Friday, November 17, 2006

Get Your 401(k) Working Right! Beat Longevity Risk.

Longevity risk is the risk of outliving your money. It shows up in financial projections for an individual frequently. Many financial planners see it as the greatest financial risk.

This article is really very good. It catches many of the common issues with 401(k)s, from plan shortcomings, to the most common things you as the employee can fix. If you are feeling too busy to find out a bit about doing 401(K)s the right way, this article could be your start.

Make your own choices, as each person's situation is different, but some good generalities should apply:

I would emphasize: if you are young, consider having the great bulk of
the money in equities. Yes, they do go up and down. That is nothing to get depressed over, because as a long-term investor, you do not have live in terror of normal market volatility, or even cyclical market declines. Markets go up when they're done going down. They're like that. No other asset class will get the job done for you as well as equities. Do not get trapped into just choosing the moneymarket fund or the stable value fund. The danger of being underfunded when you are old is greater than that from market volatility. Educate yourself more. I will be building a blogroll of the sites and people I respect the most. For a beginning, if you want something right now, search the internet for Scott Burns' columns archive. He is phenomenal. You must prudently seek appreciation by balancing the risks with equities and other asset classes -- learn about asset allocation. It is what gives you a functional portfolio, rather than just a bunch of stocks or mutual funds.

Do not ignore foreign stocks or small-cap stocks. Each has powerful reasons for inclusion. A bit of a value orientation to your equities choices is a plus.

Do a little mutual fund research. Find the best alternatives your 401(k) plan offers. Bug you plan administrator for prospectuses of the fund choices you have, or rummage around the plan website for them. Dig down for the fees disclosure. Get really annoyed if you see a bunch of 12b-1 fees in your plan choices, or if Morningstar.com describes your plan's fund choices with terms like "asset-bloated", "perennially underperforming" or "closet index funds".

The article referred to above is quite correct as to the age/target/destination funds having a problem with being overly conservative. more and more research is coming along now from objective academic finance big guns indicating that you should not reduce the percentage of your assets in equities as fast or as much as has previously been commonly recommended. Your risk of outliving your money is the greatest risk you face. Balance out the risks in a responsible fashion for you.

Don't try to time the market, by doing things like going to cash after the market has gone down some. You'll miss the recovery! Financial markets go up over the long run, though sometime the long run can be a long time coming. And don't be changing you fund choices around all the time. You'll just cost yourself money almost every time you do that.

You might even consider joining the school of thought I subscribe to: market volatility can be your friend, not the enemy, if you get your asset allocation really well thought out, and applied, and stick tenaciously to it.

The Unknown Advisor

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