Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (12) | Ignore Thread Prev Thread | Next Thread
Author: pbvisita Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25265  
Subject: Help me choose my 401k... Date: 6/10/1999 7:09 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Ok, so I read the article on 401k(s) and it basically said to choose the S&P 500 equity index fund. My company invests through Banker's Trust and they offer quite a few funds, but the ones listed with the word EQUITY are: BT Institutional Equity 500 Index Fund (seeks to match the performance of the stoack mkt represented by the S&P 500), BT Investment Equity Appreciation (invests in med. sized companies that show growth potential), Delaware Group International Equity Fund (international fund offered for relatively stable, large and mid-sized companies. The non-equity funds are: BT Institutional Asset Mgmt Fund, Mutial Series Qualified Fund, Dimensional Funds US 6-10 Fund, and Baron Asset Fund. I have the ability to put all of my eggs into one basket (100%) or split them up among various ones, totalling 100%. After reading the article, I am inclined to invest 100% of it into the BT Institutional Equity 500 Index Fund. I just wanted to hear from others if this would be the best thing for me to do. In addition, how do you feel about using 401k savings on a down payment for a house? Thanks for your input.
Print the post Back To Top
Author: jocave One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2435 of 25265
Subject: Re: Help me choose my 401k... Date: 6/10/1999 7:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<<<<<
After reading the article, I am inclined to invest 100% of it into the BT Institutional Equity 500 Index Fund. I just wanted to hear from others if this would be the best thing for me to do.
>>>>>

There are two basic Foolish schools of thought here-

1) Standard Fool response: Throw everything into the S&P index fund. Index funds tend to have lower expenses and tend to outperform similar actively-managed funds.

2) Minority Fool response (a.k.a. (with deference) tony44 response) Diversify somewhat.

Over longish time periods (decades), the various market segments (i.e. large caps (S&P 500), small caps, and international stocks) tend have very similar returns. Depending on how you run the numbers, you can get any one of the three to outperform the other two, but it's a wash to my mind.
If you split your contributions into these 3 segments, you'd expect to have about as much after 30-40 years as if you were putting everything in the S&P 500. The benefit to this strategy is that you'll tend to get more consistent returns. When large caps are doing well, small caps are often not doing so well (i.e. the past few years), and vice versa. You won't see your balance climb at 20+%/year as the S&P 500 has done of late, but if the S&P goes flat, your small-caps and/or international stocks may take off and mitigate that downturn.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: jocave One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2437 of 25265
Subject: Re: Help me choose my 401k... Date: 6/10/1999 7:45 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<CENTER>Corrected, longer reply.
Sorry for the inadvertant post</CENTER>

<<<<<
After reading the article, I am inclined to invest 100% of it into the BT Institutional Equity 500 Index Fund. I just wanted to hear from others if this would be the best thing for me to do.
>>>>>

There are two basic Foolish schools of thought here-

1) Standard Fool response: Throw everything into the S&P index fund. Index funds tend to have lower expenses and tend to outperform similar actively-managed funds.

2) Minority Fool response (a.k.a. (with deference) tony44 response) Diversify somewhat.

Over longish time periods (decades), the various market segments (i.e. large caps (S&P 500), small caps, and international stocks) tend have very similar returns. Depending on how you run the numbers, you can get any one of the three to outperform the other two, but it's a wash to my mind.
If you split your contributions into these 3 segments, you'd expect to have about as much after 30-40 years as if you were putting everything in the S&P 500. The benefit to this strategy is that you'll tend to get more consistent returns. When large caps are doing well, small caps are often not doing so well (i.e. the past few years), and vice versa. You won't see your balance climb at 20+%/year as the S&P 500 has done of late, but if the S&P goes flat, your small-caps and/or international stocks may take off and mitigate that downturn.

One important factor in this decision is the quality of the other equity funds offered. If they have significant expense ratios or loads, if they have tended to underperform their benchmark (not the S&P 500) over many years, or if there's something else about the fund you don't like (management style, no history, fund manager has ear hair, whatever) it's probably best to throw everything into the S&P 500. On the other hand, you have to be prepared for the increased volatility.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2450 of 25265
Subject: Re: Help me choose my 401k... Date: 6/11/1999 11:22 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I think that people need to realize that if you only invest in large cap, domestic stocks, you're not getting the diversification that you should have in your portfolio.

