Last night I spent some time looking at my 401k account to decide if I wanted to make any changes for the upcoming year. I have a 401k account managed by Vanguard and for the last few years, I've been contributing some money from each paycheck.
In recent years that money has been unevenly split between two of their funds:
However, in looking over recent performance data, I was less than impressed with the T. Rowe Price fund:
The LifeStrategy fund, however, has been doing reasonably well.
So looking through the options I've found a few others that look promising. The current leader is the William Blair International Growth fund.
It's the only internaional stock fund available in my plan, and given my interest in diversifying into foreign markets, I'm tempted to shift a chunk of my new investment dollars (those which will be contributed in 2006) into that fund rather than the T. Rowe Price fund.
However, I'm still poking around and checking out other funds. There are a total of 13 funds available in our plan, so I've got a few more to check out.
Posted by jzawodn at November 20, 2005 06:41 PM
International funds are hot - I would highly recommend diversifying into that market over the long term - my international funds are way up this year - Latin America in particular.
Fidelity here though.
matt
Making decisions based on mutual fund past performance is a sure way to have crappy results. Also, if everybody knows Intl funds are hot - think about the implications from a supply and demand point of view.
I strongly suggest reading The 4 Pillars of Investing by William Bernstein. It will totally change your outlook on investing decisions.
Actually, I'm looking more at the future performance I expect. But past performance being crappy is, IMHO, a good reason to think hard about laying off an investment.
I'm not sure your supply and demand argument works here either.
Thanks for the book suggestion. I'll put it on the reading list.
Ouch, looks like PASTX got in right at the dot-com crash. As for past performance being an indicator - not really. Things change. And show me a science & technology fund that did well back in 2001. However, since it's not doing well recently (didn't they buy Google??), I'd probably look elsewhere, though it is basing (technical analysis term) pretty nicely.
Greg,
Yeah, the Tech fund could bounce back. I don't plan on dumping it but I'm thinking hard about not putting as much new money into it.
It's a bad idea to switch to mutual funds just because of their performance from prior years. This has not been a successful strategy to follow.
I would suggest you research closely the differences between a S&P500 index fund vs other run-of-the-mill mutual funds. I won't be the one to tell you what is the best to do with your money for retirement but this research will be eye-opening for you.
Also important is catching the major cycles in the market. I personally follow Bob Brinker (http://bobbrinker.com). This guy is a no-load mutual fund/index fund kind of guy that is teaching the basics of investing. He is on the radio (KGO 810AM here in the bay area) on weekends and I have been listening and learning for years. He provides, through a newsletter, buy/sell signals. Before everyone rails on me for trying to time the market, he does this only very rarely.
For example, he remained 100% invested from 1982-Jan 2000 where he made the first sell signal (convert to 80% cash), then he made a buy signal on Mar 2003. Since that day, the S&P 500 is +50%.
Anyway, I am sure glad that I followed his advise because I missed out on the -50% fall that the S&P took post-2000 and the even steeper drop to the NASDAQ and other tech heavy indexes.
Being out of the market is just as important as being in the market. Fortunately, you have time on your side since this is a retirement fund and you are young, but plenty of people got significantly wiped out in that severe market correction.
Jared,
I actually have a fair amount of my money invested in an S%P 500 indexed fund already.
Once again, this about *new money* not changing where my money already is.
Hi Jeremy-
I don't know if you ever listen to Paul Merriman; he writes for Market Watch and is a pretty sharp, no BS kind of guy.
His firm, Merriman Capital Management, offers free 401(k) analysis for participants in large company plans.
If you visit this URL: http://www.fundadvice.com/401k-help/401k-plans.html,
You can submit Yahoo's plan, they'll analyze the options, and post a general recommendation for all to see.
His advice is very spot-on, and, I'd expect, will be of help to many of your fellow Yahoo's.
Interesting. I'll have to see what they can do with it.
I think you are right to shift out of the tech fund for diversification reasons, and overseas is probably a good choice because you are young and can afford the higher risk.
Presumably "most" of your economic well being is tied to the success of Yahoo, which is probably a good proxy for tech stocks in general. Therefore having such a fund means you may be over-weighted in technology now.
