The
401(k) savings account is the foundation for most people's retirement financial
security. Investors, who have 401(k) heavily skewed towards individual stocks,
risk their assets violently whipsawed by the Wall Street casino. The ever
present risk of a crash, similar to 2008, can have dire consequences for a
stock portfolio heavily weighted towards stocks. In fact, for the ten
years time period from December 2000 through December 2010, the S&P 500
Index actually lost 4.7%. Here are several alternative investment
vehicles that can assist 401(k) investors in constructing a more balanced,
diversified portfolio.
Savings Bond
Savings
bonds are debt commitments to pay for the country's borrowing
requirements. The yields are nothing special in today's low interest rate
environment; however they do offer the guarantee of return, based upon the
credit of the government.
Stock Mutual Funds
Many
investors simply aren't comfortable doing their own security analysis and stock
selection. Stock mutual funds are professionally managed vehicles that
invest pools of funds from a large number of investors. There are many
different types of stock mutual funds, including small cap versus large cap,
value versus growth, and specific funds for individual sectors such as health
care and technology. For long term 401(k) investors, look for funds that
are broad based in nature and offer low fees. Index mutual funds, which
attempt to track specific stock indices, often offer the lowest fees and
provide excellent diversification.
Bond Mutual Funds
Bond
mutual funds invest in bonds and other debt related instruments. These
funds can help provide a critical income stream and diversification to a 401(k)
portfolio. Typically, it is difficult for an individual investor to
construct a portfolio of individual debt securities due to the high transaction
costs and relative illiquidity of many segments of the bond market. While
bonds typically do not offer the upside potential of equity investments, they
are considered safer investments that have a lower potential for capital
losses. However, they are subject to interest rate and credit
risks.
A
rise in interest rates will depress the Net Asset Value (NAV) of a bond mutual
fund's holdings. Credit risk is spread among literally hundreds of
different securities so the potential for a blow up is minimal versus an
individual bond portfolio. Bond funds fall into three general categories,
corporate, municipal, and government. Corporate bond funds have different
levels of risks based upon their perceived financial stability, while the U.S.
Government bond funds are considered the safest from a credit risk
standpoint.
Go International
Often
401(k) investors are too U.S. centric in their portfolio composition and
overlook the opportunity to invest in international stock and bond mutual
funds. Emerging markets usually sport 4-5% growth rates that exceed those
of developed countries. Demographics are also on their side as they have
generally younger populations that are moving into the middle class, with a
corresponding increase in purchasing power. Emerging market government
debt funds should also be considered as these countries typically have lower
debt-GDP ratios versus developed nations.
While it may seem glamorous for investors to make their own individual stock
selections for their 401(k), remember you're going up against some formidable
competitors. Make sure your portfolio is appropriately diversified to
ensure your retirement savings can support you for the long haul.
Byline:
This
article was written by Karl Stockton. He offers information on retirement
savings and payday loans.
