Making the Right 401(k) Choices
Posted February 3, 2009 by Bernz
Knowing which investment choices are right for you in your 401(k) plan has never been easy, but in the current economic environment, it can be downright torturous. Most funds that are available to choose from in your plan are declining in value and producing negative returns. This is also the case of the stock market as a whole. That means that your job is to select investment funds not to make the biggest return but to lose the least amount of money. Preservation of capital is tantamount during this extended recession.
Many investors make the unfortunate choice of trying to beat the stock market. However, it has been proven time and time again that, over time, managed funds rarely outperform the stock market as a whole, regardless of how talented and well-compensated the fund manager is. If seasoned experts cannot beat the market, it is highly unlikely that you will be able to. The best many investors can do is to match the performance of the stock market. How can you choose investments in your 401(k) that will follow the stock market and preserve your retirement funds? Index funds.
Most 401(k) plans now offer index funds as part of their investment choices. Index funds invest in the stocks contained in a particular index, or segment of the market, like the S&P 500 or the Dow Jones Industrial Average. Index funds offer advantages over managed funds such as:
1) Broader base of investments- indices sample companies from many different parts of the stock market which can reduce your risk of a downturn in any one particular industry.
2) Fewer fees and costs- managed funds can charge 1-3% of the asset value in the fund. Index funds charge usually a fraction of one percent. Index funds can charge less because the investments in the fund select themselves. The only buying or selling that happens in the fund is when the underlying index changes.
3) Less turnover- Because an index fund buys and sells far less often than a managed fund, it incurs fewer costs which increases the fund’s overall return.
Whether you are selecting your 401(k) investments for the first time or making changes to your plan, it makes sense to include index funds in your long term investment strategy.
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