Wow, where did November go!? With the holidays creeping up and the new year right around the corner, we are quickly embarking on 2018! The new year has always been a natural time of reflection for people. It’s been a point for folks to look back at the past year, and begin to look forward to thinking about the future, new goals, and of course, new year resolutions. Many of these resolutions for folks’ center around money. Since that is the case, I wanted to touch on a very pivotal subject for most workers – and that is their employer sponsored retirement plan.
Come the first quarter of the new year is when I like to start looking to rebalance client investment portfolios, which will include their employer sponsored retirement plans. While the new year shouldn’t be the only time to re-evaluate your investments, from a psychological standpoint, the beginning of a new year is always a logical time. With that being said, what are YOU doing to evaluate your investment decisions as it relates to your company sponsored retirement plan, you know, your 401(k) or 403(b), etc??
Ever since people started living longer, pensions started disappearing (and so did the gold watch upon retirement), leaving the employee the only responsible party when it came to planning for retirement. This means YOU are responsible for determining how to save, how much to save, and how to invest that savings to help you meet your future goals – like your retirement. Now that you’ve made the commitment to begin putting a slice of your earnings away into your employer Sponsored Retirement plan (congratulations!), how did you determine what the investment mix within the plan would be? What methodology did you use to determine the investments? Did you even consider all of the investment options within the plan, or did you randomly guess or go with the default option? If any of these sound like you, you aren’t alone unfortunately.
Working with people throughout my career, I’ve helped many people be more intentional with selecting their 401(k) investments. Many had picked multiple funds without much thought, or simply looked at what performed the best over the past year or two thinking that similar performance would continue. Looking at the chart below, you can begin to see that asset classes can perform drastically different from year to year. We’ve all heard you should diversify your investments, but this graphic helps to put diversification into perspective. What may be a top performing asset class one year could be the worst performer the next.
So, what should you be doing? What considerations should you take?
What is your risk tolerance? proper long-term investing begins with understanding who you are as an investor. Are you a risk taker or risk adverse? Its true that if you have a long time frame you can afford to take more risk with your investments as we know the long term benefits of investing in higher risk asset classes such as stocks. But at what point will you begin to lose sleep if the market takes a turn? If you’ve taken too much risk, will fear of further losses cause you to sell at the wrong time? Properly allocating to YOUR own risk tolerance will help with staying invested appropriately during difficult periods in the market. Learn more about what your risk tolerance is HERE
What is your time frame? Along with understanding what your risk tolerance is as an investor and as an individual, is knowing your investing time frame. Are you 3 years from retirement, or 30? A person who is 30 years from retirement may have a completely different allocation than someone who is 3 years away from retirement. But just like individual risk tolerances, investor allocations are also unique. Just because two people are the same time frame from retirement doesn’t mean they should be allocating their investments the same. There are many other factors that go into that.
What are your investment options within the plan? When it comes to selecting investments within your retirement plan, the ideal allocation for an individual is only possible to the extent allowed by the plan. Some plans may not have a wide range of investment options, so you may be forced into something like a target date fund or one size fits all allocation. For those that have many options, it can be worth spending the time on evaluating those options from an asset class, expense and fund level standpoint. Then you’re able to build an allocation that is geared custom to you.
Target date funds? This may be the simplest choice for many as they are meant to automatically shift from aggressive to more conservative investments as you get closer to your “retirement date”, but may not be the best for all. If you have the opportunity to be more precise, it often makes sense to do so. One size fits all options like target date funds may not actually be the best fit for you. Additionally, target date funds can be difficult to evaluate, and different funds may have very different philosophies for how they shift to more conservative investments over time. Lastly, be careful about mixing target date funds with other fund selections. By doing this, you may be throwing off your entire asset allocation into something riskier, or too conservative.
Are you rebalancing? You’ve committed to contributing to your plan, and you’ve selected your investment mix, how are you monitoring it over time? Are you? Any diversified portfolio should be rebalanced over time. Remember the chart above? Different asset classes perform very differently year over year. If one asset class has outperformed another, your allocation between the two could now be very different from what you originally intended. For example, If you intended to have a mix of 70% Stocks and 30% bonds, and stocks have recently outperformed bonds, your allocation may now appear more like 85% stocks and 15% bonds. It may be a good time to harvest some gains from your stock allocation and buy into bonds to get your allocation back to your target mix again.
Don’t try to time the market!! Don’t try to time the market with your contributions. Anyone that says they know what the market will do next is either lucky or a liar. The best thing you can do is make regular systematic contributions called dollar cost averaging. People that try to time the market have been shown to have significantly lower returns over time than those that make regular systematic contributions and rebalance their portfolios.
Get Help. If you need help with these decisions, don’t be afraid to ask. Most plans have an advisor meant to help provide service to the participants and answer some of these questions. Or, reach out to a financial planner to assist. A planner can help provide guidance with these questions, but also look beyond only your company plan to determine a mix of investments that is appropriate across your entire household and risk tolerance (and help you gauge what your risk tolerance is). Remember, your 401(k) is likely only a piece of your financial puzzle. Don’t forget about the other pieces to complete the whole picture.
Remember, it may be all too easy to sit back and forget about your 401(k) investments, but small changes to how you’re invested can have enormous impacts over a person’s lifetime. It does pay to be diligent not only about how much and how often you’re contributing to your plan, but also how you’re investing those hard-earned dollars! Additionally, having the right asset allocation will help you feel more comfortable during those inevitable periods of market turbulence, which will help you avoid making a poor decision that could have detrimental impacts to your portfolio.
So, now that the new year is nearly here, what changes will you make? What resolutions will have a lasting impact on your retirement savings? Does any of this bring up any additional questions? Things you hadn’t considered? Consider it an opportunity to reach out as I’m here to help!
Do you want to bring a new level of attention to your financial decisions? Reach out to me at email@example.com or schedule a free consultation here.
Sign up for Clarity Capital Management's Newsletter to stay on top of my blog posts and other communication
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation.