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Hopefully I'm not beating a dead topic here, but I am preparing to make my first 401(k)contibutions. I'm 26, earn about 45k (i'm a paralegal, and generally supplement my 35k salary with significant overtime, although it is hard to predict the annual compensation ahead of time.)

Luckily, we do have the Vanguard Tot Stock Market fund available, which will likely be the core of my contribution. The other appealling funds are:

Janus Small Cap Value (0.82 ER, 39% turnover)
Legg Mason Value Trust (0.72 ER, 25% turnover)
Columbia Real Estate Equity (0.94 ER, 53% turnover)

we also have a few internationals that I would consider, one called Artisan and another from Templeton.

Basically, I am having a real hard time seeing a 100% index contribution as the "right" move for me. I am fairly new to investing, and brand new to fund investing. These active funds (particularly Legg Mason) have established histories of beating the market, and seem to have relatively low fees. I have read the Foolish articles on index investing over and over and am still not 100% convinced that I should ignore these seemingly great funds at my disposal. I realize that I am in a bit of a unique situation because my firm does happen to offer really great fund options. (in my naive uninformed opinion.) Maybe someone could shed a little light on my clouded mind regarding why I should still stick with the Vanguard index fund (despite my heart telling me to put 50% or so in some of the active funds.)

The other problem i'm facing is that I am very excited to put away money for the future, but am nervous that I may be "saving too much." If my goal is to work hard now, invest responsibly and retire comfortably, and hopefully a little early, then it is a little scary that I cannot touch this money (without penalty/interest) until age 59. Maybe someone could assuage my fears that I will regret making large contributions to a 401(k) with money that I could otherwise be investing with a discount broker for use in my 30's and 40's .... Thanks for all of your Foolish help, Joel
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Hopefully I'm not beating a dead topic here, but I am preparing to make my first 401(k)contibutions. I'm 26, earn about 45k (i'm a paralegal, and generally supplement my 35k salary with significant overtime, although it is hard to predict the annual compensation ahead of time.)

First off, congratulations on making a smart move for your future. I wish I had the opportunity you have when I was 26.

As to your allocation: It should be a simple matter to compare the ten-year growth for all the funds you mention. If any of them beat the Total Market Index fund, I would be surprised. If one does, go for it. I personally prefer the Extendex Market Index fund (VEXMX) over the Total market. VEXMX is just the total market, less the S&P500 component, which makes it more volatile.

Good luck!

cliff
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....funds....

Your long term results will depend on;
1) how much you contribute.
2) Your asset allocation (stocks/bonds/other)
3) Which funds you select.

Don't fret too much about much about which funds to select as long as they don't have loads or extremely high costs, most of your results will depend on the first two items. When looking at the funds don't forget to check for 12.1b costs and the more turnover there is the higher the trading costs are, both of these are not in the normal expense ratio that they list. These could bump the yearly expenses on some of these funds to over 1% higher than the Vanguard fund. One percent a year for 40 years is basically 40% of your money. They should be darn good funds to be worth this.

... I cannot touch this money (without penalty/interest) until age 59.....
After getting any employer match, you can look into contributing to a Roth IRA instead of the 401k because you can always withdrawal your contibutions from a Roth without a penality.

Greg
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Thanks for the responses so far. I have already opened an IRA, but for some reason I am not as hung up on what to invest in, particularly because the annual limit is so low relative to the 401(k). I also feel that my IRA account (currently at Sharebuilder) is going to be a lot easier to control if I decide that I want to reallocate my assets occasionally. I'm not sure why, but I do feel like the 401(k) money is going to be more "out of reach." anyway, thanks a bunch for the responses, and feel free to add anything else :) -joel
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Joel: I do not have the stats right handy but if my recollection is correct the Legg Mason Value Trust has beaten the SP 500 for at least the last 10 years if not more. It has a high management fee (around 1.75%, I think) so that is a negative, yet you can't argue with the success that Bill Miller has had. He invests in about 30 stocks and limits his turnover. If you can access James Glassman's latest column in last Sunday's Washington Post Business section you will read all about Value Trust. If I were you at the mid 20's age I would split my bets. Go with a 50% committment to SP500 index or the Total market as you suggested and the other 50% with Legg Mason. Good luck. Let us know what you do.
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If I were you I would:

1. At your salary level you are not in a very high tax bracket, therefore I would suggest that you definitely contribute to your 401K at least up to the percentage that your company matches--It's virtually 'free' money after all.

