Are You Making This Common 401k Mistake?
Conventional wisdom says we're supposed to adopt a conservative investment posture as we age.
It seems not everyone got the memo.
A new study from Fidelity Investments provides some intriguing data related to one the more common 401k errors around. The study shows that one in ten people aged 55 to 59 hold their entire 401k in stocks. A slightly higher percentage of people aged 50-54 are doing the same.
Additionally, 27-percent of investors aged 55-59 had a stock allocation at least ten percent higher than recommended.
This was no small sample size, either. Fidelity drew their data from plans covering nearly 14 million Americans.
Add it up and one conclusion is obvious: Americans aren't paying enough attention to their retirements accounts. In a good market, some of us can get away with this type of negligence. Yet if conditions start to weaken, many will soon be paying the price.
The need for 401k vigilance
There has never been an easier time to ignore a too-heavy stock allocation. We're in the midst of an historic bull market. It seems like the good times will roll on forever.
Yet that's the power of recency bias at work. It seems hard to believe now, but the S&P 500 lost close to 50% from late 2007 to early 2009. The last half decade has been a wonderful antidote to that grim period. According to Fidelity, the average 401k balance has increased by nearly half since 2010.
That kind of return is enough to make a failure to diversify understandable -- if not excusable.
Yet what should you do if you're one of the millions who hasn't paid enough attention to your 401k?
Plan for Action
If you want a safe and secure retirement, it's critical to ensure your risk is calibrated correctly. Here are some factors to consider:
- Assess your time horizon. Older investors have less margin for error, and should typically be less aggressive.
- Determine your net worth and your available risk capital. Investors with more wealth can afford to be more aggressive.
- Realistically gauge your level of expertise. Experienced investors can typically afford to take greater risks.
Along with frequently assessing risk tolerance, you should also:
- Rebalance frequently. Make sure you're comfortable with your mix of stocks and bonds. It sounds simple enough, but only one in five 401k holders did so in 2014, according to Fidelity. That's a sobering statistic.
- Consider target date funds. Most 401k plans have at least one of these options. Target date funds simplify the allocation process by handling rebalancing for you. Be aware, however, that not everyone is a fan. Some advisors believe target date funds are a "mallet solution" to a problem that needs a scalpel. They, by definition, limit flexibility.
- Review your rebalancing options. Most plan providers make it very easy to rebalance online. Once you've settled on a plan, it usually takes only a few clicks to execute.
- Fight apathy. Inertia is the number one reason Americans don't pay enough attention to their 401ks.
The 401k is a critical piece of most Americans' retirement strategy. By following the steps above, you can ensure your plan stays in harmony with your changing needs.