401(k) dilemma. Is an index fund the best choice?

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

401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Thu Aug 29, 2013 8:44 am

This is my first post so please be gentle :happy

I am having trouble with the concept why lower cost funds are more beneficial than ones with higher costs if the returns are the same. In a recent meeting with my local Bogleheads chapter, the members told me that if a low cost index fund (let’s say with a 0.17% expense ratio) and a managed fund (let’s say with a 1.57% expense ratio) both return 11% over the last five years, there is no difference in the return since the amount charged for the expense ratio is already accounted for. Their argument was that there is more risk in the managed fund because the management has to take more risk to get the higher returns that, in my example, end up being an equal return after the expenses are deducted.

I ask this because it is widely regarded that managed funds aren't even likely to exceed an index fund. But in the limited choices of my 401(k) I have several funds that have done far better than the current index fund they are offering. Here are some of these funds and their returns:

Fund Name Symbol Ins. Date YTD 1 Year 3 Year 5 Year 10 Year LOF ER

Wells Fargo Advantage Growth Fund Class A SGRAX 2/24/2000 15.61% 15.72% 22.19% 12.95% 11.28% 11.28% 1.21%

Eaton Vance-Atlanta Cap SMID-Cap CL A EAASX 11/28/2003 20.14% 26.17% 22.29% 13.47% 11.89% 1.24%

Invesco Trimark Small Cos CL A ATIAX 11/4/2003 17.39% 20.61% 22.49% 14.94% N/A 11.99% 1.18%

Spartan® 500 Index Fund FUSVX 2/17/1988 15.90% 18.16% 17.71% 7.28% 7.18% 7.59% 1.59%

(Sorry, I tried to get the columns to line up but was unsuccessful)

There are 10 other U.S. stock funds in my plan and almost all of them beat the Spartan® 500 Index Fund in the majority of the time frames.

I know past performance is no guarantee of future results but here are several funds out of a limited choice that are outperforming the index fund significantly. If someone followed this advice ten years ago they would have missed out on a lot of money. I have read all of the conventional wisdom on why index funds are better than actively managed funds but I am having trouble pushing the buttons to reallocate my 401(k) from funds with superior returns to this index fund.

I would like to know the opinion on this from the members here.
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby yosef » Thu Aug 29, 2013 9:29 am

I'm very much a novice myself, but I think your categorization of "stock funds" is much too broad. An S&P 500 index fund is a large cap fund. You're comparing that with small and mid cap funds. Apples and oranges.
yosef
 
Posts: 292
Joined: Tue May 24, 2011 2:10 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby dbr » Thu Aug 29, 2013 9:32 am

Acesalad wrote:

I know past performance is no guarantee of future results but here are several funds out of a limited choice that are outperforming the index fund significantly. If someone followed this advice ten years ago they would have missed out on a lot of money.


Well, then I won't be gentle. :happy

If you truly understand the first part of what you said above, then you would understand that the second part of what you said above is garbage. :happy

The essence of the problem is two things:

1. To compare on a basis of equal risk, an exercise left for the reader.

2. To understand that statistical variation in returns means that any given fund that has an expectation of delivering less can, for any arbitrary period deliver more and then for a different, future period, not do so.

3. In the meantime it is a certainty that costs will operate against the return of the one less than the other.

Lastly, the literature on this is substantial. It is something one can research and analyze.
dbr
 
Posts: 14969
Joined: Sun Mar 04, 2007 9:50 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby dbr » Thu Aug 29, 2013 9:36 am

yosef wrote:I'm very much a novice myself, but I think your categorization of "stock funds" is much too broad. An S&P 500 index fund is a large cap fund. You're comparing that with small and mid cap funds. Apples and oranges.


Based on well-regarded research by Fama and French investment returns are predicted by the risk factors of market, size, and value. Smaller size predicts higher average return (at higher risk). Whether that prediction is actually what accounts in this case would require analysis.

A standard trick for creating false comparisons in then mutual find business is to compare the returns of investments that are not the same and have different properties. It is not possible to escape the iron rule that, assuming diversified portfolios, higher return is accompanied by greater risk.
dbr
 
Posts: 14969
Joined: Sun Mar 04, 2007 9:50 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby DaveG » Thu Aug 29, 2013 9:37 am

Does your S&P 500 Index fund really have an ER of 1.59% ? I assume that was a typo.
He/She:39/38, Kids:6/2 | Stock (72%): 20% US LrgCap, 20% Intl Developed, 8% US MidCap, 8% US SmlCap, 7% Intl EM & Frontier, 5% RE, 4% JnkBnd | Bond (25%): 21% USIndx, 4% TIPS | Commodities (3%)
User avatar
DaveG
 
Posts: 67
Joined: Thu May 26, 2011 9:41 am
Location: Plano, Texas

Re: 401(k) dilemma. Is an index fund the best choice?

Postby YDNAL » Thu Aug 29, 2013 9:37 am

Acesalad wrote:I ask this because it is widely regarded that managed funds aren't even likely to exceed an index fund. But in the limited choices of my 401(k) I have several funds that have done far better than the current index fund they are offering. Here are some of these funds and their returns:

Code: Select all
Fund Name                                   Symbol   Ins. Date   YTD     1 Year   3 Year   5 Year   10 Year   LOF       ER
                           
Wells Fargo Advantage Growth Fund Class A   SGRAX    2/24/2000   15.61%   15.72%   22.19%   12.95%   11.28%   11.28%   1.21%
                           
Eaton Vance-Atlanta Cap SMID-Cap CL    A    EAASX   11/28/2003   20.14%   26.17%   22.29%   13.47%            11.89%   1.24%
                           
Invesco Trimark Small Cos CL A              ATIAX   11/04/2003   17.39%   20.61%   22.49%   14.94%      N/A   11.99%   1.18%
                           
Spartan® 500 Index Fund                     FUSVX    2/17/1988   15.90%   18.16%   17.71%    7.28%    7.18%    7.59%   1.59%

(Sorry, I tried to get the columns to line up but was unsuccessful)

There are 10 other U.S. stock funds in my plan and almost all of them beat the Spartan® 500 Index Fund in the majority of the time frames.

Welcome, Acesalad!

I fixed your table for you. :)

Run this by me again.... FUSVX has an ER of 1.59% in your 401K plan ??? If it indeed has that ER, that would be criminal.

Anyhow, the S&P 500 is the S&P 500.
  • You can't (shouldn't) compare ATIAX or EAASX or anything else for that matter to it.
  • Apples and Oranges.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13713
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Twins Fan » Thu Aug 29, 2013 9:44 am

If I'm reading the numbers right, you have the ER for the Spartan 500 index fund at 1.59%?? That doesn't seem right. But if that's correct, then I would say definitely don't invest in that index fund... that's crazy!

