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401k part3 – retirebyforty’s 401k, a river of tears


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All right, this is what you’ve have been waiting for all week.

Blue – My cumulative contribution over the years.

Red – The value of my contribution plus any gain/loss (just starting to overtake the Blue line recently.)  :(

Green – The total value of 401k portfolio including company contribution.

My 401k adventure is divided into three distinct phases, each with it’s own style.

1996 to 2000: An idiotic combination of the ever popular monkey throwing darts AND chasing the performance strategies. This was my first experience investing in the stock market and I had no idea what I was doing.  I picked 10-12 funds that looked good from the 401k investment handbook.  The problem was I didn’t know how to research those funds and the funds with recent high return usually would not be able to repeat their performance the following year. Overall it was OK because the Dot Com bubble was inflating during this period and the rising tide lifted all boats.

2000 to 2004: The Kool-Aid strategy, as in drinking their Kool-Aid.  The Dot Com bubble bursts and for some unknown reason I thought tech stocks would recover.  I directed most of the fund toward the company stock. This was a terrible idea! I had way too many eggs in one basket:  The pay check, bonus, benefits, stock options, stock participation plan, stock grants, and the 401k.  I was very lucky and the portfolio went sideways for a few years, but this could have been a serious catastrophe (if I worked for Enron, for example.)

2005 to present: Total portfolio diversification. Eventually, I wised up and mostly got out of company stock and went to the asset allocation plan. Currently, the 401k has no company stock and I sold off 90% of the what I had accumulated.  I am keeping the stock options for now because it is low risk/high reward, and I only have a small amount in any case.

How is the 401k doing? The last few years were painful, but I never stopped contributing and hopefully the market will continue to recover.  The total return is disappointing, but it really could have been a lot worse.

Here is my asset allocation plan, I take every account into the mix (401k, IRA, etc…) I do not recommend this allocation for anyone.  It is extremely aggressive and will probably cause you heartburn.  This allocation is very volatile and generally does not hold up too well in a bear market.  If you don’t have an asset allocation plan, you need to make one. It will guide you through hell and high water AKA the last 3 years.

US Equity Non US Equity
large 30% international 20%
medium 10% emerging market 20%
small 10%
cash 5%
bond 5%

Plan of action

  • Gradually (over next 3 years) pare down risks.
  • Rebalance 401k.  Currently, I am overweight in Small cap and underweight in Large cap.
  • Diversify the Non US investments, they are concentrated in Large caps.

DO NOT do this to your 401k

  • Buy company stock.
  • Stop contribution during down years. (This will suffocate your portfolio.)
  • Borrow from 401k.
  • Chase performance.
  • Invest in high fee funds.  (It will cut into your nest egg in the long term.)

Here is what you SHOULD do

  • Max out 401k as soon as you can.
  • Make an asset allocation plan and stick with it during the inevitable downturns.
  • Rebalance once or twice a year and take your total net worth into account when doing this.

Well, do you have any advice?  I will update in a year or so and see how it goes.

Extremely Useful Link: Morningstar Instant X-Ray will show the asset allocation of your portfolio.

Financial Success For Young Adults: How to Use Morningstar.

part 1 – The Low Down on 401k

Part 2 – traditional VS ROTH 401k

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{ 10 comments… add one }

  • Roshawn @ Watson Inc November 5, 2010, 2:34 pm

    Yes, I would be uncomfortable with that allocation; it just doesn’t suit my risk tolerance. That said, I can certainly see where these would be favorable positions in a bull market! I hope that the volatility in your portfolio will decrease some (unless that volatility ends up in your favor)!

  • Squirrelers November 5, 2010, 6:44 pm

    That’s an agressive portfolio for my tastes, but you’re balanced among equities, and that’s good. Besides, we each have our own risk tolerance and time horizons.

    I like your lessons learned component of this post. Have to agree with what you suggest doing AND not doing. Good, sound advice!

  • retirebyforty November 5, 2010, 11:02 pm

    The 20% international is a bit deceptive, it’s mostly DODFX and they hold large cap companies like Nokia and Vodafone. I know I’m a bit low on bond, but I just don’t like them for some reason. My time line is quite a long way out so I can handle some volatility for a few more years.

  • Financial Samurai November 6, 2010, 8:04 am

    300K is a great nut mate! I take it you are in your mid 30s around?

    What % of your retirement do you account your 401K to help you with given that if you retire at 40, you can’t withdraw without penalty for another 20 years?

    • retirebyforty November 6, 2010, 9:44 am

      I’m closer to 40 than 30 these days. 😯
      The plan is to put the 401k away when I hit 40 and don’t touch it until when we’re in the 60s. I mean I’ll rebalance, but I won’t draw from it.
      How will we live between 40 and 60s? The secret is what you posted a few months ago – http://www.financialsamurai.com/2010/09/10/the-secret-to-early-retirement/

      When Michelle’s 401k catches up to mine, she can retire too. 😆
      She likes her job so ….
      We also have rental income and I’ll figure out some side income. We’ll see how it goes.

      • Financial Samurai November 6, 2010, 11:57 am

        That is awesome! So you plan to kick back while the wife works until you turn 60k?

        Could be good! Has your wife read my article on the secret?

        • retirebyforty November 7, 2010, 9:14 am

          I really need a year or two off. I am extremely close to being completely burned out.

          • Financial Samurai November 7, 2010, 3:39 pm

            What do you do? Why not just take a 3 month sabbatical?

          • retirebyforty November 8, 2010, 12:14 am

            I work with computers engineers. I am going to take a 3 months sabbatical early next year. I don’t think it will change my feeling about work though.

  • Everyday Tips November 7, 2010, 10:38 am

    Well, for me, I don’t know that I would have 40 percent in overseas/emerging markets, but I certainly have not been perfect myself. I have no problem with the small cap/large cap balance. I would consider moving some of that money from overseas and put it into something safer.

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