Josh asks: I just received my 401(k) packet from my job; it has a lot of selections for my retirement. I don’t want to just pick any plan. Would my financial institution be able to sit down with me and instruct me on the best plan for my retirement?
Ah, what could be more fun than sitting by the fireplace with your significant other, a glass of wine, and a six-page printout of the mutual funds offered by your new 401(k)? Other than taking an icepick to your spleen, that is.
It’s hard to find intelligent, unbiased advice on how to choose investments for your retirement. Here’s why:
- Most 401(k)s offer investment advice and, by law, the advice can’t be driven by what will make the advisor or your employer the most money. However, when I say “most” 401(k)s, I mean about 60% of them. Most workers don’t bother to take advantage of the advice, and who can blame them? There’s no reason to believe the advice will actually be unbiased or, more to the point, good.
- Professional financial advisors charge professional-grade fees, typically a percentage of your assets or several hundred dollars an hour, depending on their fee model. Some advisors make money by selling commissioned products, but they’re not going to give you free 401(k) advice, because they can’t make any money on it. Instead, they’re going to encourage you to put less money into your 401(k) and more into their commissioned products.
I’m not bashing all financial advisors, by any means. If you’re looking to build a relationship with a trusted financial advisor, that’s fine–just be prepared to pay what they’re worth.
But if you just want some 401(k) help and most of the advice out there is bad, expensive, or both, where should you turn? Is it possible to get inexpensive, quality advice that will apply to your 401(k) and your financial goals? Yes.
First, go ahead and sign up for the 401(k) and direct your contributions to the money market or stable value fund while you decide what to do next. This is a low-risk and low-return fund, like a savings account—a good place to get the employer match and park your money while you get educated:
- You can read a short book on investing that will help you get started. It’s called Elements of Investing, by Malkiel and Ellis. It’s inexpensive, jargon-free, and to the point. Your public library probably has it.
- Your 401(k) might be supported by FutureAdvisor, a free investment advice service I wrote about recently. Their recommended portfolios are pretty good and they’re adding more 401(k) support all the time.
- The smartest investors on the net hang out at a site called Bogleheads, named for Vanguard founder John C. Bogle. Post your 401(k) options on the “Help with Personal Investments” forum and you’ll get solid, unbiased recommendations, most likely within an hour.
Diego asks: I’m 29 and got my first job while finishing my PhD. I have a 401(k) but don’t know how to distribute my contributions.
With current low interest rates, low capital gains taxes, baby boomers retiring, and technology companies moving abroad, US stocks don’t seem a good option in the long run.
U.S. bonds are too safe, giving barely to enough gains to compensate for inflation and international stock options are all in Europe, which seems rather unstable. Should I just stop contributing?
Diego, I like your outlook. Not because I particularly agree or disagree, but because it reminds me of the famous 1979 Business Week cover story called, “The Death of Equities.”
In 1979, a lot of people argued that the U.S. economy was toast. Recession? Check. Inflation? Obscenely high. Regular investors were getting out of the market in disgust. It all added up to an obvious conclusion: the U.S. stock market was poised for years of disappointing returns—perhaps a permanent bear market.
Over the next twenty years, U.S. stocks had their biggest, longest sustained bull market ever. By 2000, it looked like you couldn’t possibly lose money in stocks. Oops.
My point is: your market analysis could be correct. But the fact that everything looks bleak doesn’t mean it’s a bad time to invest. It could turn out to be a terrific time—or not.
Nobody can predict future market returns, least of all me, but you can always find an excuse not to invest. There’s no good excuse for giving up the instant tax break you get by contributing to your 401(k).
Jon asks: Is it pointless to invest in two target date retirement funds (of the same target year) at the same time?
Hmm, those last two answers were pretty long-winded. Let me see if I can rein it in for Jon’s sake. Here goes:
It doesn’t provide any diversification benefit. But if you have a good (meaning “cheap”) target-date fund in your 401(k) and another good one in your IRA, it’s fine. Go for it.
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