

[Markola]

100% VTSAX and buy him J.L. Collins’ book “The Simple Path to Wealth,” written for people his age.

 

[HarveyS]

I would think the Roth is the way to invest at his stage. Pay 12% now, and all growth is not taxed. What am I missing?

 

[Kings over Queens]

Without the matching funds, and in the 12% tax bracket, is there really much of an advantage to the 401k? Why not just save in a regular brokerage, use one fund, like VTI for now, and pay the low dividend tax rate now, rather than regular income tax rates later? Am I missing something here?

Deferring in the 401k doesn't present much of an advantage, so I made him switch that to 100% roth. He also saves in his brokerage account and funds a roth IRA. 25 years old with $90,000 across all his accounts.

 

[Kings over Queens]

I would think the Roth is the way to invest at his stage. Pay 12% now, and all growth is not taxed. What am I missing?

My thoughts exactly.

 

[Midpack]

Deferring in the 401k doesn't present much of an advantage, so I made him switch that to 100% roth. He also saves in his brokerage account and funds a roth IRA. 25 years old with $90,000 across all his accounts.

He's doing much better than I was at that age. No match makes the 401k MUCH less appealing, I never faced a no match 401k during my career.

Is a 401(k) Worth It Without a Match? | The Motley Fool

401(k)s can help you save for retirement, but not all plans are the same and there are some drawbacks. Understand what your 401(k) can be worth.

www.fool.com

 

[Al18]

For 2024, if you are under 50 you can only contribute a maximum of $7K to a Roth IRA. By comparison, you can contribute a maximum of $23K, tax free to a 401K

 

[Kings over Queens]

He's doing much better than I was at that age. No match makes the 401k MUCH less appealing, I never faced a no match 401k during my career.

Is a 401(k) Worth It Without a Match? | The Motley Fool

401(k)s can help you save for retirement, but not all plans are the same and there are some drawbacks. Understand what your 401(k) can be worth.

www.fool.com

I suggested he participate in the company 401k for the discipline of it then I learned about the deferral and helped him fix that to roth and then learned about the asset allocation and I suggested he fix that, and the company advisor told him he should leave it "cause it's making money" so I showed him how to fix it and now he's on the right path. But, truth told, I've got some regret. Hindsight is 20/20.

This isn't a long term employment situation so I'll show him how to roll it into his individual roth when the time comes.