Tweaking 401(k) Options

by Craig Moser on November 28, 2016

As we look at 401(k) investment options, they may appear very “vanilla” in what they offer. I laugh out loud when some “investment guru” says cost is the only thing important. They’re basically implying that you should buy a low-cost, unmanaged index offering and you’ll be fine. I find this a bit dangerous; you wouldn’t want to perform heart surgery on yourself, would you? If investing is that simple, why does a mammoth financial services industry exist?

With more than 25 years in the industry, I’ve learned everything works some of the time and nothing works all of the time. Economies change, interest rates change, and so will investment needs. However, you need to carefully tend the pool of money that provides your retirement income for 25–30 years.

This is me rambling, but with all of the regulations in place today, it is very difficult for a 401(k) provider to allow much in the way of creativity, due to compliance rules and the specter of regulatory repercussions. So, you the investor are offered low-cost index options in all the “flavors” to meet the minimum requirement in each asset class, and the powers-that-be are happy. Again, this sounds great on paper, but we’ll study this more closely.

Let’s flashback to 1998 and 1999, remembering where the market was at that time (which was about the same place as 2012), and think about it. Technology stocks were screaming upwards insanely, and “old school” stocks like Proctor & Gamble or General Electric were virtually a thing of the past. Also, with no one “at the wheel” for an index fund, is there anything other than the participant to decide what level of risk is on the investment choices they are buying?

If we spring forward to 2005-2007, money flowed heavily into mortgage-backed investments replete with some really tough repercussions. Markets declined substantially, and many banks nearly collapsed.

Now we are here in 2015.  After 4 billion dollars having been injected into the banking sector and general economy, we are seeing signs of decay in the markets. I will use an oft-spoken analogy of the definition of insanity — doing the same thing over and over again but expecting a different outcome.

Your 401(k) Allocations

So, what does this have to do with my 401(k), you ask? Well, that’s a good question. Given the types of investments probably available, we recommend building a strategic asset allocation for yourself. What is this you ask? Different investments act different ways in various economic environments.

This year has been the year that a few health care, technology, and discretionary stocks have performed well.  Small-cap stock investments in the U.S have also performed well. However, if that is all you own, the risk is very high. Strategic allocations provide a broad spectrum of investment types.  They won’t outperform, but they don’t typically underperform either.  In other words, you have to buy good investments when they are low.  Sell some of the bad investments when they are low, and  sell some of the good investments when they are up.  This method reduces the overall risk in your retirement portfolio.

Here is an example: You buy a really fast car that’s fun to drive, and put a 16-year-old behind the wheel. Ask yourself, would you feel nervous about that? This is kind of the same if you don’t really understand investments, and just select the things that did really well in the rear-view mirror.

So, unless you’re really good at selecting where investment dollars are headed in the future, a strategic model is a better bet for you. What you want to avoid are the extremes. You can’t make much money in the “guaranteed” account and you can experience wicked volatility in the super aggressive choice. For the vast majority of us, proper balance is found somewhere in the middle.

Know Your Risk Tolerance

Your plan will probably have a questionnaire that asks you about risk and return.  Complete the questionnaire to find out what kind of investor you are.  Then, either take the plan’s advice about allocation, or work with a professional.

We at Maestro Wealth Advisors utilize sophisticated software that analyzes your choices.  It then shows what happens in good markets, in weak markets, and in bad markets.  This helps you decide what you’re comfortable with.  Then, by making small adjustments, we build a more appropriate portfolio reflecting your needs and risk tolerance.

Nothing is perfect.  You always need to be aware of what is happening in the world.  However, you can be comfortable when events beyond your control happen.  The bottom line is we want you to have a high probability of achieving your overall retirement goals.


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