Wednesday, January 5, 2011

Financial Checkup

If you're like me, the start of a new year brings some reflection back on the events of the prior year, hopefully lots more good memories than bad, perhaps you set some goals, accomplished a bunch, but still have lots more to look forward to and some adjustments to make. For me that also means time to check out the 401k and see where things are at.

Most financial sites recommend doing a thorough check of your 401k and to rebalance at least annually, which is what I usually do. All rebalance really means is to check and be sure that the percentage of money you have going to the various funds you are invested in matches their original targets. For exampe, if you initially wanted 80% in stock mutual funds and 20% in bond mutual funds, make sure that is still where you are at.

If you invest all your money in one of the life-cycle target date funds that change your asset allocation for you as you approach retirement, then they take care of the rebalancing for you. That usually comes at a cost, since there are increased management and trading costs, but I'll talk about the pros/cons of certain mutual funds and how to pick between funds in a later post. If you are invested in anything other than 1 target date fund, read on...

Going back to the previous example, if your initial target allocation was 80% stocks/20% bonds, at the end of a year you may have ended up with 90% stocks and 10% bonds due to a higher rate of return for stocks. If your investment goals and risk level didn't significantly change over the course of the year, usually you can change your percentages back to 80%/20% quite easily.

Most of the major sites like Fidelity, Wells Fargo, etc. offer the following 3 options:

  1. Change your investment elections; This option will change what funds your money goes into for any FUTURE contributions only, anything existing will not change.
  2. Exchange money between funds; This option only allows you to manually move money from one specific fund to another.
  3. Rebalance; This option will move money from multiple funds into the funds you specify, in the percentages that you desire, basically doing things for you. 

The 3rd one is the option you would want to utilize.

If you want to go back to 80% stocks and 20% bonds and you have the option to utilize the same funds that you have been, you just put in the correct percentages next to the individual funds and click rebalance. Then generally the following business day your account would show that 80% of your money is allocated to stock funds, 20% bond funds and you're ready for the new year. It can be that quick and painless.

The only caveat is that some funds have a 'short term redemption' fee for any funds taken out within a certain number of days after they were put in, usually 30, 60 or 90 days. If you are making regular contributions to your 401k over time, that is most likely a very small amount, probably a few dollars in most cases. I was concerned about that initially, but a quick phone call to the 401k company assured me it would be less than a few dollars and they were correct. In my case it was $1.80 and they tell you that prior to you pressing the button to rebalance.

If the situation above applies to you, great! Hopefully you learned a thing or two and can feel a bit more confident if you decide to go through a similar process. My situation was a little more difficult this year.

This year was a bit more time consuming for me. My 401k company changed several of the funds that I was invested in over the course of the year and they moved my money into 'similar' new funds of their choice. You really need to keep a close eye on that. In many, but not all, cases the new funds will have similar holdings as far as the individual stocks and bonds which they own, however they can have quite different rates of return and fees associated with them.

In case you are not aware, even if you do not pay money out of your pocket per se, to purchase the various mutual funds available in a 401k, you are paying fees in almost all cases, sometimes very large ones that dig into your rates of returns over time. Even no-load mutual funds have management fees and other expenses that usually range from the 1% range on the low end to upwards of 2-3% or more. Just be aware of that and in a future post we'll discuss how to weed through various mutual funds to make a more informed decision.

In addition to going through all of the funds my 401k now offered, I also wanted to change my asset allocation. My opinion of the market changed and I wanted to remove my exposure to bond funds. My exposure in that area was already very small, so it wasn't too big a deal.

I had money in 8 or 9 different funds prior to the rebalancing/reallocation. I wanted to narrow that down to 4 funds only. If I had my choice, I would currently want to put a good portion into a financial stock based mutual fund, because I have been positive on that sector the past few months and continue to think that sector will do well in 2011. Unfortunately, as with most company 401k's, your options are pretty limited and I do not have that choice available in this particular account.

I ended up going with 4 funds that were categorized as the following: Small Cap Growth, Mid-Cap Growth, Large-Cap Growth and Emerging Markets. Once I had narrowed it down to the 4 mutual funds that I wanted, the rebalance was painless. I put 25% into each of the 4 funds and hit enter, the next day my account was rebalanced. I then went back and picked option 1 above to setup all of my future contributions to go into those same 4 funds in the same 25% for each and I was done!

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Don't take my particular asset allocation or comments as a recommendation by any means, it is what I decided based on my age, risk tolerance and outlook for the market over the next year. I am not a financial advisor and I do not play one on TV, but I do like to talk finance and hopefully you'll find some useful nuggets above to at least help to make you a more informed investor if nothing else.

Here are some links for more info:

401k Rebalance
Choosing an Asset Allocation

I'd love to hear any comments, suggestions or any tips/processes you go through with your 401k to compare notes and learn a thing or two myself. I'm always looking to gain from the wisdom of others! Feel free to ask any questions as well and I'll be glad to try and find the answer or clarify anything that is not clear. Thanks!


Jen said...

yeah, you definitely lost me on that one. You're going to have to explain it like you would to an elementary age student. The only thing I do understand is the asset allocation, not the beg. part.

Chris said...

I had a feeling I may have gone too far on that one after watching Marla start to read it and not finish. Thanks for the heads up. I guess it's true, pimpin' and bloggin' ain't easy. :-) I have a better idea of how far to take it after walking you through your 401k rebalance.

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