401k Investing Options

[chrispy]

Hi all,

 

This is my first post and I am excited to learn more from everyone and share some myself with the community here.

 

I will lead off with the fact that I am 28 and a little over a year ago discovered Buffet and Munger.  Learning about them pushed me towards the idea of value investing and the brilliant concept of their business model.  My background is in engineering so playing with numbers is very fun but my background is not in a field like finance or accounting.

 

I have investments outside of my employer sponsored 401k that I am content with and were purchased at fair/low valuations (FRFHF, MKL, BRKB).  The main area of investing that makes me uncomfortable at this moment is my 401k due to lack of investment options (funds only).  A month or so ago my company switched 401k providers and now I have the choice of what to put my investments into.  Before this switch I was using a nice S&P500 index and an intermediate term bond index that Buffet or Bogle preach.  I was very content with that.  But now the idea of putting a majority of my money into the S&P is a little concerning due to the high P/E multiples, the continuous decline in projected growth, and the dependence on near zero interest rates.  Seems like very little upside possibility and a large possibility of a decline.  My questions that I would like to bounce off everyone are:

 

1) Markets can never be timed.  Should I continue with the S&P500 and intermediate bond fund and simply allocate less to equities?

2) Should I move purely into bonds with the idea of getting some return and waiting for the markets to decline?  I will admit that I have trouble understanding the risks bond funds have in this current environment.

3) Should I go to all cash and wait for something big?

 

This is not a very exciting question when it comes to investing but one I need to settle so I can focus on more interesting topics!

 

Thanks,

Chris

[racemize]

I spent a good while looking at holding cash vs. not based on various value principles.  Here's the essay I wrote on it:

 

https://www.dropbox.com/s/zr93pt8tqkij6m8/2014-11-15%20Why%20Hold%20Cash.pdf?dl=0

[Jurgis]

I think it's a good question.

 

IMO, here's how you do it:

1. Asset allocate all your investable portfolio: how much you put in stocks, how much in bonds, how much in cash.

2. Decide how you split this between accounts.

 

So you might decide that you put 70% into stocks, 30% into bonds. Then you might decide that you'll split both your normal account and your 401(k) 70/30. Or you could decide that all bonds go into 401(k) and stocks go into normal account. Or vice versa.

 

At current rates bonds and cash are not that different, so you can play around how much of "bonds" is in cash.

 

I would not put bond percentage into things like prefs, high yields, since they correlate much more with stocks and you don't want your bond portfolio crashing when your stock portfolio is crashing.

 

My 401(k) is 80% stocks, 20% bonds, my normal account is a bit higher than that in stocks. At current prices I wouldn't go less than 60% stocks/40% bonds.

 

All of this is just IMO, others may disagree, make your own decisions, have fun.  8)

 

[rawraw]

I'd leave your retirement account for dollar cost averaging indexes.  If you turn out to be your own worst enemy for investing (which many of us are), then it is good to limit the damage IMO.  Everything that concerns you about the market is talked about 24/7.  Damodaran's calculated equity risk premiums are still reasonable.

[chrispy]

Thank you all for the input.  Racemize, your essay was very interesting and reinforces what is continually preached about cost averaging and staying in the markets!

[valueinvesting101]

Since this thread had started S&P is up 68% or 14.33% annualized with dividend reinvest.

 

Any recommendation for allocation of the balance between stocks and bonds or funds for equity investments for someone in mid thirties with stable job in technology?

 

Options available include BlackRock LifePath funds based on expected year of retirement such LifePath 2050. This seems like no thinking option.

 

There are bunch of growth funds including Harbor Capital appreciation, Fidelity contra etc. whose holdings make me uncomfortable. Dodge and Cox large cap value fund which could be better after large value underperformance.

 

Vanguard S&P 500 index for dollar cost averaging for next 20-30 years.

 

Some international value (mostly Europe & Japan), international growth (mainly China stocks).

 

Not really considering bond funds given very low yields.

 

Would love to hear people's thoughts/person choices.

 

 

[Jurgis]

I would repeat my post above-thread from 2016.

 

My 401(k) contribution allocation still remains 80% stocks/20% bonds.

80% stock allocation are 40% US indexes, 40% international indexes. 40% US is 20% SP500, 20% Mid cap index. Total market index is not available as a choice.

