401K Asset allocation Queswtion

employer

Beyond the employer match, contributing to a Roth or Traditional IRA or

529 College Savings Plan is an alternative to further 401(k) contributions, but it is probably better to exhaust these tax-advantaged opportunities before saving in a regular taxable account.

approaching it

appropriately

Here are some historical returns by style and market cap, taken from the Journal of Indexes at

. Value hassubstantially outperformed growth over the last 10 years for small andmid-cap stocks, and academic studies have also found this effect overlonger time periods. Therefore I would suggest mixing non-style-basedindex funds with value funds, rather than the growth funds you arecurrently considering. 2004 2003 3 Year 5 Year 10 Year

Barra SmallCap Value 23.23 40.03 13.86 15.07 16.07

S&P Smallcap 600 22.64 38.77 13.26 11.59 14.28

Barra SmallCap Growth 22.01 37.32 12.35 7.1 11.57

Barra MidCap Value 18.93 40.18 14.44 15.47 16.81

S&P Midcap 400 16.47 35.59 10.51 9.53 16.09

Barra Large Cap Value 15.71 31.79 6.46 2.48 12.24

Barra MidCap Growth 14.01 30.95 6.47 3.92 15.24 Standard & Poor's 500 10.87 28.67 3.58 -2.3 12.07

Most pundits suggest using the 401K up to the match (get the free money), then max out your Roth options (if you have any), then come back and max out the 401K, and then do any traditional IRA investments (if you are allowed to). If none of that works, some folks suggest a tax efficient mutual fund such as one of the major index funds.

If the market goes down, all of these go down. It would be nice to have something in there to balance that out a bit. Perhaps a little in a bond fund or a balanced fund would be nice. Next, I'd like to see more large cap action since that was a key driver in the last bull market. Finally, a little international action might be nice given how fast our government is exporting our national wealth.

-john-

Conventional wisdom is to have some of one's investments in investment grade bonds, but not necessarily bond funds, to help 'balance things out' in the event of a stock market decline.

Given the current low interest rate environments, I think this wisdom needs to be refined for the long-term investor.

Individual bonds and CDs, preferably laddered, seem to me the better choice than an investment grade bond fund right now.

"John A. Weeks III" wrote

If you are interested in bond funds, you need to get their prospectuses and see what their stratagies are. Interest rates are rising, and bonds usually lose equity when interest rates go up. Short-term bonds are less affected by this than long-term bonds. If the fund hold bonds until maturity, the price volatitiy doesn't matter. If the fund invests in short-term bonds, the price will be pretty stable.

I've never seen a bond fund that stated they held all bonds to maturity, but a small amount of my 401k is in a bond fund called the Stable Value Fund (not sure what the fund name actually is), and it somehow rocks along earning about 5 or 6% no matter what the bond market or the equities markets do.

Best regards, Bob

Hi Joe; It is best to max the 401K the contibutions are invested on a regular basis and has the advantage of dollar cost averaging. The Roth IRA is a ideal investment for a young person if they have additional funds...it grows tax free. As you are starting, I would suggest that you concentrate on Index Funds...Equity Index 500 - Total Market - and 15% to 20% International Index. T Rowe Price or Vangaurd web sites are very good resource for investing information and go to your local library, there you will find many books on investing, particularly any of John C Bogle.."The Father of Index Funds" The best of luck Richard

I agree, but how do you get them in a 401K? Most people have very limited 401K choices, often with all of the choices having greater than 5% front end load. I find this funny since if you would cut people's pay 5%, they would riot in the streets. But do it in the

401K, and almost nobody seems to care.

-john-

John, you're right.

"John A. Weeks III" wrote

snip

maturity,

Does anyone know of such a fund that is available for non-retirement accounts?

Anoop

BTTNX is the symbol for one of six "target maturity" funds managed by American Century. All of BTTNX's bonds mature in 2010, and the fund dissolves the same year. See American Century's web site

descriptions of similar funds maturing in 2005, 2015, 2020, 2025, and2030. E.g. "Target Maturities Trust: 2005," BTFIX. (Credit to a poster at misc.invest.mutual-funds who recently mentioned this.)

"ano> > I've never seen a bond fund that stated they held all bonds to > maturity,

snip

I think Thornburg does laddered bond funds also (maybe)?

IG = investment grade

Thornburg has, for one, a "Limited Term Income Fund, Class A" (THIFX). Thornburg describes this as "a laddered portfolio of short/intermediate investment grade obligations with an average maturity of five years or less."

But my take is that any typical investment grade bond fund does the same. Chart THIFX and FTHRX (Fidelity's intermediate term investment grade bond fund). They track very closely. Most importantly, neither THIFX nor FTHRX ensure one gets back all of one's principal. This contrasts with BTTNX, which has an exact, target maturity year, and where one does get back all one's principal if one holds through that year.

I'm not certain, but it seems to me that what Thornburg is doing has the potential to support some not-so-ethical sleight-of-hand. Note the fees for THIFX, too. Wow!

"msg_board_member" wrote

Anoop, A true "stable-value fund" isn't available in a regular account. It's a special category that's carved out for qualified assets and some Section

529 plans.

If it's any consolation, the "stable value" is a bit of an accounting fiction. Usually a good portion of the money goes into things that aren't marketable in the way that bonds are (GICs - essentially insurance company debt obligations). But the true value of these GICs is tied to interest rates in the same way that bond values are tied to interest rates. The value is stable only because the investments aren't revalued with every sneeze in short-term interest rates. This is allowed under regulations that apply the assets. The SEC was recently looking into whether it's appropriate to keep that stable valuation with the mutual funds that are offered for IRAs - I don't know how that worked out.

Not to bad mouth them, they can fit in well if you need that kind of characteristic in the account where they're offered. They typically have higher yields than a MM fund or CD, because the contracts they're buying have slightly higher risk. But if you can ignore the fluctuations in NAV you'd probably find the long-term returns of a high-grade short-to-intermediate bond fund to be similar.

-Tad

Thanks, Tad. I woundered my nobody could match my 401k's "Fixed Income" fund. I believe it had some leverage in it also.

The only thing I have found that is similar is Nuveen tax free ETFs.

Frank

All the "target maturity" funds do this. Effectively, when one buys into such a fund, one locks in a yield - if one holds the fund until the target maturity date. See, for example, the most well known set of them - American Century's.

That's different. Here's a nice page explaining what they are. Thanks, again, to google for finding it:

They are *not* available in non-retirement accounts. There had been a couple which were available for IRAs, but that was a recent development and, IIRC, the companies are cutting back on them.

The ones available for IRAs may be called "Stable Value Mutual Funds" (as opposed to "Stable Value Funds" which are only accessible to institutional accounts).

Here's way more than you ever wanted to know about them:

In particular, see: