My son's 401K options

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

My son's 401K options

Postby umfundi » Thu May 02, 2013 8:58 pm

I am kind of thrilled. My 21-year old son has landed a traditional (non-union) job at a Detroit-area die maker. He has paid days off, a great health care plan, and what seems to be a good 401k.

Here are the 401k options:

Alerus Con Growth Inst
Alerus Aggr Growth Inst
Alerus Cons Income Inst
Alerus Mod Growth Inst
Alerus Mod Income Inst
Met Life Stake Value
(all the above, no ticker stated)
DODIX Dodge & Cox Income
TWEIX American Century Eq Inc
FPURX Fidelity Puritan
VIFSX Vanguard 500 Index Signal
PRWAX T Rowe Price New America Gr
VMISX Vanguard Mid Cap Index Signal
ACRNX Columbia Acorn - Z
FCPVX Fidelity Small Cap Value
VSISX Vanguard Small Cap Index Signal
RERGX American Funds EuroPacific R6

Without much investigation, I told him to save 20% of his eligible income, and to put 75% in VIFSX (0.05% ER) and 25% in VSISX (0.10% ER) and to to choose the annual rebalance option. Then, to ignore it and to check back in 15 years.

21 years old, no debt, unused college fund.

Seems like a great deal to me. Any observations on the above fund choices will be welcomed.

Keith
Déjà Vu is not a prediction
umfundi
 
Posts: 3361
Joined: Tue Jun 07, 2011 6:26 pm

Re: My son's 401K options

Postby jay22 » Thu May 02, 2013 9:08 pm

You want him to be in 100% equities?
jay22
 
Posts: 328
Joined: Thu Aug 23, 2012 9:56 am

Re: My son's 401K options

Postby umfundi » Thu May 02, 2013 10:02 pm

jay22 wrote:You want him to be in 100% equities?

At this point, why not?

Do you think DODIX is an appropriate diversifier?

I have no idea what these Alerus funds are.

Keith
Déjà Vu is not a prediction
umfundi
 
Posts: 3361
Joined: Tue Jun 07, 2011 6:26 pm

Re: My son's 401K options

Postby LadyGeek » Thu May 02, 2013 10:29 pm

umfundi wrote:At this point, why not?

What's his say in the matter here? Ignore the family attachment. Remember that we generally recommend no more than 80/20 for new investors. There's not that much difference in performance and the diversification will help ride out the emotional swings he goes through the first time the market tanks.

Is he on his own? Get him started on building an emergency fund, managing a household budget, etc. He'll have a good teacher (if he listens to his Dad :) ).
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
LadyGeek
Site Admin
 
Posts: 19182
Joined: Sat Dec 20, 2008 6:34 pm
Location: Philadelphia

Re: My son's 401K options

Postby Grt2bOutdoors » Thu May 02, 2013 10:42 pm

umfundi wrote:
jay22 wrote:You want him to be in 100% equities?

At this point, why not?

Do you think DODIX is an appropriate diversifier?

I have no idea what these Alerus funds are.

Keith


Er ratio of 0.43
698 issues
45.7% Corporate
Duration 3.7

I'd put 20% into this fund - er ratio isn't that terrible and the fund has a good track record. Even Jack has good things to say about Dodge and Cox. Here's the link ---> https://www.dodgeandcox.com/incomefund_character.asp
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 10231
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: My son's 401K options

Postby umfundi » Fri May 03, 2013 12:00 am

LadyGeek wrote:
umfundi wrote:At this point, why not?

What's his say in the matter here? Ignore the family attachment. Remember that we generally recommend no more than 80/20 for new investors. There's not that much difference in performance and the diversification will help ride out the emotional swings he goes through the first time the market tanks.

Is he on his own? Get him started on building an emergency fund, managing a household budget, etc. He'll have a good teacher (if he listens to his Dad :) ).

Sue,

It's his choice, he asked for advice. The 401k does not kick in for 90 days, so we are discussing alternatives. I guess I am very encouraged that his 401k options seem to have some very good options.

Keith
Déjà Vu is not a prediction
umfundi
 
Posts: 3361
Joined: Tue Jun 07, 2011 6:26 pm

Re: My son's 401K options

Postby ziszew » Fri May 03, 2013 12:09 am

Grt2bOutdoors wrote:
umfundi wrote:
jay22 wrote:You want him to be in 100% equities?

At this point, why not?

Do you think DODIX is an appropriate diversifier?

I have no idea what these Alerus funds are.

