3 ways to get your 401k started

Young investors attracted to the simplicity of set-and-forget funds have gotten a real-life test of risk tolerance. Here are worthy alternatives to the easy, hands-off choice.

For 20-somethings new to 401k plans, target-date funds, which allocate investments and their corresponding risk according to your retirement date, have been an easy, hands-off choice.

But with many target-date funds taking a beating during the market collapse, some younger investors may be reconsidering the set-it-and-forget-it attitude and looking to take a more hands-on approach with their 401k plans.

"Not everybody can jump into a target-date fund and expect it to be what they need it to be," says DaRayl Davis, an investment adviser in Washington, D.C. "A target-date fund will only look at a certain time horizon, but it doesn't look at our risk tolerance in general."

For younger investors looking for more investment options, here are some alternative funds to consider:

Index funds. These low-cost funds seek to produce the same return you would get owning all the stocks in a particular stock index.

Davis says broad stock-market index funds -- which mimic, say, the Standard & Poor's 500 Index ($INX) or the Dow Jones Industrial Average ($INDU) -- are a good option for younger workers investing long term because, over the long haul, the market as a whole is likely to outperform any one individual stock or mutual fund.

And as market indexes recover from the steep slides of last year, index funds will gain value along with them.

You can diversify your risk by dividing contributions among index funds that follow riskier emerging markets and those following more-stable markets.

Balanced funds. These funds, which generally split investments 60-40 between stocks and bonds, may appeal to young investors who want to reduce the risk exposure in their 401k's. The goal of balanced funds is to avoid the sudden highs and lows of the markets and maintain steady growth. You might not be able to cash in on a hot new sector, but you won't be hit as hard if the market plummets.

"There's a danger with being too conservative, and there's a danger to being too aggressive," says Nancy L. Anderson, a financial planner in Sacramento, Calif.

Lifestyle funds. Rather than adjusting your portfolio to your estimated retirement date, lifestyle funds are built to match your risk tolerance by dividing money accordingly among stocks, bonds and money-market funds.

You should be able to choose from funds that are labeled as conservative, moderate or aggressive -- with the conservative funds more focused on bonds and the aggressive funds heavy in stocks. Some companies offer additional options like very aggressive and very conservative.

Some general wisdom: Regardless of your allocations, you should keep a close eye on your 401k and review statements each quarter to learn more about how the market works and what is happening to your money.

But try to rebalance no more than once a year -- and avoid drastic changes in response to a big market drop or rally.

"One of the mistakes people make in their 401k's is to continuously change their investments around," says Larry Rosenthal, a financial planner in the Washington, D.C., area.

It may help to sit down with a financial adviser to develop a long-term investment plan.

Dirty, dangerous jobs -- and in demand

Americans who have been unemployed for months are lining up for work that they would not have considered in the past.

Some of the dirtiest, smelliest, most dangerous jobs are suddenly looking a lot more appealing in this economy. People who have been out of work for months are lining up for jobs at places they once considered unthinkable: slaughterhouses, sewage plants, prisons.

"I have to just shut my mouth because I can't do anything about it," said Nichole McRoberts of Sedalia, Mo., who pictured more for herself at age 30 than working in a poultry plant, cutting diseased or damaged flesh off chicken carcasses.

Recessions and tight job markets always force some people to take less-desirable or lower-paying work than they are used to. But this recession has been the most punishing job destroyer in at least 60 years, slashing a net total of 6.7 million jobs.

All told, 14.5 million people were out of work last month, with a jobless rate of 9.4%. The result is that many people have had to seek jobs they would not have considered in the past.

Take Kristen Thompson. Before the recession, she worked at an upscale Los Angeles-area gym arranging pricey one-on-one personal training sessions. Now she's a guard at a women's prison in rural Wyoming.

After the gym laid her off last year, Thompson spent months looking for work. Even fast food restaurants failed to respond to her application. For each opening, dozens of other people seemed willing to work for less money. When she heard that a prison in Lusk, Wyo., (population 1,447) was hiring, she leapt at the chance.

In her new job, she patrols cellblocks and monitors the mess hall. Back in L.A., she never had to worry about inmates with weapons or drug stashes or prisoners getting into fights. Yet she's hardly complaining. It's a job.

"People have to pay the bills, so what we see is people kind of grasping at straws and taking anything that's available," said Matthew Freedman, assistant professor of labor economics at Cornell University.

