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401k and Personal Finance

Fund selections for Vanguard IRA

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I picked the following funds (and their weight) for my Vanguard IRA yesterday.

Vanguard International Value 50% (developed market large cap value)
Vanguard Winsor II 25% (US large cap value)
Vanguard Selected Value 25% (US mid cap value)

The first two funds are in my current 401k plan, I found the Vanguard Selected Value through Kiplinger magazine.

1) Performance
I looked at a fund’s 5 and 10 years performanace. I found something interesting: most funds could not beat its bench index consistently. For instance, Vanguard Explorer Fund and its bench mark is listed below:

Average Annual Returns—Updated Monthly as of 11/30/2007

1 Year 3 Year 5 Year 10 Year
Explorer Fund Investor 5.53% 9.71% 14.24% 9.44%
Russell 2500 Growth Index 9.52% 11.79% 15.93% 6.60%

I found Vanguard Intl Value fund to be an exception. Vanguard Winsor II also faired well. I left out fund such as Vanguard Prime Cap Core, because it does not have 5 years track record.

2) Weight

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401k and Personal Finance

Two baskets for our retirement accts

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Roll over IRA
In early Nov. I received a letter from Vanguard, it says I am eligible to transfer some of my 401k to an IRA account. I thought about it, the pros and cons, and decided to do it yesterday. Here are my rationale:

1) Ideally I like to keep all my retirement in one place, but one problem is I am not very familar with the new funds avaiable in the new 401k plan. On the other hand, I have been with Vanguard for a while and I know some of the funds are really good (good enough to make me sleep well in the night).

When I say Vanguard is good, I am not only talking about the fees, the performance, etc; but also their brand: it is one of the most respected mutual fund companies in the world. I rememeber a few years ago NY AG Spizer investigated many mutual funds, and I did not heard Vanguard name there (come back to the sleep well factor…).

2) Diversify: this will also allow me to diversify my 401k (IRA); and I can compare the performance of two baskets as time goes on.

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401k and Personal Finance

New 401k plan

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No I haven not changed my employer or anything, but my company was acquired by a global 50 company this year, and from next year we will have new 401k plan. Currently my 401k is in Vanguard and I am happy with them so far. One advantage with Vanguard is they have the lowest fees in the industry. If all other things are equal (in the long run, I do believe the performance of most large cap stock funds tend to converge), lower fee means better performance for investors.

nest egg pic

(Picture from Money Magazine)

That being said, I also found some interesting things about my new 401k plan: the new funds categories by the investment regions; and the company stock.

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401k and Personal Finance

Big Mac, Dollar and 401K

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Yum Brand, the parent co. of KFC, Pizza Hut and Taco Bell, had a great quarter yesterday, thanks to the loyal customers in China flocking to KFC and Pizza hut. Maybe because they think the steamed bun in Beijing are unsafe? Yesterday I heard about this Big Mac index (link to Economist) from NPR. This is how a McDonald “big mac” burger costs in a country (converted to USD). In China the index is $1.49, which is low compared to Sweden (the highest): $7.00. Although “big mac index” is not very scientific, it’s a useful measurement tool for the purchase power of different currencies. In reality I think American and Chinese consumers enjoyed a greater purchase power because of the economy of scale, the cheaper manufacturing cost (from China), the infrustructure and logistics go with it.

big mac pic

On the other hand, the “green back” hit all time low yesterday. A dollar is worth less than CNY 7.60 now? Three months ago it’s still worth CNY 7.70. This is not good news for me. But this seems to be the trend. In the short term, it appears Chinese goverment are dumping the US treasury bonds, for the fear of further drop of USD.

I’m thinking to counter this, I need to add more international funds to my 401k. Right now I have 30% international in my 401k, I may boost it to 50% in the near future. The US companies are not always losing in this global economy. For instance, multinational companies like GE, Coca-cola, McDonald, Yum Brands and Goldman Sachs etc. are all benefit from globalization. But at the same time emerging market are growing much faster, and will have a bigger piece of the “global equity” pie in the long run. Developed economies (EU and Japan) may steal a slice from the US too. So the bottom line is I will put more international flavor to my 401k pie.

PS, I have limited 401k experience: I started putting money in 401k since year 2001. For 401k we should think really long term (I mean 20 to 30 years) for retirement.

I am not expert on international economics either.

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401k and Personal Finance

Growth Fund or Value Fund?

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I prefer value fund in my 401K. This is from what I read (don’t remember exactly where) and from looking at the returns of funds in my 401K. Barrons’ statistics confirmed this. The worst growth fund is large cap growth. I don’t have any of those.

Go “values” 🙂

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401k and Personal Finance

My 401K Lessons

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I did not put money into 401K right after I started to work in Fall 2000. Looking back this is my biggest mistake in 401K. Although I have some credit card debt at that time, I think I should at least put the money to get the company’s maximum match (free money, hehe). Not to mention the tax deferred effect; and the potential compound effect of growth. My friend who studied finance told me a “compound” story like this: if one puts $ 5,000 when he/she is 20, it’s like someone put $50,000 when he/she is 40 (the number may not be exact, but you got the idea).

I started my 401K in year 2002, a little more than a year after working. I was not familar with the mutual funds initially. I walked to one of my colleagues who is a stock lover and he told me “put everything in stock funds” because “we are not going to use the money for a while, and stock gives better return”. But I did not go 100% stocks. I attended the company benifits semimar; I also read the Vanguard Mutual Funds prospectus and learned about the fund types (value, growth, index), and morning star rating system. I put about 70% in stock fund and 30% in bond fund: thought diversification is my best friend. Looking back now I would not put money in bond fund. Because I have plenty of time until the withdrawl from 401K. The ups and downs of stock market in short term does not mean too much to me, and ultimately the stocks will have better return than bonds.