 

I do not rebalance.

 

Since my experiment with 401(k) began ~10 years ago, SP500 is clear leader. Mid cap is lagging behind. Bond fund is in 3rd place. International stocks are at the bottom.

I would not have predicted this outcome.

 

[LC]

401ks are all SP500

[RadMan24]

The Buffett move is quoted as being 90% S&P 500 and 10% Cash, re balanced annually, has outperformed back-dated any long-term time period.

 

The 10% would need to be U.S. Treasury to earn the short-term interest rate, but if the 401k offers a cash mutual fund that provides a similar rate, that should suffice.

 

Munger approach would likely cut the S&P 500 slice and replace it with China Index to gain exposure to the future biggest economy in the world.

 

 

[stahleyp]

Did Munger actually say that or is that speculation?

[Mephistopheles]

I had my 401k 1/3 each in s&p 500, mid, and small cap because I was hoping to get a full market exposure as opposed to just the largest 500 companies.

 

But I hear that the 500 is a better bet because it has an advantaged survivorship bias in that only the best companies can get that large. The mid and small caps will have a lot more busts over time.

 

Thoughts?

[clutch]

I had my 401k 1/3 each in s&p 500, mid, and small cap because I was hoping to get a full market exposure as opposed to just the largest 500 companies.

 

But I hear that the 500 is a better bet because it has an advantaged survivorship bias in that only the best companies can get that large. The mid and small caps will have a lot more busts over time.

 

Thoughts?

 

Just listen to Buffet? ;-)

[RadMan24]

Did Munger actually say that or is that speculation?

 

Munger's three biggest investments in his life are Berkshire, Costco and Li Lu (China) and has repeatedly said investors don't have enough exposure to China. What I referenced to Munger was reading between the lines. For what its worth, most 401ks don't even offer direct exposure to China so its a non-event, but if you were to have a Roth/IRA - it's worth considering given the low cost ETFs available. 

[LearningMachine]

Did Munger actually say that or is that speculation?

 

Munger's three biggest investments in his life are Berkshire, Costco and Li Lu (China) and has repeatedly said investors don't have enough exposure to China. What I referenced to Munger was reading between the lines. For what its worth, most 401ks don't even offer direct exposure to China so its a non-event, but if you were to have a Roth/IRA - it's worth considering given the low cost ETFs available.

 

Investing in a Chinese ETF is different from making specific investments in China.  Probability is high for Chinese economy to keep growing long term while not rewarding shareholders.

[undervalued]

Did Munger actually say that or is that speculation?

 

Munger's three biggest investments in his life are Berkshire, Costco and Li Lu (China) and has repeatedly said investors don't have enough exposure to China. What I referenced to Munger was reading between the lines. For what its worth, most 401ks don't even offer direct exposure to China so its a non-event, but if you were to have a Roth/IRA - it's worth considering given the low cost ETFs available.

 

Which ETF/Index fund do you consider for China?

[RadMan24]

Did Munger actually say that or is that speculation?

 

Munger's three biggest investments in his life are Berkshire, Costco and Li Lu (China) and has repeatedly said investors don't have enough exposure to China. What I referenced to Munger was reading between the lines. For what its worth, most 401ks don't even offer direct exposure to China so its a non-event, but if you were to have a Roth/IRA - it's worth considering given the low cost ETFs available.

 

Which ETF/Index fund do you consider for China?

 

MCHI will cover China's large tech companies BABA, Tencent, and others.

CNYA will cover CSI 300 - mainland index a-shares (this is like investing in domestic small caps, you won't get much exposure to big tech names).

FXI is another option, captures top 50 China/Hong Kong excludes Baba, JD, among other listings. 

 

There could be cheaper options eventually than just using iShares.

 

Mutual Fund - Fidelity China Region is another good option.

 

Individual stock selection in China usually requires a little bit of cloning strategy, less you have deep knowledge of that market.

 

I once did a deeper dive about Li Lu, what he has to say about investing in general, as well as books he has recommended people read to gain a new perspective on China. This is definitely recommended. There's a thread on this forum about him as well, fairly recent too.

 

With all that said, as Buffett notoriously notes, most of the S&P 500 companies gain you exposure internationally, and to China, like Apple.