How do I pick a Mutual Fund from all of my Employer's 401K Funds? ~ Anonymous, Scottsdale, AZ.
Your employer usually hires an outside firm to handle it's 401 K funds; there is a predetermined selection either based upon what the company can offer, or if your employer has an administrator that has picked the individual funds for you. There will always be an option to buy into a fund that is closet to your retirement age such as Retirement Fund 2020, Retirement Fund 2045, Retirement Fund 2060 etc. You choose the one closest to your retirement age. Usually if you contribute and make no selection it will default either into a money market or one of these plans.
So what's all this Large Cap, Mid Cap, Fixed Income and all these numbers it makes no sense?
Anony, slow down we will get there I promise. I may not hit every term and every class your company may offer but I will try to give you a general idea of how they classify them.
Short Term Fixed Income
*These can also be known as Large Equity, Midsize Equity etc.
Fixed income means the fund mainly is invested in US Treasury Bonds, Bonds, Municipal Bonds and some high paying dividend stocks. Short term Fixed Income would be Treasuries, Money Markets, some Bonds and CD's usually a pick for someone getting closer to retirement that needs to ensure a solid but not overly aggressive rate of return.
Large Cap would be funds mainly invested in Blue Chip companies you would find in the DOW or the S&P 500 that would have a proven track record but still can contain up to 25-50% aggressive and flash in the pan stocks but is generally balanced with companies that are tried and true like Pfizer or McDonalds.
Mid Cap or Mid Equity would be the same as above only invested mainly in smaller companies such as a regional chain like In and Out Burger or Whole Foods; companies with a potential of expanding and growing over time like Walmart or McDonalds did.
Small Cap your new companies possibly IPO's (Initial Public Offerings) maybe a small chain of grocery stores in only downtown Minneapolis, a resort chain of Hotels just beginning on the Florida coast. New innovative companies like those getting started on Shark Tank but that generally have a proven 5 year track record of success.
International Equity the main focus of these mutual funds would be investment over seas, they could contain a variety of Large, Mid or small companies or focus on a specific country like the China Growth fund or the India Small cap, etc.
Yes William, but exactly why is there so much to choose from it confuses me?
Think of it like a really, really, really good buffet. You might want a salad, you might want some sushi, wait is that prime rib being carved, or do I go for the crab legs, oh my the bread real bread bread from France, but I know Mom always told you on buffet stay away from the bread that's how they get you. Well your retirement portfolio can look like this:
Retirement Fund 2045
or it can look like:
Large Cap Equity Growth 25%
Mid Cap US Growth 25%
Fixed Income 10%
Small Cap 15%
(You can change those percentages any way you like or have only Large Cap/Small Cap or Fixed Income, Short term income, International it's how you decide to take part in the buffet. The more diversified you are the more likely you will ride out long term corrections in the market. remember each one of these funds is diversified in many different instruments and also has a team of investors watching over the investments they pick.)
Ok I kind of get it but when I look at it I see Janus this and Dreyfus that as a matter of fact 15 Dreyfus and like 30 Fidelity they seem the same which is better?
Welcome to the laundry aisle of the grocery store do you pick Tide, Gain, Cheer or just go with Bleach and Baking Soda to wash your clothes? These are name brands Janus, Dreyfus, Fidelity large firms that have created products for you to invest in all under the umbrella of being in the same store they all get your clothes clean just some work better than others or you prefer one over the other. They may seem as similar as a Whopper to a Big Mac but yet sometimes you want a Whopper sometimes a Big Mac.
Now you are going to have to take a look at all those percentages facing you and check performance. 1 year, 3 year, 5 year, 10 year, Lifetime if you are looking at retiring 50 years from now look at lifetime it means over the course of a year over time what is it's return HAS proven to be. To do this we will look at a real fund (not in my own 401K) that is in my companies 401K plan. This is not an endorsement of this plan it is only for teaching purposes. However maybe you are 1year or 3 years or 5 years away from retirement you wan to look at the percentages under those years, the only thing that might be confusing is obviously in 2008 we had a huge loss to the market that will reflect in the percentage from 10 years ago and soon in the 15 year numbers.
We will look at Small Mid Equity American Century Inv Mgmt.
3mon = 9.47% / 3yr = 10.89% / 5yr = 13.89% / 10yr = 9.8% / Lifetime = 9.5%
(you can see 2008 dip in the 10 year percentage)
So if you invest in this stock over it's lifetime you can expect a 9.5% return per year.
So if you buy 5 shares just under $100 you can expect to gain just under $10 a year per year compounded; plus the number of shares you own will increase as you make bi-weekly contributions to the account. Leaving out gains by contributions based on 5 shares in 3 years you would have a total of:
5 shares = $99.50 x 9.5% yr = ($99,50 + $9.45) = $108.95 x 9.5%yr = ($108.95 + $10.35) = $119.30 x 9.5% = (119.30 + 11.33) = $130.63 for a profit of $31.13 from your original $99.50 investment.
Now do this 27 more times to show a 30 year period and also consider you are making contributions every month so you have more shares making more interest over time. 9.5% is a really great rate of return. (but pales to the 17.6% return you are currently making if you read past articles and follow the stocks we are watching eat your hear tout Motley Fool).
Anonymous I hope you decide to pick wisely from your 401K but if you read past articles you will see how employer contributions and other factors can make your 401K not one of the most complicated things in your life but one of the most beneficial. Simple and easy and you wished you had done it earlier and a long time ago. Even if you don't choose to look into your own individual investment options at least get Retirement fund 2020, 2030 etc they will do it probably not as well as you could on your own but very safely.
If you continue to follow this website Blog you will become one savvy investor you might even decide to change your last name to Buffet!