Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Getting the Most from Your 401(k)

Personal_Finance / Pensions & Retirement Nov 19, 2013 - 03:54 PM GMT

By: Don_Miller

Personal_Finance

Getting the Most from Your 401(k)

People who invest heavily in their 401(k)s expect to have enough money to retire. Many are surprised when they come up short—a topic Frontline recently covered in "The Retirement Gamble." What is going wrong?

The show cited mutual fund fees, a topic we tackled in depth in our special report The Top 10 ETFs to Replace Your Expensive Mutual Funds. In addition to fees and some basic number-crunching, there are fundamental issues that determine how well our 401(k) and other retirement accounts perform.


Boost Your Mental Game

The mental game is as important to investors as it is to professional athletes. As legendary investor Benjamin Graham often noted, active investors generally do better than passive ones. They keep learning about investing, and they manage their own money. Passive investors, on the other hand, stick their money in CDs, bonds, and other fixed-income investments that require less time and financial expertise. These folks should expect a lower return in the long run.

Investors tend to become more passive as they age. After all, the older we are, the fewer years there are to plan for. That's a dangerous approach, and it just won't work today. As most seniors and savers already know, high-quality fixed-income investments don't even keep up with inflation. Committing—or recommitting—to active investing will have a huge effect on how well your retirement accounts perform.

In the episode I mentioned above, Frontline interviewed several people about their 401(k)s. The fear and confusion they relayed drives home why active investors come out ahead. Here are a few of their comments:

  • Debbie Skoczynski, Computer Leasing Agent: I had no idea. I was so confused. I came out of that meeting, and I was, like, "Oh, my God." It was just—it was overwhelming for me, the knowledge that you had to have in order to invest.
  • Crystal Mendez, Teacher: I really was kind of clueless. I didn't know what I wanted to invest in. I really didn't know anything about it. I had learned somewhere—some—I had heard something about, if you're young, you should be more willing to take risk. You have time. So other than that, I really knew nothing.
  • Mark Featherston, Former Sales Manager: They showed you the plan. You either had your choices between an aggressive investment, moderate, or conservative. You know, there was nobody there managing my money. It was all up to me.

Death by Corporate Culture

Many employees invest in their own company's stock through 401(k)s. Employers put tremendous pressure on their employees to do this. Corporate culture pushes employees to go in whole hog, especially if the company's stock is performing well. No one wants to end up the sole non-millionaire in the office because of a silly thing like diversification.

If you've felt that pressure, consider a statement Frontline shared from an Enron shareholders meeting: "Should we invest all of our 401(k) in Enron stock? Absolutely. Don't you guys agree? [laughter]"

There is always subtle pressure to invest in your own company's stock and a sense that it's disloyal not to. But hear me out, folks. A dear friend retired with a sizable 401(k) he'd built up over a few decades. It was 100% invested in his company's stock. In 2008, the stock tumbled, cutting the value of his 401(k) by one-third. My friend had no control over the 2008 crash, but he could have controlled its effect on his nest egg.

Investing solely in your own company isn't the only problem. One of our analysts lives in Texas, where a lot of energy companies are headquartered. He's shared similar stories of friends investing nearly everything in energy companies because that's what they know. Furthermore, they are doubly exposed because they work in the energy sector as well. If the sector tanks, they could lose a sizeable chunk of their retirement funds and their jobs. That's far too many eggs in one basket. While it's good to invest in a sector you understand, sector diversification can be as important as stock diversification.

401(k)s should be diversified from day one. If that day has passed, start now!

What If Your 401(k) Investment Options Are Limited?

When my own 50-year-old son called to go over the investment choices for his 401(k), I sensed he wanted a quick answer. "Just tell me which box to check, Dad."

His company's program allowed him to select from several different mutual funds, described in a brochure as "index, conservative, aggressive, mid-cap, large-cap, or moderate." He had no choice other than these mutual funds. I told him the free money from his employer's matching contribution and the tax benefit made his 401(k) contributions more than worthwhile. However, he still needed to select good mutual funds and monitor their performance, so I passed along the following tips:

  1. Look at the fees. Some mutual funds charge up to 2% to manage your money. That's a heck of an obstacle to overcome in a tough market; you have to earn 2% just to break even. Only a terrific performance can justify those high fees.
  2. Five-Point Balancing Test. Look at each fund in light of our five criteria for investment selection. Go online and see how the bulk of its investments stack up.
  3. Don't be fooled by the name. The name of a fund does not necessarily match what it invests in. When the name includes a word like "balanced," check to make sure it is truly balanced. When a name includes "yield," it may mean it allocates a too-high percentage to junk bonds, thereby compromising safety. Do a little research on your own.
  4. Diversify. If your company has more than one investment option, diversifying among funds is not a bad idea, particularly if some are specialized funds—small-cap, energy, etc. If you can, instruct your fund manager on what percentage of your money to put in each fund; that's even better.
  5. Index Funds. In 2012: 65.44% of the large-cap active managers lagged behind the S&P 500; the S&P MidCap outperformed 81.57% of mid-cap funds; and the S&P SmallCap 600 outperformed 77.73% of the small-cap funds. Over the last five years, approximately 24% of domestic equity funds, 22% of international equity funds, and 15% of fixed-income funds merged or liquidated. When in doubt, index funds are the better route.
  6. Don't set it and forget it. Any plan should allow for annual adjustments. Take the time to review its performance, and make any necessary changes each year.

I took my father-son coaching opportunity to add something I felt was even more important: a 401(k) is not a pension. Its value can go up and down just as the market does, and there's no guaranteed payout. We have to manage it on our own if we want it to last.

While my son could only invest his 401(k) in certain mutual funds, many retirement accounts are more flexible. Still, some folks stick their money in mutual funds because they are unsure of the alternatives. If that sounds like you, it's time for a close look at how much those mutual funds cost.

There's a good chance you're being gouged, but I have good news: you can change that. Our timely special report, The Top 10 ETFs to Replace Your Expensive Mutual Funds can help cut your fees by as much as 91%. Click here to find out more.

© 2013 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Casey Research Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules