Objective information about retirement, financial planning and investments


Stock Market Highs and Your 401(k)


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. 

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When Selling Investments, Don’t Make These Mistakes


An important part of any investment strategy is to develop a methodology for ultimately selling your investments. Unfortunately, many investors sell based on emotional factors, making one of several mistakes:

selling investments

Holding on to an investment with a loss. Psychologically, it’s difficult for investors to sell an investment with a loss, preferring to wait until the investment at least gets back to a break-even level. However, that may never happen or may take a long time to do so. Take a hard look at the investment and consider selling if you can reinvest in an investment with better prospects.

Hanging on to capture more gain. When an investment has increased dramatically, you may be reluctant to sell it, even if you feel its price has gone too high too fast. There’s always the risk that you’ll sell and the price will keep going up. But sometimes it’s best to protect your gains and sell while you’re ahead. At least consider selling a portion of the holding and reinvesting the proceeds elsewhere.

Not setting price targets. One way to take the emotion out of selling is to set high and low price targets for reevaluating an investment. You don’t have to sell when the investment reaches those targets, but at least review it. Sticking with rigid rules for selling when an investment declines by a certain percentage can help prevent substantial losses. Stop orders can help with exchange traded investments like stocks and ETFs.

Trying to time the market
. It’s difficult to predict when the market will rise and fall. Even if the stock market is following a general trend, there will be up and down trading days. Trying to buy and sell stocks based on those daily fluctuations is difficult.

Worrying too much about taxes. Taxes can consume a significant portion of your investment gains. Even if you have long-term capital gains, 15% of your gain will go to capital gains taxes. However, avoiding taxes may not be a good reason to hold on to an investment. There are typically strategies that can be used to offset the tax burden, but there’s not much you can do about a loss in investment value. In this market environment you may have several holdings that show a paper loss. It can make sense to realize some of those losses to offset current or future gains as part of your periodic portfolio rebalancing. In general, if it’s time to sell an investment, you should probably do so.

Not paying attention to your investments. Your portfolio needs to be evaluated on a periodic basis or you could miss signals that it may be time to sell. You should reevaluate an investment when the company changes management, when the company is acquired by or merges with another company, when a strong competitor enters the market, or when several top executives sell large blocks of stock. This applies to mutual funds as well. Manager changes, a dramatic increase or decrease in assets under management, or a deviation from its stated style should all be red flags that cause you to evaluate whether it may be time to sell the fund.

If you are uncomfortable reviewing your investments it may make sense for you to engage the services of a financial professional to take an independent third-party look at your portfolio.

Please feel free to contact me with your investing and financial planning questions.

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and to get a free trial for their premium services. Please check out our Resources page for more tools and services that you might find useful.

Photo credit:  Wikipedia

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