How Do Rockford Retiree’s Choose The Best Investments In Their 401K? By Antonio FilipponeChoosing the best investments inside your 401k plan can be a difficult and overwhelming process. Have you ever called your 401k provider and asked for help in selecting the correct investments for your situation? What kind of an answer did you get? Most of the time they will tell you that they are NOT licensed to help you! Then they direct you to the website to do it yourself. How Frustrating! By the way, if you are concerned that picking the wrong investments could have you running out of money too soon in retirement then you should check out my FREE RETIREMENT VIDEO. What Strategies Can I Use To Select My Own 401k Contributions? There are a few ways you can go about this. The rule of 100 The Target Date Strategy The Past Results Strategy The Water Cooler Advice Strategy The 401k Optimizer Let us take a look at a few of these strategies and see what might work best for you. The Rule of 100 One thing that will never stop surprising me is how many rules of thumb people rely on for financial advice. The Rule of 100 is one such rule. If you have never heard of this rule it goes something like this… You take the number 100 and you subtract your age from the number. The answer is the amount of money you put into stock funds. The rest of the money goes into Bond funds as they are historically less volatile. So, if you are 60 years old this is what this would look like. 100 -60 40 percent is what you would put in Equities. 60 percent is what goes into bonds. The reason behind this strategy is that the older you are the less volatile your account should be, and this helps you allocate to a portfolio that is balanced for your age. If you use this, you might pick an S&P 500 fund for your Equities portion as this will be made up of all stocks. You might then use a government bond fund for the non-equities portion as this will typically be less volatile. This can be a fairly simple strategy most people can follow but it hardly optimizes your returns over time and it still leaves a lot to the imagination. How do you know which equities funds to use? How do you know which bond funds to use? How do you account for how conservative or aggressive you are? Let us look at another option. The Target Date Strategy More and more 401k custodians are relying heavily on using Target Date Funds. One of the main reasons is it provides a hands-off approach to retirement planning. The target date fund works a lot like the 100 minus your age strategy above only instead of doing this calculation one time it re-balances your portfolio over and over on autopilot as you get closer to retirement. All you need to do is pick a date in the future you want to retire, and it does the rest. But is it really that easy? Sometimes in making something simple you are also taking away important aspects. For example, having the right asset allocation and rebalancing it properly can greatly affect the growth rate on your money. It is also important to adjust your asset allocation to sync up with your ability to handle the ups and downs of investing. Everyone has a different tolerance so using a one size fits all approach is not usually the best choice. For a comparison of a Target Date fund to a personally customized portfolio please check out the YouTube case study video I made. Let us take a look at two other common ways that people make these decisions… The Past Results and Water Cooler Strategies Another very common strategy is to just look at all the past returns of the different options and just invest in the funds that have performed the best. While a surprising number of people use this exact strategy, I am afraid it is a really bad idea. Why? Last year’s winners are often this year’s losers. Past performance is no indicator of future performance You may end up with way more risk than you can handle You are not taking into account how close you are to retirement Trust me, its just a really bad idea. A close second for a really bad strategy is to just ask your workmate or boss for what they do. I call this one water cooler advice. I know you might think your boss is really smart, after all, he is the boss, or you might think your co-worker who checks their stocks all the time actually knows what they are doing. I am sorry to tell you this, but they really do not. If they did, they would never give you advice. They know nothing about you. What is right for you has nothing to do with them. I once met a construction worker who invested his 401k the same way as his boss. He was 80 years old and almost completely out of money. His boss was doing just fine. Why? They both used the same stockbroker. His boss had a lot more money and lived within his means, this guy did not. What’s right for the guy or gal in the next cubical is likely NOT going to fit your situation. So how do I best help people when they ask me this question? The 401k Optimizer Many times, when someone asks me for help with their 401k, I show them some options on how I can help them manage their 401k with me by rolling it over into an IRA. A lot of people do not even realize they have the option to roll their 401k into an IRA while they are still working, and this opens up the whole universe of investment options. To see more reasons why it so important to know all of your 401K options please watch my FREE Retirement Video on How to Avoid Going Broke In Retirement While Securing Your Nest Egg! But if we are unable to manage the 401k assets for you, we still want to help, so we offer a 401k optimizer service. In order to perform this no-cost service, we need to ask you a few questions about how you handle investment volatility or the ups and downs of the market. We also need to know about when you will need the money and what other assets you have to fall back on. Once we have a complete understanding of your situation, we then compare your goals with the options you have available. We then look at something called your “risk-adjusted returns’ I know that sounds like jargon but it’s a more complete way to measure your options. Then we can show you a comparison to what you have today vs. what we would do instead like I did in the case study video above. If this sounds like a helpful service, click the link below and we can set up a time to chat to see if this would be a helpful service for you.