This article was written by a special guest author and colleague, Stephen Reh. Stephen Reh CFA, MBA, CFP® is the founder of Reh Weath Advisors LLC and https://investwithsteve.com/, a fee only financial advisor in Southern California. Stephen is a member of the National Association of Personal Financial Advisors like David J. Fernandez, CFP® and specializes in financial planning and investment advice.
First, I wanted to thank David J. Fernandez, CFP®, your Fee Only Advisor in Scottsdale, for giving me the opportunity to discuss common things I see when looking at investor’s 401k accounts. Similar to David, I help individuals and families with retirement and financial planning needs. One of the areas we commonly see is 401k retirement accounts. Below are some common issues, we run into.
Turning Down Free Money
You would be surprised how many employees say, “no thank you Mr. Employer, I don’t want your free money.” If your employer offers to match your contributions and you elect not to contribute, you literally are giving away free money. Even with 401k’s that have inferior investment menus or high costs, the benefit of the company match will almost always outweigh any negatives the plan might have.
Solution – At least contribute enough money to maximize your employer match. We can help you craft a plan that maximizes your employer match and how it fits into your overall investment plan.
Naïve Diversification / Kitchen Sink / Just Pick Everything
A participant is sometimes knowledgeable enough to know they want diversification and they don’t want all their eggs in one basket. What do they do? They pick everything on their 401k menu. The problem arises in that the person really doesn’t know how much risk they are taking or what they are invested in. If there were a lot of high yield bond funds on the menu, a participant may have way too much risk with high yield bonds. You can also have times where the plan has significantly more stock choices than bonds choices which may result in a portfolio that is not appropriate for the investor.
Solution – Do your research and develop an investment plant that includes sound asset allocation and diversification. Need help creating that plan, contact a fee only advisor and they can help save you time and build an appropriate model for you.
Picking the Winners and Selling the Losers
This one sounds good on the surface but what this means is that you are likely late on buying the funds that have done well and late selling the funds that have done poorly. You also run the risk of having a very concentrated position at the wrong time. If you invested in the top funds in the late 1990s, you likely were overexposed to technology. Prior to the financial crash, if you picked the top funds, you were likely overexposed to commodities and financials.
Solution – Do your research and develop an investment plant that includes sound asset allocation and diversification. Need help creating that plan, contact a fee only advisor and they can help save you time and build an appropriate model for you.
Assuming that Target Date Fund Matches Your Risk Tolerance
The Target Date funds start out aggressive and will get more conservative over time. However, there is absolutely nothing that matches a participant with the risk level they are comfortable with. The match is entirely dependent on either your age or the age you want to retire. If you are conservative and young, your target date fund is likely too aggressive for you and you might panic in a downturn. If you are older and have a high tolerance for risk, you might be disappointed that your target date fund did not perform better. Another common issue I see is a young investor picking a target date fund with a slightly “older” age. The problem here is most of the funds are fairly aggressive until you near retirement. So by picking what you thought was a conservative portfolio, it did not make a difference until decades later.
Solution: Build a portfolio that matches your risk. A fee only advisor like David can help build a portfolio that matches your needs and risk.
Forgetting to Rebalance / Ignoring Your Plan
Some people have not rebalanced for years. By not rebalancing, the portfolio might no longer be diversified and you could be taking excess risk or potentially not enough.
Solution: Check your plan at least annually to verify if it meets your needs. Not sure it meets your needs? Contact a fee only financial advisor such as David to help keep your 401k on track.
David and I help investors every day to build portfolios that will meet their needs and goals. If you would like help making sure your investment plan is on track to meet your needs at a risk level that’s appropriate, give David a call.
