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How should I select my 401k investments?

I'm 36 and am just starting to seriously contribute to my 401k. We have 45 different funds, and 10 are target date funds.

Feb 09, 2012 by Juliette from Beaverton, OR in  |  Flag
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Ryan Level 19

Wow, this is a challenge that many investors face. Congratulations on your decision to being to build a retirement savings account. Often you'll have access to some sort of generic profiling tool that might give you guidance on your general risk tolerance but the key is to find the best available funds within the 401k platform your firm offers. If your 401k plan has an advisory component, it might be worth speaking with that organzation. If not, you might be able to find an advisor who will assist you with your asset allocation (industry phrase that means how your money will be invested based on a number of factors). Keep tuned into the responses as I bet you'll find someone close to you that could be very helpful to your needs!

Comment   |  Flag   |  Feb 09, 2012 from Gettysburg, PA

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Age-based target date funds provide for asset allocations that vary over time, becoming less risky and more stable as the target date approaches. Target date funds are an apparently convenient answer to the question "what should I do," but they are a poor fit for many investors. Individuals have different needs and goals, risk capacities, and time horizons. Target date funds consider only age, none of the other individual factors, and apply applying generic rules to the underlying asset allocation process. I recommend that you follow a step-wise planning process to select an appropriate 401k allocation for your particular circumstances:

(1) Identify your needs, goals, and time horizon; how much money will you be contributing over how many years? Will your savings be sufficient to meet your retirement goals? What is your risk appetite and risk capacity for these funds?

(2) Research the funds that are offered by the plan. Determine the asset class and risk profile of each of the funds, along with the fees and expenses. Segment your investment options by asset class (cash, equities or fixed income), style (capitalization and growth or value), and geography (U.S., international, emerging market).

(3) Implement your asset allocation plan based on your personal risk tolerance. This can be tricky, because you may not be sure about how much risk you want or how much risk the funds will entail. Generally speaking, more equities means more risk, but you should do your own research or consult with a financial advisor.

(4) Monitor your investments to ensure that your asset allocation stays in line with your goals and that it continues to be appropriate for your needs and personal circumstances.

If all of this sounds like too much to manage, then you should consider retaining a financial advisor to assist you with your planning and investment needs. Many fee-only advisors will be happy to work with you on a fixed fee, limited engagement basis to determine an appropriate plan for you. Good luck.

Comment   |  Flag   |  Feb 09, 2012 from San Francisco, CA

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For most people their 401(k) plan is their largest investment behind their house. So choosing the right allocation is critical to your future. The challenge is finding qualified advice is difficult. Most employers are prohibited from giving advice. The Target Date funds that were created to address this problem have had a difficult time with performance and finally the individual choices within a retirement plan are limited and often not updated to reflect changes within the funds such as poor performance or management changes. One of the keys to success in choosing your investment choices is to understand your risk tolerance and match that with your long term objectives. Morningstar will give you some basic information on your choices for free. To give you a few key areas to look at I would suggest upside and downside capture ratios. This is how much of the gain and loss of the market the fund has participated in. I prefer low downside capture ratios with lower standard deviation. (Steady returns that don’t lose money) You also need to understand that volatility can have a big impact on your portfolio. Let’s assume that you have two funds to choose from. One has returns of 50%, -20%, and 0% and the other has 10%, 10%, and 10%. Both have an average return of 10% but when you look at the impact of these on an account it tells a very different story. If you started with $100,000 the first account would be $150,000 then lose $30,000 ($150,000X20%) and then no gain for an ending balance of $120,000 the second account would be $110,000, $121,000 and end with a balance of $133,100. Which would you prefer? They both have an average return of 10%. If you are still having trouble understanding this I suggest you find a Certified Financial Planner that will give you some advice and charge by the hour. It would be a onetime expense, but could potentially change your retirement.

Comment   |  Flag   |  Feb 14, 2012 from Raleigh, NC

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