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|Subject: Re: Undiversified 401K||Date: 2/23/1998 11:18 PM|
|Author: tc001||Number: 1939 of 82226|
Pixy's reply suggesting that you look at Vanguard took the words right out of my mouth. Let me add a few things to that.
<I wonder if I am better off leaving that large position in Contrafund alone so as to take advantage of
the compounding associated with a larger holding.>
If I understand your statement, this is an incorrect assumption. There is no additional compounding gained due to the size of the holding. For example, $100 earning 10% per year would result in $110 at year end. If you split it into five lots of $20 each, each would be worth $22 at year end, or $110 total. The size of the holding is irrelevant to the amount earned through compounding. In some savings accounts you may get a better rate with a larger deposit, but that is a rate issue, not a compounding issue.
You also wrote:
<I have about 96% of my 401K invested in....>
While discussions about portfolio diversity do refer to percentages, the total dollar amount is also very important. Having 96% of $2000 in one fund is very different from having 96% of $500,000 in one fund. There are transaction costs (not to mention minimum investments) that would make it hard to justify splitting up a small amount. Each IRA usually charges an annual maintanence fee of $10 to $15 per fund. Vanguard Index 500 (a very popular fund) charges another $10 per year for balances below $10,000. All of this should be considered when looking at owning multiple funds. Besides, the idea behind a mutual fund is to give you immediate diversity that you couldn't buy on your own with less than $100,000 (according to most financial planner's estimates).
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