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If you’re like most Americans, the bulk of your retirement savings is nestled in a company retirement plan like a 401(k), 403(b) or 457. Now, over eight years into a bull stock market, chances are that your account balance has increased quite nicely over recent years (even apart from your contributions).
Since we tend to ignore obstacles that may lay ahead when things are going well, we want to provide a timely reminder to carefully consider your retirement plan investments.
Choosing investments in your 401(k) or other company plan is a lot like online dating. You are provided with a list of names to choose from, a bit about their heritage (stocks or bonds, domestic or international) and some information about their past (performance). Just like with dating, you don’t want to rely on an online profile to make this important decision. Ask these “get to know you” questions about your investment options before making your selections:
Will I Feel Safe? A risky lifestyle may be a relationship deal breaker. Risk should also be considered when selecting investments. Do not rely just on performance figures provided online. The fund with the highest return may also be the one with more ups and downs than you can stomach. More importantly, do not marry a fund just because it has performed well for you. Your allocation to riskier investments – as strong as they may have performed in the past – may need to be reduced as you near the distribution phase in retirement. Work with your financial advisor to review volatility and risk measures such as beta, standard deviation and sharpe ratio to see if you will feel safe – and can afford to stay – in the relationship.
What’s On The Inside? Mutual fund names tell you very little about how they are actually invested. Review the fund’s prospectus to learn more about its make-up or ask your financial advisor to take a look for you. If you aren’t familiar with the “insides,” you could be missing out on opportunities or doubling up on similar funds, providing little diversification.
Related: Top Financial Priorities: A Mid-Year Check-In
Will It Get Along With Others? Chemistry is important in a partner, but he or she also needs to fare well with other people in your life. The same goes for your investments. If you and your spouse both have retirement plans or investments outside of your company plans, it’s important to make sure they all work well together. Perhaps your spouse’s plan offers the best small-cap stock fund and yours has a great large-cap stock fund. Rather than buying sub-par investments in both plans, allocate across plans to get access to only the best fund options.
Should I Keep My Options Open? Although the goal for dating is to find “the one,” the goal for investments is to diversify risk through multiple partners. How many investments you choose, and what type, all depends on your target asset allocation. Where you choose to hold the investments will depend on account types and fund options available.
Making $ense of Life-Cycle Fund A common mutual fund type offered in company retirement plans that invests in stocks, bonds and cash - the allocation of which changes over time. A fund with a longer target date (most often provided in the fund name) will have a higher allocation to riskier investments, like stocks. Over time, the fund’s allocation will automatically become more conservative as the target date approaches.