Year 2013 was a record year for the stock market. The S&P 500 returned 32.39% last year, including dividends.
2013 was an unusual year for my 401K. Even though I did not switch jobs, my 401K switched!
With the new 401K came new funds and I did what any rational person would do. I decided to diversify as much as I could and pick the cheapest funds I could.
Note the crazy expense ratios! Most funds have an ER of more than 1%, which is considered quite high and this is after weeding out the more expensive funds! And some of these funds have redemption fees and other restrictions including a sales load of over 5%!
In short, I tried to make the most of a terrible selection of funds in my 401K. Diversify and keep costs low – that was the underlying motto behind my choice of funds.
But even after allocating funds as shown, I wasn’t too happy. No matter which direction the markets go, I still have to pay those fees!
So after a few months, I decided to tweak my allocation with 3 new goals:
- To simplify my allocation
- To reduce fees
- To increase my contribution
Much better than the 22.x% I would’ve gotten with my previous allocation!
What was the tweak?
I moved all my funds to just 2 funds! The S&P 500 index fund which has the lowest expense ratio among all other funds and RGACX which has an expense ratio of less than 1% and the lowest actively managed fund in my 401K. (Ideally I would’ve split it between Total Bond Fund and S&P 500, but bonds would’ve been a terrible choice considering the interest rates).
But wait a minute, whatever happened to diversification?
I’m not advocating against diversification! My approach initially was incorrect – to treat each account as a separate entity – diversification should be across all your investment accounts, not within each account.
Due to my delayed realization, I missed an opportunity to get returns of over 30%, but hey 26% is at least better than 22.x%!
How have you allocated funds in your 401K? How did your 401K do last year?