The desperation of the long-term jobless has rippled through the labor force. More skilled and educated workers have filled clerical or restaurant jobs. So unskilled workers such as teenagers or high school graduates who once held most of those positions have displaced those even lower on the economic ladder, such as immigrants, Freedman noted.

The intensified competition has hurt all workers, even those who are still employed, because it shrinks wages. Employers don't have to pay more to lure workers.

That helps explain why personal income fell 0.1% in June, excluding the one-time benefits of the government's stimulus program. Wages have fallen each month since October -- a total of 5% over the past eight months.

Indeed, many people who have had to downshift to unsavory jobs have found they're now earning less, too.

With two kids to support and just a high school diploma, McRoberts has few options in the job market.

"I feel like I'm not accomplishing much," said McRoberts, who lives with her boyfriend and children. "I'm paying my bills and my rent, but that's it."

A year ago, McRoberts had a good job building tool boxes at Waterloo Industries. The work was fast-paced and fun. And the nearly $14 an hour was plenty for her and her boyfriend to pay the bills.

But as production slowed, Waterloo cut her hours. By February, she was out of a job.

Around Sedalia, some other employers had begun cutting staff, too. The result was a crowded job market and few openings.

As her options dwindled, McRoberts decided to apply at a Tyson Foods (TSN, news, msgs) poultry plant. She found work on the "re-processing line," where damaged birds are sent by Agriculture Department inspectors who spot bruises or sores on carcasses.

The plant is wet and noisy. McRoberts worries about injuries when nearby workers use knives to cut birds in a hurry. She fears being sliced during a moment of distraction.

McRoberts spends evenings searching the Internet for other openings, but they are scarce.

"Until things start booming again, I can't go anywhere else," she said. "Otherwise I would."

Work at poultry plants has often been done by recent immigrants, who now face more competition for such jobs.

"It's easy for someone like your middle manager to take on a job at a poultry plant, because they have the skills to do many things. But for the immigrant, that might have been the only option," said Catherine Singley of the National Council of La Raza, an immigrant advocacy group in Washington.

Tyson spokesman Gary Mickelson said the company has seen a rise in applicants at most of its processing plants and "an increase in the qualifications and experience of those applying."

"Some applicants have recently lost jobs or are underemployed and are attracted to the full-time pay and benefits we offer," Mickelson said.

When officials in Stamford, Conn., posted a single position at the local sewage plant, more than 300 people raised their hands -- about twice the number who would seek such jobs before the recession.

About 100 of them made the cut and were allowed to take a test and interview. The work: drying up wastewater sludge and operating chlorine tanks.

After months of unemployment, that job sounded appealing to 26-year-old Gary Cappiello of nearby Norwalk. Cappiello had worked in the maintenance department of a Target (TGT, news, msgs) store before being laid off in the spring of last year.

"I'm just applying for anything now, even if the job is low-paying or not a comfortable position," he said. "It's just getting to a desperate point. The bills need to be paid."

Recently, he found out he didn't make the cut at the sewage plant.

More fortunate is Ronnie Purtty, 50, who said he's grateful for his new job gathering trash in narrow St. Louis alleyways.

Purtty used to work in the air-conditioned cab of a truck, hauling steel to local factories. He was laid off last fall.

He spent four months looking for work before landing a job in March as a trash collector for the city's "bulk item" crew.

Wearing thick leather gloves, Purtty hauls sodden carpet, moldy mattresses and nail-studded lumber into a truck. As he sorts through mounds of garbage, he watches out for rats, spiders and raccoons.

He isn't complaining. It beats his long months of unemployment.

"I was blessed to get in here," he said.

The stock market's coffee craze

While Starbucks has staged a nice recovery, the real action has been in shares of smaller outfits such as Green Mountain, Caribou and Diedrich. Credit the K-Cup.

Despite a recession, these are hot times in the stock market for the coffee business. Shares of Green Mountain Coffee (GMCR, news, msgs), which reported impressive earnings July 29, are up about 160% in 2009. One small coffee wholesaler, Diedrich Coffee (DDRX, news, msgs), is up about 6,500% this year.

Even beleaguered coffee chains are bouncing back from steep declines in previous years. Starbucks (SBUX, news, msgs) shares have risen 85% in 2009, while second-place rival Caribou (CBOU, news, msgs) has seen shares more than quadruple in value (up 360%).

