Young Investor new 401k allocation questions/advice needed

My fiance just started a new position and was offered immediate enrollment in a 401k with the company matching 50% up to 6% (he wants to start @ 4% for now) of his earnings per year (30-35k).

He is 23 years old, and has no savings to speak of. I am 22 and my company just terminated our 401k plan shortly after I enrolled, so my (limited) saving is in cash.

The 401k will be at Fidelity, which I have heard is very good. I came up with a preliminary guestimate as to allocations, but just wanted to get some feedback:

S&P 500 Index Fund - 60%
Pyramis Active Lifecycle 2050 - 20%
Pyramis Active Lifecycle 2040 - 20%

Other funds I have marked of interest:
Fidelity Balanced Fund (balanced mutual fund)
Fidelity Disciplined Equity Fund (large blend growth mutual fund)
Fidelity Diversified International Fund (international growth mutual fund)
Fidelity Emerging Markets Fund
Fidelity Contrafund (large growth mutual fund)
Royce pennsyvainia (mid growth mutual fund)

Does this sound like an appropriate allocation? I am not too sure about the Lifecycle funds, what are the pros/cons? What is a good guideline for a young investors allocation?

He shouldn't contribute to his 401(k). It makes no sense without having an emergency fund. 10 months from now when he gets laid off from his job, when he needs the money, the match won't be vested and he'll pay income tax on the contribution + income tax on the gain + a 10% penalty on the entire amount.

Get rid of any high interest debt, establish an emergency fund, get adequate insurance and then start the 401(k). The investments need to be based upon his risk tolerance. Either use lifecycle funds or don't. It doesn't make much sense to combine them together or to use them with other funds.

Try the bogleheads forums... they like to answers these topics. They will also help pick apart investment options. The general advice is to keep it simple, make an investment plan, stick to the plan, and control costs.

InsuranceExpert seems to have jumped to some conclusions. At my work 401k matching funds are instantly vested. Without knowing more about your situation it is hard to say if an emergency fund is more important than the free money a match provides. In my situation i contributed the minimum needed to max the free matching as soon as it was available.

I was them 4 years ago.

I still don't have an emergency fund, which probably isn't great, but i have 4 years of 50% match of 8%. Wife switched companies and now has the same deal. I've maxed my Roth the last 3 years.

Certainly i have done some things wrong, but i don't count 401k contributions as one of them. Roth maybe should have gone to emergency fund, but job is in a stable industry (defense/aerospace), so emergency fund hasn't been a priority.

My advice:
Don't by new cars after graduating (our mistake 2 new hondas almost paid off now)
Don't by a house until you can put 20% down (our mistake 100% finance, learned a lot about home repair though...)
Don't get into credit card debt (never have never will...)
Get used to saving for retirement first and you won't miss the money.

Peppe1, you have an emergency fund. You have three years of Roth contributions that can be removed at any time for any reason without taxes or penalties.

An emergency doesn't have to be related to losing one's job.

For someone who hasn't put money away, putting money into a Roth instead of an emergency fund isn't a bad idea. If the money is never needed, it has been invested for retirement. If it is needed, it can be pulled out of the Roth. I would simply suggest that if one doesn't have liquid cash that the Roth be invested conservatively until it can be replaced by a true emergency fund.

All four of your pieces of advice are excellent.

* put enough money in the 401(k) to get the company match, it is free money
* at your age and about to get married, do not save alot of money. Instead, try your best to stay out of debt and build up some emergency funds (does not have to be in cash or MM) outside of the 401(k) / IRA.
* since you have little money and a lot of time to save, in a sense now is the best time to make your investment mistakes. I would pick some more funds which look good to you.

Besides the fundamental questions like emergency fund (definitely required for all), you have to (1) read a book like Mutual Funds for Dummies), (2) assess your time horizon (when do you need the money) and risk tolerance, (3) do asset allocation, (4) do fudn diversification.

Your allocation/fund choices are not according to this discpline (i.e., not an assset allocation strategy). There is a lot of fund overlapping in large cap for your selection (i.e., no diversification).