Yeah, it's safe to say that I'm significantly invested in Yahoo (in more ways than one, I guess).
this market is overbought on a three month chart. this market is overvalued on a five year chart. 2005 almost saw the continuance of the unavoidable re-emergence of the bear market that began in 2000 as a response to the 1982-1999 bull market but was not allowed to follow through due to the largest creation of cheap credit in modern times (see: greenspan).
the funds are papering over 2005 now so they can show the year as a positive, but in 2006 housing is coming down (the fed has basically told you this by discussing inflation "targets") and the stock market, which is a much smaller concentration of wealth, will have no choice but to follow. the fed is only praying that the economy can hold together while it tries to kill inflation, which has just started to emerge in statistics. they care somewhat what happens to your home value (residential real estate is where most US wealth is conentrated), somewhat less what happens to *your* stocks (they will be far out of the market when they need to be).
three month CDs hitched back to back are working well so far, and the 3% return for 2005 likely beats your stock picks, with the added bonus that my results are insured by the govt.
just remember - if you see housing start to cave, get out of stocks entirely. no one, even the cnbc crowd, thinks stocks will rise in a crashing real estate market.
just another note, with regards to emerging markets.
markets such as latin america are incredibly sensitive to the us dollar, some of these nations are even fully dollarized.
the surprise return of the dollar in mid 2005 is likely intrinsic to the growth of these markets. with rates rising in 2006 and the us dollar likely reverting back down on more mega-high deficits, these markets are very vulnerable, specifically because they are "emerging".
if you have a high tolerance to risk, and are looking to gamble significantly to achieve some goal, they could be worth investigation. you have to ask yourself what your goals are.
if your goals require a massive buildup of wealth, this is the basis of your risk exposure. note that in this type of an environment you also risk getting wiped out, even in massive negative territory. i know of stories of some employees at...Y!our employer who not only were wiped out but landed in deep negative territory they will never re-emerge from under current US law (specifically AMT).
if your goal is moderate growth, go with SPY or DIA. you will still see periodic downside, but if you can stay the course over two decades or so you should be okay. SPY in particular is a massive cross-section of industry, most moderate funds trend its performance with only slight variation.
if you have more money than you need already (in a manner of speaking), you want preservation, not growth. in this scenario it hurts more to lose 20% than to miss a potential gain of 20%. in this case there are treasuries, municipal bonds, CDs, and other low/no risk instruments. don't underestimate the value of low/no risk. with inflation rising many of these instruments are becoming competitive.
pay attention to inflation wrt your risk exposure. if you are high risk, high inflation is your enemy.
if you are in the wealth preservation game, it is your friend, higher inflation means better yields (eventually).
the direction of inflation is not on the side of stocks or bonds right now, which is why i go with short term CDs. every three months i get to rebuy a better yield.
Picking funds based on how they did last year is a sure fire way to gain mediocre results.
Wow, you're a really pessimistic dude grumpy. A lot of stocks have done very well this year, including several I own. Nobody should be satisfied with earning 3%.
_A Random Walk Down Wall Street_ is the standard text on these questions. The upshot: index.
It's not a question of whether 3% is a good rate of return. It's a question of whether 3% is a good return for the risk he is taking. US bonds are essentially risk free, so if he really believes the market is going to crash, then I guess I'm not surprised he's buying bonds. Personally, I have a few old US bonds I got as gifts that I'm too lazy to sell, but I'm not buying any more until I'm at least 60. :)
An unreleated issue consider when picking funds is their correlation to each other. You could put money in multiple funds, but if they're highly correlation then you're essentially putting money in one single fund. That's one of the reasons why people often say it makes sense to throw money in an international fund -- because it's likely to be diversified against most of your US stock based funds (and your personal job welfare and your house).
Correlation is one of the reasons I sell my ESPP shares pretty much right after they're granted. It's not that I don't expect the stock prices to rise, but given my options and my bonus and my career, I want to diversify my finances.
>> Nobody should be satisfied with earning 3%.
until last week the DJIA was DOWN for 2006. that means my 3% was beating the DJIA until last week and it might still beat it.
and what was my risk exposure? ZERO. my CDs will pay me back if LA is nuked, Warren Buffett dies, or more realistically, real estate is shocked by high interest rates. their return is INSURED. this alone is worth at least 1% extra. by the way, as i said, they still might beat the DJIA for 2005.
three month CDs may beat some markets again in 2006.
