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Author: Barton18 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76095  
Subject: wondering how to allocate 401(k) money Date: 9/4/1998 4:26 PM
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I'm wondering how I should best invest the money I'm putting into a 401(k) plan at work. I would like to put it into a S&P 500 index fund, but the plan doesn't offer one. What it does offer is a number of mutual funds from the Columbia Funds family, ranging from a money-market fund to a U.S. government bond fund to a small-cap stock fund. One theory I've read is that you should subtract your age from 100, invest that percentage in stocks, and the rest in bonds and/or cash. I'm 28, so following that approach would mean I should have 72% of the 401 (k) money invested in stock funds. If anyone out there has thoughts on how someone my age should allocate money in a 401(k) plan, I'm interested in hearing your ideas.
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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5338 of 76095
Subject: Re: wondering how to allocate 401(k) money Date: 9/4/1998 4:49 PM
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I think a 28-year-old should have 100% in stocks for a retirement plan myself. The "100 - age" starts to become good at around age 50 or 60, but before that I think it's way too conservative.

One time I derived a "baseline" formula based on trial and error based on what I think is generally appropriate. I used the function 180 - (2 * age), with overriding maximums and minimums of 100% and (about) 30% respectively. Obivously, thayt's just guess work as well, but I think it's a bit more aggressive and reflects my opinion that most people should be fully or nearly fully invested in stocks well into their 40s.

I think one's time horizon has more to do with allocations than age. If someone has a definite 20-year time horizon for an investment, it doesn't really matter too much whether they are 20 or 50.

While we all have different ideas about good allocation, for 401K investments (usually in various mutual funds) I like a mix of about 50% large caps, 25% small caps and 25% international (give or take about 5% each based on your own tastes).

For what it's worth, I'm almost 33, and have 5% in cash, and everything else I'm allowed to control (i.e. other than the company match forced in company stock) in various mutual funds, roughly in the allocation I described above.

Fool on, Garth.

Tim


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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5340 of 76095
Subject: Re: wondering how to allocate 401(k) money Date: 9/4/1998 5:04 PM
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Barton18 writes:

I'm wondering how I should best invest the money I'm putting into a 401(k) plan at work. I would like to put it into a S&P 500 index fund, but the plan doesn't offer one. What it does offer is a number of mutual funds from the Columbia Funds family, ranging from a money-market fund to a U.S. government bond fund to a small-cap stock fund. One theory I've read is that you should subtract your age from 100, invest that percentage in stocks, and the rest in bonds and/or cash. I'm 28, so following that approach would mean I should have 72% of the 401 (k) money invested in stock funds. If anyone out there has thoughts on how someone my age should allocate money in a 401(k) plan, I'm interested in hearing your ideas.

I reply:

If it were my money (but of course, it's not), I'd invest every penny that I don't expect to need within the next 5-10 years in stocks. For a 28-year-old in a 401(k) plan, of course, that's all of it. Over that period of time, I expect with very high confidence that stocks will outperform all other investments. Since (by hypothesis) I can afford to ride out the inevitable volatility, I want all my money going for the best possible long-term returns. Over shorter periods of time, my confidence level is not so high; therefore, money that I will need sooner (whether 2%, 28%, or 100% of my holdings) goes into less volatile investments -- primarily double tax-free money markets.

By the way, I suspect this is an unnecessarily conservative treatment of my medium-term (1-5 years) money. Does anyone have better ideas? Thanks. --Bob

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Author: slwjpw Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5342 of 76095
Subject: Re: wondering how to allocate 401(k) money Date: 9/5/1998 2:46 AM
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<<If it were my money (but of course, it's not), I'd invest
every penny that I don't expect to need within the next
5-10 years in stocks. For a 28-year-old in a 401(k) plan,
of course, that's all of it. Over that period of time, I
expect with very high confidence that stocks will
outperform all other investments. Since (by hypothesis) I
can afford to ride out the inevitable volatility, I want
all my money going for the best possible long-term returns.
Over shorter periods of time, my confidence level is not so
high; therefore, money that I will need sooner (whether 2%,
28%, or 100% of my holdings) goes into less volatile
investments -- primarily double tax-free money markets.