A question for anyone... Does the return shown for any fund already take into account the ER?

I didn't think that was the case. I always though of it as... Let's say a S&P 500 index fund with a .05 ER and Fidelity Contrafund at .75 ER (close enough right, and only examples) both return 10% in a given year. I thought the total return would then be 9.95% for the index fund and 9.25% for the contrafund. Is that correct, or am I off base here?
Twins Fan
 
Posts: 1579
Joined: Fri Mar 08, 2013 1:02 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Thu Aug 29, 2013 11:01 am

DaveG wrote:Does your S&P 500 Index fund really have an ER of 1.59% ? I assume that was a typo.

Yes, that was a typo. It is 0.06%
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Thu Aug 29, 2013 11:06 am

A question for anyone... Does the return shown for any fund already take into account the ER?

I would like to know this for sure also. As I mentioned, the members of my local chapter were of the opinion that ER is already taken into account.
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby 3CT_Paddler » Thu Aug 29, 2013 11:23 am

Perform an experiment to confirm the notion that "Past performance does not guarantee future results". Look at the ten best performing and ten worst performing mutual funds in 2000, based on the previous ten years. Then look at the ten best performing and ten worst performing mutual funds in 2010. How many of those funds continued their success from the previous ten years?

I would propose a revision to the common phrase... "*Past performance has no bearing on future returns when attempting to choose the right actively managed fund."

"*Based on years of research and comparing thousands of mutual funds over many decades."
User avatar
3CT_Paddler
 
Posts: 3019
Joined: Wed Feb 04, 2009 5:28 pm
Location: Marietta, GA

What experts say about Past Performance.

Postby Taylor Larimore » Thu Aug 29, 2013 11:42 am

Acesalad:

Welcome to the Bogleheads Forum!
I know past performance is no guarantee of future results but here are several funds out of a limited choice that are outperforming the index fund significantly. If someone followed this advice ten years ago they would have missed out on a lot of money.


It is easy and appears logical to look at a mutual fund's past performance and assume it predicts the fund's future performance. However, it is so futile (and often dangerous) that mutual funds are required by the government to tell you that past performance does not predict future performance.

This is what experts tell us:
Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."

Barra Research: "There is no persistence of equity fund performance."

Jack Bogle: "In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority."

Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.

Wm. Bernstein, author: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."

Jack Brennan, Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."

Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."

Prof. John Cochrane, author: "Past performance has almost no information about future performance."

S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"

Jonathan Clements, author & columnist: "Trying to pick market-beating investments is a loser's game."

Eugene Fama: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."

Gensler & Bear, authors: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."

Ken Heebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Burton Malkiel, author: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."

Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to underperformance in the subsequent period."

After fifteen straight years beating the S&P 500 Index, Legg Mason Value manager, Bill Miller's Legg Mason Value Trust (LMNVX) is now (Aug. 2011) in the bottom 1% of its category for 10-year returns .

Carl Richards, financial author: "The academics, regulatory agencies and most professionals agree: When it come to investing, past performance has zero predictive value."

Ron Ross, author: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistance in mutual fund performance."

Bill Schultheis, author: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Standard & Poor's: "Over the 5 years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods."

Larry Swedroe, author: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."

David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."

Tweddell & Pierce, authors: "Numerous studies have shown that using superior past performance is no better than random selection."

Eric Tyson, author: "If you had invested in the annual #1 top performing stock and bond funds over the last 15 years, 80% of those top performers subsequently performed worse, over the next 3-10 years, than the average fund in their peer group! Two of three former #1 funds are actually the worst performing funds in their particular category."

Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.

Vanguard U.S. Growth had the 2nd BEST 10-year return of all Vanguard funds in December, 1998. On December 31, 2005 U.S. Growth had the 2nd WORST 10-year return of all Vanguard funds.

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20394
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: 401(k) dilemma. Is an index fund the best choice?

Postby KyleAAA » Thu Aug 29, 2013 12:08 pm

Acesalad wrote:
A question for anyone... Does the return shown for any fund already take into account the ER?

I would like to know this for sure also. As I mentioned, the members of my local chapter were of the opinion that ER is already taken into account.


Yes, that is how ALL mutual funds and ETFs are required by law to report returns: net of expenses.
KyleAAA
 
Posts: 5493
Joined: Wed Jul 01, 2009 5:35 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby whomever » Thu Aug 29, 2013 12:20 pm

Just for grins I checked up on SGRAX (Wells Fargo Advantage Growth) and VFINX (Vanguard SP500) (which ought to perform veeeery close to FUSVX, but started prior to the year 2000.

10K invested in SGRAX on 2/24/2000 (the date the M* chart seems to use for 'max' time) is worth around $13K today.
10K invested in VFINX on 2/24/2000 is worth just under $16K today.

Before I decided XXXXX outperforms YYYYY, I'd check over a number of time intervals.
whomever
 
Posts: 244
Joined: Sat Apr 21, 2012 5:21 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Jim180 » Thu Aug 29, 2013 1:00 pm

Acesalad wrote:
Spartan® 500 Index Fund FUSVX 2/17/1988 15.90% 18.16% 17.71% 7.28% 7.18% 7.59% 1.59%

I question that 1 yr. return of 18.16% listed for the Spartan 500. The Vanguard website shows a 1 yr. return of 24.95% for that fund.

Those managed funds you mention have a lot of mid and small cap exposure so comparing then to the S&P is not a fair comparison.
Jim180
 
Posts: 252
Joined: Wed Jun 26, 2013 9:47 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby JW Nearly Retired » Thu Aug 29, 2013 1:42 pm

Acesalad wrote:I ask this because it is widely regarded that managed funds aren't even likely to exceed an index fund. But in the limited choices of my 401(k) I have several funds that have done far better than the current index fund they are offering. Here are some of these funds and their returns:

Fund Name Symbol Ins. Date YTD 1 Year 3 Year 5 Year 10 Year LOF ER

Wells Fargo Advantage Growth Fund Class A SGRAX 2/24/2000 15.61% 15.72% 22.19% 12.95% 11.28% 11.28% 1.21%

Eaton Vance-Atlanta Cap SMID-Cap CL A EAASX 11/28/2003 20.14% 26.17% 22.29% 13.47% 11.89% 1.24%

Invesco Trimark Small Cos CL A ATIAX 11/4/2003 17.39% 20.61% 22.49% 14.94% N/A 11.99% 1.18%

Spartan® 500 Index Fund FUSVX 2/17/1988 15.90% 18.16% 17.71% 7.28% 7.18% 7.59% 0.06%

There are 10 other U.S. stock funds in my plan and almost all of them beat the Spartan® 500 Index Fund in the majority of the time frames.

