So it’s that time of year when I reallocate my holdings and also contribute to my IRA.
Given the state of the economy, I’m starting to wonder if I should deviate (this thought has always gotten me in trouble) from my allocation. The short and sweet is I don’t want to buy at the top.
Solutions.
Toss a lump sum in TZY and fahgetaboutit.
DCA into my mix of funds through the year.
Hold out for a pull back (I usually eat crow when I do this).
Rely on the crowdsourcing superiour expertise of the CFAs on AF to help me.
So what’s the consensus here? What sort of guidance would you give a chump like me?
I opt for #3. Not saying you should sell anything, but I wouldn’t invest new money into equities when they’re at record highs. I also wouldn’t invest in bonds when their yield is certain to keep climbing.
Just wait until the next market crash. We haven’t had one in five years or so, so we’re due for one any day now.
EDIT - FTR, TZY is a target-date 2050 retirement fund.
I’ll be getting my year end 401k bonus in 2-3 weeks, so I need to double check my allocations too. I think I have it split like 40% S&P index, and 60% split evenly between large cap value, mid cap value, and mid cap growth.
No idea what I’m going to do with my Roth IRA contribution this year.
I can’t determine if I’m happy I’m DCAing into emerging markets as they’re getting thumped, or if I should move my allocation elsewhere. Strongly leaning toward the former, but EM’s underperformance is definitely concerning.
If retirement is more than 20 years off, you should not own any fixed income offered in most 401k plans. You should have an equity orientation because your time horizon can handle those risks.
You should not try to time tops. Ever. Buying dips is much easier, but if you’re paying attention to the first point, you are already fully invested.
You should diversify across LC/SC and DM/EM. As Sweep said, my EM positions are lagging. Good thing I have DM SC positions that are up over 30% last year, and over that period I’ve been DCAing into EM. At some point EM is going to rebound and DM is going to lag.
For retirement, you want to decorrelate your financial capital from your human capital. I already get paid and incentivized based on what direction I think financial instruments are going. I’m not going to compound that by actively trading my 401k. Set an allocation and forget about it unless there is some supercycle event (like with fixed income now).
EM is in the process of reinventing itself from investment/commodity driven to consumer driven. The problem for the indices is that the market caps are still (although less so) concentrated in the old EM names (Vale, CNOOC) and are shifting to the “new” ones (Tencent, Shandong Weigao). A lot of the market cap for the high growth business is tied up in SOEs.
So as any exciting young professional, I’m spending a Friday night with Netflix and some craft beer, as well as my 401k paperwork. I’m reviewing my 12 month performance by fund, which ranges from 0% in my EM index fund, to 30% in a mid-cap fund. Overall, performance was about 18%.
So we’re moving 401k administrators this quarter and moving to lower expense categories on all our funds. In preparation, I’m trying to decide whether to allocate out of these high performing funds and go into the S&P index or else. Our new S&P index fund expense is 5 bps per year, vs. 65 that we currently have. Super exciting…