As you are probably aware, the Dow Jones Industrial Average closed at a record high of 14,296; the second day in row for a record close. Intra-day the index topped the 14,300 mark for the first time ever. By this benchmark we’ve now gotten past the financial crisis as the prior high was reached pre-crisis in 2007. The S&P 500 Index is also near record territory. During the financial crisis there was much handwringing about how the 401(k) had failed retirement savers. It was popular to refer to accounts with reduced balances from losses as a “201(k).”
As of the end of 2012, Fidelity reported that the average 401(k) account balance had risen some 12% during 2012 to $77,300 from $69,100 at the end of 2011. This is also up from early 2009 when the average was $46,100. Fidelity estimated that about 2/3 of the 2012 gains were from investment gains and the other 1/3 from a combination of employee salary deferrals and employer matches.
What do I do now with my 401(k) now?
If you are looking for profound, radical advice here, I suggest that you stop reading this article now. This will save you from wasting the next 30 seconds of your life.
Assuming that you are still here, the suggestions that I have for the current situation are the same as I would have offered a year ago, five years ago, or ten years ago. I would have made the same suggestions at the depths of the 2008-2009 financial crises as well.
Review and Rebalance
A market high is always a good time to review your 401(k) account to ensure that things are not too far out of balance. Ideally you have a target allocation for investments you chose. Generally if a client’s allocation varies by more than +/- 5% of the target we consider rebalancing. Given how quickly the market has risen this year your account might need some attention here.
Review your 401(k) account as part of your overall portfolio
If you have investments outside of your 401(k) plan such as taxable accounts (stocks, mutual funds, etc.); IRAs; a spouse’s retirement plan and the like this is a good point to review not only your 401(k) account but your overall portfolio. If you have a financial plan in place a market high is a good point to take stock of how you are tracking toward financial goals such as retirement. Are you ahead of schedule? If so perhaps this is a good point in time to not only rebalancing but to consider reducing the risk profile of your portfolio.
Take the long view
If you watch enough of CNBC or other cable financial news shows, or read enough articles on the web about investing you can probably find someone who will support any position ranging from an impending stock market Armageddon to someone saying this Bull Market will run for another five years or more. The route to go in my opinion is to largely ignore all of this hype, get a financial plan in place, and invest your 401(k) and any other investment holdings as a total portfolio in line with the goals and risk tolerance that flow out of the financial planning process.
Please feel free to contact me with your financial planning and investing questions.
For you do-it-yourselfers, check out Morningstar.com to analyze your 401(k) holdings and all of your investments and to get a free trial for their premium services. Please check out our Resources page for links to some additional tools and services that might be beneficial to you.