August 29, 1999. Most companies offer a good selection of mutual funds and other investments for
their retirement 401(k) plan. The question comes to many is which ones should I choose?
Actually it depends mostly on your age, certain circumstances and risk tolerance. An aggressive
investor should lean more toward stocks. A young employee should definitely be into aggressive stocks, including
international stocks or funds if the company offers it. That is a no brainer. No sense in having half of your retirement
fund into stocks and bonds or all bonds when you have 40 years to go before you pack it in.
Too many employees are investing more than 50% of their monies into bond funds. With the going
rate of return of 5% in the last 40 years in bonds and a real value of inflation of 3-4%, there is not much room
for a net return on your money.
A good mixture of a good quality of stock funds and international funds, if offered, is the best
to be had for the long term. If you want play the conservative role, then a balanced fund which would be a ratio
of 62% in stocks and the rest in bonds may be more to your liking.
There are several things that are very important. Do not put one hundred percent of your contribution
into the company you are working for. Divide it in several ways, which will give you more of a balanced portfolio.
A good mix would be 25% in the company stock and 75% in a balanced fund, or 50% in an aggressive fund and 25% in
a bond fund.
Another problem that has come in the last five years is companies have offered their employees
too much of a diversification. They are listing 6-8 different models to choose from. It is not necessary to have
that many offerings. Usually three growth funds, two balanced funds and the rest bond funds are all that are needed.
A hodgepodge of funds will only make the average person more confused.
Many employees think that company plans are on the safe side, but in all reality the companies
that offer more of a choice are the safest way to go. Especially if a bear market appears and your company has
several bad years and maybe goes in a tank, then you are really in trouble and most of your 401(k) goes in the
tank also.
Too many workers are not contributing the most that is offered. Say that Ajak Company is telling
their people that they can contribute up to 15% of their wages into a 401(k) plan. By recent statistics, the average
contributions are only 6%. A big mistake! Put the most that you can even if you think that it will hurt financially.
For every percent that you don't put in, you would be losing tens of thousands of dollars by the time you retire.
Keep in mind that a 25 year old that retires in the year 2039 is going to need a minimum of $1,200,000,
not including Social Security benefits, to live comfortable. Should you contribute the most offered? Definitely.
George