>> I have a few old US bonds I got as gifts that I'm too lazy to sell, but I'm not buying any more until I'm at least 60. :)
in the early 80s, treasuries were yielding 15%, same with CDs (even slightly higher).
this was the last time the nation was fighting inflation as it is just beginning to now (don't be fooled by the twelve or so rate increases we have seen - they haven't even erased the "accomodative" lending environment - by the feds OWN ADMISSION). by time we are done with this inflation war in 2008-2010 i would not be shocked to see them this high again.
in this case you may regret your plan of ignoring them....you find me a GOVT INSURED 15% return over ten years in anything else.....
its all on housing now. not earnings, not patents, not your next great idea. all stocks are now waiting to see how housing plays out.
You should convert all your assets into nachos.
There are very few blogs I read regularly, and this is one of them. What I like about it is your ability to think clearly about a range of topics. Unfortunately, your thinking about asset allocation is muddled, though it is muddled in the way that most people muddle it.
There's a reason A Random Walk Down Wall Street is a classic: you owe it to yourself to read this book. If the topic interests you, you'd do well to read William Bernstein
But Malkiel's Random Walk is almost always sufficient. If, after reading Random Walk, you're still using past performance in the way you use it above, read it again.
Brett, apprently you're not reading the other comments before you post here.
>> 3% CDs...didn't you mention inflation heating up? What's your return adjusted for inflation?
thats averaged over the year. the yield i get each three month cycle gets better. once again, for most of the year this has beaten the DJIA with no risk.
against inflation, the return sucks. but the DJIA return against inflation also sucks, actually since it spent most of the year in down territory, the DJIA for 2005 sucks pretty much by any measure.
>> The concerns you mention worry me zero
if you are ignoring housing and interest rates in your investment decisions, 2006 and 2007 might hold some surprises (not the good kind).
I'm curious about what proportion of your 'overseas' funds' growth is directly attributable to the US Dollar's god-awful exchange rate against EUR and GBP. 'Cos if the answer is 'a lot', it surely won't last indefinitely.
Plus, if the fund growth is in the ~30% range it might be entirely attributed to currency fluctuations. That doesn't only mean that it won't continue to grow (the dollar's leveled out and may even be coming back), but that it will inevitably come down by 20% or so over the next two years.
Cover all of that with the big "IF" which it requires, but it's worth considering.
JH, posting from Eurozone-land.
Be wary of international funds, as you are betting on the relative strength of the dollar as well as the companies that the fund invests in.
I made alot of money on international stocks from 2003-2005 and moved 90% of that money into more traditional equity funds a few months ago. The international market has had its run, and you'll have your ass handed to you when the Chinese market corrects.
The Euro is overvalued, and the US deficits aren't going to matter for a decade or more. Debt & credit don't mean too much until you default.
A Random Walk Down the Wall Street is a must read. I read it everytime I get an urge to invest in an actively managed mutual fund. I flip through the pages everytime I get the desire to open a brokerage account to invest in the individual stocks. So far, this book has kept me in check and stopped me from making wrong investment decisions. You should read it too.
I just want YOU to let US know the date that Google will hit it's high mark.
I have the TRP Science & Technology fund (mine has the symbol PRSCX but has the same NAV as your symbol) and I have had it for a very long time in my IRA. I rode it all the way to the top during the bubble and all the way back down afterward. It was one of the few I didn't bail out of. After the bubble burst they changed the focus to go after more of the biotech sector. I concur with the others that suggest the funds that are doing well now may be close to playing out. Buy a fund because it has the focus you seek and does well compared to funds with similar objectives not because it did well last year (or last 5). Since you only have 17 to choose from your options are limited. You are starting at a young enough age that are looking for consistent performance - great in good years and not too awful in bad years. Also, very low fees/costs will make a difference over a couple of decades.
>> There are other things to invest in besides CDs and the DJIA!
i agree, but the DJIA is still the benchmark average to beat, it is still the number people quote when they say "what the market closed at", and its still the primary index fund managers are trying to meet or beat. this is why i use it as a basis of comparison.
>> The risk of CDs is inflation, and tying up capital which could be put to better use
which is why i said about ten times to go with short term CDs. once again, i am beating the DJIA for 2005 with zero risk, and when i repurchase three month CDs at the end of the year, i am going to get even better yield than i did before. you can get the same with TIPS for treasuries, but the dynamics of the TIP market to me aren't worth it, CDs have incredible simplicity and the secondary market is huge (even better yields there, if your bond desk treats you as a preferred buyer).
don't get me wrong, i will gladly dive back into stock ETFs once housing has taken the stock market down, target: DJIA 6400.
