When choosing the 401(k) mutual funds you own. Nobody sets out to make a poor investment management decision.
Too often, that is exactly what happens.
It comes as no surprise that individual 401(k) investors are their worst enemies. There are many reasons. Let me outline a couple of them.
First, many individual 401(k) investors have no idea how much stock market risk they are taking on. The same thing with the recent rise in interest rates.
Sure, they have heard about “diversification.” Even read an article or two about it. But in no sense of the investment management world are they diversified in their 401(k) account.
Even if you own four to six 401(k) mutual funds. You own the same stocks in each of those mutual funds. Upwards of 75 to 80 percent of the same stocks in the same mutual funds.
The majority of 401(k) mutual funds offer a narrow stock market focus. In a small handful of stocks. Think Apple, Amazon, Meta, Microsoft, Alphabet (Google), Tesla and Nvidia.
You don’t know it. But your 401(k) account is “up to your eyeballs” in those technology stocks. Like it or not. No diversification whatsoever.
The second problem with individual 401(k) investors in the “buy-and-hope” mode. The 401(k) mutual funds they own are expensive. With high annual fees and expenses.
Don’t get me wrong. Mutual fund costs can be worth the money. But only if you receive the annual investment performance for which you are paying.
How do you react outside of your 401(k)? When the product or service you buy does not give you that for which you paid.
Most 401(k) mutual funds provide 100% of stock and bond market investment risk. Risk to the 401(k) principal invested. But don’t provide a commensurate percentage of annual investment return.
Most 401(k) mutual funds don’t provide individual 401(k) investors with what they pay for. Each year.
The stock markets are falling. And interest rates might continue to rise. What is the average 401(k) investor to do to manage stock and bond market risk?
Not a “set-it-and-forget-it” 401(k) investment management strategy. Right now, the preservation of your 401(k) principal is at stake.
Keep a close eye on your 401(k) diversification (or lack of it) and your annual fees and expenses.
It’s fine to be 100% invested in stocks in a 401(k). That is exactly the place where the best long-term investment performance is available. And bond mutual funds are most times a good 401(k) account balance.
But the stock market does not always go up. And interest rates don’t always go down.
You are most likely over-exposed to principal risk with each event now. And your over-investment leaves your 401(k) account balanced exposed.
The last several years 401(k) investment gains are now at risk. Along with your personal 401(k) contributions. And the company-matching 401(k) contributions you have earned.
Your 100% participation in the current stock market decline is optional. The same goes with any future Federal Reserve policy to raise interest rates.
Ric Lager
Lager & Company, Inc.
I have spent the last several years trying to figure out the best way to share my 401(k) advice content. I have tried Twitter, Facebook, company web site, and LinkedIn Groups. I now realize nothing beats a well-crafted newsletter delivered to your inbox once a week.
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P.S. If you like the content, hit reply, and start a conversation. I can help you figure out your current 401(k) mutual fund stock market risk level.
