Problem #5 – Investments
If you have been following me on this blog lately, you might think that I’m against the idea of 401(k) plans. Not so! Let me state this clearly. I LOVE 401(k) plans as a source of saving for retirement. EVERYONE should be participating in a 401(k).
However, there are many potential hazards that you must be aware of in your 401(k) plans.
So my purpose here has been acting as a ‘caddy’ and letting you know where the bunkers & water hazards are at so we can avoid them. And I certainly want you all to finish the ‘course’.
Today, we will look at the problem which most investors find it easiest to point fingers at –
How many investment choices are offered in your plan? And how do you choose which ones are right for you? How long do you stay with invesments in your plan before you look for
A survey done by Watson Wyatt in January 2008, (Watson Wyatt is the trusted business partner to the world’s leading organizations on people and financial issues) http://www.watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=18489
gives us this information.
* 30% of all participants have NO equity (stock mutual funds) in their plans.
* 20% of investors at least 45 and older have stopped contributing.
* Too many people are invested heavily in their company stock, some who have at least 50% or more of their plans in company stock.
(Company stock is an issue I will look at in further detail in my next article.)
Dave Ramsey likes to ask this question – If you were CFO of your own finances, would you fire you? Well, the reality is that YES YOU ARE the CFO of your finances & retirement savings!
“Investors Behaving Badly: An Analysis of Investor Trading Patterns in Mutual Funds” is a 2001 article that shows people are holding their funds for shorter and shorter time periods, as short as 2.9 years, and probably even less time these days after all of the challenges recently.
This is like moving your boat all around the pond in search of the ‘perfect’ fishing spot. It usually just scares the fish! This also explains why people finally give up and put everything into “safe” money market funds, because as one gentleman puts it, “At least I’m not losing nothing.”
Wayne Gretzky said (during his playing days), “I skate to where the puck is going, not where it has been.” How do we know where the ‘puck’ is going? We don’t. That would mean market timing, and as Warren Buffett would say, “I’m not smart enough for that.”
How many funds should an employer’s plan offer? Anywhere from about 12 – 20 is a good range. Your personal plan should meet these objectives.
* Look for funds which have 10 year (or longer) histories. Established funds give a much clearer long term picture of what to expect.
* Pay attention to fund expenses. The higher the expenses, the more it can hurt your return.
* Treat the plan as if you are at a “buffet”. The plan offers a menu of choices, and it is best to have somthing from all of the food groups. Just as you wouldn’t eat only the fried chicken, you also need fixed income, dividend paying funds (large companies), medium sized
companies, small companies, and international.
* Meet with an advisor to help you find the mix you should have and how much to put in. Many good advisors (including myself) offer to do this at no charge to you. Let him or her help you put a roadmap together which will help you get to (and through) retirement safely.
Next we will examine the issue of company stock in 401(k) plans. For more information or to contact me, please visit http://www.helpmy401k.us/. You can also follow me on Twitter at http://twitter.com/DeanVoelker