Time To Review Your Employee 401(K) Holdings

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This may be the time of year when your company gives you a chance to increase your 401(k) contributions. But how much to put in isn’t your only decision regarding your 401(k) — you’ll also want to look at your investment mix. Why? Because things change — and, if you want to get the maximum benefits from your 401(k), you’ll need to make sure it still meets your needs.

When considering adjustments to your 401(k), think about two key factors: the performance of your investments and the number of years you have until retirement.

Let’s look at both:

401(k) performance — The performance of the individual accounts within your 401(k) can affect the overall balance of your plan.

When you established your 401(k), you decided on a suitable asset allocation, with different percentages of your total portfolio going to stocks, bonds, money market funds, government securities, etc.

Over time, these percentages can change. During the long bull market of the 1990s, the equity portion of your 401(k) may have grown to such levels that your portfolio was taking on a higher level of risk than that which you were comfortable.

Now, though, the situation is different. From 2001 through 2003, the stock market has had mixed results.

So, within your overall portfolio, the value of stocks may be down, which means that your other 401(k) investments — including government securities and “guaranteed investment contracts” (fixed-income vehicles that your plan may purchase from an insurance company) — may have taken on a greater prominence.

This could be a problem. Ultimately, you need your 401(k) to grow, so that you can build resources for retirement. And to achieve this growth, you need significant exposure to stocks. As we’ve seen, stock prices will move up and down in the short term. But over the long term, stocks have historically outperformed every other financial asset. So, if your 401(k) is becoming “overweighted” toward fixed-income investments, your progress toward your retirement goals could be slowed.

Consequently, you’ll want to review your 401(k), at least once a year, to make sure your holdings still reflect your risk tolerance and your need for growth. If you have high-quality, stock-based accounts, don’t give up on them because of a down year — over time, good investments tend to reward patient investors.

Years until retirement — The other key reason to review your 401(k) plan is to make sure your investment mix is suitable for your age level.

When you’re first starting out in your career, you can afford to invest more aggressively in your 401(k), because you have many years to overcome any “down” periods.

But, in your last few years before you retire, you may want to shift some (but not all) 401(k) assets from stock accounts into fixed-income accounts. By making this move, you can “lock in” any gains you achieved from stocks and reduce the volatility of your overall account in the last few years in which you’ll be contributing to it.

Start your review soon

By reviewing your 401(k), possibly with an investment professional, you can ensure that your holdings are working together to help you achieve the retirement lifestyle you’ve envisioned.

So, the next time you get that 401(k) statement, take a close look at it — it’s got an interesting story to tell.

Ross Hage is a licensed financial adviser with Edward Jones. For more information, call (928) 468-2281. This article was written by Edward Jones for use by your local Edward Jones financial adviser.

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