With the options you've listed, I'd put 60 percent into the index, 20 percent in the equity appreciation fund, and 20 percent in the international fund. Then you'll be diversified. You have limited options, so you can't really be too picky about your investments (you can't get the best international fund, you have to take what they give you).

Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2451 of 25265
Subject: Re: Help me choose my 401k... Date: 6/11/1999 11:25 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
You're right, I'm in the minority here, because I guess I just can't leave a good thing alone. Look, first and foremost, the fact that people are putting money away in their 401k is a good thing. And if you just put 100 percent of it into an index fund, you know what? That's still pretty good.

I like diversification because it helps give you a little more when you take it out, and it also helps smooth out the road. My biggest concern is that if you're only in the S&P 500 fund, and it tanks, are there going to be people who pull out and put it into the money market option. So, by diversifying, I'm hoping that they'll stick with an equity investment plan.

Print the post Back To Top
Author: GlowingFire Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2458 of 25265
Subject: Re: Help me choose my 401k... Date: 6/11/1999 4:37 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Not that I'm necessarily saying you should or should not "put 100 percent of (ones 401(k) contributions) into an index fund," but I agree and disagree with why you recommend diversification.

First of all, even though the S&P 500 is driven by just a handful of stocks (20 or 30, as I recall), you are still pretty diversified already in an index fund.

Second, a long-term strategy has the added benefit of 'time diversification,' so that, over time, the same benefits that can be reaped by equity diverification are also obtained simply because you are holding onto the security for so long.

Third, perhaps if we try to explain to everyone we know about what is really required in a buy-and-hold investment plan, some people wouldn't be so skittish as to jump to money markets, whenever they think the market is tanking.

Not to beat a dead horse (too much), but we have got to do what we can, I think, to counter the conventional Wisdom spouted in the press and from many (maybe most, but not all) brokers and financial advisors. Just letting them have the field and suggesting ways that we can 'trick' ourselves into sticking with an equity investment plan may not accomplish what we want anyway.

Always amused by the advisors to our 401(k) Plan, I recall last month, when they polled us about what changes, if any, we would like made to the Plan. One of their questions was "What is the maximum quarterly loss you would accept, in any given fund?" I have my own feelings about why they asked that question. My response was a glib "just under 100%."

I told them that, in my opinion, this was a ridiculous question for a 401(k) poll. Granted, we are all susceptible to the stresses that a really large drop in the market would have on us. However, we are talking about a 401(k) plan. Even at my advanced age, I still have twenty years before I retire. Most employees have quite a bit more than that. If I expect the market, over the course of decades, to appreciate at some rate, then the performance during a single quarter is almost meaningless. No one that I've ever heard of before looks at loss rates over a single quarter. Even a year is pretty useless for a retirement investment.

In fact, as Warren Buffett explained in one of his Shareholder Letters a year or two ago, if I'm going to be a net purchaser of securities (as I am in a 401(k) plan), then I really want the prices to stay as low as possible, so that I can buy as many shares as possible, with the condition that I am still expecting to make that long-term percentage, whatever it is. In fact, if the market appreciates at the expected rate, a big drop in a single quarter is actually cause for some sort of celebration. I'm getting my shares cheaper. Woo-hoo!

==> david


Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2481 of 25265
Subject: Re: Help me choose my 401k... Date: 6/14/1999 9:54 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
David, I'm not sure if you're replying to me or not, but I simply don't believe in putting all of your eggs in one basket. Sure, there's diversification within a category if you buy the S&P 500 index fund. You're very well diversified among large cap domestic stocks, right?

Now, isn't there room in someone's portfolio for small caps? At one time, every company is a small cap. Wouldn't you like to get in on those at the ground floor instead of later, when they're way overpriced? So there's an argument for putting some of your money into small caps.

As far as international stocks go, well, sometimes the international market does better than the US market, and vice versa. So wouldn't you like to put some money into there, to try to level out the fluctuations somewhat?

