Allocating my 401(k)

Keeping to my post from yesterday, I thought I’d share my process of choosing how to allocate my money in my 401(k).

I knew I couldn’t just leave it in cash. Though this is certainly the easiest way, it is also the most pointless since my money won’t grow enough to keep up with inflation.

I have been excited about Vanguard funds and had been looking forward to getting in them once I finally had a 401(k) without a minimum limit. However, I pulled up the website and looked at the choices available to me and recognized none of them. This depressed me a bit.

There were managed plans in which I could just stick my money in it based on my risk level. The managers would then invest for me and reallocate my money for me in exchange for a small fee. Unfortunately, I’m too cheap to pay a fee when I could just DIY with my money.

I tried figuring out how to invest in Vanguard but according to the website, I would not be able to invest in other mutual funds or stocks without opening another account linked to my account and paying fees for every trade as well as sticking to the minimum limit (which I had nowhere near enough in my account to do).

So, I resigned myself to the funds accessable to me and decided to research them and see which ones were the best. I turned to Morningstar and looked up each fund. I knew I wanted to keep it diversified and I wanted about 3 funds. When I researched the funds, the first three things I noticed was:

1. They all had low minimum limits (not that it matters in a 401(k))
2. They all were rated pretty low in Morningstar
3.They all had ridiculously expensive expense ratios

This didn’t make me feel any better naturally. So, first, I just cut out anything lower than 4 stars in Morningstar which left me about 4 funds. Then, I just compared them by how much they’ve been earning (or losing) over a year, 5 years, and 10 years to see their long-term potential. Then I looked at their top holding and noted the ones that were holding stocks that tended to have solid returns year after year. Finally, I looked to see what categories they were in so that I could properly diversify.

In the end, I chose 2 pretty solid long-term funds (allocated 35% each) and 1 more risky fund for a little thrill (allocated 30%) for a total of 100%.

Now, I just need to watch over the funds and reallocate about once a quarter just to make sure that my funds are doing all right and I’m not bankrupt.

Any other advice you can offer?


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