Step 3: Select Investments

Investment Selection

The mutual fund is the standard type of investment within a 401(k). Mutual funds are comprised of a variety of individual stocks and/or bonds, depending upon each fund’s specific objectives. Our view is that the key to maximizing your 401(k) depends on the combination of mutual funds being used, and the percent of your overall contributions being committed to each fund. This practice is called asset allocation, and should be customized to match each investor’s unique characteristics. Assessing your long-term financial goals, investment time horizon, and personal feelings about risk are all critical factors in determining an individual’s optimal 401(k) asset allocation strategy.

When choosing an investment strategy, it is best to have a long-term approach because the 401(k) is intended to grow with you for many years.

Building your investment strategy depends on these three factors:

1

Time Horizon

An investor’s time horizon is the amount of time between today and the day in which you will first need to access your invested funds (retirement).

2

Long-Term Financial Goals

How you plan on spending your retirement plays a large role in determining your investment goals. Individuals who want to travel, purchase a second home, or simply live a more luxuriously in their golden years will require a larger retirement fund than those looking to live a more modest lifestyle in retirement. Additionally, individuals with outside investments beyond their 401(k) may choose to deploy asset allocation strategies that complement their overall portfolio.

3

Risk Tolerance

An investor’s risk tolerance plays a significant role in the asset selection process. While markets tend to grow over the long-run, short-term price fluctuations occur on a daily basis. This phenomenon is known as volatility, and can sometimes produce large swings in valuation (positive or negative) due to things like the release of new economic data, an unexpected geopolitical event, or changes to interest rates. As it relates to 401(k), determining your feelings about volatility is useful when fine-tuning your investment mix. In general, individuals with longer time horizons (younger) have higher thresholds for risk than those with shorter time horizons (older).

Portfolio Options

Simple yet effective

Balanced Index Fund

These mutual funds are comprised of a mixture of both stocks and bonds. It’s designed as a “middle of the road” option for investors who are looking to simplify their investment approach while having somewhat equal exposure to both safety and risk (balanced fund composition is typically 60% equity and 40% fixed income).

Set-it and forget-it

Target Date Fund

Target date funds are dynamic investment funds that are designed to reflect the asset allocation needs of an investor relative to their age.  Each fund is based on a specific future date, with the underlying allocation designed to adjust itself over time, from aggressive to conservative, as the investor approaches the specified future date.

Personalized

Custom Portfolio

This is the preferred option of individuals looking to personalize their 401(k) investment strategy. Portfolio construction requires a great deal of knowledge and expertise that most people don’t possess on their own. As such, we strongly encourage investors to consult with their financial advisor when developing their personal asset allocation strategy.

Need financial advice?

Complete our Wealth Management and Risk Tolerance questionnaires to help our team better understand your specific financial goals.