How can I properly diversify my 401k?

Question

I have a 401K through my employer. It is 100% vested.I'm 21, and a recent college graduate, so I'm told I have a lot of room to make mistakes, but I would like to avoid as many money mistakes as possible. I only have approximately $300 contributed to my 401k so far, because I don't understand how to diversify my portfolio. I have a number of options to choose from, but I don't know how to tell if they are "good" or not. They are: JP Morgan Stable Value, PIMCO Total Return, Vanguard Balanced Index, H&W Large Cap Value, Marsico Growth, BGI S&P 500 Equity Index, Artisan Samll Cap Value, MS Small Company Growth B and MFS International Equity. I need to invest in percentages equalling 100%, but I'm not quite sure how to choose to my financial advantage. How can I properly diversify my portfolio? Answers are greatly appreciated! Thanks in advance!

Answer 1

If I were that young, I'd be willing to take more risk in order to get a higher return. It's a very long time from 21 to retirement, so even if the market drops sharply, there is lots of time for it to recover. For that reason, I'd go heavily toward Small Company funds (which looks like Artisan Small Cap Value and MS Small Company Growth B in your list). Small company stocks have historically provided the highest return over the long run. I'd avoid the Stable Value and any bond funds. Those are less volatile, but will not provide anywhere near as high a return in the long run as a stock fund likely will.

Personally, I'd put 20% in the International fund (it's a world economy now and that diversifies the portfolio away from just the US market) and split the rest about evenly between the two small company funds. I think most advisors would recommend putting only 20-30% in the small company funds and the rest in large company stocks (S&P 500, Large Cap Value, etc.) but with 30+ years to go, I'd personally go with the slightly more volatile small company stocks to get the higher return that they have historically provided.

Just remember not to panic and move the money out of those funds if the market dives and your account value drops. You have to stay in for the rise that comes after the fall in order to get the higher long-term returns from the more volatile investments.

Answer 2

It seems you have a lot of people with differing ideas of diversifying your 401k. Here are a few things to keep in mind when diversifying your 401k the market tends to run in cycles, meaning that sometimes certain investment will be more favorable than others. The purpose of having a diversified portfolio is to have exposure to several categories so that when one investment is down the other is up. Overall in the long term your investment as a whole will have a smoother ride and positive returns. Some general characteristics of stock funds are the smaller the cap size the more risk and growth styles are more volatile than value styles. Bonds are typically safer than stocks. You have been told you have room for mistakes due to your age, what that really means is you have time to take more risk as mentioned by some of the others. Generally the more risk you take the more potential for returns. Without getting too much more into detail this is how I would suggest allocating your portfolio.

20% H&W Large Cap Value
15% Marsico Growth
15% Artisan Small Cap Value
10% MS Small Company Growth
30% MFS International Equity
10% Pimco Total Return Bond fund

This would give you a portfolio that is roughly 90% stock and 10% bond. Once you are comfortable with this and want to be more aggressive you can move some away from the bond to more stocks. Eventually you will want to get more bonds in your portfolio when you get closer to retirement.

One more thing after a yr or so you will want to revisit your allocation and rebalance to the above %. This will keep your portfolio from growing out of balance and becoming more riskier than intended. Reason being is that your small caps or international holdings may grow faster than your other holdings, making you more heavily weighted in those sectors.

Congratulations on being responsible and remember to at least contribute the minimum necessary to get all the company match!

Answer 3

Dave W gave a real good answer to your question. The main trick in getting a diversified portfolio is in choosing international stocks. And a portion of small cap is also required for proper diversification.

You might consider something like this. 30% BGI S&P 500 index. 20% Artisan Small Cap, 30% MFS International equity. A last to get the complete diversity you should put 20% in PIMCO Total Return--a bond fund. This is not perfect diversity, but about the best with the choices you have. If you would prefer a full equity position instead of 20% bonds (more risk but potentially also more rewards maybe) make it 50% MFS International equity instead of 30%. But I would not.

Answer 4

While young I would recommend 100% of your account invested in stocks. It is also a benefit to find funds with low expense ratios, defiently below 1.5%, better if below 1%. You can find this in the prospectus, which explains the fund, and provides all the information you need.

I would recommend the following allocation,
40% MFS International Equity
15% Artisan Samll Cap Value
30% MS Small Company Growth
15% H&W Large Cap Value

The point of a deversified portfolio is to spread the risk, so if one area declines it doesn't bring down the others. One of the best way to do this is through international funds, if the american stock market is performing poorly, you retirement isn't entirely in jeopardy. The rest is a difference between assets classes. Generally different types of companies perform differently. so when large companies are increasing in value fast, small ones tend to underperform. When compaines that focus on growth prospects do well, ones that are value focused lag.

Answer 5

Ignore the first few options, and put 20% of your deferal into each of the other five:

Marsico Growth,
BGI S&P 500 Equity Index,
Artisan Small Cap Value,
MS Small Company Growth B

and

MFS International Equity

Do yourself a HUGE favour, and defer more than you think you can afford into you 401(k) for about two years. The money you invest at the very beginning has so long to grow that it usually ends up accounting for most of your savings by the time you retire!

For example, if you saved $10,000 in your first year, and never invested another penny, you'd have $1.4M when you retired at 65 (assuming 12% average growth): If you saved only $1,000 in your first year, and added $1,000 to it every year thereafter (still assuming 12% average growth), you would only end up with about $140,000!

http://personal.fidelity.com/toolbox/growth/growth.shtml

Invest a lot early, end up rich!

Best wishes...

Answer 6

I would suggest you put it in an index fund either Vanguard Balanced or the S&P 500. This will give you diversification. This will get you into play in the market and you can join everyone else trying to figure out a indivdual plan. Pick a couple of plans and make believe investing for a year to see how you do. At your age you can be aggressdive but not foolish. Good Luck

Answer 7

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Answer 8

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Answer 9

You say "it is 100% vested".
The plan isn't vested - You would be vested. I would be surprised that if you are 21 and a recent graduate that you would be 100% vested.

But, to figure out where to invest, go to Yahoo Finance and type in the ticker symbol for each of the options available to you. There you can read all about each one.


Also, your company may have someone that can help with this.