How to Pick your 401K Investment.

The 401k has essentially replaced pensions as the dominant way that people save for retirement. Regardless of whether you think that is good or bad it generally creates much more choices for employee investors. Few companies can or will give advice on fund selection and the companies who provide the system to the company may not have their interests aligned with employees.

So I tried to put together a fairly simple way to help pick.

WHAT TO AVOID

1) Avoid Return Chasing.
Probably one of the worst things you can do is filter by 3, 5 and 10 year returns and pick the one that has the highest return. It’s been proven over and over again that “past performance is no guarantee of future results. Actually in many cases the reverse is true. The better the past returns, the more people tend to pile in and thus the price of the investment has gone up a lot meaning that a normal “regression to the mean” will cause future performance to be worse.

Don’t get clever and try to buy the worst performing funds either because many funds disappear completely leaving the investor with $0.

2) Avoid Making things complex.
I think it’s wise to stick to 2-4 funds. Anything more gets really messy and complicated. You have to start thinking about which companies the funds hold and in what %, because there might be lots of investment overlap. You have to understand the different strategies used by the different fund managers. You have pay more attention to which indexes they compare themselves against. Additionally this generally has very little effect on long term overall performance of the investment, and it leads to “activity” by the investor that is almost always negative for returns.

3) Avoid looking at it too much.
In many situations monitoring and information are powerful tools. In investing they can be just as effective as blowing you up and giving you increased performance. Money has a huge impact on our emotions and losing it is really scary (I’m sure many of you are feeling that after “Brexit” last week). Those big moves up and down make us react in ways that are generally bad for our long term investment performance. The best advice I can have is to try to not look at your portfolio very often. Maybe a couple times a year or once a month at most; and decide in advance what you are going to do (or not do) and when you are going to do it.


WHAT TO DO

Let’s pretend we have 100k in our 401k with Fidelity, where should we put it?

1) Max any Matching
401k matching is free money. Of course ever article ever written about 401Ks says to do this. For some people it’s really hard because they are living on every dollar they earn. Still… if you can, cut things out of your budget… maybe that coffee in the morning or go out to eat less or whatever. If your employer has a match not only do you get double dollars, you also get them Tax free AND you get to avoid taxes on the compounding earnings over many decades (assuming you are younger).

A strategy I used when I was younger was upping it by 1% every 6 months to a year. A 1% pretax drop in my pay isn’t that noticeable, but over 3-4 years it increases contributions to 5%+ and that can have a HUGE impact over 30 years. It’s the boiling frog, but in this case it makes you richer instead of killing you :).

2) Define your risk tolerance and asset allocation.
This can be really tricky for people. Traditionally it comes down to stocks, bonds and cash. Since cash is elsewhere, the 401k really comes down to stocks and bonds. My suggesting is if you don’t know what your risk tolerance is and you are going crazy thinking about whether the market is high or low or if you should subtract your age from 120 and then set your % or if you’re a little older now, or if the bond market is overpriced. I’d keep it simple and just take 70/30 stocks/bonds and start from there.

3) Focus on fees.
When I look at which investments to make I use fees as the #1 filter. Here’s why.

Assume you have 100k in your 401k and assume that on average it will return 4% inflation adjusted a year for the next 30 years.

That initial 100k represents a “job” that “pays” you $4,000/year.

I think of fees as a “tax” on my INCOME as opposed to a cost on the PRINCIPAL. So when I evaluate fee impact I don’t do this:

100,000 * (1% fee) = 1000/year. “Wow. That’s only 1% of my money, that doesn’t seem like much.”

I do this
$4,000 income from job / $1,000 fee = 25%. “Hang on. The fund is taking 25% of my money? That seems really high.”

I’m convinced that second way is the way to evaluate ANY investment service that take a % of your money.


LET’S MAKE OUR CHOICES
So we have 70k to put in stocks and 30k to put in bonds, which ones?

STOCK SELECTION


So my first goal is to find the funds with the lowest fees.
Fidelity lets me do this pretty easily as I can browse the investment choices and show the fees in a nice list (they don’t let me sort by fees, so it’s a bit more work). Here’s what it looks like:

You can see that the first tab is annual returns, followed by cumulative total returns. That’s what most people use. I barely look at them because I consider them mostly noise.
I’m VERY interested in that gross expense ratio. The lowest one is the FID 500 Index PR at 0.07%. The highest one is the JPM Midcap Value IS at 0.94%. Now all of these fees are pretty decent as many go up to and above 2%; which in our 4% long term return world is 50% of our income. No way.
I honestly think 1.5%+ fees in 401Ks should be pretty much banned. In fact I think anything over 0.5% has no business being in a 401k because it’s just acting as a wealth transfer mechanism from the middle class to the wealthy institutional investors by capitalizing on people’s ignorance. 401k managers who recommend funds that charge 1%+ without major disclosures and resistence (either in person or via automation) should be ashamed of themselves. But that’s just my opinion.
Personally I omit all funds and ETFs that charge more than 0.5%. More generally, unless there is a really strong reason to the contrary, I won’t give anyone more than 0.5% of my investment, period.
In my situation it limits me to a handful of choices. There’s a midcap index, a smallcap index, an international fund, etc. What I would normally look for is some kind of global fund (Vanguard has one called VT that is basically the world stock market in one fund). The other way to do it is to split it into “domestic” (for me the US) and International.
The best domestic option I have is the FID 500 INDEX PR (FUSVX) which basically tries to duplicate the behavior of the S&P 500.
Most people know that VERY few professional investors beat the S&P 500 over time so that combined with the small fees makes it by far the best choice open to me.
For international the best choice is FID INTL INDEX PR (FSIVX) fund because it has a low fee of 0.17% and good diversification. It’s also NON-US which means there will be very little overlap with the FUSVX.
Personally I would put ALL of the 70% into the FUSVX because it’s by far the lowest fees for the diversification. Many people argue that the S&P isn’t well diversified because it’s all big US companies. That’s partially true, but many of those companies get much of their revenue from global sources so it’s far more diverse than it looks. It DOES focus on large companies, but I think the smaller the company and the more focused the investment the more you have to know to invest and this is about SIMPLE choices.
It would be totally reasonable for me to put half of the 75% in FUSVX and half into FSIVX. I just really hate fees and think the S&P 500 is pretty well diversified globally, so that’s what I would do and what I would recommend.
BOND SELECTION
Bond selection is not different. Fidelity doesn’t let me easily filter so I have to find the bond funds inside of that list.
The lowest fee is the FID US BOND IDX PR (FSITX) at 0.17%. Similarly there’s high yield bond funds, international bond funds, and so on, but since bond investments tend to be the more stable/less return part of the portfolio fees matter even more. FSITX is invested in US government and corporate bonds in a pretty “normal” way.
So I would put the full 30% there.
That means I’m omitting international bond exposure which can be argued is not diversified enough. Unfortunately, the best choice for me was the AB GLOBAL BOND Z,  but it’s fees are way higher (0.53%) and it’s 40% US Bonds anyway.
A NOTE ON TARGET DATE FUNDS
Fidelity (and most major 401k providers) have so-called “Target Date” funds which seek to adjust the risk structure based on a targeted date (usually for retirement).
So let’s say you pick FITWX which has a target date of 2025. As it gets closer to 2025 the fund will move more of it’s assets into “less risky” assets such as bonds and cash. It’s basically a well diversified, age adjusted and rebalanced portfolio all in one.
I think these are great, but I HATE the 0.55%-0.77% fees. Vanguard, for example, has a 2025 target date fund that has 0.15% expense ratio. I’m not going to pay 3.5 times more than I could for the privilege of having the word Fidelity on the fund. Sorry.
If the fidelity fund had a competitive fee, I’d just put everything in that and move on. I just can’t pay that 0.66% fee when there’s far cheaper and nearly as simple alternatives. So if your provider has a target date fund that has reasonable fees, I’d probably go with that; and if I roll my 401k over; I’d probably put it into a Vanguard target date fund that matches my expected retirement date.
SUMMARY
So there you have it. 2 investments, simple choices, fairly broad diversification, low stress.
Of course WHAT the market returns I can neither control or predict.
I can control fees so I monitor them and adjust as needed (hasn’t been needed in last 4 years).
I can control spending (to some extent) and thus I can max the matching.
I can control taxes (to some extent) and thus reduce my income liability by saving more in my 401k.
Hope this is helpful!

Simple Visualization of Household Income Distribution by Quintile Over Time

I’ve been commenting and thinking about income, unemployment and social effects for a while now, but I had a really hard time finding a nice, simple multi-decade view of household income distribution.

It turns out this is easy to do. The data is readily available here and it goes back to 1967 based on census data… so it’s about as “objective” and consistent as you can get.

APPROACH
My approach is brain dead simple. I take the mean household income by quintile, add up the total and then divide each quintile by the total to get a % of the “pie” that quintile earned. Then I divide each % by the previous year’s % to get the delta from year to year. That should give a somewhat clear picture of how households in different brackets are doing comparatively over time.

I’ll put the table details below.

VISUALIZATION
I used a waterfall chart because I think it does the best job of showing the change over time.

NOTE: The first bar is the delta from 1967-1970 and the second bar is from 1970-2005. Then it becomes annual. I’m doing this on purpose to show the long term change as well as visualizing the last recovery between 2008 and 2014 (I couldn’t find 2015 data).

So here it is by quintile:

INTERPRETATION
We must be honest with ourselves that without knowing the size of each group we can’t know the total impact, but I am going to assume that the highest quintile did not grow meaningfully in % of total population.

So given that assumption, since 1970 every other quintile has had a meaningful decline in income (as a percent of total income to all quintiles) with the worst drop hitting the 2nd quintile.

Additionally, since the great recession only the top quintile has had a gain in income so that pretty much explain why the perception of most people is there hasn’t been a recovery. If your paycheck goes down or stays the same… you don’t feel like anything is recovering.

Now WHY this is happening is playing itself out in lots of political and social debates. I’ll save that for a different day.

