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Author: RCMX One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Undiversified 401K Date: 2/23/1998 9:59 AM
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I have about 96% of my 401K invested in Contrafund. I am 28 years of age, and have been contributing regularly for the last six years. When I changed employers recently, I rolled the 401k into a Rollover-IRA...leaving everything in Contrafund.

Question:

Should I split some of the Contrafund holdings into something else or should I just direct NEW contributions to funds other than Contrafund?

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.

Any insights appreciated.
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1924 of 76237
Subject: Re: Undiversified 401K Date: 2/23/1998 11:42 AM
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Greetings, RCMX, and welcome.

<<I have about 96% of my 401K invested in Contrafund. I am 28 years of age, and have been contributing regularly for the last six years. When I changed employers recently, I rolled the 401k into a Rollover-IRA...leaving everything in Contrafund.

Question:

Should I split some of the Contrafund holdings into something else or should I just direct NEW contributions to funds other than Contrafund?

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 you're worried about diversification, there's plenty within Contrafund. However, if you're worried about return, you have every right to be. Contrafund is following the pattern of most mutual funds in that it can't keep pace with the marker as measured by the S&P. Over the last five years, it's fallen on some hard times. Here's the data as of Jan 31, 1998:

Name 12-Mo YTD 3-Yr 5-Yr 10-Yr
Fidelity Contrafund 18.06 -0.28 27.48 18.86 22.21
S&P 500 w/Div 26.90 1.10 30.49 20.31 17.67
Vanguard Index:500 Port 26.79 1.11 30.40 20.19 17.49

Stick with the fund if you want to; however, IMHO you would find it easier to go with the Vanguard which consistently keeps pace with the market. Better yet, now that the money is out of the 401k and in an IRA, start thinking about investing on your own without having to rely on funds at all.

Just one Fool's opinion FWIW.

Regards....Pixy


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Author: tc001 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1939 of 76237
Subject: Re: Undiversified 401K Date: 2/23/1998 11:18 PM
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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.

You wrote:
<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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