Matthew C Good : Musician, Web Developer, Hobbyist.

Hi everyone. Since there seems to be several finance-geeks in the kordix community (and by several, I mean two), and since i think sites like mymoneyblog.com are soo neat, I thought I’d post something that I’ve been thinking about for a while… and see if anyone seems to care.
When I first got the job I’m at right now over a year ago, it got me access to a 401k. Of course, I really didn’t have much of a clue about what that actually WAS at the time, however. Being the kind of guy that likes to learn tons of stuff, with a sort of do-it-yourself spirit, and not one to make decisions without doing a ton of research, I set out to figure out what the heck this investing thing is all about, anyway.
I’ve begun to accumulate some knowledge in that area, and have started to fill out a mental list of concepts that I’ve accepted regarding long-term (i.e. retirement) investing… Here’s a few of the conclusions i’ve arrived at so you can get an idea of where I’m coming from.
First off, hot-shot wall-street types most of the time aren’t going to help you. What that really means is that actively managed funds seldom beat low-cost indexing over long periods of time when fund fees are factored in. Trying to get into the new hot fund and get out before it starts underperforming is trying to time the market, and I’m not smart enough to do that. This tendency to think that somebody in new york is smarter than you and should be the one in charge of your money is a bit dangerous, I think. They don’t have your best interests in mind. That should be enough to make you think twice about it right there. Another problem is the fact that they are moving HUGE amounts of money around when they make a trade, it can throw the market off a bit, and they may not be able to buy a stock at as cheap a price as they’d like. But it really gets down to the fact that these guys are really trying to predict the future. Heck its hard to know what the heck is happening in the present, let alone the future. Some guys appear to be able to do it. To cite the obvious, Warren Buffet has consistently beaten the market (though he’s not just buying and selling stocks, to be fair), but they appear few and far between. For a number of other reasons, I just think that most of the time, an active manager doesn’t really add value. Google “efficient market hypothesis.”
Secondly, weird as it sounds, adding two risky investments together can reduce your overall risk in your portfolio. The trick is that the two kinds of investments need to be noncorrelated. This is the basis for diversification – i.e. owning all kinds of companies, large and small, value and growth (which i won’t get into here), US and foreign, stocks and bonds, etc… For more information, Google “Modern Portfolio Theory.”
Third, expenses are the one factor that is guaranteed to affect your investment value a predictable amount, year after year – so try not to pay too much here. Remember – no mutual fund will guarantee you a certain rate of return, but they WILL guarantee a certain rate they’ll take from your money every year. Lower is better. I can’t cite sources, but lots of studies have shown that this has a more profound effect over a lifetime than you might initially think.
That basically sums up my current thinking on the issue. So, if you’re still reading (and NOT asleep), take a look at my current asset allocation:

hrm… all that talk about diversification and… 70% in plain old large cap US? That does seem like I’m talking one way and living another. But, we’re talking about a 401k here – which doesn’t have a TON of great options. The large blend that I’m using happens to be one I like, with a nice .88% expense ratio. Other expense ratios for my funds are 1.2%, 1.15%, 1.26%, and (eek) 1.6%, so I overweighted the fund for that reason. I’m not really sure if its smarter to favor the better fund or to keep the better diversification and eat the expenses. If anyone can register a comment on that issue, I would appreciate it.
And take a look at those bonds. Corporate bonds. Not a big fan of these nowadays… I pretty much chose them because I didn’t know much about bonds (bonds are boring), and the expense ratio and trailing rate of return weren’t too bad. I had about 10% in this fund at one time… But – they kinda have been taking pretty steady hits lately and I’ve started to think that a bazillion years from retirement is a bit too early to have a realllllly significant bond allocation… Plus I don’t really like any of the bond funds in my 401k… so what is a boy to do? Eh… just throw more money at the stocks, I guess…
About the International vs. US large cap stock funds – I think this is the only international fund available to me, so I’m in it for diversification’s sake. Its also my most expensive (1.6%) and I’m starting to wonder if it is really doing its job. Its mostly large European companies, and seems to be pretty well correlated with large US companies. Its different enough for me to keep some money in it, but not different enough for me to want to throw a lot at it. Thoughts, anyone?
Small/Mid and Mid are going quite well so far, but are a bit more expenseive (1.15% and 1.26% respectively) than I would like, so I haven’t been throwing a TON of cash their way for that reason. Wise? Stupid? Let me know.
For future contributions, my allocation breaks down like this:
Bonds: 3%
Small/Mid Value: %15
Mid Growth: 13%
Large Blend: 54%
Int’l Large Value: 13%
Am I still weighted too much toward Large US companies? Leave some comments if you have an opinion, and let me know if you care at all about finance-type blogs or if I should just stuck to the music and randomness. Peace.