Funds within a 401(k) ideally have no fees to buy or sell. My 401(k) has
a brokerage option, in which one can trade individual stocks if they
wish. $10 fee to buy or sell. Easy way to build a portfolio of low cost
ETFs, and just pay the fee to rebalance each year if deposits during the
year aren't enough to stay balanced.
My opinion: Readers should consider carefully the implications of the
phrases "funds that are doing better" and "ones that aren't." With all
due respect, ISTM underlying such phrases is the belief that past
performance guarantees future performance. Not to beat this to death
but: Not so. The fact that past performance of a fund does not
guarantee the same future performance is precisely why sticking with a
specific allocation plan is in my opinion the appropriate counsel for
the masses and probably most of the self-described experts, too.
Sell high and buy low was one of just a few rough guidelines my dad
gave me when I was in my 20s. Based on how my stock purchases and
sales have done overall in the last few decades, I think it was good
Yes, better to say "asset classes that are doing better." Doing this
kind of sell winner/buy loser rebalancing with individual
actively-managed mutual funds or, god forbid, stocks, can be a recipe
for disaster - as some pros put it, "fertilizing the weeds." Unlike
entire asset classes, individual stocks can go to zero, and "bad"
actively-managed funds can forever do poorly compared to
readily-available alternatives like index funds.
iarwain spoke of giving up on a bond fund, because it was doing
poorly. He shifted to an international [stock] fund, which is a very
different allocation category. My take on what he was saying (as
quoted in my post above) is he did not like re-balancing, because to
him it meant shifting money from what he felt was a winning allocation
category to a losing allocation category.
I think his approach misses the boat on the purpose of re-balancing.
That is, past performance of a certain category (say, small cap value
stocks) does not guarantee future performance. IOW, he should not have
sold the bond fund just because bonds were not doing as well as stocks
at the time.
Sorry, iarwain, don't mean to come down on you. More to clarify what
the points of asset allocation and re-balancing periodically are.
> iarwain spoke of giving up on a bond fund, because it was doing
Clearly, getting rid of the bond fund was my big mistake. I had it
for around six years, I think, and it had done nothing.
So I think it's understandable that I got rid of it, even if it wasn't
the right move.
I've decided to keep the funds that I have now, and allocate future
40% stable, 30% large cap, 30% mid cap.
I've made money on the large and mid cap funds I have, and I'm
replacing the international with the stable fund (to prevent loss,
plus lower fees).
The international funds have been the biggest loser for me. They
started out quite well, then dropped like a stone.
If the international funds come back, I can sell them. I don't want
to sell them now and lock in my losses.
By the way, these international funds are not emerging market funds.
I have an emerging market fund in my Roth IRA and it's done quite well.
Just sharing thoughts here.
-- To me, the guideline on whether to buy or sell your international
allocation should be what fraction allocation tools recommend, based
on age, risk tolerance, and similar.
-- Assuming we are talking about funds with low expense ratios and no
front or back loads, any data that measures performance for less than
about 20 years is not meaningful, in my opinion.
-- Someone with the 60/40 allocation of stocks and bonds (well-
diversified in the stocks) would not have been criticized by me when
stocks were far exceeding bond performance. Instead, I would remind
anyone trying to criticize a 60/40 (or similar) approach that crashes
do happen. The person with the 60/40 portfolio sleeps better at night,
even if s/he does not always beat the stock market in the short term.
-- I do not believe that for Joe or Jane Consumer the purpose of
investing in stocks and bonds should be to make a quick buck. Rather,
the goal is largely to keep up with inflation and to have Joe or Jane
understand that stocks for the long run (10-20 years) generally have
kept up with inflation and then some.
Well, that was my understanding. That's why I find the fact that my
401k has actually lost money in the last 11 years so disappointing.
Regarding the 60/40 stocks/bonds mix, remember I have other accounts
that are invested much more conservatively.
Because of that, I felt it was all right to gamble more with my 401k.
Unfortunately, at this point, it appears I am losing.
Tad was right - I started at the beginning of Dec 1999.
100% bonds: $70,000 ==> $100,844
100% stocks: $70,000 ==> $ 85,056
60/40 s/b: $70,000 ==> $ 92,642
40/60 s/b: $70,000 ==> $ 95,864
One interesting thing to note - that $500 that was deposited
at the beginning of Dec 1999 -- makes for over $1000 difference
in the end with the bonds - that's the result of compounding the
average annual return over the nearly 12 year period for that
very first $500 payment. For bonds, that was 6.2%/yr.
