I know you are busy. I also know that as 2021 comes to an end, you have asked yourself this same question multiple time this year.
Be aware that a company 401(k) account is a very dangerous animal to evaluate correctly. For that reason, here are a few things to consider when you take the time to figure out exactly “how you are doing” in your 401(k).
Remember to take into consideration all your person contributions to your company 401(k) account this year. You need to do the same thing with the total amount of your company-matching contributions in 2021.
If the stock market did not go up at all, and interest rates stayed the same, your company 401(k) account value would go up in value based on your personal and company contributions alone.
Did your 401(k) account “grow” as much as the popular stock market averages? Or was it “pushed” by your 2021 contributions?
These contributions are not investment returns. Sure, your company 401(k) balance is much higher now that it was on year-end 2020. But deduct the total value of your 2021 contributions.
Second, don’t confuse the stock and bond makeup of the company 401(k) mutual funds you own to the daily noise of the popular stock market averages. These include the Dow Jones Industrial Average, the S&P 500, and the NASDAQ.
The company 401(k) mutual funds you own are nothing like the makeup of the popular stock market averages. Facebook, Apple, Microsoft, Amazon, Netflix, and Google make up over 23% of the S&P 500 market capitalization. The rest of the 494 stocks make up the other 77% of the index.
To say that the mutual fund you own in your company 401(k) account are “up to their eyeballs” in these handful of stocks would be an investment management understatement. Realize the fact.
You own about six or seven stocks in your company 401(k) mutual funds that are responsible for your 2021 growth. And you will live or die with the investment performance of those stocks soon.
Adjust your stock market risk levels accordingly.
Third, now is a great time to make sure that you are using your generous company 401(k) contributions the right way. Think about your current level of good fortune with the stock market near all-time highs and interest rates near all-time lows.
The reason you participate in a company 401(k) in the first place is to make sure you can reach the long-term, real-life goal of retirement. Don’t let that long-term objective conflict with the short-term realities of the economy, stock market, and interest rates.
If you are in the early stages of your working career, maybe you have the luxury of letting the current economic and stock market cycle run its course. You have many more years left of company 401(k) contributions.
But if you are in the latter stages of your working career, you don’t have much luxury left. Very soon, you may be looking at your highest level of company 401(k) account principal.
By any historical measurement, the U.S. stock markets are several years overdue for a meaningful drop. With the Federal Reserve keeping interest rates near zero, bond mutual fund returns are at serious risk over the next few years.
So far in 2021, your company 401(k) investment returns have likely kept you on the right path toward building wealth for retirement. Maybe a better question to ask yourself now is this one.
“What 401(k) investment management moves am I making now to preserve the last several years of stock and bond market gains?
Ric Lager
Lager & Company, Inc.
