I don’t do market predictions, but I wanted to keep some things in perspective. In the most recent edition of A Random Walk Down Wall Street, there is an updated version of a chart which I have used before to show how important time horizon is to reducing your projected risk. I have replicated it below:

The fact that the variability in returns decreases the longer one stays in the market is very encouraging news for the long-term investor. But it is critical to remember that this data assumes you buy and hold a diversified portfolio. If you buy or sell stocks based on fear or hype, all bets are off.

Next up is a model portfolio by actor and personal finance columnist Ben Stein. I have read and reviewed two books he wrote with Phil DeMuth – Yes, You Can Still Retire Comfortably! and Yes, You Can Time The Market!. I actually ran across this information last week while waiting at a Barnes and Noble for my companions to finish shopping. I wrote down that it was in Forbes magazine, but I found the article online under Fortune. Either way, here it is:

Ben Stein Model Portfolio

Asset Allocation For 80% Stocks/20% Bonds (with ETF examples)
25% Total US Stock Market (VTI, IYY)
25% S&P 500 Index (IVV, SPY)
15% Foreign Developed Equity (EFA, VEA)
5% Emerging Markets (VWO, EEM)
5% Real Estate (VNQ, ICF)
20% Cash

Commentary
On the equity side, I guess he’s leaning towards only having about 15% of the domestic equity portion being Small/Mid Cap stocks, since about 70% of the Total US Stock Market index is made up of the S&P 500 anyways. His exposure to Real Estate is very small, especially compared to the Swensen portfolio we just looked at. He does add a specific allocation to Energy sector stocks to the mix, which you don’t always see.

On the fixed-income side, Stein doesn’t recommend any type of bond, corporate or not. He thinks long-term bonds are too risky, while short-term bonds don’t offer enough yield to warrant not just holding cash instead. I’m not sure if this is solely due to the current flat interest rate curve. This may also be because he seems to take the view that your emergency fund cash should be included in your asset allocation. (I like to keep it separate.)

See here for other model portfolios from respected sources, part of my incomplete Rough Guide to Investing.

This model portfolio is taken from Unconventional Success by David Swensen. As mentioned before, Swensen is not a personal financial advisor, but is a respected institutional money manager who currently runs the Yale Endowment. In his book for individual investors, he writes that there are only a limited number of core asset classes in which one should invest in. Although he avoids giving specific asset allocation guidance, he does provide an “outline of a well-diversified, equity-oriented portfolio”, which is shown below.

(Hurrah, I found my software disks so I can make pretty pie charts again!)

Asset Allocation For 70% Stocks/30% Bonds (with ETF examples)
30% Domestic Equity (VTI, IYY)
15% Foreign Developed Equity (EFA, VEA)
5% Emerging Markets (VWO, EEM)
20% Real Estate (VNQ, ICF)
15% U.S. Treasury Bonds (SHY, IEF)
15% Inflation-Protected Securities (TIP)

Commentary
There is a healthy portion devoted to real estate in the portfolio. The common way to track this asset class with REITs, which are considered a domestic stock. Instead of taking up less than 5% of the US stock market by capitalization, it is now taking up more than 40% of the domestic equity portion. I’m not really sure why there is so much, although he does write that if you own your home or other real estate, you may want to reduce your REIT exposure.

In addition, corporate and mortgage-backed bonds are left out, following his opinion that they aren’t the most desirable asset classes for individual portfolios due to added call risk and credit risk. (If you’ve been keeping up with the markets recently, it seems he may have been on to something here.)

As with all the model portfolios, the idea here isn’t just to follow any of them blindly. I do think it helps to see where different experts have similar components to their model portfolios, and where they differ. I also like breaking it down this way into pie charts of stocks-only and bonds-only in order to visualize them better.

See here for other model portfolios from respected sources, part of my incomplete Rough Guide to Investing.

I know there is plenty of bad advice out there, but this one just caused me physical pain. Mr. Cliff Mason impressively gained the status of Staff Reporter at TheStreet.com fresh out of college (did I mention his uncle is Jim “Mad Money” Cramer?). He hits the ground running with his recent article Young Ones, Go Forth and Speculate, where he bashes veteran Wall Street Journal reporter Jonathan Clements and proceeds to share some of his vast financial knowledge with us.

Pearl of Wisdom #1:

I believe that saving money is at best nonessential for the under-30 cohort, and that people my age will generally get more from spending their money than from buying stocks or bonds.

Pearl of Wisdom #2:

Buy small-cap stocks that trade under $10, have little analyst coverage and a reason to go higher. In a word: Speculate. […] With maybe $2,000 to invest a year, you won’t make serious money in the market unless you take enormous risks. It’s much more likely that you’ll get wiped out, but since you won’t have a lot of money on the line, it’s a worthwhile risk.

Wait, there’s more! You must see Mr. Mason in person in this TheStreet.com video showing off his brand new iPhone. Why did he buy this phone? “Well, I wasn’t doing anything… and I had money to burn… it is a babe magnet…” What about his current plan? “I have an old Verizon line that my dad still pays for [the iPhone is AT&T-only] … I should tell him about that…”

Hmm… sure sounds like someone I should listen to for financial advice!

I found this article via the Diehards Forum, where author Taylor Larimore submits his succinct reply:

If a young investor age 25 invests $4,000/year @ 10%, at age 65 he/she will have $1,947,407.

