Modern retirement accounts are making folks of average intelligence look like geniuses.
Their money, quietly stashed over the years in individual retirement accounts, company 401(k) plans or Keogh plans for the self-employed, has been growing dramatically. A robust stock market has helped such contributions significantly multiply in value.
Rather than waste time patting yourself on the back as you ponder exactly how much to contribute as tax time approaches, take time to examine your retirement portfolio carefully.
As your investment holdings escalate, they should be monitored more closely. You should be willing to make adjustments to take into account changing market conditions, your own investment philosophy and the need for diversification.
You face a myriad of investment choices with a self-directed account such as an IRA or Keogh, though there will be some limitations based on the number of offerings from the investment firm. In the case of a company 401(k), you’ll have far fewer choices, but you should study what is offered and be willing to speak up to company management if you feel available offerings are lacking.
Take time now to consider your personal retirement account strategy. By doing your homework, you can make your pride and joy even more impressive in the future and you’ll look even wiser.
“A younger retirement account investor should be 100 percent in equities, and a total stock market index fund is a great start to long-term investing,” said Sheldon Jacobs, editor of The No-Load Fund Investor newsletter in Irvington-On-Hudson, N.Y. “An older retirement investor most likely will want some fixed income, but how much depends on how much money he’ll already have to live on one day and how conservative he must be.”
T. Rowe Price Spectrum Income Fund and Vanguard Total Stock Market Index Fund would be Jacobs’ largest holdings in a retirement portfolio.
You can cut loose a bit with a retirement account because you aren’t battling tax consequences.
“Because it doesn’t have tax exposure, a retirement account should be traded more actively and be more speculative than a non-tax-exempt portfolio,” advised Marshall Acuff, investment strategist with Salomon Smith Barney. “Still, in both cases you should be investing for the long term and will do best with stocks because you want growth rather than income.”
He wouldn’t be as aggressive buying big-cap stocks as has been the case in the past few years, since their price run-up makes it harder to find value.
A careful combination of growth and value would be the goal of an Acuff-style retirement account. Big-cap stock selections still worth buying based on future potential include IBM, MCI Worldcom and defense contractor Raytheon Co., he believes. In mid-caps, he would choose retailer Saks Inc. and Wendy’s International. In the area of value, he’d include Chase Manhattan Corp., insurer Allstate Corp., oilfield services company Schlumberger Ltd. and engineering-construction firm Fluor Corp.
Some experts say index funds shouldn’t be a big component of retirement accounts.
“An investor should be much more active with tax-deferred IRAs and 401(k) accounts, but then choose index funds for taxable accounts because they’re more tax-efficient and have less turnover,” suggested Edward Foster, director of research for Fabian Investment Resources and the Fabian Fund Selector Newsletter in Huntington Beach, Calif. “It makes sense to have more exposure to actively-managed mutual funds in your retirement account and to get some exposure to the small-cap market.”
Too many 401(k) investors put too much retirement money in bonds, cash and low-yield Guaranteed Insurance Contracts, Foster pointed out. All the latter do is help the insurance company make a lot of money, he contends.
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Andrew Leckey answers reader questions each Monday in Your Money.
