Timed funds may not have a yield listed as each one is customized to the year it "completes" and may not have much data yet. If you have the option, a fund like FZROX, continually contributed to and left alone for 25 years should yield nice results.
this post was submitted on 04 Aug 2024
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OP is risk-averse, and FZROX will buck like bronco. If OP can automate it and conveniently "forget" the password, then yeah, go for it. But if OP things they're likely to panic sell, FZROX isn't the best option, they'll need some bonds to calm that horse down a bit.
Lifepath Idx 2050 should do that, but it'll take a few years for the bond portion to increase (seems to currently be 8?). I'd need to know more about what "risk averse" means, but Lifepath idx 2040 is currently ~25% fixed income, so the 2050 should get more conservative pretty quickly.
I guess I shouldn't have said risk adverse, just diversified. I'm not worried about panic selling (I just check in once in a while, I like to set it and forget it for long term accounts like this), but I do want something that's not just a single stock or industry.
Ok, well your 401k is very unlikely to offer single stocks or single industry, most of the funds it'll offer will be diversified.
If you care more about total returns, I recommend just getting either a Total Stock Market fund (if it's offered) or an S&P 500 fund, since pretty much every 401k will have access to one of those. The S&P 500 is something like 85% of the US stock market, so it's plenty diversified.
I personally invest in a mix of international total stock market and US total stock market funds in a 70/30 mix (global market cap is about 60/40, so I'm heavier on US stocks), and my 401k offers really low-cost funds for those. However, that's not true everywhere, so you may need to be careful about fees (though Fidelity 401ks usually have low-cost funds).
If you provide a list of your options, I can make some specific recommendations.
Thank you for the feedback! I played the options in another comment, and it seems your advice is shared by others!
You'll need to list a few more details, such as:
- your investment options - every plan is different, and there's no way any of us can guess what options you might have
- what do you mean by "risk averse"? Are you worried about panic selling?
- Why do you want dividends? Especially in a retirement account, you really shouldn't care what form your returns take, you should only care about total returns.
- When do you expect to retire?
- Do you have any other investments?
You can also always change your investments later, there's no tax penalty or other costs within a 401k for selling and buying.
The Lifepath 2050 seems like a decent option. I did a little research, and the Lifepath 2040 has 25% bonds, whereas the 2050 is ~8% bonds, so it'll be getting quite a bit more conservative over the next 10 years. 25% bonds is a little high for someone just starting out and a little low for a retiree, so I'd really need to know what your retirement horizon looks like to know what would make sense for you.
Thanks for the reply!
- Here is what I seem to have access to (the Vanguard funds are catching my attention).
- I just mean that I'd prefer something not too risky, like putting all your money into a single stock or industry. I'd like some diversity
- Good point, I was just told that dividends set to re-invest are a good way to compound
- I was hoping in the next 25-30 years
- rIRA that I max each year (it's only a couple years old), HSA and 529
If you want to be lazy, the Lifepath Index Funds are completely fine and well-diversified. They'll have a good mix of US, international, and bonds, and it'll become more conservative over time (i.e. more bonds). Pick a number that's close to your retirement date, and you should be set.
That said, I like to be in control, especially since I have other accounts, so I'd go with the Vanguard Institutional 500 Index, which is a super cheap S&P 500 fund, and the Vanguard International Stock Index, which is a pretty cheap total international (not US) index fund. That's about as diversified as you can get, though it does miss US small caps (can add the Vanguard Extended Market Index if you want, but it won't likely impact returns much).
As for ratios, I'd go with:
- 60-70% S&P
- 30-40% International Index
Or you can ignore international stocks and just do the S&P 500, that's also fine. If you really want those US small caps, add in like 5-10% of that fund and take from the S&P 500 fund (so they'll end up at something like 85/15 split between those two funds).
So it's up to you. The Lifepath funds (basically a target date retirement fund) is run by Blackrock, and they're usually a fantastic fund manager with low costs. The Vanguard funds are also great and you'd probably get a little lower fees by DIY, but not enough to really matter. So if you're on the fence, go with the Lifepath fund. But if you want to control where your asset allocation is (i.e. if you plan to have an IRA and taxable brokerage at some point), go with custom funds.
Wow, great advice! Thanks so much. My rIRA is through Vanguard, and I do want a brokerage account at some point in the future for mid/long term savings.
I'll likely go with a blend of the Vanguard options, but just so I know, why might it be better to do so if I have an IRA and plan to have a brokerage in the future? Just so I have more "dials to turn" to match my tolerances?
It's more about tax efficiency. if you open an IRA, you're likely going to be contributing on a Roth basis, meaning that you'll never pay taxes on the growth, whereas in a 401k, you're likely contributing on a pre-tax basis, meaning you will pay taxes on that money. With a taxable brokerage account, you'll be paying taxes on every disbursement, meaning anytime you sell or receive a dividend.
So, generally speaking, you'll want:
- Roth accounts (Roth IRA, Roth 401k, etc) - highest expected growth
- pre-tax accounts (IRA, 401k) - lowest expected growth
- taxable brokerage - lowest capital gains (so low dividends)
In practice, that usually means:
- highest growth - growth stocks
- lowest growth - bonds
- lowest capital gains - value stocks
This can be as complicated or as simple as you'd like. For me personally, I have:
- Roth - US stocks - i think these will continue to outperform longer term
- pre-tax (401k and HSA) - other stocks & bonds - this is where I rebalance
- taxable brokerage - international stocks (for the foreign tax credit)
My overall portfolio composition is the same, I just shift around where I keep each asset class based on tax efficiency.
Ah that makes sense, thank you. For now I'm doing backdoor Roth IRA contributions as I can't do direct contributions. Eventually I hope to be able to also use the mega backdoor after I fill up the pre-tax federal contribution limits for 401k. That will be "after-tax" that is converted to Roth.