401k allocation question

[jgrif08]

I'm 25 years old and just getting my 401k at work set up. I want to allocate aggresively while I'm young. They have a 'Lifetime 2040' option (its through Principal Financial) in which they'll progressively move my funds to more stable investments as I get older. They categorize that as 'Moderate' risk. I want to go 'aggressive' though. I mean now's the time in my life where I can tolerate that risk right?

Now I run into all these different 'aggressive' options and I have no clue what to look for... I see the following general categories:
Large Blend
Large Growth
Mid Cap Blend
Small Value
Small Blend
Small Growth

Can anyone here advise me on, in general terms, what these mean and/or which one I should go with and why?

I also see a risk category titled 'Dynamic'. What would that be all about?

Sorry, kind of long winded and general, and thoughts appreciated.

Thanks in advance,
J

[madcowdisease]

I'm 25 years old and just getting my 401k at work set up. I want to allocate aggresively while I'm young. They have a 'Lifetime 2040' option (its through Principal Financial) in which they'll progressively move my funds to more stable investments as I get older. They categorize that as 'Moderate' risk. I want to go 'aggressive' though. I mean now's the time in my life where I can tolerate that risk right?

Now I run into all these different 'aggressive' options and I have no clue what to look for... I see the following general categories:
Large Blend
Large Growth
Mid Cap Blend
Small Value
Small Blend
Small Growth

Can anyone here advise me on, in general terms, what these mean and/or which one I should go with and why?

I also see a risk category titled 'Dynamic'. What would that be all about?

Sorry, kind of long winded and general, and thoughts appreciated.

Thanks in advance,
J


When investing in mutual funds you should be familiar with the risk/reward chart. If you scroll down this link: http://www.trading24.org/trading-beginners/mutual-funds.php you should see a square with nine smaller boxes in it.

These boxes are categories of mutual funds. Upper right is large cap growth like Fidelity Contra Fund [FCNTX]. These funds invest in large cap (high market capitalization -- usualy in the billions of dollars) companies focusing on growth. Google would be an example of a company these funds would look to own shares.

The top left would be large cap value funds. These funds look to buy large cap stocks (see above) that the fund manager feels are undervalued relative to their peers. Sony, for example, may fit this bill or even the Dogs of the Dow strategy.

The middle column represents "Blend" or a mixture of both growth stocks and value plays. And as you move down the rows the focus is on companies with smaller market capitalizations (price per share X # shares outstanding -- assume this is the value of the company).

Know that the most conservative style would most likely be top left and the most aggressive would be bottom right. At least in my opinion.

I hope this helps without writing a book about it. I'm sure others here will chime in and offer their .02

[cramerica1972]

When investing in mutual funds you should be familiar with the risk/reward chart. If you scroll down this link: http://www.trading24.org/trading-beginners/mutual-funds.php you should see a square with nine smaller boxes in it.

These boxes are categories of mutual funds. Upper right is large cap growth like Fidelity Contra Fund [FCNTX]. These funds invest in large cap (high market capitalization -- usualy in the billions of dollars) companies focusing on growth. Google would be an example of a company these funds would look to own shares.

The top left would be large cap value funds. These funds look to buy large cap stocks (see above) that the fund manager feels are undervalued relative to their peers. Sony, for example, may fit this bill or even the Dogs of the Dow strategy.are 401k's tax deferred like ira's?

The middle column represents "Blend" or a mixture of both growth stocks and value plays. And as you move down the rows the focus is on companies with smaller market capitalizations (price per share X # shares outstanding -- assume this is the value of the company).

Know that the most conservative style would most likely be top left and the most aggressive would be bottom right. At least in my opinion.

I hope this helps without writing a book about it. I'm sure others here will chime in and offer their .02are 401k's tax deferred like IRA's?

[jgrif08]

So looking at that chart, should I try to allocate funds in a number of different 'squares' ideally?

[Will]

you don't want so many squares that your allocations aren't able to grow. I would suggesting 2-3 squares at most, when dealing with mutual funds for your 401K. My best advice would be Large Value, Mid blend, and small growth.

[optimus25]

For your age, this should be effective for the next 3-5 years.

At age 30, increase your bond exposure by 5% more.

Short and simple:
10% Small Cap (your choice of growth or value)
15% Mid Cap
45% Large Cap (20% Core, 25% Growth)
25% International
05% High yield bond

[optimus25]

Don't choose the specific investments based on returns alone. You'll need to do some research on the specific funds. Check out each fund on Morningstar and look at the 3-5 year performance.

[jgrif08]

Don't choose the specific investments based on returns alone. You'll need to do some research on the specific funds. Check out each fund on Morningstar and look at the 3-5 year performance.

I've got a couple books coming my way. I'm going to start educating myself about this stuff. But for now I'm wondering this:

When you say 'do some research', what kind of things am I looking for? 3-5 year performance is simple enough, I understand that. Any other indicators I should take a look at?

[optimus25]

I've got a couple books coming my way. I'm going to start educating myself about this stuff. But for now I'm wondering this:

When you say 'do some research', what kind of things am I looking for? 3-5 year performance is simple enough, I understand that. Any other indicators I should take a look at?

In 401K plans the research should be relatively simple since you only have a handful of funds to choose from. Among those funds, you'll need to choose usually between 1-3 funds within that class, ie. 1-3 funds within the growth category etc.

I like looking at the 3-5 year performance and even the 10 year because it takes into account how the fund performed during the last bear market. Morningstar will rate the fund performance 1-5 stars vs its corresponding index as well as its peers. They make it easy for you to do the leg work. Morningstar will also have the manager tenure. The longer the manager has been there the better.

[madcowdisease]

are 401k's tax deferred like IRA's?

My understanding is 401Ks are pre-tax. The appeal here is you use the "government's money" to grow your assets and when you finally withdraw funds from the 401K you pay the taxes just like you would income from a job.

IRAs on the other hand are post-tax. The appeal here is that if you invest early, say in your 20s, while you are, like most of us, myself included, in a small tax bracket you are taxed less. Then, as you age and your income swells you withdraw from the IRA tax free because you already payed the tax at a lower income bracket.

The strategy I use is to contribute to my 401K what my employer is willing to match, in my case the first 3% then I believe half up to 5% of my income. I just bank away 3%, with their match for a total of 6%. I then try and max out my IRA while I am young and not making squat so that I only pay the lower tax bracket.

[optimus25]

MCD, as you get older and you climb the income tax bracket, the full benefit of the Roth IRA's tax free status becomes evident. Its a matter of balancing out between tax free and tax deferred. You're following the correct strategy buy investing in your company's 401K plan to get the match.

There are two IRA's, Roth and Traditional. The contributions to a Traditional IRA are tax deferred much like a 401K. You'll need to claim it on your income taxes to reduce your taxable income.