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401k: If I Where Employed by EMC25 07 05 16  25
--------If I became an EMC employee, first of all, I would be happy. I trust the company to do
well. It has a solid and expanding product suite that compensates
for a decline on basic storage. The need for massively large and
complex, highly available, and highly reliable storage systems will just
increase as people try to make more digital data available for business
applications as well as for the entertainment industry. This
company is benefiting from increased IT spending that was being held
back during the recession years. Although Earnings Per Share on
2000 and 2001 where nothing to write home about (unless it was to receive some family emotional support),
they have been steadily and dramatically increasing year over year
since 2002. Cash flow, Revenue, and Operating Income has
steadily increase over the years, since 2002. The fact that
Standard & Poor's believe on it (Strong Buy 5 star) helps me feel
better about it. I do hold 500 shares of it, and if I was an EMC
employee I would probably hold some stake in the company also: but not more than 10% of my total net worth! Most probably I would take advantage of Options and ESPP plans, and avoid investing too much more inside the 401k on EMC stock. I like to have some more control of my finances, and I think I can do better than a long faced Fidelity wise person can. This is one of the few personal complaints I have about 401k mutual funds, that I can't have total control about the specific companies on which I invest. However, for the uninitiated or for the person who doesn't want to be paying attention to every single stock news and earnings report, well managed funds are an advantage. For the majority of people in this nation this fits the bill, and so thought our congressmen when they designed the 401k plans, and I do agree with them (I just wished they had thought of higher contribution limits). Not all funds are created equal, and there are key items that I look in them (among others):
On bull markets like the one we had on the 90's, funds with small market capitalization companies may do very well. Such small companies may be growing fast, and so the perceived value of their stock. If you feel like there is a bull market coming, you may want to consider these funds. I do not believe in timing the market, but you can benefit from this effect if you invest in funds that cover broader investment choices than just the Standard & Poor's 500 Index. A good choice could be the Fidelity Spartan Extended Market Fund, which invests in around 4500 companies, a lot broader than those following the SP 500 and more susceptible to the price increases (or decreases) of rapidly growing companies. I do believe in a balanced investment strategy. When you look at all of your Net worth it should be invested in more than one asset class. Your house for example is a Real Estate investment (although some people only count it if they can sell it and move to a less expensive one). Emergency funds are a cash-equivalent. The stocks you get from your ESPP program are an equity investment. Remember to add all assets and use them when determining if your portfolio is balanced or not. A very important goal of every investment strategy should be to produce a steady stream of income at some point. Since a 401k is not designed to be an income source when you are younger than 60 years old, you should concentrate on Growth as your primary objective if you are still young. Even then, income funds usually provide some stability to the portfolio: they provide income even if the market conditions are lousy. An income fund usually invests in securities that provide dividends. An Equity Income fund invests in stocks from companies willing to share their wealth with their owners (shareholders). Cash is difficult to fake, either the company can produce and share its cash, or they can't. This type of fund is a good point to start diversification within the 401k, and should also play a bigger role as you approach retirement age. The Fidelity Equity Income and Fidelity Equity Income II funds do show real cash (dividends), more than most equity funds in the available funds for EMC employees. However, the less than 2% dividend yield leaves a lot to be desired, and I would consider them as a way to validate the stability of the companies on which the fund invests, but I would not depend on it as a steady stream of income if I was approaching retirement age. For younger investors looking for a Growth Fund, the Goldman Sachs Mid Cap Value (Institutional Shares) Fund is hard to beat. It does however has beaten the SP&P 500 consistently by searching for medium sized companies (not necessarily those on the headlines every day) that appear to be undervalued. Apparently they have been successfull at that. Value investing is a better way of adding growth than watching the media for hot companies. This fund, if it was available to me, would certainly be on the list of investment choices I would pick. Another good option would be the Fidelity Low-Priced Stock Fund, with very similar characteristics but usually concentrating in smaller companies: more volatility, usually for the better. The US is not the only place to invest. There are a few good companies who are not based here. You may want to participate in their success by investing in them through an international mutual fund. There are risks associated with them, including currency valuations, political stability (a country may intensify their socialist policies for example), or even war -- usually risks that are less important when you invest inside the USA. I usually keep my money away from international issues but I will probably put some of it there as my investment capital grows. If it wasn't because of its upfront fee, I would have suggested AF Europacific Growth as it concentrates in almost stable international markets. Since it has a high upfront fee I would stay away from it and add international exposure outside of the 401k plan. Even then, please remember that International stock funds require a better stomach than local ones. The multiple risk factors make them very volatile. Nor stocks are the only place to invest either. Real Estate, for example, could be a good place to park your money. Most of us have parked a lot of it on our houses already. The Vanguard REIT Index is a very low management fee, high yield (4.5% dividends) fund that has experienced impressive growth on this hot Real Estate Market by investing in Real Estate Investment Trusts -- companies that hold, manage, and exchange real estate properties. Those approaching retirement age can benefit from rental income (that 4.5% dividend yield) without having to worry about fixing rental properties every time the tenants break them. Important risks to consider are the apparent "froth" the real estate market may be experiencing nowadays (slightly overvalued). What about bonds? I am slightly reluctant to use bond funds. Most mutual fund bonds do not behave like a bond. The purpose of a bond is to loan money to a company or entity and expect the principal and some interest back. A nice idea, but bond traders tend to speculate if the interest rates and credit ratings of companies go up or down, and start selling the bonds at a premium or a discount. Most bond mutual funds end up behaving like speculative secondary markets that, although profitable sometimes, not true to the investment strategy they portray. My advice: stay out of bond mutual funds (there are some exceptions). If you want to invest in bonds do so outside of your 401k. A good place would be Treasury Direct, where you can loan money to Uncle Sam with very low (or no) transaction fees. However, if I had to invest on a bond fund on the EMC 401k plan I would choose the spectacularly performing, low fee PIMCO Total Return Fund with a yield of around 2.5% and a slight growth that makes it a good choice for a person expecting a steady stream of income in a few years. Jose's picks for the EMC 401k Plan:
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