In the market via mutual funds since 1992; my strategy is to follow the advice of Vanguard founder John Bogle--invest in a low cost index fund, don't look at it for 20 years, and when you do, you'll be astonished by how much you have.
Also, I dollar-cost average, having contributed a portion of every paycheck since the mid-90s into one of the half-dozen funds I own, even during the post-crash period.
I also recommend "4 Pillars"
And also his other book. "The Intelligent Asset Allocator"
Similar to "4 pillars" but goes into more detail
Jeremy,
Congratulations, you now have at least one troll as a regular. Truely, you have hit the big time. It is only a matter of time before a URL you post can generate a slashdot effect. I can't wait until the troll's alternate personality emerges as another user and startes arguing with himself. Are blogs the next usenet?
CD's? DJIA being the index to beat? You are joking right? Oh, sorry I'm just fanning the flames a bit more. ... but it is so much fun. And with that I have taken a step towards the darkside myself.
I just browsed through the comments.
Talking about CDs and inflation rate, has anyone here
considered investing in i-bonds ? It offers 6.73% yield
[compounded twice a year.]
LOL, Jeremy's dad is a troll...
I wouldn't want my dad reading my blog, and I'm sure he'd have better things to do. What geeks.
Err, my dad hasn't commented on this post at all.
Nice try, though.
AM,
I had forgotten about the i-bonds. As your investment portfolio grows and/or you get close to retirement, the addition of bonds to the mix reduces volatility at the expence of potentially reducing the rate of return of the entire portfolio. Bonds such as the i-bond will not lose value (unlike stocks) no matter what (assuming the US treasury doesn't fail). Diversification out of the US market into foreign stocks can have the same volatility reducing effect (just like diversification within the US market does - a basket of stocks is usually more stable than individual stocks) but with a higher potential rate of return, however, they too can decrease in value just like any other stock. Whether you should choose i-bonds, foreign stocks, or some other strategy for diversification to reduce volatility is a personal choice that must reflect your tolerance for risk and how long before you need to begin to rely on the investments for personal income. I myself have about 10% of my investments in government treasuries and a smaller fraction in MUNIs and corporate bonds (the latter two only from time to time). Since my level of income does not allow me to take advantage of most of the tax benefits relating to saving for a child's educational needs, I plan to look into i-bonds for that purpose. I'm not sure I can use them either, but it is worth a look. Thanks for the pointer to these.
Ah, I guess /dad/bro/. Anyhow, Google shows he seems to like trolling slashdot and other places.
>> i-bond will not lose value (unlike stocks) no matter what
only if you hold it to maturity. otherwise it can lose (or gain) a substantial amount on the par value. many people trade bonds succesfully.
and why are you knocking CDs? they operate just like bonds, although the secondary market is more diverse, so you can get the safety of bonds (CDs are FDIC insured) with more zing, especially as the yield curve flattens.
grumpY!:
>>only if you hold it to maturity. otherwise it can lose (or gain) a substantial amount on the par value.
Now maybe there is some other thing called an i-bond, but the one I found is issued by the fed and is a treasury bond. They are basically variable rate government savings bonds. I believe you are talking about other sorts of bond (corporates, munis, ...) which can be traded (I was going to say easily, but the only easy version I know of are bond ETFs or mutual funds). These i-bonds you basically sit on for 5 to 30 years. The thing I found interesting is that they can be cashed in tax free on the growth if you use it for education. Otherwise, the interest rate reduced for taxes reaally isn't that great (6.75% * (1-0.28) = 4.86%). It is an okay rate after taxes, but you probably want to hold them until your top tax bracket drops (assuming it will) after retirement. It is really hard to predict what the tax code is going to look like 10, 15, 20 years down the road. Ya pays yo money and ya takes yo chances.
According to Mankiel (author of A Random Walk Down Wall Street), which is the evidence on diversification, higher long-run returns and risk assumption? Is beta a useful measure of risk?
You should check the investor types listed on this site www.research401k.com You can either be a conservative investor, moderate investor or an aggressive investor
Low-Risk (Conservative Investor)
- Nearing retirement age
- Can't risk losing principal amount
- Guaranteed return rate on 401k investments
Medium-Risk (Moderate Investor)
- Not nearing retirement age
- Ok with fluctuations in investment values
- Can take high/low risk investments
High-Risk (Aggressive Investor)
- Who cares about retirement?
- Ok with fluctuations in investment values - want higher gains and returns
- Highest interest rates with highest risk
