Diversification: The Benefits of Holding a Wide Range of Investments

 

Last month, T. Rowe Price Investor featured an interesting article providing advice about investing in a broad range of sectors, capitalizations, and geographic regions.  The article also explains how this diverse asset allocation minimizes your exposure to risk in any one area, expands your ability to benefit from opportunities in the global economy, and reduces volatility in your portfolio.  Establishing an appropriate mix of stocks, bonds, and short-term holdings is just the beginning.  Click here to read the article and comment below to let us know how a diversified portfolio has benefitted you through recent market changes.

 

5 Ways to “UP” Your 401(k) Plan

By Olivia Sandham

1. “BUMP UP” your deferral rate.
The average 401(k) deferral rate lingers near 4%, but this doesn’t mean your investment has to.  Increase your deferral to 10% of your paycheck, and your deferral combined with the company match will build an income base that can last in retirement.  Find out if your plan has an auto-escalation feature, which will allow you to automatically raise your deferrals incrementally over time.

2. “CHANGE UP” your fund allocation.
Over the long term, it takes time and skill to choose 401(k) funds successfully.  What seemed like the proper allocation when you were 25 will most likely change when you are 10-15 years older.  If periodically assessing your funds seems time-consuming, a target date fund or asset allocation fund may be more appropriate.

3. “SAVE UP” your account.
There may be a handful of valid reasons for pulling cash from your 401(k), such as a new home or business purchase, or for an emergency situation.  But you could be charged a 10% tax penalty on early distributions taken before you are 59½, and you may have to repay the loan within 60 days.  Instead, consider your 401(k) strictly as a retirement savings account: money goes in and stays in until retirement.  If you do have to take a loan, repay it as soon as possible so your money can get back to work for you in the market.

4. “FOLLOW UP” on your investments.
Make a plan for your 401(k) and keep an eye on it to ensure you are still on track to meet your savings goals.  A 401(k) is a long-term investment, which means there will be highs and lows in performance, so you should periodically check to make sure you’re on track.  Review and keep your quarterly statements, but don’t preoccupy yourself with looking at your account every day.  An appropriate time to reevaluate your 401(k) plan on an annual basis would be during re-enrollment so you can make any necessary adjustments.

5. “LINE UP” your future budget.
Once you’ve retired, you will rely on your 401(k) savings as a stream of income.  Before reaching too near to that point, get an idea of what your future expenses will be.  Understanding how your lifestyle will be during retirement will help you make sure your 401(k) plan will be able to cover these costs.

Are you an aggressive investor?

According to Dan Danford, CFP® and Founder/Chief Executive Officer of Family Investment Center, forget rules of thumb when it comes to determining your aggressiveness in investing. In this video, Danford answers the question of whether or not the rule of thumb of limiting your stock percentage to 110 less your age makes sense if you don't want to risk giving up potential gains. Danford offers his reasons for ignoring that oft-used financial expression and why answers to retirement questions and portfolio diversity depend on what your retirement time horizon is.

Danford in SmartMoney

Anna Prior of SmartMoney Magazine interviews Dan Danford of Family Investment Center and other financial planners about proper portfolio mixes for investors in different life stages.

Click here to read the article, "Perfect Portfolios: Your Next Move in This Market."