Jon asked in Business & FinanceInvesting · 9 years ago

401K invesment options?

I am 35 years old with high risk tolerance and I invest the maximum $16,500 annually. What is the most appropriate diversification strategy for long term growth?

Current balances of my portfolio are 27% EuroPacific, 17% Vanguard small cap, 17% Vanguard mid-cap, 12% Vanguard Institutional Index, 9% Dodge&Cox, and 8% WF DJ 2040.

My current allocations are as follows: 25% EuroPacific, 30% Vanguard Inst Index, 22% Vang small cap, 23% Vang mid cap.

Any thoughts are appreciated. Thanks.

Following are the 401K fund options offered through my employers broker:

* AF EUROPAC GROWTH R6

* EB DIVERSIFIED STOCK

* FID SMALL COMPANY FD

* VANG INST INDEX PLUS

* VANG MIDCAP IDX INST

* VANG SM CAP IDX INST

* WT MID CAP OPPS

Blended Fund Investments*

WF DJ TARGET 2010 N

WF DJ TARGET 2015 N

WF DJ TARGET 2020 N

WF DJ TARGET 2025 N

WF DJ TARGET 2030 N

WF DJ TARGET 2035 N

* WF DJ TARGET 2040 N

WF DJ TARGET 2045 N

* WF DJ TARGET 2050 N

WF DJ TARGET TODAY N

* DODGE & COX INCOME

2 Answers

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  • John W
    Lv 7
    9 years ago
    Favorite Answer

    Well, the statement that you have a high risk tolerance tells me that you don't have an idea of what risk is.

    Imagine you could invest or rather wager upon a 50/50 opportunity such as a coin toss where if you won, you would receive twice your wager plus the return of your wager and if you lost, you lost your wager. Of course, no investments will have such well defined outcomes and probabilities but this is to illustrate risks. Such a coin toss has a positive expected value and you would expect to make $1.50 for every $1 lost in the long run. Most people would consider that the risk to reward ratio with the risk being the probabilities and the reward being the potential favorable outcomes but that isn't the risk. You would choose your risk by how much of your money to wager with each toss. If you risk nothing, you will gain nothing, the more you wager, the more you stand to gain, but if you wager everything with each toss, you are only guaranteeing a total loss with the first bad toss. With a 50/50 coin toss that has a 2 to 1 payout as described, the maximum expected growth of wealth is when you wager just 25% of your wealth on each toss, this is known as the Kelly Criterion after Bell Lab physicist John L. Kelly, and at 50%, you break even, any more than 50% then the losses will wipe out any gains and your portfolio will decline, a rocky volatile decline that may even appear to do quite well for some time but overall a decline. Risk tolerance should be defined by maximum growth and your resources to tolerate loss and the sure way to turn a profitable investment into a money losing investment is by over betting.

    Read Bernoulli's 1738 paper "Specimen theoriae novae de mensura sortis (Exposition of a New Theory on the Measurement of Risk)". There's an english translation so you don't have to read the Latin original.

    Oh and thumbs down on all the targeted funds, those are another common misconception of risk.

    Most 401k's offer a very poor selection of investment choices and yours is no exception. You should beef up on the Dodge&Cox way more cause it's the only one that gives you opportunity value to take advantage of bargains after a market crash. Indeed, it's the only fund out of the bunch that appears to be managed sensibly. The others seem to place marketing over sensible management. To be truthful, on a cursory glance, it's the only one out of the bunch that I would tolerate, actually it has an impressive Sharpe ratio of 1.34 but it is bond heavy to an extreme. I would start with 50% in DODIX and 50% in VIIIX till I could get a closer look at the other funds and perhaps spread out over the respective indices. Don't drop DODIX below 20% of your portfolio and rebalance once a year.

  • Karen
    Lv 4
    4 years ago

    It will make no difference with me. I would rather block a user rather than add him as enemy.

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