The difference for the stocks, however, was putting in that
extra $500 at the beginning and at the end, you end up only
$548 more -- the average annualized return over that 12 year
period for stocks was, in fact, only 0.29%. So, yeah, if
you'd made a lump sum deposit in Dec 1999 and did nothing
else but let it compound over 12 years, it was pretty much
a lost decade.
The 60/40 annualized return over the 12yrs was just under 3%
and the 40/60 annualized return over 12yrs was almost 4.2%
One more minor note - when I asked Tad to check against the
Vanguard Balanced index, he got $71,000 ==> $97,000 even
though that fund is 60% stocks and 40% bonds, too. Why did
the 60/40 portfolio I noted above do worse? It's because
the stocks in my portfolio above are just the S&P500 and
the Vanguard Balanced Index, for stocks, tracks the MSCI
US Broad Market Index, which includes a micro, small and
mid-caps all missing from the S&P 500, and over that
decade, small-caps averaged 5.4%, just a bit under what
bonds did (though with a lot more volatility). As a
check against this, if I do 40% bonds, 42% S&P500 and 18%
small-caps, I get exactly what we expect: $97,089 and
an annualized average return of 4.04% over the period.
I was going to do some of these portfolio historical return
numbers anyway, and this was a great excuse to add the
"periodic investment" question at the end of it. Thanks
for sparking this interesting discussion!
(And thanks, of course, to Tad for the numbers check!)
David S. Meyers, CFP(R)
As I said before, I have other income sources lined up.
A pension, two other retirement accounts, savings, and social
As of now, my projections still look good, but of course I had
originally expected a lot more from the 401k.
Regarding the spreadsheet, remember I've increased the amount I've put
in as the years have gone on, so a consistent input wouldn't
accurately reflect my situation.
Again, I got rid of the bond fund partly because I have low risk
investments in other accounts, so I've looked at the 401k as a place
Unfortunately, so far it hasn't paid off.
If what you guys are saying is true, if I hold on for another five
years I should be showing a return, yes? Barring another collapse.
The only alternative I can think of would be to buy back into the bond
fund, but I'm thinking that would have a worse effect than selling it
in the first place.
Wouldn't that just lock in my losses from the international funds
(which is what I exchanged my bond fund for)?
I'm not sure I understand why you're trying to game the 401(k)
Your overall retirement plan should be a single plan which
takes into account all the various accounts (as well as
future expected additional cash-flows like the pension).
Now, the accounts where you are responsible for managing
the investments - put them all together on a single spreadsheet
and figure out your asset allocation.
Now, do you have a target allocation in mind? If not, before
you mess with things, figure that out. You seem to be trying
to time something here - you got out of bonds because they
didn't preform well and jumped into international stocks. That
was a losing move. Now you've jumped from internationsl stocks
into cash because, well, because once again, you've bought an
asset class just in time for it not to perform well. This is
a losing game. Stop jumping and start with a plan. Then
follow the plan.
And that's why it's called gambling rather than investing. If
you want to win in the long run, fold that account into the bigger
retirement plan and stop gambling with it.
Nobody's saying that. What we are saying is that different
asset classes move in different ways at different times. Rather
than trying to be in just the right one at the right time -
which nobody knows how to do - we are saying diversify amongst
asset classes and rebalance periodically if one of them outperforms
the others or underperforms the others significantly. In the
long run, a balanced portfolio managed to a target allocation
with *no* attempt to time the market is much more likely to do
well than what you've been doing.
There's no "lock" in. You have losses. They're already locked
in by the fact that they've happened. Your future investment plan
shouldn't depend on your past mistiming. Stop trying to get into
the right thing at the right time. Get into the right thing(s),
keep an eye on the long-term, and keep in balance.
If your plan says you should have X% in bonds, get yourself to
the point where you do have X% in bonds. Maybe do so in an
incremental fashion (if you don't have enough, make new additions
to the portfolio into whatever you don't have enough of). The
faster you make the move, the more you have to lose if the timing
is off -- but if you keep trying to time things just right, you
are more likely to not actually get it done.
Now there are some things you can do to try to moderate some
of the risk. For example, within the bond universe, some parts
look (to me) more overvalued than others. And there are
concerns about when the Fed is going to start pushing interest
rates up - frankly I'd thought they were going to go up sooner,
but it looks like they've committed to keeping (at least the
ones the government controls directly - which is really just
the short-end of the curve) rates very low for the next couple
Nevertheless, trying to time the bond market (ie. go short before
rates go up, go long before they go down) is at least as difficult
as trying to time getting in and out of stocks. So be careful
with trying to be too smart here.
