Tuesday, October 2, 2007

My retirement plan investment strategy

I just read a recent interview with famed economist and lawyer Ben Stein. I've gained a lot of respect for him lately, especially after a piece he wrote for CNN Money about sticking with long term investment goals instead of following short term market trends. I am definitely all about investing for the long term, and it's reflected in my investment strategy.

Because I have a long-term horizon (I don't plan to touch my retirement funds for at least 30 years), I am almost completely invested in stock funds. My 401(k) plan offers the following stock fund choices (next to them are how my contributions are allocated):

The Aggressive Asset Allocation Portfolio fund is comprised of 20% bonds, 24% international equity, and the remainder is split between the S&P 500 index, large caps, and small cap funds. It is similar to a target retirement fund in that it invests according to my risk tolerance level, only it doesn't adjust the portfolio mix over time.

How did I arrive at this particular investment mix? My primary goal was to be invested in stock funds, however within that I wanted diversify amongst the various fund choices, so I decided to put an equal amount (25%) into each fund type: an index fund, an international fund, a managed portfolio fund, and US stocks. This allows me to see how the fund types perform over time compared to one other, and as you can tell from the chart below the international equity fund is kicking butt at the moment:

401(k) Investment Asset Allocation (as of 10/07) - http://sheet.zoho.com

Ben Stein believes in foreign stocks, and so do I. 25% of my contributions are directly earmarked for the international equity fund, and another 24% within the Aggressive Asset Allocation Portfolio fund, making my total foreign investment a hefty 31% of my incoming contributions. Note that unlike a global fund, an international equity fund does not invest in US stocks. If I only had access to a global fund, I would raise my contribution allocation accordingly to increase my exposure to foreign stocks.

A lot of experts advocate regular rebalancing of retirement portfolios, usually on an annual basis, to bring investments back in line with the target asset allocation. However, like Ben Stein, I don't believe in rebalancing--at least not for myself at this time. Why would I want to sell off assets that are doing well to invest in underperforming (relatively speaking) funds? Not to mention the detrimental effect the sales fees will have on my portfolio. If I was nearing retirement, I could see an argument for using rebalancing as a tool to control my risk exposure, but until I start shifting a significant portion of my investments out of stocks it makes little sense.

I am fortunate that my current 401(k) plan offers funds with extremely low expense ratios. Most of them are at 0.50% or lower, except for the small cap fund, which is still at a reasonable 0.80%. Because of this, and the fact that I like the fund choices available to me, I was comfortable with rolling over my 401(k) accounts from previous employers. It makes managing my retirement funds easier, and reduces the amount of paperwork I have to file. I only wish I could use the same custodian for my ROTH IRA, which is invested elsewhere in a S&P 500 type index fund.

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