Investing is arguably the most complicated and intimidating part of money management. To make sure you’re moving in the right direction with your investments, consider whether these three possibilities are true for you.
You may not be investing enough. One of the big trends within workplace retirement plans, such as 401(k) plans, is “auto-enrollment.” It used to be that participation in the plan was something you had to opt into. Now, in more and more companies, participation is the default; if don’t want to take part, you have to opt-out.
While that’s helped increase participation rates, one major watch-out has to do with your plan’s automatic contribution rate. In many cases, the percentage of salary is pretty low — like 3%. And a lot of employees, assuming their employer has their back, never really figure out if that’s enough (it isn’t) or increase their contribution amount.
To figure out how much you should be investing, use a free online calculator to run some numbers.
You may not be investing knowledgeably enough. Another major trend in workplace plans is the popularity of target-date funds. Many mutual fund companies now offer such funds.
You’ll recognize them because they have a date as part of their name, such as Fidelity’s Freedom 2040 fund or Vanguard’s Target Retirement 2055 fund. They’re usually offered in 5-year increments, such as a 2020 fund, a 2025 fund, etc. The date is the year closest to the year when you plan to retire.
There are two wonderful things about target-date funds. First, they handle asset allocation decisions for you, choosing the stock/bond mix the fund companies believe is best for someone planning to retire at that date. Second, as you get older, the target-date funds automatically adjust their holdings, making the portfolio more conservative.
But here’s what to watch out for. Don’t blindly assume the allocation used by your target-date fund is appropriate. When the market fell by nearly 40% in 2008, many people who were invested in 2010 target-date funds—people right on the cusp of retirement—lost a ton of money. Their target-date fund of choice turned out to be surprisingly aggressively invested.
Understand this: One company’s fund that’s designed for the same target retirement date as another may be designed very differently. For example, Fidelity’s 2015 fund has a 59% allocation to stocks, whereas T. Rowe Price’s 2015 fund has a 42% allocation to stocks. These funds will respond to the same market conditions very differently.
To figure out how your investment portfolio should be allocated, take this simple quiz. Then find a target-date fund that has a similar allocation.
You may not be ready for how rough the ride can get. It’s easy to make the mistake of hearing that the market went up by over 30% in a particular year, as it did in 2013, and assume it moved throughout the year in a nice smooth upward path. But it doesn’t usually work that way, and it definitely didn’t work that way then.
There were six significant downturns throughout 2013. Each time the market slipped, you can be sure some people feared the worst and bailed out, a move they certainly came to regret.
This points to the importance of using a process for selecting investments you understand, trust, and are committed to staying with in good times and bad. And it points to the importance of managing your expectations about how the market performs. While its long-term trajectory has been upward, the ride will certainly get rough from time to time.
Which of these three investment truths speaks to you?
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