I know past performance is no guarantee of future results but here are several funds out of a limited choice that are outperforming the index fund significantly. If someone followed this advice ten years ago they would have missed out on a lot of money. I have read all of the conventional wisdom on why index funds are better than actively managed funds but I am having trouble pushing the buttons to reallocate my 401(k) from funds with superior returns to this index fund.

I would like to know the opinion on this from the members here.

There is one very important factor here that is risk independent. All these funds except SP500 are only about 10 years old. There are many thousands of funds out there and some can always be found to out perform even an honest benchmark for years by pure luck. The luck invariably runs out but fund companies are always starting new funds and closing old ones that encounter bad luck. Much of the investing public is chasing past performance so fund salesman don't even want to try to sell a fund that had a bad luck streak. They wish to sell only "good" funds.

Now when did your 401k decided to use these particular funds and what do you think was the criteria used to choose them?

Could it possibly have been past performance that got them into your 401k? :oops:
Of course it was.
JW
Retired at Last
JW Nearly Retired
 
Posts: 4177
Joined: Sun Dec 16, 2007 12:25 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Thu Aug 29, 2013 2:05 pm

So what should my strategy be going forward? Following the premise of The Bogleheads Guide to Investing it seems I shoud have a 55/45 mix of stocks and bonds (I am 46 years old). Do I just put 55% of my holdings in the Spartan 500 Index Fundfund and the other 45% in a bond fund?
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby slowlrnr » Thu Aug 29, 2013 2:10 pm

Acesalad wrote:So what should my strategy be going forward? Following the premise of The Bogleheads Guide to Investing it seems I shoud have a 55/45 mix of stocks and bonds (I am 46 years old). Do I just put 55% of my holdings in the Spartan 500 Index Fundfund and the other 45% in a bond fund?


+1. What bond fund options do you have in your 401k? What about international fund options? Also, the suggestion for 55/45 is for your "entire" portfolio which includes your other investments.
slowlrnr
 
Posts: 92
Joined: Fri Feb 01, 2013 6:45 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby JW Nearly Retired » Thu Aug 29, 2013 2:43 pm

Acesalad wrote:So what should my strategy be going forward? Following the premise of The Bogleheads Guide to Investing it seems I should have a 55/45 mix of stocks and bonds (I am 46 years old). Do I just put 55% of my holdings in the Spartan 500 Index Fund and the other 45% in a bond fund?

We say to hold a representation of the whole US + international stock market. The 500 index is large US stocks and only covers about 80% of US stocks, so we would want to add in some mid and small cap indexes to represent the other 20%. Then also 20% to 30% (even up to 50%) of stocks should be international. If you list all your choices in the 401k the experts here could offer their best judgment on what to use. Often you can get some of this in the 401k and make up deficiencies (such as no decent international choice) in your IRA or taxable accounts (tell us about them too).

RE the 55/45 mix, I think quite a few of us here deviate a good bit from age-in-bonds. I'm one of the high stock outliers. Nobody much wants to say exactly what AA you personally should choose.
You can read what the wiki has to say about AA.
http://www.bogleheads.org/wiki/Asset_Allocation
JW
Retired at Last
JW Nearly Retired
 
Posts: 4177
Joined: Sun Dec 16, 2007 12:25 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby 3CT_Paddler » Thu Aug 29, 2013 3:15 pm

Acesalad wrote:Do I just put 55% of my holdings in the Spartan 500 Index Fundfund and the other 45% in a bond fund?


That's an excellent starting point!
User avatar
3CT_Paddler
 
Posts: 3019
Joined: Wed Feb 04, 2009 5:28 pm
Location: Marietta, GA

Re: 401(k) dilemma. Is an index fund the best choice?

Postby MoonOrb » Thu Aug 29, 2013 3:18 pm

Hi Acelad, welcome to the forum. The answer to your dilemma will come as you do some more reading and learning. Taylor Larimore gave you a fabulous list of resources, but I will give you just three:

1. The Investment Answer, by Dan Brown and Gordon Murray
2. The Little Book of Commonsense Investing, by Jack Bogle
3. The Bogleheads Wiki (which in my view is more easily used after you've read one of the two books above).
MoonOrb
 
Posts: 519
Joined: Thu Jan 24, 2013 6:58 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Fri Aug 30, 2013 8:15 am

We say to hold a representation of the whole US + international stock market. The 500 index is large US stocks and only covers about 80% of US stocks, so we would want to add in some mid and small cap indexes to represent the other 20%. Then also 20% to 30% (even up to 50%) of stocks should be international. If you list all your choices in the 401k the experts here could offer their best judgment on what to use. Often you can get some of this in the 401k and make up deficiencies (such as no decent international choice) in your IRA or taxable accounts (tell us about them too).


I am working on the list

YDNAL can you explain how to format the table the way you did or is it overly complicated?
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Fri Aug 30, 2013 11:28 am

slowlrnr wrote:
Acesalad wrote:So what should my strategy be going forward? Following the premise of The Bogleheads Guide to Investing it seems I shoud have a 55/45 mix of stocks and bonds (I am 46 years old). Do I just put 55% of my holdings in the Spartan 500 Index Fundfund and the other 45% in a bond fund?


+1. What bond fund options do you have in your 401k? What about international fund options? Also, the suggestion for 55/45 is for your "entire" portfolio which includes your other investments.

This is my enitre portfolio right now. My wife and I made some bad decisions in the past, the biggest being financing 100% of the cost of my home in 2005 (right before the housing market crashed. 20% of it is a HELOC that is amortized over 30 years with a baloon payment due at the end of 15 years. We are going gang busters to pay the entire balance of the HELOC off in the next two years and get out of the choke hold it has us in.
If you list all your choices in the 401k the experts here could offer their best judgment on what to use.


Here is the choices in my 401(k). I did not include returns but I can if you think it is neccessary.

