it isnt complete gibberish ive actually learned something

November 1st, 2007

It isn’t complete gibberish! I’ve actually learned something…

Last week my spouse’s employer sent home a memo about some changes to the fund lineup in their retirement plans. Now, I am still an investing newbie, and words like Mid Cap and Small Cap still go over my head. But thanks to blogs such as All Financial Matters and Advanced Personal Finance that explain a lot of terms in easy to understand ways, I have learned a bit. So I took the memo, which my spouse declared “gibberish”, and read it over. And, lo and behold, I actually understood it. Well, most of it.

Basically, the plan is replacing three funds they feel are underperforming with three different funds with similar asset allocations and risk profiles. And I actually understand asset allocation (what percentage of the fund is in bonds, stocks, cash etc) and I understand that more stocks mean more risk basically. I’m not a genius or a whiz at this stuff but I do understand a lot more than I did 6 months ago. If we have any investments in the funds marked for deletion they will automatically transfer to the new funds. I still have to check out our portfolio to see if it will affect us.

As I said, I’m not a whiz at all. There is a part of the memo I don’t understand – some funds are changing their asset class from “Value” to “Blend” or vice versa and I have no idea what that means or if I should care. But I’m happy I understand as much as I do.

We are currently in the “balanced” portfolio because I am somewhat risk-adverse but I have been learning to overcome that, so I was thinking of changing to “growth” or “aggressive” (since we have a long timeline ahead of us to retirement) but I was surprised to see that our “balanced” option has performed the best over a ten year horizon of our five pre-mixed asset allocation choices. So now I am thinking I might stay still. Maybe. I have a lot more thinking to do about that. In the short term our 12%/year increase is getting its behind kicked by Aggressive’s 16%. And so it goes.

Yay for knowledge! Although the little knowledge I have might become dangerous… I should really learn some more about investing sooner rather than later. I have some free time on my hands now…. ;)

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10 Responses to “It isn’t complete gibberish! I’ve actually learned something…”

  1. Thanks for the compliment! I’m glad I actually helped someone.

    Regarding a “blend” mutual fund: it’s a fund that isn’t held to one asset class. The difficulty with these types of funds is that it can be hard to judge their performance since it might not be clear what the asset allocation for the fund is.

    If you have the information handy and you want me to look at it, shoot me an email and I’d be happy to take a look.

    Take care,

    JLP

  2. Are there any index funds in his retirement plan? Index funds usually charge lower fees than actively managed funds.

  3. Hey, long time no hear! :)

    If you’re seriously looking at 30 years to retirement, you could probably handle a “funner” ride with aggressive funds, but it really depends on your attitude and ability to handle risk. We have our (pitifully small) Roth in an aggressive growth fund, and we’re earning a nice 18% on average the last four years.

    BUT – I realize that there’s a possibility that it could all be lost tomorrow. I am willing to take that chance…now. I’m looking at 20+ years to retirement. If we were closer to that, I’d have a definite problem. If I was more fiscally conservative, ditto. But…I figure now, I have the chance to try to make up for the stooo-pid years where we didn’t put anything in at all. It’s the chance we’re willing to take.

    Now…if we could only get the cc’s paid off so we could do some *serious* investing… ;)

  4. I’m an index fund fan myself and this is well provided for by my company’s DC plan (like a 401(k)). It’s excellent that you understand more though, just think in a little while, you’ll be the one that everyone comes to when they don’t understand their plan choices.

  5. When checking out your choices of funds, make sure to take a look at the fees associated with each one. There will be a percentage fee charged for managing the accounts, ranging from .10 to 3.0 percent. You want to have low cost funds if possible….more of your money working for you.

  6. Hey,

    A “value fund” is one that invests in companies that it thinks are undervalued. An example of that might be banks right now. The subprime mortgage crisis has led to drops in the share prices of many banks. Much of that is deserved, but perhaps some of it is overreaction. Or perhaps you think the crisis will be over soon. In either case, you would see the bank as a value investment. The theory is that by investing in undervalued companies, you’ll profit when “the market” gets over its hysteria and the price goes back to a normal level.

    A “growth fund” is one that looks for companies that are growing quickly. That tends to favor smaller, newer companies. Netflix might be a growth stock if you think the mail-order dvd rental thing is going to spread a lot.

    They might sound sort of equivalent, since if you think Netflix will grow a lot, then maybe it’s undervalued at its current price. The difference is generally that with value investing, you assume the company won’t grow at all and then determine if it’s a good value. Most growth companies, by that definition, are horribly valued, because the market does indeed account for things like growth expectation. For instance, if Netflix made an announcement that they weren’t gaining any more subscribers for the next 10 years, and that they’ll never make more than $40 million per year, their stock price would probably collapse because everybody who bought their stock bought it in anticipation of “getting in on the ground floor” of something much bigger. That’s the danger with growth stocks. The danger with value stocks is… what if it’s undervalued for a reason that you don’t know about? Then you could be “catching a falling knife” as the expression goes.

  7. Thanks for the explanations!

    I’m still not sure how the “blend” fund is being reclassified as a “Value” fund and vice versa, but I understand the terms better now!

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