Thursday, February 03, 2005


I reran my fund screen for the options in my 401(k) at the beginning of the year:

 					Non-Load Adjusted Returns
Investment Name                         1 Yr	3 Yr	5 Yr	10 Yr	LOF
---------------                         ------  ------  ------  ------  ------
Excelsior Value & Restructuring Class I	19.68%	--	--	--	32.86%
Fidelity Equity-Income Fund		11.29%	6.21%	4.31%	11.94%	13.19%
First Eagle Overseas Inst CL		22.10%	24.97%	16.88%	--	16.78%
T. Rowe Price Small Cap Stock SHS	18.77%	10.48%	10.91%	14.51%	13.74%
Vanguard PRIMECAP Fund Admiral Class	18.47%	7.28%	--	--	9.51%

S&P 500® Index Fund			10.86%	3.69%	-2.12%	12.09%	13.30%
Raytheon Stock Fund			31.78%	8.68%	10.83%	4.11%	8.81%

There aren't 10 year returns on some of these funds because they've added fund "classes" which merely change the fee structure. In each case, the expenses have gone down, so I'm not complaining. All of these funds (except the Raytheon fund) have long-tenured managers. Here is the performance (from Morningstar) of the base funds:

Excelsior Value & Restructuring		15.84%	10.86%	6.42%	17.33%	--
First Eagle Overseas 			20.90%	24.88%	17.02%	14.74%	--
Vanguard PRIMECAP Fund 			10.08%	6.24%	0.89%	15.24%	--

In an ideal world, I could just pick the best fund (probably the Value & Restructuring Fund), put all my savings in it and forget about it until I'm nearing retirement. The problem with that idea is that it is risky. Of all the funds listed, the safest is the S&P 500 index fund. It has the lowest fees, turnover, volatility, and the longest management tenure. The only major risk it has is market risk. If there is a catastrophe (either financial, like the 1987 crash, or not, such as the September 11 attacks), the fund would lose money. Of course, all the rest of the funds would probably lose money too. On the downside, the index fund has a lower return than the other options.

Probably the highest risk (and certainly for me) is the Raytheon stock fund, since it only invests in one company. Everyone who invested in Enron (especially in Enron 401(k) plans) knows how this is risky. Of course, there is a potential for disproportionate returns. An individual company might find ingenious new ways to make or to lose money. Or in Enron's case both.

Mutual funds only need to hold about a dozen uncorrelated stocks in order to eliminate the risk of owning too few stocks. (Most own many more.) But fund holdings are always related in some way or another. A small cap fund could do poorly in years when small companies in general are doing poorly. Or a fund could make a series of disastrous decisions. Or it could defraud its shareholders. Or it could slip into mediocrity. In any case, it doesn't hurt to spread your bets if you think you have several good options.

The upshot of this is that after years of being invested mostly in the S&P 500 Index, I'm going to add First Eagle Overseas and Vanguard Primecap to my 401(k).

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