Fund Name Asset Class Category
FA CONS STAPLES A (FDAGX) Stock Investments Large Cap
WFA GROWTH A (SGRAX) Stock Investments Large Cap
FA STK SEL ALL CAP A (FMAMX) Stock Investments Large Cap
OPPHMR EQUITY INC A (OAEIX) Stock Investments Large Cap
PIMCO FDMTL IDXPLS A (PIXAX) Blended Investments Large Cap
SPTN 500 INDEX ADV (FUSVX) Stock Investments Large Cap
EV ATL CAP SMID-CP A (EAASX) Stock Investments Mid Cap
DREY OP MIDCAP VAL A (DMCVX) Stock Investments Mid Cap
JH DSCPL VAL MDCP A (JVMAX) Stock Investments Mid Cap
INVS SELECT CO A (ATIAX) Stock Investments Small Cap
FA SMALL CAP VAL A (FCVAX) Stock Investments Small Cap
LD ABBETT DEV GRTH A (LAGWX) Stock Investments Small Cap
PIM SMCP STKPLS TR A (PCKAX) Stock Investments Small Cap
RS SELECT GROWTH A (RSDGX) Stock Investments Small Cap
UM BEHAVIORAL VAL A (UBVAX) Stock Investments Small Cap
CALAMOS INTL GRTH A (CIGRX) Stock Investments International
FA INTL GROWTH A (FIAGX) Stock Investments International
MFS INTL VALUE R3 (MINGX) Stock Investments International
PIM INT SP US$UH ADM (PSKAX) Stock Investments International
FA REAL ESTATE INC A (FRINX) Stock Investments Specialty
PIM RE REAL RET A (PETAX) Stock Investments Specialty
TRP RETIRE 2005 R (RRTLX) Blended Investments Target
TRP RETIRE 2010 R (RRTAX) Blended Investments Target
TRP RETIRE 2015 R (RRTMX) Blended Investments Target
TRP RETIRE 2020 R (RRTBX) Blended Investments Target
TRP RETIRE 2025 R (RRTNX) Blended Investments Target
TRP RETIRE 2030 R (RRTCX) Blended Investments Target
TRP RETIRE 2035 R (RRTPX) Blended Investments Target
TRP RETIRE 2040 R (RRTDX) Blended Investments Target
TRP RETIRE 2045 R (RRTRX) Blended Investments Target
TRP RETIRE 2050 R (RRTFX) Blended Investments Target
TRP RETIRE 2055 R (RRTVX) Blended Investments Target
TRP RETIRE INCOME R (RRTIX) Blended Investments N/A
FA STABLE VALUE Bond Investments Stable Value
FED HIGH YIELD TR SS (FHYTX) Bond Investments Income
PIMCO INV GRD BD A (PBDAX) Bond Investments Income
PUTN US GOVT INC A (PGSIX) Bond Investments Income
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby slowlrnr » Fri Aug 30, 2013 11:42 am

Acesalad wrote:FA STABLE VALUE Bond Investments Stable Value
FED HIGH YIELD TR SS (FHYTX) Bond Investments Income
PIMCO INV GRD BD A (PBDAX) Bond Investments Income
PUTN US GOVT INC A (PGSIX) Bond Investments Income


I quickly went through the bonds and the expense ratios for each are killer. I do not invest in High Yield bonds so will not suggest that. For other two Pimco and Putnam, I see expense ration more than .9%. Can you put the expense ratio for each so that others can also comment?

Also, I think you picked the best fund in the options you have. Do you have an option of opening a traditional IRA, then would recommend putting most of it in VBMFX and managing your asset allocation with 401k.
slowlrnr
 
Posts: 92
Joined: Fri Feb 01, 2013 6:45 pm

Past returns vs fund costs

Postby Taylor Larimore » Fri Aug 30, 2013 11:51 am

Acesalad:
Here is the choices in my 401(k). I did not include returns but I can if you think it is necessary.


Past returns are almost meaningless when selecting funds. Cost (expense ratio plus fees) is the most important determinant of future returns within asset classes.

For us to give you informed suggestions about which fund(s) to select, please edit your list of 401K available funds to show the total cost of each.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20394
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Fri Aug 30, 2013 1:55 pm

please edit your list of 401K available funds to show the total cost of each

When you say "the total cost of each", is that just the expense ratio I would find on Morningstar or is it something more invlovled?
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Ferreting 401 total fund costs

Postby Taylor Larimore » Fri Aug 30, 2013 2:31 pm

Acesalad:

The expense ratio is only part of the cost in a 401k. There is also an administration fee. Maybe more fees. Your 401k administrator is required to tell you the total costs of a fund (although they may make it difficult). :twisted:

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20394
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Fri Aug 30, 2013 3:15 pm

I will reach out to my Human Resources department for this information, but that could take a while. They don't always respond promptly to emails.

I want to thank everyone for all the advice and help. This is a truly an amazing forum. What a great resource for personal finance information! I hope one day I can be as helpful as you all have been to me.
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby dbr » Fri Aug 30, 2013 3:32 pm

Acesalad wrote:I will reach out to my Human Resources department for this information, but that could take a while. They don't always respond promptly to emails.

I want to thank everyone for all the advice and help. This is a truly an amazing forum. What a great resource for personal finance information! I hope one day I can be as helpful as you all have been to me.


This information should be posted online wherever you go to access your account.
dbr
 
Posts: 14969
Joined: Sun Mar 04, 2007 9:50 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby leonard » Fri Aug 30, 2013 4:20 pm

Acesalad wrote:This is my first post so please be gentle :happy

I am having trouble with the concept why lower cost funds are more beneficial than ones with higher costs if the returns are the same. In a recent meeting with my local Bogleheads chapter, the members told me that if a low cost index fund (let’s say with a 0.17% expense ratio) and a managed fund (let’s say with a 1.57% expense ratio) both return 11% over the last five years, there is no difference in the return since the amount charged for the expense ratio is already accounted for. Their argument was that there is more risk in the managed fund because the management has to take more risk to get the higher returns that, in my example, end up being an equal return after the expenses are deducted.

I ask this because it is widely regarded that managed funds aren't even likely to exceed an index fund. But in the limited choices of my 401(k) I have several funds that have done far better than the current index fund they are offering. Here are some of these funds and their returns:

Fund Name Symbol Ins. Date YTD 1 Year 3 Year 5 Year 10 Year LOF ER

Wells Fargo Advantage Growth Fund Class A SGRAX 2/24/2000 15.61% 15.72% 22.19% 12.95% 11.28% 11.28% 1.21%

Eaton Vance-Atlanta Cap SMID-Cap CL A EAASX 11/28/2003 20.14% 26.17% 22.29% 13.47% 11.89% 1.24%

Invesco Trimark Small Cos CL A ATIAX 11/4/2003 17.39% 20.61% 22.49% 14.94% N/A 11.99% 1.18%

Spartan® 500 Index Fund FUSVX 2/17/1988 15.90% 18.16% 17.71% 7.28% 7.18% 7.59% 1.59%

(Sorry, I tried to get the columns to line up but was unsuccessful)

There are 10 other U.S. stock funds in my plan and almost all of them beat the Spartan® 500 Index Fund in the majority of the time frames.

