401k Options –Yes, You Are Probably Overwhelmed

Who doesn’t want to be financially secure in retirement! However, here’s the brutal reality: More than 80 percent of you aren’t confident you will have enough money when you stop working. That’s what the Employee Benefit Research Institute found.

Yet, according to a TIAA-CREF study, many of you who worry might be spending more time investigating what restaurant to go to than choosing your retirement options. Recently, your investment options for your 401k have increased. Before the changes in the Pension Protection Act of 2006, your investment choices were limited. Currently through what is called the “brokerage window,” more kinds of investments are open to you. That should be good news to you. But, instead, the increased flexibility might be downright scary.

Fear = Enemy of Building Wealth, Protecting Principal

You are not alone. Because the stakes are high, so many with 401(k) plans can become paralyzed with fear. You become like deer caught in the headlights.

But the worst thing you can do is: Do nothing. One of the riskiest approaches is to go along with how your options were set up when you opened the account. If the market is having fluctuations, you might not even open your statements. This behavior is caused by the frustration of not really knowing what to do or not do!

At the very least, points out the Financial Industry Regulatory Authority (FINRA), you should be continuing to rebalance your portfolio. The asset allocation you started out with at age 25 may or may not fit at age 40.  But many investors do not understand rebalancing. Even fewer have the discipline to set aside their emotions and stick to the plan, if they have a plan at all.

5 Common Mistakes Investors Make

Those of you who do bite the bullet and decide to choose your options may fall into 4 common traps.

  1. Chasing performance

Essentially what “chasing performance” means is selecting too many stocks which, at the time, have experienced high returns.  That can impede building wealth, reports the Society for Human Resource Management (SHRM).

  1. Over concentration

If you purchased too much stock in one sector, such as technology, you might be taking on unnecessary risk. This over-concentration risk is often seen in company retirement plans in the form of company stock.

  1. Being seduced by get-rich schemes

The film “The Wolf of Wall Street” depicted how easily human beings looking for a quick way to get rich can be duped. But, before that was the real-life lesson from Bernie Madoff’s Ponzi scheme. The sales pitch in both took the form of superior returns with low risk.  Risk is everywhere!

  1. Buying into the media

Online, on television, in print, and on radio there are specialized media outlets which discuss investing. Many feature supposed experts. However, those experts are selected to present because they may be provocative, persuasive and entertaining.  The media know those kinds of investment gurus will get attention. The media game is about maximizing the number of eyeballs and ears. The radio is particularly dangerous because for a few dollars anyone (including you!) can be presented as and appear as a real “expert.”

The media “experts” are not clairvoyant about the future. Also, a fundamental of investing is that past performance does not guarantee future returns. The CXO Advisory Group researched the accuracy of these investment experts’ predictions between 2005 and 2012. Overall, their picks were worse than would have occurred if you were flipping a coin to select stocks.

Also, those gurus are making generic recommendations. They do not know you. They do not factor in your age, your tolerance for risk or your planned retirement date.

  1. Misplacing trust

Years of working for a company might have inspired trust in that employer. That can be the foundation for a pleasant, productive working relationship. However, it’s the wrong emotion for making investment decisions.

Often company stock is provided to employees at reduced prices. Many in the company include that stock in their 401k. As mentioned earlier, a problem might arise if there is too much of this asset in the portfolio.

That’s because the financial risk is double. You depend on the company for your salary. You also depend on its stock for retirement income. You could be lucky and everything turns up roses. Of you could be unlucky. The company enters hard times. You lose your job and the value of company stock never recovers.

Taking the Time to Sort It All Out

FINRA hammers: “Managing your 401(k) takes work.” There are no shortcuts. You have to invest the time, concentration, and confidence to select options for your portfolio. The guiding fundamental in retirement planning is the focus on the long term.

As your age, your circumstances, the market and financial vehicles continue to change, you and your financial advisor will revisit those choices.

Company Retirement Plan Self Directed Brokerage Account

Whether you have a dollar or a million dollars in your retirement account, you’ll be able to explore the value of a real advisor. Simply visit the Self Directed Brokerage Account advisor contact site.

To be continued …

Watch here for our next post on discussing the many types of risk, ranging from currency to liquidity.

To learn more about Rick Willoughby, view his Paladin Registry research report.

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