401(k) questions

Nothing like the last minute, but today is the deadline for me to enroll in my company’s 401(k) plan (until next quarter).

I don’t know anything about 401(k) plans.

Apparently, the company will match my contributions at $0.50 on the dollar for up to 6% of my salary.

I also have to pick investments from a list of 14 funds. Most look like some type of Fidelity Investments, including a “government money market portfolio,” an “intermediate bond fund,” a "balanced fund, " etc.

What should I invest in, considering the current economy?

BTW, I am 34 and have not made any provisions for retirement before now.


P.S. If this belongs in IMHO, mods, feel free to move it. (I am hoping that there is an objective answer to my question, though.)

No, there’s no objective answer. What you should invest in will depend on your personal preferences and your investment goals. For instance, how much risk are you willing to take? High risk investments mean that there is the possibility of losing the money, but there is the possibility of higher returns.

Your company will probably have information about the various funds, which ones have what risk.

And please note that there is usually an ability to re-allocate your money, so don’t feel like you’re stuck with the initial choices.

Exactly. The important thing is that you begin saving now. Direct 100% of your contribution and the match into the money market fund for the time being. Then learn more about the choices your plan offers. You can change your allocations later, but you can’t make up for missed contributions.

Since your company matches up to 6%, contribute at least 6% of your salary even if it hurts. You won’t find anything else that guarantees a 50% return on your money.

Well, there’s no pat answer for your situation, but here are a few guidelines:

At age 34, you have at least 30 years until retirement. That means that you can afford some risk in your portfolio. Indeed, you should take some risk. One of the most common mistakes made by people is to invest too conservatively when they are young. By the time they get older, they find that their portfolio has not matured enough to retire on. As you get older, move your money into more conservative investments.

Start now! Today! Put away as much as you can now. If you can afford 10%, do it. If not, start with what you can (but make sure to do at least 6% get the full employer match [it’s FREE MONEY!]). Then, in increments, increase your contribution 1% every two or three months. This way you’ll be putting away more but the “pain” involved will be minimal. I started with 8% at my current employer, and slowly increased it to 12% over time.

Zev Steinhardt

Just to elaborate on isthatsowrong?'s post, when your company matches 50%, that means you automatically get a tax-deferred 50% return on your investment! Sweet! Anything you make on the market is just gravy on top of that.

Your company probably offers a prospectus of the various funds, or at least a summary of how they performed over the past 1, 5, and 10 years.

In general the Fidelity Funds are pretty solid.
Search for the top 10 performers and pick as many of them as are offered by your company.
Spread the money more or less evenly among the funds

Dude, just pick one completely at random, then go and read the tutorial at www.motleyfool.com, then go back later and change your selection based on what you’ve learned.

There’s a lot of BS on the Motley Fool site, but their tutorials for beginners are pretty good, and I recommend them to everyone looking to get into investing.

Thanks for the replies.

OK, I’ve spent all morning looking up stuff, especially at the Motley Fool website.

The Fools recommend here that I should invest entirely in index funds. Is this good advice?

Just to hedge my bets, I was thinking of putting 80% into an index fund, and 20% in a bond fund.

The index fund offered by my 401(k) plan is the Spartan U.S. Equity Index Fund, and the bond fund I’m considering is is the Fidelity Intermediate Bond Fund.

Does this seem sound, or should I be trying to further diversify?

Thanks again.

Well, since you said that today was the deadline, just do it. Try to do a little research, but if you can’t make any firm decisions by the time the deadline arrives, just get in (to get that matching money) and then spend the next month or two doing further research.

Zev Steinhardt

Okay, you have the Fidelity family. They’re the biggest mutual fund group.
Your employer match used to be fairly standard. In this day and age that’s becoming rare.

It looks like you have two solid choices there. Remember that the market leaps and swoons…keep your eye on the long-term picture.

Another person checking in to say that it sounds like you have made a good choice to start. There will probably come a time when you feel like diversifying your investments further, but the most important thing is to start now.

Remember that you can change your allocation as the years go by until you have it fine tuned to reflect your risk tolerance and investment objectives. The nice thing about starting out is that downward swings in the market don’t really start to sting until you have been in the plan a few years and built up a more substantial balance.

Congratulations! You are doing the right thing by starting now. Good Luck.

Thanks for the advice, everybody.

I just turned in my enrollment form, contributing 6% of my pay. I ended up changing my investment elections somewhat, though. I selected:

Fidelity Intermediate Bond Fund: 20%
Fidelity Growth & Income Portfolio: 30%
Spartan U.S. Equity Index Fund: 50%

Consumer Reports advised that index funds aren’t necessarily the best thing in a bear market (which I’m guessing we’re in), so I backed off from my initial 80%. Also, my plan manager, while not really giving any investment advice, mentioned that the Fidelity Growth & Income fund was one of the most popular funds picked by 401(k) enrollees in my company.

So, that’s that. My first foray into the market. :dubious:

Good for you for starting your retirement savings. Now, what to do…

First thing, over the next few months do some research to determine the best asset allocation for you over the long term. You’ve got 30+ years till you need this money, don’t get into the trap of trying to play every market that comes along. 80% equities and 20% bonds seems like a pretty good allocation to start with. Within that, choose the individual funds based on your thoughts as to what will give you the most potential over that 30+ years.

When you say a particular fund may not be good in a bear market, remember that you are looking over 30+ years. Many bear and bull markets will come and go over that time. Sticking with a good fundamental allocation and then moving it into more conservative investments at predetermined times (for example, when you’re ten years from retirment, and then again 5 years from retirement) willl do much better for you over the long run than trying to play every market. Many people who try to time the market end up missing the best gain times. That can really hurt your ending balance.

Easy to say, and hard to do when you start getting those quarterly statements! These days, all I do is verify that the amount that should be going in there is. I try to ignore the rest. It’s hard. But like you, I’m about 30 years until retirement.

Look, you’re putting the money in for the next (say) 30 years or so. Don’t worry about today’s “bear” market or whatever. Take the investment strategy that seems best to you in terms of risk. No one else can make that decision for you.

Then: don’t look at it again for six months. Or a year.

Over a 30 year period, the little day to day fluctuations are going to be meaningless. Don’t get your knickers all in a twist over it.

Looks like you done good.
Diversify, diversify, diversify, if they let you.
My personal allocations are to my company stock, which is large cap. To balance that, I put a piece into a Russell 2000 fund: this is an index of small cap companies. Then bonds, then a money market equivalent.
No one is smart enough to time everything, so diversification is the key. Since I did the above, my portfolio has rarely had a sharp down week, because if one is going down, invariably one of the others is going up.
And index funds are a smart choice for the long haul, because their expenses - which have a hidden but insidious effect - are low. Also, you know EXACTLY what you’re getting into.

A good idea is to go get a copy of “A random Walk Down Wall Street” by Burton G. Malkiel. The new edition is current since the tech bubble burst. The jest of the book is that stock market is highly efficient. Over time there is really no way to beat the market. The author makes great arguments supporting his case and includes cites to research. The only real guide lines are to diversify (to remove the risk inherent in any given individual security) and to reduce risk as you move closer to needing the money. After you read the book you may wonder why anyone needs a broker. I know I did.