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Top
401k Mistates
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In
a volatile market, it's even more important to avoid
these three top nest egg gaffes.
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NEW
YORK (CNNmoney) - Perhaps you switched jobs recently
and decided that the $6,205.41 in your 401(k) would
be better put to use on a trip to the Caribbean. Or
perhaps you didn't pay much attention to the account
and discovered that all of your funds own the same five
tech stocks. Nobody is perfect when it comes to 401(k)
investing. There are a million ways to build a retirement
portfolio, and a million ways to screw it up.
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TOP THREE 401(K) MISTAKES 1. You miss out on the
match 2. You pick the wrong funds 3. You don't rebalance
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there are mistakes, and there are Hall of Fame mistakes
that can torpedo your best intentions and keep you working
long into your golden age. |
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| "People
are making their portfolios a lot less efficient than
they could be," said Pat Jennerjohn, a certified financial
planner from Oakland, Calif. "It's not rocket science,
but it's not that simple either." The three worst bloopers
fall into three general categories: contributions, investments
and maintenance. |
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| 1.
You don't invest enough to get the match |
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| Have
you ever walked by a $100 bill lying on a sidewalk? That's
about the same thing as failing to invest enough to get
your company match. |
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| In
most cases, companies will match your contributions 50
cents on the dollar up to 6 percent, for a total of 3
percent of your salary, financial planners say. |
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| One
rule of thumb is that you should save 15 percent of your
salary to build a comfortable retirement. But if mortgage
payments, childcare and other life expenses get in the
way, at least scrape together enough to get the "free
money" from your boss. |
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| "Don't
leave money on the table," said Tom Grzymala, a certified
financial planner from Alexandria, Va. Let's say you make
$50,000 a year. The company matches 50 cents on the dollar
up to 5 percent. That means you contribute 5 percent,
or $2,500, and your company will kick in 2.5 percent,
or $1,250. |
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| Many
companies will kick in their share in stock, rather than
cash, Jennerjohn said. There's not much you can do about
it, but pay attention to the rest of your portfolio. If
you get the 2.5 percent match in ABC stock, you don't
want to invest in a fund that owns ABC stock as its top
holding. "No matter how much you love the company, Wall
Street won't love it as much as you do," Jennerjohn said.
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other extreme is when you don't invest at all. Gryzmala
said he's seen cases where people leave a job and cash
out their 401(k)s, which squanders their future. "They
take it out, pay taxes on it and they have nothing for
retirement," Gryzmala said. |
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| 2.
You pick the wrong funds |
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big gaffe is when you just invest in the wrong mutual
funds. Some people pick blindly from among their selections,
putting a little money in every option regardless of how
it fits in their long-term strategy, Jennerjohn said.
Just because you have six choices, doesn't mean you need
all of them. |
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| Other
people put too much money in fixed income, said Rich Zito,
a certified financial planner in New York. They might
have been scared off by all of the market losses and they
figure it's better not to risk any of their money. But
anyone who has five years or more can afford to take on
more risk in exchange for higher long-term returns, Zito
said. "My dad is in his 50s and he has 100 percent of
his portfolio in stocks," Zito said. |
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GRZYMALA'S FUND PICKS Thornburg Value Excelsior Value
& Restructuring Fremont MicroCap Ameristock Meridian Value
Strong Small Cap |
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| Start
by setting your investing goals, figuring out your risk
tolerance and determining your time horizon, Grzmala said.
Look for funds that are in the top 30 percent of their
categories for one and three years, with a long-time manager
at the helm. Really read the prospectus to see if you
agree with the investing premise. "You've got to plan
for what happens after you retire," Gryzmala said. If
you're not sure how to build a portfolio, you could start
by putting 25 percent each in small-, mid-, large-cap
and international stocks, Zito said. Many plans don't
have all of those options, so you can fill in the blanks
with an IRA, he said. |
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example, if your plan doesn't have any small-cap funds,
then pick one for your IRA. The idea with your choices
is to look at all of your retirement money - whether it's
in your 401(k) or an IRA - as one portfolio. |
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| 3.
You never rebalance |
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third big mistake is when you don't adjust your portfolio
year in and year out to make sure your allocation is still
on track. Let's say all of your funds are down for the
year. Or all of them are doing well. Something is wrong,
Grzymala said. |
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| "You
want to maintain a balanced, diversified portfolio," Grzymala
said. When some funds are down, some will be up to balance
out your risk. |
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over time, some of the big winners will get out of balance
in your portfolio. So if you started out with 25 percent
large caps, you might end up with 31 percent after a few
years if the category is doing well. |
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| To
rebalance, you sell some of the winning shares and put
them in a losing fund, which eventually will turn around.
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| "It's
psychologically hard to take money out of things that
are doing well and put money in things that aren't doing
well," Jennerjohn said. |
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| Jennerjohn
suggested people rebalance when they are 5 percent or
more away from their target asset allocation for two quarters
in a row. |
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| "It
doesn't have to be to the dollar," Jennerjohn said. "this
is not precision, this is just keeping things within target."
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| Rebalancing
will also be a good time to fix any mistakes in your strategy.
For example, maybe you picked a world fund for your international
exposure, not realizing that world funds can hold up to
60 percent U.S. stocks. Or, maybe you mistakenly put everything
in a cash account. |
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| The
fund recommendations are as of October 25, 2001. |