I know past performance is no guarantee of future results but here are several funds out of a limited choice that are outperforming the index fund significantly. If someone followed this advice ten years ago they would have missed out on a lot of money. I have read all of the conventional wisdom on why index funds are better than actively managed funds but I am having trouble pushing the buttons to reallocate my 401(k) from funds with superior returns to this index fund.

I would like to know the opinion on this from the members here.


Managed funds on average do not earn enough to compensate for the excess expense ratio.
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: 4447
Joined: Wed Feb 21, 2007 11:56 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby dm200 » Fri Aug 30, 2013 4:31 pm

I think, when it comes to 401k or 403b investing choices, the benefits/advantages of an index fund may not be nearly as great as when choosing mutual funds to purchase directly. Expenses (the expense ratio) are a key reason index funds are so highly thought of here. The cost of running an index fund are generally much lower than a managed fund.

It is common,, however, in many 401k and 403b plans, that higher cost mutual funds (even some index funds have higher costs) are often selected by employers for the plan. In addition, other expenses, on top of the fund expenses, are often passed on to employees/participants. As a result, the index fund choice(s) in your 401k or 403b plan may not be the best for you.
User avatar
dm200
 
Posts: 6948
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Helot » Fri Aug 30, 2013 5:02 pm

JW Nearly Retired wrote:Now when did your 401k decided to use these particular funds and what do you think was the criteria used to choose them?

Could it possibly have been past performance that got them into your 401k?
JW


Exactly. Any committee or plan administrator can populate a 401k plan with nothing but the best funds from the past 5 or 10 years. This has no bearing on how these funds will perform in the future. Inevitably, these funds will underperform due to their higher expense ratios. When the underperformance is noted by the plan administrator, new funds will be chosen to replace the old. Inevitably, these funds will hold the new record for best performance over the last 5 and 10 years. And so on, and so forth. This is how the game is played.

Avoid playing the game. Create a balanced portfolio of stock and bonds using index funds or inexpensive managed funds. Rebalance periodically. Change your allocation only if your needs, willingness, or ability to take risk has changed. Otherwise, focus on diligently and habitually spending less than you earn and saving / investing the difference.

This is how Bogleheads succeed.
Helot
 
Posts: 243
Joined: Sat Mar 03, 2007 3:05 pm

Excellent observation by Helot

Postby Taylor Larimore » Fri Aug 30, 2013 7:19 pm

Helot wrote: Any committee or plan administrator can populate a 401k plan with nothing but the best funds from the past 5 or 10 years. This has no bearing on how these funds will perform in the future. Inevitably, these funds will underperform due to their higher expense ratios. When the underperformance is noted by the plan administrator, new funds will be chosen to replace the old. Inevitably, these funds will hold the new record for best performance over the last 5 and 10 years. And so on, and so forth. This is how the game is played.

Avoid playing the game. Create a balanced portfolio of stock and bonds using index funds or inexpensive managed funds. Rebalance periodically. Change your allocation only if your needs, willingness, or ability to take risk has changed. Otherwise, focus on diligently and habitually spending less than you earn and saving / investing the difference.

This is how Bogleheads succeed.

Helot:

I admire your very insightful observation. Mr. Bogle would be pleased.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20394
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: 401(k) dilemma. Is an index fund the best choice?

Postby YDNAL » Sun Sep 01, 2013 7:25 am

Acesalad wrote:YDNAL can you explain how to format the table the way you did or is it overly complicated?

Code: Select all
The   "Code"   tab  a l l o w s   you  to  S  PA C    E  characters  as   you  wish.


Acesalad wrote:Here is the choices in my 401(k). I did not include returns but I can if you think it is neccessary.

Fund Name Asset Class Category
FA CONS STAPLES A (FDAGX) Stock Investments Large Cap
WFA GROWTH A (SGRAX) Stock Investments Large Cap
FA STK SEL ALL CAP A (FMAMX) Stock Investments Large Cap
OPPHMR EQUITY INC A (OAEIX) Stock Investments Large Cap
PIMCO FDMTL IDXPLS A (PIXAX) Blended Investments Large Cap
SPTN 500 INDEX ADV (FUSVX) Stock Investments Large Cap
EV ATL CAP SMID-CP A (EAASX) Stock Investments Mid Cap
DREY OP MIDCAP VAL A (DMCVX) Stock Investments Mid Cap
JH DSCPL VAL MDCP A (JVMAX) Stock Investments Mid Cap
INVS SELECT CO A (ATIAX) Stock Investments Small Cap
FA SMALL CAP VAL A (FCVAX) Stock Investments Small Cap
LD ABBETT DEV GRTH A (LAGWX) Stock Investments Small Cap
PIM SMCP STKPLS TR A (PCKAX) Stock Investments Small Cap
RS SELECT GROWTH A (RSDGX) Stock Investments Small Cap
UM BEHAVIORAL VAL A (UBVAX) Stock Investments Small Cap
CALAMOS INTL GRTH A (CIGRX) Stock Investments International
FA INTL GROWTH A (FIAGX) Stock Investments International
MFS INTL VALUE R3 (MINGX) Stock Investments International
PIM INT SP US$UH ADM (PSKAX) Stock Investments International
FA REAL ESTATE INC A (FRINX) Stock Investments Specialty
PIM RE REAL RET A (PETAX) Stock Investments Specialty
TRP RETIRE 2005 R (RRTLX) Blended Investments Target
TRP RETIRE 2010 R (RRTAX) Blended Investments Target
TRP RETIRE 2015 R (RRTMX) Blended Investments Target
TRP RETIRE 2020 R (RRTBX) Blended Investments Target
TRP RETIRE 2025 R (RRTNX) Blended Investments Target
TRP RETIRE 2030 R (RRTCX) Blended Investments Target
TRP RETIRE 2035 R (RRTPX) Blended Investments Target
TRP RETIRE 2040 R (RRTDX) Blended Investments Target
TRP RETIRE 2045 R (RRTRX) Blended Investments Target
TRP RETIRE 2050 R (RRTFX) Blended Investments Target
TRP RETIRE 2055 R (RRTVX) Blended Investments Target
TRP RETIRE INCOME R (RRTIX) Blended Investments N/A
FA STABLE VALUE Bond Investments Stable Value
FED HIGH YIELD TR SS (FHYTX) Bond Investments Income
PIMCO INV GRD BD A (PBDAX) Bond Investments Income
PUTN US GOVT INC A (PGSIX) Bond Investments Income

