It has been our winter of discontent. But now, as a welcome melt begins and spring hints of its coming, we look to weed, seed and feed our garden – as well as our investment portfolio -- for better growth. Let’s put on the gloves and dig in.
Rake up the retirement plans
“If you have had more than a few jobs, you may have left a trail of 401(k)s, 403(b)s, and SIMPLE IRAs in your wake,” says Tanina Frouge Linden, a fee-only financial advisor in Leesburg, Va. “Now is the time to think consolidation. Roll over any small 401(k)s, that you may have with former employers to an IRA opened at the discount broker of your choice. A rollover to your own IRA should eliminate both that extra layer of administrative fees, as well as free you from the constraints of the limited investment choices usually offered in employer-sponsored plans.”
Weed out duplicate holdings
According to research conducted by UCLA and the University of Chicago, many investors consider "diversifying" as having a bit of nearly every investment offered in their 401(k) menu. ("I'll have one of each, please.") But many mutual funds, just like the ones you’ll find in a typical 401(k), have duplicate holdings – stocks of the same companies – so even if you're investing in several mutual funds, you may not be diversifying, or spreading the risk, as much as you thought.
Two law professors at the University of Pennsylvania fielded research for a study released last year in which investors were given a hypothetical sum of $10,000 to allocate to a table of 10 mutual funds. Fully one-third chose all 10 funds, even though two of the funds were clearly identified as S&P 500 index funds and reported the same past performance.
Choosing from a menu of investments for a master chef is about the same as asking a financial advisor to bake a soufflé. Either scenario might come out all right, but the odds are against it.
Rather than trying to make sense of an investment process that is difficult to master, consider looking in your 401(k) investment menu for pre-fab “allocation”: funds which will be labeled something like “conservative,” “moderate” or “aggressive.” Or, ask your plan advisor to tell you about “target date” funds that are designed to provide a diversified investment that is automatically rebalanced and geared to a specific retirement-date goal.
The same goes for your taxable investment portfolio. Keep it simple, low cost and easy to manage. Consider mutual funds and exchange-traded funds that are pre-allocated and periodically rebalanced, or find a trusted advisor to do it for you.
Prune the rotten holdings
Now, let’s prune some of those wilted holdings and make room for more fertile opportunities. Tanina Frouge Linden, our financial planner from Virginia, is ready to give us a hand again.
“Given the amazingly long run of the current bull market, many people bought individual stocks thinking they could invest for themselves. Ultimately, they found that they either were not very good at it or that they just did not have the time it really takes to do a good job of managing their money,” she says. Now is a good time to take a hard look at those purchases. Can you even remember why you bought any particular stock? If it was a ‘hot stock’ recommendation from your dentist, you might want to think of unloading it soon. Definitely look to selling anything that has dropped more than 10% from its purchase price.”
Feed your retirement savings
Now that we’ve pulled the weeds of lousy investments, trimmed the overlapping holdings and fertilized our portfolio with a good mix of broadly diversified investments, we’re ready to feed our retirement savings for real growth.
How long has it been since you’ve reviewed your retirement plan contributions? Whether it’s making the highest legally-allowed contribution to your IRA, or kicking up your deferral to a 401(k), that’s how you plant the seeds for a substantial retirement harvest.
For 2014 you can contribute as much as $17,500 to a 401(k) – add another $5,500 if you’re 50 or older. And you can put $5,500 into an IRA; $6,500 for those 50-plus.
Now that’s done, how’s your real garden looking?