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Posted by on April 10, 2007, 10:02 am
>
> > $12K in Vanguard Target Retirement Fund, IRA
> > $11K in Fidelity Freedom Fund, current 401k
> > $14K in the following Morgan Stanley fund mix, old 401k:
> > Anyway, I need to roll the $14K in my old 401k into something else. I
> > was thinking of using it to invest in particular sectors, most likely
> > health care and real estate, and perhaps some international and
> > emerging markets stuff.
> I've just said this in another thread, but I'll say it again: Hardly
> anybody really needs sector funds in their asset allocation plan.
True enough.
> Especially if you're just starting out investing, don't have a whole
> lot of money to throw around, and don't really know what you're doing,
> stay away!
OTOH, if one has the bulk of one's long-term don't-think-about-it
money in a well diversified and managed fund (or funds - ie. the
pair of that target-retirement and freedom funds), there's room
for one to "play" a little bit at the margin. With a total
investable assets base of $37k, if the OP wants to put, say,
15 or 20% into non-diversified investments (ie. individual
stocks, sector funds, etc) it seems safe enough.
> On top of exposing you to additional risk and the danger of
> "chasing returns", investing in a lot of sector funds also gives you
> higher expenses and trading fees, and makes a lot of extra work for you in
> keeping an eye on all those funds, reading their shareholder reports, etc.
Not too messy if it's all in IRA/401ks. No need to track cost
basis or report proceeds of individual trades to the IRA (though
quicken makes it easy enough) and the difference between managing
and tracking 3 funds versus 5 funds isn't too big a deal.
> > 1) Portions of the Vanguard and Fidelity funds already invest in those
> > sectors. Would that overlap be a bad idea?
>
> Your target retirement funds are already about as diversified as they
> can be. You don't really need to invest elsewhere for diversification
> purposes.
What you do by keeping the bulk of your assets in diversified
investments which are invested roughly proportional to market
weights (presumably how they are invested via those target
retirement funds) and then putting a bit more into one or
two sectors (or styles - ie. value) is not adding to diversification
so much as "overweighting". If you believe that, say, long-term,
healthcare is going to outperform the market as a whole, you
probably don't want to go *all* healthcare, but you might
want slightly more healthcare exposure than an index would
give you. The easy way to do that is to buy an index for
the bulk and a sector fund for the overweight. Don't go
overboard - never forget what happened to Tech a couple
of years ago!
> > 2) If I'm interpreting my statement correctly, the old 401k (the one
> > to roll over) went up about 20% last year (due mostly to the
> > Institutional and International funds). The Vanguard IRA, in contrast,
> > went up only by a little under 8%, and the Fidelity fund gave me back
> > just about 9%. I wonder, then, if I shouldn't just leave the money in
> > the old 401k (with perhaps a bit of reallocation), and divert some of
> > it more toward the sector funds I wanted.
>
> That's called "chasing returns". Repeat after me: past performance is
> no guarantee of future returns. On top of that, you said above that
Very true enough. Moreover, the expenses on those MS funds
are almost certainly much higher than the expenses on the
Vanguard and Fido funds you mention, aside from the questions
of whether your 401k admin is dinging you for admin fees, and
additionally - do you really want to have to keep dealing with your
old employer (or his agent) on a long-term ongoing basis?
I'd much rather deal with Fido or Vanguard directly. That
alone is a big plus for a rollover.
> you "need" to roll the money out of your old 401k. If you don't
> "need" to do that after all, I'd just leave the money where it is
> and not reallocate or divert any of it until you educate yourself
> and come up with an asset allocation plan.
You probably don't need to roll it out of the old 401k.
But you might want to anyway and there's really no
downside to moving it into that Vanguard fund you've
already got opened as an IRA. In the IRA you can
freely reallocate it later without tax consequences,
and you will have that much less to have to track or
pay attention to, and one less administrator do deal
with.
--
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