Keith


Er ratio of 0.43
698 issues
45.7% Corporate
Duration 3.7

I'd put 20% into this fund - er ratio isn't that terrible and the fund has a good track record. Even Jack has good things to say about Dodge and Cox. Here's the link ---> https://www.dodgeandcox.com/incomefund_character.asp


If the details at Morningstar are to be believed, it's not the best option out there; it just squeaks into investment grade (BBB average) and heavy on the MBS (maybe they're copying Mr. Gross?). The good news is that it's a bit more corporate leaning than TBM (which Jack thinks is too light in that area from interviews I've heard/seen/read). It's not bad, just not particularly good as fixed options go. It also fell noticeably further down the hole in 08/09 than TBM (and even more so than the Gov funds); not exactly ideal behavior from a diversifier.

If it were my son I'd give the same advice; 100% equities given the fixed income landscape, his age, etc. I don't think that's overly aggressive given the 40 year time horizon as long as he can stay the course (which is a big caveat). If I recall Mr. Bernstein even throws out leveraging and equities early on as an overly rational way to approach the conundrum (although he says that the reality of it is too much for most when the bear shows up...).
ziszew
 
Posts: 128
Joined: Thu May 10, 2012 12:47 am

Re: My son's 401K options

Postby Grt2bOutdoors » Fri May 03, 2013 12:17 am

ziszew wrote:
Grt2bOutdoors wrote:
umfundi wrote:
jay22 wrote:You want him to be in 100% equities?

At this point, why not?

Do you think DODIX is an appropriate diversifier?

I have no idea what these Alerus funds are.

Keith


Er ratio of 0.43
698 issues
45.7% Corporate
Duration 3.7

I'd put 20% into this fund - er ratio isn't that terrible and the fund has a good track record. Even Jack has good things to say about Dodge and Cox. Here's the link ---> https://www.dodgeandcox.com/incomefund_character.asp


If the details at Morningstar are to be believed, it's not the best option out there; it just squeaks into investment grade (BBB average) and heavy on the MBS (maybe they're copying Mr. Gross?). The good news is that it's a bit more corporate leaning than TBM (which Jack thinks is too light in that area from interviews I've heard/seen/read). It's not bad, just not particularly good as fixed options go. It also fell noticeably further down the hole in 08/09 than TBM (and even more so than the Gov funds); not exactly ideal behavior from a diversifier.

If it were my son I'd give the same advice; 100% equities given the fixed income landscape, his age, etc. I don't think that's overly aggressive given the 40 year time horizon as long as he can stay the course (which is a big caveat). If I recall Mr. Bernstein even throws out leveraging and equities early on as an overly rational way to approach the conundrum (although he says that the reality of it is too much for most when the bear shows up...).


If (Dodge and Cox) indicates it holds 46 percent in corporates, where are you getting the "it's heavy in MBS" from? Holding 100% equity is as risky as they come and it speaks of trying to time the market by avoiding fixed income.....and given the other alternatives, it's the best of the lot. A 20% allocation in a fund costing 43 bps, amounts to a charge of 8.6 bps, pretty cheap, pro-rata share.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 10231
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: My son's 401K options

Postby umfundi » Fri May 03, 2013 12:18 am

Grt2bOutdoors wrote:
umfundi wrote:
jay22 wrote:You want him to be in 100% equities?

At this point, why not?

Do you think DODIX is an appropriate diversifier?

I have no idea what these Alerus funds are.

Keith


Er ratio of 0.43
698 issues
45.7% Corporate
Duration 3.7

I'd put 20% into this fund - er ratio isn't that terrible and the fund has a good track record. Even Jack has good things to say about Dodge and Cox. Here's the link ---> https://www.dodgeandcox.com/incomefund_character.asp

Thank you. I did have a look at DODIX and thought, "not bad".

Given the choices, what would you think of

VIFSX 60%
VSISX 20%
DODIX 20%

This afternoon we spent some time looking at VIFSX, seeing that it is Apple, Exxon, IBM, and other large companies.

Keith
Déjà Vu is not a prediction
umfundi
 
Posts: 3361
Joined: Tue Jun 07, 2011 6:26 pm

Re: My son's 401K options

Postby dickenjb » Fri May 03, 2013 7:06 am

umfundi wrote:
Thank you. I did have a look at DODIX and thought, "not bad".

Given the choices, what would you think of

VIFSX 60%
VSISX 20%
DODIX 20%

This afternoon we spent some time looking at VIFSX, seeing that it is Apple, Exxon, IBM, and other large companies.

