I decided to invest in my employer administered 401K plan and now I need to pick funds that are available with them. For me it was easy, I just picked 3 funds where I would invest one third of my contribution in to each fund from every paycheck. One fund would be high risk-high reward, one fund would be safest with low returns and the last one would be moderate risk-moderate returns. How did I know the level of risk and reward? From the star ratings next to each fund dummy!
It took me 1 year to realize how wrong I was. We all have pride and believe we are special. I don’t see anything wrong with that. If we don’t believe in ourselves who will? My 401K account returns for the 1 year taught me a valuable lesson and here it is. This is neither about pride nor about ability nor smartness. All I need to do was research for a few hours and learn how to pick the funds.
After reading a few books and articles I understood how I needed to pick the funds.
- Look for the lowest expense ratio. High expense ratios compound and reduce your returns.
- Look for a good provider of mutual funds. I chose Vanguard index funds
- Look for an index fund which is well diversified like complete stock market.
- Stay in it for the long term.
I started looking at all the funds that were available in my 401K plan as I wanted to change funds where I wanted to invest. I noticed the following.
- Ratings of the funds I picked last year have changed. Yes of course ratings change with fund performance. Also, past performance doesn’t exactly predict the future.
- The expense ratios were anywhere around 1% to 3%. You will be charged whether your fund is making money or not.
- There were 30 to 40 funds to pick from. There was ONLY one fund from Vanguard. I picked that.
What was the Vanguard fund that was available you ask? It was VIIIX (Vanguard Institutional Index Institutional Plus Shares). Expense ratio was 0.02%, seeks to track S&P 500 Index, had 506 stocks and 220 Billion net assets. It served me well.
I understand fund performance depends on market movements. We dollar cost average when we invest regularly in to a fund from each paycheck. We buy when it up and when it is down. We average out the price. I was well diversified, expense ratio was down by 50-100 times compared to the previous year and Vanguard was a well-respected company.
Now I agree investment goals determine what fund to invest in. I learnt the importance of thinking long term and being patient. I started seeing steady growth in my 401K account.
No Star Ratings for me!
moneyclove.finance.blog 