Know what really drives me nuts? The whole "fire and forget" mentality around retirement investing.
I can't tell you how many 401(k) participants I've talked to over the years who given me some variation on this phrase: "I set my investment allocations when I started working here, but I haven't really paid any attention to it since."
Folks, that's not good.
Now, the news in those cases isn't always bad. If your initial choices were, say, three low-fee stock index funds, and you're still 10 years or more from retirement, you might be fine. There's definitely room for improvement, but you're not too far off course.
But too often, people choose the hot aggressive equity fund of the moment. One favorite I saw in lots of plans in the late 1990s was Fidelity Aggressive Growth Fund (now Fidelity Growth Strategies), which was shooting out the lights on the strength of Qwest, Amgen, and a lot of market darlings of the moment ... a whole lot of which don't even exist anymore.
It doesn't take much to turn a high-flying growth fund into a long-term subpar performer. One market crash and several manager changes later, that's exactly what the Fidelity fund is now -- and has been for years.
But I'll bet there are an awful lot of 401(k) participants who still have all or most of their money in that fund, and in other flash-in-the-pan funds like it, because they haven't revisited their investment decisions in ages.
With the topsy-turvy market conditions we have nowadays, it's particularly important to be smart about this stuff. Fortunately, it's easy to get smarter, and it doesn't take a lot of work to get back on track.
Keep it simple, but not too simple
Being smart about managing your retirement portfolio doesn't mean turning yourself into a day trader. You don't need an at-home trading station, a Barron's subscription, or a big stack of Jim Cramer books. If you have an Internet connection and an hour or two to spend maybe twice a year, you're all set. Just follow these steps:
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Find your target asset allocation. Asset allocation isn't just stocks versus bonds; it's also about using different types of stocks to maximize your reward versus your risk over the long term. Johnson & Johnson (NYSE: JNJ) is a strong stock with a good dividend, but it doesn't have the growth potential that many people want to see in a stock. Intuitive Surgical (Nasdaq: ISRG), on the other hand, stands to see massive future growth in its robotic surgical equipment. Similarly, ExxonMobil (NYSE: XOM) may be a good value right now, given its exposure to relatively high oil prices along with the fact that it hasn't risen during the rally. But even though Weight Watchers International (NYSE: WTW) has seen its stock behave similarly to Exxon's, its smaller status and niche industry means that its shares won't act the same way. Asset allocation is the art of using those behavior differences to your advantage.
Most retirement-plan providers have online tools to help you come up with an asset allocation plan, although for liability reasons, many of those plans tend to be overly conservative or otherwise flawed.
If you'd like a better starting point, the best retirement asset allocations I've seen lately are in the new issue of the Fool's Rule Your Retirement newsletter -- it's a paid service, but you can get no-obligation access with a 30-day free trial. -
Don't forget your IRAs. Your 401(k) is only part of your overall retirement savings portfolio; IRAs almost always have much greater investment flexibility than workplace savings plans do. If your 401(k) is short on good investment options, you can and should use the IRAs to get into the asset classes your plan doesn't cover well.
You may not -- probably won't, actually -- nail your desired asset allocation exactly. But getting as close as you can is still a big improvement. -
Watch, but not too closely. Check in every six months or so to make sure things are on track. Don't be afraid to make changes if they're needed, but keep a long-term mentality, and don't let the bumps in the road freak you out. When your portfolio creeps away from your target allocation -- and it will -- don't sweat it. You should rebalance occasionally, but there's no need to do it more than once a year, if that. If one sector is growing more quickly than the others, being overweighted in it is probably a good thing, no?
- Stay informed. Make a point of paying attention when your benefits department announces changes to your plan. Contribute as much as you can, and make funding your IRAs a priority. And don't be afraid to seek expert help when you need it.
Even if you don't want to deal with the time and expense of hiring a professional investment advisor, expert help from time to time can be invaluable. The Fool's Rule Your Retirement newsletter service is a great middle ground. And with our free 30-day trial, you can be our guest for a full month, with no obligation.
This article, written by John Rosevear, was originally published on June 9, 2008. It has been updated by Dan Caplinger, who doesn't own any of the stocks mentioned above. Weight Watchers International is a Motley Fool Inside Value choice. Intuitive Surgical is a Motley Fool Rule Breakers selection. Motley Fool Options has recommended a buy calls position on Johnson & Johnson, which is a Motley Fool Income Investor selection. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy never forgets, never regrets, and never, ever smokes cigarettes.