Keith


Now you're talking. Very sensible allocation imho. And if he can start contributing 20% and/or IRS max, he will be off to a great start in life.
Philly Chapter Coordinator
dickenjb
 
Posts: 2940
Joined: Tue Jan 05, 2010 2:11 pm
Location: Philadelphia PA

Re: My son's 401K options

Postby ziszew » Fri May 03, 2013 8:53 am

Grt2bOutdoors wrote:<<snip>>

If (Dodge and Cox) indicates it holds 46 percent in corporates, where are you getting the "it's heavy in MBS" from?


They are ~32% of all holdings, and given the low Treasury holdings of ~9% (compared to 26% and 44% respectively for TBM) I consider that "heavy" towards MBS. As I said, it's not bad; given that it was the only bond option at my last employer I've owned it myself.

Grt2bOutdoors wrote:Holding 100% equity is as risky as they come and it speaks of trying to time the market by avoiding fixed income.....and given the other alternatives, it's the best of the lot. A 20% allocation in a fund costing 43 bps, amounts to a charge of 8.6 bps, pretty cheap, pro-rata share.


The VG Target Retirement 2055 as well as 2060 (his age puts him at the bottom of the 2055 range) both hold 10% Total Bond Market, which would give it about 5% Treasury, 2.5% MBS, and 2% Corp. Holding 20% DODIX would give you 2% Treasury, 6% MBS, 9% Corp, and 2% Muni.

As Bill said in this interview, "And so with that in mind you want your safe assets to be as safe as you can, and you should be investing in four things, which are Treasuries at the short end, and certificates of deposit and money markets, and then a clothes pin for your nose to be able to deal with those very low yields that you're going to be getting."

If you must have bonds, taking some money after you've reached the company match in the 401k, opening an IRA, and allocating 5-10% to treasuries would get you a more effective diversifier when that rainy day comes, with the risk (and better risk adjusted return) kept to the equity side (there are other threads around here about how Bill, Larry, et al. feel about MBS)
ziszew
 
Posts: 128
Joined: Thu May 10, 2012 12:47 am

Re: My son's 401K options

Postby jay22 » Fri May 03, 2013 9:07 am

umfundi wrote:
jay22 wrote:You want him to be in 100% equities?

At this point, why not?

Do you think DODIX is an appropriate diversifier?

I have no idea what these Alerus funds are.

Keith

Sorry, didn't read the part where it said he is 21. Still, considering the efficient frontier, with a long term horizon, why not put 10-20% in bonds?
jay22
 
Posts: 328
Joined: Thu Aug 23, 2012 9:56 am

Re: My son's 401K options

Postby Grt2bOutdoors » Fri May 03, 2013 9:10 am

ziszew wrote:
Grt2bOutdoors wrote:<<snip>>

If (Dodge and Cox) indicates it holds 46 percent in corporates, where are you getting the "it's heavy in MBS" from?


They are ~32% of all holdings, and given the low Treasury holdings of ~9% (compared to 26% and 44% respectively for TBM) I consider that "heavy" towards MBS. As I said, it's not bad; given that it was the only bond option at my last employer I've owned it myself.

Grt2bOutdoors wrote:Holding 100% equity is as risky as they come and it speaks of trying to time the market by avoiding fixed income.....and given the other alternatives, it's the best of the lot. A 20% allocation in a fund costing 43 bps, amounts to a charge of 8.6 bps, pretty cheap, pro-rata share.


The VG Target Retirement 2055 as well as 2060 (his age puts him at the bottom of the 2055 range) both hold 10% Total Bond Market, which would give it about 5% Treasury, 2.5% MBS, and 2% Corp. Holding 20% DODIX would give you 2% Treasury, 6% MBS, 9% Corp, and 2% Muni.

As Bill said in this interview, "And so with that in mind you want your safe assets to be as safe as you can, and you should be investing in four things, which are Treasuries at the short end, and certificates of deposit and money markets, and then a clothes pin for your nose to be able to deal with those very low yields that you're going to be getting."