If a gambler waits until age 35 (and loses), he/she will have $733,774–less than half.

Investing for retirement should not be a gamble.

My response? As a 20-something who tries hard every day to balance enjoying life now, buying a house, and funding my own retirement someday, I’m a bit offended by his flippant views on saving.

I don’t really care what Mr. Mason does with his money. But to tell others to just gamble it away because it’s “not that much”? Being 25 and actually having $2,000 saved up is not something to be dismissed. Not only can you take advantage of the wonder of compound interest, but look at how risk decreases as your time horizon increases when properly diversified. Why increase your risk needlessly when you could be decreasing it?

Okay, maybe I’m being too harsh. When you’re young, you should take risks. Go into debt to pay for college or graduate school, work at a start-up company or at a non-profit that you love, or even start your own business. Take chances with money that can really reap huge rewards!

It’s time to examine my mom’s 401(k) plan. The first thing that I wanted to do was to get an idea of what kind of fees she was paying. There are three basic types of fees, according to the Dept. of Labor:

1. Plan Administration Fees – Like the description states, this is for things like record-keeping, mailing statements, and other accounting duties.
2. Investment Fees – Often the largest and most hidden, these are fees that are wrapped into the investment options that you are given.
3. Individual Service Fees – These are for specific things like processing loans or for self-directed investments.

Smaller companies often can’t afford a top administrator like Fidelity or Vanguard, which can absorb most administrative costs. Instead, they must find a cheaper firm (at least for them). Guess where the costs get shifted to? The workers. Thankfully, my mom isn’t subject to any administrative fee, at least that I could find. But investment fees…

Types of Mutual Fund Investment Fees
Investment fees for a mutual fund are usually broken down into

• Front-end loads – Also known as sales charges or just front loads, this fee is charged when you buy a share of the fund. For example, if you have a 5% load and put in $1,000, only $950 worth of shares is actually purchased. Essentially a sales commission, the $50 goes to the salesman (in this case, the plan administrator). Avoid whenever possible!
• Back-end loads – Also known as deferred loads, this is essentially the same setup, except that it is charged when you sell.
• Expense Ratio – Also known as annual management fees, these are ongoing fees charged by the mutual fund company for running the fund. It is usually expressed as an annual percentage of fund’s net asset value (NAV), although the fee is subtracted a little bit each day. The expense ratio may also include a sales portion, called 12b-1 fees.
• Early Redemption Fees – Supposedly to deter market timing, such fees are usually the same as back-end loads, unless the money is direct back into the fund itself and split amongst the shareholders (instead of going to the fund managers).

What is sneaky about all these fees is that they are usually not marked on your account statements as a fee, and in the case of 401k’s I bet many investors are never told about them and how they can seriously hurt your potential returns.

Do You Know What Share Classes You’re Buying?
Now, of course by law they must give you the prospectuses for each fund. You know, those thick booklets that most people file away, never to see it again. But if you don’t know, dig them up and read them! For one, one mutual fund may have several different shares classes, with different combinations of front loads, back loads, and annual expense ratios. Don’t just assume you are buying the cheapest class, either.

For example, the only Real Estate option my mom’s plan is the AIM Real Estate Fund, Class A Shares (IARAX). I was sad to see that this has a fat 5.50% front load and a 1.29% expense ratio. The Investor Class shares of this fund (REINX) had no loads and 1.27% expense ratio. I don’t know how happy she’ll be to find out that 5% of every dollar she put in was being taken away instantly.

I still have to sort through the other details of the funds like investment objectives and asset classes, but by better understanding the fees, she can already start to choose between her available options more wisely. For instance, your 401k might offer a great International Fund with reasonable expenses, and an S&P 500 fund with horrible expenses. If so, you can buy the better fund in your 401(k) and find a good alternative for the bad one in your other brokerage accounts.

Let’s continue with the 401k/403b Rollover discussion. Previously, I explored some possible reasons to keep your old employer’s plan. The next option to consider (if only briefly) is to transfer your 401k/403b assets into your new employer’s retirement plan. You can only transfer after-tax contributions between the same type of account (401k » 401k, or 403b » 403b), but more common pre-tax contributions should be able to be transferred between different types as long as the new plan allows rollovers.

The reasons you might want to do an employer-to-employer transfer are very similar to before:

Special investment options
Maybe your new employer plan has some desirable options that aren’t available to a retail IRA investor. The average 401k has something like 7 mutual fund choices though, so this is probably unlikely. Ask your new HR department for details.

Lower minimum balances or fees
If you have a small balance and figure you might as well cash it out as you don’t meet other account minimums, don’t! Your new employer will probably have no minimum requirements and you can continue to build on what you have already contributed.

Ability to take out loans
Your new 401(k) may allow you to take out loans against your savings, which you can’t do with an IRA. In addition, if you already have a loan from your old 401(k), your new one may allow you transfer over that loan. Otherwise, most plans make you pay back the balance immediately or risk having it penalized as an unqualified withdrawal.

Still not sure? Another alternative is to roll your plan into a Rollover IRA, keeping it separate and not merging it with any other IRAs, and then see how you like your new employer’s plan. If somehow you do, then you can transfer the Rollover IRA assets into your new plan.

References: SmartMoney, American Funds