Making 401(k) choices
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January 28, 2000: 3:22 a.m. ET
Spend time deciding on asset allocation before you invest in funds
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NEW YORK (CNNfn) - With thousands of mutual funds to choose from, it's tough to make decisions about what to put in your retirement plan. And many people are stumped when it comes to how many mutual funds they really need in their 401(k).
Frank Armstrong III, president of Managed Account Services in Miami, advises people take three steps to choose the right funds in today's "Ask the Expert" feature.
Ask the experts a question about your retirement plan.
There are so many mutual funds in my 401(k) that I can't decide what to invest in. How many funds do I need?
You are fortunate to have so many funds in your plan. But sometimes an abundance of choices can seem overwhelming.
Investing in a 401(k) is like any other investment process. It can be broken down into simple steps:
- Determine your time horizon, risk tolerance and objectives.
- Design an appropriate asset allocation plan to meet those needs. For equities you might decide to invest in large domestic, small domestic, domestic value, foreign and emerging-market stocks. A broadly diversified equity portfolio can reduce risk without sacrificing return. For bonds you might want to stick to short-term bonds to reduce volatility.
- Select the one best fund to represent each asset class. I recommend index funds wherever they are available. They provide asset class exposure and returns with the lowest cost and lowest risk. However, if they are not offered in your plan, go for the funds with the lowest cost and widest diversification within each asset class.
In the example above you would need only six funds.
If you are just starting out and your account is small, you may need to reduce the number of asset classes. If the account is large, you might want to increase the number of equity asset classes to further spread the risk.
One other consideration: You should consider your 401(k) as part of your overall investment program. If you already own significant positions outside the 401(k) plan, adjust your allocations accordingly inside the plan. You don't want to be heavily overweight in any asset class.
-- Every day, CNNfn.com will feature a new question and answer about retirement plans. If you have a problem with your 401(k), IRA or pension, e-mail us your question at retirement@cnnfn.com.
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