This Thanksgiving will be memorable as a holiday celebrated during very uncertain economic and political times, with more than one war in the world. But no matter how you choose to celebrate, you will have at least a few minutes alone over the long weekend to devote to your personal finances. Here is an idea to profit in your 401(k) account: Review your current company 401(k) retirement plan holdings, open your September 30, 2023, quarterly paper statement or better yet, log in to your company 401(k) retirement plan account website.
Find the column in your quarterly statement that lists past investment returns. You will notice a huge gap in past investment performance on one or more of your current 401(k) mutual funds. Interest rates are the highest in a generation of 401(k) investors, with no decline in interest rates in sight. Your bond mutual funds have fallen in value and you are taking all the risk of investing in the stock markets, but you are not getting your fair share of 401(k) investment returns.
High risk for little or no investment returns: That gap makes no sense. Here is how to close that gap.
It's likely that you own 401(k) mutual funds that are losing principal at a faster rate than the stock market averages. Higher interest rates have destroyed the principal value of your bond mutual funds, including the popular target date mutual funds. Lower stock prices have caused your stock mutual funds to “hang on” to any level of 2023 investment gains.
A review of your 401(k) mutual funds now is well worth your time this holiday, and is the most important investment management decision you can make going into 2024. Sell the worst 401(k) mutual funds you own now as soon as possible and place the proceeds in the safety of the money market.
That's right, shoot the turkey mutual funds you currently own. Call the company 401(k) retirement plan provider's 800 number or sell the mutual funds online. There is no need to own four, six, or more company 401(k) retirement plan mutual funds. Owning more mutual funds does not reduce your stock and bond market investment risk. All you do with that is to lower your investment returns and increase your annual 401(k) expenses.
There is only a small handful of great 401(k) mutual funds, and regardless of the default 401(k) mutual fund menu, I am willing to bet the same set of circumstances exists on your default 401(k) mutual fund menu. Selling the worst performing 401(k) mutual fund now will give you a money market balance, giving you the money you'll need to reinvest when the current stock market decline arrives.
Do you enjoy the sale prices at your favorite store? Great. What do you have to have to take advantage of those sale prices? You must have the money to spend when the things you want to buy go on sale. Even better in your 401(k), you want money to spend when mutual fund prices are low.
Some good can come from the current generational high in interest rates and the lack of stock market direction. That is, you can upgrade the quality of the 401(k) mutual funds you choose to own going forward.
The best way to “get back to even” in your 401(k) starts with the sale of your bad 401(k) mutual funds, put the proceeds into the money market account, and dollar cost average into the best 401(k) mutual funds available to you.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Ric Lager
Ric Lager is a Registered Investment Advisor. He provides independent, third-party fiduciary investment advice to individual 401(k) participants. His entire focus is to help clients improve their mutual fund selections. That helps them navigate the complexities of the market to achieve their financial goals.
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