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Anyone out there have suggestions for choosing amongst fund options within a 401K? Go with the aggressive growth mostly stock funds? I've got info on them, but remain confused. Any comments/experience/advice appreciated!

Over time, 401(k) plans tend to be changed. I've been with my current employer for six years, and there have been two changes in the 401(k) plan requiring serious thought and decision making. The first time, my employer changed custodians for the 401(k) and all the investment options except company stock changed. The second time, a couple of additional funds were added to the list we can choose from.

For most of this time, I've spread my money around in the funds. This was following the Wise advice as to asset allocation, though I put less in bonds than the Wise said I should. Wise advice also says you should diversify among funds because market conditions change, and different funds will be the stars in various market conditions.

So what has experience taught me? Bond funds suck. Their upward potential is limited, but they can still tank, like they did in 1994. The "balanced" funds available to me have actually displayed more volatility in the period I've held them than the index fund or the small cap growth fund. I haven't been brave enough to put money into the international fund, but its share price periodically takes hits because of obvious international news. (It recovers, but the overall return has been sub-par.) Other than that, the stock funds available to me tend to move in the same direction in response to the same market conditions.

So I re-allocated my existing and future contributions to be 50% in the index fund and 50% in the managed aggressive growth fund. These two have had comparable returns over the past few years, with the managed fund sometimes outperforming the index. Good enough for me.

Lessons I've learned:

1) 500 stocks in the S&P 500 index fund provide a lot of diversity. If the S&P 500 is tanking, so is every other equity fund.

2) Holding bonds in a fund adds a level of risk of lost capital that holding individual bonds doesn't have. I see no reason to hold a bond fund in a tax deferred account when the time to retirement is measured in decades.

3) I'm more comfortable with my assessment of specific equity or balance funds after watching some of my own dollars in them than I am with only the company brochures for guidance.

4) Assuming that none of the investments are actually losing piles of money, today's decision is not all that critical. It can be changed next month, or five years from now.

5) It is nearly impossible for employers to resist the temptation to put 100% of the employer matching contribution into company stock. Mine made the stock restricted for five years. Much as I think that the stock is a good investment, I have way too big a percentage of my 401(k) in an investment that is doubly risky. Even if your employer is not doing this now, in a few years it will occur to the decision makers that this is a way to help support the stock price.

I'd recommend taking an index fund if it is an option. If that's not an option, I'd favor the more aggressive growth, mostly stock funds. This is based on my experience that the more "conservative" funds available in my 401(k) experience losses just as big as the aggressive funds, but take longer to recover. Having said that, your choice must depend on what's available to you. Your employer may have given you a better or worse menu to choose from than I have.

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