Post-401k

Re: Seeking advice. It's fine if that is what you choose to do. Just know that 1) This isn't rocket science. If you take an interest in your financial future, you can manage your own retirement savings in a very passive and practical way that doesn't require a lot of time, and has historically performed as well (actually better) than the typical professional money manager will. 2) By leaving it to a financial planner to choose those money managers for you, just realize that most financial planners don't really know anything all that earth shattering. They do cookie-cutter financial planning. For the typical 30 to 40 year old, they will do something like an asset allocation of mix of 70-30, equities to bonds. The traditional mix is 60-40. Then they just choose some mutual funds or ETFs to give you that exposure -- usually products whoever they work for want to push because they have some kind of financial arrangement. 3) If you leave your savings in someone else's hands, you don't have control over it. With something as important as your retirement, that is not something I'd be willing to do. 4) You are going to PAY that person. As I said, for assets less than $1 million, the typical financial planners charges 1 percent of your assets per year. Then they are going to likely choose proprietary investment vehicles with expenses in excess of 1 percent (when there are options out there with much lower expenses and fees). It's hard enough to eek out an annualized return that will grow your money over time to the point you want to be. For most people, if they could manage annualized returns in the 7 percent range, for example, over a 15 or 20 year period, they would be pretty happy. You are decreasing your chances of doing that if you are starting out with a negative 2 + percent return because you are paying 1 percent to a planner and buying dogshit investment products with high fees.

Just my 2 cents. If you really care, do a bit of reading about John Bogle, or "Bogleheads" as they are called. It is the most appropriate long-term investment strategy for the vast majority of people who don't understand equities and fixed income products are not going to closely monitor their investments or trade.

 

Smart investing isn't just about trying to find the highest growth areas and chasing their past returns. It's about paying attention to beta (a measure of the risk you are taking) and trying to get reasonable (not home run) returns while limiting your downside risk.

There is a lot of tail risk in biotech -- even if you are diversifying with a basket of biotech stocks.

Trying to pick sectors means you are trying to be a stock picker, and frankly, most people are not very good at that.

Which is why I recommended broad indexes for the vast majority of people who don't feel comfortable with equities and don't want to spend their lives managing a portfolio. Even if they do, being a stock picker is difficult. Most get it wrong. Going with broad exposure to markets and trying to replicate those broad market returns, takes away the pressure to try to guess what the winners and losers are going to be. It is a much lower beta strategy than picking a couple of high-flying sectors and losing the diversification you get across more sectors. You lower your risk, which is something most people want to do with something as important as their retirement money.

This is not gambling. It's trying to maximize potential return relative to the inherent risk.

If you plow all your money into a biotech fund and a software/computer fund, you lose all the diversification (you are putting all your eggs in one basket) that you get from putting it into the entire stock market -- a strategy that doesn't have you trying to guess what areas are going to perform well, and which aren't. Some will, some won't, but you broaden your exposure -- you reduce that beta, or risk.

Are you giving up potential returns? Sure. But those potential returns are also very tangible potential losses. You are also losing a lot of the risk, doing what I suggested.

Biotech, for example, is very cyclical. It will have years where it is down 45 percent, same as it has had years where it was up that much. It can go into long bear markets. We are in a several decade long bull market right now, and biotech has certainly outperformed. People are getting complacent, though. If we hit a stretch like we hit in the 1970s, biotech has risk that could have it underperforming by just as much for a decade. And if that is the decade you are trying to grow your retirement money, you will get hit much worse than you will be by a diversified strategy across the broader stock market.

A beta of 1 means that something you own will move in lock step with the entire market. A beta of more than 1, means that something is more volatile (and incurs more risk / potential return) than the broader market. Most biotech funds have betas of 1.3 to 1.5. That means they are going to be 30 to 50 percent more volatile than the market. If you like the prospects of the biotech sector, that is fine. But you don't want to be betting more than a small amount of what you have -- money you are counting on for retirement -- that way. The same way it might outperform for a length of time by 40 percent, it can very easily get clobbered to the tune of 40 percent negative returns.

If you invest for your retirement by looking at what has performed well over the last year, or last 5 years, you very well may find high flying sectors that continue to perform that well. You also may fall into the trap the vast majority of people do of buying something that has run up and is due for a multi-year correction. We are in a stock market right now that is not being fueled by a good economy or earnings. It is being fueled by the Federal Reserve pumping liquidity into our banks, which is inflating assets -- similar to what happened in the housing market in 2008. You see it in stocks (and real estate still and the art market, and anything else wealthy people who have been the beneficiaries can buy) So the stock market across the board has been way up for the last year +. There is no sanity right now, but momentum is continuing to drive it up. My guess is it will go parabolic at some point, taking it beyond anything that the people who are pointing out the insanity can imagine. And then it will crash hard, just as people become most complacent and the most retail (everyday people) have gotten sucked in. The highest flying sectors will be the ones that get hit hardest in that crash. So just be careful with that sector strategy of picking high flyers.

My suggestion for someone not trading or trying to time markets (and again, most people aren't good at that) would be to invest in the broad indexes I suggested. If you want to try to do some more active investing, take up to 5 percent of the money you are allocating toward equities and nibble around the edges in areas you think have long-term potential. Health care for example, on the idea that we have an aging population. Or biotech if you like its future. Or some technology area that you understand well. But don't bet the farm that way. Diversify and spread out the risk and just try to match the overall markets. You are taking a MUCH LESS RISKY approach that way, and it really is about risk first, reward second.

