10 Do's and Dont's for Your Retirement Plan
Over the last twenty years 401(k) plans have taken on an increased role in retirement investing. In many cases they are the primary, if
not only, means an individual uses to save for retirement. Unfortunately, many people are either unwilling or ill-prepared to spend the
time necessary to properly set-up and monitor their retirement account. With that in mind, we wanted to provide those of you who want to
take control of your account ten helpful tips to start you on your way towards an appropriate investment strategy.
Here’s our list of ten retirement plan investing do's and don’ts for 2008 and beyond:
DO
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Regularly review (2-4 times per year) the performance and management of all your plan investment options. Two key things to look for:
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Consistent performance versus other funds that have similar investment strategy's (e.g. large company growth funds). Consider
picking funds that have outperformed their peers each of the past five years (Morningstar.com is a good source of fund
information).
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Fund management changes. A mutual fund manager picks which companies a fund invests in or sells. A fund that has historically
performed well may perform differently under a new manager. You can access detailed performance information on your funds
through websites like Yahoo Finance (finance.yahoo.com) or Google finance (finance.google.com).
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Pay special attention to new funds added to your plan. New funds are often placed in 401(k) plans to replace underperforming funds.
These new funds have likely just been evaluated by your employer and therefore may good options to include in your account.
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Re-adjust your portfolio so your investment allocations match your desired level of risk. An investment allocation refers to how you
divide your assets across different investment types (i.e. bonds vs. large cap growth vs. small cap value). Allocations that have a
higher percentage in money market and bonds funds are generally less risky than allocations that contain higher percentages of
equity-based funds (particularly emerging market, international and small cap funds). How you set your investment allocation should
correspond with how much risk, or volatility, you are comfortable taking in your portfolio. To find out your risk tolerance, logon to
www.smart401k.com/ToolsResources and take the Risk Assessment to see where you fit. If you’ve got questions about how to proceed based
on your level, check to see if your plan has an advice option or look into using a service like Smart401k.com.
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Match up your current and future contribution percentages. For some reason, many investors are tempted to set their future
contributions differently from how they invest their current savings. This will likely alter your allocation and result in a higher
or lower level of risk than you intended.
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Take the time to educate yourself on how to invest for retirement. The web is full of sites such as MSN Money
(http://moneycentral.msn.com) and Yahoo Finance’s Personal Finance section (http://finance.yahoo.com/personal-finance) that offer a
wealth of financial and investing information. If you don’t have the time or desire to personally manage your account, we suggest you
check your plan to see if it offers an advice service. Typical options are Target-date funds (all you need to do is estimate when you
will retire and the rest is done for you) or independent services, such as Smart401k.com, which considers both your risk tolerance and
time to retirement.
DON’T
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Pour all your money into funds that returned the most last year. This strategy can be hit or miss and will likely increase the overall
risk of your portfolio. It will also surely throw a diversified portfolio approach off-kilter. “Chasing returns” is one of the
biggest mistakes the average investor makes.
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Try to act like a professional day-trader with your retirement savings. Day-traders are professional investors who watch their
investments constantly and make trades several times a day in order to profit from intraday price changes in specific stocks. In
contrast, retirement investors should be focused on long-term investing and should not try to time short-term market movements.
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Over-invest in your company stock. Many 401(k) investors are over-invested in company stock, which is usually one of the riskiest
investments in a 401(k) plan. Remember, a mutual fund diversifies you across a number of companies, whereas company stock is dependent
on the performance of a single company. Most advisors, Smart401k included, suggest that you should limit your investment in company
stock to 10% or less of your total retirement plan investment.
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Completely avoid risk….. especially if you’re not close to retirement. Sticking everything in a money market fund may guarantee that you
won’t lose any money, but it also guarantees that you will not fully participate in any growth the stock market experiences. From
January, 1926 through September, 2007, the annualized total return for the S&P 500 (frequently used as a measure of the US Stock Market)
was 10.51% per year (source: S&P). Significantly higher than the average annual return of money market funds during that period.
If you can afford the time to ride out shorter-term market volatility, it probably makes sense to have some exposure to equity-focused funds.
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Hesitate to change your investments to adopt a different strategy if you can’t sleep at night. If the ups and downs of your current
investments are creating high levels of stress, reduce the level of risk your investments are exposed to. It may help to do some reading on investment
risk to manage your concerns, but when it comes right down to it, your current health is more important.
If you would like assistance with defining a strategy for your retirement plan, you might want to consider Smart401k. We focus on helping
individuals construct a diversified portfolio for their retirement account. For more information on how to get started, please visit our
website at www.smart401k.com or speak to an advisor at 877-627-8401.
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