This may be the time of year when your company gives you a
chance to increase your 401(k) contributions. But how much to put
in isn’t your only decision
– you’ll also want to look at your investment mix. Why? Because
things change – and, if you want to get the maximum benefits,
you’ll need to make sure it still meets your needs.
This may be the time of year when your company gives you a chance to increase your 401(k) contributions. But how much to put in isn’t your only decision – you’ll also want to look at your investment mix. Why? Because things change – and, if you want to get the maximum benefits, you’ll need to make sure it still meets your needs.
When considering adjustments, think about two key factors: the performance of your investments and the number of years you have until retirement.
401(k) performance – The performance of the individual accounts within your 401(k) can affect the overall balance of your plan. When you established your 401(k), you decided on a suitable asset allocation. Over time, the allocations can change – a lot. During the long bull market of the 1990s, the equity portion of your 401(k) may have grown to such levels that your portfolio was taking on a higher level of risk than you wanted.
Now, though, the situation is different. From 2001 through 2003, the stock market has had mixed results, and 2004 has not been a particularly good year. So the value of stocks may be down, which means that your other 401(k) investments – may have taken on a greater prominence.
This could be a problem. Ultimately, you need your 401(k) to grow, so that you can build resources for retirement. And to achieve this growth, you need significant exposure to stocks.
Consequently, you’ll want to review your 401(k), at least once a year, to make sure your holdings still reflect your risk tolerance and your need for growth.
Years until retirement – The other key reason to review your 401(k) plan is to make sure your investment mix is suitable for your age level. When you’re first starting out in your career, you can afford to invest more aggressively in your 401(k). But, before you retire, you may want to shift some 401(k) assets from stock accounts into fixed-income accounts. By making this move, you can “lock in” any gains you achieved from stocks and reduce the volatility.
Start your review soon – By reviewing your 401(k), possibly, you can ensure that your holdings are working together. So, the next time you get that 401(k) statement, take a close look at it – it’s got an interesting story to tell.
