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Subject:  Re: 401K or do-it-myself? Date:  9/24/1998  12:43 AM
Author:  Bob78164 Number:  5592 of 86443

Musique writes:

OK... here goes. My employer has an excellent 401K program. I can contribute up to 15% (up to the Fed. max, what is it, btw?). They match 15% through the year and an additional 10% at the end of the calendar year. Their match is 100% vested and starts after 3 months of employment. Eligibility is immediately upon hiring.

I am not taking part yet, because I'm paying off some very unFoolishly high-interest debt, but in a few months, I'll be out from under that beast and ready to start investing.

The question: Should I go with the 401K, letting the Wise control my money in some (Principal Financial Group) fund because of a) the "free money" of the match and b) the tax deferral, OR, should I do it myself given that even with a simple F4, I can (likely) beat it? (And, over only a few years of better interest, assuming I do beat it, make up the match.)

Problems with doing it myself: I would want to wait until I have about $4K to invest before starting a F4 portfolio. What do I do with the money while it's accumulating? (This is an ongoing question... what do you do with the money for the twelve months and one day before you re-calculate your F4?)

I've read all the Fool 401K stuff, but haven't seen anything address whether or not it's better to do it oneself.

I'm clueless about the benefits/problems of the tax deferral issue...

I reply:

Think of your company's match as an instant 100% return on your investment, and the analysis simplifies greatly. I suspect if you run the numbers, the 401(k) beats anything you're likely to do on your own, even if the 401(k) significantly lags the market. (By the way, the 1998 maximum contribution to a 401(k) is $10,000, but I think that does not include your company's match.) Tax is still another reason to use the 401(k). But please remember, it's your money, not mine.

The Foolish Four is modeled on the assumption that dividends sit as cash until reinvested at the start of the new year. I'd suggest a money market for small amounts, and an index fund for larger amounts. But I understand that there are discount brokers that will execute market trades for as little as $5 per trade, in which case you can keep to the Fool's recommended 2% in commissions with a $2000 investment. Good luck!

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