If you must have bonds, taking some money after you've reached the company match in the 401k, opening an IRA, and allocating 5-10% to treasuries would get you a more effective diversifier when that rainy day comes, with the risk (and better risk adjusted return) kept to the equity side (there are other threads around here about how Bill, Larry, et al. feel about MBS)


Great analysis. You're really splitting hairs here. It's likely the OP's son will not lose his investment with the Dodge and Cox Income fund, and when and if the OP's son makes enough to contribute to either a Roth or an TIRA, he can then revisit his bond allocation. I have no problems with Bill's opinion at all.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 10231
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: My son's 401K options

Postby leonard » Fri May 03, 2013 11:45 am

I think a thorough assessment of the son's risk profile should be done. It can be tempting to dictate a boglehead portfolio to someone new - but I think the process of understanding and buying in to one's own risk profile is crucial. The initial advice feels a little cookie cutter - based purely on the sons age and not coming from a full risk assessment for the son.

So, I think 20% should be the absolute minimum bonds to start out. In fact going more conservative at first - perhaps 30 to 40% bonds. The son can always increase equity percentages and increase risk as he gets comfortable with investing and the market.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
leonard
 
Posts: 4147
Joined: Wed Feb 21, 2007 12:56 pm

Re: My son's 401K options

Postby umfundi » Fri May 03, 2013 1:56 pm

Thank you all for all the advice.

I spoke with my son last night. He is on board with saving 20%, and with a selection of 60% S&P500, 20% SmallCap and 20% bonds.

His eligibility doesn't kick in for 90 days, so he has plenty of time to get educated on his choices and to think about it.

Thanks again.

Keith
Déjà Vu is not a prediction
umfundi
 
Posts: 3361
Joined: Tue Jun 07, 2011 6:26 pm

Re: My son's 401K options

Postby jay22 » Fri May 03, 2013 2:05 pm

umfundi wrote:Thank you all for all the advice.

I spoke with my son last night. He is on board with saving 20%, and with a selection of 60% S&P500, 20% SmallCap and 20% bonds.

His eligibility doesn't kick in for 90 days, so he has plenty of time to get educated on his choices and to think about it.

Thanks again.

Keith

I am no expert, but I think that's a great plan. :D
jay22
 
Posts: 328
Joined: Thu Aug 23, 2012 9:56 am

Re: My son's 401K options

Postby umfundi » Fri May 03, 2013 2:42 pm

jay22 wrote:
umfundi wrote:Thank you all for all the advice.

I spoke with my son last night. He is on board with saving 20%, and with a selection of 60% S&P500, 20% SmallCap and 20% bonds.

His eligibility doesn't kick in for 90 days, so he has plenty of time to get educated on his choices and to think about it.

Thanks again.

Keith

I am no expert, but I think that's a great plan. :D

Jay,

I was thinking, by comparison, where was I at age 21? I am very pleased and proud of him.

There have been a number of threads on educating young people about finance. If you are lucky, some of your good practices will rub off on your kids.

Keith
Déjà Vu is not a prediction
umfundi
 
Posts: 3361
Joined: Tue Jun 07, 2011 6:26 pm

Re: My son's 401K options

Postby zaboomafoozarg » Fri May 03, 2013 2:42 pm

RERGX has a decent enough ER (.5%) and is close enough to Total International that I'd consider adding it. I'd probably do something like:

40% VIFSX
20% VSISX
20% RERGX
20% DODIX

But that's just me. I like having a decent amount of international diversification. More likely, I'd probably just use a VG IRA to buy VGTSX.

At this stage in the game though, his savings rate will matter more than anything, so probably not a big deal. Just something to think about.
Last edited by zaboomafoozarg on Sat May 04, 2013 12:26 pm, edited 1 time in total.
User avatar
zaboomafoozarg
 
Posts: 1082
Joined: Sun Jun 12, 2011 1:34 pm

Re: My son's 401K options

Postby ziszew » Sat May 04, 2013 12:34 am

Grt2bOutdoors wrote:<<snip>>
Great analysis. You're really splitting hairs here. It's likely the OP's son will not lose his investment with the Dodge and Cox Income fund, and when and if the OP's son makes enough to contribute to either a Roth or an TIRA, he can then revisit his bond allocation. I have no problems with Bill's opinion at all.


True, we are really playing with the cat's whiskers.

It's a good problem to have, and there is nothing wrong with fund. The key is saving at least 10% of his gross and everything else is probably closer to noise after that; i'd prefer 5% treasury and everything else equity all things considered, but to be fair the real battle is in saving enough to begin with..
ziszew
 
Posts: 128
Joined: Thu May 10, 2012 12:47 am


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Bing [Bot], ElecEel, markcoop, nimo956, retiredjg, ryman554, skepticalobserver, slbnoob, tcclark4, Yahoo [Bot] and 90 guests