Harry Chen Thinks Aloud

After reading my blog post that advocates cost does matter in long-term mutual fund investments, Gabriel asks how he can apply this low expense principle in managing his 401K account. Let me try to answer his question with the ideas that guide my 401K account management.

The general idea: to keep you 401K investment cost low, your first need to identify the types of expenses that you’re paying to mutual fund managers or your 401K management company. Because different companies offer employees with different 401K plan, the strategy that I’m about to describe may or may not be applicable to everyone.

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Why should we invest? For example, why is it such a good idea to buy a house, or put away money for retirement savings? The simple answer is that in order to secure our financial future, we must learn how to make money from money. For example, use the money that we’ve saved from paychecks to make more money. This is the basic of investment.
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Not all companies offer 401(k) plan. So how should you save for retirement if your company doesn’t offer 401(k)? Here is some tips from Marc Hogan at Business Week.

1. Open an individual IRA account
2. Explore other saving options (e.g., one-person 401(k) or pension plan)
3. Make saving and investment automatic
4. Invest index funds
5. Save at least 10% of your income

Some of my thinkings are as the follows.

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Plan for retirement is a complex task. During the weekend, I was chatting with friends about retirement planning and investment. In the discussion, I was reminded again about some fundamental questions that are related to retirement investment strategy.

Let me try to summarize my current strategy.

Save as much as I can in 401K and IRA accounts.

Build a portfolio that uses an S&P 500 index fund as the core. Without talking about anything else, the basic objective is to beat the market (i.e., S&P 500). The simplest strategy is to invest in an index fund that tracks the movement of the broad market. Because the market tends goes north in a long term, buying into an index fund pretty much guarantees a positive outcome. In addition, historically majority of the mutual funds can’t beat a fund that simply tracks the market index (e.g., Vanguard 500 Index Fund). Therefore, it’s wise to put money in an index fund in case my other investment selections go bad.

Exploit diversification and asset allocation in the rest of the portfolio. Diversification can be achieved by investing in mutual funds. When comes to asset allocation, I make sure that my assets are not invested in a narrow group of mutual funds. Currently I own a mix bag of large-cap, mid-cap, foreign stocks and specialties (metals and health care). While the underlying funds of these categorizes may change, but the asset allocation of the portfolio probably won’t change much.

I track world economy news and developments. Some basic economic knowledge can be helpful in building my portfolio.