Smart401k Blog

By Scott Revare

Many people have at least one New Year’s resolution focused on getting their financial house in order.  One major, but often neglected part of everyone’s financial picture is their 401(k) investment.  Unlike other top of mind typical financial issues, you won’t see the impact of your retirement savings decisions for many years’ when you retire and need the money.  However, as with everything else financial, your 401(k) investment requires constant attention and nurturing in the here and now.  In that spirit, we’ve put together a list of ten suggested retirement plan investing do’s and don’ts for 2008 and beyond:

Do

• Regularly review (2-4 times per year) the performance and management of all your plan investment options.  Two key things to look for in mutual funds: 
  • Consistent performance versus peers (other funds that invest in similar investments, like large company growth funds).  Look at the fund performance over each of the past five years.  Consider picking funds that outperform their peers each of the 5 years, in both up and down years.
  • Fund Management changes.  A mutual fund manager picks which companies a fund invests in or sells.  A fund that performed well in the past under a different manager may perform differently under a new manager.  You can access detailed performance information on your funds through website like Yahoo Finance (finance.yahoo.com) or Google finance (finance.google.com)

• Pay special attention to new funds added to your plan.  New funds are often placed in 401(k) plans to replace underperforming fund options.  These new funds can be top performing funds as they have just gone through some type of fund screening process before being selected for your plan.  Usually employers give you a 30 day advanced notice of upcoming fund changes, so chances are, you’ve already received something about any change that might have been made.
• Re-adjust your portfolio so your investment allocations match your desired level of risk.  An investment allocation is your target percentage levels of investment in the different types of investment options in your plan.   How you set your investment allocation defines how much risk, or volatility, you are taking in your portfolio.  Key allocation decisions include bond or stock based mutual funds, funds that focus on the United States versus foreign companies, or in large company versus small company stocks.  Allocation strategies to utilize for your company plan may be available through your employer or though an independent service like Smart401k.com.
• Match up your current and future contribution percentages.  For some reason, many retirement savings investors are tempted to set their future contributions differently than how they have their current savings invested.  By matching them up, it will help you be consistent with your overall target percentage investments across all your funds.
• Take the time to educate yourself on how to invest for retirement.  If you don’t have the time and know-how, rely on investment options in your plan that allocate your investments for you, or help you do your own investing.  Typical options are Target-date funds (fund options that have a target retirement date in them), or independent services like Smart401k.com

Don’t

• Don’t act like a professional day-trader with your retirement savings.  Day-traders watch their investments constantly and make trades several times a day.  Unlike investing for retirement, they take big risks to make money on the daily ups and downs of the market.  Retirement investors make a few changes in their portfolio per year and don’t try to time short term market movements.  They put daily market volatility in perspective and know that they are investing to take advantage of the long term prospects of their investments. 

• Don’t pour all your money into funds that returned the most last year.  This strategy can be hit or miss, making your overall portfolio higher risk.  It will also surely throw your diversified portfolio approach off kilter.  “Chasing returns” is one of the biggest mistakes the average investor makes.

• Don’t over-invest in your company stock.  Most 401(k) investors are over-invested in company stock, which usually is the riskiest investment you have to choose from in your plan.  Remember, a mutual fund invests in dozens of companies across many industries.  If one company goes out of business, you are still invested in dozens of other companies.  With your money in one company, you can lose all your money.  Think Enron.  Try to limit your investment in company stock to 10% or less of your total retirement plan investment.

• Don’t avoid risk if you’re not close to retirement (or even if you are close to retirement).  Sticking everything in a money market or stable value fund may guarantee that you won’t lose any money, but you are also guaranteed not to take part in the higher performance over time that the overall stock markets may enjoy.  From January 1926 through September 2007 the annualized total return for the S&P 500 (frequently used as a measure of the US Stock Market) was 10.51% per year (source:S&P web site)  significantly higher than average yearly money market rates.  It’s important to note that this number is an average and that the markets will probably rise and fall higher and lower amounts each year. Even if you are close to retirement, consider when you need access to your retirement account, and also how long you will be living.  If you can afford to ride out shorter-term market volatility, you may be better off investing at some level in equity funds instead of following the old retirement adage of removing all risk from your portfolio and moving everything to a money market or other fixed-income fund.

• Don’t hesitate to change your investments to take a more conservative strategy if you can’t sleep at night.  If the ups and downs of your current investments are causing you to have high levels of stress, reduce your levels of risk in your investments.  It may help to do some reading on investment risk to manage your concerns, but when it comes right down to it, your current health is more important.

Just a reminder to those thinking about signing up for the Smart401k service, if you sign up (risk-free for 30 days) before the new year, use the promotion code “holiday” to receive $20 off of an annual subscription. We’ve only done this deal once a year in the past.  To sign up, go to www.smart401k.com and click on the “Register Now” button.

Note also that we are updating our recommendations the first week of January.