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“Basic Training”

April 19th, 2013 Posted in Financial News

With the major markets “at or near all-time highs” what are 401(k) investors supposed to do?

shutterstock_77180239No matter what investors do with their money, there are risks involved that could derail their financial goals.  If they invest, they could suffer losses.  If they don’t, inflation can erode the value of their savings.  For investors to reach goals, all of these risks need to be anticipated and managed through and incorporated into, a solid financial plan.

Build a plan, re-define your goals; not in terms of investment returns, but in terms of financial objectives:  home ownership, a child’s college education and, of course, retirement.  After that, investors need to stick to the basics of investing and the 401(k) is an important piece of that strategy.

Getting from here to there

To meet retirement, establish an asset allocation strategy that balances downside protection and upside participation:  not just one that chases a return.  Intentional investors have clear goals and a needs-based return for their portfolio.  Get into a diversified portfolio.

Stick to the recipe

At times like these, stay disciplined and rebalance your portfolio.  Especially in bull markets when markets are “at or near their all-time highs” and one asset class performs well, its proportion of your overall portfolio swells. Rebalance to your target allocation.  In other words, sell part of the performing asset class to bring it down to the intended weighting and, at the same time, buy into the lagging asset class, increasing your stake and boosting it back to your target allocation.  The model portfolios do this for you automatically every quarter, but if you invest on your own, you need to intentionally do this too.

Here’s the reality

Contributions matter much more than investment returns.  The returns from stocks, bonds, commodities and mutual funds can help grow wealth and protect it from inflation, but they alone don’t have the power to make investors wealthy.  The earlier you get in, the more you take advantage of compounding interest on your contributions, your employer’s match and the income tax savings from the deduction.  Maximize contributions, and at least contribute into your 401(k) up to your employer’s match.  Whether the market is up or down, continue to make contributions into a portfolio constructed to withstand a variety of economic conditions.

Finally, take ownership of your 401(k) and stay vigilant.

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