What's Your 401k Strategy?
December 15, 2011, By Mark Meissner 0 comments
We've all been hearing a lot about 401k's lately—mostly lamenting the hit they've taken during the last few years. I've been hearing more questions about them from clients, asking me how to determine their asset mix or asset allocation and which funds they should select for their 401k.
The short answer: Very few people should have the same asset allocation or asset mix in their portfolio because no two people are alike, generally speaking. Everyone has a different timeline for when they want to or expect to retire, based upon their current income, debt and accumulated savings and/or investments. What might be right for me might be completely wrong for you.
In a previous article I explained how to determine a feasible and attainable date to retire. Here we'll focus on understanding the various funds available in most 401k plans and on selecting investments that will best match your risk tolerance and help you achieve your objective based upon your circumstances.
Diversify
Before getting into investment options and asset mix, it's important to understand the concept of diversification. Many people are completely misinformed in this area, which has cost them a significant amount of money.
I have a friend who explained to me he was very well diversified, that he had both stocks and bonds. When I dug a bit deeper, however, I learned that he had 50 percent of his 401k going into his company stock, and the other 50 percent was split between five or so other funds. He also had outside investments, including individual stocks and bonds. In total, one of his holdings (his company stock) totaled nearly half of his entire portfolio. Clearly, he didn't understand diversification.
As a general rule, don't invest in the company you work for. That's a bad idea (see Enron and the multitude of recent investment bank collapses). Moreover, to have half of your investments tied up in one asset is putting yourself at far too much risk, when you can achieve similar results with a fraction of the risk while still investing in higher risk/return assets.
Furthermore, being risky doesn't mean putting all your money in just a couple of investments. That's called being stupid risky. Instead, use a general rule to hold no more than 10 percent in any particular stock or bond (or fund) in your portfolio. That way, when something goes down within your portfolio, chances are good that it will be offset by something else, with the total portfolio's value trending up over the long term.
NEXT: Investment Options
