I received a phone call this afternoon from someone who found my firm online. The gentlemen has received no guidance regarding his 401k at work. Last July, he had $286,000 in his plan.
Today he has $166,000.
I asked him what he had been doing lately. He had moved his money in recent months from a “Growth and Income” fund. Now he had 20% each in five different funds:
- Growth and Income
- Equity Growth
- Blue Chip Growth
- S&P 500
- Large Cap Value
He also made changes to his new contributions. So, 20% of each dollar went into each of these five funds listed above. His primary concern was…
“should I keep contributing to my 401k?”
Sometimes it’s a bit stunning when faced with an obvious question. To his point, he felt he was throwing good money after bad. But unless you need cash now, you should continue contributing. This is your money that you will need to LIVE on when you retire. And every dollar you contribute lowers your overall taxable income.
However, do you need to contribute new money into these same lousy funds? NO! You can elect to have new contributions deposited into the money market fund, short term Treasury fund, stable value fund, stable income fund, etc.
Now. How much was actually accomplished by moving the money from a “growth and income” to these other funds he chose? Not much really. If you take a look at the top 25 positions in each fund, you will find these funds hold many similar names. So it’s really “rearranging the deck chairs on the Titanic.” In fact, it’s been written that 70% of all money in equity mutual funds sit in the same 500 stocks…the names in the S&P 500.
To really avoid risk in a declining market, you have to move some money out of the market entirely…not just to another fund in the plan, and consider (if you have a self-directed brokerage option in your plan) using inverse funds and commodity choices (gold, other metals, grains and currencies). Also, putting assets into long term bonds also invites risk of principal should interest rates move sharply higher.
One flaw that is “baked in” to many 401k plans is a recent change. Many plans prohibit the amount — or restricting the number — of changes you can make in your account. Getting “hamstrung” by limiting the amount of moves a participant can make is simply wrong. Do not misunderstand — I don’t condone active trading. But being limited in the number of transactions you can make in your plan is simply bad policy.
What limitations do you have in your plan at work? Do you have a self-directed option in your plan?
If you would like a free look at your 401k account at work — or your 403b annuity, or section 457 deferred compensation plan at work — call us at 877-223-7300, or email us at support (at) mullooly (dot) net.
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My 401k is Very Diversified
by Thomas Mullooly on November 22, 2011
Or is it?
So many times I’ll meet a new client and they will tell me, “Even though my retirement account at work is totally diversified, I still lost money. Why?”
Was it REALLY diversified?
In this video, I show you how there is so much over-lap among large cap mutual funds. It’s pretty sobering when I show clients how many of the same names appear over and over in MOST of their large cap funds. Some of the investments mentioned here include the Vanguard Institutional Index fund (VIIIX), the T Rowe Price Equity Income fund (PREIX), the Fidelity magellan fund (FMAGX), the Eaton Vance large Cap fund (EILVX).
Now, any time we are mentioning specific investments in a post or video, I think it is important to mention the following:
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or investment strategy will be profitable or equal to past performance levels.
All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions, or withdrawals may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for an investor’s portfolio.
I mean, that just makes sense, right? Oh, and something else:
If you are relying on a blog post for specific investment advice, you are making a huge mistake. Please speak with an investment adviser before making ANY investment decisions.
If you do not have an investment adviser, we encourage you to contact Mullooly Asset Management at 732-223-9000, or through our website. Under no circumstances should the content discussed here to be considered specific investment advice.
Finally, you also need to know that none of the names mentioned in this video are (or have been) specific recommendations of Mullooly Asset Management. The investments mentioned in this video (and all videos) were suggested by clients, who asked me to analyze the chart for a particular investment. if you would like us to analyze an investment for you, feel free to contact us.
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