Thoughts on 401k for the Twenty-Somethings

So I know that some of you might not really care much about retirement at the ripe old age of 20 something, but I know that enough of you have some sort of 401k or own some quantity of stocks and haven't put much thought into which mutual funds you invest.

To be clear, I firmly believe that it's important for people to be putting SOMETHING away for retirement, no matter what they're age. I'm not saying that you need to squirrel away 25% of what you bring in, but the number needs to be above 0%.

Don't say that you can't afford it! There may be times where it is wiser to not put money in your 401k, like if you're saving for a major investment like a home, or need to pay off significant portions of debt, or are funding the education of yourself or a spouse and it will imply taking on less debt. However, if you aren't in any of those situations and "can't afford it" then I'm adamant that you need to adjust your present lifestyle to afford to retire.

I was speaking with a friend of mine that said he wasn't too worried about where he put his money. He's just putting most of his money in an S&P 500 Index and will let it ride for a while. It's pretty safe he figured.

For those of you who don't tune into CNBC every night, the S&P 500 is a index fund that has the 500 largest public traded (companies with stocks) put together. You'll see how this index performs pretty much every evening on the news and in the paper every morning, along with the Nasdaq and Dow Jones Industrial Average (DJIA). For decades it's been pretty safe and stable.

What is interesting is that up until about 10 years ago, a mutual fund trying to mirror the S&P 500 was a pretty safe place to just park your money. The returns were descent and you were well diversified among 500 large, stable companies.

However, for the past 10 years, the returns on the S&P 500 are pretty poor.

A graph here shows performance over the last 10 years: (Google)


As you can see, over the past 10 years, the S&P is only up 22% - that's only 2.05% per year. I can earn more than that with zero risk in a passive savings account. Bad news!

My point here isn't to give you specific mutual fund choices, but rather to encourage you to talk with someone who manages your mutual fund (if your company is large enough, they might have an adviser come in twice a year). Take some risks while your young and plant money in the mutual funds on your plan that have the best 10 year average return. Options to plant your money in target date mutual funds aren't too bad, but typically under-perform other funds.

If your company has any sort of a match, make sure you contribute at least that amount. Danaher matches 50 cents on the dollar up to 6% of your income. If I elect to contribute 6% of my income, Danaher will put the equivalent of 3% of my income in my 401k to match. That's a 50% return - try to find any sort of mutual fund that can do that.

I would only invest in your company's preferred stock purchase plan (buying stock of the company you work for) if it is among the best annual returning option on your list of investment choices. One reason for this is pretty simple - you're already vested in the company you work for. If your company falls on hard time, the company stock price might fall, and so might the axe on your job! Then you're out of money for retirement AND out of a job. That's a double whammy I could do without!

For instance, I have about 16% of my 401k in Danaher stock because it has been a well performing stock over the past 10 years. I would never have invested in Abbott, though I did work there for a period of time.

Interesting, I've read that having a minor short position in your company could be considered a hedge, but not really something I'm interested in doing.

It's also important to be internationally diversified. Again, you're already vested heavily in the country you work in. Not everything is revolving around the U.S. anymore. Major growth is going to be coming out of emerging markets, though purely emerging market funds have probably already had their run. Get a broadly diversified international mutual fund or two and plant significant funds there. You don't want to be parking your money in bonds when you're 20 something. They under-perform stocks and are only a good place to put your money on a sliding scale as you're nearing retirement because they're less volatile.

Anyway, that's a little slice on some thoughts for now. Enjoy!