That's my take on diversification. I believe that it's a useful tool, and I think that if you do it correctly, you can make a little more over time than if you just stick it in that index fund.

Print the post Back To Top
Author: GlowingFire Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2482 of 25265
Subject: Re: Help me choose my 401k... Date: 6/14/1999 11:14 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Tony,

My take on diversification is that (a) it's not really necessary IF the companies you choose are quality companies, and you're planning on holding the stocks for a long time; and (b) investing in small caps and overseas stocks, to boost your returns, is not really what most people think of when they say that "you really ought to be diversified."

When people talk about diversification, I think it includes the idea of making ones investments less risky. Many people don't want 'unacceptable' fluctuations in the market overly affecting their account value, from day to day, or year to year. In my opinion, your use of the word places a higher emphasis on returns and a lower emphasis on safety, than is normally intended.

In any case, I'm not disagreeing with your take on small caps or foreign stocks. There's no question that investing in these types of securities can enhance your returns, but there is added risk involved in both cases, which is almost exactly the opposite of the less risk and smaller fluctuation goal of diversification.

My point was that, although the word "diversification" can simply mean "having a lot of different things," it is usually used a little more specifically than that. If ones goal is to smooth the road, as most people use the term, an index fund already has some of this built in. Adding small caps or foreign stocks may not help much in achieving that goal, and may even make the road rockier. If, on the other hand, ones goal by diversifying is simply to put your money in other things to make the most money possible, then small caps and foreign equities are certainly ways to attempt this.

Thus, I added the time diversification factor to aim at the smoother road goal only.

==> david


Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: bluGill Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2483 of 25265
Subject: Re: Help me choose my 401k... Date: 6/14/1999 11:42 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
At one time, every company is a small cap.
---------------------------------------------
This is not true. There are several large privatly held companies that I know of, that if/when they go public they will be large cap companies.
Taking such a company public is not easy as you need the institutations to put money on the table. OTOH, with a company of this size they are more likely to be willing to buy.
There are not many of the companies around, but there is reasons to belive that in some cases the founder will die, the kids will not want to take up the buisness, and so they will take the company public.

Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2484 of 25265
Subject: Re: Help me choose my 401k... Date: 6/14/1999 1:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Note that I didn't make a distinction between publicly owned and privately owned companies. Whether or not they're privately held or publicly traded, at some poing, every company has just a few employees, and they have a few million in revenue and so on.

Sure, they may be huge private companies now, and if they go public, they may be huge public companies, but at some point in the road, they were a small cap company.

You can say the same thing about spinoffs, too, because it's true about the company they came from.

Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2485 of 25265
Subject: Re: Help me choose my 401k... Date: 6/14/1999 1:06 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
David, I guess I'm shooting for a different thing than others are when I diversify. True, there is the smoothing effect -- when large caps are down, maybe small caps will be up, and when the US economy is no longer rocketing up, maybe Japan's or Europe's will be -- so there you have less overall risk.

But I'm shooting for a little performance boost as well. I don't know if the risk is lesser or greater -- I suppose I could test that somewhere -- but I do know that it's possible to boost your performance with intelligent diversification.

Print the post Back To Top
Author: GlowingFire Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2493 of 25265
Subject: Re: Help me choose my 401k... Date: 6/15/1999 9:29 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
"But I'm shooting for a little performance boost as well. I don't know if the risk is lesser or greater -- I suppose I could test that somewhere -- but I do know that it's possible to boost your performance with intelligent diversification."

How do you boost your performance with diversification? It seems to be a straightforward matter of algebra.

It may be possible to boost your performance over a short-term period because you may diversify into something that experiences a momentary surge, but if the investment has the same basic return as your other investments over a long-term, then in the end your returns will regress to that growth line. You will get no benefit, unless you're day trading in your 401(k) account.

But what if your new investment actually has a better long-term return than what you already hold? Then, of course, your overall return will be superior, but it begs the question why you don't put all or most of your funds into the new investment, and avoid the 'drag' on your returns that your existing investments would create?

==> david


Print the post Back To Top
UnThreaded | Threaded | Whole Thread (12) | Ignore Thread Prev Thread | Next Thread
Advertisement