Torie, like millions of others, knows she needs to make money investing in 401k plans in 2015-2016 and beyond (she has a couple) to retire comfortably. What she also needs to know: 401k asset allocation, how to choose and manage your best 401k investment options, and the outlook for 2015 and 2016. Let’s take a look at how she and you can make money in 2015, 2016, and beyond (or at least make the most of it) if they are in the same boat.
Although it has been easy to make money investing in 401k plans in recent years, this is not always the case. The first thing you and Torie need to do is set a goal (Torie’s goal is to retire around the year 2040). Second, be honest about your personal risk tolerance. Torie’s is “moderate” but definitely not aggressive! Third, review your current 401k asset allocation to determine if the investment options you have are in line with your risk tolerance. Are you in the best 401k investment options and in the right ratio?
Finally, you need to understand that 2015 and 2016 could be tough times to make money investing in 401k plans. The reason: Weak economic forecasts make the best 401k investment options of yesteryear vulnerable to loss. Stocks are expensive and so are bonds. Assuming your risk profile is similar to Torie’s (she’d like to make money but wants to avoid big losses), what can she do now to stay on track, make money, and avoid big losses if 2015 and beyond turn ugly? We will use Torie as our example.
Several years ago, Torie decided she wanted to make money investing in 401k plans, but she wanted to keep things simple. He had changed jobs once and was planning another change in the future. With both employers, she had set up her plan with 50% going to a safe and stable account and 50% going to a Target 2040 fund. She was busy and pretty much ignored her statements over the years. After all, her goal was to make money by investing, and at a glance she could see that her portfolio balance was growing. Now, she needs to take a closer look at her 401k asset allocation to see what percentage she invests in each of her two 401k investment options.
In early 2015, a closer look revealed that both plans had a much riskier portfolio asset allocation than she expected. The target fund represented almost 80% of her assets in her first plan and 75% in her current plan. What happened and what action do you need to take to get back on track and keep things simple? What happened was that her 2040 target fund turned out to be one of the best 401k investment options in her plan and far outperformed her safe and stable accounts.
The other best 401k investment options had been stock funds, but Torie thought they were too risky. With the target fund, most of her money was invested in stock funds, and the rest in bond funds; and both types of funds had performed well going into 2015. her plan was to continue making money investing in her 401k while maintaining her target fund and a safe investment. So she invested in stocks and also some bonds to give her portfolio some balance.
What you now need to do is REBALANCE your 401k asset allocation so that 50% of your portfolio assets are reinvested equally in each of your two chosen investment options. That lowers your risk considerably and adjusts to your comfort level. Now, can you or Torie make money investing in 401k plans in 2015-2016 with a 401k asset allocation that is allocated half to safe investment options (money market funds or stable accounts) and half to mutual funds? target stocks or funds? Yes, unless the stock market crashes and jumps it gets hit too.
How can you make money investing in 401k plans in 2015 and beyond if both stocks and bonds take a hit? You would have to move the vast majority of your money to the safe havens available. In other words, your best 401k investment options would be the interest-paying stable account (if one is available) or the money market fund (which your plan should have, but currently pays very little in dividends). For the average investor who needs long-term growth (like you and Torie), this is an extreme measure.
Remember, your real goal is to make money by investing in 401k plans, so you can have a secure retirement. Moderate risk is part of the program. I use Torie as an example because her situation is typical. Her asset allocation from her 401k fits her tolerance for risk (and probably yours) and should deliver long-term growth. She has chosen the best 401k investment options to reach her 2040 retirement goal (if she plans to retire in 2030, go with the 2030 target fund, and so on). Half of her money is safe and the other half has growth potential.
Plus, you have a plan to manage your 401k investment options. If the markets turn ugly in 2015 and 2016 she will not make money investing in 401k plans, she will lose money. But she has money going into her target fund each pay period buying stocks at cheaper and cheaper prices, and money going into and accumulating in her safe investment. Any time your 401k asset allocation shows that 60% or more is in the secure account, you will REBALANCE to 50%, which means taking money from the secure account and adding it to the target fund. Then, when the markets turn, you’ll be well positioned to make money by investing in 401k plans for a secure future.