But keep an eye on the big picture. If you have more conservative
investments in account A and more aggresive investments in account B
and account B has underperformed, that doesn't mean you have to
change account B - it means you need to make sure that your plan
incorporates both A and B at the same time. Maybe you really should
have your 401(k) all in equities - do you have an IRA which is all
bonds? Stop looking at the 401(k) in isolation and start looking
at the bigger picture.
David S. Meyers, CFP(R)
I'm not trying to game it in isolation. I just looked at how it was
doing and found it to be disappointing.
Being as it was a collection of mutual funds, I would have expected to
have made something from it in the past 11 years, even though the
market has gone down.
Clearly it was a mistake to dump the bond fund. I've admitted that
repeatedly. I got some bad advice which I bought into at the time,
and I became impatient with it, because it wasn't performing. It's
not that I was trying to time it. I just decided that since I had
other conservative accounts, I thought I could gamble more with the
In hindsight, I should have kept my original mix.
At the time I got into the international funds, I thought it was a
good idea to do so. Climates change. I no longer think it's a good
idea for me to buy more international funds. I still have all the
ones I bought - if they go up I will profit from them. I'm just not
going to be buying any more in the foreseeable future.
If you look at all my accounts I think I'm well diversified. But this
thread was specifically about the 401k.
If it was my Roth that was losing money, I'd be writing about that
You say stick to the plan but if what you are doing is losing money,
don't you think you should consider revising it?
So what do you think I should do now?
Given that the one move I made in ten years was apparently a wrong
one, should I just hold on to what I have and hope things get better
in the next five years?
Or should I make a move? And if I do make a move, doesn't that lock
in my losses?
The key is not making a move just for the sake of making a move.
You need a plan. You need a system. And, assuming it's a good
one, you need to (a) move your portfolio to be in line with the
plan -- which may be done immediately or may be done gradually;
and (b) you need to periodically make sure your plan is still a
good one; and (c) you need to periodically tweak things to keep
yourself inline on that plan's path.
Now, coming up with that plan may be very easy or may not be.
Are you talking about just your collective retirement accounts?
How are they invested? What's your current asset allocation?
And then, what's your risk tolerance? Time horizon? Investment
It doesn't have to be complicated - a good plan is usually a
simple one. But simple doesn't necessarily mean easy, either.
Without knowing a lot more about your sitution, it's impossible
to make specific recommendations. And anyone who makes specific
recommendations with as little information as you've presented
is doing you a disservice.
Take a look at the numbers I posted the other day with returns
from different asset allocations (I did 100% bonds, 100% stocks,
and also 60/40 and 40/60). Volatilies of those ultra-simple
portfolios are different - the all-bond one is much lower
volatility than the all stock one. And long-term expected
returns are also different - long-term expected returns from a
100% bond portfolio, especially right now with once-in-a-generation
low interest rates - are going to be lower than the last 15 years
of bond returns were.
David S. Meyers, CFP(R)
Last year we were told that, if big banks default, the whole economy
could suffer. Now we are being told that, if Greece defaults or Italy
defaults, the whole financial system in Europe and maybe the USA could
come tumbling down. I am getting the message that investing in
anything, including traditionally super-safe investments like US
treasury bonds, is risky, because some small nation somewhere might
default on its debts and the whole financial system could collapse. I
wonder how putting cash under the mattress would work out. Well, at
least I have assets in real estate, which hopefully will not tumble
down for a while.
I hear you.
With the current global economy, it seems like anytime there's any bad
news anywhere in the world, the whole market tumbles several hundred
The West doesn't have the economic power it used to hold for so long.
I would have been so much better off just putting my 401k money into
some sort of stable fund.
At least I'd be getting something back. Hindsight is 20/20
I'm just wondering if there's any light at the end of this tunnel.
Is there any point to continuing to play this game?
Things did look a lot better this summer when the markets were up a
I could still make some gains, but things are going to have to improve
for that to happen.
Maybe not cash, but a few gold bars and some diamonds under the
mattress might not be a bad idea. But several more tried-and-true
things may still be prudent, despite current uncertainty in the
financial markets. For example, pay off all debts as soon as possible.
Own your own home as soon as possible. Diversify your investments;
don't put all your eggs in the same basket. I would put these things
ahead of rebalancing a portfolio.
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