This article will take you through the common pitfalls that we all come across when we guess where our money should be invested in our 401k retirement savings plan. Most are simply advise we have gotten from people who did not know any better.
So how are your fortune telling skills? Unless you can know where interest rates are going to be year in and year out, you would do well to avoid the Target Date Funds in your 401k plan. You may recall that this product will increase the bond fund portion of the underlying portfolio year after year. If interest rates go up the value of the bond fund will go down.
Why is that? if you own a bond that pays 5% and prevailing rates are 10% no one is going to give you 100 cents on the dollar if you want to sell it. This is referred to as interest rate risk. A bond owner manages this risk by waiting until maturity when he will get all his investment back.
What about the self directed brokerage account? More plans are allowing their plan participants this option. Yet, be aware there may be annual fees attached. While the appeal of having access to lower cost and better performing Exchange Traded Funds may be tempting be sure the fees for the privilege does not get close to one percent.
What about the mutual funds on the main menu? Here again the discussion about the Target Date Funds apply to asset allocation funds and balanced funds as well as straight bond funds.
With all these things to keep track of you may feel more comfortable turning this over to a professional. With the passage of the Pension Protection Act of 2006 which cam into effect in January of 2008, your plan may now have the feature that will allow you to hire an independent personal investment adviser who you can pay with pre-tax dollars directly from your plan. This is serious money ~ be serious about it.