Why I’m Investing 100% of My 401(k) into One Stock Fund

December 15, 2016

Like many companies, Financial Finesse recently changed the fund line-up in our 401(k). As part of the new offering, we now have target retirement date funds that are fully-diversified “one stop shops” that automatically become more conservative as you get closer to the target retirement date. But rather than this more diversified approach, I’m choosing to put 100% of my 401(k) into an S&P 500 index fund. While this strategy is certainly not for everyone, here’s why I decided it makes sense for me:

It complements my investments outside the 401(k). If you have retirement investments outside your employer’s retirement plan, you might want to look at all of your retirement accounts as one big portfolio. In my case, the bulk of my outside retirement investments will be in real estate and microcap and international value stocks. Since I’m a very aggressive investor with my retirement portfolio, I have no interest in bonds or stable value. Therefore, domestic large cap stocks can best diversify my overall portfolio without sacrificing much in expected returns.

Index funds tend to outperform actively managed funds. It’s also the only index fund offered in the new plan. This is an important point because studies have shown that index funds tend to do better than the vast majority of actively managed funds in the long run, primarily because of their low fees and trading costs. While value stocks tend to outperform in the long run and growth stocks would better complement my already value-heavy portfolio, both advantages can be wiped out by the higher costs of active management.

Warren Buffett recommends it. Arguably the greatest investor alive today has recommended index funds to both Lebron James and average Americans. He’s also put his money where his mouth is, instructing his trust to invest 90% of his estate in an S&P 500 index fund for his wife when he passes away and betting a $1 million to charity that a simple S&P 500 index fund would outperform a selected group of top hedge fund over 10 years. (It’s year 9 and he’s way ahead so far.) If it’s good enough for Buffett, it should be good enough for me.

Of course, this certainly doesn’t mean everyone should put 100% of their employer’s retirement plan in an S&P 500 index fund. If you don’t have much outside your plan, your portfolio may not be diversified enough without international and small cap stocks. Unless you’re also a very aggressive investor, you’ll probably want some bonds and cash as well to reduce the portfolio’s risk. This is why most people are probably better off investing in a more diversified portfolio like the target date retirement funds we have now.  As always, you’ll want to make sure you’re making an informed decision that’s best for you.