 

You brought up Fidelity's Select Software and Computer Services Fund. It's an actively managed fund. In hindsight, you can tell me that fund has had a 10-year annualized return of 12+ percent. OK. Or you might tell me that since its inception 28 years ago (and that is not a very long period of time in which to gauge future performance based on past performance) it is up 15 percent.

I will tell you that over that same 10 years the S&P 500 was up 7+ percent, with a much greater degree of risk than is inherent in an investment strategy that banks on a narrow area of the market.

This is retirement money he is talking about. You don't make large bets. You want to minimize your risk, while trying to get a reasonable return. That fund exposes you to a narrow business segment.

That said, you are giving me hindsight. Why 28 years ago, didn't you choose the Fidelity Select Consumer Finance Fund to place your bets on, for example? (Much worse returns).

Even within the sector you think has a bright future because of its past, why did you choose that particular Fidelity fund? Why not any one of dozens of technology funds that are actively managed that I can point to that have done much worse than that one winner?

What I am suggesting doesn't have you 1) trying to pick the right sector (or stock) to be in at any given time, and 2) if you are placing bets on sectors, doesn't have you trying to guess what money manager is going to be particularly good at it.

That Fidelity Fund has consistently owned Microsoft, IBM, Oracle, Cisco (until recently), Yahoo!, Visa, etc. Those have been great stocks to own since 1985. But the world does change, and 28 years is not a track record you want to bet your future on. If specialized technology funds like that had existed in the 1970s, they would have owned stocks like Poloroid, Xerox, AT&T. ... If you make bets the way you are suggesting and you choose the wrong specialized fund, you can get the manager who holds onto those names too long (with hindsight, it is easy to pick out one fund and tell me that that particular fund got it right. Will it in the future?). Even right now, Cisco, which was a momentum name that made a lot of people a lot of money for close to two decades has a business model that is falling apart. Hewlett-Packard, similarly.

It's retirement money. Most people want to preserve it and grow it in a way that minimizes risk. That would mean broad diversification, first. And not putting it in the hands of a stranger's stock-picking ability. I can go through all of those Fidelity Select Funds -- most of which were started around that same time -- and show you how some have been pretty well managed relative to their peers (the two you are giving me with hindsight) and some have kind of been dogs.

More importantly, though, I can show you that from a long-term investment perspective, you are taking on a lot of beta if you place big bets in that way. You may get lucky and outperform the broader market. But you are taking on an outsized level of risk for that potential.

 

Probably. All 401(K)s are set up differently -- depending on the deal your former employer struck with the company that administers it. So it depends. But just in terms of management expenses and investment choices (and the expense ratios on those choices), you are likely going to be better served by finding a solid low-expense, no-load mutual fund company. Even if you simply replicate whatever investments you have in the 401(K) elsewhere, the amount you might save on the expenses is money that can be compounding, and it does make a difference. Expenses really add up -- more than most people realize, on a compounded basis.

Let's say you only have $10000 in that 401(K) and you move it to Vanguard and whatever funds you choose get the same exact portfolio returns you would have gotten in the funds you just leave in the 401(K). ... except save you 1 percent a year in expenses.

There is a very good chance you can save that much or more in expenses by rolling it over.

Over 25 years, that 1 percent compounded on that $10000, will be an extra $2825 toward your retirement. Isn't that worth it?

 

You really just aren't understanding. A broad index fund MIRRORS the market. It provides broad diversification. You are not trying to guess what the winners are going to be.

Yes, if you put all of your money into an S&P 500 Index fund there is risk. Equities entail risk. People take that risk risk to grow their money -- no risk, means no return. Most people, however, want to mitigate their risk as much as possible.

What you are suggesting is a much higher risk portfolio than I suspect you realize. You are looking at past returns and not understanding the risks involved with that kind of narrow portfolio.

What I was suggesting for most people is the smartest way to take on SOME risk so they can grow their retirement savings, without taking on too much risk, or beta.

Your approach is a very high beta approach. It's taking on more risk than most people should with their retirement savings, and you are telling me in hindsight that two particular actively managed sector funds (as opposed to lots of high beta actively managed funds I can point you to that have not done well -- actually more than I can find that HAVE done that well) would have outperformed the S&P 500 over the last 15 years by X percent.

Just a warning to people on here. There is no EASY money. If we get a period like the 1970s all over again -- and we likely will at some point -- people are going to realize that beta matters. The S&P 500 might be down during that period for an extended period of time. Most narrowly focused high-beta funds will be down A LOT more.

For the typical person. ... well my humble suggestion is that you use those things to nibble around the edges. But don't put your retirement at the whim of a high-beta approach. You may get lucky and get killer returns. There is a potential flipside to that.

 

Poin just said something that is key, regarding an unfortunate mistake someone might make.

If you ever do a rollover MAKE SURE that it gets done via an ACAT transfer -- from the trustee managing your 401(K) plan DIRECTLY to the company you set up your IRA with. WITHOUT the money getting issued to you in your name.

Even if you do it inadvertantly, if that money goes through you first, the IRS will count it as an early distribution, and you are going to owe taxes at your ordinary income tax rate, plus the 10 percent penalty Poin mentioned. And after that, unless you can somehow get the IRS to give you an exemption (forgive your mistake), the money can't go into an IRA -- so you lose the benefit of the tax-deferred growth you would get over the life of the IRA.

Most 401(K) trustees should know this and not let you make that mistake, but it happens. The person on the other end of the phone might give a rat's ass, so it is incumbent on you to make sure they get it right.