Except for Spartan S&P 500, this is a typical BAD plan lacking options for the employee to develop a well diversified and low cost portfolio. I can never understand the reasoning why a company would consider a 401K lineup that includes all those funds with "LOADS" and "HIGH EXPENSES" to offer their employees. :twisted: :twisted:

If I were you, would check the details behind FA STABLE VALUE to see if it is a viable option for the "Bond" portion of the portfolio.

ps. note that some 401K plans sometimes waive the "LOADS."
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13713
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Thu Sep 05, 2013 2:38 pm

OK, I did some digging. I found the Participant Disclosure Notice for my plan. It talks about Asset Based fees which it describes as basically the ER. The next section is
Plan Administrative Fees and Expenses
Plan administrative fees may include legal, accounting, trustee, recordkeeping, and
other administrative fees and expenses associated with maintaining the plan. Some
plans may deduct these fees and expenses from individual accounts in the plan.
Although the Plan permits fees to be deducted from individual accounts, based on the
information and direction Fidelity had on file at the time this Notice was prepared, no
plan administrative fees will be deducted from accounts in the Plan.
However, the Plan's
administrative services may be paid for through offsets and/or payments associated with
one or more of the Plan's investment options. Please keep in mind that fees are subject
to change.

If I am reading this correctly there are no other fees taken out of my account. The last section taks about loan, distribution and overnight mailing fees.

For us to give you informed suggestions about which fund(s) to select, please edit your list of 401K available funds to show the total cost of each.

Thank you and best wishes.
Taylor

So if there are no other fees, I assume the total cost would be the expense ratio. Here is the list with expense ratios included.

Code: Select all
CBA AGG GR A          (SHRAX)Stock Investments   Large Cap        1.27%   
COL SEL LG CAP VAL A  (SLVAX)Stock Investments   Large Cap        1.36%   
FA CONS STAPLES A     (FDAGX)Stock Investments   Large Cap        1.08%
OPPHMR EQUITY INC A   (OAEIX)Stock Investments   Large Cap        1.06%   
SPTN 500 INDEX ADV    (FUSVX)Stock Investments   Large Cap        0.07%   
 WFA GROWTH A         (SGRAX)Stock Investments   Large Cap        1.21%   
DREY OP MIDCAP VAL A  (DMCVX)Stock Investments   Mid-Cap          1.22%   
 EV ATL CAP SMID-CP A (EAASX)Stock Investments   Mid-Cap          1.32%   
JH DSCPL VAL MDCP A   (JVMAX)Stock Investments   Mid-Cap          1.27%   
ALZGI ULT MICRO CP A  (GUCAX)Stock Investments   Small Cap        3.36%   
FA SMALL CAP VAL A    (FCVAX)Stock Investments   Small Cap        1.44%
 INVS SELECT CO A     (ATIAX)Stock Investments   Small Cap        1.24%   
LD ABBETT DEV GRTH A  (LAGWX)Stock Investments   Small Cap        1.12%   
PIM SMCP STKPLS TR A  (PCKAX)Stock Investments   Small Cap        1.09%   
RS SELECT GROWTH A    (RSDGX)Stock Investments   Small Cap        1.55%   
UM BEHAVIORAL VAL A   (UBVAX)Stock Investments   Small Cap        2.15%   
FA INTL GROWTH A      (FIAGX)Stock Investments   International    1.58%
MFS INTL VALUE R3     (MINGX)Stock Investments   International    1.21%   
 OPPHMR INTL GROWTH A (OIGAX)Stock Investments   International    1.18%   
PIM INT SP US$UH ADM  (PSKAX)Stock Investments   International    0.90%   
FA REAL ESTATE INC A  (FRINX)Stock Investments   Specialty        1.12%
PIM RE REAL RET A     (PETAX)Stock Investments   Specialty        1.20%   
PIMCO FDMTL IDXPLS A  (PIXAX)Blended Investments Large Cap        1.19%   
TRP RETIRE 2005 R     (RRTLX)Blended Investments N/A              1.09%   
TRP RETIRE 2010 R     (RRTAX)Blended Investments N/A              1.11%   
TRP RETIRE 2015 R     (RRTMX)Blended Investments N/A              1.16%   
TRP RETIRE 2020 R     (RRTBX)Blended Investments N/A              1.20%   
TRP RETIRE 2025 R     (RRTNX)Blended Investments N/A              1.23%   
TRP RETIRE 2030 R     (RRTCX)Blended Investments N/A              1.25%   
TRP RETIRE 2035 R     (RRTPX)Blended Investments N/A              1.27%   
TRP RETIRE 2040 R     (RRTDX)Blended Investments N/A              1.28%   
TRP RETIRE 2045 R     (RRTRX)Blended Investments N/A              1.28%   
TRP RETIRE 2050 R     (RRTFX)Blended Investments N/A              1.28%   
TRP RETIRE 2055 R     (RRTVX)Blended Investments N/A              1.28%   
TRP RETIRE INCOME R   (RRTIX)Blended Investments N/A              1.07%   
FA STABLE VALUE              Bond Investments    Stable Value     0.94%   
COL US GOVT MTG A     (AUGAX)Bond Investments    Income           0.95%   
FED HIGH YIELD TR SS  (FHYTX)Bond Investments    Income           1.26%
PIMCO INV GRD BD A    (PBDAX)Bond Investments    Income           0.90%   
 


Except for Spartan S&P 500, this is a typical BAD plan lacking options for the employee to develop a well diversified and low cost portfolio. I can never understand the reasoning why a company would consider a 401K lineup that includes all those funds with "LOADS" and "HIGH EXPENSES" to offer their employees.

If I were you, would check the details behind FA STABLE VALUE to see if it is a viable option for the "Bond" portion of the portfolio.


Here is the Objective of the FA STABLE VALUE

The fund seeks to preserve your principal investment while earning a level of interest income that is consistent with principal preservation. The fund seeks to maintain a stable net asset value (NAV) of $1 per share, but it cannot guarantee that it will be able to do so. The yield of the fund will fluctuate

As YDNAL said, I only have one index fund available. What's my best move?
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Twins Fan » Thu Sep 05, 2013 3:04 pm

Acesalad wrote:As YDNAL said, I only have one index fund available. What's my best move?


Contribute only to that index fund in the 401k and diversify elsewhere.... Roth IRA...

I wouldn't use the stable value fund with a .94 ER. The yield in the SV fund is probably pretty low, especially now days, and they're taking most of it it .94 ER.

