Take your 401(k) Up a Notch!

Most of you already know the basic of personal finance--properly planning your spending, developing an emergency fund, saving as much as you can, preferably in an interest-bearing account. If you're working, and you're ready to place 8 -15% of your money in your 401(k), it's important to take charge of the options placed before you. Most individuals do little research on their investment strategies, often opting to

(a) let the company you work for allocate (spread around) your money, which usually means it will fall 100% into company stock, or
(b) finding the fund with the highest percentage and stashing your money there, or
(c) get confused and NOT save at all (give up).

If you've chosen (c), I implore you to come back to the table and not give up. The only way to learn is to learn about your investments and to try. (Take risk). If you've chosen (a) you're putting yourself in quite a high-risk situation.

Let's focus on (b). Since most mutual funds under-perform the market average (especially after deducting for taxes and portfolio turnover), you should seek with caution how you stash the money in the fund with the highest return. You should first check to see what number you're looking at. Make sure the return percentage is annualized over at least 5 years. (The longer the return period though, the better). Don't bother looking at how the fund performed over a 1 or 3 year period. 5 to 10+ years of having returns greater than the S & P 500 (after deductions) shows a consistency in beating the market.

Second, you should look at the prospectus on the fund. Your company should have these readily available. If it is not, then you ask them to provide them for you, or they should at least be able to answer whether the returns you see included loads, taxes, and turnover. (A quick note--turnover basically measures how often the mutual fund you hold trades in and out of securities. The more turnover, the higher the capital gains taxes, which will come out of your returns).

Consider investing in an index fund if the company offers one. This fund type invests in the S&P 500 (or another market index) proportionally across the entire index. Remember when I told you above that most mutual funds under-perform the average? Well, an index fund is the average. And the fees, taxes, and turnover are low enough to give you strong returns. (We'll explore Index Funds again in detail later).

Finally, consider investing in international stocks. An index fund that invests in international stocks is usually a pretty good bet because you can invest in an international sector and you can spread your risk around a bit.

So if you haven't checked it in a while, visit your 401(k) and make sure you're on the right track. Make sure your invest wisely, and don't get jittery with market fluctuations. Work towards allocating your investments towards index funds in your portfolio (if you have that option). If you don't have that option, complain to human resources, but then place your money in funds with low turnover, low fees, no loads, and consistent returns over at least 5-10 years. Supplement it with some international funds. Then relax. You'll be fine.

Questions? Comments? Drop us a line.