Year end usually presents a good time for personal reflection back to previous excesses that may have lasting consequences. Seldom do ordinarily conscientious folks look back for times in which they could have done more. Only here we are not talking about office parties, but rather retirement savings in the form of 401(k), 403(b), 457 and IRA accounts. Retirement savings habits, however, do present a case where more action attendant to savings, variety, costs and trading could have brought better investment returns in 2011 and beyond.
Consider the following retirement regrets where more, rather than less, would have been warranted in 2011:
Saving too little too late: Financial planners recommend individuals save at least 10 to 15 percent of pay each year for retirement, and more if you are older. When you save under an employer-sponsored 401(k), 403(b), 457 or IRA retirement savings plan, you may not only be able to defer taxes on the portion of your pay you contribute to your account, but you may also get the benefit of a company match on some or all of your contributions.
Every year you save too little or put off saving increases your future savings burden needed to meet your retirement goals. Ongoing contributions on a regular basis build capital upon which investment earnings may accrue and thereby reduce the need for future contributions. Contributions into a stock fund through regular payroll withholding at regular intervals also offer the beneficial effect of dollar cost averaging, where more shares of stock are bought when share prices are low and less when share prices are high.
In 2012, when in doubt, save more.
Putting all your eggs in one basket: Conventional wisdom suggests diversifying investments among stocks, bonds, and cash so as to minimize risk. The thinking goes that when one asset class tanks, another one may respond with more favorable investment returns. In 2011, an investment in a U.S. stock index fund like the Standard & Poor’s 500 index fund generated a return of next to nothing. Cash was not much better.
However, a prescient investment in bonds, like those in the Barclays Aggregate Bond Index, yielded a total return approaching 8 percent during 2011. Absent an ability to pick only winning asset classes, portfolio diversification makes sure you do not miss out on favorable returns in one or more asset classes when other asset classes do not fare as well.
In 2012, prudently diversify the investment of retirement savings among stocks, bonds, and cash.
Burying your head in sand when it comes to investment costs: Fund fees skimmed off the top of your retirement savings can range from a few basis points (hundredths of a percent) to 2 percent or more per year. Furthermore, studies show that the more expensive actively managed funds do not necessarily beat the market on a consistent basis. Therefore, you may end up paying something like $2,000 more in fund fees for $100,000 held in an inferior actively managed fund than in a passively managed fund based on a market index. Over time, your retirement savings portfolio will suffer considerably from these higher fees if left unchecked.
In 2012, seek out the lowest cost funds that meet your investment objectives.
Setting-it-and-forgetting-it: When it comes to investing retirement savings, most folks let it ride. Even when offered almost 20 fund options on average in which to invest, almost nine out of ten individuals make no change in the investment of their retirement savings plan accounts. In the current type of end-up-where-you-started stock market, such a buy-and-hold approach applied to retirement savings yields nothing to a stock investor.
Conventional investment advice suggests periodic rebalancing of a portfolio whose asset classes have risen (or fallen) at different rates. Especially in a volatile market, this rebalancing produces the favorable result of buying underweight asset classes at low prices and selling overweight asset classes at high prices.
If the number of fund choices is holding you back in the management of your retirement savings, simplify your life by investing some of your retirement savings portfolio in just stock and cash fund options. Then to take advantage of market volatility, consider applying a form of rebalancing to your retirement savings portfolio every day. You buy some stock each day the market is about to close lower, and sell some stock each day the market is about to close higher.
Better yet, each fund exchange under this so-called 401(k) day trading approach does not trigger immediate taxes or direct trading costs when properly carried out in a retirement savings portfolio. In the past 10 years, you could have fared more than 25 percent better than the market (as measured by the S&P 500 index) by applying a form of 401(k) day trading to your retirement savings. Although more suited for the long-term, a 401(k) day trading strategy also beat a buy-and-hold approach applied to retirement savings held in an S&P 500 index fund by three to four percent during 2011.
In 2012, consider 401(k) day trading your retirement savings portfolio by making daily fund exchanges between stock and cash funds to make the most out of a volatile market headed in no apparent direction.
Make 2012 a year in which you help yourself to a better retirement. With the new year comes an opportunity to correct 2011 retirement savings management regrets by saving, diversifying, cost-monitoring, and trading more within your retirement savings portfolio.
Richard Schmitt is author of 401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day. Outside of his appearances on Fox Business News, KCBS, and Business News Talk Radio, he is an adjunct professor teaching retirement planning at the Edward S. Ageno School of Business at Golden Gate University in San Francisco, Calif.