2. Next I would contribute the max to a Roth IRA.

3. Next I would build an 'emergency' fund of about 6-8 months living expenses in case you get laid off, hospitalized, whatever...(stuff does happen)

4. Only after all of the above would I consider a brokerage account.

As to what funds to invest in in the 401K--I invest the bulk into an index fund (about 50%) and I play with the other 50% in other funds. Last year I invested $4000 into a tech fund with high loads and high expenses in my 401K and managed to net a nice 38% return in 6 months. I then jumped ship with my $5600 back into the index. You just have to decide what percentage of your total contribution you want to play with, and then decide how much time you're willing to put in tracking all the riskier plays.

Well, that's what I would do...

2old


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Thanks for the responses. I think you guys were able to confirm my suspicion that I should not throw all of my contribution into the index fund, contrary to the general notion of this site's articles. I do have a stellar active fund at my disposal, so I will tinker with the percentages, probably 50% index, 30% legg mason value, 10% Columbia real estate, and 10% international. I guess I now have to pick between the 3 internationals. 2 are large cap and one is small. Maybe i will subdivide that 10% into small and large cap international. I will have to review their prospectuses again.

The other major decision to make is what % of my salary to defer. I am tempted to front-load my contribution so that the money has more time to grow in the market. Dollar cost averaging is appealing, although I feel that, all things being equal, it would be better to get in sooner than later.

Any thoughts on this issue? Thanks!

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The other major decision to make is what % of my salary to defer. I am tempted to front-load my contribution so that the money has more time to grow in the market. Dollar cost averaging is appealing, although I feel that, all things being equal, it would be better to get in sooner than later.


++++
++++

I would caution you to check very closely with you Co.'s HR folks to see how the Co. matches your 401k contributions. I worked for several Co.s that made their corporate match on a quarterly basis. These days, using a front-loading contribution method, there is the potential to contribute your annual maximum in one or two calendar quarters thereby missing corporate matching in the other quarters.

BOTTOM LINE:
You don't want to miss any corporate matching.

sunray

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thanks sunray-- very good advice indeed!
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I will tinker with the percentages, probably 50% index, 30% legg mason value, 10% Columbia real estate, and 10% international. I guess I now have to pick between the 3 internationals. 2 are large cap and one is small. Maybe i will subdivide that 10% into small and large cap international. I will have to review their prospectuses again.

Sounds like a good plan :-)

I agree with what Sunray said--I frontloaded my contributions one year and it turns out that my firm matches the first 3% based on the gross of each paycheck. IOW, when my contributions maxed out, I missed out on the matching 3% for all the remaining paychecks. OUCH! So now I make sure that I'm contributing at least 3% of each paycheck. If you're up to the calculations, and based on how your company determines its matching, you could contribute more at the beginning of the year, but ensure that you still have enough left to take advantage of the full match later in the year.

2old
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I have checked with HR and apparently the matching is done on an annual contribution basis at the end of the year. So I do not have to worry about missing out on the match. Given the condition of the market today, and weighing in with any additional foresight, does anyone have a stong feeling that I would do better with dollar cost averaging rather than making several rather large contributions towards the beginning of the year? (i imagine it will take 6 months or so to max out the contrib. limit) My general feeling is that it is best to just make as large of a contribution as possible now, and let the market do the hard work of making money. Any more thoughts on this? In a sense, it is an attempt to predict that the market is going to continue the general upward trend that has been going on, and therefore neglect the advantages that DCA would bring if the market slumps at any point this year.
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Any more thoughts on this? In a sense, it is an attempt to predict that the market is going to continue the general upward trend that has been going on, and therefore neglect the advantages that DCA would bring if the market slumps at any point this year.


I think that your 'prediction' is as good as mine or anyone else's, including all the financial wizards in the various media (this website included), because no one really knows--we're all just guessing. :-)

2old
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