In any case it helped me understand how the country as a whole can be wealthier but the majority of the people in it can feel poorer.

RAW DATA TABLE
If you want the actual excel file, email me.

Why the Tesla Model X changes cars forever.

Obviously I’m biased.

I picked up my Model X about a week ago and it’s been an impressive experience so far.

There’s lots of reviews out there and most of them are from enthusiasts who have mostly minor, though some major, complaints… but overall think the car is the most amazing thing ever.

I’m one of those people, but for slightly different reasons.

WHAT MAKES THE MODEL X SO GREAT


I’m not going to talk about how falcon wing doors make putting kids in and out of the car super easy.
I’m not going to talk about how the car has insane speed, handling, acceleration, etc. to the point where you can blow away Ferraris on your way to picking your kids up at school.
I’m not going to talk about how the interface and design of the car are on par with anything Apple has done.
I’m not even going to talk about how it’s an EV and therefore sets up the possibility for being completely 0-carbon footprint (with the exception of the materials used to make the car, of course).

OK, SO WHAT THEN

#1: The Model X is a Platform
A brother-in-law of mine put it perfectly. He commented that Tesla has created a PLATFORM and not just a car. Unlike any other car (except the S) the Model X can be constantly updated. And it is. Regular software updates add significant functionality. I’m relatively sure that I will be able to use my Model X to drive completely automatically in the next few years. I won’t need to buy a new car or get a bunch of hardware… it’ll happen through software only, at night, while I’m sleeping in my bed.
Things like safety improvements, preferences, driving quality, even engine and battery performance can be improved via software updates. I suspect that some things WILL require hardware updates, but I bet that the same car I have out in my garage today can be continuously improved and tweaked for many, many years; providing me with huge value.
No other car has ever done that, or even tried.
#2: Crowdsourced Energy
I happen to be in a bit of an outside EV area right now (Inland Empire) and the nearest supercharger is about 40 miles away. I also am staying at my in-laws and thus don’t have a high speed charger at home. If you use PlugShare, it has a feature that lets you search for individuals who share their chargers with people. Some of them charge, most of them don’t. Many people bring a bottle of wine or case of beer to share while waiting for a charge. There are numerous stories about people being in a strange town, unable to find a commercial charger and they share a charge with a stranger.
I think this is awesome and is a completely different way of thinking about how we power our transportation. I can easily see an AirBnB type situation popping up where there is no need for huge “electric” stations and instead people just rent out their chargers for $0.35/KWh or just ask for a cup of Starbucks in return.
One of the big concerns with EVs is that there’s no charging infrastructure… well… maybe that problem is already solving itself.
#3: Self-Driving (I mean driving assistance)
Ok. This feature gets a lot of coverage, but I have to list it. I was AMAZED at how easy and reliable this was and also how long it took me to get used to it (about 5 minutes).
I use it all the time, even on bigger local roads and especially at night.
On my first day driving  I was able to get an In N Out Burger (hey! you have to Christen it, right?) and eat the burger with BOTH hands while sitting in stop and go traffic on the 91. It was AWESOME. I am positive that all cars will be adding this over the next decade or so and there will be huge reductions in commuter accidents, stress levels and energy use.
I know other companies are working on it and I know Google has prototypes running around, but I literally did a double click and boom… the car was driving itself. There’s a few situations it didn’t deal with well, but generally speaking it was better at commuting than I was… and not by a little bit.
It’s ironic that the coolest feature about this car is that you DON’T drive it.
#4: Display
I don’t mean the giant screen… that’s cool… but I don’t look at it that much while driving. Why? Because the HUD is amazing. Why other cars haven’t solved these problems is beyond me.
The X gives you a real time collision map while you’re parking in your garage so you can see EXACTLY how far you are from all that random crap lying in your garage. Not only is it useful, it’s also really cool looking.
The GPS being integrated on the left side of the HUD is fantastic and it’s completely natural to use. It also flips seamlessly between GPS and other informational needs based on driving conditions. Everything from climate to music choice is intuitively shown in a minimalistic, easy to read display.
#5: It learns from you
I’ve had 2 or 3 incidents in the last week where the car tells me something.
It asked me to link it to my home network so it could get updates faster.
It noticed that I was in a certain location a lot so it asked if that was my home (and added it to my list).
This kind of slow onboarding and responsiveness is not something I used to having a car do. Cars are supposed to be dumb pieces of aluminum that do what we say. This is an entirely different way of thinking about what a car should be.
FINAL WORDS
I believe that what makes products successful is when they meet one of two criteria
1) They solve a fundamental problem that hasn’t been solved before (or as well).
2) They provide an experience that is meaningfully better than what was there before.
Few products do both. the iPhone was one, the Model X is another. I simply can’t imagine driving another car after a week in my X, and I suspect when the 3 comes out many hundreds of thousands (and potentially millions) of people will have a very similar feeling.
I was already pretty lazy and with the X I can be even lazier… so thanks for that!
I suspect the rest of the auto industry has noticed and they will have to substantially up their game. This will provide huge benefits in terms of safety, energy use and quality of life for many millions of people around the world in the years to come.
Well done.