To give an example: Age 22 with moderate risk tolerance --> 80% equity, 20% fixed income (asset allocation) ---> determine passive (indexing) or active --> passive fund diversification (20% large cap index, 20% mid cap index, 20% small cap index, 20% international index, 20% bond index). I choose to give an indexing diversification example since no active fund discussions are allowed in this forum.

Hope this helps.

Those lifestyle (yeart target) funds are a good lazy way of investing -- as long as the costs aren't too high. Boggleheads is your next stop.

Here's a minority view, take it with a grain of salt:

With a 50% match, you're getting a nice return on every dollar you put in (up to the match limit, obviously). In the current market environment, it might not be wise to try to stretch for more return than that. You may want to consider putting all the money in the fund closest to a 100% money market fund; most 401(k) plans have at least one option like this. They typically return a solid 2% or so, nothing sexy, but if the current bear market turns out to be long-term (which I think is likely), you will have avoided eating away at the value of the match.

You'll hear much about "investing for the long term", partly because stocks do tend to make up for losses over very long time periods, and partly because the finance industry is structurally incentivized to encourage you to be invested at all times. If you happen to invest at a time when stocks are headed south in a secular trend, however, it takes quite a bit of recovery to make up for the losses. If you incur a 50% loss, it takes a 100% gain just to get back to where you began. Accordingly, unless you're extremely convinced that we've reached the end of the global recession, it may pay to be defensive for the time being.

At 23 years old and with the market being relatively low right now, I'd find the cheapest S&P 500 index fund and put it all there. If the market tanks, at your age, that's even better. You'll make a kiling over the long haul. I guess Poppies advising you to only buy stocks when you're sure the recession is over. Unfortunately, buying stocks high usually doesn't pay off very well.

davef139 said: Put it all in single companies and ride up the last years losses. IM 100% equities in individual companies rather then some varied fund.

Not everyone wants to spend hours researching companies' financial statements, listening to earnings calls, etc. Plus that's not a very diversified approach. Finally, how many 401k plans allow investing in individual stocks, other than the employer's stock?

I think InsuranceExpert's point was that you'd be investing not only when the market started at 8000, but also during the 7000 and 6000 time, so when it goes back to 8000 it is much better than just 2%

Dollar cost averaging doesn't solve the fundamental issue. See http://moneycentral.msn.com/content/P104966.asp

poppies said: Dollar cost averaging doesn't solve the fundamental issue. See http://moneycentral.msn.com/content/P104966.asp

From your own article:

"However you do it, investing is better than not investing.

But what if you had happened to invest on Oct. 16, 1987, the Friday before Black Monday? In an S&P 500 index fund, you would still have been up more than 450% before the bear market began in 2000, and you'd still be up about 350% today. Compare that with your money market fund."

The fundamental issue is where the OP should put there money. So, yes, it does solve it!

InsuranceExpert said: If one is going into a money market because they think that the market is going down, they are engaging in market timing. The problem with this is that they have to be right twice. They have to be correct that the market is going down and they have to be right about when to put their money back into the market.

Tell that to all my friends who bought ZitiBank at 65! You only need to be wrong once to lose a few million. Buy and hold works, until it doesn't.

poppies said: InsuranceExpert and SaulHudson, I won't waste your time trying to sway you from your seemingly fairly settled opinions. I'll leave off with a suggestion to the OP to rigorously analyze the risks inherent in equities and whether the Equity Risk Premium is an adequate compensation.

See particularly http://www.advisorperspectives.com/newsletters09/How_Long_is_the... regarding risk over time and http://www.advisorperspectives.com/newsletters09/Moving_Average-... which includes some interesting information on how equity performance may be fundamentally changing due to historical shifts, and may require a new approach.

I read your "How long is the long run" article. It suggests weighting your portfolio more towards bonds over the long haul in order to preserve capital. I'm perfectly fine with suggesting a stock/bond allocation %. Your original suggestion to the OP was that they keep their money out of the market and in a money market fund until the economy rebounds. None of your articles suggest that this is a good idea. They all contradict your original suggestion.

i would not get into equities unless you are 100% certain you are not going to touch that money for quite a while..

looks like this thread has been hijacked.

Here's some advice: It doesn't matter what you invest in - just don't waste any of the employer match. Save 6%.