Got an e-mail from Margot. Seems her company is switching the retirement administrator from somebody over to Fidelity so need to make some changes and pick some new funds. That part was pretty easy though the list of available funds was large and daunting at first. But these things, like most things in life, have patterns that, once figured out, are pretty easy. Just realized that the last sentence was pretty stupid--most things in life are easy once you figure them out. It's the figuring out part that is hard.
But went through the list and started culling the funds. There were about 20 funds available and getting rid of six of them was easy since they were bond funds. Margot, at 23, has no need for bond funds at this point in her life. With a long work life ahead she can ride out the ups and downs of the market and bonds don't make sense right now.
We also eliminated the last six funds because they are life style funds which is all the rage right now in mutual funds. Life style funds take your age and figure out an asset allocation based on that fact and pretty much that fact alone. Then as you get older the fund readjusts to reflect your shortening trip toward death. I have seen studies that indicate these funds have reasonable fees but I'm not convinced and so Margot and I put a line through those funds as well.
That left us with seven equity funds ranging from large cap value to emerging international markets. Like in diving we threw out the high and the low and that left us with five funds. We put, I think, 30% in large cap growth, 20% in mid cap, 10% in 'aggressive growth' and then 20% each into a Euro Pacific fund and another international fund of which I cannot remember the name right now.
It really doesn't matter. Over Margot's work life all of these markets will have high and lows and they will regress to the mean of about an 11% return over time versus 6% for bonds and 3% for cash. Am I sure of that? No, not absolutely, but that is what the market has done for the last hundred or so years so I will accept it will probably do the same for the next hundred.
But what about a disaster? War? Flood? Market collapse? We have had all these things, and worse, and the market has averaged about 11%. And we will have all these things in the future, and worse, and the market will probably average about 11%. What if it doesn't? Well, if things get really bad you can stop worrying about your 401k and start worrying about getting a loaf of bread. If you're worrying about getting something to eat because you will starve if you don't, you quit worrying about your retirement a long time ago.
But lets not dwell on bad things. Let's assume life goes on pretty much as normal and Margot ends up with a big stack of cash at the end of her career because she did the only thing that mattered--she invested the money. She isn't spending it, she is not procrastinating, she is not dithering, she is not going to do it next year--She is doing it now and next week and next month and next year. Einstein said the eighth wonder of the world is compound interest. He was basically saying that you put in the money and the market will take care of it. Over time.
Stanley Bronfman, who made his money in liquor, said that the first billion was tough, the second billion was inevitable. This theory also applies to hundreds and thousands.
So if you are on the sidelines, get in the game. Forget about the allocation, go with something, or email me and I'll do it for you. But get in so the market can take over.
Having taken care of that Margot and I then studied a Roth vs traditional 401k. That discussion tomorrow.
4gZhAJ hulvspzo miiyjydv ljiahbok
Posted by: 1248543458 | July 27, 2009 at 02:30 AM
Here is the most diversified and best allocation for a 23 year old. Notice its all equity.
FIDELITY EQUITY
10% Fidelity Spartan 500 Index ( FSMKX )
10% Fidelity Structured Large Cap Value
(FSLVX)
10% Fidelity Small Cap Independence (FDSCX)
10% Fidelity Small Cap Value (FCPVX)
10% Fidelity Real Estate (FRESX)
10% Fidelity Spartan International Index (FSIIX)
20% Fidelity Int'l Small Cap Opportunity
(FSCOX)
10% Fidelity International Value (FIVLX)
10% Fidelity Emerging Markets (FEMKX)
I have a very similar portfolio over at vanguard.
Posted by: Jsiegel | March 19, 2007 at 08:07 PM
It's great that you're helping your daughter with her AA. I'm close to her age, but I'm aiming for a 90/10 allocation... having never lost $$$ in a bear market makes me a little cautious about how I'd act when the going gets tough. know thyself I guess. :)
Posted by: wanda | March 19, 2007 at 08:57 AM