2014
The key word in this title is “investing.” That means taking the time to evaluate all your investment options, understand different asset classes, consider your investment time frame and making appropriate adjustments along the way. Investing is not trying to beat the market by trading frequently and investing for retirement is not placing all your assets in a fixed income fund with minimal growth potential.
In other words, there is effort involved to get this whole retirement thing right. Having managed 401(k) plans for over thirty years, I have a great deal of experience seeing what people do in real life; mostly uninformed dumb things. For example, investing only in employer stock, putting all their money in a fixed income fund, or trying to time the market usually selling low and buying high. Some people looked at their account balance every day and became frustrated with irrelevant short-term results followed by switching fund balances for no good reason.
If you are not inclined to put in the effort on your own behalf, you should take advantage of target date funds or pre-mixed portfolios offered by some 401(k) plans or invest in index funds that track the S&P 500 or other market indexes (and don’t attempt to time the market; these are for the long-term). This may not be the ideal way to invest from a professional’s standpoint, but it’s far better for many people than what they are doing now.
Also, if you don’t have the time (or expertise) to analyze the actively managed funds offered in your plan (top holdings, history and track record of the fund AND Portfolio Manager, how does the fund stack up against others that are similar, etc…) then an index fund is probably your best alternative.
Watch those fees.
Costs play a big part in long-term investing, and high cost actively managed funds can eat away at long-term performance. If the funds offered in your plan are high in fees, then you would also be better off in low-cost index funds. Plans are required to provide information on fees.
Also, understand what diversification means. Investing in five different mutual funds that all use large cap U.S. equities is not being diversified. Diversification is having a mix of types of investments. For example, say you are in your fifties and are somewhat risk averse. That is, sleeping at night is more important than a potential higher return on your investments. You might want an investment allocation such as 25% Large Company Stock Index, 20% fixed income, 20% Diversified Bond, 20% Institutional Developed Markets Index, and 15% Small Cap Index.
However, if you are in your twenties and have a long investment time frame you probably want to be more aggressive when investing, perhaps something like, 30% Large Company Stock Index, 25% Institutional Developed Markets Index, 25% Small Cap Index, and 20% Diversified Bond. Some advisors may even suggest being a bit more aggressive at this age.
If your 401(k) plan includes an investment advice tool such Financial Engines (c), use it!
I recently reviewed the investment funds offered in one employer plan. There were forty-six different funds. In this case more is not better. Under the heading Large Cap there were thirteen funds alone. What do you think the chances are that a worker investing in four of those thirteen funds thinks he is diversified? Such a ridicules array of funds leads to confusion and inaction. No average person can look at such a list of funds and make informed choices.
I am not a financial advisor and I am not an expert on the stock market or on investing. However, I do know benefit plans and how employees use them. I also know that planning for retirement is a difficult endeavor, especially when your primary source of income will be the proceeds from the investment decisions you make.
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