Torie, like millions of others, knows that she needs to earn money by investing in 401k plans in 2015-2106 and beyond (she has a couple) to retire comfortably. What she also needs 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 she and you can make money in 2015, 2016, and beyond (or at least make the most of it) if you are in the same boat.
While it’s been easy to make money investing in 401k plans in recent years, that’s not always the case. The first thing you and Torie need to do is set a goal (Torie’s is to retire around the year 2040). Second, be honest about your personal risk tolerance. Torie’s is “moderate” but definitely not pushy! Third, review your current 401k asset allocation to determine if the investment options you have are in line with your risk tolerance. Are you in the best 401k investment options and in the right ratio?
Finally, you need to understand that 2015 and 2016 could be tough times to make money by investing in 401k plans. The reason: Weak economic forecasts make the best 401k investment options of yesteryear vulnerable to loss. Stocks are expensive and so are bonds. Assuming your risk profile is similar to Torie’s (she’d like to make money but wants to avoid big losses), what can she do now to stay on track, make money, and avoid big losses if 2015 and beyond turn sharp? ugly? We will use Torie as our example.
Several years ago, Torie decided that she wanted to make money by investing in 401k plans, but she wanted to keep things simple. He had changed jobs once and was planning another change in the future. With both employers, she had set up her plan with 50% going into a safe and stable account and 50% going into a Target 2040 fund. She was busy and pretty much ignored her statements over the years. After all, her goal was to earn money by investing, and at a glance she could see that her portfolio balance was growing. Now, she needs to take a closer look at her 401k asset allocation to see what percentage she is invested in each of her two 401k investment options.
In early 2015, a closer look revealed that both plans had much riskier portfolio asset allocation than she had expected. The target fund represented almost 80% of her assets in her first plan and 75% in her current plan. What happened and what action should you take to get back on track and keep things simple? What happened was that her 2040 target funds turned out to be one of the best 401k investment options in her plans and far exceeded her safe and stable accounts.
The other best 401k investment options had been stock funds, but Torie considered them too risky. With the target fund, most of her money was invested in stock funds, and the rest in bond funds; And both types of funds had performed well going into 2015. Her plan was to continue making money by investing in her 401k while keeping her fund target and a safe investment. So she invested in stocks and also some bonds to give her portfolio some balance.
What you now need to do is REBALANCE your 401k asset allocation so that 50% of your portfolio assets are again invested equally in each of your two chosen investment options. That reduces your risk considerably and adjusts to your comfort level. Now, can you or Torie make money investing in 401k plans in 2015-2016 with a 401k asset allocation that is half allocated to safe investment options (money market funds or stablecoins) and half to investment funds? target stocks or funds? Yes, unless the stock market crashes and jumps is affected as well.
How can you make money investing in 401k plans in 2015 and beyond if both stocks and bonds are hit hard? You would have to move the vast majority of your money to available safe havens. In other words, your best 401k investment choices would be the interest-paying stablecoin (if one is available) or the money market fund (which should have your plan, but currently pays very little dividends). For the average investor who needs long-term growth (like you and Torie), this is an extreme move.
Remember, your real goal is to earn money by 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. Her asset allocation her 401k is tailored to her risk tolerance (and probably yours) and should deliver long-term growth. She has chosen the best 401k investment options to reach her 2040 retirement goal (if she plans to retire in 2030, go with the 2030 goal fund, and so on). Half of her money is secure and the other half has growth potential.
Plus, you have a plan to manage your 401k investment options. If the markets turn ugly in 2015 and 2016 she won’t make money investing in 401k plans, she will lose money. But she has money coming into her target fund each pay period buying up stocks at ever cheaper prices, and money coming in and accumulating in her safe investment. Any time your 401k asset allocation shows 60% or more is in the safe account, you will REBALANCE to 50%, which means taking money from the safe account and adding it to the target fund. Then, when the markets turn, you’ll be well positioned to earn money by investing in 401k plans for a secure future.