The buy-and-hold investment strategy for company sponsored retirement plans, such as a 401K plan, has become a relic of the past. Let me re-phrase that: Buy-and-forget investing is a relic of the past.
Buy-and-Forget is not an Investment Strategy
I often have prospective clients come to me with a stack of statements…brokerage accounts, 401K accounts, IRA’s, CD’s, and other odds and ends. Invariably, one or several of the accounts have been completely ignored over the years. In some cases, the investment allocations in their company 401K plan account is still invested with the same exact options they chose when they first opened their accounts.
Just recently, I helped a new client re-allocate his funds that had not made a change in over 15 years. It was entirely invested in high-growth (or high-risk, rather) funds that performed superbly – until the year 2000. He had managed to eke out a total return (not annual return) of about 31% - over the course of 15 years. That works out to less than 2% per year (compounded). The technology bubble and growing euphoria for the stock market drove much of the investment gains in the 90’s, a situation which reversed abruptly in 2000, and is not likely to repeat itself anytime soon.
We are currently in an economic environment vastly different from years past. Interest rates are at an all-time low, unemployment still remains remarkably high, and the federal debt is unsustainably high and growing rapidly. The point is, what may have done well 5 or 10 or 15 years ago, is most likely NOT working well today.
What to do
If you are the type of person that has neither the time nor inclination to regularly review your investments, you need to begin reviewing your 401K portfolios at least once per year. I usually recommend doing this at tax time, since you can get all your painful financial exercises out of the way at once.
The place to start is with your 401K plan provider. If you work for a large company, chances are they may have some great online tools to use to help guide you to an appropriate allocation. But buyer beware; some 401K product providers (brokerage firms, mutual fund companies, and insurance companies) will attempt to steer you towards the products THEY want to sell you. In some cases, these may not be in your best interest, even if they might be considered “suitable” for you. So make sure you are comfortable with the recommendations provided by online tools.
If you do not have the resources of a 401K provider, or are not comfortable taking advice from an online calculator, you can consider seeking out a fee-only financial planner to assist you in creating a simple allocation for your 401K plan.
Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with an added focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.
If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.
