Torie, like millions of other people, knows that she needs to make money investing in 401k plans in 2015-2106 and beyond (she has a couple) in order to retire comfortably. What you also need to know: 401k asset allocation, how to choose and manage your best 401k investment options and the outlook for 2015 and 2016. Let’s take a look at how you and her can make money in 2015, 2016 and beyond (or beyond less do your best) if you’re in the same boat.
Although it has been easy to make money investing in 401k plans in recent years, this is not always the case. The first thing you and Torie need to do is set a goal (Torie is to retire around 2040). Second, be honest about your personal risk tolerance. Torie is “moderate”, but she is definitely not aggressive! Third, review your current 401k asset allocation to determine if the investment options you have are in line with your tolerance for risk. Are you in the best 401k investment options and in the right ratio?
Finally, you need to understand that 2015 and 2016 could be a difficult time to make money investing in 401k plans. The reason: weak economic forecasts make the best 401k investment options of yesteryear vulnerable to losses. Stocks are expensive and so are bonds. Assuming your risk profile is similar to Torie’s (she would like to make money but wants to avoid big losses), what can you do now to stay on track, make money and avoid big losses if 2015 and beyond turns ugly? We will use Torie as our example.
Several years ago, Torie decided that she wanted to make money investing in 401k plans, but she wanted to keep things simple. She had changed jobs once and was planning another change in the future. With both employers, she had set her plan with 50% for a stable and secure account and 50% for a Target 2040 fund. She was busy and virtually ignored their statements over the years. After all, his goal was to make money investing, and he could see at a glance that his portfolio balance was growing. Now, you need to take a closer look at your 401k asset allocation to see what percentage is invested in each of your two 401k investment options.
In early 2015, a closer look revealed that both plans had much riskier portfolio asset allocation than I expected. The target fund represented almost 80% of its assets in its first plan and 75% in its current plan. What happened and what action should you take to get back on track and still keep things simple? What happened was that their 2040 target funds turned out to be one of the best 401k investment options in their plans and far exceeded their safe stable accounts.
The other best 401k investment options had been stock funds, but Torie found them too risky. With the target fund, most of your money was invested in stock funds and the rest in bond funds; and both types of funds had performed well going into 2015. His plan was to continue making money investing in his 401k while maintaining his target fund and a safe investment. That way, he invested in stocks and also some bonds to give his portfolio some balance.
What you now need to do is REBALANCE your 401k asset allocation so that 50% of your portfolio assets are re-invested equally in each of the two chosen investment options. That greatly reduces your risk and is tailored to your comfort level. Now, can you or Torie make money investing in 401k plans in 2015-2016 with a 401k asset allocation that allocates half to safe investment options (money market funds or stable accounts) and half to equity funds? or target funds? Yes, unless the stock market crashes and bonds take a hit too.
How can you make money investing in 401k plans in 2015 and beyond if both stocks and bonds are hit hard? You should move the vast majority of your money to the safe places available. In other words, your best 401k investment options would be the stable account that pays interest (if one is available) or the money market fund (which your plan should have, but which currently pays very little in dividends). For the average investor who needs long-term growth (like you and Torie), this is an extreme measure.
Remember, your real goal is to make money investing in 401k plans, so you can have a secure retirement. Moderate risk is part of the program. I use Torie as an example because her situation is typical. Your 401k asset allocation is adjusted to your tolerance for risk (and probably yours) and should produce long-term growth. You have chosen the best 401k investment options to reach your retirement goal in 2040 (if you plan to retire in 2030, go for the 2030 target fund, and so on). Half of your money is safe and the other half has growth potential.
Additionally, you have a plan to manage your 401k investment options. If the markets go sour in 2015 and 2016, she won’t make money investing in 401k plans, she will lose money. But you have money pouring into your target fund each pay period buying stocks at ever cheaper prices, and money pouring in and accumulating in your safe investment. As long as her 401k asset allocation shows 60% or more is in the safe account, she will REBALANCE at 50%, which means taking money out of the safe account and adding it to the target pool. Then when the markets turn, she is well positioned to make money investing in 401k plans for a secure future.