With the market in such turmoil of late, it’s easy to forget the basic needs of overseeing your 401k account. They say the only thing we can be sure of in this life is change (not counting death and taxes) so you can also count on the fact that the market will change, and it’s your job as the “keeper” of you 401k to keep up on your account, and the general plan supplied by your employer. In times of confusion, it is human nature to sit back and do nothing- this strategy could be quite harmful in these times we live in.
Remember Enron? The biggest crime of that debacle was the life savings of those who invested in a seemingly sound company to find out it was all a house of cards. The biggest issue for those former employees was a lack of diversification, or “putting the eggs in one basket” theory. The issue at hand was that they were so convinced of the success of the company that many had invested their 401(k) funds solely into the company stock. Once the company collapsed, so did their life savings. Had they diversified their portfolio, thus avoiding the “all the eggs in one basket” theory, they could have avoided this disaster. So, a decade or so later, what did we learn from their experience?
As you are aware, we are great proponents of asset allocation, which is the antidote to the above. Asset allocation is an investment strategy that seeks to reduce investment risk by spreading the portfolio over a number of asset classes. It takes advantage of the tendency of different classes to move in different cycles, technically referred to as correlation, and thus smooth out the ups and downs of the entire portfolio. Company stocks, guaranteed investment contracts, mutual funds and money funds are the most widely available options. Depending on the individual need, risk tolerance and plan availability, sector investments such as real estate or gold may be used.
There is no one single asset allocation model to fit every investor, or for every stage of one’s life. The model is determined by many factors, different for each person’s need. Over time, financial markets and an individual’s goals and situation may change. At this time adjustments should be made.
If you are an employee of a company that offers a 401(k) plan, we impress upon you how important it is to spread the risk of your investments. Each person has his or her own risk tolerance, and only you can know the appropriate risk you are willing to sustain. Many companies have changed their investment options, so be sure to review the investment available to you at least annually, and rebalance your account based on your needs. Don’t let this market get you caught up in complacency. It’s your future: pay attention to it.
