Should I pick the most conservative funds for my 401k?
My thinking is that, unlike a general retirement account, I won’t be staying at my job for 40 years and will need to convert my 401k to other funds once I leave, which could happen in the relatively short horizon, next 5-10 years perhaps. At which point, I will need to rollover my funds to new funds through a rollover check.
If I had all stocks, say, wouldn’t I be subjecting my 401k to serious risk? I am comfortable with high-stock allocation for my general investment account because I know I should be focusing on the accumulating shares and not what the price is, as that should only be a concern when I retire and looking to sell.
If the market drops in 5 years, it’s only a good thing for my general investment account since I’m young and can buy more shares cheaply and wait out the recession.
For my 401k though, if the market drops when I request that rollover check in 5 years, it’s not going to be in number of shares, but actual dollars. Wouldn’t I be better off if I had all bonds for my 401k then?
I know I’m missing something here, probably with how I think about rollovers. I’d appreciate any clarification.
Stocks are an inherently risky investment. Just look at 2008 in case you have doubts about that.
That being said, stocks are doing very well right now. It’s more about personal preference. I actually prefer bonds, but if interests rates go up, you can take a hit on that investment.
For a 401(k), especially rollovers, you need something fairly liquid.
No - it doesn’t matter whether it is in shares or dollars - as even if it is in dollars (which it will be) - those dollars can be exchanged for shares at the then current (in your example lower) price.
Have you looked at the “lifestyle” funds?
They are usually labeled “Vanguard 2045” or something with the year being the supposed year you will retire. They start off with high stock allocations and then gradually shift to more bonds.
Based on your question - I thought they might interest you.
It is often recommended that any money you intend to use/withdraw within 5 years be invested in safe options like bonds, so your thinking is not entirely off track.
That said, I think the market is perhaps the only case where “you can’t win if you don’t place” is good advice. If you have enough in your brokerage account to focus it on higher-yield/higher-risk investments, then it isn’t a loss to make your 401k that safer part of your total investment picture. The average person has virtually all of their investments in a 401k, and I’d tell them to just take the risk.
The rule of thumb is to take the risks when you’re younger, and migrate to conservative investments as you age, say around 50. I did this when I joined the company at 27 and yeah, there were some days where I got queasy looking at the numbers but over the course of the entire run I was at around 20% return. Once I hit 40, I went with a mix of 20% in Bonds and 40% in an S&P 500 Index Fund, with the plan to migrate the remaining 40% of riskier stuff over at around 5% a year to Bonds, then start moving the 40% in the index fund over at 50 so I’d be rock solid stable by the time I was 59 and could consider retiring without any penalties or pension impact.
Yes, the value of your investment would drop if this happened. But if you rolled it over to a similar investment you’d also buy low when selling low - so the net impact would be small. This is different if you are withdrawing the money relatively quickly, which is why it is good to lock in investment gains and move to more stable investments when approaching retirement.
The thing you do not want to do is to move from a risky and now low priced investment to a safer but low growth investment when you roll over. People who did that at the bottom of the market got killed. Those of us who kept the faith are doing pretty good now.
My investments from rolled over 401Ks, which I’m not putting much money into (as opposed to the 401 K with my current employer which I am) are at all time highs.
And of course you need to diversify, even if you can accept more risk.
Actually the recent stuff I’ve seen has been negative on these. (I had them and dumped them.) They have higher fees than normal funds, and, if you have other investments, they may take the place of a real diversified strategy that fits your needs better. You should look this up. I know, they are superficially very appealing.
We are moving to more income producing funds which are supposed to be stable, but which are doing much better in terms of price than we were led to believe they were. On the other hand we have European funds which have been sucking lately. ( I haven’t looked for a while.)
If you’re reinvesting your rollover check in another retirement vehicle (like an IRA), it shouldn’t matter that much. Put it in stock funds, and when it comes time to roll over roll it into other, similar stock funds. It will be like you had stock funds the entire time.