It's not that coffee drinkers haven't cut back somewhat on their daily caffeine fix -- at least outside the home. Last quarter, Starbucks' same-store sales were 5% lower than the year before.

Changing the business

But the coffee business has been surprisingly resilient in the face of the steep economic slowdown. At the same time, powerful trends -- new technology, changing tastes and new industry players -- have made many coffee stocks powerful investments.

Green Mountain Coffee got investors' attention with the success of its Keurig coffee brewers. Costing about $100 each, these brewers make single cups of coffee at home in about 30 seconds. "Every 10 or 15 years, something comes around that changes the way people drink coffee," says Scott Van Winkle, an analyst at Canaccord Adams. Easy to use and easy to clean up, "this is the new thing in coffee brewing," he says, noting sales of the brewers were up 187% last quarter.

On July 29, Green Mountain beat Wall Street expectations with earnings of 36 cents per share. Green Mountain doesn't just make money off the Keurig units, but also the small packs of coffee, called K-Cups, that the brewers use. Green Mountain makes its own K-Cups, but it also licenses that privilege to companies like Diedrich Coffee. In June, Diedrich announced it was boosting its output of K-Cups by 40%.

'An affordable luxury'

Though not profitable on an annual basis since 2005, Diedrich, with a market value of just $127 million, posted a small profit last quarter. The result: Diedrich's share price has risen from 23 cents last November to 23.15 cents on July 30.

The growing popularity of at-home single-cup brewing fits with trends coffee experts have seen since the economy began slowing down. "Coffee in general is doing well. It's proven to be pretty recession-resistant," says Ric Rhinehart, executive director of the Specialty Coffee Association of America, which counts as members more than 2,000 businesses up and down the U.S. coffee supply chain.

"As people cut back, coffee is an affordable luxury," says Michelle Rhodes-Brown of Profit Investment Management, which owns Green Mountain shares.

Drinking more at home

But, while Americans are still drinking plenty of coffee, they're getting coffee from different places. Purchases of coffee for the home are up, while sales at coffee shops and other retail locations have softened, Rhinehart says.

Though the recession has hurt some coffee sales, it hasn't ended Americans' move toward higher-quality coffee, says Bruce Milletto, president of Bellissimo Coffee InfoGroup, which provides consulting and training to the industry. "Our taste buds have memories," Milletto says. "Once you drink a really excellent cappuccino, it's very hard to go back even to a chain store that may be using automatic machines."

Despite the recession, "consumers are becoming more particular," he says. "We want good coffee, and we're willing to pay for it."

McDonald's may be helping

One sign that specialty coffee is still on the rise is that it's been embraced by mass-market chains like McDonald's (MCD, news, msgs) and Dunkin' Donuts. Both have upgraded their coffee offerings in an attempt to steal business from Starbucks.

But instead of seriously hurting Starbucks' business, the marketing push from McDonald's this year may have actually sparked more interest in coffee in general. That's what Starbucks Chief Executive Howard Schultz said in July, telling analysts: "It appears that the various marketing campaigns and all the media coverage of our coffee has created unprecedented awareness for the coffee category overall."

Peet's Coffee & Tea (PEET, news, msgs) is a company that prides itself on the very highest-quality coffee, sold both through supermarkets and its own coffee shops. On July 28, Peet's announced quarterly earnings per share 24% higher than a year ago. Despite the tough economy, revenue rose 5% from a year ago.

Can it last?

Grocery store sales were also up 10% and Peet's market share was up 10% -- showing customers were willing to pay more for quality coffee at home. "Peet's may very well be one of the few premium-priced brands in the grocery store achieving strong sales and share growth despite the economic and competitive environment," Peet's President and CEO Patrick O'Dea told analysts. Peet's shares are up 15% this year.

Perhaps investors shouldn't have been surprised that coffee would hold its own during the downturn. Coffee is relatively inexpensive, particularly when prepared at home, Van Winkle notes. Also, he adds, "we are talking about an addictive product."

The question for investors now is whether the coffee craze can continue. Many coffee stocks have gotten rather expensive. Green Mountain shares trade at more than 60 times 2009 earnings. Companies like Caribou and Starbucks are in the midst of turnarounds that are still in early stages. At the beginning of 2009, Caribou reported its first quarterly profit since 2005.

Some coffee stocks may have further to run, though only if current growth trends continue and even accelerate. With coffee shares at these heights, investors need to be especially alert to signs the country's love of coffee has run its course.