Torie, like millions of other people, knows she needs to make money investing in 401k plans in 2015-2106 and beyond (she has a couple) in order to retire comfortably. What she also needs to know: 401k asset allocation, how to choose and manage her best 401k investment options, and the outlook for 2015 and 2016. Let’s see how you and her can make money in 2015, 2016 and beyond (or at least make the most of it) if you’re in the same boat.
While it has been easy to make money investing in 401k plans in recent years, it is not always the case. The first thing you and Torie need to do is set a goal for yourself (Torie’s goal is to retire around 2040). Second, be honest about your personal risk tolerance. Torie is “moderate” – but certainly not aggressive! Third, take a look at your current 401k asset allocation to determine if the investment options you hold match your risk tolerance. Are you in the best 401k investment options and in the right proportion?
Finally, you need to understand that 2015 and 2016 could be a tough time to make money by investing in 401k plans. The reason: poor 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 would like to make money but wants to avoid big losses), what can you do now to stay on track, make money, and avoid losing money? heavy losses if 2015 and beyond goes badly? We will use Torie as an example.
A few years ago, Torie decided she wanted to make money by investing in 401k plans, but wanted to keep it simple. She had changed jobs once and was planning another change in the future. Along with the two employers, she had her plan in place with 50% for a safe stable account and 50% for a Target 2040 fund. She was busy and practically ignored her statements over the years. After all, her goal was to make money by investing, and she could see at a glance that her portfolio balance was increasing. Now she needs to take a closer look at her 401k asset allocation to see what percentage is invested in each of her two 401k investment options.
In early 2015, a closer look revealed that both plans had a much riskier portfolio asset allocation than they had anticipated. The target fund represented almost 80% of its assets in its first plan and 75% in its current plan. What happened and what steps should she take to get back on track and keep it simple? What happened was his 2040 target funds turned out to be one of the best 401k investment options in his plans and they far outperformed his stable and safe accounts.
The other best 401k investment options were equity funds, but Torie considered them too risky. With the target fund, most of its money was actually invested in equity funds, the rest in bond funds; and both types of funds had performed well in 2015. His plan was to continue making money by investing in his 401k by holding his target fund and a safe investment. In this way, she was invested in stocks and bonds to give her portfolio some balance.
What she now needs to do is REBALANCE her 401k asset allocation so that 50% of her portfolio assets are again invested equally in each of her two chosen investment options. This greatly reduces his risk and matches his comfort level. Now can you or Torie make money investing in 401k plans in 2015-2016 with 401k asset allocation allocated half to safe investment options (money market funds or stable accounts) and half to equity funds or target funds? Yes, unless the stock market goes down and bonds are hit as well.
How do you make money investing in 401k plans in 2015 and beyond if stocks and bonds are hit hard? You would need to move the vast majority of your money to the available shelters. In other words, your best 401k investment options would be the stable account that pays interest (if there is one) or the money market fund (which your plan should have, but currently pays very little dividends. ). For the average investor who needs long-term growth (like you and Torie), this is an extreme measure.
Remember that your real goal is to make money by investing in 401k plans, so that you can have a secure retirement. Moderate risk is part of the program. I use Torie as an example because her situation is typical. His 401k asset allocation matches his tolerance for risk (and probably yours) and should produce long-term growth. She chose the best 401k investment options to reach her retirement goal in 2040 (if you plan to retire in 2030, go for the target fund 2030, and so on). Half of its money is safe and the other half has growth potential.
Plus, she has a plan to manage her 401k investment options. If the markets get ugly in 2015 and 2016, she won’t make money by investing in 401k plans, she will lose money. But she has money in her target fund every pay period to buy stocks at cheaper and cheaper prices, and money coming in and accumulating in her safe investment. Anytime her 401k asset allocation shows 60% or more is in the secure account, she will REBALANCE to 50%, which means taking money from the secure account and adding it to the target fund. Then when the markets turn around, she is in a good position to make money by investing in 401k plans for a secure future.