A friend and I were recently discussing our 401Ks. He said he still had all or most (90%) of his 401K in his company’s stock. I was shocked. I said I have one word for you, “Enron”. What goes up quickly can go down even faster. I reminded him of how many Enron employees, individual investors, and even large brokerage companies lost substantial amounts of money.

Before Enron happened the only way my company would match what I put into my 401K (up to 3%) was in the company stock. We were not diversified at all and approximately 90% to 95% was in the company stock. We got an education quick when we heard about Enron. We read a lot about diversification and asset allocation. Then we went about diversifying our 401K. We transferred a set amount every month for one year until we were down to 10% in company stock. We are currently at 5%. Our company gave better investment options and then started matching my 401K in each investment I had instead of just company stock.

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If for any reason you are uncomfortable with how to choose investments in your 401k or how to diversify your 401k, read as much information on investing as you can.  Read the prospects of each investment chosen in your 401k.  Read the 401k information your employer puts out as well as any information on your 401k’s web site.  Another good source for information is to check the web sites for the large mutual fund companies.    Vanguard’s web site is very good and has loads of information.  Just realize that they are trying to get you to buy their funds.  If you still do not feel comfortable after reading all the information you can gather, then find a professional to help you.  
 
Look for a Certified Financial Planner who is a fee-based planner.  Some financial planners are paid by what products they sell.  They receive a load or commission on this.  Be sure to ask them how they get paid, as it can be as high as 5% of your money right off the bat.   Look for someone who has 5 to 10 years of experience and preferably someone you know and who has a good reputation.  If all you want is to have them review your 401k, tell them that is it.  They will want you to do a full plan but only do what you need.

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Besides re-balancing your retirement plan it is also a good idea to review your plan’s performance.  We like to look at how the plan is doing overall and how each individual investment is doing.  Then we make changes to our overall plan or individual investments.  For example, this year one of our growth fund investments is not meeting our standards.  Its performance compared to the overall market, and compared against other growth funds in our portfolio, is poor.  While it is earning us a small percentage, it is not even beating our value or income investments in the plan.  This is not just based on one year performance but three, five and ten years.  Because of the risk the growth sector it is in, it should be performing better.  Greater risk should mean greater return when compared to other funds in this sector.  So we have decide to make some changes.

First, because the growth section of our plan is out of balance by 2% too much, we will move 2% of this non-performing fund to the value or income section of our plan.  We will keep the current dollars in the non-performing growth fund but we will put less money into it.

Second, we will reduce the amount of money that we put into this fund each pay period.  We will put the money into another growth fund or into another fund in our plan that is performing well.  For example, say each pay period we are putting 20% of the money we are putting into our retirement plan in this non performing fund.  We simple lower it to 10% or even 5%.  We then have another investment in our plan that is performing well receive the 10% or 5%.  This way we are re-balancing our plan’s performance and hopefully a better return.

 

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