Choosing Investments in Your 401(k)
By Joseph P. Trybula, CFP®, AIF®
Diversified Financial Advisors
When you participate in a 401(k) plan at work, you are typically responsible for choosing investments in your plan from a range of stocks, bonds and mutual funds selected by your employer. Here are five helpful tips to do that:
Pay attention to investment returns.
Most plans only offer funds that have a five-year track record. This can allow you to easily compare each funds performance to its stated investment benchmark over a reasonably long time-period. A fund that consistently lags its index usually the S&P 500® Index for US stock funds, or the Bloomberg Barclays US Aggregate Bond Index for US fixed income funds may not have enough giddy up to help get you to your long-term retirement goals.
Consider spreading your investment funds across various types of assets (such as stocks, bonds and cash), geographic regions (such as the US, European and Asian developed and emerging markets) and risk levels (spanning riskier small cap stocks to more conservative Treasury bonds). Diversification may help reduce the risk of having all your eggs in one basket. When one type of investment in your portfolio is doing poorly, odds are that another investment is doing better, thereby potentially offsetting those losses.
Limit employer stock.
Owning company stock can be a good thing if the company does well. But if you have too much of your savings concentrated in your company stock, you run the risk that if the company hits a road bump or goes bankrupt, it could wreck your savings (remember Enron). As with any investment, you should consider your risk tolerance for devastating losses, your time horizon and your goals to determine whether your company stock position is appropriate.
Consider a target date or lifecycle fund based on your estimated retirement date.
These set-it-and-mostly-forget-it options take much of the decision-making out of which asset classes to own and automatically adjusts those allocations to reduce your market risk as you approach retirement. That said, you should look at performance at least once a year to make sure it is meeting your expectations.
Consider low-cost index funds.
A portfolio with an initial value of $100,000 that delivers a 4 percent annual return over 20 years and that has an ongoing fee of 1 percent will be valued nearly $30,000 less compared to a portfolio with a 0.25 of a percent annual fee. Low-cost index funds, which are designed to simply track but not beat the performance of a basket of stocks or bonds, may be an appropriate option to look at depending on your goals and circumstances. Some retirement plans offer access to a financial advisor, a trained professional who can offer you advice, for a fee, on your investments. If you dont have the time or interest, having someone do your investing for you could be a practical alternative to doing it on your own.
Contact Joe Trybula at email@example.com or 800.307.0376 for more details.