401(k)'s for dummies/me (old myspace post)

One of my most recent hobbies has been personal finance. I don't see it just as a necessity, but an entertaining past time in which I've been known to open and close accounts within hours, max out and pay off credit cards for no particular reason, and bore the living shit out of my fiancee, roommates and friends with plenty of get rich quick (or by the time I'm 74) schemes. I do spend a fair amount of time reading and researching, and since I like doing it so much, I'm going to share some of my theories and techniques with the world.

So my number one theory in personal finance is::::::: I don't know shit. I know this as an absolute fact, and pretty much the only absolute I've found in interest rates, account maintenance fees, and certainly the stock market. Resolving myself to this, I've picked a few strategies that will hopefully make me my first million in less than a year.

Let's start with my retirement fund. I've got matching to 3% of gross salary, then matching 50% to the next 3% of my gross. So if I make $100/year, and put in $6, then the company gives me $4.50. Any more than that, DSM doesn't give me anything. Also, they automatically put 3% of my gross in, but don't let me take it out until I've worked there for 3 years. So to maximize the deal, I'm putting 6% of my gross in there, and they're giving me 7.5% total. Any other money I might want to add would be better spent on credit cards (at about 9% on the ones I use). Blah blah blah, percent and numbers dollars rate....

So to match my investing scheme (the one about me not knowing shit about investing), I need someone else to pay attention to it. The best returns are in stocks, but I don't have the time or knowledge to think I can pick individual companies that won't completely tank. That means I need mutual funds, so I can own a bunch of stocks and have someone do the picking for me.

Which mutual fund to buy though? Certain ones move faster (up and down) than others, and since I'm 25 and have plenty of time to earn back any money I lose. The answer: index funds. They're designed to track the overall performance of the stock market, which is hard to beat in the long run. (I think 80% of mutual funds underperform the market). The best thing about them is that they're automatically picked and priced, so the fees that the managers take out are very low. There's just one problem with this though: there are no index funds in my 401(k).

Damn. So how do I balance high risk and low risk mutual funds? I've got a Fidelity 401(k) that offers a set of "Freedom Funds." Fidelity looks at the average dude that plans on retiring in year X, and says, "alright, I'm this old, I've got this long to go, so I should have so much in high-risk mutual funds, yay much in low-risk, mid cap, small cap, large cap, international, index, bonds, etc. etc. etc.," and buys the funds accordingly. Not only are the individual stocks picked and balanced everyday by a professional, but the balance of risk is put together and managed by a pro as well. Remember, I don't know shit, so I need to find a way to have a pro do it (since I can't have the market do it automatically in an index fund).

What about diversification? If you own all of one thing and it tanks, you need backups and other stuff. The simple fact that the freedom fund managers pick more than one type of mutual fund spreads your money out over several markets, and the individual funds they buy spread out the money that's in a particular market over several companies. Done and done. The drawbacks are A) the fees that they charge are more than an index fund, and B) the market will probably do better, on average, in the long run. Oh well...