You definitely don't have a friendly 401k there. Do you get any kind of match in your 401k?
Twins Fan
 
Posts: 1579
Joined: Fri Mar 08, 2013 1:02 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Stan Dup » Thu Sep 05, 2013 3:19 pm

All those funds, good grief!!

Rule of thumb, any expense ratio over 0.5% is too high. Almost all of them are way too high. A few are 3.36%!!! Wow!!!

I would start by moving it all into the S+P fund. It would simplfy things greatly and have a low ER. But you will probably want to add some mid-cap, small-cap, and possibly international exposure. Of course, balance all those equities out with some bonds. The asset allocation of equities to bonds is something only you can make.

Read up on Lazy Portfolios on the wiki here and Three Fund Portfolios.

This is why Vanguard offers these three funds: Total Stock (includes every publically traded domestic stock), Total International Stock (same idea), and Total Bond (same idea but for bonds). You get all the benefits: diversification, low cost, simplicity.

Use your Roth contributions to fund the bond portion. Open an account at Vanguard and put it in the Total Bond fund.

You can asset allocate between your 401K, your traditional IRA, and your Roth IRA. You don't have to have all three catergories in each savings vehicle.
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti
Stan Dup
 
Posts: 504
Joined: Fri May 10, 2013 10:25 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby roymeo » Thu Sep 05, 2013 3:37 pm

Edit: OK, I posted this as a response too soon, My bad! After posting and then continuing to read the thread it does look like others have basically made the relevant point here and the OP's hopped on board. I'm going to leave this cause I'm lazy and hey maybe it still helps/is relevant.

-----
My Original, unedited post:
Acesalad wrote:So what should my strategy be going forward? Following the premise of The Bogleheads Guide to Investing it seems I shoud have a 55/45 mix of stocks and bonds (I am 46 years old). Do I just put 55% of my holdings in the Spartan 500 Index Fundfund and the other 45% in a bond fund?


Step 1: build a target portfolio for your retirement savings
Step 2: select the appropriate funds across your various accounts to match/approach that goal, taking into consideration personal factors such as the limitations of certain accounts such as limited selection in the 401(k)/403(b), etc.

You seem to be focusing on the second half of step 2, or worse, just selecting 'the best' funds from a limited selection with no context or consideration in the gestalt.
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo
User avatar
roymeo
 
Posts: 1035
Joined: Sat Apr 28, 2007 7:19 pm
Location: SF, CA

Re: 401(k) dilemma. Is an index fund the best choice?

Postby leonard » Thu Sep 05, 2013 3:52 pm

Acesalad wrote:This is my first post so please be gentle :happy

I am having trouble with the concept why lower cost funds are more beneficial than ones with higher costs if the returns are the same. In a recent meeting with my local Bogleheads chapter, the members told me that if a low cost index fund (let’s say with a 0.17% expense ratio) and a managed fund (let’s say with a 1.57% expense ratio) both return 11% over the last five years, there is no difference in the return since the amount charged for the expense ratio is already accounted for. Their argument was that there is more risk in the managed fund because the management has to take more risk to get the higher returns that, in my example, end up being an equal return after the expenses are deducted.

I ask this because it is widely regarded that managed funds aren't even likely to exceed an index fund. But in the limited choices of my 401(k) I have several funds that have done far better than the current index fund they are offering. Here are some of these funds and their returns:

Fund Name Symbol Ins. Date YTD 1 Year 3 Year 5 Year 10 Year LOF ER

Wells Fargo Advantage Growth Fund Class A SGRAX 2/24/2000 15.61% 15.72% 22.19% 12.95% 11.28% 11.28% 1.21%

Eaton Vance-Atlanta Cap SMID-Cap CL A EAASX 11/28/2003 20.14% 26.17% 22.29% 13.47% 11.89% 1.24%

Invesco Trimark Small Cos CL A ATIAX 11/4/2003 17.39% 20.61% 22.49% 14.94% N/A 11.99% 1.18%

Spartan® 500 Index Fund FUSVX 2/17/1988 15.90% 18.16% 17.71% 7.28% 7.18% 7.59% 1.59%

(Sorry, I tried to get the columns to line up but was unsuccessful)

There are 10 other U.S. stock funds in my plan and almost all of them beat the Spartan® 500 Index Fund in the majority of the time frames.

I know past performance is no guarantee of future results but here are several funds out of a limited choice that are outperforming the index fund significantly. If someone followed this advice ten years ago they would have missed out on a lot of money. I have read all of the conventional wisdom on why index funds are better than actively managed funds but I am having trouble pushing the buttons to reallocate my 401(k) from funds with superior returns to this index fund.

I would like to know the opinion on this from the members here.


.17% ER. Index fund every time.
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: 4447
Joined: Wed Feb 21, 2007 11:56 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Thu Sep 05, 2013 6:55 pm

Right now this is all the investing I have. I am not even currently contributing to it because we are underwater on our house that we financed in 2005 with 100% financing. It was 80% with a conventional mortgage and 20% with a HELOC. the HELOC in amortized over 30 years with a balloon payment after 15 years. We decided to follow Dave Ramsey's plan and stop all contributions while we pay off the HELOC as fast as possible.

So I just want to make the best choice with the money I have in their now and the choices that are available.

But even when I get back to contributing to it, my company matches 25% of what we contribute, with no cap on it. So if I follow the convention of contributing up to the company match this will still be the all my retirement investing since I will get a match on everything I contribute.
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Twins Fan » Thu Sep 05, 2013 8:19 pm

Doesn't change my vote any...

I still say throw it all in the index fund. It is the best choice in your 401k, it sounds like you don't have a large amount in there, and you are not contributing for the time being. Keep it in the index fund until you start adding to it again and then figure out another plan.

There's no set in stone way to invest. Each situation is different and yours is... with a stinker of a 401k plan options wise at least and you are choosing to tackle debt right now. Nothing wrong with keeping it all in the index and being 100% stocks for now. If you ask me anyway. Now, if you had mid six figures in there, I may be saying something different. But, doesn't seem like that's the case here.

There technically is a "cap" on your match since you can only contribute so much per year to your 401k. So, they would only match 25% of whatever the max. amount is that year. That is pretty good though. But, if you have a stinky bunch of options in the 401k plan, you may want to make other choices when you get back to contributing. Something to think aobut later on though.
Twins Fan
 
Posts: 1579
Joined: Fri Mar 08, 2013 1:02 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby dickenjb » Thu Sep 05, 2013 9:29 pm

Acesalad wrote:Right now this is all the investing I have. I am not even currently contributing to it because we are underwater on our house that we financed in 2005 with 100% financing. It was 80% with a conventional mortgage and 20% with a HELOC. the HELOC in amortized over 30 years with a balloon payment after 15 years. We decided to follow Dave Ramsey's plan and stop all contributions while we pay off the HELOC as fast as possible.