If you intend to take your money out of your retirement account when you leave your job and use it for something more immediate than retirement (1) that’s a bad idea, but (2) then you will want more conservative investments so you’re not hit by a market slump when that happens.
You are right - I just checked and even with vanguard - the fees appear higher, but still pretty low at ~ 0.17% vs ~ 0.10 % or less otherwise (I’m doing some quick math here of the underlying funds).
I like to do my own asset allocation - so I haven’t used them much, but thought they might be useful as a set it/forget it type thing for some, and it may be for some if they don’t like making decisions - mind extra fees. But I think in general you are right.
Ah I think I got it. When I roll over my 401k, the new funds I buy will be around the same price as the fund I sell, so it’s not really a 5-year horizon. Thanks everybody.
This thread also made reconsider my target funds. When I looked up what’s in them, they’re all funds I can just buy separately at lower expense ratios.
I’m curious as to what you consider “conservative.” Usually by that people mean fixed income investments like bonds, but right now, that could be a very risky bet since it’s likely that interest rates will rise in the coming years and bond prices move inversely with interest rates. So it’s “conservative” in the sense that you can count on a relatively guaranteed payout, but the risk of at least a paper capital loss is still very real.
The market right now cannot be sustained. It’s just brokers churning equities. I fully expect the fall to begin when sequestration hits on March 1st, or shortly thereafter.
We’ll see. For every bear, there’s a bull. I’ve long since given up on trying to predict what the markets are going to do (and I personally think that’s a fool’s errand) and listening to analysts, and just religiously put in money every two weeks and adjust my stocks:bonds ratio as I get older.
One thing you need to do is to find out the policies of your plan. You can keep your funds in some of them after you stop being an employee, so you really don’t need to roll them over. This can be a pain because you have to keep track of multiple plans, but at least you can plan when to roll them over (you don’t need to roll them over immediately). You may also like the choices of funds in some plans, or, more importantly, they may have a better fee structure. Some plans require you to close out your account when you are no longer an employee.
Back in the late eighties I left a job and did not get around to rolling it over until three months afterword. It turned out that the plan froze my account on the day I left and I lost $3,000.00 (the market was recovering rapidly from the '87 crash). It turned out that policy was clearly stated in the plan.
What people keep overlooking and I don’t know if through ignorance or willful oversight, but the federal reserve is plowing 85B USD back into the bond market every month. That means that they are gobbling up highgrade govt bonds and MBS’s and shoving the yields on these into the basement.
IOW, if people want yield, they have no choice but to move into riskier assets like stocks. Beyond that, every bit of news that hints at global uncertainty or instability bolsters our markets. So in my humble opinion, the deck is decidedly stacked in favor of US equities almost regardless of what happens.
The effects of the sequestration are still an unknown as are the potential effects of another govt shutdown due another debt ceiling debacle. Those could either hurt our credit rating and/or have deleterious economic side effects. However, ceteris paribus, current conditions seem to favor risk assets.
There isn’t much to think about. Rollovers are just transferring your 401k from one broker to another. Like if you change companies and your new employer uses Vanguard instead of Fidelity. As long as you rollover into a qualified account you don’t have to worry about taxes or fees. You’ll have to pick new funds, but most investment firms should have something equivalent.
That’s strange, unless you lost the $3000 in the value of the funds. Typically you receive a forced distribution where they send you a check once the account closes.
Yeah, it was very strange. I kept getting monthly statements, but when I actually rolled it over, they stated that I was getting what the account was worth on the day I left, which was about 3k less than what the last monthly statement said. I followed it up and the plan was clear about it. My only real gripe was that they kept sending me statements showing the growth in my accounts. Had they sent me a statement showing the freeze, I would have rolled it over sooner. I suspect I could have clawed some of that money back, but I had a new job & I was busy. I have often wondered what would have happened had I quit just before the crash. Would they have eaten the difference?
I have never encountered that provision anywhere else. Most places are perfectly willing to let you keep your money in the account as long as you like.