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|
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.