So I just want to make the best choice with the money I have in their now and the choices that are available.

But even when I get back to contributing to it, my company matches 25% of what we contribute, with no cap on it. So if I follow the convention of contributing up to the company match this will still be the all my retirement investing since I will get a match on everything I contribute.


Wow. Turning down a sure 25% return on your money. That HELOC must be at a pretty high rate.
Philly Chapter Coordinator
dickenjb
 
Posts: 2941
Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Re: 401(k) dilemma. Is an index fund the best choice?

Postby roymeo » Fri Sep 06, 2013 1:19 am

There's no price too high for being able to sleep at night. Especially when it's only an opportunity cost.
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo
User avatar
roymeo
 
Posts: 1035
Joined: Sat Apr 28, 2007 7:19 pm
Location: SF, CA

Re: 401(k) dilemma. Is an index fund the best choice?

Postby madbrain » Fri Sep 06, 2013 5:25 am

Definitely use the index fund for most of the account, and some in the stable value fund too.

Is your employer's 401k match fully and immediately vested ? Or does it have a vesting period ?
If you have already satisfied the vesting period for the match, then IMO you should contribute to the 401k plan to the maximum of your ability.

This is a separate problem, but it's really too bad that you are still underwater on the house after 8 years of ownership and payments.
Have you tried for any kind of mortgage modification ? I have heard of some second mortgages getting wiped out in the process, which may apply to your HELOC.
If that doesn't work, try for a short sale. While this may go against conventional wisdom not to buy high and sell low, IMO this is a case where it's justified if you can get the debt forgiven, which would significantly increase your net worth.
madbrain
 
Posts: 2821
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: 401(k) dilemma. Is an index fund the best choice?

Postby ruralavalon » Fri Sep 06, 2013 7:57 am

Acesalad wrote:I am having trouble with the concept why lower cost funds are more beneficial than ones with higher costs if the returns are the same. . . .
. . . . .
I know past performance is no guarantee of future results but here are several funds out of a limited choice that are outperforming the index fund significantly. If someone followed this advice ten years ago they would have missed out on a lot of money.

It always true that lower expenses give you a higher net return.

But the information on past performance ("If someone followed this advice ten years ago they would have missed out on a lot of money") is helpful only if you own a time machine :( .

My time machine is in the shop for repairs, so for now I'll go for the low expenses.

You have an excellent stock fund to use in the 401k. Sorry you can't add some IRA investing to get a better bond choice to use. In your 401k:
1. Definitely, use the S&P 500 fund er = 0.07% for your stock allocation.
2. Use PIMCO INV GRD BD A ( PBDAX ), er = 0.90% for your bond allocation.
Last edited by ruralavalon on Fri Sep 06, 2013 8:23 am, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
User avatar
ruralavalon
 
Posts: 5427
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Stan Dup » Fri Sep 06, 2013 8:16 am

Current funds in the index funds. 6 months of expenses in cash.

For further contributions, you need to do a simple calculation to find whether passing up free money (the 25% match) is worth more than paying down the HELOC. I am all for getting out of debt but sometimes the alternatives are better.
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti
Stan Dup
 
Posts: 504
Joined: Fri May 10, 2013 10:25 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Fri Sep 06, 2013 2:19 pm

The rate on the HELOC is 8.75%. Regardless of that it is a horrible loan. As I said it is amortized over 30 years but has a balloon payment due at the end of 15 years. The original amount was $75,300. At the end of the 15 years we would have only paid off $16,000 leaving $59,000 to come up with or refinance. Our monthly payment for this loan $592, so if we didn't attempt to pay it off early, over 15 years we would have made over $106,000 in payments and only paid off $16,000.

Also paying this off in the next two years should get us out from being underwater on the house. We have tried everything to refinance and cannot. We don't qualify for any of the programs because our payment to income ratio is too low and our loan isn't owned by Fannie Mae or Freddie Mac. We would actually like to sell the house because we have had children after we bought it and the house is too small. We cannot sell it because we are underwater. We cannot do a short sale because neither my wife or I have died or lost our jobs and we didn't get divorced. The whole reason I am motivated to get a hold on my finances is for security and freedom. Being trapped in a house we do not like is not my idea of freedom. So even if I crunched the numbers and found I could make a better return than the interest I am paying I would still follow my current plan.

You have an excellent stock fund to use in the 401k. Sorry you can't add some IRA investing to get a better bond choice to use. In your 401k:
1. Definitely, use the S&P 500 fund er = 0.07% for your stock allocation.
2. Use PIMCO INV GRD BD A ( PBDAX ), er = 0.90% for your bond allocation.


I will probably go with this approach, it's seems to be the best for my situation. Thanks again for all of your help everybody!
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby telemark » Fri Sep 06, 2013 2:52 pm

ruralavalon wrote:My time machine is in the shop for repairs


Waiting for a part? :)
User avatar
telemark
 
Posts: 1006
Joined: Sat Aug 11, 2012 6:35 am

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Twins Fan » Fri Sep 06, 2013 3:15 pm

Acesalad wrote:The rate on the HELOC is 8.75%. Regardless of that it is a horrible loan. As I said it is amortized over 30 years but has a balloon payment due at the end of 15 years. The original amount was $75,300. At the end of the 15 years we would have only paid off $16,000 leaving $59,000 to come up with or refinance. Our monthly payment for this loan $592, so if we didn't attempt to pay it off early, over 15 years we would have made over $106,000 in payments and only paid off $16,000.


Yikes!! Tackle that debt! You have my support on that one.
Twins Fan
 
Posts: 1579
Joined: Fri Mar 08, 2013 1:02 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby MoonOrb » Fri Sep 06, 2013 3:59 pm

Your plan is a good one. That HELOC makes me sad. I think you're doing the right thing.
MoonOrb
 
Posts: 519
Joined: Thu Jan 24, 2013 6:58 pm

Re: 401(k) dilemma. Is an index fund the best choice?

Postby Acesalad » Fri Sep 06, 2013 6:21 pm

Thanks for your support!
Acesalad
 
Posts: 48
Joined: Tue Aug 27, 2013 9:24 am

Next

Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Baidu [Spider], Bing [Bot], cmr86, fposte, generalzodschicken, gwrvmd, john94549, Lafder, Morik, NC_IL, PriceOfFreedom, saltycaper, Yahoo [Bot] and 70 guests