By the way, I suspect this is an unnecessarily conservative
treatment of my medium-term (1-5 years) money. Does anyone
have better ideas? >>

I wish I was 28 with a chance to invest 100% of my 401(k) into stocks. Lets see, I would be $11,983,195 over my original investments.

The sooner you start the better off you are.

Phil

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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: 5347 of 76095
Subject: Re: wondering how to allocate 401(k) money Date: 9/5/1998 5:08 PM
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Greetings, Barton18, and welcome. You wrote:

I'm wondering how I should best invest the money I'm putting into a 401(k) plan at work. I would like to put it into a S&P 500 index fund, but the plan doesn't offer one. What it does offer is a number of mutual funds from the Columbia Funds family, ranging from a money-market fund to a U.S. government bond fund to a small-cap stock fund. One theory I've read is that you should subtract your age from 100, invest that percentage in stocks, and the rest in bonds and/or cash. I'm 28, so following that approach would mean I should have 72% of the 401 (k) money invested in stock funds. If anyone out there has thoughts on how someone my age should allocate money in a 401(k) plan, I'm interested in hearing your ideas.

Others have already mentioned that at your age, stocks will almost certainly give you the best bang for your long-term investment dollar. I'll simply point out that the old rule of thumb you cited has widely fallen out of favor with most financial planning professionals in the last 15 years. The fact of the matter is the percentage you should invest in stocks at any age is limited only by how well you sleep at night. Everyone has a different tolerance for the ups and downs of the stock market, and that's what should dictate how much of one's portfolio is devoted to that entity. Even at age 80 it's still prudent to have some exposure to the market simply to protect one's purchasing power. Obviously, the younger you are the greater that exposure can be, but even in old age some stock investment remains prudent. How great, though, is a personal choice.

Regards…..Pixy


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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5394 of 76095
Subject: Re: wondering how to allocate 401(k) money Date: 9/11/1998 11:49 PM
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<<. One theory I've read is that you should subtract your age from 100, invest that percentage in stocks, and the rest in bonds and/or cash. I'm 28, so following that approach would mean I should have 72% of the 401 (k) money invested in stock funds.>>

IMHO, the best reason for a financial planner to recommend this is that he can avoid blame when the stocks go down. Look at a chart for S&P500 for a 20-30-50 year stretch. Even 20% crashes are a mere bobble in the graph.

<< If anyone out there has thoughts on how someone my age should allocate money in a 401(k) plan, I'm interested in hearing your ideas. >>
Go for as close to an index fund as you can. Agitate for them to add one to your investment choices.

Ray



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Author: dswartz Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5395 of 76095
Subject: Re: wondering how to allocate 401(k) money Date: 9/12/1998 9:54 AM
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<< << If anyone out there has thoughts on how someone my age should allocate money in a 401(k) plan, I'm interested in hearing your ideas. >>
Go for as close to an index fund as you can. Agitate for them to add one to your investment choices. >>

I agree. Although I am self-employed now, I am
amazed looking back at some of the pathetic choices
available to the 401K plans I had available. One
of my most recent jobs had 6 mutual funds to pick
from (a growth fund, a balanced fund, a couple of
specialized ones, etc). As I recall, they all had
some type of load and in the aggregate the plan
performance really stank.


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Author: SnootFool Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5399 of 76095
Subject: Re: wondering how to allocate 401(k) money Date: 9/12/1998 11:17 PM
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Barton18:
<< If anyone out there has thoughts on how someone my age should allocate money in a 401(k)
plan, I'm interested in hearing your ideas. >>

Rayvt:
< Go for as close to an index fund as you can. Agitate for them to add one to your investment choices.>

Me:

At the risk of sounding overly pedantic (or is that redundant?), allow me to speculate that Rayvt is almost certainly recommending an index fund based on the S&P 500, & not the Russell 2000 or a Far East stock index, etc. ;-)
Just in case your 401K custodian asks: "OK, which index?"

Chris



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